1 . What would happen in the market for loanable funds if the government were to
ID: 1131792 • Letter: 1
Question
1 . What would happen in the market for loanable funds if the government were to increase the tax on interest income?
2 .
Banks
3.
Retained earnings are
4 .
A stock index is
5 .
You are given three options. You may have the balance in an account that has been collecting 5 percent interest for 20 years, the balance in an account that has been collecting 10 percent interest for 10 years, or the balance in an account that has been collecting 20 percent interest for five years. Each account had the same original balance. Which account now has the lowest balance?
A. Interest rates would rise. B. The effect on the interest rate is uncertain. C. Interest rates would be unaffected. D. Interest rates would fall.2 .
Banks
A. play a role in creating an asset that people can use as a medium of exchange. B. are financial markets, as are bond markets. C. are financial intermediaries, but mutual funds are not financial intermediaries. D. All of the above are correct.Explanation / Answer
.Answer: A
If the government were to increase the tax on interest income, the supply of loanable funds would decrease which will increase the equilibrium interest rate and lower the equilibrium quantity of loanable
funds. Thus, if a change in the tax law encouraged lower saving, the result would be higher interest rates and lower investment.
2) D
Banks perform all the function mentioned above.
3) A
Retained earning are profits that are not paid to stockholder but is either reinvested or kept aside as reserve.
4) D
Stock index is average of group of stock prices.
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