Chapter 10 - Savings, Investment Spending, and the Financial System

There are two aspects of efficiency that the equilibrium of market for loanable funds exhibits.
Select the TWO statements that characterize these two aspects of efficiency.

Savers who lend money are willing to accept a higher minimum interest rate than potential savers who do not lend money.

All potential savers lend money.

Investment projects that are financed by savers have larger rates of return than projects that do not receive financing.

Savers who lend money are willing to accept a lower minimum interest rate than potential savers who do not lend money.

There is always a small surplus of funds in the market.

Investment projects that are financed have smaller rates of return than projects not receiving financing.
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There are two aspects of efficiency that the equilibrium of market for loanable funds exhibits.
Select the TWO statements that characterize these two aspects of efficiency.

Savers who lend money are willing to accept a higher minimum interest rate than potential savers who do not lend money.

All potential savers lend money.

Investment projects that are financed by savers have larger rates of return than projects that do not receive financing.

Savers who lend money are willing to accept a lower minimum interest rate than potential savers who do not lend money.

There is always a small surplus of funds in the market.

Investment projects that are financed have smaller rates of return than projects not receiving financing.
Investment projects that are financed by savers have larger rates of return than projects that do not receive financing.

Savers who lend money are willing to accept a lower minimum interest rate than potential savers who do not lend money.
Match the proper term for each definition. (stock, bank deposit, loan, bond)

A promise to pay issued by a borrower with annual interest payments and a principal payment at maturity.

a share of ownership in a company

funds that are kept in a bank that must be relinquished upon the owner's request

an agreement between a lender and a borrower
Bond

stock

bank deposit

loan
Determine which type of financial asset is described in each scenario. (stock, bank deposit, loan, bond)

Caleb has developed a prototype garlic-peeling device that he hopes to sell to the public. He is having his startup issue securities that offer buyers the promise to pay a specified amount of interest each year plus the principal in five years.
Caleb is selling bonds.
Determine which type of financial asset is described in each scenario.
(stock, bank deposit, loan, bond)

Audrey wants to buy a new car but does not have enough cash. She gets funding from her local bank with the promise that she will make monthly payments for the next three years to repay the original amount lent to her plus 6% interest.
Audrey is taking out a loan
Determine which type of financial asset is described in each scenario.
(stock, bank deposit, loan, bond)

Lyle and Shane start a business selling pencil sharpeners to elementary schools. Their company becomes an instant success, and they decide to allow people to start buying small shares of their company. This gives individuals who buy shares the right to vote in company decisions and a small percentage of the profits.
Lyle and Shane are selling stock.
Determine which type of financial asset is described in each scenario.
(stock, bank deposit, loan, bond)

Rand Capital, a financial industry conglomerate, pools together several hundred home mortgages and sells shares in them to groups of investors. However, many investors decide against this option because of the risk involved and the difficulty of assessing the quality of such a large number of individual mortgages.
Rand Capital is floating a loan backed security
Determine which type of financial asset is described in each scenario.
(stock, bank deposit, loan, bond)

Jack decides to build a chateau in the mountains of Colorado and operate it as a ski resort. He secures funding from a local commercial bank after discussing his business plan with the bank. He promises to pay back the principal plus interest over the next 20 years.
Jack is taking out a loan
What effect will an increase in interest rates have on the quantity of loanable funds supplied?

Some lenders will offer more whereas others offer less.

Quantity supplied will decrease.

Quantity supplied will increase.

There will be no change in quantity supplied.
Quantity supplied will increase.
As interest rate decreases, what happens to the quantity of loanable funds demanded?

Quantity demanded will increase.

Quantity demanded will decrease.

Some borrowers will demand more funds whereas others will demand less.

There will be no change in quantity demanded.
Quantity demanded will increase.
Which of the terms acts as the "price" in the market for loanable funds?

demand

capital

supply

interest rate
interest rate
If the projected rate of return for a project is less than the interest rate for a loan that is necessary to complete the project, how will the borrowing business act? The business will demand more funds to cover the shortfall. The business will take out the loan. The business will not take out the loan. The business will proceed anyway, knowing that the return is only an estimate.The business will not take out the loan.Which of the following best defines a financial intermediary? a financial institution that transforms investor funds into financial assets an asset sold by a company which entitles the buyer to partial ownership a claim by a buyer to a future payment by a seller a collection of stocks and bonds issued to investorsa financial institution that transforms investor funds into financial assetsIn a small, closed economy, national income (GDP) is $400.00 million for the current quarter. Individuals have spent $150.00 million on the consumption of goods and services. They have paid a total of $200.00 million in taxes, and the government has spent $150.00 million on goods and services this quarter. Use this information and the national income identity to answer the questions. How much is spent on investment in this economy?investment: $100 millionIn a small, closed economy, national income (GDP) is $400.00 million for the current quarter. Individuals have spent $150.00 million on the consumption of goods and services. They have paid a total of $200.00 million in taxes, and the government has spent $150.00 million on goods and services this quarter. Use this information and the national income identity to answer the questions. What is national saving in this economy?saving: $100 millionHow are investment and national saving related in an economy like this? National saving equals investment. National saving is always less than investment. They are unrelated. Investment is a component of national saving.National saving equals investment.Determine whether the statements listed regarding the savings-investment spending identity are true or false. a. The budget balance can be either positive or negative. b. National budget deficits are NOT included in the calculation of national savings. c. The national savings are the combined value of all private savings and the budget balance. d. Outflows of funds can only be generated by countries with a larger gross domestic product (GDP) per capita than the country receiving the funds.a. true b. false c. true d. falseWhy do funding from national savings and funding obtained from capital inflows differ? Because national savings are repaid domestically, whereas capital inflows are repaid to a foreigner. funds from national savings must be repaid, whereas capital inflows do not have to be repaid. national saving funds can be used for a wider variety of investments than capital inflows. capital inflows come from domestic individuals, whereas national savings come from government sources.national savings are repaid domestically, whereas capital inflows are repaid to a foreigner.Indicate whether each the following statements are true or false. a. An increase in government spending can crowd out private investment. b. An improvement in the budget balance increases the demand for financial capital. c. An increase in private consumption may crowd out private investment.a. True b. False c. TrueIndicate whether each the following statements are true or false. d. Lower interest rates can lead to private investment being crowded out. e. A trade balance in surplus increases the supply of financial capital. f. If private savings is equal to private investment, then there is neither a budget surplus nor a budget deficit.d. false e. false f. falsePlease decide whether each of the scenarios related to the loanable funds market will result in a shift in supply or a shift in demand. a. China decides to reduce its capital investment in the United States, as it expects low returns due to a weak U.S. economy. b. Calopolis, a college town in Northern California, has for many years banned the presence of fast food restaurants in city limits. As of 2012, however, the city will allow several fast food companies to open franchised locations.a. shift in supply b. shift in demandPlease decide whether each of the scenarios related to the loanable funds market will result in a shift in supply or a shift in demand. c. Due to an increase in revenues after a tax hike, the United States is able to eliminate the deficit and begins to maintain a balanced budget for the first time in several decades. d. As a result of a stock market boom, individuals begin to feel richer and spend more while also saving less.c. shift in demand d. shift in supplyWhich graph best demonstrates the Fisher effect?CROSSED ABOVE EACH OTHER NOT TOUCHINGWhich of these statements best summarizes the impact of the Fisher effect? Interest rates are unpredictable. Inflation is ignored by borrowers. The interest rate remains stable. Consumers consider future inflation.Consumers consider future inflation.Please select the correct term for each definition. (options include: national savings, budget balance, budget deficit, budget surplus, capital inflow) a. the difference between the amount the government collects and how much it spends b. when the preceding term is combined with all of the privately‑held savings from across the country c. the result when the government spends more money than it takes in through taxes d. the net amount of funds coming into a country e. when the government spends less money than it takes in through taxesa. budget balance b. national savings c. budget deficit d. capital inflow e. budget surplusSelect the statement that describes the fundamental relationship between savings and investment spending. Savings will increase as investment spending decreases. Investment spending promises higher financial returns than savings. Savings will decrease as investment spending increases. Investment spending and savings are always equal.Investment spending and savings are always equal.