Question 1

If the real interest rate is above the equilibrium real interest rate,

Accepted Answer

A)  lenders are unable to find borrowers willing to borrow all of the available funds and the real interest rate rises.
B)  a shortage of loanable funds exists.
C)  lenders are unable to find borrowers willing to borrow all of the available funds and the real interest rate falls.
D)  borrowers are unable to borrow all of the funds they want to borrow and the real interest rate rises.
E)  borrowers are unable to borrow all of the funds they want to borrow and the real interest rate falls. C

Question 2

Refer to the table below to answer the following questions.
Table 7.1.1 
-Refer to Table 7.1.1.Government saving is

Accepted Answer

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

Question 3

In the market for loanable funds, if the interest rate is above the equilibrium level

Accepted Answer

A)  wealth increases.
B)  a shortage of loanable funds exists.
C)  a surplus of loanable funds exists.
D)  expected profit falls.
E)  government expenditure decreases. C

Question 4

When the government has a budget surplus, the surplus

Accepted Answer

A)  is subtracted from private saving.
B)  contributes to financing investment.
C)  crowds- out private saving.
D)  increases the real interest rate.
E)  decreases the demand for loanable funds.

Question 5

In January 2017, Tim's Gyms, Inc.owned machines valued at $1 million.During the year, the market value of the machines fell by 30 percent.During 2017, Tim spent $200,000 on new machines.During 2017, Tim's gross investment was

Accepted Answer

A)  $1 million.
B)  $900,000.
C)  $100,000.
D)  $200,000
E)  $300,000.

Question 6

Technological progress that increases expected profit shifts the demand for loanable funds curve

Accepted Answer

A)  rightward and decreases the real interest rate.
B)  leftward and decreases the real interest rate.
C)  rightward and the supply of loanable funds curve leftward.
D)  rightward and increases the real interest rate.
E)  leftward and increases the real interest rate.

Question 7

Use the table below to answer the following questions.
Table 7.2.1
The table shows an economy's demand for loanable funds schedule and supply of loanable funds schedule.
 
-Consider Table 7.2.1.What is the equilibrium real interest rate?

Accepted Answer

A)  6 percent a year
B)  5 percent a year
C)  4 percent a year
D)  7 percent a year
E)  There is no equilibrium real interest rate.

Question 8

At the beginning of the year, Tom's Tubes has capital of 5 tube- inflating machines.During the year, Tom scraps 2 old machines and purchases 3 new machines.Tom's net investment for the year is

Accepted Answer

A)  1 machine.
B)  3 machines.
C)  2 machines.
D)  6 machines.
E)  5 machines

Question 9

A decrease in the demand for loanable funds occurs when

Accepted Answer

A)  the government cuts taxes.
B)  government expenditure increases.
C)  expected profit decreases.
D)  expected profit increases.
E)  the real interest rate rises.

Question 10

If the real interest rate is below the equilibrium real interest rate,

Accepted Answer

A)  lenders are unable to find borrowers willing to borrow all of the available funds and the real interest rate rises.
B)  lenders are unable to find borrowers willing to borrow all of the available funds and the real interest rate falls.
C)  borrowers are unable to borrow all of the funds they want to borrow and the real interest rate rises.
D)  a surplus of loanable funds exists.
E)  borrowers are unable to borrow all of the funds they want to borrow and the real interest rate falls.

Question 11

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

Accepted Answer

A)  rises from $20,000 to $25,000.
B)  falls from $2,500 to $2,000.
C)  rises from $2,000 to $2,500.
D)  falls from $25,000 to $20,000.
E)  does not change.Bond prices are constant.

Question 12

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

Accepted Answer

A)  nominal interest rate and the expected profit.
B)  real interest rate and expected total revenue.
C)  real interest rate and the expected profit.
D)  expected future income, wealth, and default risk.
E)  nominal interest rate and expected total revenue.

Question 13

Capital increases when

Accepted Answer

A)  net investment exceeds gross investment.
B)  net investment is positive.
C)  net investment is zero.
D)  gross investment exceeds net investment.
E)  gross investment is negative.

Question 14

Choose the statement that is incorrect.

Accepted Answer

A)  Most economists believe that the Ricardo- Barro effect holds in the market for loanable funds.
B)  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.
C)  The Ricardo- Barro effect does hold that a government budget deficit produces a crowding- out effect.
D)  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.
E)  According to the Ricardo- Barro effect, a budget deficit has no effect on either the real interest rate or investment.

Question 15

Suppose the market for loanable funds is in equilibrium.If expected profit falls, the equilibrium real interest rate _______ and the equilibrium quantity of loanable funds _______.

Accepted Answer

A)  falls; decreases
B)  rises; increases
C)  falls; increases
D)  rises; decreases
E)  falls; increases or decreases but we don't know for sure

Question 16

Suppose the current real interest rate is 4 percent and the equilibrium real interest rate is 3 percent.Choose the correct statement.

Accepted Answer

A)  The supply of loanable funds increases.
B)  There is neither a shortage nor surplus of loanable funds.
C)  The demand for loanable funds decreases.
D)  There is a surplus of loanable funds.
E)  There is a shortage of loanable funds.

Question 17

_______ increases households' saving.

Accepted Answer

A)  A decrease in the real interest rate
B)  Higher expected future income
C)  An increase in wealth
D)  A tax cut that increases disposable income
E)  An increase in default risk

Question 18

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

Question 19

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)  inflation rate; decreases
E)  real interest rate; decreases

Question 20

What is the effect of a decrease in expected profit?

Accepted Answer

A)  The supply curve of loanable funds shifts rightward and the nominal interest rate rises.
B)  The demand curve for loanable funds shifts leftward and the real interest rate falls.
C)  The demand curve for loanable funds shifts rightward and the real interest rate rises.
D)  The real interest rate rises as saving increases.
E)  A movement down along the demand curve for loanable funds occurs.

Exam 7: Finance, Saving, and Investment