Econ Chapter 26

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If Canada goes from a large budget deficit to a small budget deficit, it will

Increase public saving and so shift the supply of loanable funds right

When the government runs a budget deficit,

Investment is lower than it would be if the budget were balanced

The bond market

Is a financial market, as is the stock market

The primary economic function of the financial system is to

Match one person's saving with another person's investment

An increase in the government's budget deficit means

Public saving is less than $0 and decreasing

A larger budget surplus

Reduces the interest rate and raises investment

Other things the same, a higher interest rate induces people to

Save more, so the supply of loanable funds slopes upward

Given that Monika's income exceeds her expenditures, Monika is best described as a

Saver or as a supplier of funds

The source of the supply of loanable funds is

Saving, and the source of the demand for loanable funds is investment

Which of the following events could explain an increase in interest rates together with a decrease in investment?

The government budget went from surplus to deficit

In a closed economy if Y is 10,000, T is 1,000, G is 3,000 and C is 5,000, then

The government has a budget deficit and investment is 2,000

What would happen in the market for loanable funds if the government were to decrease the tax rate on interest income?

The supply of loanable funds would shift rightward and investment would increase

Which of the following statements is correct?

The supply of, and demand for, loanable funds depend on the real (rather than nominal) interest rate.

The supply of loanable funds slopes

Upward because an increase in the interest rate induces people to save more

Suppose the government were to replace the income tax with a consumption tax so that interest on savings was not taxed. The result would be that the interest rate

Would decrease and investment would increase

If the demand for loanable funds shifts to the left, then the equilibrium interest rate

and quantity of loanable funds falls

If the supply for loanable funds shifts to the left, then the equilibrium interest rate

rises and the quantity of loanable funds falls

Which of the following policy changes would lead to a decrease in the real interest rate and an increase in investment saving?

An expansion of eligibility for Individual Retirement Accounts

If the nominal interest rate is 7 percent and the rate of inflation is 3 percent, then the real interest rate is

4 percent

Suppose a country has only a sales tax. Now suppose it replaces the sales tax with an income tax that includes a tax on interest income. This would make equilibrium

Interest rates rise and equilibrium quantity of loanable funds fall

Crowding out occurs when

Investment declines because a budget deficit makes interest rates rise

Which of the following would NOT be a result of replacing the income tax with a consumption tax so that interest income was no longer taxed?

Investment would decrease

IF a reform of the tax laws encourages greater saving, the result would be

Lower interest rates and greater investment

When the government goes from running a balanced budget to running a budget surplus,

National saving increase, the interest rate falls, and the economy's long-run growth rate is likely to increase.

The slope of the demand for loanable funds curve represents the

Negative relation between the real interest rate and investment

If there is a shortage of loanable funds, then

Neither curve shifts, but the quantity of loanable funds supplied increases and the quantity demanded decreases as the interest rate rises to equilibrium

A closed economy does not engage in international trade, therefore

Net exports (NX) are zero

In 2009, the U.S government's budget deficit increased substantially. Other things the same, this means the

Supply of loanable funds shifted to the left

In a closed economy, public saving is the amount of

Tax revenue that the government has left after praying for its spending.

Which of the following could explain a decrease in the equilibrium interest rate and in the equilibrium quantity of loanable funds?

The demand for loanable funds shifted leftward

Which of the following would necessarily increase the equilibrium interest rate?

The demand for loanable funds shifts right and the supply of loanable funds shifts left

The U.S government increases its budge deficit, but at the same time Congress eliminates an investment tax credit. Which of the following is correct?

The interest rate may increase or decrease; investment will decrease.

For a closed economy, GDP is $11 trillion, consumption is $7 trillion, taxes are $2.5 trillion and the government runs a surplus of $1 trillion. What are the private and national saving?

$1.5 trillion and $2.5 trillion

Suppose a closed economy had public saving of -$1 trillion and private saving of $3 trillion. What are national saving and investment for this country?

$2 trillion, $2 trillion

As real interest rates fall, firms desire to

Buy more new equipment and buildings. This response helps explain why the demand for loanable funds is downward sloping.

A budget deficit

Changes the supply of loanable funds

Which of the following would shift the demand for loanable funds to the right?

Congress and the president pass an investment tax credit

In a closed economy, national saving is

Equal to investment

Institutions that help to match one person's saving with another person's investment are collectively called the

Financial system


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