Question 1

Which of the following events could explain an increase in interest rates together with a decrease in investment?

Accepted Answer

A)   The government budget went from surplus to deficit.
B)   The government instituted an investment tax credit.
C)   The government reduced the tax rate on savings.
D)   None of the above is correct.E) A) and D)
F) All of the above

Question 2

Other things the same, bonds are likely to have higher interest rates if they have

Accepted Answer

A)   tax exemptions and short terms.
B)   tax exemptions and long terms.
C)   no tax exemptions and short terms.
D)   no tax exemptions and long terms.E) None of the above
F) C) and D)

Question 3

If the nominal interest rate is 7 percent and the real interest rate is 2 percent, then what is the inflation rate?

Accepted Answer

A)   9.0 percent
B)   5 percent
C)   3.5 percent
D)   None of the above is correct.E) B) and D)
F) All of the above

Question 4

Other things the same, a higher interest rate induces people to

Accepted Answer

A)   save more, so the supply of loanable funds slopes upward.
B)   save less, so the supply of loanable funds slopes downward.
C)   invest more, so the supply of loanable funds slopes upward.
D)   invest less, so the supply of loanable funds slopes downward.E) A) and B)
F) B) and D)

Question 5

The nominal interest rate is the

Accepted Answer

A)   interest rate corrected for inflation.
B)   interest rate as usually reported by banks.
C)   real rate of return to the lender.
D)   real cost of borrowing to the borrower.E) B) and D)
F) B) and C)

Question 6

If there is shortage of loanable funds, then

Accepted Answer

A)   the supply for loanable funds shifts right and the demand shifts left.
B)   the supply for loanable funds shifts left and the demand shifts right.
C)   neither curve shifts, but the quantity of loanable funds supplied increases and the quantity demanded decreases as the interest rate rises to equilibrium.
D)   neither curve shifts, but the quantity of loanable funds supplied decreases and the quantity demanded increases as the interest rate falls to equilibrium.E) A) and C)
F) C) and D)

Question 7

Figure 26-1. The figure depicts a demand-for-loanable-funds curve and two supply-of-loanable-funds curves. 
-Refer to Figure 26-1. What is measured along the vertical axis of the graph?

Accepted Answer

A)   the nominal interest rate
B)   the real interest rate
C)   the quantity of investment
D)   the quantity of savingE) B) and C)
F) All of the above

Question 8

Higher education subsidies in the form of the federal government's student loan program have the potential to

Accepted Answer

A)   reduce the number of people that attend college.
B)   reduce the number of universities and colleges in the future.
C)   create a credit bubble and debt crisis.
D)   reduce the default risk on student loans.E) B) and D)
F) None of the above

Question 9

In a closed economy, what does Y - T - C)  represent?

Accepted Answer

A)   national saving
B)   government tax revenue
C)   public saving
D)   private savingE) C) and D)
F) B) and C)

Question 10

The assumption of a closed economy

Accepted Answer

A)   applies to the world economy.
B)   applies to most national economies.
C)   requires us to assume that the government's budget is always balanced.
D)   All of the above are correct.E) All of the above
F) B) and C)

Question 11

A is a certificate of indebtedness and a is a claim to partial ownership in a firm.

Accepted Answer

The answer of A is a certificate of indebtedness and...

Question 12

If, for an imaginary closed economy, investment amounts to $12,000 and the government is running a $2,000 deficit, then private saving must amount to $10,000.

Accepted Answer

A) True 
 B)False

Question 13

Suppose the government changed the tax laws, with the result that people were encouraged to consume more and save less. Using the loanable funds model, a consequence would be

Accepted Answer

A)   lower interest rates and lower investment.
B)   lower interest rates and greater investment.
C)   higher interest rates and lower investment.
D)   higher interest rates and higher investment.E) None of the above
F) C) and D)

Question 14

If the tax revenue of the federal government is less than its spending, then the federal government necessarily

Accepted Answer

A)   runs a budget deficit.
B)   runs a budget surplus.
C)   runs a national debt.
D)   will increase taxes.E) A) and D)
F) A) and B)

Question 15

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.E) B) and C)
F) None of the above

Question 16

People who buy newly issued stock in a corporation such as Crate and Barrel provide

Accepted Answer

A)   debt finance and so become part owners of Crate and Barrel.
B)   debt finance and so become creditors of Crate and Barrel.
C)   equity finance and so become part owners of Crate and Barrel.
D)   equity finance and so become creditors of Crate and Barrel.E) A) and B)
F) A) and C)

Question 17

The financial system coordinates investment and saving, which are important determinants of long-run real GDP.

Accepted Answer

A) True 
 B)False

Question 18

A government reduces its budget deficit, but at the same time people become concerned that the outlook for future government expenditures and revenues increase the chance it will default. Which of the following is correct?

Accepted Answer

A)   The reduced budget deficit will raise interest rates in general. The increased risk of default will raise interest rates on government bonds.
B)   The reduced budget deficit will raise interest rates in general. The increased risk of default will reduce interest rates on government bonds.
C)   The reduced budget deficit will reduce interest rates in general. The increased risk of default will raise interest rates on government bonds.
D)   The reduced budget deficit will reduce interest rates in general. The increased risk of default will reduce interest rates on government bonds.E) B) and C)
F) A) and D)

Question 19

Suppose a closed economy had public saving of -$1 trillion and private saving of $3 trillion. What are national saving and investment for this country?

Accepted Answer

A)   $2 trillion, $2 trillion
B)   $2 trillion, $3 trillion
C)   $3 trillion, $3 trillion
D)   $4 trillion, $2 trillionE) A) and B)
F) B) and D)

Question 20

Explain why the demand for loanable funds slopes downward and why the supply of loanable funds slopes upward.

Accepted Answer

When the interest rate rises investment ...

Exam 13: Saving, Investment, and the Financial System

Suppose the government changed the tax laws, with the result that people were encouraged to consume more and save less. Using the loanable funds model, a consequence would be

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Explain why the demand for loanable funds slopes downward and why the supply of loanable funds slopes upward.

Correct AnswerverifiedWhen the interest rate rises investment ...View AnswerShow Answer

Higher education subsidies in the form of the federal government's student loan program have the potential to

Correct AnswerverifiedShow Answer

People who buy newly issued stock in a corporation such as Crate and Barrel provide

Correct AnswerverifiedShow Answer

Other things the same, a higher interest rate induces people to

Correct AnswerverifiedShow Answer

In a closed economy, what does Y - T - C) represent?

Correct AnswerverifiedShow Answer

A government reduces its budget deficit, but at the same time people become concerned that the outlook for future government expenditures and revenues increase the chance it will default. Which of the following is correct?

Correct AnswerverifiedShow Answer

Suppose a closed economy had public saving of -$1 trillion and private saving of $3 trillion. What are national saving and investment for this country?

Correct AnswerverifiedShow Answer

The assumption of a closed economy

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The financial system coordinates investment and saving, which are important determinants of long-run real GDP.

Correct AnswerverifiedShow Answer

If the tax revenue of the federal government is less than its spending, then the federal government necessarily

Correct AnswerverifiedShow Answer

If, for an imaginary closed economy, investment amounts to $12,000 and the government is running a $2,000 deficit, then private saving must amount to $10,000.

Correct AnswerverifiedShow Answer

Figure 26-1. The figure depicts a demand-for-loanable-funds curve and two supply-of-loanable-funds curves. -Refer to Figure 26-1. What is measured along the vertical axis of the graph?

Correct AnswerverifiedShow Answer

Which of the following events could explain an increase in interest rates together with a decrease in investment?

Correct AnswerverifiedShow Answer

If the nominal interest rate is 7 percent and the real interest rate is 2 percent, then what is the inflation rate?

Correct AnswerverifiedShow Answer

The nominal interest rate is the

Correct AnswerverifiedShow Answer

A is a certificate of indebtedness and a is a claim to partial ownership in a firm.

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If there is shortage of loanable funds, then

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Other things the same, bonds are likely to have higher interest rates if they have

Correct AnswerverifiedShow Answer

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When the interest rate rises investment ...
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