Question 1

The tendency for a government budget deficit to decrease investment is called the

Accepted Answer

A) government dissaving effect. 
B) crowding-out effect. 
C) Ricardo-Barro effect. 
D) capital investment effect. 
E) deficit effect.

Question 2

In January 2014, Tim's Gyms, Inc. owned machines valued at $1 million. During the year, the market value of the machines fell by 10 percent. During 2014, Tim spent $200,000 on new machines. During 2014, Tim's net investment was

Accepted Answer

A) $1 million. 
B) $300,000. 
C) $200,000. 
D) $100,000. 
E) $1.1 million.

Question 3

When a government has a budget surplus, the surplus

Accepted Answer

A) helps finance investment. 
B) crowds-out private saving. 
C) must be subtracted from private saving. 
D) increases the world real interest rate. 
E) decreases the demand for loanable funds.

Question 4

The greater a household's ________ the less is its saving.

Accepted Answer

A) return from saving 
B) wealth 
C) disposable income 
D) expected future profit 
E) all of the above

Question 5

Choose the statement that is incorrect.

Accepted Answer

A) Stocks, bonds, short-term securities, and loans are financial assets. 
B) The interest rate on a financial asset is the interest received expressed as a percentage of the price of the asset. 
C) If the asset price rises, other things remaining the same, the interest rate falls. 
D) Insolvency can arise from a previously unexpected large rise in the interest rate. 
E) The price of an asset is determined first, then the interest rate is determined.

Question 6

Suppose a firm has an investment project which will cost $200,000 and result in $30,000 profit. The firm will not undertake the project if the interest rate is

Accepted Answer

A) greater than 15 percent. 
B) greater than 10 percent. 
C) greater than 5 percent. 
D) positive. 
E) greater than 7.5 percent.

Question 7

Table 23.3.2
 
-Refer to Table 23.3.2. The table shows an economy's demand for loanable funds and supply of loanable funds schedules when the government's budget is balanced. The quantity of loanable funds demanded increases by $1 trillion at each real interest rate and the quantity of loanable funds supplied increases by $2 trillion at each real interest rate. If the government wants investment to be $9 trillion, it must ________ its budget balance by ________ trillion.

Accepted Answer

A) increase; $1 
B) decrease; $1 
C) increase; $1.5 
D) decrease; $1.5 
E) increase; $2

Question 8

Refer to the figure below to answer the following questions.
  
Figure 23.2.3
-In Figure 23.2.3, if the real interest rate is constant at 6 percent and expected profit falls, the quantity of loanable funds demanded will be

Accepted Answer

A) less than $450 billion. 
B) $450 billion. 
C) between $450 billion and $600 billion. 
D) greater than $600 billion. 
E) zero.

Question 9

In 2011, Tim's Gyms needs to finance the building of a new gym. Suppose Tim secures this financing from a bank, and the bank receives ownership if Tim fails to make payments. This type of funding is

Accepted Answer

A) a mortgage obtained in the loan market. 
B) a stock issued in the bond market. 
C) a bond issued in the bond market. 
D) a mortgage obtained in the stock market. 
E) a stock issued in the loan market.

Question 10

Changes in all of the following shift the supply curve of loanable funds EXCEPT

Accepted Answer

A) the real interest rate. 
B) wealth. 
C) disposable income. 
D) expected future income. 
E) default risk.

Question 11

The supply of loanable funds is the relationship between the quantity of loanable funds supplied and ________, other things remaining the same.

Accepted Answer

A) real GDP 
B) the price level 
C) the real interest rate 
D) the inflation rate 
E) the nominal interest rate

Question 12

Refer to the figure below to answer the following questions.
  
Figure 23.2.2
-Refer to Figure 23.2.2. In Figure 23.2.2, a decrease in expected profit will result in a movement from point E to

Accepted Answer

A) point F. 
B) point G. 
C) point H. 
D) point I. 
E) either point G or point H.

Question 13

At the beginning of the year, your wealth is $10,000. During the year, you have an income of $80,000 and you spend $90,000 on consumption goods and services. You pay no taxes. Your wealth at the end of the year is

Accepted Answer

A) $20,000. 
B) $0. 
C) $90,000. 
D) $100,000. 
E) $10,000.

Question 14

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

Accepted Answer

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

Question 15

If the Ricardo-Barro effect occurs, a government budget deficit raises the equilibrium real interest rate by ________ and decreases the equilibrium quantity of investment by ________ if the Ricardo-Barro effect is absent.

Accepted Answer

A) more; more than 
B) more; less than 
C) less; more than 
D) less; less than 
E) the same amount; the same amount as

Question 16

An increase in ________ will shift the supply of loanable funds curve ________.

Accepted Answer

A) expected future income; rightward 
B) wealth; leftward 
C) disposable income; leftward 
D) default risk; rightward 
E) the real interest rate; rightward

Question 17

The funds used to buy physical capital are

Accepted Answer

A) net investment. 
B) financial capital. 
C) saving. 
D) wealth. 
E) investment.

Question 18

Gross investment

Accepted Answer

A) is the total amount spent on new capital. 
B) includes only replacement investment. 
C) equals wealth minus saving. 
D) equals saving minus wealth. 
E) is the change in the value of capital

Question 19

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

Accepted Answer

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

Question 20

Which of the following is false?

Accepted Answer

A) Y = C + I + G + M - X 
B) I = S + (T - G)+ (M - X) 
C) Y = C + S + T 
D) Y + M = C + I + G + X 
E) Y = C + I + G + X -M

Exam 23: Finance, Saving, and Investment