Deck 9: Consumer Spending, and Credit and Interest

Question 1

The term, "dis-saving" means

A) having no respect for savings.
B) drawing money out of savings.
C) putting money into savings.
D) not saving at all.

Answer 1

B

Question 2

Those who currently have no savings and have no income

A) are unable to consume.
B) will go into debt in order to consume.
C) have a zero marginal propensity to consume.
D) will increase their level of savings.

Answer 2

B

Question 3

A shift in income distribution from wealthy individuals to poor individuals is likely to

A) increase consumer debt.
B) increase the national propensity to consume.
C) leave the national propensity to consume unchanged.
D) decrease the national propensity to consume.

Answer 3

B

Question 4

Consumer debt as a percentage of national income in the cycle 1991 to 2001 was approximately

A) 22%
B) 52%
C) 72%
D) 92%

Question 5

What is the wealth effect?

A) The tendency for many individuals to copy the consumption patterns of the wealthy.
B) The tendency for increases in wealth to lead to increases in savings.
C) The tendency for increases in wealth to lead to increases in consumption.
D) The tendency for the wealthy to willingly share their good fortune with the less well off.

Question 6

Assume that Sam has $2000 in savings and a car worth about $10,000. He owes $9,000 on his car and $3000 on his credit card. What is Sam's wealth?

A) $2,000
B) $12,000
C) 0
D) $1,000

Question 7

Brad and Angie own a nice house worth $400,000. They have two cars worth $20,000 each, and $5,000 in the bank. They recently borrowed $100,000 on their house in order to send their daughter, Jennifer, to college. They also gave Jennifer a credit card for her expenses, and the balance is now $10,000. How much wealth do Brad and Angie have?

A) $330,000
B) $445,000
C) $110,000
D) $525,000

Question 8

Why consumers tend to purchase less if they have less wealth (or more debt), even if their income remains constant?

A) Consumers are irrational.
B) Consumers may feel richer, so they increase their savings in order to emulate the wealthy.
C) Consumers may feel poorer, so they want to increase their savings.
D) Consumers may already have bought all they want.

Question 9

How do banks create money?

A) Banks print new money and distribute it in return for deposits of old money.
B) Banks loan money to the Federal Reserve who then prints new money.
C) Banks cannot create money.
D) Banks create money when they make loans.

Question 10

Assume that the Federal Reserve sets a required reserve ratio of 20%. An individual deposits $1000 in cash into the bank. From the point of view of the bank,

A) $160 of this deposit will be required reserves; $840 will be excess reserves.
B) $200 of this deposit will be required reserves; $800 will be excess reserves.
C) $128 of this deposit will be required reserves; $872 will be excess reserves.
D) Half of the deposit will be required reserves, half will be excess reserves.

Question 11

The availability of credit makes an economy more financially fragile because

A) consumers are unable to spend because they cannot get loans.
B) during recessions, consumers and businesses may be unable to repay debt leading to financial difficulties for financial institutions.
C) during recessions, financial institutions become too free and easy with credit leading to too much borrowing.
D) during expansions, many businesses and individuals may go bankrupt from spending too much.

Question 12

What is the prime rate?

A) It is the highest interest rate in the economy.
B) It is the interest rate for long-term loans on real estate.
C) It is the interest rate offered by commercial banks to their best customers.
D) It is the interest rate consumers pay on new car loans.

Question 13

What is the relationship between the business cycle and the prime rate?

A) The prime rate rises during a contraction and falls during an expansion.
B) The prime rate rises during an expansion and falls during a contraction.
C) The prime rate rises during an expansion and rises during a contraction.
D) The prime rate initially rises during an expansion and then falls.

Question 14

Assume that the Federal Reserve sets a required reserve ratio of 10%. If a bank receives a deposit of $1000, then

A) it must keep $10 on reserve and can loan out $990.
B) it must keep $100 on reserve and can loan out $900.
C) it must keep $1000 on reserve and cannot make any loans.
D) it must keep $900 on reserve and can loan out $100.

Question 15

Assume that the Federal Reserve sets a required reserve ratio of 5%. Then the money multiplier is

A) 5
B) 20
C) 50
D) 100

Question 16

Assume that the Federal Reserve sets a required reserve ratio of 20%. An individual deposits $1000 in cash into the bank. How much money will eventually be created when all banks are fully loaned out?

A) $800
B) $640
C) $4,000
D) $5,000