Deck 8: Saving and Capital Formation

Question 1

Wealth is the same as:

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

Answer 1

net worth.

Question 2

Current income minus spending on current needs equals:

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

Answer 2

saving.

Question 3

Which of the following is an asset of a family?

A) Student loan
B) Mortgage
C) Share of stock
D) Unpaid credit card balance

Answer 3

Share of stock

Question 4

Anything of value one owns is called a(n):

A) asset.
B) liability.
C) capital gain.
D) investment.

Question 5

The saving rate equals saving divided by:

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

Question 6

Taylor has the following assets and liabilities: What is the value of Taylor's assets?

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

Question 7

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%
B) $200; 20.0%
C) $300; 20.0%
D) $500; 33.3%

Question 8

Taylor has the following assets and liabilities: What is Taylor's wealth?

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

Question 9

Taylor has the following assets and liabilities: 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 10

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 11

Taylor has the following assets and liabilities: What is the value of Taylor's liabilities?

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

Question 12

Which of the following is a liability of a family?

A) Checking account balance
B) Unpaid credit card balance
C) Share of stock
D) House

Question 13

Wealth equals:

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

Question 14

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 15

Jordan has the following assets and liabilities: Jordan's wealth is _____, the value of Jordan's assets is _____, and the value of Jordan's liability is _____.

A) $107,000; $213,000; $100,000
B) $109,000; $213,000; $104,000
C) $111,000; $213,000; $100,000
D) $213,000; $317,000; $104,000

Question 16

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 17

The debts one owes are called:

A) asset.
B) liability.
C) capital loss.
D) investment.

Question 18

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 19

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%
B) $50; 5.9%
C) $100; 10%
D) $150; 15%

Question 20

Which of the following is a liability of a family?

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

Question 21

The flow of _____ increases the stock of _______.

A) consumption; income
B) saving; wealth
C) money; income
D) investment; profits

Question 22

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

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

Question 23

The Boy 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 24

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 25

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 26

Increases in the value of existing assets are called:

A) saving.
B) investment.
C) capital gains.
D) capital losses.

Question 27

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

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

Question 28

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 29

A measure defined per unit of time is called a(n) ______ variable.

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

Question 30

The Boy 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 31

Which of the following is a stock?

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

Question 32

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

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

Question 33

Capital gains are ______, and capital losses are ______.

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

Question 34

Jordan has the following assets and liabilities: 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

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 36

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

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

Question 37

Decreases in the value of existing assets are called:

A) saving.
B) investment.
C) capital gains.
D) capital losses.

Question 38

Which of the following is a flow?

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

Question 39

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 40

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 41

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 42

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

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

Question 43

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 44

Wealth increases as a result of _____ and/or _____.

A) positive saving; capital gains
B) negative saving (borrowing); capital gains
C) positive saving; crowding out
D) positive saving; capital losses

Question 45

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 46

High 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 47

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 48

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 49

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 50

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

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

Question 51

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 52

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 53

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 54

If the shares of stock that Doug owns go up in value from $10,000 to $15,000, then Doug's wealth:

A) increases by $15,000.
B) decreases by $5,000.
C) increases by $5,000.
D) does not change.

Question 55

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 56

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 57

If Doug drives his car into a tree, reducing the value of the car from $15,000 to $14,000, then Doug's wealth:

A) decreases by $15,000.
B) increases by $1,000.
C) does not change.
D) decreases by $1,000.

Question 58

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 59

Wealth decreases as a result of _____ and/or _____.

A) positive saving; capital gains
B) negative saving (borrowing); capital gains
C) negative saving (borrowing); crowding out
D) negative saving (borrowing); capital losses

Question 60

The impact of declining stock prices in the U.S. during the period 2000-2002 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 61

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

Question 62

Empirical evidence indicates that lower real interest rates lead to ______ in savings.

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

Question 63

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) well-developed financial markets making it easy to borrow against home equity.
D) large and persistent capital gains.

Question 64

Explanations for the low saving rate in the United States consistent with the life-cycle reason for saving include:
A. relatively limited 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. well developed financial markets making it easy to borrow against home equity.
D. confidence in future economic prosperity.

Question 65

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% 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% of their income each year; the McCoys saved 10%. 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 66

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 67

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 68

National saving is saving by:

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

Question 69

Explanations for the low U.S. saving rate include all of the following EXCEPT:

A) government programs that provide income for the elderly.
B) low down payments required to purchase homes.
C) large capital gains in the stock market.
D) low real interest rates relative to the rest of the world.

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

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 72

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% real interest rate on their savings. In the year 2010, both families began to save. The Hatfields saved 8% of their income each year; the McCoys saved 10%. 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 73

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 74

A higher real rate of interest _____ the reward for saving and _____ the amount people need to save to reach a given target.

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

Question 75

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 76

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 77

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 American 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 78

Explanations for the high precautionary savings in China includes all of these except:

A) China's limited social safety net provides most people with little protection against health problems and medical costs.
B) lifetime employment and guaranteed state pensions.
C) the many uncertainties associated with changing economic institution and society as a whole.
D) higher prices for things such as housing and education.

Question 79

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

A) China's limited social safety net provides most people with little protection against health problems and medical costs.
B) few opportunities to borrow funds for education or paying for a house.
C) the desire to leave resources to children who provide support and attention to parents in their old age.
D) low unemployment rates in China.

Question 80

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