HW 8

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

diversify

If the nominal interest rate is 4 percent and the inflation rate is 3 percent, then the real interest rate is

1 %

Refer to Scenario 26-1. For this economy, investment amounts to

$15,000

A budget deficiet

Changes both the supply of and the demand for loanable funds

For an open economy, the equation Y = C + I + G + NX is an identity. If we define national saving, S, as the total income in the economy that is left after paying for consumption and government purchases, then for an open economy, it is true that

S = I + NX

A lager Budget Deficit

Raises the interest rate and reduces investment

If the government's expenditures exceeded its receipts, it would likely

Sells bonds directly to the public

Consider the expressions T − G and Y − T − C. Which of the following statements is correct?

The first one is public saving and the second one is private savings

In 2002 mortgage rates fell and mortgage lending increased. Which of the following could explain both of these changes?

The supply of loanable funds shifted rightward.

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

The supply of loanable funds shifted to the left

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

There would be an increase in the equilibrium quantity of loanable funds.

Refer to Figure 26-3. 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 point F

Two of the economy's most important financial intermediaries are

banks and mutual funds

Which of the following is a certificate of indebtedness?

bonds but not stocks

As chief financial officer you sell newly issued bonds on behalf of your firm. Your firm is

borrowing directly

If the Apple corporation sells a bond it is

borrowing directly from the public

When opening a print shop you need to buy printers, computers, furniture, and similar items. Economists call these expenditures

capital investment

Refer to Scenario 26-1. This economy's government is running a budget

deficit of $3,000

Northwest Wholesale Foods sells common stock. The company is using

equity financing and the return shareholders earn depends on how profitable the company is.

Financial intermediaries are

financial institutions through which savers can indirectly provide funds to borrowers

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

higher interest rates and lower investment.

In a closed economy, if Y , C , and T remained the same, a decrease in G would

increase neither private nor public saving.

A mutual fund

is an institution that sells shares to the public and uses the proceeds to buy a selection of various types of both stocks and bonds.

When the government's budget deficit increases the government is borrowing

more and public savings falls

A bond that never matures is known as

perpetuity

An increase in the government's budget surplus means public saving is

positive and increasing

In a closed economy, what does (Y − T − C) represent?

private saving

In a closed economy, what does the difference between the tax revenue and government purchases, (T − G), represent?

public saving

A bond Buyer is a

saver. Bond buyers may sell their bonds prior to maturity.

At the broadest level, the financial system moves the economy's scarce resources from

savers to borrowers

As an alternative to selling shares of stock as a means of raising funds, a large company could, instead,

sell bonds

If there is a surplus of loanable funds, then the quantity of loanable funds

supplied is greater than the quantity of loanable funds demanded and the interest rate is above equilibrium.

In a closed economy, public saving is the amount of

tax revenue that the government has left after paying for its spending.

National saving is

the total income in the economy that remains after paying for consumption and government purchases

A government may use deficit financing to smooth tax rates over time

true

All financial intermediaries are financial institutions, but not all financial institutions are financial intermediaries.

true

An increase in the demand for loanable funds increases the equilibrium interest rate and increases the equilibrium level of saving.

true

Anything other than a change in the interest rate that decreases national saving shifts the supply of loanable funds to the left.

true