Chapter 21:
1. Why are firms less likely to issue new shares of stock when consumers or businesses are pessimistic
about economic conditions?
Answer: When economic conditions result in consumer and/or producer pessimism,
2. In the event of a corporate bankruptcy, would you rather be a bondholder, a preferred stock holder, or
a stockholder in the ailing corporation? Explain.
Answer: It would be better to be a bondholder in the event of corporate bankruptcy,
3. Why might government sometimes try to combat recessions by lowering interest rates?
Answer: Governments sometimes try to combat recessions by lowering interest rates because at
4. What would happen to the loanable funds demand curve if new potentially profitable technologies arise
and business taxes are raised at the same time?
Answer: The new technologies would tend to increase the loanable funds demand curve,
5. What would happen to the loanable funds supply curve if there was both an increase in current
disposable income and a decrease in new technologies creating investment opportunities?
Answer: An increase in current disposable income would increase the loanable funds
6. Starting from equilibrium in the loanable funds market, what changes in loanable funds supply or
demand would tend to cause a surplus of funds at the current interest rate? What changes in loanable
funds supply or demand would tend to cause a shortage of funds at the current interest rate?
Answer: Since surpluses of funds are caused when their price (the real interest rate) is
7. What happens to net taxes when transfer payments increase? When both taxes and transfer
payments increase?
Answer: Net taxes are taxes minus transfer payments. Therefore when transfer payments
8. Which direction will an increasing budget deficit change the equilibrium interest rate, the loanable
funds supply curve, the level of loanable funds in the economy, and the likely rate of economic growth,
other things equal?
Answer: An increasing budget deficit would decrease the loanable funds supply curve,
9. Why will a given government budget deficit have a smaller effect on investment in an open economy than
a closed economy?
Answer: As interest rates in the U.S. rise, funds from overseas will also be attracted by the higher
0
Quantity of Loanable Funds
a. What happens to the loanable funds supply and demand curves if business expectations and
disposable income both increase?
b. What happens to the loanable funds supply and demand curves if profitable new technologies are
invented and disposable income decreases?
c. What happens to the loanable funds supply and demand curves if taxes on investment increase and
taxes on savings decrease?
d. What happens to the loanable funds supply and demand curves if increasingly costly business
regulations are imposed, along with increased taxes on current earnings?
10.
crisis?
Answer: After the 2001 recession, the Fed pursued an expansionary monetary policy
11. If housing prices had continued to rise during the 2008 financial crisis, would we still have had the
same problem with subprime borrowers? Or would it have just been delayed?
Answer: As long as the housing bubble kept inflating, there would not have been the same
12. Why was home building such an important factor in this crisis?
Answer: During the housing bubble, housing construction took place at a rapid pace, anticipating
135. If the government had not encouraged a goal of homeownership with easy credit, would we have the
current housing market problem?
Answer: Without the easy credit the government used to encourage homeownership, one