Macroecon chapter 8 study guide
What would happen in the market for loanable funds if the government were to increase the tax on interest income?
Interest rates would rise.
formula and definition for national savings
S = Y - C - G the total savings in an economy from households, business, and the government. y = C + I + G + MX main formula
If the public consumes $100 billion less and the government purchases $100 billion more (other things unchanging), which of the following statements is true?
Saving is unchanged
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
When Interest rates increase, how does that influence Quality demanded (Qd) and Quality supplied (Qs) in the market for loanable funds?
The higher the interest rate, the more likely a person is to save money. the supply of loanable funds shows that Qs available will increase as the interest rate increases.
formula and definition for private savings
Y - T - C Total savings from households + businesses after tax
Which of the following financial market securities would likely pay the highest interest rate?
a bond issued by a start-up company
When we save a larger portion of our GDP, what happens with capital and productivity
both will increase (have more of each)
If an increase in the budget deficit reduces national saving and investment, we have witnessed a demonstration of
crowding out
while the sale of stocks to raise funds
equity finance
Compared to bondholders, stockholders
face higher risk and have the potential for higher returns.
What would happen in the market for loanable funds if the government were to decrease the tax rate on interest income?
none of the above
A larger budget deficit
raises the interest rate and reduces investment.
If Americans become less concerned with the future and save less at each real interest rate,
real interest rates rise, and investment falls.
A larger budget surplus
reduces the interest rate and raises investment.
If Congress instituted an investment tax credit, the interest rate would
rise and saving would rise.
If GDP = $1,000, consumption = $600, taxes = $100, and government purchases = $200, how much is saving and investment?
saving = $200, investment = $200
An increase in the budget deficit that causes the government to increase its borrowing
shifts the supply of loanable funds to the left.
Which of the following is an example of equity finance?
stock
What would happen with equilibrium interest rate and quantity of LF in the LF market if the government decreases tax on interest income
supply shifts right and down
What would happen with equilibrium interest rate and quantity of LF in the LF market if the budget surplus is increasing
supply shifts up and left (crowding out)
What is the source of supply and demand for loanable funds?
supply: savers demand: investors
In a closed economy, public saving is the amount of
tax revenue that the government has left after paying for its spending.
What is the primary advantage of mutual funds?
the ability to diversify while investing a small amount (you do not put all your eggs in one basket)
What would happen with equilibrium interest rate and quantity of LF in the LF market if the supply curve shifts left
the equilibrium interest rate falls and the quantity of loanable funds rises.
Investment is
the purchase of capital equipment and structures.
If Americans become more thrifty, we would expect
the supply of loanable funds to shift to the right and the real interest rate to fall
If government spending exceeds tax collections,
there is a budget deficit
formula and definition for public savings
T - G Total savings of government: taxes minus government spending
Jerry has the choice of two bonds, one that pays 5 percent interest and one that pays 2 percent interest. Which of the following is most likely?
The 2 percent bond is a municipal bond, and the 5 percent bond is a U.S. government bond
What is a bond and its' characteristics
a __________ is a certificate of indebtedness that specifies the obligations of the borrower to the holder of the bond. Characteristics include the term, credit risk, and tax treatment.
If the supply of loanable funds is very inelastic (steep), which policy would likely increase saving and investment the most?
a reduction in the budget deficit
How corporations can raise money from the public, when they do so, do they demand funds or supply funds
by selling stocks and bonds, they are demanding funds.
Suppose the issuer of a bond fails to pay some of the interest or principal that was promised to the bondholders. This failure is referred to as a
default
What would happen with equilibrium interest rate and quantity of LF in the LF market if Congress institutes an investment tax
demand shifts up and to the right
Institutions that help to match one person's saving with another person's investment are collectively called the
financial system
If there is a shortage on LF market, what happens with Qs and Qd and interest rates when we move to its equilibrium value?
interest rates are below the equilibrium and Qs is less than Qd. When we move towards equilibrium, interest rates are increasing, Qs and Qd are decreasing.
The source of the supply of loanable funds
is saving and the source of demand for loanable funds is investment.
What is a junk bond?
issued by a shaky corporation and pay very high-interest rates.
short term bonds are
less risky, and have lower interest rates
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.
Which of the following sets of government policies is the most growth oriented?
lower taxes on the returns to saving, provide investment tax credits, and lower the deficit.
long-term bonds generally have
more risk and so they pay higher interest rates.
Other things the same, bonds are likely to have higher interest rates if they have
no tax exemptions and long terms.
An increase in the budget surplus
shifts the supply of loanable funds to the right and reduces the real interest rate
On the market for loanable funds, when do we have a shortage and when do we have a surplus?
shortage occurs when there are more people who want to buy stocks and bonds than people who want to sell.
What are two financial markets in the economy
stock market and bond market
Riskiness of the bond holder and stockholder
stocks are more risky than bonds but can yield higher rewards.
If a firm wants to borrow it can
supply bonds by selling them.
The economy's two most important financial markets are
the bond market and the stock market.
If the government increases investment tax credits and reduces taxes on the return to saving at the same time,
the impact on the real interest rate is indeterminate
capital investment
the money paid to purchase buildings, tools, and machines to create goods and services
If there is a shortage of loanable funds, then
the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is below equilibrium.
Dow Jones index based on the price of how many stocks?
30
If Congress increased the tax rate on interest income, investment
and saving would decrease.
A financial intermediary is a middleperson between
borrowers and lenders
When a corporation sells bonds, does it borrow from the public or sell shares of ownership in the corporation?
borrows from the public
Other things the same, when the interest rate rises,
people would want to lend more, making the quantity of loanable funds supplied increase.
In a closed economy, what does (Y - T - C) represent?
private saving
National saving (or just saving) is equal to
private saving + public saving
Credit risk refers to a bond's
probability of default
The old adage, "Don't put all your eggs in one basket," is very similar to a modern bit of advice concerning financial matters:
"Diversify."
Municipal bonds pay less interest than comparable corporate bonds.
True
The sale of bonds to raise money
debt finance
an increase in the budget deficit will
raise the real interest rate and decrease the quantity of loanable funds demanded for investment. It also means a decrease in public saving.
For a closed economy, GDP is $12 trillion, consumption is $7 trillion, taxes net of transfers are $3 trillion and the government runs a deficit of $1 trillion. What are private saving and national saving?
$2 trillion and $1 trillion, respectively
We would expect the interest rate on Bond A to be higher than the interest rate on Bond B if the two bonds have identical characteristics except that
Bond A has a term of 20 years and Bond B has a term of 2 years.
