Suppose the Government Ran a Budget Surplus in 2010 and a Larger

question 43

Multiple Choice

Suppose the government ran a budget surplus in 2010 and a larger surplus in 2011.The loanable funds model would predict that,as a result of the increase in the surplus,

• A)both the government debt and interest rates increased between 2010 and 2011.
• B)both the government debt and interest rates decreased between 2010 and 2011.
• C)the government debt increased and interest rates decreased between 2010 and 2011.
• D)the government debt decreased and interest rates increased between 2010 and 2011.

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Definitions:

Financing

The act of providing funds for business activities, making purchases, or investing.

Capital

Long-term assets or the money used to support long-term assets and projects. Long-term debt and equity on the balance sheet.

Profitability Index

A capital budgeting tool that measures the relationship between the present value of cash inflows and the initial investment, indicating the relative profitability of a project.

Cost of Capital

The rate of return a company must earn on its projects to maintain its market value and attract funding, often consisting of debt and equity costs.