Testing

Chapter 26:

Questions for Review

3. National saving is the amount of a nation's income that is not spent on consumption or government purchases. 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. The three variables are related because national saving equals private saving plus public saving.

4. Investment refers to the purchase of new capital, such as equipment or buildings. It is equal to national saving.

Problems and Applications

1. a. The bond of Euro government would pay a higher interest rate than the bond of the Malaysian government because there would be a greater risk of default.

b. A bond that repays the principal in 2025 would pay a higher interest rate than a bond that repays the principal in 2008 because it has a longer term to maturity, so there is more risk to the principal.

c. A bond from a software company you run in your apartment would pay a higher interest rate than a bond from TM because your software company has more credit risk.

4. To a macroeconomist, saving occurs when a person’s income exceeds his consumption, while investment occurs when a person or firm purchases new capital, such as a house or business equipment.

a. When your family takes out a housing loan and buys a new house, that is investment because it is a purchase of new capital.

b. When you use your RM200 paycheck to buy stock in TM, that is saving because your income of RM200 is not being spent on consumption goods.

c. When your roommate earns RM100 and deposits it in her account at a bank, that is saving because the money is not spent on consumption goods.

d. When you borrow RM1,000 from a bank to buy a motorbike to use in your pizza-delivery business, that is investment because the motorbike is a capital good.

5. Given that Y = 8, T = 1.5, Sprivate = 0.5...