Chapter 23 Financial Institutions And Financial Markets

Front 1

Capital is

Back 1

the tools, instruments, machines, buildings and other items that have been produced in the past and that are used today to produce goods and services

Front 2

Gross investment

Back 2

is the total amount spent on new capital

Front 3

The total amount spent on new capital is

Back 3

gross investment

Front 4

In January 2011, Tim's Gyms, Inc. owned machines valued at $1 million. During the year, the market value of the machines fell by 30 percent. During 2011, Tim spent $200,000 on new machines. During 2011, Tim's gross investment was

Back 4

$200,000 on new machines

Front 5

Net investment equals

Back 5

gross investment minus depreciation

Front 6

The increase in the value of capital is

Back 6

net investment

Front 7

Capital stock increases when

Back 7

net investment is positive

Front 8

If the economy's capital increases over time,

Back 8

net investment is positive

Front 9

If the economy's capital decreases over time,

Back 9

depreciation exceeds gross investment

Front 10

In January 2011, Tim's Gyms, Inc. owned machines valued at $1 million. During the year, the market value of the machines fell by 10 percent. During 2011, Tim spent $200,000 on new machines. During 2011, Tim's net investment was

Back 10

net investment = gross investment - depreciation = 200,000 - 100,000 = 100,000

Front 11

The Acme Stereo Company had a capital stock of $24 million at the beginning of the year. At the end of the year, the firm had a capital stock of $20 million. Thus its

Back 11

net investment was -$4 million for the year

Front 12

At the beginning of the year, Tom's Tubes had a capital stock of 5 tube-inflating machines. During the year, Tom scrapped 2 old machines and purchased 3 new machines. Tom's net investment for the year totaled

Back 12

1 machine

Front 13

At the beginning of the year, Tom's Tubes had a capital stock of 5 tube-inflating machines. During the year, Tom scrapped 2 old machines and purchased 3 new machines. Tom's gross investment for the year totaled

Back 13

3 machines

Front 14

At the beginning of the year, Tom's Tubes had capital of 5 tube-inflating machines. During the year, Tom scrapped 2 old machines and purchased 3 new machines. Tom's capital at the end of year was

Back 14

6 machines

Front 15

Which of the following is TRUE about saving?

Back 15

savings add to wealth

income left after paying taxes can either be consumed or saved

saving is the source of funds used to fiance investment

saving supplies fund in loan markets, bond s markets, and stock markets

Front 16

At the beginning of the year, your wealth is $10,000. During the year, you have an income of $90,000 and you spend $80,000 on consumption goods and services. You pay no taxes. Your wealth at the end of the year is

Back 16

$20,000

Front 17

At the beginning of the year, your wealth is $10,000. During the year, you have an income of $80,000 and you spend $90,000 on consumption goods and services. You pay no taxes. Your wealth at the end of the year is

Back 17

0

Front 18

In 2011, Tim's Gyms needs to finance the building of a new gym. Suppose Tim secures this financing from a bank, and the bank receives ownership if Tim fails to make payments. This type of funding is

Back 18

a mortgage obtained in the loan market

Front 19

The funds used to buy physical capital are

Back 19

financial capital

Front 20

This year Pizza Hut spent $1.3 billion on new capital in its stores. Depreciation during the year was $300 million. Pizza Hut's gross investment was ________ and its net investment was ________.

Back 20

1.3 billion; 1 billion

Front 21

If a bank's net worth is negative, then the bank is

Back 21

insolvent

Front 22

In which market would you find mortgage-backed securities?

Back 22

bond market

Front 23

Elena owns a Canada Savings Bond with a price of $5,000, which pays $500 per year. The price of the bond rises in the bond market to $7,500. What is the new interest rate on the bond?

Back 23

Interest rate on asset = interest received / price of asset x 100

= 500/7500 x 100 = 6.67%

Front 24

Suppose that a bond promises to pay its holder $100 a year forever. If the price of the bond increases from $1,000 to $1,250, then the interest rate on the bond ________.

Back 24

100/1250 x 100 = 8%

100/1000 x 100 = 10%

falls from 10 percent a year to 8 percent a year

Front 25

Suppose a bond promises to pay its holder $100 a year forever. The interest rate on the bond rises from 4 percent to 5 percent. The price of the bond ________.

Back 25

0.04 = 100/price of asset = 2500
0.05 = 100/price of asset = 2000

falls from $2500 to $2000

Front 26

The key Canadian financial institutions include all of the following except ________.

Back 26

ATMs

Front 27

Choose the statement that is correct about trust and loan companies.

Back 27

The largest trust and loan companies are owned by banks

Trust and loan companies accept deposits and make personal loans and mortgage loans

Trust and loan companies administer estates

Trust and loan companies administer trusts and pension plans

(FALSE statement) Trust and loan companies hold more than 70 percent of total assets of the Canadian Financial services sector

Front 28

Choose the statement that is correct.

Back 28

A financial institution can be solvent but illiquid

A firm is illiquid if it has made long-term loans with borrowed funds and is faced with a sudden demand to repay more of what is has borrowed than its available cash

Insolvency and illiquidity were at the core of a global financial meltdown in 2007-2008

A financial institution's net worth is the market value of what it has lent minus the market value of what it has borrowed

Front 29

Investment is financed by which of the following?

Back 29

Household savings and Borrowing from the rest of the world

Front 30

National saving equals

Back 30

private savings + government saving

Front 31

If national saving equals $100,000, net taxes equal $100,000 and government expenditure equals $25,000, what is private saving?

Back 31

National savings = private savings + (Taxes - Government expenditure) + foreign borrowing

100,000 = private savings + (100,000 - 25,000) + 0

private savings = $25,000

Front 32

Suppose Canada spends more on foreign goods and services than foreigners spend on our goods and services. Then

Back 32

Canada must borrow an amount equal to imports minus exports

Front 33

In 2011, Country A has net taxes of $30 million and government expenditures of $35 million. Private saving in Country A is $5 million and consumption expenditure is $80 million. The government of Country A is running a budget ________ and national saving is ________.

Back 33

national savings = private savings + (taxes - government expenses) + foreign borrow

national savings = $5 mill + (30 mill - 35 mill) = 0

deficit; 0

Front 34

Refer to Table 23.2.1. Private saving is

Back 34

Y = C + I + G + M - X

Y = C + S + T

equals

I = S + (T-G) + (M - X)

S = I - (T-G) - (M-X)

S = 20 - (5) - (-10)

S = 25 million

Front 35

Refer to Table 23.2.1. Government saving is

Back 35

Government Savings = (T - G) = 35 mill - 30 mill = 5 mill

Front 36

Approximately, the real interest rate ________ the inflation rate ________ the nominal interest rate.

Back 36

plus; equals

real interest rate plus the inflation rate = the nominal interest rate

Front 37

The real interest rate

Back 37

is approximately equal to the nominal rate minus the inflation rate

Front 38

Suppose that you took out a $1,000 loan in January and had to pay $75 in annual interest. During the year, inflation was 6 percent. Which of the following statements is correct?

Back 38

75 / 1000 x 100 = 7.5% Nominal interest rate
real interest = 7.5% - 6% = 1.5%

The nominal interest rate is 7.5 percent and the real interest rate is 1.5 percent.

Front 39

If the nominal interest rate is 11 percent and the inflation rate is 9 percent, then the real interest rate is approximately

Back 39

real interest rate = nominal interest rate - inflation = 11 - 9 = 2 percent

Front 40

A firm's decision to invest in a project is based on the

Back 40

real interest rate and the expected profit

Front 41

Suppose a firm has an investment project which will cost $200,000 and result in $30,000 profit. The firm will not undertake the project if the interest rate is ________.

Back 41

$30,000/$200,000 x 100 = 15%

greater than 15%

Front 42

As the ________ interest rate increases, the quantity of loanable funds demanded ________.

Back 42

real; decreases

Front 43

The demand for loanable funds is the relationship between the quantity of loanable funds demanded and the ________ other things remaining the same.

Back 43

real interest rate

Front 44

The demand for loanable funds curve

Back 44

has a negative slope

Front 45

As the ________ interest rate rises ________.

Back 45

real; a movement occurs up along along the demand for loanable funds curve

Front 46

If the real interest rate rises from 3 percent to 5 percent,

Back 46

there is movement up along the demand for loanable funds curve

Front 47

A rise in the real interest rate

Back 47

creates a movement up along the demand for loanable funds curve

Front 48

A fall in the real interest rate

Back 48

creates a movement down along the demand for loanable funds curve

Front 49

The quantity of loanable funds demanded increases when

Back 49

the real interest rate falls

Front 50

A decrease in the real interest rate leads to a ________ the demand for loanable funds curve, and a decrease in expected profit leads to a ________ the demand for loanable funds curve.

Back 50

movement down along; leftward shift of

Front 51

A decrease in the demand for loanable funds occurs when

Back 51

expected profit decreases

Front 52

During a recession, firms decrease their profit expectations. As a result, there is a ________ shift of the ________ loanable funds curve.

Back 52

leftward; demand for

Front 53

the economy is at point A on the initial demand for loanable funds curve DLF0. What happens if the real interest rate rises?

Back 53

There is a movement to a point such as B on the demand for loanable funds curve DLF0

Front 54

a decrease in the real interest rate will result in a movement from point E to

Back 54

point G

Front 55

an increase in expected profit will result in a movement from point E to

Back 55

point F

Front 56

a decrease in expected profit will result in a movement from point E to

Back 56

point H

Front 57

if the real interest rate is 6 percent, the quantity of loanable funds demanded is

Back 57

450 billion

Front 58

if the real interest rate is constant at 6 percent and expected profit falls, the quantity of loanable funds demanded will be

Back 58

less than $450 billion

Front 59

if the real interest rate is constant at 6 percent and and expected profit rises, the amount of loanable funds demanded will be

Back 59

greater than $450 billion

Front 60

All of the following are sources of loanable funds EXCEPT

Back 60

All of

private saving

government budget surplus

international borrowing

except

business investment

Front 61

Which of the following influences household saving?

I. The real interest rate.

II. Disposable income.

III. Expected future income.

Back 61

the real interest rate

disposable income

expected future income

Front 62

If households' disposable income decreases, then

Back 62

household's savings will decrease

the supply of loanable funds decreases

Front 63

Households will choose to save more if

Back 63

expected future income decreases

current disposable income increases

Front 64

Which of the following is correct?

Back 64

As disposable income decreases, saving decreases

Front 65

________ increases households' saving.

Back 65

A tax cut that increases disposable disposable income

Front 66

The greater a household's ________ the less is its saving.

Back 66

wealth

Front 67

As the ________ rises, the quantity of loanable funds supplied ________ other things remaining the same.

Back 67

real interest rate;; increases

Front 68

The supply of loanable funds is the relationship between the quantity loanable funds supplied and ________ other things remaining the same.

Back 68

real interest rate

Front 69

+The supply of loanable funds curve

Back 69

has a positive slope

Front 70

Changes in all of the following shift the supply curve of loanable funds EXCEPT

Back 70

the real interest rate

Front 71

Which of the following will shift the supply of loanable funds curve leftward?

Back 71

a decrease in expected future income

Front 72

An increase in ________ will shift the supply of loanable funds curve ________.

Back 72

wealth; leftward

Front 73

As a result of a recession, the default risk increases. How does this change affect the loanable funds market?

Back 73

there is a leftward shift of the supply of loanable funds curve

Front 74

When the real interest rate increases,

Back 74

there is a movement up along the supply of loanable funds curve.

Front 75

Which of the following is true?

I. As the real interest rate increases, people increase the quantity they save.

II. The supply of loanable funds curve is downward sloping.

III. As disposable income increases, the supply of loanable funds curve becomes steeper.

Back 75

As the interest rate increases, people increase the quantity they save

Front 76

A decrease in disposable income ________.

Back 76

shifts the supply of loanable curve leftward

Front 77

If households believe they will experience higher income in the near future, there is a

Back 77

leftward shift of the supply of loanable funds curve

Front 78

the economy is at point A on the supply of loanable funds curve SLF0. What happens if disposable income decreases?

Back 78

The supply of loanable funds curve shifts leftward to a curve such as SLF1.

Front 79

the economy is at point A on the supply of loanable funds curve SLF0. What happens if the real interest rate rises?

Back 79

There is a movement to a point such as B on the supply of loanable funds curve SLF0

Front 80

In the market for loanable funds, as the real interest rate rises the ________ and the ________.

Back 80

quantity of loanable funds supplied increases; the quantity of loanable funds demanded decreases

Front 81

The equilibrium real interest rate is determined by the

Back 81

demand for loanable funds curve and the supply of loanable funds curve

Front 82

Suppose the current real interest rate is 4 percent and the equilibrium real interest rate is 3 percent. Choose the correct statement.

Back 82

There is a surplus of loanable funds

Front 83

vIf the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded, then ________.

Back 83

the real interest rate will fall

Front 84

If the real interest rate is above the equilibrium real interest rate,

Back 84

lenders are unable to find borrowers willing to borrow all of the available funds and the real interest rate falls

Front 85

If the real interest rate is below the equilibrium real interest rate,

Back 85

borrowers are unable to borrow all of the funds they want to borrow and the real interest rate rises

Front 86

If the real interest rate is below the equilibrium real interest rate,

Back 86

a shortage of loanable funds exists and the real interest rate rises

Front 87

In the market for loanable funds, if the interest rate is above the equilibrium level

Back 87

a surplus of loanable funds exists

Front 88

An increase in disposable income shifts the supply of loanable funds curve

Back 88

rightward and decreases the real interest rate

Front 89

Technological progress that increases expected profit shifts the demand for loanable funds curve

Back 89

rightward and increases the real interest rate

Front 90

What is the effect of a decrease in expected profit?

Back 90

The demand curve for loanable funds shifts leftward and the real interest rate falls

Front 91

If disposable income increases, people ________ saving, the supply of loanable funds will ________ and the real interest rate will ________.

Back 91

increases; increase; fall

Front 92

Suppose the market for loanable funds is in equilibrium. If expected profit falls, the equilibrium real interest rate ________ and the quantity of loanable funds ________.

Back 92

falls; decrease

Front 93

An expansion that increases disposable income and expected profit

Back 93

shift of the supply of loanable funds rightwards to curve SLF1 and shifts the demand for loanable curve rightwards to curve DLF1.

Front 94

An increase in the expected profit

Back 94

shifts the demand for loanable funds rightward to DLF1 and does not shift the supply of loanable funds curve

Front 95

Which of the following is false?

Back 95

Y = C + I + G + X - M

Front 96

In Canada's economy, investment is financed by

Back 96

I = S + (T - G) + (M - X)

Front 97

Investment will be higher if

Back 97

national savings is higher

Front 98

Southton has investment of $100, private saving of $90, net taxes of $25, government expenditure of $30, exports of $25 and imports of $10. What is national saving?

Back 98

National savings = private savings + (T - G)
= 90 + (25-30) = $85

Front 99

When the inflation rate is zero, the ________.

Back 99

real interest rate equals the nominal interest rate

Front 100

Which of the following explains why the demand for loanable funds is negatively related to the real interest rate?

Back 100

A lower real interest rate makes more investment projects profitable

Front 101

If net taxes exceed government expenditures, the government sector has a budget ________ and government saving is ________.

Back 101

surplus; positive

Front 102

When a government has a budget surplus, the surplus

Back 102

helps finance investment

Front 103

When government saving is negative,

Back 103

the real interest rate rises

Front 104

The tendency for a government budget deficit to decrease investment is called the

Back 104

crowding-out effect

Front 105

The crowding-out effect refers to

Back 105

a government deficit crowding out investment

Front 106

Crowding out leads to all of the following EXCEPT

Back 106

All of the following:

a higher real interest rate

a decrease in investment

a smaller quantity of capital in the future

Except:

a decrease in private savingd

Front 107

If the government begins to run a larger budget deficit, the demand for loanable funds ________ and the real interest rate ________.

Back 107

increases, rises

Front 108

A government budget deficit ________ the demand for loanable funds and ________ investment.

Back 108

increases; decreases

Front 109

A government budget deficit ________ the demand for loanable funds, ________ the real interest rate, and ________ investment.

Back 109

increases; increases; crowds out

Front 110

If China's government increases its budget surplus, there is ________ in the supply of loanable funds, private saving ________ and investment ________.

Back 110

increase; decrease; increases

Front 111

The tendency for private saving to increase in response to growing government deficits is known as the

Back 111

Ricardo-Barro effect

Front 112

According to the Ricardo-Barro effect,

Back 112

households increase personal saving when government run budget deficits

Front 113

The Ricardo-Barro effect of a government budget deficit is

Back 113

an increase in private savings

Front 114

The Ricardo-Barro effect holds that

Back 114

a government deficit has no effect on the real interest rate

Front 115

According to the Ricardo-Barro effect, government deficits

Back 115

lead to simultaneous increases in private saving and have no effect on the equilibrium of real interest and investment

Front 116

According to the Ricardo-Barro effect,

Back 116

the government has no effect on the real interest rate state

Front 117

If the Ricardo-Barro effect occurs, ________ in private saving finances the government budget deficit and the real interest rate ________.

Back 117

increase; remains the same

Front 118

If the Ricardo-Barro effect occurs, a government budget deficit raises the equilibrium real interest rate by ________ and decreases the equilibrium quantity of investment by ________ if the Ricardo-Barro effect is absent.

Back 118

less; less than

Front 119

A decrease in the government budget deficit decreases the ________ loanable funds and an increase in the government budget surplus increases the ________ loanable funds.

Back 119

demand for; supply of

Front 120

The government budget is balanced. If the government moves from a balanced budget to a surplus of $20 billion, the new equilibrium has a real interest rate of ________ percent and quantity of loanable funds traded equal to ________.

Back 120

Higher disposable income shifts SLF rightward, real interest rate falls, quantity of loanable funds increases

5.5%; 110 billion

Front 121

In the market for loanable funds, a larger government surplus leads to

Back 121

a lower real interest rate, and increased investment

Front 122

Choose the statement that is correct.

Back 122

According to the Ricardo-Barro effect, taxpayers are rational people who know that a budget deficit today means that future taxes will be higher and future disposable income will be smaller

According to the ricardo-barro effect, a budget deficit has no effect on either the real interest rate or investment

According to the Ricaro-Barro effect, the quantity of loanable funds demended increases when a government budget deficit occurs, and private saving and the private supply of loanable funds increases to match the quantity of loanable funds demanded

Front 123

A government budget surplus occurs, which ________ loanable funds. The real interest rate ________, household saving ________, and investment ________.

Back 123

increases the demand for; falls; increases

Front 124

The quantity of loanable funds demanded increases by $1 trillion at each real interest rate and the quantity of loanable funds supplied increases by $2 trillion at each real interest rate. If the government wants investment to be $9 trillion, it must ________ its budget balance by ________ trillion.

Back 124

increase; $1

Front 125

f the Ricardo-Barro effect occurs, and if the government budget deficit is $2.0 trillion, the real interest rate is ________ percent a year and the quantity of investment is ________ trillion.

Back 125

7.0; $6.0 (unchanged)

Front 126

If the government budget deficit is $1.0 trillion, the real interest rate is ________ percent a year, the quantity of investment is ________ trillion, and the quantity of private saving is ________ trillion.

Back 126

5; 6.5 trillion; 7.5$

Front 127

If the government budget surplus is $2.0 trillion, the real interest rate is ________ percent a year, the quantity of investment is ________ trillion, and the quantity of private saving is ________ trillion.

Back 127

6%;7.5%;5.5%

Front 128

The government of Greece is running a large budget deficit. With no Ricardo-Barro effect, which of the following events will occur?

I. The supply curve of loanable funds will shift leftward.

II. A higher real interest rate crowds out investment.

III. Saving increases.

Back 128

The supply curve of loanable funds will shift leftward

A higher real interenet rate crowds out investment

Front 129

If we import more than we export from the rest of the world we

Back 129

are a net borrower of funds from the rest of the world

Front 130

Real interest rates around the world tend to

Back 130

be equal after adjusting for differences in risk because financial capital seeks the highest possible return

Front 131

The real interest rate is ________ in Canada compared to Zimbabwe because ________.

Back 131

lower; there is a lower risk premium in canada

Front 132

A small country is a net foreign borrower. Its real interest rate without foreign borrowing is ________ the world real interest rate.

Back 132

higher than

Front 133

A very small country is a net foreign borrower. Its supply of loanable funds increases but it still remains a net foreign borrower. As a result, the equilibrium quantity of loanable funds used in the country ________ and the country's foreign borrowing ________.

Back 133

does not change; decreases

Front 134

A very small country is a net foreign borrower and its demand for loanable funds increases. As a result, the equilibrium quantity of loanable funds used in the country ________ and the country's foreign borrowing ________.

Back 134

increases; increases

Front 135

A very small country is a net foreign lender and its supply of loanable funds increases. As a result, the equilibrium quantity of loanable funds used in the country ________ and the country's foreign lending ________.

Back 135

does not change; increases

Front 136

If the world real interest rate falls, then a country that is a net foreign lender

Back 136

decreases the amount of its lending

Front 137

Loanable funds flow among countries because ________.

Back 137

funds flow into country with the highest real interest rate and out of the country in which the the interest rate is lowest

Front 138

In an individual economy that is integrated into the global market, the demand for loanable funds is determined by the ________ demand and the supply of loanable funds is determined by the ________ supply.

Back 138

country's; world's

Front 139

If a country has a shortage of loanable funds at the world real interest rate ________.

Back 139

world suppliers of loanable funds move funds to this country

Front 140

An increase in the government budget deficit ________. If the country is an international borrower, the government budget deficit ________. If the country is an international lender, the government budget deficit ________.

Back 140

increases the country's demand for loanable funds; increases foreign borrowing; decreases foreign lending

Front 141

A country's exports are $490 billion and its imports are $529 billion. Choose the correct statement.

I. The country is a net foreign borrower.

II. The Ricardo-Barro effect holds in this country.

III. This country does not have an equilibrium in its loanable funds market.

Back 141

The country is a net foreign borrower

Front 142

A country's imports are $490 billion and its exports are $529 billion. Choose the correct statement.

I. The country is a net foreign borrower.

II. The Ricardo-Barro effect holds in this country.

III. This country does not have an equilibrium in its loanable funds market.

Back 142

none of the statements are true