macro econ ch 10

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Question 1 Multiple Choice 0 points Modify Remove

Question

Between 1987 and 1994, a group of private investors raised $16 billion to: Answer _{build an oil pipeline in Mexico.}

build a tunnel between Britain and France. tear down the Berlin Wall.

buy the Empire State Building.

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Question

Which of the following is considered investment spending in macroeconomics? Answer _{GM builds a new plant to manufacture automobiles.}

Ryan Jones buys some GM stock. Ryan Jones buys some GM bonds.

Ryan Jones buys some GM stock and bonds.

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Economists view investment spending as which of the following? Answer _stocks

bonds

spending on physical capital mutual fund investing

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Physical capital is purchased through investment spending, which in turn is mostly financed out of:

Answer _taxes.

domestic and foreign savings. import tariffs.

consumption expenditure.

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Investment spending refers to: Answer _{buying stocks.}

buying newly issued shares of stock. adding to physical capital.

adding to one's retirement account.

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Which of the following is considered an act of investing in a physical asset? Answer _{purchasing shares of stock in IBM}

selling shares of stock in IBM buying a bond issued by IBM

buying a new factory that produces IBM handheld devices

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Which of the following is an example of investment spending?

Answer _{The owner of a Domino's Pizza store has employed two students to deliver pizzas.}

The manager of a local Domino's Pizza store has taken some cash to the bank to make a deposit. A local Domino's Pizza store has purchased a new pizza oven.

The owner of the Domino's Pizza store has used some of her salary to buy shares of stock in the Domino's corporation.

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Question 8 Multiple Choice 0 points Modify Remove Question

Private savings is equal to:

Answer _{income less consumption.}

taxes less government spending on goods and services.

the total amount of savings accounts plus stocks plus bonds owned by households. income plus investment.

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Question

Use this scenario to answer questions 9–12. Scenario: Closed Economy S = I

In a closed economy suppose that GDP is $12 trillion. Consumption is $8 trillion and government spending is $2 trillion. Taxes are $0.5 trillion.

Reference: Ref 10-01

(Scenario: Closed Economy S = I) How much is private saving?

Answer _{$4 trillion}

$2.5 trillion $3.5 trillion –$0.5 trillion

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(Scenario: Closed Economy S = I) What is the government budget balance? Answer _{a surplus of $1.5 trillion}

a deficit of $1.5 trillion a surplus of $0.5 trillion a deficit of $0.5 trillion

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(Scenario: Closed Economy S = I) How much is national saving?

Answer _{$3.5 trillion}

$3 trillion $2.5 trillion $2 trillion

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(Scenario: Closed Economy S = I) How much is investment spending?

Answer _{$3.5 trillion}

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In a simple closed economy, all investment spending must come from:

Answer _saving.

money creation. debt issuance. foreign borrowing.

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The budget balance is equal to:

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taxes minus government spending. consumption plus investment. imports minus exports.

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A budget surplus would exist when which of the following occurs? Answer _{Taxes are greater than government spending.}

Taxes are less than government spending.

Taxes are less than government spending plus investment. Investment is less than government spending less taxes.

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National savings is the sum of private savings and: Answer _{private consumption.}

government tax revenue. the budget balance. trade surplus.

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In a closed economy, all investment spending must come from: Answer _government.

domestic savings. foreign savings.

government, domestic savings and foreign savings.

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The savings-investment spending identity says that:

Answer _{each person in the economy must invest as much as he or she saves.}

savings and investment spending are always equal for the economy as a whole. savings must equal government investment for the economy as a whole. each person in the economy must save as much as he or she invests.

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In a closed economy, investment spending, I, must equal: Answer _{GDP – C – G.}

GDP – C.

GDP – C – G – X. GDP – [C*G].

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The government saves when it: Answer _{has a balanced budget.}

has a budget deficit. has a budget surplus. borrows by selling bonds.

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The government saves when:

Answer _{tax revenue is smaller than government spending.} tax revenue is larger than government spending. tax revenue equals government spending. tax revenue is positive.

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National savings in a closed economy is all of the following except:

Answer _{the sum of private savings plus the government budget balance.} the total savings generated within the economy.

GDP – C – G.

government spending less consumption.

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A difference between a closed and an open economy is that:

Answer _{in the latter, foreign savings complement domestic savings in financing investment spending.}

in the latter, the government is more open to the idea of financing investment spending than in the former. in the former, foreign savings complement domestic savings in financing investment spending.

in the former, foreign savings finance more investment spending than in the latter.

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The savings-investment spending identity says that savings and investment spending are: Answer _{always equal because private savings match government savings.}

equal as long as there is no trade surplus or deficit. always equal for the economy as a whole.

equal as long as there is not government budget deficit or surplus.

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Question

In a closed economy, the savings-investment spending identity is: Answer _{I = GDP – C – G + (IM – NX).}

NS = GDP – I.

NS = GDP + (C – T + TR) + (T – TR – G). I = GDP – C – G.

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Question

In the closed economy of Sildavia, government spending during 2005 was $30 billion, consumption was $70 billion, taxes were $20 billion, and GDP was $110 billion. If investment spending in Sildavia during 2005 was $10 billion, we can conclude that:

Answer _{private savings were equal to $10 billion.}

the government's budget balance was equal to a surplus of $10 billion. net savings were equal to $0.

private savings were equal to $20 billion.

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Question

To help increase investment spending, the government can:

Answer _{lower taxes on consumption, so that disposable income rises.}

lower taxes on the returns from savings, so that total savings increase and the interest rate falls. raise taxes on the returns from bonds while lowering taxes on stock dividends.

lower taxes on investment spending while raising taxes on savings, so that total tax revenue remains constant.

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Question

According to the “savings-investment spending identity”: Answer _{savings = investment spending}

government spending = tax receipts

total income = consumption spending + savings

savings = investment spending + consumption spending

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In a closed economy, national savings is equal to: Answer _{private savings – consumption spending}

private savings + the budget balance. private savings – investment spending private savings – tax receipts

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In a closed economy, national savings is equal to:

Answer _{(disposable income – consumption spending) – (tax receipts – government spending)} (disposable income – consumption spending) + (government spending – tax receipts) (disposable income – consumption spending) + (tax receipts – government spending) (consumption spending – disposable income) + (government spending – tax receipts)

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Answer _{national savings + capital inflow}

private savings + national savings + capital inflow private savings + capital inflow

national savings – private savings – capital inflow

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Use this scenario to answer questions 32–36. Scenario: Open Economy S = I

In an open economy suppose that GDP is $12 trillion. Consumption is $8 trillion and government spending is $2 trillion. Taxes are $0.5 trillion. Exports are $1 trillion and imports are $3 trillion.

(Scenario: Open Economy S = I) How much is private saving?

$2.5 trillion $3.5 trillion $1.5 trillion

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(Scenario: Open Economy S = I) What is the government budget balance? Answer _{a surplus of $1.5 trillion}

a deficit of $1.5 trillion a deficit of $0.5 trillion a surplus of $3.5 trillion

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(Scenario: Open Economy S = I) How much is national saving?

$3.5 trillion $2 trillion $5.5 trillion

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(Scenario: Open Economy S = I) How much is the net capital inflow?

$2 trillion $3 trillion $4 trillion

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(Scenario: Open Economy S = I) How much is investment spending?

Answer $2 trillion

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(Table: Investment Spending, Private Spending, and Capital Inflows) What is the budget balance as a percentage of GDP in Northlandia?

Answer _–10%

0% 10% 20%

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Table: Investment Spending, Private Spending, and Capital Inflows

(Table: Investment Spending, Private Spending, and Capital Inflows) What is the budget balance as a percentage of GDP in Southlandia?

Answer _–10%

0% 10% 20%

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Table: Investment Spending, Private Spending, and Capital Inflows

(Table: Investment Spending, Private Spending, and Capital Inflows) Northlandia has a ______ while Southlandia has a ________. Answer _{balanced budget; budget deficit}

budget deficit; balanced budget budget surplus; balanced budget balanced budget; balanced budget

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Question

Use this scenario to answer questions 40–43. Scenario: Economy of Centralia

Centralia has no trade and no government. GDP = $25 trillion. Consumption Spending = $18 trillion.

(Scenario: The Economy of Centralia) Consider the information on the economy of Centralia. What is the level of private saving in Centralia?

Answer _{$7 trillion} $18 trillion

Can not be determined from the information provided. -$7 trillion

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(Scenario: The Economy of Centralia) Consider the information on the economy of Centralia. What is the level of investment spending in Centralia?

$7 trillion $25 trillion

–$7 trillion

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(Scenario: The Economy of Centralia) Consider the information on the economy of Centralia. Suppose that there is a new government in Centralia, and it has decided to impose taxes on its citizens in order to spend on infrastructure. Taxes = $2 trillion. Government Spending = Taxes. What is the level of private saving in Centralia now?

$7 trillion $5 trillion $18 trillion

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(Scenario: The Economy of Centralia) Consider the information on the economy of Centralia. Suppose that there is a new government in Centralia, and it has decided to impose taxes on its citizens in order to spend on infrastructure. Taxes = $3 trillion. Government Spending = Taxes. What is the level of investment spending in Centralia now?

$4 trillion $18 trillion

–$4 trillion

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Question

Which one of the following is an accurate formula for the Budget Balance? Answer _{taxes – government spending}

transfers – government spending taxes + government spending savings + taxes

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National savings is equal to:

Answer _{private savings + consumption spending.} trade balance + budget balance.

private savings + budget balance. government spending + taxes.

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Capital inflow is equal to:

Answer _{GDP + exports – imports.}

the growth in capital stock – investment spending. foreign direct investment.

the total inflow of foreign funds – the total outflow of domestic funds.

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The correct relationship between taxes and private savings is given by: Answer _{taxes = government spending + private savings.}

taxes = total spending – consumption – investment – private savings. taxes = total income – consumption – private savings.

taxes = consumption + private savings + total income.

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The relationship between the government's budget deficit and its spending is: Answer _{budget deficit = tax revenues + transfer payments.}

government spending = private savings + budget deficit. tax revenues = national savings + budget deficit. budget deficit = government spending – tax revenues.

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Question

If there is an increase in the government budget deficit:

Answer _{the demand for loanable funds will increase, interest rates will increase, and the amount of borrowing will increase.} the demand for loanable funds will decrease, interest rates will decrease, and the amount of borrowing will decrease. the supply of loanable funds will increase, interest rates will decrease, and the amount of borrowing will increase. the supply of loanable funds will decrease, interest rates will increase, and the amount of borrowing will decrease.

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Question

If private savings increase:

Answer _{the demand for loanable funds will increase, interest rates will increase, and the amount of borrowing will increase.} the demand for loanable funds will decrease, interest rates will decrease, and the amount of borrowing will decrease. the supply of loanable funds will increase, interest rates will decrease, and the amount of borrowing will increase. the supply of loanable funds will decrease, interest rates will increase, and the amount of borrowing will decrease.

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Capital inflows represent:

Answer _{the net inflow of funds into a country.} the net outflow of funds from a country.

the amount that domestic savings exceeds foreign savings.

the excess of domestic physical capital exported minus the amount of physical capital imported.

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Question

Assume that I = S_private + S_government + (IM – X). Furthermore, let's say that imports are equal to exports. Given this situation, which of the following would be true?

Answer _{Private saving plus government saving would exceed investment.} Private saving would exceed investment.

Private saving plus government saving would be less than investment. Private saving plus government saving would be equal to investment.

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Net capital inflows equal: Answer _{national savings.}

imports minus exports. consumption.

consumption plus government spending.

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Question

In the open economy of Sildavia, government spending during 2005 was $30 billion, consumption was $70 billion, taxes were $20 billion, and GDP was $100 billion. If investment spending in Sildavia during 2005 was $10 billion, we can conclude that Sildavia registered:

Answer _{a net capital inflow of $10 billion.}

capital inflows of $10 billion and capital outflows of $20 billion. a trade surplus of $20 billion and a financial deficit of $20 billion. a net capital outflow of $10 billion.

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If a country experiences a trade surplus, we can conclude that it is also experiencing: Answer _{a budget surplus.}

a net capital outflow. a net capital inflow. a budget deficit.

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In an open economy, savings can come from all of the following except: Answer _{domestic sources.}

foreign sources. government sources. consumption.

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A capital inflow into a country is associated with: Answer _{imports exceeding exports.}

a decreased source of funds available for domestic investment. imports equaling exports.

imports less than exports

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Question 58

Question

A business will want to borrow to undertake an investment project when the rate of return on that project is: Answer _{less than the interest rate.}

greater than the interest rate. greater than the exchange rate. equal to the inflation rate.

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Economists use _____ as a model to show how savers and borrowers come together to determine the equilibrium rate of interest. Answer _{the money market}

the market for loanable funds

aggregate demand and aggregate supply the financial system

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The demand for loanable funds is _____ sloping because _____ respond to lower interest rates by _____ their quantity demanded of loanable funds.

Answer _{downward; investors; increasing} downward; savers; increasing upward; investors; decreasing upward; savers; decreasing

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The supply of loanable funds is _____ sloping because _____ respond to lower interest rates by _____ their quantity supplied of loanable funds.

Answer _{upward; savers; increasing} upward; investors; decreasing upward; savers; decreasing downward; investors; increasing

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Question

In the market for loanable funds, suppose the current interest rate is 5%. At a rate of 5%, investors wish to borrow $100 million and savers wish to save $125 million. We would expect:

Answer _{the interest rate to fall as there is currently a shortage of loanable funds.} the interest rate to rise as there is currently a surplus of loanable funds. the interest rate to rise as there is currently a shortage of loanable funds. the interest rate to fall as there is currently a surplus of loanable funds.

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Table: Loanable Funds

(Table: Loanable Funds) In the accompanying table, at what interest rate will the market for loanable funds be in equilibrium?

Answer _7%

6% 5% 4%

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Question

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(Figure: Loanable Funds) The accompanying graph shows the market for loanable funds in equilibrium. Which of the following might produce a new equilibrium interest rate of 8% and a new equilibrium quantity of loanable funds of $150?

Answer _{Consumers have increased consumption as a fraction of disposable income.} Businesses have become more optimistic about the return on investment spending. The federal government has a budget surplus rather than a budget deficit.

There has been an increase in capital inflows from other nations.

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Figure: Loanable Funds

Answer _{Consumers have increased consumption as a fraction of disposable income.} Businesses have become more optimistic about the return on investment spending. The federal government has a budget surplus rather than a budget deficit.

There has been an increase in capital inflows from other nations.

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Answer _{Capital inflows from foreign citizens are declining.}

The federal government is running a budget deficit rather than a surplus. Profit expectations are less optimistic for business investments.

The government has eliminated taxes on income from interest earned.

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Answer _{Profit expectations are less optimistic for business investments.} Capital inflows from foreign citizens are declining.

The federal government is running a budget deficit rather than a surplus. The government has eliminated taxes on income from interest earned.

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Figure: Demand for Loanable Funds

(Figure: Demand for Loanable Funds) According to the accompanying figure, when the interest rate is 6%, the quantity demanded of loanable funds will equal:

Answer _{$30 billion.}

$40 billion. $50 billion. $60 billion.

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Question

A firm does NOT want to borrow money for a project when:

Answer _{the interest rate is greater than the rate of return on the project.} the interest rate is less than the rate of return on the project. the interest rate is positive.

the rate of return on the project is positive.

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If a one-year project costs $100,000 and is expected to return the firm $105,000, then the rate of return of the project is:

Answer _4.8%.

5%. $5,000. $105,000.

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Question

A business will want a loan when:

Answer _{interest rate < (return on project – cost of project)/cost of project × 100.} rate of return < interest rate.

rate of return – interest rate < 0.

rate of return > (cost of project – interest rate)/interest rate × 100.

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When the government runs a budget deficit, all of the following happen EXCEPT: Answer _{the government becomes a borrower in the market for loanable funds.}

the interest rate rises.

the total amount of borrowing decreases. private investment spending is crowded out.

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The demand curve for loanable funds slopes:

Answer _{upward, since it takes a higher rate of return to get more funds.}

downward, because there are more potential projects that yield 10% than yield 5%. upward, because higher rates of return are necessary to cover higher costs.

downward, because there are fewer potential projects that yield 10% than for those that yield 5%.

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Figure: Loanable Funds Market

(Figure: Loanable Funds Market) If the interest rate is 8%, businesses will want to borrow approximately:

Answer _{$3 trillion.}

$2 trillion. $4 trillion. $1 trillion.

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(Figure: Loanable Funds Market) If the interest rate is 8%, people will want to save approximately:

Answer _{$3 trillion.}

$2 trillion. $4 trillion. $1 trillion.

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(Figure: Loanable Funds Market) The equilibrium interest rate and total quantity of lending are:

Answer _{8% and $2 trillion.}

2% and $5 trillion. 10% and $1 trillion. 6% and $3 trillion.

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Figure: Supply of Loanable Funds

(Figure: Supply of Loanable Funds) According to the accompanying figure, when the interest rate rises from 6% to 8%, then the: Answer _{supply of loanable funds rises by $20 billion.}

quantity supplied of loanable funds rises by $20 billion. supply of loanable funds falls by $10 billion.

quantity supplied of loanable funds falls by $20 billion.

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(Figure: Market for Loanable Funds I) According to the accompanying figure, the equilibrium interest rate is:

Answer _2%.

4%. 6%. 8%.

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Figure: Market for Loanable Funds II

(Figure: Market for Loanable Funds II) If the interest rate is greater than ______, then the quantity supplied of loanable funds will _______ the quantity of loanable funds demanded.

Answer _{8%; be greater than}

8%; be less than 8%; equal

10%; be less than

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(Figure: Market for Loanable Funds II) If the interest rate is less than 8%, then the quantity supplied of loanable funds will _______ the quantity of loanable funds demanded.

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be less than equal

Cannot be determined from the information provided.

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The loanable funds market maximizes: Answer _{the interest rate to savers.}

the rate of return by borrowers.

the gains from trade between lenders and borrowers. the amount of investment spending in the economy.

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If in an open economy, a country imports more than it exports and the government budget deficit increases: Answer _{interest rates will increase and the amount of borrowing will increase.}

interest rates will decrease and the amount of borrowing will increase. interest rates will increase, but the change in borrowing is ambiguous.

the change in interest rates is ambiguous, but the amount of borrowing will increase.

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The price in the loanable funds market is: Answer _{the rate of return of a project.}

the price level. the interest rate.

the consumer price index.

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The price determined in the market for loanable funds is: Answer _{the margin call.}

the profit rate. the transaction fee. the interest rate.

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If the interest rate in the market for loanable funds is above the equilibrium interest rate, we know that: Answer _{there is a shortage of loanable funds.}

savings exceed investment spending.

the quantity demanded of loanable funds exceeds the quantity supplied of loanable funds. consumption is smaller than savings.

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Question

Figure: Market for Loanable Funds with Government Borrowing

(Figure: Market for Loanable Funds with Government Borrowing) According to the accompanying figure, after an increase in government borrowing, the new equilibrium interest rate will rise from ______ and the amount of private savings will _______.

Answer _{6% to 8%; stay the same}

6% to 8%; rise 6% to 8%; fall

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6% to 8%; be indeterminate

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A shift away from taxing asset income towards taxing consumption would lead to:

Answer _{a larger demand for loanable funds, a higher interest rate, and slower economic growth.} a larger supply of loanable funds, a lower interest rate, and faster economic growth. a larger government budget deficit and slower economic growth.

a smaller supply of loanable funds, a higher interest rate, and faster economic growth.

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Question

(Figure: Market for Loanable Funds II) An increase in government borrowing will shift the demand for loanable funds to the: Answer _{left and increase the interest rate.}

left and decrease the interest rate. right and increase the interest rate. right and decrease the interest rate.

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(Figure: Market for Loanable Funds II) A decrease in government borrowing will shift the demand for loanable funds to the: Answer _{left and increase the interest rate.}

right and decrease the interest rate. right and increase the interest rate. left and decrease the interest rate.

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If the government increases its borrowing, at the given interest rate, there is a(n): Answer _{additional supply of funds.}

additional demand for funds. decrease in the supply of funds. increase in the supply of funds.

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Question

Which of the following is the most accurate statement concerning the relationship between government budget deficits and economic growth?

Answer _{Deficits increase economic growth.} Deficits decrease economic growth.

Deficits have no impact on economic growth.

We cannot say unambiguously whether government spending that increases deficits lowers or increases economic growth.

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Crowding out negatively affects the economy by: Answer _{decreasing government borrowing.}

decreasing consumption. increasing private borrowing.

reducing investment spending on physical capital.

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(Figure: Market for Loanable Funds II) A decrease in savings by the private sector will shift the supply of loanable funds to the: Answer _{left and increase the interest rate.}

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(Figure: Market for Loanable Funds II) An increase in savings by the private sector will shift the supply of loanable funds to the: Answer _{left and increase the interest rate.}

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(Figure: Market for Loanable Funds II) Other things being equal, if there is an increase in the interest rate above 8%, the quantity of loanable funds demanded will be _________.

Answer _{the same}

more less

either more or less

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(Figure: Market for Loanable Funds II) Other things being equal, if there is a decrease in the interest rate below 8%, the quantity of loanable funds demanded will be _________.

Answer _{the same}

more less

either more or less

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(Figure: Market for Loanable Funds II) Other things being equal, an increase in taxes on savings and investment income will: Answer _{shift demand to the right and increase the interest rate.}

shift demand to the left and decrease the interest rate. shift supply to the right and decrease the interest rate.

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shift supply to the left and increase the interest rate.

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(Figure: Market for Loanable Funds II) Other things being equal, a decrease in taxes on savings and investment income will: Answer _{shift demand to the right and increase the interest rate.}

shift demand to the left and decrease the interest rate. shift supply to the right and decrease the interest rate. shift supply to the left and increase the interest rate.

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Table: Investment Projects

(Table: Investment Projects) If the market interest rate is 15%, the last project undertaken is:

Answer _F.

G. H. I.

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(Table: Investment Projects) If the market interest rate is 11%, the last project undertaken is:

Answer _G.

H. I. J.

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(Table: Investment Projects) If the market interest rate is 13%, the amount of planned investment spending is:

Answer _$200.

$800. $1,000. $2,000.

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(Table: Investment Projects) If the market interest rate is 9%, the amount of planned investment spending is:

Answer _$1,800.

$2,000. $4,000. $5,500.

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(Table: Investment Projects) If the market interest rate is 17%, the amount of investment demanded is:

Answer _$200.

$800. $1,000. $2,000.

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(Table: Investment Projects) If the market interest rate is 11%, the amount of investment demanded is:

Answer _$800.

$1,000. $2,000. $4,000.

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(Table: Investment Projects) If the market interest rate declines from 15% to 11%, then the amount of investment demanded will increase by:

Answer _$200.

$1,000. $2,000. $2,200.

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(Table: Investment Projects) If the market interest rate declines from 15% to 13%, then the amount of investment demanded will increase by:

Answer _$200.

$1,000. $2,000. $2,200.

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Higher rates of interest tend to _______ the quantity of loanable funds demanded, and lower rates of interest tend to _______ it.

Answer _{increase; reduce}

reduce; reduce increase; increase reduce; increase

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There is a _______ relationship between the amount of loanable funds demanded and the rate of interest.

Answer _positive

direct negative tenuous

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An expectation that perceived business opportunities will increase will generally cause: Answer _{a shift to the left in the loanable funds demand curve.}

a movement along the loanable funds demand curve. the demand for loanable funds to increase.

the demand for loanable funds to decrease.

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An increase in the level of business opportunity will generally: Answer _{not change the loanable funds demand curve.}

shift the loanable funds demand curve to the left.

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shift the loanable funds demand curve to the right.

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A decrease in the level of business opportunity will generally: Answer _{not change the loanable funds demand curve.}

shift the loanable funds demand curve to the left.

cause a movement up and down the loanable funds demand curve. shift the loanable funds demand curve to the right.

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Question

A decrease in the demand for loanable funds would most likely be caused by a(n): Answer _{decrease in the market interest rate.}

decrease in corporate income tax rates.

increase in the amount of expected business opportunities. decrease in the amount of expected business opportunities.

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An increase in the demand for loanable funds would most likely be caused by a(n): Answer _{increase in the market interest rate.}

increase in business tax rates.

increase in the amount of expected business opportunities decrease in the amount of expected business opportunities.

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A decrease in the demand for loanable funds would most likely be caused by a(n): Answer _{decrease in the market interest rate.}

decrease in corporate income tax rates.

decrease in the amount of expected business opportunities. increase in the amount of expected business opportunities.

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All other things unchanged, a general increase in the amount of government borrowing will typically: Answer _{shift the loanable funds demand curve to the left and decrease interest rates.}

shift the loanable funds demand curve to the right and increase interest rates. have no effect on the loanable funds demand curve.

have no effect on the demand for loanable funds.

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All other things unchanged, a general decrease in the amount of government borrowing will typically: Answer _{have no effect on the demand for loanable funds.}

increase interest rates.

shift the loanable funds demand curve to the left. raise the level of demand for loanable funds.

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All other things unchanged, an increase in loanable funds demand would most likely be caused by a(n): Answer _{decrease in the amount of expected business opportunities.}

increase in the market interest rate. increase in corporate income tax rates.

increase in the amount of government borrowing.

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All other things unchanged, an increase in loanable funds demand would most likely be caused by a(n): Answer _{important economic forecast predicting solid economic growth.}

important economic forecast predicting a looming recession. increase in the market interest rate.

increase in the cost of new capital goods.

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Question

All of the following is correct EXCEPT when there is an increase in:

Answer _{government budget deficit, the total amount of borrowing falls.} private savings, the interest rate decreases.

government budget deficit, the private investment is crowded out. private savings, the total amount of borrowing increases.

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Question

A business decision to borrow to fund its projects should be based on whether: Answer _{the rate of return on the project is less than the interest rate on the loan.}

the project will produce a good or service that is in high demand.

the rate of return on the project is at least as great as the interest rate on the loan. it is going to be a project where minimum efficient scale is attained.

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Question

The rate of return on a business project is equal to: Answer

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Question

Crowding out is a phenomenon:

Answer _{where an increase in government's budget surplus decreases the overall investment spending.} where overproduction in the goods market leads to a sharp drop in the aggregate price level. where an increase in government's budget deficit causes the overall investment spending to fall. where an increase in imports causes the overall domestic production to fall.

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Figure: Crowding Out

(Figure: Crowding Out) The demand for loanable funds curve D_LF1 will shift to D_LF2, because: Answer _{of a decrease in the government budget deficit.}

of an increase in the government budget deficit. of an increase in private savings.

of a decrease in private savings.

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(Figure: Crowding Out) If the demand for loanable funds curve shifts to the right, then it will result in: Answer _{an increase in the interest rate and the total amount of borrowing in the funds market.}

an increase in the interest rate and a decrease in the total amount of borrowing in the funds market. a decrease in the interest rate and the total amount of borrowing in the funds market.

a decrease in the interest rate and an increase in the total amount of borrowing in the funds market.

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Question

(Figure: Crowding Out) Suppose the supply of loanable funds curve S_LF1 shifts to S_LF2, that implies: Answer _{that private savings have increased.}

that national investment has decreased. that private savings have decreased. that national savings have decreased.

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Question

(Figure: Crowding Out) If the supply of loanable funds curve shifts to the right, then it will result in: Answer _{an increase in the total amount of borrowing and the interest rate.}

a decrease in the total amount of borrowing and the interest rate.

an increase in the total amount of borrowing and a fall in the interest rate. a decrease in the total amount of borrowing and an increase in the interest rate.

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Answer _{private savings decreases when the government borrows.} private investment decreases when the government borrows. there are too many players in the financial markets.

some bond holders will be squeezed out of the market.

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Question

If in an open economy, the government's budget deficit increases at the same time as the trade deficit grows, this will lead to a(n) _________ in the demand and a(n) ________ in the supply of loanable funds in domestic markets.

Answer _{increase; decrease}

decrease; decrease increase; increase decrease; increase

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Figure: Market for Loanable Funds III

(Figure: Market for Loanable Funds III) If the government in a closed economy is running a budget balance of zero when it decides to increase defense spending by $200 billion and then finances the spending by selling bonds, the equilibrium interest rate will:

Answer _{fall to 12%.}

rise to 16.5%. rise to 18%. rise to 21%.

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Question

(Figure: Market for Loanable Funds III) If the government in a closed economy is running a budget balance of zero when it decides to increase defense spending by $200 billion and then finances the spending by selling bonds, the government will crowd out _____ in private investment spending.

Answer _{$200 billion}

$100 billion $50 billion $0 billion

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Question

(Figure: Market for Loanable Funds III) If the government in a closed economy is running a budget deficit of $300 billion and finances the deficit by selling bonds when it decides to decrease defense spending by $200 billion, the equilibrium interest rate will:

Answer _{rise to 18%.}

not change. fall to 13.5%. fall to 12%.

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Question

(Figure: Market for Loanable Funds III) If the government in a closed economy is running a budget deficit of $300 billion and finances the deficit by selling bonds when it decides to decrease defense spending by $200 billion, the decrease in government spending will encourage _____ in additional private investment spending.

Answer _{$400 billion}

$200 billion $100 billion $0 billion

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Question

Governments can engage in saving when: Answer _{taxes are less than expenditures.}

taxes are greater than expenditures.

the government borrows to finance its expenditures. the president insists that Congress balance the budget.

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Question

Which of the following is an advantage to the recipient country of foreign investment?

Answer _{Foreigners are content to receive lower profits and interest rates than are domestic investors.} Foreigners don't expect to receive profits and interest as often as do domestic investors.

Domestic firms with foreign investors are exempt from domestic income taxes on a portion of their net income. Foreign companies often bring new technology to the recipient country, and this increases productivity.

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A relatively low saving rate affects productivity growth by:

Answer _{depriving investment spending of the funds needed to increase the physical capital.}

promoting consumption spending and depriving investment in human capital of the funds needed for tuition. reducing the tax base and preventing the government from providing public goods.

stimulating imports and increasing the trade deficit.

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The sources of financing of physical capital include: Answer _{domestic consumption.}

foreign borrowing from the home country. foreign investment in the home country.

domestic consumption, foreign borrowing from the home country, and foreign investment in the home country.

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Question

The government can increase savings by: Answer _{taxing more than it spends.}

spending more than it taxes. increasing inflation.

increasing the deficit.

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Question

Currently, America is a net recipient of foreign savings. Answer _{This has never happened before in America.}

This is bad because we are borrowing money from overseas. This is bad because we are losing control over our own destiny. This has been true throughout much of our history.

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Question

The Fisher Effect states that:

Answer _{the nominal rate of interest is unaffected by the change in expected inflation.} the nominal rate of interest is unaffected by the change in unexpected inflation. the expected real rate of interest is unaffected by the change in expected inflation.

the expected real rate of interest increases by one percentage point for each percentage change in expected inflation.

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Question

Suppose the lender expects a real interest rate of 6% and the inflation rate is expected to be 3%. In this case, the nominal interest rate is equal to:

Answer _3%.

9%. 12%. 6%.

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Question

Samantha is asking her employer for a 5% raise for the coming year. If the inflation rate during the next year is 5.5%, then her real wage will:

Answer _{increase by 5%.}

decrease by .5%. decrease by 5%. increase by .5%.

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Question

From the standpoint of economic growth, banks are important to: Answer _{fight inflation.}

keep interest rates low.

channel savings into investment. channel investment into savings.

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Question

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Answer _{a house} mortgage credit card debt car loan

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Question

The value of all accumulated savings of a household is considered:

Answer _wealth.

income. debt. wages.

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The main role of financial systems is to: Answer _{make the capitalist class richer.}

provide credit cards to as many people as possible.

channel goods and services to the people willing to pay for them. channel funds from savers into investments.

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Question

Which of the following is NOT one of the three tasks of a financial system? Answer _{transactions costs reduction}

risk management provide liquidity

determining fiscal policy

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Question

A household's wealth is:

Answer _{what a household earns each period.} what a household saves each period.

the value of a household's accumulated savings. the value of a household's financial assets.

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Question

A financial asset is:

Answer _{a physical asset like a car.}

a claim that entitles the owner to future income from the seller. the value of accumulated savings.

another term for capital.

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A physical asset is:

Answer _{a claim on a tangible asset that gives the owner the right to dispose of it as he or she wishes.} a claim that entitles the owner to future income from the seller.

the value of accumulated savings. human capital.

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Question A liability is:

Answer _{when you have wronged someone and are held responsible in court.} a requirement that you pay income in the future.

when you are not able to perform an agreed task.

a claim that entitles the owner to future income from the seller.

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Question

Transactions costs are:

Answer _{the return to the entrepreneur.}

the return to moving a product to market. the expenses of producing a product.

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Question

In financial markets:

Answer _{households sell liabilities.}

wealth is transformed into savings. households purchase financial assets. physical assets exchange hands.

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Question

As an investor, you may choose to purchase a bond or a share of stock. If you choose to purchase the bond, you are likely to receive a _____ return in exchange for a _____ level of risk.

Answer _{higher; higher}

lower; lower lower; higher higher; lower

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Question A loan is:

Answer _{a liability for the lender and an asset for the borrower.} a physical asset that is traded in financial markets.

a claim on a bank that obliges the bank to provide funds to a lender. a liability for the borrower and an asset for the lender.

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Question

All of the following are examples of financial assets and/or liabilities EXCEPT:

Answer _loans.

stocks and bonds. real estate. bank deposits.

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Question

Financial markets make the process of borrowing large amounts of money easier because they simplify the negotiation process between borrowers and lenders. This is an example of:

Answer _{reducing transaction costs.} reducing risk.

providing liquidity.

acting as a lender of last resort.

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Question

One reason financial institutions become very large is: Answer _{to decrease transactions cost.}

to enjoy the power of having a large corporation. to increase transactions costs.

to offset the power of other large corporations.

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Question

A risk averse person:

Answer _{considers any risk unacceptable.} would never buy a financial asset.

has an asymmetric view of the value of losses and gains would never buy insurance.

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Question

Financial markets spread the potential gains and losses of borrowing and lending operations among many individuals, therefore decreasing the overall uncertainty. This is an example of:

Answer _{reducing transaction costs.} reducing risk.

providing liquidity.

guaranteeing rates of return.

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