Chapter 10

If the projected rate of return for a project is less than the interest rate for a loan that is necessary to complete the project, how will the borrowing business act?

The business will not take out the loan

Determine which financial asset is described in each scenario. Caleb has completed a prototype garlic-peeling device that he hopes to sell to the public. Caleb decides to have his startup issue securities that offer buyers the promise to pay a specified amount of interest each year plus the principal in five years.

bonds

What is the fundamental relationship between savings and investment spending?

investment spending and savings are always equal

What is an agreement between a lender and a borrower

loan

In a small, closed economy, national income (GDP) is $500.00 million for the current quarter. Individuals have spent $300.00 million on the consumption of goods and services. They have paid a total of $200.00 million in taxes, and the government has spent $150.00 million on goods and services this quarter. Use this information and the national income identity to answer the questions. 1. How much is spent on investment in this economy? 2. What is national saving in this economy? 3. How are investment and national saving related in an economy like this?

1. $50 million 2. $50 million 3. National saving equals investment

What is a share of ownership in a company

stock

Which of these statements best summarizes the impact of the Fisher effect?

Consumers consider future inflation

Select the TWO statements that characterize these two aspects of efficiency. 1. Investment projects that are financed by savers have larger rates of return than projects that do not receive financing. 2. There is always a small surplus of funds in the market. 3. Investment projects that are financed have smaller rates of return than projects not receiving financing. 4. Savers who lend money are willing to accept a lower minimum interest rate than potential savers who do not lend money. 5. All potential savers lend money. 6. Savers who lend money are willing to accept a higher minimum interest rate than potential savers who do not lend money.

1. Investment projects that are financed by savers have larger rates of return than projects that do not receive financing. AND 4. Savers who lend money are willing to accept a lower minimum interest rate than potential savers who do not lend money.

Determine if the following statements are true or false. 1. An increase in government spending can crowd out private investment. 2. An improvement in the budget balance increases the demand for financial capital. 3. An increase in private consumption may crowd out private investment. 4. Lower interest rates can lead to private investment being crowded out. 5. A trade balance in surplus increases the supply of financial capital. 6. If private savings is equal to private investment, then there is neither a budget surplusnor a budget deficit.

1. true 2. false 3. true 4. false 5. false 6. false

What is it when budget balance is combined with all of the privately-held savings from across the country?

National savings

After reading the given descriptions, please place the correct label by the quadrant on the graph that best describes each person's position in the market for loanable funds. - Jolien decides not to take out a loan to fund expanding her grocery store because she projects it will only earn a return of 4%. - Osi closely follows the market for United States Treasury Bonds. He is willing to invest in them anytime the rate of return is 5% or higher, and sees that this is the case. - In order to open a new car wash facility expected to return 13%, Julius secures a loan. - John will shift his stock investments to corporate bonds when they return at least 10%. They do not, so he stays with stocks

Upper demand curve: Julius Lower demand curve: Jolien Upper supply curve: John Lower supply curve: Osi

Determine which financial asset is described in each scenario. Jack decides to build a chateau in the mountains of Colorado and operate it as a ski resort. He secures funding from a local commercial bank after discussing his business plan with the bank. He promises to pay back the principal plus interest over the next 20 years.

loans

Determine which financial asset is described in each scenario. Lyle and Shane start a business selling pencil sharpeners to elementary schools. Their company becomes an instant success, and they decide to allow people to start buying a small share of their company. This gives individuals who buy shares the right to vote in company decisions and a small percentage of the profits.

stocks

Determine which financial asset is described in each scenario. Rand Capital Corportation, a financial industry conglomerate, pools together several hundred home mortgages and sells shares in them to group of investor. However, many investors decide against this option because of the risk involved and the difficulty of assessing the quality of such a large number of individual mortgages.

loan-backed securities

Which of the four graphs best demonstrates the Fisher effect?

B

What is a promise to pay issued by a borrower with annual interest payments and a principal payment at maturity.

bond

As interest rate decreases, what happens to the quantity of loanable funds demanded?

Quantity demanded will increase

How do mutual funds reduce risk for the average individual investor?

Mutual funds reduce risk through portfolio diversification

What is the net amount of funds coming into a country?

Capital inflow

Which of the terms acts as the "price" in the market for loanable funds?

Interest rate

What effect will an increase in interest rates have on the quantity of loanable funds supplied?

Quantity supplied will increase

What is the difference between the amount the government collects and how much it spends?

Budget balance

What is the result when the government spends more money than it takes in through taxes?

Budget deficit

What is it when the government spends less money than it takes in through taxes?

Budget surplus

Collaboration with Congress during the Clinton Administration allowed for an aggressive deficit-cutting plan to pass. As a result, the government was able to reach a balanced budget at the end of the 90's. Move the supply and/or demand curves to describe the expected effect that this deficit-reduction likely had upon the loanable funds market. As a result, private investment should have ___.

Demand curve shifts leftward increased because the cost of borrowing decreased

Which of the following best defines a financial intermediary? 1. a claim by a buyer to a future payment by a seller 2. an asset sold by a company which entitles the buyer to partial ownership 3. a collection of stocks and bonds issued to investors 4. a financial institution that transforms investor funds into financial assets

a financial institution that transforms investor funds into financial assets

The accompanying graph represents the market for loanable funds in the hypothetical country of Bunko. Assume the market is initially in equilibrium and inflation expectations are 2%. a. Adjust the graph to demonstrate the effects of inflation expectations increasing from 2% to 4%. b. What is the real interest rate after the change in inflation expectations? c. Which effect below characterizes the relationship between inflation expectations and nominal interest rates?

a. shift demand right and shift supply left b. 3% c. The Fisher Effect

What are funds that are kept in a bank that must be relinquished upon the owner's request

bank deposit

Please use the graph to answer the given questions. Assume the people act rationally. 1. Which of the statements best describes a situation represented by point A? - Wayne projects that if he takes out a loan to open another gym franchise, he will earn a lower return than the interest rate he would have to pay, so he decides against it. - Jeff agrees to lend money to his brother, who plans to use the funds to open a shoe store. - Janine predicts that, if she borrows to expand operations, she will earn a rate of profit higher than the interest rate of the loan. So, she decides to take out the loan. - Carly decides against purchasing a corporate bond because she has another investment opportunity that returns 13%. 1. Given the market conditions, what will be the prevailing interest rate? 2. Given the market conditions, how much will be available in loanable funds?

1. Wayne projects that if he takes out a loan to open another gym franchise, he will earn a lower return than the interest rate he would have to pay, so he decides against it. 2. 10% 3. $50 billion

Each of the events will affect the stock of the company involved. For each company, please predict the effect on the demand of its stock shares, as well as on its stock price. Assume that nothing else changes. A) Ford Motor Company announces that it will have to decrease profit expectations for the current year, as an increase in gas prices has led many people to hold off on buying a new car. B) Due to a successful advertising campaign using the "Pepsi Challenge," PepsiCo announces that sales of its signature soft drink are higher than expected. C) On the same day you buy a share of Google Inc. stock, the US government announces an increase in interest rates, making bonds a more attractive option for investors. D) Starbucks Coffee Company informs the public that profits this year are larger than previously predicted, due to its expansion into the retail ice cream and chocolate businesses.

A) Demand will decrease. Price will decrease. B) Demand will increase. Price will increase. C) Demand will decrease. Price will decrease. D) Demand will increase. Price will increase.

Please decide whether each of the scenarios related to the loanable funds market will result in a shift in supply or a shift in demand. A) China decides to reduce its capital investment in the United States, as it expects low returns due to a weak US economy. B) Calopolis, a college town in Northern California, has for many years banned the presence of fast food restaurants in city limits. As of 2012, however, the city will allow several fast food companies to open franchised locations. C) Due to an increase in revenues after a tax hike, the United States is able to eliminate the deficit and begins to maintain a balanced budget for the first time in several decades. D) As a result of a stock market boom, individuals begin to feel richer and spend more while also saving less.

A) shift in supply B) shift in demand C) shift in demand D) shift in supply

Adjust the graph to show how an increase of $25.8 billion dollars in the government's budget deficit affects this loanable funds market, holding all else equal. Select the answer that describes the adjustment in the loanable funds market. 1. The deficit increases the demand for loanable funds and shifts the demand curve to the right, increasing the interest rate and crowding out investment spending. 2. The deficit decreases national savings and shifts the supply curve to the left, increasing the interest rate and crowding out investment spending. 3. The deficit decreases the demand for loanable funds and shifts the demand curve to the left, decreasing the interest rate and crowding out investment spending. 4. The deficit increases national savings and shifts the supply curve to the right, decreasing the interest rate and crowding out investment spending.

Demand curve shifts to the right The deficit increases the demand for loanable funds and shifts the demand curve to the right, increasing the interest rate and crowding out investment spending.

Determine whether the statements listed regarding the savings-investment spending identity are true or false. - The national savings are the combined value of all private savings and the budget balance - National budget deficits are not included in the calculation of national savings - Outflows of funds can only be generated by countries with a larger gross domestic product (GDP) per capita than the country receiving the funds - The budget balance can be either positive or negative How does funding from national savings differ from funding obtained from capital inflows?

True: - The national savings are the combined value of all private savings and the budget balance - The budget balance can be either positive or negative False: - National budget deficits are not included in the calculation of national savings - Outflows of funds can only be generated by countries with a larger gross domestic product (GDP) per capita than the country receiving the funds National savings are repaid domestically, whereas capital inflows are repaid to a foreigner.

Determine which financial asset is described in each scenario. Audrey wants to buy a new car but does not have enough cash. She gets funding from her local bank with the promise that she will make monthly payments for the next three years to repay the original amount lent to her plus 6% interest.

loans