eco chapter 13
A budget deficit
changes the supply of loanable funds.
The slope of the supply of loanable funds curve represents the
positive relation between the interest rate and saving.
As an alternative to selling shares of stock as a means of raising funds, a large company could, instead,
sell bonds.
In a closed economy, public saving is the amount of
tax revenue that the government has left after paying for its spending.
We associate the term debt finance with
the bond market, and we associate the term equity finance with the stock market.
National saving is
the total income in the economy that remains after paying for consumption and government purchases.
Suppose that in a closed economy GDP is equal to 20,000, consumption equal to 15,000, government purchases equal 4,000, and taxes equal 3,000. What are private saving, public saving, and national saving?
2,000, −1,000, and 1,000, respectively.
Other things the same, when the interest rate rises, people would want to lend
more, making the quantity of loanable funds supplied increase.
Which of the following is a certificate of indebtedness?
Bonds but not stocks
Assume the bonds below have the same term and principal and that the state or local government that issues the municipal bond has a good credit rating. Which list has bonds correctly ordered from the one that pays the highest interest rate to the one that pays the lowest interest rate?
Corporate bond, U.S. government bond, municipal bond
Suppose a closed economy had public saving of −$1 trillion and private saving of $3 trillion. What are national saving and investment for this country?
$2 trillion, $2 trillion
Assume the following information for an imaginary, closed economy. GDP$100,000Taxes$22,000Government Purchases$25,000National Saving$15,000 Refer to Scenario 26-1. For this economy, private saving amounts to
$18,000.
Which of the following bonds has the highest interest rate?
A long term and a high credit risk
Which of the following would necessarily create a surplus at the original equilibrium interest rate in the loanable funds market?
An increase in the supply of or a decrease in the demand for loanable funds
Consider 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.
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 left.
Northwest Wholesale Foods sells common stock. The company is using
equity financing and the return shareholders earn depends on how profitable the company is.
If the supply of loanable funds shifts to the right, then the equilibrium interest rate
falls and the quantity of loanable funds rises.
In a closed economy, if Y and T remained the same, but G rose and C fell but by less than the rise in G, what would happen to public and national saving?
Public and national saving would fall.
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.
