20 Consider the equation %DM + %DV » %DP + %DY. If the velocity of money does not change (%DV = 0), and the change in real GDP exactly keeps pace with the change in the money supply (%DM = %DY), what will happen to the price level (P)?

A It will go up, %DP > 0.

B It will go down, %DP < 0.

C It will stay the same, %DP = 0.

D It will equal the sum %DM + %DY.

E It will drop out of the equation.

21 The real interest rate in 2012 was

E a negative number.

22 Assume inflation is occurring in a nation; the implication(s)

A are that both real and nominal interest rates are positive.

B are that both real and nominal interest rates are negative.

C is that the nominal interest rate exceeds the real interest rate.

D is that the real rate of interest exceeds the nominal rate of interest.

E is that time preferences in the nation have risen.

23 If household wealth rises and capital becomes less productive, we would correctly say that

A the new equilibrium quantity of loanable funds would decrease, but we would be unable to tell if the new equilibrium interest rate would be higher or lower than the original.

B the new equilibrium quantity of loanable funds would increase, but we would be unable to tell if the new equilibrium interest rate would be higher or lower than the original.

C the new equilibrium quantity of loanable funds would be indeterminate, but we would be certain the new equilibrium interest rate would be higher than the original.

D the new equilibrium quantity of loanable funds would be indeterminate, but we would be certain the new equilibrium interest rate would be less than the original.

E based on this information and because both changes would affect the demand for loanable funds in the opposite way, we would be unable to say anything about the relationship of the new equilibrium interest rate and quantity to the original interest rate and quantity.

24 If foreign entities save more and businesses become more optimistic about the future, we would correctly say that

A the new equilibrium quantity of loanable funds would decrease, but we would be unable to tell if the new equilibrium interest rate would be higher or lower than the original.

B the new equilibrium quantity of loanable funds would increase, but we would be unable to tell if the new equilibrium interest rate would be higher or lower than the original.

C the new equilibrium quantity of loanable funds would be indeterminate, but we would be certain the new equilibrium interest rate would be higher than the original.

D the new equilibrium quantity of loanable funds would be indeterminate, but we would be certain the new equilibrium interest rate would be less than the original.

E based on this information and because both changes would affect the demand for loanable funds in the opposite way, we would be unable to say anything about the relationship of the new equilibrium interest rate and quantity to the original interest rate and quantity.

The timeline of production indicates that

A supply creates its own investment.

B first production occurs, then profit represents a residual, and then this residual is saved.

C firms first invest (which is borrowing), then they produce, and then the revenue they receive is used to pay resource suppliers and lenders.

D firms first save (which is lending), then they produce, and then the revenue they receive is used to lend even more.

E real interest rates rise faster than nominal interest rates because production occurs before income is received by the firm.

Two nations are located next to one another. In Nation A, people are very thrifty and spend much

less than their incomes; moreover, Nation A’s government runs a balanced budget every year. In Nation B, people spend all of their incomes, but their government runs consistent deficits. Thus,

A Nation A’s extra savings would increase the supply of loanable funds to Nation B.

B Nation B’s government deficit would be a supply of loanable funds to Nation B.

C Nation A’s extra savings would increase the demand for loanable funds in Nation B.

D Nation B would instantly default on all of its debt obligations.

E Nation A’s extra savings would decrease the supply of loanable funds to Nation B.

When people withdraw funds from their savings, economists call this

A irrational.

B dissaving.

C disspending.

D consumption smoothing.

E the wealth effect.

The savings rate is

A the difference between gross income and disposable income.

B the ratio of personal income to taxes paid on income.

C the percent reduction in taxes due to permitted deductions.

D personal savings as a percentage of disposable income.

E cash savings as a percentage of total net worth.

Typically a college degree is “worth it,” but it requires

A high time preferences.

B low time preferences.

C smoothed consumption.

D variable correlated consumption.

E the supply of loanable funds to be large.

Assume an epidemic hits a nation hard. As a result, people now have lower life expectancies. The most likely result would be

A a higher supply of loanable funds.

B a higher demand for loanable funds.

C a lower supply of loanable funds.

D higher productivity of capital.

E a decrease in equilibrium interest rates.

Higher education

A will generally result in higher lifetime earnings, ceteris paribus (all else equal).

B is not generally worth the costs.

C will generally result in lower lifetime earnings, ceteris paribus.

D is worth the additional expense for bachelor’s degrees and associate’s degrees but not for master’s degrees and higher.

E is only worth the additional expense for professional degrees such as law and medical degrees.

Every ________ requires a ________.

A savings dollar; foreign investment dollar

B investment dollar; savings dollar

C dollar of loanable funds; dollar of wages earned

D dollar of government borrowing; dollar of foreign borrowing

E dollar of exports; dollar of imports

Which of the following reflects an accurate economic chain of events?

A Investment finances savings, which causes the economy to shrink.

B Savings finances investment, which allows the economy to grow from a larger capital stock.

C Savings finances future consumption, which allows future production to increase from a larger capital stock.

D Investment finances future consumption, which allows incomes—and thus savings—to grow.

E Higher interest rates increase savings, which causes consumption smoothing.

Direct finance occurs when

A savers go directly to borrowers for funds.

B borrowers deposit funds into banks, which then loan these funds to savers.

C savers deposit funds into banks, which then loan these funds to borrowers.

D borrowers go directly to savers for funds.

E banks get involved with financing.

The main argument for the Troubled Asset Relief Program implemented by the U.S. government during the financial crisis of 2007-2008 was that

A without large financial intermediaries, future GDP would collapse.

B the government had an obligation to firms affected by the financial crisis.

C the funds would go to those citizens who needed help the most.

D government policies were responsible for the crisis in the first place.

E the cost of the program was relatively small.

Why do corporations find high bond ratings desirable?

A Higher interest rates on the bonds mean higher corporate profits.

B Higher ratings improve a company’s image with consumers.

C Higher ratings mean lowered corporate operating costs.

D Firms can sell more bonds when they are highly rated.

E Bonds with higher ratings are less likely to have to be repaid.

Markets in which securities are traded after their first sale are known as ________ markets.

A minor

B inferior

C alternate

D primary

E secondary

Treasury securities

A are first bought and sold in secondary markets.

B are first sold through auctions to large financial firms.

C are only available to domestic buyers.

D can never default.

E are riskier than most other investment options.