Q: Which of the following is the correct formula for net investment?

$$\text{Net Investment} = \text{Gross Investment} - \text{Depreciation}$$

Question 1

Suppose a government moves from a balanced budget to a $1 trillion budget deficit. According to the standard loanable funds model (excluding the Ricardo-Barro effect), what is the most likely impact on the real interest rate and investment, all else equal?

Accepted Answer

The real interest rate rises and investment decreases.

Question 2

A bond pays $$10 per year in interest. If the price of the bond is 200$$, what is the interest rate? If the price falls to $100, what is the new interest rate? Select the correct pair.

Accepted Answer

$$\frac{10}{200} = 0.05 or 5$$% and $$\frac{10}{100} = 0.10 or 10$$%

Question 3

Which of the following best describes the crowding-out effect?

Accepted Answer

A government budget deficit raises the real interest rate and decreases investment.

Question 4

If a household’s disposable income increases, what is the expected effect on the supply of loanable funds, all else equal?

Accepted Answer

The supply of loanable funds increases.

Question 5

Which of the following is NOT a function of financial markets and institutions?

Accepted Answer

Setting government tax rates.

Question 6

A firm is considering an investment project that is expected to yield a 7% rate of profit. If the real interest rate is 8%, what should the firm do?

Accepted Answer

Not invest, because the expected profit is less than the real interest rate.

Question 7

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

Accepted Answer

An increase in disposable income.

Question 8

If the real interest rate is above the equilibrium level in the loanable funds market, what will occur?

Accepted Answer

There will be a surplus of loanable funds and the real interest rate will fall.

Question 9

Which of the following best explains why the yield curve is usually upward sloping?

Accepted Answer

Longer-term bonds typically have higher interest rates to compensate for greater risk and time.

Question 10

Which of the following is a plausible effect of a government budget surplus on the loanable funds market?

Accepted Answer

The real interest rate falls, private saving decreases, and investment increases.

Question 11

Which of the following is the correct formula for net investment?

Accepted Answer

$$	ext{Net Investment} = 	ext{Gross Investment} - 	ext{Depreciation}$$

Question 12

Which of the following would increase the demand for loanable funds?

Accepted Answer

An increase in expected profit from new capital.

Question 13

If the price of a bond increases, what happens to its interest rate, all else equal?

Accepted Answer

The interest rate falls.

Question 14

Which of the following is a key difference between stocks and bonds?

Accepted Answer

Stocks represent ownership in a firm, while bonds are a form of debt.

Question 15

Which of the following is NOT a main source of loanable funds supply?

Accepted Answer

Business investment.

Question 16

According to the Ricardo-Barro effect, what happens if the government runs a budget deficit?

Accepted Answer

Private saving increases to offset the deficit, so the real interest rate and investment do not change.

Question 17

Which of the following best describes the impact of fintech on the personal loans market between 2013 and 2018?

Accepted Answer

Fintech's share of personal loans increased significantly, reaching 38% by 2018.

Question 18

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

Accepted Answer

An increase in expected future income.

Question 19

A household experiences a capital gain when:

Accepted Answer

The market value of its assets rises.

Question 20

Which of the following is a plausible reason why fintech loans may offer lower interest rates to low and medium risk borrowers compared to traditional lenders?

Accepted Answer

Fintech uses technology to reduce transaction costs and better assess borrower risk.

Finance, Saving, and Investment: Structured Study Notes

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