PRACTICE TEST 18

(Bassam AbuAlFoul)

Chapter 18 Saving, Capital Formation, and Financial Markets Part I: Multiple Choice. Choose the best answer for the following questions.
1. National saving last year was $1,500, the government deficit was $500. What was private saving? a. $2,000 b. $1,500 c. $1,000 d. $500 2. The equilibrium rate of interest is 6%. The market rate of interest is 7%. We would expect: a. a surplus of loanable funds, and the interest rate to increase. b. a surplus of loanable funds, and the interest rate to decrease. c. a shortage of loanable funds, and the interest rate to increase. d. a shortage of loanable funds, and the interest rate to decrease. 3. An increase in the supply of loanable funds will (other things constant): a. increase the equilibrium interest rate and decrease investment. b. increase the equilibrium interest rate and increase investment. c. decrease the equilibrium interest rate and increase investment. d. decrease the equilibrium interest rate and decrease investment. 4. A decrease in interest rates: a. encourages lenders to loan more funds. b. increases the compensation savers receive for loaning their funds. c. makes loanable funds more attractive to potential borrowers. d. must be caused by an decrease in the supply of loanable funds. 5. Suppose the government surplus begins to decline. We would expect: a. the demand for loanable funds to decrease. b. the demand for loanable funds to increase. c. the supply of loanable funds to decrease. d. the supply of loanable funds to increase. 6. Which of the following would definitely increase domestic investment? a. an increase in both private saving and the government deficit b. an increase in private saving and a decrease in the government deficit c. a decrease in both private saving and the government deficit d. a decrease in private saving and an increase in the government deficit 7. The source of the supply of loanable funds is: a. banks. b. savings and loan associations. c. business firms. d. savers. 8. Those institutions in the economy that help match saving with investment are part of: a. product markets. b. factor markets. c. the investment system. d. the financial system.

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9. The concept of crowding-out: a. implies that the capital stock of future generations will be expanded via present deficits. b. states that increased government borrowing will raise interest rates and reduce investment. c. states that deficit-financed government spending will fuel output and income and thereby increase investment. d. states that increased government presence in the marketplace will reduce production by the private sector. 10. What is true of the demand for loanable funds? a. It is positively sloped. b. It will shift to the right if there is a decrease in the rate of interest. c. Economic units (such as households and firms) will be willing to borrow more as the rate of interest falls. d. It will shift if the market for loanable funds is not in an equilibrium position. 11. In the diagram below, suppose the market for loanable funds is in equilibrium at point A. The government eliminates the tax on interest income earned in savings accounts. We would expect the market for loanable funds to move to a new equilibrium at point:

a. B. b. C. c. D. d. at B, but then return to equilibrium at A. 12. Crowding out refers to: a. an increase in national saving that occurs when government runs a deficit. b. a decrease in the real interest rates caused by government borrowing. c. a reduction in investment spending resulting from government borrowing. d. a decrease in consumption spending resulting from government borrowing. 13. For the economy as a whole: a. saving equals investment. b. saving is less than investment. c. saving is greater than investment. d. saving will only equal investment if the economy is at full employment. 14. National saving is composed of: a. private saving and government surpluses. b. public saving and government deficits. c. private saving and public saving. d. private saving, public saving, and government surpluses.

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15. Loanable funds are: a. the money in banks and other financial institutions. b. the income people choose to save and lend out. c. equal to the total value of capital in the economy. d. available only to businesses. 16. GDP last year was $4000, taxes were $300, government spending was $200, and consumption was $3000. What was national saving? a. $1000 b. $800 c. $700 d. $600 17. In general, a bond will pay a higher rate of interest if: a. it is a short-term bond. b. it is a long-term bond. c. it receives favorable tax treatment. d. it is a low credit risk. 18. Large budget deficits will likely: a. increase the nation's pool of saving. b. decrease the nation's pool of saving. c. have no impact on the nation's pool of saving. d. improve the nation's trade balance. 19. A __________________ is a financial institution through which savers can indirectly provide funds to borrowers. a. bank examiner b. monetarist c. financial intermediary d. none of the above 20. In the market for loanable funds: a. higher interest rates discourage savings. b. lower interest rates encourage investment. c. lower interest rates make borrowers worse off. d. higher interest rates increase the demand for loanable funds.

Part II: Internet:

You are also encouraged to visit the web site for your textbook which is rich in learning resources and materials related to each chapter. In addition, you can test your knowledge with the online quizzes. The internet address was provided in the course syllabus. Here it is again: http://highered.mcgrawhill.com/sites/007712961x/student_view0/index.html

ANSWERS (For Part I):

1. 2. 3. 4. 5. 6. 7. a. $2,000. b. a surplus of loanable funds, and the interest rate to decrease. c. decrease the equilibrium interest rate and increase investment. c. makes loanable funds more attractive to potential borrowers. c. the supply of loanable funds to decrease. b. an increase in private saving and a decrease in the government deficit. d. savers.

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8. d. the financial system. 9. b. states that increased government borrowing will raise interest rates and reduce investment. 10. c. Economic units (such as households and firms) will be willing to borrow more as the rate of interest falls. 11. c. D. 12. c. a reduction in investment spending resulting from government borrowing. 13. a. saving equals investment. 14. c. private saving and public saving. 15. b. the income people choose to save and lend out. 16. b. $800. 17. b. it is a long-term bond. 18. b. decrease the nation's pool of saving. 19. c. financial intermediary 20. b. lower interest rates encourage investment.

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