Econ131 Final Exam Ch. 18

12. An increase in government borrowing can: A. allow private investment to expand. B. crowd out private investment in physical capital. C. increase the incentive to invest in technology. D. cause a substantial decrease in interest rates.

B. crowd out private investment in physical capital

16. A decrease in the government's budget surplus will cause the interest rate to: A. decrease. B. increase. C. either increase or decrease. D. remain the same.

B. increase.

14. When the interest rate in an economy decreases, it is most likely as a result of: A. an increase in the government budget surplus or its budget deficit. B. a decrease in the government budget surplus or its budget deficit. C. an increase in the government budget surplus or a decrease in its budget deficit. D. a decrease in the government budget surplus or an increase in its budget deficit.

C. an increase in the government budget surplus or a decrease in its budget deficit

17. If the government initiates an expansionary monetary policy at the same time that its budget deficit decreases, then the interest rate will ______________________. A. increase B. either increase or decrease C. decrease D. remain unchanged.

C. decrease.

10. A prolonged period of budget deficits may lead to ___________________. A. outflows of financial capital abroad B. lower inflation C. lower economic growth D. increasing exchange rates

C. lower economic growth

37. A moderate increase in a budget deficit that leads to a _____________________ is not necessarily a cause for concern. A. combination of less foreign capital and banks that are bankrupt B. moderate increase in a trade deficit and a moderate appreciation of the exchange rate C. a series of large budget deficits D. shift in aggregate demand so far to the right that it causes high inflation

B. moderate increase in a trade deficit and a moderate appreciation of the exchange rate

30. Suppose you are analyzing data for an economy in which Ricardian neutrality holds true. If the budget surplus increases by 100, then: A. private savings will increase by 100. B. private savings will decrease by 100. C. investment will increase by 100. D. investment will decrease by 100.

B. private savings will decrease by 100

33. If an economy has a budget surplus of 1,500, private savings of 3,000, and investment of 5,000, what will the balance of trade in this economy equal? A. deficit of 500 B. surplus of 500 C. surplus of 1,500 D. deficit of 1,500

B. surplus of 500

35. When government policy moves from a budget surplus to a budget deficit and the trade deficit remains constant: A. savings will decrease no matter what happens to investment. B. savings will decrease if investment remains constant. C. investment will increase if savings also remains constant. D. investment will decrease if savings also remains constant.

D. investment will decrease if savings also remains constant

29. Suppose you are analyzing data for an economy in which Ricardian neutrality holds true. If the budget deficit increases by 50, then: A. investment will increase by 50 B. investment will decrease by 50 C. private savings will decrease by 50 D. private savings will increase by 50

D. private savings will increase by 50

34. If an economy has a budget deficit of 600, private savings of 2,000, and investment of 800. What is the balance of trade in this economy? A. deficit of 600 B. deficit of 2000 C. surplus of 2000 D. surplus of 600

D. surplus of 600

11. A ___________________________________ can lead to disruptive economic patterns and heavy strains on a country's banking and financial system. A. prolonged period of trade surpluses B. sustained pattern of large trade deficits C. prolonged period of budget surpluses D. sustained pattern of large budget deficits

D. sustained pattern of large budget deficits

21. If the U.S. government's budget deficits are increasing aggregate demand, and the economy is producing at a level that is substantially less than potential GDP, then: A. higher interest rates will crowd out private investment. B. government borrowing is likely to crowd out private investment. C. an inflationary increase in the price level is a real danger. D. the central bank might react with an expansionary monetary policy

D. the central bank might react with an expansionary monetary policy.

25. When a business firm makes an investment in physical capital, what is that investment subject to? A. state and local government incentives B. economic output and productivity C. political orientated incentives D. the discipline of the market

D. the discipline of the market

38. Identify the negative macroeconomic outcomes that a government risks when it continues a sustained pattern of large budget deficits over time

A sustained pattern of large budget deficits over time risks causing several negative marcro-economic outcomes: a shift to the right in aggregate demand that causes an inflationary increase in the price level; crowding out private investment in physical capital in a way that slows down economic growth; and creating a dependence on inflows of international portfolio investment which can sometimes turn into outflows of foreign financial investment that can be injurious to a macroeconomy.

4. If a country's economic data shows that private savings equal $250 million, government spending equals $400 million, taxes equal $350, and the trade surplus equals $150 million, then what does investment equal? A. $50 million B. $75 million C. $450 million D. $350 million

A. $50 million

32. If an economy has a budget surplus of 400, private savings of 1,200, and investment of 1,600, what will the balance of trade in this economy equal? A. 0 B. deficit of 1,600 C. deficit of 1,200 D. deficit of 400

A. 0

19. If a government's budget deficits are increasing aggregate demand when the economy is already producing near potential GDP, causing a threat of an inflationary increase in price levels, then the central bank may react with: A. a contractionary monetary policy. B. an expansionary monetary policy. C. a discretionary monetary policy. D. a loose monetary policy

A. a contractionary monetary policy.

28. Ricardian equivalence means that: A. changes in private savings offset any changes in the government deficit. B. changes in exports offset any changes in the government deficit. C. changes in imports offset any changes in the government deficit. D. changes in investment offset any changes in the government deficit.

A. changes in private savings offset any changes in the government deficit

22. If the government's budget deficit increases while the economy is producing substantially less then potential GDP and expansionary monetary policy is implemented, then any ______ from government borrowing would be _____ from that monetary policy. A. higher interest rates; largely offset by the lower interest rates B. lower interest rates; largely offset by the higher interest rates C. increase in interest rates; reduced by private sector investment D. inflationary increase in price level; crowding out private investment

A. higher interest rates; largely offset by the lower interest rates

7. The U.S. economy has two main sources for financial capital; __________________ and ____________________________. A. private savings from U.S. households and firms; inflows of foreign financial investment. B. private sector investment; government borrowing C. private savings from U.S. households and firms; government borrowing D. private sector investment; inflows of foreign financial investment from abroad

A. private savings from U.S. households and firms; inflows of foreign financial investment.

36. A government began 2013 with a budget surplus and a trade deficit. Due to the onset of recession, the government changed its policy and is now running a budget deficit. If all other factors hold constant, this change in policy will cause: A. the exchange rate and the trade deficit to increase. B. the exchange rate and the trade deficit to decrease. C. the exchange rate to decrease and the trade deficit to increase. D. the exchange rate to increase and the trade deficit to decrease

A. the exchange and the trade deficit to increase

6. If a country's economic data shows that private savings equal $350 million, government spending equals $375 million, taxes equal $300, and the trade surplus equals $125 million, then what does investment equal? A. $50 million B. $150 million C. $425 million D. $600 million

B. $150 million

2. If a country's economic data shows private savings of $500 million, government spending of $300 million, tax revenue of $400 million, and a trade surplus of $100 million, then what does investment equal? A. $600 million B. $500 million C. $700 million D. $900 million

B. $500 million

27. Which of the following is least likely to benefit the civilian economy? A. R&D carried out in government laboratories B. R&D aimed at producing new weapons C. direct private sector R&D spending D. tax policy promoting civilian R&D spending

B. R&D aimed at producing new weapons

8. When a government records a budget surplus, the national savings and investment identity is written as: A. S = I + (G - T) + (X - M) B. S + (M - X) + (T - G) = I C. S - (G - T) = I - (X - M) D. S + (T - G) = 1 + (X - M)

B. S + (M-X) + (T-G)= I

20. If the U.S. economy is producing at a level that is substantially less than potential GDP and the government's budget deficits are increasing aggregate demand, then ____________________________ is not much of a danger. A. a tight monetary policy B. an inflationary increase in the price level C. international financial investment D. the central bank's contractionary monetary policy

B. an inflationary increase in the price level

26. Because of the difference between the discipline imposed by market competition and the discipline imposed by political decisions, which of the following is most likely? A. reduced government borrowing to avoid crowding out private investment B. difficulty managing public investment so it's done in a cost effective way C. government budgets will exactly shadow the rate of private investment D. tax budgets increase without a corresponding drop in private investment

B. difficulty managing public investment so it's done in a cost effective way

9. When a government records a trade surplus, the national savings and investment identity is written as: A. S = (G - T) + (X - M) - I B. S - (G - T) = I - (X - M) C. S = I + (G - T) + (X - M) D. S + (G - T) = I - (X - M)

C. S = I + (G-T) + (X-M)

23. If a government decides to finance an investment in ______ with higher taxes or ___________ in other areas, it need not worry that it is crowding out private investment. A. roads and bridges; increased borrowing B. water supply and sewers; by raising capital spending C. public physical capital; lower government spending D. hydroelectric dams and windmills; government R&D

C. public physical capital; lower government spending

5. If a country's economic data shows that private savings equal $300 million, government spending equals $400 million, taxes equal $300, and the trade surplus equals $100 million, then what does investment equal? A. $150 million B. $175 million C. $200 million D. $100 million

D. $100 million

3. If a country's economic data shows private savings of $400 million, government spending of $250 million, tax revenue of $400 million, and a trade surplus of $175 million, then what does investment equal? A. $550 million B. $425 million C. $800 million D. $375 million

D. $375 million

31. A government deficit has increased from 30 to 50. The country's trade deficit is 100 and private savings equal 65 and investment equal 90. If Ricardian neutrality holds true, after this change in the government's budget, private savings will equal: A. 40. B. 105. C. 95. D. 85.

D. 85

15. An increase in the government's budget surplus will cause the interest rate to: A. either increase or decrease. B. remain the same. C. increase. D. decrease.

D. decrease.

1. A country's economic data indicates that there has been a substantial reduction in the financial capital available to private sector firms. Which of the following most likely had the greatest influence on this economy? A. especially large and sustained household saving B. increased borrowing by private firms C. reduction in influx of funds for foreign financial investors D. especially large and sustained government borrowing

D. especially large and sustained government borrowing.

13. A reduction in government borrowing can: A. decrease the incentive to invest. B. increase the interest rate. C. crowd out private investment in human capital. D. give private investment an opportunity to expand.

D. give private investment an opportunity to expand.

18. A ____________________________ is one economic mechanism by which government borrowing can crowd out private investment. A. deficit decrease B. smaller trade surplus C. larger trade surplus D. higher interest rate

D. higher interest rate

24. In a market-oriented economy, private firms will undertake most of the____________, and ________________ should seek to avoid a long series of large budget deficits that might crowd out such investment. A. economic growth activities; monetary policy B. economic growth activities; fiscal policy C. investment in human capital; monetary policy D. investment in physical capital; fiscal policy

D. investment in physical capital; fiscal policy