Problem Set for Chapter 13(Multiple choices)

Transcription

1 Problem Set for Chapter 13(Multiple choices) 1. We would expect the interest rate on Bond A to be higher than the interest rate on Bond B if the two bonds have identical characteristics except that a. Bond A was issued by a financially weak corporation and Bond B was issued by a financially strong corporation. b. Bond A was issued by the Exxon Mobil Corporation and Bond B was issued by the state of New York. c. Bond A has a term of 20 years and Bond B has a term of 1 year. d. All of the above are correct. 2. If the government's expenditures exceeded its receipts, it would likely a. lend money to a bank or other financial intermediary. b. borrow money from a bank or other financial intermediary. c. buy bonds directly from the public. d. sell bonds directly to the public. 3. Which of the following is correct? a. Lenders sell bonds and borrowers buy them. b. Long-term bonds usually pay a lower interest rate than do short-term bonds because longterm bonds are riskier. c. The term junk bonds refers to bonds that have been resold many times. d. None of the above is correct. 4. Which of the following would both make the interest rate on a bond higher than otherwise? a. the interest it pays is taxed and it is long term b. the interest it pays is taxed and it is short term c. the interest it pays is tax exempt and it is long term d. the interest it pays is tax exempt and it is short term 5. The first three elements of a financial crisis are correctly represented as taking place in the following order: a. large decline in some asset prices insolvencies at financial institutions decline in confidence in financial institutions b. insolvencies at financial institutions decline in confidence in financial institutions large decline in some asset prices c. insolvencies at financial institutions economic downturn credit crunch d. insolvencies at financial institutions credit crunch economic downturn 1

2 6. Which of the following statements is correct? a. The total income in the economy that remains after paying for consumption and government purchases is called private saving. b. The sum of private saving and national saving is called public saving. c. For a closed economy, the sum of private saving and public saving must equal investment. d. For a closed economy, the sum of consumption, national saving, and taxes must equal GDP. ANS: C 7. In a small closed economy investment is $50 billion and private saving is $55 billion. What are public saving and national saving? a. $60 billion and $5 billion b. $50 billion and -$5 billion c. $5 billion and $60 billion d. -$5 billion and $50 billion 8. Suppose the economy is closed and consumption is 6,500, taxes are 1,500, and government purchases are 2,000. If national saving amounts to 1,000, then what is GDP? a. 9,500 b. 10,000 c. 10,500 d. 11, You have some estimates of national accounts numbers for a closed economy for the coming year. Under one set of expectations, government purchases will be $30 billion, transfer payments will be $10 billion, and taxes will be $45 billion. Under another set of expectations, GDP will be $200 billion, taxes will be $50 billion, transfer payments will be $20 billion, consumption will be $120 million, and investment will be $40 billion. Based on these numbers in the first case there should be a a. $15 billion surplus, and in the second case a $10 billion surplus. b. $15 billion surplus, and in the second case a $10 billion deficit. c. $5 billion surplus, and in the second case a $10 billion surplus. d. $5 billion surplus, and in the second case a $10 billion deficit. 10. Fran buys 1,000 shares of stock issued by Miller Brewing. In turn, Miller uses the funds to buy new machinery for one of its breweries. a. Fran and Miller are both investing. b. Fran and Miller are both saving. c. Fran is investing; Miller is saving. d. Fran is saving; Miller is investing. 11. Assume the following information for an imaginary, open economy. Consumption = $1,000; investment = $300; net exports = $100; taxes = $230; private saving = $200; and national saving = $150. 2

3 This economy s government is running a a. budget deficit of $50. b. budget deficit of $80. c. budget surplus of $50. d. budget surplus of $ Suppose the market for loanable funds is in equilibrium. Given the numbers below, determine the quantity of loanable funds demanded. GDP $200 billion Consumption $130 billion Taxes Net of Transfers $30 billion Government Spending $40 billion a. $30 billion b. $25 billion c. $20 billion d. $15 billion 13. If there is a shortage of loanable funds, then a. the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is above equilibrium. b. the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is below equilibrium. c. the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is above equilibrium. d. the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is below equilibrium. 14. In 2002 mortgage rates fell and mortgage lending increased. Which of the following could explain both of these changes? a. The demand for loanable funds shifted rightward. b. The demand for loanable funds shifted leftward. c. The supply of loanable funds shifted rightward. d. The supply of loanable funds shifted leftward. ANS: C 15. What would happen in the market for loanable funds if the government were to decrease the tax rate on interest income? a. There would be an increase in the amount of loanable funds borrowed. b. There would be a reduction in the amount of loanable funds borrowed. c. There would be no change in the amount of loanable funds borrowed. d. The change in loanable funds is uncertain. 3

4 16. Suppose Congress institutes an investment tax credit. What would happen in the market for loanable funds? 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. 17. Other things the same, if the government increases transfer payments to households, then the effect of this on the government s budget a. will make investment rise. b. will make the rate of interest rise. c. will make public saving rise. d. All of the above are correct. 18. Which of the following events could explain an increase in interest rates together with an increase in investment? a. The government runs a larger deficit. b. The government institutes an investment tax credit. c. The government replaces the income tax with a consumption tax. d. None of the above is correct. 19. Which of the following is correct? a. In a closed economy, equilibrium in the market for loanable funds occurs where saving = investment. b. Investment is the source for the supply of loanable funds. c. If there is a surplus in the market for loanable funds, the interest rate rises. d. All of the above are correct 4

5 20. The figure depicts a supply-of-loanable-funds curve and two demand-for-loanable-funds curves. Supply D1 D2 Which of the following events would shift the demand curve from D1 to D2? a. The government goes from running a budget deficit to running a budget surplus. b. Firms become optimistic about the future and, as a result, they plan to increase their purchases of new equipment and construction of new factories. c. A change in the tax laws encourages people to consume less and save more. d. A change in the tax laws encourages people to consume more and save less. 21. On the horizontal axis of the graph, L represents the quantity of loanable funds in billions of dollars. r Supply 8% 6% D 2 D1 $50 $62 L Which of the following events could explain a shift of the demand-for-loanable-funds curve from to? a. The tax code is reformed to encourage greater saving. b. The tax code is reformed to encourage greater investment. c. The government starts running a budget deficit. d. The government starts running a budget surplus. 5

6 22. When the government goes from running a balanced budget to running a budget surplus, a. national saving decreases, the interest rate rises, and the economy s long-run growth rate is likely to decrease. b. national saving increases, the interest rate falls, and the economy s long-run growth rate is likely to decrease. c. national saving decreases, the interest rate rises, and the economy s long-run growth rate is likely to increase. d. national saving increases, the interest rate falls, and the economy s long-run growth rate is likely to increase. 6