Macroeconomics Exam 2

rate of return for a zero coupon bond=

((FV-Price)/Price)*100

Investment is

the purchase of new capital goods.

If the government imposes a ceiling on the interest rate that is below the equilibrium interest rate in the loanable funds market then

the quantity of savings supplied will be less than the quantity of loanable funds demanded.

Lydia is a seasonal worker. She saves more when her income rises, and dissaves when her income falls. This behavior is referred to as

Consumption smoothing

if values are in growth rate % what equation do you use>

M+v=P+Y

Why is the demand for loanable funds downward sloping?

More people borrow when the price of loans is low than when it is high.

What is TRUE about the lifecycle theory of savings?

People tend to borrow during the early years of their lifetimes, save during their prime working years, and dissave during their retirement years.

Which of the following chains of logic explain the functions of banks in the process of economic growth?

Savers deposit their savings in banks. Banks direct these funds to firms that invest and engage in capital accumulation that furthers economic growth.

Crowding out occurs because

The government increases the demand for loanable funds and drives up the interest rates, causing investment and consumption to fall.

Trading in the market for loanable funds determines the equilibrium

amount of savings

Which of the following would be the most likely reason for the increase in the demand for loanable funds?

an increase in government borrowing

Savings is

income that is not spent on consumption goods

Real interest rate=

nominal Interest rate - Inflation rate

Workers who put 10% of their income into a retirement account this year are

smoothing consumption

Stock shares represent __________ and bonds represent __________.

corporate ownership; corporate debt

If interest rate rises, the number of new businesses will

decrease

In the loanable funds market, an increase in government borrowing will most likely

decrease bond prices and increase interest rates.

When business firms become more pessimistic about the state of the economy, the interest rate

decreases and borrowing decreases.

When individuals become more willing to save because their incomes have increased, the interest rate

decreases and borrowing increases.

A decrease in investment demand

decreases both the amount saved and the interest rate.

When the interest rate decreases, the cost for investment __________ and the funds that are demanded for investment __________.

decreases; increase

Financial intermediation can break down as a result of

government controls on interest rates and bank failures

According to the consumption-smoothing theory, people with longer life expectancy

have higher savings rates in their lifetimes than those with shorter life expectancy.

An investment tax credit will cause the interest rate to

increase and borrowing to increase.

When interest rate decreases, amount demanded by borrowers...

increases

The supply of savings function shows the relationship between saving and

interest rate

Which variable is determined in the market for loanable funds?

interest rate

When a given bond's price increases, we know that the interest rate on this bond

must decrease.

Nations that have experienced high negative real interest rates also have experienced

negative growth

nominal GDP

p*y

The supply of savings is positively sloped because

people are enticed to forgo consumption when interest rates are higher.

Why do people save during their working lifetimes?

retirement, prepare for unemployment, unexpected illnesses

An increase in government borrowing will cause the interest rate to

rise and private spending to fall.

The supply of loanable funds comes from __________ and the demand for loanable funds comes from __________.

saving; investment

Firms primarily raise money by using which two methods?

selling stocks and issuing corporate bonds

An increase in the supply of savings will cause the interest rate

to be lower

Why do ratings agencies rate bonds?

to indicate the chance of a bond being repaid

equation for velocity of money (v)

v=(p*y)/m

growth rate of real GDP in the equation

y

Why do longer-term bonds pay a higher rate of interest than shorter term bonds?

A longer maturity for a bond provides a greater opportunity for default by the borrower. Longer-term bonds are only issued by corporations whereas shorter-term bonds are issued only by the U.S. government.