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According to the loanable funds model, which of the following events would result in higher interest rates and greater saving?


A) Firms become pessimistic about the future and, as a result, they cut back on their plans to buy new equipment and build new factories.
B) The government goes from running a budget deficit to running a budget surplus.
C) Congress passes a reform of the tax laws that encourages greater saving.
D) Congress passes a reform of the tax laws that encourages greater investment.

E) A) and B)
F) None of the above

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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


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.

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

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Other things the same, when the interest rate rises,


A) people would want to lend more, making the supply of loanable funds increase.
B) people would want to lend less, making the supply of loanable funds decrease.
C) people would want to lend more, making the quantity of loanable funds supplied increase.
D) people would want to lend less, making the quantity of loanable funds supplied decrease.

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

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Suppose the economy is closed with national saving of $2 trillion, consumption of $8 trillion, and government purchases of $1 trillion. What is GDP?


A) $8 trillion
B) $9 trillion
C) $10 trillion
D) $11 trillion

E) None of the above
F) B) and D)

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Consider three different closed economies with the following national income statistics. Country A has taxes of $40 billion, transfers of $20 billion, and government expenditures on goods and services of $30 billion. County B has private savings of $60 billion, and investment expenditures of $50 billion. Country C has GDP of $300 billion, investment of $70, consumption of $180 billion, taxes of $60 billion and transfers of $20 billion. From this information we know that there is a $10 billion government budget deficit for


A) only country A.
B) only country B.
C) only country C.
D) all three countries.

E) B) and D)
F) All of the above

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You are thinking of buying a bond from Bluestone Corporation. You know that this bond is long term and you know that Bluestone's business ventures are risky and uncertain. You then consider another bond with a shorter term to maturity issued by a company with good prospects and an established reputation. Which of the following is correct?


A) The longer term would tend to make the interest rate on the bond issued by Bluestone higher, while the higher risk would tend to make the interest rate lower.
B) The longer term would tend to make the interest rate on the bond issued by Bluestone lower, while the higher risk would tend to make the interest rate higher.
C) Both the longer term and the higher risk would tend to make the interest rate lower on the bond issued by Bluestone.
D) Both the longer term and the higher risk would tend to make the interest rate higher on the bond issued by Bluestone.

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

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Figure 8-4. On the horizontal axis of the graph, L represents the quantity of loanable funds in billions of dollars. Figure 8-4. On the horizontal axis of the graph, L represents the quantity of loanable funds in billions of dollars. -Refer to Figure 8-4. If the equilibrium quantity of loanable funds is $56 billion and if the rate of inflation is 5 percent, then the equilibrium nominal interest rate is A) lower than 6 percent.. B) approximately 6 percent. C) between 6 percent and 8 percent. D) approximately 12 percent. -Refer to Figure 8-4. If the equilibrium quantity of loanable funds is $56 billion and if the rate of inflation is 5 percent, then the equilibrium nominal interest rate is


A) lower than 6 percent..
B) approximately 6 percent.
C) between 6 percent and 8 percent.
D) approximately 12 percent.

E) B) and D)
F) All of the above

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In a closed economy, each unit of output is either consumed or invested.

A) True
B) False

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For an imaginary economy, when the real interest rate is 5 percent, the quantity of loanable funds demanded is $100,000 and the quantity of loanable funds supplied is $100,000. Currently, the nominal interest rate is 6 percent and the inflation rate is 2 percent. Currently,


A) the market for loanable funds is in equilibrium.
B) the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded, and as a result the real interest rate will rise.
C) the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded, and as a result the real interest rate will fall.
D) the quantity of loanable funds demanded exceeds the quantity of loanable funds supplied, and as a result the real interest rate will rise.

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

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Morgan, a financial advisor, has told her clients the following things. Which of her statements is not correct?


A) "U.S. government bonds generally pay a higher rate of interest than corporate bonds."
B) "The interest received on corporate bonds is taxable."
C) "U.S. government bonds have the lowest default risk."
D) "If you purchase a municipal bond, you can sell it before it matures."

E) All of the above
F) A) and C)

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In the national income accounting identity showing the equality between national saving and investment, what are the algebraic expressions for private saving and public saving?

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Private saving is Y ...

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Use the following table to answer the following questions. Table 8-1 Use the following table to answer the following questions. Table 8-1 -Refer to Table 8-1. Assume that the closing price was also the average price at which each stock transaction took place. What was the total dollar volume of Gillette stock traded that day? A) $912,840,000 B) $91,284,000 C) $9,128,400 D) $912,840 -Refer to Table 8-1. Assume that the closing price was also the average price at which each stock transaction took place. What was the total dollar volume of Gillette stock traded that day?


A) $912,840,000
B) $91,284,000
C) $9,128,400
D) $912,840

E) None of the above
F) A) and D)

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If an economy is closed and if it has no government, then


A) national saving = private saving.
B) total income = consumption + investment.
C) saving = total income - consumption.
D) All of the above are correct.

E) A) and D)
F) None of the above

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Other things the same, corporate bonds generally feature higher interest rates than U.S. government bonds.

A) True
B) False

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Credit risk refers to the probability that the issuer of a bond will fail to pay some or all of the interest or principal.

A) True
B) False

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Which of the following are effects of an increased budget deficit?


A) the supply of loanable funds does not change; a higher interest rate reduces private saving
B) the supply of loanable funds does not change; a higher interest rate raises private saving
C) at any interest rate the supply of loanable funds is less; a higher interest rate reduces private saving
D) at any interest rate the supply of loanable funds is less; a higher interest rate raises private saving

E) A) and B)
F) All of the above

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In which of the following cases would it necessarily be true that national saving and private saving are equal for a closed economy?


A) Private saving is equal to government expenditures.
B) Public saving is equal to investment.
C) After paying their taxes and paying for their consumption, households have nothing left.
D) The government's tax revenue is equal to its expenditures.

E) B) and C)
F) B) and D)

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Suppose a small closed economy has GDP of $5 billion, consumption of $3 billion, and government expenditures of $1 billion. Then investment and national saving are both $1 billion.

A) True
B) False

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Crowding out occurs when investment declines because


A) a budget deficit makes interest rates rise.
B) a budget deficit makes interest rates fall.
C) a budget surplus makes interest rates rise.
D) a budget surplus makes interest rates fall.

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

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If the nominal interest rate is 10 percent and the inflation rate is 4 percent, then the real interest rate is


A) 14 percent.
B) 6 percent.
C) 2.5 percent.
D) .4 percent.

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

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