Question 1

Suppose that you took out a $1,000 loan in January and were required to pay $75 in annual interest. During the year, inflation was 6 percent. Which of the following statements is correct?

Accepted Answer

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.
E)  The real interest rate is 6 percent and the nominal interest rate is -1.5 percent. A

Question 2

As the ________ interest rate rises ________.

Accepted Answer

A)  nominal; the demand for loanable funds curve shifts rightward
B)  real; the demand for loanable funds curve shifts rightward
C)  nominal; the demand for loanable funds curve shifts leftward
D)  real; a movement occurs up along the demand for loanable funds curve
E)  real; a movement occurs down along the demand for loanable funds curve D

Question 3

If national saving equals $100,000, net taxes equal $100,000 and government expenditure equals $25,000, what is private saving?

Accepted Answer

A)  $25,000
B)  $225,000
C)  -$25,000
D)  zero
E)  $175,000 A

Question 4

Figure 23.2.5
 
-Refer to Figure 23.2.5. In Figure 23.2.5, the initial supply of loanable funds curve is SLF0 and the initial demand for loanable funds curve is DLF0. An increase in the expected profit

Accepted Answer

A)  shifts the supply of loanable funds curve rightward to curve SLF1 and does not shift the demand for loanable funds curve.
B)  shifts the supply of loanable funds curve rightward to curve SLF1, and shifts the demand for loanable funds curve rightward to curve DLF1.
C)  shifts the demand for loanable funds curve rightward to curve DLF1 and does not shift the supply of loanable funds curve.
D)  has no effect on either the demand for loanable funds curve or the supply of loanable funds curve.
E)  increases the inflation rate.

Question 5

Capital stock increases when

Accepted Answer

A)  gross investment exceeds net investment.
B)  net investment exceeds gross investment.
C)  gross investment is negative.
D)  net investment is positive.
E)  net investment is zero.

Question 6

If the nominal interest rate is 11 percent and the inflation rate is 9 percent, then the real interest rate is approximately

Accepted Answer

A)  2 percent.
B)  20 percent.
C)  4 percent.
D)  18 percent.
E)  -2 percent.

Question 7

Table 23.3.6
The table shows an economy's demand for loanable funds schedule and supply of loanable funds schedule when the government's budget is balanced.
 
-Consider Table 23.3.6. If the Ricardo-Barro effect occurs, and if the government's budget becomes a deficit of $2.0 trillion, what is the real interest rate?

Accepted Answer

A)  4 percent a year
B)  5 percent a year
C)  6 percent a year
D)  6.5 percent a year
E)  7 percent a year

Question 8

The equilibrium real interest rate is determined by the

Accepted Answer

A)  demand for loanable funds curve and the supply of loanable funds curve.
B)  demand for loanable funds curve and real GDP.
C)  supply of loanable funds curve and financial institutions.
D)  government expenditure curve and the taxation curve.
E)  banks and insurance companies.

Question 9

Which of the following is false?

Accepted Answer

A)  Y = C + I + G + M - X
B)  I = S + (T - G) + (M - X) 
C)  Y = C + S + T
D)  Y + M = C + I + G + X
E)  Y = C + I + G + X -M

Question 10

Table 23.2.3
The table shows an economy's demand for loanable funds schedule and supply of loanable funds schedule.
 
-Consider Table 23.2.3. If planned saving decreases by $1.0 trillion at each real interest rate, what is the new equilibrium real interest rate?

Accepted Answer

A)  2 percent a year
B)  5 percent a year
C)  2.5 percent a year
D)  3.5 percent a year
E)  There is no new equilibrium real interest rate.

Question 11

Elena owns a Canada Savings Bond with a a price of $5,000, which pays $500 per year. The price of the bond rises in the bond market to $7,500. What is the new interest rate on the bond?

Accepted Answer

A)  5 percent
B)  6.67 percent
C)  10 percent
D)  20 percent
E)  500 percent

Question 12

When government saving is negative,

Accepted Answer

A)  the real interest rate rises.
B)  the real interest rate falls.
C)  investment increases.
D)  the real interest rate falls if crowding-out occurs.
E)  the supply of loanable funds increases.

Question 13

Choose the statement that is incorrect.

Accepted Answer

A)  According to the Ricardo-Barro effect, taxpayers are rational people who know that a budget deficit today means that future taxes will be higher and future disposable incomes will be smaller.
B)  According to the Ricardo-Barro effect, a budget deficit has no effect on either the real interest rate or investment.
C)  Most economists believe that the Ricardo-Barro effect holds in the market for loanable funds.
D)  According to the Ricardo-Barro effect, the quantity of loanable funds demanded increases when a government budget deficit occurs, and private saving and the private supply of loanable funds increase to match the quantity of loanable funds demanded.
E)  All of the above statements are correct.

Question 14

A decrease in the demand for loanable funds occurs when

Accepted Answer

A)  the real interest rate rises.
B)  government expenditure increases.
C)  the government cuts taxes.
D)  expected profit decreases.
E)  expected profit increases.

Question 15

If the Ricardo-Barro effect occurs, a government budget deficit raises the equilibrium real interest rate by ________ and decreases the equilibrium quantity of investment by ________ if the Ricardo-Barro effect is absent.

Accepted Answer

A)  more; more than
B)  more; less than
C)  less; more than
D)  less; less than
E)  the same amount; the same amount as

Question 16

The demand for loanable funds curve

Accepted Answer

A)  is horizontal.
B)  has a negative slope.
C)  is vertical.
D)  has a positive slope.
E)  slopes downward at high real interest rates and slopes upward at low real interest rates.

Question 17

In January 2014, Tim's Gyms, Inc. owned machines valued at $1 million. During the year, the market value of the machines fell by 30 percent. During 2011, Tim spent $200,000 on new machines. During 2014, Tim's gross investment was

Accepted Answer

A)  $1 million.
B)  $300,000.
C)  $200,000
D)  $900,000.
E)  $100,000.

Question 18

If a bank's net worth is negative, then the bank is

Accepted Answer

A)  liquid.
B)  insolvent.
C)  illiquid.
D)  solvent.
E)  none of the above

Question 19

What is the effect of a decrease in expected profit?

Accepted Answer

A)  The demand curve for loanable funds shifts leftward and the real interest rate falls.
B)  The supply curve of loanable funds shifts rightward and the nominal interest rate rises.
C)  A movement down along the demand curve for loanable funds occurs.
D)  The real interest rate rises as saving increases.
E)  The demand curve for loanable funds shifts rightward and the real interest rate rises.

Question 20

Approximately, the real interest rate ________ the inflation rate ________ the nominal interest rate.

Accepted Answer

A)  plus; equals
B)  equals; plus
C)  equals; minus
D)  minus; equals
E)  times; divided by 100 equals

Exam 23: Finance, Saving, and Investment

Suppose that you took out a $1,000 loan in January and were required to pay $75 in annual interest. During the year, inflation was 6 percent. Which of the following statements is correct?

As the interest rate rises .

If national saving equals $100,000, net taxes equal $100,000 and government expenditure equals $25,000, what is private saving?

Figure 23.2.5 -Refer to Figure 23.2.5. In Figure 23.2.5, the initial supply of loanable funds curve is SLF0 and the initial demand for loanable funds curve is DLF₀. An increase in the expected profit

Capital stock increases when

If the nominal interest rate is 11 percent and the inflation rate is 9 percent, then the real interest rate is approximately

The equilibrium real interest rate is determined by the

Which of the following is false?

Table 23.2.3 The table shows an economy's demand for loanable funds schedule and supply of loanable funds schedule. -Consider Table 23.2.3. If planned saving decreases by $1.0 trillion at each real interest rate, what is the new equilibrium real interest rate?

Elena owns a Canada Savings Bond with a a price of $5,000, which pays $500 per year. The price of the bond rises in the bond market to $7,500. What is the new interest rate on the bond?

When government saving is negative,

Choose the statement that is incorrect.

A decrease in the demand for loanable funds occurs when

If the Ricardo-Barro effect occurs, a government budget deficit raises the equilibrium real interest rate by and decreases the equilibrium quantity of investment by if the Ricardo-Barro effect is absent.

The demand for loanable funds curve

In January 2014, Tim's Gyms, Inc. owned machines valued at $1 million. During the year, the market value of the machines fell by 30 percent. During 2011, Tim spent $200,000 on new machines. During 2014, Tim's gross investment was

If a bank's net worth is negative, then the bank is

What is the effect of a decrease in expected profit?

Approximately, the real interest rate the inflation rate the nominal interest rate.

Exam 23: Finance, Saving, and Investment

Suppose that you took out a $1,000 loan in January and were required to pay $75 in annual interest. During the year, inflation was 6 percent. Which of the following statements is correct?

As the ________ interest rate rises ________.

If national saving equals $100,000, net taxes equal $100,000 and government expenditure equals $25,000, what is private saving?

Figure 23.2.5 -Refer to Figure 23.2.5. In Figure 23.2.5, the initial supply of loanable funds curve is SLF0 and the initial demand for loanable funds curve is DLF0. An increase in the expected profit

Capital stock increases when

If the nominal interest rate is 11 percent and the inflation rate is 9 percent, then the real interest rate is approximately

The equilibrium real interest rate is determined by the

Which of the following is false?

Table 23.2.3 The table shows an economy's demand for loanable funds schedule and supply of loanable funds schedule. -Consider Table 23.2.3. If planned saving decreases by $1.0 trillion at each real interest rate, what is the new equilibrium real interest rate?

Elena owns a Canada Savings Bond with a a price of $5,000, which pays $500 per year. The price of the bond rises in the bond market to $7,500. What is the new interest rate on the bond?

When government saving is negative,

Choose the statement that is incorrect.

A decrease in the demand for loanable funds occurs when

If the Ricardo-Barro effect occurs, a government budget deficit raises the equilibrium real interest rate by ________ and decreases the equilibrium quantity of investment by ________ if the Ricardo-Barro effect is absent.

The demand for loanable funds curve

In January 2014, Tim's Gyms, Inc. owned machines valued at $1 million. During the year, the market value of the machines fell by 30 percent. During 2011, Tim spent $200,000 on new machines. During 2014, Tim's gross investment was

If a bank's net worth is negative, then the bank is

What is the effect of a decrease in expected profit?

Approximately, the real interest rate ________ the inflation rate ________ the nominal interest rate.

As the interest rate rises .

Figure 23.2.5 -Refer to Figure 23.2.5. In Figure 23.2.5, the initial supply of loanable funds curve is SLF0 and the initial demand for loanable funds curve is DLF₀. An increase in the expected profit

If the Ricardo-Barro effect occurs, a government budget deficit raises the equilibrium real interest rate by and decreases the equilibrium quantity of investment by if the Ricardo-Barro effect is absent.

Approximately, the real interest rate the inflation rate the nominal interest rate.