Macro Test 25

1. When a business firm sells a bond, it has obtained equity finance.

F

11. If the real interest rate in the loanable funds market is temporarily held above the equilibrium rate, desired borrowing will exceed desired lending and the real interest rate will fall.

F

14. If the government wanted to increase the rate of growth, it should raise taxes on interest and dividends to shift the supply of loanable funds to the right.

F

15. An increase in the budget deficit that causes the government to increase its borrowing shifts the demand for loanable funds to the right.

F

2. People who buy shares in a firm have loaned money to the firm.

F

6. Public saving is always positive.

F

9. If you save money this week and lend it to your flatmate to buy food for consumption, your act of personal saving has increased national saving.

F

10. The quantity supplied of loanable funds is greater if real interest rates are higher.

T

12. A reduction in the budget deficit should shift the supply of loanable funds to the right, lower the real interest rate, and increase the quantity demanded of loanable funds.

T

13. Public saving and the government's budget surplus are the same things.

T

3. Investment funds reduce a shareholder's risk by purchasing a diversified portfolio.

T

4. UK government bonds pay less interest than corporate bonds issued by UK companies because the government bonds carry less credit risk.

T

5. In a closed economy, saving is what remains after consumption expenditures and government purchases.

T

7. In a closed economy, investment is always equal to saving regardless of where the saving came from - public or private sources.

T

8. Investment is the purchase of capital equipment and structures.

T

24. Which of the following financial market securities would probably pay the highest interest rate? a. A bond issued by a start up company b. A government bond issued by the government of France. c. A bond issued by a blue chip company d. An investment fund with a portfolio of corporate bonds issued by blue chip companies.

a. A bond issued by a start up company

Which of the following sets of government policies is the most growth oriented? a. Lower taxes on the returns to saving, provide investment tax credits, and lower the deficit. b. Increase tax on the returns to saving, provide investment tax credits, and increase the deficit. c. Increase tax on the returns to saving, provide investment tax credits, and lower the deficit d. Lower taxes on the returns to saving, provide investment tax credits, and increase the deficit.

a. Lower taxes on the returns to saving, provide investment tax credits, and lower the deficit.

23. If the public consumes €100 billion less and the government purchases €100 billion more (other things unchanging), which of the following statement is true? a. Saving is unchanged. b. There is an increase in saving and the economy should grow more quickly. c. There is a decrease in saving and the economy should grow more slowly. d. There is not enough information to determine what will happen to saving.

a. Saving is unchanged.

30. If the supply of loanable funds is very inelastic (steep), which policy would likely increase saving and investment the most? a. a reduction in the budget deficit c. an investment tax credit b. an increase in the budget deficit d. none of these answers

a. a reduction in the budget deficit

17. Credit risk refers to a bond's a. probability of default. b. price-earnings ratio. c. dividend. d. tax treatment. e. term to maturity.

a. probability of default.

29. An increase in the budget deficit will a. raise the real interest rate and decrease the quantity of loanable funds demanded for investment. b. lower the real interest rate and increase the quantity of loanable funds demanded for investment. c. raise the real interest rate and increase the quantity of loanable funds demanded for investment. d. lower the real interest rate and decrease the quantity of loanable funds demanded for investment.

a. raise the real interest rate and decrease the quantity of loanable funds demanded for investment.

33. If UK citizens become less concerned with the future and save less at each real interest rate, real interest rates a. rise and investment falls. c. fall and investment rises. b. rise and investment rises. d. fall and investment falls.

a. rise and investment falls.

26. If UK citizens become more thrifty, we would expect a. the supply of loanable funds in the UK loanable funds market to shift to the right and the real interest rate to fall. b. the demand for loanable funds in the UK loanable funds market to shift to the right and the real interest rate to rise. c. the demand for loanable funds in the UK loanable funds market to shift to the right and the real interest rate to fall. d. the supply of loanable funds in the UK loanable funds market to shift to the right and the real interest rate to rise.

a. the supply of loanable funds in the UK loanable funds market to shift to the right and the real interest rate to fall.

21. If government spending exceeds tax collections, a. there is a budget deficit. b. public debt will fall c. there is a budget surplus. d. private saving is positive. e. public saving is positive.

a. there is a budget deficit.

20. Which of the following statements is true? a. Long-term bonds tend to pay less interest than short-term bonds. b. Government bonds pay less interest than comparable corporate bonds. c. Investment funds are riskier than single stock purchases because the performance of so many different firms can affect the return of a mutual fund. d. A stock index is a directory used to locate information about selected stocks.

b. Government bonds pay less interest than comparable corporate bonds

35. An increase in the budget surplus shifts the a. supply of loanable funds to the left and increases the real interest rate. b. supply of loanable funds to the right and reduces the real interest rate. c. demand for loanable funds to the right and increases the real interest rate. d. demand for loanable funds to the left and reduces the real interest rate.

b. supply of loanable funds to the right and reduces the real interest rate.

25. Investment is a. the purchase of goods and services. b. the purchase of capital equipment and structures. c. when we place our saving in the bank. d. the purchase of stocks and bonds.

b. the purchase of capital equipment and structures.

18. A financial intermediary is a middleperson between a. buyers and sellers. c. borrowers and lenders. b. banks and the government. d. labour unions and firms.

c. borrowers and lenders

32. If an increase in the budget deficit reduces national saving and investment, we have witnessed a demonstration of a. intermediation. c. crowding out. b. equity finance. d. the investment fund effect.

c. crowding out.

34. If the government increases investment tax credits and reduces taxes on the return to saving at the same time, the: a. real interest rate should fall. b. real interest rate should rise. c. impact on the real interest rate is indeterminate. d. real interest rate should not change.

c. impact on the real interest rate is indeterminate.

19. National saving (or just saving) is equal to a. none of these answers. b. investment + consumption expenditures. c. private saving + public saving. d. GDP - government purchases. e. GDP + consumption expenditures + government purchases.

c. private saving + public saving.

16. Which of the following is an example of equity finance? a. Corporate bonds b. Bank loan c. All of these answers are equity finance. d. Government bonds e. Company shares

e. Company shares

31. An increase in the budget deficit is a. an increase in public saving. b. a decrease in private saving. c. an indication of a spendthrift government. d. a decrease in public saving. e. an increase in private saving.

d. a decrease in public saving.

28. An increase in the budget deficit that causes the government to increase its borrowing shifts the a. supply of loanable funds to the right. c. demand for loanable funds to the right. b. demand for loanable funds to the left. d. supply of loanable funds to the left.

d. supply of loanable funds to the left.

22. If GDP = €1,000, consumption = €600, taxes = €100, and government purchases = €200, how much is saving and investment? a. saving = €300, investment = €300 b. saving = €200, investment = €100 c. saving = €100, investment = €200 d. saving = €0, investment = €0 e. saving = €200, investment = €200

e. saving = €200, investment = €200