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Homework answers / question archive / Florida International University - MACRO ECO2013 Chapter 10(25) 1)Facebook's primary type of investment spending is the purchase of:           A) server farms, or arrays of linked computers

Florida International University - MACRO ECO2013 Chapter 10(25) 1)Facebook's primary type of investment spending is the purchase of:           A) server farms, or arrays of linked computers

Economics

Florida International University - MACRO ECO2013

Chapter 10(25)

1)Facebook's primary type of investment spending is the purchase of:

 

 

 

 

 

A)

server farms, or arrays of linked computers.

 

B)

health care for its employees.

 

C)

stock in Yahoo and Google.

 

D)

U.S. Treasury securities.

 

 

2.

Which of the following is (are) source(s) of funds for Facebook's investment spending?

I. investors who purchase shares of stock in the company

II. borrowing from savers

 

A)

I only

 

B)

II only

 

C)

both I and II

 

D)

neither I nor II

 

 

3.

Most human capital is provided by:

I. governments through public education

II. investment spending by private sector firms

 

A)

I only

 

B)

II only

 

C)

both I and II

 

D)

neither I nor II

 

 

4.

Most physical capital, except for infrastructure, is provided by:

I. governments through public education

II. investment spending by private sector firms

 

A)

I only

 

B)

II only

 

C)

both I and II

 

D)

neither I nor II

 

 

5.

Which of the following is (are) a source (sources) of funding for private investment spending?

I. savings of the owners of a family business

II. profits of a large corporation

III. borrowing

 

A)

I only

 

B)

II only

 

C)

III only

 

D)

I, II, and III

 

 

6.

Which of the following is considered investment spending in macroeconomics?

 

A)

GM builds a new plant.

 

B)

Ryan Jones buys GM stock.

 

C)

Ryan Jones buys GM bonds.

 

D)

Ryan Jones buys GM stock and bonds.

 

 

7.

Which of the following do economists view as investment spending?

 

A)

stocks

 

B)

bonds

 

C)

spending on physical capital

 

D)

mutual fund investing

 

 

8.

Investment spending in macroeconomics refers to:

 

A)

buying stocks.

 

B)

buying newly issued shares of stock.

 

C)

adding to physical capital.

 

D)

adding to one's retirement account.

 

 

9.

Which of the following is considered to be investing in a physical asset?

 

A)

purchasing stock in IBM

 

B)

selling stock in IBM

 

C)

buying a bond issued by IBM

 

D)

buying a new factory that produces IBM handheld devices

 

 

10.

Which of the following is an example of investment spending in macroeconomics?

 

A)

The owner of a Domino's Pizza store has employed two students to deliver pizzas.

 

B)

The manager of a Domino's Pizza store has deposited cash in the bank.

 

C)

A Domino's Pizza store has purchased a new pizza oven.

 

D)

The owner of the Domino's Pizza store has bought stock in Domino's.

 

 

11.

Which of the following is an advantage to the recipient of foreign investment?

 

A)

Foreigners are content to receive lower profits and interest rates than are domestic investors.

 

B)

Foreigners don't expect to receive profits and interest as often as do domestic investors.

 

C)

Domestic firms with foreign investors are exempt from domestic income taxes on a portion of their net income.

 

D)

Foreign companies often bring new technology to the recipient country, and this increases productivity.

 

 

12.

Physical capital is purchased through investment spending, which in turn is mostly financed out of:

 

A)

taxes.

 

B)

savings.

 

C)

import tariffs.

 

D)

consumption expenditure.

 

 

13.

Private savings equals:

 

A)

income after taxes minus consumption.

 

B)

taxes minus government spending on goods and services.

 

C)

the total amount of savings accounts plus stocks plus bonds owned by households.

 

D)

income plus investment.

 

 

Use the following to answer questions 14-17:

 

Scenario: Closed Economy S = I

GDP is $12 trillion this year in a closed economy. Consumption is $8 trillion and government spending is $2 trillion. Taxes are $0.5 trillion.

 

 

14.

(Scenario: Closed Economy S = I) Look at the scenario Closed Economy S = I. How much is private saving?

 

A)

$4 trillion

 

B)

$2.5 trillion

 

C)

$3.5 trillion

 

D)

–$0.5 trillion

 

 

15.

(Scenario: Closed Economy S = I) Look at the scenario Closed Economy S = I. What is the government budget balance?

 

A)

a surplus of $1.5 trillion

 

B)

a deficit of $1.5 trillion

 

C)

a surplus of $0.5 trillion

 

D)

a deficit of $0.5 trillion

 

 

16.

(Scenario: Closed Economy S = I) Look at the scenario Closed Economy S = I. How much is national saving?

 

A)

$3.5 trillion

 

B)

$3 trillion

 

C)

$2.5 trillion

 

D)

$2 trillion

 

 

17.

(Scenario: Closed Economy S = I) Look at the scenario Closed Economy S = I. How much is investment spending?

 

A)

$3.5 trillion

 

B)

$3 trillion

 

C)

$2.5 trillion

 

D)

$2 trillion

 

 

18.

In a simple closed economy, all investment spending must come from:

 

A)

savings.

 

B)

money creation.

 

C)

debt issuance.

 

D)

foreign borrowing.

 

 

19.

The budget balance equals:

 

A)

taxes plus government spending.

 

B)

taxes minus government spending.

 

C)

consumption plus investment.

 

D)

imports minus exports.

 

 

20.

A budget surplus exists when:

 

A)

taxes are greater than government spending.

 

B)

taxes are less than government spending.

 

C)

taxes are less than government spending plus investment.

 

D)

investment is less than government spending less taxes.

 

 

21.

National savings is the sum of private savings and:

 

A)

private consumption.

 

B)

government tax revenue.

 

C)

the budget balance.

 

D)

trade surplus.

 

 

22.

In a closed economy, all investment spending must come from:

 

A)

government.

 

B)

national savings.

 

C)

foreign savings.

 

D)

government, domestic savings, and foreign savings.

 

 

23.

The savings–investment spending identity says that:

 

A)

each person in the economy must invest as much as he or she saves.

 

B)

savings and investment spending are always equal for the economy as a whole.

 

C)

savings must equal government investment for the economy as a whole.

 

D)

each person in the economy must save as much as he or she invests.

 

 

24.

In a closed economy, investment spending, I, must equal:

 

A)

GDP – C – G.

 

B)

GDP – C.

 

C)

GDP – C – G – X.

 

D)

GDP – [C × G].

 

 

25.

The government saves when it:

 

A)

has a balanced budget.

 

B)

has a budget deficit.

 

C)

has a budget surplus.

 

D)

borrows by selling bonds.

 

 

26.

The government saves when:

 

A)

tax revenue is less than government spending.

 

B)

tax revenue is more than government spending.

 

C)

tax revenue equals government spending.

 

D)

tax revenue is positive.

 

 

27.

National savings in a closed economy is all of the following EXCEPT:

 

A)

the sum of private savings plus the government budget balance.

 

B)

the total savings in the economy.

 

C)

GDP – C – G.

 

D)

government spending minus consumption.

 

 

28.

One difference between a closed and an open economy is that:

 

A)

in the latter, foreign savings complement domestic savings in financing investment spending.

 

B)

in the latter, the government is more open to the idea of financing investment spending than in the former.

 

C)

in the former, foreign savings complement domestic savings in financing investment spending.

 

D)

in the former, foreign savings finance more investment spending than in the latter.

 

 

29.

The savings–investment spending identity says that savings and investment spending are:

 

A)

always equal because private savings match government savings.

 

B)

equal as long as there is no trade surplus or deficit.

 

C)

always equal for the economy as a whole.

 

D)

equal as long as there is no government budget deficit or surplus.

 

 

30.

In a closed economy, the savings–investment spending identity is:

 

A)

I = GDP – C – G + (IM – NX).

 

B)

NS = GDP + I.

 

C)

NS = GDP + (C – T + TR) + (T – TR – G).

 

D)

I = GDP – C – G.

 

 

31.

In a closed economy government spending was $30 billion, consumption was $70 billion, taxes were $20 billion, and GDP was $110 billion this year. Investment spending was $10 billion. As a result:

 

A)

private savings were $10 billion.

 

B)

the government's budget balance was a surplus of $10 billion.

 

C)

there was no net savings.

 

D)

private savings were $20 billion.

 

 

32.

To help increase investment spending, the government can:

 

A)

lower taxes on consumption, so that disposable income rises.

 

B)

lower taxes on the returns from savings, so that total savings increase and the interest rate falls.

 

C)

raise taxes on the returns from bonds while lowering taxes on stock dividends.

 

D)

lower taxes on investment spending while raising taxes on savings, so that total tax revenue remains constant.

 

 

33.

According to the savings–investment spending identity:

 

A)

savings equals investment spending.

 

B)

government spending equals tax receipts.

 

C)

total income equals consumption spending plus savings.

 

D)

savings equals investment spending plus consumption spending.

 

 

34.

In a closed economy, national savings equals private savings:

 

A)

minus consumption spending.

 

B)

plus the budget balance.

 

C)

minus investment spending.

 

D)

minus tax receipts.

 

 

35.

In a closed economy, national savings equals:

 

A)

(disposable income minus consumption spending) minus (tax receipts minus government spending).

 

B)

(disposable income minus consumption spending) plus (government spending minus tax receipts).

 

C)

(disposable income minus consumption spending) plus (tax receipts minus government spending).

 

D)

(consumption spending minus disposable income) plus (government spending minus tax receipts).

 

 

36.

In an open economy, total investment equals:

 

A)

national savings plus capital inflow.

 

B)

private savings plus national savings plus capital inflow.

 

C)

private savings plus capital inflow.

 

D)

national savings minus private savings minus capital inflow.

 

 

Use the following to answer questions 37-41:

 

Scenario: Open Economy S = I

In an open economy GDP is $12 trillion this year. Consumption is $8 trillion, and government spending is $2 trillion. Taxes are $0.5 trillion. Exports are $1 trillion, and imports are $3 trillion.

 

 

37.

(Scenario: Open Economy S = I) Look at the scenario Open Economy S = I. How much is private saving?

 

A)

$4 trillion

 

B)

$2.5 trillion

 

C)

$3.5 trillion

 

D)

$1.5 trillion

 

 

38.

(Scenario: Open Economy S = I) Look at the scenario Open Economy S = I. What is the government budget balance?

 

A)

a surplus of $1.5 trillion

 

B)

a deficit of $1.5 trillion

 

C)

a deficit of $0.5 trillion

 

D)

a surplus of $3.5 trillion

 

 

39.

(Scenario: Open Economy S = I) Look at the scenario Open Economy S = I. How much is national saving?

 

A)

$4 trillion

 

B)

$3.5 trillion

 

C)

$2 trillion

 

D)

$5.5 trillion

 

 

40.

(Scenario: Open Economy S = I) Look at the scenario Open Economy S = I. How much is the net capital inflow?

 

A)

$1 trillion

 

B)

$2 trillion

 

C)

$3 trillion

 

D)

$4 trillion

 

 

41.

(Scenario: Open Economy S = I) Look at the scenario Open Economy S = I. How much is investment spending?

 

A)

$2 trillion

 

B)

$3 trillion

 

C)

$3.5 trillion

 

D)

$4 trillion

 

 

Use the following to answer questions 42-44:

 

 

 

42.

(Table: Investment Spending, Private Spending, and Capital Inflows) Look at the table Investment Spending, Private Spending, and Capital Inflows. What is the budget balance as a percentage of GDP in Northlandia?

 

A)

–10%

 

B)

0%

 

C)

10%

 

D)

20%

 

 

43.

(Table: Investment Spending, Private Spending, and Capital Inflows) What is the budget balance as a percentage of GDP in Southlandia?

 

A)

–10%

 

B)

0%

 

C)

10%

 

D)

20%

 

 

44.

(Table: Investment Spending, Private Spending, and Capital Inflows) Northlandia has a _____, while Southlandia has a _____.

 

A)

balanced budget; budget deficit

 

B)

budget deficit; balanced budget

 

C)

budget surplus; balanced budget

 

D)

balanced budget; balanced budget

 

 

Use the following to answer questions 45-48:

 

Scenario: A Small Economy

Suppose there is no trade and no government in a small economy. GDP is $25 trillion, and consumption spending is $18 trillion this year.

 

 

45.

(Scenario: A Small Economy) Look at the scenario A Small Economy. What is the level of private saving?

 

A)

$7 trillion

 

B)

$18 trillion

 

C)

$43 trillion

 

D)

–$7 trillion

 

 

46.

(Scenario: A Small Economy) Look at the scenario A Small Economy. What is the level of investment spending?

 

A)

$18 trillion

 

B)

$7 trillion

 

C)

$25 trillion

 

D)

–$7 trillion

 

 

47.

(Scenario: A Small Economy) Look at the scenario A Small Economy. There is a new government, and it imposes taxes on its citizens to spend on infrastructure. Taxes and government spending are both $2 trillion. What is the level of private saving now?

 

A)

$11 trillion

 

B)

$7 trillion

 

C)

$5 trillion

 

D)

$18 trillion

 

 

48.

(Scenario: A Small Economy) Look at the scenario A Small Economy. There is a new government and it imposes taxes on its citizens to spend on infrastructure. Taxes and government spending are both $2 trillion. What is the level of investment spending now?

 

A)

$7 trillion

 

B)

$5 trillion

 

C)

$18 trillion

 

D)

–$4 trillion

 

 

49.

The budget balance equals:

 

A)

taxes minus government spending.

 

B)

transfers minus government spending.

 

C)

taxes plus government spending.

 

D)

savings plus taxes.

 

 

50.

National savings equals:

 

A)

private savings plus consumption spending.

 

B)

trade balance plus the budget balance.

 

C)

private savings plus the budget balance.

 

D)

government spending plus taxes.

 

 

51.

Capital inflow equals:

 

A)

GDP plus exports minus imports.

 

B)

the growth in capital stock minus investment spending.

 

C)

foreign direct investment.

 

D)

the total inflow of foreign funds minus the total outflow of domestic funds.

 

 

52.

Taxes equal:

 

A)

government spending plus private savings.

 

B)

total spending minus consumption minus investment minus private savings.

 

C)

total income minus consumption minus private savings.

 

D)

consumption plus private savings plus total income.

 

 

53.

Which statement is CORRECT?

 

A)

The budget deficit equals tax revenues plus transfer payments.

 

B)

Government spending equals private savings plus the budget deficit.

 

C)

Tax revenues equal national savings plus the budget deficit.

 

D)

The budget deficit equals government spending minus tax revenues.

 

 

54.

Capital inflow is:

 

A)

the net inflow of funds into a country.

 

B)

the net outflow of funds from a country.

 

C)

the amount by which domestic savings exceeds foreign savings.

 

D)

physical capital exported minus physical capital imported.

 

 

55.

Assume that I = SPrivate + SGovernment + (IM – X). Furthermore, let's say that imports are equal to exports. In this case, private savings:

 

A)

plus government savings exceed investment.

 

B)

exceed investment.

 

C)

plus government saving are less than investment.

 

D)

plus government saving are equal to investment.

 

 

56.

Net capital inflow equals:

 

A)

national savings.

 

B)

imports minus exports.

 

C)

consumption.

 

D)

consumption plus government spending.

 

 

57.

In an open economy government spending was $30 billion, consumption was $70 billion, taxes were $20 billion, GDP was $100 billion, and investment spending was $10 billion. As a result, there was:

 

A)

a net capital inflow of $10 billion.

 

B)

capital inflows of $10 billion and capital outflows of $20 billion.

 

C)

a trade surplus of $20 billion and a financial deficit of $20 billion.

 

D)

a net capital outflow of $10 billion.

 

 

58.

If a country has a trade surplus, we can conclude that it also has:

 

A)

a budget surplus.

 

B)

a net capital outflow.

 

C)

a net capital inflow.

 

D)

a budget deficit.

 

 

59.

In an open economy, savings can come from all of the following EXCEPT:

 

A)

domestic sources.

 

B)

foreign sources.

 

C)

government sources.

 

D)

consumption.

 

 

60.

Capital inflow into a country is associated with:

 

A)

imports exceeding exports.

 

B)

a small amount of funds available for domestic investment.

 

C)

imports equaling exports.

 

D)

exports exceeding imports.

 

 

61.

A relatively low saving rate affects productivity growth by:

 

A)

causing a shortage of funds for investment in physical capital.

 

B)

decreasing consumption spending and increasing investment in human capital.

 

C)

reducing the tax base and preventing the government from providing public goods.

 

D)

stimulating imports and increasing the trade deficit.

 

 

62.

The sources of financing of physical capital include:

 

A)

domestic consumption.

 

B)

foreign borrowing from the home country.

 

C)

foreign investment in the home country.

 

D)

domestic consumption, foreign borrowing from the home country, and foreign investment in the home country.

 

 

63.

The government can increase savings by:

 

A)

taxing more than it spends.

 

B)

spending more than it taxes.

 

C)

increasing inflation.

 

D)

increasing the deficit.

 

 

64.

The United States is a net recipient of foreign savings.

 

A)

This has never happened before.

 

B)

This is bad because we are borrowing money from overseas.

 

C)

This is bad because we are losing control over our own destiny.

 

D)

This has been true throughout much of our history.

 

 

65.

According to the savings–investment spending identity:

 

A)

savings and investment spending are always equal for the economy as a whole.

 

B)

for long-run economic growth savings must be more than investment spending.

 

C)

for long-run economic growth savings must be less than investment spending.

 

D)

the identity of savers and investors is important for encouraging long-run economic growth.

 

 

66.

GDP is the value of consumption spending _____ investment spending _____ government purchases _____ the value of exports _____ spending on imports.

 

A)

plus; plus; plus; plus

 

B)

plus; plus; plus; minus

 

C)

plus; minus; minus; plus

 

D)

minus; minus; plus; plus

 

 

Use the following to answer questions 67-71:

 

Table: National Income Accounts

 

Trillions

GDP

$15.9

Consumption

11.3

Government spending

3.0

Exports

2.2

Imports

2.7

Budget balance

–1.2

 

 

 

67.

(Table: National Income Accounts) Look at the table National Income Accounts. The value of investment spending is:

 

A)

$15.9 trillion.

 

B)

$4.9 trillion.

 

C)

$2.1 trillion.

 

D)

–$0.5 trillion.

 

 

68.

(Table: National Income Accounts) Look at the table National Income Accounts. The value of national savings is:

 

A)

$15.9 trillion.

 

B)

$4.9 trillion.

 

C)

$2.1 trillion.

 

D)

$1.6 trillion.

 

 

69.

(Table: National Income Accounts) Look at the table National Income Accounts. The value of tax revenue is:

 

A)

$1.8 trillion.

 

B)

$4.9 trillion.

 

C)

$2.1 trillion.

 

D)

$1.6 trillion.

 

 

70.

(Table: National Income Accounts) Look at the table National Income Accounts. The value of net capital inflow is:

 

A)

$1.8 trillion.

 

B)

$0.5 trillion.

 

C)

$4.9 trillion.

 

D)

$1.6 trillion.

 

 

71.

(Table: National Income Accounts) Look at the table National Income Accounts. The value of private savings is:

 

A)

$1.8 trillion.

 

B)

$0.5 trillion.

 

C)

$2.8 trillion.

 

D)

$1.6 trillion.

 

 

72.

If there is an increase in the government budget deficit, the _____ loanable funds will _____, interest rates will _____, and the amount of borrowing will _____.

 

A)

demand for; increase; increase; increase

 

B)

demand for; decrease; decrease; decrease

 

C)

supply of; increase; decrease; increase

 

D)

supply of; decrease; increase; decrease

 

 

73.

If private savings increase, the _____ loanable funds will _____, interest rates will _____, and the amount of borrowing will _____.

 

A)

demand for; increase; increase; increase

 

B)

demand for; decrease; decrease; decrease

 

C)

supply of; increase; decrease; increase

 

D)

supply of; decrease; increase; decrease

 

 

74.

A business will want to borrow to undertake an investment project when the rate of return on that project is _____ rate.

 

A)

lower than the interest

 

B)

higher than the interest

 

C)

higher than the exchange

 

D)

equal to the inflation

 

 

75.

Economists use _____ as a model to explain how savers and borrowers come together to determine the equilibrium rate of interest.

 

A)

the money market

 

B)

the market for loanable funds

 

C)

aggregate demand and aggregate supply

 

D)

the financial system

 

 

76.

The demand for loanable funds is _____ sloping because _____ respond to lower interest rates by _____ their quantity demanded of loanable funds.

 

A)

downward; investors; increasing

 

B)

downward; savers; increasing

 

C)

upward; investors; decreasing

 

D)

upward; savers; decreasing

 

 

77.

The supply of loanable funds is _____ sloping because _____ respond to lower interest rates by _____ their quantity supplied of loanable funds.

 

A)

upward; savers; increasing

 

B)

upward; investors; decreasing

 

C)

upward; savers; decreasing

 

D)

downward; investors; increasing

 

 

78.

The interest rate is 5% in the market for loanable funds. Investors wish to borrow $100 million and savers wish to save $125 million at this interest rate. We would expect the interest rate to _____, as there is a _____ of loanable funds.

 

A)

fall; shortage

 

B)

rise; surplus

 

C)

rise; shortage

 

D)

fall; surplus

 

 

Use the following to answer question 79:

 

 

 

79.

(Table: Loanable Funds) Look at the table Loanable Funds. At what interest rate will the market for loanable funds be in equilibrium?

 

A)

7%

 

B)

6%

 

C)

5%

 

D)

4%

 

 

Use the following to answer questions 80-83:

 

Figure: Loanable Funds

 

 

 

80.

(Figure: Loanable Funds) Look at the figure Loanable Funds. Which of the following might produce a new equilibrium interest rate of 8% and a new equilibrium quantity of loanable funds of $150 billion?

 

A)

Consumption as a fraction of disposable income increases.

 

B)

Businesses become more optimistic about the return on investment spending.

 

C)

The federal government has a budget surplus rather than a budget deficit.

 

D)

There is an increase in capital inflows from other nations.

 

 

81.

(Figure: Loanable Funds) Look at the figure Loanable Funds. Which of the following might produce a new equilibrium interest rate of 5% and a new equilibrium quantity of loanable funds of $150 billion?

 

A)

Consumption as a fraction of disposable income increases.

 

B)

Businesses become more optimistic about the return on investment spending.

 

C)

The federal government has a budget surplus rather than a budget deficit.

 

D)

There is an increase in capital inflows from other nations.

 

 

82.

(Figure: Loanable Funds) Look at the figure Loanable Funds. Which of the following might produce a new equilibrium interest rate of 8% and a new equilibrium quantity of loanable funds of $75 billion?

 

A)

Capital inflows from foreign citizens decline.

 

B)

The federal government runs a budget deficit rather than a surplus.

 

C)

Profit expectations for business investments become less optimistic.

 

D)

The government eliminates taxes on income from interest earned.

 

 

83.

(Figure: Loanable Funds) Look at the figure Loanable Funds. Which of the following might produce a new equilibrium interest rate of 4% and a new equilibrium quantity of loanable funds of $75 billion?

 

A)

Profit expectations for business investments become less optimistic.

 

B)

Capital inflows from foreign citizens decline.

 

C)

The federal government runs a budget deficit rather than a surplus.

 

D)

The government eliminates taxes on income from interest earned.

 

 

Use the following to answer question 84:

 

Figure: Demand for Loanable Funds

 

 

 

84.

(Figure: Demand for Loanable Funds) Look at the figure Demand for Loanable Funds. When the interest rate is 6%, the quantity demanded of loanable funds will equal:

 

A)

$30 billion.

 

B)

$40 billion.

 

C)

$50 billion.

 

D)

$60 billion.

 

 

85.

A firm does NOT want to borrow money for a project when:

 

A)

the interest rate is higher than the rate of return on the project.

 

B)

the interest rate is lower than the rate of return on the project.

 

C)

the interest rate is positive.

 

D)

the rate of return on the project is positive.

 

 

86.

If a one-year project costs $100,000 and is expected to return the firm $105,000, the rate of return of the project is:

 

A)

4.8%.

 

B)

5%.

 

C)

$5,000.

 

D)

$105,000.

 

 

87.

A business will want a loan when:

 

A)

interest rate < (return on project – cost of project) / cost of project × 100.

 

B)

rate of return < interest rate.

 

C)

rate of return – interest rate < 0.

 

D)

rate of return > (cost of project – interest rate) / interest rate × 100.

 

 

88.

All of the following scenarios are associated with government budget deficits EXCEPT that:

 

A)

the government becomes a borrower in the market for loanable funds.

 

B)

the interest rate rises.

 

C)

the total amount of borrowing decreases.

 

D)

private investment spending is crowded out.

 

 

89.

The demand curve for loanable funds slopes:

 

A)

upward, since it takes a higher rate of return to get more funds.

 

B)

downward, because more potential projects yield 10% than yield 5%.

 

C)

upward, because higher rates of return are necessary to cover higher costs.

 

D)

downward, because demand is lower when the price to borrow money is higher.

 

 

Use the following to answer questions 90-92:

 

Figure: Loanable Funds Market

 

 

 

90.

(Figure: Loanable Funds Market) Look at the figure Loanable Funds Market. If the interest rate is 8%, businesses will want to borrow approximately:

 

A)

$3 trillion.

 

B)

$2 trillion.

 

C)

$4 trillion.

 

D)

$1 trillion.

 

 

91.

(Figure: Loanable Funds Market) Look at the figure Loanable Funds Market. If the interest rate is 8%, people will want to save approximately:

 

A)

$3 trillion.

 

B)

$2 trillion.

 

C)

$4 trillion.

 

D)

$1 trillion.

 

 

92.

(Figure: Loanable Funds Market) Look at the figure Loanable Funds Market. The equilibrium interest rate and total quantity of lending are:

 

A)

8% and $2 trillion.

 

B)

2% and $5 trillion.

 

C)

10% and $1 trillion.

 

D)

6% and $3 trillion.

 

 

Use the following to answer question 93:

 

Figure: Supply of Loanable Funds

 

 

 

93.

(Figure: Supply of Loanable Funds) Look at the figure Supply of Loanable Funds. When the interest rate rises from 6% to 8%, the:

 

A)

supply of loanable funds rises by $20 billion.

 

B)

quantity supplied of loanable funds rises by $20 billion.

 

C)

supply of loanable funds falls by $10 billion.

 

D)

quantity supplied of loanable funds falls by $20 billion.

 

 

Use the following to answer question 94:

 

Figure: Market for Loanable Funds I

 

 

 

94.

(Figure: Market for Loanable Funds I) Look at the figure Market for Loanable Funds I. The equilibrium interest rate in the loanable funds market is:

 

A)

2%.

 

B)

4%.

 

C)

6%.

 

D)

8%.

 

 

95.

The loanable funds market maximizes:

 

A)

the interest rate to savers.

 

B)

the rate of return from borrowers.

 

C)

the gains from trade between lenders and borrowers.

 

D)

the amount of investment spending in the economy.

 

 

96.

If in an open economy a country imports more than it exports and the government budget deficit increases, interest rates will _____ and the amount of borrowing will _____.

 

A)

increase; increase

 

B)

decrease; increase

 

C)

increase; change unpredictably

 

D)

change unpredictably; increase

 

 

97.

The price in the loanable funds market is:

 

A)

the rate of return of a project.

 

B)

the price level.

 

C)

the interest rate.

 

D)

the consumer price index.

 

 

98.

The price determined in the market for loanable funds is:

 

A)

the margin call.

 

B)

the profit rate.

 

C)

the transaction fee.

 

D)

the interest rate.

 

 

99.

If the interest rate in the market for loanable funds is above the equilibrium rate:

 

A)

there is a shortage of loanable funds.

 

B)

savings exceed investment spending.

 

C)

the quantity demanded of loanable funds exceeds the quantity supplied.

 

D)

consumption is smaller than savings.

 

 

Use the following to answer question 100:

 

Figure: The Market for Loanable Funds with Government Borrowing

 

 

 

100.

(Figure: The Market for Loanable Funds with Government Borrowing) Look at the figure The Market for Loanable Funds with Government Borrowing. After an increase in government borrowing, the new equilibrium interest rate will rise from 6% to _____ and the amount of private savings will _____.

 

A)

10%; stay the same

 

B)

8%; rise

 

C)

8%; fall

 

D)

10%; be indeterminate

 

 

101.

A shift away from taxing asset income and toward taxing consumption would lead to:

 

A)

a larger demand for loanable funds, a higher interest rate, and more investment spending.

 

B)

a larger supply of loanable funds, a lower interest rate, and more investment spending.

 

C)

a larger government budget deficit and more investment spending.

 

D)

a smaller supply of loanable funds, a higher interest rate, and more investment spending.

 

 

102.

If the government increases its borrowing, then at every interest rate there is a(n):

 

A)

additional supply of funds.

 

B)

additional demand for funds.

 

C)

decrease in the supply of funds.

 

D)

increase in the supply of funds.

 

 

103.

Which of the following is the most accurate statement?

 

A)

Deficits increase economic growth.

 

B)

Deficits decrease economic growth.

 

C)

Deficits do not affect economic growth.

 

D)

We cannot unambiguously say whether government spending that increases deficits lowers or increases economic growth.

 

 

104.

Crowding out hampers the economy by:

 

A)

decreasing government borrowing.

 

B)

decreasing consumption.

 

C)

increasing private borrowing.

 

D)

reducing private investment spending on physical capital.

 

 

Use the following to answer questions 105-114:

 

Figure: The Market for Loanable Funds II

 

 

 

105.

(Figure: The Market for Loanable Funds II) Look at the figure The Market for Loanable Funds II. If the interest rate is higher than _____, the quantity supplied of loanable funds will _____ the quantity of loanable funds demanded.

 

A)

8%; be greater than

 

B)

8%; be less than

 

C)

8%; equal

 

D)

10%; be less than

 

 

106.

(Figure: The Market for Loanable Funds II) Look at the figure The Market for Loanable Funds II. If the interest rate is lower than 8%, the quantity supplied of loanable funds will _____ the quantity of loanable funds demanded.

 

A)

be greater than

 

B)

be less than

 

C)

equal

 

D)

The quantity supplied of loanable funds cannot be determined from the information provided.

 

 

107.

(Figure: The Market for Loanable Funds II) Look at the figure The Market for Loanable Funds II. An increase in government borrowing will shift the demand for loanable funds to the _____ and _____ the interest rate.

 

A)

left; increase

 

B)

left; decrease

 

C)

right; increase

 

D)

right; decrease

 

 

108.

(Figure: The Market for Loanable Funds II) Look at the figure The Market for Loanable Funds II. A decrease in government borrowing will shift the demand for loanable funds to the _____ and _____ the interest rate.

 

A)

left; increase

 

B)

right; decrease

 

C)

right; increase

 

D)

left; decrease

 

 

109.

(Figure: The Market for Loanable Funds II) Look at the figure The Market for Loanable Funds II. A decrease in savings by the private sector will shift the supply of loanable funds to the _____ and _____ the interest rate.

 

A)

left; increase

 

B)

right; decrease

 

C)

right; increase

 

D)

left; decrease

 

 

110.

(Figure: The Market for Loanable Funds II) Look at the figure The Market for Loanable Funds II. An increase in savings by the private sector will shift the supply of loanable funds to the_____ and _____ the interest rate.

 

A)

left; increase

 

B)

right; decrease

 

C)

right; increase

 

D)

left; decrease

 

 

111.

(Figure: The Market for Loanable Funds II) Look at the figure The Market for Loanable Funds II. Other things being equal, if there is an increase in the interest rate above 8%, _____ quantity of loanable funds will be demanded.

 

A)

the same

 

B)

a larger

 

C)

a smaller

 

D)

at first a smaller and then a larger

 

 

112.

(Figure: The Market for Loanable Funds II) Look at the figure The Market for Loanable Funds II. Other things being equal, if there is a decrease in the interest rate below 8%, _____ quantity of loanable funds will be demanded.

 

A)

the same

 

B)

a larger

 

C)

a smaller

 

D)

at first a smaller and then a larger

 

 

113.

(Figure: The Market for Loanable Funds II) Look at the figure The Market for Loanable Funds II. Other things being equal, an increase in taxes on savings and investment income will shift _____ to the _____ and _____ the interest rate.

 

A)

demand; right; increase

 

B)

demand; left; decrease

 

C)

supply; right; decrease

 

D)

supply; left; increase

 

 

114.

(Figure: The Market for Loanable Funds II) Look at the figure The Market for Loanable Funds II. Other things being equal, a decrease in taxes on savings and investment income will shift _____ to the _____ and _____ the interest rate.

 

A)

demand; right; increase

 

B)

demand; left; decrease

 

C)

supply; right; decrease

 

D)

supply; left; increase

 

 

Use the following to answer questions 115-122:

 

Table: Investment Projects

 

 

115.

(Table: Investment Projects) Look at the table Investment Projects. If the market interest rate is 15%, the last project undertaken is:

 

A)

F.

 

B)

G.

 

C)

H.

 

D)

I.

 

 

116.

(Table: Investment Projects) Look at the table Investment Projects. If the market interest rate is 11%, the last project undertaken is:

 

A)

G.

 

B)

H.

 

C)

I.

 

D)

J.

 

 

117.

(Table: Investment Projects) Look at the table Investment Projects. If the market interest rate is 13%, the amount of planned investment spending is:

 

A)

$200.

 

B)

$800.

 

C)

$1,000.

 

D)

$2,000.

 

 

118.

(Table: Investment Projects) Look at the table Investment Projects. If the market interest rate is 9%, the amount of planned investment spending is:

 

A)

$1,800.

 

B)

$2,000.

 

C)

$4,000.

 

D)

$5,500.

 

 

119.

(Table: Investment Projects) Look at the table Investment Projects. If the market interest rate is 17%, the amount of investment demanded is:

 

A)

$200.

 

B)

$800.

 

C)

$1,000.

 

D)

$2,000.

 

 

120.

(Table: Investment Projects) Look at the table Investment Projects. If the market interest rate is 11%, the amount of investment demanded is:

 

A)

$800.

 

B)

$1,000.

 

C)

$2,000.

 

D)

$4,000.

 

 

121.

(Table: Investment Projects) Look at the table Investment Projects. If the market interest rate declines from 15% to 11%, then the amount of investment demanded will increase by:

 

A)

$200.

 

B)

$1,000.

 

C)

$2,000.

 

D)

$2,200.

 

 

122.

(Table: Investment Projects) Look at the table Investment Projects. If the market interest rate declines from 15% to 13%, then the amount of investment demanded will increase by:

 

A)

$200.

 

B)

$1,000.

 

C)

$2,000.

 

D)

$2,200.

 

 

123.

Higher rates of interest tend to _____ the quantity of loanable funds demanded, and lower rates of interest tend to _____ it.

 

A)

increase; reduce

 

B)

reduce; reduce

 

C)

increase; increase

 

D)

reduce; increase

 

 

124.

There is a _____ relationship between the amount of loanable funds demanded and the rate of interest.

 

A)

positive

 

B)

direct

 

C)

negative

 

D)

weak

 

 

125.

An expectation that perceived business opportunities will increase will generally cause _____ for loanable funds.

 

A)

a shift to the left in the demand curve

 

B)

a movement along the demand curve

 

C)

an increase in the demand

 

D)

a decrease in the demand

 

 

126.

An increase in the level of business opportunity will generally _____ the loanable funds demand curve.

 

A)

not change

 

B)

left-shift

 

C)

cause a movement along

 

D)

right-shift

 

 

127.

A decrease in the level of business opportunity will generally _____ the loanable funds demand curve.

 

A)

not change

 

B)

left-shift

 

C)

cause a movement along

 

D)

right-shift

 

 

128.

A decrease in the demand for loanable funds would most likely be caused by a(n):

 

A)

decrease in the market interest rate.

 

B)

decrease in corporate income tax rates.

 

C)

increase in expected business opportunities.

 

D)

decrease in expected business opportunities.

 

 

129.

An increase in the demand for loanable funds would most likely be caused by a(n):

 

A)

increase in the market interest rate.

 

B)

increase in business tax rates.

 

C)

increase in expected business opportunities.

 

D)

decrease in expected business opportunities.

 

 

130.

A decrease in the demand for loanable funds would most likely be caused by a(n):

 

A)

decrease in the inflation rate.

 

B)

increase in the budget deficit.

 

C)

decrease in expected business opportunities.

 

D)

increase in expected business opportunities.

 

 

131.

All other things unchanged, a general increase in government borrowing will typically:

 

A)

shift the loanable funds demand curve to the left and decrease interest rates.

 

B)

shift the loanable funds demand curve to the right and increase interest rates.

 

C)

have no effect on the loanable funds demand curve.

 

D)

have no effect on the demand for loanable funds.

 

 

132.

All other things unchanged, a general decrease in the amount of government borrowing will typically:

 

A)

have no effect on the demand for loanable funds.

 

B)

increase interest rates.

 

C)

shift the loanable funds demand curve to the left.

 

D)

raise the level of demand for loanable funds.

 

 

133.

All other things unchanged, an increase in demand for loanable funds would most likely be caused by a(n):

 

A)

decrease in expected business opportunities.

 

B)

increase in the market interest rate.

 

C)

increase in corporate income tax rates.

 

D)

increase in government borrowing.

 

 

134.

All other things unchanged, an increase in demand for loanable funds would most likely be caused by a(n):

 

A)

important forecast predicting solid economic growth.

 

B)

important forecast predicting a recession.

 

C)

increase in the market interest rate.

 

D)

increase in the cost of new capital goods.

 

 

135.

Which of the following is FALSE? When there is an increase in:

 

A)

the government budget deficit, the total amount of borrowing falls.

 

B)

private savings, the interest rate decreases.

 

C)

the government budget deficit, private investment is crowded out.

 

D)

private savings, the total amount of borrowing increases.

 

 

136.

A business will be likely to borrow to fund projects if:

 

A)

the rate of return on the project is less than the interest rate on the loan.

 

B)

the project will produce a good or service that is in high demand.

 

C)

the rate of return on the project is at least as high as the interest rate on the loan.

 

D)

the minimum efficient scale will be attained.

 

 

137.

The rate of return on a business project equals:

 

A)

(Cost of project / revenue from project) × 100.

 

B)

(Revenue from project / cost of project) × 100.

 

C)

(Revenue from project × cost of project) × 100.

 

D)

(Revenue from project – cost of project) / Cost of project) × 100.

 

 

138.

Crowding out is a phenomenon in which:

 

A)

an increase in the government's budget surplus decreases overall investment spending.

 

B)

overproduction in the goods market leads to a sharp drop in the aggregate price level.

 

C)

an increase in the government's budget deficit reduces overall investment spending.

 

D)

an increase in imports reduces overall domestic production.

 

 

Use the following to answer questions 139-142:

 

Figure: Crowding Out

 

 

 

139.

(Figure: Crowding Out) Look at the figure Crowding Out. The demand for loanable funds curve DLF1 will shift to DLF2 when there is:

 

A)

a decrease in the government budget deficit.

 

B)

an increase in the government budget deficit.

 

C)

an increase in private savings.

 

D)

a decrease in private savings.

 

 

140.

(Figure: Crowding Out) Look at the figure Crowding Out. If the demand for loanable funds curve shifts to the right, the result will be a(n) _____ in the interest rate and a(n) _____ in the total amount of borrowing in the funds market.

 

A)

increase; increase

 

B)

increase; decrease

 

C)

decrease; decrease

 

D)

decrease; increase

 

 

141.

(Figure: Crowding Out) Look at the figure Crowding Out. The supply of loanable funds curve SLF1 shifts to SLF2. This shift implies that:

 

A)

private savings has increased.

 

B)

national investment has decreased.

 

C)

private savings has decreased.

 

D)

national savings has decreased.

 

 

142.

(Figure: Crowding Out) If the supply of loanable funds curve shifts to the right, the result will be a(n) _____ in the total amount of borrowing and a(n) _____ in the interest rate.

 

A)

increase; increase

 

B)

decrease; decrease

 

C)

increase; decrease

 

D)

decrease; increase

 

 

143.

Crowding out means:

 

A)

private savings decreases when the government borrows money.

 

B)

private investment decreases when the government borrows money.

 

C)

there are too many players in the financial markets.

 

D)

some bondholders will be squeezed out of the market.

 

 

144.

The government's budget deficit increases, and at the same time the trade deficit grows. This will lead to a(n) _____ in the demand and a(n) _____ in the supply of loanable funds in domestic markets.

 

A)

increase; decrease

 

B)

decrease; decrease

 

C)

increase; increase

 

D)

decrease; increase

 

 

Use the following to answer questions 145-148:

 

Figure: The Market for Loanable Funds III

 

 

 

145.

(Figure: The Market for Loanable Funds III) Look at the figure The Market for Loanable Funds III. If the government in a closed economy is running a budget balance of zero when it decides to increase defense spending by $200 billion and then finances the spending by selling bonds, the equilibrium interest rate will:

 

A)

fall to 12%.

 

B)

rise to 16.5%.

 

C)

rise to 18%.

 

D)

rise to 21%.

 

 

146.

(Figure: The Market for Loanable Funds III) Look at the figure The Market for Loanable Funds III. If the government in a closed economy is running a budget balance of zero when it decides to increase defense spending by $200 billion and then finances the spending by selling bonds, the government will crowd out a maximum of _____ in private investment spending.

 

A)

$200 billion

 

B)

$100 billion

 

C)

$50 billion

 

D)

$10 billion

 

 

147.

(Figure: The Market for Loanable Funds III) Look at the figure The Market for Loanable Funds III. If the government in a closed economy finances deficits by selling bonds and it decides to decrease defense spending by $200 billion, the equilibrium interest rate will:

 

A)

rise to 18%.

 

B)

not change.

 

C)

fall to 13.5%.

 

D)

fall to 12%.

 

 

148.

(Figure: The Market for Loanable Funds III) Look at the figure The Market for Loanable Funds III. If the government in a closed economy finances deficits by selling bonds and it decides to decrease defense spending by $200 billion, the decrease in government spending will encourage _____ in additional private investment spending.

 

A)

$400 billion

 

B)

$200 billion

 

C)

$100 billion

 

D)

$10 billion

 

 

149.

Governments can save when:

 

A)

taxes are less than expenditures.

 

B)

taxes are greater than expenditures.

 

C)

the government borrows to finance its expenditures.

 

D)

the president insists that Congress balance the budget.

 

 

150.

The Fisher effect states that:

 

A)

the nominal rate of interest is unaffected by the change in expected inflation.

 

B)

the nominal rate of interest is unaffected by the change in unexpected inflation.

 

C)

the expected real rate of interest is unaffected by the change in expected inflation.

 

D)

the expected real rate of interest increases by one percentage point for each percentage change in expected inflation.

 

 

151.

Suppose a lender expects a real interest rate of 6% and the inflation rate is expected to be 3%. In this case, the nominal interest rate equals:

 

A)

3%.

 

B)

9%.

 

C)

12%.

 

D)

6%.

 

 

152.

Samantha asks her employer for a 5% raise for the coming year. If the inflation rate during the next year is 5.5%, then her real wage will:

 

A)

increase by 5%.

 

B)

decrease by 0.5%.

 

C)

decrease by 5%.

 

D)

increase by 0.5%.

 

 

153.

Suppose Maria wins a $7 million lottery and is trying to decide whether to take $2 million all at once or $7 million over 20 years. One bit of information Maria would need to know is what the prevailing _____ will be over the next 20 years.

 

A)

unemployment rate

 

B)

interest rate

 

C)

deflation rate

 

D)

standard of living

 

 

154.

You receive an email from a firm proposing the following business deal. The firm will send you $1,000 now, and in exchange you will send it $1,100 in one year. You will just break even if the annual interest rate is:

 

A)

12%.

 

B)

4%.

 

C)

6%.

 

D)

10%.

 

 

155.

Your textbook costs $90, and you can resell it in one year for $45. If the annual interest rate is 10%, then the present value of the textbook's resale value (to the nearest dollar) is:

 

A)

$90.

 

B)

$41.

 

C)

$45.

 

D)

$37.

 

 

156.

You have an opportunity to pay $1,000 today and receive $1,200 a year from now. If the annual interest rate is 20%, the difference between the present value of the benefit and your investment is:

 

A)

$440.

 

B)

$200.

 

C)

$166.

 

D)

0.

 

 

157.

The _____ money paid back after borrowing money, the _____ the interest rate.

 

A)

more; higher

 

B)

less; higher

 

C)

more; lower

 

D)

There is not enough information to determine the answer.

 

 

158.

If you are paid $10,500 in one year on a $10,000 loan made today, then your annual interest rate is:

 

A)

0.5%.

 

B)

5%.

 

C)

10%.

 

D)

10.5%.

 

 

159.

If Mega Corp. borrows $9,000 and agrees to pay the lender $10,000 in one year, the annual interest rate on the loan is approximately:

 

A)

9.0%.

 

B)

10.0%.

 

C)

11.1%.

 

D)

0.9%

 

 

160.

Someone who has to decide whether to receive $100 now or $100 one year from now will probably choose _____, since there is a(n) _____ in waiting to use money.

 

A)

one year from now; benefit

 

B)

now; opportunity cost

 

C)

one year from now; opportunity cost

 

D)

now; benefit

 

 

161.

Assuming a positive interest rate, the dollar amount of a future payment is _____ its present value.

 

A)

exactly the same as

 

B)

approximately the same as

 

C)

less than

 

D)

more than

 

 

162.

Assuming a positive interest rate, the present value of a future payment is _____ its future dollar amount.

 

A)

exactly the same as

 

B)

approximately the same as

 

C)

less than

 

D)

more than

 

 

163.

An amount that would equal a particular future value if deposited today at the prevailing interest rate is the:

 

A)

present value.

 

B)

inflation rate.

 

C)

discount premium.

 

D)

market index.

 

 

164.

The present value of future payments depends on:

 

A)

whether the payment is interest or dividends.

 

B)

the marginal propensity to save.

 

C)

the interest rate.

 

D)

sunk costs.

 

 

165.

Given an annual interest rate of 3%, the present value of a future payment of $2,080 to be paid in one year is:

 

A)

$1,904.76.

 

B)

$2,000.00.

 

C)

$2,019.42.

 

D)

$2,080.00.

 

 

166.

The present value of $1 realized one year from now equals:

 

A)

$1 / (1 + r).

 

B)

$1 × (1 + r).

 

C)

1 + r.

 

D)

1 / r.

 

 

167.

You have purchased a new mattress for $2,000, and the store has given you a “12 months, same as cash” deal. This means that you do not actually have to pay for the mattress for another year. One year from now you will have to give the store the full price of $2,000. If the annual interest rate is 10%, how much money do you need today to ensure that you will have $2,000 one year from today?

 

A)

$1,980

 

B)

$1,818

 

C)

$2,200

 

D)

$20,000

 

 

168.

You are given the choice of receiving $100 today or $115 one year from today. What annual interest rate will make you indifferent between these two choices?

 

A)

5%

 

B)

10%

 

C)

15%

 

D)

20%

 

 

169.

If you are paid $5,500 in one year on a $5,000 loan made today, then your annual interest rate is:

 

A)

0.5%.

 

B)

10%.

 

C)

1%.

 

D)

5%.

 

 

170.

Assuming a positive interest rate, the dollar amount of a future payment is:

 

A)

exactly the same as its present value.

 

B)

approximately the same as its present value.

 

C)

less than its present value.

 

D)

more than its present value.

 

 

171.

An amount that would equal a particular future value if deposited today at a specific interest rate is the:

 

A)

present value.

 

B)

inflation rate.

 

C)

discount premium.

 

D)

market index.

 

 

172.

The present value of a future payment _____if the _____.

 

A)

decreases; interest rate increases

 

B)

increases; future payment decreases

 

C)

decreases; interest rate decreases

 

D)

increases; stock market falls

 

 

173.

If Mega Corp. borrows $8,000 and agrees to pay the lender $9,000 in one year, the annual interest rate on the loan is approximately:

 

A)

9.0%.

 

B)

10.5%.

 

C)

12.5%.

 

D)

11.8%.

 

 

174.

If Mega Corp. borrows $9,000 and agrees to pay the lender $10,500 in one year, the annual interest rate on this loan is approximately:

 

A)

8.6%.

 

B)

14.3%.

 

C)

16.7%.

 

D)

15%.

 

 

175.

The present value of a $110 payment in one year, given an annual 10% interest rate, is:

 

A)

$10.

 

B)

$11.

 

C)

$100.

 

D)

$110.

 

 

176.

Given an annual interest rate of 2%, the present value of a future payment of $1,500 to be paid in one year is:

 

A)

$1,250.55.

 

B)

$1,470.59.

 

C)

$1,530.

 

D)

$1,500.

 

 

177.

Interest rates:

 

A)

were very high in the 1970s and decreased in the 1980s.

 

B)

were very low in the 1970s and increased in the 1980s.

 

C)

steadily increased from 1960 through 2012.

 

D)

steadily decreased from 1960 through 2012.

 

 

178.

Inflation:

 

A)

was very low in the 1970s and increased in the 1980s.

 

B)

was very high in the 1970s and decreased in the 1980s.

 

C)

steadily increased from 1960 through 2012.

 

D)

steadily decreased from 1960 through 2012.

 

 

179.

Interest rates were high during the 1970s and decreased during the 1980s because expected inflation was:

 

A)

high during both decades.

 

B)

low during both decades.

 

C)

high during the 1970s and decreased during the 1980s.

 

D)

low during the 1970s and increased during the 1980s.

 

 

180.

Interest rates were high during the middle years of the period from 2002 to 2014 and then decreased primarily because:

 

A)

the supply of loanable funds steadily increased.

 

B)

the supply of loanable funds steadily decreased.

 

C)

the demand for loanable funds decreased and then increased because of conditions in the housing market.

 

D)

the demand for loanable funds increased and then decreased because of conditions in the housing market.

 

 

181.

From the standpoint of economic growth, banks are important to:

 

A)

fight inflation.

 

B)

keep interest rates low.

 

C)

channel savings into investment.

 

D)

channel investment into savings.

 

 

182.

Which of the following qualifies as an asset from the viewpoint of a household?

 

A)

a house

 

B)

mortgage

 

C)

credit card debt

 

D)

car loan

 

 

183.

The value of all accumulated savings of a household is called:

 

A)

wealth.

 

B)

income.

 

C)

debt.

 

D)

wages.

 

 

184.

The main role of financial systems is to:

 

A)

make the capitalist class richer.

 

B)

provide credit cards to as many people as possible.

 

C)

channel goods and services to the people willing to pay for them.

 

D)

channel funds from savers into investments.

 

 

185.

A household's wealth is:

 

A)

what it earns each period.

 

B)

what it saves each period.

 

C)

the value of its accumulated savings.

 

D)

the value of its financial assets.

 

 

186.

A financial asset is:

 

A)

a physical asset like a car.

 

B)

a claim that entitles the owner to future income from the seller.

 

C)

the value of accumulated savings.

 

D)

another term for capital.

 

 

187.

A physical asset is:

 

A)

a tangible asset that can be used to generate income and whose owner has the right to dispose of it at will.

 

B)

a paper claim that entitles the owner to future income from the seller.

 

C)

the value of accumulated savings.

 

D)

human capital.

 

 

188.

A liability is:

 

A)

having wronged someone and being held responsible in court.

 

B)

a requirement to pay in the future.

 

C)

inability to perform an agreed task.

 

D)

the requirement that banks offer insurance to depositors.

 

 

189.

In financial markets:

 

A)

households sell liabilities.

 

B)

wealth is transformed into savings.

 

C)

households purchase financial assets.

 

D)

physical assets change hands.

 

 

190.

A bank loan is a(n) _____ to the borrower and a(n) _____ to the bank.

 

A)

asset; liability

 

B)

asset; asset

 

C)

liability; liability

 

D)

liability; asset

 

 

191.

Which of the following is a paper claim that entitles the buyer to future income from the seller?

I. a financial asset

II. a physical asset

III. a liability

 

A)

I only

 

B)

II only

 

C)

III only

 

D)

I, II, and III

 

 

192.

Which of the following is a tangible object that can be used to generate future income?

I. a financial asset

II. a physical asset

III. a liability

 

A)

I only

 

B)

II only

 

C)

III only

 

D)

I, II, and III

 

 

193.

Which of the following is a requirement to pay in the future?

I. a financial asset

II. a physical asset

III. a liability

 

A)

I only

 

B)

II only

 

C)

III only

 

D)

I, II, and III

 

 

194.

Suppose that Jim just got a $20,000 loan from his credit union to buy a new car. The loan is a _____ for Jim and a _____ for the credit union.

 

A)

financial asset; physical asset

 

B)

financial asset; financial asset

 

C)

financial asset; liability

 

D)

liability; financial asset

 

 

195.

Which of the following is NOT one of the three tasks of a financial system?

 

A)

reduction of transaction costs

 

B)

risk management

 

C)

provision of liquidity

 

D)

determination of fiscal policy

 

 

196.

Transaction costs are:

 

A)

the return to an entrepreneur.

 

B)

the return to moving a product to market.

 

C)

the expenses of producing a product.

 

D)

the expenses of negotiating and executing a deal.

 

 

197.

Financial markets make borrowing large amounts of money easier because they simplify negotiation between borrowers and lenders. This is an example of:

 

A)

reducing transaction costs.

 

B)

reducing risk.

 

C)

providing liquidity.

 

D)

acting as a lender of last resort.

 

 

198.

A risk-averse person:

 

A)

considers any risk unacceptable.

 

B)

would never buy a financial asset.

 

C)

has an asymmetric view of the value of losses and gains.

 

D)

would never buy insurance.

 

 

199.

Financial markets spread the potential gains and losses of borrowing and lending operations among many individuals, therefore decreasing the overall uncertainty. This is an example of:

 

A)

reducing transaction costs.

 

B)

reducing risk.

 

C)

providing liquidity.

 

D)

guaranteeing rates of return.

 

 

200.

The most diversified portfolio in terms of risk is $100,000 worth of stock in:

 

A)

10 companies in the same industry.

 

B)

10 companies in two industries.

 

C)

10 companies in five industries.

 

D)

one company that sells 10 products.

 

 

201.

Financial markets:

 

A)

increase transaction costs.

 

B)

reduce diversification.

 

C)

provide liquidity.

 

D)

determine tax rates.

 

 

202.

A common strategy to reduce the risk of a large financial loss is:

 

A)

to buy and sell assets through a mutual fund, since mutual funds cannot lose money.

 

B)

to diversify financial assets so that their risks of failure are unrelated.

 

C)

to buy financial assets from developing countries, because the rates of return are very high and safe and their national currencies are much more stable than the U.S. dollar.

 

D)

to buy real instead of financial assets.

 

 

203.

The best way to reduce financial risk is to:

 

A)

buy stock only in a major company.

 

B)

buy bonds only in a major company.

 

C)

buy a variety of assets, both financial and physical.

 

D)

never buy stock in foreign companies.

 

 

204.

The term liquidity means that the:

 

A)

asset is used in a barter exchange.

 

B)

asset is used as the medium of exchange.

 

C)

asset is readily convertible to cash without much loss of value.

 

D)

market interest rate is too low.

 

 

205.

The financial system performs certain tasks to make the financial market more efficient. Which one of the following is NOT one of these tasks?

 

A)

reducing risk

 

B)

reducing menu costs

 

C)

reducing transaction costs

 

D)

providing liquidity

 

 

206.

Diversification in investment is achieved when:

 

A)

the government invests in several projects of different lengths to increase total output.

 

B)

a business produces multiple unrelated products so that the firm can maximize profit.

 

C)

an economy trades with multiple trading partners for maximum benefit.

 

D)

an individual invests in several assets with independent or unrelated risks so that total risk from loss is reduced.

 

 

207.

Which of the following assets is the LEAST liquid?

 

A)

cash

 

B)

checking account balance

 

C)

corporate bond

 

D)

ownership of one fourth of a privately held company

 

 

208.

Which of the following assets is the MOST liquid?

 

A)

currency

 

B)

checking account balance

 

C)

stock in a publicly traded company

 

D)

a townhouse

 

 

209.

An illiquid asset:

 

A)

cannot be sold.

 

B)

provides the owner no return or income.

 

C)

is a tangible asset.

 

D)

cannot quickly be converted into cash with little loss of value.

 

 

210.

Which of the following is (are) a task(s) of the financial system?

I. reducing transactions costs

II. reducing risk

III. providing liquidity

 

A)

I only

 

B)

II only

 

C)

III only

 

D)

I, II, and III

 

 

211.

A person who is risk-averse:

 

A)

is more sensitive to a loss than to a gain of an equal dollar amount.

 

B)

is less sensitive to a loss than to a gain of an equal dollar amount.

 

C)

is willing to pay any price to avoid risk.

 

D)

enjoys taking risks, especially in financial markets.

 

 

212.

An asset that can be quickly converted to cash with relatively little loss of value is:

 

A)

illiquid.

 

B)

liquid.

 

C)

diversified.

 

D)

risk averse.

 

 

213.

Which of the following assets is the MOST liquid?

 

A)

a house

 

B)

100 shares of Apple stock

 

C)

money in a checking account

 

D)

a life insurance policy

 

 

214.

Which of the following assets is the LEAST liquid?

 

A)

a U.S. government bond

 

B)

100 shares of Apple stock

 

C)

money in a checking account

 

D)

a 2010 Toyota Camry

 

 

215.

Which of the following is NOT one of the four main types of financial assets?

 

A)

real estate

 

B)

bonds

 

C)

bank deposits

 

D)

loans

 

 

216.

You are choosing whether to purchase a bond or stock. If you purchase the bond, you are likely to receive a _____ return in exchange for a _____ level of risk.

 

A)

higher; higher

 

B)

lower; lower

 

C)

lower; higher

 

D)

higher; lower

 

 

217.

A loan is:

 

A)

a liability for the lender and an asset for the borrower.

 

B)

a physical asset that is traded in financial markets.

 

C)

a claim on a bank that obliges the bank to provide funds to a lender.

 

D)

a liability for the borrower and an asset for the lender.

 

 

218.

All of the following are examples of financial assets and/or liabilities EXCEPT:

 

A)

loans.

 

B)

stocks and bonds.

 

C)

real estate.

 

D)

bank deposits.

 

 

219.

All of the following are financial assets EXCEPT:

 

A)

bonds.

 

B)

stocks.

 

C)

bank deposits.

 

D)

gold coins.

 

 

220.

An important advantage of bonds as a financial asset is that they:

 

A)

are standardized and therefore are easier to sell than loans.

 

B)

offer higher rates of return than stocks.

 

C)

allow the owner to receive a share of the company's profits in the form of dividends.

 

D)

are guaranteed to be risk free.

 

 

221.

When a corporation borrows money from a bank in exchange for a contract to repay it on a schedule, the corporation is:

 

A)

taking out a loan.

 

B)

issuing bonds.

 

C)

issuing stocks.

 

D)

liquidating a bank deposit.

 

 

222.

When a corporation borrows money from lenders in exchange for a fixed rate of return and a given maturity, the corporation is:

 

A)

taking out a loan.

 

B)

issuing bonds.

 

C)

issuing stocks.

 

D)

liquidating a bank deposit.

 

 

223.

When a corporation borrows money from lenders in exchange for a fixed share of the firm's assets and potential profits, the corporation is:

 

A)

taking out a loan.

 

B)

issuing bonds.

 

C)

issuing stocks.

 

D)

liquidating a bank deposit.

 

 

224.

A bond is:

 

A)

share of ownership in a company.

 

B)

a promise to pay interest each year and to repay the principal on a specified date.

 

C)

a liquid asset, since it is a standardized product with a market in which the owner can sell it.

 

D)

both a promise to pay interest each year and to repay the principal on a specified date and a liquid asset, since it is a standardized product with a market in which the owner can sell it.

 

 

225.

Financial assets that carry more risk:

 

A)

usually have a lower rate of return.

 

B)

usually have a higher rate of return.

 

C)

are purchased by risk-averse buyers.

 

D)

are a hedge against the future.

 

 

226.

Financial assets with the highest risk are:

 

A)

stocks.

 

B)

U.S. government bonds.

 

C)

bonds.

 

D)

bank deposits.

 

 

227.

Which of the following financial assets is likely to be the MOST liquid?

 

A)

stocks

 

B)

bonds

 

C)

mutual funds shares

 

D)

bank demand deposits

 

 

228.

Transactions costs are likely to be the highest for:

 

A)

loans.

 

B)

bonds.

 

C)

stocks.

 

D)

bank deposits.

 

 

229.

A default occurs when:

 

A)

the borrower repays a bond or loan before its maturity date.

 

B)

a borrower fails to make payments as specified by the loan or bond contract.

 

C)

an asset can't be converted to cash quickly with little or no loss of value.

 

D)

transactions costs are minimized.

 

 

230.

Bonds with a high risk of default usually:

 

A)

have a longer maturity than bonds with a low risk of default.

 

B)

have a shorter maturity than bonds with a low risk of default.

 

C)

have to pay a high rate of interest to attract investors.

 

D)

can pay a low rate of interest and still attract investors.

 

 

231.

One advantage of bonds over loans is that:

 

A)

interest rates on bonds are generally lower than interest rates on loans.

 

B)

interest rates on bonds are generally higher than interest rates on loans.

 

C)

each bond is specifically tailored to meet the needs of the borrower so that no two bonds are alike.

 

D)

bonds are more standardized than loans.

 

 

232.

An asset formed by pooling individual loans and selling shares in that pool is called a:

 

A)

loan-backed security.

 

B)

mutual fund.

 

C)

stock.

 

D)

bond.

 

 

233.

Compared to individual loans, loan-backed securities provide _____diversification and _____ liquidity than individual loans.

 

A)

less; less

 

B)

more; more

 

C)

less; more

 

D)

more; less

 

 

234.

Suppose that Ann bought a share of General Motors stock. The stock is a(n) _____ for Ann and a(n) _____ for General Motors.

 

A)

asset; asset

 

B)

asset; liability

 

C)

liability; asset

 

D)

liability; liability

 

 

235.

Which of the following financial asset(s) is (are) a share of ownership in a company?

I. bonds

II. loan-backed securities

III. stocks

 

A)

I only

 

B)

II only

 

C)

III only

 

D)

I, II, and III

 

 

236.

Which of the following is (are) an advantage(s) of stock?

I. reduction of risk for the owners of the company

II. increased welfare for investors who buy the stocks

 

A)

I only

 

B)

II only

 

C)

both I and II

 

D)

neither I nor II

 

 

237.

Compared to bonds, stocks generally provide a _____ return and carry a _____ financial risk.

 

A)

lower; lower

 

B)

lower; higher

 

C)

higher; lower

 

D)

higher; higher

 

 

238.

Over the past 100 years, the rate of return on stocks has averaged about _____, and the return on bonds has averaged approximately _____.

 

A)

20%; 25%

 

B)

1%; 2%

 

C)

–10%; 5%

 

D)

7%; 2%

 

 

239.

One reason financial institutions become very large is to:

 

A)

decrease transaction costs.

 

B)

enjoy the power of having a large corporation.

 

C)

increase transaction costs.

 

D)

avoid the risks of diversification.

 

 

240.

A financial intermediary that sets up a diversified portfolio of stocks and then resells that portfolio to individual investors is known as a:

 

A)

life insurance company.

 

B)

mutual fund.

 

C)

brokerage company.

 

D)

credit card company

 

 

241.

Financial intermediaries that manage a stock portfolio and sell shares of the portfolio to individual investors are:

 

A)

mutual funds.

 

B)

pension funds.

 

C)

life insurance companies.

 

D)

banks.

 

 

242.

A mutual fund:

 

A)

always includes a base year.

 

B)

owns a diversified portfolio.

 

C)

always earns a profit.

 

D)

offers a lower rate of return for any given level of risk.

 

 

243.

Banks are financial intermediaries that:

 

A)

have customer deposits as the primary asset and loans to borrowers as the primary liability.

 

B)

provide liquid assets to lenders and long-term financing to borrowers.

 

C)

are types of mutual funds.

 

D)

have customer deposits as the primary asset and that provide liquid assets to lenders.

 

 

244.

All of the following are financial intermediaries EXCEPT:

 

A)

mutual funds.

 

B)

pension funds.

 

C)

insurance companies.

 

D)

the New York Stock Exchange.

 

 

245.

Which of the following is NOT a financial intermediary?

 

A)

pension funds

 

B)

mutual funds

 

C)

life insurance company

 

D)

credit card company

 

 

246.

Which of the following is a function of financial intermediaries?

 

A)

transforming funds from many individuals to financial assets

 

B)

transforming funds from many individuals to physical assets

 

C)

helping individuals and businesses determine their tax liabilities

 

D)

conducting fiscal policy

 

 

247.

A _____ is a nonprofit institution that collects the savings of its members and invests those funds in a diversified portfolio to provide income to members when they retire.

 

A)

life insurance company

 

B)

pension fund

 

C)

commercial bank

 

D)

investment bank

 

 

248.

A _____ sells policies to savers and guarantees a payment to the policyholder's beneficiaries when the policyholder dies.

 

A)

commercial bank

 

B)

mutual fund

 

C)

life insurance company

 

D)

pension fund

 

 

249.

The financial slump that began in the United States in the summer of 2007 was a result of:

 

A)

falling energy prices.

 

B)

massive tax increases necessary to balance the federal budget.

 

C)

a crisis in the foreign exchange market.

 

D)

a sharp fall in housing prices.

 

 

250.

Shares of stock are:

 

A)

shares of ownership in the issuing company.

 

B)

a tax liability for the issuing company.

 

C)

a tax deduction for the investor.

 

D)

a debt of the issuing company to the investors who purchase the stock.

 

 

251.

Which of the following is NOT a stock market index?

 

A)

the Dow Jones Industrial Average

 

B)

the producer price index

 

C)

the S&P 500

 

D)

the NASDAQ

 

 

252.

Which of the following is an index of 30 leading companies, such as Microsoft, Walmart, and General Electric?

 

A)

the Dow Jones Industrial Average

 

B)

the producer price index

 

C)

the S&P 500

 

D)

the NASDAQ

 

 

253.

Which of the following is the index that includes the most companies and provides the broadest measure of stock market performance?

 

A)

the Dow Jones Industrial Average

 

B)

the producer price index

 

C)

the S&P 500

 

D)

the NASDAQ

 

 

254.

Which index includes smaller companies, many in the technology sector?

 

A)

the Dow Jones Industrial Average

 

B)

the producer price index

 

C)

the S&P 500

 

D)

the NASDAQ

 

 

255.

If the NASDAQ is down and the Dow Jones Industrial Average is higher on a particular day, which of the following is likely to be TRUE?

 

A)

Investors are optimistic about the technology sector and pessimistic about the old-economy sector.

 

B)

Investors are pessimistic about the technology sector and optimistic about the old-economy sector.

 

C)

Investors prefer bonds to stocks.

 

D)

Investors prefer stocks to bonds.

 

 

256.

Owners of stock may receive income in the form of:

 

A)

interest.

 

B)

dividends and profit from selling the stock for more than its purchase price.

 

C)

transfer payments.

 

D)

rent.

 

 

257.

If interest rates increase, making bonds more attractive, the demand for stock will _____ and the price of stock will _____.

 

A)

increase; increase

 

B)

increase; decrease

 

C)

decrease; increase

 

D)

decrease; decrease

 

 

258.

If interest rates decrease, making bonds less attractive, the demand for stock will _____ and the price of stock will _____.

 

A)

increase; increase

 

B)

increase; decrease

 

C)

decrease; increase

 

D)

decrease; decrease

 

 

259.

If the price of an asset is expected to rise in the future:

 

A)

asset owners will be more willing to sell it now.

 

B)

it will be more in demand today.

 

C)

the price of the asset will fall today.

 

D)

the market is irrational.

 

 

260.

The demand for stocks:

 

A)

is largely a guessing game.

 

B)

mostly depends on their price.

 

C)

is mostly a function of buyers' beliefs about their future prices.

 

D)

comes from companies who want to borrow money.

 

 

261.

If Congress passed a law last year that will increase corporate taxes this year, holding other things constant, stock prices will _____ this year.

 

A)

increase

 

B)

decrease

 

C)

not change

 

D)

It is impossible to say how stock prices will change.

 

 

262.

If all retail stores announce unexpectedly high sales volumes, holding other things constant, stock prices in the retail sector will:

 

A)

increase.

 

B)

decrease.

 

C)

not change.

 

D)

It is impossible to say how stock prices will change.

 

 

263.

If interest rates on bonds rise, holding other things constant, stock prices will:

 

A)

increase.

 

B)

decrease.

 

C)

not change.

 

D)

It is impossible to say how stock prices will change.

 

 

264.

When a bond becomes more attractive as an asset because of a rise in the interest rate:

 

A)

the price of stock, a substitute asset, will rise.

 

B)

the price of stock, a substitute asset, will fall.

 

C)

the future price of bonds will fall.

 

D)

people will stop buying bonds and buy other assets.

 

 

265.

Income to the owners of commercial real estate is in the form of:

 

A)

interest.

 

B)

dividends

 

C)

transfer payments.

 

D)

rent and profit from selling the property at a price higher than its purchase price.

 

 

266.

When interest rates increase, the demand for commercial and residential real estate will _____ and the price of real estate will _____.

 

A)

increase; increase

 

B)

increase; decrease

 

C)

decrease; increase

 

D)

decrease; decrease

 

 

267.

When interest rates decrease, the demand for commercial and residential real estate will _____ and the price of real estate will _____.

 

A)

increase; increase

 

B)

increase; decrease

 

C)

decrease; increase

 

D)

decrease; decrease

 

 

268.

A random walk occurs when an asset price:

 

A)

moves in a predicable direction but with random error.

 

B)

makes unpredictable movements.

 

C)

moves in a predictable way with no error.

 

D)

moves slowly but predictably.

 

 

269.

According to the efficient markets hypothesis, if you are trying to find out what a stock is really worth, you should:

 

A)

look up the current stock price.

 

B)

study past trends in the stock price.

 

C)

study the underlying determinants of the company's future profits.

 

D)

examine its recent price changes.

 

 

270.

Which of the following is (are) a serious challenge(s) to the efficient markets hypothesis?

 

A)

Stock prices fluctuate more than can be explained by news about fundamentals.

 

B)

Individual investors behave in systematically irrational ways.

 

C)

Stock prices follow a random walk.

 

D)

Stock prices fluctuate more than can be explained by news about fundamentals, and individual investors behave in systematically irrational ways.

 

 

271.

A random walk is:

 

A)

the unpredictable movement over time of a variable.

 

B)

the predicted fluctuations of a known variable.

 

C)

the movement of GDP growth per capita in the long run.

 

D)

a description of the economic fluctuations in the short run.

 

 

272.

The efficient markets hypothesis states that:

 

A)

stock prices fluctuate following the path of business cycles.

 

B)

at any time stock prices are fairly valued, reflecting all available information.

 

C)

stock prices move irrationally and rather unpredictably.

 

D)

stock prices are easily manipulated by irrational exuberance.

 

 

273.

The theory that assets embody all publicly available information about their fundamentals is the:

 

A)

efficient markets hypothesis.

 

B)

multiplier theory.

 

C)

accelerator theory

 

D)

Fisher effect.

 

 

274.

According to the efficient markets hypothesis:

 

A)

stocks are often overpriced.

 

B)

stocks are often underpriced.

 

C)

stocks are neither overpriced or underpriced.

 

D)

the random fluctuations in the value of stocks is unexplainable.

 

 

275.

If stock prices follow a random walk, it means that stock prices are:

 

A)

unpredictable.

 

B)

increasing.

 

C)

decreasing

 

D)

constant.

 

 

276.

Between 2000 and 2006, there was a housing bubble in the United States. A bubble is:

 

A)

a fluctuation in asset prices that leads to inherent instability.

 

B)

an increase in asset prices driven by unrealistic expectations about future prices.

 

C)

individuals reselling assets rapidly to make quick profit.

 

D)

speculation by unscrupulous investors.

 

 

277.

Facebook's primary type of investment spending is the purchase of server farms, or arrays of linked computers that track and process social media information.

 

A)

True

 

B)

False

 

 

278.

Most of Facebook's investment spending is for scholarships for its employees to study the latest social media technology.

 

A)

True

 

B)

False

 

 

279.

The financial system contributes to long-run economic growth by channeling funds from savers to businesses for investment spending.

 

A)

True

 

B)

False

 

 

280.

Most human capital is provided by private spending for private education.

 

A)

True

 

B)

False

 

 

281.

Most human capital is provided by government through public education.

 

A)

True

 

B)

False

 

 

282.

Most physical capital, except infrastructure, is financed by private investment spending by people and corporations.

 

A)

True

 

B)

False

 

 

283.

Investment spending contributes to economic growth.

 

A)

True

 

B)

False

 

 

284.

Investment spending in a closed economy must equal GDP minus consumption minus government spending.

 

A)

True

 

B)

False

 

 

285.

The government saves when it runs a budget deficit.

 

A)

True

 

B)

False

 

 

286.

A budget deficit occurs when tax revenue is higher than government spending plus government transfers.

 

A)

True

 

B)

False

 

 

287.

The savings–investment spending identity says that savings and investment spending are always equal for the economy as a whole.

 

A)

True

 

B)

False

 

 

288.

If a country's capital inflow exceeds outflow, then foreigners are contributing to the domestic country's investment spending.

 

A)

True

 

B)

False

 

 

289.

Since money from both domestic and foreign savers must eventually be repaid with interest, capital inflow has the same effect on the national economy as national savings.

 

A)

True

 

B)

False

 

 

290.

According to the savings–investment spending identity, savings and investment spending are the most important components of GDP.

 

A)

True

 

B)

False

 

 

291.

According to the savings–investment spending identity, savings and investment spending are always equal for the economy as a whole.

 

A)

True

 

B)

False

 

 

292.

The present value of $1 to be paid 10 years in the future will increase with the interest rate.

 

A)

True

 

B)

False

 

 

293.

Your grandmother has promised you $1,000 when you graduate in one year. At a 6% annual interest rate, you can borrow $943.40 and pay it back with your grandmother's gift at graduation.

 

A)

True

 

B)

False

 

 

294.

The loanable funds market examines the market outcome of the demand for funds from savers and the supply of funds from borrowers.

 

A)

True

 

B)

False

 

 

295.

If a project costs $100,000 and is expected to return $105,000 in a year and if the interest rate is 6%, then the company will want to take out a loan to undertake the project.

 

A)

True

 

B)

False

 

 

296.

Firms want to undertake projects whose rate of return is greater than the interest rate.

 

A)

True

 

B)

False

 

 

297.

If interest rates are high, people are willing to forgo consumption and save more, all else equal.

 

A)

True

 

B)

False

 

 

298.

An increase in the interest rate causes a decrease in investment by shifting the loanable funds demand curve to the left.

 

A)

True

 

B)

False

 

 

299.

Expectations of an improving economy will generally cause an increase in investment by shifting the loanable funds demand curve to the right.

 

A)

True

 

B)

False

 

 

300.

Higher interest rates will lead to increased investment spending.

 

A)

True

 

B)

False

 

 

301.

Lower interest rates will lead to less investment spending.

 

A)

True

 

B)

False

 

 

302.

There is a negative relationship between the quantity of investment spending and the interest rate.

 

A)

True

 

B)

False

 

 

303.

Higher interest rates encourage investment spending.

 

A)

True

 

B)

False

 

 

304.

An increase in the level of business opportunities will not change investment spending.

 

A)

True

 

B)

False

 

 

305.

The crowding-out effect is the negative effect of government budget deficits on private investment spending.

 

A)

True

 

B)

False

 

 

306.

When expected inflation was high during the 1970s, interest rates were low.

 

A)

True

 

B)

False

 

 

307.

Interest rates decreased during the 1980s because expectations of future inflation were lower.

 

A)

True

 

B)

False

 

 

308.

When the demand for housing increased during the early 2000s, the demand for loanable funds decreased and caused the interest rate to decrease.

 

A)

True

 

B)

False

 

 

309.

When the housing market collapsed in 2007, the demand for loanable funds decreased and caused interest rates to decrease.

 

A)

True

 

B)

False

 

 

310.

If you borrow money from a bank to buy a house, the mortgage (loan) is a financial asset for you and a liability for the bank.

 

A)

True

 

B)

False

 

 

311.

A household's wealth is always equal to its income in the current year.

 

A)

True

 

B)

False

 

 

312.

When households invest their wealth in financial markets, they purchase financial assets.

 

A)

True

 

B)

False

 

 

313.

The primary function of the financial system is to channel funds from savers to investors.

 

A)

True

 

B)

False

 

 

314.

The expenses involved in actually putting together and executing a deal are called liquidity costs.

 

A)

True

 

B)

False

 

 

315.

The expenses involved in actually putting together and executing a deal are called transactions costs.

 

A)

True

 

B)

False

 

 

316.

A person who is risk averse loses less welfare from losing $100 than he or she gains in welfare from winning $100.

 

A)

True

 

B)

False

 

 

317.

An individual can reduce financial risk by diversifying investments, that is, by investing in several assets whose possible losses are independent events.

 

A)

True

 

B)

False

 

 

318.

To reduce risk through diversification, a person must invest in several assets with related, or dependent, risk of loss.

 

A)

True

 

B)

False

 

 

319.

Financial markets eliminate transactions costs.

 

A)

True

 

B)

False

 

 

320.

When corporations need to borrow large amounts of money, they can minimize their transaction costs by getting many small loans directly from many people.

 

A)

True

 

B)

False

 

 

321.

An illiquid asset can be quickly converted to cash with little or no loss of value.

 

A)

True

 

B)

False

 

 

322.

Stocks are usually riskier than bonds but also typically earn a higher rate of return than bonds.

 

A)

True

 

B)

False

 

 

323.

Of all types of financial assets, transactions costs are likely to be the lowest for loans.

 

A)

True

 

B)

False

 

 

324.

More so than other financial assets, loans are specifically tailored to meet the needs of the borrower.

 

A)

True

 

B)

False

 

 

325.

A loan is a liability to the issuer but an asset to the person taking it out.