Chapter 7
2) A nation's investment must be financed by A) national saving only. B) the government's budget deficit. C) borrowing from the rest of the world only. D) national saving plus borrowing from the rest of the world.
A
68) All of the following are sources of loanable funds except A) business investment. B) private saving. C) government budget surplus. D) international borrowing.
A
109) In the loanable funds market, if the interest rate is above the equilibrium level A) there is a shortage of loanable funds. B) there is a surplus of loanable funds. C) expected profit falls. D) government expenditure decreases.
B
110) In the above figure, if the real interest rate is 8, there is A) underproduction in this economy. B) a surplus of loanable funds. C) a shortage of loanable funds. D) a shortage in available funds for investment.
B
13) France's government is running a budget deficit. With no Ricardo-Barro effect, which of the following events will occur? i. The supply curve of loanable funds will shift leftward. ii. A higher real interest rate crowds out investment. iii. Saving increases. A) i and ii. B) ii and iii. C) i only. D) iii only.
B
73) Saving by households A) decreases when the real interest rate rises. B) increases when the real interest rate rises. C) increases when the real interest rate falls. D) is unaffected by the real interest rate.
B
74) The quantity of ______ by households will be less ________ . A) saving; the higher is disposable income B) saving; the lower is the real interest rate C) consumption; the lower is the inflation rate D) consumption; the higher is disposable income
B
79) Which of the following is correct? A) As disposable income increases, the real interest rate increases. B) As disposable income decreases, saving decreases. C) As saving decreases, disposable income increases. D) As saving increases, investment by households decreases.
B
24) People know that the inflation rate will increase from 3 percent to 5 percent. As a result A) the nominal interest rate falls by 2 percentage points. B) the nominal interest rate is constant. C) the nominal interest rate rises by 2 percentage points. D) the real interest rate rises by 2 percentage points.
C
In the above figure, if the real interest rate is 4 percent, then there A) there is a surplus of loanable funds. B) is equilibrium in the loanable funds market. C) the real interest rate will rise. D) the demand curve for loanable funds will shift rightward.
C
14) The tendency for private saving to increase in response to growing government deficits is known as the A) crowding out effect. B) money illusion effect. C) Keynes effect. D) Ricardo-Barro effect.
D
121) In the above figure, the initial supply of loanable funds curve is SLF0 and the demand for loanable funds investment curve is DLF0. An increase in the real interest rate to 7 percent could be caused by A) an increase in investment demand. B) a decrease in the expected profit. C) an increase in people's disposable incomes. D) an expansion that increased both saving and investment by the same amount.
A
60) In the above figure, a decrease in the real interest rate will result in a movement from point E to A) point F. B) point G. C) point H. D) point I.
A
88) Changes in all of the following shift the supply curve of loanable funds EXCEPT A) the real interest rate. B) wealth. C) disposable income. D) expected future income.
A
95) In the loanable funds market, an increase in wealth shifts _____ the loanable funds curve _______ A) supply of; rightward B) supply of; leftward C) demand for; rightward D) demand for; leftward
A
97) If households believe their incomes will fall in the future, the result is a A) rightward shift in the supply of loanable funds curve. B) leftward shift in the supply of loanable funds curve. C) movement along the supply of loanable funds curve. D) movement along the demand for loanable funds curve.
A
81) The greater a household's ____ the less is its saving. A) return from saving B) wealth C) disposable income D) expected future profits
B
90) An increase in _____ will shift the supply of loanable funds curve ______ A) expected future income; rightward. B) wealth; leftward. C) disposable income; leftward. D) default risk; rightward
B
96) A decrease in disposable income ________ . A) has no effect on the supply of loanable funds curve B) shifts the supply of loanable funds curve rightward C) shifts the supply of loanable funds curve leftward D) results in movement up the supply of loanable funds curve
B
26) 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) $1.3 billion; $1.6 billion B) $1.0 billion; $1.3 billion C) $1.3 billion; $1.0 billion D) $1.0 billion; $0.7 billion
C
27) If people expect an inflation rate of 3.3 percent, and the real interest rate is 3 percent, the nominal interest rate equals (approximately) A) 0.3 percent. B) 8.6 percent. C) 6.3 percent. D) 9.9 percent.
C
28) If the nominal interest rate is 8 percent and inflation is 3 percent, approximately what is the real interest rate? A) 11 percent B) 8 percent C) 5 percent D) 3 percent
C
63) In the above figure, if the real interest rate is 6 percent, the quantity of loanable funds demanded is A) $150 billion. B) $300 billion. C) $450 billion. D) $600 billion.
C
If disposable income increases, people will decide to ____ saving, the supply of loanable funds will ____ and the real interest rate will ____ A) increase; decrease; rise. B) decrease; decrease; rise. C) increase; increase; fall. D) decrease; increase; fall.
C
1) If net taxes exceed government expenditures, the government sector has a budget ______ and government saving is ________ A) surplus; positive B) surplus; negative C) deficit; positive D) deficit; negative
A
1) The term "capital," as used in macroeconomics, refers to A) the plant, equipment, buildings, and inventories of raw materials and semi-finished goods. B) financial wealth. C) the sum of investment and government purchases of goods. D) investment.
A
10) If the economy's capital stock increases over time, A) net investment is positive. B) depreciation is less than zero. C) depreciation exceeds gross investment. D) gross investment equals depreciation.
A
15) The ____ interest rate approximately equals the ______ interest rate minus ____ A) nominal; real; depreciation B) nominal; real; the inflation rate C) real; nominal; depreciation D) real; nominal; the inflation rate
D
5) If the government runs a budget deficit, then A) national saving is negative. B) household but not business saving must pay for the deficit. C) part of household and business saving finances the deficit. D) national saving cannot fund investment.
D
100) In the above figure, the economy is at point a on the initial supply of loanable funds curve SLF0. What happens if the interest rate rises? A) There is a movement to a point such as b on supply of loanable funds curve SLF0. B) The supply of loanable funds curve shifts rightward to a curve such as SLF2. C) The supply of loanable funds curve shifts leftward to a curve such as SLF1. D) none of the above
A
102) In the loanable funds market, as the interest rate rises the _____ and the _________ A) quantity of loanable funds supplied increases; quantity of loanable funds demanded decreases B) quantity of loanable funds supplied decreases; quantity of loanable funds demanded increases C) supply of loanable funds increases; demand for loanable funds decreases D) supply of loanable funds decreases; demand for loanable funds increases
A
106) If the real interest rate is above the equilibrium real interest rate, A) lenders will be unable to find borrowers willing to borrow all of the available funds and the real interest rate will fall. B) borrowers will be unable to borrow all of the funds they want to borrow and the real interest rate will rise. C) lenders will be unable to find borrowers willing to borrow all of the available funds and the real interest rate will rise. D) borrowers will be unable to borrow all of the funds they want to borrow and the real interest rate will fall.
A
114) Suppose that expected profit decreases. This change means A) the demand curve for loanable funds shifts leftward and the real interest rate falls. B) the supply curve for loanable funds shifts rightward and the nominal interest rate rises. C) there is a movement down along the demand curve for loanable funds. D) the real interest rate rises as saving increases.
A
116) Suppose the real interest rate rises and the quantity of loanable funds increases. These changes could have been the result of A) firms expecting higher future profits. B) firms expecting lower future profits. C) households expecting higher future income. D) in increase in the default risk.
A
117) Suppose the market for loanable funds is in equilibrium. If disposable income increases, the equilibrium real interest rate _____ and the quantity of loanable funds ______ . A) falls; increases B) falls; decreases C) rises; decreases D) rises; increases
A
12) If China's government runs a budget surplus and there is no Ricardo-Barro effect, there will be ____ in the supply of loanable funds, private saving _______ and investment ______ . A) an increase; decreases; increases B) a decrease; increases; increases C) an increase; increases; increases D) a decrease; decrease; increases
A
122) A fall in the real interest rate A) results in a movement along the demand for loanable funds curve. B) shifts the demand for loanable funds curve rightward. C) shifts the demand for loanable funds curve leftward. D) has no effect on the demand for loanable funds curve
A
123) A decrease in disposable income shifts the . A) demand for loanable funds curve rightward B) demand for loanable funds curve leftward C) supply of loanable funds curve leftward D) supply of loanable funds curve rightward
A
14) Approximately, the real interest rate ___ the inflation rate ____ the nominal interest rate. A) plus; equals B) equals; plus C) equals; minus D) minus; equals
A
14) 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
16) The Ricardo-Barro effect of a government budget deficit refers to A) a change in private savings supply. B) a large crowding out effect from a government budget deficit. C) a large crowding out effect from a government budget surplus. D) the international impact of government deficits.
A
18) At the beginning of the year, your wealth is $10,000. During the year, you have an income of $90,000 and you spend $80,000 on consumption. You pay no taxes. Your wealth at the end of the year is A) $20,000.00. B) $0. C) $90,000.00. D) $100,000.00.
A
18) The Ricardo-Barro effect says that A) government budget deficits have no crowding out effect because taxpayers increase their savings to match the quantity of loanable funds demanded by the government. B) government budget deficits crowd out private investment and thereby lower the real interest rate. C) 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. D) government budget deficits cause households to save more in anticipation of higher taxes, which causes higher real interest rates.
A
2) When a government has a budget surplus, the surplus A) helps finance investment. B) crowds-out private saving. C) must be subtracted from private saving to get total saving. D) increases the world real interest rate.
A
20) According to the Ricardo-Barro effect, A) the government budget has no effect on the real interest rate. B) a government budget deficit crowds out private investment. C) financing government spending with taxes has a less severe effect on private investment than financing through government borrowing. D) None of the above answers are correct.
A
21) 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) falls from 10 percent to 8 percent. B) rises from 8 percent to 10 percent. C) does not change because it is not affected by the price of the bond. D) falls from 10 percent to 6 percent.
A
21) The Ricardo-Barro effects assets that government A) saving affects private saving. B) budget deficits crowd out private borrowing. C) expenditure affects private expenditure. D) taxation raises interest rates.
A
22) If the Ricardo-Barro effect occurs, an ______ in saving finances the government budget deficit and the real interest rate _________ A) increase; remains the same B) decrease; increases C) increase; falls D) decrease; remains the same
A
22) 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) falls from $2,500 to $2,000. B) does not change because it is not affected by the interest rate. C) falls from $25,000 to $20,000. D) rises from $2,000 to $2,500.
A
22) When the inflation rate is negative, the A) real interest rate is greater than the nominal interest rate. B) real interest rate is less than the nominal interest rate. C) nominal interest rate is zero. D) real interest rate equals the nominal interest rate.
A
23) People expect an inflation rate of 5 percent and the real interest rate is positive. Then the nominal interest rate will be A) more than 5 percent. B) 5 percent. C) less than 5 percent. D) Without more information it is impossible to tell if the nominal interest rate will be more than, less than, or equal to 5 percent.
A
25) 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 nominal interest rate is 7.5 percent and the real interest rate is 1.5 percent. B) The nominal interest rate is 7.5 percent and the real interest rate is 13.5 percent. C) The real interest rate is 7.5 percent and the nominal interest rate is 1.5 percent. D) The real interest rate is 6 percent and the nominal interest rate is 7.5 percent.
A
26) People know that the inflation rate will decrease from 7 percent to 3 percent. As a result A) the nominal interest rate falls by 4 percentage points. B) the nominal interest rate is constant. C) the nominal interest rate rises by 4 percentage points. D) the nominal interest rate equals 3 percent.
A
3) 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
31) If the nominal interest rate is 11 percent and the inflation rate is 9 percent, then the real interest rate is approximately A) 2 percent. B) 20 percent. C) 4 percent. D) 18 percent.
A
38) Suppose a firm has an investment project which will cost $200,000 and result in $30,000 profit. The firm will not undertake the project if the interest rate is ________ . A) greater than 15 percent. B) greater than 10 percent. C) greater than 5 percent. D) positive.
A
4) Gross investment A) is the purchase of new capital. B) includes only replacement investment. C) does not include additions to inventories. D) Both answers A and B are correct.
A
40) 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
44) Which of the following explains why the demand for loanable funds is negatively related to the real interest rate? A) A lower real interest rate makes more investment projects profitable. B) Consumers are willing to spend less and hence save more at higher real interest rates. 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.
A
45) The demand for loanable funds is the relationship between loanable funds and the ______ other things remaining the same. A) real interest rate B) nominal interest rate C) inflation rate D) price level
A
46) The demand for loanable funds curve is A) downward sloping when plotted against the real interest rate. B) vertical at the full employment level of investment. C) constant at the maximum expected profit rate. D) upward sloping when plotted against the real interest rate.
A
56) Greater optimism about the expected profits from investment projects A) shifts the demand for loanable funds curve rightward. B) shifts the demand for loanable funds curve leftward. C) causes a movement upward along the demand for loanable funds curve. D) causes a movement downward along the demand for loanable funds curve
A
59) In the above figure, the economy is at point a on the initial demand for loanable funds curve DLF0. What happens if the real interest rate rises? A) There is a movement to a point such as b on the demand for loanable funds curve DLF0. B) The demand for loanable funds curve shifts rightward to a curve such as DLF2. C) The demand for loanable funds curve shifts leftward to a curve such as DLF1. D) none of the above
A
61) In the above figure, an increase in the expected profit will result in a movement from point E to A) point F. B) point G. C) point H. D) point I.
A
64) In the above figure, the demand for loanable funds curve is drawn for the average expected profit. If the real interest rate is constant at 6 percent and the expected profit falls, the amount of loanable funds demanded will be A) less than $450 billion. B) $450 billion. C) between $450 billion and $600 billion. D) greater than $600 billion.
A
69) 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
7) 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) United States must borrow an amount equal to national saving. B) United States must borrow an amount equal to imports minus exports. C) rest of the world may or may not finance the U.S. trade deficit. D) United States must borrow an amount equal to consumption expenditure plus investment.
A
70) In the loanable funds market, the supply comes from A) saving, the government budget surplus and international borrowing B) only saving and the government budget surplus C) only saving D) only the government budget surplus and international borrowing
A
72) Which of the following is NOT a determinant of household saving? A) the nominal interest rate B) disposable income C) the household's wealth D) expected future income
A
75) If the real interest rate rises, people A) save more. B) save less. C) earn a higher real wage rate. D) decrease their expected future income.
A
76) If households' disposable income decreases, then A) households' saving will decrease. B) households' saving will increase. C) investment will increase. D) Both B and C are correct.
A
78) Which of the following have a positive relationship with household saving? I. the real interest rate II. disposable income III. expected future income A) I and II B) II only C) II and III D) I, II and III
A
8) If foreigners spend more on U.S.-made goods and services than we spend on theirs, A) foreigners must borrow from the United States or sell U.S. assets to make up the difference. B) all U.S. national saving remains in the United States C) we must borrow from foreigners because of low imports. D) funds flow in from abroad to help finance U.S. investment.
A
83) If households expect an increase in their future incomes, they will save A) less and consume more today B) more and consume less today C) and consume more today D) and consume less today
A
85) Sarah and Diane are both billing clerks for the local trucking company earning $17,000 per year. Sarah is attending college, plans to graduate in one year and earn $55,000 as an economist. Diane is not in college or undergoing any specialized training and will have the same job next year. According to economic theory, which of the two individuals would tend to have a higher current savings rate? A) Diane B) Sarah C) Both will have the same saving rate D) Economic theory sheds no light on this question
A
86) If two households have the same disposable income in the current year, the household with the A) higher expected future income will consume a larger portion of its current income today. B) lower expected future income will consume more today while it has the money. C) lower expected future income will spend a larger portion of its current income on consumption today because it will increase its saving in the future. D) none of the above
A
113) Technological progress that increases the expected profit shifts the demand for loanable funds curve A) leftward and reduces the real interest rate. B) rightward and increases the real interest rate. C) rightward and reduces the real interest rate. D) leftward and increases the real interest rate.
B
118) Suppose the market for loanable funds is in equilibrium. If the expected profit falls, the equilibrium real interest rate _______ and the quantity of loanable funds ______ . A) falls; decreases B) falls; increases C) rises; increases D) rises; decreases
B
119) 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) 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) have no effect on either the demand for loanable funds curve or the supply of loanable funds curve.
B
17) The Ricardo-Barro effect holds that A) equal increases in taxes and government expenditures have no effect on equilibrium real GDP. B) government budget deficits have no effect on the real interest rate. C) a government budget deficit crowds out private investment. D) a government budget deficit induces a decrease in saving that magnifies the crowding out effect.
B
17) The nominal interest rate minus the real interest rate approximately equals the A) rate of increase in the amount of investment. B) inflation rate. C) the rate of increase in the income. D) the rate the bank receives to cover lending costs.
B
18) The nominal interest rate approximately equals which of the following? A) the real interest rate minus the inflation rate B) the real interest rate plus the inflation rate C) the real interest rate minus the growth rate of real GDP D) the real interest rate plus the growth rate of real GDP
B
19) According to the Ricardo-Barro effect, government deficits A) lead to a rise in the equilibrium real interest rate, crowding out investment. B) lead to simultaneous increases in private saving and no effect on the equilibrium real interest rate and investment. C) lead to simultaneous decreases in private saving and decreases in the equilibrium real interest rate and investment. D) lead to a fall in the equilibrium real interest rate and a rise in investment.
B
19) At the beginning of the year, your wealth is $10,000. During the year, you have an income of $80,000 and you spend $90,000 on consumption. You pay no taxes. Your wealth at the end of the year is A) $20,000.00. B) $0. C) $90,000.00. D) $100,000.00.
B
21) When the inflation rate is positive, the A) real interest rate is greater than the nominal interest rate. B) real interest rate is less than the nominal interest rate. C) nominal interest rate is zero. D) real interest rate equals the nominal interest rate.
B
24) A decrease in the government budget deficit decreases the _____ loanable funds and an increase in the government budget surplus increases the ______ loanable funds. A) demand for; demand for B) demand for; supply of C) supply of; demand for D) supply of; supply of
B
25) The funds used to buy and operate physical capital are A) depreciation. B) financial capital. C) saving. D) wealth.
B
27) If a bank's net worth is negative, then the bank definitely is A) liquid. B) insolvent. C) illiquid. D) solvent.
B
29) If the nominal interest rate is 7 percent and the inflation rate is 1 percent, the real interest rate is approximately A) 7 percent. B) 6 percent. C) 8 percent. D) -6 percent.
B
30) If the nominal interest rate is 8 percent and the inflation rate is 2 percent, the real interest rate is approximately A) 4 percent. B) 6 percent. C) 0.25 percent. D) 10 percent.
B
34) The real interest rate is 4 percent a year. When the inflation rate is zero, the nominal interest rate is approximately _____ percent a year; and when the inflation rate is 2 percent a year, the nominal interest rate is approximately _____ percent a year. A) 0; 2 B) 4; 6 C) 6; 8 D) 6; 4
B
39) Other things remaining the same, the greater the expected profit, A) the less the amount of investment. B) the greater the amount of investment. C) the steeper is the investment demand curve. D) the flatter is the investment demand curve.
B
4) The idea that a government budget deficit decreases investment is called A) government dissaving. B) the crowding-out effect. C) the Ricardo-Barro effect. D) the capital investment effect.
B
41) The expected profit from an investment will change with A) a change in the real interest rate. B) a change in technology. C) Both A and B are correct. D) Neither A nor B is correct.
B
42) The the expected profit, the greater is the . A) lower; investment demand B) higher; investment demand C) lower; capital stock D) None of the above answers is correct
B
43) As the ______ interest rate increases, the quantity of loanable funds demanded . A) real; increases B) real; decreases C) nominal; increases D) nominal; decreases
B
5) The total amount spent on new capital in a time period is equal to A) wealth. B) gross investment. C) depreciation. D) net investment.
B
51) When the real interest rate rises A) there is a downward movement along the demand for loanable funds curve. B) there is an upward movement along the demand for loanable funds curve. C) the demand for loanable funds curve shifts rightward. D) the demand for loanable funds curve shifts leftward.
B
57) 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; supply of B) leftward; demand for C) rightward; demand for D) rightward, supply of
B
66) In the above figure, new expectations of booming business conditions and a higher expected profit will A) shift the demand for loanable funds curve leftward. B) shift the demand for loanable funds curve rightward. C) have no effect on the demand for loanable funds curve. D) make the demand for loanable funds curve become horizontal.
B
67) In the above figure, technological progress that increases the expected profit will A) shift the demand for loanable funds curve leftward. B) shift the demand for loanable funds curve rightward. C) have no effect on the demand for loanable funds curve. D) make the demand for loanable funds curve become horizontal.
B
7) Net investment equals A) capital stock minus depreciation. B) gross investment minus depreciation. C) the total quantity of plant, equipment and buildings. D) gross investment/depreciation.
B
80) _______ increases households' saving. A) A decrease in the real interest rate B) A tax cut that increases disposable income C) Higher expected future income D) A stock market boom that increases the purchasing power of households' wealth
B
84) Which of the following is true regarding the effect expected future income has on saving? I. As expected future income increases, saving increases. II. Young people typically save very little. III. Middle aged people, earning higher incomes, are not very big savers. A) I and III B) II only C) III only D) II and III
B
91) 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 movement up along the supply of loanable funds curve. B) There was a leftward shift in the supply of loanable funds curve. C) There was a movement down along the demand for loanable funds curve. D) There was a rightward shift in the supply of loanable funds curve.
B
99) In the above figure, the economy is at point a on the initial supply of loanable funds curve SLF0. What happens if the real interest rate rises? A) Nothing; the economy would remain at point a. B) There would be a movement to a point such as b on supply of loanable funds curve SLF0. C) The supply of loanable funds curve would shift rightward to a curve such as SLF2. D) The supply of loanable funds curve would shift leftward to a curve such as SLF1.
B
Suppose the current real interest rate is 4 percent and the equilibrium real interest rate is 3 percent. Then A) prices rise and inflation occurs. B) there is a surplus of loanable funds. C) there is a shortage of loanable funds. D) there is neither a shortage nor surplus of loanable funds.
B
101) 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) Nothing; the economy would remain at point a. B) There would be a movement to a point such as b on supply of loanable funds curve SLF0. C) The supply of loanable funds curve would shift rightward to a curve such as SLF2. D) The supply of loanable funds curve would shift leftward to a curve such as SLF1.
C
108) If the real interest rate is below the equilibrium real interest rate, A) lenders will be unable to find borrowers willing to borrow all of the available funds and the supply of loanable funds curve will shift leftward. B) borrowers will be unable to borrow all of the funds they want to borrow and the demand for loanable funds curve will shift rightward. C) a shortage of of loanable funds will cause the real interest rate to rise. D) borrowers will be unable to borrow all of the funds they want to borrow and the demand for loanable funds curve will shift leftward.
C
11) If the economy's capital stock decreases over time, A) net investment is positive. B) depreciation is less than zero. C) depreciation exceeds gross investment. D) gross investment equals net investment.
C
11) Use the information in the table above to calculate the value of private saving. A) -$15 million B) $40 million C) $25 million D) $20 million
C
112) An increase in disposable income shifts the supply of loanable funds curve A) leftward and decreases the real interest rate. B) leftward and increases the real interest rate. C) rightward and decreases the real interest rate. D) rightward and increases the real interest rate.
C
115) Suppose the real interest rate rises and the quantity of loanable funds decreases. These changes could have been the result of A) firms expecting higher future profits. B) an increase in disposable income. C) an increase in household wealth. D) a decrease in the default risk.
C
12) Use the information in the table above to calculate the value of government saving. A) $15 million B) -$5 million C) $5 million D) $45 million
C
120) 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) only shift the supply of loanable funds curve rightward to a curve such as SLF1. 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) have no effect on either the demand for loanable funds curve or the supply of loanable funds curve.
C
13) 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
C
15) According to the Ricardo-Barro effect, A) government deficits raise the real interest rate. B) taxpayers fail to foresee that government deficits imply higher future taxes. C) households increase their personal saving when governments run budget deficits. D) government budget deficits increase households' expected future disposable income.
C
15) 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
16) The real interest rate A) can never be negative. B) is approximately equal to the nominal interest rate plus the inflation rate. C) is approximately equal to the nominal interest rate minus the inflation rate. D) is positively related to the inflation rate.
C
17) Which of the following is FALSE about saving? A) Saving adds to wealth. B) Income left after paying taxes can either be consumed or saved. C) Saving equals wealth minus consumption expenditures. D) Saving is the source of funds used to finance investment.
C
19) 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 risen over the year regardless of the interest rate at which you lent it. B) the purchasing power of your loan has remained constant 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
2) The term capital, as used in macroeconomics, refers to A) the amount of money that someone can invest in a new venture. B) the amount of money a firm can raise in the stock market. C) physical capital. D) All of the above answers are correct.
C
20) In January, suppose that a share of stock in Meyer, Inc. had a price of $50 and that each share entitled its owner to $2 of Meyer, Inc.'s profit. During the year, the price of a share of Meyer's stock rose to $100. The interest rate paid on the share in January was percent. A) 2 B) 0.02 C) 4 D) 25
C
32) If the nominal interest rate is 8 percent and the current inflation rate is 3 percent, approximately what is the real interest rate? A) 11 percent B) 8 percent C) 5 percent D) 3 percent
C
33) Assume you save $1,000 in a bank account that pays 8 percent interest per year and the inflation rate is 3 percent. At the end of the year you have earned A) a nominal return of $50. B) a negative real return. C) a real return of $50. D) a real return of $80.
C
35) Initially the nominal interest rate is 8 percent and the inflation rate is 5 percent. People know that the inflation rate increases to 10 percent. What is the new nominal interest rate? A) 8 percent B) 3 percent C) 13 percent D) 11 percent
C
48) If the real interest rate increases from 3 percent to 5 percent, A) the nominal interest rate will also increase. B) the demand for loanable funds curve will shift rightward. C) there will be a movement up along the demand for loanable funds curve. D) the supply of loanable funds curve will shift rightward.
C
49) A rise in the real interest rate A) shifts the demand for loanable funds curve rightward. B) shifts the demand for loanable funds curve leftward. C) creates a movement upward along the demand for loanable funds curve. D) creates a movement downward along the demand for loanable funds curve.
C
5) The term "crowding out" relates to the decrease in A) consumption expenditure from an increase in investment. B) the real interest rate from a government budget deficit. C) private investment from a government budget deficit. D) saving from an increase in disposable income.
C
52) The quantity of loanable funds demanded increases so there is a movement downward along the demand for loanable funds curve when A) the expected profit from investment decreases. B) business expectations become more optimistic. C) the real interest rate falls. D) the pool of loanable funds falls.
C
53) A rise in the real interest rate A) decreases the demand for loanable funds. B) increases the demand for loanable funds. C) decreases the quantity of loanable funds demanded. D) increases the quantity of loanable funds demanded.
C
6) If national saving (S) is $100,000, net taxes (T) equal $100,000 and government expenditure (G) is $25,000, how much are households and businesses saving? A) $25,000. B) $225,000. C) -$25,000. D) none of the above
C
6) In January 2010, Tim's Gyms, Inc. owned machines valued at $1 million. During the year, the market value of the equipment fell by 30 percent. During 2010, Tim spent $200,000 on new machines. During 2010, Tim's gross investment totalled A) $1 million. B) $300,000. C) $200,000 D) $900,000.
C
6) The crowding out effect refers to A) government spending crowding out private spending. B) private saving crowding out government saving. C) government investment crowding out private investment. D) private investment crowding out government saving.
C
62) In the above figure, a decrease in the expected profit will result in a movement from point E to A) point F. B) point G. C) point H. D) point I.
C
77) Households will choose to save more if A) income is expected to decrease in the future. B) current disposable income increases. C) Both answers A and B are correct. D) Neither answer A nor B is correct.
C
8) If the government begins to run a larger budget deficits, then assuming there is no Ricardo-Barro effect, the demand for loanable funds _______ and the real interest rate ________ A) decreases; falls B) decreases; rises C) increases; rises D) increases; falls
C
8) The increase in the capital stock equals the amount of A) gross investment. B) depreciation. C) net investment. D) private sector spending.
C
82) Suppose Molly has an income of $35,000 annually and has inherited a savings account of $20,000. Wyatt has a job that pays $35,000 annually, but has debts totaling $6,000. Which of the following is true? A) We can expect Wyatt and Molly to save the same proportion of their incomes this year. B) We can expect Molly to save more than Wyatt this year. C) We can expect Wyatt to save more than Molly this year. D) We can expect Wyatt and Molly to have equal amounts of consumption this year.
C
87) The supply of loanable funds is the relationship between loanable funds and _____ other things remaining the same. A) real GDP B) the price level C) the real interest rate D) the inflation rate
C
89) Which of the following will shift the supply of loanable funds curve leftward? A) a decrease in the real interest rate B) a decrease in real wealth C) a decrease in disposable income D) a decrease in expected future income
C
9) If our exports are $2.2 billion and our imports are $2.7 billion, A) the United States is lending to the rest of the world. B) U.S. national saving is too high. C) the United States is borrowing from the rest of the world. D) U.S. investment must decrease.
C
9) In the absence of a Ricardo-Barro effect, a government budget deficit _______the demand for loanable funds and _______ investment. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases
C
92) When the real interest rate increases, A) the supply of loanable funds curve shifts rightward. B) the supply of loanable funds curve shifts leftward. C) there is a movement upward along the supply of loanable funds curve. D) there is a movement downward along the supply of loanable funds curve.
C
93) An increase in the real interest rate results in a A) rightward shift in the supply of loanable funds curve. B) leftward shift in the supply of loanable funds curve. C) movement along the supply of loanable funds curve. D) None of the above.
C
94) 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
1) 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
104) When the actual real interest rate is less than the equilibrium real interest rate, A) the equilibrium real interest rate will rise. B) borrowers find it difficult to borrow. C) there is a shortage of loanable funds. D) Both answers B and C are correct.
D
105) If the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded, then _____ . A) the real interest rate will rise B) firms will decrease their investment demand C) people will save more D) the real interest rate will fall
D
11) In the absence of a Ricardo-Barro effect, a government budget deficit _____ the demand for loanable funds, _____the real interest rate, and ______ investment. A) increases; decreases; crowds out B) increases; decreases; increases C) decreases; increases; increases D) decreases; increases; crowds out
D
111) In the above figure, if the real interest rate is 8 percent, then there is A) an increase in the equilibrium interest rate. B) a rightward shift in the DLF curve. C) a leftward shift in the SLF curve. D) a surplus of loanable funds.
D
12) In January 2010, Tim's Gyms, Inc. owned machines valued at $1 million. During the year, the market value of the equipment fell by 30 percent. During 2010, Tim spent $200,000 on new machines. During 2010, Tim's net investment totalled A) $1 million. B) $300,000. C) $200,000. D) $100,000.
D
13) The Acme Stereo Company had a capital stock of $24 million at the beginning of the year. At the end of the year, the firm had a capital stock of $20 million. Thus its A) net investment was some amount but we need more information to determine the amount. B) net investment was $4 million for the year. C) gross investment was zero. D) net investment was -$4 million for the year.
D
16) 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 capital stock at the end of year equals A) 1 machine. B) 2 machines. C) 3 machines. D) 6 machines.
D
20) When the inflation rate is zero, the A) real interest rate is greater than the nominal interest rate. B) real interest rate is less than the nominal interest rate. C) nominal interest rate is zero. D) real interest rate equals the nominal interest rate.
D
23) If the Ricardo-Barro effect is present, a government budget deficit raises the equilibrium real interest rate by ______ and decreases the equilibrium quantity of investment by _______ than if the Ricardo-Barro effect is absent. A) more; more B) more; less C) less; more D) less; less
D
3) If the government's budget deficit increases and the Ricardo- Barro effect does not apply, A) the real interest rate rises. B) investment increases C) investment decreases D) Both answers A and C are correct.
D
3) National saving is defined as the amount of A) business saving. B) household saving. C) business saving and household saving. D) private saving and government saving.
D
36) Suppose that, initially, the nominal interest rate is 6 percent and the inflation rate is 3 percent. If the inflation rate increases to 6 percent, what will be the new nominal interest rate? A) 6 percent B) 1 percent C) 11 percent D) 9 percent
D
37) A firm's decision to invest in a project is based on the A) real interest rate and expected total revenue. B) nominal interest rate and expected total revenue. C) nominal interest rate and the expected profit. D) real interest rate and the expected profit.
D
4) National saving equals A) household saving + business saving. B) household saving + business saving + government saving. C) household saving + business saving + net taxes - government expenditure. D) Both answers B and C are correct.
D
47) The demand for loanable funds curve shows that as the _____ interest rate increases, there will be a ______ curve. A) nominal; rightward shift in B) real; rightward shift in C) nominal; movement down along D) real; movement up along.
D
50) A decrease in the real interest rate leads to A) an increase in investment demand so that the demand for loanable funds curve shifts rightward. B) a fall in the capital stock. C) an increase in the expected profit. D) a movement downward along the demand for loanable funds curve.
D
54) A decrease in the real interest rate leads to a ______ the demand for loanable funds curve, and a decrease in the expected profit leads to a _______ the demand for loanable funds curve. A) rightward shift in; leftward shift in B) movement down along; movement up along C) rightward shift in; movement up along D) movement down along; leftward shift in
D
55) A decrease in the demand for loanable funds and a leftward shift of the demand for loanable funds curve results from A) an increase in the real interest rate. B) technological improvements. C) tax cuts. D) decreases in the expected profit.
D
58) Which of the following shifts the demand for loanable funds curve leftward? A) a fall in the real interest rate B) a rise in the real interest rate C) a decrease in the taxes paid by the business D) a decrease in the expected profit
D
65) In the above figure, the demand for loanable funds curve is drawn for the average expected profit. If the real interest rate is constant at 6 percent and and the expected profit rises, the amount of loanable funds demanded will be A) less than $450 billion. B) $450 billion. C) between $300 billion and $450 billion. D) greater than $450 billion.
D
7) If the government has a budget deficit, crowding out might occur. Crowding out leads to all of the following EXCEPT A) a higher real interest rate. B) a decreased quantity of investment. C) a smaller capital stock in the future. D) decreased private saving.
D
71) Which of the following influences household saving? I. The real interest rate. II. Disposable income. III. Expected future income. A) I only B) I and II C) I and III D) I, II, and III
D
9) The capital stock increases whenever A) gross investment is exceeds net investment. B) net investment exceeds gross investment. C) gross investment is negative. D) net investment is positive.
D
98) 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) Nothing; the economy would remain at point a. B) There would be a movement to a point such as b on supply of loanable funds curve SLF0. C) The supply of loanable funds curve would shift rightward to a curve such as SLF2. D) The supply of loanable funds curve would shift leftward to a curve such as SLF1.
D
10) 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) higher; higher B) higher; lower C) lower; higher D) lower; lower
B
10) Suppose Country A had net taxes of $30 million and government expenditures of $35 million. In addition, household saving in Country A totalled $5 million while consumption was $80 million. The government of Country A is running a budget ____ and national saving is ______ million. A) surplus; $5 B) deficit; -$5 C) deficit; $5 D) surplus; $25
B
103) An increase in the real interest rate ______ the quantity of loanable funds supplied and ______ the quantity of loanable funds demanded. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases
B
