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Saving, Investment, and the Financial System 6439
48.
Suppose the government were to replace the income tax with a consumption tax so that interest
on savings was not
taxed. The result would be that the interest rate
a.
and investment both would increase.
b.
and investment both would decrease.
c.
would increase and investment would decrease.
d.
would decrease and investment would increase.
49.
Which of the following would not be a result of replacing the income tax with a consumption tax
so that interest
income was no longer taxed?
a.
The interest rate would decrease.
b.
Investment would decrease.
c.
The standard of living would eventually rise.
d.
The supply of loanable funds would shift right.
50.
If in the past Congress had taken additional actions to make saving more rewarding, then today it
is likely that the
equilibrium interest rate
a.
and the equilibrium quantity of loanable funds both would be lower.
b.
and the equilibrium quantity of loanable funds both would be higher.
c.
would be higher and the equilibrium quantity of loanable funds would be lower.
d.
would be lower and the equilibrium quantity of loanable funds would be higher.
51.
Suppose a country has a consumption tax that is similar to a state sales tax. If its government
were to eliminate the
consumption tax and replace it with an income tax that includes an income
tax on interest from savings, what would
happen?
a.
There would be no change in the interest rate or saving.
b.
The interest rate would decrease and saving would increase.
c.
The interest rate would increase and saving would decrease.
d.
None of the above is correct.
52.
Suppose a country has only a sales tax. Now suppose it replaces the sales tax with an income tax
that includes a
tax on interest income. This would make equilibrium
a.
interest rates and the equilibrium quantity of loanable funds rise.
b.
interest rates rise and the equilibrium quantity of loanable funds fall.
c.
interest rates fall and the equilibrium quantity of loanable funds rise.
d.
interest rates and the equilibrium quantity of loanable funds fall.
53.
Suppose a government that taxed all interest income changed its tax law so that the first $5,000
of a taxpayer’s interest income was tax free. This would shift the
a.
supply of loanable funds to the right, causing interest rates to fall.
b.
supply of loanable funds to the left, causing interest rates to rise.
c.
demand for loanable funds to the right, causing interest rates to rise.
d.
demand for loanable funds to the left, causing interest rates to fall.
54.
Which of the following is not correct?
a.
American families save a larger fraction of their incomes than their counterparts in many other
countries
such as Germany and Japan.
b.
Saving is an important long-run determinant of a nation's standard of living.
c.
A change in tax laws that encouraged greater saving would lower interest rates.
d.
Taxes on interest income can substantially decrease the future value of current saving.
55.
If Congress instituted an investment tax credit, the interest rate would
a.
rise and saving would rise.
b.
fall and saving would fall.
c.
rise and saving would fall.
d.
fall and saving would rise.
56.
If Congress instituted an investment tax credit, the equilibrium quantity of loanable funds would
a.
rise.
b.
fall.
c.
be unchanged.
d.
move in an uncertain direction.
57.
Suppose the U.S. offered a tax credit for firms that built new factories in the U.S. Then
a.
the demand for loanable funds would shift rightward, initially creating a surplus of loanable
funds at the
original interest rate.
b.
the demand for loanable funds would shift rightward, initially creating a shortage of loanable
funds at the
original interest rate.
c.
the supply of loanable funds would shift rightward, initially creating a surplus of loanable funds
at the original
interest rate.
d.
the supply of loanable funds would shift rightward, initially creating a shortage of loanable funds
at the
original interest rate.
58.
Suppose that Congress were to institute an investment tax credit. What would happen in the
market for loanable
funds?
a.
The demand for loanable funds would shift left.
b.
The supply of loanable funds would shift left.
c.
The demand for loanable funds would shift right.
d.
The supply of loanable funds would shift right.
59.
Suppose that Congress were to repeal an investment tax credit. What would happen in the
market for loanable
funds?
a.
The demand and supply of loanable funds would shift right.
b.
The demand and supply of loanable funds would shift left.
c.
The supply of loanable funds would shift right.
d.
The demand for loanable funds would shift left.
60.
Suppose a country repealed its investment tax credit. The effects of this are represented by
shifting the
a.
demand for and the supply of loanable funds to the right.
b.
demand for and the supply of loanable funds to the left.
c.
supply of loanable funds to the right and the demand for loanable funds to the left.
d.
None of the above is correct.
61.
Suppose Congress institutes an investment tax credit. What would happen in the market for
loanable funds?
a.
The interest rate and investment would fall.
b.
The interest rate and investment would rise.
c.
The interest rate would rise and investment would fall.
d.
None of the above is necessarily correct.
62.
In the loanable funds model, an increase in an investment tax credit would create a
a.
shortage at the former equilibrium interest rate. This shortage would lead to a rise in the
interest rate.
b.
shortage at the former equilibrium interest rate. This shortage would lead to a fall in the interest
rate.
c.
surplus at the former equilibrium interest rate. This surplus would lead to a rise in the interest
rate.
d.
surplus at the former equilibrium interest rate. This surplus would lead to a fall in the interest
rate.
63.
If the government currently has a budget deficit, then
a.
it does not necessarily have a debt.
b.
its debt is increasing.
c.
government expenditures are greater than taxes.
d.
All of the above are correct.
64.
A budget deficit
a.
changes the supply of loanable funds.
b.
changes the demand for loanable funds.
c.
changes both the supply of and demand for loanable funds.
d.
does not influence the supply of or the demand for loanable funds.
65.
Other things the same, a government budget deficit
a.
reduces public saving, but not national saving.
b.
reduces national saving, but not public saving.
c.
reduces both public and national saving.
d.
reduces neither public saving nor national saving.
66.
A larger budget surplus
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.
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.
