Macro Chapter 9
Which statement is NOT true?
An impatient person will discount the up-front costs highly and weigh the future benefits more. An impatient person will discount the future benefits more heavily.
A certificate of ownership in a corporation is called:
a share of stock. Owners have a claim to the firm's profits, which is what is left over after everyone else has been paid.
Which event would definitely cause the equilibrium quantity of savings to decrease?
a simultaneous decrease in the demand for loanable funds and a decrease in the supply of loanable funds Both a decrease in demand and a decrease in supply cause the equilibrium quantity to fall
Crowding out occurs if:
there is a decrease in private consumption and investment when government borrows more. When the government borrows more, some of the increased borrowing is financed by reduced consumption and some by reduced investment.
In today's economy, if the people with the best ideas are not also the people with the most savings:
they will have to borrow funds to bring their ideas to fruition. Many new businesses can't get under way at all without borrowing.
Suppose a homeowner puts $50,000 down on the purchase of a $200,000 home and mortgages the rest. What is the homeowner's leverage ratio?
3 $150,000 ÷ $50,000 = 3.
All else equal, if consumer preferences changed so that they generally decided to borrow less, what would occur?
Demand in the market for loanable funds would decrease, and the interest rate would fall. The price of loanable funds is the interest rate.
All else equal, if consumer preferences changed so that they generally decided to borrow more, what would occur?
Demand in the market for loanable funds would increase, and the interest rate would rise. The price of loanable funds is the interest rate.
AIDS has dramatically reduced life expectancies in Africa. What impact would this have on saving rates?
It would reduce the rate of saving, because many Africans expect to die young. This is related to consumption smoothing; if there is no future to save for, people will not save.
Refer to the graph. Which statement is TRUE?
The removal of an existing investment tax credit would shift the demand curve in the market for loanable funds to the left, causing a decrease in the quantity of savings. An investment tax credit would shift the demand curve in the market for loanable funds to the right, causing an increase in the quantity of savings. During a recession, many entrepreneurs get scared about the future and they are reluctant to invest, causing a decrease in the demand for loanable funds. An investment tax credit is added to the above market, creating a rightward shift of the demand curve of $200 billion at every interest rate, leading to a new equilibrium interest rate of 8 percent.
Which event would definitely cause the equilibrium interest rate in the market for loanable funds to decrease?
a simultaneous decrease in the demand for loanable funds and an increase in the supply of loanable funds Both a decrease in demand and an increase in supply cause the price to fall.
Which event would definitely cause the equilibrium interest rate in the market for loanable funds to increase?
a simultaneous increase in the demand for loanable funds and a decrease in the supply of loanable funds Both an increase in demand and a decrease in supply cause the price to rise.
Financial intermediation may fail if something causes:
an increase in the politicization of lending. Government-owned banks are useful to authoritarian regimes that use the banks to direct capital to political supporters, to the detriment of the economy.
Which condition would NOT lead financial intermediation to fail?
extensive property rights If property rights are insecure, investors will be reluctant to put their money in banks or invest in bond or stock markets.
All else equal, _____ interest rates usually result in more _____.
higher; savings The supply curve for savings is positively sloped.
Which factor is one of the four major factors that economists believe determine the supply of savings?
interest rates The higher the interest rate, the greater the quantity saved.
All else equal, higher _____ rates usually result in _____ savings.
interest; more The supply curve for savings is positively sloped.
When General Motors decides to purchase a new assembly line in order to produce a new line of cars, this activity can be BEST categorized as:
investment. Investment is the purchase of new capital goods.
The market where savers of funds trade with borrowers of funds is called the:
market for loanable funds. The savers supply loanable funds, and the borrowers demand loanable funds
Interest rates and bond prices:
move in opposite directions. Arbitrage, the buying and selling of equally risky assets, ensures that equally risky assets earn equal returns.
On the supply curve for savings, the vertical axis represents the interest rate as a percent rather than the price expressed in dollars, as on other supply curves. This is because:
prices are expressed as dollars per unit, but in the market for savings the unit is dollars, so it's dollars per dollar, which is most easily expressed as a percentage. In fact, an interest rate, if expressed as a decimal, is really a number of dollars per dollar.
An increase in government borrowing:
reduces private consumption. This effect is referred to as crowding out.
An inverse relationship occurring in bond markets means that when the price of a zero-coupon bond with a face value of $1,000 falls from $952 to $935, interest rates on other assets with equal risk:
rise from 5 percent to 7 percent. Interest rates and bond prices move in opposite directions.
Imagine that last year, Jennifer earned $80,000 in salary and consumed $50,000 in goods and $23,000 in services. How could we best categorize the remaining $7,000?
saving Saving is income that is not spent on consumption goods.
People whose incomes fluctuate (like salespeople, writers, and homebuilders) smooth consumption by:
saving. Savings helps to smooth consumption. By saving when income is high, these workers will have funds available for consumption when income is low.
If a company's profits are relatively high,
shareholders benefit. A stock or a share is a certificate of ownership in a corporation.
One of the benefits to a bank of securitizing its loans is that:
sloppy or under-researched loans can be sold to unsuspecting buyers. If homeowners default, for example, it will affect the owners of the securitized mortgages, not the bank that made the risky loan to begin with. the bank gets more liquid. Rather than waiting on future mortgage payments, for example, a bank can sell those future revenue streams in order to have more cash today.
The downside of a high leverage ratio for a firm is that a:
small decrease in prices can lead to bankruptcy. The benefit of a high leverage ratio to a firm is that a small increase in prices leads to large profits.
The benefit of a high leverage ratio to a firm is that a:
small increase in prices leads to large profits. The downside of a high leverage ratio for a firm is that a small decrease in prices leads to large losses.
Treasury securities are particularly desirable for investors because:
the U.S. government is unlikely to fail to make a payment. Short-term U.S. government securities tend to be the safest assets.
Borrowing plays a valuable role in the economy, because:
the ability to borrow greatly increases the ability to invest. Higher investment increases the standard of living and the rate of economic growth.
Suppose a homeowner owes $300,000 on a house that is worth $330,000. What is the homeowner's leverage ratio?
10 $300,000 ÷ $30,000 = 10.
In order to counteract the decrease in investment demand during a recession, the government sometimes offers a:
temporary investment tax credit. An investment tax credit gives firms that invest in plants and equipment a tax break.
If the government offers an investment tax credit during a recession in order to stimulate investment demand, it will probably make the tax credit:
temporary, to encourage firms to invest quickly. An investment tax credit gives firms that invest in plants and equipment a tax break.
The _____ the interest rate, the greater the quantity of funds demanded for _____.
lower; investment The demand curve for borrowing is downward sloping.
All else equal, _____ interest rates usually result in less _____.
lower; savings The supply curve for savings is positively sloped.
Individuals want to _____ over time.
smooth consumption By saving during the working years and dissaving during the retirement years, workers smooth their consumption.
During the financial crisis, when investment banks were highly leveraged and asset prices fell slightly, the banks:
suffered tremendous losses, forcing the sale of assets, which drove asset prices even lower. The panic in the banking system that resulted from falling asset prices caused a reduction in lending throughout the economy.
The market for loanable funds is the market where:
suppliers of funds trade with demanders of funds. The savers supply loanable funds, and the borrowers demand loanable funds.
If the interest rate offered on savings accounts decreases from 5 percent to 2 percent, then the price of an equally risky one-year maturity zero-coupon bond with a face value of $1,000 will:
rise from $952 to $980. Arbitrage, the buying and selling of equally risky assets, ensures that equally risky assets earn equal returns. Recall that the rate of return for a zero-coupon bond = [(FV − price) ÷ price] × 100.
It has been said that consumers often want immediate satisfaction and therefore must be compensated for saving their money. Which preference best captures this phenomenon?
time preference Time preference indicates that people would rather consume today than tomorrow.
All else equal, lower _____ rates usually result in _____ savings.
interest; less The supply curve for savings is positively sloped.
All else equal, if consumers decide to save more, the:
supply of funds in the loanable funds market will increase. This would be shown as a rightward shift of the supply curve in the market for loanable funds.
Regulators and policymakers:
for a long time were unaware of the importance of the shadow banking system. The shadow banking system got its name because it grew up in the shadow of the traditional banking system.
Which event would definitely cause the equilibrium quantity of savings to increase?
a simultaneous increase in the demand for loanable funds and an increase in the supply of loanable funds Both an increase in demand and an increase in supply cause the equilibrium quantity to rise.
All else equal, if consumer preferences changed so that they generally decided to save less, what would occur?
Supply in the market for loanable funds would decrease, and the interest rate would rise. The savers supply loanable funds, and the borrowers demand loanable funds.
All else equal, if consumer preferences changed so that they generally decided to save more, what would occur?
Supply in the market for loanable funds would increase, and the interest rate would fall. The savers supply loanable funds, and the borrowers demand loanable funds.
According to the life cycle theory of savings, people tend to:
borrow when young. By borrowing, saving, and dissaving, workers can smooth their consumption path over a lifetime, improving their overall satisfaction.
Which condition could break the bridge between savers and borrowers?
politicized lending Government-owned banks are useful to authoritarian regimes that use the banks to direct capital to political supporters, to the detriment of the economy.
Which statement is TRUE?
A mortgage loan that has been "securitized" is one that has been bundled together and sold on the market as different financial assets. When interest rates rise, bond prices fall. Interest rates and bond prices have a negative relationship. A leverage ratio of 10 implies a buyer with $50,000 in cash can borrow $500,000. If the current rate of return on a zero-coupon bond is 11 percent and a current price of $1,801.80, then the face value must be $900. This is not correct: 11 percent = ((face value − $1,801.80) ÷ $1,801.80) × 100, solve for face value to get $2,000. The 2007-2008 crisis was brought about by high leverage and falling asset prices that created a panic in the shadow banking system and hence sharply reduced the amount of lending in the economy. The leverage ratio is the ratio of debt to equity