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Krugman/Wells

10. >>. Savings, Investment Spending, and the Financial System. Krugman/Wells. CHECK YOUR UNDERSTANDING. Check Your Understanding 10-1 Question 1*. In an open economy suppose that GDP is $20 trillion. Consumption is $12 trillion, and government spending is

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Krugman/Wells

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  1. 10 >> Savings, Investment Spending, and the Financial System Krugman/Wells CHECK YOUR UNDERSTANDING

  2. Check Your Understanding 10-1Question 1* In an open economy suppose that GDP is $20 trillion. Consumption is $12 trillion, and government spending is $3 trillion. Taxes are $1 trillion. Exports are $1 trillion and imports are $4 trillion.

  3. 1a*) In an open economy suppose that GDP is $20 trillion. Consumption is $12 trillion, and government spending is $3 trillion. Taxes are $1 trillion. Exports are $1 trillion and imports are $4 trillion. How much is private saving? • $8 trillion • $7 trillion • -$2 trillion • -$3 trillion

  4. 1b*) In an open economy suppose that GDP is $20 trillion. Consumption is $12 trillion, and government spending is $3 trillion. Taxes are $1 trillion. Exports are $1 trillion and imports are $4 trillion. How much is the budget balance? • $8 trillion • $7 trillion • -$2 trillion • -$3 trillion

  5. 1c*) In an open economy suppose that GDP is $20 trillion. Consumption is $12 trillion, and government spending is $3 trillion. Taxes are $1 trillion. Exports are $1 trillion and imports are $4 trillion. How much is national saving? • $8 trillion • $7 trillion • $5 trillion • $3 trillion

  6. 1d*) In an open economy suppose that GDP is $20 trillion. Consumption is $12 trillion, and government spending is $3 trillion. Taxes are $1 trillion. Exports are $1 trillion and imports are $4 trillion. How much is the net capital inflow? • $8 trillion • $7 trillion • $5 trillion • $3 trillion

  7. 1e*) In an open economy suppose that GDP is $20 trillion. Consumption is $12 trillion, and government spending is $3 trillion. Taxes are $1 trillion. Exports are $1 trillion and imports are $4 trillion. How much is investment? • $8 trillion • $7 trillion • $5 trillion • $3 trillion

  8. Check Your Understanding 10-1Question 1 What is the effect of the following events on the equilibrium Interest rate and investment spending?

  9. 1a) If a closed economy becomes an open economy, causing an inflow of capital, what effect does this have on the equilibrium interest rate and investment spending? • interest rate rises, investment rises • interest rate falls, investment rises • Interest rate falls, investment falls • interest rate and investment do not change

  10. 1b) Suppose that retired people generally save less than working people at any interest rate and the proportion of retired people in the population goes up. What effect does this have on the equilibrium interest rate? • interest rate rises, investment rises • interest rate falls, investment rises • Interest rate rises, investment falls • interest rate and investment do not change

  11. Check Your Understanding 10-1Questions 2-3

  12. 2) Savings and investment spending may not be equal in the economy as a whole because when the interest rate rises, households will want to save more money than businesses want to invest. • True • False

  13. 3a) Suppose that expected inflation rises from 3% to 6%. The real interest rate will: • increase. • decrease. • remain the same.

  14. 3b) Suppose that expected inflation rises from 3% to 6%. The nominal interest rate will: • increase. • decrease. • remain the same.

  15. 3c) Suppose that expected inflation rises from 3% to 6%. The equilibrium quantity of loanable funds will: • increase. • decrease. • remain the same.

  16. Check Your Understanding 10-2Questions 1 and 2

  17. 1a) Which of the following assets has the highest transaction costs? • a bank deposit with a guaranteed interest rate • a share of a highly diversified mutual fund, which can be quickly sold • a share of the family business, which can be sold only if you find a buyer and all other family members agree to the sale

  18. 1b) Which of the following assets has the lowest risk? • a bank deposit with a guaranteed interest rate • a share of a highly diversified mutual fund, which can be quickly sold • a share of the family business, which can be sold only if you find a buyer and all other family members agree to the sale

  19. 1c) Which of the following assets has the highest liquidity? • a bank deposit with a guaranteed interest rate • a share of a highly diversified mutual fund, which can be quickly sold • a share of the family business, which can be sold only if you find a buyer and all other family members agree to the sale

  20. 2) A country’s level of economic development is positively related to the level of development of its financial system. • True • False

  21. Check Your Understanding 10-3Questions 1 and 2

  22. 1a) Assume that a company announces that while profit is low this year, it has discovered a new line of business that will generate a high profit next year. What effect will this likely have on the stock price of the company? • The stock price will increase. • The stock price will decrease. • The stock price will not change.

  23. 1b) Assume that a company announces that although it had a high profit this year, that profit will be less than had been previously announced. What effect will this likely have on the stock price of the company? • The stock price will increase. • The stock price will decrease. • The stock price will not change.

  24. 1c) Assume that other companies in the same industry as XYZ Corporation announce that sales are unexpectedly slow this year. What effect will this likely have on the stock price of XYZ Corporation? • The stock price will increase. • The stock price will decrease. • The stock price will not change.

  25. 2) Although many investors may be irrational, it is unlikely that over time they will behave irrationally in exactly the same way – such as always buying stocks the day after the Dow has risen by 1%. • True • False

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