Page 1
1.
Facebook’s primary type of investment spending is the purchase of:
A)
server farms, or arrays of linked computers.
B)
health care for its employees.
C)
stock in Yahoo and Google.
D)
U.S. Treasury securities.
2.
Which of the following is (are) source(s) of funds for Facebook’s investment spending?
I. investors who purchase shares of stock in the company
II. borrowing from savers
A)
I only
B)
II only
C)
both I and II
D)
neither I nor II
3.
Most human capital is provided by:
I. governments through public education
II. investment spending by private sector firms
A)
I only
B)
II only
C)
both I and II
D)
neither I nor II
4.
Most physical capital, except for infrastructure, is provided by:
I. governments through public education
II. investment spending by private sector firms
A)
I only
B)
II only
C)
both I and II
D)
neither I nor II
5.
Which of the following is (are) a source (sources) of funding for private investment
spending?
I. savings of the owners of a family business
II. profits of a large corporation
III. borrowing
A)
I only
B)
II only
C)
III only
D)
I, II, and III
Page 2
6.
Which of the following is considered investment spending in macroeconomics?
A)
GM builds a new plant.
B)
Ryan Jones buys GM stock.
C)
Ryan Jones buys GM bonds.
D)
Ryan Jones buys GM stock and bonds.
7.
Which of the following do economists view as investment spending?
A)
stocks
B)
bonds
C)
spending on physical capital
D)
mutual fund investing
8.
Investment spending in macroeconomics refers to:
A)
buying stocks.
B)
buying newly issued shares of stock.
C)
adding to physical capital.
D)
adding to one’s retirement account.
9.
Which of the following is considered to be investing in a physical asset?
A)
purchasing stock in IBM
B)
selling stock in IBM
C)
buying a bond issued by IBM
D)
buying a new factory that produces IBM handheld devices
10.
Which of the following is an example of investment spending in macroeconomics?
A)
The owner of a Domino’s Pizza store has employed two students to deliver pizzas.
B)
The manager of a Domino’s Pizza store has deposited cash in the bank.
C)
A Domino’s Pizza store has purchased a new pizza oven.
D)
The owner of the Domino’s Pizza store has bought stock in Domino’s.
11.
Which of the following is an advantage to the recipient of foreign investment?
A)
Foreigners are content to receive lower profits and interest rates than are domestic
investors.
B)
Foreigners don’t expect to receive profits and interest as often as do domestic
investors.
C)
Domestic firms with foreign investors are exempt from domestic income taxes on a
portion of their net income.
D)
Foreign companies often bring new technology to the recipient country, and this
increases productivity.
Page 3
12.
Physical capital is purchased through investment spending, which in turn is mostly
financed out of:
A)
taxes.
B)
savings.
C)
import tariffs.
D)
consumption expenditure.
13.
Private savings equals:
A)
income after taxes minus consumption.
B)
taxes minus government spending on goods and services.
C)
the total amount of savings accounts plus stocks plus bonds owned by households.
D)
income plus investment.
Use the following to answer questions 14-17:
Scenario: Closed Economy S = I
GDP is $12 trillion this year in a closed economy. Consumption is $8 trillion and government
spending is $2 trillion. Taxes are $0.5 trillion.
14.
(Scenario: Closed Economy S = I) Look at the scenario Closed Economy S = I. How
much is private saving?
A)
$4 trillion
B)
$2.5 trillion
C)
$3.5 trillion
D)
–$0.5 trillion
15.
(Scenario: Closed Economy S = I) Look at the scenario Closed Economy S = I. What is
the government budget balance?
A)
a surplus of $1.5 trillion
B)
a deficit of $1.5 trillion
C)
a surplus of $0.5 trillion
D)
a deficit of $0.5 trillion
16.
(Scenario: Closed Economy S = I) Look at the scenario Closed Economy S = I. How
much is national saving?
A)
$3.5 trillion
B)
$3 trillion
C)
$2.5 trillion
D)
$2 trillion
Page 4
17.
(Scenario: Closed Economy S = I) Look at the scenario Closed Economy S = I. How
much is investment spending?
A)
$3.5 trillion
B)
$3 trillion
C)
$2.5 trillion
D)
$2 trillion
18.
In a simple closed economy, all investment spending must come from:
A)
savings.
B)
money creation.
C)
debt issuance.
D)
foreign borrowing.
19.
The budget balance equals:
A)
taxes plus government spending.
B)
taxes minus government spending.
C)
consumption plus investment.
D)
imports minus exports.
20.
A budget surplus exists when:
A)
taxes are greater than government spending.
B)
taxes are less than government spending.
C)
taxes are less than government spending plus investment.
D)
investment is less than government spending less taxes.
21.
National savings is the sum of private savings and:
A)
private consumption.
B)
government tax revenue.
C)
the budget balance.
D)
trade surplus.
22.
In a closed economy, all investment spending must come from:
A)
government.
B)
national savings.
C)
foreign savings.
D)
government, domestic savings, and foreign savings.
Page 5
23.
The savings–investment spending identity says that:
A)
each person in the economy must invest as much as he or she saves.
B)
savings and investment spending are always equal for the economy as a whole.
C)
savings must equal government investment for the economy as a whole.
D)
each person in the economy must save as much as he or she invests.
24.
In a closed economy, investment spending, I, must equal:
A)
GDP – C – G.
B)
GDP – C.
C)
GDP – C – G – X.
D)
GDP – [C × G].
25.
The government saves when it:
A)
has a balanced budget.
B)
has a budget deficit.
C)
has a budget surplus.
D)
borrows by selling bonds.
26.
The government saves when:
A)
tax revenue is less than government spending.
B)
tax revenue is more than government spending.
C)
tax revenue equals government spending.
D)
tax revenue is positive.
27.
National savings in a closed economy is all of the following EXCEPT:
A)
the sum of private savings plus the government budget balance.
B)
the total savings in the economy.
C)
GDP – C – G.
D)
government spending minus consumption.
28.
One difference between a closed and an open economy is that:
A)
in the latter, foreign savings complement domestic savings in financing investment
spending.
B)
in the latter, the government is more open to the idea of financing investment
spending than in the former.
C)
in the former, foreign savings complement domestic savings in financing
investment spending.
D)
in the former, foreign savings finance more investment spending than in the latter.
Page 6
29.
The savings–investment spending identity says that savings and investment spending
are:
A)
always equal because private savings match government savings.
B)
equal as long as there is no trade surplus or deficit.
C)
always equal for the economy as a whole.
D)
equal as long as there is no government budget deficit or surplus.
30.
In a closed economy, the savings–investment spending identity is:
A)
I = GDP – C – G + (IM – NX).
B)
NS = GDP + I.
C)
NS = GDP + (C – T + TR) + (T – TR – G).
D)
I = GDP – C – G.
31.
In a closed economy government spending was $30 billion, consumption was $70
billion, taxes were $20 billion, and GDP was $110 billion this year. Investment
spending was $10 billion. As a result:
A)
private savings were $10 billion.
B)
the government’s budget balance was a surplus of $10 billion.
C)
there was no net savings.
D)
private savings were $20 billion.
32.
To help increase investment spending, the government can:
A)
lower taxes on consumption, so that disposable income rises.
B)
lower taxes on the returns from savings, so that total savings increase and the
interest rate falls.
C)
raise taxes on the returns from bonds while lowering taxes on stock dividends.
D)
lower taxes on investment spending while raising taxes on savings, so that total tax
revenue remains constant.
33.
According to the savings–investment spending identity:
A)
savings equals investment spending.
B)
government spending equals tax receipts.
C)
total income equals consumption spending plus savings.
D)
savings equals investment spending plus consumption spending.
34.
In a closed economy, national savings equals private savings:
A)
minus consumption spending.
B)
plus the budget balance.
C)
minus investment spending.
D)
minus tax receipts.
Page 7
35.
In a closed economy, national savings equals:
A)
(disposable income minus consumption spending) minus (tax receipts minus
government spending).
B)
(disposable income minus consumption spending) plus (government spending
minus tax receipts).
C)
(disposable income minus consumption spending) plus (tax receipts minus
government spending).
D)
(consumption spending minus disposable income) plus (government spending
minus tax receipts).
36.
In an open economy, total investment equals:
A)
national savings plus capital inflow.
B)
private savings plus national savings plus capital inflow.
C)
private savings plus capital inflow.
D)
national savings minus private savings minus capital inflow.
Use the following to answer questions 37-41:
Scenario: Open Economy S = I
In an open economy GDP is $12 trillion this year. Consumption is $8 trillion, and government
spending is $2 trillion. Taxes are $0.5 trillion. Exports are $1 trillion, and imports are $3 trillion.
37.
(Scenario: Open Economy S = I) Look at the scenario Open Economy S = I. How much
is private saving?
A)
$4 trillion
B)
$2.5 trillion
C)
$3.5 trillion
D)
$1.5 trillion
38.
(Scenario: Open Economy S = I) Look at the scenario Open Economy S = I. What is the
government budget balance?
A)
a surplus of $1.5 trillion
B)
a deficit of $1.5 trillion
C)
a deficit of $0.5 trillion
D)
a surplus of $3.5 trillion
Page 8
39.
(Scenario: Open Economy S = I) Look at the scenario Open Economy S = I. How much
is national saving?
A)
$4 trillion
B)
$3.5 trillion
C)
$2 trillion
D)
$5.5 trillion
40.
(Scenario: Open Economy S = I) Look at the scenario Open Economy S = I. How much
is the net capital inflow?
A)
$1 trillion
B)
$2 trillion
C)
$3 trillion
D)
$4 trillion
41.
(Scenario: Open Economy S = I) Look at the scenario Open Economy S = I. How much
is investment spending?
A)
$2 trillion
B)
$3 trillion
C)
$3.5 trillion
D)
$4 trillion
Use the following to answer questions 42-44:
42.
(Table: Investment Spending, Private Spending, and Capital Inflows) Look at the table
Investment Spending, Private Spending, and Capital Inflows. What is the budget
balance as a percentage of GDP in Northlandia?
A)
–10%
B)
0%
C)
10%
D)
20%
Page 9
43.
(Table: Investment Spending, Private Spending, and Capital Inflows) What is the budget
balance as a percentage of GDP in Southlandia?
A)
–10%
B)
0%
C)
10%
D)
20%
44.
(Table: Investment Spending, Private Spending, and Capital Inflows) Northlandia has a
_____, while Southlandia has a _____.
A)
balanced budget; budget deficit
B)
budget deficit; balanced budget
C)
budget surplus; balanced budget
D)
balanced budget; balanced budget
Use the following to answer questions 45-48:
Scenario: A Small Economy
Suppose there is no trade and no government in a small economy. GDP is $25 trillion, and
consumption spending is $18 trillion this year.
45.
(Scenario: A Small Economy) Look at the scenario A Small Economy. What is the level
of private saving?
A)
$7 trillion
B)
$18 trillion
C)
$43 trillion
D)
–$7 trillion
46.
(Scenario: A Small Economy) Look at the scenario A Small Economy. What is the level
of investment spending?
A)
$18 trillion
B)
$7 trillion
C)
$25 trillion
D)
–$7 trillion
Page 10
47.
(Scenario: A Small Economy) Look at the scenario A Small Economy. There is a new
government, and it imposes taxes on its citizens to spend on infrastructure. Taxes and
government spending are both $2 trillion. What is the level of private saving now?
A)
$11 trillion
B)
$7 trillion
C)
$5 trillion
D)
$18 trillion
48.
(Scenario: A Small Economy) Look at the scenario A Small Economy. There is a new
government and it imposes taxes on its citizens to spend on infrastructure. Taxes and
government spending are both $2 trillion. What is the level of investment spending
now?
A)
$7 trillion
B)
$5 trillion
C)
$18 trillion
D)
–$4 trillion
49.
The budget balance equals:
A)
taxes minus government spending.
B)
transfers minus government spending.
C)
taxes plus government spending.
D)
savings plus taxes.
50.
National savings equals:
A)
private savings plus consumption spending.
B)
trade balance plus the budget balance.
C)
private savings plus the budget balance.
D)
government spending plus taxes.
51.
Capital inflow equals:
A)
GDP plus exports minus imports.
B)
the growth in capital stock minus investment spending.
C)
foreign direct investment.
D)
the total inflow of foreign funds minus the total outflow of domestic funds.
52.
Taxes equal:
A)
government spending plus private savings.
B)
total spending minus consumption minus investment minus private savings.
C)
total income minus consumption minus private savings.
D)
consumption plus private savings plus total income.
Page 11
53.
Which statement is CORRECT?
A)
The budget deficit equals tax revenues plus transfer payments.
B)
Government spending equals private savings plus the budget deficit.
C)
Tax revenues equal national savings plus the budget deficit.
D)
The budget deficit equals government spending minus tax revenues.
54.
Capital inflow is:
A)
the net inflow of funds into a country.
B)
the net outflow of funds from a country.
C)
the amount by which domestic savings exceeds foreign savings.
D)
physical capital exported minus physical capital imported.
55.
Assume that I = SPrivate + SGovernment + (IM – X). Furthermore, let’s say that imports are
equal to exports. In this case, private savings:
A)
plus government savings exceed investment.
B)
exceed investment.
C)
plus government saving are less than investment.
D)
plus government saving are equal to investment.
56.
Net capital inflow equals:
A)
national savings.
B)
imports minus exports.
C)
consumption.
D)
consumption plus government spending.
57.
In an open economy government spending was $30 billion, consumption was $70
billion, taxes were $20 billion, GDP was $100 billion, and investment spending was $10
billion. As a result, there was:
A)
a net capital inflow of $10 billion.
B)
capital inflows of $10 billion and capital outflows of $20 billion.
C)
a trade surplus of $20 billion and a financial deficit of $20 billion.
D)
a net capital outflow of $10 billion.
58.
If a country has a trade surplus, we can conclude that it also has:
A)
a budget surplus.
B)
a net capital outflow.
C)
a net capital inflow.
D)
a budget deficit.
Page 12
59.
In an open economy, savings can come from all of the following EXCEPT:
A)
domestic sources.
B)
foreign sources.
C)
government sources.
D)
consumption.
60.
Capital inflow into a country is associated with:
A)
imports exceeding exports.
B)
a small amount of funds available for domestic investment.
C)
imports equaling exports.
D)
exports exceeding imports.
61.
A relatively low saving rate affects productivity growth by:
A)
causing a shortage of funds for investment in physical capital.
B)
decreasing consumption spending and increasing investment in human capital.
C)
reducing the tax base and preventing the government from providing public goods.
D)
stimulating imports and increasing the trade deficit.
62.
The sources of financing of physical capital include:
A)
domestic consumption.
B)
foreign borrowing from the home country.
C)
foreign investment in the home country.
D)
domestic consumption, foreign borrowing from the home country, and foreign
investment in the home country.
63.
The government can increase savings by:
A)
taxing more than it spends.
B)
spending more than it taxes.
C)
increasing inflation.
D)
increasing the deficit.
64.
The United States is a net recipient of foreign savings.
A)
This has never happened before.
B)
This is bad because we are borrowing money from overseas.
C)
This is bad because we are losing control over our own destiny.
D)
This has been true throughout much of our history.
Page 13
65.
According to the savings–investment spending identity:
A)
savings and investment spending are always equal for the economy as a whole.
B)
for long-run economic growth savings must be more than investment spending.
C)
for long-run economic growth savings must be less than investment spending.
D)
the identity of savers and investors is important for encouraging long-run economic
growth.
66.
GDP is the value of consumption spending _____ investment spending _____
government purchases _____ the value of exports _____ spending on imports.
A)
plus; plus; plus; plus
B)
plus; plus; plus; minus
C)
plus; minus; minus; plus
D)
minus; minus; plus; plus
Use the following to answer questions 67-71:
Table: National Income Accounts
Trillions
GDP
$15.9
Consumption
11.3
Government spending
3.0
Exports
2.2
Imports
2.7
Budget balance
–1.2
67.
(Table: National Income Accounts) Look at the table National Income Accounts. The
value of investment spending is:
A)
$15.9 trillion.
B)
$4.9 trillion.
C)
$2.1 trillion.
D)
–$0.5 trillion.
68.
(Table: National Income Accounts) Look at the table National Income Accounts. The
value of national savings is:
A)
$15.9 trillion.
B)
$4.9 trillion.
C)
$2.1 trillion.
D)
$1.6 trillion.
Page 14
69.
(Table: National Income Accounts) Look at the table National Income Accounts. The
value of tax revenue is:
A)
$1.8 trillion.
B)
$4.9 trillion.
C)
$2.1 trillion.
D)
$1.6 trillion.
70.
(Table: National Income Accounts) Look at the table National Income Accounts. The
value of net capital inflow is:
A)
$1.8 trillion.
B)
$0.5 trillion.
C)
$4.9 trillion.
D)
$1.6 trillion.
71.
(Table: National Income Accounts) Look at the table National Income Accounts. The
value of private savings is:
A)
$1.8 trillion.
B)
$0.5 trillion.
C)
$2.8 trillion.
D)
$1.6 trillion.
72.
If there is an increase in the government budget deficit, the _____ loanable funds will
_____, interest rates will _____, and the amount of borrowing will _____.
A)
demand for; increase; increase; increase
B)
demand for; decrease; decrease; decrease
C)
supply of; increase; decrease; increase
D)
supply of; decrease; increase; decrease
73.
If private savings increase, the _____ loanable funds will _____, interest rates will
_____, and the amount of borrowing will _____.
A)
demand for; increase; increase; increase
B)
demand for; decrease; decrease; decrease
C)
supply of; increase; decrease; increase
D)
supply of; decrease; increase; decrease
Page 15
74.
A business will want to borrow to undertake an investment project when the rate of
return on that project is _____ rate.
A)
lower than the interest
B)
higher than the interest
C)
higher than the exchange
D)
equal to the inflation
75.
Economists use _____ as a model to explain how savers and borrowers come together to
determine the equilibrium rate of interest.
A)
the money market
B)
the market for loanable funds
C)
aggregate demand and aggregate supply
D)
the financial system
76.
The demand for loanable funds is _____ sloping because _____ respond to lower
interest rates by _____ their quantity demanded of loanable funds.
A)
downward; investors; increasing
B)
downward; savers; increasing
C)
upward; investors; decreasing
D)
upward; savers; decreasing
77.
The supply of loanable funds is _____ sloping because _____ respond to lower interest
rates by _____ their quantity supplied of loanable funds.
A)
upward; savers; increasing
B)
upward; investors; decreasing
C)
upward; savers; decreasing
D)
downward; investors; increasing
78.
The interest rate is 5% in the market for loanable funds. Investors wish to borrow $100
million and savers wish to save $125 million at this interest rate. We would expect the
interest rate to _____, as there is a _____ of loanable funds.
A)
fall; shortage
B)
rise; surplus
C)
rise; shortage
D)
fall; surplus
Page 16
Use the following to answer question 79:
79.
(Table: Loanable Funds) Look at the table Loanable Funds. At what interest rate will the
market for loanable funds be in equilibrium?
A)
7%
B)
6%
C)
5%
D)
4%
Use the following to answer questions 80-83:
Figure: Loanable Funds
Page 17
80.
(Figure: Loanable Funds) Look at the figure Loanable Funds. Which of the following
might produce a new equilibrium interest rate of 8% and a new equilibrium quantity of
loanable funds of $150 billion?
A)
Consumption as a fraction of disposable income increases.
B)
Businesses become more optimistic about the return on investment spending.
C)
The federal government has a budget surplus rather than a budget deficit.
D)
There is an increase in capital inflows from other nations.
81.
(Figure: Loanable Funds) Look at the figure Loanable Funds. Which of the following
might produce a new equilibrium interest rate of 5% and a new equilibrium quantity of
loanable funds of $150 billion?
A)
Consumption as a fraction of disposable income increases.
B)
Businesses become more optimistic about the return on investment spending.
C)
The federal government has a budget surplus rather than a budget deficit.
D)
There is an increase in capital inflows from other nations.
82.
(Figure: Loanable Funds) Look at the figure Loanable Funds. Which of the following
might produce a new equilibrium interest rate of 8% and a new equilibrium quantity of
loanable funds of $75 billion?
A)
Capital inflows from foreign citizens decline.
B)
The federal government runs a budget deficit rather than a surplus.
C)
Profit expectations for business investments become less optimistic.
D)
The government eliminates taxes on income from interest earned.
83.
(Figure: Loanable Funds) Look at the figure Loanable Funds. Which of the following
might produce a new equilibrium interest rate of 4% and a new equilibrium quantity of
loanable funds of $75 billion?
A)
Profit expectations for business investments become less optimistic.
B)
Capital inflows from foreign citizens decline.
C)
The federal government runs a budget deficit rather than a surplus.
D)
The government eliminates taxes on income from interest earned.
Page 18
Use the following to answer question 84:
Figure: Demand for Loanable Funds
84.
(Figure: Demand for Loanable Funds) Look at the figure Demand for Loanable Funds.
When the interest rate is 6%, the quantity demanded of loanable funds will equal:
A)
$30 billion.
B)
$40 billion.
C)
$50 billion.
D)
$60 billion.
85.
A firm does NOT want to borrow money for a project when:
A)
the interest rate is higher than the rate of return on the project.
B)
the interest rate is lower than the rate of return on the project.
C)
the interest rate is positive.
D)
the rate of return on the project is positive.
86.
If a one-year project costs $100,000 and is expected to return the firm $105,000, the rate
of return of the project is:
A)
4.8%.
B)
5%.
C)
$5,000.
D)
$105,000.
Page 19
87.
A business will want a loan when:
A)
interest rate < (return on project – cost of project) / cost of project × 100.
B)
rate of return < interest rate.
C)
rate of return – interest rate < 0.
D)
rate of return > (cost of project – interest rate) / interest rate × 100.
88.
All of the following scenarios are associated with government budget deficits EXCEPT
that:
A)
the government becomes a borrower in the market for loanable funds.
B)
the interest rate rises.
C)
the total amount of borrowing decreases.
D)
private investment spending is crowded out.
89.
The demand curve for loanable funds slopes:
A)
upward, since it takes a higher rate of return to get more funds.
B)
downward, because more potential projects yield 10% than yield 5%.
C)
upward, because higher rates of return are necessary to cover higher costs.
D)
downward, because demand is lower when the price to borrow money is higher.
Use the following to answer questions 90-92:
Figure: Loanable Funds Market
Page 20
90.
(Figure: Loanable Funds Market) Look at the figure Loanable Funds Market. If the
interest rate is 8%, businesses will want to borrow approximately:
A)
$3 trillion.
B)
$2 trillion.
C)
$4 trillion.
D)
$1 trillion.
91.
(Figure: Loanable Funds Market) Look at the figure Loanable Funds Market. If the
interest rate is 8%, people will want to save approximately:
A)
$3 trillion.
B)
$2 trillion.
C)
$4 trillion.
D)
$1 trillion.
92.
(Figure: Loanable Funds Market) Look at the figure Loanable Funds Market. The
equilibrium interest rate and total quantity of lending are:
A)
8% and $2 trillion.
B)
2% and $5 trillion.
C)
10% and $1 trillion.
D)
6% and $3 trillion.
Use the following to answer question 93:
Figure: Supply of Loanable Funds
Page 21
93.
(Figure: Supply of Loanable Funds) Look at the figure Supply of Loanable Funds.
When the interest rate rises from 6% to 8%, the:
A)
supply of loanable funds rises by $20 billion.
B)
quantity supplied of loanable funds rises by $20 billion.
C)
supply of loanable funds falls by $10 billion.
D)
quantity supplied of loanable funds falls by $20 billion.
Use the following to answer question 94:
Figure: Market for Loanable Funds I
94.
(Figure: Market for Loanable Funds I) Look at the figure Market for Loanable Funds I.
The equilibrium interest rate in the loanable funds market is:
A)
2%.
B)
4%.
C)
6%.
D)
8%.
95.
The loanable funds market maximizes:
A)
the interest rate to savers.
B)
the rate of return from borrowers.
C)
the gains from trade between lenders and borrowers.
D)
the amount of investment spending in the economy.
Page 22
96.
If in an open economy a country imports more than it exports and the government
budget deficit increases, interest rates will _____ and the amount of borrowing will
_____.
A)
increase; increase
B)
decrease; increase
C)
increase; change unpredictably
D)
change unpredictably; increase
97.
The price in the loanable funds market is:
A)
the rate of return of a project.
B)
the price level.
C)
the interest rate.
D)
the consumer price index.
98.
The price determined in the market for loanable funds is:
A)
the margin call.
B)
the profit rate.
C)
the transaction fee.
D)
the interest rate.
99.
If the interest rate in the market for loanable funds is above the equilibrium rate:
A)
there is a shortage of loanable funds.
B)
savings exceed investment spending.
C)
the quantity demanded of loanable funds exceeds the quantity supplied.
D)
consumption is smaller than savings.
Page 23
Use the following to answer question 100:
Figure: The Market for Loanable Funds with Government Borrowing
100.
(Figure: The Market for Loanable Funds with Government Borrowing) Look at the
figure The Market for Loanable Funds with Government Borrowing. After an increase
in government borrowing, the new equilibrium interest rate will rise from 6% to _____
and the amount of private savings will _____.
A)
10%; stay the same
B)
8%; rise
C)
8%; fall
D)
10%; be indeterminate
101.
A shift away from taxing asset income and toward taxing consumption would lead to:
A)
a larger demand for loanable funds, a higher interest rate, and more investment
spending.
B)
a larger supply of loanable funds, a lower interest rate, and more investment
spending.
C)
a larger government budget deficit and more investment spending.
D)
a smaller supply of loanable funds, a higher interest rate, and more investment
spending.
Page 24
102.
If the government increases its borrowing, then at every interest rate there is a(n):
A)
additional supply of funds.
B)
additional demand for funds.
C)
decrease in the supply of funds.
D)
increase in the supply of funds.
103.
Which of the following is the most accurate statement?
A)
Deficits increase economic growth.
B)
Deficits decrease economic growth.
C)
Deficits do not affect economic growth.
D)
We cannot unambiguously say whether government spending that increases
deficits lowers or increases economic growth.
104.
Crowding out hampers the economy by:
A)
decreasing government borrowing.
B)
decreasing consumption.
C)
increasing private borrowing.
D)
reducing private investment spending on physical capital.
Use the following to answer questions 105-114:
Figure: The Market for Loanable Funds II
Page 25
105.
(Figure: The Market for Loanable Funds II) Look at the figure The Market for Loanable
Funds II. If the interest rate is higher than _____, the quantity supplied of loanable funds
will _____ the quantity of loanable funds demanded.
A)
8%; be greater than
B)
8%; be less than
C)
8%; equal
D)
10%; be less than
106.
(Figure: The Market for Loanable Funds II) Look at the figure The Market for Loanable
Funds II. If the interest rate is lower than 8%, the quantity supplied of loanable funds
will _____ the quantity of loanable funds demanded.
A)
be greater than
B)
be less than
C)
equal
D)
The quantity supplied of loanable funds cannot be determined from the information
provided.
107.
(Figure: The Market for Loanable Funds II) Look at the figure The Market for Loanable
Funds II. An increase in government borrowing will shift the demand for loanable funds
to the _____ and _____ the interest rate.
A)
left; increase
B)
left; decrease
C)
right; increase
D)
right; decrease
108.
(Figure: The Market for Loanable Funds II) Look at the figure The Market for Loanable
Funds II. A decrease in government borrowing will shift the demand for loanable funds
to the _____ and _____ the interest rate.
A)
left; increase
B)
right; decrease
C)
right; increase
D)
left; decrease
109.
(Figure: The Market for Loanable Funds II) Look at the figure The Market for Loanable
Funds II. A decrease in savings by the private sector will shift the supply of loanable
funds to the _____ and _____ the interest rate.
A)
left; increase
B)
right; decrease
C)
right; increase
D)
left; decrease
Page 26
110.
(Figure: The Market for Loanable Funds II) Look at the figure The Market for Loanable
Funds II. An increase in savings by the private sector will shift the supply of loanable
funds to the_____ and _____ the interest rate.
A)
left; increase
B)
right; decrease
C)
right; increase
D)
left; decrease
111.
(Figure: The Market for Loanable Funds II) Look at the figure The Market for Loanable
Funds II. Other things being equal, if there is an increase in the interest rate above 8%,
_____ quantity of loanable funds will be demanded.
A)
the same
B)
a larger
C)
a smaller
D)
at first a smaller and then a larger
112.
(Figure: The Market for Loanable Funds II) Look at the figure The Market for Loanable
Funds II. Other things being equal, if there is a decrease in the interest rate below 8%,
_____ quantity of loanable funds will be demanded.
A)
the same
B)
a larger
C)
a smaller
D)
at first a smaller and then a larger
113.
(Figure: The Market for Loanable Funds II) Look at the figure The Market for Loanable
Funds II. Other things being equal, an increase in taxes on savings and investment
income will shift _____ to the _____ and _____ the interest rate.
A)
demand; right; increase
B)
demand; left; decrease
C)
supply; right; decrease
D)
supply; left; increase
114.
(Figure: The Market for Loanable Funds II) Look at the figure The Market for Loanable
Funds II. Other things being equal, a decrease in taxes on savings and investment
income will shift _____ to the _____ and _____ the interest rate.
A)
demand; right; increase
B)
demand; left; decrease
C)
supply; right; decrease
D)
supply; left; increase
Page 27
Use the following to answer questions 115-122:
Table: Investment Projects
115.
(Table: Investment Projects) Look at the table Investment Projects. If the market interest
rate is 15%, the last project undertaken is:
A)
F.
B)
G.
C)
H.
D)
I.
116.
(Table: Investment Projects) Look at the table Investment Projects. If the market interest
rate is 11%, the last project undertaken is:
A)
G.
B)
H.
C)
I.
D)
J.
117.
(Table: Investment Projects) Look at the table Investment Projects. If the market interest
rate is 13%, the amount of planned investment spending is:
A)
$200.
B)
$800.
C)
$1,000.
D)
$2,000.
118.
(Table: Investment Projects) Look at the table Investment Projects. If the market interest
rate is 9%, the amount of planned investment spending is:
A)
$1,800.
B)
$2,000.
C)
$4,000.
D)
$5,500.
Page 28
119.
(Table: Investment Projects) Look at the table Investment Projects. If the market interest
rate is 17%, the amount of investment demanded is:
A)
$200.
B)
$800.
C)
$1,000.
D)
$2,000.
120.
(Table: Investment Projects) Look at the table Investment Projects. If the market interest
rate is 11%, the amount of investment demanded is:
A)
$800.
B)
$1,000.
C)
$2,000.
D)
$4,000.
121.
(Table: Investment Projects) Look at the table Investment Projects. If the market interest
rate declines from 15% to 11%, then the amount of investment demanded will increase
by:
A)
$200.
B)
$1,000.
C)
$2,000.
D)
$2,200.
122.
(Table: Investment Projects) Look at the table Investment Projects. If the market interest
rate declines from 15% to 13%, then the amount of investment demanded will increase
by:
A)
$200.
B)
$1,000.
C)
$2,000.
D)
$2,200.
123.
Higher rates of interest tend to _____ the quantity of loanable funds demanded, and
lower rates of interest tend to _____ it.
A)
increase; reduce
B)
reduce; reduce
C)
increase; increase
D)
reduce; increase
Page 29
124.
There is a _____ relationship between the amount of loanable funds demanded and the
rate of interest.
A)
positive
B)
direct
C)
negative
D)
weak
125.
An expectation that perceived business opportunities will increase will generally cause
_____ for loanable funds.
A)
a shift to the left in the demand curve
B)
a movement along the demand curve
C)
an increase in the demand
D)
a decrease in the demand
126.
An increase in the level of business opportunity will generally _____ the loanable funds
demand curve.
A)
not change
B)
left-shift
C)
cause a movement along
D)
right-shift
127.
A decrease in the level of business opportunity will generally _____ the loanable funds
demand curve.
A)
not change
B)
left-shift
C)
cause a movement along
D)
right-shift
128.
A decrease in the demand for loanable funds would most likely be caused by a(n):
A)
decrease in the market interest rate.
B)
decrease in corporate income tax rates.
C)
increase in expected business opportunities.
D)
decrease in expected business opportunities.
129.
An increase in the demand for loanable funds would most likely be caused by a(n):
A)
increase in the market interest rate.
B)
increase in business tax rates.
C)
increase in expected business opportunities.
D)
decrease in expected business opportunities.
Page 30
130.
A decrease in the demand for loanable funds would most likely be caused by a(n):
A)
decrease in the inflation rate.
B)
increase in the budget deficit.
C)
decrease in expected business opportunities.
D)
increase in expected business opportunities.
131.
All other things unchanged, a general increase in government borrowing will typically:
A)
shift the loanable funds demand curve to the left and decrease interest rates.
B)
shift the loanable funds demand curve to the right and increase interest rates.
C)
have no effect on the loanable funds demand curve.
D)
have no effect on the demand for loanable funds.
132.
All other things unchanged, a general decrease in the amount of government borrowing
will typically:
A)
have no effect on the demand for loanable funds.
B)
increase interest rates.
C)
shift the loanable funds demand curve to the left.
D)
raise the level of demand for loanable funds.
133.
All other things unchanged, an increase in demand for loanable funds would most likely
be caused by a(n):
A)
decrease in expected business opportunities.
B)
increase in the market interest rate.
C)
increase in corporate income tax rates.
D)
increase in government borrowing.
134.
All other things unchanged, an increase in demand for loanable funds would most likely
be caused by a(n):
A)
important forecast predicting solid economic growth.
B)
important forecast predicting a recession.
C)
increase in the market interest rate.
D)
increase in the cost of new capital goods.
135.
Which of the following is FALSE? When there is an increase in:
A)
the government budget deficit, the total amount of borrowing falls.
B)
private savings, the interest rate decreases.
C)
the government budget deficit, private investment is crowded out.
D)
private savings, the total amount of borrowing increases.
Page 31
136.
A business will be likely to borrow to fund projects if:
A)
the rate of return on the project is less than the interest rate on the loan.
B)
the project will produce a good or service that is in high demand.
C)
the rate of return on the project is at least as high as the interest rate on the loan.
D)
the minimum efficient scale will be attained.
137.
The rate of return on a business project equals:
A)
(Cost of project / revenue from project) × 100.
B)
(Revenue from project / cost of project) × 100.
C)
(Revenue from project × cost of project) × 100.
D)
(Revenue from project – cost of project) / Cost of project) × 100.
138.
Crowding out is a phenomenon in which:
A)
an increase in the government’s budget surplus decreases overall investment
spending.
B)
overproduction in the goods market leads to a sharp drop in the aggregate price
level.
C)
an increase in the government’s budget deficit reduces overall investment spending.
D)
an increase in imports reduces overall domestic production.
Use the following to answer questions 139-142:
Figure: Crowding Out
Page 32
139.
(Figure: Crowding Out) Look at the figure Crowding Out. The demand for loanable
funds curve DLF1 will shift to DLF2 when there is:
A)
a decrease in the government budget deficit.
B)
an increase in the government budget deficit.
C)
an increase in private savings.
D)
a decrease in private savings.
140.
(Figure: Crowding Out) Look at the figure Crowding Out. If the demand for loanable
funds curve shifts to the right, the result will be a(n) _____ in the interest rate and a(n)
_____ in the total amount of borrowing in the funds market.
A)
increase; increase
B)
increase; decrease
C)
decrease; decrease
D)
decrease; increase
141.
(Figure: Crowding Out) Look at the figure Crowding Out. The supply of loanable funds
curve SLF1 shifts to SLF2. This shift implies that:
A)
private savings has increased.
B)
national investment has decreased.
C)
private savings has decreased.
D)
national savings has decreased.
142.
(Figure: Crowding Out) If the supply of loanable funds curve shifts to the right, the
result will be a(n) _____ in the total amount of borrowing and a(n) _____ in the interest
rate.
A)
increase; increase
B)
decrease; decrease
C)
increase; decrease
D)
decrease; increase
143.
Crowding out means:
A)
private savings decreases when the government borrows money.
B)
private investment decreases when the government borrows money.
C)
there are too many players in the financial markets.
D)
some bondholders will be squeezed out of the market.
Page 33
144.
The government’s budget deficit increases, and at the same time 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.
A)
increase; decrease
B)
decrease; decrease
C)
increase; increase
D)
decrease; increase
Use the following to answer questions 145-148:
Figure: The Market for Loanable Funds III
145.
(Figure: The Market for Loanable Funds III) Look at the figure The 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:
A)
fall to 12%.
B)
rise to 16.5%.
C)
rise to 18%.
D)
rise to 21%.
Page 34
146.
(Figure: The Market for Loanable Funds III) Look at the figure The 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 a maximum of _____ in
private investment spending.
A)
$200 billion
B)
$100 billion
C)
$50 billion
D)
$10 billion
147.
(Figure: The Market for Loanable Funds III) Look at the figure The Market for
Loanable Funds III. If the government in a closed economy finances deficits by selling
bonds and it decides to decrease defense spending by $200 billion, the equilibrium
interest rate will:
A)
rise to 18%.
B)
not change.
C)
fall to 13.5%.
D)
fall to 12%.
148.
(Figure: The Market for Loanable Funds III) Look at the figure The Market for
Loanable Funds III. If the government in a closed economy finances deficits by selling
bonds and it decides to decrease defense spending by $200 billion, the decrease in
government spending will encourage _____ in additional private investment spending.
A)
$400 billion
B)
$200 billion
C)
$100 billion
D)
$10 billion
149.
Governments can save when:
A)
taxes are less than expenditures.
B)
taxes are greater than expenditures.
C)
the government borrows to finance its expenditures.
D)
the president insists that Congress balance the budget.
150.
The Fisher effect states that:
A)
the nominal rate of interest is unaffected by the change in expected inflation.
B)
the nominal rate of interest is unaffected by the change in unexpected inflation.
C)
the expected real rate of interest is unaffected by the change in expected inflation.
D)
the expected real rate of interest increases by one percentage point for each
percentage change in expected inflation.
Page 35
151.
Suppose a lender expects a real interest rate of 6% and the inflation rate is expected to
be 3%. In this case, the nominal interest rate equals:
A)
3%.
B)
9%.
C)
12%.
D)
6%.
152.
Samantha asks 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:
A)
increase by 5%.
B)
decrease by 0.5%.
C)
decrease by 5%.
D)
increase by 0.5%.
153.
Suppose Maria wins a $7 million lottery and is trying to decide whether to take $2
million all at once or $7 million over 20 years. One bit of information Maria would need
to know is what the prevailing _____ will be over the next 20 years.
A)
unemployment rate
B)
interest rate
C)
deflation rate
D)
standard of living
154.
You receive an email from a firm proposing the following business deal. The firm will
send you $1,000 now, and in exchange you will send it $1,100 in one year. You will just
break even if the annual interest rate is:
A)
12%.
B)
4%.
C)
6%.
D)
10%.
155.
Your textbook costs $90, and you can resell it in one year for $45. If the annual interest
rate is 10%, then the present value of the textbook’s resale value (to the nearest dollar)
is:
A)
$90.
B)
$41.
C)
$45.
D)
$37.
Page 36
156.
You have an opportunity to pay $1,000 today and receive $1,200 a year from now. If the
annual interest rate is 20%, the difference between the present value of the benefit and
your investment is:
A)
$440.
B)
$200.
C)
$166.
D)
0.
157.
The _____ money paid back after borrowing money, the _____ the interest rate.
A)
more; higher
B)
less; higher
C)
more; lower
D)
There is not enough information to determine the answer.
158.
If you are paid $10,500 in one year on a $10,000 loan made today, then your annual
interest rate is:
A)
0.5%.
B)
5%.
C)
10%.
D)
10.5%.
159.
If Mega Corp. borrows $9,000 and agrees to pay the lender $10,000 in one year, the
annual interest rate on the loan is approximately:
A)
9.0%.
B)
10.0%.
C)
11.1%.
D)
0.9%
160.
Someone who has to decide whether to receive $100 now or $100 one year from now
will probably choose _____, since there is a(n) _____ in waiting to use money.
A)
one year from now; benefit
B)
now; opportunity cost
C)
one year from now; opportunity cost
D)
now; benefit
Page 37
161.
Assuming a positive interest rate, the dollar amount of a future payment is _____ its
present value.
A)
exactly the same as
B)
approximately the same as
C)
less than
D)
more than
162.
Assuming a positive interest rate, the present value of a future payment is _____ its
future dollar amount.
A)
exactly the same as
B)
approximately the same as
C)
less than
D)
more than
163.
An amount that would equal a particular future value if deposited today at the prevailing
interest rate is the:
A)
present value.
B)
inflation rate.
C)
discount premium.
D)
market index.
164.
The present value of future payments depends on:
A)
whether the payment is interest or dividends.
B)
the marginal propensity to save.
C)
the interest rate.
D)
sunk costs.
165.
Given an annual interest rate of 3%, the present value of a future payment of $2,080 to
be paid in one year is:
A)
$1,904.76.
B)
$2,000.00.
C)
$2,019.42.
D)
$2,080.00.
166.
The present value of $1 realized one year from now equals:
A)
$1 / (1 + r).
B)
$1 × (1 + r).
C)
1 + r.
D)
1 / r.
Page 38
167.
You have purchased a new mattress for $2,000, and the store has given you a “12
months, same as cash” deal. This means that you do not actually have to pay for the
mattress for another year. One year from now you will have to give the store the full
price of $2,000. If the annual interest rate is 10%, how much money do you need today
to ensure that you will have $2,000 one year from today?
A)
$1,980
B)
$1,818
C)
$2,200
D)
$20,000
168.
You are given the choice of receiving $100 today or $115 one year from today. What
annual interest rate will make you indifferent between these two choices?
A)
5%
B)
10%
C)
15%
D)
20%
169.
If you are paid $5,500 in one year on a $5,000 loan made today, then your annual
interest rate is:
A)
0.5%.
B)
10%.
C)
1%.
D)
5%.
170.
Assuming a positive interest rate, the dollar amount of a future payment is:
A)
exactly the same as its present value.
B)
approximately the same as its present value.
C)
less than its present value.
D)
more than its present value.
171.
An amount that would equal a particular future value if deposited today at a specific
interest rate is the:
A)
present value.
B)
inflation rate.
C)
discount premium.
D)
market index.
Page 39
172.
The present value of a future payment _____if the _____.
A)
decreases; interest rate increases
B)
increases; future payment decreases
C)
decreases; interest rate decreases
D)
increases; stock market falls
173.
If Mega Corp. borrows $8,000 and agrees to pay the lender $9,000 in one year, the
annual interest rate on the loan is approximately:
A)
9.0%.
B)
10.5%.
C)
12.5%.
D)
11.8%.
174.
If Mega Corp. borrows $9,000 and agrees to pay the lender $10,500 in one year, the
annual interest rate on this loan is approximately:
A)
8.6%.
B)
14.3%.
C)
16.7%.
D)
15%.
175.
The present value of a $110 payment in one year, given an annual 10% interest rate, is:
A)
$10.
B)
$11.
C)
$100.
D)
$110.
176.
Given an annual interest rate of 2%, the present value of a future payment of $1,500 to
be paid in one year is:
A)
$1,250.55.
B)
$1,470.59.
C)
$1,530.
D)
$1,500.
177.
Interest rates:
A)
were very high in the 1970s and decreased in the 1980s.
B)
were very low in the 1970s and increased in the 1980s.
C)
steadily increased from 1960 through 2012.
D)
steadily decreased from 1960 through 2012.
Page 40
178.
Inflation:
A)
was very low in the 1970s and increased in the 1980s.
B)
was very high in the 1970s and decreased in the 1980s.
C)
steadily increased from 1960 through 2012.
D)
steadily decreased from 1960 through 2012.
179.
Interest rates were high during the 1970s and decreased during the 1980s because
expected inflation was:
A)
high during both decades.
B)
low during both decades.
C)
high during the 1970s and decreased during the 1980s.
D)
low during the 1970s and increased during the 1980s.
180.
Interest rates were high during the middle years of the period from 2002 to 2014 and
then decreased primarily because:
A)
the supply of loanable funds steadily increased.
B)
the supply of loanable funds steadily decreased.
C)
the demand for loanable funds decreased and then increased because of conditions
in the housing market.
D)
the demand for loanable funds increased and then decreased because of conditions
in the housing market.
181.
From the standpoint of economic growth, banks are important to:
A)
fight inflation.
B)
keep interest rates low.
C)
channel savings into investment.
D)
channel investment into savings.
182.
Which of the following qualifies as an asset from the viewpoint of a household?
A)
a house
B)
mortgage
C)
credit card debt
D)
car loan
183.
The value of all accumulated savings of a household is called:
A)
wealth.
B)
income.
C)
debt.
D)
wages.
Page 41
184.
The main role of financial systems is to:
A)
make the capitalist class richer.
B)
provide credit cards to as many people as possible.
C)
channel goods and services to the people willing to pay for them.
D)
channel funds from savers into investments.
185.
A household’s wealth is:
A)
what it earns each period.
B)
what it saves each period.
C)
the value of its accumulated savings.
D)
the value of its financial assets.
186.
A financial asset is:
A)
a physical asset like a car.
B)
a claim that entitles the owner to future income from the seller.
C)
the value of accumulated savings.
D)
another term for capital.
187.
A physical asset is:
A)
a tangible asset that can be used to generate income and whose owner has the right
to dispose of it at will.
B)
a paper claim that entitles the owner to future income from the seller.
C)
the value of accumulated savings.
D)
human capital.
188.
A liability is:
A)
having wronged someone and being held responsible in court.
B)
a requirement to pay in the future.
C)
inability to perform an agreed task.
D)
the requirement that banks offer insurance to depositors.
189.
In financial markets:
A)
households sell liabilities.
B)
wealth is transformed into savings.
C)
households purchase financial assets.
D)
physical assets change hands.
Page 42
190.
A bank loan is a(n) _____ to the borrower and a(n) _____ to the bank.
A)
asset; liability
B)
asset; asset
C)
liability; liability
D)
liability; asset
191.
Which of the following is a paper claim that entitles the buyer to future income from the
seller?
I. a financial asset
II. a physical asset
III. a liability
A)
I only
B)
II only
C)
III only
D)
I, II, and III
192.
Which of the following is a tangible object that can be used to generate future income?
I. a financial asset
II. a physical asset
III. a liability
A)
I only
B)
II only
C)
III only
D)
I, II, and III
193.
Which of the following is a requirement to pay in the future?
I. a financial asset
II. a physical asset
III. a liability
A)
I only
B)
II only
C)
III only
D)
I, II, and III
194.
Suppose that Jim just got a $20,000 loan from his credit union to buy a new car. The
loan is a _____ for Jim and a _____ for the credit union.
A)
financial asset; physical asset
B)
financial asset; financial asset
C)
financial asset; liability
D)
liability; financial asset
Page 43
195.
Which of the following is NOT one of the three tasks of a financial system?
A)
reduction of transaction costs
B)
risk management
C)
provision of liquidity
D)
determination of fiscal policy
196.
Transaction costs are:
A)
the return to an entrepreneur.
B)
the return to moving a product to market.
C)
the expenses of producing a product.
D)
the expenses of negotiating and executing a deal.
197.
Financial markets make borrowing large amounts of money easier because they simplify
negotiation between borrowers and lenders. This is an example of:
A)
reducing transaction costs.
B)
reducing risk.
C)
providing liquidity.
D)
acting as a lender of last resort.
198.
A risk-averse person:
A)
considers any risk unacceptable.
B)
would never buy a financial asset.
C)
has an asymmetric view of the value of losses and gains.
D)
would never buy insurance.
199.
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:
A)
reducing transaction costs.
B)
reducing risk.
C)
providing liquidity.
D)
guaranteeing rates of return.
200.
The most diversified portfolio in terms of risk is $100,000 worth of stock in:
A)
10 companies in the same industry.
B)
10 companies in two industries.
C)
10 companies in five industries.
D)
one company that sells 10 products.
Page 44
201.
Financial markets:
A)
increase transaction costs.
B)
reduce diversification.
C)
provide liquidity.
D)
determine tax rates.
202.
A common strategy to reduce the risk of a large financial loss is:
A)
to buy and sell assets through a mutual fund, since mutual funds cannot lose
money.
B)
to diversify financial assets so that their risks of failure are unrelated.
C)
to buy financial assets from developing countries, because the rates of return are
very high and safe and their national currencies are much more stable than the U.S.
dollar.
D)
to buy real instead of financial assets.
203.
The best way to reduce financial risk is to:
A)
buy stock only in a major company.
B)
buy bonds only in a major company.
C)
buy a variety of assets, both financial and physical.
D)
never buy stock in foreign companies.
204.
The term liquidity means that the:
A)
asset is used in a barter exchange.
B)
asset is used as the medium of exchange.
C)
asset is readily convertible to cash without much loss of value.
D)
market interest rate is too low.
205.
The financial system performs certain tasks to make the financial market more efficient.
Which one of the following is NOT one of these tasks?
A)
reducing risk
B)
reducing menu costs
C)
reducing transaction costs
D)
providing liquidity
Page 45
206.
Diversification in investment is achieved when:
A)
the government invests in several projects of different lengths to increase total
output.
B)
a business produces multiple unrelated products so that the firm can maximize
profit.
C)
an economy trades with multiple trading partners for maximum benefit.
D)
an individual invests in several assets with independent or unrelated risks so that
total risk from loss is reduced.
207.
Which of the following assets is the LEAST liquid?
A)
cash
B)
checking account balance
C)
corporate bond
D)
ownership of one fourth of a privately held company
208.
Which of the following assets is the MOST liquid?
A)
currency
B)
checking account balance
C)
stock in a publicly traded company
D)
a townhouse
209.
An illiquid asset:
A)
cannot be sold.
B)
provides the owner no return or income.
C)
is a tangible asset.
D)
cannot quickly be converted into cash with little loss of value.
210.
Which of the following is (are) a task(s) of the financial system?
I. reducing transactions costs
II. reducing risk
III. providing liquidity
A)
I only
B)
II only
C)
III only
D)
I, II, and III
Page 46
211.
A person who is risk-averse:
A)
is more sensitive to a loss than to a gain of an equal dollar amount.
B)
is less sensitive to a loss than to a gain of an equal dollar amount.
C)
is willing to pay any price to avoid risk.
D)
enjoys taking risks, especially in financial markets.
212.
An asset that can be quickly converted to cash with relatively little loss of value is:
A)
illiquid.
B)
liquid.
C)
diversified.
D)
risk averse.
213.
Which of the following assets is the MOST liquid?
A)
a house
B)
100 shares of Apple stock
C)
money in a checking account
D)
a life insurance policy
214.
Which of the following assets is the LEAST liquid?
A)
a U.S. government bond
B)
100 shares of Apple stock
C)
money in a checking account
D)
a 2010 Toyota Camry
215.
Which of the following is NOT one of the four main types of financial assets?
A)
real estate
B)
bonds
C)
bank deposits
D)
loans
216.
You are choosing whether to purchase a bond or stock. If you purchase the bond, you
are likely to receive a _____ return in exchange for a _____ level of risk.
A)
higher; higher
B)
lower; lower
C)
lower; higher
D)
higher; lower
Page 47
217.
A loan is:
A)
a liability for the lender and an asset for the borrower.
B)
a physical asset that is traded in financial markets.
C)
a claim on a bank that obliges the bank to provide funds to a lender.
D)
a liability for the borrower and an asset for the lender.
218.
All of the following are examples of financial assets and/or liabilities EXCEPT:
A)
loans.
B)
stocks and bonds.
C)
real estate.
D)
bank deposits.
219.
All of the following are financial assets EXCEPT:
A)
bonds.
B)
stocks.
C)
bank deposits.
D)
gold coins.
220.
An important advantage of bonds as a financial asset is that they:
A)
are standardized and therefore are easier to sell than loans.
B)
offer higher rates of return than stocks.
C)
allow the owner to receive a share of the company’s profits in the form of
dividends.
D)
are guaranteed to be risk free.
221.
When a corporation borrows money from a bank in exchange for a contract to repay it
on a schedule, the corporation is:
A)
taking out a loan.
B)
issuing bonds.
C)
issuing stocks.
D)
liquidating a bank deposit.
222.
When a corporation borrows money from lenders in exchange for a fixed rate of return
and a given maturity, the corporation is:
A)
taking out a loan.
B)
issuing bonds.
C)
issuing stocks.
D)
liquidating a bank deposit.
Page 48
223.
When a corporation borrows money from lenders in exchange for a fixed share of the
firm’s assets and potential profits, the corporation is:
A)
taking out a loan.
B)
issuing bonds.
C)
issuing stocks.
D)
liquidating a bank deposit.
224.
A bond is:
A)
share of ownership in a company.
B)
a promise to pay interest each year and to repay the principal on a specified date.
C)
a liquid asset, since it is a standardized product with a market in which the owner
can sell it.
D)
both a promise to pay interest each year and to repay the principal on a specified
date and a liquid asset, since it is a standardized product with a market in which the
owner can sell it.
225.
Financial assets that carry more risk:
A)
usually have a lower rate of return.
B)
usually have a higher rate of return.
C)
are purchased by risk-averse buyers.
D)
are a hedge against the future.
226.
Financial assets with the highest risk are:
A)
stocks.
B)
U.S. government bonds.
C)
bonds.
D)
bank deposits.
227.
Which of the following financial assets is likely to be the MOST liquid?
A)
stocks
B)
bonds
C)
mutual funds shares
D)
bank demand deposits
228.
Transactions costs are likely to be the highest for:
A)
loans.
B)
bonds.
C)
stocks.
D)
bank deposits.
Page 49
229.
A default occurs when:
A)
the borrower repays a bond or loan before its maturity date.
B)
a borrower fails to make payments as specified by the loan or bond contract.
C)
an asset can’t be converted to cash quickly with little or no loss of value.
D)
transactions costs are minimized.
230.
Bonds with a high risk of default usually:
A)
have a longer maturity than bonds with a low risk of default.
B)
have a shorter maturity than bonds with a low risk of default.
C)
have to pay a high rate of interest to attract investors.
D)
can pay a low rate of interest and still attract investors.
231.
One advantage of bonds over loans is that:
A)
interest rates on bonds are generally lower than interest rates on loans.
B)
interest rates on bonds are generally higher than interest rates on loans.
C)
each bond is specifically tailored to meet the needs of the borrower so that no two
bonds are alike.
D)
bonds are more standardized than loans.
232.
An asset formed by pooling individual loans and selling shares in that pool is called a:
A)
loan-backed security.
B)
mutual fund.
C)
stock.
D)
bond.
233.
Compared to individual loans, loan-backed securities provide _____diversification and
_____ liquidity than individual loans.
A)
less; less
B)
more; more
C)
less; more
D)
more; less
234.
Suppose that Ann bought a share of General Motors stock. The stock is a(n) _____ for
Ann and a(n) _____ for General Motors.
A)
asset; asset
B)
asset; liability
C)
liability; asset
D)
liability; liability
Page 50
235.
Which of the following financial asset(s) is (are) a share of ownership in a company?
I. bonds
II. loan-backed securities
III. stocks
A)
I only
B)
II only
C)
III only
D)
I, II, and III
236.
Which of the following is (are) an advantage(s) of stock?
I. reduction of risk for the owners of the company
II. increased welfare for investors who buy the stocks
A)
I only
B)
II only
C)
both I and II
D)
neither I nor II
237.
Compared to bonds, stocks generally provide a _____ return and carry a _____ financial
risk.
A)
lower; lower
B)
lower; higher
C)
higher; lower
D)
higher; higher
238.
Over the past 100 years, the rate of return on stocks has averaged about _____, and the
return on bonds has averaged approximately _____.
A)
20%; 25%
B)
1%; 2%
C)
–10%; 5%
D)
7%; 2%
239.
One reason financial institutions become very large is to:
A)
decrease transaction costs.
B)
enjoy the power of having a large corporation.
C)
increase transaction costs.
D)
avoid the risks of diversification.
Page 51
240.
A financial intermediary that sets up a diversified portfolio of stocks and then resells
that portfolio to individual investors is known as a:
A)
life insurance company.
B)
mutual fund.
C)
brokerage company.
D)
credit card company
241.
Financial intermediaries that manage a stock portfolio and sell shares of the portfolio to
individual investors are:
A)
mutual funds.
B)
pension funds.
C)
life insurance companies.
D)
banks.
242.
A mutual fund:
A)
always includes a base year.
B)
owns a diversified portfolio.
C)
always earns a profit.
D)
offers a lower rate of return for any given level of risk.
243.
Banks are financial intermediaries that:
A)
have customer deposits as the primary asset and loans to borrowers as the primary
liability.
B)
provide liquid assets to lenders and long-term financing to borrowers.
C)
are types of mutual funds.
D)
have customer deposits as the primary asset and that provide liquid assets to
lenders.
244.
All of the following are financial intermediaries EXCEPT:
A)
mutual funds.
B)
pension funds.
C)
insurance companies.
D)
the New York Stock Exchange.
245.
Which of the following is NOT a financial intermediary?
A)
pension funds
B)
mutual funds
C)
life insurance company
D)
credit card company
Page 52
246.
Which of the following is a function of financial intermediaries?
A)
transforming funds from many individuals to financial assets
B)
transforming funds from many individuals to physical assets
C)
helping individuals and businesses determine their tax liabilities
D)
conducting fiscal policy
247.
A _____ is a nonprofit institution that collects the savings of its members and invests
those funds in a diversified portfolio to provide income to members when they retire.
A)
life insurance company
B)
pension fund
C)
commercial bank
D)
investment bank
248.
A _____ sells policies to savers and guarantees a payment to the policyholder’s
beneficiaries when the policyholder dies.
A)
commercial bank
B)
mutual fund
C)
life insurance company
D)
pension fund
249.
The financial slump that began in the United States in the summer of 2007 was a result
of:
A)
falling energy prices.
B)
massive tax increases necessary to balance the federal budget.
C)
a crisis in the foreign exchange market.
D)
a sharp fall in housing prices.
250.
Shares of stock are:
A)
shares of ownership in the issuing company.
B)
a tax liability for the issuing company.
C)
a tax deduction for the investor.
D)
a debt of the issuing company to the investors who purchase the stock.
251.
Which of the following is NOT a stock market index?
A)
the Dow Jones Industrial Average
B)
the producer price index
C)
the S&P 500
D)
the NASDAQ
Page 53
252.
Which of the following is an index of 30 leading companies, such as Microsoft,
Walmart, and General Electric?
A)
the Dow Jones Industrial Average
B)
the producer price index
C)
the S&P 500
D)
the NASDAQ
253.
Which of the following is the index that includes the most companies and provides the
broadest measure of stock market performance?
A)
the Dow Jones Industrial Average
B)
the producer price index
C)
the S&P 500
D)
the NASDAQ
254.
Which index includes smaller companies, many in the technology sector?
A)
the Dow Jones Industrial Average
B)
the producer price index
C)
the S&P 500
D)
the NASDAQ
255.
If the NASDAQ is down and the Dow Jones Industrial Average is higher on a particular
day, which of the following is likely to be TRUE?
A)
Investors are optimistic about the technology sector and pessimistic about the
old-economy sector.
B)
Investors are pessimistic about the technology sector and optimistic about the
old-economy sector.
C)
Investors prefer bonds to stocks.
D)
Investors prefer stocks to bonds.
256.
Owners of stock may receive income in the form of:
A)
interest.
B)
dividends and profit from selling the stock for more than its purchase price.
C)
transfer payments.
D)
rent.
Page 54
257.
If interest rates increase, making bonds more attractive, the demand for stock will _____
and the price of stock will _____.
A)
increase; increase
B)
increase; decrease
C)
decrease; increase
D)
decrease; decrease
258.
If interest rates decrease, making bonds less attractive, the demand for stock will _____
and the price of stock will _____.
A)
increase; increase
B)
increase; decrease
C)
decrease; increase
D)
decrease; decrease
259.
If the price of an asset is expected to rise in the future:
A)
asset owners will be more willing to sell it now.
B)
it will be more in demand today.
C)
the price of the asset will fall today.
D)
the market is irrational.
260.
The demand for stocks:
A)
is largely a guessing game.
B)
mostly depends on their price.
C)
is mostly a function of buyers’ beliefs about their future prices.
D)
comes from companies who want to borrow money.
261.
If Congress passed a law last year that will increase corporate taxes this year, holding
other things constant, stock prices will _____ this year.
A)
increase
B)
decrease
C)
not change
D)
It is impossible to say how stock prices will change.
262.
If all retail stores announce unexpectedly high sales volumes, holding other things
constant, stock prices in the retail sector will:
A)
increase.
B)
decrease.
C)
not change.
D)
It is impossible to say how stock prices will change.
Page 55
263.
If interest rates on bonds rise, holding other things constant, stock prices will:
A)
increase.
B)
decrease.
C)
not change.
D)
It is impossible to say how stock prices will change.
264.
When a bond becomes more attractive as an asset because of a rise in the interest rate:
A)
the price of stock, a substitute asset, will rise.
B)
the price of stock, a substitute asset, will fall.
C)
the future price of bonds will fall.
D)
people will stop buying bonds and buy other assets.
265.
Income to the owners of commercial real estate is in the form of:
A)
interest.
B)
dividends
C)
transfer payments.
D)
rent and profit from selling the property at a price higher than its purchase price.
266.
When interest rates increase, the demand for commercial and residential real estate will
_____ and the price of real estate will _____.
A)
increase; increase
B)
increase; decrease
C)
decrease; increase
D)
decrease; decrease
267.
When interest rates decrease, the demand for commercial and residential real estate will
_____ and the price of real estate will _____.
A)
increase; increase
B)
increase; decrease
C)
decrease; increase
D)
decrease; decrease
268.
A random walk occurs when an asset price:
A)
moves in a predicable direction but with random error.
B)
makes unpredictable movements.
C)
moves in a predictable way with no error.
D)
moves slowly but predictably.
Page 56
269.
According to the efficient markets hypothesis, if you are trying to find out what a stock
is really worth, you should:
A)
look up the current stock price.
B)
study past trends in the stock price.
C)
study the underlying determinants of the company’s future profits.
D)
examine its recent price changes.
270.
Which of the following is (are) a serious challenge(s) to the efficient markets
hypothesis?
A)
Stock prices fluctuate more than can be explained by news about fundamentals.
B)
Individual investors behave in systematically irrational ways.
C)
Stock prices follow a random walk.
D)
Stock prices fluctuate more than can be explained by news about fundamentals,
and individual investors behave in systematically irrational ways.
271.
A random walk is:
A)
the unpredictable movement over time of a variable.
B)
the predicted fluctuations of a known variable.
C)
the movement of GDP growth per capita in the long run.
D)
a description of the economic fluctuations in the short run.
272.
The efficient markets hypothesis states that:
A)
stock prices fluctuate following the path of business cycles.
B)
at any time stock prices are fairly valued, reflecting all available information.
C)
stock prices move irrationally and rather unpredictably.
D)
stock prices are easily manipulated by irrational exuberance.
273.
The theory that assets embody all publicly available information about their
fundamentals is the:
A)
efficient markets hypothesis.
B)
multiplier theory.
C)
accelerator theory
D)
Fisher effect.
274.
According to the efficient markets hypothesis:
A)
stocks are often overpriced.
B)
stocks are often underpriced.
C)
stocks are neither overpriced or underpriced.
D)
the random fluctuations in the value of stocks is unexplainable.
Page 57
275.
If stock prices follow a random walk, it means that stock prices are:
A)
unpredictable.
B)
increasing.
C)
decreasing
D)
constant.
276.
Between 2000 and 2006, there was a housing bubble in the United States. A bubble is:
A)
a fluctuation in asset prices that leads to inherent instability.
B)
an increase in asset prices driven by unrealistic expectations about future prices.
C)
individuals reselling assets rapidly to make quick profit.
D)
speculation by unscrupulous investors.
277.
Facebook’s primary type of investment spending is the purchase of server farms, or
arrays of linked computers that track and process social media information.
A)
True
B)
False
278.
Most of Facebook’s investment spending is for scholarships for its employees to study
the latest social media technology.
A)
True
B)
False
279.
The financial system contributes to long-run economic growth by channeling funds
from savers to businesses for investment spending.
A)
True
B)
False
280.
Most human capital is provided by private spending for private education.
A)
True
B)
False
281.
Most human capital is provided by government through public education.
A)
True
B)
False
Page 58
282.
Most physical capital, except infrastructure, is financed by private investment spending
by people and corporations.
A)
True
B)
False
283.
Investment spending contributes to economic growth.
A)
True
B)
False
284.
Investment spending in a closed economy must equal GDP minus consumption minus
government spending.
A)
True
B)
False
285.
The government saves when it runs a budget deficit.
A)
True
B)
False
286.
A budget deficit occurs when tax revenue is higher than government spending plus
government transfers.
A)
True
B)
False
287.
The savings–investment spending identity says that savings and investment spending are
always equal for the economy as a whole.
A)
True
B)
False
288.
If a country’s capital inflow exceeds outflow, then foreigners are contributing to the
domestic country’s investment spending.
A)
True
B)
False
289.
Since money from both domestic and foreign savers must eventually be repaid with
interest, capital inflow has the same effect on the national economy as national savings.
A)
True
B)
False
Page 59
290.
According to the savings–investment spending identity, savings and investment
spending are the most important components of GDP.
A)
True
B)
False
291.
According to the savings–investment spending identity, savings and investment
spending are always equal for the economy as a whole.
A)
True
B)
False
292.
The present value of $1 to be paid 10 years in the future will increase with the interest
rate.
A)
True
B)
False
293.
Your grandmother has promised you $1,000 when you graduate in one year. At a 6%
annual interest rate, you can borrow $943.40 and pay it back with your grandmother’s
gift at graduation.
A)
True
B)
False
294.
The loanable funds market examines the market outcome of the demand for funds from
savers and the supply of funds from borrowers.
A)
True
B)
False
295.
If a project costs $100,000 and is expected to return $105,000 in a year and if the
interest rate is 6%, then the company will want to take out a loan to undertake the
project.
A)
True
B)
False
296.
Firms want to undertake projects whose rate of return is greater than the interest rate.
A)
True
B)
False
Page 60
297.
If interest rates are high, people are willing to forgo consumption and save more, all else
equal.
A)
True
B)
False
298.
An increase in the interest rate causes a decrease in investment by shifting the loanable
funds demand curve to the left.
A)
True
B)
False
299.
Expectations of an improving economy will generally cause an increase in investment
by shifting the loanable funds demand curve to the right.
A)
True
B)
False
300.
Higher interest rates will lead to increased investment spending.
A)
True
B)
False
301.
Lower interest rates will lead to less investment spending.
A)
True
B)
False
302.
There is a negative relationship between the quantity of investment spending and the
interest rate.
A)
True
B)
False
303.
Higher interest rates encourage investment spending.
A)
True
B)
False
304.
An increase in the level of business opportunities will not change investment spending.
A)
True
B)
False
Page 61
305.
The crowding-out effect is the negative effect of government budget deficits on private
investment spending.
A)
True
B)
False
306.
When expected inflation was high during the 1970s, interest rates were low.
A)
True
B)
False
307.
Interest rates decreased during the 1980s because expectations of future inflation were
lower.
A)
True
B)
False
308.
When the demand for housing increased during the early 2000s, the demand for
loanable funds decreased and caused the interest rate to decrease.
A)
True
B)
False
309.
When the housing market collapsed in 2007, the demand for loanable funds decreased
and caused interest rates to decrease.
A)
True
B)
False
310.
If you borrow money from a bank to buy a house, the mortgage (loan) is a financial
asset for you and a liability for the bank.
A)
True
B)
False
311.
A household’s wealth is always equal to its income in the current year.
A)
True
B)
False
312.
When households invest their wealth in financial markets, they purchase financial
assets.
A)
True
B)
False
Page 62
313.
The primary function of the financial system is to channel funds from savers to
investors.
A)
True
B)
False
314.
The expenses involved in actually putting together and executing a deal are called
liquidity costs.
A)
True
B)
False
315.
The expenses involved in actually putting together and executing a deal are called
transactions costs.
A)
True
B)
False
316.
A person who is risk averse loses less welfare from losing $100 than he or she gains in
welfare from winning $100.
A)
True
B)
False
317.
An individual can reduce financial risk by diversifying investments, that is, by investing
in several assets whose possible losses are independent events.
A)
True
B)
False
318.
To reduce risk through diversification, a person must invest in several assets with
related, or dependent, risk of loss.
A)
True
B)
False
319.
Financial markets eliminate transactions costs.
A)
True
B)
False
320.
When corporations need to borrow large amounts of money, they can minimize their
transaction costs by getting many small loans directly from many people.
A)
True
B)
False
Page 63
321.
An illiquid asset can be quickly converted to cash with little or no loss of value.
A)
True
B)
False
322.
Stocks are usually riskier than bonds but also typically earn a higher rate of return than
bonds.
A)
True
B)
False
323.
Of all types of financial assets, transactions costs are likely to be the lowest for loans.
A)
True
B)
False
324.
More so than other financial assets, loans are specifically tailored to meet the needs of
the borrower.
A)
True
B)
False
325.
A loan is a liability to the issuer but an asset to the person taking it out.
A)
True
B)
False
326.
If Debbie gets a loan to remodel her kitchen, the loan is a liability for Debbie and an
asset for the bank that issued the loan.
A)
True
B)
False
327.
When a corporation issues a bond, it is an asset for the corporation and a liability for the
purchaser of the bond.
A)
True
B)
False
328.
A bond is a financial asset that pays a fixed amount of interest each year and then repays
the principal on a given date.
A)
True
B)
False
Page 64
329.
Loans are more liquid than bonds because they are more standardized than bonds.
A)
True
B)
False
330.
Because bonds are more standardized than loans, transactions costs for bonds are
typically lower than transactions costs for loans.
A)
True
B)
False
331.
Although loan-backed securities provide more diversification than individual loans, they
are much less liquid than individual loans.
A)
True
B)
False
332.
Securitization is the process of setting up assets by pooling individual loans and selling
shares in the pool.
A)
True
B)
False
333.
During the financial crisis of 2008, many financial assets lost value, but
mortgage-backed securities never underwent default.
A)
True
B)
False
334.
Student loans, auto loans, and credit card loans are often securitized.
A)
True
B)
False
335.
Privately held companies are owned by an individual or a few partners, who get to keep
all of the company’s profit.
A)
True
B)
False
336.
Usually the rate of return on stock is lower than the rate of return on bonds.
A)
True
B)
False
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337.
Generally bonds are considered to be riskier than stocks.
A)
True
B)
False
338.
Bonds are less risky than stocks because a company legally must pay what it owes to
lenders before it can distribute profits to stockholders.
A)
True
B)
False
339.
If a company fails and declares bankruptcy, its physical and financial assets must be
used to pay its bondholders before the stockholders can be paid.
A)
True
B)
False
340.
A financial intermediary transforms funds gathered from many individuals into financial
assets.
A)
True
B)
False
341.
The primary purpose of financial intermediaries is to redistribute wealth by
implementing a progressive income tax.
A)
True
B)
False
342.
The primary purpose of financial intermediaries it to transform funds gathered from
savers into financial assets.
A)
True
B)
False
343.
About 75% of the financial assets that Americans own are held through financial
intermediaries rather than directly.
A)
True
B)
False
344.
A life insurance company is a financial intermediary that sets up a stock portfolio of
shares of companies and then sells shares of the stock portfolio to investors.
A)
True
B)
False
Page 66
345.
Mutual funds allow investors with a relatively small amount of money to indirectly hold
a diversified portfolio, which allows them to invest in stocks more safely than they
could otherwise.
A)
True
B)
False
346.
By doing research on the companies in their portfolios, mutual funds reduce transactions
costs for their investors.
A)
True
B)
False
347.
Banks are nonprofit financial intermediaries that collect the savings of their members
and invest those funds in a diversified portfolio of assets to provide income to members
when they retire.
A)
True
B)
False
348.
Life insurance companies are financial intermediaries that sell policies to savers and
guarantee a payment to the policyholder’s beneficiaries when the policyholder dies.
A)
True
B)
False
349.
If the price of a share of stock is expected to rise, then demanders will demand more of
it today, owners will be less willing to sell it today, and its price will rise today.
A)
True
B)
False
350.
Changes in the prices of stock are the result of changes in the supply and demand for
stocks of investors.
A)
True
B)
False
351.
The purchaser of a share of stock receives interest each year from the stock and then
receives the purchase price of the stock at its maturity.
A)
True
B)
False
Page 67
352.
The value of a stock depends primarily on investors’ assessments of its value in the past.
A)
True
B)
False
353.
Implicit rent is an estimate of the amount that homeowners would pay if they had to rent
their home and is also an estimate of the benefit of owning a home.
A)
True
B)
False
354.
The efficient markets hypothesis says that asset prices embody all publicly available
information.
A)
True
B)
False
355.
Fundamentals are the underlying determinants of a company’s future profits.
A)
True
B)
False
356.
Some economists have challenged the efficient markets hypothesis because they believe
that stocks may be incorrectly priced when markets behave irrationally.
A)
True
B)
False
357.
A bubble is a large decrease in asset prices caused by unrealistic expectations about
future prices.
A)
True
B)
False
358.
Suppose the federal government has a budget deficit and the economy is closed. Using
the savings–investment spending identity, explain how this affects investment spending.
359.
Suppose the federal government has a balanced budget, the economy is open, and there
is a positive capital inflow from foreign citizens. Using the savings–investment
spending identity, explain how this affects investment spending.
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360.
Assume that an economy is open to capital inflows and that the inflows are equal to
imports minus exports (IM – X). Answer the following questions.
a. Budget balance = –$20; X = $60; IM = $90; Private saving = $150. Calculate
investment spending.
b. Private saving = $200; Investment = $220; Budget balance = –$30. Calculate (IM –
X).
361.
The table that follows shows four possible physical investment projects, the expected
revenue from each project, and the expected cost of each project. You may assume that
each project, once completed, lasts only one year. Complete the empty column in the
table by computing the rate of return on each project.
362.
The market for loanable funds is in equilibrium. All else equal, the federal deficit is
growing. Describe how this will affect the market for loanable funds, the equilibrium
interest rate, and the equilibrium quantity of loanable funds.
363.
The market for loanable funds is in equilibrium. All else equal, the federal government
has eliminated taxes on interest earned from savings. Describe how this will affect the
market for loanable funds, the equilibrium interest rate, and the equilibrium quantity of
loanable funds.
364.
Explain what the Fisher effect implies. What does this effect tell us about the
relationship between inflation expectations and the market for loanable funds?
365.
You have contracted to borrow $2,000 from the bank for one year. The nominal rate of
interest is 8.5% and the real interest rate is 6%. At the end of the year, inflation was 1%.
How does this affect the borrower (you) and the lender (the bank)? Who is better off?
366.
You have agreed to borrow $2,000 from the bank for one year. The nominal rate of
interest is 8.5% and the real interest rate is 6%. At the end of the year, inflation was
3.5%. How does this affect the borrower (you) and the lender (the bank)? Who is better
off?
Page 69
367.
Your business has $100,000 of excess cash and is considering the purchase of some real
estate. The land will cost your firm $100,000 today, but you hope that in a year its value
will have increased because of a new shopping mall being built nearby, and you plan to
sell it for a profit. Your banker tells you that the annual rate of interest being offered to
savers is 12%. What price must you receive for the land next year for this investment to
be profitable?
368.
Consider each of these forms of investment. Identify whether it is constitutes investment
spending, an investment in physical assets, or a financial investment.
a. You purchase a 1965 Ford Mustang.
b. You buy 50 shares of stock in the Ford Motor Company.
c. Ford Motor Company builds a new plant in Tennessee.
369.
Compare stocks and bonds with respect to risk and return.
370.
Explain how a commercial bank meets both the short-term and long-term needs of its
customers.
371.
Explain how fluctuations in asset prices contributed to the financial crisis of 2008.
372.
What are the three tasks of a financial system? Explain how a mutual fund performs
these three tasks.
373.
This year, Alan purchases a home built in the 1950s. Alan’s purchase:
A)
counts as residential investment spending.
B)
counts as government spending.
C)
does not count as investment spending.
D)
is considered business fixed investment.
374.
Human capital refers to:
A)
changes in inventories.
B)
workers’ education or training.
C)
funds available for investment spending.
D)
spending on physical capital, such as machines that aid workers.
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375.
Human capital development often comes from:
A)
financial markets.
B)
government and private spending for education.
C)
the private sector, but only in capitalist economies.
D)
investment spending by businesses.
376.
Domestic savings and foreign savings are:
A)
sources of funds for investment spending.
B)
equal in terms of the composition of total savings.
C)
used for investment spending only when there is unplanned investment spending.
D)
not necessary for investment spending, since government funds this spending.
377.
If an economy is closed and wishes to increase its investment spending:
A)
its only source of funding is domestic saving.
B)
its sources of funding are domestic and foreign saving.
C)
the government will have to increase its spending to provide for this.
D)
the government will increase taxes to provide for this.
378.
Which of the following is TRUE of an open economy?
A)
GDP = C + I + G + X – IM
B)
GDP = C + I + G
C)
GDP = T – TR – G
D)
GDP = SPrivate + SGovernment
379.
When government spending is less than net taxes:
A)
there is a budget deficit.
B)
government savings is negative.
C)
there is budget surplus.
D)
the economy is moving toward a balanced budget.
380.
The budget balance equals:
A)
taxes minus government spending.
B)
taxes plus government spending.
C)
GDP minus consumption and government spending.
D)
GDP plus taxes.
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381.
National savings is the sum of:
A)
private savings plus the budget balance.
B)
private savings plus government spending.
C)
investment spending plus consumption.
D)
consumption spending minus government spending.
382.
If capital inflow is negative, then a country:
A)
borrows more than it lends to other countries.
B)
lends more than it borrows from other countries.
C)
has balanced trade.
D)
imports more than it exports.
383.
If a country has a positive capital inflow, it:
A)
borrows more than it lends to foreigners.
B)
has an inflow amount equal to its X + IM.
C)
lends more than it borrows from foreigners.
D)
has an outflow amount equal to X + IM.
384.
In an open economy:
A)
a country with a positive capital inflow will also have X greater than IM.
B)
savings of foreigners may be supporting investment spending.
C)
capital inflows are always negative.
D)
investment spending equals national savings.
385.
A government has a budget deficit in an open economy. This means:
A)
the government is spending less than its tax revenue.
B)
exports minus imports are zero.
C)
exports minus imports are positive.
D)
the government is spending more than its tax revenue.
386.
When portions of investment spending are financed by a capital inflow:
A)
interest is being paid by government for the use of those funds.
B)
interest is being paid to a foreigner for use of those funds.
C)
consumers will need to cut back on spending.
D)
taxes will be raised to pay for this capital inflow.
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387.
In the loanable funds market, borrowers:
A)
are best represented by the supply of loanable funds.
B)
are not affected by changes in the inflation rate.
C)
are best represented by the demand for loanable funds.
D)
lose money to unexpected increases in the inflation rate.
388.
Investment spending is undertaken when the rate of return is:
A)
positive.
B)
higher than the equilibrium interest rate.
C)
equal to the equilibrium interest rate.
D)
less than the equilibrium interest rate.
389.
Suppose an investment project is projected to provide $200,000 in revenues. The
investment will cost the company $180,000. Given this information, one should commit
to the project:
A)
regardless of the interest rate.
B)
if the interest rate is less than or equal to 11%.
C)
if the Fed is expected to decrease the money supply.
D)
if the interest rate is higher than 11%.
390.
Holding everything else constant, when the government uses an expansionary policy in
the presence of a deficit, it will result in:
A)
an increase in the equilibrium interest rate in the loanable funds market.
B)
an increase in the level of private investment spending.
C)
an increase in government savings.
D)
a fall in the equilibrium interest rate in the loanable funds market.
391.
In the loanable funds market, savers:
A)
demand funds.
B)
supply funds.
C)
represent borrowers of funds.
D)
pay the equilibrium interest rate.
392.
Alison lends $100 to Vanessa for one year. Alison expects that inflation will be 10%. If
Alison wishes to maintain the real value of her $100, she should expect payment from
Vanessa in the amount of:
A)
$100.
B)
$110.
C)
$120.
D)
$101.
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393.
In lending to Vanessa, Alison expects the inflation rate to be 8% over the next year.
Vanessa agrees to pay Alison a 10% interest rate on the loan, but Vanessa expects
inflation to be 9%. If the actual inflation rate is 9%:
A)
the real rate of interest is 1%.
B)
the real rate of interest is 9%.
C)
Vanessa ends up paying a lower real interest rate than she had expected.
D)
Alison ends up receiving a higher real interest rate than she had expected.
394.
Businesses will undertake projects if the rate of return is:
A)
positive.
B)
greater than or equal to the interest rate levied on the loan.
C)
greater than 1.
D)
less than the cost of borrowing for the project.
395.
Crowding out results in a(n):
A)
decrease in private investment spending resulting from government deficit
spending.
B)
increase in accumulation of physical capital, which leads to higher economic
growth.
C)
increase in private investment spending resulting from government deficit
spending.
D)
increase in consumption spending as a result of higher investment spending.
396.
Linking savers and investors is an important aspect of:
A)
a well-functioning financial system.
B)
government.
C)
the public sector.
D)
consumers.
397.
Financial assets:
A)
are paper claims that provide the buyer of the claim future income from the seller
of the claim.
B)
in the form of loans by an individual are an asset to the individual receiving the
loan.
C)
are accompanied by high transaction costs.
D)
have no financial risk.
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398.
A liquid asset:
A)
can be easily converted to a loan.
B)
can be easily converted to cash with little or no loss of value.
C)
are the only assets which financial markets work with.
D)
carries no financial risk.
399.
Someone who is risk-averse is:
A)
willing to expend whatever resources necessary to gain an uncertain amount of
money.
B)
willing to spend more resources to avoid losing a given sum of money than to gain
the same sum of money.
C)
irrational in the need to hold all assets in liquid form.
D)
one who does not believe in financial risk.
400.
A checking account with $500 is:
A)
more liquid than a person’s new car.
B)
less liquid than a checking account with $1,000.
C)
as liquid as a stock share with a $500 value.
D)
less liquid than a house with a market value of $250,000.
401.
Borrowers who cannot be served by the stock and bond markets:
A)
can use banks for their financing needs.
B)
can use the government for their financing needs.
C)
are crowded out of the market.
D)
must hold all of their assets in liquid form.
402.
Four types of financial intermediaries are:
A)
mutual funds, pension funds, government, and the central bank.
B)
mutual funds, pension funds, life insurance companies, and banks.
C)
banks, stock markets, pension funds, and the central bank.
D)
the central bank, government, the stock market, and the Dow Jones Industrial
Average.
Page 75
403.
The efficient markets hypothesis says that:
A)
stock markets reflect irrational behavior, and therefore stock prices could be
overvalued or undervalued.
B)
stock prices embody much public information and therefore are not overpriced or
underpriced.
C)
the three stock market indexes will provide consistent information about the stock
market.
D)
financial fluctuations in markets do not affect the macro economy in a noticeable
way.
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Answer Key
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