-In the Figure Above, the SLF Curve Is the Supply

question 25

Multiple Choice

-In the figure above, the SLF curve is the supply of loanable funds curve and the PSLF curve is the private supply of loanable funds curve. If there is no Ricardo-Barro effect and the government now runs a balanced budget,

• A) the equilibrium interest rate is 4 per cent and investment is $1.8 trillion.
• B) the interest rate will increase from 4 per cent to 6 per cent.
• C) the equilibrium interest rate is 6 per cent and investment is $1.6 trillion.
• D) there is shortage of investment funds of $0.4 trillion.
• E) there is a surplus of investment funds and the interest rate falls to 4 per cent.

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Definitions:

Shareholder's Wealth

The value of a company to its shareholders, often measured by the price of its shares multiplied by the number of shares outstanding.

Stock Split

A change in the number of shares outstanding by issuing new shares in proportion to those already owned. All stockholders’ proportionate ownership is maintained, and no economic value is created. Used to keep stock prices within a desirable trading range.

Maximum Cash Dividend

The highest dividend payment a company can make, determined by its current earnings and reserve cash levels, without compromising its financial stability.

Balance Sheet

A financial statement that summarizes a company's assets, liabilities, and shareholders' equity at a specific point in time.