Exam 8: Saving, Investment, and the Financial System

When the federal government is in debt, it follows that it has a deficit.

In a closed economy, the fact that total income equals total expenditure is reflected by the GDP identity Y = C + I + G. a. Starting from the GDP identity, show that national saving (S) must be equal to investment. Show that an increase in government spending reduces national saving. b. Rewrite the GDP identity by introducing taxes (T). In this new form of the GDP relationship, identify private saving and public saving. Show that an increase in taxes has no effect on national saving. c. Is the equation S = I true for an open economy Could you explain why or why not

What would most likely happen in the market for loanable funds if the government were to increase the tax on interest income?

Corporate bonds generally have higher interest rates than federal government bonds.

Which statement best characterizes the lending strategy of banks?

In a closed economy, what does (T - G) represent?

Suppose the Canadian government allowed taxpayers to earn their first $5000 interest free of income tax. How would this shift the supply of, or demand for, loanable funds?

Suppose that in a closed economy GDP is equal to 15,000, taxes are equal to 2500, consumption is equal to 7500, and government expenditures are equal to 3100. What is public saving?

What does a low P/E for a stock indicate?

What are junk bonds?

Which equation most simply represents GDP in a closed economy?

In the language of macroeconomics, what is considered "investment"?

What would most likely happen in the market for loanable funds if the government were to decrease the tax on interest income?

When the government runs a budget deficit, what is most likely to happen?

What is the source of the supply of and demand for loanable funds, respectively?

What would an increase in the budget deficit most likely cause?

The following table shows information about bonds issued by governments and companies in Canada, sorted by increasing maturity. (Source: Globe and Mail, retrieved 12 August, 2010, http://www.globeinvestor.com/servlet/Page/document/v5/data/bonds/.) Does this information support the theory that less risky bonds yield lower returns Explain your answer.

The country of Nemedia does not trade with any other country. Its GDP is $20 billion. Its government collects $4 billion in taxes and pays out $3 billion to households in the form of transfer payments. Consumption equals $13 billion, and investment equals $2 billion. What is the value of the goods and services purchased by the government of Nemedia?

If the nominal interest rate is 68 percent and the rate of inflation is 2 percent, what is the real interest rate?

When will a change in the tax laws that increases the supply of loanable funds have a bigger effect on investment?