chap 26 macro

The Eye of Horus incense company has $10 million in cash which it has accumulated from retained earnings. It was planning to use the money to build a new factory. Recently, the rate of interest has increased. The increase in the rate of interest should

• not influence the decision to build the factory because The Eye of Horus doesn't have to borrow any money.

• not influence the decision to build the factory because its stockholders are expecting a new factory.

• make it more likely that The Eye of Horus will build the factory because a higher interest rate will make the factory more valuable.

• make it less likely that The Eye of Horus will build the factory because the opportunity cost of the $10 million is now higher.

If there is shortage of loanable funds, then

• the supply for loanable funds shifts right and the demand shifts left.

• the supply for loanable funds shifts left and the demand shifts right.

• neither curve shifts, but the quantity of loanable funds supplied increases and the quantity demanded decreases as the interest rate rises to equilibrium.

• neither curve shifts, but the quantity of loanable funds supplied decreases and the quantity demanded increases as the interest rate falls to equilibrium.

Suppose the government were to replace the income tax with a consumption tax so that interest on savings was not taxed. The result would be that the interest rate

• and investment both would increase.

• and investment both would decrease.

• would increase and investment would decrease.

• would decrease and investment would increase.

Suppose a country has a consumption tax that is similar to a state sales tax. If its government were to eliminate the consumption tax and replace it with an income tax that includes an income tax on interest from savings, what would happen?

• There would be no change in the interest rate or saving.

• The interest rate would decrease and saving would increase.

• The interest rate would increase and saving would decrease.

• None of the above is correct.

Suppose a country has only a sales tax. Now suppose it replaces the sales tax with an income tax that includes a tax on interest income. This would make equilibrium

• interest rates and the equilibrium quantity of loanable funds rise.

• interest rates rise and the equilibrium quantity of loanable funds fall.

• interest rates fall and the equilibrium quantity of loanable funds rise.

• interest rates and the equilibrium quantity of loanable funds fall.

In the loanable funds model, an increase in an investment tax credit would create a

• shortage at the former equilibrium interest rate. This shortage would lead to a rise in the interest rate.

• shortage at the former equilibrium interest rate. This shortage would lead to a fall in the interest rate.

• surplus at the former equilibrium interest rate. This surplus would lead to a rise in the interest rate.

• surplus at the former equilibrium interest rate. This surplus would lead to a fall in the interest rate.

An increase in the budget deficit would cause a

• shortage of loanable funds at the original interest rate, which would lead to falling interest rates.

• surplus of loanable funds at the original interest rate, which would lead to rising interest rates.

• shortage of loanable funds at the original interest rate, which would lead to rising interest rates.

• surplus of loanable funds at the original interest rate, which would lead to falling interest rates.

Which of the following are effects of an increased budget deficit?

• the supply of loanable funds does not change; a higher interest rate reduces private saving.

• the supply of loanable funds does not change; a higher interest rate raises private saving.

• at any interest rate the supply of loanable funds is less; a higher interest rate reduces private saving.

• at any interest rate the supply of loanable funds is less; a higher interest rate raises private saving.

A government reduces its budget deficit, but at the same time people become concerned that the outlook for future government expenditures and revenues increase the chance it will default. Which of the following is correct?

• The reduced budget deficit will raise interest rates in general. The increased risk of default will raise interest rates on government bonds.

• The reduced budget deficit will raise interest rates in general. The increased risk of default will reduce interest rates on government bonds.

• The reduced budget deficit will reduce interest rates in general. The increased risk of default will raise interest rates on government bonds.

• The reduced budget deficit will reduce interest rates in general. The increased risk of default will reduce interest rates on government bonds.

The U.S. government increases its budget deficit, but at the same time Congress eliminates an investment tax credit. Which of the following is correct?

• The interest rate will increase; investment may increase or decrease.

• The interest rate will decrease; investment may increase or decrease.

• The interest rate may increase or decrease; investment will decrease.

• The interest rate may increase or decrease; investment will increase.