FINANCE, SAVINGS AND INVESTMENT

A

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

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

T

Expected profit and the real interest rate affect investment decisions.

F

If Ann's disposable income increases, her saving decreases.

B

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

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.

F

The nominal interest rate is approximately equal to the real interest rate minus the inflation rate.

A

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

Which of the following are included in the supply of loanable funds? i. private saving ii. governmentbudgetsurplus iii. international borrowing A) i, ii and iii. B) i and iii. C) ii and iii. D) i and ii.

A

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

C

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

B

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.

A

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.

D

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

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.

C

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

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.

T

As the purchasing power of wealth increases, saving decreases.

C

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.

D

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.

A

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.

C

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.

C

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

D

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

A

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

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

B

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

A

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

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

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.

C

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

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.

B

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

C

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

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

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.

A

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.

B

If a bank's net worth is negative, then the bank definitely is A) liquid. B) insolvent. C) illiquid. D) solvent.

A

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

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

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

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

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

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

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.

A

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.

C

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.

D

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. machines. During 2010, Tim's net investment totalled A) $1 million. B) $300,000. C) $200,000. D) $100,000.

C

In January 2010, Tim's Gyms, Inc. owned machines valued at $1 million. 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

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. percent. The interest rate paid on the share in January was ________ A) 2 B) 0.02 C) 4 D) 25

A

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

D

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

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

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.

B

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

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.

A

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

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.

C

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.

B

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.

A

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.

B

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

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.

D

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.

A

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

A

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.

D

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

B

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

D

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.

B

The greater a household's ________ the less is its saving. A) return from saving B) wealth C) disposable income D) expected future profits

B

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.

C

The increase in the capital stock equals the amount of A) gross investment. B) depreciation. C) net investment. D) private sector spending.

B

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

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

C

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

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.

T

The real interest rate has a positive relationship with the supply of loanable funds.

F

The supply of loanable funds curve shifts leftward if the real interest rate rises.

C

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

A

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.

C

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

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.

B

The total amount spent on new capital in a time period is equal to A) wealth. B) gross investment. C) depreciation. D) net investment.

F

There is a positive relationship between the demand for loanable funds and the real interest rate.

C

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

D

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.

A

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.

B

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.

D

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.

C

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.

B

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.

A

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

A

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.

D

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

B

________ 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

A

f 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

C

hich 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.

B

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

C

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.

B

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

C

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.

B

As the ________ interest rate increases, the quantity of loanable funds demanded ________. A) real; increases B) real; decreases C) nominal; increases D) nominal; decreases

C

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.

A

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.

B

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.

A

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.