Question 1

In a closed economy, which equation correctly represents the savings-investment identity?

Accepted Answer

$$S = I$$

Question 2

Which of the following best describes the role of financial intermediaries in the financial system?

Accepted Answer

They match savers and borrowers indirectly, often through institutions like banks and mutual funds.

Question 3

Suppose a government runs a budget deficit. How does this affect public saving?

Accepted Answer

Public saving becomes negative, indicating dissaving.

Question 4

A firm considers borrowing $$600,000 at an 8% real interest rate to invest in a project that will return 650$$,000 in one year. Should the firm undertake the investment?

Accepted Answer

No, because the rate of return is less than the interest rate.

Question 5

Which of the following is considered physical capital in the context of investment spending?

Accepted Answer

A factory building used for manufacturing goods.

Question 6

If the real interest rate in the loanable funds market increases, what is the most likely effect on the quantity of loanable funds supplied?

Accepted Answer

It increases, as more people are willing to save.

Question 7

Which of the following would cause the demand curve for loanable funds to shift to the right?

Accepted Answer

An increase in expected future profits from investment projects.

Question 8

In the market for loanable funds, what is the 'price' that equilibrates the market?

Accepted Answer

The real interest rate ($$r)$$

Question 9

Which of the following is NOT a service provided by the financial system?

Accepted Answer

Production of physical capital

Question 10

If the government increases its borrowing, what happens to the supply curve for loanable funds?

Accepted Answer

It shifts to the left.

Question 11

Household savings in a closed economy can be expressed as:

Accepted Answer

$$S_{private} = Y + TR - C - T$$

Question 12

Which of the following scenarios would most likely increase precautionary household savings?

Accepted Answer

Households become uncertain about future employment.

Question 13

What is the effect of a decrease in corporate taxes on the demand for loanable funds?

Accepted Answer

It increases demand, as firms keep more of their returns.

Question 14

Which of the following best explains why the supply curve for loanable funds is upward sloping?

Accepted Answer

Higher interest rates incentivize more people to save.

Question 15

A country is described as a closed economy. Which of the following is true?

Accepted Answer

It does not engage in international trade or financial flows.

Question 16

If a firm expects a rate of return of 10% on a new investment and the real interest rate is 6%, what should the firm do?

Accepted Answer

Borrow and invest, since the expected return exceeds the cost of borrowing.

Question 17

Which of the following is an example of indirect finance?

Accepted Answer

Depositing money in a bank, which then lends to businesses.

Question 18

In the circular-flow diagram for a closed economy, which sector provides public saving?

Accepted Answer

Government

Question 19

Which of the following would shift the supply curve for loanable funds to the right?

Accepted Answer

Introduction of tax-advantaged retirement savings plans.

Question 20

If the equilibrium real interest rate in the loanable funds market is 6%, which investment projects get funded?

Accepted Answer

Only those with expected returns of 6% or higher.

macro chapter 10

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