ECON201 Ch 10 Sapling

Which of these statements best summarizes the impact of the Fisher effect?

Consumers consider future inflation.

An improvement in the budget balance increases the demand for financial capital. Lower interest rates can lead to private investment being crowded out. A trade balance in surplus increases the supply of financial capital. If private savings is equal to private investment, then there is neither a budget surplus nor a budget deficit.

False

There are two aspects of efficiency that the equilibrium of market for loanable funds exhibits. Select the TWO statements that characterize there two aspects of efficiency.

Investment projects that are financed by savers have larger return than projects that do not receive financing. Savers who lend money are willing to accept a lower minimum interest rate than potential savers who do not lend money.

True

The national savings are the combined value of all private savings and the budget balance. The budget balance can be either positive or negative.

The net amount of funds coming into a country is the

capital inflow

a share of ownership in a company

stock

Starbucks Coffee Company informs the public that profits this year are larger than previously predicted, due to its expansion into the retail ice cream and chocolate businesses.

Demand will increase Price will increase

In a small, closed economy, national income (GDP) is $600.00 million for the current month. Individuals have spent $250.00 million on the consumption of goods and services. They have paid a total of $100.00 million in taxes, and the government has spent $200.00 million on goods and services this month.

How much is spent on investment in this economy? Investment: $150 million What is national saving in this economy? Saving: $150 million

If the projected rate of return for a project is less than the interest rate for a loan that is necessary to complete the project, how will the borrowing business act?

The business will not take out the loan.

An increase in government spending can crowd out private investment. An increase in private consumption may crowd out private investment.

True

an agreement between lender and a borrower

loan

Jack decides to build a chateau in the mountains of Colorado and operate it as a ski resort. He secures funding from a local commercial bank after discussing his business plan with the bank. He promises to pay back the principal plus interest over the next 20 years.

loans

Rand Capital Corporation, a financial industry conglomerate, pools together several hundred home mortgages and sells shares in them to groups of investors. However, many investors decide against this option because of the risk involved and the difficulty of assessing the quality of such a large number of individual mortgages.

loan-backed securities

Lyle and Shane start a business selling pencil sharpeners to elementary schools. Their company becomes instant success, and they decide to allow people to start buying a small share of their company. This gives individuals who buy shares the right to vote in company decisions and a small percentage of profits.

stocks

shift in supply

China decides to reduce its capital investment in the U.S., as it expects low returns due to weak U.S. economy. As a result of a stock market boom, individuals begin to feel richer and spend more while also saving less.

What effect will an increase in interest rates have on the quantity of loanable funds supplied?

Quantity supplied will increase.

The difference between the amount the government collects and how much it spends is known as the

budget balance

If the government spends more money than it takes in through taxes, it will experience a

budget deficit

If the government spends less money than it takes in through taxes, it will experience a

budget surplus

When the preceding term is combined with all of the privately held savings from across the country, it is known as the

national savings

Due to a successful advertising campaign using the "Pepsi Challenge." PepsiCo announces that sales of its signature soft drink are higher than expected.

Demand will increase Price will increase

How do mutual funds receive risk for the average individual investor?

Mutual funds reduce risk through portfolio diversification.

How are investment and national saving related in an economy like this?

National saving equals investment.

False

Outflows of funds can be generated by countries with a larger GDP per capita than the country receiving the funds. National budget deficits are not included in the calculation of national savings.

As interest rate decreases, what happens to the quantity of loanable funds demanded?

Quantity demanded will increase.

funds that are kept in a bank that must be relinquished upon the owner's request

bank deposit

A promise to pay issued by a borrower with annual interest payments and a principal payment at maturity.

bond

Caleb has completed a prototype garlic-peeling that he hopes to sell to the public. Caleb decides to have his startup issues securities that offer buyers the promise to pay a specified amount of interest each year plus the principal in five years

bonds

Which of the terms acts as the "price" in the market for loanable funds?

interest rate

shift in demand

Calopolis, a college town in Northern California, has for many years banned the presence of fast food restaurants in city limits. As of 2012, however, the city will allow several fast food companies to open franchised locations. Due to an increase in revenues after a tax hike, the U.S. is able to eliminate the deficit and begin to maintain a balanced budget for the first time in several decades.

On the same day you buy a share of Google Inc. stock, the U.S. government announces an increase in interest rates, making bonds a more attractive option for investors.

Demand will decrease Price will decrease

Ford Motor Company announces that it will have to decrease profit expectations for the current year, as an increase in gas prices led many people to hold off on buying a new car.

Demand will decrease Price will decrease

Which of the following best defines a financial intermediary?

a financial institution that transforms funds into financial assets

Audrey wants to buy a new car but does not have enough cash. She gets funding from her local bank with the promise that she will make monthly payments for the next three years to repay the original amount lent to her plus 6% interest.

loans