Question 1

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

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Question 2

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.

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Question 3

Suppose a country has a smaller increase in debt in 2012 than it had in 2011.Then other things the same,

Accepted Answer

If a country has a smaller increase in debt, then it is borrowing less, which means it is supplying less loanable funds. When the supply of loanable funds decreases, the interest rate falls (assuming demand remains constant). This is because borrowers are now competing for a smaller pool of funds, which reduces the cost of borrowing.

Question 4

Mutual funds

Accepted Answer

Mutual funds provide diversification by pooling money from multiple investors and investing in a variety of assets. This spreads out the risk, reducing the impact of any one investment on the overall performance of the fund. However, shareholders still assume some level of risk associated with the investments made by the fund. There is no government insurance eliminating the risk of mutual fund investors.

Question 5

If there is a shortage in the market for loanable funds,what happens to desired saving and desired investment as the interest rate moves to its equilibrium value?

Accepted Answer

If there is a shortage of loanable funds in the market, the interest rate will increase to reach equilibrium. As the interest rate rises, the opportunity cost of spending today (instead of saving) becomes higher, leading to a rise in desired saving. On the other hand, the cost of borrowing (interest rate) becomes higher, leading to a fall in desired investment. Therefore, desired saving rises and desired investment falls.

Question 6

Which of the following would shift the demand for loanable funds to the right?

Accepted Answer

Congress and the President passing an investment tax credit encourages investment, increasing the demand for loanable funds and shifting the demand curve to the right. Income tax increases, government expenditures increases, and a fall in interest rate would all decrease the demand for loanable funds and shift the curve to the left.

Question 7

If the nominal interest rate is 2.5 percent and the inflation rate is 2 percent,what is the real interest rate?

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Question 8

If the demand for loanable funds shifts to the right,then initially there is a

Accepted Answer

An increase in demand for loanable funds would shift the demand curve to the right, leading to a shortage of funds at the original interest rate. To attract more lenders, borrowers would need to offer a higher interest rate, leading to an increase in the market interest rate. Therefore, the correct answer is D) shortage so the interest rate will rise.

Question 9

Other things the same,if the government increases transfer payments,then

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Question 10

Atlas Corporation is in sound financial condition.It sells a long-term bond.Which of the following make the interest rate on this bond lower than otherwise?

Accepted Answer

Atlas Corporation's sound financial condition would make the interest rate on its bond lower because investors perceive it as a lower risk. However, the long term of the bond typically increases the interest rate due to higher risk over a longer period.

Question 11

Melinda buys new equipment for her dental office with funds she borrowed from a bank that raised funds from depositors.Which of the following is correct?

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Question 12

If the supply of and demand for loanable funds both shift right,which of the following necessarily happens?

Accepted Answer

When both supply and demand for loanable funds shift right, the equilibrium quantity of loanable funds rises because both lenders and borrowers are willing to supply and demand more funds, respectively. However, the equilibrium interest rate cannot be determined solely by the direction of the shifts, as it depends on the magnitude of the shifts. If the supply shift is larger than the demand shift, the equilibrium interest rate will fall, while if the demand shift is larger than the supply shift, the equilibrium interest rate will rise.

Question 13

Kroger's grocery chain wants to finance the purchase of a new warehouse.It decides to sell bonds.

Accepted Answer

Kroger's plans to finance the purchase of a new warehouse by selling bonds, which is a type of debt financing. Therefore, its action is part of the demand for loanable funds.

Question 14

What does the maturity of a bond indicate?

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Question 15

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?

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Question 16

If people expect future earnings of Galt Corporation to be high relative to current earnings,then

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Question 17

What is the main function of the financial system?

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Question 18

For a closed economy,GDP is $12 trillion,consumption is $7 trillion,taxes net of transfers are $3 trillion and the government runs a deficit of $1 trillion.What are private saving and national saving?

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Question 19

Which of the following is true concerning interest rates on bonds?

Accepted Answer

The tax treatment of interest earned on municipal bonds makes the interest rate on them lower than otherwise, as the interest income earned from them is typically exempt from federal income tax and sometimes state and local taxes. High default risk makes the interest rate on a bond higher than otherwise, but this is not true in general for all bonds.

Question 20

Other things the same,the effects of an increase in transfer payments on the government's budget deficit will lead to

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Quiz 26: Saving,investment,and the Financial System