Chapter 8—Saving, Investment, and the Financial System

MULTIPLE CHOICE

1. In a closed economy, what does national saving equal?

a. income minus consumption
b. income minus the sum of consumption and government expenditures
c. income minus consumption minus taxes
d. income minus government expenditures
2. In a closed economy, how does national saving compare with investment?
a. National saving is usually greater than investment.
b. National saving is equal to investment.
c. National saving is usually less than investment because of the leakage of taxes.
d. National saving is usually less than investment.
3. In a closed economy, what does (T – G) represent?
a. national saving
b. investment
c. private saving
d. public saving
4. In a closed economy, what does (Y – T – C) represent?
a. national saving
b. government tax revenue
c. public saving
d. private saving
5. The country of Meritor uses the merit as its currency. Recent national income statistics shows that it
has GDP of 700 million merits, no government transfer payments, taxes of 210 million merits, a
budget surplus of 60 million merits, and investment of 100 million merits. What is the sum of its
consumption and government expenditures?
a. 600 million merits
b. 560 million merits
c. 490 million merits
d. 470
6. In examining the national income accounts of the closed economy of Nepotocracy, you see that it in
2007 it had taxes of $100 billion, transfers of $40 billion, and government purchases of goods and
services of $80 billion. You also notice that in 2006 it had private saving of $50 billion and investment
of $70 billion. In which year did Nepotocracy have a budget deficit of $20 billion?
a. 2007 and 2006
b. 2007 but not 2006
c. 2006 but not 2007
d. neither 2006 nor 2007
7. What is public saving equal to?
a. national saving
b. net exports
c. taxes minus government spending
d. government saving minus taxes
 8. Which of the following terms refers to the situation when the tax revenue of the federal government
exceeds government spending?
a. budget deficit
b. budget surplus
c. national debt
d. trade deficit
9. What does a higher interest rate induce people to do?
a. save more, so the supply of loanable funds slopes upward
b. save less, so the supply of loanable funds slopes downward
c. invest more, so the supply of loanable funds slopes upward
d. invest less, so the supply of loanable funds slopes downward
10. If the current market interest rate for loanable funds is below the equilibrium level, which of the
following is most likely to happen?
a. The quantity of loanable funds demanded will exceed the quantity of loanable funds
supplied and the interest rate will rise.
b. The quantity of loanable funds supplied will exceed the quantity of loanable funds
demanded and the interest rate will rise.
c. The quantity of loanable funds demanded will exceed the quantity of loanable funds
supplied and the interest rate will fall.
d. The quantity of loanable funds supplied will exceed the quantity of loanable funds
demanded and the interest rate will fall.
11. If there is surplus of loanable funds, which of the following is most likely to happen?
a. The supply for loanable funds shifts right and the demand shifts left.
b. The supply for loanable funds shifts left and the demand shifts right.
c. Neither curve shifts, but the quantity of loanable funds supplied increases and the quantity
demanded decreases as the interest rate rises to equilibrium.
d. Neither curve shifts, but the quantity of loanable funds supplied decreases and the quantity
demanded increases as the interest rate falls to equilibrium.
12. Suppose equilibrium exists in the market for loanable funds. Using the following table, what is the
quantity of funds supplied in this market?
GDP $8.7 trillion
Consumption Spending $3.5 trillion
Taxes minus Transfers $2.7 trillion
Government Purchases $3.0 trillion

a. $2.2 trillion
b. $2.5 trillion
c. $2.8 trillion
d. $3.1 trillion
13. Generally, when economists talk of the "interest rate," which of the following are they talking about?
a. the real interest rate
b. the current nominal interest rate
c. the real interest rate minus the inflation rate
d. the equilibrium nominal interest rate

14. Which of the following would most likely happen in the market for loanable funds if the government
were to increase the tax on interest income?

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 a. The supply of loanable funds would shift right.
b. The demand for loanable funds would shift right.
c. The supply of loanable funds would shift left.
d. The demand for loanable funds would shift left.
15. If Parliament reduced the tax rate on interest income, which of the following would most likely happen
to investment and saving?
a. Investment would increase, and saving would decrease.
b. Investment would decrease, and saving would increase.
c. Investment and saving would both increase.
d. Investment and saving would both decrease.
16. Which of the following best describes the relationship between government deficit and government
debt?
a. If the government currently has a budget deficit, currently it must have also a debt.
b. If the government currently has a budget deficit, the debt is increasing.
c. If the government currently has a budget deficit, government expenditures must be less
than taxes.
d. If the government currently has a budget deficit, national savings must be higher.
17. What would an increase in the budget deficit most likely do to investment spending?
a. It would make investment spending fall.
b. It would make investment spending rise.
c. It would not affect investment spending.
d. It may increase, decrease, or not affect investment spending.

Figure 8-1

18. Refer to Figure 8-1. Which of the graphs in the figure shows the effects of an increase in the tax rate
on saving?
a. graph 1
b. graph 2
c. graph 3
d. none of the three graphs
19. Refer to Figure 8-1. Which of the graphs in the figure shows the effects of instituting a national sales
tax and simultaneously lowering the income tax rate?
a. graph 1
b. graph 2
c. graph 3
d. none of the three graphs

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TRUE/FALSE

20. National saving is equal to Y – T – C.

21. Public saving is T – G, while private saving is Y – T – C.

22. Public saving is equal to national saving minus private saving.

23. A decrease in taxes on interest income would increase the interest rate.

24. When the government runs a budget deficit, national saving is reduced, interest rates rise, and
investment falls.

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