Question 1

Suppose that 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.

Accepted Answer

Maria needs to know the prevailing interest rate over the next 20 years to make a decision about whether to take the $2 million lump sum or $7 million over 20 years. If the interest rate is high, it may make more financial sense to take the lump sum and invest it, while a low interest rate may make the annuity option more attractive.

Question 2

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

Accepted Answer

The more money paid back after borrowing money, the more money the lender will receive in return. Therefore, lenders will typically charge a higher interest rate when more money is borrowed and paid back.

Question 3

Use the following to answer questions: -(Figure: Crowding Out) Use Figure: Crowding Out. The supply of loanable funds curve S_LF₁ shifts to S_LF₂. This shift implies that:

Accepted Answer

The shift from S_LF₁ to S_LF₂ indicates an increase in the supply of loanable funds, which suggests that private savings has increased.

Question 4

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:

Accepted Answer

If Samantha were to receive a 5% raise, but the inflation rate is 5.5%, then her purchasing power would actually decrease by 0.5%. This means that her real wage (what she can actually buy with her wage) would decrease by 0.5%.

Question 5

Use the following to answer questions: 
-(Figure: The Market for Loanable Funds III) Use 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.

Accepted Answer

The answer of Use the following to answer questions: 
-(Figure:...

Question 6

Use the following to answer questions: 
-(Figure: The Market for Loanable Funds III) Use 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.

Accepted Answer

The answer of Use the following to answer questions: 
-(Figure:...

Question 7

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 _____%.

Accepted Answer

The interest rate can be calculated using the formula: 
Interest = Principal x Rate x Time
where Principal = $9,000, Interest = $1,000, Time = 1 year
Plugging in the values, we get:
$1,000 = $9,000 x Rate x 1
Rate = $1,000/$9,000 
Rate = 0.111 or 11.1%
Therefore, the answer is choice C, 11.1%.

Question 8

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:

Accepted Answer

The present value of the resale value of the textbook one year from now can be calculated using the formula:
PV = FV / (1 + r)^n
where PV is the present value, FV is the future value, r is the interest rate, and n is the number of years.

In this case, FV is $45, r is 10%, n is 1 year, and we want to find PV. Plugging in the numbers, we get:
PV = $45 / (1 + 0.1)^1 = $41

Therefore, the present value of the resale value of the textbook is $41, which is the best choice.

Question 9

Suppose that 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 _____%.

Accepted Answer

Nominal interest rate = Real interest rate + Inflation rate
Therefore, Nominal interest rate = 6% + 3% = 9%

Question 10

Use the following to answer questions: 
-(Figure: Crowding Out) Use 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.

Accepted Answer

When the supply of loanable funds increases (shifts to the right), it typically leads to a decrease in the interest rate because more funds are available for borrowing. Consequently, the lower interest rate encourages more borrowing, leading to an increase in the total amount of borrowing.

Question 11

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 the money.

Accepted Answer

The correct choice is B) now; opportunity cost because receiving $100 now rather than one year from now avoids the opportunity cost associated with waiting to use the money. The opportunity cost refers to the benefits or earnings one foregoes by choosing one option over another.

Question 12

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.

Accepted Answer

The answer of The government's budget deficit increases, and at...

Question 13

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 _____%.

Accepted Answer

Let's assume that the annual interest rate is r%.

According to the proposal, you will receive $1,000 now, and in one year's time, you will have to pay $1,100.

So, the amount you will have to pay after one year would be:

$1,000 * (1 + r) = $1,100

Simplifying this equation, we get:

1 + r = 1.1

r = 0.1 or 10%

Therefore, the answer is D, as you will just break-even if the annual interest rate is 10%.

Question 14

Use the following to answer questions: 
-(Figure: The Market for Loanable Funds III) Use 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:

Accepted Answer

The increase in government borrowing will shift the demand for loanable funds to the right, causing the equilibrium interest rate to rise. The size of the shift is determined by the amount of the increase in government borrowing. In this case, the increase in government borrowing is $200 billion, so the demand curve shifts to the right by $200 billion at each interest rate. The new equilibrium interest rate is where the demand and supply curves intersect after the shift, which is approximately 18%.

Question 15

Use the following to answer questions: 
-(Figure: The Market for Loanable Funds III) Use 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:

Accepted Answer

The answer of Use the following to answer questions: 
-(Figure:...

Question 16

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:

Accepted Answer

The present value of $1,200 received a year from now at a 20% interest rate is $1,000 ($1,200 / 1.20). Since the present value of the benefit equals the investment, the difference is $0.

Question 17

The Fisher effect states that the:

Accepted Answer

The Fisher effect posits that the expected real rate of interest is essentially unaffected by changes in expected inflation, as nominal interest rates adjust to offset the impact of inflation expectations, thereby leaving the real rate of interest stable.

Question 18

Governments can save when:

Accepted Answer

When taxes are greater than expenditures, the government has a budget surplus and is saving money. Choices A and C result in a budget deficit, which means the government is spending more than it is taking in through taxes and borrowing. Choice D, while it may encourage budget balancing, does not necessarily result in actual savings unless taxes are adjusted accordingly.

Question 19

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

Accepted Answer

The answer of If you are paid $10,500 in one...

Question 20

Crowding out means that:

Accepted Answer

Crowding out refers to the government borrowing money, which decreases the availability of funds for private investment. This occurs because the demand for loanable funds increases due to government borrowing, which causes interest rates to rise, making it more expensive for private borrowers to obtain financing. As a result, private investment may decrease. Private savings may also decrease, but this is not the primary effect of crowding out. Choices A and D are incorrect. Choice C is not directly related to the concept of crowding out.

Quiz 10: Savings, Investment Spending, and the Financial Syst

Suppose that 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.

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

Use the following to answer questions: -(Figure: Crowding Out) Use Figure: Crowding Out. The supply of loanable funds curve S_LF₁ shifts to S_LF₂. This shift implies that:

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:

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 _____%.

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:

Suppose that 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 _____%.

Use the following to answer questions: -(Figure: Crowding Out) Use 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.

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 the money.

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.

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 _____%.

Use the following to answer questions: -(Figure: The Market for Loanable Funds III) Use 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:

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:

The Fisher effect states that the:

Governments can save when:

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

Crowding out means that:

Quiz 10: Savings, Investment Spending, and the Financial Syst

Suppose that 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.

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

Use the following to answer questions: -(Figure: Crowding Out) Use Figure: Crowding Out. The supply of loanable funds curve SLF1 shifts to SLF2. This shift implies that:

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:

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 _____%.

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:

Suppose that 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 _____%.

Use the following to answer questions: -(Figure: Crowding Out) Use 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.

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 the money.

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.

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 _____%.

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:

The Fisher effect states that the:

Governments can save when:

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

Crowding out means that:

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

Use the following to answer questions: -(Figure: Crowding Out) Use Figure: Crowding Out. The supply of loanable funds curve S_LF₁ shifts to S_LF₂. This shift implies that:

Use the following to answer questions: -(Figure: Crowding Out) Use 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.

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 the money.

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.