Download Practice Set 1

Module 29 Practice Set 1
Multiple Choice
Identify the choice that best completes the statement or answers the question.
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1. The supply of loanable funds is _____ sloping because _____ respond to lower interest rates by _____ their
quantity supplied of loanable funds.
A. upward; savers; increasing
B. upward; investors; decreasing
C. upward; savers; decreasing
D. downward; investors; increasing
E. downward; savers; decreasing
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2. In the market for loanable funds, suppose the current interest rate is 5%. At a rate of 5%, investors wish to
borrow $100 million and savers wish to save $125 million. We would expect:
A. the interest rate to fall as there is currently a shortage of loanable funds.
B. the interest rate to rise as there is currently a surplus of loanable funds.
C. the interest rate to rise as there is currently a shortage of loanable funds.
D. the interest rate to fall as there is currently a surplus of loanable funds.
E. the interest rate to remain the same as the loanable funds market is in equilibrium.
Figure 29-1: Loanable Funds
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3. Use the “Loanable Funds” Figure 29-1. The accompanying graph shows the market for loanable funds in
equilibrium. Which of the following might produce a new equilibrium interest rate of 8% and a new
equilibrium quantity of loanable funds of $150?
A. Consumers have increased consumption as a fraction of disposable income.
B. Businesses have become more optimistic about the return on investment spending.
C. The federal government has a budget surplus rather than a budget deficit.
D. There has been an increase in capital inflows from other nations.
E. Forecasts for future corporate profits are gloomier than expected.
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4. Use the “Loanable Funds” Figure 29-1. The accompanying graph shows the market for loanable funds in
equilibrium. Which of the following might produce a new equilibrium interest rate of 5% and a new
equilibrium quantity of loanable funds of $150?
A. Consumers have increased consumption as a fraction of disposable income.
B. Businesses have become more optimistic about the return on investment spending.
C. The federal government has a budget surplus rather than a budget deficit.
D. There has been an increase in capital inflows from other nations.
E. Forecasts for future corporate profits are gloomier than expected.
____
5. Use the “Loanable Funds” Figure 29-1. The accompanying graph shows the market for loanable funds in
equilibrium. Which of the following might produce a new equilibrium interest rate of 8% and a new
equilibrium quantity of loanable funds of $75?
A. Capital inflows from foreign citizens are declining.
B. The federal government is running a budget deficit rather than a surplus.
C. Profit expectations are less optimistic for business investments.
D. The government has eliminated taxes on income earned from interest.
E. Consumers have decreased consumption as a fraction of disposable income.
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6. Use the “Loanable Funds” Figure 29-1. The accompanying graph shows the market for loanable funds in
equilibrium. Which of the following might produce a new equilibrium interest rate of 4% and a new
equilibrium quantity of loanable funds of $75?
A. The government has decreased taxes on capital investment projects.
B. Capital inflows from foreign citizens are declining.
C. The federal government is running a budget deficit rather than a surplus.
D. The government has eliminated taxes on income earned from interest.
E. Profit expectations are less optimistic for business investments.
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7. A business will want a loan when:
A. interest rate < 100 ? [($ return on project – $ cost of project)/($ cost of project)].
B. rate of return < interest rate.
C. rate of return – interest rate < 0.
D. rate of return > 100 ? [($ cost of project – interest ratE./(interest ratE.].
E. inflation rate > rate of return
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8. If in an open economy, a country imports more than it exports and the government budget deficit increases:
A. interest rates will increase and the amount of borrowing will increase.
B. interest rates will decrease and the amount of borrowing will increase.
C. interest rates will increase, but the change in borrowing is ambiguous.
D. the change in interest rates is ambiguous, but the amount of borrowing will increase.
E. both the change in interest rates and the amount of borrowing are ambiguous.
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9. The price in the loanable funds market is:
A. the rate of return of a project.
B. the price level.
C. the interest rate.
D. the consumer price index.
E. the rate of inflation.
Figure 29-7: Market for Loanable Funds with Government Borrowing
____ 10. Use the “Market for Loanable Funds with Government Borrowing” Figure 29-7. According to the
accompanying figure, after an increase in government borrowing, the new equilibrium interest rate will rise
from ______ and the amount of private savings will _______.
A. 6% to 8%; stay the same
B. 6% to 8%; rise
C. 6% to 8%; fall
D. 6% to 8%; be indeterminate
E. 6% to 10%; rise
____ 11. A shift away from taxing asset income towards taxing consumption would lead to:
A. a larger demand for loanable funds, a higher interest rate, and slower economic growth.
B. a larger supply of loanable funds, a lower interest rate, and faster economic growth.
C. a larger government budget deficit and slower economic growth.
D. a smaller supply of loanable funds, a higher interest rate, and faster economic growth.
E. a larger supply of loanable funds, a lower interest rate, and slower economic growth
Figure 29-8: Market for Loanable Funds II
____ 12. Use the “Market for Loanable Funds II” Figure 29-8. An increase in government borrowing will shift the
demand for loanable funds to the:
A. left and increase the interest rate.
B. left and decrease the interest rate.
C. right and increase the interest rate.
D. right and decrease the interest rate.
E. right and have no impact on the interest rate.
____ 13. Use the “Market for Loanable Funds II” Figure 29-8. A decrease in government borrowing will shift the
demand for loanable funds to the:
A. left and increase the interest rate.
B. right and decrease the interest rate.
C. right and increase the interest rate.
D. left and decrease the interest rate.
E. left and have no impact on the interest rate.
____ 14. Crowding out negatively affects the economy by:
A. decreasing government borrowing.
B. decreasing consumption.
C. increasing private borrowing.
D. reducing investment spending on physical capital.
E. decreasing government deficits.
____ 15. An expectation that perceived business opportunities will increase will generally cause:
A. a shift to the left in the loanable funds demand curve.
B. a movement along the loanable funds demand curve.
C. the demand for loanable funds to increase.
D. the demand for loanable funds to decrease.
E. the supply of loanable funds to increase.
____ 16. A decrease in the demand for loanable funds would most likely be caused by a(n):
A. decrease in the market interest rate.
B. decrease in corporate income tax rates.
C. increase in the amount of expected business opportunities.
D. decrease in the amount of expected business opportunities.
E. decrease in private savings.
____ 17. All other things unchanged, a general decrease in the amount of government borrowing will typically:
A. have no effect on the demand for loanable funds.
B. increase interest rates.
C. shift the loanable funds demand curve to the left.
D. raise the level of demand for loanable funds.
E. reduce the supply of loanable funds.
____ 18. Crowding out is a phenomenon:
A. where an increase in government's budget surplus decreases the overall investment
spending.
B. where overproduction in the goods market leads to a sharp drop in the aggregate price
level.
C. where an increase in government spending causes an equal decrease in consumption
spending.
D. where an increase in imports causes the overall domestic production to fall.
E. where an increase in government's budget deficit causes the overall investment spending
to fall.
Figure 29-10: Crowding Out
____ 19. Use the “Crowding Out” Figure 29-10. The demand for loanable funds curve DLF1 will shift to DLF2,
because:
A. of a decrease in the government budget deficit.
B. of an increase in the government budget deficit.
C. of an increase in private savings.
D. of a decrease in private savings.
E. of an increase in consumer spending.
____ 20. Use the “Crowding Out” Figure 29-10. All else equal, if the demand for loanable funds curve shifts to the
right, then it will result in:
A. an increase in the interest rate and the total amount of borrowing in the funds market.
B. an increase in the interest rate and a decrease in the total amount of borrowing in the funds
market.
C. a decrease in the interest rate and the total amount of borrowing in the funds market.
D. a decrease in the interest rate and an increase in the total amount of borrowing in the funds
market.
E. an increase in the interest rate and no change in the total amount of borrowing in the funds
market.
____ 21. Use the “Crowding Out” Figure 29-10. Suppose the supply of loanable funds curve SLF1 shifts to SLF2, that
implies:
A. that private savings have increased.
B. that national investment has decreased.
C. that private savings have decreased.
D. that national savings have decreased.
E. that government spending has increased.
____ 22. Use the “Crowding Out” Figure 29-10. All else equal, if the supply of loanable funds curve shifts to the
right, then it will result in:
A. an increase in the total amount of borrowing and the interest rate.
B. a decrease in the total amount of borrowing and the interest rate.
C. an increase in the total amount of borrowing and a decrease in the interest rate.
D. a decrease in the total amount of borrowing and an increase in the interest rate.
E. an increase in the total amount of borrowing and no change in the interest rate.
Module 29 Practice Set 1
Answer Section
MULTIPLE CHOICE
1. ANS:
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22. ANS:
C
PTS:
Concept-Based
D
PTS:
Concept-Based
B
PTS:
Critical Thinking
D
PTS:
Critical Thinking
A
PTS:
Critical Thinking
E
PTS:
Critical Thinking
A
PTS:
Concept-Based
D
PTS:
Critical Thinking
C
PTS:
Definitional
B
PTS:
Concept-Based
B
PTS:
Analytical Thinking
C
PTS:
Critical Thinking
D
PTS:
Critical Thinking
D
PTS:
Concept-Based
C
PTS:
Critical Thinking
D
PTS:
Concept-Based
C
PTS:
Critical Thinking
E
PTS:
Concept-Based
B
PTS:
Critical Thinking
A
PTS:
Critical Thinking
A
PTS:
Critical Thinking
C
PTS:
1
DIF: M
REF: Module 29
1
DIF: M
REF: Module 29
1
DIF: M
REF: Module 29
1
DIF: M
REF: Module 29
1
DIF: M
REF: Module 29
1
DIF: M
REF: Module 29
1
DIF: M
REF: Module 29
1
DIF: D
REF: Module 29
1
DIF: M
REF: Module 29
1
DIF: M
REF: Module 29
1
DIF: D
REF: Module 29
1
DIF: M
REF: Module 29
1
DIF: M
REF: Module 29
1
DIF: E
REF: Module 29
1
DIF: M
REF: Module 29
1
DIF: M
REF: Module 29
1
DIF: M
REF: Module 29
1
DIF: M
REF: Module 29
1
DIF: M
REF: Module 29
1
DIF: M
REF: Module 29
1
DIF: M
REF: Module 29
1
DIF: M
REF: Module 29
SKL: Critical Thinking