Savings, Investment & the Financial System

The main function of the financial system is to

• manage government debt

• monitor the stock and bond markets

• match savers with investors

• print currency

Government deficits mean that

• the government is unable to pay its debts.

• the government is spending more than it is collecting in taxes.

• there is a gap between the rich and the poor.

• the government is saving at a very slow rate.

The source of the supply of loanable funds

• is saving and the source of demand for loanable funds is investment.

• is investment and the source of demand for loanable funds is saving.

• as well as the demand for loanable funds is saving.

• as well as the demand for loanable funds is investment.

The national debt

• exists because of past government budget deficits

• is the difference between the government's spending and revenue in a given year.

• is the amount households owe on credit cards, mortgages and other loans.

• s the amount households and firms have borrowed minus the amount they have saved.

Crowding out occurs when investment declines because

• a budget deficit causes interest rates to rise.

• a budget deficit causes interest rates to fall.

• a budget surplus causes interest rates to rise.

• a budget surplus causes interest rates to fall.

Other things remaining the same, when the interest rate rises,

• people want to lend more, but there would be no change in the quantity of loanable funds.

• people want to lend less, but there would be no change in the quantity of loanable funds.

• people want to lend more, making the quantity of loanable funds supplied increase.

• people want to lend less, making the quantity of loanable funds supplied decrease.

If Congress instituted an investment tax credit, the equilibrium quantity of loanable funds would

• rise.

• fall.

• be unchanged.

• move in an uncertain direction.

The financial system does NOT influence

• long run economic growth.

• savings and investment.

• the amount of capital in the economy.

• the amount of natural resources in the economy.

The economy includes consumer spending, government spending, and investment. Which of the following is an example of an investment?

• Mr. King deposits $500 in the First National Bank of Meyerland.

• Mr. Cusack purchases $500 in government savings bonds.

• Mr. Ramsey purchases a new $500 pair of running shoes.

• Mrs. Ernest spends $500 to attend an English teachers’ seminar that will improve her English course.

Most people do not have enough money of their own to start their businesses. When they acquire the necessary funds from someone else,

• their consumption expenditures are being financed by someone else’s saving.

• their consumption expenditures are being financed by someone else’s investment.

• their investments are being financed by someone else’s saving.

• their saving is being financed by someone else’s investment