Practice Questions

If a firm wants to borrow $10 million and the real interest rate increases from 5 percent to 6 percent,then the cost of the investment has increased by A)$100,000 per year. B)$600,000 per year. C)$6 million per year. D)$1 million per year. E)nothing because the real interest rate is the return the firm will earn on its investment.

A)$100,000 per year

A share of stock is a A)certificate of ownership and claim to the profits made by a firm. B)form of investment in physical capital. C)promise to pay specified sums of money on specified dates. D)collection of funds that travels the world looking for the highest return. E)set of demanders and suppliers for the savings of households.

A)certificate of ownership and claim to the profits made by a firm.

The decrease in the value of the capital that results from its use and obsolescence is A)depreciation. B)net investment. C)appreciation. D)deconstruction. E)gross investment.

A)depreciation.

Riley deposits $4,000 cash in her checkable deposit at Fershur Bank. If the desired reserve ratio is 5percent, Fershur Bank's A)desired reserves increase by $200 and its excess reserves increase by $3,800. B)assets and its liabilities change in opposite directions. C)excess reserves increase by $4,000. D)desired reserves increase by $4,000. E)liabilities do not change but its assets increase.

A)desired reserves increase by $200 and its excess reserves increase by $3,800.

Which of the following are typically financed in a "bond market"? i.a mortgage for a house ii.state government borrowing for a new road project iii.your purchase of 4,000 shares of stock in Google A)ii only B)i and ii C)i only D)ii and iii

A)ii only

Banks create money by A)making loans. B)printing currency. C)asking the Fed to print more currency. D)buying government securities. E)lending to the Fed.

A)making loans.

Government saving is equal to A)net taxes minus government expenditures. B)net taxes plus government expenditures. C)net taxes. D)the quantity of investment demanded. E)private savings minus government expenditures.

A)net taxes minus government expenditures.

The real interest rate is ________ related to the supply of loanable funds because ________. A)positively; the opportunity cost of consumption expenditure increases as the real interest rate rises B)negatively; people are motivated to save more as the real interest rate rises C)negatively; the opportunity cost of consumption expenditure increases as the real interest rate rises D)positively; people are motivated to increase their consumption expenditure as the real interest rate rises E)None of the above answers is correct.

A)positively; the opportunity cost of consumption expenditure increases as the real interest rate rises

Open market operations are the A)purchase or sale of government securities by the Fed. B)purchase or sale of gold by the Fed. C)borrowing of reserves by the Fed from the banking system. D)minimum percentage of loans that banks must retain as reserves in the open market. E)lending of reserves to the banking system by the Fed.

A)purchase or sale of government securities by the Fed.

Economists use the word "capital" to mean A)the tools, instruments, and other produced goods used to produce goods and services. B)the funds that firms use to buy and operate their businesses. C)the workers that firms employ to produce goods and services. D)purchases in the market for stocks and bonds. E)people's skills and talents.

A)the tools, instruments, and other produced goods used to produce goods and services.

During this year, Barbara earned $60,000 as a financial analyst, paid taxes of $5,000 and consumed$53,000. If Barbara's wealth was $4,000 at the beginning of the year, at the end of the year Barbara's wealth was A)$2,000. B)$6,000. C)$5,000. D)$4,000. E)$60,000.

B)$6,000.

If the currency drain ratio is 30 percent and the desired reserve ratio is 10 percent, the money multiplier is A)5.00. B)3.25. C)0.80. D)1.25. E)10.0.

B)3.25.

Bill's Lawn service starts the year with 20 lawn mowers. During the year, 3 mowers break and are not worth fixing. Bill also expands his business and buys 10 more mowers. Bill's net investment is________ mowers. A)20 B)7 C)27 D)10 E)13

B)7

________ increases the quantity of capital, and ________ decreases the quantity of capital. A)Net investment; gross investment B)Investment; depreciation C)Investment; saving D)Gross investment; net investment E)Depreciation; net investment

B)Investment; depreciation

A document that promises to pay specified sums of money on specified dates and is a debt to the issuer is called A)depreciation. B)a bond. C)net investment. D)a stock. E)gross investment.

B)a bond.

A decrease in households' disposable income ________ saving supply, and the supply of loanable funds curve ________. A)increases; shifts rightward B)decreases; shifts leftward C)does not change; does not shift D)decreases; shifts rightward E)increases; shifts leftward

B)decreases; shifts leftward

Actual reserves are equal to A)excess reserves plus liabilities. B)desired reserves plus excess reserves. C)government securities plus cash in the bank's vault. D)required reserves plus fractional deposits. E)minimum balances plus desired reserves.

B)desired reserves plus excess reserves.

If a surplus of loanable funds exists in the loanable funds market, the real interest rate ________and the quantity of saving ________. A)falls; does not change B)falls; decreases C)falls; increases D)rises; increases E)rises; decreases

B)falls; decreases

Money is any commodity or token that is A)backed by gold. B)generally accepted as a means of payment. C)generally accepted as a means of measurement. D)issued by the government. E)a store of value.

B)generally accepted as a means

​​The demand for loanable funds includes demand for I.loans. Ii.stocks. iii.bonds. A)ii and iii B)i, ii and iii C)iii only D)i only E)i and ii

B)i, ii and iii

If the real interest rate falls, people decide to ________ because the opportunity cost of ________. A)decrease their consumption expenditure; consumption has decreased B)increase their consumption expenditure; consumption has decreased C)increase their consumption expenditure; saving has decreased D)save more; saving has decreased E)None of the above answers is correct.

B)increase their consumption expenditure; consumption has decreased

If the Fed makes an open market purchase of $1 million of government securities, the monetary base A)will increase by a multiple of $1 million over time. B)is increased by $1 million. C)is decreased by $1 million. D)is unchanged in size, though its composition changes. E)will decrease by a multiple of $1 million over time.

B)is increased by $1 million.

If the Federal Reserve lowers the required reserve ratio, people will end up taking out ________because the interest rates ________. A)the same number of loans; will not change B)more loans; will fall C)more loans; will rise D)fewer loans; will rise E)fewer loans; are controlled by the economic conditions alone

B)more loans; will fall

Suppose that there is an increase in expected future disposable income and simultaneously an increase in the expected profitability of investment. As a result, the equilibrium real interest rate________ and the equilibrium quantity of loanable funds ________. A)rises; increases B)rises; might increase, decrease, or not change C)falls; increases D)falls; might increase, decrease, or not change E)rises; decreases

B)rises; might increase, decrease, or not change

Fiat money means A)money's value does not change. B)the government has decreed that something is money. C)the money can be converted into gold. D)Italian currency. E)only currency counts as money.

B)the government has decreed that something is money.

If you shop for a car online and compare car prices across dealerships, money is functioning as a A)medium of exchange. B)unit of account. C)barter mechanism. D)means of payment. E)store of value.

B)unit of account.

C/D is the currency drain ratio and R/D is the desired reserve ratio. The money multiplier equals A) 1 +R/D1 +C/D. B)R/D-C/D1 +R/D. C) 1 + C/DR/D+C/D. D) R/D+C/D1 +C/D. E) 1 +R/DR/D+ C/D.

C) 1 + C/DR/D+C/D.

The Zonamo company produces waste disposal machines and sells them to militaries all over the world. The company started last year with $10 million of capital on hand and invested $15 million in new capital throughout the year. At the end of the year, the company's capital stock was $17million. Hence, for the year, depreciation equaled ________ and net investment equaled ________ A)$8 million; $15 million B)$25 million; $5 million C)$8 million; $7 million D)$5 million; $5 million E)$7 million; $8 million

C)$8 million; $7 million

As the economy enters an expansion so that people's expected future incomes rise, there will be A)a leftward shift in the demand for loanable funds curve. B)a decrease in the nominal interest rate. C)an increase in the supply of loanable funds. D)a leftward shift in the supply of loanable funds curve. E)None of the above answers is correct.

C)an increase in the supply of loanable funds.

The total amount spent to buy new physical capital and replace old capital is referred to as A)depreciation. B)net investment. C)gross investment. D)wealth. E)savings.

C)gross investment.

For a government to add to the supply of loanable funds, it must A)borrow. B)have a budget deficit. C)have a budget surplus. D)raise the real interest rate. E)increase its investment demand.

C)have a budget surplus.

The required reserve ratio is 10 percent and Charlie deposits $3,000 in her checking account. The bank must A)decrease reserves by $3,000. B)increase reserves by $3,000. C)increase reserves by $300. D)decrease reserves by $300. E)not change its reserves until Charlie decides to withdraw her funds.

C)increase reserves by $300.

The functions of money are A)medium of exchange, the ability to buy goods and services, and the ability to pay off debts. B)credit cards, checking accounts, currency, and coins. C)medium of exchange, unit of account, and store of value. D)medium of exchange, the ability to buy goods and services, and checking accounts. E)store of value, use as a barter mechanism, and unit of account.

C)medium of exchange, unit of account, and store of value.

If the real interest rate is less than the equilibrium real interest rate, there is a ________ of loanable funds, and ________. A)shortage; borrowers have an easy time finding the funds they want B)surplus; borrowers have an easy time finding the funds they want C)shortage; some borrowers cannot find the funds they want D)surplus; some borrowers cannot find the funds they want E)shortage; savers increase their saving supply to restore the equilibrium

C)shortage; some borrowers cannot find the funds they want

When we keep part of our wealth in a bank checking account, we are using money as a A)medium of exchange. B)unit of currency. C)store of value. D)unit of account. E)barter token.

C)store of value.

Barter is A)the exchange of goods and services for money. B)storing money for use at a later date. C)the exchange of goods and services directly for other goods and services. D)a generally accepted means of payment. E)the pricing of goods and services with one agreed upon standard.

C)the exchange of goods and services directly for other goods

Wealth is A)another name for income. B)defined as the money in your savings account. C)the value of all the things that a person owns. D)equivalent to saving. E)the same as investment in financial capital.

C)the value of all the things that a person owns.

Bill's Lawn service starts the year with 20 lawn mowers. During the year, 3 mowers break and are not worth fixing. Bill also expands his business and buys 10 more mowers. Bill's capital at the end of the year is ________ mowers. A)30 B)20 C)10 D)27 E)33

D)27

The monetary base is equal to A)banks' assets plus liabilities. B)M2 minus M1. C)checkable deposits plus coins plus banks' assets. D)Federal Reserve notes plus coins plus banks' reserves at the Fed. E)checkable deposits plus coins plus traveler's checks.

D)Federal Reserve notes plus coins plus banks' reserves at the Fed.

The required reserve ratio is the A)total amount of reserves the bank holds at the Fed. B)amount of reserves banks are required by the Fed to be held as a percentage of the bank's loans. C)amount of excess reserves the bank holds just in case. D)amount of reserves banks are required by the Fed to be held as a percentage of the bank's deposits. E)total amount of reserves the bank holds in its vaults.

D)amount of reserves banks are required by the Fed to be held as a percentage of the bank's deposits.

Net investment is A)gross investment plus depreciation. B)the same as wealth. C)the same as depreciation. D)gross investment minus depreciation. E)the same as gross investment.

D)gross investment minus depreciation.

As the economy enters a strong expansion, then firms' demand for loanable funds A)increases because the real interest rate rises. B)increases because the nominal interest rate rises. C)decreases because the nominal interest rate falls. D)increases because expected profit increases. E)decreases because expected profit decreases.

D)increases because expected profit increases.

If the money multiplier is 3.0, a $1,000 increase in the monetary base A)increases the monetary base by $300. B)decreases quantity of money by $3,000. C)increases the money multiplier by 3 percent. D)increases quantity of money by $3,000. E)decreases the quantity of money by 3 percent.

D)increases quantity of money by $3,000.

Other things remaining the same, the ________ the real interest rate, the ________. A)higher; greater the quantity of loanable funds demanded B)lower; greater the demand for loanable funds C)higher; greater the demand for loanable funds D)lower; greater the quantity of loanable funds demanded E)lower; greater the quantity of loanable funds supplied

D)lower; greater the quantity of loanable funds demanded

The Fed buys $100 million U.S. government securities from Bank of America. Bank of America's balance sheet shows this transaction as ________ in total assets and ________ in reserves. A)a $100 million increase; a $100 million increase B)no change; a $100 million decrease C)a $100 million increase; no change D)no change; a $100 million increase E)a $100 million decrease; a $100 million decrease

D)no change; a $100 million increase

A currency drain ________ the amount of bank reserves available to banks to make loans because________. A)reduces the monetary base; people are holding more money outside of the banks B)reduces; people are holding onto the money the banks could have borrowed from the Fed C)increases; people are holding less money outside of the banks D)reduces; people are holding more money outside of the banks E)reduces; people are holding less money outside of the banks

D)reduces; people are holding more money outside of the banks

As the central bank, the Federal Reserve System provides banking services to A)the government and the stock market. B)individuals and controls the quantity of money. C)foreign corporations and determines the exchange rate. D)banks and determines how much the U.S. government will borrow. E)banks and regulates financial institutions and markets.

E)banks and regulates financial institutions and markets.

The distinction between physical and financial capital is that A)the value of financial capital depends on the amount of available physical capital. B)physical capital is equal to financial capital plus depreciation. C)physical capital is equal to financial capital minus depreciation. D)financial capital depreciates and physical capital does not. E)financial capital is used to purchase and operate physical capital.

E)financial capital is used to purchase and operate physical capital.

To acquire financial capital, a firm can i.obtain a loan from a bank. ii.issue stock. iii.issue bonds. A)i only B)ii only C)iii only D)i and iii E)i, ii, and iii

E)i, ii, and iii

Which of the following is a policy tool of the Fed? i.setting the required reserve ratios ii.conducting open market operations iii.quantitative easing A)i only B)ii only C)iii only D)i and ii E)i, ii, and iii

E)i, ii, and iii

The discount rate is the A)interest rate paid on U.S. government securities. B)interest rate banks charge the Fed when the Fed borrows from the banks. C)name of the interest rate banks charge their most credit-worthy borrowers. D)banks' real interest rate. E)interest rate at which the Fed will loan reserves to commercial banks.

E)interest rate at which the Fed will loan reserves to commercial banks.

Federal Express's purchase of trucks and planes A)reflects capital gains. B)is financial capital. C)includes depreciation. D)creates wealth. E)is an example of physical capital.

E)is an example of physical capital.

When you use currency to buy lunch, money is performing which function? A)barter token B)unit of currency C)store of value D)unit of purchase E)medium of exchange

E)medium of exchange

Suppose that there is an increase in disposable income and simultaneously an increase in the expected profitability of investment. As a result, the equilibrium real interest rate ________ and the equilibrium quantity of loanable funds ________. A)might rise, fall, or remain unchanged; decreases B)falls; increases C)rises; increases D)remains unchanged; increases E)might rise, fall, or remain unchanged; increases

E)might rise, fall, or remain unchanged; increases

A decrease in expected future income leads to a A)downward movement along the supply of loanable funds curve. B)leftward shift of the supply of loanable funds curve. C)leftward shift of the demand for loanable funds curve. D)rightward shift of the demand for loanable funds curve. E)rightward shift of the supply of loanable funds curve.

E)rightward shift of the supply of loanable funds curve.

The amount of loans that a bank can create is limited by A)a directive from the Federal Reserve System, which takes into account the bank's financial stability. B)the real interest rate. C)the bank's government securities. D)a law enacted by Congress. E)the bank's excess reserves.

E)the bank's excess reserves.