ECON2030 QUIZ/TEST #2

Scenario 1-2. Assume the following information for an imaginary, closed economy. GDP = 5 trillion Consumption = 3.1 trillion Government purchases = .7 trillion Taxes = .9 trillion Refer to Scenario 1-2. For this economy, private saving is equal to

1 trillion Y-T-C 5-.9-3.1=1

Scenario 1-2. Assume the following information for an imaginary, closed economy. GDP = 5 trillion Consumption = 3.1 trillion Government purchases = .7 trillion Taxes = .9 trillion Refer to Scenario 1-2. For this economy, investment amounts to

1.2 trillion Y-C-G 5-3.1-.7=1.2

Scenario 1-2. Assume the following information for an imaginary, closed economy. GDP = 5 trillion Consumption = 3.1 trillion Government purchases = .7 trillion Taxes = .9 trillion Refer to Scenario 1-2. For this economy, national saving is equal to

1.2 trillion (same as investment)

Scenario 1-2. Assume the following information for an imaginary, closed economy. GDP = 5 trillion Consumption = 3.1 trillion Government purchases = .7 trillion Taxes = .9 trillion Refer to Scenario 1-2. Suppose, for this economy, the relationship between the real interest rate, r, and investment, I, is given by the equation I=10.78-3.03r (If for example r=10, this means that the real interest rate is 10 percent). The equilibrium real interest rate for this economy is

3.16

The indirect provision of funds by savers is accomplished by

Banks and other financial intermediaries

Which of the following is not a characteristic of a bond?

It's dividend yield

a bond that never matured is known as a

Perpetuity

Suppose the market for loanable funds is in equilibrium. What would happen in the market for loanable funsds, other things the same, if the Congress and President increased the maximum contribution limits to 401(k) and 403B tax-deferred retirement accounts?

The interest-rate would decrease in the quantity of loanable funds would increase

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

Refer to Figure 1-3. A shift of the supply curve from S1 to S2 is called

a decrease in quantity of loanable funds supplied

Refer to Figure 1-3. Which of the following movements shows the effects of the government going from a budget surplus to a budget deficit?

a movement from point A to point B

Refer to Figure 1-3. Which of the following movements would be consistent with the government budget going from deficit to surplus and the simultaneous enactment of an investment tax credit?

a movement from point B to F

Refer to Figure 1-3. Which of the following movements shows the effects of households' decision to save more?

a movement from point C to point F

Refer to Figure 1-3. A shift of the demand curve from D1 to D2 is called

an increase in the demand for loanable funds, and that increase would originate from HH and firms who wish to borrow and make investments

If Huedepool Beer runs into financial difficulty, the stockholders as a. part owners of Huedepool are paid before bondholders get paid anything at all. b. part owners of Huedepool are paid after bondholders get paid. c. creditors of Huedepool are paid before bondholders get paid anything at all. d. creditors of Huedepool are paid after bondholders get paid.

b

Which of the following statements is true?

compared to the standard and poors 500 index, the Dow Jones industrial average incorporates the stock prices of a much smaller number of corporations

If a firm sells a total of 100 shares of stock, then

each share represents ownership of 1 percent of the firm, the firm is engaging in equity finance, the supply and demand of those shares determine the price per share

Suppose the government changed the tax laws, with the result that people were encouraged to consume more and save lee. Using the loanable funds model, a consequence would be

higher interest rates and lower investment

Crowding out occurs when

investment declines because a budget deficit makes interest rates rise

The country of Cedarland does not trade with any other country. Its GDP is 17 billion. Its government purchases 5 billion worth of goods and services each year and collects 6 billion in taxes. Private saving in Cedarland is 5 billion. For Cedarland,

investment is 6 billion and consumption is 6 billion

For an imaginary closed economy, T = $5,000; S = $11,000; C = $48,000; and the government is running a budget surplus of $1,000. Then

private saving = 10,000 and GDP = 63,000

Figure 1-3. The figure shows two demand for loanable funds curves and two supply of loanable funds curves. "i" on the vertical axis represents

real interest rate

Long-term bonds are

riskier than short-term bonds, and so interest rates on long-term bonds are usually higher than interest rates on short-term bonds.

An increase in the budget deficit would cause a

shortage of loanable funds at the original interest rate, which would lead to rising interest rates.

We associate the term debt finance with

the bond market, and we associate the term equity finance with the stock market.

Suppose the city of Des Moines has a high credit rating, and so when Des Moines borrows funds by selling bonds,

the city's high credit rating and the tax status of municipal bonds both contribute to a lower interest rate than would otherwise apply.

Suppose the U.S. offered a tax credit for firms that built new factories in the U.S. Then

the demand for loanable funds would shift rightward, initially creating a shortage of loanable funds at the original interest rate

In which case would people desire to borrow the most?

the nominal interest rate is 8 percent and inflation rate is 7 percent

For an imaginary economy, when the real interest rate is 5 percent, the quantity of loanable funds demanded is 1000 and the quantity of loanable funds supplied is 1000. Currently the nominal interest rate is 9 percent and the inflation rate is 2 percent. Currently,

the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded and as a result the real interest rate will fall

A government reduces its budget deficit, but at the same time people become concerned that the outlook for future government expenditures and revenues increase the chance it will default. Which of the following is correct?

the reduced budget deficit will reduce interest rate in general. The increased risk of default will raise interest rates on government bonds.

The old adage, "Don't put all your eggs in one basket," is very similar to a modern bit of advice concerning financial matters:

to diversify

When a country saves a larger portion of its GDP than it did before, it will have

more capital and higher productivity

Two bonds have the same term to maturity. The first was issued by a state government and the probability of default is believed to be low. The other was issued by a corporation and the probability of default is believed to be high. Which of the following is correct?

Because of the differences in tax treatment and credit risk, the corporate bond should have the higher interest rate.

Suppose the government finds a major defect in one of a company's products and demands that the product be taken off the market. We would expect that the

Demand for existing shares of stock and price will both fall.

Assume the bonds below have the same term and principal and that the state or local government that issues the municipal bond has a good credit rating. Which list has bonds correctly ordered from the one that pays the highest interest rate to the one that pays the lowest interest rate?

corporate bond, U.S. government bond, municipal bond

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.

Suppose a government that taxed all interest income changed its tax law so that the first $5,000 of a taxpayer's interest income was tax free. This would shift the

supply of loanable funds to the right, causing interest rates to fall

Suppose government expenditures on goods and services increase, transfer are unchanged, and taxes rise by less than the increase in expenditures. These changes in the government's budget cause

the equilibrium interest rate to rise and the equilibrium quantity of loanable funds to fall

We would expect the interest rate on Bond A to be higher than the interest rate on Bond B if the two bonds have identical characteristics except that

Bond A has a term of 20 years and Bond B has a term of 1 year, Bond A was issued by the Exxon mobile corporation and Bond B was issued by the state of New York, and Bond A was issued by a financially weak corporation and Bond B was issued by a financially strong corporation all the above