Q: Which formula correctly calculates net investment?

$$\text{Net Investment} = \text{Gross Investment} - \text{Depreciation}$$

Question 1

Which of the following best describes the relationship between the real interest rate and the quantity of loanable funds demanded, as shown in the loanable funds market diagram?

Accepted Answer

There is an inverse relationship; as the real interest rate increases, the quantity of loanable funds demanded decreases.

Question 2

Suppose a government runs a budget deficit. According to the loanable funds market model, what is the most likely effect on the real interest rate and private investment?

Accepted Answer

The real interest rate increases and private investment decreases due to crowding out.

Question 3

If the nominal interest rate on a one-year Treasury bill is 4% and the inflation rate is 2%, what is the real interest rate?

Accepted Answer

$$4\% - 2\% = 2\%$$

Question 4

A firm is considering purchasing a machine for $$200,000. The machine will generate 60$$,000 per year for 4 years, and has no resale value. If the discount rate is 5%, what is the present value of the future cash flows? (Use $$PV = \sum_{t=1}^{4} \frac{60,000}{(1+0.05)^t})$$

Accepted Answer

$$PV = 57,143 + 54,422 + 51,831 + 49,363 = 212,759$$

Question 5

Which of the following best explains why credit card loan rates are relatively high compared to other types of loans?

Accepted Answer

Credit card loans are unsecured and have higher default risk, so lenders demand higher interest rates.

Question 6

If a bond has a face value of $100,000, a coupon rate of 6%, and two years to maturity, what happens to the bond's price if the market interest rate rises to 8%? (Assume annual coupon payments.)

Accepted Answer

The bond's price falls below $100,000.

Question 7

Which formula correctly calculates net investment?

Accepted Answer

$$	ext{Net Investment} = 	ext{Gross Investment} - 	ext{Depreciation}$$

Question 8

A household has assets worth $$500,000 and liabilities of 200$$,000. What is the household's net wealth?

Accepted Answer

$$500,000 - 200,000 = 300$$,000$

Question 9

If the government runs a budget surplus, what is the expected effect on the supply of loanable funds and the real interest rate?

Accepted Answer

Supply of loanable funds increases and the real interest rate falls.

Question 10

Which of the following is an example of financial capital?

Accepted Answer

A firm's cash holdings used to purchase new machinery.

Question 11

If a firm is insolvent, which of the following must be true?

Accepted Answer

The firm's liabilities exceed its assets.

Question 12

Which equation correctly expresses the relationship between investment, saving, government budget, and net exports?

Accepted Answer

$$I = S + (T - G) + (M - X)$$

Question 13

A mutual fund is best described as:

Accepted Answer

A fund that combines savings of individuals to purchase a diversified portfolio of assets.

Question 14

If the present value of an investment's future cash flows is $$120,000 and the initial cost is 100$$,000, what is the net present value (NPV)?

Accepted Answer

$$NPV = 120,000 - 100,000 = 20,000$$

Question 15

Which of the following best describes the Ricardo-Barro effect?

Accepted Answer

Rational taxpayers increase saving in response to government deficits, potentially offsetting the impact on real interest rates.

Question 16

If a bank is illiquid, what does this mean?

Accepted Answer

The bank cannot easily sell assets to meet cash demands.

Question 17

Which of the following is true about the yield curve in bond markets?

Accepted Answer

It shows the relationship between interest rates and the term to maturity.

Question 18

If the price of an asset is $$80 and the annual interest payment is 4$$, what is the interest rate?

Accepted Answer

$$4 \div 80 = 0.05 = 5\%$$

Question 19

Which of the following is NOT a function of financial institutions?

Accepted Answer

Issuing government bonds to finance public projects.

Finance, Saving, and Investment: Principles of Macroeconomics Study Notes

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