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142 Cards in this Set

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Capital is

the tools, instruments, machines, buildings and other items that have been produced in the past and that are used today to produce goods and services

Gross investment

is the total amount spent on new capital

The total amount spent on new capital is

gross investment

In January 2011, Tim's Gyms, Inc. owned machines valued at $1 million. During the year, the market value of the machines fell by 30 percent. During 2011, Tim spent $200,000 on new machines. During 2011, Tim's gross investment was

$200,000 on new machines

Net investment equals

gross investment minus depreciation

The increase in the value of capital is

net investment

Capital stock increases when

net investment is positive

If the economy's capital increases over time,

net investment is positive

If the economy's capital decreases over time,

depreciation exceeds gross investment

In January 2011, Tim's Gyms, Inc. owned machines valued at $1 million. During the year, the market value of the machines fell by 10 percent. During 2011, Tim spent $200,000 on new machines. During 2011, Tim's net investment was

net investment = gross investment - depreciation = 200,000 - 100,000 = 100,000

The Acme Stereo Company had a capital stock of $24 million at the beginning of the year. At the end of the year, the firm had a capital stock of $20 million. Thus its

net investment was -$4 million for the year

At the beginning of the year, Tom's Tubes had a capital stock of 5 tube-inflating machines. During the year, Tom scrapped 2 old machines and purchased 3 new machines. Tom's net investment for the year totaled

1 machine

At the beginning of the year, Tom's Tubes had a capital stock of 5 tube-inflating machines. During the year, Tom scrapped 2 old machines and purchased 3 new machines. Tom's gross investment for the year totaled

3 machines

At the beginning of the year, Tom's Tubes had capital of 5 tube-inflating machines. During the year, Tom scrapped 2 old machines and purchased 3 new machines. Tom's capital at the end of year was

6 machines

Which of the following is TRUE about saving?

savings add to wealth


income left after paying taxes can either be consumed or saved


saving is the source of funds used to fiance investment


saving supplies fund in loan markets, bond s markets, and stock markets

At the beginning of the year, your wealth is $10,000. During the year, you have an income of $90,000 and you spend $80,000 on consumption goods and services. You pay no taxes. Your wealth at the end of the year is

$20,000

At the beginning of the year, your wealth is $10,000. During the year, you have an income of $80,000 and you spend $90,000 on consumption goods and services. You pay no taxes. Your wealth at the end of the year is

0

In 2011, Tim's Gyms needs to finance the building of a new gym. Suppose Tim secures this financing from a bank, and the bank receives ownership if Tim fails to make payments. This type of funding is

a mortgage obtained in the loan market

The funds used to buy physical capital are

financial capital

This year Pizza Hut spent $1.3 billion on new capital in its stores. Depreciation during the year was $300 million. Pizza Hut's gross investment was ________ and its net investment was ________.

1.3 billion; 1 billion

If a bank's net worth is negative, then the bank is

insolvent

In which market would you find mortgage-backed securities?

bond market

Elena owns a Canada Savings Bond with a price of $5,000, which pays $500 per year. The price of the bond rises in the bond market to $7,500. What is the new interest rate on the bond?

Interest rate on asset = interest received / price of asset x 100


= 500/7500 x 100 = 6.67%

Suppose that a bond promises to pay its holder $100 a year forever. If the price of the bond increases from $1,000 to $1,250, then the interest rate on the bond ________.

100/1250 x 100 = 8%


100/1000 x 100 = 10%




falls from 10 percent a year to 8 percent a year

Suppose a bond promises to pay its holder $100 a year forever. The interest rate on the bond rises from 4 percent to 5 percent. The price of the bond ________.

0.04 = 100/price of asset = 2500
0.05 = 100/price of asset = 2000

falls from $2500 to $2000

The key Canadian financial institutions include all of the following except ________.

ATMs

Choose the statement that is correct about trust and loan companies.

The largest trust and loan companies are owned by banks


Trust and loan companies accept deposits and make personal loans and mortgage loans


Trust and loan companies administer estates


Trust and loan companies administer trusts and pension plans




(FALSE statement) Trust and loan companies hold more than 70 percent of total assets of the Canadian Financial services sector

Choose the statement that is correct.

A financial institution can be solvent but illiquid


A firm is illiquid if it has made long-term loans with borrowed funds and is faced with a sudden demand to repay more of what is has borrowed than its available cash


Insolvency and illiquidity were at the core of a global financial meltdown in 2007-2008


A financial institution's net worth is the market value of what it has lent minus the market value of what it has borrowed

Investment is financed by which of the following?

Household savings and Borrowing from the rest of the world

National saving equals

private savings + government saving

If national saving equals $100,000, net taxes equal $100,000 and government expenditure equals $25,000, what is private saving?

National savings = private savings + (Taxes - Government expenditure) + foreign borrowing


100,000 = private savings + (100,000 - 25,000) + 0


private savings = $25,000

Suppose Canada spends more on foreign goods and services than foreigners spend on our goods and services. Then

Canada must borrow an amount equal to imports minus exports

In 2011, Country A has net taxes of $30 million and government expenditures of $35 million. Private saving in Country A is $5 million and consumption expenditure is $80 million. The government of Country A is running a budget ________ and national saving is ________.

national savings = private savings + (taxes - government expenses) + foreign borrow


national savings = $5 mill + (30 mill - 35 mill) = 0




deficit; 0

Refer to Table 23.2.1. Private saving is

Y = C + I + G + M - X


Y = C + S + T


equals


I = S + (T-G) + (M - X)


S = I - (T-G) - (M-X)


S = 20 - (5) - (-10)


S = 25 million

Refer to Table 23.2.1. Government saving is

Government Savings = (T - G) = 35 mill - 30 mill = 5 mill

Approximately, the real interest rate ________ the inflation rate ________ the nominal interest rate.

plus; equals


real interest rate plus the inflation rate = the nominal interest rate

The real interest rate

is approximately equal to the nominal rate minus the inflation rate

Suppose that you took out a $1,000 loan in January and had to pay $75 in annual interest. During the year, inflation was 6 percent. Which of the following statements is correct?

75 / 1000 x 100 = 7.5% Nominal interest rate
real interest = 7.5% - 6% = 1.5%

The nominal interest rate is 7.5 percent and the real interest rate is 1.5 percent.

If the nominal interest rate is 11 percent and the inflation rate is 9 percent, then the real interest rate is approximately

real interest rate = nominal interest rate - inflation = 11 - 9 = 2 percent

A firm's decision to invest in a project is based on the

real interest rate and the expected profit

Suppose a firm has an investment project which will cost $200,000 and result in $30,000 profit. The firm will not undertake the project if the interest rate is ________.

$30,000/$200,000 x 100 = 15%


greater than 15%

As the ________ interest rate increases, the quantity of loanable funds demanded ________.

real; decreases

The demand for loanable funds is the relationship between the quantity of loanable funds demanded and the ________ other things remaining the same.

real interest rate

The demand for loanable funds curve


has a negative slope

As the ________ interest rate rises ________.

real; a movement occurs up along along the demand for loanable funds curve

If the real interest rate rises from 3 percent to 5 percent,

there is movement up along the demand for loanable funds curve

A rise in the real interest rate

creates a movement up along the demand for loanable funds curve

A fall in the real interest rate

creates a movement down along the demand for loanable funds curve

The quantity of loanable funds demanded increases when

the real interest rate falls

A decrease in the real interest rate leads to a ________ the demand for loanable funds curve, and a decrease in expected profit leads to a ________ the demand for loanable funds curve.

movement down along; leftward shift of

A decrease in the demand for loanable funds occurs when

expected profit decreases

During a recession, firms decrease their profit expectations. As a result, there is a ________ shift of the ________ loanable funds curve.

leftward; demand for

the economy is at point A on the initial demand for loanable funds curve DLF0. What happens if the real interest rate rises?

the economy is at point A on the initial demand for loanable funds curve DLF0. What happens if the real interest rate rises?

There is a movement to a point such as B on the demand for loanable funds curve DLF0


a decrease in the real interest rate will result in a movement from point E to

a decrease in the real interest rate will result in a movement from point E to

point G


an increase in expected profit will result in a movement from point E to

an increase in expected profit will result in a movement from point E to

point F


a decrease in expected profit will result in a movement from point E to

a decrease in expected profit will result in a movement from point E to

point H


 if the real interest rate is 6 percent, the quantity of loanable funds demanded is

if the real interest rate is 6 percent, the quantity of loanable funds demanded is

450 billion


if the real interest rate is constant at 6 percent and expected profit falls, the quantity of loanable funds demanded will be

if the real interest rate is constant at 6 percent and expected profit falls, the quantity of loanable funds demanded will be

less than $450 billion


if the real interest rate is constant at 6 percent and and expected profit rises, the amount of loanable funds demanded will be

if the real interest rate is constant at 6 percent and and expected profit rises, the amount of loanable funds demanded will be

greater than $450 billion

All of the following are sources of loanable funds EXCEPT

All of


private saving


government budget surplus


international borrowing


except


business investment

Which of the following influences household saving?


I. The real interest rate.


II. Disposable income.


III. Expected future income.

the real interest rate


disposable income


expected future income

If households' disposable income decreases, then

household's savings will decrease


the supply of loanable funds decreases

Households will choose to save more if

expected future income decreases


current disposable income increases

Which of the following is correct?

As disposable income decreases, saving decreases

________ increases households' saving.

A tax cut that increases disposable disposable income

The greater a household's ________ the less is its saving.

wealth

As the ________ rises, the quantity of loanable funds supplied ________ other things remaining the same.

real interest rate;; increases

The supply of loanable funds is the relationship between the quantity loanable funds supplied and ________ other things remaining the same.

real interest rate

+The supply of loanable funds curve

has a positive slope

Changes in all of the following shift the supply curve of loanable funds EXCEPT

the real interest rate

Which of the following will shift the supply of loanable funds curve leftward?

a decrease in expected future income

An increase in ________ will shift the supply of loanable funds curve ________.

wealth; leftward

As a result of a recession, the default risk increases. How does this change affect the loanable funds market?

there is a leftward shift of the supply of loanable funds curve

When the real interest rate increases,

there is a movement up along the supply of loanable funds curve.

Which of the following is true?


I. As the real interest rate increases, people increase the quantity they save.


II. The supply of loanable funds curve is downward sloping.


III. As disposable income increases, the supply of loanable funds curve becomes steeper.

As the interest rate increases, people increase the quantity they save

A decrease in disposable income ________.

shifts the supply of loanable curve leftward

If households believe they will experience higher income in the near future, there is a

leftward shift of the supply of loanable funds curve


the economy is at point A on the supply of loanable funds curve SLF0. What happens if disposable income decreases?

the economy is at point A on the supply of loanable funds curve SLF0. What happens if disposable income decreases?

The supply of loanable funds curve shifts leftward to a curve such as SLF1.


the economy is at point A on the supply of loanable funds curve SLF0. What happens if the real interest rate rises?

the economy is at point A on the supply of loanable funds curve SLF0. What happens if the real interest rate rises?

There is a movement to a point such as B on the supply of loanable funds curve SLF0

In the market for loanable funds, as the real interest rate rises the ________ and the ________.

quantity of loanable funds supplied increases; the quantity of loanable funds demanded decreases

The equilibrium real interest rate is determined by the

demand for loanable funds curve and the supply of loanable funds curve

Suppose the current real interest rate is 4 percent and the equilibrium real interest rate is 3 percent. Choose the correct statement.

There is a surplus of loanable funds

vIf the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded, then ________.

the real interest rate will fall

If the real interest rate is above the equilibrium real interest rate,

lenders are unable to find borrowers willing to borrow all of the available funds and the real interest rate falls

If the real interest rate is below the equilibrium real interest rate,

borrowers are unable to borrow all of the funds they want to borrow and the real interest rate rises

If the real interest rate is below the equilibrium real interest rate,

a shortage of loanable funds exists and the real interest rate rises

In the market for loanable funds, if the interest rate is above the equilibrium level

a surplus of loanable funds exists

An increase in disposable income shifts the supply of loanable funds curve

rightward and decreases the real interest rate

Technological progress that increases expected profit shifts the demand for loanable funds curve

rightward and increases the real interest rate

What is the effect of a decrease in expected profit?

The demand curve for loanable funds shifts leftward and the real interest rate falls

If disposable income increases, people ________ saving, the supply of loanable funds will ________ and the real interest rate will ________.

increases; increase; fall

Suppose the market for loanable funds is in equilibrium. If expected profit falls, the equilibrium real interest rate ________ and the quantity of loanable funds ________.

falls; decrease

  An expansion that increases disposable income and expected profit

An expansion that increases disposable income and expected profit

shift of the supply of loanable funds rightwards to curve SLF1 and shifts the demand for loanable curve rightwards to curve DLF1.


An increase in the expected profit

An increase in the expected profit

shifts the demand for loanable funds rightward to DLF1 and does not shift the supply of loanable funds curve

Which of the following is false?

Y = C + I + G + X - M

In Canada's economy, investment is financed by

I = S + (T - G) + (M - X)

Investment will be higher if

national savings is higher

Southton has investment of $100, private saving of $90, net taxes of $25, government expenditure of $30, exports of $25 and imports of $10. What is national saving?

National savings = private savings + (T - G)
= 90 + (25-30) = $85

When the inflation rate is zero, the ________.

real interest rate equals the nominal interest rate

Which of the following explains why the demand for loanable funds is negatively related to the real interest rate?

A lower real interest rate makes more investment projects profitable

If net taxes exceed government expenditures, the government sector has a budget ________ and government saving is ________.

surplus; positive

When a government has a budget surplus, the surplus

helps finance investment

When government saving is negative,

the real interest rate rises

The tendency for a government budget deficit to decrease investment is called the

crowding-out effect

The crowding-out effect refers to

a government deficit crowding out investment

Crowding out leads to all of the following EXCEPT

All of the following:


a higher real interest rate


a decrease in investment


a smaller quantity of capital in the future


Except:


a decrease in private savingd

If the government begins to run a larger budget deficit, the demand for loanable funds ________ and the real interest rate ________.

increases, rises

A government budget deficit ________ the demand for loanable funds and ________ investment.

increases; decreases

A government budget deficit ________ the demand for loanable funds, ________ the real interest rate, and ________ investment.

increases; increases; crowds out

If China's government increases its budget surplus, there is ________ in the supply of loanable funds, private saving ________ and investment ________.

increase; decrease; increases

The tendency for private saving to increase in response to growing government deficits is known as the

Ricardo-Barro effect

According to the Ricardo-Barro effect,

households increase personal saving when government run budget deficits

The Ricardo-Barro effect of a government budget deficit is

an increase in private savings

The Ricardo-Barro effect holds that

a government deficit has no effect on the real interest rate

According to the Ricardo-Barro effect, government deficits

lead to simultaneous increases in private saving and have no effect on the equilibrium of real interest and investment

According to the Ricardo-Barro effect,

the government has no effect on the real interest rate state

If the Ricardo-Barro effect occurs, ________ in private saving finances the government budget deficit and the real interest rate ________.

increase; remains the same

If the Ricardo-Barro effect occurs, a government budget deficit raises the equilibrium real interest rate by ________ and decreases the equilibrium quantity of investment by ________ if the Ricardo-Barro effect is absent.

less; less than

A decrease in the government budget deficit decreases the ________ loanable funds and an increase in the government budget surplus increases the ________ loanable funds.

demand for; supply of

The government budget is balanced. If the government moves from a balanced budget to a surplus of $20 billion, the new equilibrium has a real interest rate of ________ percent and quantity of loanable funds traded equal to ________.

Higher disposable income shifts SLF rightward, real interest rate falls, quantity of loanable funds increases


5.5%; 110 billion

In the market for loanable funds, a larger government surplus leads to

a lower real interest rate, and increased investment

Choose the statement that is correct.

According to the Ricardo-Barro effect, taxpayers are rational people who know that a budget deficit today means that future taxes will be higher and future disposable income will be smaller


According to the ricardo-barro effect, a budget deficit has no effect on either the real interest rate or investment


According to the Ricaro-Barro effect, the quantity of loanable funds demended increases when a government budget deficit occurs, and private saving and the private supply of loanable funds increases to match the quantity of loanable funds demanded



A government budget surplus occurs, which ________ loanable funds. The real interest rate ________, household saving ________, and investment ________.

increases the demand for; falls; increases

The quantity of loanable funds demanded increases by $1 trillion at each real interest rate and the quantity of loanable funds supplied increases by $2 trillion at each real interest rate. If the government wants investment to be $9 trillion, it must ________ its budget balance by ________ trillion.

increase; $1

f the Ricardo-Barro effect occurs, and if the government budget deficit is $2.0 trillion, the real interest rate is ________ percent a year and the quantity of investment is ________ trillion.

7.0; $6.0 (unchanged)

If the government budget deficit is $1.0 trillion, the real interest rate is ________ percent a year, the quantity of investment is ________ trillion, and the quantity of private saving is ________ trillion.

5; 6.5 trillion; 7.5$

If the government budget surplus is $2.0 trillion, the real interest rate is ________ percent a year, the quantity of investment is ________ trillion, and the quantity of private saving is ________ trillion.

6%;7.5%;5.5%

The government of Greece is running a large budget deficit. With no Ricardo-Barro effect, which of the following events will occur?


I. The supply curve of loanable funds will shift leftward.


II. A higher real interest rate crowds out investment.


III. Saving increases.

The supply curve of loanable funds will shift leftward


A higher real interenet rate crowds out investment

If we import more than we export from the rest of the world we

are a net borrower of funds from the rest of the world

Real interest rates around the world tend to

be equal after adjusting for differences in risk because financial capital seeks the highest possible return

The real interest rate is ________ in Canada compared to Zimbabwe because ________.

lower; there is a lower risk premium in canada

A small country is a net foreign borrower. Its real interest rate without foreign borrowing is ________ the world real interest rate.

higher than

A very small country is a net foreign borrower. Its supply of loanable funds increases but it still remains a net foreign borrower. As a result, the equilibrium quantity of loanable funds used in the country ________ and the country's foreign borrowing ________.

does not change; decreases

A very small country is a net foreign borrower and its demand for loanable funds increases. As a result, the equilibrium quantity of loanable funds used in the country ________ and the country's foreign borrowing ________.

increases; increases

A very small country is a net foreign lender and its supply of loanable funds increases. As a result, the equilibrium quantity of loanable funds used in the country ________ and the country's foreign lending ________.

does not change; increases

If the world real interest rate falls, then a country that is a net foreign lender

decreases the amount of its lending

Loanable funds flow among countries because ________.

funds flow into country with the highest real interest rate and out of the country in which the the interest rate is lowest

In an individual economy that is integrated into the global market, the demand for loanable funds is determined by the ________ demand and the supply of loanable funds is determined by the ________ supply.

country's; world's

If a country has a shortage of loanable funds at the world real interest rate ________.

world suppliers of loanable funds move funds to this country

An increase in the government budget deficit ________. If the country is an international borrower, the government budget deficit ________. If the country is an international lender, the government budget deficit ________.

increases the country's demand for loanable funds; increases foreign borrowing; decreases foreign lending

A country's exports are $490 billion and its imports are $529 billion. Choose the correct statement.


I. The country is a net foreign borrower.


II. The Ricardo-Barro effect holds in this country.


III. This country does not have an equilibrium in its loanable funds market.

The country is a net foreign borrower

A country's imports are $490 billion and its exports are $529 billion. Choose the correct statement.


I. The country is a net foreign borrower.


II. The Ricardo-Barro effect holds in this country.


III. This country does not have an equilibrium in its loanable funds market.

none of the statements are true