Selected Questions Chapter 23

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
Type: MC
Topic: Financial Institutions and Financial Markets
Skill: Recognition
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
Type: MC
Skill: Conceptual
10) 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
A) $1 million.
B) $300,000.
C) $200,000. ASK
D) $100,000.
E) $1.1 million.
Answer: D
Diff: 1 Type: MC
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
Type: MC
Skill: Analytical
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
Type: MC
Skill: Recognition
19) The funds used to buy physical capital are

A) net investment.
B) financial capital.
C) saving.
D) wealth.
E) investment.
Answer: B
Type: MC
Skill: Recognition
24) 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 ________.
A) rises from 8 percent a year to 10 percent a year
B) falls from 10 percent a year to 6 percent a year
C) falls from 10 percent a year to 8 percent a year
D) rises because the bond becomes a better investment
E) does not change because the purchaser buys the bond knowing that interest rates will
be adjusted
Answer: C
Type: MC
27) Choose the statement that is incorrect about trust and loan companies.
A) Trust and loan companies hold more than 70 percent of the total assets of the
Canadian financial services sector.
B) The largest trust and loan companies are owned by banks.
C) Trust and loan companies accept deposits and make personal loans and mortgage
loans.
D) Trust and loan companies administer estates.
E) Trust and loan companies administer trusts and pension plans.
Answer: A
Type: MC
28) Choose the statement that is incorrect.

A) A financial institution can be solvent but illiquid.
B) 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.
C) Insolvency and illiquidity were at the core of a global financial meltdown in 2007-
2008.
D) A financial institution's net worth is the market value of what it has lent minus the
market value of what it has borrowed.
E) All of the above are true.
Answer: E
Type: MC
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
Type: MC
Topic: The Market for Loanable Funds
Skill: Analytical
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
Type: MC
Skill: Recognition
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
Type: MC
Skill: Analytical
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 leftward
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 Type: MC
Skill: Recognition
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
Type: MC
Skill: Conceptual
Refer to the figure below to answer the following questions.
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
Type: MC
Skill: Analytical
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
Type: MC
Skill: Conceptual
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
Type: MC
Skill: Conceptual
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 Type: MC
Skill: Conceptua
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
Type: MC
Skill: Conceptual
67) Which of the following is false?

A) Y = C + I + G + M - X
B) I = S + (T - G) + (M - X)
C) Y = C + S + T
D) Y + M = C + I + G + X
E) Y = C + I + G + X -M
Answer: A
Type: MC
Skill: Analytical
Source: Study Guide
68) In Canada's economy, investment is financed by

A) C + I + G + X - M.
B) C + S + T.
C) S + T + M.
D) S + (T - G) + (X - M).
E) S + (T - G) + (M - X).
Answer: E
Type: MC
Skill: Analytical
Source: Study Guide
6) Crowding out leads to all of the following EXCEPT

A) a higher real interest rate.
B) a decrease in investment.
C) a smaller quantity of capital in the future.
D) a decrease in private saving.
E) crowding out leads to all of the above.
Answer: D
Type: MC
Topic: Government in the Market for Loanable Funds
Skill: Conceptual
9) A government budget deficit ________ the demand for loanable funds, ________ the
real interest rate, and ________ investment.
A) increases; decreases; crowds out
B) increases; decreases; increases
C) decreases; increases; increases
D) decreases; increases; crowds out
E) increases; increases; crowds out
Answer: E
Type: MC
Skill: Analytical
Use the table below to answer the following question.

Table 23.3.1
Data from Northland
Real Demand for Supply of

interest rate Loanable Funds Loanable Funds
(percent per year) (billions of dollars) (billions of dollars)
3 160 40
4 140 60
5 120 80
6 100 100
7 80 120
8 60 140
20) Refer to Table 23.3.1. Table 23.3.1 shows the market for loanable funds in Northland.
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 ________.
A) 6.5; $110 billion
B) 6.5; $90 billion
C) 5.5; $90 billion
D) 5.5; $110 billion
E) 6; $120 billion
Answer: D
Type: MC
Skill: Conceptual
Source: Study Guide

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1) Capital is

9) If the economy's capital decreases over time,

15) Which of the following is FALSE about saving?

19) The funds used to buy physical capital are

28) Choose the statement that is incorrect.

Item Millions of dollars

6) Refer to Table 23.2.1. Private saving is

17) As the interest rate rises .

Refer to the figure below to answer the following questions.

37) ________ increases households' saving.

67) Which of the following is false?

68) In Canada's economy, investment is financed by

6) Crowding out leads to all of the following EXCEPT

Use the table below to answer the following question.

Real Demand for Supply of

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