Macro Econ CH 10

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Description Question pool for Chapter 10: Savings, Investment Spending, and the Financial System
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Question 1 Multiple Choice 0 points Modify Remove
Question
Between 1987 and 1994, a group of private investors raised $16 billion to:
Answer
build an oil pipeline in Mexico.
build a tunnel between Britain and France.
tear down the Berlin Wall.
buy the Empire State Building.
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Question
Which of the following is considered investment spending in macroeconomics?
Answer
GM builds a new plant to manufacture automobiles.
Ryan J ones buys some GM stock.
Ryan J ones buys some GM bonds.
Ryan J ones buys some GM stock and bonds.
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Question
Economists view investment spending as which of the following?
Answer
stocks
bonds
spending on physical capital
mutual fund investing
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Question
Physical capital is purchased through investment spending, which in turn is mostly financed out of:
Answer
taxes.
domestic and foreign savings.
import tariffs.
consumption expenditure.
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Question
Investment spending refers to:
Answer
buying stocks.
buying newly issued shares of stock.
adding to physical capital.
adding to one's retirement account.
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Question
Which of the following is considered an act of investing in a physical asset?
Answer
purchasing shares of stock in IBM
selling shares of stock in IBM
buying a bond issued by IBM
buying a new factory that produces IBM handheld devices
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Question
Which of the following is an example of investment spending?
Answer
The owner of a Domino's Pizza store has employed two students to deliver pizzas.
The manager of a local Domino's Pizza store has taken some cash to the bank to make a deposit.
A local Domino's Pizza store has purchased a new pizza oven.
The owner of the Domino's Pizza store has used some of her salary to buy shares of stock in the Domino's corporation.
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Page 1of 42
Question
Private savings is equal to:
Answer
income less consumption.
taxes less government spending on goods and services.
the total amount of savings accounts plus stocks plus bonds owned by households.
income plus investment.
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Question
Use this scenario to answer questions 912.
Scenario: Closed Economy S = I
In a closed economy suppose that GDP is $12 trillion. Consumption is $8 trillion and government spending is $2 trillion. Taxes are $0.5
trillion.
Reference: Ref 10-01
(Scenario: Closed Economy S =I) How much is private saving?
Answer
$4 trillion
$2.5 trillion
$3.5 trillion
$0.5 trillion
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Question
trillion.
(Scenario: Closed Economy S =I) What is the government budget balance?
Answer
a surplus of $1.5 trillion
a deficit of $1.5 trillion
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Question
trillion.
(Scenario: Closed Economy S =I) How much is national saving?
Answer
$3.5 trillion
$3 trillion
$2.5 trillion
$2 trillion
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Question
trillion.
(Scenario: Closed Economy S =I) How much is investment spending?
Answer
$3.5 trillion
$3 trillion
$2.5 trillion
$2 trillion
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Question
In a simple closed economy, all investment spending must come from:
Answer
saving.
money creation.
debt issuance.
foreign borrowing.
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Question
The budget balance is equal to:
Answer
taxes plus government spending.
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taxes minus government spending.
consumption plus investment.
imports minus exports.
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Question
A budget surplus would exist when which of the following occurs?
Answer
Taxes are greater than government spending.
Taxes are less than government spending.
Taxes are less than government spending plus investment.
Investment is less than government spending less taxes.
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Question
National savings is the sum of private savings and:
Answer
private consumption.
government tax revenue.
the budget balance.
trade surplus.
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Question
In a closed economy, all investment spending must come from:
Answer
government.
domestic savings.
foreign savings.
government, domestic savings and foreign savings.
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Question
The savings-investment spending identity says that:
Answer
each person in the economy must invest as much as he or she saves.
savings and investment spending are always equal for the economy as a whole.
savings must equal government investment for the economy as a whole.
each person in the economy must save as much as he or she invests.
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Question
In a closed economy, investment spending, I, must equal:
Answer
GDP C G.
GDP C.
GDP C G X.
GDP [C*G].
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Question
The government saves when it:
Answer
has a balanced budget.
has a budget deficit.
has a budget surplus.
borrows by selling bonds.
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Question
The government saves when:
Answer
tax revenue is smaller than government spending.
tax revenue is larger than government spending.
tax revenue equals government spending.
tax revenue is positive.
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Question
National savings in a closed economy is all of the following except:
Answer
the sum of private savings plus the government budget balance.
the total savings generated within the economy.
GDP C G.
government spending less consumption.
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Question
A difference between a closed and an open economy is that:
Answer
in the latter, foreign savings complement domestic savings in financing investment spending.
in the latter, the government is more open to the idea of financing investment spending than in the former.
in the former, foreign savings complement domestic savings in financing investment spending.
in the former, foreign savings finance more investment spending than in the latter.
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Question
The savings-investment spending identity says that savings and investment spending are:
Answer
always equal because private savings match government savings.
equal as long as there is no trade surplus or deficit.
always equal for the economy as a whole.
equal as long as there is not government budget deficit or surplus.
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Question
In a closed economy, the savings-investment spending identity is:
Answer
I =GDP C G +(IM NX).
NS =GDP I.
NS =GDP +(C T +TR) +(T TR G).
I =GDP C G.
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Question
In the closed economy of Sildavia, government spending during 2005 was $30 billion, consumption was $70 billion, taxes were $20
billion, and GDP was $110 billion. If investment spending in Sildavia during 2005 was $10 billion, we can conclude that:
Answer
private savings were equal to $10 billion.
the government's budget balance was equal to a surplus of $10 billion.
net savings were equal to $0.
private savings were equal to $20 billion.
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Question
To help increase investment spending, the government can:
Answer
lower taxes on consumption, so that disposable income rises.
lower taxes on the returns from savings, so that total savings increase and the interest rate falls.
raise taxes on the returns from bonds while lowering taxes on stock dividends.
lower taxes on investment spending while raising taxes on savings, so that total tax revenue remains constant.
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Question
According to the savings-investment spending identity:
Answer
savings =investment spending
government spending =tax receipts
total income =consumption spending +savings
savings =investment spending +consumption spending
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Question
In a closed economy, national savings is equal to:
Answer
private savings consumption spending
private savings +the budget balance.
private savings investment spending
private savings tax receipts
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Question
In a closed economy, national savings is equal to:
Answer
(disposable income consumption spending) (tax receipts government spending)
(disposable income consumption spending) +(government spending tax receipts)
(disposable income consumption spending) +(tax receipts government spending)
(consumption spending disposable income) +(government spending tax receipts)
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Question
In an open economy, total investment is equal to:
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Answer
national savings +capital inflow
private savings +national savings +capital inflow
private savings +capital inflow
national savings private savings capital inflow
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Question
Scenario: Open Economy S = I
In an open economy suppose that GDP is $12 trillion. Consumption is $8 trillion and government spending is $2 trillion. Taxes are $0.5
trillion. Exports are $1 trillion and imports are $3 trillion.
(Scenario: Open Economy S =I) How much is private saving?
Answer
$4 trillion
$2.5 trillion
$3.5 trillion
$1.5 trillion
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Question
(Scenario: Open Economy S =I) What is the government budget balance?
Answer
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Question
(Scenario: Open Economy S =I) How much is national saving?
Answer
$4 trillion
$3.5 trillion
$2 trillion
$5.5 trillion
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Question
(Scenario: Open Economy S =I) How much is the net capital inflow?
Answer
$1 trillion
$2 trillion
$3 trillion
$4 trillion
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Question
(Scenario: Open Economy S =I) How much is investment spending?
Answer
$2 trillion
$3 trillion
$3.5 trillion
$4 trillion
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Question
Table: Investment Spending, Private Spending, and Capital Inflows
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(Table: Investment Spending, Private Spending, and Capital Inflows) What is the budget balance as a percentage of GDP in
Northlandia?
Answer
10%
0%
10%
20%
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Question
(Table: Investment Spending, Private Spending, and Capital Inflows) What is the budget balance as a percentage of GDP in
Southlandia?
Answer
10%
0%
10%
20%
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Question
(Table: Investment Spending, Private Spending, and Capital Inflows) Northlandia has a ______ while Southlandia has a ________.
Answer
balanced budget; budget deficit
budget deficit; balanced budget
budget surplus; balanced budget
balanced budget; balanced budget
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Question
Scenario: Economy of Centralia
Centralia has no trade and no government. GDP =$25 trillion. Consumption Spending =$18 trillion.
(Scenario: The Economy of Centralia) Consider the information on the economy of Centralia. What is the level of private saving in
Centralia?
Answer
$7 trillion
$18 trillion
Can not be determined from the information provided.
-$7 trillion
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Question
(Scenario: The Economy of Centralia) Consider the information on the economy of Centralia. What is the level of investment spending
in Centralia?
Answer
$18 trillion
$7 trillion
$25 trillion
$7 trillion
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Question
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(Scenario: The Economy of Centralia) Consider the information on the economy of Centralia. Suppose that there is a new government
in Centralia, and it has decided to impose taxes on its citizens in order to spend on infrastructure. Taxes =$2 trillion. Government
Spending =Taxes. What is the level of private saving in Centralia now?
Answer
$11 trillion
$7 trillion
$5 trillion
$18 trillion
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Question
(Scenario: The Economy of Centralia) Consider the information on the economy of Centralia. Suppose that there is a new government
in Centralia, and it has decided to impose taxes on its citizens in order to spend on infrastructure. Taxes =$3 trillion. Government
Spending =Taxes. What is the level of investment spending in Centralia now?
Answer
$7 trillion
$4 trillion
$18 trillion
$4 trillion
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Question
Which one of the following is an accurate formula for the Budget Balance?
Answer
taxes government spending
transfers government spending
taxes +government spending
savings +taxes
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Question
National savings is equal to:
Answer
private savings +consumption spending.
trade balance +budget balance.
private savings +budget balance.
government spending +taxes.
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Question
Capital inflow is equal to:
Answer
GDP +exports imports.
the growth in capital stock investment spending.
foreign direct investment.
the total inflow of foreign funds the total outflow of domestic funds.
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Question
The correct relationship between taxes and private savings is given by:
Answer
taxes =government spending +private savings.
taxes =total spending consumption investment private savings.
taxes =total income consumption private savings.
taxes =consumption +private savings +total income.
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Question
The relationship between the government's budget deficit and its spending is:
Answer
budget deficit =tax revenues +transfer payments.
government spending =private savings +budget deficit.
tax revenues =national savings +budget deficit.
budget deficit =government spending tax revenues.
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Question
If there is an increase in the government budget deficit:
Answer
the demand for loanable funds will increase, interest rates will increase, and the amount of borrowing will increase.
the demand for loanable funds will decrease, interest rates will decrease, and the amount of borrowing will decrease.
the supply of loanable funds will increase, interest rates will decrease, and the amount of borrowing will increase.
the supply of loanable funds will decrease, interest rates will increase, and the amount of borrowing will decrease.
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Question
If private savings increase:
Answer
the demand for loanable funds will increase, interest rates will increase, and the amount of borrowing will increase.
the demand for loanable funds will decrease, interest rates will decrease, and the amount of borrowing will decrease.
the supply of loanable funds will increase, interest rates will decrease, and the amount of borrowing will increase.
the supply of loanable funds will decrease, interest rates will increase, and the amount of borrowing will decrease.
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Question
Capital inflows represent:
Answer
the net inflow of funds into a country.
the net outflow of funds from a country.
the amount that domestic savings exceeds foreign savings.
the excess of domestic physical capital exported minus the amount of physical capital imported.
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Question
Assume that I =S
private
+S
government
+(IM X). Furthermore, let's say that imports are equal to exports. Given this situation, which of
the following would be true?
Answer
Private saving plus government saving would exceed investment.
Private saving would exceed investment.
Private saving plus government saving would be less than investment.
Private saving plus government saving would be equal to investment.
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Question
Net capital inflows equal:
Answer
national savings.
imports minus exports.
consumption.
consumption plus government spending.
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Question
In the open economy of Sildavia, government spending during 2005 was $30 billion, consumption was $70 billion, taxes were $20
billion, and GDP was $100 billion. If investment spending in Sildavia during 2005 was $10 billion, we can conclude that Sildavia
registered:
Answer
a net capital inflow of $10 billion.
capital inflows of $10 billion and capital outflows of $20 billion.
a trade surplus of $20 billion and a financial deficit of $20 billion.
a net capital outflow of $10 billion.
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Question
If a country experiences a trade surplus, we can conclude that it is also experiencing:
Answer
a budget surplus.
a net capital outflow.
a net capital inflow.
a budget deficit.
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Question
In an open economy, savings can come from all of the following except:
Answer
domestic sources.
foreign sources.
government sources.
consumption.
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Question
A capital inflow into a country is associated with:
Answer
imports exceeding exports.
a decreased source of funds available for domestic investment.
imports equaling exports.
imports less than exports
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Question 58
Question
A business will want to borrow to undertake an investment project when the rate of return on that project is:
Answer
less than the interest rate.
greater than the interest rate.
greater than the exchange rate.
equal to the inflation rate.
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Question
Economists use _____ as a model to show how savers and borrowers come together to determine the equilibrium rate of interest.
Answer
the money market
the market for loanable funds
aggregate demand and aggregate supply
the financial system
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Question
The demand for loanable funds is _____ sloping because _____ respond to lower interest rates by _____ their quantity demanded of
loanable funds.
Answer
downward; investors; increasing
downward; savers; increasing
upward; investors; decreasing
upward; savers; decreasing
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Question
The supply of loanable funds is _____ sloping because _____ respond to lower interest rates by _____ their quantity supplied of
loanable funds.
Answer
upward; savers; increasing
upward; investors; decreasing
upward; savers; decreasing
downward; investors; increasing
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Question
In the market for loanable funds, suppose the current interest rate is 5%. At a rate of 5%, investors wish to borrow $100 million and
savers wish to save $125 million. We would expect:
Answer
the interest rate to fall as there is currently a shortage of loanable funds.
the interest rate to rise as there is currently a surplus of loanable funds.
the interest rate to rise as there is currently a shortage of loanable funds.
the interest rate to fall as there is currently a surplus of loanable funds.
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Question
Table: Loanable Funds
(Table: Loanable Funds) In the accompanying table, at what interest rate will the market for loanable funds be in equilibrium?
Answer
7%
6%
5%
4%
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Question
Figure: Loanable Funds
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(Figure: Loanable Funds) The accompanying graph shows the market for loanable funds in equilibrium. Which of the following might
produce a new equilibrium interest rate of 8% and a new equilibrium quantity of loanable funds of $150?
Answer
Consumers have increased consumption as a fraction of disposable income.
Businesses have become more optimistic about the return on investment spending.
The federal government has a budget surplus rather than a budget deficit.
There has been an increase in capital inflows from other nations.
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Question
Answer
Consumers have increased consumption as a fraction of disposable income.
Businesses have become more optimistic about the return on investment spending.
The federal government has a budget surplus rather than a budget deficit.
There has been an increase in capital inflows from other nations.
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Question
Answer
Capital inflows from foreign citizens are declining.
The federal government is running a budget deficit rather than a surplus.
Profit expectations are less optimistic for business investments.
The government has eliminated taxes on income from interest earned.
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Question
Answer
Profit expectations are less optimistic for business investments.
Capital inflows from foreign citizens are declining.
The federal government is running a budget deficit rather than a surplus.
The government has eliminated taxes on income from interest earned.
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Question
Figure: Demand for Loanable Funds
(Figure: Demand for Loanable Funds) According to the accompanying figure, when the interest rate is 6%, the quantity demanded of
loanable funds will equal:
Answer
$30 billion.
$40 billion.
$50 billion.
$60 billion.
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Question
A firm does NOT want to borrow money for a project when:
Answer
the interest rate is greater than the rate of return on the project.
the interest rate is less than the rate of return on the project.
the interest rate is positive.
the rate of return on the project is positive.
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Question
If a one-year project costs $100,000 and is expected to return the firm $105,000, then the rate of return of the project is:
Answer
4.8%.
5%.
$5,000.
$105,000.
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Question
A business will want a loan when:
Answer
interest rate <(return on project cost of project)/cost of project 100.
rate of return <interest rate.
rate of return interest rate <0.
rate of return >(cost of project interest rate)/interest rate 100.
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Question
When the government runs a budget deficit, all of the following happen EXCEPT:
Answer
the government becomes a borrower in the market for loanable funds.
the interest rate rises.
the total amount of borrowing decreases.
private investment spending is crowded out.
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Question
The demand curve for loanable funds slopes:
Answer
upward, since it takes a higher rate of return to get more funds.
downward, because there are more potential projects that yield 10% than yield 5%.
upward, because higher rates of return are necessary to cover higher costs.
downward, because there are fewer potential projects that yield 10% than for those that yield 5%.
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Question
Figure: Loanable Funds Market
(Figure: Loanable Funds Market) If the interest rate is 8%, businesses will want to borrow approximately:
Answer
$3 trillion.
$2 trillion.
$4 trillion.
$1 trillion.
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Question
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(Figure: Loanable Funds Market) If the interest rate is 8%, people will want to save approximately:
Answer
$3 trillion.
$2 trillion.
$4 trillion.
$1 trillion.
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Question
(Figure: Loanable Funds Market) The equilibrium interest rate and total quantity of lending are:
Answer
8% and $2 trillion.
2% and $5 trillion.
10% and $1 trillion.
6% and $3 trillion.
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Question
Figure: Supply of Loanable Funds
(Figure: Supply of Loanable Funds) According to the accompanying figure, when the interest rate rises from 6% to 8%, then the:
Answer
supply of loanable funds rises by $20 billion.
quantity supplied of loanable funds rises by $20 billion.
supply of loanable funds falls by $10 billion.
quantity supplied of loanable funds falls by $20 billion.
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Question
Figure: Market for Loanable Funds I
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(Figure: Market for Loanable Funds I) According to the accompanying figure, the equilibrium interest rate is:
Answer
2%.
4%.
6%.
8%.
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Question
Figure: Market for Loanable Funds II
(Figure: Market for Loanable Funds II) If the interest rate is greater than ______, then the quantity supplied of loanable funds will
_______ the quantity of loanable funds demanded.
Answer
8%; be greater than
8%; be less than
8%; equal
10%; be less than
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Question
(Figure: Market for Loanable Funds II) If the interest rate is less than 8%, then the quantity supplied of loanable funds will _______ the
quantity of loanable funds demanded.
Answer
be greater than
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be less than
equal
Cannot be determined from the information provided.
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Question
The loanable funds market maximizes:
Answer
the interest rate to savers.
the rate of return by borrowers.
the gains from trade between lenders and borrowers.
the amount of investment spending in the economy.
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Question
If in an open economy, a country imports more than it exports and the government budget deficit increases:
Answer
interest rates will increase and the amount of borrowing will increase.
interest rates will decrease and the amount of borrowing will increase.
interest rates will increase, but the change in borrowing is ambiguous.
the change in interest rates is ambiguous, but the amount of borrowing will increase.
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Question
The price in the loanable funds market is:
Answer
the rate of return of a project.
the price level.
the interest rate.
the consumer price index.
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Question
The price determined in the market for loanable funds is:
Answer
the margin call.
the profit rate.
the transaction fee.
the interest rate.
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Question
If the interest rate in the market for loanable funds is above the equilibrium interest rate, we know that:
Answer
there is a shortage of loanable funds.
savings exceed investment spending.
the quantity demanded of loanable funds exceeds the quantity supplied of loanable funds.
consumption is smaller than savings.
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Question
Figure: Market for Loanable Funds with Government Borrowing
(Figure: Market for Loanable Funds with Government Borrowing) According to the accompanying figure, after an increase in
government borrowing, the new equilibrium interest rate will rise from ______ and the amount of private savings will _______.
Answer
6% to 8%; stay the same
6% to 8%; rise
6% to 8%; fall
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6% to 8%; be indeterminate
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Question
A shift away from taxing asset income towards taxing consumption would lead to:
Answer
a larger demand for loanable funds, a higher interest rate, and slower economic growth.
a larger supply of loanable funds, a lower interest rate, and faster economic growth.
a larger government budget deficit and slower economic growth.
a smaller supply of loanable funds, a higher interest rate, and faster economic growth.
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Question
(Figure: Market for Loanable Funds II) An increase in government borrowing will shift the demand for loanable funds to the:
Answer
left and increase the interest rate.
left and decrease the interest rate.
right and increase the interest rate.
right and decrease the interest rate.
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Question
(Figure: Market for Loanable Funds II) A decrease in government borrowing will shift the demand for loanable funds to the:
Answer
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Question
If the government increases its borrowing, at the given interest rate, there is a(n):
Answer
additional supply of funds.
additional demand for funds.
decrease in the supply of funds.
increase in the supply of funds.
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Question
Which of the following is the most accurate statement concerning the relationship between government budget deficits and economic
growth?
Answer
Deficits increase economic growth.
Deficits decrease economic growth.
Deficits have no impact on economic growth.
We cannot say unambiguously whether government spending that increases deficits lowers or increases economic
growth.
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Question
Crowding out negatively affects the economy by:
Answer
decreasing government borrowing.
decreasing consumption.
increasing private borrowing.
reducing investment spending on physical capital.
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Question
(Figure: Market for Loanable Funds II) A decrease in savings by the private sector will shift the supply of loanable funds to the:
Answer
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Question
(Figure: Market for Loanable Funds II) An increase in savings by the private sector will shift the supply of loanable funds to the:
Answer
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(Figure: Market for Loanable Funds II) Other things being equal, if there is an increase in the interest rate above 8%, the quantity of
loanable funds demanded will be _________.
Answer
the same
more
less
either more or less
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Question
(Figure: Market for Loanable Funds II) Other things being equal, if there is a decrease in the interest rate below 8%, the quantity of
loanable funds demanded will be _________.
Answer
the same
more
less
either more or less
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Question
(Figure: Market for Loanable Funds II) Other things being equal, an increase in taxes on savings and investment income will:
Answer
shift demand to the right and increase the interest rate.
shift demand to the left and decrease the interest rate.
shift supply to the right and decrease the interest rate.
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shift supply to the left and increase the interest rate.
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Question
(Figure: Market for Loanable Funds II) Other things being equal, a decrease in taxes on savings and investment income will:
Answer
shift demand to the right and increase the interest rate.
shift demand to the left and decrease the interest rate.
shift supply to the right and decrease the interest rate.
shift supply to the left and increase the interest rate.
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Question
Table: Investment Projects
(Table: Investment Projects) If the market interest rate is 15%, the last project undertaken is:
Answer
F.
G.
H.
I.
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Question
(Table: Investment Projects) If the market interest rate is 11%, the last project undertaken is:
Answer
G.
H.
I.
J .
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Question
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(Table: Investment Projects) If the market interest rate is 13%, the amount of planned investment spending is:
Answer
$200.
$800.
$1,000.
$2,000.
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(Table: Investment Projects) If the market interest rate is 9%, the amount of planned investment spending is:
Answer
$1,800.
$2,000.
$4,000.
$5,500.
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Question
(Table: Investment Projects) If the market interest rate is 17%, the amount of investment demanded is:
Answer
$200.
$800.
$1,000.
$2,000.
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Question
(Table: Investment Projects) If the market interest rate is 11%, the amount of investment demanded is:
Answer
$800.
$1,000.
$2,000.
$4,000.
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Question
(Table: Investment Projects) If the market interest rate declines from 15% to 11%, then the amount of investment demanded will
increase by:
Answer
$200.
$1,000.
$2,000.
$2,200.
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Question
(Table: Investment Projects) If the market interest rate declines from 15% to 13%, then the amount of investment demanded will
increase by:
Answer
$200.
$1,000.
$2,000.
$2,200.
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Question
Higher rates of interest tend to _______ the quantity of loanable funds demanded, and lower rates of interest tend to _______ it.
Answer
increase; reduce
reduce; reduce
increase; increase
reduce; increase
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Question
There is a _______ relationship between the amount of loanable funds demanded and the rate of interest.
Answer
positive
direct
negative
tenuous
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Question
An expectation that perceived business opportunities will increase will generally cause:
Answer
a shift to the left in the loanable funds demand curve.
a movement along the loanable funds demand curve.
the demand for loanable funds to increase.
the demand for loanable funds to decrease.
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Question
An increase in the level of business opportunity will generally:
Answer
not change the loanable funds demand curve.
shift the loanable funds demand curve to the left.
cause a movement both up and down the loanable funds demand curve.
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shift the loanable funds demand curve to the right.
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Question
A decrease in the level of business opportunity will generally:
Answer
not change the loanable funds demand curve.
cause a movement up and down the loanable funds demand curve.
shift the loanable funds demand curve to the right.
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Question
A decrease in the demand for loanable funds would most likely be caused by a(n):
Answer
decrease in the market interest rate.
decrease in corporate income tax rates.
increase in the amount of expected business opportunities.
decrease in the amount of expected business opportunities.
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Question
An increase in the demand for loanable funds would most likely be caused by a(n):
Answer
increase in the market interest rate.
increase in business tax rates.
increase in the amount of expected business opportunities
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Question
A decrease in the demand for loanable funds would most likely be caused by a(n):
Answer
decrease in the market interest rate.
decrease in corporate income tax rates.
increase in the amount of expected business opportunities.
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Question
All other things unchanged, a general increase in the amount of government borrowing will typically:
Answer
shift the loanable funds demand curve to the left and decrease interest rates.
shift the loanable funds demand curve to the right and increase interest rates.
have no effect on the loanable funds demand curve.
have no effect on the demand for loanable funds.
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Question
All other things unchanged, a general decrease in the amount of government borrowing will typically:
Answer
have no effect on the demand for loanable funds.
increase interest rates.
raise the level of demand for loanable funds.
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Question
All other things unchanged, an increase in loanable funds demand would most likely be caused by a(n):
Answer
increase in corporate income tax rates.
increase in the amount of government borrowing.
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Question
All other things unchanged, an increase in loanable funds demand would most likely be caused by a(n):
Answer
important economic forecast predicting solid economic growth.
important economic forecast predicting a looming recession.
increase in the cost of new capital goods.
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Page 22of 42
Question
All of the following is correct EXCEPT when there is an increase in:
Answer
government budget deficit, the total amount of borrowing falls.
private savings, the interest rate decreases.
government budget deficit, the private investment is crowded out.
private savings, the total amount of borrowing increases.
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Question
A business decision to borrow to fund its projects should be based on whether:
Answer
the rate of return on the project is less than the interest rate on the loan.
the project will produce a good or service that is in high demand.
the rate of return on the project is at least as great as the interest rate on the loan.
it is going to be a project where minimum efficient scale is attained.
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Question
The rate of return on a business project is equal to:
Answer
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Question
Crowding out is a phenomenon:
Answer
where an increase in government's budget surplus decreases the overall investment spending.
where overproduction in the goods market leads to a sharp drop in the aggregate price level.
where an increase in government's budget deficit causes the overall investment spending to fall.
where an increase in imports causes the overall domestic production to fall.
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Question
Figure: Crowding Out
(Figure: Crowding Out) The demand for loanable funds curve D
LF1
will shift to D
LF2
, because:
Answer
of a decrease in the government budget deficit.
of an increase in the government budget deficit.
of an increase in private savings.
of a decrease in private savings.
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Question
Page 23of 42
(Figure: Crowding Out) If the demand for loanable funds curve shifts to the right, then it will result in:
Answer
an increase in the interest rate and the total amount of borrowing in the funds market.
an increase in the interest rate and a decrease in the total amount of borrowing in the funds market.
a decrease in the interest rate and the total amount of borrowing in the funds market.
a decrease in the interest rate and an increase in the total amount of borrowing in the funds market.
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Question
(Figure: Crowding Out) Suppose the supply of loanable funds curve S
LF1
shifts to S
LF2
, that implies:
Answer
that private savings have increased.
that national investment has decreased.
that private savings have decreased.
that national savings have decreased.
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Question
(Figure: Crowding Out) If the supply of loanable funds curve shifts to the right, then it will result in:
Answer
an increase in the total amount of borrowing and the interest rate.
a decrease in the total amount of borrowing and the interest rate.
an increase in the total amount of borrowing and a fall in the interest rate.
a decrease in the total amount of borrowing and an increase in the interest rate.
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Question
Crowding out means:
Page 24of 42
Answer
private savings decreases when the government borrows.
private investment decreases when the government borrows.
there are too many players in the financial markets.
some bond holders will be squeezed out of the market.
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Question
If in an open economy, the government's budget deficit increases at the same time as the trade deficit grows, this will lead to a(n)
_________ in the demand and a(n) ________ in the supply of loanable funds in domestic markets.
Answer
increase; decrease
decrease; decrease
increase; increase
decrease; increase
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Question
Figure: Market for Loanable Funds III
(Figure: Market for Loanable Funds III) If the government in a closed economy is running a budget balance of zero when it decides to
increase defense spending by $200 billion and then finances the spending by selling bonds, the equilibrium interest rate will:
Answer
fall to 12%.
rise to 16.5%.
rise to 18%.
rise to 21%.
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Question
(Figure: Market for Loanable Funds III) If the government in a closed economy is running a budget balance of zero when it decides to
increase defense spending by $200 billion and then finances the spending by selling bonds, the government will crowd out _____ in
private investment spending.
Answer
$200 billion
$100 billion
$50 billion
$0 billion
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Page 25of 42
Question
(Figure: Market for Loanable Funds III) If the government in a closed economy is running a budget deficit of $300 billion and finances
the deficit by selling bonds when it decides to decrease defense spending by $200 billion, the equilibrium interest rate will:
Answer
rise to 18%.
not change.
fall to 13.5%.
fall to 12%.
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Question
(Figure: Market for Loanable Funds III) If the government in a closed economy is running a budget deficit of $300 billion and finances
the deficit by selling bonds when it decides to decrease defense spending by $200 billion, the decrease in government spending will
encourage _____ in additional private investment spending.
Answer
$400 billion
$200 billion
$100 billion
$0 billion
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Question
Governments can engage in saving when:
Answer
taxes are less than expenditures.
taxes are greater than expenditures.
the government borrows to finance its expenditures.
the president insists that Congress balance the budget.
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Question
Which of the following is an advantage to the recipient country of foreign investment?
Answer
Foreigners are content to receive lower profits and interest rates than are domestic investors.
Foreigners don't expect to receive profits and interest as often as do domestic investors.
Domestic firms with foreign investors are exempt from domestic income taxes on a portion of their net income.
Foreign companies often bring new technology to the recipient country, and this increases productivity.
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Page 26of 42
Question
A relatively low saving rate affects productivity growth by:
Answer
depriving investment spending of the funds needed to increase the physical capital.
promoting consumption spending and depriving investment in human capital of the funds needed for tuition.
reducing the tax base and preventing the government from providing public goods.
stimulating imports and increasing the trade deficit.
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Question
The sources of financing of physical capital include:
Answer
domestic consumption.
foreign borrowing from the home country.
foreign investment in the home country.
domestic consumption, foreign borrowing from the home country, and foreign investment in the home country.
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Question
The government can increase savings by:
Answer
taxing more than it spends.
spending more than it taxes.
increasing inflation.
increasing the deficit.
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Question
Currently, America is a net recipient of foreign savings.
Answer
This has never happened before in America.
This is bad because we are borrowing money from overseas.
This is bad because we are losing control over our own destiny.
This has been true throughout much of our history.
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Question
The Fisher Effect states that:
Answer
the nominal rate of interest is unaffected by the change in expected inflation.
the nominal rate of interest is unaffected by the change in unexpected inflation.
the expected real rate of interest is unaffected by the change in expected inflation.
the expected real rate of interest increases by one percentage point for each percentage change in expected inflation.
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Question
Suppose the lender expects a real interest rate of 6% and the inflation rate is expected to be 3%. In this case, the nominal interest rate
is equal to:
Answer
3%.
9%.
12%.
6%.
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Question
Samantha is asking her employer for a 5% raise for the coming year. If the inflation rate during the next year is 5.5%, then her real
wage will:
Answer
increase by 5%.
decrease by .5%.
decrease by 5%.
increase by .5%.
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Question
From the standpoint of economic growth, banks are important to:
Answer
fight inflation.
keep interest rates low.
channel savings into investment.
channel investment into savings.
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Question
Which of the following qualify as an asset from the viewpoint of a household?
Page 27of 42
Answer
a house
mortgage
credit card debt
car loan
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Question
The value of all accumulated savings of a household is considered:
Answer
wealth.
income.
debt.
wages.
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Question
The main role of financial systems is to:
Answer
make the capitalist class richer.
provide credit cards to as many people as possible.
channel goods and services to the people willing to pay for them.
channel funds from savers into investments.
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Question
Which of the following is NOT one of the three tasks of a financial system?
Answer
transactions costs reduction
risk management
provide liquidity
determining fiscal policy
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Question
A household's wealth is:
Answer
what a household earns each period.
what a household saves each period.
the value of a household's accumulated savings.
the value of a household's financial assets.
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Question
A financial asset is:
Answer
a physical asset like a car.
a claim that entitles the owner to future income from the seller.
the value of accumulated savings.
another term for capital.
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Question
A physical asset is:
Answer
a claim on a tangible asset that gives the owner the right to dispose of it as he or she wishes.
the value of accumulated savings.
human capital.
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Question
A liability is:
Answer
when you have wronged someone and are held responsible in court.
a requirement that you pay income in the future.
when you are not able to perform an agreed task.
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Question
Transactions costs are:
Answer
the return to the entrepreneur.
the return to moving a product to market.
the expenses of producing a product.
the expenses of negotiating and executing a deal.
Page 28of 42
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Question
In financial markets:
Answer
households sell liabilities.
wealth is transformed into savings.
households purchase financial assets.
physical assets exchange hands.
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Question
As an investor, you may choose to purchase a bond or a share of stock. If you choose to purchase the bond, you are likely to receive a
_____ return in exchange for a _____ level of risk.
Answer
higher; higher
lower; lower
lower; higher
higher; lower
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Question
A loan is:
Answer
a liability for the lender and an asset for the borrower.
a physical asset that is traded in financial markets.
a claim on a bank that obliges the bank to provide funds to a lender.
a liability for the borrower and an asset for the lender.
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Question
All of the following are examples of financial assets and/or liabilities EXCEPT:
Answer
loans.
stocks and bonds.
real estate.
bank deposits.
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Question
Financial markets make the process of borrowing large amounts of money easier because they simplify the negotiation process
between borrowers and lenders. This is an example of:
Answer
reducing transaction costs.
reducing risk.
providing liquidity.
acting as a lender of last resort.
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Question
One reason financial institutions become very large is:
Answer
to decrease transactions cost.
to enjoy the power of having a large corporation.
to increase transactions costs.
to offset the power of other large corporations.
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Question
A risk averse person:
Answer
considers any risk unacceptable.
would never buy a financial asset.
has an asymmetric view of the value of losses and gains
would never buy insurance.
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Question
Financial markets spread the potential gains and losses of borrowing and lending operations among many individuals, therefore
decreasing the overall uncertainty. This is an example of:
Answer
reducing transaction costs.
reducing risk.
providing liquidity.
guaranteeing rates of return.
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Page 29of 42
Question
Which of the following portfolios is the most diversified in terms of risk?
Answer
$100,000 worth of stock in ten different companies in the same industry
$100,000 worth of stock in ten different companies in two different industries
$100,000 worth of stock in ten different companies in five different industries
$100,000 worth of stock in one company that sells ten different products
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Question
Financial markets:
Answer
increase transactions costs.
reduce diversification.
provide liquidity.
determine tax rates.
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Question
A common strategy to reduce the potential of a large financial loss is:
Answer
to buy and sell assets through a mutual fund, since mutual funds can not lose money.
to diversify financial assets, so that their risks of failure are unrelated.
to buy financial assets from developing countries, because the rates of return are very high and safe and their national
currencies are much more stable than the U.S. dollar.
to buy real instead of financial assets.
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Question
One way to reduce financial risk is:
Answer
to only buy stock in a major company.
to only buy bonds in a major company.
to diversify in a variety of assets, both financial and physical.
to diversify in a number of banks.
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Question
The term liquiditymeans:
Answer
that the asset is used in a barter exchange.
that the asset is used as the medium of exchange.
that the asset is readily convertible to cash.
that the market interest rate is too low.
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Question
A financial intermediary that creates a diversified portfolio of stocks and then resells that portfolio to individual investors is known as:
Answer
a life insurance company.
a mutual fund.
a brokerage company.
a credit card company
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Question
The financial system performs certain tasks in order to make the financial market more efficient. Which one of the following is NOT one
of these tasks?
Answer
reducing risk
reducing menu costs
reducing transaction costs
providing liquidity
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Question
Diversification in investment is achieved when:
Answer
the government invests in several projects of different lengths in order to increase total output.
a business produces multiple unrelated products so that the firm can maximize profit.
an economy trades with multiple trading partners for maximum benefit.
an individual invests in several assets with independent or unrelated risks so that total risk from loss is reduced.
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Question
All of the following are financial assets, except:
Answer
bonds.
Page 30of 42
stocks.
bank deposits.
gold coins.
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Question
An important advantage of bonds as a financial asset is that they:
Answer
are standardized and therefore are easier to sell than loans.
offer higher rates of return than stocks.
allow the owner to receive a share of the company's profits in the form of dividends.
are guaranteed to be risk free.
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Question
Which of the following assets would be considered to be the least liquid?
Answer
cash
checking account balance
corporate bond
stock in a privately held company
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Question
Which of the following assets would be considered to be the most liquid?
Answer
currency
checking account balance
stock in a publicly traded company
a townhouse
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Question
Which of the following would NOT be considered to be one of the four main types of financial assets?
Answer
stocks
bonds
bank deposits
gold coins
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Question
An illiquid asset:
Answer
can not be sold.
provides the owner no return or income.
is a tangible asset.
can not quickly be converted into cash.
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Question
When a corporation borrows money from a bank to expand its factory plant, the corporation is:
Answer
taking out a loan.
issuing bonds.
issuing stocks.
liquidating a bank deposit.
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Question
When a corporation borrows money from lenders in exchange for a fixed rate of return and a given maturity, the corporation is:
Answer
taking out a loan.
issuing bonds.
issuing stocks.
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Question
When a corporation borrows money from lenders in exchange for a fixed share of the firm's assets and potential profits, the corporation
is:
Answer
taking out a loan.
issuing bonds.
issuing stocks.
Page 31of 42
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Question
When you take out a loan from a bank, it is:
Answer
an asset to you and a liability to the bank.
an asset to you and an asset to the bank.
a liability to you and a liability to the bank.
a liability to you and an asset to the bank.
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Question
A bond is:
Answer
share of ownership in company.
a promise to pay interest each year and to repay the principle on a specified date.
a liquid asset since it is a standardized product with a market in which the owner can sell it.
both a promise to pay interest each year and to repay the principle on a specified date and a liquid asset since it is a
standardized product with a market in which the owner can sell it.
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Question
Financial assets that carry more risk:
Answer
usually have a lower rate of return.
usually have a higher rate of return.
are purchased by risk-averse buyers.
are a hedge against the future.
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Question
Due to their very own characteristics, the financial assets with the highest risk are:
Answer
stocks.
loans.
bonds.
bank deposits.
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Question
Financial intermediaries that manage a stock portfolio and sell shares of the stock portfolio itself to individual investors are:
Answer
mutual funds.
pension funds.
life insurance companies.
banks.
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Question
A mutual fund:
Answer
always includes a base year.
owns a diversified portfolio.
always earns a profit.
involves a lower rate of return for any given level of risk.
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Question
Banks are financial intermediaries that:
Answer
have customer deposits as its primary asset and loans to borrowers as their primary liability.
provide liquid assets to lenders and long-term financing to borrowers.
are types of mutual funds.
have customer deposits as its primary asset and that provide liquid assets to lenders.
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Question
Which of the following financial assets is likely to be the most liquid?
Answer
stocks
bonds
mutual funds shares
bank demand deposits
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Question
Page 32of 42
Among financial intermediaries are all of the following except:
Answer
mutual funds.
pension funds.
insurance companies.
the New York Stock exchange.
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Question
Which of the following is NOT a financial intermediary?
Answer
pension funds
mutual funds
life insurance companies
credit card companies
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Question
South Korea experienced economic growth after 1965 because:
Answer
the people overthrew their communist government.
the United States gave it a large amount of foreign aid.
the government reformed the banking system and raised interest rates on deposits.
South Koreans decreased their saving and increased their spending on real estate and gold.
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Question
If the price of an asset is expected to rise in the future:
Answer
asset owners will be more willing to sell it now.
it will be more in demand today.
the price of the asset will fall today.
the market is irrational.
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Question
The demand for stocks:
Answer
is largely a guessing game.
is mostly dependent on their current price.
is mostly a function of buyers' beliefs about their future prices.
comes from companies who want to borrow money.
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Question
If Congress passed a law last year that will increase corporate taxes this year, holding other things constant, stock prices will _____ this
year.
Answer
increase
decrease
not change
It is impossible to say how stock prices will change.
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Question
If all retail stores announce unexpectedly high sales volumes, holding other things constant, stock prices in the retail sector will:
Answer
increase.
decrease.
not change.
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Question
If interest rates on bonds rise, holding other things constant, stock prices will:
Answer
increase.
decrease.
not change.
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Question
A random walk is when an asset price:
Answer
moves in a predicable direction but with random error.
movements are unpredictable.
Page 33of 42
moves in a predictable way with no error.
moves slowly, but predictably.
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Question
According to the efficient markets hypothesis, if you are trying to find out what a stock is really worth, you should:
Answer
look up the current stock price.
study past trend in the stock price.
study the underlying determinants of the company's future profits.
examine its recent price changes.
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Question
Which of the following is a serious challenge to the efficient markets hypothesis?
Answer
Stock prices fluctuate more than can be explained by news about fundamentals.
Individual investors behave in systematically irrational ways.
Stock prices follow a random walk.
Both that stock prices fluctuate more than can be explained by news about fundamentals and that individual investors
behave in systematically irrational ways.
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Question
A random walk is:
Answer
the movement over time of an unpredictable variable.
the predicted fluctuations of a known variable.
the movement of GDP growth per capita in the long run.
a description of the economic fluctuations in the short run.
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Question
When a bond becomes more attractive as an asset due to a rise in the interest rate:
Answer
the price of stock, a substitute asset, will rise.
the price of stock, a substitute asset, will fall.
the future price of bonds will fall.
people will stop buying bonds and buy other assets.
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Question
Efficient market hypothesis states that:
Answer
stock prices fluctuate following the path of business cycles.
at any time stock prices are fairly valued reflecting all currently available information.
stock prices move irrationally and rather unpredictably.
stock prices are easily manipulated by irrational exuberance.
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Question
Between 2000 and 2006, there was a housing bubblein the U.S. A bubbleis:
Answer
a fluctuation in real estate prices that leads to inherent instability.
an increase in real estate prices driven by unrealistic expectations about future prices.
a situation where individuals resell their houses very quickly to make quick profit.
a situation where unscrupulous investors speculate in the real estate market.
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Question 200 True/False 0 points Modify Remove
Question
Investment spending in a closed economy must equal GDP minus consumption minus government spending.
Answer
True
False
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Question
Government saves when it runs a budget deficit.
Answer
True
False
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Question
A budget deficit is when government tax revenue is greater than government spending plus government transfers.
Page 34of 42
Answer
True
False
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Question
The saving-investment spending identity says that savings and investment spending are always equal for the economy as a whole.
Answer
True
False
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Question
If a country's capital inflow exceeds outflow, then foreigners are contributing to the domestic country's investment spending.
Answer
True
False
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Question
A capital inflow has the same effect on the national economy as national savings.
Answer
True
False
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Question
In 2007, U.S. private saving as a percentage of GDP was smaller than that of J apan.
Answer
True
False
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Question
The loanable funds market examines the market outcome of the demand for funds from savers and the supply of funds from borrowers.
Answer
True
False
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Question
If a project costs $100,000 and is expected to return $105,000 in a year and the interest rate is 6%, then the company will want to take
out a loan to undertake the project.
Answer
True
False
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Question
Firms want to undertake those projects whose rate of return is greater than the interest rate.
Answer
True
False
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Question
If interest rates are high, people are willing to forgo consumption and save more, all else equal.
Answer
True
False
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Question
An increase in the interest rate causes a decrease in investment by shifting the loanable funds demand curve to the left.
Answer
True
False
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Question
Expectations of an improving economy will generally cause an increase in investment by shifting the loanable funds demand curve to
the right.
Answer
True
False
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Page 35of 42
Question
Higher interest rates will lead to increased investment.
Answer
True
False
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Question
Lower interest rates will lead to less investment.
Answer
True
False
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Question
There is a negative relationship between the quantity of investment demanded and the interest rate.
Answer
True
False
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Question
Higher interest rates encourage investment.
Answer
True
False
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Question
An increase in the level business opportunities will not cause a change in investment.
Answer
True
False
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Question
Investment contributes to economic growth.
Answer
True
False
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Question
The crowding out effect is the negative effect of government budget deficits on private investment spending.
Answer
True
False
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Question
Financial markets completely eliminate transactions costs.
Answer
True
False
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Question
When corporations need to borrow large amounts of money, they can minimize their transactions costs by getting many small loans
from many different people.
Answer
True
False
Add Question Here
Question
Stocks are usually more risky than bonds but also earn a higher rate of return than bonds.
Answer
True
False
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Question
An illiquid asset can be quickly converted into cash.
Answer
True
Page 36of 42
False
Add Question Here
Question
A financial intermediary transforms funds gathered from many individuals into financial assets.
Answer
True
False
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Question
If you borrow money from a bank to buy a house, the mortgage (loan) is a financial asset for you and a liability for the bank.
Answer
True
False
Add Question Here
Question
If the price of a share of stock were expected to rise in the future, then demanders would demand more of it today, owners would be
less willing to sell it today, and its price would rise today.
Answer
True
False
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Question
The efficient market hypothesis says that asset prices embody all publicly available information.
Answer
True
False
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Question 228 Essay 0 points Modify Remove
Question
Suppose the federal government has a budget deficit and the economy is closed. Using the savings-investment spending identity,
explain how this affects investment spending.
Answer National savings is equal to private savings plus the budget balance. If the budget is in a state of deficit, then the budget
balance is a negative number and national savings is falling. Through the identity then, if national savings is falling, investment
spending must also be falling.
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Question
Suppose the federal government has a balanced budget, the economy is open, and there is a positive capital inflow from foreign
citizens. Using the savings-investment spending identity, explain how this affects investment spending.
Answer National savings is equal to private savings plus the budget balance plus capital inflow. If the budget is balanced, then the
budget balance is actually zero, but with positive capital inflow, national savings is rising. Through the identity then, if national
savings is rising, investment spending must also be rising.
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Question
The table below shows four possible physical investment projects, the expected revenue from each project and the expected cost of
each project. You may assume that each project, once completed, lasts only one year. Complete the empty column in the table by
computing the rate of return on each project.
Answer The completed table is below. The rate of return is computed as: 100*(Revenue Cost)/Cost.
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Question
The market for loanable funds is in equilibrium. All else equal, the federal government deficit is growing. Describe how this will affect the
market for loanable funds, the equilibrium interest rate, and the equilibrium quantity of loanable funds.
Answer A larger budget deficit means the government must borrow to pay the bills. This shifts the demand for loanable funds to the
right. The equilibrium interest rate and the equilibrium quantity of loanable funds both increase.
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Question
The market for loanable funds is in equilibrium. All else equal, the federal government has eliminated all taxes on interest that is earned
Page 37of 42
from savings. Describe how this will affect the market for loanable funds, the equilibrium interest rate, and the equilibrium quantity of
loanable funds.
Answer If households are no longer taxed on income earned from interest on savings, savings will increase and the supply of loanable
funds will shift to the right. The equilibrium interest rate decreases and the equilibrium quantity of loanable funds increases.
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Question
Explain what is meant by the Fisher Effect. What does this imply about the relationship between inflation expectations and the market
for loanable funds?
Answer In general, the Fisher Effect says that the expected real interest rate is unaffected by the change in expected inflation.
Because the nominal interest rate is equal to the real interest rate plus expected inflation, any change in expected inflation will
only affect the nominal rate, not the real rate. Because both savers and borrowers are basing their decisions solely on the real
rate, the equilibrium quantity of loanable funds is unaffected, but the nominal rate can rise or fall with inflation expectations.
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Question
Assume that an economy is open to capital inflows and that capital inflows are equal to the difference between imports and exports
(IM X). Answer each of the following questions.
a. Budget Balance =$20; X =$60; IM =$90; Private Saving =$150.
Calculate investment spending.
b. Private Saving =$200; Investment =$220; Budget Balance =$30.
Calculate (IM X).
Answer Use the savings-investment spending identity.
a. I =Private Spending +Budget Balance +(IM X).
I =150 20 +30; I=$160.
b. I =Private Spending +Budget Balance +(IM X).
220 =200 30 +(IM X); (IM X) =$50.
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Question
You have agreed to borrow $2000 from the bank for a period of one year. The nominal rate of interest is 8.5% and the real interest rate
is 6%. At the end of the year, inflation was 1%. How does this impact the borrower (you) and the lender (the bank)? Who is better off?
Answer The terms of the loan included an inflation expectation of 2.5% (8.5%-6%). When actual inflation was 1%, less than expected,
the bank is better off and you are worse off. The real rate of interest, with actual inflation of 1%, was 8.5% 1% or 7.5%, which
is higher than the original terms of the loan. Because of the unexpectedly low rate of inflation, in real terms you are actually
over-compensating the bank for lending you the money.
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Question
You have agreed to borrow $2000 from the bank for a period of one year. The nominal rate of interest is 8.5% and the real interest rate
is 6%. At the end of the year, inflation was 3.5%. How does this impact the borrower (you) and the lender (the bank)? Who is better off?
Answer The terms of the loan included an inflation expectation of 2.5% (8.5%6%). When actual inflation was 3.5%, more than
expected, the bank is worse off and you are better off. The real rate of interest, with actual inflation of 3.5%, was 8.5% 3.5%
or 5%, which is lower than the original terms of the loan. Because of the unexpectedly high rate of inflation, in real terms you
are actually under-compensating the bank for lending you the money.
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Question
Consider each of these forms of investment. Identify whether it is an example of investment spending, an investment in physical assets,
or a financial investment.
a. You purchase a classic 1965 Ford Mustang.
b. You buy 50 shares of stock in the Ford Motor Company.
c. Ford Motor Company builds a new plant in Tennessee.
Answer a. This is an investment in a physical asset. Like any asset, you hope that it appreciates in value so that you might sell it later
at a profit, but it does not add to the nation's stock of physical capital.
b. This is a financial investment. These shares of stock give you a very small ownership stake in the company and a very small
claim on future profits. It is not investment spending because it is not increasing the stock of physical capital.
c. This is investment spending. The new plant actually increases the stock of physical capital.
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Question
This year, Alan purchases a home built in the 1950s. Alan's purchase:
Answer
counts as residential investment spending in this current year.
counts as government spending in this current year.
does not count as investment spending in this current year.
is considered business fixed investment in this current year.
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Question
Human capital refers to:
Answer
changes in inventories.
changes in the level of education or training which workers possess.
funds available for investment spending.
spending on physical capital such as machines which aid workers.
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Question
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Human capital development often comes from:
Answer
financial markets.
government spending for education.
the private sector, but only in capitalist economies.
investment spending by businesses.
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Question
Domestic savings and foreign savings are:
Answer
sources of funds for investment spending.
equal to each other in terms of the composition of total savings.
used for investment spending only when there is unplanned investment spending.
not necessary for investment spending since government funds this spending.
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Question
If an economy is closed and wishes to increase its investment spending:
Answer
its only source of funding is domestic saving.
its sources of funding are domestic and foreign saving.
the government will need to increase its spending to provide for this.
the government will increase taxes to provide for this.
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Question
In an open economy, which of the following is true?
Answer
GDP =C +I +G +X IM
GDP =C +I +G
GDP =T TR G
GDP =S
private
+S
government
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Question
When government spending is less than net taxes:
Answer
there is a budget deficit.
government savings is negative.
there is budget surplus.
the economy is moving towards a balanced budget.
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Question
The budget balance is equal to:
Answer
taxes minus government spending.
taxes plus government spending.
GDP minus consumption and government spending.
GDP plus taxes.
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Question
National savings is the sum of:
Answer
private savings plus the budget balance.
private savings and government spending.
investment spending plus consumption.
consumption spending minus government spending.
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Question
If capital inflow is negative, this suggests a country is:
Answer
borrowing more than it is lending to other countries.
lending more than it is borrowing from other countries.
experiencing balanced trade.
experiencing a situation where its imports are greater than its exports.
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Question
If a country has a positive capital inflow, the country is:
Answer
borrowing more than it is lending to foreigners.
experiencing an inflow amount equal to its X +IM.
lending more than it is borrowing from foreigners.
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experiencing an outflow amount equal to its X +IM.
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Question
In an open economy:
Answer
a country with a positive capital inflow will also have a situation where X are greater than IM.
savings of foreigners may be supporting investment spending.
capital inflows are always negative.
investment spending equals national savings.
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Question
A government currently has a budget deficit in an open economy, this means that:
Answer
the government is spending less than its tax revenue.
exports minus imports are negative.
exports minus imports are positive.
the government is spending more than its tax revenue.
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Question
Suppose portions of investment spending are financed by a capital inflow, this means:
Answer
interest is being paid by government for the use of those funds.
interest is being paid to a foreigner for use of those funds.
consumers will need to cut back on spending.
taxes will be raised to pay for this capital inflow.
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Question
Investment projects are undertaken when the rate of return is:
Answer
positive.
greater than the equilibrium interest rate.
equal to the equilibrium interest rate.
less than the equilibrium interest rate
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Question
Suppose an investment project is projected to provide $200,000 in revenues if the project is undertaken. The investment will cost the
company $180,000. Given this information, one should commit to the project:
Answer
regardless of the interest rate.
if the current interest rate is less than or equal to 11%.
if the Fed is expected to decrease the money supply.
if the current interest rate is greater than 11%.
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Question
Holding everything else constant, when government uses an expansionary policy in the presence of a deficit, this will result in:
Answer
an increase in the equilibrium interest rate in the loanable funds market.
an increase in the level of private investment spending.
an increase in government savings.
a fall in the equilibrium interest rate in the loanable funds market.
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Question
In the loanable funds market, savers:
Answer
demand funds.
supply funds.
represent borrowers of funds.
pay the equilibrium interest rate.
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Question
Alison lends $100 to Vanessa. Alison expects that inflation will rise by 10%. If Alison wishes to maintain the real value of her $100, she
should expect payment from Vanessa in the amount of:
Answer
$100.
$110.
$120.
$101.
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Page 40of 42
Question
In lending to Vanessa, Alison expects the inflation rate to be 8% over the next year. Vanessa agrees to pay Alison a 10% interest rate
on the loan, but Vanessa expects inflation to be 9%. If the inflation rate is 9%, then:
Answer
Alison's real rate of interest is 1%.
Alison's real rate of interest is 9%.
Vanessa ends up paying a lower real interest rate than she had expected.
Alison ends up receiving a higher real interest rate than she had expected.
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Question
Businesses will undertake projects if the rate of return is:
Answer
positive.
greater than or equal to the interest rate levied on the loan.
greater than 1.
less than the cost of borrowing for the project.
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Question
Crowding out results in a(n):
Answer
decrease in private investment spending resulting from government deficit spending.
increase in physical capital accumulation which leads to higher economic growth.
increase in private investment spending resulting from government deficit spending.
increase in consumption spending as a result of higher investment spending.
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Question
Providing a linkage between savers and investors is an important aspect of:
Answer
a well functioning financial system.
government.
the public sector.
consumers.
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Question
Financial assets:
Answer
are paper claims that provide the buyer of the claim future income from the seller of the claim.
in the form of loans by an individual are an asset to the individual receiving the loan.
are accompanied by high transaction costs.
have no financial risk.
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Question
A liquid asset:
Answer
can be easily converted into a loan.
can be easily converted into cash.
are the only assets which financial markets work with.
carries no financial risk.
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Question
Someone who is risk averse is:
Answer
willing to expend whatever resources necessary to gain an uncertain amount of money.
willing to spend more resources to avoid losing a fixed sum of money than is willing to expend on gaining the same sum
of money.
irrational in their need to hold all of their assets in liquid form.
one who does not believe in financial risk.
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Question
A checking account with $500 is:
Answer
more liquid than a person's new car.
less liquid than a checking account with $1000.
equally liquid as a stock share with a $500 value.
less liquid than a home with a market value of $250,000.
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Question
Borrowers who cannot be served by the stock and bond markets can use:
Page 41of 42
Answer
banks for their financing needs.
the government for their financing needs.
no other source and are therefore 'crowded out' of the market.
must hold all of their assets in liquid form.
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Question
Four types of financial intermediaries are:
Answer
mutual funds, pension funds, government, and the central bank.
mutual funds, pension funds, life insurance companies, and banks.
banks, stock markets, pension funds, and the central bank.
the central bank, government, the stock market, and the Dow J ones Industrial Average.
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Question
Since the 1980s, compared to other wealthy countries, the U.S. has:
Answer
experienced volatile changes in its levels of savings.
had consistently low levels of savings.
experienced an increase in its levels of savings.
had negative levels of savings.
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Question
In the loanable funds market, borrowers are:
Answer
best represented by the supply of loanable funds.
not affected by changes in the inflation rate.
best represented by the demand for loanable funds.
negatively impacted by unexpected increases in the inflation rate.
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Question
The efficient market hypothesis believes that:
Answer
stock markets reflect irrational behavior and therefore stock prices could be over or undervalued.
stock prices embody much public information and therefore are not over or underpriced.
the three stock market indexes will provide consistent information about the stock market.
financial fluctuations in markets do not impact the macro economy in a noticeable way.
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Macro Econ CH 10

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