Question

1. Suppose that a corporation has $5 million in cash that it was planning to use to build a new factory. Recently, the real interest rate has decreased. The decrease in the rate of interest should
A. not influence the decision to build the factory because the corporation doesn’t have to borrow any money.
B. not influence the decision to build the factory because its stockholders are expecting a new factory.
C. not influence the decision to build the factory because bondholders are more concerned about the nominal interest rate than the real interest rate.
D. make it less likely that the corporation will build the factory because a lower interest rate will make the factory less valuable.
E. make it more likely that the corporation will build the factory because the opportunity cost of the $5 million is now lower.

2. According to the textbook, which of the following statements is (are) correct?
(x) In a closed economy, private saving is the amount of income that households have left after paying for their consumption and paying taxes and is represented by “Y – T – C”
(y) In a closed economy, national saving is represented by either the equation “S = Y – C – G” or
“S = (Y – T – C) + (T – G)”
(z) In a closed economy, public saving is the amount of tax revenue that the government has left after paying for its spending and public saving is represented by “T – G”
A. (x), (y) and (z) B. (x) and (y) only
C. (x) and (z) only D. (y) and (z) only
E. (x) only

3. Which of the following statements is (are) correct?
(x) A budget deficit is created if the government spends more than it receives in tax revenue.
(y) In a closed economy, private saving is larger than investment if government incurs a budget surplus.
(z) If the tax revenue of the federal government exceeds spending, then the government runs a budget surplus and “T – G” has a value greater than zero.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (x) only

Answer 1

Answer 1

If the real interest rate is lower, the corporation will more likely build a factory as the opportunity cost of $5 million has gone lower. At higher interest rate the corporation would have earned higher interest by not building the factory.

Hence option e is correct

Answer 2

Private saving is income less consumption and taxes i.e Y-T-C

Public Saving is Taxes less Government Spending i.e T-G

National Saving = Private Saving+ Public Saving = Y-T-C + T-G

Hence all three are correct i.e option A

Answer 2

1. E. make it more likely that the corporation will build the factory because the opportunity cost of the $5 million is now lower. When the real interest rate decreases, the opportunity cost of using the $5 million in cash to build the factory decreases. This means that the corporation can earn a lower return on alternative investments, making the factory project relatively more attractive.

2. C. (x) and (z) only In a closed economy, private saving is the amount of income that households have left after paying for their consumption and paying taxes, represented by "Y - T - C" (x). Public saving is the amount of tax revenue that the government has left after paying for its spending, represented by "T - G" (z). National saving is represented by the equation "S = Y - C - G" (y), but this is not mentioned in the options.

3. A. (x), (y) and (z) A budget deficit is created if the government spends more than it receives in tax revenue (x). In a closed economy, private saving is larger than investment if the government incurs a budget surplus (y). If the tax revenue of the federal government exceeds spending, then the government runs a budget surplus and "T - G" has a value greater than zero (z). All three statements are correct.

4.