Three students have each saved $1000. Each has an investment opportunity in which he or she can invest up to $2000. Here are the rates of return on the students’ investment projects:
5 percent 8 percent 20 percent
a. If borrowing and lending are prohibited, so each student uses only personal saving to finance his or her own investment project, how much will each student have a year later when the project pays its return?
b. Now suppose their school opens up a market for loanable funds in which students can borrow and
lend among themselves at an interest rate r. What would determine whether a student would choose to be a borrower or lender in this market?
c. Among these three students, what would be the quantity of loanable funds supplied and quantity of loanable funds demanded at an interest rate of 7 percent? At 10 percent? Assume unlimited funds are available to be borrowed at these interest rates.
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