ECO Chapter 9 Practice

Please answer the given four questions related to the market for loanable funds. - If the projected rate of return for a project is less than the interest rate for a loan that is necessary to complete the project, how will the borrowing business act?

The business will not take out the loan.

Elimination of sugar tariffs would benefit all of the following individuals EXCEPT:

an American sugar producer

Under conditions of free trade, area C is part of _____, but if trade is eliminated through tariffs, area C represents _____.

domestic consumer surplus; lost gains from trade

Pt 3:Please use the graph to answer the given questions. Assume the people act rationally. - Given the market conditions, how much will be available in loanable funds?

$50 billion

Pt 2: Classify each of the given events according to the category that best describes how it affects the equilibrium interest rate in the market for loanable funds.

- an increase in savings - a decrease in investor optimism

Protectionism tends to create a society:

that pits one interest group against another.

John has to decide whether to buy a zero-coupon bond with very little risk that costs $950$950 and will pay $1075$1075 in one year or put his money in a savings account with an annual interest rate of 1212%. Compute the difference in the rate of return of the two investments. Round your answer to one decimal place.

1.2

Pt 2:Please use the graph to answer the given questions. Assume the people act rationally. - Given the market conditions, what will be the prevailing interest rate?

10%

Bans on child labor:

can, perversely, lead to an increase in child labor in poor countries.

The shadow banking system refers to

the unregulated non-bank financial firms engaged in borrowing from investors and lending to households and firms

What is Brian's leverage ratio associated with this condo when he moves in?

7.75

Suppose the Chief Financial Officer (CFO) of a company is interested in raising funds for a major investment by issuing bonds of varying maturity to investors. One of the longer-term bonds being issued can be purchased for $75,000.00 per bond and pays $7,125.00 annually to the investor. What is the anual interest rate on this bond?

9.50%

Suppose there was initially free trade in this market, but then a $20 tariff was placed on imported units of this good. By how much would this tariff increase the number of units produced domestically?

At a price of $45, 100 units will be produced domestically, compared to 0 units produced at a price of $25.

There were many causes that contributed to the financial crisis of 2007-2008. Which of the choices most accurately describes the role of securitization in contributing to the crisis?

Banks bundled mortgages together and then sold them on the market as a financial asset. However, the risk level of these securitized assets was often much higher than the purchaser thought.

________ are a mechanism by which crowding out occurs.

Increases in interest rates

Which of the situations is an example of the crowding-out effect on investment as it pertains to macroeconomics?

Jack wants to borrow money to create a cowboy-themed inflatable bounce house for kids called "Wild Wild West." However, the government is running a deficit which has increased interest rates so much that Jack can no longer afford to borrow the money.

Pt 1: Please use the graph to answer the given questions. Assume the people act rationally. - Which of the statements best describes a situation represented by point A?

Wayne projects that if he takes out a loan to open another gym franchise, he will earn a lower return than the interest rate he would have to pay, so he decides against it.

The source of the _______ for loanable funds is saving.

demand

Please answer the given four questions related to the market for loanable funds. - Which of the terms acts as the "price" in the market for loanable funds?

interest rate

The _______ represents the price of a loan.

interest rate

A tariff:

is a protectionist policy.

A principle arising out of an examination of national security arguments in favor of trade restrictions is that:

it's common for protectionists to lobby under the guise of some other motive.

The revenues collected by the government from imposing a tariff are measured by:

multiplying the tariff rate by the quantity of the imports.

An import quota is a:

numerical limit on imports.

Ex of protectionism

pits sugar producers against sugar consumers.

Child labor is a problem that is caused by:

poverty

Calopolis, a college town in Northern California, has for many years banned the presence of fast food restaurants in city limits. As of 2012, however, the city will allow several fast food companies to open franchised locations.

shift in demand

Due to an increase in revenues after a tax hike, the United States is able to eliminate the deficit and begins to maintain a balanced budget for the first time in several decades.

shift in demand

As a result of a stock market boom, individuals begin to feel richer and spend more while also saving less.

shift in supply

China decides to reduce its capital investment in the United States, as it expects low returns due to a weak U.S. economy.

shift in supply

Tariffs:

shift the world supply curve up by the amount of the tariff.

John has to decide whether to buy a zero-coupon bond with very little risk that costs $950$950 and will pay $1075$1075 in one year or put his money in a savings account with an annual interest rate of 1212%. Which of the two investments will John prefer?

the zero-coupon bond

The Organization of Petroleum Exporting Countries (OPEC) limits the amount of oil it exports:

to raise prices and revenues from the sale of oil.

Pt 1: Classify each of the given events according to the category that best describes how it affects the equilibrium interest rate in the market for loanable funds. -Increases the interest rate:

-an investment tax credit - an increase in large investments

Free international trade generally:

can reduce child labor.

A _____ is a tax on imports.

tariff

Suppose there was initially free trade in this market, but then a $20-per-unit tariff was levied on this good. What is domestic producer surplus under the tariff?

$1,000 Domestic producer surplus under the tariff is ½($45 − $25)(100) = $1,000

In the textbook, it is estimated that sugar quotas cost the U.S. economy about:

$1.32 billion per year.

Which curve represents domestic willingness to pay? Please choose the correct answer from the following choices, and then select the submit answer button. Answer choices

domestic demand

Brian has grown tired of paying rent each month to his landlord and has decided to purchase a condo. Brian has been saving money and has $40.00$40.00 that he will use as a down payment on this condo. He will take out a mortgage to pay the remaining price. Brian finds a suitable condo and negotiates a price of $350.00$350.00. Assume that there are no extra fees associated with purchasing the condo. - Upon moving in, how much equity does Brian have in this condo?

$40.00

Suppose that the government changes the tax code to allow additional amounts of money to be placed in 401k retirement accounts, increasing the extent to which people can delay their tax obligation (effectively, this is a tax cut on retirement savings). Show the effect by shifting the appropriate curve in the market for savings.

-Private investment would increase as the cost of borrowing decreased. -Supply shifts to the right and demand stays the same

Suppose that the government is concerned with the unemployment rate and, as a response, offers a tax credit to any firm that builds a new factory in the United States. Show the effect of this policy on the market for loanable funds by shifting the appropriate curve in the graph.

Demand curve shifts to the right and the supply curve stays in place.

_______________ escape, that is the more elastic side of the market can escape (some) of the tax so the more inelastic side of the market bears more of the burden of a tax.

Elasticity=

_____ is the economic policy of restraining trade though quotas, tariffs, or other regulations that burden foreign producers but not domestic producers.

Protectionism

Please answer the given four questions related to the market for loanable funds. - As interest rate decreases, what happens to the quantity of loanable funds demanded?

Quantity demanded will increase.

Please answer the given four questions related to the market for loanable funds. - What effect will an increase in interest rates have on the quantity of loanable funds supplied?

Quantity supplied will increase.

Which of the following best defines a financial intermediary?

a financial institution that transforms investor funds into financial assets

What is crowding out?

a reduction in consumption and investment spending that results from government borrowing

Select the definition of consumption smoothing.

borrowing in periods of low income and saving in periods of high income to make consumption less variable than income

One study finds that, by reducing the wages companies are willing pay child laborers, bans on child labor make _______________, compelling them to increase their children's participation in the workforce.

families poorer

Economists generally believe that trade:

has no overall effect on the number of U.S. jobs.

Imports beyond a trade quota are:

heavily taxed or forbidden.

A trade quota restricts the quantity of goods that can be:

imported

Tariffs are generally used to protect domestic producers.

imports.

The six-fold increase in imports to the United States from China between 1996 and 2006 led to:

increased demand for high-skilled American workers and decreased demand for low-skilled workers, with as many jobs being created as were lost.

Suppose that the government changes the tax code to allow additional amounts of money to be placed in 401(k) retirement accounts, increasing the extent to which people can delay their tax obligations. Show the effect by shifting the appropriate curve in the market for loanable funds.

Supply curve shifts to the right and the demand curve stays in place.

Which industry is NOT mentioned in the textbook as having been protected in the name of national security?

accordions

Identify an example of consumption smoothing.

all of these are examples of consumption smoothing