Deck 7: Finance, Saving, and Investment

Question 1

Which of the following is FALSE about saving?

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

Answer 1

C

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

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

Answer 2

C

Question 3

At the beginning of the year, your wealth is $10,000. During the year, you have an income of
$90,000 and you spend $80,000 on consumption. You pay no taxes. Your wealth at the end of the year is

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

Answer 3

C

Question 4

In January 2010, Timʹs Gyms, Inc. owned machines valued at $1 million. During the year, the market value of the equipment fell by 30 percent. During 2010, Tim spent $200,000 on new machines. During 2010, Timʹs net investment totalled

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

Question 5

In January, suppose that a share of stock in Meyer, Inc. had a price of $50 and that each share entitled its owner to $2 of Meyer, Inc.ʹs profit. During the year, the price of a share of Meyerʹs stock rose to $100. The interest rate paid on the share in January was percent.

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

Question 6

The term capital, as used in macroeconomics, refers to

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

Question 7

If the economyʹs capital stock decreases over time,

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

Question 8

The increase in the capital stock equals the amount of

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

Question 9

The capital stock increases whenever

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

Question 10

The Acme Stereo Company had a capital stock of $24 million at the beginning of the year. At the end of the year, the firm had a capital stock of $20 million. Thus its

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

Question 11

If the economyʹs capital stock increases over time,

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

Question 12

Net investment equals

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

Question 13

Gross investment

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

Question 14

The total amount spent on new capital in a time period is equal to

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

Question 15

In January 2010, Timʹs Gyms, Inc. owned machines valued at $1 million. During the year, the market value of the equipment fell by 30 percent. During 2010, Tim spent $200,000 on new machines. During 2010, Timʹs gross investment totalled

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

Question 16

At the beginning of the year, Tomʹs Tubes had a capital stock of 5 tube inflating machines. During the year, Tom scrapped 2 old machines and purchased 3 new machines. Tomʹs capital stock at the end of year equals

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

Question 17

Which of the following items are considered physical capital?
i. shares of Ford stock traded on the New York Stock Exchange
ii. the Taco Bell store nearest you
iii. the rental cars owned by Hertz Rental-A-Car
iv. the salaries paid to Intel executives

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

Question 18

The term ʺcapital,ʺ as used in macroeconomics, refers to

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

Question 19

At the beginning of the year, Tomʹs Tubes had a capital stock of 5 tube inflating machines. During the year, Tom scrapped 2 old machines and purchased 3 new machines. Tomʹs net investment for the year totaled

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

Question 20

At the beginning of the year, Tomʹs Tubes had a capital stock of 5 tube inflating machines. During the year, Tom scrapped 2 old machines and purchased 3 new machines. Tomʹs gross investment for the year totaled

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

Question 21

U.S. investment is financed from

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

Question 22

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) falls from 10 percent to 8 percent.
B) falls from 10 percent to 6 percent.
C) rises from 8 percent to 10 percent.
D) does not change because it is not affected by the price of the bond.

Question 23

Suppose the United States spends more on foreign goods and services than foreigners spend on our goods and services and the United States sells no foreign assets. Then the

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

Question 24

If a bankʹs net worth is negative, then the bank definitely is

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

Question 25

National saving is defined as the amount of

A) business saving.
B) business saving and household saving.
C) household saving.
D) private saving and government saving.

Question 26

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

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

Question 27

The Restoring American Financial Stability Act of 2010

A) prohibits banks from selling mortgage backed securities, which were largely to blame for the financial market crisis in 2007-2008.
B) cut the federal governmentʹs ties with Fannie Mae and Freddy Mac.
C) eliminated the Federal Deposit Insurance Corporation.
D) had restrictions that try to limit risky investment by banks.

Question 28

All of the following are points of the Restoring American Financial Stability Act of 2010 EXCEPT:

A) imposing tighter restrictions on banks to limit risky investments.
B) requiring mortgage lenders to review income and credit histories of applicants to ensure they can afford payments.
C) creating a Consumer Financial Protection Bureau.
D) requiring firms that create mortgage backed securities to keep at least 50 percent of their value as reserves.

Question 29

$\begin{array}{|c|c|}\hline \text { Item } & \begin{array}{c}\text { Millions of } \\\text { dollars }\end{array} \\\hline \text { Personal consumption expenditure } & 80 \\\hline \begin{array}{l}\text { Government expenditure on goods } \\\text { and services }\end{array} & 30 \\\hline \text { Net taxes } & 35 \\\hline \text { Gross private domestic investment } & 20 \\\hline \text { Imports of goods and services } & 10 \\\hline \text { Exports of goods and services } & 20 \\\hline\end{array}$

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

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

Question 30

The funds used to buy and operate physical capital are

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

Question 31

$\begin{array}{|c|c|}\hline \text { Item } & \begin{array}{c}\text { Millions of } \\\text { dollars }\end{array} \\\hline \text { Personal consumption expenditure } & 80 \\\hline \begin{array}{l}\text { Government expenditure on goods } \\\text { and services }\end{array} & 30 \\\hline \text { Net taxes } & 35 \\\hline \text { Gross private domestic investment } & 20 \\\hline \text { Imports of goods and services } & 10 \\\hline \text { Exports of goods and services } & 20 \\\hline\end{array}$

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

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

Question 32

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

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

Question 33

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

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

Question 34

If the government runs a budget deficit, then

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

Question 35

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) rises from $2,000 to $2,500.
B) does not change because it is not affected by the interest rate.
C) falls from $25,000 to $20,000.
D) falls from $2,500 to $2,000.

Question 36

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

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

Question 37

This year Pizza Hut makes a total investment of $1.3 billion in new stores. Its depreciation in this year is $300 million. Pizza Hutʹs gross investment is and its net investment is .

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

Question 38

If national saving S) is $100,000, net taxes T) equal $100,000 and government expenditure G. is $25,000, how much are households and businesses saving?

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

Question 39

National saving equals

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

Question 40

A nationʹs investment must be financed by

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

Question 41

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

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

Question 42

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

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

Question 43

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

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

Question 44

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

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

Question 45

When the inflation rate is negative, the

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

Question 46

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

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

Question 47

Which of the following is TRUE regarding the real interest rate?
I. The real interest rate is the opportunity cost of borrowed funds.
II. The real interest rate equals the nominal interest rate adjusted for inflation.

A) I
B) II
C) both I and II
D) neither I nor II

Question 48

The nominal interest rate minus the real interest rate approximately equals the

A) rate of increase in the amount of investment.
B) the rate of increase in the income.
C) inflation rate.
D) the rate the bank receives to cover lending costs.

Question 49

When the inflation rate is positive, the

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

Question 50

The interest rate approximately equals the interest rate minus .

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

Question 51

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

A) 5 percent.
B) less than 5 percent.
C) more than 5 percent.
D) Without more information it is impossible to tell if the nominal interest rate will be more than, less than, or equal to 5 percent.

Question 52

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

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

Question 53

If people expect an inflation rate of 3.3 percent, and the real interest rate is 3 percent, the nominal interest rate equals approximately)

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

Question 54

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

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

Question 55

If the nominal interest rate is 7 percent and the inflation rate is 1 percent, the real interest rate is approximately

A) 8 percent.
B) 6 percent.
C) -6 percent.
D) 7 percent.

Question 56

When the inflation rate is zero, the

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

Question 57

The nominal interest rate approximately equals which of the following?

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

Question 58

The real interest rate

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

Question 59

Suppose that you took out a $1000 loan in January and had to pay $75 in annual interest. During the year, inflation was 6 percent. Which of the following statements is correct?

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

Question 60

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

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

Question 61

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

A) real; decreases
B) real; increases
C) nominal; decreases
D) nominal; increases

Question 62

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

Question 63

A rise in the real interest rate

A) shifts the demand for loanable funds curve rightward.
B) creates a movement downward along the demand for loanable funds curve.
C) creates a movement upward along the demand for loanable funds curve.
D) shifts the demand for loanable funds curve leftward.

Question 64

The quantity of loanable funds demanded increases so there is a movement downward along the demand for loanable funds curve when

A) business expectations become more optimistic.
B) the real interest rate falls.
C) the pool of loanable funds falls.
D) the expected profit from investment decreases.

Question 65

The expected profit from an investment will change with

A) a change in technology.
B) a change in the real interest rate.
C) Both A and B are correct.
D) Neither A nor B is correct.

Question 66

Initially the nominal interest rate is 8 percent and the inflation rate is 5 percent. People know that the inflation rate increases to 10 percent. What is the new nominal interest rate?

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

Question 67

The the expected profit, the greater is the .

A) higher; investment demand
B) lower; investment demand
C) lower; capital stock
D) None of the above answers is correct

Question 68

Which of the following explains why the demand for loanable funds is negatively related to the real interest rate?

A) A lower real interest rate makes more investment projects profitable.
B) Interest rate flexibility in financial markets assures an equilibrium in which saving equals investment.
C) Consumers are willing to spend less and hence save more at higher real interest rates.
D) All of the above are reasons why the demand for loanable funds is negatively related to the real interest rate.

Question 69

A firmʹs 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) real interest rate and the expected profit.
D) nominal interest rate and the expected profit.

Question 70

Suppose that, initially, the nominal interest rate is 6 percent and the inflation rate is 3 percent. If the inflation rate increases to 6 percent, what will be the new nominal interest rate?

A) 6 percent
B) 11 percent
C) 1 percent
D) 9 percent

Question 71

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

A) the supply of loanable funds curve will shift rightward.
B) the demand for loanable funds curve will shift rightward.
C) the nominal interest rate will also increase.
D) there will be a movement up along the demand for loanable funds curve.

Question 72

Which of the following are major influences on the expected profit from an investment?
I. technology advances
II. stock market behavior
III. accounting practices

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

Question 73

When the real interest rate rises

A) there is an upward movement along the demand for loanable funds curve.
B) the demand for loanable funds curve shifts rightward.
C) the demand for loanable funds curve shifts leftward.
D) there is a downward movement along the demand for loanable funds curve.

Question 74

The demand for loanable funds is the relationship between loanable funds and the other things remaining the same.

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

Question 75

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

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

Question 76

The real interest rate is 4 percent a year. When the inflation rate is zero, the nominal interest rate is approximately percent a year; and when the inflation rate is 2 percent a year, the nominal interest rate is approximately percent a year.

A) 4; 6
B) 6; 8
C) 0; 2
D) 6; 4

Question 77

The demand for loanable funds curve is

A) vertical at the full employment level of investment.
B) constant at the maximum expected profit rate.
C) downward sloping when plotted against the real interest rate.
D) upward sloping when plotted against the real interest rate.

Question 78

A decrease in the real interest rate leads to

A) an increase in investment demand so that the demand for loanable funds curve shifts rightward.
B) an increase in the expected profit.
C) a movement downward along the demand for loanable funds curve.
D) a fall in the capital stock.

Question 79

The demand for loanable funds curve shows that as the interest rate increases, there will be a curve.

A) nominal; movement down along
B) real; movement up along.
C) nominal; rightward shift in
D) real; rightward shift in

Question 80

Assume you save $1,000 in a bank account that pays 8 percent interest per year and the inflation rate is 3 percent. At the end of the year you have earned

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