Investment and the market of loanable funds


·  This is an individual task.

·  Weight: This task is worth 40% of your overall grade for this subject.

Submission: Via Moodle (Turnitin). Submissions will be accepted until Sunday 7th March 2021 at 21:59 CEST.


·  The minimum amount of words to be used is 1000 and the maximm is 1500

·  You may want to include images/graphics etc. (for example from their website) to make your reasoning and argumention more visual and explicative

·  Font: Arial. Size: 12,5pts. Line spacing: 1,5. Text align: Justified.

·  Appendices and References, do not count towards the final wordcount but are strongly recommended (referencing websites, articles, books etc.)

·  The in-text References and the Bibliography have to be in Harvard’s citation style.


1.  Investment and the market of loanable funds (30%)

a)  Suppose that Inditex, a Spanish multinational clothing company, is considering building a new clothes factory.

·  Assuming that Inditex needs to borrow money in the bond market, why would an increase in interest rates affect Inditex’s decision about whether to build the factory? Use the graphical representation of the market of loanable funds to support your answer.

·  If Inditex has enough of its own funds to finance the new factory without borrowing, would an increase in interest rates still affect Insitex’s decision about whether to build the factory? Explain.

b)  Suppose now that Inditex and its lender agree on the nominal interest rate to be paid on a loan. Then inflationturns out to be higher than they both expected.

·  Is the real interest rate on this loan higher or lower than expected?

·  Does the lender gain or lose from this unexpectedly high inflation? Does the borrower gain or lose? Explain.

2.  Economic growth and productivity

a)  What is the productivity of a country? How it affects economic growth? Use the theoretical concepts delivered in this course, the graphs and equations explained to answer the question.

b)  What components of GDP (if any) would each of the following transactions affect? Assume that you live in the US. Explain.

1.  Tom buys a new refrigerator from a domestic manufacturer.

2.  Pedro hires a local contractor to build her a new house.

3.  Ford sells a Mustang from its inventory to the Martinez family.

4.  Ford manufactures a Focus and sells it to Avis, the car rental company.

5.  The federal government sends your grandmother a Social Security check.

6.  Your parents buy a bottle of French wine.

7.  Honda expands its factory in Ohio.

3.  Unemployment

a)  Structural unemployment is sometimes said to result from a mismatch between the job skills that employers want and the job skills that workers have. To explore this idea, consider an economy with two industries: auto manufacturing and aircraft manufacturing.

·  Suppose that one day the economy opens itself to international trade and, as a result, starts importing autos and exporting aircraft. What would happen to the demand for labor in these two industries?

·  Suppose that workers in one industry cannot be quickly retrained for the other. How would these shifts in demand affect equilibrium wages both in the short run and in the long run?

·  If for some reason wages fail to adjust to the new equilibrium levels, what would occur?

b)  Between January 2012 and January 2019, U.S. employment increased by 17.3 million workers, but the number of unemployed workers declined by only 6.3 million. How are these numbers consistent with each other? Why might one expect a reduction in the number of people counted as unemployed to be smaller than the increase in the number of people employed?