Deck 21: Finance, Saving, and Investment

Question 1

In the above figure, the economy is at point a on the initial supply of loanable funds curve SLF0. What happens if the real interest rate rises?

A)The supply of loanable funds curve shifts rightward to a curve such as SLF2.
B)The supply of loanable funds curve shifts leftward to a curve such as SLF1.
C)There is a movement to a point such as b on the supply of loanable funds curve SLF0.
D)None of the above.

Answer 1

C

Question 2

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

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

Answer 2

A

Question 3

The supply of loanable funds is the relationship between loanable funds and _, other things remaining the same.

A)the price level
B)real GDP
C)the real interest rate
D)the inflation rate

Answer 3

C

Question 4

A rise in the real interest rate

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

Question 5

According to the Ricardo- Barro effect, government budget deficits

A)lead to simultaneous increases in private saving and no effect on the equilibrium real interest rate and investment.
B)lead to a rise in the equilibrium real interest rate, crowding- out investment.
C)lead to simultaneous decreases in private saving and decreases in the equilibrium real interest rate and investment.
D)lead to a fall in the equilibrium real interest rate and a rise in investment.

Question 6

In January 2010, Tim owned machines valued at $1 million. During the year, the market value of the equipment fell by 30 per cent. During 2010, Tim spent $200,000 on new machines. During 2010, Tim's gross investment totalled

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

Question 7

Suppose the real interest rate rises and the quantity of loanable funds decreases. These changes could have been the result of

A)an increase in household wealth.
B)a decrease in the default risk.
C)an increase in disposable income.
D)firms expecting higher future profits.

Question 8

Gross investment

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

Question 9

National saving is defined as the amount of

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

Question 10

A nation's investment must be financed by

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

Question 11

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

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

Question 12

If the government runs a budget deficit, then

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

Question 13

If households' disposable income decreases, then

A)households' saving will increase.
B)households' saving will decrease.
C)investment will increase.
D)Both B and C are correct.

Question 14

Which of the following is true regarding the real interest rate?

A)I
B)II
C)Both I and II
D)Neither I nor II

Question 15

The crowding- out effect refers to

A)government spending crowding- out private spending.
B)government investment crowding- out private investment.
C)private investment crowding- out government saving.
D)private saving crowding- out government saving.

Question 16

If the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded, then
.

A)the real interest rate will rise
B)the real interest rate will fall
C)people will save more
D)firms will decrease their investment demand

Question 17

The tendency for private saving to increase in response to growing government deficits is known as the

A)money illusion effect.
B)Keynes effect.
C)Ricardo- Barro effect.
D)crowding- out effect.

Question 18

The quantity of by households will be less _.

A)consumption; the higher is disposable income
B)saving; the lower is the real interest rate
C)saving; the higher is disposable income
D)consumption; the lower is the inflation rate

Question 19

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

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

Question 20

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

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

Question 21

If the real interest rate is above the equilibrium real interest rate,

A)lenders will be unable to find borrowers willing to borrow all of the available funds and the real interest rate will fall.
B)borrowers will be unable to borrow all of the funds they want to borrow and the real interest rate will rise.
C)borrowers will be unable to borrow all of the funds they want to borrow and the real interest rate will fall.
D)lenders will be unable to find borrowers willing to borrow all of the available funds and the real interest rate will rise.

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

Question 23

In the above figure, an increase in the expected profit will result in a movement from point E to

A)point F.
B)point G.
C)point H.
D)point I.

Question 24

Which of the following shifts the demand for loanable funds curve leftward?

A)A rise in the real interest rate
B)A decrease in the expected profit
C)A fall in the real interest rate
D)A decrease in the taxes paid by the business

Question 25

Saving by households

A)is unaffected by the real interest rate.
B)increases when the real interest rate rises.
C)decreases when the real interest rate rises.
D)increases when the real interest rate falls.

Question 26

An increase in will shift the supply of loanable funds curve .

A)disposable income; leftward
B)wealth; leftward
C)expected future income; rightward
D)default risk; rightward

Question 27

Households will choose to save more if

A)income is expected to decrease in the future.
B)current disposable income increases.
C)Both answers A and B are correct.
D)Neither answer A nor B is correct.

Question 28

The idea that a government budget deficit decreases investment is called

A)the crowding- out effect.
B)the Ricardo- Barro effect.
C)the capital investment effect.
D)government dissaving.

Question 29

Which of the following is true?

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

Question 30

When the actual real interest rate is less than the equilibrium real interest rate,

A)the equilibrium real interest rate will rise.
B)borrowers find it difficult to borrow.
C)there is a shortage of loanable funds.
D)Both answers B and C are correct.

Question 31

Which of the following is a major influence on the expected profit from an investment?

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

Question 32

Which of the following will shift the supply of loanable funds curve leftward?

A)A decrease in expected future income
B)A decrease in disposable income
C)A decrease in the real interest rate
D)A decrease in real wealth

Question 33

Which of the following is FALSE about saving?

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

Question 34

An increase in disposable income shifts the supply of loanable funds curve

A)rightward and decreases the real interest rate.
B)leftward and decreases the real interest rate.
C)leftward and increases the real interest rate.
D)rightward and increases the real interest rate.

Question 35

Changes in all of the following shift the supply curve of loanable funds EXCEPT

A)wealth.
B)expected future income.
C)disposable income.
D)the real interest rate.

Question 36

The greater a household's _ , the less is its saving.

A)wealth
B)disposable income
C)expected future profits
D)return from saving

Question 37

In the above figure, the economy is at point a on the initial demand for loanable funds curve DLF0. What happens if the real interest rate rises?

A)The demand for loanable funds curve shifts leftward to a curve such as DLF1.
B)The demand for loanable funds curve shifts rightward to a curve such as DLF2.
C)There is a movement to a point such as b on the demand for loanable funds curve DLF0.
D)None of the above

Question 38

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

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

Question 39

Which of the following has a positive relationship with household saving?

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

Question 40

The Ricardo- Barro effect holds that

A)government budget deficits have no effect on the real interest rate.
B)a government budget deficit crowds- out private investment.
C)equal increases in taxes and government expenditures have no effect on equilibrium real GDP.
D)a government budget deficit induces a decrease in saving that magnifies the crowding- out effect.

Question 41

In the loanable funds market, if the interest rate is above the equilibrium level

A)expected profit falls.
B)there is a surplus of loanable funds.
C)government expenditure decreases.
D)there is a shortage of loanable funds.

Question 42

A small country is a net foreign borrower and its demand for loanable funds increases. As a result, the equilibrium quantity of loanable funds used in the country and the country's foreign borrowing .

A)does not change; does not change
B)increases; does not change
C)does not change; increases
D)increases; increases

Question 43

The Ricardo- Barro effect asserts that government

A)expenditure affects private expenditure.
B)budget deficits crowd- out private borrowing.
C)saving affects private saving.
D)taxation raises interest rates.

Question 44

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

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

Question 45

In the global loanable funds market,

A)riskier loans will have lower real interest rates than safer loans.
B)interest rates for all types of loans will be equal.
C)loans of equal risk will have equal interest rates.
D)safer loans will have higher real interest rates than riskier loans.

Question 46

When the inflation rate is positive, the

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

Question 47

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 48

The the expected profit, the greater is the .

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

Question 49

If the government's budget deficit increases and the Ricardo- Barro effect does not apply,

A)investment decreases.
B)investment increases.
C)the real interest rate rises.
D)Both answers A and C are correct.

Question 50

Suppose the market for loanable funds is in equilibrium. If disposable income increases, the equilibrium real interest rate and the quantity of loanable funds .

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

Question 51

In the above figure, the economy is at point a on the initial supply of loanable funds curve SLF0. What happens if disposable income decreases?

A)There would be a movement to a point such as b on the supply of loanable funds curve SLF0.
B)Nothing; the economy would remain at point a.
C)The supply of loanable funds curve would shift rightward to a curve such as SLF2.
D)The supply of loanable funds curve would shift leftward to a curve such as SLF1.

Question 52

In the above figure, the initial supply of loanable funds curve is SLF0 and the initial demand for loanable funds curve is DLF0. An economic expansion that raises disposable income and the expected profit would

A)have no effect on either the demand for loanable funds curve or the supply of loanable funds curve.
B)shift the supply of loanable funds curve rightward to a curve such as SLF1, and shift the demand for loanable funds curve rightward to a curve such as DLF1.
C)only shift the demand for loanable funds curve rightward to a curve such as DLF1.
D)only shift the supply of loanable funds curve rightward to a curve such as SLF1.

Question 53

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

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

Question 54

If disposable income increases, people will decide to saving, the supply of loanable funds will _ _ and the real interest rate will _.

A)increase; increase; fall.
B)increase; decrease; rise.
C)decrease; decrease; rise.
D)decrease; increase; fall.

Question 55

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.
B)$100,000.
C)$0.
D)$20,000.

Question 56

Technological progress that increases the expected profit shifts the demand for loanable funds curve

A)rightward and increases the real interest rate.
B)rightward and reduces the real interest rate.
C)leftward and increases the real interest rate.
D)leftward and reduces the real interest rate.

Question 57

In the above figure, the demand for loanable funds curve is drawn for the average expected profit. If the real interest rate is constant at 6 per cent and the expected profit falls, the amount of loanable funds demanded will be

A)between $450 billion and $600 billion.
B)less than $450 billion.
C)greater than $600 billion.
D)$450 billion.

Question 58

Investment is financed by which of the following?

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

Question 59

A small country is a net foreign borrower if its real interest rate without foreign borrowing is
The world real interest rate.

A)lower than
B)equal to
C)higher than
D)not comparable to

Question 60

A firm's decision to invest in a project is based on the

A)real interest rate and the expected profit.
B)nominal interest rate and the expected profit.
C)real interest rate and expected total revenue.
D)nominal interest rate and expected total revenue.

Question 61

An increase in the real interest rate the quantity of loanable funds supplied and _ the quantity of loanable funds demanded.

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

Question 62

A rise in the real interest rate

A)decreases the demand for loanable funds.
B)increases the quantity of loanable funds demanded.
C)decreases the quantity of loanable funds demanded.
D)increases the demand for loanable funds.

Question 63

If the government begins to run larger budget deficits, then, assuming there is no Ricardo- Barro effect, the demand for loanable funds and the real interest rate .

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

Question 64

When the inflation rate is negative, the

A)real interest rate is greater 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 less than the nominal interest rate.

Question 65

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

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

Question 66

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 67

The real interest rate is _ in Australia compared to Zimbabwe because _.

A)lower; there is a lower risk premium in Australia.
B)lower; Australia is a net borrower.
C)higher; Zimbabwe is a net borrower.
D)higher; more firms want to borrow financial capital in Australia.

Question 68

In the above figure, a decrease in the real interest rate will result in a movement from point E to

A)point F.
B)point G.
C)point H.
D)point I.

Question 69

If China's government runs a budget surplus and there is no Ricardo- Barro effect, there will be
In the supply of loanable funds, private saving _ and investment .

A)a decrease; increases; increases
B)an increase; increases; increases
C)an increase; decreases; increases
D)a decrease; decrease; increases

Question 70

When the inflation rate is zero, the

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

Question 71

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

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

Question 72

If the real interest rate rises, people

A)decrease their expected future income.
B)earn a higher real wage rate.
C)save more.
D)save less.

Question 73

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

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

Question 74

Australian investment is financed from

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

Question 75

In the absence of a Ricardo- Barro effect, a government budget deficit the demand for loanable funds, _ the real interest rate, and investment.

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

Question 76

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

A)Australia's investment must decrease.
B)Australia is borrowing from the rest of the world.
C)Australia is lending to the rest of the world.
D)Australia's national saving is too high.

Question 77

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

A)5 per cent
B)11 per cent
C)8 per cent
D)3 per cent

Question 78

In the above figure, the economy is at point a on the initial supply of loanable funds curve SLF0. What happens if the real interest rate rises?

A)The supply of loanable funds curve would shift leftward to a curve such as SLF1.
B)There would be a movement to a point such as b on the supply of loanable funds curve SLF0.
C)The supply of loanable funds curve would shift rightward to a curve such as SLF2.
D)Nothing; the economy would remain at point a.

Question 79

If the government has a budget deficit, crowding- out might occur. Crowding- out leads to all of the following EXCEPT

A)a higher real interest rate.
B)decreased private saving.
C)a smaller capital stock in the future.
D)a decreased quantity of investment.

Question 80

When the real interest rate rises

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