7. Refer to Table The market value of all final goods and services produced within Bahkan in 2010 is a. $95. b. $100. c. $110. d. $120.

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1 Chapter For an economy as a whole, income must equal expenditure because a. the number of firms is equal to the number of households in an economy. b. individuals can only spend what they earn each period. c. every dollar of spending by some buyer is a dollar of income for some seller. d. every dollar of saving by some consumer is a dollar of spending by some other consumer. 2. If a state made a previously-illegal activity, such as gambling or prostitution, legal, then, other things equal, GDP a. decreases. b. increases. c. doesn't change because both legal and illegal production are included in GDP. d. doesn't change because these activities are never included in GDP. 3. Tyler and Camille both live in Oklahoma. A new-car dealer in Oklahoma bought a new car from the manufacturer for $18,000 and sold it to Tyler for $22,000. Later that year, Tyler sold the car to Camille for $17,000. By how much did these transactions contribute to U.S. GDP for the year? a. $18,000 b. $22,000 c. $39,000 d. $57, Michigan Tea Company sold $15 million worth of tea it produced. In producing this tea it purchased $5 million dollars worth of ingredients from foreign countries and paid workers who reside in Canada but commute to the U.S. $1 million. How much did these transactions add to U.S. GDP? a. $21 million b. $15 million c. $10 million d. $9 million 5. Which of the following examples of production of goods and services would be included in U.S. GDP? a. Samantha, a Canadian citizen, grows sweet corn in Minnesota and sells it to a grocery store in Canada. b. Ian, an American citizen, grows peaches for his family in the back yard of their Atlanta home. c. Leo, an American citizen, grows marijuana in his Seattle home and sells it to his friends and neighbors. d. None of the above examples of production would be included in U.S. GDP.

2 6. U.S. GDP a. includes production of foreigners working in the U.S. and production by U.S. residents working in foreign countries. b. includes production of foreigners working in the U.S. but excludes production by U.S. residents working in foreign countries. c. excludes production of foreigners working in the U.S. but includes production by U.S. residents working in foreign countries. d. excludes production of foreigners working in the U.S. and production by U.S. residents working in foreign countries. Table 10-1 The table below contains data for Bahkan for the year GDP $110 Income earned by citizens abroad $5 Income foreigners earn here $15 Losses from depreciation $4 Indirect business taxes $6 Statistical discrepancy $0 Retained earnings $5 Corporate income taxes $6 Social insurance contributions $10 Interest paid to households by government $5 Transfer payments to households from government $15 Personal taxes $30 Nontax payments to government $5 7. Refer to Table The market value of all final goods and services produced within Bahkan in 2010 is a. $95. b. $100. c. $110. d. $120.

3 8.John buys a used car for $5,400 and spends $600 on new parts, made in the U.S., to fix the car. The end result of these two transactions is a. U.S. consumption purchases increase by $5,400 and U.S. GDP increases by $5,400. b. U.S. consumption purchases increase by $6,000 and U.S. GDP increases by $6,000. c. U.S. consumption purchases increase by $600 and U.S. GDP increases by $600. d. U.S. consumption purchases increase by $600 and U.S. GDP increases by $6, Consider two items that might be included in GDP: (1) the estimated rental value of owneroccupied housing and (2) purchases of newly-constructed homes. How are these two items accounted for when GDP is calculated? a. Both item (1) and item (2) are included in the consumption component of GDP. b. Item (1) is included in the consumption component of GDP, while item (2) is included in the investment component of GDP. c. Item (1) is included in the investment component of GDP, while item (2) is included in the consumption component of GDP. d. Only item (2) is included in GDP, and it is included in the investment component. 10. During the current quarter, a firm produces consumer goods and adds some of those goods to its inventory rather than selling them. The value of the goods added to inventory is a. not included in the current quarter GDP. b. included in the current quarter GDP as investment. c. included in the current quarter GDP as consumption. d. included in the current quarter GDP as a statistical discrepancy. 11. An American retailer purchased 100 pairs of shoes from a company in Denmark in the second quarter of 2010 but does not sell them to a consumer until the third quarter of Which of the following components of U.S. GDP is affected by this transaction in the third quarter of 2010? a. consumption, investment and imports b. only consumption and investment c. only consumption and imports d. only investment and imports The table below contains data for the country of Crete for the year Total income $5731 Household purchases of durable goods $1108 Household purchases of nondurable goods $702 Household purchases of non-education services $203 Household purchases of education services $302 Household purchases of new housing $816 Purchases of capital equipment $333 Inventory changes $75 Purchases of new structures $267 Depreciation $401 Local government spending on goods and services $236 State government spending on goods and services $419 Federal government spending on goods and services $1182 Transfer payments $707 Foreign purchases of domestically produced goods $217 Domestic purchases of foreign goods $129

4 12. Refer to Table What was Crete s GDP in 2010? a. $4623 b. $5731 c. $6037 d. $ Refer to Table What was Crete s consumption in 2010? a. $1810 b. $2013 c. $2315 d. $ Refer to Table What was Crete s investment in 2010? a. $675 b. $1090 c. $1491 d. $ Refer to Table What were Crete s government purchases in 2010? a. $1130 b. $1601 c. $1837 d. $ Refer to Table What were Crete s net exports in 2010? a. -$217 b. -$88 c. $88 d. $ If you buy a burger and fries at your favorite fast food restaurant, a. then neither GDP nor consumption will be affected because you would have eaten at home had you not bought the meal at the restaurant. b. then GDP will be higher, but consumption spending will be unchanged. c. then GDP will be unchanged, but consumption spending will be higher. d. then both GDP and consumption spending will be higher. 18. To encourage formation of small businesses, the government could provide subsidies; these subsidies a. would be included in GDP because they are part of government purchases. b. would be included in GDP because they are part of investment expenditures. c. would not be included in GDP because they are transfer payments. d. would not be included in GDP because the government raises taxes to pay for them. 19. If real GDP is 5,100 and nominal GDP is 4,900, then the GDP deflator is a so prices are higher than in the base year. b so prices are lower than in the base year. c so prices are higher than in the base year. d so prices are lower than in the base year. 20. Suppose an economy produces only cranberries and maple syrup. In 2010, 50 units of cranberries are sold at $20 per unit and 100 units of maple syrup are sold at $8 per unit. In

5 2009, the base year, the price of cranberries was $10 per unit and the price of maple syrup was $15 per unit. For 2010, a. nominal GDP is $1800, real GDP is $2000, and the GDP deflator is 90. b. nominal GDP is $1800, real GDP is $2000, and the GDP deflator is c. nominal GDP is $2000, real GDP is $1800, and the GDP deflator is 90. d. nominal GDP is $2000, real GDP is $1800, and the GDP deflator is Table 10-7 The table below contains data for the country of Togogo. The base year is Year Nominal GDP GDP Deflator 1974 $ $ $ $ Refer to Table Which of the following is not correct? a. This economy experienced growth from 1974 to b. This economy experienced growth from 1975 to c. This economy experienced growth from 1976 to d. This economy experienced inflation from 1974 to 1975, from 1975 to 1976, and from 1976 to Refer to Table From 1975 to 1976, a. inflation was 25% and output did not grow. b. inflation was 25% and output grew. c. inflation was 50% and output did not grow. d. inflation was 50% and output grew. 23. Refer to Table From 1976 to 1977, a. inflation was 33.3% and output grew at a rate of 20%. b. inflation was 33.3% and output grew at a rate of 60%. c. inflation was 50% and output grew at a rate of 20%. d. inflation was 50% and output grew at a rate of 60%. 24. Which of the following is not a correct statement about the growth of real GDP in the U.S. economy? a. Real GDP in 2009 was almost four times its 1965 level. b. Growth was steady between 1965 and c. Continued growth in real GDP enables the typical American to enjoy greater economic prosperity than his or her parents and grandparents did. d. The output of goods and services produced grew on average about 3 percent per year between 1965 and MSC: Definitional

6 25. The information below for 2008 in millions was reported by the World Bank. On the basis of this information, which list below contains the correct ordering of GDP per person from highest to lowest? Country GDP (Constant US$) GDP(Current US$) Population Ghana 7,690 16, Kenya 17,569 30, Tanzania 15,394 20, a. Ghana, Kenya, Tanzania b. Ghana, Tanzania, Kenya c. Kenya, Tanzania, Ghana d. Kenya, Ghana, Tanzania ANSWER: C B B C A B C C B B B B C C C C D C D A B A A B C

7 Chapter 11

8 1. Babe Ruth, the famous baseball player, earned $80,000 in Today, the best baseball players can earn more than 400 times as much as Babe Ruth earned in However, prices have also risen since We can conclude that a. the best baseball players today are about 400 times better off than Babe Ruth was in b. because prices have also risen, the standard of living of baseball stars hasn't changed since c. one cannot make judgments about changes in the standard of living based on changes in prices and changes in incomes. d. one cannot determine whether baseball stars today enjoy a higher standard of living than Babe Ruth did in 1931 without additional information regarding increases in prices since Which of the following is correct? a. The GDP deflator is better than the CPI at reflecting the goods and services bought by consumers. b. The CPI is better than the GDP deflator at reflecting the goods and services bought by consumers. c. The GDP deflator and the CPI are equally good at reflecting the goods and services bought by consumers. d. The GDP deflator is more commonly used as a gauge of inflation than the CPI is. 3. In the CPI, goods and services are weighted according to a. how long a market has existed for each good or service. b. the extent to which each good or service is regarded by the government as a necessity. c. how much consumers buy of each good or service. d. the number of firms that produce and sell each good or service. 4. If 2002 is the base year, then the inflation rate in 2005 equals a. b. c. d. 5. The market basket used to calculate the CPI in Aquilonia is 4 loaves of bread, 6 gallons of milk, 2 shirts, and 2 pairs of pants. In 2005, bread cost $1.00 per loaf, milk cost $1.50 per gallon, shirts cost $6.00 each, and pants cost $10.00 per pair. In 2006, bread cost $1.50 per loaf, milk cost $2.00 per gallon, shirts cost $7.00 each, and pants cost $12.00 per pair. Using 2005 as the base year, what was Aquilonia s inflation rate in 2006? a. 4 percent b. 11 percent c percent d percent

9 Table 11-1 The table below pertains to Pieway, an economy in which the typical consumer s basket consists of 10 bushels of peaches and 15 bushels of pecans. Year Price of Peaches Price of Pecans 2005 $11 per bushel $6 per bushel 2006 $9 per bushel $10 per bushel 6. Refer to Table The cost of the basket in 2005 was a. $200. b. $210. c. $240. d. $245. ANS: A PTS: 1 DIF: 2 REF: 11-1 NAT: Analytic LOC: The study of economics and definitions in economics TOP: CPI MSC: Applicative

10 7. Refer to Table The cost of the basket in 2006 was a. $200. b. $210. c. $240. d. $ Refer to Table If 2005 is the base year, then the CPI for 2005 was a b c d Refer to Table If 2005 is the base year, then the CPI for 2006 was a b c d Refer to Table If 2006 is the base year, then the CPI for 2005 was a b c d Refer to Table If 2006 is the base year, then the CPI for 2006 was a b c d Refer to Table If 2005 is the base year, then the inflation rate in 2006 was a percent. b. 20 percent. c. 40 percent. d percent. 13. Refer to Table If 2006 is the base year, then the inflation rate in 2006 was a percent. b. 20 percent. c. 40 percent. d percent. Table 11-3 The table below pertains to Studious, an economy in which the typical consumer s basket consists of 5 books and 10 calculators. Year Price of a Book 2006 $24 $ $30 $ $32 $15 Price of a Calculator

11 14. Refer to Table The cost of the basket in 2006 was a. $32. b. $200. c. $280. d. $ Refer to Table The cost of the basket a. increased from 2006 to 2007 and increased from 2007 to b. increased from 2006 to 2007 and decreased from 2007 to c. decreased from 2006 to 2007 and increased from 2007 to d. decreased from 2006 to 2007 and decreased from 2007 to Refer to Table The cost of the basket a. increased by $10 from 2006 to b. increased by $42 from 2006 to c. increased by $70 from 2006 to d. increased by $150 from 2006 to Refer to Table If 2006 is the base year, then the consumer price index was a. 100 in 2006, 135 in 2007, and 155 in b. 100 in 2006, 270 in 2007, and 310 in c. 200 in 2006, 135 in 2007, and 155 in d. 200 in 2006, 270 in 2007, and 310 in Refer to Table If 2007 is the base year, then the consumer price index was a in 2006, 100 in 2007, and in b in 2006, 270 in 2007, and 310 in c. 200 in 2006, 100 in 2007, and in d. 200 in 2006, 270 in 2007, and 310 in Refer to Table If 2008 is the base year, then the consumer price index was a in 2006, 87.1 in 2007, and 100 in b in 2006, 270 in 2007, and 310 in c. 200 in 2006, 87.1 in 2007, and 100 in d. 200 in 2006, 270 in 2007, and 310 in Refer to Table The inflation rate was a percent in 2007 and 12.9 percent in b percent in 2007 and 14.8 percent in c. 35 percent in 2007 and 14.8 percent in d. 35 percent in 2007 and 20 percent in Suppose the price of a gallon of ice cream rises from $4 to $5 and the price of a can of coffee rises from $2 to $2.50. If the CPI rises from 150 to 177, then people likely will buy a. more ice cream and more coffee. b. more ice cream and less coffee. c. less ice cream and more coffee. d. less ice cream and less coffee.

12 22. Suppose that the prices of dairy products have risen relatively less than prices in general over the last several years. To which problem in the construction of the CPI is this situation most relevant? a. substitution bias b. introduction of new goods c. unmeasured quality change d. income bias 23. When new goods are introduced, consumers have more variety from which to choose. As a result, each dollar is worth a. more, and the cost of living increases. b. more, and the cost of living decreases. c. less, and the cost of living increases. d. less, and the cost of living decreases. 24. Which of these events would cause the consumer price index to overstate the increase in the cost of living? a. Car makers benefit from a new technology that allows them to sell higher-quality cars to consumers with no increase in price. b. Energy prices decrease, and consumers respond by buying more gas and electricity. c. A new good is introduced that renders cellular telephones inferior and obsolete. d. All of the above are correct. 25. the CPI was 96 in 1982, and the CPI was 208 in How much money would you have needed in 2010 in order to buy what you could have bought with $500 in 1982? a. $ b. $1, c. $1, d. $1, Scenario 11-1 The price tag on a tennis ball in 1975 read $0.10, and the price tag on a tennis ball in 2005 read $1.00. The CPI in 1975 was 52.3, and the CPI in 2005 was Refer to Scenario The price of a 1975 tennis ball in 2005 dollars is a. $0.03. b. $0.27. c. $0.37. d. $1.00. ANSWER: D B C D D A C B C A B B B B A C A A A C D A B D B C

13 Chpater Productivity is the a. key determinant of living standards, and growth in productivity is the key determinant of growth in living standards. b. key determinant of living standards, but growth in productivity is not the key determinant of growth in living standards. c. not the key determinant of living standards, but growth in productivity is the key determinant of growth in living standards. d. not the key determinant of living standards, and growth in productivity is not the key determinant of growth in living standards. 2. Last year real GDP in the imaginary nation of Oceania was billion and the population was 2.2 million. The year before, real GDP was billion and the population was 2.0 million. What was the growth rate of real GDP per person during the year? a. 12 percent b. 10 percent c. 4 percent d. 2 percent 3. Real Foods produced 400,000 cans of diced tomatoes in 2009 and 460,000 cans of diced tomatoes in It employed the same number of labor hours each year. Real Foods productivity a. decreased 13 percent. b. was unchanged. c. increased 13 percent. d. increased 15 percent. Table Athens and Troy both produce only ribs and baked potatoes. Athens Troy Quantities Ribs 300, ,000 Baked Potatoes 400, ,000 Base year prices Ribs $10 $10 Baked Potatoes $4 $4 Population and Employment Population 12,000 8,000 Total hours of employment 80,000 48, Refer to Table Which of the following is correct? a. Both real GDP and real GDP per person are higher in Athens than Troy. b. Real GDP is higher in Athens while real GDP per person is higher in Troy c. Real GDP is higher in Troy while real GDP per person is higher in Athens. d. Both real GDP and real GDP per person are higher in Troy than Athens. 6. Refer to Table Which of the following is correct? a. Both productivity and the standard of living are higher in Athens than Troy. b. Productivity is higher in Athens while the standard of living is higher in Troy c. Productivity is higher in Troy while the standard of living is higher in Athens.

14 d. Both productivity and the standard of living are higher in Troy than Athens. 7. Each day Sonja works 8 hours and produces 8 units of goods and services. Emma works 10 hours each day and produces 9 units of goods and services. It follows that a. Sonja s productivity is higher than Emma s. b. Emma s productivity is higher than Sonja s. c. Emma s income per hour will be higher than Sonja s. d. Sonja s income per day will be higher than Emma s.

15 8. Other things the same, which of the following would increase productivity? a. an increase in either human or physical capital b. an increase in human capital but not an increase in physical capital c. an increase in physical capital but not an increase in human capital d. neither an increase in human capital nor an increase in physical capital 9. If your firm s production function has constant returns to scale, then if you double all your inputs, your firm's output will a. double and productivity will rise. b. double but productivity will not change. c. more than double and productivity will rise. d. more then double but productivity will not change. 10. In an economy where net exports are zero, if saving rises in some period, then in that period a. consumption and investment fall. b. consumption falls and investment rises. c. consumption rises and investment falls. d. consumption rises and investment falls. 11. Country A and country B are the same except country A currently has a lower level of capital. Assuming diminishing returns, if both countries increase their capital by 100 units and other factors that determine output are unchanged, then a. output in country A increases by more than in country B. b. output in country A increases by the same amount as in country B. c. output in country A increases by less than in country B. d. None of the above is necessarily correct. Figure On the horizontal axis, K/L represents capital (K) per worker (L). On the vertical axis, Y/L represents output (Y) per worker (L). Y/L K/L 12.Refer to Figure The curve becomes flatter as the amount of capital per worker increases because of a. increasing returns to capital. b. increasing returns to labor. c. diminishing returns to capital. d. diminishing returns to labor.

16 13.Refer to Figure The shape of the curve is consistent with which of the following statements about the economy to which the curve applies? a. In the long run, a higher saving rate leads to a higher level of productivity. b. In the long run, a higher saving rate leads to a higher level of income. c. In the long run, a higher saving rate leads to neither a higher growth rate of productivity nor a higher growth rate of income. d. All of the above are correct. 14.Refer to Figure The shape of the curve is consistent with which of the following statements about the economy to which the curve applies? a. In the long run, a higher saving rate leads to a higher growth rate of productivity. b. In the long run, a higher saving rate leads to a higher growth rate of income. c. Returns to capital become increasingly smaller as the amount of capital per worker increases. d. All of the above are correct. 15.Refer to Figure Choose a point anywhere on the curve and call it point A. If the economy is at point A in 2011, then it will definitely remain at point A in 2012 if, between 2011 and 2012, a. the quantity of physical capital remains constant; the number of workers doubles; and human capital, natural resources, and technology all double as well. b. the quantity of physical capital doubles; human capital, natural resources, and technology all double as well; and the number of workers remains constant. c. the quantity of physical capital doubles; the number of workers doubles; and human capital, natural resources, and technology all double as well. d. the quantity of physical capital doubles; the number of workers doubles; and human capital, natural resources, and technology remain constant. 16. The catch-up effect refers to the idea that a. saving will always catch-up with investment spending. b. it is easier for a country to grow fast and so catch-up if it starts out relatively poor. c. population eventually catches-up with increased output. d. if investment spending is low, increased saving will help investment to "catch-up." 17. Suppose Japanese-based Toshiba Corporation builds and operates a new computer factory in the United States. Future production from such an investment would a. increase U.S. GNP more than it would increase U.S. GDP. b. increase U.S. GDP more than it would increase U.S. GNP. c. not affect U.S. GNP, but would increase U.S. GDP. d. have no affect on U.S. GNP or GDP. 18. In the country of Suchnott, the price of silver increased from $30 per ounce to $32 per ounce during a time when the overall price level increased by 5 percent. During this period, the real price of silver a. increased. b. decreased. c. stayed the same. d. might have increased, decreased or stayed the same; more information is needed to be sure. ANSWER: A D C D A C A A B B A C D C D B B A

17 Chapter 13 1.If the government's expenditures exceeded its receipts, it would likely a. lend money to a bank or other financial intermediary. b. borrow money from a bank or other financial intermediary. c. buy bonds directly from the public. d. sell bonds directly to the public. 2. ABC Co. sells newly issued bonds. JLG Co. sells newly issued stocks. Which company is raising funds in financial markets? a. only ABC b. only JLG c. both ABC and JLG d. neither ABC nor JLG 3. In a closed economy, what does (T - G) represent? a. national saving b. investment c. private saving d. public saving 4. Suppose that in a closed economy GDP is equal to 11,000, taxes are equal to 2,500, consumption equals 7,000, and government purchases equal 3,000. What are private saving and public saving? a. 1,500 and -500, respectively b. 1,500 and 500, respectively c. 1,000 and -500, respectively d. 1,000 and 500, respectively Scenario Assume the following information for an imaginary, closed economy. GDP = $120,000; consumption = $70,000; private saving = $9,000; national saving = $12, Refer to Scenario For this economy, investment amounts to a. $4,000. b. $9,000. c. $12,000. d. $16,000. ANS: C PTS: 1 DIF: 2 REF: 13-2 NAT: Analytic LOC: The study of economics and definitions in economics TOP: Investment MSC: Applicative 6.Refer to Scenario This economy s government is running a a. budget surplus of $3,000. b. budget surplus of $6,000. c. budget deficit of $3,000. d. budget deficit of $6,000. ANS: A PTS: 1 DIF: 2 REF: 13-2 NAT: Analytic LOC: The study of economics and definitions in economics TOP: Government purchases MSC: Applicative

18 7.Refer to Scenario For this economy, government purchases amount to a. $12,000. b. $18,000. c. $28,000. d. $38,000. ANS: D PTS: 1 DIF: 2 REF: 13-2 NAT: Analytic LOC: The study of economics and definitions in economics TOP: Government purchases MSC: Applicative 8.Refer to Scenario For this economy, taxes amount to a. $28,000. b. $38,000. c. $41,000. d. $44,000. ANS: C PTS: 1 DIF: 2 REF: 13-2 NAT: Analytic LOC: The study of economics and definitions in economics TOP: Taxes MSC: Applicative

19 9. In a closed economy, private saving is a. the amount of income that households have left after paying for their taxes and consumption. b. the amount of income that businesses have left after paying for the factors of production. c. the amount of tax revenue that the government has left after paying for its spending. d. always equal to investment. 10. In a closed economy, if Y remained the same, but G rose, T rose by the same amount as G, and C fell but by less than the increase in T, what would happen to private and national saving? a. national saving would fall and private saving would rise b. national saving would rise and private saving would fall c. both national saving and private saving would fall d. None of the above is correct. 11. The slope of the demand for loanable funds curve represents the a. positive relation between the real interest rate and investment. b. negative relation between the real interest rate and investment. c. positive relation between the real interest rate and saving. d. negative relation between the real interest rate and saving. 12. Other things the same, when the interest rate rises, a. people would want to lend more, making the supply of loanable funds increase. b. people would want to lend less, making the supply of loanable funds decrease. c. people would want to lend more, making the quantity of loanable funds supplied increase. d. people would want to lend less, making the quantity of loanable funds supplied decrease. 13. If the demand for loanable funds shifts to the left, then the equilibrium interest rate a. and quantity of loanable funds rise. b. and quantity of loanable funds fall. c. rises and the quantity of loanable funds falls. d. falls and the quantity of loanable funds rises. 14. The nominal interest rate is the a. interest rate corrected for inflation. b. interest rate as usually reported by banks. c. real rate of return to the lender. d. real cost of borrowing to the borrower. 15. If a reform of the tax laws encourages greater saving, the result would be a. higher interest rates and greater investment. b. higher interest rates and less investment. c. lower interest rates and greater investment. d. lower interest rate and less investment. 16. Other things the same, if the government increases transfer payments to households, then the effect of this on the government s budget a. will make investment rise. b. will make the rate of interest rise. c. will make public saving rise. d. All of the above are correct. 17. Which of the following events could explain an increase in interest rates together with an increase in investment?

20 a. The government runs a larger deficit. b. The government institutes an investment tax credit. c. The government replaces the income tax with a consumption tax. d. None of the above is correct. Figure The figure depicts a demand-for-loanable-funds curve and two supply-of-loanablefunds curves. S1 S2 Demand 18.Refer to Figure What is measured along the vertical axis of the graph? a. the nominal interest rate b. the real interest rate c. the quantity of investment d. the quantity of saving 19. Refer to Figure Which of the following events would shift the supply curve from S1 to S2? a. In response to tax reform, firms are encouraged to invest more than they previously invested. b. In response to tax reform, households are encouraged to save more than they previously saved. c. Government goes from running a balanced budget to running a budget deficit. d. Any of the above events would shift the supply curve from S1 to S For an imaginary economy, when the real interest rate is 5 percent, the quantity of loanable funds demanded is $1,000 and the quantity of loanable funds supplied is $1,000. Currently, the nominal interest rate is 9 percent and the inflation rate is 2 percent. Currently, a. the market for loanable funds is in equilibrium. b. the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded, and as a result the real interest rate will rise. c. the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded, and as a result the real interest rate will fall. d. the quantity of loanable funds demanded exceeds the quantity of loanable funds supplied, and as a result the real interest rate will rise. 21. In 2008, XYZ Corporation had total earnings of $200 million and 50 million shares of the corporation s stock were outstanding. If the price-earnings ratio for XYZ is 20, then what is the price of a share of its stock? a. $5 b. $10

21 c. $80 d. $ Which of the following statements is correct? a. Stocks, bonds, and deposits are all similar in that each provides a common medium of exchange. b. Most buyers of stocks and bonds prefer those issued by large and familiar companies. c. Banks charge borrowers a slightly lower interest rate than they pay to depositors. d. None of the above is correct. 23. Which of the following is not always correct for a closed economy? a. National saving equals private saving plus public saving. b. Net exports equal zero. c. Real GDP measures both income and expenditures. d. Private saving equals investment. 24. Which of the following could explain a decrease in the equilibrium interest rate and in the equilibrium quantity of loanable funds? a. The demand for loanable funds shifted rightward. b. The demand for loanable funds shifted leftward. c. The supply of loanable funds shifted rightward. d. The supply of loanable funds shifted leftward. 25. Suppose the government changed the tax laws, with the result that people were encouraged to consume more and save less. Using the loanable funds model, a consequence would be a. lower interest rates and lower investment. b. lower interest rates and greater investment. c. higher interest rates and lower investment. d. higher interest rates and higher investment. 26. Try to explain to yourself (or your study buddy) about the two kinds of crowding out effect. ANSWER: D C D A C A D C A C B C B B C B B B B C C B D B C