Deck 7: Finance, Saving, and Investment

Question 1

The increase in the capital stock equals the amount of

A) net investment.
B) private sector spending.
C) depreciation.
D) gross investment.

Answer 1

A

Question 2

The total amount of plants, inventories, equipment and buildings is called

A) depreciation.
B) gross investment.
C) net investment.
D) capital stock.

Answer 2

D

Question 3

The term capital, as used in macroeconomics, refers to

A) the sum of investment and government purchases of goods.
B) the plant, equipment, buildings, and inventories of raw materials and semi- finished goods.
C) investment.
D) financial wealth.

Answer 3

B

Question 4

The total amount spent on new capital

A) net investment.
B) gross investment.
C) depreciation.
D) consumption on new capital.

Question 5

The physical capital in the economy is the total

A) financial assets held by firms.
B) quantity of plant and equipment owned by governments.
C) quantity of plant, equipment, and inventories.
D) financial assets of the public.

Question 6

Which of the following items are considered physical capital?
I) shares of Ford traded on the NYSE
Ii) the production line at the Saturn plant in Tennessee
Iii) the windshields at the Saturn plant in Tennessee
Iv) the salaries paid to Ford executives

A) ii and iii
B) i, ii and iii
C) i and iv
D) i, ii and iv

Question 7

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) 6 machines.
D) 3 machines.

Question 8

If the economy's capital stock increases over time,

A) gross investment equals depreciation.
B) net investment is positive.
C) depreciation exceeds gross investment.
D) depreciation is less than zero.

Question 9

The term capital, as used in macroeconomics, includes all of the following EXCEPT

A) inventories.
B) a company's work force.
C) equipment.
D) buildings.

Question 10

Net investment equals

A) gross investment/depreciation.
B) gross investment minus depreciation.
C) the total quantity of plant, equipment and buildings.
D) capital stock minus depreciation.

Question 11

Gross investment

A) does not include additions to inventories.
B) includes only replacement investment.
C) is the purchase of new capital.
D) Both answers A and B are correct.

Question 12

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 $4 million for the year.
B) gross investment was zero.
C) net investment was some amount but we need more information to determine the amount.
D) net investment was - $4 million for the year.

Question 13

The term capital, as used in macroeconomics, refers to

A) the amount of money a firm can raise in the stock market.
B) the amount of money that someone can invest in a new venture.
C) physical capital.
D) All of the above answers are correct.

Question 14

If the economy's capital stock decreases over time,

A) net investment is positive.
B) depreciation exceeds gross investment.
C) depreciation is less than zero.
D) gross investment equals net investment.

Question 15

In January 2008, Tim's Gyms, Inc. owned machines valued at $1 million. During the year, the market value of the equipment fell by 30 percent. During 2008, Tim spent $200,000 on new machines. During 2008, Tim's gross investment totalled

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

Question 16

The total amount spent on new capital

A) the net stock of investment.
B) depreciation.
C) wealth.
D) gross investment.

Question 17

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) 6 machines.
B) 1 machine.
C) 2 machines.
D) 3 machines.

Question 18

In January 2008, Tim's Gyms, Inc. owned machines valued at $1 million. During the year, the market value of the equipment fell by 30 percent. During 2008, Tim spent $200,000 on new machines. During 2008, Tim's net investment totalled

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

Question 19

The capital stock increases whenever

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

Question 20

Capital

A) does not include semifinished goods used to produce other goods and services.
B) increases when depreciation increases.
C) is a flow variable.
D) includes the plant, equipment, and buildings owned by firms.

Question 21

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) - $25,000.
C) $225,000.
D) none of the above

Question 22

A country's investment can be financed by _ .

A) only saving by households and firms
B) making exports exceed imports
C) national saving and foreign borrowing
D) a government budget surplus

Question 23

The funds used to buy and operate physical capital are

A) wealth.
B) saving.
C) financial capital.
D) depreciation.

Question 24

In January 2009, suppose that a share of stock in Meyer, Inc. was worth $50 and that each share entitled its owner to $2 of Meyer, Inc.'s profit. During 2009, the price of a share of Meyer's stock increased to $100. The interest rate paid on the share percent.

A) 4
B) 0.02
C) 2
D) 25

Question 25

National saving is defined as the amount of saving by

A) households.
B) businesses.
C) businesses and households and the government.
D) businesses and households.

Question 26

National saving equals

A) household saving + business saving.
B) household saving + business saving + net taxes - government expenditure.
C) household saving + business saving + government saving.
D) Both answers B and C are correct.

Question 27

Investment is financed by which of the following?
I) Government spending
II) National saving
III) Borrowing from the rest of the world

A) II and III only
B) I and II only
C) I, II, and III
D) I and III only

Question 28

National saving is defined as

A) the saving by the federal government.
B) saving by households and businesses plus government saving.
C) the total amount of household saving.
D) None of the above answers are correct.

Question 29

A nation's investment must be financed by

A) the government's budget deficit.
B) national saving plus borrowing from the rest of the world.
C) borrowing from the rest of the world only.
D) national saving only.

Question 30

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) 6 machines.
B) 1 machine.
C) 3 machines.
D) 2 machines.

Question 31

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; $1.0 billion
B) $1.0 billion; $1.3 billion
C) $1.0 billion; $0.7 billion
D) $1.3 billion; $1.6 billion

Question 32

U.S. investment is financed from

A) private saving and borrowing from the rest of the world only.
B) private saving, government budget surpluses, 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, government budget deficits, and borrowing from the rest of the world.

Question 33

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) $0.
B) $100,000.00.
C) $90,000.00.
D) $20,000.00.

Question 34

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) rest of the world may or may not finance the U.S. trade deficit.
C) United States must borrow an amount equal to consumption expenditure plus investment.
D) United States must borrow an amount equal to imports minus exports.

Question 35

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) $90,000.00.
C) $100,000.00.
D) $0.

Question 36

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

A) insolvent.
B) liquid.
C) solvent.
D) illiquid.

Question 37

Which of the following is FALSE about saving?

A) Saving equals wealth minus consumption expenditures.
B) Saving is the source of funds used to finance investment.
C) Saving adds to wealth.
D) Income left after paying taxes can either be consumed or saved.

Question 38

Between 2008 and 2010, Tim's Gyms wants to expand his business by building 20 new gyms around the country. Suppose that Tim promises to repay the lenders a specific amount on specific dates. This type of funding is

A) bonds issued in the bond market.
B) a mortgage obtained in the loan market.
C) mortgage- backed securities issued in the bond market.
D) stocks issued in the stock market.

Question 39

If the government runs a budget deficit, then

A) national saving cannot fund investment.
B) part of household and business saving finances the deficit.
C) national saving is negative.
D) household but not business saving must pay for the deficit.

Question 40

In 2008, Tim's Gyms needs to finance the building of a new gym. Suppose Tim secures this financing from a bank, and the bank receives ownership if Tim fails to make payments. This type of funding is

A) a stock issued in the bond market.
B) a mortgage obtained in the stock market.
C) a bond issued in the bond market.
D) a mortgage obtained in the loan market.

Question 41

The real interest rate

A) is approximately equal to the nominal interest rate plus the inflation rate.
B) is positively related to the inflation rate.
C) is approximately equal to the nominal interest rate minus the inflation rate.
D) can never be negative.

Question 42

If foreigners spend more on U.S.- made goods and services than we spend on theirs,

A) we must borrow from foreigners because of low imports.
B) funds flow in from abroad to help finance U.S. investment.
C) all U.S. national saving remains in the United States
D) foreigners must borrow from the United States or sell U.S. assets to make up the difference.

Question 43

In 2008, suppose Country A had net taxes of $30 million and government expenditures of $35 million. In addition, household saving in Country A totalled $5 million while consumption was
$80 million. The government of Country A is running a budget and national saving is
Million.

A) deficit; $5
B) surplus; $25
C) deficit; - $5
D) surplus; $5

Question 44

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) the rate the bank receives to cover lending costs.
D) the rate of increase in the income.

Question 45

The interest rate approximately equals the interest rate minus .

A) nominal; real; depreciation
B) real; nominal; the inflation rate
C) real; nominal; depreciation
D) nominal; real; the inflation rate

Question 46

The nominal interest rate approximately equals which of the following?

A) the real interest rate plus the growth rate of real GDP
B) the real interest rate minus the growth rate of real GDP
C) the real interest rate minus the inflation rate
D) the real interest rate plus the inflation rate

Question 47

When the inflation rate is positive, the

A) nominal interest rate is zero.
B) real interest rate is less than the nominal interest rate.
C) real interest rate is greater than the nominal interest rate.
D) real interest rate equals the nominal interest rate.

Question 48

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 13.5 percent.
B) The real interest rate is 6 percent and the nominal interest rate is 7.5 percent.
C) The nominal interest rate is 7.5 percent and the real interest rate is 1.5 percent.
D) The real interest rate is 7.5 percent and the nominal interest rate is 1.5 percent.

Question 49

Which of the following is TRUE regarding the real interest rate?
I) The real interest rate is the return on capital.
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

Question 50

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

A) minus; equals
B) equals; minus
C) equals; plus
D) plus; equals

Question 51

When the inflation rate is negative, the

A) real interest rate equals the nominal interest rate.
B) real interest rate is greater than the nominal interest rate.
C) real interest rate is less than the nominal interest rate.
D) nominal interest rate is zero.

Question 52

Use the information in the table above to calculate the value of private saving.

A) $25 million
B) $40 million
C) - $15 million
D) $20 million

Question 53

People know that the inflation rate will decrease from 7 percent to 3 percent. As a result

A) the nominal interest rate rises by 4 percentage points.
B) the nominal interest rate is constant.
C) the nominal interest rate falls by 4 percentage points.
D) the nominal interest rate equals 3 percent.

Question 54

People know that the inflation rate will increase from 3 percent to 5 percent. As a result

A) the nominal interest rate is constant.
B) the real interest rate rises by 2 percentage points.
C) the nominal interest rate falls by 2 percentage points.
D) the nominal interest rate rises by 2 percentage points.

Question 55

When the inflation rate is zero, the

A) real interest rate is greater than the nominal interest rate.
B) real interest rate equals the nominal interest rate.
C) nominal interest rate is zero.
D) real interest rate is less than the nominal interest rate.

Question 56

Which of the following approximately equals the real interest rate?

A) the nominal interest rate plus the inflation rate
B) the nominal interest rate minus the growth rate of GDP
C) the rate paid when the best customers of banks borrow money
D) the nominal interest rate minus the inflation rate

Question 57

People expect an inflation rate of 5 percent and the real interest rate is positive. Then the nominal interest rate will be

A) less than 5 percent.
B) more than 5 percent.
C) 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.

Question 58

If our exports are $2.2 billion and our imports are $2.7 billion,

A) the United States is borrowing from the rest of the world.
B) U.S. investment must decrease.
C) the United States is lending to the rest of the world.
D) U.S. national saving is too high.

Question 59

If you lend a dollar for a year and at the end of the year the price level has risen by 10 percent,

A) you must have earned a nominal interest rate of 10 percent to maintain the purchasing power of your loan.
B) the purchasing power of your loan has risen over the year regardless of the interest rate at which you lent it.
C) you must have earned a nominal interest rate of 5 percent to maintain the purchasing power of your loan.
D) the purchasing power of your loan has remained constant over the year regardless of the interest rate at which you lent it.

Question 60

Use the information in the table above to calculate the value of government saving.

A) - $5 million
B) $15 million
C) $45 million
D) $5 million

Question 61

If the real interest rate is 4 percent and the inflation rate is 3 percent, the nominal interest rate is approximately

A) 7 percent.
B) 12 percent.
C) 1.33 percent.
D) 1 percent.

Question 62

If the nominal interest rate is 8 percent and the inflation rate is 2 percent, the real interest rate is approximately

A) 6 percent.
B) 4 percent.
C) 0.25 percent.
D) 10 percent.

Question 63

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) 6; 8
C) 6; 4
D) 4; 6

Question 64

A firm's decision to invest in a project is based on the

A) real interest rate and expected total revenue.
B) real interest rate and the expected profit.
C) nominal interest rate and expected total revenue.
D) nominal interest rate and the expected profit.

Question 65

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) 3 percent
B) 13 percent
C) 11 percent
D) 8 percent

Question 66

If the inflation rate is 13 percent and the nominal interest rate is 12 percent, then the

A) real interest rate is approximately 0 percent.
B) nominal interest rate adjusted for inflation is approximately is 25 percent.
C) real interest rate is approximately 1 percent.
D) real interest rate is approximately - 1 percent.

Question 67

If the nominal interest rate is 10 percent and inflation is 7 percent, the real interest rate is approximately

A) 1.4 percent.
B) 3 percent.
C) 17 percent.
D) - 3 percent.

Question 68

Other things remaining the same, the greater the expected profit from capital,

A) the less the amount of investment.
B) the steeper is the investment demand curve.
C) the flatter is the investment demand curve.
D) the greater the amount of investment.

Question 69

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) 8.6 percent.
B) 6.3 percent.
C) 9.9 percent.
D) 0.3 percent.

Question 70

If the nominal interest rate is 7 percent and the inflation rate is 2 percent, the real interest rate is approximately

A) 9 percent.
B) 3.5 percent.
C) - 5 percent.
D) 5 percent.

Question 71

If the nominal interest rate is 8 percent and the current inflation rate is 3 percent, approximately what is the real interest rate?

A) 8 percent
B) 5 percent
C) 11 percent
D) 3 percent

Question 72

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) 11 percent
C) 1 percent
D) 9 percent

Question 73

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) 18 percent.
C) 4 percent.
D) 20 percent.

Question 74

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 and II
B) II and III
C) I only
D) I and III

Question 75

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 real return of $80.
B) a nominal return of $50.
C) a real return of $50.
D) a negative real return.

Question 76

In 2006 the inflation rate is 1 percent and Wally is willing to lend Barbara $100,000 at a 6 percent interest rate. In 2007, the inflation rate rises to 3 percent. As a result

A) Wally and Barbara will agree to a real interest rate of 9 percent.
B) Wally and Barbara will agree to a nominal interest rate of 5 percent.
C) Wally and Barbara will agree to a nominal interest rate of 8 percent.
D) Wally and Barbara will agree to a nominal interest rate of 9 percent.

Question 77

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 5 percent.
B) positive.
C) greater than 10 percent.
D) greater than 15 percent.

Question 78

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) - 6 percent.
D) 8 percent.

Question 79

If the real interest rate is 3 percent and the inflation rate is 2 percent, the nominal interest rate is approximately

A) 1.5 percent.
B) 5 percent.
C) 1 percent.
D) - 1 percent.

Question 80

If the nominal interest rate is 8 percent and inflation is 3 percent, what is the real interest rate?

A) 3 percent
B) 5 percent
C) 11 percent
D) 8 percent