Deck 21: Saving and Capital Formation

Question 1

Jordan has the following assets and liabilities: $$\begin{array} { l | r } \hline \text { Tuo cars } & \$ 10,000 \\\text { House } & \$ 200,000 \\\text { Mortgage } & \$ 100,000 \\\hline \text { Cash } & \$ 1,000 \\\text { Car loars } & \$ 3,000 \\\hline \text { Checkire accourtbalarce } & \$ 2,000 \\\text { Credit card balarce } & \$ 1,000\end{array}$$  
What is the value of Jordan's assets?

A)$109,000
B)$203,000
C)$213,000
D)$317,000

Answer 1

$213,000

Question 2

Wealth equals:

A)current income minus spending on current needs.
B)assets minus liabilities.
C)saving minus investment.
D)investment minus saving.

Answer 2

assets minus liabilities.

Question 3

The saving rate equals saving divided by:

A)wealth.
B)assets.
C)liabilities.
D)income.

Answer 3

income.

Question 4

Saving divided by income equals the _______ rate.

A)interest
B)wealth
C)saving
D)income

Question 5

Taylor has the following assets and liabilities: $$\begin{array} { l | r } \text { Two cars } & \$ 15,000 \\\text { House } & \$ 400,000 \\\text { Mortgage } & \$ 300,000 \\\hline \text { Cash } & \$ 1,000 \\\text { Car loars } & \$ 5,000 \\\hline \text { Checkire accourtbalarce } & \$ 3,000 \\\text { Credit card balarce } & \$ 3,000\end{array}$$  
What is the value of Taylor's assets?

A)$308,000
B)$416,000
C)$419,000
D)$422,000

Question 6

Liabilities are:

A)current income minus spending on current needs.
B)the debts one owes.
C)saving minus investment.
D)anything of value one owns.

Question 7

Jordan has the following assets and liabilities: $$\begin{array} { l | r } \hline \text { Tuo cars } & \$ 10,000 \\\text { House } & \$ 200,000 \\\text { Mortgage } & \$ 100,000 \\\hline \text { Cash } & \$ 1,000 \\\text { Car loars } & \$ 3,000 \\\hline \text { Checkire accourtbalarce } & \$ 2,000 \\\text { Credit card balarce } & \$ 1,000\end{array}$$  
What is Jordan's wealth?

A)$107,000
B)$109,000
C)$111,000
D)$213,000

Question 8

Assets minus liabilities equal:

A)saving.
B)investment.
C)wealth.
D)current income minus spending on current needs.

Question 9

Assets are:

A)current income minus spending on current needs.
B)stocks, bonds, and credit card balances.
C)saving minus investment.
D)anything of value one owns.

Question 10

Taylor has the following assets and liabilities:  
$$\begin{array} { l | r } \text { Two cars } & \$ 15,000 \\\text { House } & \$ 400,000 \\\text { Mortgage } & \$ 300,000 \\\hline \text { Cash } & \$ 1,000 \\\text { Car loars } & \$ 5,000 \\\hline \text { Checkire accourtbalarce } & \$ 3,000 \\\text { Credit card balarce } & \$ 3,000\end{array}$$  
What is Taylor's wealth?

A)$105,000
B)$107,000
C)$111,000
D)$419,000

Question 11

Wealth is the same as:

A)net worth.
B)assets.
C)capital gains.
D)savings.

Question 12

Taylor has the following assets and liabilities: $$\begin{array} { l | r } \text { Two cars } & \$ 15,000 \\\text { House } & \$ 400,000 \\\text { Mortgage } & \$ 300,000 \\\hline \text { Cash } & \$ 1,000 \\\text { Car loars } & \$ 5,000 \\\hline \text { Checkire accourtbalarce } & \$ 3,000 \\\text { Credit card balarce } & \$ 3,000\end{array}$$  
What is the value of Taylor's liabilities?

A)$300,000
B)$303,000
C)$308,000
D)$311,000

Question 13

Chris earns $1,500 per week and spends $1,000 per week on living expenses, puts $200 in a savings account, and buys $300 worth of shares in a stock mutual fund. Chris's saving is ________, and Chris's saving rate is ________.

A)$200; 13.3 percent
B)$200; 20.0 percent
C)$300; 20.0 percent
D)$500; 33.3 percent

Question 14

Pat earns $1,000 per week and spends $850 per week on living expenses, puts $50 in a savings account, and buys $100 worth of shares in a stock mutual fund. Pat's saving is ________, and Pat's saving rate is ________.

A)$50; 5.0 percent
B)$50; 5.9 percent
C)$100; 10 percent
D)$150; 15 percent

Question 15

Taylor has the following assets and liabilities: $$\begin{array} { l | r } \text { Two cars } & \$ 15,000 \\\text { House } & \$ 400,000 \\\text { Mortgage } & \$ 300,000 \\\hline \text { Cash } & \$ 1,000 \\\text { Car loars } & \$ 5,000 \\\hline \text { Checkire accourtbalarce } & \$ 3,000 \\\text { Credit card balarce } & \$ 3,000\end{array}$$  
Suppose that Taylor receives a $10,000 bonus from her employer. If she puts that money toward her mortgage, her wealth would ________; if she puts that money in her checking account, her wealth would ________.

A)increase to $121,000; decrease to $101,000
B)increase to $115,000; decrease to $95,000
C)increase to $121,000; increase to $121,000
D)increase to $115,000; increase to $115,000

Question 16

Which of the following is a liability of a family?

A)Checking account balance
B)Share of stock
C)House
D)Mortgage

Question 17

Jordan has the following assets and liabilities: $$\begin{array} { l | r } \hline \text { Tuo cars } & \$ 10,000 \\\text { House } & \$ 200,000 \\\text { Mortgage } & \$ 100,000 \\\hline \text { Cash } & \$ 1,000 \\\text { Car loars } & \$ 3,000 \\\hline \text { Checkire accourtbalarce } & \$ 2,000 \\\text { Credit card balarce } & \$ 1,000\end{array}$$  
What is the value of Jordan's liabilities?

A)$100,000
B)$104,000
C)$213,000
D)$317,000

Question 18

Current income minus spending on current needs equals:

A)saving.
B)wealth.
C)transfers.
D)investment.

Question 19

Which of the following is an asset of a family?

A)Student loan
B)Mortgage
C)Unpaid credit card balance
D)Checking account balance

Question 20

Saving equals:

A)current spending minus current income.
B)wealth minus assets.
C)assets minus liabilities.
D)current income minus spending on current needs.

Question 21

Jay owns a classic car he purchased for $50,000. At a car rally a knowledgeable classic car enthusiast offers him $75,000 for the car. Based on this information:

A)Jay's saving this year has increased by $25,000.
B)Jay's saving this year has decreased by $25,000.
C)Jay has experienced a $25,000 capital gain.
D)Jay's wealth is unchanged.

Question 22

Capital losses are:

A)decreases in the flow of investment.
B)decreases in the flow of saving.
C)the destruction of plant and equipment.
D)decreases in the value of existing assets.

Question 23

Mo's current income is $100 more per month than his current consumption needs. He decides to use the $100 to reduce his credit card debt. As a result, his:

A)liabilities will decrease and his wealth will increase.
B)liabilities and his wealth will decrease.
C)assets will decrease and his wealth will increase.
D)assets and his wealth will increase.

Question 24

Saving $100 will:

A)increase wealth by $100.
B)increase wealth by $100 only if the $100 is used to purchase an asset.
C)increase wealth by $100 only if the $100 is used to repay a debt.
D)decrease wealth by $100.

Question 25

If Dylan saves $50 per week, then Dylan's ________ will increase by $50 per week.

A)investment
B)consumption
C)taxes
D)wealth

Question 26

Steve uses $300 from his paycheck to pay off his credit card balance. Based on this information:

A)Steve's saving has increased by $300.
B)Steve's saving has decreased by $300.
C)Steve's wealth is unchanged.
D)Steve has a capital loss of $300.

Question 27

Saving is a(n)________ and wealth is a(n)________.

A)stock; flow
B)flow; stock
C)asset; liability
D)liability; asset

Question 28

A measure defined at a point in time is called a(n)________ variable.

A)stock
B)nominal
C)aggregate
D)flow

Question 29

The stock of wealth increases more rapidly the faster the flow of ________.

A)income
B)saving
C)money
D)assets

Question 30

Capital gains are:

A)increases in the flow of investment.
B)increases in the flow of saving.
C)additions to plant and equipment.
D)increases in the value of existing assets.

Question 31

Elaine owns a beautiful diamond ring she purchased for $2,500. When she has it appraised she learns that it is now worth $3,000. Based on this information:

A)Elaine's saving this year has increased by $500.
B)Elaine's saving this year has decreased by $500.
C)Elaine has experienced a $500 capital gain.
D)Elaine's wealth is unchanged.

Question 32

A flow is a measure defined:

A)per unit of time.
B)at a point in time.
C)in real terms.
D)in nominal terms.

Question 33

A stock is a measure defined:

A)per unit of time.
B)at a point in time.
C)in real terms.
D)in nominal terms.

Question 34

Jordan has the following assets and liabilities: $$\begin{array} { l | r } \hline \text { Tuo cars } & \$ 10,000 \\\text { House } & \$ 200,000 \\\text { Mortgage } & \$ 100,000 \\\hline \text { Cash } & \$ 1,000 \\\text { Car loars } & \$ 3,000 \\\hline \text { Checkire accourtbalarce } & \$ 2,000 \\\text { Credit card balarce } & \$ 1,000\end{array}$$  
Suppose that Jordan wins $100,000 in the lottery. If he uses that money to pay off his mortgage, his wealth would ________; if he puts that money in his checking account, his wealth would ________;

A)increase to $209,000; not change
B)not change; increase to $207,000
C)increase to $209,000; increase to $209,000
D)increase to $207,000; not change

Question 35

If Gerry saves $500 per month, then Gerry's ________ will increase by ________.

A)wealth; $500 only if he has no debt
B)income; $500 only if he buys additional assets
C)wealth; $500
D)wealth; $500 only if he buys additional assets

Question 36

Which of the following is a flow?

A)Saving
B)Wealth
C)Assets
D)Money

Question 37

Joan purchases a beautiful rug for $25,000. After several years of wear and tear, Joan has the rug appraised and finds that it is now worth only $20,000. Based on this information:

A)Joan's saving this year has increased by $5,000.
B)Joan has a $5,000 capital gain.
C)Joan has a $5,000 capital loss.
D)Joan's wealth is unchanged.

Question 38

The Cub Scouts have so far sold 100 tickets for their upcoming raffle, but they sell a constant additional 12 tickets every day. After three more days of selling tickets, the stock of tickets sold will be ________, and the flow of tickets sold will be ________.

A)136; 12
B)36; 12
C)100; 36
D)136; 36

Question 39

Which of the following is a stock?

A)Saving
B)Income
C)Consumption
D)Wealth

Question 40

The Cub Scouts have so far sold 100 tickets for their upcoming raffle, but they sell an additional 12 tickets every day. The ________ is a stock variable, and the ________ is a flow variable.

A)number of tickets sold each day; number of tickets sold so far
B)number of tickets sold so far; total number of tickets sold by the time of the raffle
C)number of tickets sold each day; total number of tickets available
D)total number of tickets sold by the time of the raffle; number of tickets sold each day

Question 41

Precautionary saving is saving:

A)to meet long-term objectives, such as retirement, college attendance, or the purchase of a home.
B)for protection against unexpected setbacks, such as the loss of a job or a medical emergency.
C)for the purpose of leaving an inheritance.
D)done in anticipation of sales or bargain in the future.

Question 42

Which of the following is an example of the precautionary motive for saving?

A)Pat puts $400 per month in his 401(k)retirement account.
B)Jordan sets aside $200 per month in case she has to pay for a new roof for her house.
C)Gerry and Terry put $2,000,000 in a trust fund that will go to their children when the parents die.
D)Every month, Chris puts $400 into his saving account so that he can buy a new car in a few years.

Question 43

Saving done for the purpose of leaving an inheritance is called ________ saving.

A)public
B)bequest
C)precautionary
D)life-cycle

Question 44

Bob has heard rumors that his employer will be merging with another firm and many employees may lose their jobs, and he wants to be prepared in case he loses his job. If he begins to save more in response to this rumor, it is a ________ reason for saving.

A)life-cycle
B)public
C)private
D)precautionary

Question 45

The impact of declining stock prices in the U.S. during 2000-2006 on U.S. household wealth was at least partially offset by:

A)an increase in the saving rate.
B)a decrease in the saving rate.
C)an increase in public saving.
D)increasing housing prices.

Question 46

Fred and Wilma just had a baby girl and want to make sure they save enough in the future to send her to college. They begin to save in response to this ________ reason for saving.

A)life-cycle
B)bequest
C)private
D)precautionary

Question 47

Bequest saving is saving:

A)to meet long-term objectives, such as retirement, college attendance, or the purchase of a home.
B)for protection against unexpected setbacks, such as the loss of a job or a medical emergency.
C)for the purpose of leaving an inheritance.
D)done in anticipation of sales or bargain in the future.

Question 48

Life-cycle saving is saving:

A)to meet long-term objectives, such as retirement, college attendance, or the purchase of a home.
B)for protection against unexpected setbacks, such as the loss of a job or a medical emergency.
C)for the purpose of leaving an inheritance.
D)to pay life-insurance premiums.

Question 49

The three broad reasons for saving, as identified by economists, relate to:

A)consumption, investment, and exports.
B)national, public, and private production.
C)the life-cycle, precaution, and bequests.
D)capital gains, capital losses, and deficits.

Question 50

Ted and Alice want to make sure that their children will inherit lots of money when they die, so that their children do not have to struggle the way they themselves did. Saving more in response to this is a ________ reason for saving.

A)life-cycle
B)bequest
C)private
D)precautionary

Question 51

Steve takes $500 from his paycheck and uses it to purchase U.S. Savings Bonds. Based on this information:

A)Steve's saving has increased by $500.
B)Steve's saving has decreased by $500.
C)Steve has a capital gain of $500.
D)Steve's wealth is unchanged.

Question 52

Higher rates of saving today contribute to ________ in the future.

A)higher tax rates
B)more unemployment
C)a higher standard of living
D)more capital gains

Question 53

The large increase in household wealth in the United States in the 1990s and early 2000s was the result of:

A)a high saving rate.
B)a low saving rate.
C)large capital gains.
D)high rates of inflation.

Question 54

Which of the following is an example of the bequest motive for saving?

A)Pat puts $400 per month in his 401(k)retirement account.
B)Jordan sets aside $200 per month in case she has to pay for a new roof for her house.
C)Gerry and Terry put $2,000,000 in a trust fund that will go to their children when they die.
D)Chris keeps $15,000 in a money market account to pay expenses in case he loses his job.

Question 55

Saving for protection against unexpected setbacks-such as the loss of a job or a medical emergency-is called ________ saving.

A)public
B)bequest
C)precautionary
D)life-cycle

Question 56

If Alex uses $800 from her checking account to pay her credit card balance, her wealth:

A)increases by $800.
B)decreases by $800.
C)increases by $1,600.
D)does not change.

Question 57

The change in wealth during a period equals:

A)saving + capital gains - capital losses.
B)saving - capital gains + capital losses.
C)saving - investment + capital gains - capital losses.
D)public saving + private saving - transfers.

Question 58

Saving to meet long-term objectives-such as retirement, college attendance, or to purchase a home,-is called ________ saving.

A)public
B)bequest
C)precautionary
D)life-cycle

Question 59

Which of the following is an example of the life-cycle motive for saving?

A)Pat puts $400 per month in his 401(k)retirement account.
B)Jordan sets aside $200 per month in case she has to pay for a new roof for her house.
C)Gerry and Terry put $2,000,000 in a trust fund that will go to their children when they die.
D)Chris keeps $15,000 in a money market account to pay expenses in case he loses his job.

Question 60

If Alex deposits $1,000 from her paycheck into her checking account and, at the same time, increases her credit card balance by $1,500, then her saving is ________, and her wealth ________.

A)+$1,000; decreases by $500
B)+$500; decreases by $1,000
C)-$500; increases by $2,500
D)-$500; decreases by $500

Question 61

An explanation for the low saving rate in the United States consistent with the precautionary reason for saving includes:

A)relatively generous government assistance for the elderly and large down payments required for home purchases.
B)households spending beyond their means to keep up with community standards.
C)highly-developed financial systems making it easy to buy homes with down payments under 15 percent.
D)confidence in future economic prosperity.

Question 62

The self-control hypothesis suggests that people:

A)base their spending decisions (and consequently their saving decisions)on spending decisions of others.
B)want to save, but lack the discipline to refrain from consuming.
C)substantially decrease their saving when the real interest rate increases.
D)control their spending in order to save more when the real interest rate increases.

Question 63

Explanations for the high saving rate in China consistent with the life-cycle reason for saving include:

A)China's social safety net provides most people little in the way of retirement income.
B)lifetime employment.
C)the desire to leave resources to children who provide support and attention to parents in their old age.
D)low unemployment rates in Japan.

Question 64

An explanation for the low saving rate in the United States consistent with the life-cycle reason for saving includes:

A)relatively generous government assistance for the elderly and large down payments required for home purchases.
B)households spending beyond their means to keep up with community standards.
C)highly-developed financial systems making it easy to buy homes with down payments under 15 percent.
D)large and persistent capital gains.

Question 65

Which of the following hypotheses is a plausible explanation for why U.S. households save so little?

A)Government assistance to the elderly has reduced the need for life-cycling saving.
B)Most Americans already own homes and, therefore, have less need for life-cycle saving.
C)The highly developed financial markets in the U.S. have reduced the need for precautionary saving by Americans.
D)Government assistance to low-income U.S. households has increased the demonstration effects on spending by the poor.

Question 66

Other things equal, the combination of a ________ saving rate and a ________ real interest rate will result in the largest accumulation of wealth over time.

A)high; high
B)high; low
C)high; zero
D)low; high

Question 67

If total government tax collections equal $200 billion, transfer payments equal $75 billion, and government interest payments equal $10 billion, then net taxes equal:

A)$115 billion.
B)$125 billion.
C)$190 billion.
D)$275 billion.

Question 68

The Hatfields and the McCoys both earn $50,000 per year in real terms in the labor market, and both families are able to earn a 25 percent real interest rate on their savings. Assume that all interest is paid out as income in the following year. In the year 2010, both families began to save. The Hatfields saved 8 percent of their income each year; the McCoys saved 10 percent. In 2010, the Hatfields consumed ________ more than the McCoys; in 2011, the Hatfields consumed ________ than the McCoys.

A)$1,000; about $800 more
B)$2,000; about $250 more
C)$1,000; about $800 less
D)$2,000; about $250 less

Question 69

Where Y is GDP, C is consumption, I is investment, G is government spending, and there is no international trade, national saving equals:

A)C + I + G.
B)Y - C - G.
C)Y + C + G.
D)Y - C - I.

Question 70

Psychological factors that may influence the saving rate are ________ and ________.

A)the real interest rate; the demonstration effect
B)self-control problems; the demonstration effect
C)capital gains; the real interest rate
D)the desire to leave a bequest; capital gains

Question 71

The Hatfields and the McCoys both earn $50,000 per year in real terms in the labor market, and both families are able to earn a 5 percent real interest rate on their savings. In the year 2010, both families began to save. The Hatfields saved 8 percent of their income each year; the McCoys saved 10 percent. In 2010, the Hatfields consumed ________ more than the McCoys; in 2011, the Hatfields consumed ________ than the McCoys.

A)$1,000; about $960 less
B)$2,000; about $960 more
C)$1,000; about $960 more
D)$2,000; about $960 less

Question 72

Net taxes equal the amount that the:

A)government pays the private sector plus the amount of private sector pays the government.
B)government pays the private sector minus the amount the private sector pays the government.
C)business sector pays the government minus the amount the private sector pays the government.
D)private sector pays the government minus the amount the private sector receives from the government.

Question 73

A nation's saving equals its ________ income less its spending on ________.

A)real; investment
B)current; current needs
C)nominal; investment
D)nominal; net taxes

Question 74

National saving is done by:

A)only households.
B)only businesses.
C)only governments.
D)households, businesses, and governments.

Question 75

The demonstration effect suggests that people will save less when they

A)base their spending decisions (and consequently their saving decisions)on spending decisions of others who spend more than they do.
B)base their saving decisions on their projections of income and spending needs over their lifetime.
C)recognize that the real interest rate has increased.
D)control their spending in order to save more when the real interest rate increases.

Question 76

An explanation for the low saving rate in the United States consistent with the demonstration effect includes:

A)relatively generous government assistance for the elderly and large down payments required for home purchases.
B)households spending beyond their means to keep up with community standards.
C)highly-developed financial systems making it easy to buy homes with down payments under 15 percent.
D)large and persistent capital gains.

Question 77

National saving is saving by:

A)households for retirement.
B)the government.
C)households and firms.
D)the entire economy.

Question 78

To the extent that households are target savers who save to reach a specific goal, an increase in the interest rate ________ household saving and a decrease in the interest rate ________ household saving.

A)increases; decreases
B)decreases; increases
C)does not affect; increases
D)increases; does not affect

Question 79

Total taxes minus transfer payments minus government interest payments is called:

A)a budget surplus.
B)net taxes.
C)a budget deficit.
D)national saving.

Question 80

Empirical evidence indicates that higher real interest rates lead to ________ in savings.

A)modest increases
B)substantial increases
C)no change in
D)modest decreases