Ch. 13 Questions

An increase in the budget deficit is a. a decrease in public saving. b. an increase in public saving. c. a decrease in private saving. d. an increase in private saving. e. none of the above.

a

An increase in the budget deficit will a. raise the real interest rate and decrease the quantity of loanable funds demanded for investment. b. lower the real interest rate and increase the quantity of loanable funds demanded for investment. c. lower the real interest rate and decrease the quantity of loanable funds demanded for investment. d. raise the real interest rate and increase the quantity of loanable funds demanded for investment.

a

If GDP = $1,000, consumption = $600, taxes = $100, and government purchases = $200, how much is saving and investment? a. saving = $200, investment = $200 b. saving = $0, investment = $0 c. saving = $200, investment = $100 d. saving = $300, investment = $300 e. saving = $100, investment = $200

a

If an increase in the budget deficit reduces national saving and investment, we have witnessed a demonstration of a. crowding out. b. intermediation. c. equity finance. d. the mutual fund effect.

a

If the government increases investment tax credits and reduces taxes on the return to saving at the same time, a. the impact on the real interest rate is indeterminate. b. the real interest rate should rise. c. the real interest rate should not change. d. the real interest rate should fall.

a

National saving (or just saving) is equal to a. private saving + public saving. b. investment + consumption expenditures. c. GDP - government purchases. d. GDP + consumption expenditures + government purchases. e. none of the above

a

Which of the following sets of government policies is the most growth oriented? a. lower taxes on the returns to saving, provide investment tax credits, and lower the deficit b. lower taxes on the returns to saving, provide investment tax credits, and increase the deficit c. increase taxes on the returns to saving, provide investment tax credits, and lower the deficit d. increase taxes on the returns to saving, provide investment tax credits, and increase the deficit

a

A closed economy has income of $1,000, government spending of $200, taxes of $150, and investment of $250. What is private saving? a. $300 b. $100 c. $200 d. $400

a S=I Y-C-G = 250 (Y-C-T) + (T-G) = 250 Private saving + (150-200) = 250 Private saving + (-50) = 250 Private saving = 300

If a popular TV show on personal finance convinces Americans to save more for retirement, the ________ curve for loanable funds would shift, driving the equilibrium interest rate ________. a. supply, down b. demand, up c. supply, up d. demand, down

a Saving makes up the supply of loanable funds; therefore, an increase in saving shifts the supply curve for loanable funds to the right. This drives the equilibrium interest rate down.

A financial intermediary is a middleperson between a. buyers and sellers. b. borrowers and lenders. c. labor unions and firms. d. husbands and wives.

b

If Americans become less concerned with the future and save less at each real interest rate, a. real interest rates rise and investment rises. b. real interest rates rise and investment falls. c. real interest rates fall and investment falls. d. real interest rates fall and investment rises.

b

If government spending exceeds tax collections, a. there is a budget surplus. b. there is a budget deficit. c. private saving is positive. d. public saving is positive. e. none of the above is true.

b

If the government collects more in tax revenue than it spends, and households consume more than they get in after-tax income, then a. private saving and public saving are both negative. b. private saving is negative, but public saving is positive. c. private saving is positive, but public saving is negative. d. private saving and public saving are both positive.

b

If the public consumes $100 billion less and the government purchases $100 billion more (other things unchanging), which of the following statements is true? a. There is an increase in saving, and the economy should grow more quickly. b. Saving is unchanged. c. There is not enough information to determine what will happen to saving. d. There is a decrease in saving, and the economy should grow more slowly.

b

If the supply of loanable funds is very inelastic (steep), which policy would likely increase saving and investment the most? a. an investment tax credit b. a reduction in the budget deficit c. an increase in the budget deficit d. none of the above

b

The main advantage of mutual funds is that they provide a. a return insured by the government. b. an easy way to hold a diversified portfolio. c. a way to avoid fluctuations in stock and bond prices. d. an asset that is widely used as the medium of exchange.

b

Which of the following financial market securities would likely pay the highest interest rate? a. a bond issued by a blue chip company b. a bond issued by a start-up company c. a mutual fund with a portfolio of blue chip bonds d. a municipal bond issued by the state of Texas

b

Credit risk refers to a bond's a. term to maturity. b. tax treatment. c. dividend. d. price-earnings ratio. e. probability of default.

e

An increase in the budget deficit that causes the government to increase its borrowing a. shifts the demand for loanable funds to the left. b. shifts the demand for loanable funds to the right. c. shifts the supply of loanable funds to the left. d. shifts the supply of loanable funds to the right.

c

Which of the following is an example of equity finance? a. corporate bonds b. municipal bonds c. stock d. bank loan e. All of the above are equity finance.

c

Which of the following statements is true? a. A stock index is a directory used to locate information about selected stocks. b. Longer-term bonds tend to pay less interest than shorter-term bonds. c. Municipal bonds pay less interest than comparable corporate bonds. d. Mutual funds are riskier than single stock purchases because the performance of so many different firms can affect the return of a mutual fund.

c

Which of the following policy actions would unambiguously reduce the supply of loanable funds and crowd out investment? a. an increase in taxes and a decrease in government spending. b. a decrease in both taxes and government spending. c. a decrease in taxes together with an increase in government spending. d. an increase in both taxes and government spending.

c increase government budget deficit which crowds out investors

A bond tends to pay a high interest rate if it is a. a short-term bond rather than a long-term bond. b. issued by the federal government rather than a corporation. c. a municipal bond exempt from federal taxation. d. issued by a corporation of dubious credit quality.

d

An increase in the budget surplus a. shifts the supply of loanable funds to the left and increases the real interest rate. b. shifts the demand for loanable funds to the left and reduces the real interest rate. c. shifts the demand for loanable funds to the right and increases the real interest rate. d. shifts the supply of loanable funds to the right and reduces the real interest rate.

d

Carly wants to buy and operate an ice-cream truck but doesn't have the financial resources to start the business. She borrows $20,000 from her friend Freddie, to whom she promises an interest rate of 7 percent, and gets another $30,000 from her friend Sam, to whom she promises a third of her profits. What best describes this situation? a. Sam is a stockholder, and Carly is a bondholder. b. Freddie is a stockholder, and Carly is a bondholder. c. Freddie is a stockholder, and Sam is a bondholder. d. Sam is a stockholder, and Freddie is a bondholder.

d

From 2008 to 2012, in the aftermath of the financial crisis, the ratio of government debt to GDP in the United States a. was stable at a historically high level. b. decreased markedly. c. was stable at a historically low level. d. increased markedly.

d

If Americans become more thrifty, we would expect a. the supply of loanable funds to shift to the right and the real interest rate to rise. b. the demand for loanable funds to shift to the right and the real interest rate to rise. c. the demand for loanable funds to shift to the right and the real interest rate to fall. d. the supply of loanable funds to shift to the right and the real interest rate to fall.

d

If the business community becomes more optimistic about the profitability of capital, the ________ curve for loanable funds would shift, driving the equilibrium interest rate ________. a. supply, up b. demand, down c. supply, down d. demand, up

d

Investment is a. when we place our saving in the bank. b. the purchase of stocks and bonds. c. the purchase of goods and services. d. the purchase of capital equipment and structures.

d