Deck 21: Financial Aspects of the Household, Business, Government, and Rest-Of-The-World Sectors

Question 1

___________________ is the difference between one's assets and liabilities.

A)Net worth
B)One's portfolio
C)Income
D)All of the above are correct.

Answer 1

A

Question 2

Net worth is the difference between one's assets and

A)liabilities.
B)money holdings.
C)income.
D)All of the above are correct.

Answer 2

A

Question 3

The ratio of debt to equity on a firm's balance sheet is called

A)coverage ratio.
B)net worth.
C)the leverage ratio.
D)net investment ratio.

Answer 3

C

Question 4

__________ is gross investment minus depreciation.

A)Leverage
B)Net worth
C)Net investment
D)None of the above

Question 5

Internal financing refers to

A)the spending of money balances on hand or the liquidation of financial or real assets to finance spending that exceeds current receipts.
B)the financing of spending that exceeds current receipts by expanding either debt or equity.
C)the increase in a firm's liabilities that is equal to the increase in assets held minus retained earnings.
D)the impediment to continuous borrowing that may come from the lender's unwillingness to keep lending or the borrower's unwillingness to keep borrowing.

Question 6

External financing refers to

A)the spending of money balances on hand or the liquidation of financial or real assets to finance spending that exceeds current receipts.
B)the financing of spending that exceeds current receipts by expanding either debt or equity.
C)the decrease in a firm's liabilities that is equal to the increase in assets held minus retained earnings.
D)the impediment to continuous borrowing that may come from the lender's unwillingness to keep lending or the borrower's unwillingness to keep borrowing.

Question 7

A borrowing constraint refers to

A)the spending of money balances on hand or the liquidation of financial or real assets to finance spending that exceeds current receipts.
B)the financing of spending that exceeds current receipts by expanding either debt or equity.
C)the increase in a firm's liabilities that is equal to the increase in assets held minus retained earnings.
D)the impediment to continuous borrowing that may come from the lender's unwillingness to keep lending or the borrower's unwillingness to keep borrowing.

Question 8

The largest component of aggregate demand is which of the following?

A)government expenditures
B)consumption expenditures by households
C)investment spending
D)net exports

Question 9

The largest component of aggregate demand is which of the following?

A)the money supply
B)consumption expenditures by households
C)government spending
D)taxes

Question 10

Real assets are not acquired when

A)durable goods are purchased.
B)a house is bought.
C)nondurable consumer goods are purchased.
D)an automobile is purchased for transportation.

Question 11

In national income accounting terms, a newly constructed house is considered which of the following?

A)an investment good
B)a consumer good
C)a nondurable good
D)a tax shelter

Question 12

Which of the following statements about debt financing is false?

A)Debt financing can be either short term or long term.
B)Debt financing is a form of internal finance.
C)Under U.S. tax law, long-term debt is more favorably treated than equity financing.
D)Debt financing exposes a firm to more risk and, therefore, weakens its financial structure.

Question 13

Which of the following changes would best explain why households might increase their net demand for nonmonetary financial assets and decrease their demand for real assets?

A)an increase in income
B)a decrease in wealth
C)a decrease in the return on real assets
D)a decrease in the interest rate

Question 14

A decision to borrow today is really

A)a decision to repay in the future what is borrowed today plus interest.
B)always based on earning potential.
C)a decision to invest today.
D)the quickest way to "make money."

Question 15

If interest rates fall and the return on real assets goes up, then households will hold which of the following?

A)fewer real assets and more financial assets
B)fewer financial assets and more real assets
C)more long-term government bonds
D)more municipal bonds

Question 16

Declines in wealth cause which of the following?

A)a decline in overall consumer spending
B)an increase in government spending
C)a decline in inflation
D)increase in expenditures for many types of services

Question 17

The accumulation of capital depends on

A)capacity utilization.
B)the business outlook.
C)the government's tax policy.
D)All of the above are correct.

Question 18

Investment spending by nonfinancial businesses depends on several different variables. Which of the following economic events would most likely lead to an increase in net investment spending?

A)much higher existing capacity utilization
B)increased interest rates
C)increased corporate income taxes
D)decreased expected returns

Question 19

Generally speaking, the higher the interest rate at which a firm has to borrow,

A)the smaller the upward adjustment of inventories in response to a surge in sales.
B)the larger the upward adjustment of inventories in response to a surge in sales.
C)the higher will be capital investment.
D)None of the above is correct.

Question 20

Borrowing to finance inventories has traditionally been through short-term bank loans or commercial paper with a maturity date of from 1-6 months because

A)any firm that has to borrow to finance inventories is not a good long-term risk.
B)a firm should only expand on the upswing.
C)inventories, hopefully, will not be held long.
D)equity financing is more expensive.

Question 21

A major reason for using short-term debt for capital expenditures is which of the following?

A)because long-term interest rates are expected to come down in the future.
B)because technology in today's world has great fluctuations in cost and long-term financing may not pay.
C)because the project at hand may not be solid enough for long-term risk.
D)because the accounting staff must have something to do now that computers do most of the work.

Question 22

Gross investment minus net investment is which of the following?

A)always negative
B)positive for households and negative for businesses
C)depreciation
D)always positive

Question 23

Which of the following is false?

A)Financing may be either internal or external.
B)External financing comes from retained earnings.
C)External financing may consist of either debt or equity.
D)Debt financing may be short or long term.

Question 24

Which form of financing is desired because of its tax advantages?

A)internal financing
B)external financing
C)equity financing
D)debt financing

Question 25

The public debt is best defined as

A)the taxing and spending policies of the government to achieve economic stability and growth.
B)the difference between government revenues and expenditures in any one year.
C)the sum of all past government deficits minus past government surpluses.
D)a situation in which the purchases of U.S. financial claims by foreigners exceed the purchases of foreign financial claims by U.S. entities.

Question 26

Crowding out refers to a situation where

A)foreign imports successfully compete with domestic firms and crowd them out of the market.
B)ceteris paribus, government's deficit financing tends to reduce the flow of funds to private borrowers as well as to municipal and state governments.
C)corporate bonds are crowded out of the market by municipal bonds.
D)record trade deficits are crowded out by capital inflows.

Question 27

Net new borrowing by the government is usually referred to as the

A)government budget deficit.
B)national debt.
C)trade deficit.
D)public debt.

Question 28

A __________ occurs whenever the purchases of U.S. financial claims by foreigners exceed the purchases of foreign financial claims by U.S. entities.

A)budget deficit
B)trade surplus
C)net capital outflow
D)net capital inflow

Question 29

A __________ occurs whenever the purchases of foreign financial claims by U.S. entities exceed the purchases of U.S. financial claims by foreigners.

A)budget deficit
B)trade deficit
C)net capital outflow
D)net capital inflow

Question 30

If we propose to pay for increases in government spending with higher taxes, then the most immediate effect of higher taxes is which of the following?

A)Spending units will have more income
B)Consumption spending will increase
C)Investment spending will increase
D)Disposable income will fall

Question 31

If government securities are sold to the public to increase government spending, then

A)interest rates will go down.
B)inventory investment will go up.
C)investment in capital will go up.
D)interest rates may go up, affecting interest-sensitive spending.

Question 32

_________ increases the capital stock or inventories.

A)Government budget policy always
B)Net investment
C)Money supply growth
D)Net investment and money supply growth

Question 33

The exchange rate is influenced by changes

A)in foreign economies.
B)in the domestic economy.
C)In domestic and foreign incomes
D)All of the above are correct.

Question 34

Ceteris paribus, if government spending increases,

A)the demand for loanable funds increases.
B)the supply of loanable funds increases.
C)the supply of loanable funds decreases.
D)interest rates always go down.

Question 35

Despite an increase in the government deficit, interest rates could fall if

A)United States investments look stronger than foreign investments, causing a capital inflow.
B)there is an increase in bank reserves by the Fed.
C)the supply of loanable funds increases.
D)All of the above are correct.

Question 36

If interest rates on government bonds are expected to rise because of predictions that the government deficit will be larger than previously expected, then

A)market makers will attempt to sell bonds before their value drops.
B)market makers will attempt to buy bonds before their value increases.
C)bond prices will increase.
D)Both b and c are correct.

Question 37

If the value of goods a country is importing is greater than the value of the goods it is exporting, then the country is running a

A)trade surplus.
B)trade deficit.
C)dollar sale.
D)contracting economy.

Question 38

Ceteris paribus, as the dollar appreciates,

A)foreigners increase the their purchases of U.S. goods and services.
B)spending units in the domestic economy buy more domestic goods and fewer foreign goods.
C)United States residents have less purchasing power than foreigners.
D)exports from the United States become more expensive for foreigners.

Question 39

If capital outflows exceed capital inflows, the United States is experiencing

A)a net capital inflow.
B)a net capital outflow.
C)an increase in the supply of loanable funds.
D)Both a and c are correct.

Question 40

If foreigners purchase U.S. financial assets, they are

A)increasing the supply of loanable funds.
B)increasing the interest rate.
C)crowding out investment spending in the United States.
D)increasing the demand for loanable funds.

Question 41

Ceteris paribus, increases in government spending always have which effect?

A)decrease the level of aggregate demand
B)result in higher taxes
C)increase the level of aggregate demand
D)result in increases in aggregate supply

Question 42

Which of the following is false?

A)Government spending increases financed entirely with tax increases are inflationary.
B)Government spending financed by increasing the money supply may be inflationary.
C)For government spending to be increased, the benefits of the spending should outweigh the costs.
D)Increases in government spending may be financed by capital inflows from abroad.

Question 43

Government outlays minus government receipts equal which of the following?

A)the government debt
B)the trade deficit
C)net borrowing by the government
D)the net government supply of loanable funds

Question 44

The reduction in private borrowing due to higher interest rates that results from increased government deficit spending is called which of these?

A)refunding
B)regularized
C)crowding out
D)not important to the U.S. economy

Question 45

If U.S. purchases of foreign financial assets exceed foreign purchases of U.S. financial assets, then the United States is experiencing which of the following?

A)a net capital inflow
B)a net capital outflow
C)a capital balance
D)capital inflows

Question 46

If U.S. purchases of foreign financial assets are less than foreign purchases of U.S. financial assets, then the United States is experiencing what?

A)a net capital inflow
B)a net capital outflow
C)a capital balance
D)capital outflows

Question 47

Which of the following is true?

A)If the government prints money to spend, the costs of that spending are zero.
B)Consumers respond to changes in interest rates and adjust their portfolios to maximize their satisfaction.
C)The most stable part of consumption is purchases of durable goods.
D)Consumption is the most volatile part of aggregate demand.

Question 48

If the domestic currency appreciates, then

A)exports decrease.
B)imports increase
C)net exports increase.
D)Both a and b are correct.

Question 49

Which of the following events would lead to an increase in the supply of loanable funds and a decrease in the interest rate?

A)decreases in foreign purchases of domestic financial assets, ceteris paribus
B)decreases in U.S. interest rates relative to those abroad
C)increases in foreign purchases of U.S. financial assets, ceteris paribus
D)increases in U.S. purchases of foreign financial assets, ceteris paribus

Question 50

What effect would the development of federal government budget surpluses have on the demand and supply of loanable funds and interest rates, ceteris paribus?

A)The supply of loanable funds should decrease, putting downward pressure on interest rates.
B)The supply of loanable funds should decrease, putting upward pressure on interest rates.
C)The demand for loanable funds should decrease, putting downward pressure on interest rates.
D)The demand for loanable funds should increase, putting upward pressure on interest rates.

Question 51

An accounting statement that measures the value of assets and liabilities held at a particular point in time is called a(n)

A)income statement.
B)balance sheet.
C)portfolio.
D)net worth statement.

Question 52

One's collection of real and financial assets and liabilities is called a(n)

A)income statement.
B)balance sheet.
C)portfolio.
D)net worth statement.

Question 53

Crowding out by federal government borrowing is a phenomenon that

A)reduces funds flowing to firms.
B)reduces funds flowing to households.
C)reduces funds flowing to state and local governments.
D)All of the above are correct.

Question 54

Which of the following is not associated with a firm's balance sheet?

A)real assets
B)financial assets
C)income flows
D)net worth

Question 55

Which of the following equations correctly describes the relationships among assets (A), liabilities (L), and net worth (NW) on a balance sheet?

A)NW = A + L
B)A = L + NW
C)L = A + NW
D)L + NW - A

Question 56

__________ is the difference between assets and liabilities at a point in time.

A)Net financial investment
B)Net worth
C)Net investment
D)None of the above is correct.

Question 57

Which of the following is not an example of a real asset for a consumer?

A)a share of stock
B)an automobile
C)a house
D)a computer

Question 58

Which of the following is an example of a real asset for a consumer?

A)a computer
B)an automobile
C)a house
D)All of the above are correct.

Question 59

Which of the following is not an example of business investment?

A)net additions to inventory
B)spending on new equipment
C)buying stocks and bonds
D)capital accumulation

Question 60

Fluctuations in aggregate demand lead to changes in the level of real economic activity, as measured by which of the following?

A)Dow-Jones Averages
B)Proctor and Gamble
C)Standard and Poor's
D)real GDP

Question 61

The ratio of debt to equity on a firm's balance is

A)the leverage ratio.
B)always greater than one.
C)always less than one.
D)less than the leverage ratio.

Question 62

Government outlays minus government receipts when greater than zero equals

A)new borrowing.
B)net new debt issued by the Treasury.
C)net government demand for loanable funds.
D)All of the above are correct.

Question 63

While household portfolio decisions are guided by desires for happiness, good health, and a high standard of living, economists traditionally focus on which of the following?

A)happiness
B)saving for their offspring
C)long life
D)living standards

Question 64

Economists take the position that households make

A)purposeful decisions.
B)haphazard choices.
C)few decisions without government.
D)planning decisions only when going through their first bankruptcy.

Question 65

Financial assets, from the household point of view, serve as which of the following?

A)a store of value
B)immediate use but not future planning
C)status symbols rather than purchasing power
D)clever tax evasion

Question 66

An increase in the market interest rate is likely to

A)increase household demand for real assets.
B)increase household demand for real money balances.
C)increase household demand for nonmonetary financial assets.
D)All of the above are correct.

Question 67

The interest rate

A)specifies the terms on which present purchasing power can be traded for future purchasing power.
B)bears little or no relationship to the supply of and the demand for money.
C)is economic profit for the borrower.
D)is the cost for lending and the reward for borrowing.

Question 68

If the household sector has some reason or belief to be more optimistic about the future, then the households will

A)consume more.
B)invest less.
C)lend more.
D)consume less.

Question 69

Real assets of a firm include which of the following?

A)negotiable certificates of deposits (CDs)
B)foreign deposits
C)trade credit
D)plant and equipment

Question 70

Firms hold financial assets which may include which of the following?

A)demand deposits
B)plant
C)inventories
D)equipment

Question 71

Firms hold real assets which may include which of the following?

A)demand deposits
B)negotiable CDs
C)accounts receivable
D)capital goods

Question 72

Which is not a liability to a nonfinancial firm?

A)bonds outstanding
B)long-term mortgage loans owed
C)short-term debts
D)demand deposits held at the local bank

Question 73

Even though investment spending is a smaller part of aggregate demand than consumption, it is much more

A)sluggish in movement or response.
B)short run in nature.
C)volatile.
D)independent of business fluctuations.

Question 74

Changes in business investment are important because

A)investment spending is the largest component of aggregate demand.
B)investment spending can be easily directed by government policy.
C)investment spending is the most volatile component of aggregate demand.
D)increases in investment spending decrease capacity utilization and stimulate additional spending on inventories.

Question 75

Which of the following is not a reason for business investment?

A)to replace worn out or obsolete plant and equipment
B)to acquire financial assets that will pay a future income stream to the business
C)to increase the capital stock
D)to add to inventories

Question 76

Investment spending by nonfinancial businesses depends on several different variables. Which of the following economic events would most likely lead to a decrease in net investment spending?

A)much higher capacity utilization
B)decreased interest rates
C)decreased corporate income taxes
D)decreased expected returns

Question 77

The real interest rate is which of the following?

A)the nominal interest rate multiplied by the expected inflation rate
B)the nominal interest rate minus the expected inflation rate
C)the nominal interest rate plus the expected inflation rate
D)the average percentage rate (APR)

Question 78

Which is not a major consideration in anticipating the accumulation of capital by firms in the aggregate?

A)the degree of capacity utilization
B)the business outlook
C)the government's tax policy
D)the average age of the work force is getting younger

Question 79

Inventory purchases are considered investments. Which of the following is not a reason to hold inventories?

A)smooth and efficient production
B)reduce taxes
C)satisfy consumer demand
D)anticipation of seasonal or cyclical flux in sales

Question 80

The largest source of funds for business firms is which of the following?

A)expanding equity
B)expanding debt
C)reducing wages
D)internal financing