Macroeconomics, 12e (Parkin)
Chapter 7 Finance, Saving, and Investment
1 Financial Institutions and Financial Markets
1) The term “capital,” as used in macroeconomics, refers to
A) the plant, equipment, buildings, and inventories of raw materials and semi-finished goods.
B) financial wealth.
C) the sum of investment and government purchases of goods.
D) investment.
2) The term capital, as used in macroeconomics, refers to
A) the amount of money that someone can invest in a new venture.
B) the amount of money a firm can raise in the stock market.
C) physical capital.
D) All of the above answers are correct.
3) Which of the following items are considered physical capital?
I. shares of Ford stock traded on the New York Stock Exchange
II. the Taco Bell store nearest you
III. the rental cars owned by Hertz Rental-A-Car
IV. the salaries paid to Intel executives
A) II and III
B) I and IV
C) I, II and III
D) I, II and IV
4) Gross investment
A) is the purchase of new capital.
B) includes only replacement investment.
C) does not include additions to inventories.
D) Both answers A and B are correct.
5) The total amount spent on new capital in a time period is equal to
A) wealth.
B) gross investment.
C) depreciation.
D) net investment.
6) In January 2015, Tim’s Gyms, Inc. owned machines valued at $1 million. During the year, the
market value of the equipment fell by 30 percent. During 2015, Tim spent $200,000 on new
machines. During 2015, Tim’s gross investment totaled
A) $1 million.
B) $300,000.
C) $200,000
D) $900,000.
7) Net investment equals
A) capital stock minus depreciation.
B) gross investment minus depreciation.
C) the total quantity of plant, equipment and buildings.
D) gross investment/depreciation.
8) The increase in the capital stock equals the amount of
A) gross investment.
B) depreciation.
C) net investment.
D) private sector spending.
9) The capital stock increases whenever
A) gross investment is exceeds net investment.
B) net investment exceeds gross investment.
C) gross investment is negative.
D) net investment is positive.
10) If the economy’s capital stock increases over time
A) net investment is positive.
B) depreciation is less than zero.
C) depreciation exceeds gross investment.
D) gross investment equals depreciation.
11) If the economy’s capital stock decreases over time
A) net investment is positive.
B) depreciation is less than zero.
C) depreciation exceeds gross investment.
D) gross investment equals net investment.
12) In January 2015, Tim’s Gyms, Inc. owned machines valued at $1 million. During the year,
the market value of the equipment fell by 30 percent. During 2015, Tim spent $200,000 on new
machines. During 2015, Tim’s net investment totaled
A) $1 million.
B) -$300,000.
C) $200,000.
D) -$100,000.
13) The Acme Stereo Company had a capital stock of $24 million at the beginning of the year.
At the end of the year, the firm had a capital stock of $20 million. Thus its
A) net investment was some amount but we need more information to determine the amount.
B) net investment was $4 million for the year.
C) gross investment was zero.
D) net investment was -$4 million for the year.
14) At the beginning of the year, Tom’s Tubes had a capital stock of 5 tube inflating machines.
During the year, Tom scrapped 2 old machines and purchased 3 new machines. Tom’s net
investment for the year totaled
A) 1 machine.
B) 2 machines.
C) 3 machines.
D) 6 machines.
15) At the beginning of the year, Tom’s Tubes had a capital stock of 5 tube inflating machines.
During the year, Tom scrapped 2 old machines and purchased 3 new machines. Tom’s gross
investment for the year totaled
A) 1 machine.
B) 2 machines.
C) 3 machines.
D) 6 machines.
16) At the beginning of the year, Tom’s Tubes had a capital stock of 5 tube inflating machines.
During the year, Tom scrapped 2 old machines and purchased 3 new machines. Tom’s capital
stock at the end of year equals
A) 1 machine.
B) 2 machines.
C) 3 machines.
D) 6 machines.
17) Which of the following is FALSE about saving?
A) Saving adds to wealth.
B) Income left after paying taxes can either be consumed or saved.
C) Saving equals wealth minus consumption expenditures.
D) Saving is the source of funds used to finance investment.
18) An increase in the ________ is an example of a capital gain.
A) value of a share of stock
B) wage rate of a federal employee
C) amount of income not spent on consumption or taxes
D) after-tax wage rate as a result of a decrease in income tax rates
19) Facebook sold shares of stock for the first time in an IPO on May 18, 2012. The stock
originally sold for $38 per share. As of October 19, 2012, a share of Facebook stock was valued
at $19 per share. The decrease in the value of a share of Facebook purchased in May and still
owned in October is called
A) a capital gain.
B) a capital loss.
C) gross investment.
D) net investment.
20) At the beginning of the year, your wealth is $10,000. During the year, you have an income of
$90,000 and you spend $80,000 on consumption. You pay no taxes. Your wealth at the end of
the year is
A) $20,000.00.
B) $0.
C) $90,000.00.
D) $100,000.00.
21) At the beginning of the year, your wealth is $10,000. During the year, you have an income of
$80,000 and you spend $90,000 on consumption. You pay no taxes. Your wealth at the end of
the year is
A) $20,000.00.
B) $0.
C) $90,000.00.
D) $100,000.00.
22) In January, suppose that a share of stock in Meyer, Inc. had a price of $50 and that each
share entitled its owner to $2 of Meyer, Inc.’s profit. During the year, the price of a share of
Meyer’s stock rose to $100. The interest rate paid on the share in January was ________ percent.
A) 2
B) 0.02
C) 4
D) 25
23) Suppose that a bond promises to pay its holder $100 a year forever. If the price of the bond
increases from $1,000 to $1,250, then the interest rate on the bond
A) falls from 10 percent to 8 percent.
B) rises from 8 percent to 10 percent.
C) does not change because it is not affected by the price of the bond.
D) falls from 10 percent to 6 percent.
24) Suppose a bond promises to pay its holder $100 a year forever. The interest rate on the bond
rises from 4 percent to 5 percent. The price of the bond
A) falls from $2,500 to $2,000.
B) does not change because it is not affected by the interest rate.
C) falls from $25,000 to $20,000.
D) rises from $2,000 to $2,500.
25) The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
A) cut the federal government’s ties with Fannie Mae and Freddy Mac.
B) prohibits banks from selling mortgage backed securities, which were largely to blame for the
financial market crisis in 2007-2008.
C) eliminated the Federal Deposit Insurance Corporation.
D) had restrictions that try to limit risky investment by banks.
26) All of the following are points of the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 EXCEPT
A) creating a Consumer Financial Protection Bureau.
B) requiring mortgage lenders to review income and credit histories of applicants to ensure they
can afford payments.
C) imposing tighter restrictions on banks to limit risky investments.
D) requiring firms that create mortgage backed securities to keep at least 50 percent of their
value as reserves.
27) The funds used to buy and operate physical capital are
A) depreciation.
B) financial capital.
C) saving.
D) wealth.
28) This year Pizza Hut makes a total investment of $1.3 billion in new stores. Its depreciation in
this year is $300 million. Pizza Hut’s gross investment is ________ and its net investment is
________.
A) $1.3 billion; $1.6 billion
B) $1.0 billion; $1.3 billion
C) $1.3 billion; $1.0 billion
D) $1.0 billion; $0.7 billion
29) If a bank’s net worth is negative, then the bank definitely is
A) liquid.
B) insolvent.
C) illiquid.
D) solvent.
30) The key financial institutions in the United States include all of the following EXCEPT
A) the U.S. Treasury
B) the Federal Reserve
C) commercial banks, pension funds, and insurance companies
D) government-sponsored mortgage lenders
2 The Loanable Funds Market
1) Investment is financed by which of the following?
I. Government spending
II. National saving
III. Borrowing from the rest of the world
A) I, II, and III
B) I and II only
C) I and III only
D) II and III only
2) U.S. investment is financed from
A) private saving, government budget surpluses, and borrowing from the rest of the world.
B) private saving, government budget deficits, and borrowing from the rest of the world.
C) private borrowing, government budget deficits, and lending to the rest of the world.
D) private saving and borrowing from the rest of the world only.
3) A nation’s investment must be financed by
A) national saving only.
B) the government’s budget deficit.
C) borrowing from the rest of the world only.
D) national saving plus borrowing from the rest of the world.
4) National saving is defined as the amount of
A) business saving.
B) household saving.
C) business saving and household saving.
D) private saving and government saving.
5) National saving equals
A) household saving + business saving.
B) household saving + business saving + government saving.
C) household saving + business saving + net taxes – government expenditure.
D) Both answers B and C are correct.
6) If the government runs a budget deficit, then
A) national saving is negative.
B) household but not business saving must pay for the deficit.
C) part of household and business saving finances the deficit.
D) national saving cannot fund investment.
7) If national saving (S) is $100,000, net taxes (T) equal $100,000 and government expenditure
(G) is $25,000, how much are households and businesses saving?
A) $25,000
B) $225,000
C) -$25,000
D) none of the above
8) Suppose the United States spends more on foreign goods and services than foreigners spend
on our goods and services and the United States sells no foreign assets. Then the
A) United States must borrow an amount equal to national saving.
B) United States must borrow an amount equal to imports minus exports.
C) rest of the world may or may not finance the U.S. trade deficit.
D) United States must borrow an amount equal to consumption expenditure plus investment.
9) If foreigners spend more on U.S.-made goods and services than we spend on theirs
A) foreigners must borrow from the United States or sell U.S. assets to make up the difference.
B) all U.S. national saving remains in the United States.
C) we must borrow from foreigners because of low imports.
D) funds flow in from abroad to help finance U.S. investment.
10) If U.S. exports are $2.2 billion and our imports are $2.7 billion
A) the United States is lending to the rest of the world.
B) U.S. national saving is too high.
C) the United States is borrowing from the rest of the world.
D) U.S. investment must decrease.
11) Suppose Country A had net taxes of $30 million and government expenditures of $35
million. In addition, household saving in Country A totaled $5 million while consumption was
$80 million. The government of Country A is running a budget ________ and national saving is
________ million.
A) surplus; $5
B) deficit; -$5
C) deficit; $0
Item
Millions of
dollars
Personal consumption
expenditure
80
Government expenditure on
goods and services
30
Net taxes
35
Gross private domestic
investment
20
Imports of goods and services
10
Exports of goods and services
20
12) Use the information in the table above to calculate the value of national saving.
A) -$15 million
B) $40 million
C) $25 million
D) $20 million
13) Use the information in the table above to calculate the value of government saving.
A) $15 million
B) -$5 million
C) $5 million
D) $45 million
14) Which of the following is TRUE regarding the real interest rate?
I. The real interest rate is the opportunity cost of borrowed funds.
II. The real interest rate equals the nominal interest rate adjusted for inflation.
A) I
B) II
C) both I and II
D) neither I nor II
15) Approximately, the real interest rate ________ the inflation rate ________ the nominal
interest rate.
A) plus; equals
B) equals; plus
C) equals; minus
D) minus; equals
16) The ________ interest rate approximately equals the ________ interest rate minus
________.
A) nominal; real; depreciation
B) nominal; real; the inflation rate
C) real; nominal; depreciation
D) real; nominal; the inflation rate
17) The real interest rate
A) can never be negative.
B) is approximately equal to the nominal interest rate plus the inflation rate.
C) is approximately equal to the nominal interest rate minus the inflation rate.
D) is positively related to the inflation rate.
18) The nominal interest rate minus the real interest rate approximately equals the
A) rate of increase in the amount of investment.
B) inflation rate.
C) rate of increase in the income.
D) rate the bank receives to cover lending costs.
19) The nominal interest rate approximately equals which of the following?
A) the real interest rate minus the inflation rate
B) the real interest rate plus the inflation rate
C) the real interest rate minus the growth rate of real GDP
D) the real interest rate plus the growth rate of real GDP
20) If you lend a dollar for a year and at the end of the year the price level has risen by 10
percent
A) the purchasing power of your loan has risen over the year regardless of the interest rate at
which you lent it.
B) the purchasing power of your loan has remained constant over the year regardless of the
interest rate at which you lent it.
C) you must have earned a nominal interest rate of 10 percent to maintain the purchasing power
of your loan.
D) you must have earned a nominal interest rate of 5 percent to maintain the purchasing power of
your loan.
21) When the inflation rate is zero, the
A) real interest rate is greater than the nominal interest rate.
B) real interest rate is less than the nominal interest rate.
C) nominal interest rate is zero.
D) real interest rate equals the nominal interest rate.
22) When the inflation rate is positive, the
A) real interest rate is greater than the nominal interest rate.
B) real interest rate is less than the nominal interest rate.
C) nominal interest rate is zero.
D) real interest rate equals the nominal interest rate.
23) When the inflation rate is negative, the
A) real interest rate is greater than the nominal interest rate.
B) real interest rate is less than the nominal interest rate.
C) nominal interest rate is zero.
D) real interest rate equals the nominal interest rate.
24) People expect an inflation rate of 5 percent and the real interest rate is positive. Consequently
the nominal interest rate will be
A) more than 5 percent.
B) 5 percent.
C) less than 5 percent.
D) Without more information it is impossible to tell if the nominal interest rate will be more
than, less than, or equal to 5 percent.
25) People know that the inflation rate will increase from 3 percent to 5 percent. As a result
A) the nominal interest rate falls by 2 percentage points.
B) the nominal interest rate is constant.
C) the nominal interest rate rises by 2 percentage points.
D) the real interest rate rises by 2 percentage points.
26) Suppose that you took out a $1000 loan in January and had to pay $75 in annual interest.
During the year, inflation was 6 percent. Which of the following statements is CORRECT?
A) The nominal interest rate is 7.5 percent and the real interest rate is 1.5 percent.
B) The nominal interest rate is 7.5 percent and the real interest rate is 13.5 percent.
C) The real interest rate is 7.5 percent and the nominal interest rate is 1.5 percent.
D) The real interest rate is 6 percent and the nominal interest rate is 7.5 percent.
27) People know that the inflation rate will decrease from 7 percent to 3 percent. As a result
A) the nominal interest rate falls by 4 percentage points.
B) the nominal interest rate is constant.
C) the nominal interest rate rises by 4 percentage points.
D) the nominal interest rate equals 3 percent.
28) If people expect an inflation rate of 3.3 percent, and the real interest rate is 3 percent, the
nominal interest rate equals (approximately)
A) 0.3 percent.
B) 8.6 percent.
C) 6.3 percent.
D) 9.9 percent.
29) If the nominal interest rate is 8 percent and inflation is 3 percent, approximately what is the
real interest rate?
A) 11 percent
B) 8 percent
C) 5 percent
D) 3 percent
30) If the nominal interest rate is 7 percent and the inflation rate is 1 percent, the real interest rate
is approximately
A) 7 percent.
B) 6 percent.
C) 8 percent.
D) -6 percent.
31) If the nominal interest rate is 8 percent and the inflation rate is 2 percent, the real interest rate
is approximately
A) 4 percent.
B) 6 percent.
C) 0.25 percent.
D) 10 percent.
32) If the nominal interest rate is 11 percent and the inflation rate is 9 percent, then the real
interest rate is approximately
A) 2 percent.
B) 20 percent.
C) 4 percent.
D) 18 percent.
33) If the nominal interest rate is 8 percent and the current inflation rate is 3 percent,
approximately what is the real interest rate?
A) 11 percent
B) 8 percent
C) 5 percent
D) 3 percent
34) Assume you save $1,000 in a bank account that pays 8 percent interest per year and the
inflation rate is 3 percent. At the end of the year you have earned
A) a nominal return of $50.
B) a negative real return.
C) a real return of $50.
D) a real return of $80.
35) The real interest rate is 4 percent a year. When the inflation rate is zero, the nominal interest
rate is approximately ________ percent a year; and when the inflation rate is 2 percent a year,
the nominal interest rate is approximately ________ percent a year.
A) 0; 2
B) 4; 6
C) 6; 8
D) 6; 4
36) Initially the nominal interest rate is 8 percent and the inflation rate is 5 percent. People know
that the inflation rate increases to 10 percent. What is the new nominal interest rate?
A) 8 percent
B) 3 percent
C) 13 percent
D) 11 percent
37) Suppose that, initially, the nominal interest rate is 6 percent and the inflation rate is 3
percent. If the inflation rate increases to 6 percent, what will be the new nominal interest rate?
A) 6 percent
B) 1 percent
C) 11 percent
D) 9 percent
38) A firm’s decision to invest in a project is based on the
A) real interest rate and expected total revenue.
B) nominal interest rate and expected total revenue.
C) nominal interest rate and the expected profit.
D) real interest rate and the expected profit.
39) Suppose a firm has an investment project which will cost $200,000 and result in $30,000
profit. The firm will not undertake the project if the interest rate is
A) greater than 15 percent.
B) greater than 10 percent.
C) greater than 5 percent.
D) positive.
40) Other things remaining the same, the greater the expected profit
A) the less the amount of investment.
B) the greater the amount of investment.
C) the steeper is the investment demand curve.
D) the flatter is the investment demand curve.
41) Which of the following are major influences on the expected profit from an investment?
I. technology advances
II. stock market behavior
III. accounting practices
A) I only
B) I and II
C) I and III
D) II and III
42) The expected profit from an investment will change with
A) a change in the real interest rate.
B) a change in technology.
C) Both A and B are correct.
D) Neither A nor B is correct.
43) The ________ the expected profit, the greater is the ________.
A) lower; investment demand
B) higher; investment demand
C) lower; capital stock
D) None of the above answers is correct
44) As the ________ interest rate increases, the quantity of loanable funds demanded ________.
A) real; increases
B) real; decreases
C) nominal; increases
D) nominal; decreases
45) Which of the following explains why the demand for loanable funds is negatively related to
the real interest rate?
A) A lower real interest rate makes more investment projects profitable.
B) Consumers are willing to spend less and hence save more at higher real interest rates.
C) Interest rate flexibility in financial markets assures an equilibrium in which saving equals
investment.
D) All of the above are reasons why the demand for loanable funds is negatively related to the
real interest rate.
46) The demand for loanable funds is the relationship between loanable funds and the ________
other things remaining the same.
A) real interest rate
B) nominal interest rate
C) inflation rate
D) price level
47) The demand for loanable funds curve is
A) downward sloping when plotted against the real interest rate.
B) vertical at the full employment level of investment.
C) constant at the maximum expected profit rate.
D) upward sloping when plotted against the real interest rate.
48) The demand for loanable funds curve shows that as the ________ interest rate increases,
there will be ________ the curve.
A) nominal; a rightward shift in
B) real; a rightward shift in
C) nominal; movement down along
D) real; movement up along.