Macro CH 24 sample test question

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1 Class: Date: Macro CH 24 sample test question Multiple Choice Identify the choice that best completes the statement or answers the question. 1. The funds firms use to buy and operate physical capital are referred to as a. physical capital. b. financial capital. c. government capital. d. human capital. e. business capital. 2. Depreciation includes the a. additional value of new capital goods. b. additional value of new financial capital. c. decrease in value of physical capital from use. d. decrease in value of financial capital from use. e. addition to a person's wealth when the value of the person's assets rise. 3. During 2006, suppose a country's total purchases of newly produced capital goods is $2,000 billion, issues $1,600 billion of stock, and has $500 billion in depreciation. Gross investment in this country equals a. $2,000 billion. b. $2,500 billion. c. $3,600 billion. d. $4,100 billion. e. $2,100 billion. 4. Which of the following is correct? a. Gross investment equals net investment minus depreciation. b. Net investment is the same as capital consumption. c. Gross investment is the total spent on capital, both new and replacement. d. Net investment is the total spent on capital, both new and replacement. e. The change in the nation's capital stock over a year equals the amount of gross investment. 5. Net investment equals a. new capital plus old capital. b. capital plus depreciation. c. gross investment minus depreciation. d. gross investment plus depreciation. e. the amount of national wealth. 6. The Zonamo company produces waste disposal machines and sells them to militaries all over the world. The company started last year with $10 million of capital on hand and invested $15 million in new capital throughout the year. At the end of the year, the company's capital stock was $17 million. Hence, for the year, depreciation equaled and net investment equaled. a. $8 million; $7 million b. $7 million; $8 million c. $25 million; $5 million d. $5 million; $5 million e. $8 million; $15 million 1

2 7. The local Allied Moving Company begins 2006 with capital equal to $250,000. During 2006 the firm depreciates $150,000 worth of its capital and ends 2006 with capital equal to $250,000. Which statement correctly summarizes Allied Moving Company's investment? a. Allied Moving Company made no capital investment during the year. b. Allied Moving Company made no gross investment during the year. c. Allied Moving Company made no net investment during the year. d. Allied Moving Company made net investment of $150,000 during the year. e. Allied Moving Company made gross investment of $250,000 during the year. 8. During 2006, a country's total purchases of newly produced capital goods are $1,000 billion, the country issues $750 billion of stock, and there is $200 billion of depreciation. Net investment in this country equals a. $800 billion. b. $1,550 billion. c. $1,000 billion. d. $1,750 billion. e. $550 billion. 9. The change in the quantity of capital from one period to the next is equal to a. net investment. b. gross investment. c. depreciation. d. financial investment. e. wealth. 10. Comparing the existing stock of capital in the United States with the net investment added each year from 1975 to 2005, we find that the amount of the net investment was a. not comparable to the capital stock. b. on the average about 3 percent of the capital stock. c. on the average, about 117 percent of the capital stock. d. on the average, about equal to the capital stock. e. in every year greater than the amount of the capital stock. 11. Economists use the term wealth to mean a. the same thing as income. b. what a person earns. c. what a person owns. d. the amount of income that is spent and not saved. e. a person's investment. 12. During 2006, a country's income was $6.0 trillion, its consumption was $5.5 trillion, and its wealth at the beginning of 2003 was $30.0 trillion. The country's wealth at the end of 2006 was a. $30.0 trillion. b. $30.5 trillion. c. $35.5 trillion. d. $36.0 trillion. e. $6.0 trillion. 13. Equilibrium in the financial markets determines the price of a. financial capital expressed as interest rates. b. financial capital expressed as dollars. c. physical capital expressed as interest rates. d. physical capital expressed as dollars. e. investment and saving expressed as dollars. 2

3 14. A demander in a financial market a. wants funds to purchase financial capital. b. wants funds to purchase physical capital. c. lends funds to purchase financial capital. d. lends funds to purchase physical capital. e. wants physical capital in order to purchase financial capital. 15. All of the following are financial markets EXCEPT a. stock markets. b. bond markets. c. short-term securities markets. d. physical capital markets. e. loans markets. 16. Which of the following is NOT part of the global financial markets? a. short-term securities markets b. bond markets c. real interest rate markets d. stock markets e. loan markets. 17. A share of stock is defined as a a. promise to pay specified sums of money on specified dates. b. certificate of ownership and claim to the profits made by a firm. c. collection of funds that travels the world looking for the highest return. d. set of demanders and suppliers for the savings of households. e. form of investment in physical capital. 18. A promise to pay specified sums of money on specified dates is a. a stock. b. a bond. c. physical capital. d. money. e. a person's saving. 19. Which of the following is an example of investment demand? a. Mary buying stocks for her retirement portfolio b. George purchasing United States savings bonds for his son's college fund c. Scott purchasing a rookie-year baseball card for last year's World Series MVP d. Brian, owner of Bryan Games, purchasing computers to enhance the production of games e. Mark buying rare gold coins. 20. The opportunity cost of the financial resources used to finance the purchase of capital is a. the real interest rate. b. the supply of investment. c. capital investment. d. the quantity of investment demanded. e. the price of the capital goods purchased. 3

4 21. Ford Motor Corporation is considering purchasing new technology that will increase productivity by twenty percent. If Ford Motor Corporation decides to make this investment at the going real interest rate, then a. the quantity of investment demanded increases. b. the quantity of saving increases. c. investment demand increases. d. Ford's profits will decline. e. saving supply increases. 22. Investment demand a. increases in an expansion and decreases in a recession. b. decreases in an expansion and increases in a recession. c. increases if population growth declines. d. increases if the expected rate of profit decreases. e. increases if the purchasing power of net assets increases. 23. Which of the following decreases investment demand and shifts the investment demand curve leftward? a. the real interest rate rises b. the economy experiences a recession c. technology that increases productivity is introduced d. an economy experiences a rapid increase in population e. the purchasing power of net assets decreases 24. Technological change increases investment demand because it a. lowers the interest rate. b. can create new products. c. has little effect on production cost. d. decreases the need for additional equipment. e. increases people's expected future disposable income. 25. The investment demand curve shifts in response to changes in the a. real interest rate. b. amount of household savings. c. expected rate of profits. d. expected future disposable income. e. buying power of net assets. 26. The investment demand curve shows that the higher the real interest rate, the a. smaller the quantity of investment demanded. b. smaller the demand for investment. c. larger the quantity of investment demanded. d. larger the demand for investment. e. more the investment demand curve shifts leftward. 27. What happens to the investment demand curve when the economy enters a recession? a. The investment demand curve shifts rightward because the real interest rate falls. b. The investment demand curve shifts leftward because the real interest rate falls. c. The investment demand curve shifts rightward because the expected rate of profit falls. d. The investment demand curve shifts leftward because the expected rate of profit falls. e. The investment demand curve shifts leftward because the purchasing power of net assets decreases. 4

5 28. The investment demand curve shows the a. negative relationship between the interest rate and the quantity of capital demanded. b. positive relationship between the interest rate and the quantity of capital demanded. c. negative relationship between the investment demand curve and the saving supply curve. d. positive relationship between the investment demand curve and the saving supply curve. e. U-shaped relationship between the interest rate and the quantity of capital demanded. 29. The investment demand curve shifts rightward when a. the real interest rate rises. b. the real interest rate falls. c. expected rate of profit increases. d. expected rate of profit decreases. e. the purchasing power of net assets rises. 30. In the figure above, the rightward shift from investment demand curve ID1 to investment demand curve ID2, could be the result of a. a rise in the interest rate. b. an increase in the buying power of net assets. c. an increase in the expected rate of profit. d. a decrease in the expected rate of profit. e. a fall in the interest rate. 31. In the figure above, the leftward shift from investment demand curve ID1 to investment demand curve ID3, could be the result of a. a fall in the interest rate. b. a decrease in the expected rate of profit. c. an advancement in technology. d. an increase in the population. e. a rise in the interest rate. 5

6 32. Which of the above figures shows the effect of an economic expansion on the investment demand curve? a. Figure A b. Figure B c. Figure C d. Figure D e. Both Figure A and Figure D. 33. Which of the following graphs shows the effect of an increase in the real interest rate on investment demand? a. Figure A b. Figure B c. Figure C d. Figure D e. Both Figure B and Figure C. 34. When disposable income increases, saving will a. decrease and there is a movement downward along the saving supply curve. b. increase and there is a movement upward along the saving supply curve. c. not change. d. increase and the saving supply curve shifts rightward. e. decrease and the saving supply curve shifts leftward. 6

7 35. Which of the following factors changes saving supply and hence shifts the saving supply curve? i. disposable income ii. the buying power of net assets iii. expected rate of profit a. i only. b. ii only. c. iii only. d. i and ii. e. i, ii, and iii. 36. Which of the following shifts the saving supply curve? a. change in the real interest rate b. change in investment demand c. change in disposable income d. change in expected rate of profit e. change in "animal spirits" 37. If the real interest rate a. rises, the saving supply curve shifts rightward. b. rises, the saving supply curve shifts leftward. c. falls, there is a movement along the saving supply curve to a higher quantity of saving. d. falls, there is a movement along the supply curve to a lower quantity of saving. e. falls, the saving supply curve shifts leftward. 38. Which of the following factors does NOT shift the saving supply curve? i. change in disposable income ii. change in buying power of net assets iii. change in "animal spirits" a. i only. b. ii only. c. iii only. d. i and ii. e. ii and iii. 39. The saving supply curve has a slope and the investment demand curve has a slope. a. positive; positive b. positive; negative c. negative; positive d. negative; negative e. vertical; horizontal 7

8 40. Suppose that the initial saving supply curve is SS1. In the figure above, an increase in the real interest rate would lead to i. a shift in the saving supply curve from SS 1 to SS 2. ii. a shift in the saving supply curve from SS 1 to SS 3. iii. a movement along the saving supply curve SS 1. iv. no change whatever.. a. i only. b. ii only. c. iii only. d. i and iii. e. iv only. 41. In the figure above, the shift in the saving supply curve from SS 1 to SS 2 could be the result of a(n) a. increase in the real interest rate. b. decrease in disposable income. c. increase in expected rate of profit. d. decrease in the buying power of net assets. e. increase in expected future disposable income. 42. If the real interest rate is less than the equilibrium real interest rate, there is a of savings and. a. surplus; some borrowers cannot find the funds they want. b. shortage; some borrowers cannot find the funds they want. c. surplus; borrowers have an easy time finding the funds they want. d. shortage; borrowers have an easy time finding the funds they want. e. shortage; savers increase their saving supply to restore the equilibrium. 43. In the financial market, if the real interest rate is higher than the equilibrium real interest rate, a. there is a shortage of saving. b. there is a surplus of saving. c. there is a surplus of investment. d. the investment demand curve shifts rightward to restore the equilibrium. e. the investment demand curve shifts leftward to restore the equilibrium. 8

9 44. The above table gives investment demand and saving supply schedules. If the real interest rate is 6 percent, then there is a and the real interest rate will. a. surplus of saving; rise b. surplus of saving; fall c. shortage of saving; rise d. surplus of investment; fall e. surplus of investment; rise 45. The figure above shows the financial market. The equilibrium real interest rate is and the equilibrium quantity of investment is. a. 6 percent; $12 trillion b. 4 percent; $13 trillion c. 8 percent; $11 trillion d. 0 percent; $10 trillion e. 4 percent; $11 trillion 46. The figure above shows the financial market. If the real interest rate equals 8 percent, then the a. demand for investment exceeds the supply of saving. b. supply of saving exceeds the demand for investment. c. quantity of saving supplied exceeds the quantity of investment demanded. d. quantity of investment demanded exceeds the quantity of saving supplied. e. investment demand curve will shift rightward. 9

10 47. The figure above shows the financial market. The equilibrium real interest rate is percent and the equilibrium quantity of investment is. a. 4; $1.8 trillion b. 6; $1.6 trillion c. 8; $1.4 trillion d. 4; $1.4 trillion e. 8; $1.8 trillion 48. The figure above shows the financial market. If the real interest rate equals 8 percent, there will be a surplus of a. saving of $0.4 trillion. b. investment of $0.4 trillion. c. saving of $1.8 trillion. d. investment of $1.4 trillion. e. saving of $1.4 trillion. 49. For a government to add to the supply of saving, it must a. borrow. b. have a budget surplus. c. have a budget deficit. d. raise the real interest rate. e. increase its investment demand. 50. Government saving is equal to a. the quantity of investment demanded. b. net taxes minus government expenditures. c. net taxes plus government expenditures. d. private savings minus government expenditures. e. net taxes. 10

11 51. If there is no Ricardo-Barro effect, the government a. plays no direct role in the financial market because it doesn't affect either the investment demand or saving supply curves. b. has negative saving and therefore lowers the real interest rate. c. only affects the investment demand curve in the financial market. d. either increases or decreases total saving as its budget deficit or surplus shifts the saving supply curve. e. has no effect because private saving changes to offset the effect that the government's budget deficit or surplus might otherwise have. 52. For the world, investment equals private savings a. minus net taxes plus government expenditures. b. plus net taxes plus government expenditures. c. minus net taxes minus government expenditures. d. plus net taxes minus government expenditures. e. minus government expenditures. 53. During 2005, the world has investment of $10 trillion, net taxes of $6 trillion, and government purchases of $8 trillion. Private savings is equal to a. $2 trillion. b. $4 trillion. c. $8 trillion. d. $12 trillion. e. $10 trillion. 54. I equals investment, S equals saving, G equals government expenditure, and NT equals net taxes. Using these symbols, the formula showing how investment is financed is a. I = S + (G NT). b. I = G + (S NT). c. I = S + (NT G). d. I = G + S + NT. e. I = S G NT. 55. If there is no Ricardo-Barro effect, an increase in the government budget surplus a. decreases private saving. b. increases private saving. c. decreases saving supply. d. increases saving supply. e. has no effect on investment, saving, or the real interest rate. 56. If there is no Ricardo-Barro effect, a government budget surplus a. increases saving supply. b. decreases saving supply. c. increases investment demand. d. decreases investment demand. e. has no effect on investment, saving, or the real interest rate. 57. During 2005, the world has net taxes of $5 trillion and government purchases of $6.2 trillion. Without a Ricardo-Barro effect, the government's net taxes and spending lead to in total savings and real interest rate than otherwise. a. an increase; a higher b. an increase; a lower c. a decrease; a higher d. a decrease; a lower e. no change in; no change in the 11

12 58. With no Ricardo-Barro effect, a government budget surplus a. decreases saving supply and lowers the real interest rate. b. decreases investment demand and increases the real interest rate. c. increases investment demand and lowers the real interest rate. d. increases saving supply and lowers the real interest rate. e. increases investment demand and raises the real interest rate. 59. Suppose the government has a budget surplus of $2 billion. If there is no Ricardo-Barro effect, what occurs? a. The saving supply curve shifts rightward, lowering the interest rate, and increasing investment. b. The investment demand curve shifts rightward, raising the interest rate, and increasing investment. c. The saving supply curve shifts leftward, raising the interest rate, and decreasing investment. d. The investment demand curve shifts leftward, lowering the interest rate, and decreasing investment. e. The saving supply curve shifts leftward, lowering the interest rate, and increasing investment. 60. If the government runs a budget surplus, it a. competes with businesses for private saving. b. shifts the saving supply curve leftward. c. shifts the investment demand curve leftward. d. contributes to financing investment. e. shifts the investment demand curve rightward. 61. In the figure above, the SS curve is the saving supply curve and the PS curve is the private saving supply curve. Given these curves, there is a government budget and therefore the real interest rate is than it would be otherwise. a. surplus; higher b. surplus; lower c. deficit; higher d. deficit; lower e. deficit; not different 12

13 62. In the figure above, the SS curve is the saving supply curve and the PS curve is the private saving supply curve. The equilibrium interest rate is percent and the equilibrium quantity of investment is. a. 6; $1.6 trillion b. 6; $2.0 trillion c. 4; $1.4 trillion d. 4; $1.8 trillion e. 4; $2.0 trillion 63. In the figure above, the SS curve is the saving supply curve and the PS curve is the private saving supply curve. The figure shows a situation in which the government has a budget a. surplus of $2 trillion. b. deficit of $2 trillion. c. surplus of $14 trillion. d. deficit of $11 trillion. e. surplus of $12 trillion. 64. In the figure above, the SS curve is the saving supply curve and the PS curve is the private saving supply curve. The equilibrium interest rate is percent and the equilibrium quantity of investment is. a. 6; $12 trillion b. 6; $14 trillion c. 4; $13 trillion d. 4; $11 trillion e. 4; $14 trillion 65. Suppose government has a budget deficit of $500 billion. If there is no Ricardo-Barro effect, what occurs? a. The investment demand curve shifts rightward, the interest rate rises, and the quantity of investment increases. b. The saving supply curve shifts leftward, the interest rate rises, and the quantity of investment decreases. c. The investment demand curve shifts leftward, the interest rate falls, and the quantity of investment decreases. d. The saving supply curve shifts rightward, the interest rate falls, and the quantity of investment increases. e. The saving supply curve shifts leftward, the interest rate rises, and the quantity of investment increases. 13

14 66. A country initially has an equilibrium real interest rate of 4 percent and an equilibrium quantity of investment of $2 trillion. The government then runs a budget deficit. According to the crowding-out effect, the a. investment demand curve shifts leftward, the real interest rate falls, and investment increases. b. saving supply curve shifts rightward, the real interest rate rises, and investment increases. c. investment demand curve shifts rightward, the real interest rate falls, and investment increases. d. saving supply curve shifts leftward, the real interest rate rises, and investment decreases. e. saving supply curve shifts leftward, the real interest rate falls, and investment decreases. 67. Suppose the government has a budget deficit of $2 billion. If there is no Ricardo-Barro effect, how much crowding out of investment occurs? a. more than $2 billion b. some crowding out occurs, but less than $2 billion c. exactly equal to $2 billion dollars d. no crowding out occurs and investment does not change e. no crowding out occurs because investment increases 68. The Ricardo-Barro effect refers to how the in response to a government budget. a. investment demand curve shifts; surplus b. investment demand curve shifts; deficit c. saving supply curve shifts; deficit d. government budget curve shifts; surplus or deficit e. investment demand and saving supply curves shift; surplus 69. The Ricardo-Barro effect argues that the crowding-out effect a. is the result of a government budget surplus and higher interest rates. b. will not occur, because the private saving supply will change to offset any change in government saving. c. is the result of the government budget deficit and higher interest rates. d. will occur, because the private saving supply will change to offset any change in government saving. e. is stronger when the government runs a budget surplus than when it runs a budget deficit. 70. The Ricardo-Barro effect is based on the idea that when the government has a budget deficit. a. people decrease their private saving b. people increase their private saving c. investment demand increases because expected future profits increase d. investment demand decreases because of the higher real interest rate e. people immediately increase their tax payments 71. Evidence to support the Ricardo-Barro effect would show that a. higher government budget deficits decrease investment. b. higher government budget surpluses decrease investment. c. government budget deficits increase household consumption. d. government budget deficits have no effect on the real interest rate or investment. e. higher government budget deficits raise the real interest rate. 14

15 72. Suppose the government has a budget deficit of $2 billion. If the Ricardo-Barro effect is correct, then how much crowding out of investment occurs? a. more than $2 billion b. some crowding out occurs, but less than $2 billion c. exactly equal to $2 billion dollars d. no crowding out occurs and investment does not change e. no crowding out occurs because investment increases by $2 billion 73. The above table has investment demand and private saving supply schedules. If the government budget deficit is $200 billion, and there is no Ricardo-Barro effect, the equilibrium real interest rate is and the equilibrium quantity of investment is. a. 6 percent; $600 billion b. 4 percent; $700 billion c. 8 percent, $500 billion d. 8 percent; $700 billion e. 4 percent; $500 billion 74. The above table has investment demand and private saving supply schedules. If the government budget surplus is $200 billion, and there is a Ricardo-Barro effect, the equilibrium real interest rate is and the equilibrium quantity of investment is. a. 6 percent; $600 billion b. 4 percent; $700 billion c. 8 percent, $500 billion d. 8 percent; $700 billion e. 4 percent; $500 billion 75. If investment demand increases, the equilibrium real interest rate and the equilibrium quantity of investment. a. rises; increases b. rises; decreases c. falls; increases d. falls; decreases e. does not change; does not change 76. In the late 1990s, the U.S. federal government had a budget surplus. If there is no Ricardo-Barro effect, the budget surplus the real interest rate and the equilibrium quantity of investment. a. raised; increased b. raised; decreased c. lowered; increased d. lowered; decreased e. did not change; did not change 15

16 77. In 2005, the U.S. federal government had a budget deficit. If there is no Ricardo-Barro effect, the budget deficit the real interest rate and the equilibrium quantity of investment. a. raised; increased b. raised; decreased c. lowered; increased d. lowered; decreased e. did not change; did not change 78. Crowding out can occur when a government budget raises the real interest rate and the equilibrium quantity of investment. a. surplus; increases b. surplus; decreases c. deficit; increases d. deficit; decreases e. surplus; does not change 79. What does the Ricardo-Barro Effect predict? a. The level of saving in a developed economy will be very low. b. There is no way to explain animal spirits or irrational exuberance. c. Private saving will offset the impact of government borrowing. d. Government budget deficits crowd out private investment. e. Net investment and gross investment will be equal. 80. If the government runs a budget deficit to fight a war and there is no Ricardo-Barro effect, what is an impact of the deficit? a. the quantity of private saving decreases b. firms purchase more capital equipment c. animal spirits or irrational exuberance is created. d. the real interest rate rises e. the quantity of investment increases. 16