ECON 202 Chapter 13 Study Guide

Crowding out

A decrease in investment as a result of government borrowing

Budget deficit

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

An increase in the budget deficit is a. a decrease in public saving. b. an increase in public saving. c. a decrease in private saving. d. an increase in private saving. e. none of the above.

A) a decrease in public saving

Which of the following sets of government policies is the most growth oriented? a. lower taxes on the returns to saving, provide investment tax credits, and lower the deficit b. lower taxes on the returns to saving, provide investment tax credits, and increase the deficit c. increase taxes on the returns to saving, provide investment tax credits, and lower the deficit d. increase taxes on the returns to saving, provide investment tax credits, and increase the deficit

A) lower taxes on the returns to saving, provide investment tax credits, and lower the deficit

National saving (or just saving) is equal to a. private saving + public saving. b. investment + consumption expenditures. c. GDP - government purchases. d. GDP+ consumption expenditures + government purchases. e. none of the above.

A) private saving + public saving

An increase in the budget deficit will a. raise the real interest rate and decrease the quantity of loanable funds demanded for investment. b. raise the real interest rate and increase the quantity of loanable funds demanded for investment. c. lower the real interest rate and increase the quantity of loanable funds demanded for investment. d. lower the real interest rate and decrease the quantity of loanable funds demanded for investment.

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

If GDP = $1,000, consumption= $600, taxes= $100, and government purchases= $200, how much is saving and investment? a. saving = $200, investment = $200 b. saving= $300, investment= $300 c. saving= $100, investment = $200 d. saving = $200, investment = $100 e. saving = $0, investment = $0

A) saving= $200, investment= $200

Closed economy

An economy with no international transactions

Budget surplus

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

If the supply of loanable funds is very inelastic (steep), which policy would likely increase saving and investment the most? a. an investment tax credit b. a reduction in the budget deficit c. an increase in the budget deficit d. none of the above

B) a reduction in the budget deficit

Credit risk refers to a bond's a. term to maturity. b. probability of default. c. tax treatment. d. dividend. e. price-earnings ratio.

B) probability of default

Investment is a. the purchase of stocks and bonds. b. the purchase of capital equipment and structures. c. when we place our saving in the bank. d. the purchase of goods and services.

B) the purchase of capital equipment and structures

If Americans become more thrifty, we would expect a. the supply of loanable funds to shift to the right and the real interest rate to rise. b. the supply of loanable funds to shift to the right and the real interest rate to fall. c. the demand for loanable funds to shift to the right and the real interest rate to rise. d. the demand for loanable funds to shift to the right and the real interest rate to fall.

B) the supply of loanable funds to shift to the right and the real interest rate to fall

If government spending exceeds tax collections, a. there is a budget surplus. b. there is a budget deficit. c. private saving is positive. d. public saving is positive. e. none of the above is true.

B) there is a budget deficit

Which of the following statements is true? a. A stock index is a directory used to locate information about selected stocks. b. Longer-term bonds tend to pay less interest than shorter-term bonds. c. Municipal bonds pay less interest than comparable corporate bonds. d. Mutual funds are riskier than single stock purchases because the performance of so many different firms can affect the return of a mutual fund.

C) Municipal bonds pay less interest than comparable corporate bonds

If Americans become less concerned with the future and save less at each real interest rate, a. real interest rates fall, and investment falls. b. real interest rates fall, and investment rises. c. real interest rates rise, and investment falls. d. real interest rates rise, and investment rises,

C) real interest rates rise, and investment falls

If the public consumes $100 billion less and the government purchases $100 billion more (other things unchanging), which of the following statements is true? a. There is an increase in saving, and the economy should grow more quickly. b. There is a decrease in saving, and the economy should grow more slowly. c. Saving is unchanged. d. There is not enough information to determine what will happen to saving.

C) saving is unchanged

An increase in the budget deficit that causes the government to increase its borrowing a. shifts the demand for loanable funds to the right. b. shifts the demand for loanable funds to the left. c. shifts the supply of loanable funds to the left. d. shifts the supply of loanable funds to the right.

C) shifts the supply of loanable funds to the left.

Bond

Certificate of indebtedness of IOU

Stock

Certificate of ownership of a small portion of a larger firm

Which of the following financial market securities would likely pay the highest interest rate? a. a municipal bond issued by the state of Texas b. a mutual fund with a portfolio of blue chip bonds c. a bond issued by a blue chip company d. a bond issued by a start-up company

D) a bond issued by a start up company

A financial intermediary is a middle-person between a. labor unions and firms. b. husbands and wives. c. buyers and sellers. d. borrowers and lenders.

D) borrowers and lenders

If an increase in the budget deficit reduces national saving and investment, we have witnessed a demonstration of a. equity finance. b. the mutual fund effect. c. intermediation. d. crowding out.

D) crowding out

. An increase in the budget surplus a. shifts the demand for loanable funds to the right and increases the real interest rate. b. shifts the demand for loanable funds to the left and reduces the real interest rate c. shifts the supply of loanable funds to the left and increases the real interest rate. d. shifts the supply of loanable funds to the right and reduces the real interest rate.

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

If the government increases investment tax credits and reduces taxes on the return to saving at the same time, a. the real interest rate should rise. b. the real interest rate should fall. c. the real interest rate should not change. d. the impact on the real interest rate is indeterminate

D) the impact on the real interest rate is indeterminate

Which of the following is an example of equity finance? a. corporate bonds b. municipal bonds c. stock d. bank loan e. All of the above are equity finance.

E) All of the above are equity finance

Investment

Expenditures on capital equipment and structures

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

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

False

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

False

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

False

Financial markets

Financial institutions through which 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

Medium of exchange

Spendable asset such as a checking deposit

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 of 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

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

Public saving

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

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