Macroeconomics Exam 2
rate of return for a zero coupon bond=
((FV-Price)/Price)*100
Investment is
the purchase of new capital goods.
If the government imposes a ceiling on the interest rate that is below the equilibrium interest rate in the loanable funds market then
the quantity of savings supplied will be less than the quantity of loanable funds demanded.
Lydia is a seasonal worker. She saves more when her income rises, and dissaves when her income falls. This behavior is referred to as
Consumption smoothing
if values are in growth rate % what equation do you use>
M+v=P+Y
Why is the demand for loanable funds downward sloping?
More people borrow when the price of loans is low than when it is high.
What is TRUE about the lifecycle theory of savings?
People tend to borrow during the early years of their lifetimes, save during their prime working years, and dissave during their retirement years.
Which of the following chains of logic explain the functions of banks in the process of economic growth?
Savers deposit their savings in banks. Banks direct these funds to firms that invest and engage in capital accumulation that furthers economic growth.
Crowding out occurs because
The government increases the demand for loanable funds and drives up the interest rates, causing investment and consumption to fall.
Trading in the market for loanable funds determines the equilibrium
amount of savings
Which of the following would be the most likely reason for the increase in the demand for loanable funds?
an increase in government borrowing
Savings is
income that is not spent on consumption goods
Real interest rate=
nominal Interest rate - Inflation rate
Workers who put 10% of their income into a retirement account this year are
smoothing consumption
Stock shares represent __________ and bonds represent __________.
corporate ownership; corporate debt
If interest rate rises, the number of new businesses will
decrease
In the loanable funds market, an increase in government borrowing will most likely
decrease bond prices and increase interest rates.
When business firms become more pessimistic about the state of the economy, the interest rate
decreases and borrowing decreases.
When individuals become more willing to save because their incomes have increased, the interest rate
decreases and borrowing increases.
A decrease in investment demand
decreases both the amount saved and the interest rate.
When the interest rate decreases, the cost for investment __________ and the funds that are demanded for investment __________.
decreases; increase
Financial intermediation can break down as a result of
government controls on interest rates and bank failures
According to the consumption-smoothing theory, people with longer life expectancy
have higher savings rates in their lifetimes than those with shorter life expectancy.
An investment tax credit will cause the interest rate to
increase and borrowing to increase.
When interest rate decreases, amount demanded by borrowers...
increases
The supply of savings function shows the relationship between saving and
interest rate
Which variable is determined in the market for loanable funds?
interest rate
When a given bond's price increases, we know that the interest rate on this bond
must decrease.
Nations that have experienced high negative real interest rates also have experienced
negative growth
nominal GDP
p*y
The supply of savings is positively sloped because
people are enticed to forgo consumption when interest rates are higher.
Why do people save during their working lifetimes?
retirement, prepare for unemployment, unexpected illnesses
An increase in government borrowing will cause the interest rate to
rise and private spending to fall.
The supply of loanable funds comes from __________ and the demand for loanable funds comes from __________.
saving; investment
Firms primarily raise money by using which two methods?
selling stocks and issuing corporate bonds
An increase in the supply of savings will cause the interest rate
to be lower
Why do ratings agencies rate bonds?
to indicate the chance of a bond being repaid
equation for velocity of money (v)
v=(p*y)/m
growth rate of real GDP in the equation
y
Why do longer-term bonds pay a higher rate of interest than shorter term bonds?
A longer maturity for a bond provides a greater opportunity for default by the borrower. Longer-term bonds are only issued by corporations whereas shorter-term bonds are issued only by the U.S. government.