Econ Chapter 26
If Canada goes from a large budget deficit to a small budget deficit, it will
Increase public saving and so shift the supply of loanable funds right
When the government runs a budget deficit,
Investment is lower than it would be if the budget were balanced
The bond market
Is a financial market, as is the stock market
The primary economic function of the financial system is to
Match one person's saving with another person's investment
An increase in the government's budget deficit means
Public saving is less than $0 and decreasing
A larger budget surplus
Reduces the interest rate and raises investment
Other things the same, a higher interest rate induces people to
Save more, so the supply of loanable funds slopes upward
Given that Monika's income exceeds her expenditures, Monika is best described as a
Saver or as a supplier of funds
The source of the supply of loanable funds is
Saving, and the source of the demand for loanable funds is investment
Which of the following events could explain an increase in interest rates together with a decrease in investment?
The government budget went from surplus to deficit
In a closed economy if Y is 10,000, T is 1,000, G is 3,000 and C is 5,000, then
The government has a budget deficit and investment is 2,000
What would happen in the market for loanable funds if the government were to decrease the tax rate on interest income?
The supply of loanable funds would shift rightward and investment would increase
Which of the following statements is correct?
The supply of, and demand for, loanable funds depend on the real (rather than nominal) interest rate.
The supply of loanable funds slopes
Upward because an increase in the interest rate induces people to save more
Suppose the government were to replace the income tax with a consumption tax so that interest on savings was not taxed. The result would be that the interest rate
Would decrease and investment would increase
If the demand for loanable funds shifts to the left, then the equilibrium interest rate
and quantity of loanable funds falls
If the supply for loanable funds shifts to the left, then the equilibrium interest rate
rises and the quantity of loanable funds falls
Which of the following policy changes would lead to a decrease in the real interest rate and an increase in investment saving?
An expansion of eligibility for Individual Retirement Accounts
If the nominal interest rate is 7 percent and the rate of inflation is 3 percent, then the real interest rate is
4 percent
Suppose a country has only a sales tax. Now suppose it replaces the sales tax with an income tax that includes a tax on interest income. This would make equilibrium
Interest rates rise and equilibrium quantity of loanable funds fall
Crowding out occurs when
Investment declines because a budget deficit makes interest rates rise
Which of the following would NOT be a result of replacing the income tax with a consumption tax so that interest income was no longer taxed?
Investment would decrease
IF a reform of the tax laws encourages greater saving, the result would be
Lower interest rates and greater investment
When the government goes from running a balanced budget to running a budget surplus,
National saving increase, the interest rate falls, and the economy's long-run growth rate is likely to increase.
The slope of the demand for loanable funds curve represents the
Negative relation between the real interest rate and investment
If there is a shortage of loanable funds, then
Neither curve shifts, but the quantity of loanable funds supplied increases and the quantity demanded decreases as the interest rate rises to equilibrium
A closed economy does not engage in international trade, therefore
Net exports (NX) are zero
In 2009, the U.S government's budget deficit increased substantially. Other things the same, this means the
Supply of loanable funds shifted to the left
In a closed economy, public saving is the amount of
Tax revenue that the government has left after praying for its spending.
Which of the following could explain a decrease in the equilibrium interest rate and in the equilibrium quantity of loanable funds?
The demand for loanable funds shifted leftward
Which of the following would necessarily increase the equilibrium interest rate?
The demand for loanable funds shifts right and the supply of loanable funds shifts left
The U.S government increases its budge deficit, but at the same time Congress eliminates an investment tax credit. Which of the following is correct?
The interest rate may increase or decrease; investment will decrease.
For a closed economy, GDP is $11 trillion, consumption is $7 trillion, taxes are $2.5 trillion and the government runs a surplus of $1 trillion. What are the private and national saving?
$1.5 trillion and $2.5 trillion
Suppose a closed economy had public saving of -$1 trillion and private saving of $3 trillion. What are national saving and investment for this country?
$2 trillion, $2 trillion
As real interest rates fall, firms desire to
Buy more new equipment and buildings. This response helps explain why the demand for loanable funds is downward sloping.
A budget deficit
Changes the supply of loanable funds
Which of the following would shift the demand for loanable funds to the right?
Congress and the president pass an investment tax credit
In a closed economy, national saving is
Equal to investment
Institutions that help to match one person's saving with another person's investment are collectively called the
Financial system
