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CHAPTER 23
Financial Aspects of the Household, Firm,
Government, and Rest-of-the-World Sectors
1. An accounting statement that measures the value of assets and liabilities held at a particular point
in time is called a(n)
a. income statement.
b. balance sheet.
c. portfolio.
d. net worth statement.
ANSWER: b
2. ___________________ is the difference between one’s assets and liabilities.
a. Net worth
b. One’s portfolio
c. Income
d. All of the above
ANSWER: a
3. One’s collection of real and financial assets and liabilities is called a(n)
a. income statement.
b. balance sheet.
c. portfolio.
d. net worth statement.
ANSWER: c
4. Household portfolio decisions are guided by certain objectives. Which one of the following
objectives are economists most concerned with?
a. Happiness
b. Good health
c. Profit maximization
d. A high standard of living
ANSWER: d
5. Which of the following is not associated with a firm’s balance sheet?
a. Real assets
b. Financial assets
c. Income flows
d. Net worth
ANSWER: c
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Financial Aspects of the Household, Firm, Government, and Rest-of-the-World Sectors
6. Which of the following equations correctly describes the relationships among assets (A),
liabilities (L), and net worth (NW) on a balance sheet?
a. NW = A + L
b. A = L + NW
c. L = A + NW
d. L + NW – A
ANSWER: b
7. The ratio of debt to equity on a firm's balance sheet is called
a. coverage ratio.
b. net worth.
c. the leverage ratio.
d. net investment ratio.
ANSWER: c
8.
is gross investment minus depreciation.
a. Leverage
b. Net worth
c. Net investment
d. None of the above
ANSWER: c
9.
is the difference between assets and liabilities at a point in time.
a. Net financial investment
b. Net worth
c. Net investment
d. None of the above
ANSWER: b
10. Which of the following is not an example of a real asset for a consumer?
a. A share of stock
b. An automobile
c. A house
d. A computer
ANSWER: a
11. Which of the following is not an example of business investment?
a. Net additions to inventory
b. Spending on new equipment
c. Buying stocks and bonds
d. Capital accumulation
ANSWER: c
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12. Internal financing refers to
a. the spending of money balances on hand or the liquidation of financial or real assets to
finance spending that exceeds current receipts.
b. the financing of spending that exceeds current receipts by expanding either debt or equity.
c. the increase in a firm's liabilities that is equal to the increase in assets held minus retained
earnings.
d. the impediment to continuous borrowing that may come from the lender's unwillingness to
keep lending or the borrower's unwillingness to keep borrowing.
ANSWER: a
13. External financing refers to
a. the spending of money balances on hand or the liquidation of financial or real assets to
finance spending that exceeds current receipts.
b. the financing of spending that exceeds current receipts by expanding either debt or equity.
c. the increase in a firm's liabilities that is equal to the increase in assets held minus retained
earnings.
d. the impediment to continuous borrowing that may come from the lender's unwillingness to
keep lending or the borrower's unwillingness to keep borrowing.
ANSWER: b
14. A borrowing constraint refers to
a. the spending of money balances on hand or the liquidation of financial or real assets to
finance spending that exceeds current receipts.
b. the financing of spending that exceeds current receipts by expanding either debt or equity.
c. the increase in a firm's liabilities that is equal to the increase in assets held minus retained
earnings.
d. the impediment to continuous borrowing that may come from the lender's unwillingness to
keep lending or the borrower's unwillingness to keep borrowing.
ANSWER: d
15. Fluctuations in aggregate demand lead to changes in the level of real economic activity, as
measured by which of the following?
a. Dow-Jones Averages
b. Proctor and Gamble
c. Standard and Poor’s
d. Real GDP
ANSWER: d
16. The largest component of aggregate demand is which of the following?
a. Government expenditures
b. Consumption expenditures by households
c. Investment spending
d. Net exports
ANSWER: b
17. Which of the following changes would cause the largest increase in aggregate demand?
a. A 10 percent increase in investment spending
b. A 10 percent increase in consumption spending
c. A 10 percent increase in government spending
d. A 50 percent increase in savings
ANSWER: b
18. The most volatile component of aggregate demand is which of the following?
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331
a. Government expenditures
b. Consumption expenditures by households
c. Investment spending
d. Net exports
ANSWER: c
19. The smallest component of aggregate demand is which of the following?
a. Government expenditures
b. Consumption expenditures by households
c. Investment spending
d. Net exports
ANSWER: d
20. While household portfolio decisions are guided by desires for happiness, good health, and a high
standard of living, economists traditionally focus on which of the following?
a. Happiness
b. Saving for their offspring
c. Long life
d. Living standards
ANSWER: d
21. Economists take the position that households make
a. purposeful decisions.
b. haphazard choices.
c. few decisions without government.
d. planning decisions only when going through their first bankruptcy.
ANSWER: a
22. Real assets are not acquired when
a. durable goods are purchased.
b. a house is bought.
c. nondurable consumer goods are purchased.
d. an automobile is purchased for transportation.
ANSWER: c
23. In national income accounting terms, a newly constructed house is considered which of the
following?
a. An investment good
b. A consumer good
c. A nondurable good
d. A tax shelter
ANSWER: a
24. Financial assets, from the household point of view, serve as which of the following?
a. A store of value
b. Immediate use but not future planning
c. Status symbols rather than purchasing power
d. Clever tax evasion
ANSWER: a
25. Which of the following statements about debt financing is false?
a. Debt financing can be either short term or long term.
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b. Debt financing is a form of internal finance.
c. Under U.S. tax law, long-term debt is more favorably treated than equity financing.
d. Debt financing exposes a firm to more risk and, therefore, weakens its financial structure.
ANSWER: b
26. Which of the following changes would best explain why households might increase their net
demand for nonmonetary financial assets and decrease their demand for real assets?
a. An increase in income
b. A decrease in wealth
c. A decrease in the return on real assets
d. A decrease in the interest rate
ANSWER: c
27. An increase in the market interest rate is likely to
a. increase household demand for real assets.
b. increase household demand for real money balances.
c. increase household demand for nonmonetary financial assets.
d. All of the above
ANSWER: c
28. A decision to borrow today is really
a. a decision to repay in the future what is borrowed today plus interest.
b. always based on earning potential.
c. a decision to invest today.
d. the quickest way to "make money."
ANSWER: a
29. The interest rate
a. specifies the terms on which present purchasing power can be traded for future purchasing
power.
b. bears little or no relationship to the supply of and the demand for money.
c. is economic profit for the borrower.
d. is the cost for lending and the reward for borrowing.
ANSWER: a
30. If interest rates fall and the return on real assets goes up, the households will hold which of the
following?
a. Fewer real assets and more financial assets
b. Fewer financial assets and more real assets
c. More long-term government bonds
d. More municipal bonds
ANSWER: b
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31. Declines in wealth cause which of the following?
a. A decline in overall consumer spending
b. An increase in government spending
c. A decline in inflation
d. Increase in expenditures for many types of services
ANSWER: a
32. If the household sector has some reason or belief to be more optimistic about the future, then the
households will
a. consume more.
b. invest less.
c. lend more.
d. consume less.
ANSWER: a
33. Real assets of a firm include which of the following?
a. Negotiable certificates of deposits (CDs)
b. Foreign deposits
c. Trade credit
d. Plant and equipment
ANSWER: d
34. Firms hold financial assets, which may include which of the following?
a. Demand deposits
b. Plant
c. Inventories
d. Equipment
ANSWER: a
35. Which is not a liability to a nonfinancial firm?
a. Bonds outstanding
b. Long-term mortgage loans owed
c. Short-term debts
d. Demand deposits held at the local bank
ANSWER: d
36. Even though investment spending is a smaller part of aggregate demand than consumption, it is
much more
a. sluggish in movement or response.
b. short run in nature.
c. volatile.
d. dependent on business fluctuations.
ANSWER: c
37. Changes in business investment are important because
a. investment spending is the largest component of aggregate demand.
b. investment spending can be easily directed by government policy.
c. investment spending is the most volatile component of aggregate demand.
d. increases in investment spending increase capacity utilization and stimulate additional
spending on inventories.
ANSWER: c
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38. Which of the following is not a reason for business investment?
a. To replace worn out or obsolete plant and equipment
b. To acquire financial assets that will pay a future income stream to the business
c. To increase the capital stock
d. To add to inventories
ANSWER: b
39. In determining whether or not to invest, a firm will compare the rate of return on a project with
which of the following?
a. Anticipated profits
b. Opportunity costs available in other businesses
c. Likelihood of "going broke"
d. Costs of financing the project
ANSWER: d
40. Investment spending by nonfinancial businesses depends on several different variables. Which
of the following economic events would most likely lead to a decrease in net investment
spending?
a. Growing capacity utilization
b. Decreased interest rates
c. Decreased corporate income taxes
d. Decreased expected returns
ANSWER: d
41. Investment spending by nonfinancial businesses depends on several different variables. Which
of the following economic events would most likely lead to an increase in net investment
spending?
a. Growing capacity utilization
b. Increased interest rates
c. Increased corporate income taxes
d. Decreased expected returns
ANSWER: a
42. The real interest rate is which of the following?
a. The nominal interest rate multiplied by the expected inflation rate
b. The nominal interest rate minus the expected inflation rate
c. The nominal interest rate plus the expected inflation rate
d. The average percentage rate (APR)
ANSWER: b
43. Which is not a major consideration in anticipating the accumulation of capital by firms in the
aggregate?
a. The degree of capacity utilization
b. The business outlook
c. The government's tax policy
d. The average age of the work force is getting older
ANSWER: d
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44. Inventory purchases are considered investments. Which of the following is not a reason to hold
inventories?
a. Smooth and efficient production
b. Reduce taxes
c. Satisfy consumer demand
d. Anticipation of seasonal or cyclical flux in sales
ANSWER: b
45. Generally speaking, the higher the interest rate at which a firm has to borrow,
a. the smaller the upward adjustment of inventories in response to a surge in sales.
b. the larger the upward adjustment of inventories in response to a surge in sales.
c. the greater the return on capital investment.
d. None of the above
ANSWER: a
46. The largest source of funds for business firms is which of the following?
a. Expanding equity
b. Expanding debt
c. Reducing wages
d. Internal financing
ANSWER: d
47. External financing can be acquired by
a. expanding equity.
b. expanding debt.
c. reducing internal financing.
d. Both a and b
ANSWER: d
48. External financing via equity involves issuing which of the following?
a. Shares of stock
b. Bonds
c. Derivatives
d. Junk bonds
ANSWER: a
49. Borrowing to finance inventories has traditionally been through short-term bank loans or
commercial paper with a maturity date of from 1-6 months because
a. any firm that has to borrow to finance inventories is not a good long-term risk.
b. a firm should only expand on the upswing.
c. inventories, hopefully, will not be held long.
d. equity financing is more expensive.
ANSWER: c
50. A major reason for using short-term debt for capital expenditures is which of the following?
a. Long-term interest rates are expected to come down in the future.
b. Technology in today's world has great fluctuations in cost, and long-term financing may not
pay.
c. The project at hand may not be solid enough for long-term risk.
d. The accounting staff must have something to do now that computers do most of the work.
ANSWER: a
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51. From the mid-1970s until 1991, much financing was done by long-term debt rather than equity
because
a. lending institutions and people wanted a share of the "action."
b. dividends paid equity holders are tax deductible.
c. dividends are paid out of after-tax earnings.
d. United States tax laws were biased toward debt and away from equity.
ANSWER: d
52. Business spending on new plant and equipment and/or the accumulation of inventories is
a. capital spending.
b. always done through borrowing.
c. investment spending.
d. never profitable.
ANSWER: c
53. Net investment by business firms is which of the following?
a. Investment that leads to increases in the capital stock or inventories
b. Always negative
c. Investment that leads to increases in the capital stock only
d. Positive only if there is inventory investment
ANSWER: a
54. Which interest rate is the most important for investment decisions by firms?
a. The nominal interest rate
b. The real interest rate
c. The Treasury bill rate
d. The long-term nominal rate
ANSWER: b
55. The impediment to continuous borrowing and increases in the level of debt by households
a. is known as a borrowing constraint.
b. may come from a lender's unwillingness to keep lending.
c. may come from a borrower's unwillingness to keep borrowing.
d. All of the above
ANSWER: d
56. Which of the following is false?
a. Households accumulate assets and liabilities in an attempt to maximize their well being.
b. Assets may be real or financial.
c. Financial assets do not include money.
d. Money is demanded for the stream of services that it yields.
ANSWER: c
57. Gross investment minus net investment is which of the following?
a. Always negative
b. Positive for households and negative for businesses
c. Depreciation
d. Always positive
ANSWER: c
58. Which of the following is false?
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a. Financing may be either internal or external.
b. External financing comes from retained earnings.
c. External financing may consist of either debt or equity.
d. Debt financing may be short or long term.
ANSWER: b
59. The ratio of debt to equity on a firm's balance sheet is which of the following?
a. The equity ratio
b. The yield ratio
c. The opportunity cost
d. The leverage ratio
ANSWER: d
60. Which form of financing is desired because of its tax advantages?
a. Internal financing
b. External financing
c. Equity financing
d. Debt financing
ANSWER: d
61. We say debt is
when maturing debt is paid for with new borrowing. The
borrowing used to pay off the maturing debt is called
.
a. refunded, rolling over
b. crowded out, refunding
c. regularized, refunding
d. rolled over, refunding
ANSWER: d
62. The Treasury
borrowing by making advance announcements of its intentions
to borrow at standard intervals.
a. refunds
b. regularizes
c. rolls over
d. refinances
ANSWER: b
63. To minimize the disruptions that its financing operations can cause in the market, the Treasury
has “regularized” a large part of its financing activity. By regularized, we mean that
a. new borrowing must occur to refinance that part of the debt that is coming due.
b. previously issued past debt is maturing, and the government is not in a position to pay it off.
c. the Treasury announces its borrowing intentions well in advance and tends to borrow at
routine intervals.
d. government borrowing represents an increase in the government’s demand for funds.
ANSWER: c
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64. The public debt is best defined as
a. the taxing and spending policies of the government to achieve economic stability and growth
b. the difference between government revenues and expenditures in any one year.
c. the sum of all past government deficits minus past government surpluses.
d. a situation in which the purchases of U.S. financial claims by foreigners exceed the
purchases of foreign financial claims by U.S. entities.
ANSWER: c
65. Crowding out refers to a situation where
a. foreign imports successfully compete with domestic firms and crowd them out of the market.
b. ceteris paribus, government’s deficit financing tends to reduce the flow of funds to private
borrowers as well as to municipal and state governments.
c. corporate bonds are crowded out of the market by municipal bonds.
d. record trade deficits are crowded out by capital inflows.
ANSWER: b
66. Net new borrowing by the government is usually referred to as the
a. government budget deficit.
b. national debt.
c. trade deficit.
d. public debt.
ANSWER: a
67. A trade deficit occurs when
a. the value of goods a country is importing is greater than the value of goods it is exporting.
b. the value of goods a country is exporting is greater than the value of goods it is importing.
c. the value of goods a country is importing is equal to the value of the goods it is exporting.
d. a government’s expenditures are greater than its tax receipts.
ANSWER: a
68. A trade surplus occurs when
a. the value of goods a country is importing is greater than the value of goods it is exporting.
b. the value of goods a country is exporting is greater than the value of goods it is importing.
c. the value of goods a country is importing is equal to the value of the goods it is exporting.
d. a government’s expenditures are greater than its tax receipts.
ANSWER: b
69. A
occurs whenever the purchases of U.S. financial claims by foreigners
exceed the purchases of foreign financial claims by U.S. entities.
a. budget deficit
b. trade surplus
c. net capital outflow
d. net capital inflow
ANSWER: d
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70. A
occurs whenever the purchases of foreign financial claims by U.S.
entities exceed the purchases of U.S. financial claims by foreigners.
a. budget deficit
b. trade deficit
c. net capital outflow
d. net capital inflow
ANSWER: c
71. Which of the following is not a direct component of aggregate demand?
a. Consumption expenditures
b. Government transfer payments
c. Investment expenditures
d. Net foreign purchases of U.S. goods
ANSWER: b
72. If we propose to pay for increases in government spending with higher taxes, then the most
immediate effect of higher taxes is which of the following?
a. Spending units will have more income
b. Consumption spending will increase
c. Investment spending will increase
d. Disposable income will fall
ANSWER: d
73. If government securities are sold to the public to increase government spending, then
a. interest rates will go down.
b. inventory investment will go up.
c. investment in capital will go up.
d. interest rates may go up, affecting interest-sensitive spending.
ANSWER: d
74. Before government spending is increased, the government needs to be certain that
a. constituents are pleased.
b. votes are recorded in planning committees.
c. there is little time lag involved.
d. the benefits of the increased spending exceed the costs.
ANSWER: d
75. The most common reason politicians are often reluctant to raise taxes and cut spending is that
a. our grandchildren may pay the bill.
b. taxes once put into place are hard to eliminate.
c. spending creates dependency.
d. these actions are likely to cost them votes.
ANSWER: d
76. In addition to borrowing to finance the current deficit, previous debt coming due must be paid.
The new debt used to pay off maturing debt is called which of the following?
a. Refunding, and does not increase the public debt
b. "Rolling over," and it increases the public debt
c. A budget deficit
d. Crowding out
ANSWER: a
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77. Ceteris paribus, a rise in government borrowing will
a. lower the interest rate in the private sector.
b. raise the interest rate.
c. raise the interest rate only for secondary banks.
d. lower the interest rates on municipal bonds.
ANSWER: b
78. As portfolios shift toward buying government bonds, which of the following will likely happen?
a. Bond prices will increase.
b. Generally speaking, interest rates will not change.
c. The rate of return (the interest rate) on corporate bonds will fall.
d. Both a and c
ANSWER: d
79. The rise in interest rates generated by the effect of government borrowing will cause which of the
following?
a. Increased consumption spending
b. Decreased investment spending
c. Rates on mortgage loans to go down
d. Increased net exports
ANSWER: b
80. Why do interest rates and government deficits not always move up and down together?
a. When many factors are changing at once, relationships can be hard to isolate because of the
great variety of causes.
b. It depends upon where the economy is in the business cycle.
c. The Fed may be changing the supply of funds at the same time.
d. All of the above
ANSWER: d
81. A rise in the demand for funds may not result in a rise in interest rates if
a. there is an increase in the supply of funds.
b. the supply curve for funds shifts to the left.
c. surplus spending units (SSUs), both domestic and foreign, refuse to act.
d. All of the above
ANSWER: a
82. Despite an increase in the government deficit, interest rates could fall if
a. United States investments look stronger than foreign investments, causing a capital inflow.
b. there is an increase in bank reserves by the Fed.
c. the supply of loanable funds increases.
d. All of the above
ANSWER: d
83. Despite an increase in the government deficit, interest rates could fall if
a. United States investments look stronger than foreign investments, causing a capital inflow.
b. there is a decrease in bank reserves by the Fed.
c. the supply of loanable funds decreases.
d. All of the above
ANSWER: a
84. Despite an increase in the government deficit, interest rates could fall if
Financial Aspects of the Household, Firm, Government, and Rest-of-the-World Sectors
341
a. United States investments look stronger than foreign investments, causing a capital outflow.
b. there is an increase in bank reserves by the Fed.
c. the supply of loanable funds decreases.
d. All of the above
ANSWER: b
85. If interest rates on government bonds are expected to rise because of predictions that the
government deficit will be larger than previously expected, then
a. market makers will attempt to sell bonds before their value drops.
b. market makers will attempt to buy bonds before their value increases.
c. bond prices will increase.
d. Both b and c
ANSWER: a
86. Changes in expectations lead to changes in interest rates. This effect is greatest for which of the
following?
a. Commercial paper
b. Treasury bills
c. Treasury notes
d. Treasury bonds
ANSWER: d
87. In most of the years since the end of World War II, and especially between 1980 and 1997, the
government sector as a whole has
a. made great strides in reducing debt.
b. generally followed the business cycle.
c. continually run surpluses.
d. been a deficit sector.
ANSWER: d
88. Between 1977 and 1997, all government units taken together
a. ran significant surpluses.
b. increased their debt levels greatly.
c. decreased their debt levels greatly.
d. generally elected government officials with great economic understanding.
ANSWER: b
89. If there is an increase in government borrowing but there are even larger increases in capital
inflows, and the supply of loanable funds, then interest rates
a. may increase.
b. may decrease.
c. may remain unchanged.
d. None of the above
ANSWER: b
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90. The exchange rate is determined by demand and supply. The demand for dollars is directly
related to
a. changes in U.S. income.
b. changes in foreign income.
c. changes in the U.S. price of foreign goods relative to the foreign price of foreign goods.
d. changes in foreign interest rates relative to U.S. interest rates.
ANSWER: b
91. The exchange rate is determined by demand and supply. The quantity demanded of dollars is
inversely related to
a. changes in U.S. income.
b. changes in foreign income.
c. changes in the foreign price of U.S. goods relative to the foreign price of foreign goods.
d. the exchange rate.
ANSWER: d
92. If our exchange rate depreciates, ceteris paribus,
a. exports become cheaper for foreigners, while imports become more expensive for domestic
residents; our net exports are likely to increase.
b. exports become more expensive for foreigners, while imports become cheaper for domestic
residents; our net exports are likely to decrease.
c. exports become more expensive for foreigners, while imports become cheaper for domestic
residents; our net exports are likely to increase.
d. exports become cheaper for foreigners, while imports become more expensive for domestic
residents; our net exports are likely to decrease.
ANSWER: a
93. If the value of goods a country is exporting is greater than the value of goods it is importing, then
the country is running a
a. trade surplus.
b. trade deficit.
c. dollar sale.
d. contracting economy.
ANSWER: a
94. If the value of goods a country is importing is greater than the value of the goods it is exporting,
then the country is running a
a. trade surplus.
b. trade deficit.
c. dollar sale.
d. contracting economy.
ANSWER: b
95. Ceteris paribus, as the dollar appreciates,
a. foreigners increase the their purchases of U.S. goods and services.
b. spending units in the domestic economy buy more domestic goods and fewer foreign goods.
c. United States residents have less purchasing power than foreigners.
d. exports from the United States become more expensive for foreigners.
ANSWER: d
96. Ceteris paribus, as the dollar appreciates, the demand for domestic goods and services becomes
lower than it would have been,
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a. thus creating more jobs in the United States.
b. thus generating more income in the United States.
c. because U.S. residents will purchase more goods from abroad.
d. because U.S. residents will purchase more domestic goods.
ANSWER: c
97. Ceteris paribus, as the U.S. dollar appreciates, United States production will
a. be greater than it otherwise would have been.
b. stay the same.
c. be less than it otherwise would have been.
d. be unaffected.
ANSWER: c
98. If capital outflows exceed capital inflows, the United States is experiencing
a. a net capital inflow.
b. a net capital outflow.
c. an increase in the supply of loanable funds.
d. Both a and c
ANSWER: b
99. If foreigners purchase U.S. financial assets, they are
a. increasing the supply of loanable funds.
b. increasing the interest rate.
c. crowding out investment spending in the United States.
d. increasing the demand for loanable funds.
ANSWER: a
100. Why would foreigners want to buy United States financial assets?
a. All U.S. financial assets are backed by the FDIC.
b. Tariff barriers are on the horizon.
c. United States interest rates are higher than other countries.
d. United States interest rates are lower, making securities easier to purchase.
ANSWER: c
101. Government spending and taxing decisions to speed up or slow down the economy are which of
the following?
a. Monetary and fiscal policy
b. Controlled by Congress
c. Fiscal policy
d. Both b and c
ANSWER: d
102. Ceteris paribus, increases in government spending always have which effect?
a. Decrease the level of aggregate demand
b. Result in higher taxes
c. Increase the level of aggregate demand
d. Result in increases in aggregate supply
ANSWER: c
103. Which of the following is false?
a. Government spending increases financed entirely with tax increases are inflationary.
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b. Government spending financed by increasing the money supply may be inflationary.
c. For government spending to be increased, the benefits of the spending should outweigh the
costs.
d. Increases in government spending may be financed by capital inflows from abroad.
ANSWER: a
104. Government outlays minus government receipts equal which of the following?
a. The government debt
b. The trade deficit
c. Net borrowing by the government
d. The net government supply of loanable funds
ANSWER: c
105. The public debt
a. is the sum of all past deficits less past surpluses of the government sector.
b. results from the sum of the private and public demand for credit.
c. may be reduced by the inflow of funds from abroad.
d. has been declining since 1980 because of an increased awareness of the dangers of a large
public debt.
ANSWER: a
106. The term that applies to the fact that the Treasury's intentions to borrow at regular intervals are
announced in advance is known as which of the following?
a. Democratized
b. Refunding
c. Rolled over
d. Regularized
ANSWER: d
107. The reduction in private borrowing due to higher interest rates that results from increased
government deficit spending is which of the following?
a. Refunding
b. Regularized
c. Crowding out
d. Not important to the U.S. economy
ANSWER: c
108. If U.S. purchases of foreign financial assets exceed foreign purchases of U.S. financial assets,
then the United States is experiencing which of the following?
a. A net capital inflow
b. A net capital outflow
c. A capital balance
d. Capital inflows
ANSWER: b
Financial Aspects of the Household, Firm, Government, and Rest-of-the-World Sectors
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109. If U.S. purchases of foreign financial assets are less than foreign purchases of U.S. financial
assets, then the United States is experiencing what?
a. A net capital inflow
b. A net capital outflow
c. A capital balance
d. Capital outflows
ANSWER: a
110. Which of the following is true?
a. If the government prints money to spend, the costs of that spending are zero.
b. Consumers respond to changes in interest rates and adjust their portfolios to maximize their
satisfaction.
c. The most stable part of consumption is purchases of durable goods.
d. Consumption is the most volatile part of aggregate demand.
ANSWER: b
111. If the domestic currency depreciates, then
a. exports increase.
b. the trade balance improves.
c. net exports increase.
d. All of the above
ANSWER: d
112. If the domestic currency depreciates, then
a. exports decrease.
b. imports increase
c. net exports increase.
d. Both a and b
ANSWER: c
113. If the domestic currency appreciates, then
a. exports decrease.
b. imports increase
c. net exports increase.
d. Both a and b
ANSWER: d
114. Ceteris paribus, if government spending increases,
a. the demand for loanable funds increases.
b. the supply of loanable funds increases.
c. the supply of loanable funds decreases.
d. interest rates always go down.
ANSWER: a
115. Which of the following events would lead to an increase in the supply of loanable funds and a
decrease in the interest rate?
a. Decreases in foreign purchases of domestic financial assets, ceteris paribus
b. Decreases in U.S. interest rates relative to those abroad
c. Increases in foreign purchases of U.S. financial assets, ceteris paribus
d. Increases in U.S. purchases of foreign financial assets, ceteris paribus
ANSWER: c
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Chapter 23
116. What effect will the recent development of federal government budget surpluses have on the
demand and supply of loanable funds and interest rates, ceteris paribus?
a. The supply of loanable funds should increase, putting downward pressure on interest rates.
b. The supply of loanable funds should decrease, putting upward pressure on interest rates.
c. The demand for loanable funds should decrease, putting downward pressure on interest
rates.
d. The demand for loanable funds should increase, putting upward pressure on interest rates.
ANSWER: c