Question 1

Which of the following policy changes would lead to a decrease in the real interest rate and an increase in investment and saving?

Accepted Answer

A)   a larger investment tax credit
B)   an expansion of eligibility for Individual Retirement Accounts
C)   an increase in income-tax rates,with no change in the government budget deficit or surplus
D)   an increase in government purchases,with no change in taxes

Question 2

Suppose that in a closed economy GDP is equal to 11,000,taxes are equal to 1,500,consumption equals 7,500,and government purchases equal 2,000.What is national saving?

Accepted Answer

A)   -500
B)   0
C)   2,000
D)   None of the above is correct.

Question 3

What would happen in the market for loanable funds if the government were to decrease the tax rate on interest income?

Accepted Answer

A)   The supply of loanable funds would shift rightward and investment would increase.
B)   The supply of loanable funds would shift leftward and investment would decrease.
C)   The demand for loanable funds would shift rightward and investment would increase.
D)   The demand for loanable funds would shift leftward and investment would decrease.

Question 4

Scenario 18-2.Assume the following information for an imaginary,closed economy.
GDP = $200,000; consumption = $120,000;
government purchases = $35,000; and taxes = $25,000.
-Refer to Scenario 18-2.For this economy,private saving is equal to

Accepted Answer

A)   $40,000.
B)   $50,000.
C)   $55,000.
D)   $60,000.

Question 5

Public saving is equal to national saving minus private saving.

Accepted Answer

A) True 
 B)False

Question 6

It is claimed that a secondary advantage of mutual funds is that

Accepted Answer

A)   an investor can avoid investment charges and fees.
B)   they give ordinary people access to loanable funds for investing.
C)   they usually outperform stock market indexes.
D)   they give ordinary people access to the skills of professional money managers.

Question 7

An increase in the budget deficit

Accepted Answer

A)   makes investment spending fall.
B)   makes investment spending rise.
C)   does not affect investment spending.
D)   may increase,decrease,or not affect investment spending.

Question 8

Suppose government expenditures on goods and services increase,transfers are unchanged,and taxes rise by less than the increase in expenditures.These changes in the government's budget cause

Accepted Answer

A)   both the equilibrium interest rate and the equilibrium quantity of loanable funds to fall.
B)   both the equilibrium interest rate and the equilibrium quantity of loanable funds to rise.
C)   the equilibrium interest rate to rise and the equilibrium quantity of loanable funds to fall.
D)   the equilibrium interest rate to fall and the equilibrium quantity of loanable funds to rise.

Question 9

If the government institutes policies that diminish incentives to save,then in the loanable funds market

Accepted Answer

A)   the demand for loanable funds shifts rightward.
B)   the demand for loanable funds shifts leftward.
C)   the supply of loanable funds shifts rightward.
D)   the supply of loanable funds shifts leftward.

Question 10

The bond market

Accepted Answer

A)   is a financial market,whereas the stock market is a financial intermediary.
B)   is a financial intermediary,whereas the stock market is a financial market.
C)   is a financial market,as is the stock market.
D)   is a financial intermediary,as is the stock market.

Question 11

If we were to change the interpretation of the term "loanable funds" in such a way that government budget deficits would affect the demand for loanable funds,rather than the supply of loanable funds,then

Accepted Answer

A)   crowding out would not be a consequence of an increase in the budget deficit.
B)   higher interest rates would not be a consequence of an increase in the budget deficit.
C)   an increase in the budget deficit would cause the demand for loanable funds to decrease.
D)   we would be making only a semantic change in how we analyze the effects of government budget deficits.

Question 12

If there is a shortage of loanable funds,then

Accepted Answer

A)   the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is above equilibrium.
B)   the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is below equilibrium.
C)   the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is above equilibrium.
D)   the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is below equilibrium.

Question 13

By definition,government purchases and taxes are zero for a closed economy.

Accepted Answer

A) True 
 B)False

Question 14

The economy's two most important financial markets are

Accepted Answer

A)   the investment market and the saving market.
B)   the bond market and the stock market.
C)   banks and the stock market.
D)   financial markets and financial institutions.

Question 15

The source of the supply of loanable funds

Accepted Answer

A)   is saving and the source of demand for loanable funds is investment.
B)   is investment and the source of demand for loanable funds is saving.
C)   and the demand for loanable funds is saving.
D)   and the demand for loanable funds is investment.

Question 16

If the supply for loanable funds shifts to the left,then the equilibrium interest rate

Accepted Answer

A)   and quantity of loanable funds rise.
B)   and quantity of loanable funds fall.
C)   rises and the quantity of loanable funds falls.
D)   falls and the quantity of loanable funds rises.

Question 17

If the government instituted an investment tax credit,then which of the following would be higher in equilibrium?

Accepted Answer

A)   saving and the interest rate
B)   saving but not the interest rate
C)   the interest rate but not saving
D)   neither saving nor the interest rate

Question 18

Borrowers can (and sometimes do) default on their loans when

Accepted Answer

A)   the dividend yield on their shares of stock reaches zero.
B)   they convert their bonds into perpetuities.
C)   they declare bankruptcy.
D)   they cannot find enough buyers of their bonds to sell all the bonds they wish to sell.

Question 19

When a firm wants to borrow directly from the public to finance the purchase of new equipment,it does so by selling shares of stock.

Accepted Answer

A) True 
 B)False

Question 20

A government may use deficit financing to smooth tax rates over time.

Accepted Answer

A) True 
 B)False

Exam 18: Saving,investment,and the Financial System

When a firm wants to borrow directly from the public to finance the purchase of new equipment,it does so by selling shares of stock.

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If we were to change the interpretation of the term "loanable funds" in such a way that government budget deficits would affect the demand for loanable funds,rather than the supply of loanable funds,then

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Which of the following policy changes would lead to a decrease in the real interest rate and an increase in investment and saving?

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It is claimed that a secondary advantage of mutual funds is that

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Public saving is equal to national saving minus private saving.

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The bond market

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The economy's two most important financial markets are

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What would happen in the market for loanable funds if the government were to decrease the tax rate on interest income?

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Suppose that in a closed economy GDP is equal to 11,000,taxes are equal to 1,500,consumption equals 7,500,and government purchases equal 2,000.What is national saving?

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If the government institutes policies that diminish incentives to save,then in the loanable funds market

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Scenario 18-2.Assume the following information for an imaginary,closed economy. GDP = $200,000; consumption = $120,000; government purchases = $35,000; and taxes = $25,000. -Refer to Scenario 18-2.For this economy,private saving is equal to

Correct AnswerverifiedShow Answer

The source of the supply of loanable funds

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A government may use deficit financing to smooth tax rates over time.

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If the supply for loanable funds shifts to the left,then the equilibrium interest rate

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An increase in the budget deficit

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Suppose government expenditures on goods and services increase,transfers are unchanged,and taxes rise by less than the increase in expenditures.These changes in the government's budget cause

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By definition,government purchases and taxes are zero for a closed economy.

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If there is a shortage of loanable funds,then

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Borrowers can (and sometimes do) default on their loans when

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If the government instituted an investment tax credit,then which of the following would be higher in equilibrium?

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