Question 1

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

Accepted Answer

Higher interest rates, indeed, are shown to slightly increase the rate of saving as savers find it more rewarding to save at higher real interest rates.

Question 2

Joe's Taco Hut can purchase a delivery truck for $20,000 and Joe estimates it will generate a net income (after taxes, maintenance and operating costs) of $2,000 per year.He has no other opportunities.He should:

Accepted Answer

Joe should purchase the truck if the real interest rate is less than 10% because the truck generates a 10% return on investment ($2,000/$20,000).

Question 3

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.

Accepted Answer

The answer of The Hatfields and the McCoys both earn...

Question 4

Investment is a(n) ______ that changes the ______ of capital.

Accepted Answer

Investment is a flow that changes the stock of capital. When an investment is made, it represents a flow of funds from the investor to the recipient, resulting in an increase in the stock of capital of the recipient.

Question 5

Holding other factors constant, a decline in the price of new capital goods will:

Accepted Answer

A decline in the price of new capital goods will increase investment as it becomes cheaper for firms to acquire new capital goods, which should lead to an increase in investment spending. Additionally, a decline in the price of new capital goods may also increase productivity and profits, which could further stimulate investment. National saving is not directly affected by a decline in the price of new capital goods, so options A and B are incorrect.

Question 6

The demonstration effect suggests that people will save less when they

Accepted Answer

The demonstration effect suggests that people base their spending decisions on the spending decisions of others who spend more than they do. Therefore, if others are spending more, individuals may feel pressure to spend more as well and save less.

Question 7

The self-control hypothesis suggests that people:

Accepted Answer

Many people hope to save and are well aware its importance, but are compelled to spend because of short-run desires.

Question 8

Firms will invest in new equipment whenever:

Accepted Answer

Firms will invest in new equipment if the expected benefits of such investment exceed the expected costs. Therefore, when the expected cost of the equipment is less than the expected benefit, it makes economic sense for the firm to invest in that equipment.

Question 9

The costs of investment depend on the ______ and the _______.

Accepted Answer

The price of new capital goods and the real interest rate both affect the costs of investment. The price of new capital goods represents the cost of acquiring the physical assets needed to produce a firm's output, while the real interest rate determines the cost of financing that investment through borrowing. As the real interest rate rises, the opportunity cost of investing also increases, since there is a higher return available in alternative investments. Therefore, B is the correct answer.

Question 10

The value of the marginal product of new capital increases when the:

Accepted Answer

The marginal product of capital refers to the additional output that can be produced by adding one more unit of capital. The value of this marginal product increases when the productivity of new capital increases, meaning that each additional unit of capital contributes more to the production process. Therefore, choice D is the best answer.

Question 11

The real rate of interest measures the ______ of capital investment.

Accepted Answer

The real rate of interest measures the opportunity cost of capital investment. This is because it represents the return that could be earned on alternative investments of equal risk.

Question 12

The opportunity cost of capital investment is the:

Accepted Answer

When a firm makes capital investments, it faces an opportunity cost because the money invested cannot be lent out to others.

Question 13

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

Accepted Answer

The demonstration effect suggests that individuals spend more to match the consumption patterns of their peers, leading to lower savings rates as they try to keep up with community standards.

Question 14

The marginal product of new capital depends on ______ and _____.

Accepted Answer

When a firm considers new investments, they evaluate how much the investment increases output and how much new output can be sold for.

Question 15

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.

Accepted Answer

When interest rates increase, the opportunity cost of spending money now instead of saving it increases, thus encouraging households to save more. Conversely, when interest rates decrease, the opportunity cost of spending money now instead of saving it decreases, leading to a decrease in household saving.

Question 16

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

Accepted Answer

The answer of Which of the following hypotheses is a...

Question 17

Joe's Taco Hut can purchase a delivery truck for $20,000 and Joe estimates it will generate a net income (after taxes, maintenance and operating costs) of $4,000 per year.His other option is to go to work for someone else earning net income of $3,000 per year.He should:

Accepted Answer

The correct answer is D because the net present value of the truck is positive if the real interest rate is less than 5%.

Question 18

The greater the flow of investment spending, the greater the increase in the stock of:

Accepted Answer

Investment spending increases the stock of capital, as it involves purchasing capital goods that contribute to future production capacity.

Question 19

Psychological factors that may influence the saving rate are ______ and _______.

Accepted Answer

Self-control problems can lead to impulsive spending and a lower saving rate, while the demonstration effect is the tendency to spend more when others around us are spending more, which also lowers the saving rate. The other options either don't directly relate to psychological factors (capital gains and real interest rate) or are not commonly seen as psychological factors affecting the saving rate (desire to leave a bequest).

Question 20

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.

Accepted Answer

In 2010, the Hatfields saved 8% of $50,000, which is $4,000, consuming $46,000. The McCoys saved 10%, which is $5,000, consuming $45,000. Thus, the Hatfields consumed $1,000 more in 2010. In 2011, the Hatfields' savings grew by 25% to $5,000, and the McCoys' savings grew to $6,250. The Hatfields consumed $46,000 + $5,000 = $51,000, and the McCoys consumed $45,000 + $6,250 = $51,250. Thus, the Hatfields consumed about $800 more in 2011.

Quiz 8: Saving, Capital Formation, and Financial Markets