Question 1

Suppose an investment project is projected to provide $200,000 in revenues. The investment will cost the company $180,000. Given this information, one should commit to the project:

Accepted Answer

The net gain from the project is $20,000. To determine if the project is worthwhile, compare this gain to the cost of borrowing $180,000. If the interest rate is less than or equal to 11%, the cost of borrowing will not exceed $20,000, making the project profitable.

Question 2

A liquid asset:

Accepted Answer

A liquid asset is an asset that can easily be converted to cash with little or no loss of value. This means that it is a readily available asset that is easily traded and can be quickly turned into cash when needed. Examples of liquid assets include cash, stocks, and bonds. Therefore, choice B is the correct answer.

Question 3

Crowding out results in a(n):

Accepted Answer

Crowding out refers to a reduction in private investment spending caused by an increase in government borrowing, which causes interest rates to rise. Higher interest rates make borrowing more expensive for businesses, reducing their incentive to invest in physical capital. Therefore, crowding out results in a decrease in private investment spending, as stated in option A. Option B is incorrect because crowding out does not necessarily lead to an increase in physical capital accumulation or economic growth. Option C is incorrect because crowding out actually reduces private investment spending, so it does not result in an increase. Option D is also incorrect because crowding out does not affect consumption spending directly; it primarily impacts private investment.

Question 4

In lending to Vanessa, Alison expects the inflation rate to be 8% over the next year. Vanessa agrees to pay Alison a 10% interest rate on the loan, but Vanessa expects inflation to be 9%. If the actual inflation rate is 9%:

Accepted Answer

The real rate of interest is calculated as the nominal interest rate minus the actual inflation rate. Here, it is 10% - 9% = 1%.

Question 5

Someone who is risk-averse is:

Accepted Answer

A risk-averse individual is someone who is more concerned about avoiding losses than seeking gains, which means they would be willing to spend more resources to avoid losing a given sum of money than to gain the same sum of money. This behavior stems from their aversion to financial risk.

Question 6

Investment spending is undertaken when the rate of return is:

Accepted Answer

The answer of Investment spending is undertaken when the rate...

Question 7

If a country has a positive capital inflow, it:

Accepted Answer

A positive capital inflow means the country is receiving more capital from abroad than it is sending out, indicating it borrows more than it lends to foreigners.

Question 8

Businesses will undertake projects if the rate of return is:

Accepted Answer

Businesses will undertake projects if the rate of return is greater than or equal to the interest rate levied on the loan, as this ensures profitability after covering borrowing costs.

Question 9

In the loanable funds market, borrowers:

Accepted Answer

Borrowers are those who demand loanable funds in the market, as they are the ones seeking funds to invest or finance projects. Hence, they are best represented by the demand for loanable funds.

Question 10

A checking account with $500 is:

Accepted Answer

Liquidity refers to the ease with which an asset can be converted into cash without losing value. A checking account with $500 is more liquid compared to a person's new car because the car needs to be sold, which may take time and result in a loss in value due to depreciation.

Question 11

When portions of investment spending are financed by a capital inflow:

Accepted Answer

When investment spending is financed by a capital inflow, it means that the funds are coming from a foreign source. In this case, interest will need to be paid on the borrowed funds to the foreign lender. Therefore, option B is the correct choice. Options A, C, and D are not relevant to this scenario.

Question 12

In an open economy:

Accepted Answer

In an open economy, savings of foreigners could support investment spending through capital inflows. Therefore, choice B is the correct answer. Choice A is incorrect because a positive capital inflow does not necessarily mean that X (exports) will be greater than IM (imports). Choice C is also incorrect because capital inflows could be positive or negative depending on the situation. Choice D is incorrect because investment spending may not always equal national savings in an open economy.

Question 13

A government has a budget deficit in an open economy. This means:

Accepted Answer

A budget deficit occurs when a government spends more money than it collects in taxes, resulting in a negative balance. In an open economy, trade between countries allows for imports and exports, but this factor is not directly related to the government's budget deficit. Therefore, the correct answer is D - the government is spending more than its tax revenue.

Question 14

Holding everything else constant, when the government uses an expansionary policy in the presence of a deficit, it will result in:

Accepted Answer

When the government uses an expansionary policy (such as increasing government spending or cutting taxes) in the presence of a deficit, it will increase the demand for loanable funds. Since the supply of loanable funds remains the same, the equilibrium interest rate will rise. This is because borrowers (including the government) are now willing to pay higher interest rates to obtain the necessary funds.

Question 15

If capital inflow is negative, then a country:

Accepted Answer

A negative capital inflow indicates that a country is lending more to other countries than it is borrowing from them.

Question 16

Borrowers who cannot be served by the stock and bond markets:

Accepted Answer

Borrowers who cannot access stock and bond markets often turn to banks for loans and other financing options.

Question 17

In the loanable funds market, savers:

Accepted Answer

Savers are individuals or institutions that have excess funds which they lend out in the loanable funds market. Hence, they supply funds.

Question 18

Financial assets:

Accepted Answer

Financial assets are paper claims that provide the buyer with future income from the seller. This can include stocks, bonds, and other securities. They carry financial risk and can be traded in financial markets. Option B is not true for financial assets, as in the case of loans, the lender is the one who owns the asset. Option C is also not true for financial assets, as most can be traded with low transaction costs. Option D is not true, as financial assets carry financial risk.

Question 19

Alison lends $100 to Vanessa for one year. Alison expects that inflation will be 10%. If Alison wishes to maintain the real value of her $100, she should expect payment from Vanessa in the amount of:

Accepted Answer

To maintain the real value of her $100 after accounting for 10% inflation, Alison should expect $110 from Vanessa. This compensates for the decrease in purchasing power due to inflation.

Question 20

Linking savers and investors is an important aspect of:

Accepted Answer

Linking savers and investors is a crucial function of a well-functioning financial system. It allows for the efficient allocation of resources and the mobilization of savings for investment purposes, which helps promote economic growth and development. The government may play a role in regulating this process, but it is not the primary driver. The public sector and consumers are not directly involved in linking savers and investors.

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