Question

Suppose that Amanda, Bobby, and Camilla have each saved 1 million rupiahs. Each of them could invest up to two (2) million rupiahs on their specific investment projects. The rates of return respectively are 6% (on Bobby’s project), 10% (on Arina’s project), and 15% (on Amanda’s project).If they cannot borrow nor lend funds, how much saving will each person haveafter one year when they get the returns from their investment projects?

If they can borrow and lend among themselves at an interest rate , thus small market for loanable funds is now available, how much would be the supply (from the lender(s)) of and the demand (from the borrower(s)) for loanable funds at an interest rate of 8 percent? At 12 percent?
(Explain what is happening in the market in each situation).

Answer 1

With their respective investment returns, Amanda would have 1,150,000 rupiahs, Bobby 1,060,000 rupiahs after one year. At an 8% loan interest rate, Bobby would likely supply funds as his return is lower. At 12%, both Bobby and the entity with a 10% return project could supply, with Amanda demanding funds.

Step-by-step explanation:

Amanda, Bobby, and Camilla each have 1 million rupiahs to invest. With different rates of return on their respective investment projects - 6% for Bobby, 10% for an unnamed entity's (Arina's) project, and 15% for Amanda, we can calculate their savings after one year. Assuming they invest all their savings, Amanda would have 1,150,000 rupiahs, Bobby would have 1,060,000 rupiahs, and Camilla's amount is not described in the question so cannot be calculated.

If they can borrow and lend among themselves, at an interest rate of 8%, the supply of loanable funds would come from whoever values the 8% return less than their own project's return, and demand would come from those with projects yielding more than 8%. Bobby will likely supply since his project only returns 6%. At 12%, Bobby and potentially the entity with a 10% project (Arina) would be suppliers, while Amanda with her 15% project could be a demander.