Question 1

An increase in the government's budget deficit ________ the real interest rate and ________ the equilibrium quantity of national saving.

Accepted Answer

An increase in the government's budget deficit means the government has to borrow more. This shifts the supply curve for savings to the left and results in increases in the real interest rate but a decrease in the quantity of national saving and investment. This is also called "crowding out" as some private investment is crowded out by the borrowing of the government.

Question 2

Crowding out is the tendency for increased government deficits to:

Accepted Answer

"Crowding out" means that government has competed for investment funds with the private sector, thereby reducing the supply of savings available for private investment. A leftward shift of supply will bid up interest rates and the quantity of investment spending.

Question 3

The supply and demand for saving are brought into equilibrium by adjustments of the ________ rate.

Accepted Answer

Equilibrium in financial markets occurs at the intersection of the supply and demand for saving curves, which determines the interest rate.

Question 4

Holding other factors constant, if a tax increase moves the government budget from deficit to surplus, then the real interest rate will ________ and the equilibrium quantity of national saving and investment will ________.

Accepted Answer

When the government reduces its deficit it increases the supply of loanable funds to private businesses, shifting the supply of savings right. The real interest rates decrease but the quantity of national savings and investment increase.

Question 5

Holding other factors constant, if terrorist attacks increase the desire for precautionary saving, then the real interest rate will ________ and the equilibrium quantity of saving and investment will ________.

Accepted Answer

Increased desire for precautionary saving increases the supply of savings, making more investment funds available and decreases the real interest rate. At the same time, the quantity of saving and investment increase.

Question 6

Holding other factors constant, if growing concerns about job security raise precautionary saving, then the real interest rate will ________ and the equilibrium quantity of national saving and investment will ________.

Accepted Answer

When precautionary saving increases, shifting the supply of savings right, the real interest rate falls but the quantity of, national saving and investment increase.

Question 7

Holding other factors constant, if new environmental regulations increase firms' cost of operating capital, then the real interest rate will ________ and the equilibrium quantity of national saving and investment will ________.

Accepted Answer

New environmental regulations will reduce the desire for business investment, shifting the demand for investment left and decrease real interest rates. At the same time, the quantity of national saving and investment will decrease.

Question 8

The introduction of a new technology that raises the marginal product of new capital will:

Accepted Answer

The introduction of a new technology that raises productivity will shift the demand curve for loanable funds to the right. This increases real interest rates and the quantity of national savings and investment.

Question 9

Holding other factors constant, a higher relative price of a firm's output will:

Accepted Answer

The higher the relative price of a firm's output, the higher is the value of the marginal product of new capital and thereby the benefit of new capital. With higher benefits, and other factors constant, investment is likely to increase.

Question 10

Holding other factors constant, if employers automatically enroll employees in retirement savings programs in order to overcome psychological barriers to saving, then the real interest rate will ________ and the equilibrium quantity of saving and investment will ________.

Accepted Answer

An increase in, or rightward shift of, the supply of savings will decrease real interest rates while the quantity of saving and investment will increase.

Question 11

As the real interest rate increases, the quantity of saving supplied ________ and the quantity of saving demanded ________.

Accepted Answer

As the real interest rate increases, suppliers of funds are more eager to make funds available whereas demanders of funds are less inclined to borrow. These are movements along the respective supply and demand curves.

Question 12

Holding other factors constant, if the income tax is replaced with a consumption tax so that saving is not taxed, then the real interest rate will ________ and the equilibrium quantity of saving and investment will ________.

Accepted Answer

The change in tax law will increase the supply of savings, making more investment funds available and decrease the real interest rate. At the same time, the quantity of saving and investment will increase.

Question 13

Holding other factors constant, if new technology becomes available that allows machines to produce manufactured goods more quickly and with fewer defects, then the real interest rate will ________ and the equilibrium quantity of national saving and investment will ________.

Accepted Answer

A new, better technology increases business investment and shifts the demand for investment to the right, causing higher interest rates and the quantity of national savings and investment to increase.

Question 14

In the market for saving, the price is the:

Accepted Answer

In financial markets, the price for saving is the real interest rate.

Question 15

Holding other factors constant, if a change in tax laws discourages people from saving more for retirement, then the real interest rate will ________ and the equilibrium quantity of saving and investment will ________.

Accepted Answer

When people save less for retirement, the supply of savings shift left and real interest rate increases while the quantity of national saving and investment decrease.

Question 16

Holding other factors constant, if Congress passes a 5% investment tax credit under which a firm receives $5 in tax refunds from the government for every $100 it spends on new capital equipment, then the real interest rate will ________ and the equilibrium quantity of national saving and investment will ________.

Accepted Answer

The creation of an investment tax credit will make investors more inclined to invest and shift the demand for loanable funds to the right. This will increase the real interest rate and also increase national saving and investment.

Question 17

The introduction of new technologies ________ the real interest rate and ________ the equilibrium quantity of national saving.

Accepted Answer

New technologies cause business firms to be more inclined to invest, which shifts the investment demand curve to the right. This increases the real interest rate and the quantity of national savings and investment.

Question 18

As the real interest rate decreases, the quantity of saving supplied ________ and the quantity of saving demanded ________.

Accepted Answer

As the real interest rate decreases, suppliers of funds are less eager to make funds available whereas demanders of funds are more inclined to borrow. These are movements along the respective supply and demand curves.

Question 19

Holding other factors constant, an increase in the tax rate on revenue generated by capital will:

Accepted Answer

As tax rates rise, investors realize lower returns on investment. Thus, investors are less inclined to invest.

Question 20

A real interest rate that causes the quantity of saving supplied to be equal to the quantity of saving (or investment)demanded is an example of the:

Accepted Answer

Equilibrium in financial markets occurs at the intersection of the supply of savings and demand for investment curves.

Quiz 21: Saving and Capital Formation

An increase in the government's budget deficit the real interest rate and the equilibrium quantity of national saving.

Crowding out is the tendency for increased government deficits to:

The supply and demand for saving are brought into equilibrium by adjustments of the ________ rate.

Holding other factors constant, if a tax increase moves the government budget from deficit to surplus, then the real interest rate will and the equilibrium quantity of national saving and investment will .

Holding other factors constant, if terrorist attacks increase the desire for precautionary saving, then the real interest rate will and the equilibrium quantity of saving and investment will .

Holding other factors constant, if growing concerns about job security raise precautionary saving, then the real interest rate will and the equilibrium quantity of national saving and investment will .

Holding other factors constant, if new environmental regulations increase firms' cost of operating capital, then the real interest rate will and the equilibrium quantity of national saving and investment will .

The introduction of a new technology that raises the marginal product of new capital will:

Holding other factors constant, a higher relative price of a firm's output will:

Holding other factors constant, if employers automatically enroll employees in retirement savings programs in order to overcome psychological barriers to saving, then the real interest rate will and the equilibrium quantity of saving and investment will .

As the real interest rate increases, the quantity of saving supplied and the quantity of saving demanded .

Holding other factors constant, if the income tax is replaced with a consumption tax so that saving is not taxed, then the real interest rate will and the equilibrium quantity of saving and investment will .

Holding other factors constant, if new technology becomes available that allows machines to produce manufactured goods more quickly and with fewer defects, then the real interest rate will and the equilibrium quantity of national saving and investment will .

In the market for saving, the price is the:

Holding other factors constant, if a change in tax laws discourages people from saving more for retirement, then the real interest rate will and the equilibrium quantity of saving and investment will .

Holding other factors constant, if Congress passes a 5% investment tax credit under which a firm receives $5 in tax refunds from the government for every $100 it spends on new capital equipment, then the real interest rate will and the equilibrium quantity of national saving and investment will .

The introduction of new technologies the real interest rate and the equilibrium quantity of national saving.

As the real interest rate decreases, the quantity of saving supplied and the quantity of saving demanded .

Holding other factors constant, an increase in the tax rate on revenue generated by capital will:

A real interest rate that causes the quantity of saving supplied to be equal to the quantity of saving (or investment) demanded is an example of the: