Chapter 8: Saving, Investment and the Financial System

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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

public saving

the tax revenue that the government has left after paying for its spending

If government spending exceeds tax collections

there is a budget deficit

A reduction in the budget deficit should shift the supply of loanable funds to the right, lower the real interest rate, and increase the quantity demanded of loanable funds.

true

In a closed economy, investment is always equal to saving regardless of where the saving came from - public or private sources.

true

In a closed economy, saving is what remains after consumption expenditures and government purchases.

true

Investment is the purchase of capital equipment and structures.

true

Municipal bonds pay less interest than comparable risk corporate bonds because the interest payments are tax exempt to the bondholder.

true

Mutual funds reduce a shareholder's risk by purchasing a diversified portfolio.

true

Public saving and the government's budget surplus are the same thing.

true

The quantity supplied of loanable funds is greater if real interest rates are higher.

true

crowding out

a decrease in investment as a result of government borrowing

An increase in the budget deficit is

a decrease in public saving

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

budget deficit

a shortfall of tax revenue relative to government spending causing public saving to be negative

The financial crisis of 2008 and 2009 began with a sharp economic downturn and a reduction in the overall demand for output.

false

When a business firm sells a bond, it has engaged in equity finance

false

financial markets

financial institutions through much savers can directly lend to borrowers

financial intermediaries

financial institutions through which savers can indirectly lend to borrowers

bank

institution that collects deposits and makes loans

mutual fund

institution that sells shares and uses the proceeds to buy a diversified portfolio

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

Which of the following statements is true?

municipal bonds pay less interest than comparable corporate bonds

National saving (or just saving) is equal to

private saving + public saving

Credit risk refers to a bond's

probability of default

An increase in the budget deficit will

raise the real interest rate and decrease the quantity of loanable funds demanded for investment

If Americans become less concerned with the future and save less at each real interest rate,

real interest rates rise, and investment falls

If GDP = $1,000, consumption = $600, taxes = $100, and government purchases = $200, how much is saving and investment?

saving = $200, investment = $200; only add consumption and purchases for saving

investment

expenditures on capital equipment and structures

Which of the following financial market securities would likely pay the highest interest rate?

a bond issued by a start up company

closed economy

an economy with no international transactions

budget surplus

an excess of tax revenue over government spending causing public saving to be positive

A financial intermediary is a middleperson between

borrowers and lenders

bond

certificate of indebtedness or IOU

stock

certificate of ownership of a small portion of a large firm

If an increase in the budget deficit reduces national saving and investment, we have witnessed a demonstration of

crowding out

An increase in the budget deficit that causes the government to increase its borrowing shits the demand for loanable funds to the right.

false

If the government wanted to increase the rate of growth, it should raise taxes on interest and dividends to shift the supply of loanable funds to the right.

false

If the real interest rate in the loanable funds market is temporarily held above the equilibrium rate, desired borrowing will exceed desired lending and the real interest rate will fall.

false

If you save money this week and lend it to your roommate to buy food for consumption, your act of personal saving has increased national saving.

false

People who buy stock in a firm have loaned money to the firm.

false

If the public consumes $100 billion less and the government purchases $100 billion more ( other things unchanging), which of the following statements is true?

savings is unchanged

An increase in the budget deficit that causes the government to increase its borrowing

shifts the supply of loanable funds to the left

An increase in the budget surplus

shifts the supply of loanable funds to the right and reduces the real interest rate

medium of exchange

spendable asset such as a checking deposit

Which of the following is an example of equity finance?

stock

government debt

the accumulation of past budget deficits

demand for loanable funds

the amount of borrowing for investment desired at each real interest rate

supply for loanable funds

the amount of saving made available for lending at each real interest rate

financial system

the group of institutions in the economy that help match borrowers and lenders

If the government increases investment tax credits and reduce taxes on the return to saving at the same time,

the impact on the real interest rate is indeterminate

national saving (saving)

the income that remains after consumption expenditures and government purchases

private saving

the income that remains after consumption expenditures and taxes

market for loanable funds

the market in which those who want to save supply funds and those who want to borrow to invest demand funds

Investment is

the purchase of capital equipment and structures


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