SECTION I.
MULTIPLE CHOICE QUESTIONS
Question 1 The figure shows two demand-for-loanable-funds curves and two supply-of-loanable-funds
curves.
a. A movement from Point A to Point C
b. A movement from Point B to Point A
c. A movement from Point B to Point F
d. A movement from Point C to Point B
Question 2 Which of the following statements about the term of a bond is correct?
a. Term refers to the various characteristics of a bond, including its interest rate and tax treatment.
b. The term of a bond is determined entirely by its credit risk.
c. The term of a bond is determined entirely by how much sales commission the buyer of the bond pays when
he or she purchases the bond.
d. Interest rates on long-term bonds are usually higher than interest rates on short-term bonds.
Question 3 Which of the following could explain an increase in the equilibrium interest rate and a
decrease in the equilibrium quantity of loanable funds?
a. The demand for loanable funds shifted right.
b. The demand for loanable funds shifted left.
c. The supply of loanable funds shifted right.
d. The supply of loanable funds shifted left.
Question 4 Which of the following bonds has the highest interest rate?
a. A high credit risk and a short term
b. A low credit risk and a short term
c. A long term and a high credit risk
d. A long term and a low credit risk
Question 5 Institutions that help to match one person's saving with another person's investment are
collectively called the
a. Federal Reserve system.
b. banking system.
c. monetary system.
d. financial system.
Question 6 When the government's budget deficit increases the government is borrowing
a. less and public savings falls.
b. less and public savings increases.
c. more and public savings falls.
d. more and public savings increases.
Question 7 The country of Cedarland does not trade with any other country. Its GDP is $17 billion. Its
government purchases $5 billion worth of goods and services each year and collects $6 billion in taxes. Private
saving in Cedarland is $5 billion. For Cedarland, investment is
a. $6 billion and consumption is $7 billion.
b. $6 billion and consumption is $6 billion.
c. $7 billion and consumption is $7 billion.
d. $7 billion and consumption is $6 billion.
Question 8 The following table presents information about a closed economy whose market for loanable
funds is in equilibrium. The quantity of loanable funds demanded is
GDP $8.7 trillion
Consumer Spending $6.1 trillion
Taxes Minus Transfers $1.0 trillion
Government Purchases $0.8 trillion
a. $1.8 trillion.
b. $1.6 trillion.
c. $1.4 trillion.
d. $0.8 trillion.
Question 9 Refer to the above Table. The quantity of private savings is
a. $0.2 trillion.
b. $1.6 trillion.
c. $1.8 trillion.
d. $2.6 trillion.
Question 10 Suppose the government changed the tax laws, with the result that people were encouraged
to consume more and save less. Using the loanable funds model, a consequence would be
a. lower interest rates and lower investment.
b. lower interest rates and greater investment.
c. higher interest rates and lower investment.
d. higher interest rates and higher investment.
Question 11 In which of the following cases would it necessarily be true that national saving and private
saving are equal for a closed economy?
a. Private saving is equal to government expenditures.
b. Public saving is equal to investment.
c. After paying their taxes and paying for their consumption, households have nothing left.
d. The government’s tax revenue is equal to its expenditures.
Question 12 Other things the same, an increase in the interest rate
a. would shift the demand for loanable funds to the right.
b. would shift the demand for loanable funds to the left.
c. would increase the quantity of loanable funds demanded.
d. would decrease the quantity of loanable funds demanded.
Question 13 If the demand for loanable funds shifts to the right, then the equilibrium interest rate
a. and quantity of loanable funds rise.
b. and quantity of loanable funds fall.
c. rises and the quantity of loanable funds falls.
d. falls and the quantity of loanable funds rises.
Question 14 Crowding out occurs when investment declines because a budget
a. deficit makes interest rates rise.
b. deficit makes interest rates fall.
c. surplus makes interest rates rise.
d. surplus makes interest rates fall.
Question 15 The figure depicts a demand-for-loanable-funds curve and two supply-of-loanable-funds
curves. Which of the following events would shift the supply curve from S1 to S2?
S1 S2
Demand
a. In response to tax reform, firms are encouraged to invest more than they previously invested.
b. In response to tax reform, households are encouraged to save more than they previously saved.
c. Government goes from running a balanced budget to running a budget deficit.
d. Any of the above events would shift the supply curve from S1 to S2.
Question 16 The length of time until a bond matures is called the
a. perpetuity.
b. term.
c. maturity.
d. intermediation.
Question 17 If national saving in a closed economy is greater than zero, which of the following must be
true?
a. Either public saving or private saving must be greater than zero.
b. Investment is positive.
c. Y-C-G>0
d. All of the above are correct.
Question 18 Suppose that in a closed economy GDP is equal to 11,000, taxes are equal to 2,500,
consumption equals 7,000, and government purchases equal 3,000. What are private saving and public
saving?
a. 1,500 and -500, respectively
b. 1,500 and 500, respectively
c. 1,000 and -500, respectively
d. 1,000 and 500, respectively
Question 19 Consider three different closed economies with the following national income statistics.
Country A has taxes of $40 billion, transfers of $20 billion, and government expenditures on goods and
services of $30 billion. County B has private savings of $60 billion, and investment expenditures of $50 billion.
Country C has GDP of $300 billion, investment of $70, consumption of $180 billion, taxes of $60 billion and
transfers of $20 billion. From this information we know that there is a $10 billion government budget deficit
for
a. only country A.
b. only country B.
c. conly country C.
d. all three countries.
Question 20 The economy’s two most important financial markets are
a. the investment market and the saving market.
b. the bond market and the stock market.
c. banks and the stock market.
d. financial markets and financial institutions.
SECTION II. SHORT-ANSWER QUESTIONS
Question 1 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.
Question 2 Identify each of the following acts as representing either saving or investment.
a. Fred uses some of his income to buy government bonds.
b. Julie takes some of her income and buys mutual funds.
c. Alex purchases a new truck for his delivery business using borrowed funds.
d. Elaine uses some of her income to buy stock in a major corporation.
e. Henrietta hires a builder to construct a new building for her bicycle shop.
Question 3 Economists in Funlandia, a closed economy, have collected the following information about
the economy for a particular year:
Y = 10,000 C = 6,000 T = 1,500 G = 1,700
The economists also estimate that the investment function is: I = 3,300 – 100 r,
Where r is the country’s real interest rate, expressed as a percentage. Calculate private saving, public saving,
national saving, investment, and the equilibrium real interest rate.
Question 4 Suppose the government borrows $20 billion more next year than this year.
a. Use a supply-and-demand diagram to analyze this policy. Does the interest rate rise or fall?
b. What happens to investment? To private saving? To public saving? To national saving? Compare the size
of the changes to the $20 billion of extra government borrowing.
c. How does the elasticity of supply of loanable funds affect the size of these changes?
d. How does the elasticity of demand for loanable funds affect the size of these changes?
e. Suppose households believe that greater government borrowing today implies higher taxes to pay off the
government debt in the future. What does this belief do to private saving and the supply of loanable funds
today? Does it increase or decrease the effects you discussed in parts (a) and (b)?
Question 5 Suppose GDP is $8 trillion, taxes are $1.5 trillion, private saving is $0.5 trillion, and public
saving is $0.2 trillion. Assuming this economy is closed, calculate consumption, government purchases,
national saving, and investment.