Macroeconomics Chapter 8 Quiz

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Questions and Answers

What is meant by loanable funds in the context of private investment?

The savings held by banks for emergency loans.

The flow of resources available to fund private investment. (correct)

The cash reserves maintained by businesses for operations.

The amount of money the government can directly invest.

How would a government budget deficit likely impact the supply of loanable funds?

It has no impact on loanable funds.

It reduces the supply of loanable funds. (correct)

It increases the supply of loanable funds.

It only impacts loanable funds for private investments.

What might happen to investment levels if Canadians increasingly adopt a 'live for today' mindset?

Investment levels might decrease due to reduced savings. (correct)

Investment levels would remain constant.

Investment levels are likely to increase significantly.

Investment levels would be unaffected by consumer behavior.

What effect would an increase in interest rates likely have on the value of a portfolio?

It decreases the value of fixed income securities in the portfolio. Signup and view all the answers

What would be a likely effect of a depreciation of the Canadian dollar on an investment portfolio?

It could improve export-oriented companies' profits. Signup and view all the answers

What is the role of the financial system in the economy?

To match savings with investments Signup and view all the answers

How does saving contribute to economic growth?

It increases resources available for investment in capital Signup and view all the answers

Which of the following is a characteristic of bonds?

The bond's investment term Signup and view all the answers

What does equity finance involve?

Selling stock to raise money Signup and view all the answers

What factors determine the prices of shares on stock exchanges?

Supply and demand for the stock Signup and view all the answers

Which of the following best describes financial markets?

Institutions that allow direct fund transfer from savers to borrowers Signup and view all the answers

What is the effect of higher capital on a country's productivity?

It raises productivity and living standards Signup and view all the answers

How can individuals finance their capital investments?

By taking loans from banks or people Signup and view all the answers

What is public saving defined as?

The tax revenue the government has left after its spending. Signup and view all the answers

How is national saving calculated?

Gross Domestic Product minus consumption and government spending. Signup and view all the answers

If the government has a budget deficit, what can be inferred about public saving?

Public saving is negative. Signup and view all the answers

In the first calculation, what was the value of public saving?

$-0.3 billion Signup and view all the answers

If consumers saved the entire tax cut of $200 million, what would happen to national saving?

It would remain unchanged. Signup and view all the answers

What would be true if consumers only saved $50 million of the $200 million tax cut?

National saving would fall by $150 million. Signup and view all the answers

What does the equation $S = I$ indicate?

Total savings equals total investment in the economy. Signup and view all the answers

In the first exercise, what was the total amount of private saving calculated?

$1.8 billion Signup and view all the answers

What is the primary function of a bank?

To take deposits from savers and use these deposits to make loans Signup and view all the answers

What does national saving represent in a closed economy?

The total income in the economy after consumption and public spending Signup and view all the answers

Which of the following describes a mutual fund?

An institution that sells shares and buys a mix of stocks and bonds Signup and view all the answers

How can national saving be expressed, considering government activities?

Income after consumption and government transfers Signup and view all the answers

What is the importance of indices like the Dow Jones Industrial Average?

They are indicators of stock market performance and future economic conditions Signup and view all the answers

Which statement about private saving is accurate?

It is the income that households have after taxes and consumption Signup and view all the answers

In the context of financial institutions, what do financial intermediaries do?

They allow savers to provide funds indirectly to borrowers Signup and view all the answers

Which of the following does NOT define a stock index?

A direct measure of individual stock profitability Signup and view all the answers

Which scenario is more likely to occur when a tax cut is implemented?

Consumers save 1/4 and spend 3/4 of the tax cut. Signup and view all the answers

What primarily drives the supply side of the market for loanable funds?

Consumer savings. Signup and view all the answers

How does a higher saving rate impact the economy according to the discussion?

It may increase the growth rate of GDP. Signup and view all the answers

What effect does an investment tax credit have on the market for loanable funds?

It increases the demand for loanable funds. Signup and view all the answers

Which of the following policies is designed to encourage saving?

Consumption taxes. Signup and view all the answers

What does the term 'crowding out' refer to in the context of government borrowing?

Reduction in private investment as a result of government borrowing. Signup and view all the answers

Which statement best explains the distinction between government borrowing and private investor borrowing?

Government borrowing shifts the supply curve, while private borrowing shifts the demand curve. Signup and view all the answers

What is the primary role of interest rates in the market for loanable funds?

They serve as the price of a loan. Signup and view all the answers

Study Notes

PowerPoint Presentation: Principles of Macroeconomics

The presentation is for the eighth Canadian edition of Principles of Macroeconomics by Mankiw/Kneebone/McKenzie
The presentation was adapted for the eighth Canadian edition by Marc Prud'Homme, University of Ottawa

Chapter 8: Saving, Investment, and the Financial System

Various ways to finance capital investments include borrowing from banks or individuals, or convincing someone to invest in exchange for future profits.
The financial system is a group of institutions in an economy to match savings with investments.

Saving, Investment, and the Financial System

Saving and investment are key to long-run economic growth.
When a country saves a large portion of its GDP, more resources are available for investment in capital, increasing productivity and living standards.
The chapter examines how the financial system operates.

Financial Institutions in the Canadian Economy

Financial institutions can be grouped into financial markets and financial intermediaries.

Financial Markets

Financial markets are institutions where savers directly provide funds to borrowers.
A bond is a certificate of indebtedness specifying the borrower's obligation to the bondholder.
Bond characteristics include term and credit risk.
Stock represents ownership in a firm.
Equity finance is the sale of a stock to raise funds.
Stock prices are determined by supply and demand.
Stock indexes (e.g. Dow Jones Industrial Average, S&P/TSX Composite Index) reflect likely future economic conditions.

Financial Intermediaries

Financial intermediaries are institutions that indirectly provide funds to borrowers from savers
Banks accept deposits and offer loans.
Mutual funds sell shares to the public and use the proceeds to buy a portfolio of stocks and bonds, providing diversification and access to professional money management.

National Income Accounts

Accounting details how various numbers are defined and summed.
National income accounts include GDP and related statistics

Important Identities

GDP (Y) = C + I + G + NX (where C = consumption, I = investment, G = government spending, NX = net exports)
In a closed economy, NX = 0, so Y = C + I + G
National saving (S) = Y - C - G, or (Y - T - C) + (T - G)
Private saving is income left after taxes and consumption
Public saving is government tax revenue left after spending
Budget deficit: T < G
Budget surplus: T > G
Although saving and investment are equal for an economy as a whole, this doesn't necessarily hold for individuals and firms.

Active Learning (Calculations)

Suppose GDP = 10billion,consumption=10 billion, consumption = 10billion,consumption=6.5 billion, government spending = 2billion,andthebudgetdeficit=2 billion, and the budget deficit = 2billion,andthebudgetdeficit=300 million
Calculate taxes, private saving, national saving, and investment.

Active Learning (Part B Calculations)

Government cuts taxes by $200 million.
Consumers save full proceeds of tax cut, national saving is unchanged, investment unchanged
Consumers save 1/4 of tax cut, and spend the other 3/4, then national saving and investment falls $150 million

Active Learning (Discussion Questions)

The two scenarios are:
- Consumers save the full tax cut
- Consumers save ¼ of the tax cut
Which is more realistic?
Why is this important?

The Market for Loanable Funds

The market for loanable funds facilitates the supply and demand of funds for saving and borrowing
Saving is the source of loanable funds supply; investment is the source of demand for loanable funds.
The interest rate is the price of a loan.

Policy 1: Saving Incentives

Higher saving rates lead to higher GDP growth.
People respond to saving incentives (e.g. RRSPs, TFSA, RESP, cons. Taxes like GST)

Policy 2: Investment Incentives

Investment tax credit gives tax advantages for new factory or equipment purchases

Policy 3: Government Budget Deficits and Surpluses

Government debt is sum of past budget deficits and surpluses.
Crowding out is a reduction in investment caused by government borrowing

Classroom Activity

Create a portfolio with $100,000 in savings,
Calculate current portfolio holdings using newspaper prices;
Identify objectives for the portfolio (short-term gain, long-term stability etc.)
Explain how economic events might affect portfolio values (interest rate changes, recession, inflation, currency depreciation)

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Description

Test your knowledge on Chapter 8 of the eighth Canadian edition of Principles of Macroeconomics, focusing on savings, investments, and the financial system. Explore how financial institutions influence capital investment and the overall economy's growth.