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# ECON EXAM'S ANSWERS

Test Bank: I Topic: The Interest-Rate-Investment Relationship

The investment demand curve suggests that

A. changes in the real interest rate will not affect the amount invested.

B. there is an inverse relationship between the real rate of interest and the level of investment spending.

an increase in business taxes will tend to stimulate investment spending.

there is a direct relationship between the real rate of interest and the level of investment spending.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 10-03 Explain how changes in real interest rates affect investment.

Test Bank: I Topic: The Interest-Rate-Investment Relationship

Assume there are no prospective investment projects (I) that will yield an expected rate of return (r) of 25 percent or more, but there are $5 billion of investment opportunities with an expected rate of return between 20 and 25 percent, an additional $5 billion between 15 and 20 percent, and so on. The investment demand curve for this economy is shown in which table?

A.

B.

C.

D.

AACSB: Knowledge Application

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 10-03 Explain how changes in real interest rates affect investment.

Test Bank: I Topic: The Interest-Rate-Investment Relationship

Assume there are no prospective investment projects (I) that will yield an expected rate of return (r) of 25 percent or more, but there are $5 billion of investment opportunities with an expected rate of return between 20 and 25 percent, an additional $5 billion between 15 and 20 percent, and so on. If the real interest rate is 15 percent in this economy, the aggregate amount of investment will be

$25 billion.

$20 billion.

$15 billion.

D. $10 billion.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 10-03 Explain how changes in real interest rates affect investment.

Test Bank: I Topic: The Interest-Rate-Investment Relationship

If business taxes are reduced and the real interest rate increases,

A. consumption and saving will necessarily increase.

B. the level of investment spending might either increase or decrease.

the level of investment spending will necessarily increase.

the level of investment spending will necessarily decrease.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Remember Difficulty: 01 Easy

Learning Objective: 10-04 Identify and explain factors other than the real interest rate that can affect investment.

Test Bank: I Topic: Shifts of the Investment Demand Curve

Other things equal, a 10 percent decrease in corporate income taxes will

decrease the market price of real capital goods.

have no effect on the location of the investment demand curve.

C. shift the investment demand curve to the right.

D. shift the investment demand curve to the left.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Remember Difficulty: 01 Easy

Learning Objective: 10-04 Identify and explain factors other than the real interest rate that can affect investment.

Test Bank: I Topic: Shifts of the Investment Demand Curve

The investment demand curve will shift to the right as the result of

the availability of excess production capacity.

an increase in business taxes.

C. businesses becoming more optimistic about future business conditions.

D. an increase in the real interest rate.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Remember Difficulty: 01 Easy

Learning Objective: 10-04 Identify and explain factors other than the real interest rate that can affect investment.

Test Bank: I Topic: Shifts of the Investment Demand Curve

115.

The investment schedule in the given table indicates that if the real interest rate is 8 percent, then

we cannot tell what volume of investment will be profitable.

$30 billion will be both saved and invested.

C. $30 billion of investment will be undertaken.

D. $60 billion of investment will be undertaken.

AACSB: Knowledge Application

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 10-03 Explain how changes in real interest rates affect investment.

Test Bank: I Topic: The Interest-Rate-Investment Relationship

Type: Table

Other things equal, if the real interest rate falls and business taxes rise,

A. investment will rise until it is equal to saving.

B. we will be uncertain as to the resulting change in investment.

we can be certain that investment will rise.

we can be certain that investment will fall.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Remember Difficulty: 01 Easy

Test Bank: I Topic: Shifts of the Investment Demand Curve

The investment demand curve will shift to the right as a result of

an increase in the excess production capacity available in industry.

an increase in business taxes.

C. technological progress.

D. an increase in the acquisition and maintenance cost of capital goods.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Remember Difficulty: 01 Easy

Test Bank: I Topic: Shifts of the Investment Demand Curve

The investment demand curve will shift to the left as a result of

A. an increase in the excess production capacity available in industry.

a decrease in business taxes.

increased business optimism with respect to future economic conditions.

a decrease in labor costs.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Remember Difficulty: 01 Easy

Test Bank: I Topic: Shifts of the Investment Demand Curve

If the real interest rate in the economy is i and the expected rate of return from additional investment is r, then more investment will be forthcoming when

r falls.

i is greater than r.

C. r is greater than i.

D. i rises.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 10-03 Explain how changes in real interest rates affect investment.

Test Bank: I Topic: The Interest-Rate-Investment Relationship

A rightward shift of the investment demand curve might be caused by

an increase in the price level.

a decline in the real interest rate.

C. businesses planning to increase their stock of inventories.

D. an increase in business taxes.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Remember Difficulty: 01 Easy

Test Bank: I Topic: Shifts of the Investment Demand Curve

The real interest rate is

A. the percentage increase in money that the lender receives on a loan.

B. the percentage increase in purchasing power that the lender receives on a loan.

also called the after-tax interest rate.

usually higher than the nominal interest rate.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 10-03 Explain how changes in real interest rates affect investment.

Test Bank: I Topic: The Interest-Rate-Investment Relationship

When we draw an investment demand curve, we hold constant all of the following except

the expected rate of return on the investment.

business taxes.

C. the interest rate.

D. the present stock of capital goods.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 10-03 Explain how changes in real interest rates affect investment.

Test Bank: I Topic: The Interest-Rate-Investment Relationship

If the nominal interest rate is 18 percent and the real interest rate is 6 percent, the inflation rate is

18 percent.

24 percent.

C. 12 percent.

D. 6 percent.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 10-03 Explain how changes in real interest rates affect investment.

Test Bank: I Topic: The Interest-Rate-Investment Relationship

If the inflation rate is 10 percent and the real interest rate is 12 percent, the nominal interest rate is

2 percent.

zero percent.

10 percent.

D. 22 percent.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 10-03 Explain how changes in real interest rates affect investment.

Test Bank: I Topic: The Interest-Rate-Investment Relationship

A high rate of inflation is likely to cause a

A. high nominal interest rate.

low nominal interest rate.

low rate of growth of nominal GDP.

decrease in nominal wages.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 10-03 Explain how changes in real interest rates affect investment.

Test Bank: I Topic: The Interest-Rate-Investment Relationship

If the real interest rate in the economy is i and the expected rate of return on additional investment is r, then, other things equal,

more investment will be forthcoming when i exceeds r.

less investment will be forthcoming when r rises.

C. r will fall as more investment is undertaken.

D. r will exceed i at all possible levels of investment.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 10-03 Explain how changes in real interest rates affect investment.

Test Bank: I Topic: The Interest-Rate-Investment Relationship

If the real interest rate in the economy is i and the expected rate of return on additional investment is r, then, other things equal,

A. investment will take place until i and r are equal.

investment will take place until r exceeds i by the greatest amount.

r will rise as more investment is undertaken.

i will fall as more investment is undertaken.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 10-03 Explain how changes in real interest rates affect investment.

Test Bank: I Topic: The Interest-Rate-Investment Relationship

128.

Refer to the diagram. Assume that for the entire business sector of a private closed economy there is $0 worth of investment projects that will yield an expected rate of return of 25 percent or more. But there are $15 worth of investments that will yield an expected rate of return of 20–25 percent; another $15 with an expected rate of return of 15–20 percent; and an additional $15 of investment projects in each successive rate of return range down to and including the 0–5 percent range. Which of the lines on the diagram represents these data?

A. A

B. B

C

D

AACSB: Knowledge Application

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 10-03 Explain how changes in real interest rates affect investment.

Test Bank: I Topic: The Interest-Rate-Investment Relationship

Type: Graph

Assume that for the entire business sector of a private closed economy, there are $0 worth of investment projects that will yield an expected rate of return of 25 percent or more. But there are $15 worth of investments that will yield an expected rate of return of 20–25 percent, another $15 with an expected rate of return of 15–20 percent, and an additional $15 of investment projects in each successive rate of return range down to and

including the 0–5 percent range. If the real interest rate is 15 percent, what amount of investment will be undertaken?

A. $15 B. $30 C. $45 D. $60

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 10-03 Explain how changes in real interest rates affect investment.

Test Bank: I Topic: The Interest-Rate-Investment Relationship

Assume that for the entire business sector of a private closed economy, there are $0 worth of investment projects that will yield an expected rate of return of 25 percent or more. But there are $15 worth of investments that will yield an expected rate of return of 20–25 percent, another $15 with an expected rate of return of 15–20 percent, and an additional $15 of investment projects in each successive rate of return range down to and

including the 0–5 percent range. If the real interest rate is 5 percent, what amount of investment will be undertaken?

A. $15 B. $30 C. $45 D. $60

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 10-03 Explain how changes in real interest rates affect investment.

Test Bank: I Topic: The Interest-Rate-Investment Relationship

Assume that for the entire business sector of a private closed economy, there are $0 worth of investment projects that will yield an expected rate of return of 25 percent or more. But there are $15 worth of investments that will yield an expected rate of return of 20–25 percent, another $15 with an expected rate of return of 15–20 percent, and an additional $15 of investment projects in each successive rate of return range down to and

including the 0–5 percent range. The expected rate of return curve

A. shows a direct relationship between the interest rate and investment.

B. is also the investment demand curve.

is indeterminate.

implies a direct (positive) relationship between the interest rate and the level of GDP.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 10-03 Explain how changes in real interest rates affect investment.

Test Bank: I Topic: The Interest-Rate-Investment Relationship

132.

Refer to the diagram. Which of the following would shift the investment demand curve from ID1 to ID2?

a lower interest rate

lower expected rates of return on investment

a higher interest rate

D. higher expected rates of return on investment

AACSB: Knowledge Application

Blooms: Remember Difficulty: 01 Easy

Test Bank: I Topic: Shifts of the Investment Demand Curve

Type: Graph

133.

Refer to the diagram. Which of the following would shift the investment demand curve from ID1 to ID3?

A. a lower interest rate

B. lower expected rates of return on investment

a higher interest rate

higher expected rates of return on investment

AACSB: Knowledge Application

Blooms: Remember Difficulty: 01 Easy

Test Bank: I Topic: Shifts of the Investment Demand Curve

Type: Graph

134.

Refer to the diagram. Which of the following would increase investment while leaving an existing investment demand curve, say, ID2, in place?

A. a lower interest rate

a higher interest rate

lower expected returns on investment

higher expected returns on investment

AACSB: Knowledge Application

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 10-03 Explain how changes in real interest rates affect investment.

Test Bank: I Topic: The Interest-Rate-Investment Relationship

Type: Graph

In annual percentage terms, investment spending in the United States is

less variable than real GDP.

less variable than consumption spending.

less variable than the price level.

D. more variable than real GDP.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 10-03 Explain how changes in real interest rates affect investment. Learning Objective: 10-05 Illustrate how changes in investment or one of the other components of total spending can increase or decrease real GDP by a multiple amount.

Test Bank: I Topic: The Interest-Rate-Investment Relationship

Topic: The Multiplier Effect

Investment spending in the United States tends to be unstable because

expected profits are highly variable.

capital goods are durable.

innovation occurs at an irregular pace.

D. all of the factors mentioned in other answers contribute to the instability.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Remember Difficulty: 01 Easy

Test Bank: I Topic: Shifts of the Investment Demand Curve

Investment spending in the United States tends to be unstable because

A. profits are highly variable.

the price level fluctuates rapidly.

investment spending is affected by interest rates.

capital wears out quickly and must be replaced often.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Remember Difficulty: 01 Easy

Test Bank: I Topic: Shifts of the Investment Demand Curve

The purchase of capital goods, like consumer goods, can be postponed; it tends to contribute to in investment spending.

nondurable; instability

nondurable; stability

C. durable; instability

D. durable; stability

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Remember Difficulty: 01 Easy

Test Bank: I Topic: Shifts of the Investment Demand Curve

The multiplier effect means that

consumption is typically several times as large as saving.

a change in consumption can cause a larger increase in investment.

C. an increase in investment can cause GDP to change by a larger amount.

D. a decline in the MPC can cause GDP to rise by several times that amount.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 10-05 Illustrate how changes in investment or one of the other components of total spending can increase or decrease real GDP by a multiple amount.

Test Bank: I Topic: The Multiplier Effect

The multiplier is

A. 1/MPC.

B. 1/(1 + MPC.

C. 1/MPS.

D. 1/(1 − MPS).

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 10-05 Illustrate how changes in investment or one of the other components of total spending can increase or decrease real GDP by a multiple amount.

Test Bank: I Topic: The Multiplier Effect

The multiplier is useful in determining the

full-employment unemployment rate.

level of business inventories.

change in the rate of inflation from a change in the interest rate.

D. change in GDP resulting from a change in spending.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 10-05 Illustrate how changes in investment or one of the other components of total spending can increase or decrease real GDP by a multiple amount.

Test Bank: I Topic: The Multiplier Effect

The multiplier is defined as

1 − MPS.

change in GDP × initial change in spending.

C. change in GDP/initial change in spending.

D. change in GDP − initial change in spending.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Test Bank: I Topic: The Multiplier Effect

143.

The figure shows the saving schedules for economies 1, 2, 3, and 4. Which economy has the highest marginal propensity to consume?

1

2

3

D. 4

AACSB: Knowledge Application

Blooms: Understand Difficulty: 02 Medium

Test Bank: I Topic: The Multiplier Effect

Type: Graph

144.

The figure shows the saving schedules for economies 1, 2, 3, and 4. Which economy has the largest multiplier?

1

2

3

D. 4

AACSB: Knowledge Application

Blooms: Understand Difficulty: 02 Medium

Test Bank: I Topic: The Multiplier Effect

Type: Graph

If 100 percent of any change in income is spent, the multiplier will be

equal to the MPC.

1.

zero.

D. infinitely large.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Test Bank: I Topic: The Multiplier Effect

The multiplier can be calculated as

1/(MPS + MPC).

MPC/MPS.

C. 1/(1 − MPC).

D. 1 − MPC = MPS.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Test Bank: I Topic: The Multiplier Effect

The size of the multiplier is equal to the

slope of the consumption schedule.

reciprocal of the slope of the consumption schedule.

slope of the saving schedule.

D. reciprocal of the slope of the saving schedule.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Test Bank: I Topic: The Multiplier Effect

If the MPS is only half as large as the MPC, the multiplier is

A. 2.

B. 3.

4.

5.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Test Bank: I Topic: The Multiplier Effect

If the MPC is 0.70 and investment increases by $3 billion, the equilibrium GDP will

A. increase by $10 billion.

increase by $2.10 billion.

decrease by $4.29 billion.

increase by $4.29 billion.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Test Bank: I Topic: The Multiplier Effect

The numerical value of the multiplier will be smaller the

A. larger the average propensity to consume.

B. larger the slope of the saving schedule.

larger the slope of the consumption schedule.

smaller the slope of the saving schedule.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Test Bank: I Topic: The Multiplier Effect

The practical significance of the multiplier is that it

A. equates the real interest rate and the expected rate of return on investment.

B. magnifies initial changes in spending into larger changes in GDP.

keeps inflation within tolerable limits.

helps to stabilize the economy.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Test Bank: I Topic: The Multiplier Effect

If the MPC is 0.6, the multiplier will be A. 4.0.

B. 6.0.

C. 2.5.

D. 1.67.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Test Bank: I Topic: The Multiplier Effect

Assume the MPC is 2/3. If investment spending increases by $2 billion, the level of GDP will increase by

$3 billion.

$2/3 billion.

C. $6 billion.

D. $2 billion.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Test Bank: I Topic: The Multiplier Effect

The multiplier applies to