Chapter 18 Testbank

Chapter 18 Testbank

1. Saving equals:

A. current spending minus current income.

B. wealth minus assets.

C. assets minus liabilities.

D. current income minus spending on current needs.

2. Current income minus spending on current needs equals:

A. saving.

B. wealth.

C. transfers.

D. investment.

3. The saving rate equals saving divided by:

A. wealth.

B. assets.

C. liabilities.

D. income.

4. Huda earns $1,000 per week and spends $850 per week on living expenses, puts $50 in a

savings account, and buys $100 worth of shares in a stock mutual fund. Huda's saving is ____

and Huda's saving rate is _____.

A. $50; 5%

B. $50; 5.9%

C. $100; 10%

D. $150; 15%

5. Kareem earns $1,500 per week and spends $1,000 per week on living expenses, puts $200 in a

savings account, and buys $300 worth of shares in a stock mutual fund. Kareem's saving is ____

and Kareem's saving rate is _____.

A. $200; 13.3%

B. $200; 20%

C. $300; 20%

D. $500; 33.3%

6. Wealth equals:

A. current income minus spending on current needs.

B. assets minus liabilities.

C. saving minus investment.

D. investment minus saving.

7. Assets are:


B. stocks, bonds, and credit card balances.


D. anything of value one owns.

8. Liabilities are:


B. the debts one owes.



9. Which of the following is an asset of a family?

A. student loan

B. mortgage

C. unpaid credit card balance

D. checking account balance

10. Which of the following is a liability of a family?

A. checking account balance

B. share of stock

C. a house

D. mortgage

Tahani has the following assets and liabilities:

11. What is Tahani's wealth?

A. $105,000

B. $107,000

C. $111,000

D. $419,000

12. What is the value of Tahani's assets?

A. $308,00

B. $416,000

C. $419,000

D. $422,000

13. What is the value of Tahani's liabilities?

A. $300,000

B. $303,000

C. $308,000

D. $311,000

14. Jihan has the following assets and liabilities:

Jihan's wealth is _____, the value of Jihan's assets is _____ and the value of Jihan's liability is

_____.

A. $107,000; $213,000; $100,000

B. $109,000; $213,000; $104,000

C. $111,000 ; $213,000; $100,000

D. $213,000; $317,000; $104,000

15. A measure defined at a point in time is called a(n) ____ variable.

A. stock

B. nominal

C. aggregate

D. flow

16. A flow is a measure defined:

A. per unit of time.

B. at a point in time.

C. in real terms.

D. in nominal terms.

17. Which of the following is a flow?

A. saving

B. wealth

C. assets

D. money

18. Which of the following is a stock?

A. saving

B. income

C. consumption

D. wealth

19. Saving $100 will:

A. increase wealth by $100.

B. increase wealth by $100 only if the $100 is used to purchase an asset.

C. increase wealth by $100 only if the $100 is used to repay a debt.

D. decrease wealth by $100.

20. Saving is a(n) _____ and wealth is a(n) ______.

A. stock; flow

B. flow; stock

C. asset; liability

D. liability; asset

21. The stock of wealth increases more rapidly the faster the flow of ______.

A. income

B. saving

C. money

D. assets

22. If you save $50 per week, then your _____ will increase by $50 per week.

A. investment

B. consumption

C. taxes

D. wealth

23. If you save $500 per month, then your ____ will increase by _____.

A. wealth; $500 only if you have no debt

B. income; $500 only if you buy additional assets

C. wealth; $500

D. wealth; $500 only if you buy additional assets

24. The flow of _____ increases the stock of _______.

A. money; income

B. money; wealth

C. investment; profits

D. saving; wealth

25. High rates of saving today contribute to _______ in the future.

A. higher tax rates

B. more unemployment

C. a higher standard of living

D. more capital gains

26. If economy A is wealthier than economy B, then:

A. there has been more saving in country A and/or capital gains were larger in country A.

B. there has been more saving in country A and/or capital gains were smaller in country A.

C. the tax rate is lower in country A and/or the profit rate is higher in country A.

D. the tax rate is lower in country A and/or the profit rate is lower in country A.

27. Capital gains are _____ and capital losses are _________:

A. increases in the flow of investment; decreases in the flow of investment.

B. increases in the flow of saving; decreases in the flow of saving.

C. additions to plant and equipment; the destruction of plant and equipment.

D. increases in the value of existing assets; decreases in the value of existing assets.

28. Ilhame owns a beautiful diamond ring she purchased for $2,500. When she has it appraised she

learns it is now worth $3,000. Based on this information:

A. Ilhame's saving this year has increased by $500.

B. Ilhame's saving this year has decreased by $500.

C. Ilhame has a $500 capital gain.

D. Ilhame's wealth is unchanged.

29. Jibran owns a classic car he purchased for $50,000. At a car rally he is offered $75,000 for the

car. Based on this information:

A. Jibran's saving this year has increased by $25,000.

B. Jibran's saving this year has decreased by $25,000.

C. Jibran has a $25,000 capital gain.

D. Jibran's wealth is unchanged.

30. On January 1, 2007, Jibran purchased shares of stock for $10,000. On December 31, 2007, the

same shares are now worth $7,500. Based on this information:

A. Jibran's saving for the year increased by $2,500.

B. Jibran's saving for the year decreased by $2,500.

C. Jibran has a $2,500 capital gain for the year.

D. Jibran has a $2,500 capital loss for the year.

31. Samer uses $300 from his paycheck to pay off his credit card balance. Based on this

information:

A. Samer's saving has increased by $300.

B. Samer's saving has decreased by $300.

C. Samer's wealth is unchanged.

D. Samer has a capital loss of $300.

32. Samer has $500 from his paycheck automatically used to purchase U.S. Savings Bonds. Based

on this information:



C. Samer has a capital gain of $500.

D. Samer's wealth is unchanged.

33. Wealth decreases as a result of _____ and/or _____.

A. positive saving; capital gains

B. negative saving; capital gains

C. positive saving; capital losses

D. negative saving; capital losses

34. The change in wealth during a period equals:

A. saving + capital gains - capital losses.

B. saving - capital gains + capital losses.

C. saving - investment + capital gains - capital losses.

D. public saving + private saving - transfers.

35. If Alia deposits $1,000 from her paycheck into her checking account and at the same time

increases her credit card balance by $1,500, then her wealth ______ and her saving changes by

______:

A. decreases by $500; +$1,000

B. decreases by $1,000; +$500

C. increases by $2,500; -$500

D. decreases by $500; -$500

36. If Alia uses $800 from her checking account to pay her credit card balance, her wealth:

A. increases by $800.

B. decreases by $800.

C. increases by $1,600.

D. does not change.

37. National saving is saving by:

A. households for retirement.

B. the government.

C. households and firms

D. the entire economy.

38. A nation's saving equals its _______ income less its spending on _______.

A. real; investment

B. current; current needs

C. nominal; investment

D. nominal; net taxes

39. Where Y is GDP, C is consumption, I is investment, and G is government spending, if there is no

international trade, then national saving equals:

A. C + I + G

B. Y - C - G

C. Y + C + G

D. Y - C - I

40. National saving is done by:

A. only households.

B. only businesses.

C. only governments.

D. households, business, and government.

41. Net taxes equal the amount

A. the government pays the private sector plus the amount of private sector pays the government.

B. the government pays the private sector minus the amount the private sector pays the

government.

C. the business sector pays the government minus the amount the private sector pays the

government.

D. the private sector pays the government minus the amount the private sector receives from the

government.

42. Total taxes minus transfer payments minus government interest payments is called:

A. a budget surplus.

B. net taxes.

C. a budget deficit.

D. national saving.

43. If total government tax collections equal $200 billion, transfer payments equal $75 billion, and

government interest payments equal $10 billion, then net taxes equal:

A. $115 billion.

B. $125 billion.

C. $190 billion.

D. $275 billion.

44. Payments by the government to the public for which the government receives no current goods or

services in return are called:

A. public saving

B. net taxes

C. transfer payments

D. capital losses

45. Social Security benefits, welfare payments, and farm support payments are examples of:

A. consumption spending

B. public interest payments

C. investment spending

D. transfer payments

46. Saving by households and businesses is called ______ saving.

A. private

B. public

C. national

D. aggregate

47. Where Y is GDP, C is consumption, I is investment, T is net taxes, and G is government

spending, if there is no trade, then private saving equals:

A. C + I + G - T

B. Y - T - C

C. Y - T - G

D. Y - C - I

48. The saving of the government sector is called ____ saving.

A. private

B. public

C. national

D. aggregate

49. Where Y is GDP, C is consumption, T is net taxes, and G is government spending, if there is no

international trade, then public saving equals:

A. T - G

B. Y - T - C

C. Y + T - G

D. Y - C - T

50. ______ saving equals _____ saving _____ saving.

A. national; private; plus public

B. public; national; plus private

C. private; national; plus public

D. national; public; minus private

51. The excess of government spending over tax collections is:

A. national income.

B. national saving.

C. national wealth.

D. the government budget deficit.

52. Where Y is GDP, C is consumption, T is net taxes, and G is government spending, if there is no

international trade, then the government budget deficit equals:

A. T - G

B. Y - G

C. Y + T - G

D. G - T

53. Public saving is positive when:

A. there is a government budget surplus.

B. after-tax income of households and businesses is less than consumption expenditure.

C. the government's budget is balanced.

D. after-tax income of households and businesses is greater than consumption expenditures.

54. Public saving is negative when:


B. there is a government budget deficit.



55. Private saving is positive when:





56. When the government runs a budget deficit, it makes up the difference by:

A. issuing bonds.

B. paying down outstanding debt.

C. increasing transfer payments.

D. increasing public saving.

57. When the government runs a budget surplus, it uses the funds to:

A. issue bonds.

B. pay down outstanding debt.

C. decrease transfer payments.

D. decrease public saving.

58. You are given the following information about the economy:

Private saving equals ____ ; public saving equals ______; and national saving equals ____.

A. 100; 200; 100

B. 100; 100; 200

C. 200; 100; 300

D. 200; 100; 500


Public saving is _____ ; private saving is _______ and national saving is ______.

A. 500; 2,000; 500

B. 500; 2000; 2,500

C. 2,000; 500; 3,500

D. 750; 500; 2,750


Private saving is _____ ; public saving is ________; and national saving is ______.

A. 800; 200; 600

B. 800; 200; 1,000

C. 1,000; 800; 1,000

D. 1,500; 700; 2,700

61. If government spending increases by $1 million while net taxes are unchanged, then:

A. public saving increases.

B. public saving decreases.

C. public saving does not change.

D. private saving increases.

62. If household saving increases by $4 million, business saving decreases by $4 million,

government budget deficit increases by $4 million, then private saving ____ and public saving

______.

A. increases; increases

B. increases; decreases

C. does not change; increases

D. does not change; decreases

63. If household saving decreases by $4 million, business saving increases by $4 million, and the

government budget deficit decreases by $4 million, then private saving ____ and public saving

______.





64. These data are available for Econland:

Public saving in Econland equals:

A. -5

B. 5

C. 16

D. 17

65. Based on the following information where negative amounts are indicated by parentheses (), how

much does national saving equal?

A. $415 billion.

B. $265 billion.

C. $250 billion.

D. $105 billion.

66. If consumption spending increases by $10 million with no changes in net taxes, then:



C. private saving increases.

D. private saving decreases.

67. Three broad reasons for saving identified by economists include for _____ reasons.

A. consumption, investment, and exports

B. national, public, and private

C. life-cycle, precautionary, and bequest

D. capital gains, capital losses, and deficits

68. Saving to meet long-term objectives, such as retirement, college attendance, or to purchase a

home, is called _____ saving.

A. public

B. bequest

C. precautionary

D. life-cycle

69. Saving for protection against unexpected setbacks, such as the loss of a job or a medical

emergency, is called ____ saving.

A. public

B. bequest

C. precautionary

D. life-cycle

70. Saving done for the purpose of leaving an inheritance is called _____ saving.

A. public

B. bequest

C. precautionary

D. life-cycle

71. Which of the following is an example of the life-cycle motive for saving?

A. Huda puts $400 per month in his 401(k) retirement account.

B. Jihan sets aside $200 per month in case she has to pay for a new roof for her house.

C. Abbas and Bilqis put $2,000,000 in a trust fund that will go to their children when they die.

D. Khawlah keeps $15,000 in a money market account to pay expenses in case she loses her

job.

72. Which of the following is an example of the precautionary motive for saving?





job.

73. Which of the following is an example of the bequest motive for saving?





job.

74. Farhan and Wijdan agree that they want to save so that they can leave a substantial amount to

local charities in their wills. This is an example of the _____ motive for saving.

A. life-cycle

B. public

C. bequest

D. precautionary

75. Farhan and Wijdan just had a baby girl and want to make sure they save enough in the future to

send her to college. This is an example of the ____ motive for saving.

A. life-cycle

B. bequest

C. private

D. precautionary

76. Bakr decides to save more because he has heard rumors that his employer will be merging with

another firm and many employees may lose their jobs. This is an example of the _____ motive for

saving.

A. life-cycle

B. public

C. private

D. precautionary

77. Tariq and Amal are saving more today because they want to make sure that their children will

inherit lots of money when they die. This is an example of the _____ motive for saving.

A. life-cycle

B. bequest

C. private

D. precautionary

78. Explanations for the high saving rate in Japan consistent with the life-cycle reason for saving

include:

A. long life expectancies and large down payments required for home purchases.

B. lifetime employment.

C. the desire to leave resources to children who provide support and attention to parents in their

old age.

D. low unemployment rates in Japan.

79. Explanations for the high saving rate in Japan consistent with the bequest reason for saving

include:



C. the desire to leave resources to children who provide support and attention to parents in their

old age.


80. The combination of a ____ saving rate and a ____ real interest rate will result in the largest

accumulation of wealth over time.

A. high; high

B. high; low

C. high; zero

D. low; high

81. To the extent that households are target savers, who save to reach a specific goal, an increase in

the interest rate _____ household saving and a decrease in the interest rate _____ household

saving.

A. increases; decreases

B. decreases; increases

C. does not affect; increases

D. increases; does not affect

82. Empirical evidence indicates that higher real interest rates lead to _____ in savings.

A. modest increases

B. substantial increases

C. no change in

D. modest decreases

83. Psychological factors that may influence the saving rate are ______ and _______.

A. the real interest rate; the demonstration effect

B. self control problems; the demonstration effect

C. capital gains; the real interest rate

D. the desire to leave a bequest; capital gains

84. The self-control hypothesis suggests that people:

A. base their spending decisions (and consequently their saving decisions) on spending decisions

of others.

B. want to save, but lack the discipline to refrain from consuming.

C. substantially decrease their saving when the real interest rate increases.

D. control their spending in order to save more when the real interest rate increases.

85. The demonstration effect suggests that people will save less when they

A. base their spending decisions (and consequently their saving decisions) on spending decisions

of others who spend more than they do.

B. base their saving decisions on their projections of income and spending needs over their

lifetime.

C. recognize that the real interest rate has increased.


86. Firms will invest in new equipment whenever:

A. the expected cost of the equipment exceeds the expected benefit.

B. the expected cost of the equipment is less than the expected benefit.

C. the expected cost of the equipment is greater than the value of the marginal product of the

equipment.

D. public saving is greater than private saving.

87. The expected benefit of investment equals:

A. private saving.

B. the value of the marginal product of capital.

C. the real interest rate.

D. the price of the capital good.

88. The builder of a new movie theater complex is trying to decide how many screens she wants.

Below are her estimates of the number of patrons the complex will attract each year, depending

on the number of screens available:

After paying the movie distributor and meeting all other non-interest expenses, the owner

expects to net $2.00 per ticket sold. Construction costs are $1,000,000 per screen. If the real

interest rate is 7% _____ screens should be built and if the real interest rate is 5% _____ screens

should be built.

A. 1; 2

B. 2; 3

C. 3; 2

D. 4; 3

89. An entrepreneur is considering how many limousines to purchase when he starts up a limousine

service. Below are his estimates of the number of limousine rentals the service will make during a

year, depending on the number of limousines available.

After paying all non-interest expenses, the owner expects to net $10 per rental. Each limousine

costs $50,000. How many limousines should he purchase if the real interest rate is 4.5%? If the

real interest rate is 5.5%.

A. 2; 0

B. 1; 2

C. 2; 1

D. 3; 2

90. The costs of investment depend on the ______ and the _______.

A. marginal product of capital; relative price of the firm's output

B. price of new capital goods; real interest rate

C. relative price of the firm's output; real interest rate

D. taxes levied on the revenue generated; relative price of the firm's output

91. The marginal product of new capital depends on _____ and _____.

A. productivity of capital; relative price of the firm's output



D. productivity of new capital; real interest rate

92. Investment is a(n) _____ that changes the _____ of capital.

A. flow; stock

B. stock; flow

C. asset; liability

D. liability; asset

93. The greater the flow of investment spending, the greater the increase in the stock of:

A. saving.

B. money.

C. income.

D. capital.

94. The flow of ________ changes the stock of _______.

A. money; income

B. investment; capital


D. capital; investment

95. The real rate of interest measures the ______ of capital investment.

A. value of the marginal product

B. opportunity cost

C. marginal benefit

D. relative price

96. The opportunity cost of capital investment is the:

A. value of the marginal product of capital.

B. value of the marginal product of labor.

C. real interest rate.

D. price of new capital goods.

97. The value of the marginal product of new capital increases when the:

A. price of new capital goods increases.

B. real interest rate increases.

C. the price of the good the firm produces decreases.

D. productivity of new capital increases.

98. Holding other factors constant, a decline in the price of new capital goods will:

A. increase national saving

B. decrease national saving

C. increase investment

D. decrease investment

99. Holding other factors constant, a technological improvement that increases the marginal product

of capital will:

A. increase national saving.

B. decrease national saving.

C. increase investment.

D. decrease investment.

100. Holding other factors constant, a decrease in the tax rate on revenue generated by capital will:





101. Holding other factors constant, a higher relative price of a firm's output will:





102. In an economy without international trade, investment must equal _____ saving.

A. national

B. private

C. public

D. life-cycle

103. In the market for saving, the price is the:

A. relative price.

B. real interest rate.

C. nominal interest rate.

D. inflation rate.

104. The real interest rate bringing the supply of saving equal to the demand for saving is an example

of the:

A. scarcity principle.

B. principle of comparative advantage.

C. equilibrium principle.

D. principle of increasing opportunity cost.

105. The supply of saving equals desired _____ and the demand for saving equals desired _____.

A. investment; national saving

B. investment; public saving

C. national saving; investment

D. national saving; capital

106. The supply and demand for saving are brought into equilibrium by adjustments of the ____ rate.

A. discount

B. nominal interest

C. real interest

D. dividend

107. The introduction of new technologies ____ the real interest rate and ____ the equilibrium quantity

of national saving.



C. decreases; decreases

D. decreases; increases

108. An increase in the government's budget deficit ____ the real interest rate and ____ the equilibrium

quantity of national saving.





109. As the real interest rate increases, the quantity of saving supplied _____ and the quantity of

saving demanded ____.



C. does not change; does not change


110. As the real interest rate decreases the quantity of saving supplied _____ and the quantity of






111. Holding other factors constant, if the government introduces a 5% investment tax credit under

which for every $100 a firm spends on new capital equipment it receives an extra $5 in tax

refunds from the government, then the real interest rate will ____ and the equilibrium quantity of

national saving and investment will _____.

A. increase; increase

B. increase; decrease

C. increase; not change

D. decrease; increase

112. Holding other factors constant, if a tax increase moves the government budget from deficit to

surplus, then the real interest rate will ___ and the equilibrium quantity of national saving and

investment will ____.


B. decrease; decrease



113. Holding other factors constant, if new technology comes online that allows machines to produce

manufactured goods more quickly and with fewer defects, then the real interest rate will _____

and the equilibrium quantity of national saving and investment will ____.





114. Holding other factors constant, if growing concerns about job security raise precautionary saving,

then the real interest rate will _____ and the equilibrium quantity of national saving and




C. decrease; decrease


115. Holding other factors constant, if a change in tax laws encourages people to save more for

retirement, then the real interest rate will _____ and the equilibrium quantity of saving and

investment will _____.





116. Holding other factors constant, if employers automatically enroll employees in retirement savings

programs in order to overcome psychological barriers to saving, then the real interest rate will

________ and the equilibrium quantity of saving and investment will ________.


B. increase; not change

C. increase; decrease


117. Holding other factors constant, if political instability increases the desire for precautionary saving,

then the real interest rate will _______ and the equilibrium quantity of saving and investment will

_______.





118. Holding other factors constant, if the income tax is replaced with a consumption so that saving is

not taxed, then the real interest rate will ________ and the equilibrium quantity of saving and

investment will _______.





119. Holding other factors constant, if new environmental regulations increase firms' cost of operating

capital, then the real interest rate will ____ and the equilibrium quantity of national saving and






120. Crowding out is the tendency for increased government deficits to:

A. reduce investment spending.

B. increase investment spending.

C. reduce consumption spending.

D. increase consumption spending.

121. At the national level, higher saving rates lead to ______ and higher standards of living.

A. greater current consumption

B. slower growth

C. greater investment

D. crowding out

122. At the household level higher saving rates lead to _____ and greater economic security.


B. greater wealth

C. less wealth

D. less current income

123. Which of the following policies could be expected to increase private saving?

A. replace the income tax with a consumption tax.

B. increase the tax rate on capital gains.

C. provide more generous Social Security retirement benefits.

D. reduce the size of down payments needed to buy a house.


A. increase the income tax.

B. reduce the tax rate on capital gains and dividends.


D. increase job security.

125. If the real interest rate on saving account increases from 3% to 5%, all other things equal,:

A. business investment spending for new capital will increase.

B. business investment spending for new capital will remain unchanged.

C. people will be less willing to save.

D. people will be more willing to save.

126. If net taxes paid by households increase:

A. private saving will decrease.

B. private saving will increase.

C. public saving will decrease.

D. transfer payments to households will decrease.

127. Taco Hut can purchase a delivery truck for $20,000 and it estimates it will generate a net income

(i.e., after-taxes and maintenance and operating costs) of $2,000 per year. Taco Hut should:

A. purchase the truck only if the real interest rate is less than 2%.

B. not purchase the truck if the real interest rate is greater than 2%.

C. purchase the truck if the real interest rate is greater than 10%.

D. purchase the truck if the real interest rate is less than 10%.

128. The investment demand curve indicates that there is a(n):

A. positive relationship between the real interest rates and the level of investment spending, all

other things equal.

B. inverse relationship between the real interest rates and the level of investment spending, all

other things equal.

C. direct relationship between the real interest rates and the level of investment spending, all

other things equal.

D. inverse relationship between the determinants of investment and the level of investment

spending, holding interest rates constant.

129. Mahjub's current income is $100 more per month than his current consumption needs. He

decides to use the $100 to reduce his credit card debt. As a result, his:

A. liabilities will decrease and his wealth will increase.

B. liabilities and his wealth will decrease.

C. assets will decrease and his wealth will increase.

D. assets and his wealth will increase.

130. During a conversation with her mother about her financial circumstances, Salma complained that

she could not afford to save because she wanted to maintain a lifestyle similar to that of her

friends. Her mother suggested that if she would save more now, she would not only have more

wealth, but she would also have a higher standard of living, than her friends in the future. Her

mother's argument was:

A. incorrect, because if she saved her standard of living would be lower than that of her friends.

B. incorrect, and probably an attempt to confuse her daughter to get her to begin saving some of

her income.

C. correct, because of the power of compound interest her income would increase to a level that

would allow her to save and consume more.

D. correct, because the more saving, the higher the standard of living.

131. Private saving:

A. can be broken down into household saving and business saving.

B. can be broken down into transfers and household saving.

C. rises when net taxes increase.

D. falls when income rises.

132. An increase in net taxes (i.e., taxes paid by the private sector to the government less transfer

payments and interest payments made by the government to the private sector) will:

A. increase private saving.

B. decrease public saving.

C. increase public saving.

D. reduce investment in new capital equipment.

133. Public saving is:

A. increased when the government budget deficit rises.

B. identical to the government budget surplus.

C. less important to national saving than private saving.

D. more important to national saving than private saving.

134. Sanaa has $5,000 in a fixed deposit account paying 10% interest. It will mature in a few weeks

and, the bank told her that interest rates on fixed deposits were decreasing. She is thinking of

spending it on a new computer and software that she will use to start a bookkeeping service. If

she were to do so, she would have to quit her job where she makes $15,000 per year in after-tax

income. She has estimated that the bookkeeping service will earn a net income of $15, 250 after

taxes, and maintenance and operating costs.

A. Since the interest rate is declining, Sanaa would be better off using the money to buy the

computer.

B. If the interest rate on the new CD is 5% or greater she should leave the money in the CD.

C. If the interest rate on the new CD is 2.5% or greater she should buy the computer.

D. If the interest rate on the new CD is 2% or less she should leave the money in the CD.

135. A decrease in the capital gains tax on income generated through investment in new capital will:

A. shift the demand for investment curve to the left.

B. shift the demand for investment curve to the right.

C. shift the supply of saving curve to the left.

D. shift the supply of saving curve to the right.

136. The introduction of a new technology that raises the marginal product of new capital will:

A. decrease real interest rates and increase the equilibrium quantity of saving supplied and

demanded.

B. decrease real interest rates and the equilibrium quantity of saving supplied and demanded.

C. increase real interest rates and the equilibrium quantity of saving supplied and demanded.

D. increase real interest rates and decrease the equilibrium quantity of saving supplied and

demanded.

Chapter 18 Testbank Key

1. Saving equals:

A. current spending minus current income.

B. wealth minus assets.

C. assets minus liabilities.

D. current income minus spending on current needs.

AACSB: Analytical Skills

Blooms: Knowledge

Frank - Chapter 18 #1

Learning Objective: 18-01 Explain the relationship between saving and wealth.0

Section: Saving and Wealth

2. Current income minus spending on current needs equals:

A. saving.

B. wealth.

C. transfers.

D. investment.


Blooms: Knowledge




3. The saving rate equals saving divided by:

A. wealth.

B. assets.

C. liabilities.

D. income.


Blooms: Knowledge




4. Huda earns $1,000 per week and spends $850 per week on living expenses, puts $50 in a

savings account, and buys $100 worth of shares in a stock mutual fund. Huda's saving is ____

and Huda's saving rate is _____.

A. $50; 5%

B. $50; 5.9%

C. $100; 10%

D. $150; 15%


Blooms: Application




5. Kareem earns $1,500 per week and spends $1,000 per week on living expenses, puts $200 in

a savings account, and buys $300 worth of shares in a stock mutual fund. Kareem's saving is

____ and Kareem's saving rate is _____.

A. $200; 13.3%

B. $200; 20%

C. $300; 20%

D. $500; 33.3%


Blooms: Application




6. Wealth equals:


B. assets minus liabilities.


D. investment minus saving.


Blooms: Knowledge




7. Assets are:


B. stocks, bonds, and credit card balances.




Blooms: Knowledge




8. Liabilities are:


B. the debts one owes.




Blooms: Knowledge




9. Which of the following is an asset of a family?

A. student loan

B. mortgage

C. unpaid credit card balance

D. checking account balance


Blooms: Understanding




10. Which of the following is a liability of a family?

A. checking account balance

B. share of stock

C. a house

D. mortgage






Tahani has the following assets and liabilities:

Frank - Chapter 18

11. What is Tahani's wealth?

A. $105,000

B. $107,000

C. $111,000

D. $419,000


Blooms: Application




12. What is the value of Tahani's assets?

A. $308,00

B. $416,000

C. $419,000

D. $422,000


Blooms: Application




13. What is the value of Tahani's liabilities?

A. $300,000

B. $303,000

C. $308,000

D. $311,000


Blooms: Application




14. Jihan has the following assets and liabilities:

Jihan's wealth is _____, the value of Jihan's assets is _____ and the value of Jihan's liability is

_____.

A. $107,000; $213,000; $100,000

B. $109,000; $213,000; $104,000

C. $111,000 ; $213,000; $100,000

D. $213,000; $317,000; $104,000


Blooms: Application




15. A measure defined at a point in time is called a(n) ____ variable.

A. stock

B. nominal

C. aggregate

D. flow


Blooms: Knowledge




16. A flow is a measure defined:

A. per unit of time.

B. at a point in time.

C. in real terms.

D. in nominal terms.


Blooms: Knowledge




17. Which of the following is a flow?

A. saving

B. wealth

C. assets

D. money


Blooms: Knowledge




18. Which of the following is a stock?

A. saving

B. income

C. consumption

D. wealth


Blooms: Knowledge




19. Saving $100 will:

A. increase wealth by $100.

B. increase wealth by $100 only if the $100 is used to purchase an asset.

C. increase wealth by $100 only if the $100 is used to repay a debt.

D. decrease wealth by $100.


Blooms: Application




20. Saving is a(n) _____ and wealth is a(n) ______.

A. stock; flow

B. flow; stock

C. asset; liability

D. liability; asset






21. The stock of wealth increases more rapidly the faster the flow of ______.

A. income

B. saving

C. money

D. assets






22. If you save $50 per week, then your _____ will increase by $50 per week.

A. investment

B. consumption

C. taxes

D. wealth


Blooms: Application




23. If you save $500 per month, then your ____ will increase by _____.

A. wealth; $500 only if you have no debt

B. income; $500 only if you buy additional assets

C. wealth; $500

D. wealth; $500 only if you buy additional assets


Blooms: Application




24. The flow of _____ increases the stock of _______.

A. money; income

B. money; wealth


D. saving; wealth






25. High rates of saving today contribute to _______ in the future.

A. higher tax rates

B. more unemployment

C. a higher standard of living

D. more capital gains




Learning Objective: 18-02 Recognize and work with the components of national saving.

Section: National Saving and Its Components

26. If economy A is wealthier than economy B, then:

A. there has been more saving in country A and/or capital gains were larger in country A.

B. there has been more saving in country A and/or capital gains were smaller in country A.

C. the tax rate is lower in country A and/or the profit rate is higher in country A.

D. the tax rate is lower in country A and/or the profit rate is lower in country A.






27. Capital gains are _____ and capital losses are _________:

A. increases in the flow of investment; decreases in the flow of investment.

B. increases in the flow of saving; decreases in the flow of saving.

C. additions to plant and equipment; the destruction of plant and equipment.

D. increases in the value of existing assets; decreases in the value of existing assets.






28. Ilhame owns a beautiful diamond ring she purchased for $2,500. When she has it appraised

she learns it is now worth $3,000. Based on this information:

A. Ilhame's saving this year has increased by $500.

B. Ilhame's saving this year has decreased by $500.

C. Ilhame has a $500 capital gain.

D. Ilhame's wealth is unchanged.


Blooms: Application




29. Jibran owns a classic car he purchased for $50,000. At a car rally he is offered $75,000 for the

car. Based on this information:

A. Jibran's saving this year has increased by $25,000.

B. Jibran's saving this year has decreased by $25,000.

C. Jibran has a $25,000 capital gain.

D. Jibran's wealth is unchanged.


Blooms: Application




30. On January 1, 2007, Jibran purchased shares of stock for $10,000. On December 31, 2007,

the same shares are now worth $7,500. Based on this information:

A. Jibran's saving for the year increased by $2,500.

B. Jibran's saving for the year decreased by $2,500.

C. Jibran has a $2,500 capital gain for the year.

D. Jibran has a $2,500 capital loss for the year.


Blooms: Application




31. Samer uses $300 from his paycheck to pay off his credit card balance. Based on this

information:



C. Samer's wealth is unchanged.

D. Samer has a capital loss of $300.


Blooms: Application




32. Samer has $500 from his paycheck automatically used to purchase U.S. Savings Bonds.

Based on this information:



C. Samer has a capital gain of $500.

D. Samer's wealth is unchanged.


Blooms: Application




33. Wealth decreases as a result of _____ and/or _____.

A. positive saving; capital gains

B. negative saving; capital gains

C. positive saving; capital losses

D. negative saving; capital losses






34. The change in wealth during a period equals:

A. saving + capital gains - capital losses.

B. saving - capital gains + capital losses.

C. saving - investment + capital gains - capital losses.

D. public saving + private saving - transfers.






35. If Alia deposits $1,000 from her paycheck into her checking account and at the same time

increases her credit card balance by $1,500, then her wealth ______ and her saving changes

by ______:

A. decreases by $500; +$1,000

B. decreases by $1,000; +$500

C. increases by $2,500; -$500

D. decreases by $500; -$500


Blooms: Application




36. If Alia uses $800 from her checking account to pay her credit card balance, her wealth:

A. increases by $800.

B. decreases by $800.

C. increases by $1,600.

D. does not change.


Blooms: Application




37. National saving is saving by:

A. households for retirement.

B. the government.

C. households and firms

D. the entire economy.


Blooms: Knowledge




38. A nation's saving equals its _______ income less its spending on _______.

A. real; investment

B. current; current needs

C. nominal; investment

D. nominal; net taxes


Blooms: Knowledge




39. Where Y is GDP, C is consumption, I is investment, and G is government spending, if there is

no international trade, then national saving equals:

A. C + I + G

B. Y - C - G

C. Y + C + G

D. Y - C - I


Blooms: Knowledge




40. National saving is done by:

A. only households.

B. only businesses.

C. only governments.

D. households, business, and government.


Blooms: Knowledge




41. Net taxes equal the amount

A. the government pays the private sector plus the amount of private sector pays the

government.

B. the government pays the private sector minus the amount the private sector pays the

government.

C. the business sector pays the government minus the amount the private sector pays the

government.

D. the private sector pays the government minus the amount the private sector receives from

the government.


Blooms: Knowledge




42. Total taxes minus transfer payments minus government interest payments is called:

A. a budget surplus.

B. net taxes.

C. a budget deficit.

D. national saving.


Blooms: Knowledge




43. If total government tax collections equal $200 billion, transfer payments equal $75 billion, and

government interest payments equal $10 billion, then net taxes equal:

A. $115 billion.

B. $125 billion.

C. $190 billion.

D. $275 billion.


Blooms: Application




44. Payments by the government to the public for which the government receives no current

goods or services in return are called:

A. public saving

B. net taxes

C. transfer payments

D. capital losses


Blooms: Knowledge




45. Social Security benefits, welfare payments, and farm support payments are examples of:

A. consumption spending

B. public interest payments

C. investment spending

D. transfer payments


Blooms: Knowledge




46. Saving by households and businesses is called ______ saving.

A. private

B. public

C. national

D. aggregate


Blooms: Knowledge




47. Where Y is GDP, C is consumption, I is investment, T is net taxes, and G is government

spending, if there is no trade, then private saving equals:

A. C + I + G - T

B. Y - T - C

C. Y - T - G

D. Y - C - I






48. The saving of the government sector is called ____ saving.

A. private

B. public

C. national

D. aggregate


Blooms: Knowledge




49. Where Y is GDP, C is consumption, T is net taxes, and G is government spending, if there is

no international trade, then public saving equals:

A. T - G

B. Y - T - C

C. Y + T - G

D. Y - C - T






50. ______ saving equals _____ saving _____ saving.

A. national; private; plus public

B. public; national; plus private

C. private; national; plus public

D. national; public; minus private


Blooms: Knowledge




51. The excess of government spending over tax collections is:

A. national income.

B. national saving.

C. national wealth.

D. the government budget deficit.


Blooms: Knowledge




52. Where Y is GDP, C is consumption, T is net taxes, and G is government spending, if there is

no international trade, then the government budget deficit equals:

A. T - G

B. Y - G

C. Y + T - G

D. G - T






53. Public saving is positive when:


B. after-tax income of households and businesses is less than consumption expenditure.




54. Public saving is negative when:










55. Private saving is positive when:










56. When the government runs a budget deficit, it makes up the difference by:

A. issuing bonds.

B. paying down outstanding debt.

C. increasing transfer payments.

D. increasing public saving.






57. When the government runs a budget surplus, it uses the funds to:

A. issue bonds.

B. pay down outstanding debt.

C. decrease transfer payments.

D. decrease public saving.







Private saving equals ____ ; public saving equals ______; and national saving equals ____.

A. 100; 200; 100

B. 100; 100; 200

C. 200; 100; 300

D. 200; 100; 500


Blooms: Application





Public saving is _____ ; private saving is _______ and national saving is ______.

A. 500; 2,000; 500

B. 500; 2000; 2,500

C. 2,000; 500; 3,500

D. 750; 500; 2,750


Blooms: Application





Private saving is _____ ; public saving is ________; and national saving is ______.

A. 800; 200; 600

B. 800; 200; 1,000

C. 1,000; 800; 1,000

D. 1,500; 700; 2,700


Blooms: Application




61. If government spending increases by $1 million while net taxes are unchanged, then:



C. public saving does not change.

D. private saving increases.






62. If household saving increases by $4 million, business saving decreases by $4 million,

government budget deficit increases by $4 million, then private saving ____ and public saving

______.






Blooms: Application




63. If household saving decreases by $4 million, business saving increases by $4 million, and the

government budget deficit decreases by $4 million, then private saving ____ and public saving

______.






Blooms: Application




64. These data are available for Econland:

Public saving in Econland equals:

A. -5

B. 5

C. 16

D. 17


Blooms: Application




65. Based on the following information where negative amounts are indicated by parentheses (),

how much does national saving equal?

A. $415 billion.

B. $265 billion.

C. $250 billion.

D. $105 billion.


Blooms: Application




66. If consumption spending increases by $10 million with no changes in net taxes, then:



C. private saving increases.

D. private saving decreases.






67. Three broad reasons for saving identified by economists include for _____ reasons.

A. consumption, investment, and exports

B. national, public, and private

C. life-cycle, precautionary, and bequest

D. capital gains, capital losses, and deficits


Blooms: Knowledge


Learning Objective: 18-03 Understand the reasons why people save.

Section: Why Do People Save?

68. Saving to meet long-term objectives, such as retirement, college attendance, or to purchase a

home, is called _____ saving.

A. public

B. bequest

C. precautionary

D. life-cycle


Blooms: Knowledge




69. Saving for protection against unexpected setbacks, such as the loss of a job or a medical

emergency, is called ____ saving.

A. public

B. bequest

C. precautionary

D. life-cycle


Blooms: Knowledge




70. Saving done for the purpose of leaving an inheritance is called _____ saving.

A. public

B. bequest

C. precautionary

D. life-cycle


Blooms: Knowledge




71. Which of the following is an example of the life-cycle motive for saving?





job.






72. Which of the following is an example of the precautionary motive for saving?





job.






73. Which of the following is an example of the bequest motive for saving?





job.






74. Farhan and Wijdan agree that they want to save so that they can leave a substantial amount

to local charities in their wills. This is an example of the _____ motive for saving.

A. life-cycle

B. public

C. bequest

D. precautionary






75. Farhan and Wijdan just had a baby girl and want to make sure they save enough in the future

to send her to college. This is an example of the ____ motive for saving.

A. life-cycle

B. bequest

C. private

D. precautionary






76. Bakr decides to save more because he has heard rumors that his employer will be merging

with another firm and many employees may lose their jobs. This is an example of the _____

motive for saving.

A. life-cycle

B. public

C. private

D. precautionary






77. Tariq and Amal are saving more today because they want to make sure that their children will

inherit lots of money when they die. This is an example of the _____ motive for saving.

A. life-cycle

B. bequest

C. private

D. precautionary






78. Explanations for the high saving rate in Japan consistent with the life-cycle reason for saving

include:



C. the desire to leave resources to children who provide support and attention to parents in

their old age.







79. Explanations for the high saving rate in Japan consistent with the bequest reason for saving

include:



C. the desire to leave resources to children who provide support and attention to parents in

their old age.







80. The combination of a ____ saving rate and a ____ real interest rate will result in the largest

accumulation of wealth over time.

A. high; high

B. high; low

C. high; zero

D. low; high






81. To the extent that households are target savers, who save to reach a specific goal, an

increase in the interest rate _____ household saving and a decrease in the interest rate _____

household saving.

A. increases; decreases

B. decreases; increases

C. does not affect; increases

D. increases; does not affect






82. Empirical evidence indicates that higher real interest rates lead to _____ in savings.

A. modest increases

B. substantial increases

C. no change in

D. modest decreases


Blooms: Knowledge




83. Psychological factors that may influence the saving rate are ______ and _______.

A. the real interest rate; the demonstration effect

B. self control problems; the demonstration effect

C. capital gains; the real interest rate

D. the desire to leave a bequest; capital gains






84. The self-control hypothesis suggests that people:

A. base their spending decisions (and consequently their saving decisions) on spending

decisions of others.

B. want to save, but lack the discipline to refrain from consuming.

C. substantially decrease their saving when the real interest rate increases.







85. The demonstration effect suggests that people will save less when they

A. base their spending decisions (and consequently their saving decisions) on spending

decisions of others who spend more than they do.

B. base their saving decisions on their projections of income and spending needs over their

lifetime.

C. recognize that the real interest rate has increased.







86. Firms will invest in new equipment whenever:

A. the expected cost of the equipment exceeds the expected benefit.

B. the expected cost of the equipment is less than the expected benefit.

C. the expected cost of the equipment is greater than the value of the marginal product of the

equipment.

D. public saving is greater than private saving.




Learning Objective: 18-04 Discuss the reasons why firms choose to invest in capital rather than in financial assets.

Section: Investment and Capital Formation

87. The expected benefit of investment equals:

A. private saving.

B. the value of the marginal product of capital.

C. the real interest rate.

D. the price of the capital good.


Blooms: Knowledge




88. The builder of a new movie theater complex is trying to decide how many screens she wants.

Below are her estimates of the number of patrons the complex will attract each year,

depending on the number of screens available:

After paying the movie distributor and meeting all other non-interest expenses, the owner

expects to net $2.00 per ticket sold. Construction costs are $1,000,000 per screen. If the real

interest rate is 7% _____ screens should be built and if the real interest rate is 5% _____

screens should be built.

A. 1; 2

B. 2; 3

C. 3; 2

D. 4; 3


Blooms: Application




89. An entrepreneur is considering how many limousines to purchase when he starts up a

limousine service. Below are his estimates of the number of limousine rentals the service will

make during a year, depending on the number of limousines available.

After paying all non-interest expenses, the owner expects to net $10 per rental. Each

limousine costs $50,000. How many limousines should he purchase if the real interest rate is

4.5%? If the real interest rate is 5.5%.

A. 2; 0

B. 1; 2

C. 2; 1

D. 3; 2


Blooms: Application




90. The costs of investment depend on the ______ and the _______.

A. marginal product of capital; relative price of the firm's output



D. taxes levied on the revenue generated; relative price of the firm's output






91. The marginal product of new capital depends on _____ and _____.

A. productivity of capital; relative price of the firm's output



D. productivity of new capital; real interest rate






92. Investment is a(n) _____ that changes the _____ of capital.

A. flow; stock

B. stock; flow

C. asset; liability

D. liability; asset






93. The greater the flow of investment spending, the greater the increase in the stock of:

A. saving.

B. money.

C. income.

D. capital.






94. The flow of ________ changes the stock of _______.

A. money; income

B. investment; capital


D. capital; investment






95. The real rate of interest measures the ______ of capital investment.

A. value of the marginal product

B. opportunity cost

C. marginal benefit

D. relative price






96. The opportunity cost of capital investment is the:

A. value of the marginal product of capital.

B. value of the marginal product of labor.

C. real interest rate.

D. price of new capital goods.






97. The value of the marginal product of new capital increases when the:

A. price of new capital goods increases.

B. real interest rate increases.

C. the price of the good the firm produces decreases.

D. productivity of new capital increases.






98. Holding other factors constant, a decline in the price of new capital goods will:

A. increase national saving

B. decrease national saving

C. increase investment

D. decrease investment




Learning Objective: 18-05 Analyze financial markets using the tools of supply and demand.

Section: Saving, Investment, and Financial Markets

99. Holding other factors constant, a technological improvement that increases the marginal

product of capital will:










100. Holding other factors constant, a decrease in the tax rate on revenue generated by capital

will:










101. Holding other factors constant, a higher relative price of a firm's output will:










102. In an economy without international trade, investment must equal _____ saving.

A. national

B. private

C. public

D. life-cycle


Blooms: Knowledge




103. In the market for saving, the price is the:

A. relative price.

B. real interest rate.

C. nominal interest rate.

D. inflation rate.


Blooms: Knowledge




104. The real interest rate bringing the supply of saving equal to the demand for saving is an

example of the:

A. scarcity principle.

B. principle of comparative advantage.

C. equilibrium principle.

D. principle of increasing opportunity cost.


Blooms: Knowledge




105. The supply of saving equals desired _____ and the demand for saving equals desired _____.

A. investment; national saving

B. investment; public saving

C. national saving; investment

D. national saving; capital


Blooms: Knowledge




106. The supply and demand for saving are brought into equilibrium by adjustments of the ____

rate.

A. discount

B. nominal interest

C. real interest

D. dividend


Blooms: Knowledge




107. The introduction of new technologies ____ the real interest rate and ____ the equilibrium

quantity of national saving.






Blooms: Knowledge




108. An increase in the government's budget deficit ____ the real interest rate and ____ the

equilibrium quantity of national saving.










109. As the real interest rate increases, the quantity of saving supplied _____ and the quantity of











110. As the real interest rate decreases the quantity of saving supplied _____ and the quantity of











111. Holding other factors constant, if the government introduces a 5% investment tax credit under

which for every $100 a firm spends on new capital equipment it receives an extra $5 in tax

refunds from the government, then the real interest rate will ____ and the equilibrium quantity

of national saving and investment will _____.






Blooms: Application




112. Holding other factors constant, if a tax increase moves the government budget from deficit to

surplus, then the real interest rate will ___ and the equilibrium quantity of national saving and







Blooms: Application




113. Holding other factors constant, if new technology comes online that allows machines to

produce manufactured goods more quickly and with fewer defects, then the real interest rate

will _____ and the equilibrium quantity of national saving and investment will ____.






Blooms: Application




114. Holding other factors constant, if growing concerns about job security raise precautionary

saving, then the real interest rate will _____ and the equilibrium quantity of national saving and







Blooms: Application




115. Holding other factors constant, if a change in tax laws encourages people to save more for

retirement, then the real interest rate will _____ and the equilibrium quantity of saving and

investment will _____.






Blooms: Application




116. Holding other factors constant, if employers automatically enroll employees in retirement

savings programs in order to overcome psychological barriers to saving, then the real interest

rate will ________ and the equilibrium quantity of saving and investment will ________.






Blooms: Application




117. Holding other factors constant, if political instability increases the desire for precautionary

saving, then the real interest rate will _______ and the equilibrium quantity of saving and







Blooms: Application




118. Holding other factors constant, if the income tax is replaced with a consumption so that saving

is not taxed, then the real interest rate will ________ and the equilibrium quantity of saving and







Blooms: Application




119. Holding other factors constant, if new environmental regulations increase firms' cost of

operating capital, then the real interest rate will ____ and the equilibrium quantity of national

saving and investment will ____.






Blooms: Application




120. Crowding out is the tendency for increased government deficits to:

A. reduce investment spending.

B. increase investment spending.

C. reduce consumption spending.

D. increase consumption spending.






121. At the national level, higher saving rates lead to ______ and higher standards of living.


B. slower growth

C. greater investment

D. crowding out






122. At the household level higher saving rates lead to _____ and greater economic security.


B. greater wealth

C. less wealth

D. less current income







A. replace the income tax with a consumption tax.

B. increase the tax rate on capital gains.


D. reduce the size of down payments needed to buy a house.

AACSB: Reflective Thinking Skills

Blooms: Analysis





A. increase the income tax.

B. reduce the tax rate on capital gains and dividends.


D. increase job security.

AACSB: Reflective Thinking Skills

Blooms: Analysis




125. If the real interest rate on saving account increases from 3% to 5%, all other things equal,:

A. business investment spending for new capital will increase.

B. business investment spending for new capital will remain unchanged.

C. people will be less willing to save.

D. people will be more willing to save.


Blooms: Application




126. If net taxes paid by households increase:

A. private saving will decrease.

B. private saving will increase.

C. public saving will decrease.

D. transfer payments to households will decrease.






127. Taco Hut can purchase a delivery truck for $20,000 and it estimates it will generate a net

income (i.e., after-taxes and maintenance and operating costs) of $2,000 per year. Taco Hut

should:

A. purchase the truck only if the real interest rate is less than 2%.

B. not purchase the truck if the real interest rate is greater than 2%.

C. purchase the truck if the real interest rate is greater than 10%.

D. purchase the truck if the real interest rate is less than 10%.


Blooms: Application




128. The investment demand curve indicates that there is a(n):

A. positive relationship between the real interest rates and the level of investment spending,

all other things equal.

B. inverse relationship between the real interest rates and the level of investment spending, all

other things equal.

C. direct relationship between the real interest rates and the level of investment spending, all

other things equal.

D. inverse relationship between the determinants of investment and the level of investment

spending, holding interest rates constant.


Blooms: Knowledge




129. Mahjub's current income is $100 more per month than his current consumption needs. He

decides to use the $100 to reduce his credit card debt. As a result, his:

A. liabilities will decrease and his wealth will increase.

B. liabilities and his wealth will decrease.

C. assets will decrease and his wealth will increase.

D. assets and his wealth will increase.


Blooms: Application




130. During a conversation with her mother about her financial circumstances, Salma complained

that she could not afford to save because she wanted to maintain a lifestyle similar to that of

her friends. Her mother suggested that if she would save more now, she would not only have

more wealth, but she would also have a higher standard of living, than her friends in the future.

Her mother's argument was:

A. incorrect, because if she saved her standard of living would be lower than that of her

friends.

B. incorrect, and probably an attempt to confuse her daughter to get her to begin saving some

of her income.

C. correct, because of the power of compound interest her income would increase to a level

that would allow her to save and consume more.

D. correct, because the more saving, the higher the standard of living.


Blooms: Application




131. Private saving:

A. can be broken down into household saving and business saving.

B. can be broken down into transfers and household saving.

C. rises when net taxes increase.

D. falls when income rises.


Blooms: Knowledge




132. An increase in net taxes (i.e., taxes paid by the private sector to the government less transfer

payments and interest payments made by the government to the private sector) will:

A. increase private saving.

B. decrease public saving.

C. increase public saving.

D. reduce investment in new capital equipment.






133. Public saving is:

A. increased when the government budget deficit rises.

B. identical to the government budget surplus.

C. less important to national saving than private saving.

D. more important to national saving than private saving.


Blooms: Knowledge




134. Sanaa has $5,000 in a fixed deposit account paying 10% interest. It will mature in a few weeks

and, the bank told her that interest rates on fixed deposits were decreasing. She is thinking of

spending it on a new computer and software that she will use to start a bookkeeping service. If

she were to do so, she would have to quit her job where she makes $15,000 per year in after-

tax income. She has estimated that the bookkeeping service will earn a net income of $15,

250 after taxes, and maintenance and operating costs.

A. Since the interest rate is declining, Sanaa would be better off using the money to buy the

computer.

B. If the interest rate on the new CD is 5% or greater she should leave the money in the CD.

C. If the interest rate on the new CD is 2.5% or greater she should buy the computer.

D. If the interest rate on the new CD is 2% or less she should leave the money in the CD.


Blooms: Application




135. A decrease in the capital gains tax on income generated through investment in new capital

will:

A. shift the demand for investment curve to the left.

B. shift the demand for investment curve to the right.

C. shift the supply of saving curve to the left.

D. shift the supply of saving curve to the right.






136. The introduction of a new technology that raises the marginal product of new capital will:

A. decrease real interest rates and increase the equilibrium quantity of saving supplied and

demanded.

B. decrease real interest rates and the equilibrium quantity of saving supplied and demanded.

C. increase real interest rates and the equilibrium quantity of saving supplied and demanded.

D. increase real interest rates and decrease the equilibrium quantity of saving supplied and

demanded.






Chapter 18 Testbank Summary

Category # of Questions

AACSB: Analytical Skills 133

AACSB: Reflective Thinking Skills 2

Blooms: Analysis 2

Blooms: Application 40

Blooms: Knowledge 37

Blooms: Understanding 56

Frank - Chapter 18 137

Learning Objective: 18-01 Explain the relationship between saving and wealth.0 34

Learning Objective: 18-02 Recognize and work with the components of national saving. 31

Learning Objective: 18-03 Understand the reasons why people save. 19

Learning Objective: 18-

04 Discuss the reasons why firms choose to invest in capital rather than in financial assets.

12

Learning Objective: 18-05 Analyze financial markets using the tools of supply and demand. 39

Section: Investment and Capital Formation 12

Section: National Saving and Its Components 31

Section: Saving and Wealth 34

Section: Saving, Investment, and Financial Markets 39

Section: Why Do People Save? 19

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