Practice Problems: Chapter 10 Savings, Investment Spending, and the Financial System

Transcription

1 Practice Problems: Chapter 10 Savings, Investment Spending, and the Financial System 1. In a closed economy, all investment spending must come from: A) government. B) domestic savings. C) foreign savings. D) all of the above. Use the following to answer questions 2-5: Scenario: Closed Economy S = I In a closed economy suppose that GDP is $12 trillion. Consumption is $8 trillion and government spending is $2 trillion. Taxes are $1.5 trillion and government transfers are $1 trillion. 2. (Scenario: Closed Economy S = I) How much is private saving? A) $4 trillion B) $2.5 trillion C) $3.5 trillion D) -$0.5 trillion 3. (Scenario: Closed Economy S = I) What is the government budget balance? A) a surplus of $1.5 trillion B) a deficit of $1.5 trillion C) a surplus of $0.5 trillion D) a deficit of $0.5 trillion 4. (Scenario: Closed Economy S = I) How much is national saving? A) $3.5 trillion B) $3 trillion C) $2.5 trillion D) $2 trillion 5. (Scenario: Closed Economy S = I) How much is investment spending? A) $3.5 trillion B) $3 trillion C) $2.5 trillion D) $2 trillion

2 6. In an open economy, savings can come from: A) domestic sources. B) foreign sources. C) government sources. D) all of the above. 7. Which of the following represents the equation for capital inflow? A) KI = IM X B) KI = X IM C) KI = S M D) KI = M S 8. In the open economy of Sildavia, government spending during 2005 was $30 billion, government transfers were $15 billion, consumption was $70 billion, taxes were $35 billion, and GDP was $100 billion. If investment spending in Sildavia during 2005 was $10 billion, we can conclude that Sildavia registered: A) a net capital inflow of $10 billion. B) capital inflows of $10 billion and capital outflows of $20 billion. C) a trade surplus of $20 billion and a financial deficit of $20 billion. D) a net capital outflow of $10 billion. 9. If a country experiences a trade surplus, we can conclude that it is also experiencing: A) a budget surplus. B) a net capital outflow. C) a net capital inflow. D) a budget deficit. Use the following to answer question 10: Table: Investment Spending, Private Spending, and Capital Inflows Northlandia Southlandia Investment spending as a percentage of GDP 25% 30% Private savings as a percentage of GDP 10% 35% Capital inflow as a percentage of GDP 5% -5%

3 10. (Table: Investment Spending, Private Spending, and Capital Inflows) Northlandia has a while Southlandia has a. A) balanced budget; budget deficit. B) budget deficit; balanced budget C) budget surplus; balanced budget D) None of the above is correct. Use the following to answer question 11: Figure: Demand for Loanable Funds 11. (Figure: Demand for Loanable Funds) According to the accompanying figure, when the interest rate is 6%, the quantity demanded of loanable funds will equal: A) $30 billion. B) $40 billion. C) $50 billion. D) $60 billion. 12. A firm does NOT want to borrow money for a project when: A) the interest rate is greater than the rate of return on the project. B) the interest rate is less than the rate of return on the project. C) the interest rate is positive. D) the rate of return on the project is positive.

4 Use the following to answer questions 13-15: Figure: Loanable Funds Market 13. (Figure: Loanable Funds Market) If the interest rate is 8%, businesses will want to borrow approximately: A) $3 trillion. B) $2 trillion. C) $4 trillion. D) $1 trillion. 14. (Figure: Loanable Funds Market) If the interest rate is 8%, people will want to save approximately: A) $3 trillion. B) $2 trillion. C) $4 trillion. D) $1 trillion. 15. (Figure: Loanable Funds Market) The equilibrium interest rate and total quantity of lending are: A) 8% and $2 trillion. B) 2% and $5 trillion. C) 10% and $1 trillion. D) 6% and $3 trillion.

5 Use the following to answer question 16: Figure: Market for Loanable Funds 16. (Figure: Market for Loanable Funds) An increase in government borrowing will shift the demand for loanable funds to the: A) left and increase the interest rate. B) left and decrease the interest rate. C) right and increase the interest rate. D) right and decrease the interest rate. 17. If the government increases its borrowing, at the given interest rate, there is a(n): A) additional supply of funds. B) additional demand for funds. C) decrease in the supply of funds. D) increase in the supply of funds. 18. Crowding out negatively affects the economy by: A) decreasing government borrowing. B) decreasing consumption. C) increasing private borrowing. D) reducing investment spending on physical capital.

6 Use the following to answer question 19: Figure: Market for Loanable Funds 19. (Figure: Market for Loanable Funds) A decrease in savings by the private sector will shift the supply of loanable funds to the: A) left and increase the interest rate. B) right and decrease the interest rate. C) right and increase the interest rate. D) left and decrease the interest rate. 20. A financial asset is: A) a tangible asset like a car. B) a claim that entitles the owner to future income from the seller. C) the value of accumulated savings. D) all of the above. 21. Which of the following financial assets is likely to be the most liquid? A) stocks B) bonds C) mutual funds shares D) bank demand deposits

7 22. Financial 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: A) reducing transaction costs. B) reducing risk. C) providing liquidity. D) acting as a lender of last resort. 23. Financial intermediaries that manage a stock portfolio and sell shares of the stock portfolio itself to individual investors are: A) mutual funds. B) pension funds. C) life insurance companies. D) banks. 24. A random walk is when an asset price: A) moves in a predicable direction but with random error. B) movements are unpredictable. C) moves in a predictable way with no error. D) moves slowly, but predictably. 25. Which of the following is a serious challenge to the efficient markets hypothesis? A) Stock prices fluctuate more than can be explained by news about fundamentals. B) Individual investors behave in systematically irrational ways. C) Stock prices follow a random walk. D) Both a and b are serious challenges.

8 Answer Key 1. B 2. C 3. B 4. D 5. D 6. D 7. A 8. A 9. B 10. C 11. C 12. A 13. B 14. C 15. D 16. C 17. B 18. D 19. A 20. B 21. D 22. A 23. A 24. B 25. D