ECON 1B03 Lecture Notes - Government Budget Balance, Comparative Statics

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8 Mar 2014

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ECON 1B03 Full Course Notes

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Government saving have nothing to do with interest rate since they will save if they have a surplus and not save if they don"t have a surplus. Household have a direct relationship with the interest rate. Household decides how much to save depend on the interest. Demand negative relationship between investment and the interest rate. Positive relationship between saving (private) and the interest rate. Demand anything that affects investment (other than the interest rate) Anything that affects private saving (other than the interest rate) In the following cases, use a market diagram to show what happens to the demand and/or supply curves. An improvement in technology causes firms to increase investment in capital goods. The intersection of the demand and the supply curve is the national saving which is always equal to investment. Investment = up (shift the demand to the right) Public saving and the private saving have to do with the interest rate.

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Use the market for loanable funds to explain what happens to 1) private savings (PS) 2) private investment spending (PI) and 3) the interest rate (r) if each of the following events occur:

Case 1: The government decides to invade and occupy a Middle Eastern nation, which causes government spending to rise.

Case 2: At any given interest rate, businesses become very optimistic about the future profitability of investment spending.

Case 3: Home prices begin declining at a rapid rate, making homeowners feel poorer. This perception causes them to spend less and save more at any interest rate than they did previously.

Case 4: The government imposes a new tax on the financial capital inflow from other nations. Because of this, the economy will have a much harder time attracting international capital.

6. If there is a shortage of loanable funds, then

a.	the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is above equilibrium.
b.	the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is below equilibrium.
c.	the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is above equilibrium.
d.	the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is below equilibrium.

7. We associate the term debt finance with

a.	the bond market and we associate the term equity finance with the stock market.
b.	the stock market and we associate the term equity finance with the bond market.
c.	financial intermediaries and we associate the term equity finance with financial markets.
d.	financial markets and we associate the term equity finance with financial intermediaries.

8. If the demand for loanable funds shifts to the right, then the equilibrium interest rate

a.	and the quantity of loanable funds rises.
b.	and the quantity of loanable funds falls.
c.	rises and the quantity of loanable funds falls.
d.	falls and the quantity of loanable funds rises.

9. Long-term bonds are

a.	riskier than short-term bonds, and so interest rates on long-term bonds are usually lower than interest rates on short-term bonds.
b.	riskier than short-term bonds, and so interest rates on long-term bonds are usually higher than interest rates on short-term bonds.
c.	less risky than short-term bonds, and so interest rates on long-term bonds are usually lower than interest rates on short-term bonds.
d.	less risky than short-term bonds, and so interest rates on long-term bonds are usually higher than interest rates on short-term bonds.

10. Compared to bondholders, stockholders

a.	face higher risk and have the potential for higher returns.
b.	face higher risk but receive a fixed payment.
c.	face lower risk and have the potential for higher returns.
d.	face lower risk but receive a fixed payment.

11. The old adage, 'don't put all your eggs in one basket', is very similar to a modern bit of advice concerning financial matters:

a.	Buy low-risk bonds.
b.	Use a medium of exchange.
c.	Diversify.
d.	Intermediate.

12. A budget surplus is created if

a.	the government sells more bonds than it buys back.
b.	the government spends more than it receives in tax revenue.
c.	private saving is greater than zero.
d.	None of the above is correct.

greenwildebeest673

Many people believe that Congress will eventually have to reduceSocial Security benefits in order to reduce the budget deficit.Although most of the changes would not take place until later,assume for the purpose of this problem that Social Securitybenefits were cut today by $100billion per year.
A) If the marginal propensity to consume is 0.8, explain what thelong-run effects would be on real GDP, public saving, and nationalsaving.
B) The US is a large open economy with a trade deficit. Use theappropriate graphs to illustrate and state what the reduction inSocial Security benefits would do to each of the following inthelong run: national saving, investment, the US real interest rate,net capital outflows, the real exchange rate, and the tradedeficit.
C) Now, consider the small open economy of Norway, which has atrade surplus. If the US, a large open economy, were to reduce itsSocial Security benefits, use the appropriate graphs to illustrateand state what would happen in the long run to Norwayâs nationalsaving, investment, interest rate, real exchange rate, and tradesurplus.

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ECON 1B03 Lecture Notes - Government Budget Balance, Comparative Statics

ECON 1B03 Full Course Notes

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