ECON 102- Midterm 3 Study Guide Ch. 7

1) Which of the following items are considered physical capital? I. shares of Ford stock traded on the New York Stock Exchange II. the Taco Bell store nearest you III. the rental cars owned by Hertz Rental-A-Car IV. the salaries paid to Intel executives A) II and III B) I and IV C) I, II and III D) I, II and IV

A

14) A nation's investment must be financed by A) national saving plus borrowing from the rest of the world. B) borrowing from the rest of the world only. C) the government's budget deficit. D) national saving only.

A

24) Which of the following are major influences on the expected profit from an investment? I. technology advances II. stock market behavior III. accounting practices A) I only B) I and II C) I and III D) II and III

A

28) A decrease in the demand for loanable funds and a leftward shift of the demand for loanable funds curve results from A) decreases in the expected profit. B) tax cuts. C) an increase in the real interest rate. D) technological improvements

A

34) Which of the following are included in the supply of loanable funds? I. private saving II. government budget surplus III. international borrowing A) I, II and III B) I and III C) II and III D) I and II

A

36) Which of the following will shift the supply of loanable funds curve leftward? A) a decrease in disposable income B) a decrease in the real interest rate C) a decrease in expected future income D) a decrease in real wealth

A

37) As a result of the recession in 2008, the default risk increased. How did this change affect the loanable funds market? A) There was a leftward shift in the supply of loanable funds curve. B) There was a movement down along the demand for loanable funds curve. C) There was a rightward shift in the supply of loanable funds curve. D) There was a movement up along the supply of loanable funds curve

A

39) In the above figure, the economy is at point a on the initial supply of loanable funds curve SLF0. What happens if disposable income decreases? A) The supply of loanable funds curve would shift leftward to a curve such as SLF1. B) There would be a movement to a point such as b on supply of loanable funds curve SLF0. C) Nothing; the economy would remain at point a. D) The supply of loanable funds curve would shift rightward to a curve such as SLF2.

A

6) At the beginning of the year, Tom's Tubes had a capital stock of 5 tube inflating machines. During the year, Tom scrapped 2 old machines and purchased 3 new machines. Tom's net investment for the year totaled A) 1 machine. B) 2 machines. C) 3 machines. D) 6 machines.

A

8) Suppose that a bond promises to pay its holder $100 a year forever. If the price of the bond increases from $1,000 to $1,250, then the interest rate on the bond A) rises from 8 percent to 10 percent. B) falls from 10 percent to 8 percent. C) does not change because it is not affected by the price of the bond. D) falls from 10 percent to 6 percent.

B

Item Millions of dollars Personal consumption expenditure 80 Government expenditure on goods and services 30 Net taxes 35 Gross private domestic investment 20 Imports of goods and services 10 Exports of goods and services 20 18) Use the information in the table above to calculate the value of government saving. A) $15 million B) $5 million C) $45 million D) -$5 million

B

10) This year Pizza Hut makes a total investment of $1.3 billion in new stores. Its depreciation in this year is $300 million. Pizza Hut's gross investment is ________ and its net investment is ________. A) $1.0 billion; $0.7 billion B) $1.0 billion; $1.3 billion C) $1.3 billion; $1.0 billion D) $1.3 billion; $1.6 billion

C

2) In January 2015, Tim's Gyms, Inc. owned machines valued at $1 million. During the year, the market value of the equipment fell by 30 percent. During 2015, Tim spent $200,000 on new machines. During 2015, Tim's gross investment totaled A) $1 million. B) $900,000. C) $200,000 D) $300,000.

C

20) If you lend a dollar for a year and at the end of the year the price level has risen by 10 percent A) the purchasing power of your loan has remained constant over the year regardless of the interest rate at which you lent it. B) the purchasing power of your loan has risen over the year regardless of the interest rate at which you lent it. C) you must have earned a nominal interest rate of 10 percent to maintain the purchasing power of your loan. D) you must have earned a nominal interest rate of 5 percent to maintain the purchasing power of your loan.

C

22) If the nominal interest rate is 7 percent and the inflation rate is 1 percent, the real interest rate is approximately A) -6 percent. B) 7 percent. C) 6 percent. D) 8 percent.

C

27) A rise in the real interest rate A) creates a movement downward along the demand for loanable funds curve. B) shifts the demand for loanable funds curve leftward. C) creates a movement upward along the demand for loanable funds curve. D) shifts the demand for loanable funds curve rightward.

C

29) Greater optimism about the expected profits from investment projects A) shifts the demand for loanable funds curve leftward. B) causes a movement downward along the demand for loanable funds curve. C) shifts the demand for loanable funds curve rightward. D) causes a movement upward along the demand for loanable funds curve.

C

30) Due to the recession in 2008, firms decreased their profit expectations. As a result, there was a ________ shift in the ________ loanable funds curve. A) rightward; demand for B) rightward, supply of C) leftward; demand for D) rightward; supply of

C

31) Which of the following shifts the demand for loanable funds curve leftward? A) a decrease in the taxes paid by the business B) a fall in the real interest rate C) a decrease in the expected profit D) a rise in the real interest rate

C

33) In the above figure, technological progress that increases the expected profit will A) have no effect on the demand for loanable funds curve. B) make the demand for loanable funds curve become horizontal. C) shift the demand for loanable funds curve rightward. D) shift the demand for loanable funds curve leftward.

C

38) Which of the following is TRUE? I. As the real interest rate increases, people increase the quantity they save. II. The supply of loanable funds curve is downward sloping. III. As disposable income increases, the supply of loanable funds curve becomes steeper. A) I and III B) II and III C) I only D) III only

C

42) In the above figure, the initial supply of loanable funds curve is SLF0 and the initial demand for loanable funds curve is DLF0. An increase in the expected profit would A) have no effect on either the demand for loanable funds curve or the supply of loanable funds curve. B) shift the supply of loanable funds curve rightward to a curve such as SLF1, and shift the demand for loanable funds curve rightward to a curve such as DLF1. C) only shift the demand for loanable funds curve rightward to a curve such as DLF1. D) only shift the supply of loanable funds curve rightward to a curve such as SLF1.

C

46) The crowding-out effect refers to A) private investment crowding out government saving. B) government spending crowding out private spending. C) government investment crowding out private investment. D) private saving crowding out government saving.

C

50) The Ricardo-Barro effect says that A) government budget deficits resulting from an increase in government expenditure have no effect on investment but government deficits resulting from a decrease in taxes crowd out investment. B) government budget deficits crowd out private investment and thereby lower the real interest rate. C) government budget deficits have no crowding out effect because taxpayers increase their savings to match the quantity of loanable funds demanded by the government. D) government budget deficits cause households to save more in anticipation of higher taxes, which causes higher real interest rates

C

7) At the beginning of the year, Tom's Tubes had a capital stock of 5 tube inflating machines. During the year, Tom scrapped 2 old machines and purchased 3 new machines. Tom's gross investment for the year totaled A) 1 machine. B) 2 machines. C) 3 machines. D) 6 machines

C

11) The funds used to buy and operate physical capital are A) saving. B) wealth. C) depreciation. D) financial capital

D

12) Investment is financed by which of the following? I. Government spending II. National saving III. Borrowing from the rest of the world A) I, II, and III B) I and II only C) I and III only D) II and III only

D

13) U.S. investment is financed from A) private saving and borrowing from the rest of the world only. B) private saving, government budget deficits, and borrowing from the rest of the world. C) private borrowing, government budget deficits, and lending to the rest of the world. D) private saving, government budget surpluses, and borrowing from the rest of the world.

D

19) Which of the following is TRUE regarding the real interest rate? I. The real interest rate is the opportunity cost of borrowed funds. II. The real interest rate equals the nominal interest rate adjusted for inflation. A) I B) II C) both I and II D) neither I nor II

D

26) If the real interest rate increases from 3 percent to 5 percent A) the supply of loanable funds curve will shift rightward. B) the nominal interest rate will also increase. C) the demand for loanable funds curve will shift rightward. D) there will be a movement up along the demand for loanable funds curve.

D

3) The capital stock increases whenever A) net investment exceeds gross investment. B) gross investment is exceeds net investment. C) gross investment is negative. D) net investment is positive.

D

35) In the loanable funds market, the supply comes from A) only saving and the government budget surplus. B) only the government budget surplus and international borrowing. C) only saving. D) saving, the government budget surplus and international borrowing

D

4) If the economy's capital stock increases over time A) depreciation is less than zero. B) depreciation exceeds gross investment. C) gross investment equals depreciation. D) net investment is positive.

D

41) In the above figure, the initial supply of loanable funds curve is SLF0 and the initial demand for loanable funds curve is DLF0. An economic expansion that raises disposable income and the expected profit would A) only shift the supply of loanable funds curve rightward to a curve such as SLF1. B) only shift the demand for loanable funds curve rightward to a curve such as DLF1. C) have no effect on either the demand for loanable funds curve or the supply of loanable funds curve. D) shift the supply of loanable funds curve rightward to a curve such as SLF1, and shift the demand for loanable funds curve rightward to a curve such as DLF1.

D

43) If net taxes exceed government expenditures, the government sector has a budget ________ and government saving is ________. A) surplus; negative B) deficit; positive C) deficit; negative D) surplus; positive

D

44) When a government has a budget surplus, the surplus A) must be subtracted from private saving to get total saving. B) crowds-out private saving. C) increases the world real interest rate. D) helps finance investment

D

48) In the absence of the Ricardo-Barro effect, an increase in the government deficit results in a ________ real interest rate and a ________ equilibrium quantity of investment. A) lower; lower B) lower; higher C) higher; higher D) higher; lower

D

49) According to the Ricardo-Barro effect A) government budget deficits increase households' expected future disposable income. B) government deficits raise the real interest rate. C) taxpayers fail to foresee that government deficits imply higher future taxes. D) households increase their personal saving when governments run budget deficits.

D

9) Suppose a bond promises to pay its holder $100 a year forever. The interest rate on the bond rises from 4 percent to 5 percent. The price of the bond A) does not change because it is not affected by the interest rate. B) falls from $25,000 to $20,000. C) rises from $2,000 to $2,500. D) falls from $2,500 to $2,000

D

Item Millions of dollars Personal consumption expenditure 80 Government expenditure on goods and services 30 Net taxes 35 Gross private domestic investment 20 Imports of goods and services 10 Exports of goods and services 20 17) Use the information in the table above to calculate the value of private saving. A) $20 million B) $40 million C) -$15 million D) $25 million

D

5) In January 2015, Tim's Gyms, Inc. owned machines valued at $1 million. During the year, the market value of the equipment fell by 30 percent. During 2015, Tim spent $200,000 on new machines. During 2015, Tim's net investment totaled A) -$300,000. B) -$100,000. C) $200,000. D) $1 million

B

15) Suppose the United States spends more on foreign goods and services than foreigners spend on our goods and services and the United States sells no foreign assets. Then the A) rest of the world may or may not finance the U.S. trade deficit. B) United States must borrow an amount equal to imports minus exports. C) United States must borrow an amount equal to national saving. D) United States must borrow an amount equal to consumption expenditure plus investment

B

16) If foreigners spend more on U.S.-made goods and services than we spend on theirs A) all U.S. national saving remains in the United States. B) foreigners must borrow from the United States or sell U.S. assets to make up the difference. C) we must borrow from foreigners because of low imports. D) funds flow in from abroad to help finance U.S. investment.

B

21) Suppose that you took out a $1000 loan in January and had to pay $75 in annual interest. During the year, inflation was 6 percent. Which of the following statements is CORRECT? A) The real interest rate is 7.5 percent and the nominal interest rate is 1.5 percent. B) The nominal interest rate is 7.5 percent and the real interest rate is 1.5 percent. C) The real interest rate is 6 percent and the nominal interest rate is 7.5 percent. D) The nominal interest rate is 7.5 percent and the real interest rate is 13.5 percent.

B

23) If the nominal interest rate is 8 percent and the inflation rate is 2 percent, the real interest rate is approximately A) 10 percent. B) 6 percent. C) 4 percent. D) 0.25 percent

B

25) Which of the following explains why the demand for loanable funds is negatively related to the real interest rate? A) Consumers are willing to spend less and hence save more at higher real interest rates. B) A lower real interest rate makes more investment projects profitable. C) Interest rate flexibility in financial markets assures an equilibrium in which saving equals investment. D) All of the above are reasons why the demand for loanable funds is negatively related to the real interest rate.

B

32) In the above figure, new expectations of booming business conditions and a higher expected profit will A) make the demand for loanable funds curve become horizontal. B) shift the demand for loanable funds curve rightward. C) shift the demand for loanable funds curve leftward. D) have no effect on the demand for loanable funds curve.

B

40) In the above figure, the economy is at point a on the initial supply of loanable funds curve SLF0. What happens if real wealth decreases? A) The supply of loanable funds curve would shift leftward to a curve such as SLF1. B) The supply of loanable funds curve would shift rightward to a curve such as SLF2. C) Nothing; the economy would remain at point a. D) There would be a movement to a point such as b on supply of loanable funds curve SLF0.

B

45) The term "crowding out" relates to the decrease in A) consumption expenditure from an increase in investment. B) private investment from a government budget deficit. C) the real interest rate from a government budget deficit. D) saving from an increase in disposable income.

B

47) In the absence of a Ricardo-Barro effect, a government budget deficit ________ the demand for loanable funds and ________ investment. A) decreases; decreases B) increases; decreases C) decreases; increases D) increases; increases

B