ECON 216 Chapter 8
Suppose that the market for loanable funds is in equilibrium. What would happen in the market for loanable funds, other things the same, if the Congress and President increased the maximum contribution limits to 401(k) and 403(b) tax-deferred retirement accounts?
the interest rate would decrease and the quantity of loanable funds would increase.
An increase in the budget deficit would cause a
shortage of loanable funds at the original interest rate, which would lead to rising interest rates.
Other things being constant, when a business issues more stock, the
supply of the stock is greater and thus the price will fall.
Nastech Pharmaceuticals announced they have developed a nasal spray that would reduce hunger cravings. Other things the same we'd expect
the demand for existing shares of stock in this company increased, so the price rose
The source of the supply of loanable funds
is saving and the source of demand for loanable funds is investment
Municipal bonds pay a relatively
low rate of interest because of their low-default risk and because the interest they pay is not subject to federal income tax.
Long-term bonds are generally
more risky than short-term bonds and so pay higher interest
Suppose that in a closed economy GDP is $11 trillion, consumption is $7 trillion, taxes are $3 trillion and the government runs a surplus of $1 trillion. What are private saving and national saving?
$1 trillion and $2 trillion
In a small closed economy investment is $20 billion and private saving is $22 billion. What is public saving and national saving?
-$2 billion and $20 billion
Which of the following is not correct?
A supplier of loanable funds borrows money.
Fred sells newly issued bonds. Ethel sells newly issued stocks. Who uses direct finance?
Both Fred and Ethel.
Suppose that the government deficit increases, but the interest rate remains the same. Which of the following things might have happened simultaneously to keep interest rates the same?
Consumers decide to decrease consumption and work more
Megasoft wants to finance the purchase of new equipment for developing security software called Doors, but they have limited internal funds. Megasoft will likely
Demand loanable funds by selling bonds.
It is claimed that mutual funds have two advantages. The first is that mutual funds allow people with small amounts of money to diversify. The second is that mutual funds provide the skills of professional money managers who buy stocks they believe will be the most profitable and thereby increase the return that mutual fund depositors earn on their savings.
Economists strongly agree with the first claim, but are skeptical of the second.
What would happen in the market for loanable funds if the government were to increase the tax on interest income?
Interest rates would rise.
Suppose that Congress were to repeal an investment tax credit. What would happen in the market for loanable funds?
The demand for loanable funds would shift left.
In 2002 mortgage rates fell and mortgage lending increased. Which of the following could explain both of these changes?
The supply of loanable funds shifted right.
Which of the following equations represents national saving in a closed economy?
Y - C - G
On which bond is default most likely?
a junk bond
The primary advantage of mutual funds is that they
allow people with small amounts of money to diversify.
When opening a restaurant you may need to buy ovens, freezers, tables, and cash registers. Economists call these expenditures
capital investment
People who buy newly issued stock in a corporation such as Crate and Barrel provide
equity finance and so become part owners of Crate and Barrel.
The supply of loanable funds slopes
upward because an increase in the interest rate induces people to save more.
Other things the same, an increase in the interest rate
would decrease the quantity of loanable funds demanded.
