econ ch13
Suppose that the nominal interest rate is 6.5% and the real interest rate is 3%. What is the inflation rate? a) 3.5% b) 9.5% c) the inflation rate cannot be found from this data d) 2.2%
3.5% nominal interest rate = inflation rate + real interest rate 6% - 3% = 3.5%
Suppose that the nominal interest rate is 6% and the rate of inflation is 2%. What is the real interest rate? a) 10% b) 4% c) 8% d) 3%
4% The real interest rate equals the nominal interest rate minus the inflation rate: 6% - 2% = 4%
Suppose that the inflation rate is 2% and the real interest rate is 4%. What is the nominal interest rate? a.6%. b.10%. c.8% d.2%.
6% 4% + 2% = 6%
if the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded, there is a shortage of loanable funds and the interest rate is below the equilibrium level (true/false)
False When the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded, a surplus of loanable funds occurs. This situation arises from the actual interest rate being higher than the equilibrium interest rate, which encourages lenders to lower the interest rate they charge.
Suppose a closed economy had public saving of -$2 trillion and private saving of $4 trillion. What are national saving and investment for this country? a.national savings is $4 trillion and investment is $2 trillion b.national savings is $2 trillion and investment is $2 trillion c.national savings is $2 trillion and investment is $3 trillion d.national savings is $3 trillion and investment is $3 trillion
national saving is $2 trillion and investment is $2 trillion In a closed economy, national savings is a sum of private saving and public saving: (-$2 trillion) + $4 trillion = $2 trillion. At the same time, the accounting identity S = I shows that national saving and investment are equal for the economy as a whole. Thus, investment, I = $2 trillion.
Suppose a closed economy has public saving of -$1 trillion and private saving of $3 trillion. What are national saving and investment for this country? a.national saving is $2 trillion, investment is $2 trillion b.national saving is $4 trillion, investment is $2 trillion c.national saving is $3 trillion, investment is $3 trillion d.national saving is $2 trillion, investment is $3 trillion
national saving is $2 trillion, investment is $2 trillion In a closed economy, national savings is a sum of private saving and public saving: S = (-$1 trillion) + $3 trillion = $2 trillion. At the same time, the accounting identity shows that national saving and investment are equal for the economy as a whole, S = I. Thus, investment, I = $2 trillion.
Which of the following must be true if Y = (C + I + G)? a) national saving is less than investment (S < I) b) Net exports (NX) are zero c) national saving is zero d) Y - C - G > I
net exports (NX) are zero Generally, Y = C + I + G + NX. In a closed economy, however, Y = C + I + G. This is because the closed economy does not engage in international trade, thus imports and exports are exactly zero, NX = 0.
A perpetuity is distinguished form other bonds in that it a) never matures b) will be used to purchase another bond when it matures unless the owner specifies otherwise c) pays interest only when it matures d) pays continuously compounded interest
never matures A bond that never matures is called a perpetuity. Some bonds have short terms, such as a few months, while others have terms as long as thirty years.
Which of the following bonds has the lowest risk of default? a) a bond issued by the state of Arizona b) a junk bond c) a bond issued by General Electric Corporation d) a bond issued by the federal government
a bond issued by the federal government. Bonds issued by financially shaky corporations, or junk bonds, have the highest risk of default and thus pay very high interest rates. By contrast, The U.S. government bonds have the lowest risk of default and offer low rates of return. Buyers of bonds can judge credit risk by checking with various private agencies which rate the credit risk of different bonds.
A bond is a) a claim to partial ownership b) a loan c) a special tax treatment d) a certificate of indebtedness
a certificate of indebtedness A bond is a certificate of indebtedness that specifies the obligations of the borrower to the holder of the bond, an IOU. It identifies the time at which the loan will be repaid, called the date of maturity, and the rate of interest that will be paid periodically until the loan matures.
A bond is a.a claim to partial ownership. b.a loan. c.a special tax treatment. d.a certificate of indebtedness.
a certificate of indebtedness. A bond is a certificate of indebtedness that specifies the obligations of the borrower to the holder of the bond, an IOU. It identifies the time at which the loan will be repaid, called the date of maturity, and the rate of interest that will be paid periodically until the loan matures.
which of the following bonds has the highest risk of default (or credit risk)? a) a US government bond b) a corporate bond issued by Procter & Gamble Corporation c) A municipal bond d) a junk bond
a junk bond Bonds issued by financially shaky corporations, or junk bonds, have the highest risk of default and thus pay very high interest rates. By contrast, The U.S. government bonds have the lowest risk of default and offer low rates of return. Buyers of bonds can judge credit risk by checking with various private agencies which rate the credit risk of different bonds.
A bond that never matures is known as a) an indexed bond b) a junk bond c) an intermediary bond d) a perpetuity
a perpetuity A bond that never matures is called a perpetuity.
By definition a closed economy a) does not trade with other economies b) is centrally-planned c) engages in international borrowing and lending d) does not allow financial intermediation
does not trade with other economies Each unit of output sold in a closed economy is consumed by domestic consumers, invested in domestic business, or bought by the domestic government. In other words, closed economies neither export nor import from abroad. They also do not engage in international borrowing and lending.
Consider a closed economy with national saving of $3 trillion, consumption of $10 trillion, and government purchases of $4 trillion. What is the economy's GDP? a) $3 trillion b) $9 trillion c) $17 trillion d) $11 trillion
$17 trillion In a closed economy, GDP is a sum of national savings (or investment), consumption, and government purchases, Y = C + I + G = $10 trillion + $3 trillion + $4 trillion = $17 trillion
In a closed economy, GDP is $12 trillion, consumption is $7 trillion, taxes net of transfers are $3 trillion and the government runs a deficit of $1 trillion. What are private saving and national saving? a) $2 trillion and $1 trillion, respectively b) $2 trillion and $3 trillion, respectively c) $5 trillion and $1 trillion, respectively d) $5 trillion and $3 trillion, respectively
$2 trillion and $1 trillion, respectively In a closed economy, private saving is (Y - T - C) = ($12 trillion - $3 trillion - $7 trillion) = $2 trillion. National saving is a sum of private saving (Y - T - C) and public saving (T - G), which is -$1 trillion. Thus S = $2 trillion + (-$1 trillion) = $1 trillion.
In a closed economy GDP is Y = $100,000, government purchases are G = $25,000, and consumption C = $15,000. In this economy, investment amounts to a) $60,000 b) $85,000 c) $40,000 d) $72,000
$60,000 In a closed economy, Y = C + I + G. Therefore, investment is I = Y - C - G = $100,000 - $15,000 - $25,000 = $60,000.
Consider an economy with GDP = $8.7 trillion, consumption spending = $6.1 trillion, taxes net of transfers = $1.0 trillion, and government purchases = $0.8 trillion. Which of the following is true for the described economy?
Private saving is $1.6 trillion and the quantity of loanable funds demanded is $1.8 trillion
Suppose that Bonds A and B have identical characteristics except that Bond A has a term of 10 years and Bond B has a term of 1 year. Which of the following is true about these bonds? a)Bond A was issued by a municipal government and Bond B was issued by Blue Sun Corporation. b) The credit risk associated with Bond A is lower than the credit risk associated with Bond B. c) Bond A pays a lower interest rate than Bond B. d) Bond A pays a higher interest rate than Bond B.
Bond A pays a higher interest rate than Bond B. Long-term bonds are riskier than short-term bonds because holders of long-term bonds have to wait longer for repayment of principal. To compensate for this risk, long-term bonds usually pay higher interest rates than short-term bonds. Thus you should expect that a 10-year Bond A will pay a higher interest rate than a 1-year Bond B.
Jim considers borrowing funds to invest in expanding his auto repair shop. He is less likely to do that if the interest rates fall. (true/false)
False The interest rate is the price of a loan. It represents the amount that borrowers pay for loans and the amount that lenders receive on their saving. The demand curve for loanable funds slopes downward. Other things the same, lower interest rates make borrowing more attractive. Thus Jim is more likely to expand his business as interest rates fall.
An automotive company has $10 million in cash, which would cover the cost of building a new factory. Suppose that recently, the interest rate has increased. Which of the following correctly describes the effect of a higher interest rate on the decision to build a new factory? a) Decreases the likelihood of building a new factory as a higher interest rate increases the opportunity cost of the $10 million. b) No effect because the automaker doesn't have to borrow any funds. c) No effect because stockholders are expecting a new factory. d) Increases the likelihood of building a new factory as a higher interest rate increases the future value of the new factory.
Decreases the likelihood of building a new factory as a higher interest rate increases the opportunity cost of the $10 million In this case, even though the automaker does not have to borrow funds to build a new factory, an increase in the interest rate increases the opportunity cost of the $10 million as a higher interest rate makes saving more attractive
Suppose the government runs a budget surplus. This means that government expenditures are greater than tax revenue, which reduces the supply of loanable funds available to finance investment by households and firms. (true/false)
False A budget surplus is an excess of tax revenue over government spending. It contributes to national saving as the government saves the difference by retiring some of the outstanding government debt. Thus the amount of loanable funds increases. As a result, the supply curve for loanable funds shifts to the right causing the equilibrium real interest rate to decrease and the equilibrium quantity of loanable funds to increase.
A closed economy does not engage in international trade of goods and services but it does engage in international borrowing or lending (true/false)
False A closed economy neither engages in international trade of goods and services nor engages in international borrowing or lending. Each unit of output sold in a closed economy is consumed by domestic consumers, invested in domestic business, or bought by the domestic government.
Banks are the only type of financial intermediaries (true/false)
False Financial intermediaries are financial institutions through which savers can indirectly provide funds to borrowers. Two of the most important financial intermediaries are banks and mutual funds.
mutual funds are the only type of financial intermediaries (true/false)
False Financial intermediaries are financial institutions through which savers can indirectly provide funds to borrowers. Two of the most important financial intermediaries are banks and mutual funds.
The term junk bond refers to bonds that have been resold many times. (true/false)
False Financially shaky corporations raise money by issuing junk bonds, which pay very high interest rates to compensate for the high risk of default.
Purchases of capital goods are excluded from GDP (true/false)
False GDP is a sum of consumption, investment, government purchases, and net exports: Y = C + I + G + NX. In this identity, investment includes capital goods. Therefore, purchases of capital goods are not excluded from GDP.
Y = C + I + G represents GDP for an open economy, whereas Y = C + I + G +NX represents GDP for a closed economy (true/false)
False In an open economy, Y = C + I + G + NX. A closed economy, however, does not engage in international trade, and imports and exports are exactly zero, thus NX is zero, which implies Y = C + I + G.
People whose consumption exceeds their income are savers (true/false)
False Savers are people whose income exceeds consumption.
Consider a closed economy, in which S = (Y - T - C) + (T - G). In this identity, what does (Y - T - C) represent? a.National saving b.Public saving c.Private saving d.Investment
Private saving The identity S = (Y - T - C) + (T - G) is one of the ways to write national saving, where (T - G) is public saving and (Y - T - C) is private saving.
A corporation will borrow directly from the public by
Issuing bonds
Consider a closed economy, in which S = (Y - T - C) + (T - G) holds. What does this identity imply if the government's tax revenue is equal to its expenditures? a) Private saving is equal to government expenditures. b) Public saving is equal to investment. c) National saving and private saving are equal. d) After paying their taxes and paying for their consumption, households have nothing left.
National Saving and private saving are equal In a closed economy, when taxes equal government spending, public saving is zero and national saving equals private saving.
Consider a closed economy, in which S = (Y - T - C) + (T - G) holds. What does this identity imply if the government's tax revenue is equal to its expenditures?
National saving and private saving are equal
Consider a closed economy with a government deficit and positive investment. Which of the following is correct? a) both private saving and public saving are negative b) private saving is negative; public saving is positive c) private saving is positive; public saving is negative d) private and public saving are both positive
Private saving is positive; public saving is negative Private saving is the amount of income that households have left after taxes and paying for consumption. This closed economy has positive investment because households earn more than they consume and pay in taxes, which leads to positive private saving. Public saving is the amount of tax revenue left after government spending. A government deficit implies that the amount of tax revenue falls short of the government spending, which means that public saving is negative.
Consider a closed economy, in which S = (Y - T - C) +(T - G). In this identity, what does (T -G) represent?
Public saving The identity S = (Y - T - C) + (T - G) is one of the ways to write national saving, where (T - G) is public saving.
Which of the following must be true for an economy in which S = I? a) S = Y - C - G b) this is an open economy c) investment exceeds saving d) saving exceeds investment
S = Y - C - G In a closed economy, Y = C + I + G. Thus, Y - C - G = I, where (Y-C-G) is the total income in the economy that remains after paying for consumption and government purchases, or national saving, and is denoted as S. Since S= I, we can write that S = Y - C - G.
The source of the supply of loanable funds is a) imports b) GDP c) investment d) saving
Saving The supply of loanable funds comes from people who have some extra income they want to save and lend out. This lending can occur directly or indirectly. In both cases, saving is the source of the supply of loanable funds.
Suppose you have to choose between two bonds. The interest rate on one bond is 5% and the interest rate on the other is 2%. Which of the following is likely to be true about these bonds? a) the 2% bond has a longer term than the 5% bond b) the 2% bond is a municipal bond, and the 5% bond is a U.S. government bond c) the 5% bond is a U.S. government bond, and the 2% bond is a junk bond d) the 2% bond is more risky than the 5% bond
The 2% bond is a municipal bond, and the 5% bond is a U.S. government bond The interest on most bonds is taxable income; that is, the bond owner has to pay a portion of the interest in income taxes. Owners of municipal bonds issued by state and local governments, are not required to pay federal income tax on the interest income. Because of this tax advantage, such bonds typically pay a lower interest rate than bonds issued by corporations or the federal government.
Which of the following explains the effect of an investment tax credit on the market for loanable funds? a.The demand curve for loanable funds shifts to the left causing the equilibrium quantity of loanable funds to decrease and the equilibrium interest rate to increase. b.The demand curve for loanable funds shifts to the right causing both the equilibrium quantity of loanable funds and the equilibrium interest rate to increase. c.The demand curve for loanable funds shifts to the right causing both the equilibrium quantity of loanable funds the equilibrium interest rate to decrease. d.The demand curve for loanable funds shifts to the left causing the equilibrium quantity of loanable funds to increase, and the equilibrium interest rate to decrease.
The demand curve for loanable funds shifts to the right causing both the equilibrium quantity of loanable funds and the equilibrium interest rate to increase. An investment tax credit would encourage borrowing at each real interest rate level. As a result, the demand curve for loanable funds will shift to the right causing both the equilibrium quantity of loanable funds and the equilibrium interest rate to increase.
Consider the market for loanable funds, which is initially in equilibrium. Suppose the government allows workers to increase the maximum contribution limits to 401(k) and 403(b) tax-deferred retirement accounts. Which of the following describes the effect of this change on the market for loanable funds? a) The interest rate would increase and the quantity of loanable funds would decrease. b) The interest rate and quantity of loanable funds would decrease. c) The interest rate and quantity of loanable funds would increase d) The interest rate would decrease and the quantity of loanable funds would increase.
The interest rate would decrease and the quantity of loanable funds would increase other things being the same, if people can increase their tax-deferred savings, the amount of loanable funds increases at each real interest level. As a result, the supply curve of loanable funds shifts to the right causing the equilibrium interest rate to decrease and the equilibrium quantity of loanable funds to increase.
Which of the following describes a bond's credit risk? a.The probability that financially sound corporations raise money by issuing junk bonds, which pay very high interest rates. b.The fact that long-term bonds are riskier than short-term bonds because holders of long-term bonds have to wait longer for repayment of principal. c.The probability that the borrower will fail to pay some of the interest or principal. d.The probability that the bond owners will not be required to pay federal income tax on the interest income.
The probability that the borrower will fail to pay some of the interest or principal One of the important characteristic of a bond is the probability that the borrower will default, or fail to pay some of the interest or principal. Such a probability is called credit risk.
If there is a surplus of loanable funds, then a) the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is above equilibrium. b) the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is below equilibrium. c) the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is above equilibrium. d) the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is below equilibrium.
The quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is above equilibrium When the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded, a surplus of loanable funds occurs. This situation arises from the actual interest rate being higher than the equilibrium rate, which encourages lenders to lower the interest rate they charge. Additional Resources
Suppose the government runs a budget deficit. This means that government expenditures are greater than tax revenue, which reduces the supply of loanable funds available to finance investment by households and firms. True False
True A budget deficit is an excess of government spending over tax revenue. It affects the supply of loanable funds. When the government runs a budget deficit, public saving is negative, and this reduces national saving at each real interest rate level. As a result, the supply curve for loanable funds shifts to the left, the equilibrium quantity of loanable funds available to finance investment by households and firms decreases, whereas the equilibrium real interest rate increases.
If the supply curve of loanable funds shifts to the right, then the equilibrium interest rate falls an the quantity of loanable funds rises (true/false)
True A shift of the supply curve of loanable funds to the right causes the equilibrium interest rate to fall. The lower interest rate will stimulate investment and increase the equilibrium quantity of loanable funds.
Suppose that mortgage rates fell and mortgage lending increased. This can be explained by a rightward shift of the supply curve of loanable funds. True False
True A shift of the supply of loanable funds to the right causes the equilibrium interest rate to fall. Lower interest rates stimulate borrowing and investment and increase the equilibrium quantity of loanable funds.
Suppose that Congress repeals an investment tax credit. The demand curve for loanable funds shifts to the left causing both the equilibrium quantity of loanable funds and the equilibrium interest rate to decrease. (true/false)
True Repealing an investment tax credit essentially translates into a higher cost of investment resulting in a lower quantity demanded for loanable funds at each real interest rate level. As a result, the demand curve for loanable funds shifts to the left causing both the equilibrium quantity of loanable funds and the equilibrium interest rate to decrease.
Savers supply their money to the financial system with the expectation that they will get it back with interest at a later date. (true/false)
True Savers (people who spend less than they earn) supply their money to the financial system with the expectation that they will get it back with interest at a later date.
Bertha considers borrowing funds to invest in expanding her dress shop. She is less likely to do that if the interest rates increase. (true/false)
True The interest rate is the price of a loan. It represents the amount that borrowers pay for loans and the amount that lenders receive on their saving. The demand curve for loanable funds slopes downward. Other things the same, higher interest rates make borrowing less attractive. Thus Bertha is less likely to expand her business as interest rates increase.
Which of the following is consistent with the fact that national saving in a closed economy is negative? a) Y - C > G. b) Y - C - G > 0. c) Y - C - G = 0. d) Y - C - G < 0.
Y - C - G < 0 National saving (or saving) is the total income in the economy that remains after paying for consumption and government purchases: (Y - C - G). The fact that national saving is less than zero means that (Y - C - G) < 0.
Which of the following is consistent with the fact that national saving in a closed economy is positive? a) Y - C < G b) Y - C - G < 0 c) Y - C - G = 0 d) Y - C - G > 0
Y - C - G > 0 Nation saving (or saving) is the total income in the economy that remains after paying for consumption and government purchases: (Y - C - G). The fact that national saving is positive, greater than zero, means that (Y - C -G) > 0
A certificate of indebtedness is called a) a bond b) a partial ownership of an enterprise c) a share of stock d) a financial intermediary
a bond A bond is a certificate of indebtedness that specifies the obligations of the borrower to the holder of the bond, an IOU. It identifies the time at which the loan will be repaid the date of maturity and the rate of interest that will be paid periodically until the loan matures.
The higher the expected future profitability of a corporation, the higher the demand for that corporation's stock. True False
true The stock prices are determined by the supply of and demand for the stock. Because stock represents ownership in a corporation, the demand for a stock (and thus its price) reflects people's perception of the corporation's future profitability.
If the supply curve of loanable funds shifts to the left, then the equilibrium interest rate falls and the quantity of loanable funds rises (true/false)
false
As the term to maturity of a bond increases, the interest rate a) decreases because the bond's risk increases b) decreases because the bond's risk decreases c) remains the same as there is no relationship between term and risk d) increases because the bond's risk increases
increases because the bond's risk increases The interest rate on a bond depends, in part, on its term. Long-term bonds are riskier than short-term bonds because holders of long-term bonds have to wait longer for repayment of principal. If a holder of a long-term bond needs his money earlier than the distant date of maturity, he has no choice but to sell the bond to someone else, perhaps at a reduced price. To compensate for this risk, long-term bonds usually pay higher interest rates than short-term bonds.
The source of the demand for loanable funds is a.saving. b.imports. c.GDP. d.investment.
investment The demand for loanable funds comes from households and firms who wish to borrow to make investments. Thus investment is the source of the demand for loanable funds.
the interest earned on bonds issues by the city of Sacramento, California a) is not subject to federal income tax and, thus such bonds pay a lower interest rate than comparable bonds issues by the U.S. government. b)is subject to federal income tax and, thus such bonds pay a higher interest rate than comparable bonds issued by the U.S. government. c) is subject to federal income tax and so these bonds pay a lower interest rate than otherwise comparable bonds issued by the U.S. government. d) is not subject to federal income tax, thus such bonds pay a higher interest rate than comparable bonds issued by the U.S. government.
is not subject to federal income tax, and thus such bonds pay a lower interest rate than comparable bonds issued by the U.S. government. The interest on most bonds is taxable income; that is, the bond owner has to pay a portion of the interest in income taxes. Owners of municipal bonds issued by state and local governments, are not required to pay federal income tax on the interest income. Because of this tax advantage, such bonds typically pay a lower interest rate than bonds issued by corporations or the federal government.
A national chain of grocery stores with limited internal funds plans to expand by opening several new stores. Which of the following describes how the chain will likely raise the required funds? a) buy stocks of financially sound corporations b) invest in research and development c) issue bonds d) buy government bonds
issue bonds When corporations, such as a national chain of grocery stores need to finance a business expansion such as a new store or a factory, they usually borrow from the public by issuing bonds a certificate of indebtedness that specifies the obligations of the borrower to the holder of the bond.
As an alternative to issuing bonds as a means of raising funds, a corporation could a.invest in human capital. b.use equity finance. c.invest in physical capital. d.purchase bonds.
use equity finance Corporation issue bonds and sell stock to raise funds for new investments. Note that stocks and bonds are different: The owner of shares of Intel stock is a part owner of Intel, while the owner of an Intel bond is its creditor.
Other things the same, when interest rates fall, a) people would tend to borrow more causing the quantity demanded of loanable funds to increase. b) people would tend to borrow less causing the quantity demanded of loanable funds to decrease. c) people would want to tend to save more causing the quantity of loanable funds supplied to decrease. d) people would want to tend to save more causing the quantity of loanable funds supplied to increase.
people would tend to borrow more causing the quantity of loanable funds demanded to increase Lower interest rates make borrowing more attractive, thus the quantity of loanable funds demanded increases. At the same time, lower interest rates make saving less attractive, thus the quantity of loanable funds supplied declines.
In a small closed economy investment is $50 billion and private saving is $45 billion. What are public saving and national saving? a.public saving is $5 billion, and national saving is $45 billion b.public saving is -$5 billion, and national saving is $50 billion c.public saving is $5 billion, and national saving is $50 billion d.public saving is -$5 billion, and national saving is $45 billion
public saving is $5 billion and national saving is $50 billion National savings is a sum of private saving and public saving. Thus public saving is the difference between national savings and private saving: $50 billion - $45 billion = $5 billion. At the same time, the accounting identity S = I shows that national saving and investment are equal for the economy as a whole. Thus national saving, S = $50 billion.
in a small closed economy investment is $55 billion and private saving is $50 billion. What are public saving and national saving? a) public saving is $5 billion, and national saving is $45 billion b) public saving is -$5 billion, and national saving is $45 billion c) public saving is -$5 billion, and national saving is $50 billion d) public saving is $5 billion, and national saving is $55 billion
public saving is $5 billion, and national saving is $55 billion National savings is a sum of private saving and public saving. Thus public saving is the difference between national saving and private saving: $55 billion - $50 billion = $5 billion. At the same time, the accounting identity shows that national saving and investment are equal for the economy as a whole, S = I. Thus national saving, S = $55 billion.
According to the definitions of private and public saving, if Y, C, and G remained the same, a decrease in taxes would
reduce public saving and raise private saving
The financial system moves the economy's scarce resources from a) government to households b) business firms to financial institutions c) savers to borrowers d) the rich to the poor
savers to borrowers The financial system consists of the group of institutions that help to match one person's saving with another person's investment.
Which of the following must be true if S= (Y - C - G)? a.Such an economy is closed. b.In such an economy, investment exceeds saving. c.In such an economy, saving exceeds investment. d.Such an economy is open.
such an economy is closed In a closed economy, Y = C + I + G. Thus, Y - C - G = I, where (Y-C-G) is the total income in the economy that remains after paying for consumption and government purchases, or national saving, and is denoted as S. Since S = I, we can write that S = Y - C - G.
When a large, well-known corporation sells bonds, it means that a) the corporation will soon go to a bank for a loan b) the corporation will invest in government bonds c) the corporation wishes to borrow directly from the public d) the corporation wishes to lend to the public
the corporation wishes to borrow directly from the public When large corporations, the federal government, or state and local governments need to borrow to finance the purchase of a new factory, a new jet fighter, or a new school, they usually do so by issuing bonds.
What would happen in the market for loanable funds if the government increased the tax on interest income? a) The effect on the interest rate is uncertain. b) The equilibrium interest rate would rise. c) The equilibrium interest rate would be unaffected. d) The equilibrium interest rate would fall.
the equilibrium interest rate would rise Other things being the same, a higher tax on interest income would discourage saving at each real interest rate level. As a result, the supply curve of loanable funds would shift to the left causing the equilibrium interest rate to increase and the equilibrium quantity of loanable funds to decrease
If the government were to decrease the tax rate on interest income, then the equilibrium amount of loanable funds would increase and the equilibrium interest rate would decrease (true/false)
true Other things being the same, a lower tax on interest income would encourage saving at each real interest rate level. As a result, the supply of loanable funds curve would shift to the right causing the equilibrium interest rate to decrease and the equilibrium quantity of loanable funds to increase.
The assumption of a closed economy applies to the world economy true false
true The assumption of a closed economy, which neither engages in international trade of goods and services nor engages in international borrowing or lending, is a useful simplification, which applies perfectly to the world economy.
Which of the following can explain why one of the two bonds with otherwise identical characteristics pays a higher interest rate than the other? a) The higher interest bond has a term of 2 years, whereas a lower interest bond has a term of 10 years b) the higher interest bond was issued by a financially strong corporation, whereas a lower interest bond was issued by a financially weak corporation. c) the higher bond was issued by the state of New York, whereas a lower interest bond was issued by Exxon Mobil Corporation d) the higher interest bond was issued by a financially weak corporation, whereas a lower interest bond was issued by a financially sound corporation
the higher interest bond was issued by a financially weak corporation, whereas a lower interest bond was issued by a financially sound corporation A bond is characterized by its credit risk, the probability that the borrower will fail to pay some of the interest or principal. When the probability of default is high, bond buyers demand a higher interest rate as compensation for this risk. Financially sound corporations pay a lower interest rate on their bonds than financially weak corporations, which raise money by issuing bonds (junk bonds) and promise to pay high interest rates
Which of the following explains the relationship between the nominal and real interest rates? a.The nominal interest rate is always higher than the real one and thus more accurately reflects the real return to saving and the real cost of borrowing. b.The nominal interest rate is the rate reported by banks, whereas the real interest rate is the nominal one corrected for inflation. c.The real interest rate is the rate reported by banks, whereas the nominal interest rate is the real one corrected for inflation. d.There is no relation between the two interest rates.
the nominal interest rate is reported by banks, whereas the real interest rate is the nominal one corrected for inflation The nominal interest rate reflects the monetary return to saving and the monetary cost of borrowing and is the one usually reported by the banks. The real interest rate equals the nominal interest rate minus the inflation rate. Inflation erodes the value of money over time, thus the real interest rate more accurately reflects the real return to saving and the real cost of borrowing.
Other things the same, when interest rates increase, a) the quantity of loanable funds supplied decreases, whereas the quantity of loanable funds demanded increases. b) both, the quantity of loanable funds supplied and demanded increases c) both, the quantity of loanable funds supplied and demanded decreases d) the quantity of loanable funds supplied increases, whereas the quantity of loanable funds demanded decreases.
the quantity of loanable funds supplied increases, whereas the quantity of loanable funds demanded decreases. The interest rate is the price of a loan. It represents the amount that borrowers pay for loans and the amount that lenders receive on their saving. Higher interest rates make borrowing less attractive causing the quantity of loanable funds demanded to decrease. At the same time, higher interest rates make saving more attractive causing the quantity of loanable funds supplied to increase.
Which of the following correctly describes how corporations raise funds for new investments? a.Bond holders enjoy the benefits of the corporate profits, whereas stockholders receive interest on their investment. b.The sale of stock to raise money is called debt finance, whereas the sale of bonds is called equity finance. c.The sale of stock to raise money is called equity finance, whereas the sale of bonds is called debt finance. d.Compared to stocks, bonds offer the holder both higher risk and potentially higher return.
the sale of stock to raise money is called equity finance, whereas the sale of bonds is called debt finance The sale of stock to raise money is called equity finance, whereas the sale of bonds is called debt finance. Corporations use both equity and debt finance to raise money for new investments, stocks and bonds are different: The owner of shares of Intel stock is a part owner of Intel, while the owner of an Intel bond is its creditor.
Interest rates on long-term bonds are usually higher than interest rates on short-term bonds (true/false)
true
a closed economy neither engages in international trade of goods and services nor engages in international borrowing or lending true false
true A closed economy neither engages in international trade of goods and services nor engages in international borrowing or lending. Each unit of output sold in a closed economy is consumed by domestic consumers, invested in domestic business, or bought by the domestic government.
The economy's stock market is associated with equity finance (true/false)
true A corporation issues stock by selling shares to the public; these shares trade among stockholders on organized stock exchanges, or stock market. Because the sale of stock is called equity finance, the stock market is associated with equity finance.
If the quantity of loanable funds demanded exceeds the quantity of loanable funds supplied, there is a shortage of loanable funds and the interest rate is below the equilibrium level. True False
true A shortage of loanable funds occurs when the interest rate is lower than the equilibrium level. Then the quantity of loanable funds supplied falls short of the quantity of loanable funds demanded. The resulting shortage encourages lenders to increase the interest rate they charge.
the economy's bond market is associated with debt finance true false
true Bonds are traded at bond markets. Because the sale of bonds to raise money is called debt finance, the bond market is associated with debt finance.
Y = C + I + G represents GDP in a closed economy, whereas Y = C + I + G + NX represents GDP in an open economy. True False
true Generally, in an open economy, Y = C + I + G + NX. A closed economy, however, does not engage in international trade, and imports and exports are exactly zero (NX = 0), which implies Y = C + I + G.