By international standards, the household saving rate of the United States:

59. Private saving is positive when:

A. there is a government budget surplus.

B. there is a government budget deficit.

C. the government's budget is balanced.

D. after­tax income of households and businesses is greater than consumption expenditures. This is the definition of "private saving."

60. When government runs a budget deficit, it makes up the difference by: A. issuing government bonds.

B. paying down outstanding debt.

C. increasing transfer payments.

D. increasing public saving.

Like a household, when government spends more than it takes in it must borrow to make up the difference.

61. 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.

When the government runs a budget surplus, it can reduce taxes, increase transfer payments, or pay down outstanding debt. It usually does the latter.

64. Which of the following contributed to the turn­around in the U.S. government budget from a surplus in the early 2000s to record deficits by the end of the decade? A. An increase in household saving.

B. An increase in business saving.

C. An increase in tax revenues because of a recession.

D. An increase in government spending on homeland security and wars.

The U.S. government budget was beset by international problems in the early 2000s, which caused it to spend much on military and defense activities. Assuming no other changes, any increase in government purchases or decreases in net taxes will reduce or reverse a government surplus.

65.

Based on the following information, what is the amount of public saving?

A. +3,700

B. +2,500

C. +200 D. ­300

Federal government ran a surplus of 500 and state and local governments ran a deficit of 300. Net government flow had a surplus of 200.

Private saving equals ____; public saving equals ______; national saving equals ____. Suppose the following information describes the economy:

A. 100; 200; 100

B. 100; 100; 200

C. 200; 100; 300 D. 200; 100; 500

Private saving is income (2,000) minus consumption (1,500) minus net taxes (400), which equals 100. Public saving is net taxes (400) minus government spending (300), which equals 100. National saving is private saving plus public saving.

67. Private saving equals ____; public saving equals ______; national saving equals ____. Suppose the following information describes the economy:

A. 800; 200; 600

B. 800; 200; 1,000

C. 1,000; 800; 1,000 D. 1,500; 700; 2,700

National income is consumption (8,000) plus investment (1,000) plus government purchases (1,000), which equals 10,000. Private saving is national income (10,000) minus consumption (8,000) minus net taxes (1,200), which equals 800. Public saving is net taxes (1,200) minus government spending (1,000), which equals 200. National saving is private saving plus public saving, which is 1,000.

68. 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.

In this case government spending increased with no change in tax revenue, so public savings decreases.

69. 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 ______. A. increases; increases

B. increases; decreases

C. does not change; increases

D. does not change; decreases

Private saving consists of household and business savings. In this case, the decrease in household saving was offset by an equal increase in business saving. Public saving depends on the budget surplus. In this case, the government reduced its deficit by $4 million, so public saving increased.

70. Public saving in Econland equals:

The data below describe the economy of Econland:

A. ­5

B. 5

C. 16 D. 17

Public saving is determined by the government surplus or deficit. In this case, net taxes are 30 (tax collections minus transfers and interest payments) while government purchases are 25, so there is a government surplus of 5.

71. If in the economy, business saving equals $240 billion, household saving equals $15 billion and government saving equals ­$150 billion, what is the value of national saving?

A. $415 billion

B. $265 billion

C. $250 billion

D. D. $105 billion

National saving adds up private and public saving. Private saving consists of business and household savings, which in this case equals $255 billion. Public savings is ­$150 billion, so national savings is $105 billion ($255 billion ­ $150 billion).

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

A. public saving increases.

B. public saving decreases.

C. private saving increases.

D. private saving decreases.

Household saving is a sub­category of private saving. If consumption spending goes up with income constant, then household saving must go down. In this case, private saving goes down by $10 million.

73. In the United States from 1960 to 2010, the largest positive contribution to national saving was from: A. the public sector.

B. the government budget deficit.

C. business saving.

D. household saving.

Business saving, sometimes from unplanned inventories, accounted for the bulk of national savings from 19602010.

74. From a macroeconomic perspective, the problem of low household saving has probably been overstated because:

A. household saving is not related at all to an economy’s ability to accumulate new capital.

B. household saving has been increasing steadily over the last three decades.

C. it is national saving, not household saving, that allows an economy to accumulate new capital.

D. household saving represents a smaller share of national saving than does public saving.

U.S. household savings rates have fallen in the past 20 years. But if government or business saving picks up the slack, the national saving rate could be unaffected by falling household saving.

75. By international standards, the household saving rate of the United States: A. has not ever really been high.

B. was extremely high until the 1980s.

C. has always been very high.

D. was low through the 1970s and 1980s, but increased throughout the 1990s to become one of the highest.

The U.S. savings rate, compared to other countries, is always on the lower end of the distribution.

76.

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

national

private

public

D.

life­cycle

National saving (S) equals Y – C ­ G. Since Y = C + I + G, we can substitute for Y in the equation, and S = C + I + G – C – G = I, so S = I.

The three broad reasons for saving, as identified by economists, relate to: A. consumption, investment, and exports.

B. national, public, and private production.

C. the life­cycle, precaution, and bequests.

D. capital gains, capital losses, and deficits.

Households save for retirement, to meet unexpected conditions and to leave money to heirs or organizations like colleges, churches and charities.

78. Saving to meet long­term objectives­such as retirement, college attendance, or to purchase a home,­is called ______ saving.

A. public

B. bequest

C. precautionary

D. D. life­cycle

Life­cycle saving is saving to meet long­term objectives­such as retirement, college attendance, or to purchase a home.

?

79. Saving for protection against unexpected setbacks­such as the loss of a job or a medical emergency­is called ______ saving.

A. public

B. bequest

C. precautionary D. life­cycle

Precautionary saving is saving for protection against unexpected setbacks­such as the loss of a job or a medical emergency.

80. Saving done for the purpose of leaving an inheritance is called ______ saving.

A. public

B. bequest

C. precautionary

D. life­cycle

Bequest saving is saving done for the purpose of leaving an inheritance.

81. Which of the following is an example of the life­cycle motive for saving?

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

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

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

D. Chris keeps $15,000 in a money market account to pay expenses in case he loses his job.

Life­cycle saving is done to smooth consumption during fairly predictable periods of erratic income.

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

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

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

C. Gerry and Terry put $2,000,000 in a trust fund that will go to their children when the parents die.

D. Every month, Chris puts $400 into his saving account so that he can buy a new car in a few years. The precautionary motive is saving for unexpected life events. A new roof may be needed sooner rather than later, so Jordan is saving now to prepare for an unexpected event.

83. Which of the following is an example of the bequest motive for saving? A. Pat puts $400 per month in his 401(k) retirement account.

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

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

D. Chris keeps $15,000 in a money market account to pay expenses in case he loses his job.

The bequest motive gives savers a person or organization, like a college, church or charity, to receive a gift upon the death of the saver.

84. Fred and Wilma just had a baby girl and want to make sure they save enough in the future to send her to college. They begin to save in response to this ______ reason for saving.

A. life­cycle

B. bequest

C. private

D. precautionary Saving for college is a plan for a predicted future event, thus it is life­cycle saving.

85. Bob has heard rumors that his employer will be merging with another firm and many employees may lose their jobs, and he wants to be prepared in case he loses his job. If he begins to save more in response to this rumor, it is a ______ reason for saving.

A. life­cycle

B. public

C. private

D. precautionary

Precautionary savings occurs because the future is uncertain and households need to prepare for unexpected changes in income and expenses.

86. Ted and Alice want to make sure that their children will inherit lots of money when they die, so that their children do not have to struggle the way they themselves did. Saving more in response to this is a______ reason for saving.

A. life­cycle

B. bequest

C. private

D. precautionary

The bequest motive gives savers a person or organization, like a college, church or charity, to receive a gift upon the death of the saver.

?

87. Explanations for the high saving rate in Japan consistent with the life­cycle 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.

Japan is a highly developed economy that enjoys long average life spans. Thus, Japanese must save for an extended period of old age. Additionally, down payments for homes are typically larger in Japan than the U.S.

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

The Japanese greatly respect their elders and save for their parents’ old age.

89. Other things equal, 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

If savings rates are high and the annual earnings on those savings are high, it results in large accumulation of wealth over time.

90. The Hatfields and the McCoys both earn $50,000 per year in real terms in the labor market, and both families are able to earn a 25% real interest rate on their savings. Assume that all interest is paid out as income in the following year. In the year 2010, both families began to save. The Hatfields saved 8% of their income each year; the McCoys saved 10%. In 2010, the Hatfields consumed ______ more than the McCoys; in 2011, the Hatfields consumed ______ than the McCoys.

A. $1,000; about $800 more

B. $2,000; about $250 more

C. $1,000; about $800 less D. $2,000; about $250 less

In 2010, the Hatfields consumed $50,000*0.92 = $46,000, whereas the McCoys consumed $50,000*0.9 =

$45,000. The Hatfields consumed $1,000 more. In 2011, the Hatfields’ income from labor and interest was $50,000 + ($4,000*0.25) = $51,000, and their consumption was $51,000*0.92 = $46,920. The McCoys’ income from labor and interest was $50,000 + ($5,000*0.25) = $51,250, and their consumption was $51,250*0.9 = $46,125, or $795 less than the Hartfields. While the McCoys still consume less than the Hartfields in 2011, the gap is shrinking between the first and second year.

91. The Hatfields and the McCoys both earn $50,000 per year in real terms in the labor market, and both families are able to earn a 5% real interest rate on their savings. In the year 2010, both families began to save. The Hatfields saved 8% of their income each year; the McCoys saved 10%. In 2010, the Hatfields consumed ______ more than the McCoys; in 2011, the Hatfields consumed ______ than the McCoys.

A. $1,000; about $960 less

B. $2,000; about $960 more

C. $1,000; about $960 more D. $2,000; about $960 less

In 2010, the Hatfields consumed $50,000*0.92 = $46,000, whereas the McCoys consumed $50,000*0.9 =

$45,000. The Hatfields consumed $1,000 more. In 2011, the Hatfields’ income from labor and interest was $50,000 + ($4,000*0.05) = $50,200, and their consumption was $50,200*0.92 = $46,184. The McCoys’ income from labor and interest was $50,000 + ($5,000*0.05) = $50,250, and their consumption was $50,250*0.9 = $45,225, or $959 less than the Hartfields. While the McCoys still consume less than the Hartfields in 2011, the gap is shrinking between the first and second year.

92. 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

If savers have a target in mind, higher interest rates decrease the saving rate as a smaller amount of savings can still reach a certain goal when the rate of interest or growth is higher. Similarly, a larger amount of savings will be needed to reach a certain goal when the rate of interest or growth is lower.

93. 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

Higher interest rates, indeed, are shown to slightly increase the rate of saving as savers find it more rewarding to save at higher real interest rates.

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

A. the real interest rate; the demonstration effect

B. self­control problems; the demonstration effect

C. capital gains; the real interest rate

D. the desire to leave a bequest; capital gains

Self­control problems make it hard to resist the temptation of current consumption. The demonstration effect suggests that household spending emulates what neighbors are doing, sometimes to the detriment of saving.

95. The self­control 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.

Many people hope to save and are well aware its importance, but are compelled to spend because of short­run desires.

96. 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.

D. control their spending in order to save more when the real interest rate increases. This is the definition of the "demonstration effect."

97. An explanation for the low saving rate in the United States consistent with the demonstration effect includes:

A. relatively generous government assistance for the elderly and large down payments required for home purchases.

B. households spending beyond their means to keep up with community standards.

C. well­developed financial markets making it easy to borrow against home equity.

D. large and persistent capital gains.

The demonstration effect suggests that Americans have a low rate of saving because they pattern their behavior after the low­saving people they live around.

98. Which of the following hypotheses is a plausible explanation for why U.S. households save so little?

A. Government assistance to the elderly has reduced the need for life­cycling saving.

B. Most American already own homes and, therefore, have less need for life­cycle saving.

C. The highly developed financial markets in the U.S. have reduced the need for precautionary saving by Americans.

D. Government assistance to low­income U.S. households has increased the demonstration effects on spending by the poor.

Expansion of Social Security in the U.S. has given households more confidence in their financial futures and has decreased the need for saving.

99. 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.

Firms do a cost­benefit comparison before they buy new equipment. If the benefits exceed the costs, firms invest in new equipment.

100. 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.

Firms investments are based on the marginal contribution to output and the price for which that output sells., which is know as the value of the marginal product of capital.