macro econ ch 10

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Question 1 Multiple Choice 0 points Modify Remove

QuestionBetween 1987 and 1994, a group of private investors raised $16 billion to:

Answer build an oil pipeline in Mexico.

build a tunnel between Britain and France.

tear down the Berlin Wall.

buy the Empire State Building.

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QuestionWhich of the following is considered investment spending in macroeconomics?

Answer GM builds a new plant to manufacture automobiles.

Ryan Jones buys some GM stock.

Ryan Jones buys some GM bonds.

Ryan Jones buys some GM stock and bonds.

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QuestionEconomists view investment spending as which of the following?

Answer stocks

bonds

spending on physical capital

mutual fund investing

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QuestionPhysical capital is purchased through investment spending, which in turn is mostly financed out of:

Answer taxes.

domestic and foreign savings.

import tariffs.

consumption expenditure.

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QuestionInvestment spending refers to:

Answer buying stocks.

buying newly issued shares of stock.

adding to physical capital.

adding to one's retirement account.

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QuestionWhich of the following is considered an act of investing in a physical asset?

Answer purchasing shares of stock in IBM

selling shares of stock in IBM

buying a bond issued by IBM

buying a new factory that produces IBM handheld devices

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QuestionWhich of the following is an example of investment spending?

Answer The owner of a Domino's Pizza store has employed two students to deliver pizzas.

The manager of a local Domino's Pizza store has taken some cash to the bank to make a deposit.

A local Domino's Pizza store has purchased a new pizza oven.

The owner of the Domino's Pizza store has used some of her salary to buy shares of stock in the Domino's corporation.

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QuestionPrivate savings is equal to:

Answer income less consumption.

taxes less government spending on goods and services.

the total amount of savings accounts plus stocks plus bonds owned by households.

income plus investment.

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QuestionUse this scenario to answer questions 9–12.Scenario: Closed Economy S = IIn a closed economy suppose that GDP is $12 trillion. Consumption is $8 trillion and government spending is $2 trillion. Taxes are $0.5 trillion.Reference: Ref 10-01

(Scenario: Closed Economy S = I) How much is private saving?

Answer $4 trillion

$2.5 trillion

$3.5 trillion

–$0.5 trillion

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(Scenario: Closed Economy S = I) What is the government budget balance?

Answer a surplus of $1.5 trillion

a deficit of $1.5 trillion

a surplus of $0.5 trillion


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(Scenario: Closed Economy S = I) How much is national saving?

Answer $3.5 trillion

$3 trillion

$2.5 trillion

$2 trillion

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(Scenario: Closed Economy S = I) How much is investment spending?

Answer $3.5 trillion

$3 trillion

$2.5 trillion

$2 trillion

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QuestionIn a simple closed economy, all investment spending must come from:

Answer saving.

money creation.

debt issuance.

foreign borrowing.

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QuestionThe budget balance is equal to:

Answer taxes plus government spending.

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taxes minus government spending.

consumption plus investment.

imports minus exports.

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QuestionA budget surplus would exist when which of the following occurs?

Answer Taxes are greater than government spending.

Taxes are less than government spending.

Taxes are less than government spending plus investment.

Investment is less than government spending less taxes.

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QuestionNational savings is the sum of private savings and:

Answer private consumption.

government tax revenue.

the budget balance.

trade surplus.

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QuestionIn a closed economy, all investment spending must come from:

Answer government.

domestic savings.

foreign savings.

government, domestic savings and foreign savings.

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QuestionThe savings-investment spending identity says that:

Answer each person in the economy must invest as much as he or she saves.

savings and investment spending are always equal for the economy as a whole.

savings must equal government investment for the economy as a whole.

each person in the economy must save as much as he or she invests.

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QuestionIn a closed economy, investment spending, I, must equal:

Answer GDP – C – G.

GDP – C.

GDP – C – G – X.

GDP – [C*G].

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QuestionThe government saves when it:

Answer has a balanced budget.

has a budget deficit.

has a budget surplus.

borrows by selling bonds.

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QuestionThe government saves when:

Answer tax revenue is smaller than government spending.

tax revenue is larger than government spending.

tax revenue equals government spending.

tax revenue is positive.

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QuestionNational savings in a closed economy is all of the following except:

Answer the sum of private savings plus the government budget balance.

the total savings generated within the economy.

GDP – C – G.

government spending less consumption.

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QuestionA difference between a closed and an open economy is that:

Answer in the latter, foreign savings complement domestic savings in financing investment spending.

in the latter, the government is more open to the idea of financing investment spending than in the former.

in the former, foreign savings complement domestic savings in financing investment spending.

in the former, foreign savings finance more investment spending than in the latter.

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QuestionThe savings-investment spending identity says that savings and investment spending are:

Answer always equal because private savings match government savings.

equal as long as there is no trade surplus or deficit.

always equal for the economy as a whole.

equal as long as there is not government budget deficit or surplus.

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QuestionIn a closed economy, the savings-investment spending identity is:

Answer I = GDP – C – G + (IM – NX).

NS = GDP – I.

NS = GDP + (C – T + TR) + (T – TR – G).

I = GDP – C – G.

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QuestionIn the closed economy of Sildavia, government spending during 2005 was $30 billion, consumption was $70 billion, taxes were $20 billion, and GDP was $110 billion. If investment spending in Sildavia during 2005 was $10 billion, we can conclude that:

Answer private savings were equal to $10 billion.

the government's budget balance was equal to a surplus of $10 billion.

net savings were equal to $0.

private savings were equal to $20 billion.

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QuestionTo help increase investment spending, the government can:

Answer lower taxes on consumption, so that disposable income rises.

lower taxes on the returns from savings, so that total savings increase and the interest rate falls.

raise taxes on the returns from bonds while lowering taxes on stock dividends.

lower taxes on investment spending while raising taxes on savings, so that total tax revenue remains constant.

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QuestionAccording to the “savings-investment spending identity”:

Answer savings = investment spending

government spending = tax receipts

total income = consumption spending + savings

savings = investment spending + consumption spending

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QuestionIn a closed economy, national savings is equal to:

Answer private savings – consumption spending

private savings + the budget balance.

private savings – investment spending

private savings – tax receipts

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QuestionIn a closed economy, national savings is equal to:

Answer (disposable income – consumption spending) – (tax receipts – government spending)

(disposable income – consumption spending) + (government spending – tax receipts)

(disposable income – consumption spending) + (tax receipts – government spending)

(consumption spending – disposable income) + (government spending – tax receipts)

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QuestionIn an open economy, total investment is equal to:

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Answer national savings + capital inflow

private savings + national savings + capital inflow

private savings + capital inflow

national savings – private savings – capital inflow

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QuestionUse this scenario to answer questions 32–36.Scenario: Open Economy S = IIn an open economy suppose that GDP is $12 trillion. Consumption is $8 trillion and government spending is $2 trillion. Taxes are $0.5 trillion. Exports are $1 trillion and imports are $3 trillion.Reference: Ref 10-02

(Scenario: Open Economy S = I) How much is private saving?

Answer $4 trillion

$2.5 trillion

$3.5 trillion

$1.5 trillion

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(Scenario: Open Economy S = I) What is the government budget balance?

Answer a surplus of $1.5 trillion



a surplus of $3.5 trillion

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(Scenario: Open Economy S = I) How much is national saving?

Answer $4 trillion

$3.5 trillion

$2 trillion

$5.5 trillion

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(Scenario: Open Economy S = I) How much is the net capital inflow?

Answer $1 trillion

$2 trillion

$3 trillion

$4 trillion

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(Scenario: Open Economy S = I) How much is investment spending?

Answer $2 trillion

$3 trillion

$3.5 trillion

$4 trillion

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QuestionTable: Investment Spending, Private Spending, and Capital Inflows

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Reference: Ref 10-03

(Table: Investment Spending, Private Spending, and Capital Inflows) What is the budget balance as a percentage of GDP in Northlandia?

Answer –10%

0%

10%

20%

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(Table: Investment Spending, Private Spending, and Capital Inflows) What is the budget balance as a percentage of GDP in Southlandia?

Answer –10%

0%

10%

20%

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(Table: Investment Spending, Private Spending, and Capital Inflows) Northlandia has a ______ while Southlandia has a ________.

Answer balanced budget; budget deficit

budget deficit; balanced budget

budget surplus; balanced budget

balanced budget; balanced budget

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QuestionUse this scenario to answer questions 40–43.Scenario: Economy of CentraliaCentralia has no trade and no government. GDP = $25 trillion. Consumption Spending = $18 trillion.Reference: Ref 10-04

(Scenario: The Economy of Centralia) Consider the information on the economy of Centralia. What is the level of private saving in Centralia?

Answer $7 trillion

$18 trillion

Can not be determined from the information provided.

-$7 trillion

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(Scenario: The Economy of Centralia) Consider the information on the economy of Centralia. What is the level of investment spending in Centralia?

Answer $18 trillion

$7 trillion

$25 trillion

–$7 trillion

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QuestionUse this scenario to answer questions 40–43.Scenario: Economy of CentraliaCentralia has no trade and no government. GDP = $25 trillion. Consumption Spending = $18 trillion.

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(Scenario: The Economy of Centralia) Consider the information on the economy of Centralia. Suppose that there is a new government in Centralia, and it has decided to impose taxes on its citizens in order to spend on infrastructure. Taxes = $2 trillion. Government Spending = Taxes. What is the level of private saving in Centralia now?

Answer $11 trillion

$7 trillion

$5 trillion

$18 trillion

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(Scenario: The Economy of Centralia) Consider the information on the economy of Centralia. Suppose that there is a new government in Centralia, and it has decided to impose taxes on its citizens in order to spend on infrastructure. Taxes = $3 trillion. Government Spending = Taxes. What is the level of investment spending in Centralia now?

Answer $7 trillion

$4 trillion

$18 trillion

–$4 trillion

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QuestionWhich one of the following is an accurate formula for the Budget Balance?

Answer taxes – government spending

transfers – government spending

taxes + government spending

savings + taxes

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QuestionNational savings is equal to:

Answer private savings + consumption spending.

trade balance + budget balance.

private savings + budget balance.

government spending + taxes.

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QuestionCapital inflow is equal to:

Answer GDP + exports – imports.

the growth in capital stock – investment spending.

foreign direct investment.

the total inflow of foreign funds – the total outflow of domestic funds.

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QuestionThe correct relationship between taxes and private savings is given by:

Answer taxes = government spending + private savings.

taxes = total spending – consumption – investment – private savings.

taxes = total income – consumption – private savings.

taxes = consumption + private savings + total income.

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QuestionThe relationship between the government's budget deficit and its spending is:

Answer budget deficit = tax revenues + transfer payments.

government spending = private savings + budget deficit.

tax revenues = national savings + budget deficit.

budget deficit = government spending – tax revenues.

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QuestionIf there is an increase in the government budget deficit:

Answer the demand for loanable funds will increase, interest rates will increase, and the amount of borrowing will increase.

the demand for loanable funds will decrease, interest rates will decrease, and the amount of borrowing will decrease.

the supply of loanable funds will increase, interest rates will decrease, and the amount of borrowing will increase.

the supply of loanable funds will decrease, interest rates will increase, and the amount of borrowing will decrease.

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QuestionIf private savings increase:

Answer the demand for loanable funds will increase, interest rates will increase, and the amount of borrowing will increase.

the demand for loanable funds will decrease, interest rates will decrease, and the amount of borrowing will decrease.

the supply of loanable funds will increase, interest rates will decrease, and the amount of borrowing will increase.

the supply of loanable funds will decrease, interest rates will increase, and the amount of borrowing will decrease.

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QuestionCapital inflows represent:

Answer the net inflow of funds into a country.

the net outflow of funds from a country.

the amount that domestic savings exceeds foreign savings.

the excess of domestic physical capital exported minus the amount of physical capital imported.

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QuestionAssume that I = Sprivate + Sgovernment + (IM – X). Furthermore, let's say that imports are equal to exports. Given this situation, which of

the following would be true?

Answer Private saving plus government saving would exceed investment.

Private saving would exceed investment.

Private saving plus government saving would be less than investment.

Private saving plus government saving would be equal to investment.

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QuestionNet capital inflows equal:

Answer national savings.

imports minus exports.

consumption.

consumption plus government spending.

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QuestionIn the open economy of Sildavia, government spending during 2005 was $30 billion, consumption was $70 billion, taxes were $20 billion, and GDP was $100 billion. If investment spending in Sildavia during 2005 was $10 billion, we can conclude that Sildavia registered:

Answer a net capital inflow of $10 billion.

capital inflows of $10 billion and capital outflows of $20 billion.

a trade surplus of $20 billion and a financial deficit of $20 billion.

a net capital outflow of $10 billion.

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QuestionIf a country experiences a trade surplus, we can conclude that it is also experiencing:

Answer a budget surplus.

a net capital outflow.

a net capital inflow.

a budget deficit.

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QuestionIn an open economy, savings can come from all of the following except:

Answer domestic sources.

foreign sources.

government sources.

consumption.

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QuestionA capital inflow into a country is associated with:

Answer imports exceeding exports.

a decreased source of funds available for domestic investment.

imports equaling exports.

imports less than exports

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Question 58

QuestionA business will want to borrow to undertake an investment project when the rate of return on that project is:

Answer less than the interest rate.

greater than the interest rate.

greater than the exchange rate.

equal to the inflation rate.

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QuestionEconomists use _____ as a model to show how savers and borrowers come together to determine the equilibrium rate of interest.

Answer the money market

the market for loanable funds

aggregate demand and aggregate supply

the financial system

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QuestionThe demand for loanable funds is _____ sloping because _____ respond to lower interest rates by _____ their quantity demanded of loanable funds.

Answer downward; investors; increasing

downward; savers; increasing

upward; investors; decreasing

upward; savers; decreasing

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QuestionThe supply of loanable funds is _____ sloping because _____ respond to lower interest rates by _____ their quantity supplied of loanable funds.

Answer upward; savers; increasing

upward; investors; decreasing

upward; savers; decreasing

downward; investors; increasing

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QuestionIn the market for loanable funds, suppose the current interest rate is 5%. At a rate of 5%, investors wish to borrow $100 million and savers wish to save $125 million. We would expect:

Answer the interest rate to fall as there is currently a shortage of loanable funds.

the interest rate to rise as there is currently a surplus of loanable funds.

the interest rate to rise as there is currently a shortage of loanable funds.

the interest rate to fall as there is currently a surplus of loanable funds.

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QuestionTable: Loanable Funds


(Table: Loanable Funds) In the accompanying table, at what interest rate will the market for loanable funds be in equilibrium?

Answer 7%

6%

5%

4%

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QuestionFigure: Loanable Funds

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(Figure: Loanable Funds) The accompanying graph shows the market for loanable funds in equilibrium. Which of the following might produce a new equilibrium interest rate of 8% and a new equilibrium quantity of loanable funds of $150?

Answer Consumers have increased consumption as a fraction of disposable income.

Businesses have become more optimistic about the return on investment spending.

The federal government has a budget surplus rather than a budget deficit.

There has been an increase in capital inflows from other nations.

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Answer Consumers have increased consumption as a fraction of disposable income.

Businesses have become more optimistic about the return on investment spending.

The federal government has a budget surplus rather than a budget deficit.

There has been an increase in capital inflows from other nations.

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Answer Capital inflows from foreign citizens are declining.

The federal government is running a budget deficit rather than a surplus.

Profit expectations are less optimistic for business investments.

The government has eliminated taxes on income from interest earned.

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Answer Profit expectations are less optimistic for business investments.

Capital inflows from foreign citizens are declining.

The federal government is running a budget deficit rather than a surplus.

The government has eliminated taxes on income from interest earned.

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QuestionFigure: Demand for Loanable Funds


(Figure: Demand for Loanable Funds) According to the accompanying figure, when the interest rate is 6%, the quantity demanded of loanable funds will equal:

Answer $30 billion.

$40 billion.

$50 billion.

$60 billion.

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QuestionA firm does NOT want to borrow money for a project when:

Answer the interest rate is greater than the rate of return on the project.

the interest rate is less than the rate of return on the project.

the interest rate is positive.

the rate of return on the project is positive.

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QuestionIf a one-year project costs $100,000 and is expected to return the firm $105,000, then the rate of return of the project is:

Answer 4.8%.

5%.

$5,000.

$105,000.

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QuestionA business will want a loan when:

Answer interest rate < (return on project – cost of project)/cost of project × 100.

rate of return < interest rate.

rate of return – interest rate < 0.

rate of return > (cost of project – interest rate)/interest rate × 100.

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QuestionWhen the government runs a budget deficit, all of the following happen EXCEPT:

Answer the government becomes a borrower in the market for loanable funds.

the interest rate rises.

the total amount of borrowing decreases.

private investment spending is crowded out.

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QuestionThe demand curve for loanable funds slopes:

Answer upward, since it takes a higher rate of return to get more funds.

downward, because there are more potential projects that yield 10% than yield 5%.

upward, because higher rates of return are necessary to cover higher costs.

downward, because there are fewer potential projects that yield 10% than for those that yield 5%.

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QuestionFigure: Loanable Funds Market


(Figure: Loanable Funds Market) If the interest rate is 8%, businesses will want to borrow approximately:

Answer $3 trillion.

$2 trillion.

$4 trillion.

$1 trillion.

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(Figure: Loanable Funds Market) If the interest rate is 8%, people will want to save approximately:

Answer $3 trillion.

$2 trillion.

$4 trillion.

$1 trillion.

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(Figure: Loanable Funds Market) The equilibrium interest rate and total quantity of lending are:

Answer 8% and $2 trillion.

2% and $5 trillion.

10% and $1 trillion.

6% and $3 trillion.

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QuestionFigure: Supply of Loanable Funds


(Figure: Supply of Loanable Funds) According to the accompanying figure, when the interest rate rises from 6% to 8%, then the:

Answer supply of loanable funds rises by $20 billion.

quantity supplied of loanable funds rises by $20 billion.

supply of loanable funds falls by $10 billion.

quantity supplied of loanable funds falls by $20 billion.

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QuestionFigure: Market for Loanable Funds I

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(Figure: Market for Loanable Funds I) According to the accompanying figure, the equilibrium interest rate is:

Answer 2%.

4%.

6%.

8%.

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QuestionFigure: Market for Loanable Funds II


(Figure: Market for Loanable Funds II) If the interest rate is greater than ______, then the quantity supplied of loanable funds will _______ the quantity of loanable funds demanded.

Answer 8%; be greater than

8%; be less than

8%; equal

10%; be less than

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(Figure: Market for Loanable Funds II) If the interest rate is less than 8%, then the quantity supplied of loanable funds will _______ the quantity of loanable funds demanded.

Answer be greater than

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be less than

equal

Cannot be determined from the information provided.

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QuestionThe loanable funds market maximizes:

Answer the interest rate to savers.

the rate of return by borrowers.

the gains from trade between lenders and borrowers.

the amount of investment spending in the economy.

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QuestionIf in an open economy, a country imports more than it exports and the government budget deficit increases:

Answer interest rates will increase and the amount of borrowing will increase.

interest rates will decrease and the amount of borrowing will increase.

interest rates will increase, but the change in borrowing is ambiguous.

the change in interest rates is ambiguous, but the amount of borrowing will increase.

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QuestionThe price in the loanable funds market is:

Answer the rate of return of a project.

the price level.

the interest rate.

the consumer price index.

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QuestionThe price determined in the market for loanable funds is:

Answer the margin call.

the profit rate.

the transaction fee.

the interest rate.

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QuestionIf the interest rate in the market for loanable funds is above the equilibrium interest rate, we know that:

Answer there is a shortage of loanable funds.

savings exceed investment spending.

the quantity demanded of loanable funds exceeds the quantity supplied of loanable funds.

consumption is smaller than savings.

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QuestionFigure: Market for Loanable Funds with Government Borrowing


(Figure: Market for Loanable Funds with Government Borrowing) According to the accompanying figure, after an increase in government borrowing, the new equilibrium interest rate will rise from ______ and the amount of private savings will _______.

Answer 6% to 8%; stay the same

6% to 8%; rise

6% to 8%; fall

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6% to 8%; be indeterminate

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QuestionA shift away from taxing asset income towards taxing consumption would lead to:

Answer a larger demand for loanable funds, a higher interest rate, and slower economic growth.

a larger supply of loanable funds, a lower interest rate, and faster economic growth.

a larger government budget deficit and slower economic growth.

a smaller supply of loanable funds, a higher interest rate, and faster economic growth.

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(Figure: Market for Loanable Funds II) An increase in government borrowing will shift the demand for loanable funds to the:

Answer left and increase the interest rate.

left and decrease the interest rate.

right and increase the interest rate.

right and decrease the interest rate.

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(Figure: Market for Loanable Funds II) A decrease in government borrowing will shift the demand for loanable funds to the:





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QuestionIf the government increases its borrowing, at the given interest rate, there is a(n):

Answer additional supply of funds.

additional demand for funds.

decrease in the supply of funds.

increase in the supply of funds.

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QuestionWhich of the following is the most accurate statement concerning the relationship between government budget deficits and economic growth?

Answer Deficits increase economic growth.

Deficits decrease economic growth.

Deficits have no impact on economic growth.

We cannot say unambiguously whether government spending that increases deficits lowers or increases economic growth.

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QuestionCrowding out negatively affects the economy by:

Answer decreasing government borrowing.

decreasing consumption.

increasing private borrowing.

reducing investment spending on physical capital.

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(Figure: Market for Loanable Funds II) A decrease in savings by the private sector will shift the supply of loanable funds to the:





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(Figure: Market for Loanable Funds II) An increase in savings by the private sector will shift the supply of loanable funds to the:





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(Figure: Market for Loanable Funds II) Other things being equal, if there is an increase in the interest rate above 8%, the quantity of loanable funds demanded will be _________.

Answer the same

more

less

either more or less

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(Figure: Market for Loanable Funds II) Other things being equal, if there is a decrease in the interest rate below 8%, the quantity of loanable funds demanded will be _________.

Answer the same

more

less

either more or less

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(Figure: Market for Loanable Funds II) Other things being equal, an increase in taxes on savings and investment income will:

Answer shift demand to the right and increase the interest rate.

shift demand to the left and decrease the interest rate.

shift supply to the right and decrease the interest rate.

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shift supply to the left and increase the interest rate.

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(Figure: Market for Loanable Funds II) Other things being equal, a decrease in taxes on savings and investment income will:

Answer shift demand to the right and increase the interest rate.

shift demand to the left and decrease the interest rate.

shift supply to the right and decrease the interest rate.

shift supply to the left and increase the interest rate.

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QuestionTable: Investment Projects


(Table: Investment Projects) If the market interest rate is 15%, the last project undertaken is:

Answer F.

G.

H.

I.

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(Table: Investment Projects) If the market interest rate is 11%, the last project undertaken is:

Answer G.

H.

I.

J.

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(Table: Investment Projects) If the market interest rate is 13%, the amount of planned investment spending is:

Answer $200.

$800.

$1,000.

$2,000.

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(Table: Investment Projects) If the market interest rate is 9%, the amount of planned investment spending is:

Answer $1,800.

$2,000.

$4,000.

$5,500.

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(Table: Investment Projects) If the market interest rate is 17%, the amount of investment demanded is:

Answer $200.

$800.

$1,000.

$2,000.

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(Table: Investment Projects) If the market interest rate is 11%, the amount of investment demanded is:

Answer $800.

$1,000.

$2,000.

$4,000.

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(Table: Investment Projects) If the market interest rate declines from 15% to 11%, then the amount of investment demanded will increase by:

Answer $200.

$1,000.

$2,000.

$2,200.

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(Table: Investment Projects) If the market interest rate declines from 15% to 13%, then the amount of investment demanded will increase by:

Answer $200.

$1,000.

$2,000.

$2,200.

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QuestionHigher rates of interest tend to _______ the quantity of loanable funds demanded, and lower rates of interest tend to _______ it.

Answer increase; reduce

reduce; reduce

increase; increase

reduce; increase

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QuestionThere is a _______ relationship between the amount of loanable funds demanded and the rate of interest.

Answer positive

direct

negative

tenuous

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QuestionAn expectation that perceived business opportunities will increase will generally cause:

Answer a shift to the left in the loanable funds demand curve.

a movement along the loanable funds demand curve.

the demand for loanable funds to increase.

the demand for loanable funds to decrease.

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QuestionAn increase in the level of business opportunity will generally:

Answer not change the loanable funds demand curve.

shift the loanable funds demand curve to the left.

cause a movement both up and down the loanable funds demand curve.

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shift the loanable funds demand curve to the right.

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QuestionA decrease in the level of business opportunity will generally:

Answer not change the loanable funds demand curve.


cause a movement up and down the loanable funds demand curve.

shift the loanable funds demand curve to the right.

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QuestionA decrease in the demand for loanable funds would most likely be caused by a(n):

Answer decrease in the market interest rate.

decrease in corporate income tax rates.

increase in the amount of expected business opportunities.

decrease in the amount of expected business opportunities.

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QuestionAn increase in the demand for loanable funds would most likely be caused by a(n):

Answer increase in the market interest rate.

increase in business tax rates.

increase in the amount of expected business opportunities


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QuestionA decrease in the demand for loanable funds would most likely be caused by a(n):

Answer decrease in the market interest rate.

decrease in corporate income tax rates.


increase in the amount of expected business opportunities.

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QuestionAll other things unchanged, a general increase in the amount of government borrowing will typically:

Answer shift the loanable funds demand curve to the left and decrease interest rates.

shift the loanable funds demand curve to the right and increase interest rates.

have no effect on the loanable funds demand curve.

have no effect on the demand for loanable funds.

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QuestionAll other things unchanged, a general decrease in the amount of government borrowing will typically:

Answer have no effect on the demand for loanable funds.

increase interest rates.


raise the level of demand for loanable funds.

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QuestionAll other things unchanged, an increase in loanable funds demand would most likely be caused by a(n):

Answer decrease in the amount of expected business opportunities.

increase in the market interest rate.

increase in corporate income tax rates.

increase in the amount of government borrowing.

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QuestionAll other things unchanged, an increase in loanable funds demand would most likely be caused by a(n):

Answer important economic forecast predicting solid economic growth.

important economic forecast predicting a looming recession.

increase in the market interest rate.

increase in the cost of new capital goods.

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Page 22 of 42

QuestionAll of the following is correct EXCEPT when there is an increase in:

Answer government budget deficit, the total amount of borrowing falls.

private savings, the interest rate decreases.

government budget deficit, the private investment is crowded out.

private savings, the total amount of borrowing increases.

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QuestionA business decision to borrow to fund its projects should be based on whether:

Answer the rate of return on the project is less than the interest rate on the loan.

the project will produce a good or service that is in high demand.

the rate of return on the project is at least as great as the interest rate on the loan.

it is going to be a project where minimum efficient scale is attained.

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QuestionThe rate of return on a business project is equal to:

Answer

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QuestionCrowding out is a phenomenon:

Answer where an increase in government's budget surplus decreases the overall investment spending.

where overproduction in the goods market leads to a sharp drop in the aggregate price level.

where an increase in government's budget deficit causes the overall investment spending to fall.

where an increase in imports causes the overall domestic production to fall.

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QuestionFigure: Crowding Out


(Figure: Crowding Out) The demand for loanable funds curve DLF1 will shift to DLF2, because:

Answer of a decrease in the government budget deficit.

of an increase in the government budget deficit.

of an increase in private savings.

of a decrease in private savings.

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Page 23 of 42


(Figure: Crowding Out) If the demand for loanable funds curve shifts to the right, then it will result in:

Answer an increase in the interest rate and the total amount of borrowing in the funds market.

an increase in the interest rate and a decrease in the total amount of borrowing in the funds market.

a decrease in the interest rate and the total amount of borrowing in the funds market.

a decrease in the interest rate and an increase in the total amount of borrowing in the funds market.

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(Figure: Crowding Out) Suppose the supply of loanable funds curve SLF1 shifts to SLF2, that implies:

Answer that private savings have increased.

that national investment has decreased.

that private savings have decreased.

that national savings have decreased.

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(Figure: Crowding Out) If the supply of loanable funds curve shifts to the right, then it will result in:

Answer an increase in the total amount of borrowing and the interest rate.

a decrease in the total amount of borrowing and the interest rate.

an increase in the total amount of borrowing and a fall in the interest rate.

a decrease in the total amount of borrowing and an increase in the interest rate.

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QuestionCrowding out means:

Page 24 of 42

Answer private savings decreases when the government borrows.

private investment decreases when the government borrows.

there are too many players in the financial markets.

some bond holders will be squeezed out of the market.

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QuestionIf in an open economy, the government's budget deficit increases at the same time as 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.

Answer increase; decrease

decrease; decrease

increase; increase

decrease; increase

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QuestionFigure: Market for Loanable Funds III


(Figure: 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:

Answer fall to 12%.

rise to 16.5%.

rise to 18%.

rise to 21%.

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(Figure: 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 _____ in private investment spending.

Answer $200 billion

$100 billion

$50 billion

$0 billion

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Page 25 of 42



(Figure: Market for Loanable Funds III) If the government in a closed economy is running a budget deficit of $300 billion and finances the deficit by selling bonds when it decides to decrease defense spending by $200 billion, the equilibrium interest rate will:

Answer rise to 18%.

not change.

fall to 13.5%.

fall to 12%.

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(Figure: Market for Loanable Funds III) If the government in a closed economy is running a budget deficit of $300 billion and finances the deficit by selling bonds when it decides to decrease defense spending by $200 billion, the decrease in government spending will encourage _____ in additional private investment spending.

Answer $400 billion

$200 billion

$100 billion

$0 billion

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QuestionGovernments can engage in saving when:

Answer taxes are less than expenditures.

taxes are greater than expenditures.

the government borrows to finance its expenditures.

the president insists that Congress balance the budget.

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QuestionWhich of the following is an advantage to the recipient country of foreign investment?

Answer Foreigners are content to receive lower profits and interest rates than are domestic investors.

Foreigners don't expect to receive profits and interest as often as do domestic investors.

Domestic firms with foreign investors are exempt from domestic income taxes on a portion of their net income.

Foreign companies often bring new technology to the recipient country, and this increases productivity.

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Page 26 of 42


QuestionA relatively low saving rate affects productivity growth by:

Answer depriving investment spending of the funds needed to increase the physical capital.

promoting consumption spending and depriving investment in human capital of the funds needed for tuition.

reducing the tax base and preventing the government from providing public goods.

stimulating imports and increasing the trade deficit.

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QuestionThe sources of financing of physical capital include:

Answer domestic consumption.

foreign borrowing from the home country.

foreign investment in the home country.

domestic consumption, foreign borrowing from the home country, and foreign investment in the home country.

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QuestionThe government can increase savings by:

Answer taxing more than it spends.

spending more than it taxes.

increasing inflation.

increasing the deficit.

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QuestionCurrently, America is a net recipient of foreign savings.

Answer This has never happened before in America.

This is bad because we are borrowing money from overseas.

This is bad because we are losing control over our own destiny.

This has been true throughout much of our history.

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QuestionThe Fisher Effect states that:

Answer the nominal rate of interest is unaffected by the change in expected inflation.

the nominal rate of interest is unaffected by the change in unexpected inflation.

the expected real rate of interest is unaffected by the change in expected inflation.

the expected real rate of interest increases by one percentage point for each percentage change in expected inflation.

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QuestionSuppose the lender expects a real interest rate of 6% and the inflation rate is expected to be 3%. In this case, the nominal interest rate is equal to:

Answer 3%.

9%.

12%.

6%.

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QuestionSamantha is asking 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:

Answer increase by 5%.

decrease by .5%.

decrease by 5%.

increase by .5%.

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QuestionFrom the standpoint of economic growth, banks are important to:

Answer fight inflation.

keep interest rates low.

channel savings into investment.

channel investment into savings.

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QuestionWhich of the following qualify as an asset from the viewpoint of a household?

Page 27 of 42

Answer a house

mortgage

credit card debt

car loan

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QuestionThe value of all accumulated savings of a household is considered:

Answer wealth.

income.

debt.

wages.

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QuestionThe main role of financial systems is to:

Answer make the capitalist class richer.

provide credit cards to as many people as possible.

channel goods and services to the people willing to pay for them.

channel funds from savers into investments.

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QuestionWhich of the following is NOT one of the three tasks of a financial system?

Answer transactions costs reduction

risk management

provide liquidity

determining fiscal policy

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QuestionA household's wealth is:

Answer what a household earns each period.

what a household saves each period.

the value of a household's accumulated savings.

the value of a household's financial assets.

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QuestionA financial asset is:

Answer a physical asset like a car.

a claim that entitles the owner to future income from the seller.

the value of accumulated savings.

another term for capital.

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QuestionA physical asset is:

Answer a claim on a tangible asset that gives the owner the right to dispose of it as he or she wishes.


the value of accumulated savings.

human capital.

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QuestionA liability is:

Answer when you have wronged someone and are held responsible in court.

a requirement that you pay income in the future.

when you are not able to perform an agreed task.


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QuestionTransactions costs are:

Answer the return to the entrepreneur.

the return to moving a product to market.

the expenses of producing a product.

the expenses of negotiating and executing a deal.

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QuestionIn financial markets:

Answer households sell liabilities.

wealth is transformed into savings.

households purchase financial assets.

physical assets exchange hands.

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QuestionAs an investor, you may choose to purchase a bond or a share of stock. If you choose to purchase the bond, you are likely to receive a _____ return in exchange for a _____ level of risk.

Answer higher; higher

lower; lower

lower; higher

higher; lower

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QuestionA loan is:

Answer a liability for the lender and an asset for the borrower.

a physical asset that is traded in financial markets.

a claim on a bank that obliges the bank to provide funds to a lender.

a liability for the borrower and an asset for the lender.

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QuestionAll of the following are examples of financial assets and/or liabilities EXCEPT:

Answer loans.

stocks and bonds.

real estate.

bank deposits.

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QuestionFinancial markets make the process of borrowing large amounts of money easier because they simplify the negotiation process between borrowers and lenders. This is an example of:

Answer reducing transaction costs.

reducing risk.

providing liquidity.

acting as a lender of last resort.

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QuestionOne reason financial institutions become very large is:

Answer to decrease transactions cost.

to enjoy the power of having a large corporation.

to increase transactions costs.

to offset the power of other large corporations.

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QuestionA risk averse person:

Answer considers any risk unacceptable.

would never buy a financial asset.

has an asymmetric view of the value of losses and gains

would never buy insurance.

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QuestionFinancial markets spread the potential gains and losses of borrowing and lending operations among many individuals, therefore decreasing the overall uncertainty. This is an example of:

Answer reducing transaction costs.

reducing risk.

providing liquidity.

guaranteeing rates of return.

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Page 29 of 42

QuestionWhich of the following portfolios is the most diversified in terms of risk?

Answer $100,000 worth of stock in ten different companies in the same industry

$100,000 worth of stock in ten different companies in two different industries

$100,000 worth of stock in ten different companies in five different industries

$100,000 worth of stock in one company that sells ten different products

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QuestionFinancial markets:

Answer increase transactions costs.

reduce diversification.

provide liquidity.

determine tax rates.

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QuestionA common strategy to reduce the potential of a large financial loss is:

Answer to buy and sell assets through a mutual fund, since mutual funds can not lose money.

to diversify financial assets, so that their risks of failure are unrelated.

to buy financial assets from developing countries, because the rates of return are very high and safe and their national currencies are much more stable than the U.S. dollar.

to buy real instead of financial assets.

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QuestionOne way to reduce financial risk is:

Answer to only buy stock in a major company.

to only buy bonds in a major company.

to diversify in a variety of assets, both financial and physical.

to diversify in a number of banks.

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QuestionThe term “liquidity” means:

Answer that the asset is used in a barter exchange.

that the asset is used as the medium of exchange.

that the asset is readily convertible to cash.

that the market interest rate is too low.

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QuestionA financial intermediary that creates a diversified portfolio of stocks and then resells that portfolio to individual investors is known as:

Answer a life insurance company.

a mutual fund.

a brokerage company.

a credit card company

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QuestionThe financial system performs certain tasks in order to make the financial market more efficient. Which one of the following is NOT one of these tasks?

Answer reducing risk

reducing menu costs

reducing transaction costs

providing liquidity

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QuestionDiversification in investment is achieved when:

Answer the government invests in several projects of different lengths in order to increase total output.

a business produces multiple unrelated products so that the firm can maximize profit.

an economy trades with multiple trading partners for maximum benefit.

an individual invests in several assets with independent or unrelated risks so that total risk from loss is reduced.

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QuestionAll of the following are financial assets, except:

Answer bonds.

Page 30 of 42

stocks.

bank deposits.

gold coins.

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QuestionAn important advantage of bonds as a financial asset is that they:

Answer are standardized and therefore are easier to sell than loans.

offer higher rates of return than stocks.

allow the owner to receive a share of the company's profits in the form of dividends.

are guaranteed to be risk free.

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QuestionWhich of the following assets would be considered to be the least liquid?

Answer cash

checking account balance

corporate bond

stock in a privately held company

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QuestionWhich of the following assets would be considered to be the most liquid?

Answer currency

checking account balance

stock in a publicly traded company

a townhouse

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QuestionWhich of the following would NOT be considered to be one of the four main types of financial assets?

Answer stocks

bonds

bank deposits

gold coins

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QuestionAn illiquid asset:

Answer can not be sold.

provides the owner no return or income.

is a tangible asset.

can not quickly be converted into cash.

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QuestionWhen a corporation borrows money from a bank to expand its factory plant, the corporation is:

Answer taking out a loan.

issuing bonds.

issuing stocks.

liquidating a bank deposit.

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QuestionWhen a corporation borrows money from lenders in exchange for a fixed rate of return and a given maturity, the corporation is:


issuing bonds.

issuing stocks.


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QuestionWhen a corporation borrows money from lenders in exchange for a fixed share of the firm's assets and potential profits, the corporation is:


issuing bonds.

issuing stocks.


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QuestionWhen you take out a loan from a bank, it is:

Answer an asset to you and a liability to the bank.

an asset to you and an asset to the bank.

a liability to you and a liability to the bank.

a liability to you and an asset to the bank.

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QuestionA bond is:

Answer share of ownership in company.

a promise to pay interest each year and to repay the principle on a specified date.

a liquid asset since it is a standardized product with a market in which the owner can sell it.

both a promise to pay interest each year and to repay the principle on a specified date and a liquid asset since it is a standardized product with a market in which the owner can sell it.

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QuestionFinancial assets that carry more risk:

Answer usually have a lower rate of return.

usually have a higher rate of return.

are purchased by risk-averse buyers.

are a hedge against the future.

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QuestionDue to their very own characteristics, the financial assets with the highest risk are:

Answer stocks.

loans.

bonds.

bank deposits.

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QuestionFinancial intermediaries that manage a stock portfolio and sell shares of the stock portfolio itself to individual investors are:

Answer mutual funds.

pension funds.

life insurance companies.

banks.

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QuestionA mutual fund:

Answer always includes a base year.

owns a diversified portfolio.

always earns a profit.

involves a lower rate of return for any given level of risk.

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QuestionBanks are financial intermediaries that:

Answer have customer deposits as its primary asset and loans to borrowers as their primary liability.

provide liquid assets to lenders and long-term financing to borrowers.

are types of mutual funds.

have customer deposits as its primary asset and that provide liquid assets to lenders.

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QuestionWhich of the following financial assets is likely to be the most liquid?

Answer stocks

bonds

mutual funds shares

bank demand deposits

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Question

Page 32 of 42

Among financial intermediaries are all of the following except:

Answer mutual funds.

pension funds.

insurance companies.

the New York Stock exchange.

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QuestionWhich of the following is NOT a financial intermediary?

Answer pension funds

mutual funds

life insurance companies

credit card companies

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QuestionSouth Korea experienced economic growth after 1965 because:

Answer the people overthrew their communist government.

the United States gave it a large amount of foreign aid.

the government reformed the banking system and raised interest rates on deposits.

South Koreans decreased their saving and increased their spending on real estate and gold.

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QuestionIf the price of an asset is expected to rise in the future:

Answer asset owners will be more willing to sell it now.

it will be more in demand today.

the price of the asset will fall today.

the market is irrational.

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QuestionThe demand for stocks:

Answer is largely a guessing game.

is mostly dependent on their current price.

is mostly a function of buyers' beliefs about their future prices.

comes from companies who want to borrow money.

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QuestionIf Congress passed a law last year that will increase corporate taxes this year, holding other things constant, stock prices will _____ this year.

Answer increase

decrease

not change

It is impossible to say how stock prices will change.

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QuestionIf all retail stores announce unexpectedly high sales volumes, holding other things constant, stock prices in the retail sector will:

Answer increase.

decrease.

not change.


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QuestionIf interest rates on bonds rise, holding other things constant, stock prices will:

Answer increase.

decrease.

not change.


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QuestionA random walk is when an asset price:

Answer moves in a predicable direction but with random error.

movements are unpredictable.

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moves in a predictable way with no error.

moves slowly, but predictably.

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QuestionAccording to the efficient markets hypothesis, if you are trying to find out what a stock is really worth, you should:

Answer look up the current stock price.

study past trend in the stock price.

study the underlying determinants of the company's future profits.

examine its recent price changes.

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QuestionWhich of the following is a serious challenge to the efficient markets hypothesis?

Answer Stock prices fluctuate more than can be explained by news about fundamentals.

Individual investors behave in systematically irrational ways.

Stock prices follow a random walk.

Both that stock prices fluctuate more than can be explained by news about fundamentals and that individual investors behave in systematically irrational ways.

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QuestionA random walk is:

Answer the movement over time of an unpredictable variable.

the predicted fluctuations of a known variable.

the movement of GDP growth per capita in the long run.

a description of the economic fluctuations in the short run.

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QuestionWhen a bond becomes more attractive as an asset due to a rise in the interest rate:

Answer the price of stock, a substitute asset, will rise.

the price of stock, a substitute asset, will fall.

the future price of bonds will fall.

people will stop buying bonds and buy other assets.

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QuestionEfficient market hypothesis states that:

Answer stock prices fluctuate following the path of business cycles.

at any time stock prices are fairly valued reflecting all currently available information.

stock prices move irrationally and rather unpredictably.

stock prices are easily manipulated by irrational exuberance.

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QuestionBetween 2000 and 2006, there was a “housing bubble” in the U.S. A “bubble” is:

Answer a fluctuation in real estate prices that leads to inherent instability.

an increase in real estate prices driven by unrealistic expectations about future prices.

a situation where individuals resell their houses very quickly to make quick profit.

a situation where unscrupulous investors speculate in the real estate market.

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Question 200 True/False 0 points Modify Remove

QuestionInvestment spending in a closed economy must equal GDP minus consumption minus government spending.

Answer True

False

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QuestionGovernment saves when it runs a budget deficit.

Answer True

False

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QuestionA budget deficit is when government tax revenue is greater than government spending plus government transfers.

Page 34 of 42

Answer True

False

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QuestionThe saving-investment spending identity says that savings and investment spending are always equal for the economy as a whole.

Answer True

False

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QuestionIf a country's capital inflow exceeds outflow, then foreigners are contributing to the domestic country's investment spending.

Answer True

False

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QuestionA capital inflow has the same effect on the national economy as national savings.

Answer True

False

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QuestionIn 2007, U.S. private saving as a percentage of GDP was smaller than that of Japan.

Answer True

False

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QuestionThe loanable funds market examines the market outcome of the demand for funds from savers and the supply of funds from borrowers.

Answer True

False

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QuestionIf a project costs $100,000 and is expected to return $105,000 in a year and the interest rate is 6%, then the company will want to take out a loan to undertake the project.

Answer True

False

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QuestionFirms want to undertake those projects whose rate of return is greater than the interest rate.

Answer True

False

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QuestionIf interest rates are high, people are willing to forgo consumption and save more, all else equal.

Answer True

False

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QuestionAn increase in the interest rate causes a decrease in investment by shifting the loanable funds demand curve to the left.

Answer True

False

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QuestionExpectations of an improving economy will generally cause an increase in investment by shifting the loanable funds demand curve to the right.

Answer True

False

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Page 35 of 42


QuestionHigher interest rates will lead to increased investment.

Answer True

False

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QuestionLower interest rates will lead to less investment.

Answer True

False

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QuestionThere is a negative relationship between the quantity of investment demanded and the interest rate.

Answer True

False

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QuestionHigher interest rates encourage investment.

Answer True

False

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QuestionAn increase in the level business opportunities will not cause a change in investment.

Answer True

False

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QuestionInvestment contributes to economic growth.

Answer True

False

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QuestionThe crowding out effect is the negative effect of government budget deficits on private investment spending.

Answer True

False

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QuestionFinancial markets completely eliminate transactions costs.

Answer True

False

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QuestionWhen corporations need to borrow large amounts of money, they can minimize their transactions costs by getting many small loans from many different people.

Answer True

False

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QuestionStocks are usually more risky than bonds but also earn a higher rate of return than bonds.

Answer True

False

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QuestionAn illiquid asset can be quickly converted into cash.

Answer True

Page 36 of 42

False

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QuestionA financial intermediary transforms funds gathered from many individuals into financial assets.

Answer True

False

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QuestionIf you borrow money from a bank to buy a house, the mortgage (loan) is a financial asset for you and a liability for the bank.

Answer True

False

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QuestionIf the price of a share of stock were expected to rise in the future, then demanders would demand more of it today, owners would be less willing to sell it today, and its price would rise today.

Answer True

False

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QuestionThe efficient market hypothesis says that asset prices embody all publicly available information.

Answer True

False

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Question 228 Essay 0 points Modify Remove

QuestionSuppose the federal government has a budget deficit and the economy is closed. Using the savings-investment spending identity, explain how this affects investment spending.

Answer National savings is equal to private savings plus the budget balance. If the budget is in a state of deficit, then the budget balance is a negative number and national savings is falling. Through the identity then, if national savings is falling, investment spending must also be falling.

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QuestionSuppose the federal government has a balanced budget, the economy is open, and there is a positive capital inflow from foreign citizens. Using the savings-investment spending identity, explain how this affects investment spending.

Answer National savings is equal to private savings plus the budget balance plus capital inflow. If the budget is balanced, then the budget balance is actually zero, but with positive capital inflow, national savings is rising. Through the identity then, if national savings is rising, investment spending must also be rising.

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QuestionThe table below shows four possible physical investment projects, the expected revenue from each project and the expected cost of each project. You may assume that each project, once completed, lasts only one year. Complete the empty column in the table by computing the rate of return on each project.

Answer The completed table is below. The rate of return is computed as: 100*(Revenue – Cost)/Cost.

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QuestionThe market for loanable funds is in equilibrium. All else equal, the federal government deficit is growing. Describe how this will affect the market for loanable funds, the equilibrium interest rate, and the equilibrium quantity of loanable funds.

Answer A larger budget deficit means the government must borrow to pay the bills. This shifts the demand for loanable funds to the right. The equilibrium interest rate and the equilibrium quantity of loanable funds both increase.

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QuestionThe market for loanable funds is in equilibrium. All else equal, the federal government has eliminated all taxes on interest that is earned

Page 37 of 42

from savings. Describe how this will affect the market for loanable funds, the equilibrium interest rate, and the equilibrium quantity of loanable funds.

Answer If households are no longer taxed on income earned from interest on savings, savings will increase and the supply of loanable funds will shift to the right. The equilibrium interest rate decreases and the equilibrium quantity of loanable funds increases.

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QuestionExplain what is meant by the Fisher Effect. What does this imply about the relationship between inflation expectations and the market for loanable funds?

Answer In general, the Fisher Effect says that the expected real interest rate is unaffected by the change in expected inflation. Because the nominal interest rate is equal to the real interest rate plus expected inflation, any change in expected inflation will only affect the nominal rate, not the real rate. Because both savers and borrowers are basing their decisions solely on the real rate, the equilibrium quantity of loanable funds is unaffected, but the nominal rate can rise or fall with inflation expectations.

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QuestionAssume that an economy is open to capital inflows and that capital inflows are equal to the difference between imports and exports (IM– X). Answer each of the following questions.a. Budget Balance = –$20; X = $60; IM = $90; Private Saving = $150. Calculate investment spending.b. Private Saving = $200; Investment = $220; Budget Balance = –$30. Calculate (IM – X).

Answer Use the savings-investment spending identity.a. I = Private Spending + Budget Balance + (IM – X).

I = 150 – 20 +30; I=$160.b. I = Private Spending + Budget Balance + (IM – X).

220 = 200 – 30 + (IM – X); (IM – X) = $50.

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QuestionYou have agreed to borrow $2000 from the bank for a period of one year. The nominal rate of interest is 8.5% and the real interest rate is 6%. At the end of the year, inflation was 1%. How does this impact the borrower (you) and the lender (the bank)? Who is better off?

Answer The terms of the loan included an inflation expectation of 2.5% (8.5%-6%). When actual inflation was 1%, less than expected, the bank is better off and you are worse off. The real rate of interest, with actual inflation of 1%, was 8.5% – 1% or 7.5%, which is higher than the original terms of the loan. Because of the unexpectedly low rate of inflation, in real terms you are actually over-compensating the bank for lending you the money.

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QuestionYou have agreed to borrow $2000 from the bank for a period of one year. The nominal rate of interest is 8.5% and the real interest rate is 6%. At the end of the year, inflation was 3.5%. How does this impact the borrower (you) and the lender (the bank)? Who is better off?

Answer The terms of the loan included an inflation expectation of 2.5% (8.5%–6%). When actual inflation was 3.5%, more than expected, the bank is worse off and you are better off. The real rate of interest, with actual inflation of 3.5%, was 8.5% – 3.5% or 5%, which is lower than the original terms of the loan. Because of the unexpectedly high rate of inflation, in real terms you are actually under-compensating the bank for lending you the money.

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QuestionConsider each of these forms of investment. Identify whether it is an example of investment spending, an investment in physical assets, or a financial investment.a. You purchase a classic 1965 Ford Mustang.b. You buy 50 shares of stock in the Ford Motor Company.c. Ford Motor Company builds a new plant in Tennessee.

Answer a. This is an investment in a physical asset. Like any asset, you hope that it appreciates in value so that you might sell it later at a profit, but it does not add to the nation's stock of physical capital.b. This is a financial investment. These shares of stock give you a very small ownership stake in the company and a very small claim on future profits. It is not investment spending because it is not increasing the stock of physical capital.c. This is investment spending. The new plant actually increases the stock of physical capital.

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QuestionThis year, Alan purchases a home built in the 1950s. Alan's purchase:

Answer counts as residential investment spending in this current year.

counts as government spending in this current year.

does not count as investment spending in this current year.

is considered business fixed investment in this current year.

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QuestionHuman capital refers to:

Answer changes in inventories.

changes in the level of education or training which workers possess.

funds available for investment spending.

spending on physical capital such as machines which aid workers.

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Question

Page 38 of 42

Human capital development often comes from:

Answer financial markets.

government spending for education.

the private sector, but only in capitalist economies.

investment spending by businesses.

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QuestionDomestic savings and foreign savings are:

Answer sources of funds for investment spending.

equal to each other in terms of the composition of total savings.

used for investment spending only when there is unplanned investment spending.

not necessary for investment spending since government funds this spending.

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QuestionIf an economy is closed and wishes to increase its investment spending:

Answer its only source of funding is domestic saving.

its sources of funding are domestic and foreign saving.

the government will need to increase its spending to provide for this.

the government will increase taxes to provide for this.

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QuestionIn an open economy, which of the following is true?

Answer GDP = C + I + G + X – IM

GDP = C + I + G

GDP = T – TR – G

GDP = Sprivate + Sgovernment

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QuestionWhen government spending is less than net taxes:

Answer there is a budget deficit.

government savings is negative.

there is budget surplus.

the economy is moving towards a balanced budget.

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QuestionThe budget balance is equal to:

Answer taxes minus government spending.

taxes plus government spending.

GDP minus consumption and government spending.

GDP plus taxes.

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QuestionNational savings is the sum of:

Answer private savings plus the budget balance.

private savings and government spending.

investment spending plus consumption.

consumption spending minus government spending.

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QuestionIf capital inflow is negative, this suggests a country is:

Answer borrowing more than it is lending to other countries.

lending more than it is borrowing from other countries.

experiencing balanced trade.

experiencing a situation where its imports are greater than its exports.

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QuestionIf a country has a positive capital inflow, the country is:

Answer borrowing more than it is lending to foreigners.

experiencing an inflow amount equal to its X + IM.

lending more than it is borrowing from foreigners.

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experiencing an outflow amount equal to its X + IM.

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QuestionIn an open economy:

Answer a country with a positive capital inflow will also have a situation where X are greater than IM.

savings of foreigners may be supporting investment spending.

capital inflows are always negative.

investment spending equals national savings.

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QuestionA government currently has a budget deficit in an open economy, this means that:

Answer the government is spending less than its tax revenue.

exports minus imports are negative.

exports minus imports are positive.

the government is spending more than its tax revenue.

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QuestionSuppose portions of investment spending are financed by a capital inflow, this means:

Answer interest is being paid by government for the use of those funds.

interest is being paid to a foreigner for use of those funds.

consumers will need to cut back on spending.

taxes will be raised to pay for this capital inflow.

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QuestionInvestment projects are undertaken when the rate of return is:

Answer positive.

greater than the equilibrium interest rate.

equal to the equilibrium interest rate.

less than the equilibrium interest rate

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

Answer regardless of the interest rate.

if the current interest rate is less than or equal to 11%.

if the Fed is expected to decrease the money supply.

if the current interest rate is greater than 11%.

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

Answer an increase in the equilibrium interest rate in the loanable funds market.

an increase in the level of private investment spending.

an increase in government savings.

a fall in the equilibrium interest rate in the loanable funds market.

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QuestionIn the loanable funds market, savers:

Answer demand funds.

supply funds.

represent borrowers of funds.

pay the equilibrium interest rate.

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

Answer $100.

$110.

$120.

$101.

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QuestionIn 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 inflation rate is 9%, then:

Answer Alison's real rate of interest is 1%.

Alison's real rate of interest is 9%.

Vanessa ends up paying a lower real interest rate than she had expected.

Alison ends up receiving a higher real interest rate than she had expected.

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QuestionBusinesses will undertake projects if the rate of return is:

Answer positive.

greater than or equal to the interest rate levied on the loan.

greater than 1.

less than the cost of borrowing for the project.

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QuestionCrowding out results in a(n):

Answer decrease in private investment spending resulting from government deficit spending.

increase in physical capital accumulation which leads to higher economic growth.

increase in private investment spending resulting from government deficit spending.

increase in consumption spending as a result of higher investment spending.

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QuestionProviding a linkage between savers and investors is an important aspect of:

Answer a well functioning financial system.

government.

the public sector.

consumers.

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QuestionFinancial assets:

Answer are paper claims that provide the buyer of the claim future income from the seller of the claim.

in the form of loans by an individual are an asset to the individual receiving the loan.

are accompanied by high transaction costs.

have no financial risk.

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QuestionA liquid asset:

Answer can be easily converted into a loan.

can be easily converted into cash.

are the only assets which financial markets work with.

carries no financial risk.

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QuestionSomeone who is risk averse is:

Answer willing to expend whatever resources necessary to gain an uncertain amount of money.

willing to spend more resources to avoid losing a fixed sum of money than is willing to expend on gaining the same sum of money.

irrational in their need to hold all of their assets in liquid form.

one who does not believe in financial risk.

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QuestionA checking account with $500 is:

Answer more liquid than a person's new car.

less liquid than a checking account with $1000.

equally liquid as a stock share with a $500 value.

less liquid than a home with a market value of $250,000.

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QuestionBorrowers who cannot be served by the stock and bond markets can use:

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Answer banks for their financing needs.

the government for their financing needs.

no other source and are therefore 'crowded out' of the market.

must hold all of their assets in liquid form.

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QuestionFour types of financial intermediaries are:

Answer mutual funds, pension funds, government, and the central bank.

mutual funds, pension funds, life insurance companies, and banks.

banks, stock markets, pension funds, and the central bank.

the central bank, government, the stock market, and the Dow Jones Industrial Average.

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QuestionSince the 1980s, compared to other wealthy countries, the U.S. has:

Answer experienced volatile changes in its levels of savings.

had consistently low levels of savings.

experienced an increase in its levels of savings.

had negative levels of savings.

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QuestionIn the loanable funds market, borrowers are:

Answer best represented by the supply of loanable funds.

not affected by changes in the inflation rate.

best represented by the demand for loanable funds.

negatively impacted by unexpected increases in the inflation rate.

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QuestionThe efficient market hypothesis believes that:

Answer stock markets reflect irrational behavior and therefore stock prices could be over or undervalued.

stock prices embody much public information and therefore are not over or underpriced.

the three stock market indexes will provide consistent information about the stock market.

financial fluctuations in markets do not impact the macro economy in a noticeable way.

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macro econ ch 10