Macro Ch.13

What would happen in the market for loanable funds if the government were to increase the tax on interest income? a. Interest rates would rise. b. Interest rates would be unaffected. c. Interest rates would fall. d. The effect on the interest rate is uncertain.

a

Suppose that mortgage rates fell and mortgage lending increased. This can be explained by a rightward shift of the supply curve of loanable funds. a)True b)False

a) True -A shift of the supply of loanable funds to the right causes the equilibrium interest rate to fall. Lower interest rates stimulate borrowing and investment and increase the equilibrium quantity of loanable funds.

As an alternative to issuing bonds as a means of raising funds, a corporation could a)use equity finance. b)purchase bonds. c)invest in human capital. d)invest in physical capital.

a) use of equity finance Corporation issue bonds and sell stock to raise funds for new investments. Note that stocks and bonds are different: The owner of shares of Intel stock is a part owner of Intel, while the owner of an Intel bond is its creditor.

Consider a closed economy, in which S = (Y - T - C) + (T - G) holds. What does this identity imply if the government's tax revenue is equal to its expenditures? a)National saving and private saving are equal. b)Public saving is equal to investment. c)After paying their taxes and paying for their consumption, households have nothing left. d)Private saving is equal to government expenditures.

a)National saving and private saving are qual -The government receives T in tax revenue and spends G on goods and services. If T = G, then S = (Y - T - C), which means that national saving equals private saving.

Which of the following could explain a decrease in the equilibrium interest rate and an increase in the equilibrium quantity of loanable funds? a. The demand for loanable funds shifted rightward. b. The demand for loanable funds shifted leftward. c. The supply of loanable funds shifted rightward. d. The supply of loanable funds shifted leftward. Hide Feedback

c

Consider a closed economy, in which S = (Y - T - C) + (T - G). In this identity, what does (Y - T - C) represent? a)Investment b)Public saving c)Private saving d)National saving

c)private savings The identity S = (Y - T - C) + (T - G) is one of the ways to write national saving, where (T - G) is public saving and (Y - T - C) is private saving.

In a small closed economy investment is $50 billion and private saving is $45 billion. What are public saving and national saving? a)public saving is -$5 billion, and national saving is $50 billion b)public saving is -$5 billion, and national saving is $45 billion c)public saving is $5 billion, and national saving is $50 billion d)public saving is $5 billion, and national saving is $45 billion

c)public saving is $5 billion, and national saving is $50 billion -National savings is a sum of private saving and public saving. Thus public saving is the difference between national savings and private saving: $50 billion - $45 billion = $5 billion. At the same time, the accounting identity S = I shows that national saving and investment are equal for the economy as a whole. Thus national saving, S = $50 billion.

municipal bonds

tax-exempt bonds issued by state and local governments

Purchases of capital goods are excluded from GDP. True False

False -GDP is a sum of consumption, investment, government purchases, and net exports: Y = C + I + G + NX. In this identity, investment includes capital goods. Therefore, purchases of capital goods are not excluded from GDP.

If the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded, a. there is a surplus and the interest rate is above the equilibrium level. b. there is a surplus and the interest rate is below the equilibrium level. c. there is a shortage and the interest rate is above the equilibrium level. d. there is a shortage and the interest rate is below the equilibrium level.

a

Interest rates on long-term bonds are usually higher than interest rates on short-term bonds. a)True b)False

a) True

The interest earned on bonds issued by the city of Sacramento, California a)is not subject to federal income tax and, thus such bonds pay a lower interest rate than comparable bonds issued by the U.S. government. b)is subject to federal income tax and so these bonds pay a lower interest rate than otherwise comparable bonds issued by the U.S. government. c)is subject to federal income tax and, thus such bonds pay a higher interest rate than comparable bonds issued by the U.S. government. d)is not subject to federal income tax, thus such bonds pay a higher interest rate than comparable bonds issued by the U.S. government.

a)is not subject to federal income tax and, thus such bonds pay a lower interest rate than comparable bonds issued by the U.S. government.

If Congress instituted an investment tax credit a. it would make buying bonds more desirable, so the demand for loanable funds would shift. b. it would make buying capital goods more desirable, so the demand for loanable funds would shift. c. it would make buying bonds more desirable, so the supply of loanable funds would shift. d. it would make buying capital goods more desirable, so the supply of loanable funds would shift.

b

Other things the same, if the government increases transfer payments to households, then the effect of this on the government's budget a. will make investment rise. b. will make the rate of interest rise. c. will make public saving rise. d. All of the above are correct. Hide Feedback

b

The slope of the supply of loanable funds curve represents the a. positive relation between the real interest rate and investment. b. positive relation between the real interest rate and saving. c. negative relation between the real interest rate and investment. d. negative relation between the real interest rate and saving.

b

Which of the following is included in the demand for loanable funds? a. investment and government borrowing b. investment but not government borrowing c. government borrowing but not investment d. neither government borrowing nor investment

b

Consider a closed economy with national saving of $3 trillion, consumption of $10 trillion, and government purchases of $4 trillion. What the economy's is GDP? a)$9 trillion b)$17 trillion c)$11 trillion d)$3 trillion

b) 17 trillion in a closed economy, GDP is a sum of national savings (or investment), consumption, and government purchases, Y = C + I + G = $10 trillion + $3 trillion + $4 trillion = $17 trillion.

A national chain of grocery stores with limited internal funds plans to expand by opening several new stores. Which of the following describes how the chain will likely raise the required funds? a)Invest in research and development. b)Issue bonds. c)Buy stocks of financially sound corporations. d)Buy government bonds.

b)Issue bonds -When corporations, such as a national chain of grocery stores need to finance a business expansion such as a new store or a factory, they usually borrow from the public by issuing bonds a certificate of indebtedness that specifies the obligations of the borrower to the holder of the bond.

If the quantity of loanable funds demanded exceeds the quantity of loanable funds supplied, a. there is a surplus so interest rates will rise. b. there is a surplus so interest rates will fall. c. there is a shortage so interest rates will rise. d. there is a shortage so interest rates will fall.

c

If in the past Congress had taken additional actions to make saving more rewarding, then today it is likely that the equilibrium interest rate a. and the equilibrium quantity of loanable funds both would be lower. b. and the equilibrium quantity of loanable funds both would be higher. c. would be higher and the equilibrium quantity of loanable funds would be lower. d. would be lower and the equilibrium quantity of loanable funds would be higher. Correct

d

If the government institutes policies that diminish incentives to save, then in the loanable funds market a. the demand for loanable funds shifts rightward. b. the demand for loanable funds shifts leftward. c. the supply of loanable funds shifts rightward. d. the supply of loanable funds shifts leftward.

d

Consider a closed economy, in which S = (Y - T - C) + (T - G). In this identity, what does (Y - T - C) represent? a)Investment b)Public saving c)Private saving d)National saving

d) National Savings -The left side of this equation (Y − C − G) is the total income in the economy that remains after paying for consumption and government purchases

Which of the following explains the effect of an investment tax credit on the market for loanable funds? a)The demand curve for loanable funds shifts to the right causing both the equilibrium quantity of loanable funds the equilibrium interest rate to decrease. b)The demand curve for loanable funds shifts to the left causing the equilibrium quantity of loanable funds to decrease and the equilibrium interest rate to increase. c)The demand curve for loanable funds shifts to the left causing the equilibrium quantity of loanable funds to increase, and the equilibrium interest rate to decrease. d)The demand curve for loanable funds shifts to the right causing both the equilibrium quantity of loanable funds and the equilibrium interest rate to increase.

d)The demand curve for loanable funds shifts to the right causing both the equilibrium quantity of loanable funds and the equilibrium interest rate to increase.

interest rate lower than equilibrium

the quantity of loanable funds supplied would be less than the quantity of loanable funds demanded. The resulting shortage of loanable funds would encourage lenders to raise the interest rate they charge. A higher interest rate would encourage saving (thereby increasing the quantity of loanable funds supplied) and discourage borrowing for investment (thereby decreasing the quantity of loanable funds demanded).

interest rate higher than equilibrium

the quantity of loanable funds supplied would exceed the quantity of loanable funds demanded. As lenders compete for the scarce borrowers, interest rates would be driven down. In this way, the interest rate approaches the equilibrium level at which the supply and demand for loanable funds exactly balance.