Ch. 13 Macro Homework
Suppose that in a closed economy GDP is equal to 15,000, government purchases are equal to 3,000, consumption equals 10,500, and taxes equal 3,500. What are private saving and public saving?
1,000 and 500, respectively
Suppose that in a closed economy GDP is11,000, consumption is 7,500, and taxes are 500. What value of government purchases would make national savings equal to 2,000 and at that value would the government have a deficit or surplus?
1500, deficit
The Dow Jones Industrial Average is now based on the prices of the stocks of
30 major US corporations
Which of the following is a financial-market transaction?
A saver buys a bond a corporation has just issued so it can purchase capital
Kroger's grocery chain wants to finance the purchase of a new warehouse. It decides to sell bonds.
Kroger's plans to use debt financing and its action is part of the demand for loanable funds.
Mandy purchases 68.2 shares of a mutual fund for $1500. Cassie's purchase of these shares contributes $1500 to which magnitude in the identity Y=C+I+G
NONE
Suppose that Congress were to institute an investment tax credit. What would happen in the market for loanable funds?
The demand for loanable funds would shift right
Suppose Congress institutes an investment tax credit. What would happen in the market for loanable funds?
The interest rate and investment would rise.
What would happen in the market for loanable funds if the government were to decrease the tax rate on interest income?
There would be an increase in the amount of loanable funds borrowed
If you were to start a business delivering documents, you might need to purchase cell phones, bicycles, desks, and chairs.
These purchases are called capital investment. If you raise the funds to purchase them from others you are a borrower.
Crowding out occurs when investment declines because
a budget deficit makes interest rates rise
On which of these bonds is the prospect of default most likely?
a junk bond
A stock index is
an average of a group of stock prices
If the demand for loanable funds shifts to the left, then the equilibrium interest rate
and quantity of loanable funds falls
The fact that borrowers sometimes default on their loans by declaring bankruptcy is directly related to the characteristic of a bond called
credit risk
A national chain of grocery stores wants to finance the construction of several new stores. The firm has limited internal funds, so it likely will
demand the required funds by selling bonds
A closed economy
does not engage in international trade of goods and services and does not engage in international borrowing or lending
If national saving in a closed economy is greater than zero, then
either public saving or private saving must be greater than zero, investment is positive, and Y-C-G>0
Institutions that help to match one person's saving with another person's investment are collectively called the
financial system
In the demand for loanable funds, investment but not _______ is included.
government borrowing
A government budget deficit affects the supply of loanable funds, rather than the demand for loanable funds, because
in our model of the loanable funds market, we define "loanable funds" as the flow of resources available to fund private investment.
In a closed economy, equilibrium in the market for loanable funds occurs where saving equals
investment
When public saving falls by $2b and private saving falls by $1b in a closed economy,
investment falls by $3b
In a closed economy, national saving equals
investment, income minus the sum of consumption and government purchases, and private saving plus public saving
A mutual fund
is a financial institution that stands between savers and borrowers, is a financial intermediary, and allows people with small amounts of money to diversify their holdings
The source of the supply of loanable funds
is saving and the source of demand for loanable funds is investment
Kathleen is considering expanding her dress shop. If interest rates rise she is
less likely to expand. This illustrates why the demand for loanable funds slopes downward
A corporation's earnings are the amount of revenue it receives for the sale of its products
minus its cost of production as measured by its accountants. Earnings may be paid out as dividends or retained by the corporation.
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
The slope of the demand for loanable funds curve represents the
negative relation between the real interest rate and investment
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
Other things the same, when the interest rate rises,
people would want to lend more, making the quantity of loanable funds supplied increase
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 (T-G) represent?
public saving
An increase in the government's budget surplus means
public saving is greater than $0 and increasing
World Wide Delivery Service Corporation develops a way to speed up its deliveries and reduce its costs. We would expect that this would
raise the demand for existing shares of the stock, causing the price to rise.
A larger budget deficit
raises the interest rate and reduces investment
Other things the same, a government budget deficit
reduces both public and national saving
If Congress instituted an investment tax credit, the interest rate would
rise and saving would rise
Other things the same, an increase in taxes with no change in government purchases makes national saving
rise. The supply of loanable funds shifts right
A bond buyer is a
saver. Long term bonds have more risk than short term bonds.
As an alternative to selling shares of stock as a means of raising funds, a large company could, instead,
sell bonds
When a large, well known corporation wishes to borrow directly from the public, it can
sell bonds
In a closed economy, public saving is the amount of
tax revenue that the government has left after paying for its spending
The ratio of debt to GDP in the US
tends to rise during wars, rose during the decade that began in 2001, and fell during the late 1990s
Net exports must equal zero for any economy
that is closed, for which Y=C+I+G, and for which S=Y-C-G
In a closed economy, private saving is
the amount of income that households have left after paying for their taxes and consumption
We associate the term debt finance with
the bond market, and we associated the term equity finance with the stock market
In a closed economy, if Y is 10,000, T is 1,000, G is 3,000, and C is 5,000, then
the government has a budget deficit and investment is 2,00
Suppose the market for loanable funds is in equilibrium. What would happen in the market for loanable funds, other things the same, if the Congress and President increased the maximum contribution limits to 401(k) and 403(b) tax- deferred retirement accounts?
the interest rate would decrease and the quantity of loanable funds would increase
If there is a surplus of loanable funds, then
the quantity supplied is greater than the quantity demanded and the interest rate will fall.
If a firm sells a total of 10 shares of stock, then
the supply of, and demand for, those shares determine the price per share, each share represents ownership of 1 percent of the firm, and the firm is engaging in equity finance
Most entrepreneurs do not have enough money of their own to start their businesses. When they acquire the necessary funds from someone else,
their investments are being financed by someone else's saving
If the quantity of loanable funds demanded exceeds the quantity of loanable funds supplied
there is a shortage and the interest rate is below the equilibrium level
Managed funds
typically have a lower rate of return and higher costs than index funds
Other things the same, an increase in the interest rate
would decrease the quantity of loanable funds demanded.
Suppose private saving in a closed economy in $12b and investment is $10b, the government budget deficit must equal
$2b
We would expect the interest rate on Bond A to be higher than the interest rate on Bond B if the two bonds have identical characteristics except that
Bond A has a term of 20 years and Bond B has a term of 2 years
