Question 1

Joe's Taco Hut can purchase a delivery truck for $20,000 and Joe estimates it will generate a net income (after taxes, maintenance and operating costs)of $4,000 per year. His other option is to go to work for someone else earning net income of $3,000 per year. He should:

Accepted Answer

A) purchase the truck if the real interest rate is less than 15 percent. 
B) not purchase the truck if the real interest rate is greater than 1 percent. 
C) purchase the truck if the real interest rate is greater than 5 percent. 
D) purchase the truck if the real interest rate is less than 5 percent.

Question 2

Joan purchases a beautiful rug for $25,000. After several years of wear and tear, Joan has the rug appraised and finds that it is now worth only $20,000. Based on this information:

Accepted Answer

A) Joan's saving this year has increased by $5,000. 
B) Joan has a $5,000 capital gain. 
C) Joan has a $5,000 capital loss. 
D) Joan's wealth is unchanged.

Question 3

An explanation for the low saving rate in the United States consistent with the demonstration effect includes:

Accepted Answer

A) relatively generous government assistance for the elderly and large down payments required for home purchases. 
B) households spending beyond their means to keep up with community standards. 
C) highly-developed financial systems making it easy to buy homes with down payments under 15 percent. 
D) large and persistent capital gains.

Question 4

The large increase in household wealth in the United States in the 1990s and early 2000s was the result of:

Accepted Answer

A) a high saving rate. 
B) a low saving rate. 
C) large capital gains. 
D) high rates of inflation.

Question 5

Which of the following is a stock?

Accepted Answer

A) Saving 
B) Income 
C) Consumption 
D) Wealth

Question 6

The expected benefit of investment equals:

Accepted Answer

A) private saving. 
B) the value of the marginal product of capital. 
C) the real interest rate. 
D) the price of the capital good.

Question 7

Holding other factors constant, if the income tax is replaced with a consumption tax so that saving is not taxed, then the real interest rate will ________ and the equilibrium quantity of saving and investment will ________.

Accepted Answer

A) increase; increase 
B) increase; not change 
C) increase; decrease 
D) decrease; increase

Question 8

Net taxes equal the amount that the:

Accepted Answer

A) government pays the private sector plus the amount of private sector pays the government. 
B) government pays the private sector minus the amount the private sector pays the government. 
C) business sector pays the government minus the amount the private sector pays the government. 
D) private sector pays the government minus the amount the private sector receives from the government.

Question 9

Chris earns $1,500 per week and spends $1,000 per week on living expenses, puts $200 in a savings account, and buys $300 worth of shares in a stock mutual fund. Chris's saving is ________, and Chris's saving rate is ________.

Accepted Answer

A) $200; 13.3 percent 
B) $200; 20.0 percent 
C) $300; 20.0 percent 
D) $500; 33.3 percent

Question 10

If Alex uses $800 from her checking account to pay her credit card balance, her wealth:

Accepted Answer

A) increases by $800. 
B) decreases by $800. 
C) increases by $1,600. 
D) does not change.

Question 11

Saving by households and businesses is called ________ saving.

Accepted Answer

A) private 
B) public 
C) national 
D) aggregate

Question 12

Which of the following is an example of the bequest motive for saving?

Accepted Answer

A) Pat puts $400 per month in his 401(k)retirement account. 
B) Jordan sets aside $200 per month in case she has to pay for a new roof for her house. 
C) Gerry and Terry put $2,000,000 in a trust fund that will go to their children when they die. 
D) Chris keeps $15,000 in a money market account to pay expenses in case he loses his job.

Question 13

The marginal product of new capital depends on ________ and ________.

Accepted Answer

A) productivity of capital; relative price of the firm's output 
B) price of new capital goods; real interest rate 
C) relative price of the firm's output; real interest rate 
D) productivity of new capital; real interest rate

Question 14

If household saving decreases by $4 million, business saving increases by $4 million, and the government budget deficit decreases by $4 million, then private saving ________ and public saving ________.

Accepted Answer

A) increases; increases 
B) increases; decreases 
C) does not change; increases 
D) does not change; decreases

Question 15

Holding other factors constant, if a change in tax laws discourages people from saving more for retirement, then the real interest rate will ________ and the equilibrium quantity of saving and investment will ________.

Accepted Answer

A) increase; increase 
B) increase; decrease 
C) decrease; decrease 
D) decrease; increase

Question 16

Jordan has the following assets and liabilities: $$\begin{array} { l | r } 
\hline \text { Tuo cars } & \$ 10,000 \
\text { House } & \$ 200,000 \
\text { Mortgage } & \$ 100,000 \
\hline \text { Cash } & \$ 1,000 \
\text { Car loars } & \$ 3,000 \
\hline \text { Checkire accourtbalarce } & \$ 2,000 \
\text { Credit card balarce } & \$ 1,000
\end{array}$$  
What is Jordan's wealth?

Accepted Answer

A) $107,000 
B) $109,000 
C) $111,000 
D) $213,000

Question 17

Saving divided by income equals the _______ rate.

Accepted Answer

A) interest 
B) wealth 
C) saving 
D) income

Question 18

Precautionary saving is saving:

Accepted Answer

A) to meet long-term objectives, such as retirement, college attendance, or the purchase of a home. 
B) for protection against unexpected setbacks, such as the loss of a job or a medical emergency. 
C) for the purpose of leaving an inheritance. 
D) done in anticipation of sales or bargain in the future.

Question 19

Steve takes $500 from his paycheck and uses it to purchase U.S. Savings Bonds. Based on this information:

Accepted Answer

A) Steve's saving has increased by $500. 
B) Steve's saving has decreased by $500. 
C) Steve has a capital gain of $500. 
D) Steve's wealth is unchanged.

Question 20

The opportunity cost of capital investment is the:

Accepted Answer

A) value of the marginal product of capital. 
B) value of the marginal product of labor. 
C) real interest rate. 
D) price of new capital goods.

Exam 21: Saving and Capital Formation

Joe's Taco Hut can purchase a delivery truck for $20,000 and Joe estimates it will generate a net income (after taxes, maintenance and operating costs) of $4,000 per year. His other option is to go to work for someone else earning net income of $3,000 per year. He should: