Chapter 8 Macroeconomics Test

What is a bond and its' characteristics

A bond is a certificate of indebtedness (aka an IOU). The first characteristic is term(length of time until the bond matures). The second characteristic is credit risk (the probability that the borrower will fail to pay some of the interest of principle) The third characteristic is tax treatment( the way the tax laws treat the interested earned on the bond)

Think about national savings in a closed economy, national saving in a closed economy equals

All of the above are correct.

Think about the market for loanable funds. What would happen in this market if the government were to increase the tax on interest income?

Interest rates would rise.

Riskiness of the short term and long term bond

Long term bonds are riskier than short term bonds

When we save a larger portion of GDP, what happens with capital and productivity?

More resources are available for investment in capital and higher capital raises a country's productivity and living standard.

Municipal bonds, tax treatment and interest rate

Municipal bond: when state and local governments issue bonds; bond owners are not required to pay federal income tax on the interest income. Tax treatment: the way the tax laws treat the interest on the bond. Interest rate for bonds: interest on bonds is taxable income; municipal bonds don't pay federal income tax on interest income.

What is the source of supply and demand for loanable funds?

Saving is the source of the supply of loanable funds. Investment is the source of demand for loanable funds.

What is default and what characteristic of bond can explain that?

The characteristic of bond is credit risk while default is failure to pay bond.

What would happen in the market for loanable funds if the Congress decided to repeal an investment tax credit.

The demand for loanable funds would shift left.

Based on the material covered in chapter 8, recall the expressions T - G and Y - T - C. Which of the following statements is correct?

The first of these is public saving; the second one is private saving.

Private savings

The income that households have left after paying for taxes and consumption. (Y-T-C)

Public savings

The tax revenue that the government has left after paying for its spending. (T-G)

National savings

The total income in the economy that remains after paying for consumption and government purchases. S=Y-C-G or S=(Y-T-C)+(T-G)

What is the primary advantage of mutual funds?

They allow people with small amounts of money to diversify their holdings

capital investment

Things like equipment and buildings. This is expensive for a company to take on, and makes getting a new product on the store shelves very difficult, even if it is a really good product. Also, if your getting something on the shelf, that means that something else if coming off.

Think about different types of bonds we studied in chapter 8. Which of these bonds will have the lowest default risk?

a bond issued by the federal government

Crowding out occurs when investment declines because

a budget deficit makes interest rates rise.

Recall the market for LF from Ch. 8. If the demand for loanable funds shifts to the right, then the equilibrium interest rate

and quantity of loanable funds rises.

Think about different bonds and tax treatment. People who hold municipal bonds:

are not required to pay federal income tax on the interest income.

Based on the material covered in chapter 8, think about financial system of the country. The example of economies two financial intermediaries, are

banks and mutual funds.

The indirect provision of funds by savers to borrowers is accomplished by

banks and other financial intermediaries.

A national chain of restaurants wants to open several new locations. The company has limited internal funds, so it will

demand the required funds by selling bonds.

Based on the material covered in chapter 8, what is the advantage of mutual funds?

diversification and access to the skills of professional money managers

Based on the material covered in chapter 8, think about the riskiness and the term of a bond. If we are talking about short-term bonds, they are generally

less risky than long-term bonds and so they feature lower interest rates.

Think about different risk and potential return that stocks and bonds offer to their holders. If we going to compare stock to bonds, then bond offer

lower risk and lower potential return.

Think about tax treatment and term of the bond, bonds that will pay higher interest rates will have:

no tax exemptions and long terms.

People who buy stock in a corporation such as General Electric become

part owners of General Electric, so the benefits of holding the stock depend on General Electric's profits.

Based on the material covered in chapter 8. If a corporation wants to borrow directly from the public, it can

sell bonds.

Think about the supply and demand of funds. If a company wants to borrow funds it can

supply bonds by selling them.

In a closed economy, public saving is the amount of

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

In the language of macroeconomics, investment refers to

the purchase of new capital.

Please recall the market for LF. If the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded,

there is a surplus and the interest rate is above the equilibrium level.

Based in the material covered in class. If the company sell stocks

to raise money, it is called equity finance, while the sale of bonds to raise funds is called debt finance.

If in the past Congress had taken additional actions to make saving more rewarding, then today it is likely that the equilibrium interest rate

would be lower and the equilibrium quantity of loanable funds would be higher.

Suppose that in a closed economy GDP is equal to 15,000, government purchases are equal to 3,000, consumption equals 10,500, and taxes equal 3,500. What are private saving and public saving?

1,000 and 500, respectively

What are two financial markets in the economy?

Bond market and stock market

When do we have a budget deficit vs. budget surplus?

Budget deficit is when government spends more that it receives in tax revenue (and public saving is a negative number) Budget surplus is when government receives more money that it spends.

Based on the material covered in chapter 8, which examples a macroeconomist consider as investment?

Charlie builds a new coffee shop.

What is equity finance and what is debt finance?

Equity finance is sale of the stock to raise money while debt finance is the sale of a bond.

What is a junk bond?

Financially shaky corporations raise money by issuing junk bond which pay very high interest rates.