Question 1

Since the financial crisis of 2008-09, expected profits have fallen, which has resulted in

Accepted Answer

When expected profits fall, businesses are less likely to invest, leading to a decrease in the private demand for loanable funds.

Question 2

Suppose the government has a budget deficit of $2 billion. If the Ricardo-Barro effect is correct, then how much crowding out of investment occurs?

Accepted Answer

The Ricardo-Barro effect suggests that when the government runs a budget deficit, individuals anticipate future taxes to pay off the debt and increase their savings, leaving investment unchanged.

Question 3

-In the figure above, the DLF curve is the demand for loanable funds curve and the PDLF curve is the private demand for loanable funds curve. If there is no Ricardo-Barro effect, the figure shows a situation in which the government has a budget

Accepted Answer

The government has a budget deficit of $1 trillion, indicated by the shift from the private demand for loanable funds curve (PDLF) to the demand for loanable funds curve (DLF), which shows an increase in demand for loanable funds due to government borrowing.

Question 4

A country initially has an equilibrium real interest rate of 4 per cent and an equilibrium quantity of investment of $2 trillion. The government's budget deficit then increases. According to the crowding-out effect, the

Accepted Answer

When the government's budget deficit increases, it borrows more, shifting the demand for loanable funds curve rightward. This increases the real interest rate and decreases investment, illustrating the crowding-out effect.

Question 5

The crowding-out effect implies that a government budget deficit ________ the demand for loanable funds and ________ equilibrium investment.

Accepted Answer

The crowding-out effect suggests that when the government borrows more (to finance a budget deficit), it increases the demand for loanable funds, which typically raises interest rates. Higher interest rates, in turn, discourage private investment, leading to a decrease in equilibrium investment.

Question 6

-In the figure above, the SLF curve is the supply of loanable funds curve and the PSLF curve is the private supply of loanable funds curve. The equilibrium interest rate is ________ per cent and the equilibrium quantity of loanable funds is ________.

Accepted Answer

The equilibrium interest rate and quantity of loanable funds are determined at the point where the supply and demand curves intersect. In this case, the correct answer is 4% interest rate and $1.8 trillion in loanable funds, which corresponds to the intersection point on the graph provided.

Question 7

-In the figure above, the SLF curve is the supply of loanable funds curve and the PSLF curve is the private supply of loanable funds curve. The equilibrium interest rate is ________ per cent and the equilibrium quantity of loanable funds is ________.

Accepted Answer

The answer of 
-In the figure above, the SLF curve...

Question 8

-In the figure above, the SLF curve is the supply of loanable funds curve and the PSLF curve is the private supply of loanable funds curve. If there is no Ricardo-Barro effect and the government now runs a balanced budget,

Accepted Answer

When the government runs a balanced budget, it means that it is not borrowing from the loanable funds market, which would shift the supply curve of loanable funds (SLF) to the left (as depicted by the PSLF curve). Without the Ricardo-Barro effect, which posits that private saving adjusts to offset government borrowing or saving, the supply of loanable funds is higher, leading to a lower equilibrium interest rate and higher investment. However, since the question does not provide details about shifts in curves or initial conditions beyond the absence of the Ricardo-Barro effect and a balanced budget, the correct answer is inferred based on the given options. Option C suggests an equilibrium interest rate of 6 per cent and investment of $1.6 trillion, which could reflect the new equilibrium without government borrowing, assuming the PSLF represents the new supply curve without government intervention.

Question 9

-The above table has the private demand for loanable funds and the private supply of loanable funds schedules. If the government budget surplus is $200 billion, and there is no Ricardo-Barro effect, the equilibrium real interest rate is ________ and the equilibrium quantity of loanable funds is ________.

Accepted Answer

A government budget surplus increases the supply of loanable funds, shifting the supply curve to the right. This leads to a lower equilibrium interest rate and a higher equilibrium quantity of loanable funds than would exist without the surplus. Without specific numbers from the table mentioned, the general principle is that an increase in supply of loanable funds due to a government surplus, without the Ricardo-Barro effect (which posits that government budget deficits do not affect the total supply of loanable funds in an economy because individuals save more in anticipation of future taxes), leads to a lower interest rate and higher quantity of loanable funds at equilibrium. Choice D suggests a lower interest rate (4%) and a higher quantity of loanable funds ($700 billion) compared to other options, aligning with the expected outcome of a government surplus on the loanable funds market.

Question 10

The tendency for higher government budget deficits to decrease investment is called the

Accepted Answer

The crowding-out effect refers to the situation where increased government borrowing leads to higher interest rates, which in turn reduces private investment. When the government borrows more, it competes with the private sector for available funds in the financial markets, leading to higher interest rates and making it more expensive for businesses to borrow and invest.

Question 11

China's government runs a budget surplus. As a result,

Accepted Answer

A budget surplus means the government is saving more than it is spending, increasing the overall supply of loanable funds. Without the Ricardo-Barro effect, this surplus shifts the supply curve of loanable funds to the right, indicating an increase in available funds for lending.

Question 12

According to the Ricardo-Barro effect, a government budget

Accepted Answer

The Ricardo-Barro effect suggests that a government budget deficit leads to an increase in private saving supply because individuals anticipate future taxes to pay off the debt, so they save more to offset the expected future tax burden.

Question 13

If there is no Ricardo-Barro effect, an increase in the government budget surplus

Accepted Answer

An increase in the government budget surplus means the government is saving more, which increases the overall supply of loanable funds in the economy.

Question 14

-In the figure above, the DLF curve is the demand for loanable funds curve and the PDLF curve is the private demand for loanable funds curve. If there is no Ricardo-Barro effect, the figure shows the situation in which the government has a ________ so that the equilibrium real interest rate is ________ and the equilibrium quantity of investment is ________.

Accepted Answer

The absence of the Ricardo-Barro effect implies that government borrowing increases the demand for loanable funds, leading to a higher equilibrium real interest rate and quantity of investment.

Question 15

-The above table has the private demand for loanable funds and the private supply of loanable funds schedules. If the government budget deficit is $200 billion, and there is no Ricardo-Barro effect, the equilibrium real interest rate is ________ and the equilibrium quantity of investment is ________.

Accepted Answer

The answer of 
-The above table has the private demand...

Question 16

With no Ricardo-Barro effect, a government budget surplus

Accepted Answer

A government budget surplus increases the supply of loanable funds in the economy because the government is borrowing less (or repaying debt), which typically leads to a lower real interest rate.

Question 17

-In the figure above, if there is no Ricardo-Barro effect, the government has a budget ________ because the ________.

Accepted Answer

The answer of 
-In the figure above, if there is...

Question 18

The Ricardo-Barro effect argues that the crowding-out effect

Accepted Answer

The Ricardo-Barro effect, also known as Ricardian equivalence, posits that government budget deficits do not affect the level of demand in an economy because individuals anticipate future taxes to pay off the debt and increase their savings to offset government spending, thus neutralizing the crowding-out effect.

Question 19

-In the figure above, the SLF curve is the supply of loanable funds curve and the PSLF curve is the private supply of loanable funds curve. Given these curves, there is a government budget ________ and therefore the real interest rate is ________ than it would be otherwise.

Accepted Answer

The answer of 
-In the figure above, the SLF curve...

Quiz 9: Finance, Saving and Investment

Since the financial crisis of 2008-09, expected profits have fallen, which has resulted in

Suppose the government has a budget deficit of $2 billion. If the Ricardo-Barro effect is correct, then how much crowding out of investment occurs?

-In the figure above, the DLF curve is the demand for loanable funds curve and the PDLF curve is the private demand for loanable funds curve. If there is no Ricardo-Barro effect, the figure shows a situation in which the government has a budget

A country initially has an equilibrium real interest rate of 4 per cent and an equilibrium quantity of investment of $2 trillion. The government's budget deficit then increases. According to the crowding-out effect, the

The crowding-out effect implies that a government budget deficit the demand for loanable funds and equilibrium investment.

-In the figure above, the SLF curve is the supply of loanable funds curve and the PSLF curve is the private supply of loanable funds curve. The equilibrium interest rate is per cent and the equilibrium quantity of loanable funds is .

-In the figure above, the SLF curve is the supply of loanable funds curve and the PSLF curve is the private supply of loanable funds curve. The equilibrium interest rate is per cent and the equilibrium quantity of loanable funds is .

-In the figure above, the SLF curve is the supply of loanable funds curve and the PSLF curve is the private supply of loanable funds curve. If there is no Ricardo-Barro effect and the government now runs a balanced budget,

-The above table has the private demand for loanable funds and the private supply of loanable funds schedules. If the government budget surplus is $200 billion, and there is no Ricardo-Barro effect, the equilibrium real interest rate is and the equilibrium quantity of loanable funds is .

The tendency for higher government budget deficits to decrease investment is called the

China's government runs a budget surplus. As a result,

According to the Ricardo-Barro effect, a government budget

If there is no Ricardo-Barro effect, an increase in the government budget surplus

-The above table has the private demand for loanable funds and the private supply of loanable funds schedules. If the government budget deficit is $200 billion, and there is no Ricardo-Barro effect, the equilibrium real interest rate is and the equilibrium quantity of investment is .

With no Ricardo-Barro effect, a government budget surplus

-In the figure above, if there is no Ricardo-Barro effect, the government has a budget because the .

The Ricardo-Barro effect argues that the crowding-out effect

-In the figure above, the SLF curve is the supply of loanable funds curve and the PSLF curve is the private supply of loanable funds curve. Given these curves, there is a government budget and therefore the real interest rate is than it would be otherwise.