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Economics: Canada in the Global Environment, 7e (Parkin) Chapter 23 Finance, Saving, and Investment 23.1 Financial Institutions and Financial Markets 1) Capital is A) 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. B) financial wealth. C) the sum of investment and government expenditure on goods. D) net investment. E) gross investment. Answer: A Topic: Financial Institutions and Financial Markets Skill: Recognition AACSB: Reflective Thinking 2) Gross investment A) is the total amount spent on new capital. B) includes only replacement investment. C) equals wealth minus saving. D) equals saving minus wealth. E) is the change in the value of capital Answer: A Topic: Financial Institutions and Financial Markets Skill: Recognition AACSB: Reflective Thinking 3) The total amount spent on new capital is A) wealth. B) gross investment. C) depreciation. D) net investment. E) saving. Answer: B Topic: Financial Institutions and Financial Markets Skill: Recognition AACSB: Reflective Thinking 1 © 2010 Pearson Education Canada 4) In January 2008, Tim's Gyms, Inc. owned machines valued at $1 million. During the year, the market value of the machines fell by 30 percent. During 2008, Tim spent $200,000 on new machines. During 2008, Tim's gross investment was A) $1 million. B) $300,000. C) $200,000 D) $900,000. E) $100,000. Answer: C Diff: 1 Topic: Financial Institutions and Financial Markets Skill: Analytical AACSB: Analytical Skills 5) Net investment equals A) capital minus depreciation. B) gross investment minus depreciation. C) the total quantity of plant, equipment, and buildings. D) gross investment/depreciation. E) wealth minus saving. Answer: B Topic: Financial Institutions and Financial Markets Skill: Recognition AACSB: Reflective Thinking 6) The increase in the value of capital is A) gross investment. B) depreciation. C) net investment. D) private sector spending. E) wealth. Answer: C Topic: Financial Institutions and Financial Markets Skill: Recognition AACSB: Reflective Thinking 7) Capital stock increases when A) gross investment exceeds net investment. B) net investment exceeds gross investment. C) gross investment is negative. D) net investment is positive. E) net investment is zero. Answer: D Topic: Financial Institutions and Financial Markets Skill: Conceptual AACSB: Reflective Thinking 2 © 2010 Pearson Education Canada 8) If the economy's capital increases over time, A) net investment is positive. B) depreciation is less than zero. C) depreciation exceeds gross investment. D) gross investment equals depreciation. E) gross investment is zero. Answer: A Topic: Financial Institutions and Financial Markets Skill: Conceptual AACSB: Reflective Thinking 9) If the economy's capital decreases over time, A) net investment is positive. B) depreciation is less than zero. C) depreciation exceeds gross investment. D) gross investment equals net investment. E) gross investment is zero. Answer: C Topic: Financial Institutions and Financial Markets Skill: Conceptual AACSB: Reflective Thinking 10) In January 2008, Tim's Gyms, Inc. owned machines valued at $1 million. During the year, the market value of the machines fell by 10 percent. During 2008, Tim spent $200,000 on new machines. During 2008, Tim's net investment was A) $1 million. B) $300,000. C) $200,000. D) $100,000. E) $1.1 million. Answer: D Diff: 1 Topic: Financial Institutions and Financial Markets Skill: Analytical AACSB: Analytical Skills 11) 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 A) net investment was some amount but we need more information to determine the amount. B) net investment was $4 million for the year. C) gross investment was zero. D) net investment was -$4 million for the year. E) depreciation was $4 million. Answer: D Topic: Financial Institutions and Financial Markets Skill: Analytical AACSB: Analytical Skills 3 © 2010 Pearson Education Canada 12) 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 A) 1 machine. B) 2 machines. C) 3 machines. D) 6 machines. E) 5 machines Answer: A Topic: Financial Institutions and Financial Markets Skill: Analytical AACSB: Analytical Skills 13) 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 A) 1 machine. B) 2 machines. C) 3 machines. D) 6 machines. E) 8 machines. Answer: C Topic: Financial Institutions and Financial Markets Skill: Analytical AACSB: Analytical Skills 14) 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 A) 1 machine. B) 2 machines. C) 3 machines. D) 6 machines. E) 8 machines. Answer: D Topic: Financial Institutions and Financial Markets Skill: Analytical AACSB: Analytical Skills 4 © 2010 Pearson Education Canada 15) Which of the following is FALSE about saving? A) Saving adds to wealth. B) Income left after paying taxes can either be consumed or saved. C) Saving equals wealth minus consumption expenditure. D) Saving is the source of funds used to finance investment. E) Saving supplies funds in loan markets, bond markets, and stock markets. Answer: C Topic: Financial Institutions and Financial Markets Skill: Recognition AACSB: Reflective Thinking 16) 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 A) $20,000. B) $0. C) $90,000. D) $100,000. E) $10,000. Answer: A Topic: Financial Institutions and Financial Markets Skill: Analytical AACSB: Analytical Skills 17) 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 A) $20,000. B) $0. C) $90,000. D) $100,000. E) $10,000. Answer: B Topic: Financial Institutions and Financial Markets Skill: Analytical AACSB: Analytical Skills 5 © 2010 Pearson Education Canada 18) In 2008, 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) a mortgage obtained in the loan market. B) a stock issued in the bond market. C) a bond issued in the bond market. D) a mortgage obtained in the stock market. E) a stock issued in the loan market. Answer: A Diff: 1 Topic: Financial Institutions and Financial Markets Skill: Conceptual AACSB: Reflective Thinking 19) The funds used to buy physical capital are A) net investment. B) financial capital. C) saving. D) wealth. E) investment. Answer: B Topic: Financial Institutions and Financial Markets Skill: Recognition AACSB: Reflective Thinking 20) 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 ________. A) $1.3 billion; $1.6 billion B) $1.0 billion; $1.3 billion C) $1.3 billion; $1.0 billion D) $1.0 billion; $0.7 billion E) $1.3 billion; $0.3 billion Answer: C Topic: Financial Institutions and Financial Markets Skill: Analytical AACSB: Analytical Skills 6 © 2010 Pearson Education Canada 21) If a bank's net worth is negative, then the bank is A) liquid. B) insolvent. C) liquid. D) solvent. E) none of the above. Answer: B Topic: Financial Institutions and Financial Markets Skill: Recognition AACSB: Reflective Thinking 22) In which market would you find mortgage-backed securities? A) stock market B) bond market C) housing market D) capital market E) loan market Answer: B Topic: Financial Institutions and Financial Markets Skill: Recognition Source: Study Guide AACSB: Reflective Thinking 23) Elena owns a Canada Savings Bond with a 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? A) 5% B) 6.67% C) 10% D) 20% E) 500% Answer: B Topic: Financial Institutions and Financial Markets Skill: Recognition Source: Study Guide AACSB: Reflective Thinking 7 © 2010 Pearson Education Canada 23.2 The Market for Loanable Funds 1) Investment is financed by which of the following? I. Government spending. II. Household saving. III. Borrowing from the rest of the world. A) I, II, and III. B) I and II only. C) I and III only. D) II and III only. E) None of the above. Answer: D Topic: The Market for Loanable Funds Skill: Recognition AACSB: Reflective Thinking 2) National saving equals A) private saving + private wealth. B) private saving + government saving. C) private saving - net taxes. D) government saving. E) investment. Answer: B Topic: The Market for Loanable Funds Skill: Recognition AACSB: Reflective Thinking 3) If national saving equals $100,000, net taxes equal $100,000 and government expenditure equals $25,000, what is private saving? A) $25,000 B) $225,000 C) -$25,000 D) zero E) $175,000 Answer: A Topic: The Market for Loanable Funds Skill: Analytical AACSB: Analytical Skills 8 © 2010 Pearson Education Canada 4) Suppose Canada spends more on foreign goods and services than foreigners spend on our goods and services. Then A) Canada must borrow an amount equal to national saving. B) Canada must borrow an amount equal to imports minus exports. C) the rest of the world may or may not finance Canada's trade deficit. D) Canada must borrow an amount equal to consumption expenditure plus investment. E) none of the above. Answer: B Topic: The Market for Loanable Funds Skill: Recognition AACSB: Reflective Thinking 5) In 2008, 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 ________. A) surplus; $5 million B) deficit; -$5 million C) deficit; $5 million D) surplus; $25 million E) deficit; zero Answer: E Diff: 2 Topic: The Market for Loanable Funds Skill: Analytical AACSB: Analytical Skills 9 © 2010 Pearson Education Canada Refer to the table below to answer the following questions. Table 23.2.1 Item Millions of dollars Consumption expenditure 80 Government expenditure on goods and services 30 Net taxes 35 Investment 20 Imports 10 Exports 20 6) Refer to Table 23.2.1. Private saving is A) -$15 million. B) $40 million. C) $25 million. D) $20 million. E) $80 million. Answer: C Topic: The Market for Loanable Funds Skill: Analytical AACSB: Analytical Skills 7) Refer to Table 23.2.1. Government saving is A) $15 million. B) -$5 million. C) $5 million. D) $45 million. E) $20 million. Answer: C Topic: The Market for Loanable Funds Skill: Analytical AACSB: Analytical Skills 8) Approximately, the real interest rate ________ the inflation rate ________ the nominal interest rate. A) plus; equals B) equals; plus C) equals; minus D) minus; equals E) times; divided by 100 equals Answer: A Topic: The Market for Loanable Funds Skill: Recognition AACSB: Reflective Thinking 10 © 2010 Pearson Education Canada 9) The real interest rate A) can never be negative. B) is approximately equal to the nominal interest rate plus the inflation rate. C) is approximately equal to the nominal interest rate minus the inflation rate. D) increases when the inflation rate increases. E) none of the above. Answer: C Topic: The Market for Loanable Funds Skill: Recognition AACSB: Reflective Thinking 10) 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? A) The nominal interest rate is 7.5 percent and the real interest rate is 1.5 percent. B) The nominal interest rate is 7.5 percent and the real interest rate is 13.5 percent. C) The real interest rate is 7.5 percent and the nominal interest rate is 1.5 percent. D) The real interest rate is 6 percent and the nominal interest rate is 7.5 percent. E) The real interest rate is 6 percent and the nominal interest rate is -1.5 percent. Answer: A Diff: 2 Topic: The Market for Loanable Funds Skill: Analytical AACSB: Analytical Skills 11) If the nominal interest rate is 11 percent and the inflation rate is 9 percent, then the real interest rate is approximately A) 2 percent. B) 20 percent. C) 4 percent. D) 18 percent. E) -2 percent. Answer: A Topic: The Market for Loanable Funds Skill: Analytical AACSB: Analytical Skills 12) A firm's decision to invest in a project is based on the A) real interest rate and expected total revenue. B) nominal interest rate and expected total revenue. C) nominal interest rate and the expected profit. D) real interest rate and the expected profit. E) expected future income, wealth, and default risk. Answer: D Topic: The Market for Loanable Funds Skill: Recognition AACSB: Reflective Thinking 11 © 2010 Pearson Education Canada 13) 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 ________. A) greater than 15 percent B) greater than 10 percent C) greater than 5 percent D) positive E) greater than 7.5 percent Answer: A Topic: The Market for Loanable Funds Skill: Conceptual AACSB: Reflective Thinking 14) As the ________ interest rate increases, the quantity of loanable funds demanded ________. A) real; increases B) real; decreases C) nominal; increases D) nominal; decreases E) None of the above. There is no relationship between interest rates and loanable funds. Answer: B Topic: The Market for Loanable Funds Skill: Conceptual AACSB: Reflective Thinking 15) The demand for loanable funds is the relationship between the quantity of loanable funds demanded and the ________ other things remaining the same. A) real interest rate B) nominal interest rate C) inflation rate D) price level E) quantity of loanable funds supplied Answer: A Topic: The Market for Loanable Funds Skill: Recognition AACSB: Reflective Thinking 16) The demand for loanable funds curve A) is horizontal. B) has a negative slope. C) is vertical. D) has a positive slope. E) slopes downward at high real interest rates and slopes upward at low real interest rates. Answer: B Topic: The Market for Loanable Funds Skill: Recognition AACSB: Reflective Thinking 12 © 2010 Pearson Education Canada 17) As the ________ interest rate rises ________. A) nominal; the demand for loanable funds curve shifts rightward B) real; the demand for loanable funds curve shifts rightward C) nominal; the demand for loanable funds curve shifts rightward D) real; a movement occurs up along the demand for loanable funds curve E) real; a movement occurs down along the demand for loanable funds curve Answer: D Diff: 2 Topic: The Market for Loanable Funds Skill: Recognition AACSB: Reflective Thinking 18) If the real interest rate rises from 3 percent to 5 percent, A) the nominal interest rate falls. B) the demand for loanable funds curve shifts rightward. C) there is a movement up along the demand for loanable funds curve. D) the supply of loanable funds curve shifts rightward. E) there is a movement down along the supply of loanable funds curve. Answer: C Diff: 2 Topic: The Market for Loanable Funds Skill: Conceptual AACSB: Reflective Thinking 19) A rise in the real interest rate A) shifts the demand for loanable funds curve rightward. B) shifts the demand for loanable funds curve leftward. C) creates a movement up along the demand for loanable funds curve. D) creates a movement down along the demand for loanable funds curve. E) none of the above. Answer: C Topic: The Market for Loanable Funds Skill: Conceptual AACSB: Reflective Thinking 20) A fall in the real interest rate A) shifts the demand for loanable funds curve rightward. B) shifts the demand for loanable funds curve leftward. C) creates a movement up along the demand for loanable funds curve. D) creates a movement down along the demand for loanable funds curve. E) none of the above. Answer: D Topic: The Market for Loanable Funds Skill: Conceptual AACSB: Reflective Thinking 13 © 2010 Pearson Education Canada 21) The quantity of loanable funds demanded increases when A) expected profit decreases. B) the real interest rate rises. C) the real interest rate falls. D) the supply of loanable funds decreases. E) wealth increases. Answer: C Topic: The Market for Loanable Funds Skill: Conceptual AACSB: Reflective Thinking 22) 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. A) rightward shift of; leftward shift of B) movement down along; movement up along C) rightward shift of; movement up along D) movement down along; leftward shift of E) movement down along; rightward shift of Answer: D Topic: The Market for Loanable Funds Skill: Conceptual AACSB: Reflective Thinking 23) A decrease in the demand for loanable funds occurs when A) the real interest rate rises. B) the government raises taxes. C) the government cuts taxes. D) expected profit decreases. E) expected profit increases. Answer: D Topic: The Market for Loanable Funds Skill: Conceptual AACSB: Reflective Thinking 24) During a recession, firms decrease their profit expectations. As a result, there is a ________ shift of the ________ loanable funds curve. A) rightward; supply of B) leftward; demand for C) rightward; demand for D) rightward, supply of E) leftward; demand for loanable funds curve and supply of Answer: B Diff: 2 Topic: The Market for Loanable Funds Skill: Conceptual AACSB: Reflective Thinking 14 © 2010 Pearson Education Canada Refer to the figure below to answer the following question. Figure 23.2.1 25) Refer to Figure 23.2.1. In Figure 23.2.1, the economy is at point A on the initial demand for loanable funds curve DLF 0 What happens if the real interest rate rises? A) There is a movement to a point such as B on the demand for loanable funds curve DLF0. B) The demand for loanable funds curve shifts rightward to curve DLF2. C) The demand for loanable funds curve shifts leftward to curve DLF1. D) Either A or B can occur. E) Either A or C can occur. Answer: A Topic: The Market for Loanable Funds Skill: Analytical AACSB: Analytical Skills 15 © 2010 Pearson Education Canada Refer to the figure below to answer the following questions. Figure 23.2.2 26) Refer to Figure 23.2.2. In Figure 23.2.2, a decrease in the real interest rate will result in a movement from point E to A) point F. B) point G. C) point H. D) point I. E) either point G or point F. Answer: B Topic: The Market for Loanable Funds Skill: Analytical AACSB: Analytical Skills 27) Refer to Figure 23.2.2. In Figure 23.2.2, an increase in expected profit will result in a movement from point E to A) point F. B) point G. C) point H. D) point I. E) either point I or point F. Answer: A Topic: The Market for Loanable Funds Skill: Analytical AACSB: Analytical Skills 16 © 2010 Pearson Education Canada 28) Refer to Figure 23.2.2. In Figure 23.2.2, a decrease in expected profit will result in a movement from point E to A) point F. B) point G. C) point H. D) point I. E) either point G or point H. Answer: C Topic: The Market for Loanable Funds Skill: Analytical AACSB: Analytical Skills Refer to the figure below to answer the following questions. Figure 23.2.3 29) Refer to Figure 23.2.3. In Figure 23.2.3, if the real interest rate is 6 percent, the quantity of loanable funds demanded is A) $150 billion. B) $300 billion. C) $450 billion. D) $600 billion. E) only amount less than $450 billion. Answer: C Topic: The Market for Loanable Funds Skill: Analytical AACSB: Analytical Skills 17 © 2010 Pearson Education Canada 30) In Figure 23.2.3, if the real interest rate is constant at 6 percent and expected profit falls, the quantity of loanable funds demanded will be A) less than $450 billion. B) $450 billion. C) between $450 billion and $600 billion. D) greater than $600 billion. E) zero. Answer: A Topic: The Market for Loanable Funds Skill: Analytical AACSB: Analytical Skills 31) In Figure 23.2.3, if the real interest rate is constant at 6 percent and and expected profit rises, the amount of loanable funds demanded will be A) less than $450 billion. B) $450 billion. C) between $300 billion and $450 billion. D) greater than $450 billion. E) zero. Answer: D Topic: The Market for Loanable Funds Skill: Analytical AACSB: Analytical Skills 32) All of the following are sources of loanable funds EXCEPT A) business investment. B) private saving. C) government budget surplus. D) international borrowing. E) none of the above. Answer: A Topic: The Market for Loanable Funds Skill: Conceptual AACSB: Reflective Thinking 18 © 2010 Pearson Education Canada 33) Which of the following influences household saving? I. The real interest rate. II. Disposable income. III. Expected future income. A) I only. B) I and II. C) I and III. D) I, II, and III. E) None of the above. Answer: D Topic: The Market for Loanable Funds Skill: Recognition AACSB: Reflective Thinking 34) If households' disposable income decreases, then A) households' saving will decrease. B) households' saving will increase. C) the supply of loanable funds decreases. D) a movement occurs down along the supply of loanable funds curve. E) both A and C are correct. Answer: E Topic: The Market for Loanable Funds Skill: Conceptual AACSB: Reflective Thinking 35) Households will choose to save more if A) expected future income decreases. B) current disposable income increases. C) current disposable income decreases. D) both A and B are correct. E) both A and C are correct. Answer: D Topic: The Market for Loanable Funds Skill: Conceptual AACSB: Reflective Thinking 36) Which of the following is correct? A) As disposable income increases, the real interest rate rises. B) As disposable income decreases, saving decreases. C) The higher a household's wealth the greater is its saving. D) Both B and C are correct. E) Both A and C are correct. Answer: B Topic: The Market for Loanable Funds Skill: Conceptual AACSB: Reflective Thinking 19 © 2010 Pearson Education Canada 37) ________ increases households' saving. A) A decrease in the real interest rate B) A tax cut that increases disposable income C) Higher expected future income D) An increase in wealth E) An increase in default risk Answer: B Topic: The Market for Loanable Funds Skill: Conceptual AACSB: Reflective Thinking 38) The greater a household's ________ the less is its saving. A) return from saving B) wealth C) disposable income D) expected future profit E) all of the above Answer: B Topic: The Market for Loanable Funds Skill: Conceptual AACSB: Reflective Thinking 39) As the ________ rises, the supply of loanable funds ________ other things remaining the same. A) nominal interest rate; increases B) real interest rate; increases C) inflation rate; increases D) real interest rate; decreases E) inflation rate; decreases Answer: B Topic: The Market for Loanable Funds Skill: Recognition AACSB: Reflective Thinking 40) The supply of loanable funds is the relationship between the quantity loanable funds supplied and ________ other things remaining the same. A) real GDP B) the price level C) the real interest rate D) the inflation rate E) the nominal interest rate Answer: C Topic: The Market for Loanable Funds Skill: Recognition AACSB: Reflective Thinking 20 © 2010 Pearson Education Canada 41) The supply of loanable funds curve A) has a positive slope. B) is vertical. C) is horizontal. D) has a negative slope. E) is upward sloping at low real interest rates and downward sloping at high real interest rates. Answer: A Topic: The Market for Loanable Funds Skill: Recognition AACSB: Reflective Thinking 42) Changes in all of the following shift the supply curve of loanable funds EXCEPT A) the real interest rate. B) wealth. C) disposable income. D) expected future income. E) default risk. Answer: A Topic: The Market for Loanable Funds Skill: Conceptual AACSB: Reflective Thinking 43) Which of the following will shift the supply of loanable funds curve leftward? A) a decrease in the real interest rate B) a decrease in real wealth C) a decrease in disposable income D) a decrease in expected future income E) a decrease in default risk Answer: C Topic: The Market for Loanable Funds Skill: Conceptual AACSB: Analytical Skills 44) An increase in ________ will shift the supply of loanable funds curve ________. A) expected future income; rightward B) wealth; leftward C) disposable income; leftward D) default risk; rightward E) the real interest rate; rightward Answer: B Diff: 2 Topic: The Market for Loanable Funds Skill: Conceptual AACSB: Analytical Skills 21 © 2010 Pearson Education Canada 45) As a result of a recession, the default risk increases. How does this change affect the loanable funds market? A) There is a movement up along the supply of loanable funds curve. B) There is a leftward shift of the supply of loanable funds curve. C) There is a movement down along the demand for loanable funds curve. D) There is a rightward shift of the supply of loanable funds curve. E) There is a movement down along the demand for loanable funds curve. Answer: B Diff: 2 Topic: The Market for Loanable Funds Skill: Conceptual AACSB: Analytical Skills 46) When the real interest rate increases, A) the supply of loanable funds curve shifts rightward. B) the supply of loanable funds curve shifts leftward. C) there is a movement up along the supply of loanable funds curve. D) there is a movement down along the supply of loanable funds curve. E) the demand for loanable funds curve shifts leftward. Answer: C Topic: The Market for Loanable Funds Skill: Recognition AACSB: Analytical Skills 47) 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. A) I and III only. B) II and III only. C) I only. D) III only. E) I, II, and III. Answer: C Topic: The Market for Loanable Funds Skill: Conceptual AACSB: Reflective Thinking 22 © 2010 Pearson Education Canada 48) A decrease in disposable income ________. A) has no effect on the supply of loanable funds curve B) shifts the supply of loanable funds curve rightward C) shifts the supply of loanable funds curve leftward D) creates a movement up along the supply of loanable funds curve E) creates a movement down along the supply of loanable funds curve Answer: C Topic: The Market for Loanable Funds Skill: Conceptual AACSB: Reflective Thinking 49) If households believe they will experience higher income in the near future, there is a A) rightward shift of the supply of loanable funds curve. B) leftward shift of the supply of loanable funds curve. C) movement up along the supply of loanable funds curve. D) movement up along the demand for loanable funds curve. E) rightward shift of the demand for loanable funds curve. Answer: A Diff: 2 Topic: The Market for Loanable Funds Skill: Conceptual AACSB: Reflective Thinking 23 © 2010 Pearson Education Canada Refer to the figure below to answer the following questions. Figure 23.2.4 50) Refer to Figure 23.2.4. In Figure 23.2.4, the economy is at point A on the supply of loanable funds curve SLF 0 What happens if disposable income decreases? A) Nothing; the economy would remain at point A. B) There is a movement to a point such as B on the supply of loanable funds curve S0F . C) The supply of loanable funds curve shifts rightward to a curve such as 2LF . D) The supply of loanable funds curve shifts leftward to a curve such as 1LF . E) None of the above. Answer: D Topic: The Market for Loanable Funds Skill: Analytical AACSB: Analytical Skills 51) Refer to Figure 23.2.4. In Figure 23.2.4, the economy is at point A on the supply of loanable funds curve SLF 0 What happens if the real interest rate rises? A) Nothing; the economy would remain at point A. B) There is a movement to a point such as B on the supply of loanable funds curve S0F . C) The supply of loanable funds curve shifts rightward to a curve such as SLF . 2 D) The supply of loanable funds curve shifts leftward to a curve such as 1LF . E) None of the above. Answer: B Topic: The Market for Loanable Funds Skill: Analytical AACSB: Analytical Skills 24 © 2010 Pearson Education Canada 52) In the market for loanable funds, as the real interest rate rises the ________ and the ________. A) quantity of loanable funds supplied increases; quantity of loanable funds demanded decreases B) quantity of loanable funds supplied decreases; quantity of loanable funds demanded increases C) supply of loanable funds increases; demand for loanable funds decreases D) supply of loanable funds decreases; demand for loanable funds increases E) quantity of loanable funds supplied increases; supply of loanable funds increases Answer: A Topic: The Market for Loanable Funds Skill: Recognition AACSB: Reflective Thinking 53) The equilibrium real interest rate is determined by the A) demand for loanable funds curve and the supply of loanable funds curve. B) demand for loanable funds curve and real GDP. C) supply of loanable funds curve and financial institutions. D) government expenditure curve and the taxation curve. E) banks and insurance companies. Answer: A Topic: The Market for Loanable Funds Skill: Recognition AACSB: Reflective Thinking 54) Suppose the current real interest rate is 4 percent and the equilibrium real interest rate is 3 percent. Choose the correct statement. A) The supply of loanable funds increases. B) There is a surplus of loanable funds. C) There is a shortage of loanable funds. D) There is neither a shortage nor surplus of loanable funds. E) The demand for loanable funds decreases. Answer: B Topic: The Market for Loanable Funds Skill: Conceptual AACSB: Analytical Skills 55) If the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded, then ________. A) the real interest rate will rise B) the supply of loanable funds increases C) people will save more D) the real interest rate will fall E) the demand for loanable funds increases Answer: D Topic: The Marke
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