Chapter 26/Saving, Investment, and the Financial System 153 Chapter 26 Saving, Investment, and the Financial System Bond markets allow firms to pursue a equity financing b debt financing c limitedgrowth policies d government loans and subsidy programs Junk bonds are issues by firms with a high degrees of financial security b business ties to the trashhauling industry c high degrees of financial insecurity d the ability to offer lower interest rates to lenders The stock market is an institution that promotes a buying and selling of debt financing b the purchase and sale of firm equities c the purchase and sale of mutual funds d bank borrowing and lending The major advantage of mutual funds is that a they allow people with limited funds to diversify b they encourage households to spend their money on current consumption 154 Chapter 26/Saving, Investment, and the Financial System c fund managers are replaced by household administrators d they always use index funds to limit investor risk 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 cover transactions c can be used by firms for debt financing d can be used by firms for equity financing 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 Economists say that investment occurs when a someone buys stock on the New York Stock Exchange b someone buys a U.S. government bond c a firm increases its capital stock d a government buys goods from another country Which of the following would be counted as a private investment expenditure in the national income accounts? a The Navy builds a new battleship b Microsoft expands plant capacity to produce new software c A public high school builds a new football stadium Chapter 26/Saving, Investment, and the Financial System 155 d All of the above are correct 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 investment demand curve will shift downward b investment demand curve will shift upward c consumption curve will shift downward d position along the existing investment curve will move upward 10 Households make their savings available to borrowers through a resource markets b the loanable funds market c the labor market d taxes 11 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 12 Assuming the economy is in equilibrium, use the following information to determine the amount of funds supplied to the loanable funds market Consumption Spending $3.5 trillion Net Taxes $2.7 trillion Household Saving $2.5 trillion Investment Spending $2.2 trillion 156 Chapter 26/Saving, Investment, and the Financial System Government Purchases a $2.2 trillion b $2.5 trillion c $2.7 trillion d $3.0 trillion $3.0 trillion 13 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 14 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 15 The investment demand curve a is upward sloping b is downward sloping c is horizontal d begins sloping upward, then becomes horizontal 16 When interest rates rise, the quantity of loanable funds demanded by Chapter 26/Saving, Investment, and the Financial System 157 a b c d firms decreases government decreases firms increases government increases 17 Market clearing in the loanable funds market a guarantees that total spending will be just sufficient to purchase whatever output is produced b means that the interest rate never changes c guarantees that total spending will equal the quantity of loanable funds demanded d requires that the government run a budget deficit 18 If taxes are reduced with no change in government spending, and people spend all the money from the tax cut on consumption 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 decrease c the supply of loanable funds will decrease and the interest rate will increase d neither the demand nor the supply of loanable funds will change 19 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 20 A(n) allows a firm to decrease its tax liability by a fraction of the investment it initiates during a particular period a tax on corporate profits 158 Chapter 26/Saving, Investment, and the Financial System b tax on retained earnings c investment tax credit d personal income tax 21 If the U.S. 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 dams d increase the personal income tax 22 Assuming the economy was in equilibrium, use the following information to determine the government’s budget deficit or surplus Consumption Spending $3.5 trillion Net Taxes $2.7 trillion Household Saving $2.5 trillion Investment Spending $2.2 trillion The government’s deficit (surplus) was a $.3 trillion surplus b $.2 trillion surplus c $.3 trillion deficit d $.5. trillion deficit 23 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 24 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 25 If technical progress raises productivity permanently, then a the equilibrium interest rate will increase b equilibrium saving will increase c real GDP will increase d All of the above are correct ...154 Chapter 26/ Saving, Investment, and the Financial System c fund managers are replaced by household administrators... Microsoft expands plant capacity to produce new software c A public high school builds a new football stadium Chapter 26/ Saving, Investment, and the Financial System 155 d All of the above are correct If a series of major technological breakthroughs occur in the economy at the same time, then the ... Net Taxes $2.7 trillion Household Saving $2.5 trillion Investment Spending $2.2 trillion 156 Chapter 26/ Saving, Investment, and the Financial System Government Purchases a $2.2 trillion b $2.5 trillion