Tutorial 6 – Saving, investment and financial system

(Chapter 27)
To be conducted in Week 7

MCQs

1. A budget surplus is created when the government:

a. spends more than it receives in tax revenue
b. buys back more bonds than it issues
c. receives more tax revenue than it spends
d. raises interest rates

2. The supply and demand for saving are brought into equilibrium by adjustments of the ____ rate.
a. coupon
b. nominal interest
c. real interest
d. dividend

3. The supply of loanable funds shows the:

a. quantity of loanable funds supplied at each possible nominal interest rate
b. equilibrium quantity of money that will be offered by savers at each possible nominal
interest rate
c. equilibrium quantity of money that will be offered by savers at each possible real interest
rate
d. quantity of loanable funds supplied at each possible real interest rate

4. The demand for loanable funds is downward-sloping because:

a. as the interest rate falls, the demand for loanable funds increases
b. as the interest rate falls, the demand for loanable funds falls
c. as the interest rate rises, the quantity of loanable funds demanded rises
d. as the interest rate rises, the quantity of loanable funds demanded falls

5. What would happen to investment if the government were to increase the tax on interest income?
a. investment spending would fall
b. investment spending would rise
c. investment would be unaffected
d. investment could rise, fall or remain unchanged

6. The excess of government tax collections over government spending is:

a. the government budget surplus
b. national saving
c. national wealth
d. the government budget deficit

7. An increase in the government's budget deficit ____ the real interest rate and ____ the equilibrium quantity of
national saving.
a. increases; increases

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 b. increases; decreases
c. increases; does not change
d. decreases; increases $70 million

8. When the government runs a budget surplus, it uses the funds to:
a. issue bonds
b. pay down outstanding debt
c. decrease transfer payments
d. decrease public saving

SHORT ANSWER

9. Using a graph representing the market for loanable funds, show and explain what happens to interest rates and
investment if the investment tax credit is abolished.

10. Define crowding out and explain its implication on the economy.

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