Question

(1) Consider the market for loanable funds. Which of the following events would increase the demand for loanable funds?

A. The government goes from running a budget deficit to running a budget surplus.

B. Firms become optimistic about the future and, as a result, they plan to increase their purchases of new equipment and construction of new factories.

C. A change in the tax laws encourages people to consume less and save more.

D. A change in the tax laws encourages people to consume more and save less.

(2) Fundamental analysis shows that stock in Johnson & Johnson Company has a present value that is lower than its price.

A. This stock is overvalued; you should consider adding it to your portfolio.

B. This stock is overvalued; you shouldn't consider adding it to your portfolio.

C. This stock is undervalued; you should consider adding it to your portfolio.

D. This stock is undervalued; you shouldn't consider adding it to your portfolio.

Answer 1

Answer 1 :

(B) Firms become optimistic about the future and, as a result, they plan to increase their purchases of new equipment and construction of new factories.

If firms are optimistic about the future and are planning to increase their purchases of new equipment and construction of new factories, then they will require more funds and hence, demand for loanable funds will increase.

Answer 2 :

(b) This stock is overvalued; you shouldn't consider adding it to your portfolio.

When present value of a stock is lower than its price, then the stock is overvalued and analysts expect the price to fall eventually.Therefore, one shouldn't consider adding it to your portfolio.