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201M2Fall03

# 201M2Fall03 - Name Section ECON 201 Prof Gordon Midterm II...

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Name: ECON 201 11/10/2003 Prof. Gordon Midterm II Section#: Multiple Choice Answer Sheet 1 18 2 19 3 20 4 21 5 22 6 23 7 24 8 25 9 26 10 27 11 28 12 29 13 30 14 31 15 32 16 33 17 34 35

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Short Answer Questions (36-41) 36 37 38 39 40 Neatness counts! Think before you write… 41 Saving and investment Sorinland Capital Market Saving and investment Sorinland Capital Market Saving and investment Sorinland Capital Market Saving and investment Sorinland Capital Market
Each question counts one point unless otherwise stated (Total: 41 pts) 1 Suppose a firm borrows funds to finance investment. The opportunity cost of this investment a) is greater than if the firm used its retained earnings. b) is less than if the firm used its retained earnings. c) is greater than the real interest rate. d) is equal to the real interest rate. 2 In the above figure, the economy is at point a on the initial investment demand curve ID 0 . What happens if corporate taxes are reduced? a) There is a movement to a point such as b on investment demand curve ID 0 . b) The investment demand curve shifts rightward to a curve such as ID 2 . c) The investment demand curve shifts leftward to a curve such as ID 1 . d) There is a movement to a point such as c on investment demand curve ID 0 . 3 Due to the crowding out effect, a government deficit ___________ the real interest rate and __________ private investment. a) increases; increases b) increases; decreases c) decreases; increases d) decreases; decreases 4 Suppose a firm is considering a new investment project. The total cost is \$100,000 and the firm expects to earn \$9,000 in profit from the new project. The current real interest rate is 8 percent. Which of the following is true? a) The firm will make the investment. b) The firm will make the investment only if the real interest rate falls. c) The firm will make the investment only if the real interest rate increases. d) The firm will make the investment only if the expected profit rate from it increases.

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5 A decrease in the real interest rate leads to a ____ the investment demand curve, and a decrease in the expected profit rate leads to a ____ the investment demand curve. a) rightward shift in; leftward shift in b) movement down along; movement up along c) rightward shift in; movement up along d) movement down along; leftward shift in 6 According to the Ricardo-Barro effect, a) government deficits raise the real interest rate. b) taxpayers fail to foresee that government deficits imply higher future taxes. c) households increase their personal saving when governments run budget deficits. d) government budget deficits increase households’ expected future disposable income.
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201M2Fall03 - Name Section ECON 201 Prof Gordon Midterm II...

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