ISU ECON 102 Test 2 Chapter 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 net investment for the year totaled

A) 1 machine.

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) I only

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

In the above figure, the economy is at the equilibrium point on the supply of loanable funds curve SLF and demand for loanable funds curve DLF. What happens if disposable income decreases?

A) The supply of loanable funds curve would shift leftward.

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

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

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

A) a decrease in disposable income

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.

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

B) -$100,000.

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

B) 6 percent.

Which of the following explains 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.

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?

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 the equilibrium point on the supply of loanable funds curve SLF and demand for loanable funds curve DLF. What happens if real wealth decreases?

B) The supply of loanable funds curve would shift rightward.

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

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

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

B) falls from 10 percent to 8 percent.

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

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

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

B) increases; decreases

The term "crowding out" relates to the decrease in

B) private investment from a government budget deficit.

In the above figure, new expectations of booming business conditions and a higher expected profit will

B) shift the demand for loanable funds curve rightward.

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 ________.

C) $1.3 billion; $1.0 billion

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

C) $200,000

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

C) 3 machines.

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

C) 6 percent.

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.

C) I only

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

C) a decrease in the expected profit

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.

C) both I and II

The Ricardo-Barro effect says that

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

46) The crowding-out effect refers to

C) government investment crowding out private investment.

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

C) leftward; demand for

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

C) only shift the demand for loanable funds curve rightward to a curve such as DLF1.

In the above figure, technological progress that increases the expected profit will

C) shift the demand for loanable funds curve rightward.

Greater optimism about the expected profits from investment projects

C) shifts the demand for loanable funds curve rightward.

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

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

Use the information in the table above to calculate the value of private saving.

D) $25 million

Use the information in the table above to calculate the value of government saving.

D) $5 million

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

D) II and III only

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

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

The funds used to buy and operate physical capital are

D) financial capital.

When a government has a budget surplus, the surplus

D) helps finance investment.

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.

D) higher; lower

According to the Ricardo-Barro effect

D) households increase their personal saving when governments run budget deficits.

If the economy's capital stock increases over time

D) net investment is positive.

The capital stock increases whenever

D) net investment is positive.

In the loanable funds market, the supply comes from

D) saving, the government budget surplus and international borrowing.

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 disposable income and the expected profit would

D) 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.

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

D) surplus; positive

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

II and III

A rise in the real interest rate

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

U.S. investment is financed from

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

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

the nominal interest rate will also increase.

A nation's investment must be financed by

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