Econ 102 Chapter 7

II and III

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

$1.3 billion; $1.0 billion

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 ________.

financial capital.

11) The funds used to buy and operate physical capital are

II and III only

12) Investment is financed by which of the following? I. Government spending II. National saving III. Borrowing from the rest of the world

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

13) U.S. investment is financed from

national saving plus borrowing from the rest of the world.

14) A nation's investment must be financed by

United States must borrow an amount equal to imports minus exports

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

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

16) If foreigners spend more on U.S.-made goods and services than we spend on theirs

both I and II

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

$200,000

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

you must have earned a nominal interest rate of 10 percent to maintain the purchasing power of your loan.

20) If you lend a dollar for a year and at the end of the year the price level has risen by 10 percent

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

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?

6 percent.

22) If the nominal interest rate is 7 percent and the inflation rate is 1 percent, the real interest rate is approximately

6 percent.

23) If the nominal interest rate is 8 percent and the inflation rate is 2 percent, the real interest rate is approximately

I only

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 lower real interest rate makes more investment projects profitable

25) Which of the following explains why the demand for loanable funds is negatively related to the real interest rate?

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

26) If the real interest rate increases from 3 percent to 5 percent

creates a movement upward along the demand for loanable funds curve.

27) A rise in the real interest rate

decreases in the expected profit.

28) A decrease in the demand for loanable funds and a leftward shift of the demand for loanable funds curve results from

shifts the demand for loanable funds curve rightward.

29) Greater optimism about the expected profits from investment projects

net investment is positive.

3) The capital stock increases whenever

leftward; demand for

30) Due to the recession in 2008, firms decreased their profit expectations. As a result, there was a ________ shift in the ________ loanable funds curve.

decrease in the expected profit

31) Which of the following shifts the demand for loanable funds curve leftward?

I, II and III

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

saving, the government budget surplus and international borrowing

35) In the loanable funds market, the supply comes from

a decrease in disposable income

36) Which of the following will shift the supply of loanable funds curve leftward?

There was a leftward shift in the supply of loanable funds curve.

37) As a result of the recession in 2008, the default risk increased. How did this change affect the loanable funds market?

I only

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.

net investment is positive.

4) If the economy's capital stock increases over time

surplus; positive

43) If net taxes exceed government expenditures, the government sector has a budget ________ and government saving is ________.

helps finance investment.

44) When a government has a budget surplus, the surplus

private investment from a government budget deficit

45) The term "crowding out" relates to the decrease in

government investment crowding out private investment.

46) The crowding-out effect refers to

increases; decreases

47) In the absence of a Ricardo-Barro effect, a government budget deficit ________ the demand for loanable funds and ________ investment.

higher; lower

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.

households increase their personal saving when governments run budget deficits.

49) According to the Ricardo-Barro effect

-$100,000.

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

government budget deficits have no crowding out effect because taxpayers increase their savings to match the quantity of loanable funds demanded by the government.

50) The Ricardo-Barro effect says that

1 machine.

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

3 machines.

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

falls from 10 percent to 8 percent.

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

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

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