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34) Suppose the government's budget deicit increases by $500 billion. If there is no
Ricardo-Barro efect, what occurs?
A) The demand for loanable funds curve shifts rightward, the real interest rate rises, and
the quantity of loanable funds increases.
B) The supply of loanable funds curve shifts leftward, the real interest rate rises, and the
quantity of loanable funds decreases.
C) The demand for loanable funds curve shifts leftward, the real interest rate falls, and the
quantity of loanable funds decreases.
D) The supply of loanable funds curve shifts rightward, the real interest rate falls, and the
quantity of loanable funds increases.
E) The supply of loanable funds curve shifts leftward, the real interest rate rises, and the
quantity of loanable funds increases.
Skill: Level 3: Using models
Section: Checkpoint 10.3
Status: Old
AACSB: Relective thinking
35) A country initially has an equilibrium real interest rate of 4 percent and an equilibrium
quantity of investment of $2 trillion. The government's budget deicit then increases.
According to the crowding-out efect, the
A) demand for loanable funds curve shifts leftward, the real interest rate falls, and
investment increases.
B) supply of loanable funds curve shifts rightward, the real interest rate rises, and
investment increases.
C) demand for loanable funds curve shifts rightward, the real interest rate falls, and
investment increases.
D) demand for loanable funds curve shifts rightward, the real interest rate rises, and
investment decreases.
E) supply of loanable funds curve shifts leftward, the real interest rate falls, and investment
decreases.
Skill: Level 3: Using models
Section: Checkpoint 10.3
Status: Old
AACSB: Relective thinking
36) Suppose the government has a budget deicit of $2 billion. If there is no Ricardo-Barro
efect, how much crowding out of investment occurs?
A) more than $2 billion
B) some crowding out occurs, but less than $2 billion
C) exactly equal to $2 billion dollars
D) No crowding out occurs and investment does not change.
E) No crowding out occurs because investment increases.
Skill: Level 3: Using models
Section: Checkpoint 10.3
Status: Old
AACSB: Relective thinking
37) According to the Ricardo-Barro efect, a government budget
A) surplus increases private saving supply.
B) deicit increases private saving supply.
71
C) deicit decreases private saving supply.
D) surplus decreases private investment demand.
E) deicit decreases private investment demand.
Skill: Level 1: Deinition
Section: Checkpoint 10.3
Status: Old
AACSB: Relective thinking
38) According to the Ricardo-Barro efect, an increase in the government budget deicit
A) does not change the real interest rate.
B) lowers the real interest rate.
C) shifts the supply of loanable funds curve leftward.
D) has no efect on the nominal interest rate but does change the real interest rate.
E) shifts the demand for loanable funds curve leftward.
Skill: Level 2: Using deinitions
Section: Checkpoint 10.3
Status: Old
AACSB: Relective thinking
39) The Ricardo-Barro efect refers to how ________ in response to a government budget
________.
A) investment demand changes; surplus
B) investment demand changes; deicit
C) saving supply changes; deicit
D) government budget changes; surplus or deicit
E) investment demand and saving supply change; surplus
Skill: Level 1: Deinition
Section: Checkpoint 10.3
Status: Old
AACSB: Relective thinking
72
40) A prediction of the Ricardo-Barro efect is
A) a larger increase in the real interest rate when the government runs a budget deicit.
B) a larger decrease in the real interest rate when the government runs a budget surplus.
C) no efect on the real interest rate when the government runs a budget deicit.
D) a larger decrease in investment when the government runs a budget deicit.
E) a larger decrease in investment when the government runs a budget surplus.
Skill: Level 2: Using deinitions
Section: Checkpoint 10.3
Status: Old
AACSB: Relective thinking
41) The Ricardo-Barro efect argues that the crowding-out efect
A) is the result of a government budget surplus and higher interest rates.
B) will not occur, because the private saving supply will change to ofset any change in the
government budget deicit.
C) is the result of the government budget deicit and higher interest rates.
D) will occur, because the private saving supply will change to ofset any change in the
government budget deicit.
E) is stronger when the government runs a budget surplus than when it runs a budget
deicit.
Skill: Level 3: Using models
Section: Checkpoint 10.3
Status: Old
AACSB: Relective thinking
42) The Ricardo-Barro efect is based on the idea that ________ when the government has a
budget deicit.
A) people decrease their private saving
B) people increase their private saving
C) investment demand increases because expected future proits increase
D) investment demand decreases because of the higher real interest rate
E) people immediately increase their tax payments
Skill: Level 3: Using models
Section: Checkpoint 10.3
Status: Old
AACSB: Relective thinking
73
43) Evidence to support the Ricardo-Barro efect would show that
A) higher government budget deicits decrease investment.
B) higher government budget surpluses decrease investment.
C) government budget deicits increase household consumption.
D) government budget deicits have no efect on the real interest rate or investment.
E) higher government budget deicits raise the real interest rate.
Skill: Level 2: Using deinitions
Section: Checkpoint 10.3
Status: Old
AACSB: Relective thinking
44) Suppose the government has a budget deicit of $2 billion. If the Ricardo-Barro efect is
correct, then how much crowding out of investment occurs?
A) more than $2 billion
B) some crowding out occurs, but less than $2 billion
C) exactly equal to $2 billion dollars
D) No crowding out occurs and investment does not change.
E) No crowding out occurs because investment increases by $2 billion.
Skill: Level 3: Using models
Section: Checkpoint 10.3
Status: Old
AACSB: Analytical thinking
74
45) The above table has the private demand for loanable funds and the private supply of
loanable funds schedules. If the government budget surplus is $200 billion, and there is no
Ricardo-Barro efect, the equilibrium real interest rate is ________ and the equilibrium
quantity of loanable funds is ________.
A) 6 percent; $600 billion
B) 4 percent; $700 billion
C) 8 percent, $500 billion
D) 8 percent; $700 billion
E) 4 percent; $500 billion
Skill: Level 3: Using models
Section: Checkpoint 10.3
Status: Old
AACSB: Analytical thinking
46) The above table has the private demand for loanable funds and the private supply of
loanable funds schedules. If the government budget deicit is $200 billion, and there is no
Ricardo-Barro efect, the equilibrium real interest rate is ________ and the equilibrium
quantity of investment is ________.
A) 6 percent; $600 billion
B) 4 percent; $700 billion
C) 8 percent, $500 billion
D) 8 percent; $700 billion
E) 4 percent; $500 billion
Skill: Level 3: Using models
Section: Checkpoint 10.3
Status: Old
AACSB: Analytical thinking
75
47) The above table has the private demand for loanable funds and the private supply of
loanable funds schedules. If the government budget surplus is $200 billion, and there is a
Ricardo-Barro efect, the equilibrium real interest rate is ________ and the equilibrium
quantity of loanable funds is ________.
A) 6 percent; $600 billion
B) 4 percent; $700 billion
C) 8 percent, $500 billion
D) 8 percent; $700 billion
E) 4 percent; $500 billion
Skill: Level 3: Using models
Section: Checkpoint 10.3
Status: Old
AACSB: Analytical thinking
48) The above table has the private demand for loanable funds and the private supply of
loanable funds schedules. If the government budget deicit is $200 billion, and there is a
Ricardo-Barro efect, the equilibrium real interest rate is ________ and the equilibrium
quantity of investment is ________.
A) 6 percent; $600 billion
B) 4 percent; $700 billion
C) 8 percent, $500 billion
D) 8 percent; $700 billion
E) 4 percent; $500 billion
Skill: Level 3: Using models
Section: Checkpoint 10.3
Status: Revised
AACSB: Analytical thinking
49) During inancial crisis of 2008-09, the government rescued inancial irms and the auto
industry. As a result,
A) the government's budget deicit increased, the government's demand for loanable funds
increased and private investment was crowded out.
B) real interest rates decreased.
C) the supply of loanable funds decreased in response to the government's budget deicit.
D) the private demand for loanable funds increased.
E) the government's rescue plan created a surplus of loanable funds.
Skill: Level 1: Deinition
Section: Checkpoint 10.3
Status: Old
AACSB: Relective thinking
76
50) As a result of the government's rescue of inancial irms and the auto industry in 2008,
which of the following occurred?
i) The government's demand for loanable funds increased the real interest rate.
ii) Investment expenditures were crowded out.
iii) The supply of loanable funds curve shifted leftward.
A) i and ii
B) i, ii and iii
C) i only
D) ii only
E) ii and iii
Skill: Level 2: Using deinitions
Section: Checkpoint 10.3
Status: Old
AACSB: Relective thinking
51) With no Ricardo-Barro efect, a government budget surplus
A) increases the supply of loanable funds.
B) increases the demand for loanable funds.
C) decreases the supply of loanable funds.
D) decreases the demand for loanable funds.
E) has no efect on either the supply or the demand for loanable funds.
Skill: Level 1: Deinition
Section: Checkpoint 10.3
Status: Old
AACSB: Relective thinking
52) Suppose the government has a budget surplus. Then
A) private saving is equal to investment.
B) private saving is greater than investment and government saving is positive.
C) private saving is less than investment and government saving is positive.
D) private investment is greater than the sum of government saving and private saving.
E) private saving is greater than investment and government saving is negative.
Skill: Level 1: Deinition
Section: Checkpoint 10.3
Status: Old
AACSB: Relective thinking
77
53) When there is no Ricardo-Barro efect, a government budget surplus ________ the real
interest rate because the ________ loanable funds increases.
A) raises; demand for
B) lowers; demand for
C) raises; supply of
D) lowers; supply of
E) None of the above answers is correct because the real interest rate does not change.
Skill: Level 2: Using deinitions
Section: Checkpoint 10.3
Status: Revised
AACSB: Relective thinking
54) The "crowding-out efect" refers to how a government budget deicit
A) shifts only the supply of loanable funds curve leftward.
B) shifts only the demand for loanable funds curve leftward.
C) shifts both the demand for and the supply of loanable funds curves leftward.
D) decreases the equilibrium quantity of investment.
E) increases the equilibrium quantity of investment.
Skill: Level 1: Deinition
Section: Checkpoint 10.3
Status: Old
AACSB: Relective thinking
55) If there is no Ricardo-Barro efect, a government budget deicit will ________ the
equilibrium real interest rate and ________ the equilibrium quantity of investment.
A) raise; increase
B) raise; decrease
C) lower; increase
D) lower; decrease
E) not change; not change
Skill: Level 2: Using deinitions
Section: Checkpoint 10.3
Status: Old
AACSB: Relective thinking
78
56) The Ricardo-Barro efect says that a government budget deicit leads to
A) a higher real interest rate.
B) a lower real interest rate.
C) no change in the real interest rate.
D) an increase in demand for loanable funds.
E) an increase in the quantity of investment.
Skill: Level 2: Using deinitions
Section: Checkpoint 10.3
Status: Old
AACSB: Relective thinking
57) When the U.S. government launched a massive rescue plan in response to the 2008-
2009 inancial crisis, one of the main actions taken was to ________ because the desire was
to lessen the severity of the recession by ________.
A) increase the supply of loanable funds; encouraging decrease in investment
B) decrease the supply of loanable funds; encouraging decrease in investment
C) increase the supply of loanable funds; limiting the decrease in investment
D) decrease the supply of loanable funds; limiting the decrease in investment
E) increase the demand of loanable funds; encouraging decrease in investment
Skill: Level 3: Using models
Section: Checkpoint 10.3
Status: New
AACSB: Relective thinking
58) When the U.S. government launched a massive rescue plan in response to the 2008-
2009 inancial crisis, the overall demand for loanable funds ________ because the ________.
A) increased; demand by households, businesses, and inancial institutions increased as did
the federal government demand
B) decreased; demand by households, businesses, and inancial institutions changed by the
same amount as the federal government demand
C) decreased; demand by households, businesses, and inancial institutions decreased by
more than the federal government demand increased
D) increased; demand by households, businesses, and inancial institutions increased by
more than the federal government demand increased
E) did not change; demand by households, businesses, and inancial institutions changed by
the same amount as the federal government demand
Skill: Level 3: Using models
Section: Checkpoint 10.3
Status: New
AACSB: Relective thinking
79
59) In 2007 the real interest rate in the United States was 2 percent. By 2013, the
equilibrium real interest in the United States was ________ because the ________.
A) 3.5 percent; United States began to recover from the deep recession and inancial crisis
of 2008-2009
B) 0.5 percent; United States began to recover from the deep recession and inancial crisis
of 2008-2009
C) 0.5 percent; United States experienced a deep recession as a result of a inancial crisis
in 2008-2009
D) 3.5 percent; United States experienced a deep recession as a result of a inancial crisis
in 2008-2009
E) not yet calculated; efects of the inancial crisis of 2008-2009 have not yet been tallied
Skill: Level 3: Using models
Section: Checkpoint 10.3
Status: New
AACSB: Relective thinking
80
