Question 2 Businesses’ Investment decisions are based on the trade-off between the:
A - potential profit that could be generated by investment and the cost of borrowing money to finance the investment.
B- interest rate that savers will earn and the interest rate that the borrowers will have to pay.
C- potential profit that could be generated and the willingness of a lender to make the loan.
D- future value of the loan and the present value of the loan.
Question 3 A bank allows us to diversify risk because it has a:
A-small amount of borrowers, but many savers, so it can combine savings to make larger loans.
B- big pool of borrowers, but not many savers, so it can choose the riskiest person to borrow from.
C- small amount of borrowers and savers, so it can connect the optimal saver to the best-matched borrower.
D- big pool of borrowers and savers, so the risk of repayment is spread among many.
-Question 8 of the following would not generate demand for dollars?
A-Foreign banks and citizens who wish to increase their holding of “hard currencies” such as dollars.
B- U.S. residents who demand domestically produced goods, services, and assets.
C- Foreign residents abroad who demand U.S. goods, services, and assets.
D- U.S. residents who desire to save (part of) their income.
Question 17 The risk-free rate is:
A- All of these are true.
B- lower than any other interest rate.
C- the interest rate at which one would lend if there were no risk of default.
D- usually approximated by interest rates on U.S. government debt.
Question 20 crowding-out effect refers to which of the following?
A-increases in consumption spending that leave fewer resources available for the economy to use to create capital
B- price increases that result in less purchasing power for consumers
C-reductions in aggregate demand that occur as the government enacts a fiscal policy that is intended to eliminate an inflationary gap
D- reductions in private investment spending that is a result of increased government borrowing
The opportunity cost of holding money is
A-the liquidity foregone.
B-the higher interest rates that can be earned by holding a bond fund.
C-the liquidity gained by holding ready cash.
D-the decrease in risk from holding money rather than a bond fund.
An increase in interest rates is likely to cause
A- the money demand curve to shift to the right.
B- firms and households to increase the quantity of money demanded.
C- the money demand curve to shift to the left.
D- firms and households to decrease the quantity of money demanded.
Which of the following decreases the demand for money?
A-expectations of higher bond prices
B- a decrease in real GDP
C- an increase in the price level
D- an increase in income
20. D- reductions in private investment spending that is a result of increased government borrowing
Crowding out refers to decline of private investment due to fiscal expansion. Fiscal expansion could be in the form of government expenditure or reduction in taxes.
25. B-the higher interest rates that can be earned by holding a bond fund.
Opportunity cost is the value of next best alternative foregone.
27. D- firms and households to decrease the quantity of money demanded.
Increase in interest rate induces households to keep their money in banks as opportunity cost of holding money in hand increases.
29. A-expectations of higher bond prices
When people expect that bond prices increases then they want to invest their money to buy bonds and decreases the demand for money.
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