Question 1

The Acme Stereo Company had capital of $24 million at the beginning of the year. At the end of the year, the firm had a capital stock of $20 million. Its

Accepted Answer

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. 
E) depreciation was $4 million. 
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. 
E) depreciation was $4 million.

Question 2

Table 23.3.5
  
-Refer to Table 23.3.5. The table shows an economy's demand for loanable funds schedule and supply of loanable funds schedule when the government's budget is balanced. If the government budget surplus is $2.0 trillion, the real interest rate is ________ percent a year, the quantity of investment is ________ trillion, and the quantity of private saving is ________ trillion.

Accepted Answer

A) 10; $5.5; $7.5 
B) 10; $7.5; $5.5 
C) 8; $6.5; $6.5 
D) 6; $7.5; $7.5 
E) 6; $7.5; $5.5 
A) 10; $5.5; $7.5 
B) 10; $7.5; $5.5 
C) 8; $6.5; $6.5 
D) 6; $7.5; $7.5 
E) 6; $7.5; $5.5

Question 3

If a bank's net worth is negative, then the bank is

Accepted Answer

A) liquid. 
B) insolvent. 
C) illiquid. 
D) solvent. 
E) none of the above 
A) liquid. 
B) insolvent. 
C) illiquid. 
D) solvent. 
E) none of the above

Question 4

The quantity of loanable funds demanded increases when

Accepted Answer

A) expected profit decreases. 
B) the real interest rate rises. 
C) the real interest rate falls. 
D) the supply of loanable funds decreases. 
E) wealth increases. 
A) expected profit decreases. 
B) the real interest rate rises. 
C) the real interest rate falls. 
D) the supply of loanable funds decreases. 
E) wealth increases.

Question 5

If China's government increases its budget surplus, there is ________ in the supply of loanable funds, private saving ________ and investment ________.

Accepted Answer

A) an increase; decreases; increases 
B) a decrease; increases; increases 
C) an increase; increases; increases 
D) a decrease; decreases; increases 
E) an increase; decreases; is crowded out 
A) an increase; decreases; increases 
B) a decrease; increases; increases 
C) an increase; increases; increases 
D) a decrease; decreases; increases 
E) an increase; decreases; is crowded out

Question 6

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

Accepted Answer

A) Consumers are willing to spend less so they save more at higher real interest rates. 
B) Interest rate flexibility in financial markets assures an equilibrium in which saving equals investment. 
C) A lower real interest rate makes more investment projects profitable. 
D) All of the above are reasons why the demand for loanable funds is negatively related to the real interest rate. 
E) None of the above are reasons why the demand for loanable funds is negatively related to the real interest rate. 
A) Consumers are willing to spend less so they save more at higher real interest rates. 
B) Interest rate flexibility in financial markets assures an equilibrium in which saving equals investment. 
C) A lower real interest rate makes more investment projects profitable. 
D) All of the above are reasons why the demand for loanable funds is negatively related to the real interest rate. 
E) None of the above are reasons why the demand for loanable funds is negatively related to the real interest rate.

Question 7

When the real interest rate increases,

Accepted Answer

A) the supply of loanable funds curve shifts rightward. 
B) the supply of loanable funds curve shifts leftward. 
C) there is a movement up along the supply of loanable funds curve. 
D) there is a movement down along the supply of loanable funds curve. 
E) the demand for loanable funds curve shifts leftward. 
A) the supply of loanable funds curve shifts rightward. 
B) the supply of loanable funds curve shifts leftward. 
C) there is a movement up along the supply of loanable funds curve. 
D) there is a movement down along the supply of loanable funds curve. 
E) the demand for loanable funds curve shifts leftward.

Question 8

A firm's decision to invest in a project is based on the

Accepted Answer

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. 
E) expected future income, wealth, and default risk. 
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. 
E) expected future income, wealth, and default risk.

Question 9

Choose the statement that is incorrect.

Accepted Answer

A) According to the Ricardo-Barro effect, taxpayers are rational people who know that a budget deficit today means that future taxes will be higher and future disposable incomes will be smaller. 
B) According to the Ricardo-Barro effect, a budget deficit has no effect on either the real interest rate or investment. 
C) Most economists believe that the Ricardo-Barro effect holds in the market for loanable funds. 
D) According to the Ricardo-Barro effect, the quantity of loanable funds demanded increases when a government budget deficit occurs, and private saving and the private supply of loanable funds increase to match the quantity of loanable funds demanded. 
E) All of the above statements are correct. 
A) According to the Ricardo-Barro effect, taxpayers are rational people who know that a budget deficit today means that future taxes will be higher and future disposable incomes will be smaller. 
B) According to the Ricardo-Barro effect, a budget deficit has no effect on either the real interest rate or investment. 
C) Most economists believe that the Ricardo-Barro effect holds in the market for loanable funds. 
D) According to the Ricardo-Barro effect, the quantity of loanable funds demanded increases when a government budget deficit occurs, and private saving and the private supply of loanable funds increase to match the quantity of loanable funds demanded. 
E) All of the above statements are correct.

Question 10

At the beginning of the year, Tom's Tubes had capital of 5 tube-inflating machines. During the year, Tom scrapped 2 old machines and purchased 3 new machines. Tom's capital at the end of year was

Accepted Answer

A) 1 machine. 
B) 2 machines. 
C) 3 machines. 
D) 6 machines. 
E) 8 machines. 
A) 1 machine. 
B) 2 machines. 
C) 3 machines. 
D) 6 machines. 
E) 8 machines.

Question 11

If the Ricardo-Barro effect occurs, ________ in private saving finances the government budget deficit, and the real interest rate ________.

Accepted Answer

A) an increase; remains the same 
B) a decrease; increases 
C) an increase; falls 
D) a decrease; remains the same 
E) an increase; rises 
A) an increase; remains the same 
B) a decrease; increases 
C) an increase; falls 
D) a decrease; remains the same 
E) an increase; rises

Question 12

A fall in the real interest rate

Accepted Answer

A) shifts the demand for loanable funds curve rightward. 
B) shifts the demand for loanable funds curve leftward. 
C) creates a movement up along the demand for loanable funds curve. 
D) creates a movement down along the demand for loanable funds curve. 
E) decreases the inflation rate. 
A) shifts the demand for loanable funds curve rightward. 
B) shifts the demand for loanable funds curve leftward. 
C) creates a movement up along the demand for loanable funds curve. 
D) creates a movement down along the demand for loanable funds curve. 
E) decreases the inflation rate.

Question 13

If households' disposable income decreases, then

Accepted Answer

A) households' saving will decrease. 
B) households' saving will increase. 
C) the supply of loanable funds decreases. 
D) a movement occurs down along the supply of loanable funds curve. 
E) Both A and C are correct. 
A) households' saving will decrease. 
B) households' saving will increase. 
C) the supply of loanable funds decreases. 
D) a movement occurs down along the supply of loanable funds curve. 
E) Both A and C are correct.

Question 14

As the ________ rises, the quantity of loanable funds supplied ________, other things remaining the same.

Accepted Answer

A) nominal interest rate; increases 
B) real interest rate; increases 
C) inflation rate; increases 
D) real interest rate; decreases 
E) inflation rate; decreases 
A) nominal interest rate; increases 
B) real interest rate; increases 
C) inflation rate; increases 
D) real interest rate; decreases 
E) inflation rate; decreases

Question 15

Southton has investment of $100, private saving of $90, net taxes of $25, government expenditure of $30, exports of $25 and imports of $10. What is national saving?

Accepted Answer

A) $85 
B) $90 
C) $95 
D) $100 
E) $105 
A) $85 
B) $90 
C) $95 
D) $100 
E) $105

Question 16

The Ricardo-Barro effect holds that

Accepted Answer

A) equal increases in taxes and government expenditures have no effect on equilibrium real GDP. 
B) a government budget deficit has no effect on the real interest rate. 
C) a government budget deficit crowds out private investment. 
D) a government budget deficit induces a decrease in saving that magnifies the crowding out effect. 
E) a government budget deficit increases the real interest rate. 
A) equal increases in taxes and government expenditures have no effect on equilibrium real GDP. 
B) a government budget deficit has no effect on the real interest rate. 
C) a government budget deficit crowds out private investment. 
D) a government budget deficit induces a decrease in saving that magnifies the crowding out effect. 
E) a government budget deficit increases the real interest rate.

Question 17

Table 23.2.1
  
-Refer to Table 23.2.1. Government saving is

Accepted Answer

A) $15 million. 
B) -$5 million. 
C) $5 million. 
D) $45 million. 
E) $20 million. 
A) $15 million. 
B) -$5 million. 
C) $5 million. 
D) $45 million. 
E) $20 million.

Question 18

As the ________ interest rate rises ________.

Accepted Answer

A) nominal; the demand for loanable funds curve shifts rightward 
B) real; the demand for loanable funds curve shifts rightward 
C) nominal; the demand for loanable funds curve shifts leftward 
D) real; a movement occurs up along the demand for loanable funds curve 
E) real; a movement occurs down along the demand for loanable funds curve 
A) nominal; the demand for loanable funds curve shifts rightward 
B) real; the demand for loanable funds curve shifts rightward 
C) nominal; the demand for loanable funds curve shifts leftward 
D) real; a movement occurs up along the demand for loanable funds curve 
E) real; a movement occurs down along the demand for loanable funds curve

Question 19

If disposable income increases, people ________ saving and the real interest rate will ________.

Accepted Answer

A) increase; rise 
B) decrease; rise 
C) increase; fall 
D) decrease; fall 
E) increase; rise or fall depending on the shift of the demand curve for loanable funds 
A) increase; rise 
B) decrease; rise 
C) increase; fall 
D) decrease; fall 
E) increase; rise or fall depending on the shift of the demand curve for loanable funds

Question 20

When the inflation rate is zero, the

Accepted Answer

A) real interest rate equals the nominal interest rate. 
B) demand for loanable funds increases. 
C) supply of loanable funds decreases. 
D) nominal interest rate is zero. 
E) real interest rate is negative. 
A) real interest rate equals the nominal interest rate. 
B) demand for loanable funds increases. 
C) supply of loanable funds decreases. 
D) nominal interest rate is zero. 
E) real interest rate is negative.

Exam 23: Finance, Saving, and Investment

The Acme Stereo Company had capital of $24 million at the beginning of the year. At the end of the year, the firm had a capital stock of $20 million. Its

If a bank's net worth is negative, then the bank is

The quantity of loanable funds demanded increases when

If China's government increases its budget surplus, there is ________ in the supply of loanable funds, private saving ________ and investment ________.

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

When the real interest rate increases,

A firm's decision to invest in a project is based on the

Choose the statement that is incorrect.

At the beginning of the year, Tom's Tubes had capital of 5 tube-inflating machines. During the year, Tom scrapped 2 old machines and purchased 3 new machines. Tom's capital at the end of year was

If the Ricardo-Barro effect occurs, ________ in private saving finances the government budget deficit, and the real interest rate ________.

A fall in the real interest rate

If households' disposable income decreases, then

As the ________ rises, the quantity of loanable funds supplied ________, other things remaining the same.

Southton has investment of $100, private saving of $90, net taxes of $25, government expenditure of $30, exports of $25 and imports of $10. What is national saving?

The Ricardo-Barro effect holds that

Table 23.2.1 -Refer to Table 23.2.1. Government saving is

As the ________ interest rate rises ________.

If disposable income increases, people ________ saving and the real interest rate will ________.

When the inflation rate is zero, the

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If China's government increases its budget surplus, there is in the supply of loanable funds, private saving and investment .

If the Ricardo-Barro effect occurs, in private saving finances the government budget deficit, and the real interest rate .

As the rises, the quantity of loanable funds supplied , other things remaining the same.

As the interest rate rises .

If disposable income increases, people saving and the real interest rate will .