For a borrower, an increase in the real interest rate will lead to

For a borrower, an increase in the real interest rate will lead to 

(a) higher current consumption and less borrowing.
(b) higher current consumption and less saving.
(c) lower current consumption and less borrowing.
(d) lower current consumption and less saving.




Answer: C

The substitution effect of a decrease in real interest rates is to cause a consumer to

The substitution effect of a decrease in real interest rates is to cause a consumer to 

(a) increase future consumption and decrease current consumption.
(b) decrease future consumption and increase current consumption.
(c) increase current consumption and increase saving.
(d) decrease current consumption and increase saving.

Answer: B

If Claudette gets a permanent increase in her income of $1000 per year, she saves an extra $200 this year and consumes an extra $800 this year. If the increase in income had been temporary instead of permanent, she would have saved _____ of the extra income.

If Claudette gets a permanent increase in her income of $1000 per year, she saves an extra $200 this year and consumes an extra $800 this year. If the increase in income had been temporary instead of permanent, she would have saved _____ of the extra income. 

(a) More than $200
(b) Less than $200
(c) Exactly $200
(d) None




Answer: B

If Claudette gets a permanent increase in her income of $1000 per year, she saves an extra $200 this year and consumes an extra $800 this year. If the increase in income had been temporary instead of permanent, she would have saved _____ of the extra income.

If Claudette gets a permanent increase in her income of $1000 per year, she saves an extra $200 this year and consumes an extra $800 this year. If the increase in income had been temporary instead of permanent, she would have saved _____ of the extra income. 

(a) More than $200
(b) Less than $200
(c) Exactly $200
(d) None




Answer: A

A curve that connects all the consumption combinations that yield the same level of utility is known as

A curve that connects all the consumption combinations that yield the same level of utility is known as 

(a) an isoquant.
(b) a yield curve.
(c) a budget line.
(d) an indifference curve.




Answer: D

Rachel earns nothing during her learning period, 1100 during her working period, and nothing during her retirement period. She has initial assets of 300. The real interest rate is zero. Rachel is not allowed to borrow by the banks. Whenever possible,Rachel wants to smooth consumption between periods. How much will she save during her working period?

Rachel earns nothing during her learning period, 1100 during her working period, and nothing during her retirement period. She has initial assets of 300. The real interest rate is zero. Rachel is not allowed to borrow by the banks. Whenever possible,Rachel wants to smooth consumption between periods. How much will she save during her working period? 

(a) 400
(b) 550
(c) 700
(d) 950



Answer: B

David consumes 200 in the current period and 330 in the future period. The real interest rate is 10% per period. David's present value of lifetime consumption is

David consumes 200 in the current period and 330 in the future period. The real interest rate is 10% per period. David's present value of lifetime consumption is 

(a) 500.
(b) 530.
(c) 550.
(d) 563.

Answer: A

A temporary supply shock, such as a drought, would

A temporary supply shock, such as a drought, would 

(a) increase the marginal product of capital and increase desired investment.
(b) decrease the marginal product of capital and decrease desired investment.
(c) have little or no effect on desired investment.
(d) decrease both the marginal product of capital and the marginal product of labor in the long-term future.

Answer: C

An invention that raises the future marginal product of capital would cause an increase in desired investment, which would cause the investment curve to shift to the ________ and would cause the real interest rate to ________.

An invention that raises the future marginal product of capital would cause an increase in desired investment, which would cause the investment curve to shift to the ________ and would cause the real interest rate to ________. 

(a) right; increase
(b) right; decrease
(c) left; increase
(d) left; decrease



Answer: A

If consumers foresee future taxes completely, a reduction in taxes this year that is accompanied by an offsetting increase in future taxes would cause

If consumers foresee future taxes completely, a reduction in taxes this year that is accompanied by an offsetting increase in future taxes would cause 

(a) a rightward shift in the saving curve and a rightward shift in the investment curve.
(b) a shift in neither the saving nor the investment curve.
(c) a leftward shift in the saving curve,but no shift in the investment curve.
(d) no shift in the saving curve, but a rightward shift in the investment curve.

Answer: B

A temporary decrease in government purchases would cause

A temporary decrease in government purchases would cause 

(a) a rightward shift in the saving curve and a leftward shift in the investment curve.
(b) a rightward shift in the saving curve and a rightward shift in the investment curve.
(c) a rightward shift in the saving curve,but no shift in the investment curve.
(d) no shift in the saving curve, but a leftward shift in the investment curve.




Answer: C

The saving-investment diagram shows that a higher real interest rate due to a leftward shift of the saving curve

The saving-investment diagram shows that a higher real interest rate due to a leftward shift of the saving curve 

(a) raises the profitability of investment for firms.
(b) causes the amount of firms'investment to increase.
(c) increases the total amount of saving because of the increase in the real interest rate.
(d) causes the total amounts of saving and investment to fall.




Answer: D

An increase in the expected real interest rate tends to

An increase in the expected real interest rate tends to 

(a) raise desired savings only.
(b) raise desired investment only.
(c) raise both desired savings and desired investment.
(d) raise desired savings, but lower desired investment.



Answer: D

Any change in the economy that raises desired national saving for a given value of the real interest rate will shift the desired national saving curve to

Any change in the economy that raises desired national saving for a given value of the real interest rate will shift the desired national saving curve to 

(a) the right and increase the real interest rate.
(b) the right and decrease the real interest rate.
(c) the left and increase the real interest rate.
(d) the left and decrease the real interest rate.



Answer: B

An economy has government purchases of 1000. Desired national saving and desired investment are given by

An economy has government purchases of 1000. Desired national saving and desired investment are given by 

S
d
=200 +5000r +0.10Y- 0.20G
I
d
=1000 - 4000r
When the full-employment level of output equals 5000, then the real interest rate that clears the
goods market will be


(a) 1.11%.
(b) 5.56%.
(c) 16.67%.
(d) 21.11%.




Answer: B

An economy has full-employment output of 5000. Government Purchases are 1000. Desired consumption and desired investment are given by

An economy has full-employment output of 5000. Government Purchases are 1000. Desired consumption and desired investment are given by 

C
d
=3000 - 2000r +0.10Y
I
d
=1000 - 4000r
where Yis output and ris the real interest rate. The real interest rate that clears the goods market is
equal to

(a) 1.25%.
(b) 2.50%.
(c) 8.33%.
(d) 25.00%.




Answer: C

When desired national saving equals desired national investment, what market is in equilibrium?

When desired national saving equals desired national investment, what market is in equilibrium? 

(a) The goods market
(b) The money market
(c) The foreign exchange market
(d) The stock market



Answer: A

Your firm has capital stock of $10 million and a depreciation rate of 15%. Gross investment is $3 million. How much is net investment?

Your firm has capital stock of $10 million and a depreciation rate of 15%. Gross investment is $3 million. How much is net investment? 

(a) $1.5 million
(b) $2.0 million
(c) $2.5 million
(d) $3.5 million




Answer: B

Your firm has capital stock of $10 million and a depreciation rate of 15%. Gross investment is $3 million. How much is net investment?

Your firm has capital stock of $10 million and a depreciation rate of 15%. Gross investment is $3 million. How much is net investment? 

(a) $1.5 million
(b) $2.0 million
(c) $2.5 million
(d) $3.5 million



Answer: A

In 2003, your firm's capital stock equaled $10 million, and in 2004 it equaled $15 million. The average depreciation rate on your capital stock was 20%. Net investment in 2004 equaled

In 2003, your firm's capital stock equaled $10 million, and in 2004 it equaled $15 million. The average depreciation rate on your capital stock was 20%. Net investment in 2004 equaled 

(a) $3 million.
(b) $4 million.
(c) $5 million.
(d) $7 million.




Answer: C