Chapter 14 Review Questions
The demand for loanable funds has a ________ slope because the lower the interest rate, the ________ number of investment projects are profitable, and the ________ the quantity of loanable funds demanded. A) negative; greater; lesser B) negative; greater; greater C) positive; lesser; lesser D) negative; lesser; greater
B negative/ greater/ greater
Which of the following would increase public saving(other things equal)? A. an increase in taxes B. a decrease in govnt purchases C. a decrease in govnt transfer payments D. All of the above would increase public savings
D. All of the above
In a closed economy, national savings is: A) the sum of public savings plus private savings. B) equal to national investment. C) the sum of the savings of individuals and corporations plus the savings of the government. D) All of these are true.
D. All of these
Good current economic conditions incent people to save ________ and a good outlook on future economic condtions incent people to save ________ A. less/less B. Less/more C. more/more D. more/less
D. More/less
If the government changed the tax code in a way that simultaneously increased the profitability of investment spending and reduced the incentive to save, then which of the following will happen with certainty? A) increase in the real interest rate B) decrease in the equilibrium quantity of savings C) decrease in the equilibrium quantity of loanable funds D) increase in the equilibrium quantity of loanable funds E) More than one of the above will happen with certainty
A. Increase in the real interest rate
The primary Function of a financial system is A. To channel the funds saved by savers to those who wish to borrow those funds B. To reduce the govnts budget deficit C. To control the amount of inflation in the economy D. To allow rich people to get richer
A. To channel the funds saved by savers to those who wish to borrow those funds
Which of the following would definitely increase public savings in the economy? A) a combination of higher taxes and lower government spending B) a combination of lower taxes and higher government spending C) a combination of lower taxes and lower government spending D) a combination of higher taxes and higher government spending
A. a combination of higher taxes and lower government spending
Which of the following policies/events results in an increase in the equilibrium quantity of savings? A) the economy enters an expansion making firms more likely to expand their operations B) there is an increase in social assistance programs from the government that provide payments to the elderly C) the economy enters a recession making firms less likely to expand their operations D) borrowing constraints are lessen making it easier for everyone to qualify for loans E) None of the above
A. the economy enters an expansion making firms more likely to expand their operations
Which of the following policies/events results in a decrease in the equilibrium quantity of savings? A) The uncertainty of savers about the future decreases B) The wealth of savers increases C) Both of the above D) None of the above
A. the uncertainty of savers about the future decreases
If the govnts budget deficit increases the the _____ curve for loanable funds will shift toe the ______and the equilibrium interest rate will _______ A. Supply/right/fall B. Demand/right/rise C.Supply/left/rise D. demand/left/fall
B Demand/right/rise
Which of the following would you expect to decrease the equilibrium interest rate? A) there is an increase in social assistance programs from the government that provide payments to the elderly B) a decrease in the profitability of investment projects firms are considering C) an increase in the budget deficit D) a decrease in the percentage of income that households save E) More than one of the above is correct
B. A decrease in the profitability of investment projects firms are considering
You buy a bond issued by general mills corp. You are the the ________ and General Mills is the ________ A.Consumer/borrower B. Lender/borrower C. Borrower/lender D. Lender/Consumer
B. Lender/Borrower
Sarah is able to take out a loan for $5000 for one year at an annual interest rat of 10% she would use the loan for an investment project after calculating her return from the project to be $450 sarah will: A. lose $450 on net and should not take the loan B. lose $50 on net and should not take out the loan C. make $50 on net and should take out the loan D. Make $450 on net and should take out the loan
B. Lose $50 and should not take out the loan
If expectations about the future dont change at all, then an economic downturn will generally: A. Increase savings at a given interest rate and shift the supply curve for loanable funds to the right B.Decrease savings at a given interest rate and shfit the supply curve for loanable funds the left C. Decrease savings at a given interest rate and shift the supply curve for loanable funds to the right D. increase savings at a given interest rate and shift the supply curve for loanable funds to the left
B. decrease savings at a given interest rate and shift the supply curve for loanable funds to the left
Increasing the amount of consumption spending and reducing the amount of savings ________ investment expenditures, and ________ long-run economic growth in the economy. A) decreases; increases B) decreases; decreases C) increases; decreases D) increases; increases
B. decreases/ decreases
Which model shows us the interaction of savers and borrowers? A) per-worker production function B) loanable funds model C) new growth theory D) the liquidity model
B. loanable funds
Adverse selection refers to when A.One party selects the wrong strategy and they are displease with their selection B. One party to a transaction has ore info than the other and transactions occur less frequently due to the info asymmetry C. Neither party is willing to be party to a transaction because they dont have enough info D. one party to a transaction has more info than the other and this results in a bargaining dispute
B. one party to a transaction has more info than the other an transactions occur less frequently due to the information asymmetry
In the market for loanable funds, the law of supply: A) reflects that more people will choose to save the lower is the interest rate. B) reflects that more people will choose to save the higher is the interest rate. C) reflects that more people will choose to borrow the higher is the interest rate. D) reflects that more people will choose to borrow the lower is the interest rate.
B. reflects that more people will choose to save the higher is the interest rate
The fact that US citizens expect to receive retirement benefits through socail seccurity and medicare pushes their A. demand for loanable funds further left than it would otherwise be B. supply of loanable funds further left that it would otherwise be C. demand for loanable funds further right than it would otherwise be D. supply of loanable funds further right than it would otherwise be
B. supply of loanable funds further left than it would otherwise be
Assuming all else equal, if there is an increase in the interest rate: A) there will be a movement downward and to the right along the demand for loanable funds curve. B) there will be a movement up and to the left along the demand for loanable funds curve. C) the demand for loanable funds curve shifts to the left. D) the demand for loanable funds curve shifts to the right.
B. there will be a movement up and to the left along the demand for loanable funds curve
Consider the following actions and determine whether each is a source of ʺsavingʺ, ʺconsumptionʺ, or ʺinvestmentʺ from a macroeconomic perspective: I. Google issues new bonds. II. Janet buys a new bond issued by Google. III. Janet buys a new computer. A) I is investment, II is saving, and III is consumption B) I is saving, and II and III are consumption C) I is investment, and II and III are saving D) I is saving, II is investment, and III is consumption
A. I is investment/ II is saving/ III is consumption
The issuer of a bond is a _____________ and the purchaser of a bond is a ____________. A) lender ; borrower B) lender ; consumer C) borrower ; lender D) consumer ; borrower
C. Borrower/ lender
Which of the following would you expect to increase the equilibrium interest rate? A) a decrease in the profitability of investment projects firms are considering B) a cultural change that makes people more ʺfuture-orientedʺ and less ʺpresent-orientedʺ C) a decrease in the percentage of income that households save D) the government moves from a budget deficit to a balanced budget E) More than one of the above is correct
C. a decrease in the percentage of income that households save
Which of the following would you expect to decrease the equilibrium interest rate? A) an increase in the budget deficit B) firms decide to purchase new capital C) an increase in the percentage of income that households save D) an increase in the profitability of investment projects firms are considering E) More than one of the above is correct
C. an increase in the percentage of income that households save
In comparison to a government that runs a balanced budget, when the government runs a budget deficit, A) household savings will fall. B) the equilibrium interest rate will fall. C) business investment will fall. D) public savings will rise
C. business investment will fall
If income is equal to total spending, then in a closed economy, it is equal to: A) consumption minus investment spending. B) savings plus investment. C) consumption plus investment spending. D) savings minus investment.
C. consumption plus investment spending
A net capital inflow occurs in open economies where investment is: A) equal to national savings. B) higher than national spending. C) higher than national savings. D) lower than national savings.
C. higher than national savings
If the demand for loanable funds increases at the same time that the supply of loanable funds increases, then which of the following will happen with certainty? A) decrease in the real interest rate B) increase in the real interest rate C) increase in the equilibrium quantity of loanable funds D) decrease in the equilibrium quantity of loanable funds E) More than one of the above will happen with certainty
C. increase in the equilibrium quantity of loanable funds
Public savings in the economy can be increased by A) raising government spending. B) lowering taxes. C) raising taxes. D) raising transfer payments.
C. raising taxes
In general, stocks are ________ risky than bonds, and have a ________ rate of return. A) more; higher B) less; higher C) more; lower D) less; lower
A. more/ higher
Refer to Figure 9-1. The loanable funds market is in equilibrium, as shown in the figure above. If the government begins to run a budget deficit, the ________ loanable funds will ________, thereby ________ the equilibrium interest rate. A) demand for; fall; decreasing B) demand for; rise; increasing C) supply of; fall; increasing D) supply of; rise; decreasing (refer Econ 1)
demand/ rise/ increasing
THe loanable funds market is in equilibrium as shown in the figure above. suppose that there is a cultural change in society and people begin to be more frugal than before and thus increase their desire to save money.The _____ loanable funds will ______ thereby _______ the equilibrium interest rate and ______ the equilibrium quantity of loanable funds. A. demand for/fall/decreasing/decreasing B.Supply/Rise/decreasing/increasing C. demand/rise/increasing/increasing D. Supply/Fall/increasing/decreasing
D. Supply/fall/increasing/decreasing
If technological change increases the profitability of new investment for firms, then the ________ curve for loanable funds will shift to the ________ and the equilibrium real interest rate will ________. A) supply; right; fall B) supply; left; rise C) demand; left; fall D) demand; right; rise
D. demand/ right/ rise
The fact that there are fewer and fewer potential investments that will generate returns high enough to make the cost of paying back a loan worthwhile is reflected in the: A. upward slope of the demand curve in the market for loanable funds B. upward slope of the supply curve in the market for loanable funds C. Downward slope of the supply curve in the market for loanable funds D. dowanward slope of the demand curve in the market for loanable funds
D. downward slope of the demand curve in the market for loanable funds
Consider a technological advance which makes capital more productive. In the loanable funds framework, this will lead to an increase in the equilibrium quantity of savings. Which of the following best explains this increase? A) The supply of loanable funds shifts to the right, causing an increase in savings. B) The supply of loanable funds shifts to the left, causing an increase in savings. C) The demand for loanable shifts to the left, putting upward pressure on the real interest rate. This higher real interest rate causes the quantity of loanable funds supplied to increase. D) The demand for loanable funds shifts to the right, putting upward pressure on the real interest rate. This higher real interest rate causes the quantity of loanable funds supplied to increase. E) None of the above. This is a trick question. The equilibrium quantity of loanable funds increases, but the equilbrium quantity of savings does not.
D. the demand for loanable funds shifts to the right putting upward pressure on the real interest rate this higher real interest rate causes the quantity of loanable funds supplied to increase