ECON 1022 Final Exam (Chapter 8, 11, 12 and 15)

Unit of account

the yardstick people use to post prices and record debts

A certificate of indebtedness that specifies the obligations of the borrower to the holder is called a

bond

ABC Co. sells newly issued bonds. JLG Co. sells newly issued stocks. Which company is raising funds in financial markets?

both ABC and JLG

M2

everything in M1 plus savings deposits, small time deposits, money market mutual funds, and a few minor categories

The reserve ratio

fraction of deposits that banks hold as reserves total reserves as a percentage of total deposits

Fiat money

money without intrinsic value, used as money because of government decree

The slope of the demand for loanable funds curve represents the

negative relation between the real interest rate and investment.

For an imaginary closed economy, T=$5,000; S=$11,000; C=$48,000; and the government is running a budget surplus of $1,000. Then

private saving = $10,000 and GDP = $63,000

Suppose a government that taxed all interest income changed its tax law so that the first $5,000 of a taxpayer's interest income was tax free. This would shift the

supply of loanable funds to the right, causing interest rates to fall.

Commodity money

takes the form of a commodity with intrinsic value

Barter

the exchange of one good or service for another

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 2,000

The position and/or slope of the supply curve are influenced by

the level of public saving, the level of national saving, decisions made by people who have extra income they want to save and lend out

Investment

the purchase of new capital NOT stocks and bonds

What is measured along the horizontal axis of the graph?

the quantity of loanable funds

If there is a shortage of loanable funds, then

the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is below equilibrium

What is measured along the vertical axis of the graph?

the real interest rate

Double coincidence of wants

the unlikely occurrence that two people each have a good the other wants

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

Budget deficit

A shortfall of tax revenue from government spending G - T

Budget surplus

An excess of tax revenue over government spending T - G Public saving

National Saving

Private saving + public saving (Y - T - C) + (T - G) Y - C - G The portion of national income that is not used for consumption or government purchases

Public Saving

Tax revenue less government spending T - G

Interest rates fall and investment falls. Which of the following could explain these changes?

The government repeals an investment tax credit.

Private Saving

The income remaining after households pay their taxes and pay for consumption

Private Saving

The portion of households' income that is not used for consumption or paying taxes = Y - T - C

Which of the following could explain an increase in the equilibrium interest rate and a decrease in the equilibrium quantity of loanable funds?

The supply of loanable funds shifted left.

Other things the same, which bond would you expect to pay the lowest interest rate?

a bond issued by a state with a very good credit rating

Other things the same, the maturity of a bond becomes longer, the bond will pay

a higher interest rate because it has more risk.

Medium of exchange

an item buyers give to sellers when they want to purchase goods and services

Store of value

an item people can use to transfer purchasing power from the present to the future

M1

currenct, demand deposits, travelers checks and other checkable deposits