Deck 7: Saving, Investment and the Financial System

Question 1

A reduction in the budget deficit should shift the supply of loanable funds to the right, lower the real interest rate, and increase the quantity demanded of loanable funds.

Answer 1

True

Question 2

The four categories of expenditures that make up GDP are consumption,

A)investment, net exports, and government expenditures.
B)investment, government purchases, and depreciation.
C)interest, government purchases, and net exports.
D)investment, exports, and rental expenditures.

Answer 2

investment, net exports, and government expenditures.

Question 3

In a closed economy, saving is what remains after consumption expenditures and government purchases.

Answer 3

True

Question 4

When a business firm sells a bond, it has obtained equity finance.

Question 5

Economists say that investment occurs when

A)someone buys shares on the London or Paris or Frankfurt Stock Exchange, or any other stock exchange.
B)someone buys a government bond.
C)a firm increases its capital stock.
D)a government buys goods from another country.

Question 6

Public saving is always positive.

Question 7

An increase in the budget deficit that causes the government to increase its borrowing shifts the demand for loanable funds to the right.

Question 8

A financial intermediary is a middleperson between

A)buyers and sellers.
B)banks and the government.
C)borrowers and lenders.
D)labour unions and firms.

Question 9

SA government bonds pay less interest than corporate bonds issued by SA companies because the government bonds carry less credit risk.

Question 10

If an asset functions as a medium of exchange it

A)holds its value over a long period of time.
B)can be used by people to pay for transactions.
C)can be used by firms for debt financing.
D)can be used by firms for equity financing.

Question 11

People who buy shares in a firm have loaned money to the firm.

Question 12

National saving (or just saving) is equal to

A)None of these answers.
B)investment + consumption expenditures.
C)private saving + public saving.
D)GDP - government purchases.
E)GDP + consumption expenditures + government purchases.

Question 13

The major advantage of investment funds is that

A)they allow people with limited funds to diversify their investment.
B)they encourage households to spend their money on current consumption.
C)fund managers are replaced by household administrators.
D)they always use index funds to limit investor risk.

Question 14

Which of the following is an example of equity finance?

A)Corporate bonds.
B)Bank loan.
C)All of these answers are equity finance.
D)Government bonds.
E)Company shares.

Question 15

The stock market is an institution that facilitates

A)buying and selling of debt financing.
B)the purchase and sale of company shares.
C)the purchase and sale of investment funds.
D)bank borrowing and lending.

Question 16

Credit risk refers to a bond's

A)probability of default.
B)dividend.
C)tax treatment.
D)term to maturity.

Question 17

The quantity supplied of loanable funds is greater if real interest rates are higher.

Question 18

Bond markets allow firms to pursue

A)equity financing.
B)debt financing.
C)limited growth policies.
D)government loans and subsidy programmes.

Question 19

In a closed economy, investment is always equal to saving regardless of where the saving came from - public or private sources.

Question 20

Investment is the purchase of capital equipment and structures.

Question 21

When interest rates rise, the quantity of loanable funds demanded by

A)firms decreases.
B)government decreases.
C)firms increases.
D)government increases.

Question 22

The quantity of loanable funds supplied is

A)positively related to the level of income.
B)negatively related to the price level.
C)positively related to the price level.
D)positively related to the interest rate.

Question 23

Which of the following financial market securities would probably pay the highest interest rate?

A)A bond issued by a large, well-established (blue chip) company.
B)A bond issued by a start-up company in a newly emerging industry.
C)A government bond issued by the government of France.
D)They would all pay about the same rate of interest.

Question 24

Consider a closed economy (with no foreign trade).Assuming the economy was in equilibrium, use the following information to determine the government's budget deficit or surplus. $\begin{array}{ll}\text { Consumption Spending } & € 350 \text { billion } \\\text { Net Taxes } & \text { R270 billion } \\\text { Household Saving } & \text { R250 billion } \\\text { Investment Spending } & \text { R220 billion }\end{array}$ The government's deficit (surplus) was

A)R30 billion surplus.
B)R20 billion surplus.
C)R30 billion deficit.
D)R50 billion deficit.

Question 25

Which of the following sets of government policies is the most growth oriented?

A)Lower taxes on the returns to saving, provide investment tax credits, and lower the deficit.
B)Increase tax on the returns to saving, provide investment tax credits, and increase the deficit.
C)Increase tax on the returns to saving, provide investment tax credits, and lower the deficit.
D)Lower taxes on the returns to saving, provide investment tax credits, and increase the deficit.

Question 26

An increase in the budget deficit that causes the government to increase its borrowing shifts the

A)supply of loanable funds to the right.
B)demand for loanable funds to the left.
C)demand for loanable funds to the right.
D)supply of loanable funds to the left.

Question 27

Investment is

A)the purchase of goods and services.
B)the purchase of capital equipment and structures.
C)when we place our saving in the bank.
D)the purchase of stocks and bonds.

Question 28

If the public consumes r₁00 billion less and the government purchases r₁00 billion more (other things unchanging), which of the following statement is true?

A)Saving is unchanged.
B)There is an increase in saving and the economy should grow more quickly.
C)There is a decrease in saving and the economy should grow more slowly.
D)There is not enough information to determine what will happen to saving.

Question 29

If SA citizens become thriftier, we would expect

A)the supply of loanable funds in the SA loanable funds market to shift to the right and the real interest rate to fall.
B)the demand for loanable funds in the SA loanable funds market to shift to the right and the real interest rate to rise.
C)the demand for loanable funds in the SA loanable funds market to shift to the right and the real interest rate to fall.
D)the supply of loanable funds in the SA loanable funds market to shift to the right and the real interest rate to rise.

Question 30

Households make their savings available to borrowers through

A)resource markets.
B)the loanable funds market.
C)the labour market.
D)taxes.

Question 31

The government budget deficit is

A)the difference between government purchases and government revenues from bonds and taxes.
B)caused by a lack of business sector investment.
C)created when the government expenditures exceed net taxes.
D)caused by leakages in the economy.

Question 32

Which of the following statements is true?

A)Long term bonds tend to pay less interest than short term bonds.
B)Government bonds pay less interest than comparable corporate bonds.
C)Investment funds are riskier than single stock purchases because the performance of so many different firms can affect the return of a mutual fund.
D)A stock index is a directory used to locate information about selected stocks.

Question 33

If government spending exceeds tax collections,

A)there is a budget deficit.
B)public debt will fall.
C)there is a budget surplus.
D)private saving is positive.
E)public saving is positive.

Question 34

Consider a closed economy (with no foreign trade).Assuming the economy is in equilibrium, use the following information to determine the amount of funds supplied to the loanable funds market. $\begin{array}{ll}\text { Consumption Spending } & \text { R350 billior } \\\text { Net Taxes } & \text { R270 billior } \\\text { Household Saving } & \text { R250 billion } \\\text { Investment Spending } & \text { R220 billion } \\\text { Government Purchases } & \text { R300 billior }\end{array}$

A)R220 billion
B)R250 billion
C)R270 billion
D)R300 billion

Question 35

If the government budget deficit increases, the

A)supply of loans increases and the equilibrium interest rate increases.
B)supply of loans increases and the equilibrium interest rate decreases.
C)demand for loans increases and the equilibrium interest rate decreases.
D)demand for loans increases and the equilibrium interest rate increases.

Question 36

Which of the following financial market securities would probably pay the lowest interest rate?

A)A bond issued by a start-up company.
B)A government bond issued by the government of France.
C)A bond issued by a blue chip company.
D)An investment fund with a portfolio of corporate bonds issued by blue chip companies.

Question 37

If a series of major technological breakthroughs occur in the economy at the same time, then the most likely outcome would be that the economy's

A)demand curve for loanable funds will shift downward.
B)demand curve for loanable funds will shift upward.
C)consumption curve will shift downward.
D)position along the existing demand curve for loanable funds will move upward.

Question 38

If GDP = r₁ 000, consumption = R600, taxes = r₁00, and government purchases = R200, how much is saving and investment?

A)saving = R300, investment = R300
B)saving = R200, investment = r₁00
C)saving = r₁00, investment = R200
D)saving = r₀, investment = r₀
E)saving = R200, investment = R200

Question 39

The supply of loanable funds curve is upward sloping because a rise in the interest rate

A)decreases the opportunity cost of firms' investment spending.
B)increases the opportunity cost of firms' investment spending.
C)decreases the opportunity cost to households of consuming.
D)increases the opportunity cost to households of consuming.

Question 40

What is the price of funds in the loanable funds market?

A)The real wage rate.
B)The consumer price index.
C)The nominal interest rate.
D)The average firm profit rate.

Question 41

Why were Collateralized Debt Obligations (CDOs) based on residential mortgages developed, and why did they fail?

Question 42

A close friend with surplus money wants to buy either stock or bonds in Real Oak Furniture plc, which manufactures wooden furniture.He wants your advice on whether to buy stock or bonds.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 Real Oak Furniture plc."
c."I do not want to take on much risk."

Question 43

What are the basic differences between bonds and stocks?

Question 44

If the government increases investment tax credits and reduces taxes on the return to saving at the same time, the

A)real interest rate should fall.
B)real interest rate should rise.
C)impact on the real interest rate is indeterminate.
D)real interest rate should not change.

Question 45

An increase in the budget deficit is

A)an increase in public saving.
B)a decrease in private saving.
C)an indication of a spendthrift government.
D)a decrease in public saving.
E)an increase in private saving.

Question 46

If the supply of loanable funds is very inelastic (steep), which policy would likely increase saving and investment the most?

A)A reduction in the budget deficit.
B)An increase in the budget deficit.
C)An investment tax credit.
D)None of these answers.

Question 47

Using a graph representing the market for loanable funds, show and explain what happens to interest rates and investment if the government budget goes from a deficit to a surplus.

Question 48

An increase in the budget deficit will

A)raise the real interest rate and decrease the quantity of loanable funds demanded for investment.
B)lower the real interest rate and increase the quantity of loanable funds demanded for investment.
C)raise the real interest rate and increase the quantity of loanable funds demanded for investment.
D)lower the real interest rate and decrease the quantity of loanable funds demanded for investment.

Question 49

Identify each of the following acts as representing either saving or investment.
a.Pieter uses some of his income to buy government bonds.
b.Julie takes some of her income and buys mutual funds.
c.Alex purchases a new truck for his delivery business using borrowed funds.
d.Thato uses some of his income to buy stock in a major corporation.
e.Lerato hires a builder to construct a new building for her bicycle shop.

Question 50

If the government wants to increase the level of employment and real output, it could

A)increase corporate income taxes.
B)provide an investment tax credit.
C)decrease expenditures on roads and schools.
D)increase the personal income tax.

Question 51

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

Question 52

The model of the market for loanable funds shows that an investment tax credit will cause interest rates to rise and investment to rise.Yet we also suppose that higher interest rates lead to lower investment.How can these two conclusions be reconciled?

Question 53

An increase in the budget surplus shifts the

A)supply of loanable funds to the left and increases the real interest rate.
B)supply of loanable funds to the right and reduces the real interest rate.
C)demand for loanable funds to the right and increases the real interest rate.
D)demand for loanable funds to the left and reduces the real interest rate.

Question 54

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?

Question 55

Draw and label a graph showing equilibrium in the market for loanable funds.

Question 56

A(n) __________ allows a firm to decrease its tax liability by a fraction of the investment it makes during a particular period.

A)tax on corporate profits
B)tax on retained earnings
C)investment tax credit
D)personal income tax

Question 57

If SA citizens become less concerned with the future and save less at each real interest rate, real interest rates

A)rise and investment falls.
B)rise and investment rises.
C)fall and investment rises.
D)fall and investment falls.

Question 58

If taxes are reduced with no change in government spending, and people save all the money from the tax cut,

A)the demand for loanable funds will increase and the interest rate will increase.
B)the demand for loanable funds will increase and the interest rate will remain constant.
C)the supply of loanable funds will increase and the interest rate will decrease.
D)neither the demand nor the supply of loanable funds will change.

Question 59

Which of the two bonds in each example would you expect to generally pay the higher interest rate? Explain why.
a.a German government bond or a South African government bond
b.a 6-month Treasury bill or a 20-year Treasury bond
c.a Microsoft bond or a bond issued by a new recording company

Question 60

If an increase in the budget deficit reduces national saving and investment, we have witnessed a demonstration of

A)intermediation.
B)equity finance.
C)crowding out.
D)the investment fund effect.