Question 1

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

Accepted Answer

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

Question 2

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. 
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.

Question 3

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. 
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.

Question 4

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. 
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 5

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 trillion 
A)  $2 trillion, $2 trillion 
B)  $2 trillion, $3 trillion 
C)  $3 trillion, $3 trillion 
D)  $4 trillion, $2 trillion

Question 6

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. 
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.

Question 7

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 8

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. 
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.

Question 9

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. 
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.

Question 10

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 11

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. 
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.

Question 12

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 saving 
A)  the nominal interest rate 
B)  the real interest rate 
C)  the quantity of investment 
D)  the quantity of saving

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

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. 
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.

Question 15

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. 
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.

Question 16

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

Question 17

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. 
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.

Question 18

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

Question 19

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. 
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.

Question 20

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

Exam 13: Saving, Investment, and the Financial System

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

The assumption of a closed economy

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

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

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?

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?

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

The nominal interest rate is the

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

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.

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

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?

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

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

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

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

If there is shortage of loanable funds, then

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

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

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

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Elasticity and Its Application

Supply, Demand, and Government Policies

Consumers, Producers, and the Efficiency of Markets

Application: the Costs of Taxation

Application: International Trade

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

The Basic Tools of Finance

Unemployment

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Open Economy

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

The Short-Run Trade-Off Between Inflation and Unemployment

Six Debates Over Macroeconomic Policy

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