1. What is the distinction between net investment and gross investment? Which is the total amount spent on investment in a given year? Which is the change in the capital stock?
2. Is an illiquid company necessarily insolvent? Is an insolvent company necessarily illiquid? Briefly explain your answers.
3. What is the distinction between the nominal interest rate and the real interest rate?
4. In a diagram, show the effect on the real interest rate and amount of investment if people's disposable income increases.
5. Explain how a government budget deficit affects the market for loanable funds. What is the effect on investment? Ignore the possibility of a Ricardo-Barro effect.
6. Before there is any international trade or international lending and borrowing, suppose the world real interest rate is less than the real interest rate within a nation. Once the nation is open to international trade and international lending and borrowing, will the nation's net exports be negative or positive? Explain your answer.
Answer the following multiple choice questions.
7. The ____ interest rate approximately equals the ____ interest rate minus ____.
a. nominal; real; depreciation
b. nominal; real; inflation
c. real; nominal; depreciation
d. real; nominal; inflation
8. Crowding out can be the result of
a. an increase in the government budget deficit.
b. a decrease in the government budget deficit.
c. an increase in the government budget surplus.
d. an increase in expected profit.
9. If the world real interest rate is greater than the nation's real interest rate, then the country will ____ abroad and the country's exports will be ___ its imports.
a. borrow from; greater than
b. loan to; greater than
c. borrow from; be less than
d. loan to; be less than