Deck 23: Finance, Saving, and Investment

Question 1

Net investment equals

A)capital minus depreciation.
B)gross investment minus depreciation.
C)the total quantity of plant, equipment, and buildings.
D)gross investment divided by depreciation.
E)wealth minus saving.

Answer 1

B

Question 2

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 goods and services. You pay no taxes. Your wealth at the end of the year is

A)$20,000.
B)$0.
C)$90,000.
D)$100,000.
E)$10,000.

Answer 2

B

Question 3

If the economy's capital increases over time,

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

Answer 3

A

Question 4

At the beginning of the year, Tom's Tubes had capital 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 is

A)1 machine.
B)2 machines.
C)3 machines.
D)6 machines.
E)8 machines.

Question 5

At the beginning of the year, Tom's Tubes had capital of 5 tube-inflating machines. During the year, Tom scrapped 2 old machines and purchased 3 new machines. Tom's capital at the end of year was

A)1 machine.
B)2 machines.
C)3 machines.
D)6 machines.
E)8 machines.

Question 6

In January 2014, Tim's Gyms, Inc. owned machines valued at $1 million. During the year, the market value of the machines fell by 10 percent. During 2014, Tim spent $200,000 on new machines. During 2014, Tim's net investment was

A)$1 million.
B)$300,000.
C)$200,000.
D)$100,000.
E)$1.1 million.

Question 7

In 2011, 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 mortgage obtained in the loan market.
B)a stock issued in the bond market.
C)a bond issued in the bond market.
D)a mortgage obtained in the stock market.
E)a stock issued in the loan market.

Question 8

This year Pizza Hut spent $1.3 billion on new capital in its stores. Depreciation during the year was $300 million. Pizza Hut's gross investment was ________ and its net investment was ________.

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
E)$1.3 billion; $0.3 billion

Question 9

Capital is

A)the tools, instruments, machines, buildings, and other items that have been produced in the past and that are used today to produce goods and services.
B)financial wealth.
C)the sum of investment and government expenditure on goods.
D)net investment.
E)gross investment.

Question 10

The increase in the value of capital is

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

Question 11

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 goods and services. You pay no taxes. Your wealth at the end of the year is

A)$20,000.
B)$0.
C)$90,000.
D)$100,000.
E)$10,000.

Question 12

Which of the following is FALSE?

A)Saving adds to wealth.
B)Income left after paying taxes can either be consumed or saved.
C)Saving equals wealth minus consumption expenditure.
D)Saving is the source of funds used to finance investment.
E)Saving supplies funds in loan markets, bond markets, and stock markets.

Question 13

Capital stock increases when

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 14

The funds used to buy physical capital are

A)net investment.
B)financial capital.
C)saving.
D)wealth.
E)investment.

Question 15

At the beginning of the year, Tom's Tubes had capital 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 is

A)1 machine.
B)2 machines.
C)3 machines.
D)6 machines.
E)5 machines

Question 16

If the economy's capital 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.
E)gross investment is zero.

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

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

Question 18

Gross investment

A)is the total amount spent on new capital.
B)includes only replacement investment.
C)equals wealth minus saving.
D)equals saving minus wealth.
E)is the change in the value of capital

Question 19

The total amount spent on new capital is

A)wealth.
B)gross investment.
C)depreciation.
D)net investment.
E)saving.

Question 20

The Acme Stereo Company had capital of $24 million at the beginning of the year. At the end of the year, the firm had a capital stock of $20 million. 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.
E)depreciation was $4 million.

Question 21

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

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

Question 22

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)falls from $25,000 to $20,000.
C)rises from $2,000 to $2,500.
D)rises from $20,000 to $25,000.
E)does not change. Bond prices are constant.

Question 23

Table 23.2.1

Refer to Table 23.2.1. Private saving is

A)-$15 million.
B)$40 million.
C)$25 million.
D)$20 million.
E)$80 million.

Question 24

Investment is financed by which of the following?
I. Government spending
II. Household 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
E)None of the above

Question 25

The key Canadian financial institutions include all of the following except

A)commercial banks.
B)trust and loan companies.
C)credit unions and caisses populaires.
D)pension funds.
E)ATMs.

Question 26

Choose the statement that is incorrect about trust and loan companies.

A)Trust and loan companies hold more than 70 percent of the total assets of the Canadian financial services sector.
B)The largest trust and loan companies are owned by banks.
C)Trust and loan companies accept deposits and make personal loans and mortgage loans.
D)Trust and loan companies administer estates.
E)Trust and loan companies administer trusts and pension plans.

Question 27

Suppose Canada spends more on foreign goods and services than foreigners spend on our goods and services. Then

A)Canada must borrow an amount equal to national saving.
B)Canada must borrow an amount equal to imports minus exports.
C)the rest of the world may or may not finance Canada's trade deficit.
D)Canada must borrow an amount equal to consumption expenditure plus investment.
E)the Bank of Canada will raise the foreign exchange rate of the Canadian dollar.

Question 28

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)rises from 8 percent a year to 10 percent a year.
B)falls from 10 percent a year to 6 percent a year.
C)falls from 10 percent a year to 8 percent a year.
D)rises because the bond becomes a better investment.
E)does not change because the purchaser buys the bond knowing that interest rates will be adjusted.

Question 29

In which market would you find mortgage-backed securities?

A)stock market
B)bond market
C)housing market
D)capital market
E)loan market

Question 30

National saving equals

A)private saving + private wealth.
B)private saving + government saving.
C)private saving - net taxes.
D)government saving.
E)investment.

Question 31

Choose the statement that is incorrect.

A)A financial institution can be solvent but illiquid.
B)A firm is illiquid if it has made long-term loans with borrowed funds and is faced with a sudden demand to repay more of what is has borrowed than its available cash.
C)Insolvency and illiquidity were at the core of a global financial meltdown in 2007-2008.
D)A financial institution's net worth is the market value of what it has lent minus the market value of what it has borrowed.
E)If a financial institution's net worth is negative, the institution is solvent.

Question 32

Choose the statement that is incorrect.

A)Stocks, bonds, short-term securities, and loans are financial assets.
B)The interest rate on a financial asset is the interest received expressed as a percentage of the price of the asset.
C)If the asset price rises, other things remaining the same, the interest rate falls.
D)Insolvency can arise from a previously unexpected large rise in the interest rate.
E)The price of an asset is determined first, then the interest rate is determined.

Question 33

In 2014, Country A has net taxes of $30 million and government expenditures of $35 million. Private saving in Country A is $5 million and consumption expenditure is $80 million. The government of Country A is running a budget ________ and national saving is ________.

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

Question 34

Table 23.2.1

Refer to Table 23.2.1. Government saving is

A)$15 million.
B)-$5 million.
C)$5 million.
D)$45 million.
E)$20 million.

Question 35

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

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

Question 36

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)increases when the inflation rate increases.
E)is determined in the market for money.

Question 37

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

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

Question 38

A stock is

A)a certificate of ownership and claim to the firm's profits.
B)a promise to make specified payments on specified dates.
C)a document which entitles its holder to the income from a package of mortgages.
D)a financial market.
E)available from a bank in the form of a loan.

Question 39

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?

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

Question 40

Choose the statement that is incorrect about Treasury bonds.

A)If the price of a Treasury bond rises, other things remaining the same, the interest rate falls because the interest payment is a smaller percentage of the Treasury bond price.
B)The price of a Treasury bond and the interest rate on a Treasury bond are determined simultaneously.
C)If the demand for Treasury bonds increases, the interest rate on the Treasury bond rises.
D)The interest rate is a percentage of the price of the Treasury bond.
E)When the interest rate on a Treasury bond rises, the supply of Treasury bonds increases.

Question 41

A decrease in the demand for loanable funds occurs when

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

Question 42

Figure 23.2.3
Refer to the figure below to answer the following questions.

Refer to Figure 23.2.3. In Figure 23.2.3, if the real interest rate is 6 percent, the quantity of loanable funds demanded is

A)$150 billion.
B)$300 billion.
C)$450 billion.
D)$600 billion.
E)any amount less than $450 billion.

Question 43

Figure 23.2.1

Refer to Figure 23.2.1. In Figure 23.2.1, the economy is at point A on the initial demand for loanable funds curve DLF0. What happens if the real interest rate rises?

A)There is a movement to a point such as B on the demand for loanable funds curve DLF0.
B)The demand for loanable funds curve shifts rightward to curve DLF2.
C)The demand for loanable funds curve shifts leftward to curve DLF1.
D)Either A or B can occur.
E)Either A or C can occur.

Question 44

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.
E)greater than 7.5 percent.

Question 45

Figure 23.2.2

Refer to Figure 23.2.2. In Figure 23.2.2, an increase in expected profit will result in a movement from point E to

A)point F.
B)point G.
C)point H.
D)point I.
E)either point I or point F.

Question 46

As the ________ interest rate rises ________.

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

Question 47

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.
E)expected future income, wealth, and default risk.

Question 48

The demand for loanable funds is the relationship between the quantity of loanable funds demanded and the ________, other things remaining the same.

A)real interest rate
B)nominal interest rate
C)inflation rate
D)price level
E)quantity of loanable funds supplied

Question 49

A decrease in the real interest rate leads to a ________ the demand for loanable funds curve, and a decrease in expected profit leads to a ________ the demand for loanable funds curve.

A)rightward shift of; leftward shift of
B)movement down along; movement up along
C)rightward shift of; movement up along
D)movement down along; leftward shift of
E)movement down along; rightward shift of

Question 50

Figure 23.2.2

Refer to Figure 23.2.2. In Figure 23.2.2, a decrease in expected profit will result in a movement from point E to

A)point F.
B)point G.
C)point H.
D)point I.
E)either point G or point H.

Question 51

During a recession, firms decrease their profit expectations. As a result, there is a ________ shift of the ________ loanable funds curve.

A)rightward; supply of
B)leftward; demand for
C)rightward; demand for
D)rightward, supply of
E)leftward; demand for loanable funds curve and supply of

Question 52

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?

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.

Question 53

A fall in the real interest rate

A)shifts the demand for loanable funds curve rightward.
B)shifts the demand for loanable funds curve leftward.
C)creates a movement up along the demand for loanable funds curve.
D)creates a movement down along the demand for loanable funds curve.
E)decreases the inflation rate.

Question 54

Figure 23.2.2

Refer to Figure 23.2.2. In Figure 23.2.2, a decrease in the real interest rate will result in a movement from point E to

A)point F.
B)point G.
C)point H.
D)point I.
E)either point G or point F.

Question 55

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.
E)-2 percent.

Question 56

A rise in the real interest rate

A)shifts the demand for loanable funds curve rightward.
B)shifts the demand for loanable funds curve leftward.
C)creates a movement up along the demand for loanable funds curve.
D)creates a movement down along the demand for loanable funds curve.
E)increases the inflation rate.

Question 57

If the real interest rate rises from 3 percent to 5 percent,

A)the nominal interest rate falls.
B)the demand for loanable funds curve shifts rightward.
C)there is a movement up along the demand for loanable funds curve.
D)the supply of loanable funds curve shifts rightward.
E)there is a movement down along the supply of loanable funds curve.

Question 58

The quantity of loanable funds demanded increases when

A)expected profit decreases.
B)the real interest rate rises.
C)the real interest rate falls.
D)the supply of loanable funds decreases.
E)wealth increases.

Question 59

The demand for loanable funds curve

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 60

As the ________ interest rate increases, the quantity of loanable funds demanded ________.

A)real; increases
B)real; decreases
C)nominal; increases
D)nominal; decreases
E)none of the above. There is no relationship between interest rates and loanable funds.

Question 61

The greater a household's ________ the less is its saving.

A)return from saving
B)wealth
C)disposable income
D)expected future profit
E)all of the above

Question 62

The supply of loanable funds curve

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

Question 63

Which of the following is true?
I. As the real interest rate increases, people increase the quantity they save.
II. The supply of loanable funds curve is downward sloping.
III. As disposable income increases, the supply of loanable funds curve becomes steeper.

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

Question 64

If households believe they will experience higher income in the near future, there is a

A)rightward shift of the supply of loanable funds curve.
B)leftward shift of the supply of loanable funds curve.
C)movement up along the supply of loanable funds curve.
D)movement down along the demand for loanable funds curve.
E)rightward shift of the demand for loanable funds curve.

Question 65

All of the following are sources of loanable funds EXCEPT

A)business investment.
B)private saving.
C)government budget surplus.
D)international borrowing.
E)none of the above

Question 66

Which of the following will shift the supply of loanable funds curve leftward?

A)a decrease in the real interest rate
B)a decrease in real wealth
C)a decrease in disposable income
D)a decrease in expected future income
E)a decrease in default risk

Question 67

Which of the following influences household saving?
I. The real interest rate
II. Disposable income
III. Expected future income

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

Question 68

A decrease in disposable income

A)has no effect on the supply of loanable funds curve.
B)shifts the supply of loanable funds curve rightward.
C)shifts the supply of loanable funds curve leftward.
D)creates a movement up along the supply of loanable funds curve.
E)creates a movement down along the supply of loanable funds curve.

Question 69

Changes in all of the following shift the supply curve of loanable funds EXCEPT

A)the real interest rate.
B)wealth.
C)disposable income.
D)expected future income.
E)default risk.

Question 70

The supply of loanable funds is the relationship between the quantity of loanable funds supplied and ________, other things remaining the same.

A)real GDP
B)the price level
C)the real interest rate
D)the inflation rate
E)the nominal interest rate

Question 71

Figure 23.2.3
Refer to the figure below to answer the following questions.

In Figure 23.2.3, if the real interest rate is constant at 6 percent and and expected profit rises, the amount of loanable funds demanded will be

A)less than $450 billion.
B)$450 billion.
C)between $300 billion and $450 billion.
D)greater than $450 billion.
E)zero.

Question 72

Which of the following is correct?

A)As disposable income increases, the real interest rate rises.
B)As disposable income decreases, saving decreases.
C)The higher a household's wealth the greater is its saving.
D)Both B and C are correct.
E)Both A and C are correct.

Question 73

If households' disposable income decreases, then

A)households' saving will decrease.
B)households' saving will increase.
C)the supply of loanable funds decreases.
D)a movement occurs down along the supply of loanable funds curve.
E)Both A and C are correct.

Question 74

When the real interest rate increases,

A)the supply of loanable funds curve shifts rightward.
B)the supply of loanable funds curve shifts leftward.
C)there is a movement up along the supply of loanable funds curve.
D)there is a movement down along the supply of loanable funds curve.
E)the demand for loanable funds curve shifts leftward.

Question 75

As a result of a recession, the default risk increases. How does this change affect the loanable funds market?

A)There is a movement up along the supply of loanable funds curve.
B)There is a leftward shift of the supply of loanable funds curve.
C)There is a movement down along the demand for loanable funds curve.
D)There is a rightward shift of the supply of loanable funds curve.
E)There is a rightward shift of the demand for loanable funds curve.

Question 76

Figure 23.2.3
Refer to the figure below to answer the following questions.

In Figure 23.2.3, if the real interest rate is constant at 6 percent and expected profit falls, the quantity of loanable funds demanded will be

A)less than $450 billion.
B)$450 billion.
C)between $450 billion and $600 billion.
D)greater than $600 billion.
E)zero.

Question 77

Households will choose to save more if

A)expected future income decreases.
B)current disposable income increases.
C)current disposable income decreases.
D)Both A and B are correct.
E)Both A and C are correct.

Question 78

As the ________ rises, the quantity of loanable funds supplied ________, other things remaining the same.

A)nominal interest rate; increases
B)real interest rate; increases
C)inflation rate; increases
D)real interest rate; decreases
E)inflation rate; decreases

Question 79

An increase in ________ will shift the supply of loanable funds curve ________.

A)expected future income; rightward
B)wealth; leftward
C)disposable income; leftward
D)default risk; rightward
E)the real interest rate; rightward

Question 80

________ increases households' saving.

A)A decrease in the real interest rate
B)A tax cut that increases disposable income
C)Higher expected future income
D)An increase in wealth
E)An increase in default risk