ECN 222 Homework 4

In a small closed economy investment is $50 billion and private saving is $45 billion. What are public saving and national saving?

$5 billion and $50 billion

If the government currently has a budget deficit, then

All of the above are correct. (it does not necessarily have a debt. its debt is increasing. government expenditures are greater than taxes)

Refer to Figure 26-4. The position and/or slope of the Supply curve are influenced by

All of the above are correct. (the level of public saving. the level of national savings. decisions made by people who have extra income they want to save and lend out)

Refer to Figure 26-4. Regard the position of the Supply curve as fixed, as on the graph. If the real interest rate is 8 percent, the inflation rate is 3 percent, and the market for loanable funds is in equilibrium, then the position of the demand-for-loanable-funds curve must be

D2

For an open economy, the equation Y = C + I + G + NX is an identity. If we define national saving, S, as the total income in the economy that is left after paying for consumption and government purchases, then for an open economy, it is true that

S = I + NX.

Refer to Figure 26-4. Which of the following events could explain a shift of the demand-for-loanable-funds curve from D1 to D2?

The tax code is reformed to encourage greater investment.

Crowding out occurs when investment declines because

a budget deficit makes interest rates rise.

Which of the following is a financial intermediary?

a mutual fund

Refer to Figure 26-4. If the equilibrium quantity of loanable funds is $56 billion and if the rate of inflation is 5 percent, then the equilibrium nominal interest rate is

between 11 percent and 13 percent.

Refer to Figure 26-4. If the equilibrium quantity of loanable funds is $56 billion and if the rate of inflation is 4 percent, then the equilibrium real interest rate is

between 6 percent and 8 percent.

Financial intermediaries are

financial institutions through which savers can indirectly provide funds to borrowers.

An increase in the quantity of loanable funds traded means that

firms are borrowing more and investment increases.

In a closed economy private saving is $500 billion and the government budget deficit is $100 billion. What is investment?

honestly idk, use formual y-c-g

The real interest rate is the

interest rate corrected for inflation.

By definition, equity finance

is accomplished when firms sell shares of stock.

The source of the supply of loanable funds

is saving and the source of demand for loanable funds is investment.

National saving

is the total income in the economy that remains after paying for consumption and government purchases.

Short-term bonds are generally

less risky than long-term bonds and so they feature 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.

When a country saves a larger portion of its GDP than it did before, it will have

more capital and higher productivity.

Compared to short-term bonds, other things the same, long-term bonds generally have

more risk and so they pay higher interest rates.

Bonds issued by state and local governments are called _____ bonds. Bonds issued by financially shaky corporations are called _____ bonds. Of these two, which type of bond usually pays a relatively higher interest rate?

municipal junk junk

People who buy stock in a corporation such as General Electric become

part owners of General Electric, so the benefits of holding the stock depend on General Electric's profits.

The slope of the supply of loanable funds curve represents the

positive relation between the real interest rate and saving.

Mutual funds

provide diversification. Shareholders assume all of the risk associated with the mutual fund.

The length of time until a bond matures is called the

term.

Refer to Figure 26-4. If the equilibrium quantity of loanable funds is $50 billion and if the equilibrium nominal interest rate is 8 percent, then

the rate of inflation is approximately 2 percent.

A policy that induces people to save more shifts

the supply of loanable funds rightward and increases investment

It is claimed that a secondary advantage of mutual funds is that

they give ordinary people access to the skills of professional money managers.

How do banks make profits?

they make money by lending money and collecting on the interest

Refer to Figure 26-4. Regard the position of the Supply curve as fixed, as on the graph. If the real interest rate is 4 percent, the inflation rate is 2 percent, and the market for loanable funds is in equilibrium, then the position of the demand-for-loanable-funds curve must be

to the left of D1