Macro Final Chapter 10.2 and 10.3

The primary advantage of a mutual fund is that it allows savers with small quantities of funds to diversify.

True.

Consider the following data for a closed economy: Y=$12 trillion G=$2 trillion C=$8 trillion TR=$2 trillion I=$2 trillion T=$3 trillion What is private saving in this economy? A. $3 Trillion B. $4 trillion C. $5 trillion D. $8 trillion

A. Private saving=Y+TR-C-T=12+2-8-3+$3 TRILLION

Which of the following would encourage economic growth through an increase in the economy's quantity of saving and investment? A. An increase in the tax rate on interest income B. A tax credit for investment C. A larger government budget deficit D. All of the above are correct.

B. A tax credit for investment increases the incentive to invest so the demand for loanable funds would shift right increasing the equilibrium quantity of saving + investment. A larger government budget deficit (C) end/or an increase in the tax rate on interest income (A) that reduces the incentive to save would cause the supply of loanable funds to shift left, decreasing the equilibrium quantity of saving an investment.

Consider the following data for a closed economy: Y=$10 trillion C=$5 trillion TR=$2 trillion G=$2 trillion What is investment in this economy? A. $5 trillion B. $3 trillion C. $2 trillion D. Investments cannot be determined without data on taxes (T)

B. Investment= Y-C-G=10-5-2=$3 TRILLION. Y=C+I+G+NX(0)

Under which of the following circumstances would the government be running a budget deficit? A. G=$7 trillion. T=$10 Trillion, TR=$3 Trillion B.G=$5 Trillion, T=$7 trillion, TR=$1 Trillion C.G=$7 Trillion, T=$7 Trillion, TR=$0 D.G=$5 Trillion, T=$5 Trillion, Tr=$1 Trillion

d. T-G-TR=-5-5-1=$-1 trillion budget deficit. Want the result to be Negative

In 2003, Barkstralia's government had a balanced budget. In 2004, Barkstralia's government ran a budget deficit. Holding all else constant, which of the following is incorrect? A. Barkstralia's public saving was equal to zero in 2003 and less than zero in 2004. B. Barkstralia's equilibrium quantity of saving and investment was smaller in 2003 than it was in 2004. C. Barkstralia's equilibrium real interest rate was smaller in 2003 than it was in 2004. D. In 2004, the sum of Barkstralia's transfer payments and government purchases was greater than Barkstralia's tax revenue.

B. The 2004 Budget deficit decreased public saving, shifting the supply of loanable funds left relative to its 2003 position. As a result B's equilibrium quantity of saving and investment (l*) was larger in 2003 than it was 2004

If the government decrease the tax rate on interest income, the the equilibrium real interest rate will _____ and the equilibrium quantity of saving and investment will ____. A. increase, increase B. increase, decrease C. decrease, increase D. decrease, decrease

C. If the government decrease the tax rate on interest income it increases the incentive to save so the supply of loanable funds will shift right. This will decrease i* and increase L*

In 2004, Wrexington's government ran a budget deficit, but in 2005, Wrexington's government had a balanced budget. Holding all else constant, this would have caused the __ loanable funds to shift __ in 2005. A. demand for, right B. demand for; left C. supply of; right D. suplly of; left

C. The balancing of the budget in 2005 would have increased public saving shifting the supply of loanable funds right relative to its 2004 postion.

28. Stock indexes, such as the Dow Jones Industrial Average, typically _____ before the beginning of a recession and _____ before the beginning of an expansion. A. rise; rise B. rise; fall C. fall; rise D. fall; fall

C. This is why stock indexes are a leading economic indicator

Consider the following data for a closed economy: Y=$12 trillion G=$2 trillion C=$8 trillion TR=$2 trillion I=$2 trillion T=$3 trillion What is public saving in this economy? A. $0 B. $1 trillion C. $2 trillion D. -$1 trillion

D. Public Saving= T-G-TR=3-2-2=$-1 trillion

If the government eliminates a tax credit for investment, then the equilibrium real interest rate will ___ and the equilibrium quantity of saving and investment will __-. A. increase, increase B. increase, decrease C. decrease, increase D. decrease, decrease

D. The elimination of a tax credit for investment will reduce the incentive to invest so the demand for loanable funds will shift left. This will decrease both i* and LA*

Holding all else constant, which of the following would you expect to increase the equilibrium real interest rate? A. An increase in saving by households B. A decrease in saving by households C. an increase investment by firms D. A decrease in investment by firms E. More than one of the above is correct

E. Holding all else constant an decrease in saving by household (B) shift the supply of loanable funds left, increasing the equilibrium real interest rate. Holding all else constant, an increase in investment by firms (C) will shift the demand for loanable funds right, increasing the equilibrium real interest rate.

29. Which of the following does not decrease during a recession? A. income B. production C. profits D. spending E. unemployment

E. Unemployed increase during a recession

A firm receives funds every time a share of its stock is sold.

FAlse. A firm revives funds only when a share of its stock is sold for the first time in a primary market.

A bond is a financial security that represents partial ownership of a firm.

False. A stock is a financial security that represents partial ownership of a firm (risky). A bond is a financial security that represents a promise to repay a fixed amount of funds.

Banks pay higher interest rates to savers than they receive from borrowers.

False. Banks pay lower interest rates and use the difference to cover expense and generate profit.

Business cycle are regular and predictable.

False. Business cycles are irregular and unpredictable ( Expansions and recessions length of periods are not predicted or regular)

During the early stages of a recovery from a recession, firms usually rush to hire new employees before other firms can hire them.

False. During the early stages of a recovery from a recessioon, firms increase the hours of their existing work force before they hire new workers

Over time, the U.S. economy has experienced constant economic growth.

False. Over time, the U.S. economy has experience economic growth but has not been constant due to the business cycle.

Savers prefer to buy bonds when their interest rates are low.

False. Savers prefer to buy bonds when their interest rates are HIGH because savers receive interest from bonds. Bonds: Interest Rates

The demand for loanable funds comes from savers, and the supply of loanable funds come from investors

False. The demand for loanable funds comes from investors and the supply of loanable funds comes from savers.

The nominal interest rate reflects the true return to lending/saving and the true cost of borrowing.

False. The real interest rate reflects the true return to lending/ saving and the true cost of borrowing because it is adjusted for inflation.

When discouraged workers return to the labor force during an expansion, the unemployment rate decreases.

False. When discouraged workers return to the labor force during an expansion, the unemployment rate increases because they return to the labor force as unemployed workers

30. Wrexington is a closed economy that has collected the following data: Y = $20 trillion, C = $12 trillion, I = $3 trillion, TR = $1 trillion, and T = $7 trillion. What is Wrexington's private saving? What is Wrexington's public saving?

Private Saving=Y+TR-T-C =20+1-7-12=2 Public saving=T-TR-G =7-1-G Closed economy No NX=0 solve for G by y=C+I+G 20=12+13+G. G=5 =7-1-5=1

The unemployment rate rises almost immediately during a recession, but it does not usually fall until the latter part of an expansion.

True. The unemployment rate doesn't usually fall until the latter part of an expansion because (1) firms increase the hours of their existing workforce, some of whom were underemployed before they hire new workers and (2) discouraged workers often return to the labor force during an expansion. Unemployment rate= Number Unemployed/ labor Force

As the real interest rate increases, the quantity of loanable funds demanded decreases and the quantity of loanable funds supplied increase.

True ( Law of Demand and Supply)

The inflation rate and the interest rate both tend to rise during expansions and fall during recessions.

True During expansions, the inflation rate usually rises in response to strong demand for consumer goods, and the interest rate usually rise in response to strong demand for investment. During recessions, the inflation rate usually falls in response to weak demand for consumer goods, and the interest rate usually falls in response to weak demand for investment.

In macroeconomics, the purchase of stocks and bonds is called saving, and the purchase of new machinery and equipment is called investment.

True.

Holding all else constant, a country's labor productivity and standard of living increase when the country's L* increases.

True. A country's L* is quantity of saving and investment. When a country's L* increase the country's quantity of capital per hour worked increases and/or is technology improves so the country's labor productivity and standard of living increases.

In a closed economy, saving equals investment and (Y - C- G) and (private saving = public saving).

True. Saving= Public Saving+Private Saving= Y-C-G. Public saving= Taxes-Transfer Payment-Government. Private Saving (Individuals)=Y(Income)+ Transfer Payment)-T(Taxes)-C(consumption)