Question 1

Which of the following best describes the difference between gross investment and net investment?

Accepted Answer

Gross investment is the purchase of new capital, while net investment equals gross investment minus depreciation.

Question 2

Suppose the nominal interest rate is 8% and the inflation rate is 3%. Using the Fisher Equation, what is the real interest rate?

Accepted Answer

$$r = i - \pi = 8\% - 3\% = 5\%$$

Question 3

If a government runs a budget deficit, what is the direct effect on the loanable funds market?

Accepted Answer

The supply of loanable funds decreases, raising the real interest rate and crowding out investment.

Question 4

Which of the following factors would most likely increase the supply of loanable funds in an economy?

Accepted Answer

A decrease in default risk.

Question 5

A country has private savings of $$400B, government savings of -100B$$, and business savings of $200B. What is its national savings?

Accepted Answer

$$National\ Savings = Private\ Savings + Government\ Savings + Business\ Savings = 400B + (-100B) + 200B = 500B$$

Question 6

According to the Fisher effect, what happens when expected future inflation increases?

Accepted Answer

The nominal interest rate increases, but the expected real interest rate remains unchanged.

Question 7

Which of the following is NOT a component of national savings?

Accepted Answer

Capital gains

Question 8

In the market for loanable funds, what is the main item that makes up the demand for loanable funds?

Accepted Answer

Business investment

Question 9

If the real interest rate rises, what happens to the quantity of loanable funds supplied and demanded?

Accepted Answer

Supplied increases, demanded decreases.

Question 10

Suppose a country has investment of $$600B, national savings of 500B$$, and net exports of $-100B. Is the country a net borrower or lender to the rest of the world?

Accepted Answer

Net borrower, because investment exceeds national savings.

Question 11

Which of the following best describes the Ricardo-Barro effect?

Accepted Answer

A government budget deficit is exactly offset by an increase in private saving, so national saving does not change.

Question 12

Which equation correctly represents the relationship between investment, savings, and net exports in an open economy?

Accepted Answer

$$I = S - NX$$

Question 13

If a household expects its future income to increase, what is the likely effect on its current saving?

Accepted Answer

Current saving will decrease.

Question 14

Which of the following is the opportunity cost of borrowing funds for investment?

Accepted Answer

The real interest rate

Question 15

A government budget surplus will have which of the following effects in the loanable funds market?

Accepted Answer

Increase the supply of loanable funds, lower the real interest rate, and increase investment.

Question 16

Which of the following would shift the supply curve of loanable funds to the right?

Accepted Answer

A decrease in household wealth

Question 17

In a closed, private economy, equilibrium in the loanable funds market occurs when:

Accepted Answer

$$I(r) = S(r;Y)$$

Question 18

Which of the following is NOT a type of financial capital market?

Accepted Answer

Goods market

Question 19

If the real interest rate in the world market increases, what is the likely effect on a debtor nation?

Accepted Answer

It will borrow less from the rest of the world.

Question 20

Suppose the government increases its purchases without raising taxes, causing a budget deficit. According to the twin deficits hypothesis, what is a possible consequence?

Accepted Answer

The country may move from a trade surplus to a trade deficit.

Financial Markets, Savings, and Investment in Macroeconomics

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