Question

A government program that allows savers to exempt interest income from taxation until a date in the future would probably increase private saving.

Select one:

True

False

In a closed economy, private saving is the amount of income that households have left after paying their taxes and paying for their consumption. Public saving is the amount of tax revenue that the government has left after paying for its spending.

Select one:

True

False

Crowding out occurs when increased government spending leads to a budget deficit which results in a higher interest rate and a fall in investment.

Select one:

True

False

If Bond ABC has a term of 20 years and Bond XYZ has a term of 5 years then we would expect the interest rate on Bond ABC to be higher than the interest rate on Bond XYZ if the two bonds have identical characteristics.

Select one:

True

False

Suppose government debt equaled zero until three years ago. In the last three years government had a budget deficit of $16 billion in each of the first two years and a budget surplus of $12 billion in the last year. At the end of the last year, the government had debt of $20 billion.

Select one:

True

False

Answer 1

1. Exemption of tax on interest earned income gives an incentive to the people to save more while the imposition of a tax or an increase in existing tax on interest earned income create less incentive for saving.

Answer: True.

2. In a closed economy national savings = Public savings + Private savings(S=T-G+Y-T-C)

Public savings = T-G, Private savings = Y-T-C.

Private savings is how much income all private persons have left over, after they pay their taxes and purchase all goods and services they desire.

Public savings is the amount of tax revenue that the government has left after paying for its spending.

Answer: True.

3. Crowding out is the adverse effect of government borrowing. When the government runs a budget deficit, it borrows from the public by issuing bonds. Such borrowing cause decrease in money supply and increase the rate of interest. When the rate of interest increase private investment decrease.

Answer: True.

4. The bonds having longer maturity date will have a higher rate of interest.

Answer: True.

5. The total budget deficit during the first two years is equal to $32 billion. The surplus in the last year is $12 billion. Then the overall government debt is $20 billion at the end of the third year.

Answer: True.