ECON 102 Ch 7

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

A) II and III only

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

B) A lower real interest rate makes more investment projects profitable.

33) If the world real interest rate falls, then a country that is a net foreign lender A) does not change the amount of its lending. B) increases the amount of its lending. C) decreases the amount of its lending. D) None of the above answers is correct because lending might increase, decrease, or not change.

C) decreases the amount of its lending.

26) The quantity of loanable funds demanded increases so there is a movement downward along the demand for loanable funds curve when A) business expectations become more optimistic. B) the pool of loanable funds falls. C) the real interest rate falls. D) the expected profit from investment decreases.

C) the real interest rate falls.

34) 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 consumption expenditure plus investment. C) rest of the world may or may not finance the U.S. trade deficit. D) United States must borrow an amount equal to imports minus exports.

D) United States must borrow an amount equal to imports minus exports.

16) 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) helps finance investment.

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4) 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; $1.0 billion B) $1.0 billion; $1.3 billion C) $1.3 billion; $1.6 billion D) $1.0 billion; $0.7 billion

A) $1.3 billion; $1.0 billion

31) 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 real interest rate is 6 percent and the nominal interest rate is 7.5 percent. C) The real interest rate is 7.5 percent and the nominal interest rate is 1.5 percent. D) The nominal interest rate is 7.5 percent and the real interest rate is 13.5 percent.

A) The nominal interest rate is 7.5 percent and the real interest rate is 1.5 percent.

39) 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 surplus. C) the international impact of government deficits. D) a large crowding out effect from a government budget deficit.

A) a change in private savings supply.

25) 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) technological improvements. C) tax cuts. D) an increase in the real interest rate.

A) decreases in the expected profit.

23) A small country is a net foreign borrower and its supply of loanable funds increases. As a result, the equilibrium quantity of loanable funds used in the country ________ and the country's foreign borrowing ________. A) does not change; decreases B) does not change; increases C) increases; does not change D) does not change; does not change

A) does not change; decreases

2) 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) rises from $2,000 to $2,500. D) falls from $25,000 to $20,000.

A) falls from $2,500 to $2,000.

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

A) government spending crowding out private investment.

30) 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) positive. D) greater than 5 percent.

A) greater than 15 percent.

18) 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 ii. C) i and iii. D) ii and iii.

A) i, ii and iii

22) A small country is a net foreign borrower and its demand for loanable funds increases. As a result, the equilibrium quantity of loanable funds used in the country ________ and the country's foreign borrowing ________. A) increases; increases B) increases; does not change C) does not change; increases D) does not change; does not change

A) increases; increases

12) Approximately, the real interest rate ________ the inflation rate ________ the nominal interest rate. A) plus; equals B) equals; minus C) equals; plus D) minus; equals

A) plus; equals

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

A) private investment from a government budget deficit.

24) When the inflation rate is zero, the A) real interest rate equals the nominal interest rate. B) real interest rate is less than the nominal interest rate. C) real interest rate is greater than the nominal interest rate. D) nominal interest rate is zero.

A) real interest rate equals the nominal interest rate.

14) An increase in disposable income shifts the supply of loanable funds curve A) rightward and decreases the real interest rate. B) leftward and decreases the real interest rate. C) rightward and increases the real interest rate. D) leftward and increases the real interest rate.

A) rightward and decreases the real interest rate

5) ________ increases households' saving. A) Higher expected future income B) A tax cut that increases disposable income C) A stock market boom that increases the purchasing power of households' wealth D) A decrease in the real interest rate

B) A tax cut that increases disposable income

19) A decrease in the government budget deficit decreases the ________ loanable funds and an increase in the government budget surplus increases the ________ loanable funds. A) supply of; demand for B) demand for; supply of C) supply of; supply of D) demand for; demand for

B) demand for; supply of

13) 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) rises; decreases B) falls; decreases C) rises; increases D) falls; increases

B) falls; decreases

35) 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) foreigners must borrow from the United States or sell U.S. assets to make up the difference.

21) A small country is a net foreign borrower if its real interest rate without foreign borrowing is ________ the world real interest rate. A) lower than B) higher than C) equal to D) not comparable to

B) higher than

7) National saving is defined as the amount of A) business saving and household saving. B) private saving and government saving. C) household saving. D) business saving.

B) private saving and government saving.

28) The demand for loanable funds is the relationship between loanable funds and the ________ other things remaining the same. A) price level B) real interest rate C) inflation rate D) nominal interest rate

B) real interest rate

32) Suppose that Country A (a small country) has exports of $40 million and imports of $50 million. As a result, Country A will ________ funds from/to the rest of the world and engage in net foreign ________. A) send; lending B) receive; borrowing C) receive; lending D) send; borrowing

B) receive; borrowing

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

B) there will be a movement up along the demand for loanable funds curve.

1) 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 6 percent. B) rises from 8 percent to 10 percent. C) falls from 10 percent to 8 percent. D) does not change because it is not affected by the price of the bond.

C) falls from 10 percent to 8 percent.

37) According to the Ricardo-Barro effect, government deficits A) lead to simultaneous decreases in private saving and decreases in the equilibrium real interest rate and investment. B) lead to a fall in the equilibrium real interest rate and a rise in investment. C) lead to simultaneous increases in private saving and no effect on the equilibrium real interest rate and investment. D) lead to a rise in the equilibrium real interest rate, crowding out investment.

C) lead to simultaneous increases in private saving and no effect on the equilibrium real interest rate and investment.

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

C) net investment is positive.

11) Suppose Country A had net taxes of $30 million and government expenditures of $35 million. In addition, household saving in Country A totaled $5 million while consumption was $80 million. The government of Country A is running a budget ________ of ________ million. A) deficit; $5 B) surplus; $25 C) surplus; $5 D) deficit; -$5

D) deficit; -$5

20) In the global loanable funds market, A) when funds enter a country, a surplus of funds raises the real interest rate. B) when funds leave a country, a shortage of funds lowers the real interest rate. C) funds flow into countries with the lowest risk-adjusted interest rates and out of countries with the highest risk-adjusted interest rates. D) funds flow into countries with the highest risk-adjusted interest rates and out of countries with the lowest risk-adjusted interest rates.

D) funds flow into countries with the highest risk-adjusted interest rates and out of countries with the lowest risk-adjusted interest rates.

40) 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) surplus; positive

15) 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) you must have earned a nominal interest rate of 5 percent to maintain the purchasing power of your loan. C) the purchasing power of your loan has risen over the year regardless of the interest rate at which you lent it. D) 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 10 percent to maintain the purchasing power of your loan.