Question 1

A country initially has an equilibrium real interest rate of 4 percent 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

An increase in the government's budget deficit leads to an increase in the demand for loanable funds, as the government has to borrow more to finance its deficit. This results in a rightward shift of the demand for loanable funds curve. As a result, the equilibrium real interest rate increases, and the equilibrium quantity of investment decreases due to higher borrowing costs. This is known as the crowding-out effect. Therefore, the correct answer is D, which states that the demand for loanable funds curve shifts rightward, the real interest rate rises, and investment decreases.

Question 2

If there is no Ricardo-Barro effect, a government budget deficit increases

Accepted Answer

If there is no Ricardo-Barro effect, increased government borrowing to finance a budget deficit puts pressure on the demand for loanable funds. This is because the government is competing with the private sector for available funds, which raises the interest rate. As a result, the demand for loanable funds increases and this, in turn, raises the real interest rate. Option A and E are incorrect because private savings are not affected by government spending policies. Option B is incorrect because an increase in the supply of loanable funds would lower the interest rate, not raise it. Option D is incorrect because investment demand is not directly affected by government spending policies.

Question 3

-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

Accepted Answer

The equilibrium interest rate is 6 percent and investment is $1.6 trillion.

Question 4

-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 ________ percent and the equilibrium quantity of loanable funds is ________.

Accepted Answer

From the graph, the equilibrium interest rate is where the SLF and PSLF curves intersect, which is at 4%. The equilibrium quantity of loanable funds is the corresponding point on the vertical axis, which is $13 trillion. Therefore, the answer is C) 4; $13 trillion.

Question 5

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

Accepted Answer

Without the Ricardo-Barro effect, an increase in the budget deficit leads to higher demand for loanable funds, which raises the real interest rate and decreases 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 ________ percent and the equilibrium quantity of loanable funds is ________.

Accepted Answer

The equilibrium point is where the SLF and PSLF curves intersect. In this case, they intersect at an interest rate of 4 percent and a quantity of $1.8 trillion. Therefore, the correct answer is D, 4 percent and $1.8 trillion.

Question 7

-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 a government budget deficit increases the demand for loanable funds, raising the real interest rate to 6 percent and increasing the equilibrium quantity of investment to $1.5 trillion.

Question 8

The crowding-out effect describes how a government budget ________ ________ the real interest rate and thereby ________ equilibrium investment.

Accepted Answer

The crowding-out effect occurs when a government budget deficit raises the real interest rate, which decreases equilibrium investment by making borrowing more expensive for the private sector.

Question 9

-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, the figure shows a situation in which the government has a budget

Accepted Answer

The government has a budget surplus when the SLF curve is above the PSLF curve, which is the case in the figure. The vertical distance between the two curves at the equilibrium point is the amount of the surplus, which is $2 trillion.

Question 10

-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...

Question 11

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 tax increases to pay off the debt, so they save more to offset the expected future tax burden.

Question 12

The crowding-out effect is the tendency for

Accepted Answer

The crowding-out effect refers to the decrease in investment caused by higher government budget deficits. When the government borrows money to finance its deficit spending, it competes with other borrowers for the available savings in the economy. This increases interest rates, making it more expensive for businesses to borrow money for investment. As a result, investment decreases and can lead to a decrease in long-term economic growth.

Question 13

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

Accepted Answer

The crowding-out effect is the tendency for higher government budget deficits to decrease investment, as the government borrows more money, increasing interest rates and making it more expensive for businesses to borrow and invest. This can lead to a decrease in overall economic output and growth.

Question 14

Suppose the government has a budget deficit of $2 billion.If there is no Ricardo-Barro effect, how much crowding out of investment occurs?

Accepted Answer

Without the Ricardo-Barro effect, government borrowing can lead to higher interest rates, which can crowd out some private investment, but not necessarily the full amount of the deficit.

Question 15

According to the Ricardo-Barro effect, an increase in the government budget deficit

Accepted Answer

The Ricardo-Barro effect suggests that when the government increases its budget deficit, individuals anticipate higher future taxes to pay off the debt. As a result, they increase their savings, which offsets the government's borrowing, leaving the real interest rate unchanged.

Question 16

$$\begin{array} { c c c c c } 
\begin{array} { l } 
\text { Real interest rate } \
\text { (percent per year) }
\end{array} & \begin{array} { c } 
\text { Investment } \
\text { (billions of }
\end{array} & \begin{array} { c } 
\text { Private saving } \
\text { (billions of }
\end{array} & \begin{array} { c } 
\text { Net taxes } \
\text { (billions of }
\end{array} & \begin{array} { c } 
\text { Government expenditures } \
\text { (billions of }
\end{array} \
\text { 2005 dollars) } & \text { 2005 dollars) } & \text { 2005 dollars) } \
\hline 3 & 60 & 20 & 40 & 20 \
4 & 50 & 30 & 40 & 20 \
5 & 40 & 40 & 40 & 20 \
6 & 30 & 50 & 40 & 20 \
7 & 20 & 60 & 40 & 20
\end{array}$$
-The table above gives a nation's investment demand and saving supply schedules.It also has the government's net taxes and expenditures.The loanable funds market is in equilibrium when the real interest rate is

Accepted Answer

The loanable funds market is in equilibrium when the quantity of loanable funds supplied equals the quantity of loanable funds demanded. In this case, the quantity of loanable funds supplied is equal to private saving plus net taxes, which is 60 billion dollars. The quantity of loanable funds demanded is equal to investment, which is 60 billion dollars. Therefore, the loanable funds market is in equilibrium when the real interest rate is 3 percent.

Question 17

Suppose the government's budget deficit increases by $500 billion.If there is no Ricardo-Barro effect, what occurs?

Accepted Answer

An increase in the government's budget deficit increases the demand for loanable funds, shifting the demand curve rightward, leading to a higher real interest rate and an increase in the quantity of loanable funds.

Question 18

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

Accepted Answer

The crowding-out effect occurs when the government borrows funds, which increases the demand for loanable funds, leading to an increase in the interest rate. Higher interest rates discourage private investment, which leads to a decrease in equilibrium investment. Therefore, a government budget deficit increases the demand for loanable funds (crowding out private investment) and decreases equilibrium investment.

Question 19

-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 difference between the DLF curve and the PDLF curve represents the government's demand for loanable funds, indicating a budget deficit of $1 trillion.

Question 20

$$\begin{array} { c c c c c } 
\begin{array} { l } 
\text { Real interest rate } \
\text { (percent per year) }
\end{array} & \begin{array} { c } 
\text { Investment } \
\text { (billions of }
\end{array} & \begin{array} { c } 
\text { Private saving } \
\text { (billions of }
\end{array} & \begin{array} { c } 
\text { Net taxes } \
\text { (billions of }
\end{array} & \begin{array} { c } 
\text { Government expenditures } \
\text { (billions of }
\end{array} \
\text { 2005 dollars) } & \text { 2005 dollars) } & \text { 2005 dollars) } \
\hline 3 & 60 & 20 & 40 & 20 \
4 & 50 & 30 & 40 & 20 \
5 & 40 & 40 & 40 & 20 \
6 & 30 & 50 & 40 & 20 \
7 & 20 & 60 & 40 & 20
\end{array}$$
-The table above gives a nation's investment demand and saving supply schedules.It also has the government's net taxes and expenditures.When the real interest rate is 4 percent, the supply of loanable funds is equal to

Accepted Answer

At a real interest rate of 4 percent, the investment and saving schedules intersect at $50 billion of loanable funds, where $30 billion of private savings equals $50 billion in investment demand, and net taxes and government expenditures are both $40 billion.

Quiz 10: Finance, Saving, and Investment