Chapter 10

Gross investment A) includes only replacement investment. B) does not include additions to inventories. C) is the purchase of new capital. D) Both answers A and B are correct.

C) is the purchase of new capital.

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) 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. B) only shift the supply of loanable funds curve rightward to a curve such as SLF1. 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) only shift the demand for loanable funds curve rightward to a curve such as DLF1.

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

C) plus; equals

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) The supply of loanable funds curve shifts rightward to a curve such as SLF2. B) There is a movement to a point such as b on supply of loanable funds curve SLF0. C) The supply of loanable funds curve shifts leftward to a curve such as SLF1. D) none of the above

B) There is a movement to a point such as b on supply of loanable funds curve SLF0.

Which one of the following statements is true? A) The savings and loan crisis of the 1990s was due to the big U.S. budget deficit. B) Deposit insurance guarantees savings up to $1,000,000. C) Deposit insurance was created to prevent bank runs from occurring. D) Savings and loan institutions were very profitable during the 1970s when there was high inflation

C) Deposit insurance was created to prevent bank runs from occurring.

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) There would be a movement to a point such as b on supply of loanable funds curve SLF0. B) Nothing; the economy would remain at point a. C) The supply of loanable funds curve would shift leftward to a curve such as SLF1. D) The supply of loanable funds curve would shift rightward to a curve such as SLF2

C) The supply of loanable funds curve would shift leftward to a curve such as SLF1

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) The demand for loanable funds curve shifts rightward to a curve such as DLF2. B) The demand for loanable funds curve shifts leftward to a curve such as DLF1. C) There is a movement to a point such as b on the demand for loanable funds curve DLF0. D) none of the above

C) There is a movement to a point such as b on the demand for loanable funds curve DLF0.

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 10 percent. B) greater than 5 percent. C) greater than 15 percent. D) positive

C) greater than 15 percent.

In January 2008, Timʹs Gyms, Inc. owned machines valued at $1 million. During the year, the market value of the equipment fell by 30 percent. During 2008, Tim spent $200,000 on new machines. During 2008, Timʹs gross investment totalled A) $1 million. B) $300,000. C) $900,000. D) $200,000

D) $200,000

When the actual real interest rate is less than the equilibrium real interest rate, A) the equilibrium real interest rate will rise. B) there are not enough loanable funds supplied for the quantity of loanable funds demanded. C) borrowers find it difficult to borrow. D) Both answers B and C are correct.

D) Both answers B and C are correct.

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) II and III B) I and III C) III only D) II only

D) II only

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) 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

D) There would be a movement to a point such as b on supply of loanable funds curve SLF0

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) between $300 billion and $450 billion. B) $450 billion. C) less than $450 billion. D) greater than $450 billion

D) greater than $450 billion

The term capital, as used in macroeconomics, refers to A) financial wealth. B) the sum of investment and government purchases of goods. C) investment. D) the plant, equipment, buildings, and inventories of raw materials and semi-finished goods.

D) the plant, equipment, buildings, and inventories of raw materials and semi-finished goods.

Which of the following is correct? A) As disposable income decreases, saving decreases. B) As saving increases, investment by households decreases. C) As disposable income increases, the real interest rate increases. D) As saving decreases, disposable income increases.

A) As disposable income decreases, saving decreases.

Which of the following influences household saving? I. The real interest rate. II. Disposable income. III. Expected future income. A) I, II, and III B) I and III C) I only D) I and II

A) I, II, and III

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 to save more than Molly this year. B) We can expect Molly to save more than Wyatt this year. C) We can expect Wyatt and Molly to have equal amounts of consumption this year. D) We can expect Wyatt and Molly to save the same proportion of their incomes this year

A) We can expect Wyatt to save more than Molly this year.

Which of the following is an example of risk diversification? A) a lumber mill purchasing trees from various forests across the western United States B) an insurance company writing earthquake insurance only for the Los Angeles area C) an individual purchasing only IBM stock D) an individual investing all of her savings in a single, new firm

A) a lumber mill purchasing trees from various forests across the western United States

Diversification ________ the risks of investing in the stock market. A) can reduce but not eliminate B) increases C) is unrelated to D) eliminates

A) can reduce but not eliminate

Deposit insurance indirectly helped to create the savings and loan crisis in the United States because: A) depositors were not concerned with the types of investments made because they were insured, while at the same time savings and loans were aggressively investing in risky projects. B) depositors, believing that the government would not secure their deposits, were very concerned with the types of investments made at savings and loans. C) depositors were not concerned with the types of investment made because savings and loans were making very conservative investments. D) the government, without warning, eliminated deposit insurance for savings and loans, thereby causing a run on these institutions

A) depositors were not concerned with the types of investments made because they were insured, while at the same time savings and loans were aggressively investing in risky projects.

Which of the following items are considered physical capital? i. shares of Ford traded on the NYSE ii. the production line at the Saturn plant in Tennessee iii. the windshields at the Saturn plant in Tennessee iv. the salaries paid to Ford executives A) ii and iii B) i, ii and iii C) i and iv D) i, ii and iv

A) ii and iii

Financial intermediaries reduce risk by: A) investing in a large number of projects with independent returns. B) investing in a small number of projects with independent returns. C) limiting the diversity of their investment portfolios. D) gaining expertise in evaluating and monitoring investments.

A) investing in a large number of projects with independent returns.

If households believe they will experience higher income in the near future, the result is a A) leftward shift in the supply of loanable funds curve. B) rightward 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) leftward shift in the supply of loanable funds curve.

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) greater than $600 billion. C) between $450 billion and $600 billion. D) $450 billion.

A) less than $450 billion.

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

A) private saving, government budget surpluses, and borrowing from the rest of the world.

Financial intermediaries are institutions that facilitate the movement of funds from savers to investors because they: A) provide liquidity. B) guarantee positive returns on investments. C) eliminate risks. D) eliminate the costs of negotiating such transactions

A) provide liquidity.

If the real interest rate rises, people A) save more. B) decrease their expected future income. C) earn a higher real wage rate. D) save less.

A) save more.

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 disposab le income and the expected profit would A) 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. B) only shift the supply of loanable funds curve rightward to a curve such as SLF1. C) have no effect on either the demand for loanable funds curve or the supply of loanable funds curve. D) only shift the demand for loanable funds curve rightward to a curve such as DLF1.

A) 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.

A decrease in disposable income ________. A) shifts the supply of loanable funds curve leftward B) shifts the supply of loanable funds curve rightward C) results in movement up the supply of loanable funds curve D) has no effect on the supply of loanable funds curve

A) shifts the supply of loanable funds curve leftward

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) $25,000. C) $225,000. D) none of the above

B) $25,000.

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 and hence undertaken. C) Consumers are willing to spend less and hence save more at higher real interest rates. D) All of the above are correct 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 and hence undertaken.

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

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) The supply of loanable funds curve would shift rightward to a curve such as SLF2. C) There would be a movement to a point such as b on supply of loanable funds curve SLF0. D) 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.

In the above figure, an 8 percent real interest rate results in A) a rightward shift in the DLF curve. B) a surplus of loanable funds. C) a leftward shift in the SLF curve. D) an increase in the equilibrium interest rate.

B) a surplus of loanable funds.

The ________ the expected profit from new capital, the greater is the ________. A) lower; capital stock B) greater; investment demand C) lower; investment demand D) None of the above answers is correct

B) greater; investment demand

An increase in the real interest rate increases the quantity of saving because the higher real interest rate A) increases the cost of buying capital. B) decreases the benefit of saving. C) increases the opportunity cost of current consumption. D) reduces taxes because interest payments are tax deductible.

C) increases the opportunity cost of current consumption.

If the real interest rate is above the equilibrium real interest rate, A) borrowers will be unable to borrow all of the funds they want to borrow and the real interest rate will fall. B) lenders will be unable to find borrowers willing to borrow all of the available funds and the real interest rate will fall. 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 rise.

B) lenders will be unable to find borrowers willing to borrow all of the available funds and the real interest rate will fall

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 I. D) point H

B) point G.

In the above figure, a decrease in the expected profit will result in a movement from point E to A) point G. B) point H. C) point I. D) point F

B) point H.

Financial intermediaries: A) allow for a smaller volume of investment in the economy. B) reduce the costs associated with investment. C) only provide services for the wealthy. D) increase the risks associated with investment.

B) reduce the costs associated with investment.

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) make the demand for loanable funds curve become horizontal. D) have no effect on the demand for loanable funds curve.

B) shift the demand for loanable funds curve rightward.

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

B) shift the demand for loanable funds curve rightward.

In the market for loanable funds, an increase in wealth shifts the ________ loanable funds curve ________. A) supply of; rightward B) supply of; leftward C) demand for; leftward D) demand for; rightward

B) supply of; leftward

Which of the following is NOT a determinant of household saving? A) the householdʹs wealth B) the nominal interest rate C) expected future income D) disposable income

B) the nominal interest rate

People know that the inflation rate will increase from 3 percent to 5 percent. As a result A) the nominal interest rate is constant. B) the nominal interest rate rises by 2 percentage points. C) the nominal interest rate falls by 2 percentage points. D) the real interest rate rises by 2 percentage points.

B) the nominal interest rate rises by 2 percentage points.

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

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

If you lend a dollar for a year and at the end of the year the price level has risen by 10 percent, A) you must have earned a nominal interest rate of 5 percent to maintain the purchasing power of your loan. B) you must have earned a nominal interest rate of 10 percent to maintain thepurchasing 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) 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 10 percent to maintain thepurchasing power of your loan.

In the above figure, if the real interest rate was 8, there would be A) underproduction in this economy. B) a shortage of loanable funds. C) a surplus of loanable funds. D) a shortage in available funds for investment.

C) a surplus of loanable funds.

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

C) financial capital.

Net investment equals A) capital stock minus depreciation. B) gross investment/depreciation. C) gross investment minus depreciation. D) the total quantity of plant, equipment and buildings.

C) gross investment minus depreciation.

If households expect an increase in their future incomes, they will save A) and consume more today B) more and consume less today C) less and consume more today D) and consume less today

C) less and consume more today

The payoffs resulting from new investment: A) occur in the future and are known with certainty. B) depend only on current profits. C) occur in the future but are not known with certainty. D) occur in the present and are known with certainty.

C) occur in the future but are not known with certainty.

Financial intermediaries reduce the costs of negotiation by: A) investing in a small number of projects with independent returns. B) investing in a large number of projects with independent returns. C) pooling funds. D) gaining expertise in evaluating and monitoring investments.

C) pooling funds.

In the market for loanable funds, as the interest rate rises the ________ and the ________. A) supply of loanable funds decreases; demand for loanable funds increases B) quantity of loanable funds supplied decreases; quantity of loanable funds demanded increases C) quantity of loanable funds supplied increases; quantity of loanable funds demanded decreases D) supply of loanable funds increases; demand for loanable funds decreases

C) quantity of loanable funds supplied increases; quantity of loanable funds demanded decreases

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

C) real interest rate is greater than the nominal interest rate.

Which of the following activities does not diversify risk? A) writing earthquake insurance policies for the entire Western United States B) investing in real estate in various states across the U.S. C) writing hurricane insurance policies only in Florida D) purchasing the stock of a variety of different companies

C) writing hurricane insurance policies only in Florida

Which of the following is an example of investment? A) A student attends college. B) A firm builds a new plant. C) The government builds a dam to have a source of hydroelectric power. D) all of the above

D) all of the above

The equilibrium real interest rate is determined by the A) demand for loanable funds curve and the consumption demand curve. B) government spending curve and the taxing curve. C) consumption demand curve and the supply of loanable funds curve. D) demand for loanable funds curve and the supply of loanable funds curve

D) demand for loanable funds curve and the supply of loanable funds curve

Financial intermediaries are: A) persons that advise households on investment decisions. B) salespersons who collect money from customers purchasing goods and services. C) firms that receive funds from investors and channel them to savers. D) firms that receive funds from savers and channel them to investors

D) firms that receive funds from savers and channel them to investors

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) rightward, supply of C) rightward; demand for D) leftward; demand for

D) leftward; demand for

A nationʹs investment must be financed by A) borrowing from the rest of the world only. B) national saving only. C) the governmentʹs budget deficit. D) national saving plus borrowing from the rest of the world.

D) national saving plus borrowing from the rest of the world.

In the above figure, an increase in the expected profit will result in a movement from point E to A) point I. B) point H. C) point G. D) point F

D) point F

Technological progress that increases the expected profit shifts the demand for loanable funds curve A) rightward and reduces the real interest rate. B) leftward and increases the real interest rate. C) leftward and reduces the real interest rate. D) rightward and increases the real interest rate

D) rightward and increases the real interest rate

The amount of ________ by households will be less ________. A) saving; the higher is disposable income B) consumption; the higher is disposable income C) consumption; the lower is the inflation rate D) saving; the lower is the real interest rate

D) saving; the lower is the real interest rate

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 neither a shortage nor surplus of loanable funds. C) there is a shortage of loanable funds. D) there is a surplus of loanable funds.

D) there is a surplus of loanable funds.