Macro- CH 7
In January 2013, Tim's Gyms, Inc. owned machines valued at $1 million. During the year, the market value of equipment fell by 30%. During 2013, Tim spent $200,000 on new machines. During 2013, Tim's gross investment totaled___.
$200,000
Households make saving decisions by considering all of the following except: 1. default risk 2. expected future income 3. expected profit 4. the real interest rate
Expected profit
T/F concerning firms' investment decisions: The higher the real interest rate, the greater the demand for loanable funds, the other things remaining the same.
False
T/F: A government budget surplus competes with investment for funds.
False
T/F: The nominal interest rate is the real interest rate adjusted to remove the effects of inflation on the buying power of money.
False
T/F: Commercial banks are financial institutions that accept deposits, provide payment services, and make loans to firms and households.
True
T/F: When the price of an asset rises, the interest rate falls, everything else remaining the same
True
Over time, on average the demand for loanable funds _____, so the real interest rate _____.
and the supply of loanable funds increase at a similar pace; has no trend
Examples of financial capital are:
bonds issued by Wal-Mart and stocks issued by Boeing
In an individual economy that is integrated into the global market, the demand for loanable funds is determined by the ___ demand and the supply of loanable funds is determined by the ___ supply.
country's; world's
The crowding-out effect is the tendency for a government budget ____ to ____ the real interest rate and decrease ____.
deficit; raise; investment
Loanable funds flow among countries because _____.
funds flow into the country with the highest real interest rate and out of the country in which the real interest rate is the lowest
According to the Ricardo-Barro effect, the government budget deficit ___ the real interest rate.
has no effect on
A government budget deficit ____ the demand for loanable funds. The real interest rate ____, ____ increases, and ____ decreases.
increase; rises; private saving; investment
A decrease in expected future income ____.
increases the supply of loanable funds today because households with smaller expected future income will save more today
A government budget surplus occurs, which ___. The real interest rate ___, household saving ___, and investment ___.
increases the supply of loanable funds; falls; decreases; increases.
A government budget surplus ____ the supply of loanable funds. The real interest rate ____, ____ decreases, and ____ increases.
increases; falls; private saving; investment
A decrease in current income taxes ____ the supply of loanable funds today because it ____.
increases; increases disposable income, which encourages greater saving
The three main types of markets for financial capital are
loan markets, bond markets, and stock markets
If a country's net exports are ____, the rest of the world supplies funds to that country and the quantity of loanable funds in that country is ____ the national saving.
negative; greater
Examples of physical capital are:
ovens used by Pizza Hut and lawn mowers used by Larry's Mowing
When the real interest rate falls, the ____ because the _____ is the opportunity cost of loanable funds.
quantity of loanable funds demanded increases; real interest rate
A government budget deficit ____ the real interest rate because ____.
raises; the demand for loanable funds increases
The ____ interest rate is the opportunity cost of loanable funds because ____.
real; the real interest paid on borrowed funds is the opportunity cost of borrowing and the real interest rate forgone is the opportunity cost of not saving or not lending those funds
The demand for loanable funds increases and the supply of loanable funds increases. As a result, the equilibrium real interest rate _____ and the equilibrium quantity of loanable funds _____.
rises, falls or remains the same; increases
The demand for loanable funds increases and the supply of loanable funds decreases. As a result, the equilibrium real interest rate ____ and the equilibrium quantity of loanable funds ____.
rises; increases, decreases, or remains the same
According to the Ricardo-Barro effect, when a government budget deficit occurs today, ___.
saving increases, the supply of loanable funds increases, and the real interest rate does not change.
The loanable funds market is ___.
the aggregate of all the individual financial markets
Net investment is
the change in the value of capital
Financial capital is ____.
the funds that firms use to buy physical capital
The demand for loanable funds is determined by ____. The demand for loanable funds changes when ____ changes.
the real interest rate and expected profit; expected profit
Physical capital is ____.
the tools, instruments, machines, buildings, and other items that have been produced in the past and that are used today to produce goods and services.
Gross investment is
the total amount spent on new capital
The supply of loanable funds is influenced by ____.
wealth and default risk, the real interest rate, the disposable income and expected future income.
I=
S+(T-G)+(M-X)
