CH-8 Saving Investment, and the Financial System

Scenario 1: Suppose savers either buy bonds or make deposits in savings accounts at banks. Initially, the interest income earned on bonds or deposits is taxed at a rate of 20%. Now suppose there is a decrease in the tax rate on interest income, from 20% to 15%. This change in the tax treatment of saving causes the equilibrium interest rate int he market for loanable funds to ______ and the level of investment spending to ______.

* Fall *Increase

Scenario 2: An investment tax credit effectively lowers the tax bill of any firm that purchases new capital in the relevant time period. Suppose the government implements a new investment tax credit. The implementation of the new tax credit causes the interest rate to _____ and the level of investments to _____.

* Rise * Rise

Based on your calculations, the government is running a budget _____.

* Surplus

Complete the following table by using national income accounting identities to calculate national saving. In your calculations. Suppose GDP in this country is $ 1,540 million. Enter the amount for investment. National Income account (Value is in Millions of Dollars) Government Purchases (G)= 350 Taxes minus Transfer Payments (T)= 455 Consumption (C)= 700 Investment (I)= 490 National Saving (S) = ______ = ______ = ______ Million.

* Y-C-G *I *490 (National Saving equals Investment)

Complete the following table by using national income accounting identities to calculate private and public saving. Suppose GDP in this country is $ 1,540 million. Enter the amount for investment. National Income account (Value is in Millions of Dollars) Government Purchases (G)= 350 Taxes minus Transfer Payments (T)= 455 Consumption (C)= 700 Investment (I)= 490 Private Saving= _____ = _____ million Public saving= _____ = _____ million

* Y-C-T * 385 million * T-C * 105 million National savings can be written as: S=Y-C-G Or S= (Y-T-C) + (T-G) Private saving: (Y-T-C) Public saving: (T-G)

The following table contains data for a hypothetical closed economy that uses the dollar as its currency. Suppose GDP in this country is $ 1,540 million. Enter the amount for investment. National Income account (Value is in Millions of Dollars) Government Purchases (G)= 350 Taxes minus Transfer Payments (T)= 455 Consumption (C)= 700 Investment (I)= _______

*490 Use Closed economy equation to find (I) Y=C+I+G

Scenario 3: Initially, the government's budget is balanced; then the government significantly increases spending on national defense without changing taxes. This change in spending causes the government to run a budget _______, which _______ national saving. This causes the interest rate to _______, ____________ the level of investment spending.

*Deficit *Decreases *Rise *Crowding Out

Scenario 3: Initially the government's budget is balanced: then the government significantly increases spending on national defense without changing taxes. This change in spending causes the government to run a budget _________, which __________ national saving. This causes the interest rate to _____, _________, the level of investment spending.

*Deficit *Decreases *Rise *Crowding out

Suppose Charles would like to use $1,000 of his savings to make a financial investment. One way of making financial investment is to purchase stock or bonds from a private company. Suppose RoboTroid, a robotics firm, is selling stocks to raise money for a new lab-a practice known as ______ finance. Buying a share of RoboTroid stock would give Charles _____________ the firm. In the event that RoboTriod runs into financial difficulty, _______ will be paid first.

*Equity *A claim to partial ownership in *The bondholders

Scenario 2: An investment tax credit effectively lowers the tax bill of any firm that purchases new capital in the relevant time period. Suppose the government repeals a previously existing investment tax credit. The repeal of the previously existing tax credit causes the interest rate to ______ and the level of saving to ______.

*Fall *Fall

Scenario 2: An investment tax credit effectively lowers the tax bill of any firm that purchases new capital in the relevant time period. Suppose the government repeals a previously existing investment tax credit. They repeal of the previously existing tax credit causes the interest rate to _____ and the level of investment to _______.

*Fall *Fall

Suppose the interest rate is 3.5%. Based on the previous graph, the quantity of loanable funds supplied is ________ than the quantity of loans demanded, resulting in a ________ of loanable funds. This would encourage lenders to ________ the interest rates they charge, thereby ________ the quantity of loanable funds supplied and ________ the quantity of loanable funds demanded, moving the market toward the equilibrium interest rate of ______.

*Greater *Surplus *Lower *Decreasing *Increasing *3%

__________ is the source of the demand for loanable funds. As the interest rate fall , the quantity of loanable funds demterm-11anded ___________ .

*Investment *Increases

Suppose the interest rate is 4.5%. Based on the previous graph, the quantity of loanable funds supplied is _________ than the quantity of loans demanded, resulting in a _________ of loanable funds. This would encourage lender to _________ the interest rates they charge, thereby ____________ the quantity of loanable funds supplied and ___________ the quantity of loanable funds demanded, moving the market toward the equilibrium interest rate of _____.

*Less *Shortage *Raise *Increasing *Decreasing *5%

Alternatively, Charles could make a financial investment by purchasing bonds issued by the U.S. government. Assuming that everything else is equal, a municipal bond issued by a stat most likely pays a _____ interest rate than a corporate bod issued by an electronics manufacturer.

*Lower

Scenario 1: Individual Retirement Accounts (IRAs) allow people to shelter some of their income from taxation. Suppose the maximum annual contribution to such accounts is $5,000 per person. Now suppose there is a decrease in the maximum contribution, from $5,000 to $3,000 per year. This change in the tax treatment of interest income from saving causes the equilibrium interest rate in the market for loanable funds to _______ and the level of investment spending to _________.

*Rise *Decrease

Scenario 1: Suppose savers either buy bonds or make deposit in savings account at banks. Initially, the interest income earned on bonds or deposits is taxed at a rate of 20%. Now suppose there is is an increase in the tax rate on interest income, from 20% to 25%. This change in the tax treatment of interest income form saving causes the equilibrium interest rate in the market for loanable funds to _____ and the level of investment spending to _______.

*Rise *Decrease

Classify each of the following based on the macroeconomic definitions of saving and investment. *Nick buys a government bond. *Rosa buys new bulldozers for her construction firm. *Alyssa purchases stock in NanoSpeck, a biotech firm. *Tim takes out a mortgage for a new home in Detroit.

*Saving *Investment *Saving *Investment

Scenario 3: Initially, the government's budget is balanced; then the government responds to the conclusion of a war by significantly reducing defense spending without changing taxes. This change in spending causes the government to run a budget _________, which ________ national saving. This causes the interest rate to _______, ____________ the level of investment spending.

*Surplus *Increases *Fall *Increasing

The following graph shows the market for loanable funds. For each of the given scenarios, adjust the appropriate curve on the graph to help you complete the question that follow. Treat each scenario separately by resetting the graph to its original state before examining the effect of each individual scenario.

*Version 3

The following graph shows the market for loanable funds in a closed economy. The upward-sloping orange line represents the supply of loanable funds, and the downward-sloping blue line represents the demand for loanable funds.

*version 1

The following graph shows the market for loanable funds. For each of the given scenarios, adjust the appropriate curve on the graph to help you complete the question that follow. Treat each scenario separately by resetting the graph to its original state before examining the effect of each individual scenario.

*version 1

The following graph shoes the market for loanable funds in a closed economy. The upward-sloping orange line represents the supply of loanable funds, and the downward-sloping blue line represents the demand for loanable funds.

*version 2

The following graph shows the market for loanable funds. For each of the given scenarios, adjust the appropriate curve on the graph to help you complete the question that follow. Treat each scenario separately by resetting the graph to its original state before examining the effect of each individual scenario.

*version 2

Suppose Charles decides to buy 100 shares of RoboTroid stock. Which of the following statements are correct? Check all that apply. *The price of his shares will rise if RoboTroid issues additional shares of stock. *An increase in the perceived profitability of RoboTroid will likely cause the value of Charles's shares to rise. *RoboTroid earns revenue when Charles purchases 100 shares, even if he purchases them from an existing shareholder.

only one is correct. *An increase in the perceived profitability of RoboTroid will likely cause the value of Charles's shares to rise.