Deck 26: Essay

Question 1

The two most important financial markets are the ----- market and the ----- market.

Answer 1

Robert is a saver.Rachel is an investor.

Question 2

What is a bond buyer promised when she buys a bond?

Answer 2

Bond A

Question 3

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

Answer 3

closed economy

Question 4

What is the main function of the financial system?

Question 5

If federal tax rates increased,what would happen to the interest rate on municipal bonds?

Question 6

Stock in Frozen Dreams,an ice cream manufacturer,has a price to earnings ratio of 24.Is this comparatively high or low? What are two explanations for the size of this company's price to earnings ratio?

Question 7

Concerns about the bankruptcy of an appliance manufacturer diminish after a new CEO is appointed and some of the company's less productive factories are sold.What type of risk for bondholders falls? What happens to the interest rate on this company's bonds?

Question 8

Bond A and Bond B are identical except Bond B has a longer term.Therefore,we expect Bond ----- to pay a higher rate of interest.

Question 9

----- and ----- are the two most important financial intermediaries.

Question 10

Bond A and Bond B have identical characteristics except that Bond A has a higher interest rate.Which bond has a higher credit risk?

Question 11

When someone borrows to purchase capital goods,he is using someone else's ----- to fund his -----.

Question 12

The financial system is important because it helps to match one person's ----- with another person's -----.

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?

Question 14

How do banks make profits?

Question 15

A restaurant chain announces declining revenues.What's the name of the type of risk that this news raises for holders of this chain's bonds? What does this news to do the interest rate on this chain's bonds?

Question 16

In a closed economy,GDP is $1000,government purchases are $200,and consumption is $700.If the government has a budget surplus of $25,what are investment,taxes,private saving,and national saving?

Question 17

Bonds issued by state and local governments are called ----- bonds.Bonds issued by financially shaky corporations are called ----- bonds.Of these two,which type of bond usually pays a relatively higher interest rate?

Question 18

What is a mutual fund?

Question 19

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

Question 20

A ----- is a certificate of indebtedness and a ----- is a claim to partial ownership in a firm.

Question 21

If at some interest rate desired investment is $400 billion,desired private saving is $600 billion,and the budget deficit is $300 billion,is there a surplus or a shortage in the market for loanable funds? What does this imply would happen to interest rates?

Question 22

The income that households have left after paying their taxes and paying for their consumption is known as -----.

Question 23

When tax code changes reduce investment incentives,the ----- for loanable funds curve shifts to the -----.This results in a(n)----- in the interest rate and a(n)----- in investment.

Question 24

When tax code changes reduce saving incentives,the interest rate will ----- and investment will -----.

Question 25

National saving is the sum of ----- and -----.In a closed economy it is equal to ----- in equilibrium.

Question 26

In macroeconomics,----- refers to the purchase of new capital.

Question 27

Robert buys bonds.Rachel buys a new truck for her landscaping business.Identify both as savers,investors,both,or neither.

Question 28

What variable adjusts to balance demand and supply in the market for loanable funds?

Question 29

In a closed economy,Y - C - G equals -----.The variable Y is -----,C is -----,and G is -----.

Question 30

When tax code changes increase investment incentives,the ----- for loanable funds curve shifts to the -----.This results in a(n)----- in the interest rate and a(n)----- in investment.

Question 31

In the terminology of macroeconomics,what's the difference between a saver and an investor?

Question 32

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

Question 33

A higher interest rate makes ----- less attractive.Therefore the quantity of loanable funds demanded decreases.

Question 34

A ----- does not engage in international trade in goods and services and it does not engage in international borrowing and lending.

Question 35

Public saving is the difference between ----- and -----.

Question 36

Suppose there is a shortage in the market for loanable funds.Is the interest rate above or below its equilibrium level? How do desired saving and desired investment at this interest rate compare?

Question 37

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

Question 38

What happens to desired investment spending if the interest rate rises? Is this response relevant to the supply of loanable funds curve or the demand for loanable funds curve?

Question 39

What is the source of the supply of loanable funds?

Question 40

Congress and the President implement an investment tax credit.Which curve in the market for loanable funds shifts,which direction does it shift,and what happens to the interest rate?

Question 41

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 42

Suppose the Move It! exercise chain has revenues of $45 million,accounting costs of $15 million,and currently has issued 10 million shares of stocks selling at $90 each.Compute the price-earning ratio.Show your work.Is this ratio relatively high or low? What might an increase in the price-earnings ratio indicate?

Question 43

Which government policy raises the interest rate and raises investment spending?

Question 44

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 -----.

Question 45

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 46

The interest rate will ----- and the quantity of loanable funds invested will ----- when the government decreases the budget deficit.

Question 47

Which of the two bonds in each example would you expect to generally pay the higher interest rate? Explain why.
a.a U.S.government bond or a Venezuelan government bond
b.a U.S.government bond or a municipal bond with the same term and issued by a creditworthy municipality.
c.a 6-month Treasury bill or a 20-year Treasury bond
d.a Microsoft bond or a bond issued by a new recording company

Question 48

If the government reduces transfer payments,what happens to the budget deficit? What curve does this change in the market for loanable funds,which direction does it shift,and what happens to the equilibrium interest rate?

Question 49

When the government increases its borrowing,the budget ----- increases and government debt -----.The resulting change in investment due to this increased government borrowing is called -----.

Question 50

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 51

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

Question 52

Congress and the President allow people to make greater contributions to tax-deferred savings accounts.Which curve in the market for loanable funds would shift,which direction would it shift,what would happen to the interest rate,and what would happen to investment spending?

Question 53

If the government budget deficit increases,which curve in the market for loanable funds shifts,which direction does it shift,and what happens to the interest rate?

Question 54

What are the basic differences between bonds and stocks?

Question 55

Your brother-in-law wants to buy either stock or bonds in Cedar Valley Furniture,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 Cedar Valley Furniture."
c."I do not want to take on much risk."

Question 56

An increase in the government budget deficit causes national saving to -----,the interest rate to -----,and investment to -----.

Question 57

Suppose that you are a broker and people tell you the following about themselves.What sort of bond would you recommend to each? Defend your choices.
a."I am in a high federal income tax bracket and I don't want to take very much risk."
b."I want a high return and I am willing to take a lot of risk to get it."
c."I want a decent return and I have enough deductions that I don't value tax breaks highly."