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67. A larger budget deficit
a.
raises the interest rate and investment.
b.
reduces the interest rate and investment.
c.
raises the interest rate and reduces investment.
d.
reduces the interest rate and raises investment.
68. In 2009, the U.S. government’s budget deficit increased substantially. Other things the same, this means the
a.
supply of loanable funds shifted to the right.
b.
supply of loanable funds shifted to the left.
c.
demand for loanable funds shifted to the right.
d.
demand for loanable funds shifted to the left.
69. If Canada goes from a large budget deficit to a small budget deficit, it will
a.
increase private saving and so shift the supply of loanable funds right.
b.
increase investment and so shift the demand for loanable funds right.
c.
increase public saving and so shift the supply of loanable funds right.
d.
reduce national saving and shift the supply left.
70. An increase in the budget deficit would cause a
a.
shortage of loanable funds at the original interest rate, which would lead to falling interest rates.
b.
surplus of loanable funds at the original interest rate, which would lead to rising interest rates.
c.
shortage of loanable funds at the original interest rate, which would lead to rising interest rates.
d.
surplus of loanable funds at the original interest rate, which would lead to falling interest rates.
71. A decrease in the budget deficit
a.
makes investment spending fall.
b.
makes investment spending rise.
c.
does not affect investment spending.
d.
may increase, decrease, or not affect investment spending if private saving doesn’t change.
72. Suppose the government deficit increases, but the interest rate remains the same. Which of the following things might
have happened simultaneously to keep interest rates the same?
a.
The government reduces the amount that people may put into savings accounts on which the interest is tax
exempt.
b.
Because they are optimistic about the future of the economy, firms desire to borrow more to purchase physical
capital.
c.
Consumers decide to decrease consumption and work more.
d.
All of the above could explain why the interest rate would be unchanged.
73. Other things the same, if the government increases transfer payments to households, then the effect of this on the
government’s budget
a.
will make investment rise.
b.
will make the rate of interest rise.
c.
will make public saving rise.
d.
All of the above are correct.
74. Suppose government expenditures on goods and services increase, transfers are unchanged, and taxes rise by less than
the increase in expenditures. These changes in the government’s budget cause
a.
both the equilibrium interest rate and the equilibrium quantity of loanable funds to fall.
b.
both the equilibrium interest rate and the equilibrium quantity of loanable funds to rise.
c.
the equilibrium interest rate to rise and the equilibrium quantity of loanable funds to fall.
d.
the equilibrium interest rate to fall and the equilibrium quantity of loanable funds to rise.
75. Suppose government expenditures on goods and services and net taxes both decrease, and expenditures fall by more
than net taxes. The effects of these changes on the budget deficit cause
a.
both the equilibrium interest rate and the equilibrium quantity of loanable funds to fall.
b.
both the equilibrium interest rate and the equilibrium quantity of loanable funds to rise.
c.
the equilibrium interest rate to rise and the equilibrium quantity of loanable funds to fall.
d.
the equilibrium interest rate to fall and the equilibrium quantity of loanable funds to rise.
76. Bolivia had a smaller budget deficit in 2003 than in 2002. Other things the same, we would expect this reduction in the
budget deficit to have
a.
increased both interest rates and investment.
b.
increased interest rates and decreased investment.
c.
decreased interest rates and increased investment.
d.
decreased both interest rates and investment.
77. Suppose a country had a smaller increase in debt in 2011 than it had in 2010. Then other things the same, we would
expect
a.
lower interest rates and investment in 2011 than in 2010.
b.
lower interest rates and greater investment in 2011 than in 2010.
c.
higher interest rates and greater investment in 2011 than in 2010.
d.
higher interest rates and lower investment in 2011 than in 2010.
78. Suppose the government ran a budget surplus in 2010 and a larger surplus in 2011. The loanable funds model would
predict that, as a result of the increase in the surplus,
a.
both the government debt and interest rates increased between 2010 and 2011.
b.
both the government debt and interest rates decreased between 2010 and 2011.
c.
the government debt increased and interest rates decreased between 2010 and 2011.
d.
the government debt decreased and interest rates increased between 2010 and 2011.
79. Crowding out occurs when investment declines because
a.
a budget deficit makes interest rates rise.
b.
a budget deficit makes interest rates fall.
c.
a budget surplus makes interest rates rise.
d.
a budget surplus makes interest rates fall.
80. Crowding out occurs when
a.
investment declines because a budget deficit makes interest rates rise.
b.
investment declines because a budget deficit makes interest rates fall.
c.
investment increases because a budget surplus makes interest rates rise.
d.
investment increases because a budget surplus makes interest rates fall.
81. When the government runs a budget deficit,
a.
interest rates are lower than they would be if the budget were balanced.
b.
national saving is higher than it would be if the budget were balanced.
c.
investment is lower than it would be if the budget were balanced.
d.
All of the above are correct.
82. Suppose the Congress and president decreased the maximum annual contributions limits to retirement accounts and at
the same time reduced the budget deficit. What would happen to the interest rate?
a.
It would decrease.
b.
It would increase.
c.
It would stay the same.
d.
It might do any of the above.
83. Which of the following events could explain a decrease in interest rates together with an increase in investment?
a.
The government went from surplus to deficit.
b.
The government instituted an investment tax credit.
c.
The government reduced the tax rate on savings.
d.
None of the above is correct.
84. Which of the following events could explain an increase in interest rates together with a decrease in investment?
a.
The government budget went from surplus to deficit.
b.
The government instituted an investment tax credit.
c.
The government reduced the tax rate on savings.
d.
None of the above is correct.
85. Which of the following events could explain an increase in interest rates together with an increase in investment?
a.
The government runs a larger deficit.
b.
The government institutes an investment tax credit.
c.
The government replaces the income tax with a consumption tax.
d.
None of the above is correct.
86. Interest rates fall and investment falls. Which of the following could explain these changes?
a.
The government goes from a surplus to a deficit.
b.
The government repeals an investment tax credit.
c.
The government replaces a consumption tax with an income tax.
d.
None of the above is correct.
87. The supply of loanable funds would shift to the right if either
a.
tax reforms encouraged greater saving or the budget deficit became smaller.
b.
tax reforms encouraged greater saving or investment tax credits were increased.
c.
the budget deficit became larger or investment tax credits were increased.
d.
the budget deficit became larger or tax reforms discouraged saving.
88. A change in the tax laws that increases the supply of loanable funds will have a smaller effect on investment when
a.
the demand for loanable funds is more elastic and the supply of loanable funds is more inelastic.
b.
the demand for loanable funds is more inelastic and the supply of loanable funds is more elastic.
c.
both the demand for and supply of loanable funds are more elastic.
d.
both the demand for and supply of loanable funds are more inelastic.
89. A government budget deficit affects the supply of loanable funds, rather than the demand for loanable funds, because
a.
in our model of the loanable funds market, we define “loanable funds” as the flow of resources available to
fund private investment.
b.
in our model of the loanable funds market, we define “loanable funds” as the flow of resources available from
private saving.
c.
markets for government debt are fundamentally different from markets for private debt.
d.
of our assumption that the economy is closed.
90. If we were to change the interpretation of the term “loanable funds” in such a way that government budget deficits
would affect the demand for loanable funds, rather than the supply of loanable funds, then
a.
crowding out would not be a consequence of an increase in the budget deficit.
b.
higher interest rates would not be a consequence of an increase in the budget deficit.
c.
an increase in the budget deficit would cause the demand for loanable funds to decrease.
d.
we would be making only a semantic change in how we analyze the effects of government budget deficits.
91. Which of the following statements is not correct?
a.
If GDP is rising faster than debt, the government is, in some sense, living within its means.
b.
The ratio of debt to GDP in the United States has always been less than one.
c.
Debts during wars may distribute the burden of fighting the war more evenly across generations.
d.
During times of peace in the United States, the ratio of debt to GDP sometimes rose.
92. The ratio of debt to GDP in the United States
a.
tends to rise during wars.
b.
rose during the decade that began in 2001.
c.
fell during the late 1990s.
d.
All of the above are correct.
93. The source of the supply of loanable funds is
a.
saving, and the source of the demand for loanable funds is investment.
b.
consumption, and the source of the demand for loanable funds is investment.
c.
investment, and the source of the demand for loanable funds is saving.
d.
the interest rate, and the source of the demand for loanable funds is saving.
94. In the market for loanable funds, the interaction of the demand for, and supply of, loanable funds determines the
equilibrium level of
a.
the inflation rate.
b.
gross domestic product.
c.
the real interest rate.
d.
the nominal interest rate.
95. 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.
96. According to the loanable funds model, which of the following events would result in higher interest rates and greater
saving?
a.
Firms become pessimistic about the future and, as a result, they cut back on their plans to buy new equipment
and build new factories.
b.
The government goes from running a budget deficit to running a budget surplus.
c.
Congress passes a reform of the tax laws that encourages greater saving.
d.
Congress passes a reform of the tax laws that encourages greater investment.
97. Which of the following counts as part of the supply of loanable funds?
a.
bank deposits and purchases of bonds
b.
bank deposits but not purchases of bonds
c.
purchases of bonds but not bank deposits
d.
neither purchases of bonds nor bank deposits
98. Which of the following is included in the demand for loanable funds?
a.
investment and government borrowing
b.
investment but not government borrowing
c.
government borrowing but not investment
d.
neither government borrowing nor investment
99. Which of the following is correct?
a.
In a closed economy, equilibrium in the market for loanable funds occurs where saving = investment.
b.
Investment is the source for the supply of loanable funds.
c.
If there is a surplus in the market for loanable funds, the interest rate rises.
d.
All of the above are correct
100. A policy that induces people to save more shifts
a.
the supply of loanable funds and raises interest rates.
b.
the supply of loanable funds and reduces interest rates.
c.
the demand for loanable funds and raises interest rates.
d.
the demand for loanable funds and reduces interest rates.
101. A policy that induces people to save more shifts
a.
the supply of loanable funds rightward and increases investment.
b.
the supply of loanable funds leftward and decreases investment.
c.
the supply of loanable funds rightward and decreases investment.
d.
the supply of loanable funds leftward and increases investment.
102. If the government instituted an investment tax credit, then which of the following would be higher in equilibrium?
a.
saving and the interest rate
b.
saving but not the interest rate
c.
the interest rate but not saving
d.
neither saving nor the interest rate
103. If the budget deficit increases then
a.
saving and the interest rate rise.
b.
saving rises and the interest rate falls.
c.
saving falls and the interest rate rises.
d.
saving and the interest rate fall.
104. Which of the following are effects of an increased budget deficit?
a.
the supply of loanable funds does not change; a higher interest rate reduces private saving
b.
the supply of loanable funds does not change; a higher interest rate raises private saving
c.
at any interest rate the supply of loanable funds is less; a higher interest rate reduces private saving
d.
at any interest rate the supply of loanable funds is less; a higher interest rate raises private saving
Figure 26-1. The figure depicts a demand-for-loanable-funds curve and two supply-of-loanable-funds curves.
105. Refer to Figure 26-1. What is measured along the vertical axis of the graph?
a.
the nominal interest rate
b.
the real interest rate
c.
the quantity of investment
d.
the quantity of saving
106. Refer to Figure 26-1. Which of the following events would shift the supply curve from S1 to S2?
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.
Figure 26-2. The figure depicts a supply-of-loanable-funds curve and two demand-for-loanable-funds curves.
r
Q
107. Refer to Figure 26-2. What is measured along the horizontal axis of the graph?
a.
the quantity of loanable funds
b.
the size of the government budget deficit or surplus
c.
the real interest rate
d.
the nominal interest rate
108. Refer to Figure 26-2. Which of the following events would shift the demand curve from D1 to D2?
a.
The government goes from running a budget deficit to running a budget surplus.
b.
Firms become optimistic about the future and, as a result, they plan to increase their purchases of new
equipment and construction of new factories.
c.
A change in the tax laws encourages people to consume less and save more.
d.
A change in the tax laws encourages people to consume more and save less.
Figure 26-3. The figure shows two demand-for-loanable-funds curves and two supply-of-loanable-funds curves.
109. Refer to Figure 26-3. What, specifically, does the label on the vertical axis, i, represent?
a.
the nominal interest rate
b.
the real interest rate
c.
the inflation rate
d.
the dividend yield
110. Refer to Figure 26-3. A shift of the supply curve from S1 to S2 is called
a.
an increase in the supply of loanable funds.
b.
an increase in the quantity of loanable funds supplied.
c.
a decrease in the supply of loanable funds.
d.
a decrease in the quantity of loanable funds supplied.
111. Refer to Figure 26-3. A shift of the demand curve from D1 to D2 is called
a.
an increase in the demand for loanable funds, and that increase would originate from people who had some
extra income they wanted to lend.
b.
an increase in the demand for loanable funds, and that increase would originate from households and firms
who wish to borrow to make investments.
c.
a decrease in the demand for loanable funds, and that decrease would originate from people who had some
extra income they wanted to lend.
d.
a decrease in the demand for loanable funds, and that decrease would originate from households and firms
who wish to borrow to make investments.
112. Refer to Figure 26-3. Which of the following movements shows the effects of the government going from a budget
surplus to a budget deficit?
a.
a movement from Point A to Point B
b.
a movement from Point B to Point A
c.
a movement from Point A to Point F
d.
a movement from Point B to Point C
113. Refer to Figure 26-3. Which of the following movements shows the effects of households’ decision to save more?
a.
a movement from Point A to Point B
b.
a movement from Point F to Point A
c.
a movement from Point C to Point F
d.
a movement from Point B to Point C
114. Refer to Figure 26-3. Which of the following movements would be consistent with the government budget going
from deficit to surplus and the simultaneous enactment of an investment tax credit?
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
Figure 26-4. On the horizontal axis of the graph, L represents the quantity of loanable funds in billions of dollars.
115. Refer to Figure 26-4. Which of the following events could explain a shift of the demand-for-loanable-funds curve
from to ?
a.
The tax code is reformed to encourage greater saving.
b.
The tax code is reformed to encourage greater investment.
c.
The government starts running a budget deficit.
d.
The government starts running a budget surplus.
116. Refer to Figure 26-4. The position and/or slope of the Supply curve are influenced by
a.
the level of public saving.
b.
the level of national saving.
c.
decisions made by people who have extra income they want to save and lend out.
d.
All of the above are correct.
117. Refer to Figure 26-4. Regard the position of the Supply curve as fixed, as on the graph. If the real interest rate is 8
percent, the inflation rate is 3 percent, and the market for loanable funds is in equilibrium, then the position of the
demand-for-loanable-funds curve must be
a.
.
b.
.
c.
between and .
d.
to the right of .
118. Refer to Figure 26-4. Regard the position of the Supply curve as fixed, as on the graph. If the real interest rate is 4
percent, the inflation rate is 2 percent, and the market for loanable funds is in equilibrium, then the position of the
demand-for-loanable-funds curve must be
a.
.
b.
.
c.
between and .
d.
to the left of .
119. Refer to Figure 26-4. If the equilibrium quantity of loanable funds is $56 billion and if the rate of inflation is 4
percent, then the equilibrium real interest rate is
a.
lower than 6 percent.
b.
6 percent.
c.
between 6 percent and 8 percent.
d.
higher than 8 percent.
120. Refer to Figure 26-4. If the equilibrium quantity of loanable funds is $50 billion and if the equilibrium nominal
interest rate is 8 percent, then
a.
there is an excess supply of loanable funds at a real interest rate of 6 percent.
b.
there is an excess demand for loanable funds at a real interest rate of 8 percent.
c.
the rate of inflation is approximately 2 percent.
d.
the rate of inflation is approximately 14 percent.
121. Refer to Figure 26-4. If the equilibrium quantity of loanable funds is $56 billion and if the rate of inflation is 5
percent, then the equilibrium nominal interest rate is
a.
11 percent.
b.
approximately 6 percent.
c.
between 6 percent and 8 percent.
d.
between 11 percent and 13 percent.
122. For an imaginary economy, when the real interest rate is 7 percent, the quantity of loanable funds demanded is $500
and the quantity of loanable funds supplied is $500. Currently, the nominal interest rate is 9 percent and the inflation rate
is 4 percent. Currently,
a.
the market for loanable funds is in equilibrium.
b.
the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded, and as a result the
real interest rate will rise.
c.
the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded, and as a result the
real interest rate will fall.
d.
the quantity of loanable funds demanded exceeds the quantity of loanable funds supplied, and as a result the
real interest rate will rise.
123. For an imaginary economy, when the real interest rate is 5 percent, the quantity of loanable funds demanded is
$1,000 and the quantity of loanable funds supplied is $1,000. Currently, the nominal interest rate is 9 percent and the
inflation rate is 2 percent. Currently,
a.
the market for loanable funds is in equilibrium.
b.
the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded, and as a result the
real interest rate will rise.
c.
the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded, and as a result the
real interest rate will fall.
d.
the quantity of loanable funds demanded exceeds the quantity of loanable funds supplied, and as a result the
real interest rate will rise.
124. For an imaginary economy, when the real interest rate is 5 percent, the quantity of loanable funds demanded is
$100,000 and the quantity of loanable funds supplied is $100,000. Currently, the nominal interest rate is 6 percent and the
inflation rate is 2 percent. Currently,
a.
the market for loanable funds is in equilibrium.
b.
the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded, and as a result the
real interest rate will rise.
c.
the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded, and as a result the
real interest rate will fall.
d.
the quantity of loanable funds demanded exceeds the quantity of loanable funds supplied, and as a result the
real interest rate will rise.
125. When the government goes from running a balanced budget to running a budget surplus,
a.
national saving decreases, the interest rate rises, and the economy’s long-run growth rate is likely to decrease.
b.
national saving increases, the interest rate falls, and the economy’s long-run growth rate is likely to decrease.
c.
national saving decreases, the interest rate rises, and the economy’s long-run growth rate is likely to increase.
