Saving investment and the financial system multiple choice

1. Multiple Choice 1 Nina wants to buy and operate an ice-cream truck but doesn’t have the financial resources to start the business. She borrows $5,000 from her friend Max, to whom she promises an interest rate of 7 percent, and gets another $10,000 from her friend David, to whom she promises a third of her profits. What best describes this situation? Max is a shareholder, and Nina is a bondholder. Max is a shareholder, and David is a bondholder. David is a shareholder, and Nina is a bondholder. David is a shareholder, and Max is a bondholder. 2. Multiple Choice 2 If the government collects more in tax revenue than it spends, and households consume more than they get in after-tax income, then private and public saving are both positive. private and public saving are both negative. private saving is positive, but public saving is negative. private saving is negative, but public saving is positive. 3. Multiple Choice 3 A closed economy has income of $1,000, government spending of $200, taxes of $150, and investment of $250. What is private saving? $100 $200 $300 $400 4. Multiple Choice 4 If a popular TV show on personal finance convinces more Canadians about the importance of saving for retirement, the ________ curve for loanable funds would shift, driving the equilibrium interest rate ________. supply, up supply, down demand, up demand, down 5. Multiple Choice 5 If the business community becomes more optimistic about the profitability of capital, the ________ curve for loanable funds would shift, driving the equilibrium interest rate ________. supply, up supply, down demand, up demand, down 6. Exercise 1 When the Russian government defaulted on its debt to foreigners in 1998, interest rates rose on bonds issued by many other developing countries. This happened because investors perceived a (lower or higher ) chance of default on similar bonds sold by other developing countries. Thus the supply of loanable funds shifted to the (left or right ) . 7. Exercise 2 Indicate whether each of the following descriptions represents saving or investment, as defined by a macroeconomist. Description Saving This occurs when a person or firm purchases new capital. This occurs when a person’s income exceeds his consumption. Indicate whether each of the following situations represents saving or investment. Investmen t Situation Saving Investmen t Your family takes out a mortgage and buys a new house. You use your $200 paycheque to buy stock in Bombardier. Your roommate earns $100 and deposits it in his account at a bank. You borrow $1,000 from a bank to buy a car to use in your pizza delivery business. 8. Exercise 3 Suppose GDP is $8 trillion, taxes are $1.5 trillion, private saving is $0.5 trillion, and public saving is $0.2 trillion. Assuming the economy is closed, complete the following table by calculating consumption, government purchases, national saving, and investment. Component Amount (Trillions of dollars) Consumption Government Purchases National Saving Investment 9. Exercise 4 Suppose the government borrows $20 billion more next year than this year. The following graph shows the market for loanable funds before the additional borrowing for next year. Use the orange line (square symbol) to graph the new supply of loanable funds as a result of this government policy to borrow $20 billion more next year than this year. As a result of this policy, the equilibrium interest rate (falls or rises) . Indicate whether each of the following economy components rises or falls as a result of this policy change. Then determine if the magnitude of this change is less than, more than, or equal to the $20 billion of extra government borrowing. Component Change Magnitude of Change Investment decreases or increases Private saving Public saving National saving exactly 20$ billion or less than 20$ billion or more than 20$ billion decreases or increases exactly 20$ billion or less than 20$ billion or more than 20$ billion decreases or increases exactly 20$ billion or less than 20$ billion or more than 20$ billion decreases or increases exactly 20$ billion or less than 20$ billion or more than 20$ billion A more elastic supply of loanable funds would result in the interest rate rising by more and, thus, national saving falling by less or more or less . A more elastic demand for loanable funds would result in the interest rate rising by more and, thus, national saving falling by less or more or less . Suppose households believe that greater government borrowing today implies higher taxes to pay off the government debt in the future. This belief causes people to save decreases private saving and magnify or reduce less or more today, which increases or increases or decreases the supply of loanable funds.