lesson 4 financial
GDP = $100,000; taxes = $22,000; government purchases = $25,000; national saving = $15,000. Refer to Scenario 26-1. For this economy, investment amounts to
15,000
Which of the following could explain an increase in the interest rate and the equilibrium quantity of loanable funds?
The demand for loanable funds shifted rightward
Suppose private saving in a closed economy is $12b and investment is $10b.
The government budget deficit must equal $2b.
Crowding out occurs when investment declines because
a budget deficit makes interest rates rise.
As real interest rates fall, firms desire to
buy more new equipment and buildings. This response helps explain why the demand for loanable funds is downward sloping.
Financial intermediaries are
financial institutions through which savers can indirectly provide funds to borrowers.
Institutions that help to match one person's saving with another person's investment are collectively called the
financial system.
Suppose the government changed the tax laws, with the result that people were encouraged to consume more and save less. Using the loanable funds model, a consequence would be
higher interest rates and lower investment.
The real interest rate is the
interest rate corrected for inflation
When the government has a budget surplus
it buys more of its bonds from the public than it sells to the public.
The slope of the demand for loanable funds curve represents the
negative relation between the real interest rate and investment.
If there is shortage of loanable funds, then
neither curve shifts, but the quantity of loanable funds supplied increases and the quantity demanded decreases as the interest rate rises to equilibrium.
The slope of the supply of loanable funds curve represents the
positive relation between the real interest rate and saving
In a closed economy, what does (Y - T - C) represent?
private saving
An increase in the government's budget deficit means
public saving is less than $0 and decreasing.
At the broadest level, the financial system moves the economy's scarce resources from
savers to borrowers.
If the government instituted an investment tax credit, then which of the following would be higher in equilibrium?
saving and the interest rate
In a closed economy, public saving is the amount of
tax revenue that the government has left after paying for its spending.
A change in the tax laws that increases the supply of loanable funds will have a smaller effect on investment when
the demand for loanable funds is more inelastic and the supply of loanable funds is more elastic.
When the government's budget deficit increases
the government is borrowing more and public savings falls
Rob wants to create a personal trainer program service and needs to pay for equipment and gym space. He can finance this capital investment by
All of the above
A larger budget deficit
raises the interest rate and reduces investment
A mutual fund
All of the above are correct.
The primary economic function of the financial system is to
match one person's saving with another person's investment
If a firm wants to borrow it can
supply bonds by selling them.
