10.4 Chapter Figures
The igure above shows the demand for loanable funds curve.
1) In the igure above, a movement from point A to point C can be the result of
A) an increase in expected proit.
B) a decrease in expected proit.
C) a rise in the real interest rate.
D) a fall in the real interest rate.
E) an increase in the government budget deicit.
Skill: Level 3: Using models
Section: Checkpoint 10.2
Status: Old
AACSB: Analytical thinking
81
2) If the demand for loanable funds curve shifts rightward from the curve shown in the
igure above, the shift could be the result of
A) an increase in expected proit.
B) a decrease in expected proit.
C) a rise in the real interest rate.
D) a fall in the real interest rate.
E) a decrease in real GDP.
Skill: Level 3: Using models
Section: Checkpoint 10.2
Status: Old
AACSB: Analytical thinking
The igure above shows the supply of loanable funds curve.
3) In the igure above, a movement from point A to point C can be the result of
A) a fall in expected future income.
B) an increase in disposable income.
C) a rise in the real interest rate.
D) a fall in the real interest rate.
E) an increase in wealth.
Skill: Level 3: Using models
Section: Checkpoint 10.2
Status: Old
AACSB: Analytical thinking
4) If the supply of loanable funds curve shifts rightward from the curve shown in the igure
above, the shift could be the result of
A) a fall in expected future income.
B) a decrease in disposable income.
C) a decrease in the demand for loanable funds.
82
D) a decrease in the supply of loanable funds.
E) an increase in wealth.
Skill: Level 3: Using models
Section: Checkpoint 10.2
Status: Old
AACSB: Analytical thinking
5) If the supply of loanable funds curve shifts rightward from the curve shown in the igure
above, the shift could be the result of
A) a rise in expected future income.
B) an increase in disposable income.
C) a decrease in the demand for loanable funds.
D) a decrease in the supply of loanable funds.
E) an increase in wealth.
Skill: Level 3: Using models
Section: Checkpoint 10.2
Status: Old
AACSB: Analytical thinking
6) If the supply of loanable funds curve shifts rightward from the curve shown in the igure
above, the shift could be the result of
A) a rise in expected future income.
B) a decrease in disposable income.
C) a decrease in the demand for loanable funds.
D) a decrease in the supply of loanable funds.
E) a decrease in wealth.
Skill: Level 3: Using models
Section: Checkpoint 10.2
Status: Old
AACSB: Analytical thinking
83
10.5 Integrative Questions
1) If investment demand increases, the equilibrium real interest rate ________ and the
equilibrium quantity of investment ________.
A) rises; increases
B) rises; decreases
C) falls; increases
D) falls; decreases
E) does not change; does not change
Skill: Level 3: Using models
Section: Integrative
Status: Old
AACSB: Analytical thinking
2) If saving supply decreases, the equilibrium real interest rate ________ and the equilibrium
quantity of investment ________.
A) rises; increases
B) rises; decreases
C) falls; increases
D) falls; decreases
E) does not change; does not change
Skill: Level 3: Using models
Section: Integrative
Status: Old
AACSB: Analytical thinking
3) In the late 1990s, the U.S. federal government had a budget surplus. If there is no
Ricardo-Barro efect, these surpluses ________ the supply of loanable funds and ________ the
real interest rate.
A) increased; raised
B) increased; lowered
C) decreased; raised
D) decreased; lowered
E) did not change; did not change
Skill: Level 4: Applying models
Section: Integrative
Status: Old
AACSB: Analytical thinking
84
4) In 2012, the U.S. federal government budget had a budget deicit. If there is no Ricardo-
Barro efect, this deicit ________ the demand for loanable funds and ________ the real
interest rate.
A) increased; raised
B) increased; lowered
C) decreased; raised
D) decreased; lowered
E) did not change; did not change
Skill: Level 4: Applying models
Section: Integrative
Status: Old
AACSB: Analytical thinking
5) In the late 1990s, the U.S. federal government had a budget surplus. If there is no
Ricardo-Barro efect, the budget surplus ________ the real interest rate and ________ the
equilibrium quantity of investment.
A) raised; increased
B) raised; decreased
C) lowered; increased
D) lowered; decreased
E) did not change; did not change
Skill: Level 4: Applying models
Section: Integrative
Status: Old
AACSB: Analytical thinking
6) In 2012, the U.S. federal government had a budget deicit. If there is no Ricardo-Barro
efect, the budget deicit ________ the real interest rate and ________ the equilibrium
quantity of investment.
A) raised; increased
B) raised; decreased
C) lowered; increased
D) lowered; decreased
E) did not change; did not change
Skill: Level 4: Applying models
Section: Integrative
Status: Old
AACSB: Analytical thinking
85
7) Crowding out can occur when a government budget ________ raises the real interest rate
and the equilibrium quantity of investment ________.
A) surplus; increases
B) surplus; decreases
C) deicit; increases
D) deicit; decreases
E) surplus; does not change
Skill: Level 4: Applying models
Section: Integrative
Status: Old
AACSB: Analytical thinking
8) What does the Ricardo-Barro Efect predict?
A) The level of saving in a developed economy will be very low.
B) There is no way to explain animal spirits or irrational exuberance.
C) Private saving will ofset the impact of government borrowing.
D) Government budget deicits crowd out private investment.
E) Net investment and gross investment will be equal.
Skill: Level 3: Using models
Section: Integrative
Status: Old
AACSB: Analytical thinking
9) If the government runs a budget deicit to ight a war and there is no Ricardo-Barro
efect, what is an impact of the deicit?
A) The quantity of private saving decreases.
B) Firms purchase more capital equipment.
C) Animal spirits or irrational exuberance is created.
D) The real interest rate rises.
E) The quantity of investment increases.
Skill: Level 4: Applying models
Section: Integrative
Status: Old
AACSB: Analytical thinking
86
10.6 Essay: Financial Institutions and Markets
1) What is the diference, if any, between physical capital and inancial capital?
Skill: Level 1: Deinition
Section: Checkpoint 10.1
Status: Old
AACSB: Relective thinking
2) Deine gross investment and net investment. Discuss the relationship between gross
investment and net investment.
Skill: Level 1: Deinition
Section: Checkpoint 10.1
Status: Old
AACSB: Relective thinking
3) What is the distinction between gross investment and net investment?
Skill: Level 1: Deinition
Section: Checkpoint 10.1
Status: Old
AACSB: Relective thinking
4) “When a company’s depreciation is larger than its gross investment, net investment
becomes negative and the irm’s capital stock decreases.” Is the previous statement correct
or incorrect? Explain your answer.
Skill: Level 2: Using deinitions
Section: Checkpoint 10.1
Status: Old
AACSB: Written and oral communication
5) Is wealth the same thing as income?
Skill: Level 1: Deinition
87
Section: Checkpoint 10.1
Status: Old
AACSB: Relective thinking
6) Deine wealth. What is the relationship between wealth and saving?
Skill: Level 1: Deinition
Section: Checkpoint 10.1
Status: Old
AACSB: Relective thinking
7) If a irm wants to buy a piece of capital equipment, is this irm a demander or supplier in
the inancial market?
Skill: Level 1: Deinition
Section: Checkpoint 10.1
Status: Old
AACSB: Relective thinking
8) In the nation’s inancial markets, what are the various ways a irm can obtain inancial
capital?
Skill: Level 1: Deinition
Section: Checkpoint 10.1
Status: Old
AACSB: Relective thinking
88
9) List three diferent types of inancial markets and discuss the type of inancial
instruments traded in the markets.
Skill: Level 1: Deinition
Section: Checkpoint 10.1
Status: Old
AACSB: Written and oral communication
10) Describe two main diferences between bonds and stocks.
Skill: Level 1: Deinition
Section: Checkpoint 10.1
Status: Old
AACSB: Written and oral communication
11) Does a stock certiicate or a bond represent ownership of a company and a claim on its
proits?
Skill: Level 1: Deinition
Section: Checkpoint 10.1
Status: Old
AACSB: Relective thinking
12) At the beginning of the year, Becky’s wealth was $30,000. During the year, she earned
$50,000 of income, paid $6,000 in taxes and consumed $43,000 of goods and services.
What is Becky’s wealth at the end of the year?
Skill: Level 2: Using deinitions
Section: Checkpoint 10.1
Status: Old
AACSB: Analytical thinking
89