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Exam 8: Saving,Investment,and the Financial System

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Question 31

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If the current market interest rate for loanable funds is above the equilibrium level,which of the following will most likely happen?

A) The quantity of loanable funds demanded will exceed the quantity of loanable funds supplied and the interest rate will rise.
B) The quantity of loanable funds supplied will exceed the quantity of loanable funds demanded and the interest rate will rise.
C) The quantity of loanable funds demanded will exceed the quantity of loanable funds supplied and the interest rate will fall.
D) The quantity of loanable funds supplied will exceed the quantity of loanable funds demanded and the interest rate will fall.

E) A) and C)
F) A) and B)

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Question 32

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Which of the following best characterizes the lending strategy of banks?

A) Banks make most their profits from account fees.
B) Banks lend mostly to large and familiar companies rather than smaller local firms.
C) Banks charge borrowers a slightly lower interest rate than they pay to depositors.
D) Banks lend money both for investment and consumption purposes.

E) A) and C)
F) C) and D)

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Question 33

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Which of the following best defines the nominal interest rate?

Which of the following is a financial intermediary?

If Huedepool Beer runs into financial difficulty,how are bondholders and shareholders paid?

Which of the following terms refers to the amount of revenue a firm receives for the sale of its products,minus its costs of production,as measured by its accountants?

Public saving is equal to national saving minus private saving.

You are required to testify before Parliament concerning the effects of an increase in the government surplus.Which of the following is the correct thing for you to say?

Suppose the following equations give the demand and supply for loanable funds in billions of dollars;r is the real interest rate in percentage points (e.g.,if the interest rate is 5 percent,r = 5): QD = 160-10r QS = -20 + 20r a)How do the demand and supply equations change if the government deficit increased by $5 billion? b)Calculate the new equilibrium interest rate and quantity of loanable funds.(Compare this to the zero-deficit equilibrium.) c)Calculate the changes in consumer and producer surplus due to the increase in government deficit.Who gains and who loses from the change in government deficit?

If there is shortage of loanable funds,which of the following is most likely to happen?

Suppose the following equations give the demand and supply for loanable funds in billions of dollars;r is the real interest rate in percentage points (e.g.,if the interest rate is 5 percent,r = 5): QD = 160 - 10r QS = -20 + 20r Now,assume the government wishes to stimulate consumption,and imposes a tax on interest earnings of 40 percent. a)How do the demand and supply equations change to reflect the interest earnings tax? b)Calculate the new equilibrium interest rate and quantity of loanable funds.(Compare this to the zero-tax equilibrium.) c)Calculate the changes in consumer and producer surplus due to the tax.Who gains and who loses from the tax?

In a closed economy,the fact that total income equals total expenditure is reflected by the GDP identity Y = C + I + G. a. Starting from the GDP identity, show that national saving (S) must be equal to investment. Show that an increase in government spending reduces national saving. b. Rewrite the GDP identity by introducing taxes (T). In this new form of the GDP relationship, identify private saving and public saving. Show that an increase in taxes has no effect on national saving. c. Is the equation S = I true for an open economy? Could you explain why or why not?

Which of the following equations most simply represents GDP in a closed economy?

Most entrepreneurs finance their purchases of real capital using their past saving.

Table 8-3 $\begin{array} { | l | l } \hline \text { GDP } & \$ 8.7 \text { tillion } \\\hline \text { Consumption Spendine } & \$ 3.5 \text { trillion } \\\hline \text { Tares minus Transfers } & 12.7 \text { tillion } \\\hline \text { Goverment purchases } & \$ 3.0 \text { tillion } \\\hline\end{array}$ -Refer to the Table 8-3.Supposing equilibrium exists in the market for loanable funds,what is the quantity of funds supplied in this market?

In a closed economy,what does (T - G) represent?

Your brother-in-law wants to buy either stock or bonds in Cedar Valley Furniture,but he isn't sure which to buy.Explain how each of his quotes below should affect his choice between the stock and the bond. a."I have reason to believe that people are soon going to find rocking chairs have health benefits." b."I would like to tell people I am part owner of Cedar Valley Furniture." c."I do not want to take on much risk."

What do people who buy newly issued stock in a corporation such as Rockwood Pottery Ltd.provide?

Which of the following terms refers to the profits NOT paid out to shareholders?

Assuming that other things remain the same,what effect does a government budget deficit have on saving?