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ECO100Y5 Chapter Notes - Chapter 10: Financial Market, Nominal Interest Rate, Real Interest Rate

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Economics
Course
ECO100Y5
Professor
Michael H O

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Document Summary

Chapter 10 savings, investment spending, and the financial system. The saving-investment spending identity is an accounting fact: savings is equal to investment spending for the economy as a whole. The government is a source of savings when it runs a positive budget balance, a budget surplus. The government is a source of dissavings when it runs a negative budget balance, a budget deficit. National savings must equal investment spending in a closed economy. However, in an open economy, national savings can be split between investment spending and net foreign investment, which may be positive, zero, or negative. When costs or benefits arrive at different times, you must take the complication created by time into account. This is done by transforming any dollars realized in the future into their present value. The loanable funds market matches savers to borrowers. In equilibrium, only investment spending projects with an expected return greater than or equal to the equilibrium interest rate are funded.

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Related Questions

1. The government saves when it:

A) Has a balanced budget

B) Has a budget deficit.

C) Has a budget surplus.

D) Borrows by selling bonds.

2. In an open economy, total investment spending is equal to:

A) National savings plus the net capital inflow

B) Private savings plus national savings plus net capital inflow.

C) Private savings plus net capital inflow.

D) National savings minus private savings minus net capital inflow.

3. Net capital inflow is equal to:

A) GDP plus exports minus imports.

B) The growth in capital stock minus investment spending.

C) Foreign direct investment.

D) The total inflow of foreign funds minus the total outflow of domestic funds.

I'm a bit confused about this question, help would be much appreciated.

The following macroeconomics equation describes an accounting identity (i.e. fact) relating national savings (S) to total investment (I), government spending (G), tax revenue (T), exports (X), and imports (M):

(S-I)= (G-T)+(X-M)

Assume a country has a net-zer trade balance (X-M=0)

A) Suppose a country experiences a government budget deficit, (G>T). What can we infer about the relationship between national savings (S) or investment (I)? Explain which is greater.

B) Now, suppose a country experiences a government budget surplus (G<T). Which is greater, national (S) or investment (I)? Explain.

6. To study the macroeconomy we must combined prices and quantities generated in single-product markets into broad aggregates.

a) True
b) False

7. An economist who favored expanded government would recommend:

a) tax cuts during recession and tax increases during inflation
b) tax increases during recession and tax cuts during inflation.
c) tax cuts during both recession and inflation
d) increases in government spending during a recession and tax increases during inflation.
e) tax cuts during recessions and reduction in government spending during inflation.

8. If Government tax revenue exceeds Government spending the result of the budget is

a) an increase in investment
b) a shortage
c) an increase in the deficit
d) a decrease in savings
e) a surplus

9. Which of the following statements is true?

a) In the US economy, the net export sector is positive.
b) Aggregate demand is the sum of total output produced by all firms in the US.
c) The aggregate supply curve is vertical if the price level is equal to the per-unit cost of production
d) Aggregate production sums up the four major components C+I+G+Xn in the US economy.
e) Government spending is the largest component of aggregate demand.

10. Which of the following statements is true?

Β  a) When unemployment is rising then real GDP is rising.
b) The required reserve ratio is a tool used by the government to control the demand for money.
c) The four components of aggregate supply are the same as aggregate demand.
d) when an imported resource such as oil has decreased that is an increase in aggregate demand.
e) The four components of aggregate demand---Households, Business, Government, and Net Exports.