1. In a closed economy, GDP is $1000, government purchases are $200, and consumption is $700. If the government has a budget surplus of $25, what are investment, taxes, private saving, and national saving?
I=100, T=225, PRIVATE SAVING=75, NATIONAL SAVING=100

2. Robert buys bonds. Rachel buys a new truck for her landscaping business. Identify both as savers, investors, both, or neither.

ROBERT IS A SAVER. RACHEL IS AN INVESTOR.

3Using a graph representing the market for loanable funds, show and explain what happens to interest rates and investment if the government budget goes from a deficit to a surplus.
THE SUPPLY OF LOANABLE FUNDS SHIFTS TO THE RIGHT (INCREASES). THE INTEREST RATES DECREASES AND CAPITAL INVESTMENT IS CROWDED IN.

4Identify each of the following acts as representing either saving or investment. a. Fred uses some of his income to buy government bonds. SAVER b. Julie takes some of her income and buys mutual funds. SAVERS c. Alex purchases a new truck for his delivery business using borrowed funds. INVESTMENT d. Elaine uses some of her income to buy stock in a major corporation. SAVER e. Henrietta hires a builder to construct a new building for her bicycle shop. INVESTMENT

5)Demonstrate that whether you would prefer to have $225 today or wait five years for $300 depends on the interest rate. Show your work.
At 3%, PV=258. At 7%, PV=213.90

6)What's the difference between firm-specific risk and market risk? Will diversification eliminate one or both? Explain. MARKET RISK IS ECONOMY WIDE RISK AND CANNOT BE ELIMINATED. FIRM SPECIFIC RISK IS RISK SPECIFIC TO AN INDIVIDUAL FIRM AND CAN BE ELIMINATED THROUGH DIVERSIFICATION.

7Draw graphs showing the following three relationships. 1. The relation between utility and wealth for a risk averse consumer. INCREASING AT