Chapter 8: Saving, Investment and the Financial System
If Americans become more thrifty, we would expect
the supply of loanable funds to shift to the right and the real interest rate to fall
public saving
the tax revenue that the government has left after paying for its spending
If government spending exceeds tax collections
there is a budget deficit
A reduction in the budget deficit should shift the supply of loanable funds to the right, lower the real interest rate, and increase the quantity demanded of loanable funds.
true
In a closed economy, investment is always equal to saving regardless of where the saving came from - public or private sources.
true
In a closed economy, saving is what remains after consumption expenditures and government purchases.
true
Investment is the purchase of capital equipment and structures.
true
Municipal bonds pay less interest than comparable risk corporate bonds because the interest payments are tax exempt to the bondholder.
true
Mutual funds reduce a shareholder's risk by purchasing a diversified portfolio.
true
Public saving and the government's budget surplus are the same thing.
true
The quantity supplied of loanable funds is greater if real interest rates are higher.
true
crowding out
a decrease in investment as a result of government borrowing
An increase in the budget deficit is
a decrease in public saving
If the supply of loanable funds is very inelastic (steep), which policy would likely increase saving and investment the most?
a reduction in the budget deficit
budget deficit
a shortfall of tax revenue relative to government spending causing public saving to be negative
The financial crisis of 2008 and 2009 began with a sharp economic downturn and a reduction in the overall demand for output.
false
When a business firm sells a bond, it has engaged in equity finance
false
financial markets
financial institutions through much savers can directly lend to borrowers
financial intermediaries
financial institutions through which savers can indirectly lend to borrowers
bank
institution that collects deposits and makes loans
mutual fund
institution that sells shares and uses the proceeds to buy a diversified portfolio
Which of the following sets of government policies is the most growth oriented?
lower taxes on the returns to saving, provide investment tax credits, and lower the deficit
Which of the following statements is true?
municipal bonds pay less interest than comparable corporate bonds
National saving (or just saving) is equal to
private saving + public saving
Credit risk refers to a bond's
probability of default
An increase in the budget deficit will
raise the real interest rate and decrease the quantity of loanable funds demanded for investment
If Americans become less concerned with the future and save less at each real interest rate,
real interest rates rise, and investment falls
If GDP = $1,000, consumption = $600, taxes = $100, and government purchases = $200, how much is saving and investment?
saving = $200, investment = $200; only add consumption and purchases for saving
investment
expenditures on capital equipment and structures
Which of the following financial market securities would likely pay the highest interest rate?
a bond issued by a start up company
closed economy
an economy with no international transactions
budget surplus
an excess of tax revenue over government spending causing public saving to be positive
A financial intermediary is a middleperson between
borrowers and lenders
bond
certificate of indebtedness or IOU
stock
certificate of ownership of a small portion of a large firm
If an increase in the budget deficit reduces national saving and investment, we have witnessed a demonstration of
crowding out
An increase in the budget deficit that causes the government to increase its borrowing shits the demand for loanable funds to the right.
false
If the government wanted to increase the rate of growth, it should raise taxes on interest and dividends to shift the supply of loanable funds to the right.
false
If the real interest rate in the loanable funds market is temporarily held above the equilibrium rate, desired borrowing will exceed desired lending and the real interest rate will fall.
false
If you save money this week and lend it to your roommate to buy food for consumption, your act of personal saving has increased national saving.
false
People who buy stock in a firm have loaned money to the firm.
false
If the public consumes $100 billion less and the government purchases $100 billion more ( other things unchanging), which of the following statements is true?
savings is unchanged
An increase in the budget deficit that causes the government to increase its borrowing
shifts the supply of loanable funds to the left
An increase in the budget surplus
shifts the supply of loanable funds to the right and reduces the real interest rate
medium of exchange
spendable asset such as a checking deposit
Which of the following is an example of equity finance?
stock
government debt
the accumulation of past budget deficits
demand for loanable funds
the amount of borrowing for investment desired at each real interest rate
supply for loanable funds
the amount of saving made available for lending at each real interest rate
financial system
the group of institutions in the economy that help match borrowers and lenders
If the government increases investment tax credits and reduce taxes on the return to saving at the same time,
the impact on the real interest rate is indeterminate
national saving (saving)
the income that remains after consumption expenditures and government purchases
private saving
the income that remains after consumption expenditures and taxes
market for loanable funds
the market in which those who want to save supply funds and those who want to borrow to invest demand funds
Investment is
the purchase of capital equipment and structures
