Question 1

When the government increases spending (holding taxes constant), the budget balance _____. This causes the interest rate in the market for loanable funds to _____ and investment to _____.

Accepted Answer

The answer of When the government increases spending (holding taxes...

Question 2

If consumers reduced their spending, what would happen to the interest rate and investment?

Accepted Answer

The answer of If consumers reduced their spending, what would...

Question 3

Which of the following counts as part of the supply of loanable funds?

Accepted Answer

A) bank deposits and purchases of bonds 
B) bank deposits but not purchases of bonds 
C) purchases of bonds but not bank deposits 
D) neither purchases of bonds nor bank deposits

Question 4

If a firm's price-earnings ratio is relatively low, then it might be an indication that

Accepted Answer

A) the demand for the stock is relatively high. 
B) the supply of the stock is relatively low. 
C) people expect the firm's earnings to rise. 
D) people expect the firm's earnings to fall.

Question 5

If Huedepool Beer runs into financial difficulty, the stockholders as

Accepted Answer

A) part owners of Huedepool are paid before bondholders get paid anything at all. 
B) part owners of Huedepool are paid after bondholders get paid. 
C) creditors of Huedepool are paid before bondholders get paid anything at all. 
D) creditors of Huedepool are paid after bondholders get paid.

Question 6

Scenario 26-1. Assume the following information for an imaginary, closed economy.
GDP = $100,000; taxes = $22,000; government purchases = $25,000; national
saving = $15,000.
-Refer to Scenario 26-1. For this economy, consumption amounts to

Accepted Answer

A) $68,000. 
B) $38,000. 
C) $53,000. 
D) $60,000.

Question 7

Figure 26-5. Figure 26-5 shows the loanable funds market for a closed economy. 
-Refer to Figure 26-5. Starting at point A, a reduction in government spending would cause

Accepted Answer

A) the quantity of loanable funds traded to increase to $125 and the interest rate to rise to 7% (point 
C) . 
B) the quantity of loanable funds traded to decrease to $75 and the interest rate to fall to 5% (point 
B) . 
C) the quantity of loanable funds traded to increase to $125 and the interest rate to fall to 5% (point 
D) . 
D) the quantity of loanable funds traded to decrease to $75 and the interest rate to rise to 7% (point 
E) .

Question 8

Suppose a country has a consumption tax that is similar to a state sales tax. If its government were to eliminate the consumption tax and replace it with an income tax that includes an income tax on interest from savings, what would happen?

Accepted Answer

A) There would be no change in the interest rate or saving. 
B) The interest rate would decrease and saving would increase. 
C) The interest rate would increase and saving would decrease. 
D) None of the above is correct.

Question 9

The Eye of Horus incense company has $10 million in cash which it has accumulated from retained earnings. It was planning to use the money to build a new factory. Recently, the rate of interest has increased. The increase in the rate of interest should

Accepted Answer

A) not influence the decision to build the factory because The Eye of Horus doesn't have to borrow any money. 
B) not influence the decision to build the factory because its stockholders are expecting a new factory. 
C) make it more likely that The Eye of Horus will build the factory because a higher interest rate will make the factory more valuable. 
D) make it less likely that The Eye of Horus will build the factory because the opportunity cost of the $10 million is now higher.

Question 10

The term loanable funds refers to all income that is not used for consumption or government expenditures.

Accepted Answer

A) True 
 B)False

Question 11

List three characteristics of a bond that would make its interest rate higher than otherwise.

Accepted Answer

The answer of List three characteristics of a bond that...

Question 12

A higher interest rate makes _____ more attractive. Therefore the quantity of loanable funds supplied increases.

Accepted Answer

The answer of A higher interest rate makes _____ more...

Question 13

In a closed economy taxes are $750 billion, government transfers are $400 billion, government expenditures are $500 billion, and investment is $400 billion. What are private saving, public saving and national saving?

Accepted Answer

The answer of In a closed economy taxes are $750...

Question 14

When tax code changes increase saving incentives, the interest rate will _____ and investment will _____.

Accepted Answer

The answer of When tax code changes increase saving incentives,...

Question 15

An increase in the budget deficit would cause a

Accepted Answer

A) shortage of loanable funds at the original interest rate, which would lead to falling interest rates. 
B) surplus of loanable funds at the original interest rate, which would lead to rising interest rates. 
C) shortage of loanable funds at the original interest rate, which would lead to rising interest rates. 
D) surplus of loanable funds at the original interest rate, which would lead to falling interest rates.

Question 16

Figure 26-4. On the horizontal axis of the graph, L represents the quantity of loanable funds in billions of dollars. 
-Refer to Figure 26-4. The position and/or slope of the Supply curve are influenced by

Accepted Answer

A) the level of public saving. 
B) the level of national saving. 
C) decisions made by people who have extra income they want to save and lend out. 
D) All of the above are correct.

Question 17

Suppose Congress institutes an investment tax credit. What would happen in the market for loanable funds?

Accepted Answer

A) The interest rate and investment would fall. 
B) The interest rate and investment would rise. 
C) The interest rate would rise and investment would fall. 
D) None of the above is necessarily correct.

Question 18

If the budget deficit increases then

Accepted Answer

A) saving and the interest rate rise. 
B) saving rises and the interest rate falls. 
C) saving falls and the interest rate rises. 
D) saving and the interest rate fall.

Question 19

The term crowding out refers to decreases in the interest rate caused by government budget surpluses.

Accepted Answer

A) True 
 B)False

Question 20

In a closed economy private saving is $500 billion and the government budget deficit is $100 billion. What is investment?

Accepted Answer

The answer of In a closed economy private saving is...

Exam 26: Saving, Investment, and the Financial System

When the government increases spending (holding taxes constant), the budget balance ___. This causes the interest rate in the market for loanable funds to _ and investment to ___.