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TRUE/FALSE 1. The financial system coordinates investment and saving, which are important determinants of long-run real GDP. ANS: T DIF: 1 REF: 26-1 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Investment | Saving MSC: Definitional 2. When economists refer to investment, they mean the purchasing of stocks and bonds and other types of saving. ANS: F DIF: 1 REF: 26-1 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Investment | Saving MSC: Definitional 3. Banks and mutual funds are examples of financial markets. ANS: F DIF: 1 REF: 26-1 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Financial intermediaries | Financial markets MSC: Definitional 4. When a firm wants to borrow directly from the public to finance the purchase of new equipment, it does so by selling shares of stock. ANS: F DIF: 1 REF: 26-1 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Bonds | Stock MSC: Definitional 5. Most entrepreneurs finance their purchases of real capital using their past saving. ANS: F DIF: 1 REF: 26-1 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Investment MSC: Definitional 6. Other things the same, the higher the rate of saving and investment in a country, the higher will be the standard of living. ANS: T DIF: 1 REF: 26-1 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Saving | Investment MSC: Interpretive 7. Lenders sell bonds and borrowers buy them. ANS: F DIF: 1 REF: 26-1 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Bonds MSC: Definitional 8. When a firm wants to borrow directly from the public to finance the purchase of new equipment, it does so by selling bonds. ANS: T DIF: 1 REF: 26-1 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Bonds | Stock MSC: Definitional 9. Other things the same, corporate bonds generally feature higher interest rates than U.S. government bonds. ANS: T DIF: 1 REF: 26-1 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Bonds MSC: Definitional 10. The sale of either stocks or bonds to raise money is known as equity finance. ANS: F DIF: 1 REF: 26-1 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Bonds | Stock MSC: Definitional
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Which of the two bonds in each example would you expect to generally pay the higher interest rate? Explain why. a. a U.S. government bond or a Brazilian government bond b. a U.S. government bond or a municipal bond with the same term and issued by a creditworthy municipality. c. a 6-month Treasury bill or a 20-year Treasury bond d. a Microsoft bond or a bond issued by a new recording company a. b. c. d. The Brazilian government bond would likely pay a higher interest rate because the market perceives a higher level of risk for the Brazilian bond relative to the U.S. bond. Because of the tax advantages of municipal bonds, the U.S. government bond would likely pay the higher interest rate. The 20-year bond would likely pay a higher interest rate than would the 6-month bill. The future is uncertain and therefore more risky for a 20-year bond than for a 6-month bill. Since Microsoft is less likely to default than a new and unknown company, the interest on the bond of the new company is likely to be higher. TOP: Bonds
ANS:
DIF: 2 REF: 26-1 NAT: Analytic LOC: The Study of economics, and definitions of economics MSC: Applicative 3.
Suppose that you are a broker and people tell you the following about themselves. What sort of bond would you recommend to each? Defend your choices. a. "I am in a high federal income tax bracket and I don't want to take very much risk." b. "I want a high return and I am willing to take a lot of risk to get it." c. "I want a decent return and I have enough deductions that I don't value tax breaks highly." a. b. c. A municipal bond. Municipal bonds generally have low credit risk and are not subject to federal income tax. A junk bond. Junks bonds have a high return because they have high risk. A corporate bond that isn't a junk bond. Corporate bonds have more risk than government bonds but have no special tax treatment, so they pay moderate rates of return. TOP: Bonds
ANS:
DIF: 2 REF: 26-1 NAT: Analytic LOC: The Study of economics, and definitions of economics MSC: Analytical
ANS:
DIF: 2 REF: 26-1 NAT: Analytic LOC: The Study of economics, and definitions of economics MSC: Interpretive 5.
Suppose the Move It! exercise chain has revenues of $45 million, accounting costs of $15 million, and currently has issued 10 million shares of stocks selling at $90 each. Compute the price-earning ratio. Show your work. Is this ratio relatively high or low? What might an increase in the price-earnings ratio indicate?
ANS: The earnings per share is ($45 million - $15 million)/10 million = $3. So, the price-earnings ratio is $90/$3 = 30. This is a high P/E ratio, as the historical average for the market is about 15. An increase in the PE ratio may indicate the people expect the firm to have higher earnings in the future or that the stock has become overvalued. DIF: 2 REF: 26-1 NAT: Analytic LOC: The Study of economics, and definitions of economics MSC: Analytical 6. TOP: Stock
In the national income accounting identity showing the equality between national saving and investment, what are the algebraic expressions for private saving and public saving?
ANS: Private saving is Y - C - T, Public Saving is T - G DIF: 2 REF: 26-2 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Private saving | Public saving MSC: Interpretive 7. Identify each of the following acts as representing either saving or investment. a. Fred uses some of his income to buy government bonds. b. Julie takes some of her income and buys mutual funds. c. Alex purchases a new truck for his delivery business using borrowed funds. d. Elaine uses some of her income to buy stock in a major corporation. e. Henrietta hires a builder to construct a new building for her bicycle shop. a. b. c. d. e. Fred is saving. Julie is saving. Alex is investing. Elaine is saving. Henrietta is investing. TOP: Saving | Investment
ANS:
DIF: 1 REF: 26-2 NAT: Analytic LOC: The Study of economics, and definitions of economics MSC: Interpretive
DIF: 1 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: MSC: Interpretive 9.
Explain why the demand for loanable funds slopes downward and why the supply of loanable funds slopes upward.
ANS: When the interest rate rises investment spending becomes more expensive, so people invest less. As the interest rate rises saving becomes more rewarding, so people want to save more. The inverse relation between interest and borrowing is reflected in the downward slope of the demand for loanable funds curve. The positive relation between interest and saving is reflected in the upward slope of the supply of loanable funds curve. DIF: 2 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: MSC: Interpretive 10. Market for loanable funds
The model of the market for loanable funds shows that an investment tax credit will cause interest rates to rise and investment to rise. Yet we also suppose that higher interest rates lead to lower investment. How can these two conclusions be reconciled?
ANS: The claim that an increase in the interest rate decreases investment supposes that only the interest rate changes and everything else is constant. The investment tax credit causes investment to rise at each interest rate. As firms want to borrow more the interest rate will rise. The rise in interest rates does make investment less than it would otherwise be, but unless the supply of loanable funds is vertical, the increase in investment demand from the tax credit is larger than the decrease in investment demand from the rising interest rate. DIF: 3 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: MSC: Analytical Investment
ANS: As shown in the graph below, the economy starts in equilibrium at point E0 with interest rate r0 and equilibrium quantity of saving and investment at q0. If the government succeeds in obtaining a surplus, there will be more public saving in the economy and so more national saving at each interest rate, and the supply of loanable funds curve will shift from S0 to S1. The new equilibrium will be at E1, with a lower interest rate, r1 and a higher quantity of saving and investment, q1. Hence, if the federal government succeeds in having a surplus, interest rates will fall and investment will increase. Market for Loanable Funds
DIF: 2 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Budget deficits | Budget surpluses MSC: Applicative
If you were to start a business delivering documents, you might need to purchase cell phones, bicycles, desks, and chairs. a. These purchases are called capital investment. If you raise the funds from others to purchase them you are a saver. b. These purchases are called capital investment. If you raise the funds from others to purchase them you are a borrower. c. These purchases are called consumption. If you raise the funds from others to purchase them you are a saver. d. These purchases are called consumption. If you raise the funds from others to purchase them you are a borrower. DIF: 2 REF: 26-0 LOC: The study of economics, and definitions of economics MSC: Interpretive
ANS: A DIF: 1 REF: 26-0 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Saving | Investment MSC: Interpretive 4. Institutions that help to match one person's saving with another person's investment are collectively called the a. Federal Reserve system. b. banking system. c. monetary system. d. financial system.
ANS: D DIF: 1 REF: 26-0 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Financial system MSC: Definitional 5. The primary economic function of the financial system is to a. keep interest rates low. b. provide expert advice to savers and investors. c. match one persons consumption expenditures with another persons capital expenditures. d. match one persons saving with another persons investment.
ANS: D DIF: 2 REF: 26-0 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Financial system MSC: Interpretive 6. Given that Lekeisha's income exceeds her expenditures, Lekeisha is best described as a a. saver or as a supplier of funds. b. saver or as a demander of funds. c. borrower or as a supplier of funds. d. borrower or as a demander of funds. DIF: 1 REF: 26-0 LOC: The Study of economics, and definitions of economics MSC: Interpretive
Alyssa is opening a bicycle shop, and her monthly expenditures to get the shop up and running exceed her monthly income. Alyssa is best described as a a. saver or as a supplier of funds. b. saver or as a demander of funds. c. borrower or as a supplier of funds. d. borrower or as a demander of funds. DIF: 1 REF: 26-0 LOC: The Study of economics, and definitions of economics MSC: Interpretive
Most entrepreneurs do not have enough money of their own to start their businesses. When they acquire the necessary funds from someone else, a. their consumption expenditures are being financed by someone elses saving. b. their consumption expenditures are being financed by someone elses investment. c. their investments are being financed by someone elses saving. d. their saving is being financed by someone elses investment.
ANS: C DIF: 2 REF: 26-0 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Investment | Saving MSC: Interpretive
Sec01 - Saving, Investment, and the Financial System - Financial Institutions in the U.S. Economy
MULTIPLE CHOICE 1. At the broadest level, the financial system moves the economys scarce resources from a. the rich to the poor. b. financial institutions to business firms and government. c. households to financial institutions. d. savers to borrowers.
ANS: D DIF: 1 REF: 26-1 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Financial system MSC: Interpretive 2. The fact that borrowers sometimes default on their loans by declaring bankruptcy is directly related to the characteristic of a bond called a. credit risk. b. interest risk. c. term risk. d. private risk. DIF: 1 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Definitional
When a large, well-known corporation wishes to borrow directly from the public, it can a. sell bonds. b. sell shares of stock. c. go to a bank for a loan. d. All of the above are correct. DIF: 1 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Interpretive
Which of the following statements about the term of a bond is correct? a. Term refers to the various characteristics of a bond, including its interest rate and tax treatment. b. The term of a bond is determined entirely by its credit risk. c. The term of a bond is determined entirely by how much sales charge the buyer of the bond pays when he or she purchases the bond. d. Interest rates on long-term bonds are usually higher than interest rates on short-term bonds. DIF: 2 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Interpretive
We would expect the interest rate on Bond A to be higher than the interest rate on Bond B if the two bonds have identical characteristics except that a. the credit risk associated with Bond A is lower than the credit risk associated with Bond B. b. Bond A was issued by the state of New York and Bond B was issued by the Exxon Mobil Corporation. c. Bond A has a term of 20 years and Bond B has a term of 2 years. d. All of the above are correct. DIF: 2 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Applicative
As an alternative to selling shares of stock as a means of raising funds, a large company could, instead, a. invest in physical capital. b. use equity finance. c. sell bonds. d. purchase bonds. DIF: 1 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Interpretive
Which of the following statements is correct? a. The expected future profitability of a corporation influences the demand for that corporations stock. b. When a corporation sells stock as a means of raising funds it is engaging in debt finance. c. The owners of bonds sold by the Microsoft Corporation are part owners of that corporation. d. All bonds are, by definition, perpetuities. DIF: 2 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Interpretive
Which of the following statements is correct? a. A corporation receives a monetary payment every time its shares of stock are traded by stockholders on organized stock exchanges. b. When a corporation sells bonds as a means of raising funds it is engaging in debt finance. c. A share of stock is an IOU. d. The two most important financial markets in the economy are the stock market and financial intermediaries. DIF: 2 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Interpretive
The economys two most important financial markets are a. the investment market and the saving market. b. the bond market and the stock market. c. banks and the stock market. d. financial markets and financial institutions.
ANS: B DIF: 1 REF: 26-1 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Financial markets MSC: Interpretive 11. Two of the economys most important financial intermediaries are a. suppliers of funds and demanders of funds. b. banks and the bond market. c. the stock market and the bond market. d. banks and mutual funds.
ANS: D DIF: 1 REF: 26-1 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Financial intermediaries MSC: Interpretive
ANS: A DIF: 2 REF: 26-1 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Financial markets | Financial intermediaries MSC: Interpretive 13. A bond is a a. financial intermediary. b. certificate of indebtedness. c. certificate of partial ownership in an enterprise. d. None of the above is correct. DIF: 1 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Definitional
Which of the following is a financial-market transaction? a. A saver buys shares in a mutual fund. b. A saver deposits money into a credit union. c. A saver buys a bond a corporation has just issued so it can purchase capital. d. None of the above is correct.
ANS: C DIF: 2 REF: 26-1 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Financial markets | Bonds MSC: Interpretive 15. A certificate of indebtedness that specifies the obligations of the borrower to the holder is called a a. bond. b. stock. c. mutual fund. d. All of the above are correct. DIF: 1 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Definitional
Long-term bonds are a. riskier than short-term bonds, and so interest rates on long-term bonds are usually lower than interest rates on short-term bonds. b. riskier than short-term bonds, and so interest rates on long-term bonds are usually higher than interest rates on short-term bonds. c. less risky than short-term bonds, and so interest rates on long-term bonds are usually lower than interest rates on short-term bonds. d. less risky than short-term bonds, and so interest rates on long-term bonds are usually higher than interest rates on short-term bonds. DIF: 2 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Interpretive
If the government's expenditures exceeded its receipts, it would likely a. lend money to a bank or other financial intermediary. b. borrow money from a bank or other financial intermediary. c. buy bonds directly from the public. d. sell bonds directly to the public.
ANS: D DIF: 2 REF: 26-1 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Bonds | Financial system MSC: Interpretive
ANS: B DIF: 2 REF: 26-1 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Investment | Bonds MSC: Interpretive 19. Skyline Chili wants to finance the purchase of new equipment for its restaurants. The firm has limited internal funds, so Skyline likely will a. demand funds from the financial system by buying bonds. b. demand funds from the financial system by selling bonds. c. supply funds to the financial system by buying bonds. d. supply funds to the financial system by selling bonds.
ANS: B DIF: 2 REF: 26-1 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Investment | Bonds MSC: Interpretive 20. If Proctor and Gamble sells a bond it is a. borrowing directly from the public. b. borrowing indirectly from the public. c. lending directly to the public. d. lending indirectly to the public.
ANS: A DIF: 2 REF: 26-1 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Bonds | Financial markets MSC: Interpretive 21. Which of the following is correct? a. The maturity of a bond refers to the amount to be paid back. b. The principal of the bond refers to the person selling the bond. c. A bond buyer cannot sell a bond before it matures. d. None of the above is correct. DIF: 1 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Definitional
Which of the following is not correct? a. By saving a larger portion of its GDP, a country can raise its output per worker. b. Savers supply their money to the financial system with the expectation that they will get it back with interest at a later date. c. Financial intermediaries are the only type of financial institution. d. The financial system helps match peoples saving with other peoples borrowing.
ANS: C DIF: 1 REF: 26-1 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: Financial system MSC: Interpretive 23. Which of the following is not a nonsensical headline? a. British perpetuities about to mature. b. Disney issues new bonds with term of $1,000 each. c. Government bonds currently pay less interest than corporate bonds. d. Standard and Poor's judges new junk bond to have very low credit risk. DIF: 2 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Interpretive
A perpetuity is distinguished from other bonds in that it a. pays continuously compounded interest. b. pays interest only when it matures. c. never matures. d. will be used to purchase another bond when it matures unless the owner specifies otherwise. DIF: 1 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Definitional
Which of the following is correct? a. Some bonds have terms as short as a few months. b. Because they are so risky, junk bonds pay a low rate of interest. c. Corporations buy bonds to raise funds. d. All of the above are correct. DIF: 1 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Interpretive
Which of the following is not correct? a. If you buy a bond from a corporation, you can sell the bond to someone else before it matures. b. Term refers to the scheduling of periodic interest rate payments on a bond. c. A bond is an IOU. d. There are millions of different bonds in the U.S. economy. DIF: 1 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Definitional
A bond that never matures is known as a a. perpetuity. b. an intermediary bond. c. an indexed bond. d. a junk bond. DIF: 1 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Definitional
A bond buyer is a a. saver. Bond buyers must hold their bonds until maturity. b. saver. Bond buyers may sell their bonds prior to maturity. c. borrower. Bond buyers must hold their bonds until maturity. d. borrower. Bond buyers may sell their bonds prior to maturity. DIF: 1 REF: 26-1 LOC: The study of economics, and definitions of economics MSC: Definitional
Short-term bonds are generally a. less risky than long-term bonds and so they feature higher interest rates. b. less risky than long-term bonds and so they feature lower interest rates. c. more risky than long-term bonds and so they feature higher interest rates. d. more risky than long-term bonds and so they feature lower interest rates. DIF: 2 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Interpretive
Compared to short-term bonds, other things the same, long-term bonds generally have a. more risk and so they pay higher interest rates. b. less risk and so they pay lower interest rates. c. less risk and so they pay higher interest rates. d. about the same risk and so they pay about the same interest rate. DIF: 2 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Interpretive
Two bonds have the same term to maturity. The first was issued by a state government and the probability of default is believed to be low. The other was issued by a corporation and the probability of default is believed to be high. Which of the following is correct? a. Because they have the same term to maturity the interest rates should be the same. b. Because of the differences in tax treatment and credit risk, the state bond should have the higher interest rate. c. Because of the differences in tax treatment and credit risk, the corporate bond should have the higher interest rate. d. It is not possible to say if one bond has a higher interest rate than the other.
ANS: C DIF: 3 REF: 26-1 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: Bonds | Interest rates MSC: Applicative 34. On which of these bonds is the prospect of default most likely? a. a junk bond b. a municipal bond c. a U.S. government bond d. a corporate bond issued by General Electric Corporation DIF: 2 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Interpretive
On which of these bonds is the prospect of default least likely? a. a junk bond b. a bond issued by the state of Texas c. a bond issued by the federal government d. a bond issued by Exxon Mobil Corporation DIF: 2 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Interpretive
Other things the same, as the maturity of a bond becomes longer, the bond will pay a. a lower interest rate because it has less risk. b. a lower interest rate because it has more risk. c. a higher interest rate because it has more risk. d. the same interest rate, because there is no relationship between term and risk. DIF: 2 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Interpretive
Suppose the issuer of a bond fails to pay some of the interest or principal that was promised to the bondholders. This failure is referred to as a a. breach. b. default. c. risk. d. term failure. DIF: 1 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Definitional
Suppose the city of Springfield has a high credit rating, and so when Springfield borrows funds by selling bonds, a. the citys high credit rating and the tax status of municipal bonds both contribute to a lower interest rate than would otherwise apply. b. the citys high credit rating and the tax status of municipal bonds both contribute to a higher interest rate than would otherwise apply. c. the citys high credit rating contributes to a lower interest rate than would otherwise apply, while the tax status of municipal bonds contributes to a higher interest rate than would otherwise apply. d. the citys high credit rating contributes to a higher interest rate than would otherwise apply, while the tax status of municipal bonds contributes to a lower interest rate than would otherwise apply.
ANS: A DIF: 2 REF: 26-1 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Bonds | Interest rates MSC: Applicative 40. Municipal bonds pay a relatively a. low rate of interest because of their high default risk and because the interest they pay is subject to federal income tax. b. low rate of interest because of their low default risk and because the interest they pay is not subject to federal income tax. c. high rate of interest because of their high default risk and because federal taxes must be paid on the interest they pay. d. high rate of interest because of their low default risk and because the interest they pay is not subject to federal income tax.
ANS: B DIF: 2 REF: 26-1 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Bonds | Interest rates MSC: Interpretive
You hold bonds issued by the state of Ohio. The interest you earn each year on these bonds a. is not subject to federal income tax and so these bonds pay a higher interest rate than otherwise comparable bonds issued by the U.S. government. b. is not subject to federal income tax and so these bonds pay a lower interest rate than otherwise comparable bonds issued by the U.S. government. c. is subject to federal income tax and so these bonds pay a higher interest rate than otherwise comparable bonds issued by the U.S. government. d. is subject to federal income tax and so these bonds pay a lower interest rate than otherwise comparable bonds issued by the U.S. government.
ANS: B DIF: 2 REF: 26-1 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Bonds | Interest rates MSC: Interpretive 43. Other things the same, bonds are likely to have higher interest rates if they have a. tax exemptions and short terms. b. tax exemptions and long terms. c. no tax exemptions and short terms. d. no tax exemptions and long terms. 1 REF: 26-1 MSC: Definitional
Other things the same, which bond would you expect to pay the highest interest rate? a. a bond issued by the U.S. government b. a bond issued by IBM c. a bond issued by New York State d. a bond issued by a new restaurant chain
ANS: D DIF: 1 REF: 26-1 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Bonds | Interest rates MSC: Applicative 45. Other things the same, which bond would you expect to pay the lowest interest rate? a. a bond issued by a state with a very good credit rating b. a bond issued by the U.S. government c. a bond issued by a fairly new company doing genetic research d. a bond issued by Nabisco
ANS: A DIF: 2 REF: 26-1 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Bonds | Interest rates MSC: Applicative
ANS: D DIF: 2 REF: 26-1 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Bonds | Interest rates | Risk MSC: Applicative 47. Jerry has the choice of two bonds, one that pays 3 percent interest and one that pays 6 percent interest. Which of the following is most likely? a. The 6 percent bond is less risky than the 3 percent bond. b. The 6 percent bond is a U.S. government bond, and the 3 percent bond is a junk bond. c. The 6 percent bond has a longer term than the 3 percent bond. d. The 6 percent bond is a municipal bond, and the 3 percent bond is a U.S. government bond. DIF: 2 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Applicative
Lacey, a financial advisor, has told her clients the following things. Which of her statements is not correct? a. "U.S. government bonds generally have a higher rate of interest than municipal bonds." b. "The interest received on corporate bonds is taxable." c. "U.S. government bonds have the lowest default risk." d. "If you purchase a bond, you must hold it until it matures." DIF: 2 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Applicative
The sale of stocks a. and bonds to raise money is called debt finance. b. and bonds to raise money is called equity finance. c. to raise money is called debt finance, while the sale of bonds to raise funds is called equity finance. d. to raise money is called equity finance, while the sale of bonds to raise funds is called debt finance. DIF: 1 REF: 26-1 MSC: Definitional
ABC Co. sells newly issued bonds. JLG Co. sells newly issued stocks. Which company is raising funds in financial markets? a. only ABC b. only JLG c. both ABC and JLG d. neither ABC nor JLG DIF: 1 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Definitional
Stock represents a. a claim to a share of the profits of a firm. b. ownership in a firm. c. equity finance. d. All of the above are correct DIF: 1 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Definitional
The bond market a. is a financial market, whereas the stock market is a financial intermediary. b. is a financial intermediary, whereas the stock market is a financial market. c. is a financial market, as is the stock market. d. is a financial intermediary, as is the stock market.
ANS: C DIF: 2 REF: 26-1 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Bond market, stock market MSC: Definitional 54. Which of the following would likely make the interest rate on a bond higher than otherwise? a. both high credit risk and a long term b. high credit risk but not a long term c. a long term but not a high credit risk d. neither high credit risk nor a long term
ANS: A DIF: 1 REF: 26-1 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: Bonds | Interest rates MSC: Definitional 55. People who buy newly issued stock in a corporation such as Crate and Barrel provide a. debt finance and so become part owners of Crate and Barrel. b. debt finance and so become creditors of Crate and Barrel. c. equity finance and so become part owners of Crate and Barrel. d. equity finance and so become creditors of Crate and Barrel. DIF: 1 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Definitional
People who buy stock in a corporation such as General Electric become a. creditors of General Electric, so the benefits of holding the stock depend on General Electric's profits. b. creditors of General Electric, but the benefits of holding the stock do not depend on General Electric's profits. c. part owners of General Electric, so the benefits of holding the stock depend on General Electric's profits. d. part owners of General Electric, but the benefits of holding the stock do not depend on General Electric's profits. DIF: 1 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Interpretive
As chief financial officer you sell newly issued bonds on behalf of your firm. Your firm is a. borrowing directly. b. borrowing indirectly. c. lending directly. d. lending indirectly. DIF: 1 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Definitional
Which of the following people purchased the correct asset to meet his or her objective? a. Michelle wanted to be a part owner of Mamma Rosa's Pizza, so she purchased a bond issued by Mamma Rosa's Pizza. b. Tim wanted a high return, even if it meant taking some risk, so he purchased stock issued by Specific Electric instead of bonds issued by Specific Electric. c. Jennifer wanted to buy equity in Honda, so she purchased bonds sold by Honda. d. All of the above are correct. DIF: 1 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Interpretive
If a firm sells a total of 100 shares of stock, then a. each share represents 1 percent of the firms indebtedness. b. each share represents ownership of 1 percent of the firm. c. the firm is engaging in debt finance. d. the firm is engaging in term finance. DIF: 1 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Interpretive
The prices of stock traded on exchanges are determined by a. the Corporate Stock Administration. b. the administrators of NASDAQ. c. the supply of, and demand for, the stock. d. All of the above are correct. DIF: 1 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Interpretive
Which of the following is not an important stock exchange in the United States? a. New York Stock Exchange b. American Stock Exchange c. Chicago Mercantile Exchange d. NASDAQ DIF: 1 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Definitional
Suppose the government finds a major defect in one of a company's products and demands that the product be taken off the market. We would expect that the a. supply of existing shares of the stock and the price will both rise. b. supply of existing shares of the stock and the price will both fall. c. demand for existing shares of the stock and the price will both rise. d. demand for existing shares of the stock and the price will both fall. DIF: 2 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Analytical
World Wide Delivery Service Corporation develops a way to speed up its deliveries and reduce its costs. We would expect that this would a. raise the demand for existing shares of the stock, causing the price to rise. b. decrease the demand for existing shares of the stock, causing the price to fall. c. raise the supply of the existing shares of stock, causing the price to rise. d. raise the supply of the existing shares of stock, causing the price to fall. DIF: 2 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Analytical
In the late summer of 2005 some regions of the country were suffering from drought. What effect would we expect this to have on the stock of companies such as John Deere that manufacture farm equipment? a. raise the demand for existing shares of the stock, causing the price to rise b. decrease the demand for existing shares of the stock, causing the price to fall c. raise the supply of the existing shares of stock, causing the price to rise d. raise the supply of the existing shares of stock, causing the price to fall DIF: 2 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Analytical
In the Coen Brothers movie The Hudsucker Proxy the board of directors picks someone to run the company who they believe will make poor decisions. If things turn out as they plan, a. the price of a share of stock in the Hudsucker corporation should decline as the demand for shares falls. b. the price of a share of stock in the Hudsucker corporation should rise as the demand for shares rises. c. the price of a share of stock in the Hudsucker corporation should decline as the supply of existing shares falls. d. the price of a share of stock in the Hudsucker corporation should rise as the supply of existing shares rises. DIF: 2 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Analytical
Nastech Pharmaceuticals announced it has developed a nasal spray that would reduce hunger cravings. Other things the same we would expect a. the demand for existing shares of stock in this company to decrease, so the price would fall. b. the demand for existing shares of stock in this company to increase, so the price would rise. c. the supply of existing shares of stock in this company to decrease, so the price would fall. d. the supply of existing shares of stock in this company to increase, so the price would rise. DIF: 2 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Analytical
Other things being constant, when a firm sells new shares of stock, the a. supply of the stock increases and the price decreases as a result. b. supply of the stock decreases and the price increases as a result. c. demand for the stock increases and the price increases as a result. d. demand for the stock decreases and the price decreases as a result. DIF: 2 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Interpretive
Which of the following is a certificate of indebtedness? a. stocks and bonds b. stocks but not bonds c. bonds but not stocks d. neither stocks nor bonds
ANS: C DIF: 1 REF: 26-1 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: Bonds | Stocks MSC: Definitional 72. Compared to stocks, bonds offer the holder a. lower risk and lower potential return. b. lower risk and higher potential return. c. higher risk and lower potential return. d. higher risk and higher potential return. DIF: 2 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Interpretive
Which of the following statements is correct? a. A general, persistent decline in stock prices may signal that the economy is about to enter a boom period because people will be able to buy stock for less money. b. A general, persistent decline in stock prices may signal that the economy is about to enter a recession because low stock prices may mean that people are expecting low corporate profits. c. A general, persistent decline in stock prices may signal that the economy is about to enter a recession because low stock prices mean that corporations have had low profits in the past. d. Expectations about the business cycle have no impact on stock prices. DIF: 2 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Analytical
The Dow Jones Industrial Average has been computed regularly since a. 1976. b. 1948. c. 1913. d. 1896. DIF: 1 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Definitional
The Dow Jones Industrial Average is now based on the prices of the stocks of a. 30 major U.S. corporations. b. 100 major U.S. corporations. c. 500 representative U.S. corporations. d. 1,000 representative U.S. corporations. DIF: 1 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Definitional
The single most important piece of information about a stock is its a. term. b. dividend. c. daily volume. d. price. DIF: 1 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Interpretive
Potential buyers of ABC Corporation bonds are not concerned about ABC Corporation declaring bankruptcy. Potential buyers of XYZ Corporation bonds are concerned that XYZ Corporation may declare bankruptcy. Which of the following statements is correct? a. Other things equal, the interest rate on XYZ Corporation bonds will be high relative to the interest rate on ABC Corporation bonds. b. An ABC Corporation bond is a perpetuity, whereas an XYZ Corporation bond is not a perpetuity. c. XYZ Corporation bonds carry more interest-rate risk than do ABC Corporation bonds. d. All of the above are correct. DIF: 2 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Interpretive
Compared to bondholders, stockholders a. face higher risk and have the potential for higher returns. b. face higher risk but receive a fixed payment. c. face lower risk and have the potential for higher returns. d. face lower risk but receive a fixed payment. DIF: 1 REF: 26-1 LOC: The study of economics, and definitions of economics MSC: Interpretive
A high demand for a companys stock is an indication that a. the company is in need of funds. b. the company has recently sold a large quantity of bonds. c. people are optimistic about the companys future. d. people are pessimistic about the companys future. DIF: 2 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Interpretive
The price of a stock will rise if a. the managers of a stock exchange decide the price should be higher. b. the demand for the stock rises. c. the supply of the stock rises. d. None of the above are correct. DIF: 2 REF: 26-1 LOC: The study of economics, and definitions of economics MSC: Interpretive
Volume, as reported in stock tables, refers to the a. number of shares traded. b. percentage of shares outstanding traded. c. number of shares traded times the price they sold at. d. number of shares of a company traded divided by the shares of all companies traded. DIF: 1 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Definitional
A corporations earnings are the amount of revenue it receives for the sale of its products a. minus its cost of production as measured by its accountants. Earnings must be paid out as dividends. b. minus its cost of production as measured by its accountants. Earnings may be paid out as dividends or retained by the corporation. c. minus its direct and indirect costs as measured by its economists. Earnings must be paid out as dividends. d. minus its direct and indirect cost as measure by its economists. Earnings may be paid out as dividends or retained by the corporation.
ANS: B DIF: 2 REF: 26-2 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: Dividends | Stock MSC: Definitional 85. All or part of a firms profits may be paid out to the firms stockholders in the form of a. retained earnings. b. dividends. c. interest payments. d. capital accounts. DIF: 1 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Definitional
A stocks dividend yield is the a. dividend as a percentage of the price per share. b. stock price as a percentage of the dividend. c. dividend as a percentage of the retained earnings per share. d. retained earnings per share as the percentage of the dividend. DIF: 1 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Definitional
A particular stock pays an annual dividend of $2 per share and the annual dividend yield is 4 percent. The price of a share of this stock is a. $2.08. b. $5.00. c. $8.00 d. $50.00. DIF: 1 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Interpretive
In 2008, XYZ Corporation had total earnings of $200 million and 50 million shares of the corporations stock were outstanding. If the price-earnings ratio for XYZ is 20, then what is the price of a share of its stock? a. $5 b. $10 c. $80 d. $500 DIF: 2 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Applicative
In 2008, CDZ Corporation had total earnings of $500 million and CDZ retained 30 percent of its earnings for future investments. If the price of a share of CDZ stock is $70 and if 80 million shares of its stock were outstanding, then what is the price-earnings ratio? a. 0.14 b. 11.2 c. 16.0 d. 37.3 DIF: 3 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Applicative
The number of shares of Biggie Corporation stock outstanding in 2007 was 100 million. In 2007, Biggie stock paid a dividend of $2.40 per share and its dividend yield was 4 percent. If the price-earnings ratio is 16, then Biggies total earnings in 2007 amounted to a. $1.92 million. b. $87.50 million. c. $375.00 million. d. $960.00 million. DIF: 3 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Applicative
Fortunade Corporation stock has a price of $100 per share, a dividend of $1.60 per share, and retained earnings of $2.00 per share. The dividend yield on this stock is a. 2.8 percent. b. 2.0 percent. c. 1.6 percent. d. 0.4 percent. DIF: 2 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Applicative
Queen City Sausage stock is selling at $40 per share, it has retained earnings of $2.00 per share and dividends of $.50 per share. What is the price-earnings ratio and what is the dividend yield? a. 20, 1.25 percent b. 20, 6.25 percent c. 16, 1.25 percent d. None of the above is correct. DIF: 3 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Analytical
Stock in Creole Cuisine Restaurants is selling at $25 per share. Creole Cuisine had earnings of $5 a share and a dividend yield of 5 percent. The dividend is a. $0.25 and the price-earnings ratio is 5. b. $.25 and the price-earnings ratio is 6.7. c. $1.25 and the price-earnings ratio is 5. d. $1.25 and the price-earnings ratio is 6.7. DIF: 2 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Applicative
Stock in Tasty Greens Restaurants is selling at $80 per share with 1 million shares outstanding. Last year, Tasty Greens earned $5 million, of which it retained $1 million for future investments. The dividend yield on the stock is a. 1 percent. b. 2 percent. c. 4 percent. d. 5 percent.
ANS: D DIF: 2 REF: 26-1 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Stock | Dividends MSC: Applicative
Over-the-Rhine Cheese Corporation had a P/E ratio of 20, retained earnings of $1.50 per share and a dividend of $.50. What was its dividend yield? a. 1.25% b. 1.67% c. 3.33% d. 7.50% DIF: 3 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Analytical
Dependable Appliances had a P/E ratio of 25, earnings per share of $4, and retained earnings per share of $3. What was its dividend yield? a. 4% b. 3% c. 1% d. None of the above is correct. DIF: 2 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Analytical
100. XDF Corp. had a price-earnings ratio of 15, paid a dividend of $1, and retained earnings of $2 a share. What was the price of a share of XDF stock? a. $15 b. $30 c. $45 d. None of the above is correct. ANS: C NAT: Analytic TOP: Stock DIF: 2 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Applicative
101. Thomas Publishing has a share price of $28, retained earnings of $0.60 per share, and a dividend yield of 5 percent. What is its price-earnings ratio? a. 24 b. 16 c. 14 d. 12 ANS: C NAT: Analytic TOP: Stock DIF: 2 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Analytical
103. Retained earnings are a. earnings of a company that are not paid out to stockholders. b. the amount of revenue a corporation receives for the sale of its products minus its costs of production as measured by its accountants. c. the single most important piece of information about a stock. d. computed by multiplying the dividend yield by the price of the stock. ANS: A NAT: Analytic TOP: Profits DIF: 1 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Interpretive
104. The amount of revenue a firm receives for the sale of its products minus its costs of production as measured by its accountants is the firm's a. earnings. b. retained earnings. c. economic, or real, profit. d. dividend. ANS: A NAT: Analytic TOP: Profits DIF: 1 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Definitional
105. Historically, the typical price-earnings ratio for stocks is about a. 3 b. 8 c. 15 d. 26 ANS: C NAT: Analytic TOP: Stock DIF: 1 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Definitional
106. A high price-earnings ratio for a stock indicates that either the stock is a. undervalued or people are relatively optimistic about the corporation's prospects. b. overvalued or people are relatively optimistic about the corporation's prospects. c. overvalued or people are relatively pessimistic about the corporation's prospects. d. undervalued or people are relatively pessimistic about the corporation's prospects. ANS: B NAT: Analytic TOP: Stock DIF: 1 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Interpretive
107. A low price-earnings ratio indicates that either the stock is a. undervalued or people are relatively optimistic about the corporation's prospects. b. overvalued or people are relatively optimistic about the corporation's prospects. c. overvalued or people are relatively pessimistic about the corporation's prospects. d. undervalued or people are relatively pessimistic about the corporation's prospects. ANS: D NAT: Analytic TOP: Stock DIF: 1 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Interpretive
109. Metals, Inc. has a price of $20 a share, outstanding shares of 2.5 million, retained earnings of $1 million dollars, and a dividend yield of 2 percent. It has a price-earnings ratio of a. 50, which is high by historical standards. b. 50, which is low by historical standards. c. 25, which is high by historical standards. d. 25, which is low by historical standards. ANS: C NAT: Analytic TOP: Stock DIF: 3 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Analytical
110. Zeta Corporation has a price of $20 a share, outstanding shares of 2.5 million, retained earnings of $1 million dollars, and a dividend yield of 1 percent. It has a price-earnings ratio which is a. high, perhaps indicating that people expect future earnings to rise. b. high, perhaps indicating that people expect future earnings to fall. c. low, perhaps indicating that people expect future earnings to rise. d. low, perhaps indicating that people expect future earnings to fall. ANS: A NAT: Analytic TOP: Stock DIF: 2 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Analytical
111. A low P/E for a stock indicates that a. people may expect earnings to fall in the future, perhaps because the firm will be faced with increased competition. b. its dividends have been low so that no one is willing to pay very much for it. c. the corporation is possibly overvalued. d. All of the above are correct. ANS: A NAT: Analytic TOP: Stock DIF: 1 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Interpretive
112. Suppose Sarah Lee Corporation stock has a P/E ratio of 8. This P/E ratio is relatively a. low, indicating that buyers may expect earnings to rise. b. low, indicating that buyers may expect earnings to fall. c. high, indicating that buyers may expect earnings to rise. d. high, indicating that buyers may expect earnings to fall. ANS: B NAT: Analytic TOP: Stock DIF: 2 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Interpretive
113. Which of the following is correct? a. Joan takes some of her income and buys mutual fund shares. Joans purchase will be included in the investment category of GDP. b. If a share of stock in Virtual Pizza Corporation sells for $77, the earnings per share are $5, and the dividend per share is $2, then the P/E ratio is 11. c. In order to use equity finance, a firm must sell about equal values of stocks and bonds. d. None of the above is correct. ANS: D NAT: Analytic TOP: Stock DIF: 2 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Applicative
114. Refer to Table 26-1. In dollar terms, which company paid the highest dividend per share? a. GenMills b. Gillette c. Graco d. Hershey ANS: D NAT: Analytic TOP: Dividends DIF: 3 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Applicative
115. Refer to Table 26-1. What was Hershey's earnings per share? a. $38 b. $1.64 c. $1.31 d. $0.61 ANS: B NAT: Analytic TOP: Stock DIF: 3 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Applicative
116. Refer to Table 26-1. Assume that the closing price was also the average price at which each stock transaction took place. What was the total dollar volume of Gillette stock traded that day? a. $912,840,000 b. $91,284,000 c. $9,128,400 d. $912,840 ANS: B NAT: Analytic TOP: Stock DIF: 2 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Applicative
117. Refer to Table 26-1. Which firm had the P/E ratio that was closest to the historically typical P/E ratio? a. GenMills b. Gillette c. Graco d. Hershey ANS: C NAT: Analytic TOP: Stock DIF: 2 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Definitional
118. Refer to Table 26-2. Which company had the highest dollar dividend? a. Boeing Co. b. Eli Lilly and Co. c. H. J. Heinz and Co. d. Kellog Co. ANS: B NAT: Analytic TOP: Stock DIF: 2 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Applicative
119. Refer to Table 26-2. Which company had the lowest dollar dividend? a. Boeing Co. b. Eli Lilly and Co. c. H. J. Heinz and Co. d. Kellog Co. ANS: A NAT: Analytic TOP: Stock DIF: 2 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Applicative
120. Refer to Table 26-2. Which company had the highest earnings per share? a. Boeing Co. b. Eli Lilly and Co. c. H. J. Heinz and Co. d. Kellog Co. ANS: C NAT: Analytic TOP: Stock DIF: 3 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Applicative
121. Refer to Table 26-2. Which company had the lowest earnings per share? a. Boeing Co. b. Eli Lilly and Co. c. H. J. Heinz and Co. d. Kellog Co. ANS: B NAT: Analytic TOP: Stock DIF: 3 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Applicative
122. Refer to Table 26-2. For which companys stock is the P/E ratio closest to what is historically typical? a. Boeing Co. b. Eli Lilly and Co. c. H. J. Heinz and Co. d. Kellog Co. ANS: C NAT: Analytic TOP: Stock DIF: 2 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Applicative
137. It is claimed that mutual funds have two advantages. The first is that mutual funds allow people with small amounts of money to diversify. The second is that mutual funds provide the skills of professional money managers who buy stocks they believe will be the most profitable and thereby increase the return that mutual fund depositors earn on their savings. a. Economists strongly agree with both claims. b. Economists are skeptical of both claims. c. Economists are skeptical of the first claim, but strongly agree with the second. d. Economists strongly agree with the first claim, but are skeptical of the second. ANS: D NAT: Analytic TOP: Mutual funds DIF: 2 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Interpretive
138. The primary advantage of mutual funds is that they a. always make a return that "beats the market." b. allow people with small amounts of money to diversify. c. provide customers with a medium of exchange. d. All of the above are correct. ANS: B DIF: 2 REF: 26-1 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Mutual funds | Diversification MSC: Definitional
141. It is claimed that a secondary advantage of mutual funds is that a. an investor can avoid investment charges and fees. b. they give ordinary people access to loanable funds for investing. c. they usually outperform stock market indexes. d. they give ordinary people access to the skills of professional money managers. ANS: D NAT: Analytic TOP: Mutual funds DIF: 1 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Interpretive
142. Index funds a. typically have a higher rate of return and higher costs than managed mutual funds. b. typically have a higher rate of return and lower costs than managed mutual funds. c. typically have a lower rate of return and higher costs than managed mutual funds. d. typically have a lower rate of return and lower costs than managed mutual funds. ANS: B DIF: 1 REF: 26-1 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Mutual funds | Index funds MSC: Interpretive 143. Index funds a. buy all the stocks in a given stock index. b. promise to beat the market by a certain percentage known as an index. c. provide a return that is adjusted for changes in the consumer price index. d. buy industries within a particular category of the North American Industry Classification System. ANS: A NAT: Analytic TOP: Index funds DIF: 1 REF: 26-1 LOC: The Study of economics, and definitions of economics MSC: Definitional
144. Managed funds a. typically have a higher rate of return and higher costs than index funds. b. typically have a higher rate of return and lower costs than index funds. c. typically have a lower rate of return and higher costs than index funds. d. typically have a lower rate of return and lower costs than index funds. ANS: C DIF: 1 REF: 26-1 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Mutual funds | Index funds MSC: Interpretive
146. Which advantage(s) do mutual funds claim to provide? a. diversification and access to the skills of professional money managers b. diversification but not access to the skills of professional money managers c. access to the skills of professional money managers but not diversification d. neither diversification nor access to the skills of professional money managers. ANS: A NAT: Analytic TOP: Mutual funds DIF: 1 REF: 26-1 LOC: The study of economics, and definitions of economics MSC: Interpretive
Sec02 - Saving, Investment, and the Financial System - Saving and Investment in the National Income Accounts
MULTIPLE CHOICE 1. Which of the following is not correct? a. Gross domestic product is both total income in an economy and total expenditures on the economys output of goods and services. b. In a closed economy net exports are zero. c. National saving is the sum of private saving and public saving. d. Purchases of capital goods are excluded from GDP.
ANS: D DIF: 1 REF: 26-2 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: Investment | Gross domestic product MSC: Definitional 2. You observe a closed economy that has a government deficit and positive investment. Which of the following is correct? a. Private and public saving are both positive. b. Private saving is positive; public saving is negative. c. Private saving is negative; public saving is positive. d. Both private saving and public saving are negative.
ANS: B DIF: 2 REF: 26-2 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: Private saving | Public saving MSC: Analytic 3. If national saving in a closed economy is greater than zero, which of the following must be true? a. Either public saving or private saving must be greater than zero. b. Investment is positive. c. Y - C - G > 0 d. All of the above are correct.
ANS: D DIF: 2 REF: 26-2 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: National saving MSC: Analytic
ANS: C DIF: 1 REF: 26-2 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: Financial system | Saving MSC: Definitional 5. A closed economy does not a. trade with other economies. b. have free markets. c. allow financial intermediation. d. All of the above are correct.
ANS: A DIF: 1 REF: 26-2 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Closed economies MSC: Definitional 6. The assumption of a closed economy a. applies to the world economy. b. applies to most national economies. c. requires us to assume that the governments budget is always balanced. d. All of the above are correct.
ANS: A DIF: 1 REF: 26-2 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Closed economies MSC: Interpretive 7. In a closed economy, what does (T - G) represent? a. national saving b. investment c. private saving d. public saving DIF: 1 REF: 26-2 LOC: The Study of economics, and definitions of economics MSC: Definitional
In a closed economy, what remains after paying for consumption and government purchases is a. national disposable income. b. national saving. c. public saving. d. private saving.
ANS: B DIF: 2 REF: 26-2 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: National saving MSC: Interpretive 9. In a closed economy, what does (Y - T - C) represent? a. national saving b. government tax revenue c. public saving d. private saving
ANS: D DIF: 1 REF: 26-2 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Private saving MSC: Definitional
ANS: D DIF: 2 REF: 26-2 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: National saving | Private saving MSC: Applicative 11. Which of the following statements is correct? a. The total income in the economy that remains after paying for consumption and government purchases is called private saving. b. The sum of private saving and national saving is called public saving. c. For a closed economy, the sum of private saving and public saving must equal investment. d. For a closed economy, the sum of consumption, national saving, and taxes must equal GDP. DIF: 2 REF: 26-2 LOC: The Study of economics, and definitions of economics MSC: Interpretive
Net exports must equal zero for any economy a. that is closed. b. for which Y = C + I + G. c. for which S = Y - C - G. d. All of the above are correct.
ANS: D DIF: 2 REF: 26-2 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Closed economies MSC: Applicative 13. In national income accounting, we use which of the following pairs of terms interchangeably? a. investment and private saving b. investment and purchases of stocks and bonds c. saving and national saving d. public saving and government tax revenue minus government spending
ANS: D DIF: 1 REF: 26-2 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: National saving MSC: Definitional 14. The purchase of a new house is the one form of a. investment that is financed by private saving rather than public saving. b. household spending that is not counted as part of investment in the national income accounts. c. household spending that is investment rather than consumption. d. household spending that does not contribute to GDP. DIF: 1 REF: 26-2 LOC: The Study of economics, and definitions of economics MSC: Definitional
The identity that shows that total income and total expenditure are equal is a. GDP = Y. b. Y = DI + T + NX. c. GDP = GNP - NX. d. Y = C + I + G + NX.
ANS: D DIF: 1 REF: 26-2 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Gross domestic product MSC: Interpretive
ANS: A DIF: 1 REF: 26-2 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Gross domestic product MSC: Definitional 17. Y = C + I + G + NX is an identity because a. each symbol identifies a macroeconomic variable. b. the right-hand and left-hand sides are equal when an equilibrium is reached. c. the equality holds due to the way the variables are defined. d. None of the above is correct.
ANS: C DIF: 1 REF: 26-2 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Identities | Gross domestic product MSC: Interpretive 18. Which of the following equations will always represent GDP in an open economy? a. S = I - G b. I = Y - C + G c. Y = C + I + G d. Y = C + I + G + NX
ANS: D DIF: 1 REF: 26-2 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Gross domestic product MSC: Interpretive 19. Which of the following equations represents GDP for a closed economy? a. Y = C + I + G + T b. S = I - G c. I = Y - C + G d. Y = C + I + G
ANS: D DIF: 1 REF: 26-2 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Gross domestic product | Closed economies MSC: Interpretive 20. Which of the following equations represents GDP for an open economy? a. Y = C + I + G + NX b. NX = I - G c. I = Y - C + G + NX d. Y = C + I + G
ANS: A DIF: 1 REF: 26-2 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Gross domestic product | Open economies MSC: Interpretive 21. Which of the following expressions must be equal to national saving for a closed economy? a. Y - I - G - NX b. Y - C - G c. Y - I - C d. G + C - Y
ANS: B DIF: 1 REF: 26-2 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: National saving MSC: Interpretive
ANS: D DIF: 2 REF: 26-2 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: National saving MSC: Interpretive 23. In a closed economy, national saving is a. usually greater than investment. b. equal to investment. c. usually less than investment because of the leakage of taxes. d. always less than investment.
ANS: B DIF: 1 REF: 26-2 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: National saving MSC: Definitional 24. In a small closed economy investment is $20 billion and private saving is $22 billion. What are public saving and national saving? a. $24 billion and $2 billion b. $20 billion and -$2 billion c. $2 billion and $24 billion d. -$2 billion and $20 billion
ANS: D DIF: 2 REF: 26-2 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: National saving | Public saving MSC: Applicative 25. Suppose a closed economy had public saving of $3 trillion and private saving of $2 trillion. What are national saving and investment for this country? a. $5 trillion, $5 trillion b. $5 trillion, $2 trillion c. $1 trillion, $5 trillion d. $1 trillion, $2 trillion
ANS: A DIF: 2 REF: 26-2 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: National saving | Investment MSC: Applicative 26. Consider the expressions T - G and Y - T - C. Which of the following statements is correct? a. Each one of these is equal to national saving. b. Each one of these is equal to public saving. c. The first of these is private saving; the second one is public saving. d. The first of these is public saving; the second one is private saving.
ANS: D DIF: 1 REF: 26-2 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Public saving | Private saving MSC: Definitional 27. According to the definitions of private and public saving, if Y, C, and G remained the same, an increase in taxes would a. raise both private and public saving. b. raise private saving and lower public saving. c. lower private saving and raise public saving. d. lower private and public saving.
ANS: C DIF: 2 REF: 26-2 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Private saving | Public saving MSC: Interpretive
ANS: D DIF: 2 REF: 26-2 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: National saving | Private saving MSC: Interpretive 29. According to the definitions of national saving and public saving, if Y, C, and G remained the same, an increase in taxes would a. raise national saving and public saving. b. raise national saving and raise public saving. c. leave national saving and public saving unchanged. d. leave national saving unchanged and raise public saving.
ANS: D DIF: 2 REF: 26-2 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: National saving | Public saving MSC: Interpretive 30. Suppose that in a closed economy GDP is equal to 11,000, taxes are equal to 1,500, consumption equals 7,500, and government purchases equal 2,000. What is national saving? a. -500 b. 0 c. 1,500 d. None of the above is correct.
ANS: C DIF: 2 REF: 26-2 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: National saving MSC: Applicative 31. Suppose that in a closed economy GDP is equal to 11,000, taxes are equal to 2,500, consumption equals 7,000, and government purchases equal 3,000. What are private saving and public saving? a. 1,500 and -500, respectively b. 1,500 and 500, respectively c. 1,000 and -500, respectively d. 1,000 and 500, respectively
ANS: A DIF: 2 REF: 26-2 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Public saving | Private saving MSC: Applicative 32. Suppose that in a closed economy GDP is equal to 11,000, taxes are equal to 2,500 consumption equals 7,500 and government purchases equal 2,000. What are private saving, public saving, and national saving? a. 1,500, 1,000, and 500, respectively b. 1,000, 500, and 1,500, respectively c. 500, 1,500, and 1,000, respectively d. None of the above is correct.
ANS: B DIF: 3 REF: 26-2 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Private saving | Public saving | National saving MSC: Applicative
ANS: A DIF: 2 REF: 26-2 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: National saving | Budget deficits MSC: Applicative 34. Suppose the economy is closed with national saving of $2 trillion, consumption of $7 trillion, and government purchases of $1 trillion. What is GDP? a. $8 trillion b. $9 trillion c. $10 trillion d. $11 trillion
ANS: C DIF: 1 REF: 26-2 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Gross domestic product MSC: Applicative 35. Suppose the economy is closed and consumption is 6,500, taxes are 1,500, and government purchases are 2,000. If national saving amounts to 1,000, then what is GDP? a. 9,500 b. 10,000 c. 10,500 d. None of the above is correct.
ANS: A DIF: 2 REF: 26-2 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Gross domestic product MSC: Applicative 36. For a closed economy, GDP is $11 trillion, consumption is $7 trillion, taxes are $2 trillion and the government runs a deficit of $1 trillion. What are private saving and national saving? a. $4 trillion and $1 trillion, respectively b. $4 trillion and $-1 trillion, respectively c. $2 trillion and $1 trillion, respectively d. $2 trillion and $-1 trillion, respectively
ANS: C DIF: 3 REF: 26-2 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Private saving | National saving MSC: Applicative 37. For a closed economy, GDP is $11 trillion, consumption is $7 trillion, taxes are $3 trillion and the government runs a surplus of $1 trillion. What are private saving and national saving? a. $4 trillion and $1 trillion, respectively b. $4 trillion and $5 trillion, respectively c. $1 trillion and $2 trillion, respectively d. $1 trillion and $1 trillion, respectively
ANS: C DIF: 3 REF: 26-2 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Private saving | National saving MSC: Applicative
ANS: A DIF: 2 REF: 26-2 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: National saving MSC: Interpretive 39. For an imaginary closed economy, T = $5,000; S = $11,000; C = $50,000; and the government is running a budget deficit of $1,000. Then a. private saving = $10,000 and GDP = $54,000. b. private saving = $10,000 and GDP = $58,000. c. private saving = $12,000 and GDP = $67,000. d. private saving = $12,000 and GDP = $72,000.
ANS: C DIF: 3 REF: 26-2 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Private saving | Gross domestic product MSC: Applicative Scenario 26-1. Assume the following information for an imaginary, closed economy. GDP = $110,000; consumption = $70,000; private saving = $8,000; national saving = $12,000. 40. Refer to Scenario 26-1. For this economy, investment amounts to a. $4,000. b. $8,000. c. $12,000. d. $16,000. DIF: 2 REF: 26-2 LOC: The Study of economics, and definitions of economics MSC: Applicative
Refer to Scenario 26-1. This economys government is running a a. budget surplus of $4,000. b. budget surplus of $8,000. c. budget deficit of $4,000. d. budget deficit of $8,000.
ANS: A DIF: 2 REF: 26-2 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Government purchases MSC: Applicative 42. Refer to Scenario 26-1. For this economy, government purchases amount to a. $12,000. b. $18,000. c. $28,000. d. $40,000.
ANS: C DIF: 2 REF: 26-2 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Government purchases MSC: Applicative 43. Refer to Scenario 26-1. For this economy, taxes amount to a. $16,000. b. $24,000. c. $28,000. d. $32,000. DIF: 2 REF: 26-2 LOC: The Study of economics, and definitions of economics MSC: Applicative
ANS: A DIF: 2 REF: 26-2 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Consumption | Investment MSC: Analytical 45. The country of Meditor uses the merit as its currency. Recent national income statistics showed that it had GDP of $700 million merits, no government transfer payments, taxes of $210 million merits, a budget surplus of $60 billion merits, and investment of $100 billion merits. What were its consumption and government expenditures on goods and services? a. 450 million merits and $150 million merits b. 410 million merits and $150 million merits c. 330 million merits and $270 million merits d. 290 million merits and $270 million merits
ANS: A DIF: 3 REF: 26-2 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Consumption | Government purchases MSC: Analytical 46. Consider three different closed economies with the following national income statistics. Country A has taxes of $40 billion, transfers of $20 billion, and government expenditures on goods and services of $30 billion. County B has private savings of $60 billion, and investment expenditures of $50 billion. Country C has GDP of $300 billion, investment of $70, consumption of $180 billion, taxes of $60 billion and transfers of $20 billion. From this information we know that there is a $10 billion government budget deficit for a. only country A. b. only country B. c. only country C. d. all three countries.
ANS: D DIF: 3 REF: 26-2 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Budget deficits MSC: Analytical 47. In examining the national income accounts of the closed economy of Nepotocracy you see that this year it had taxes of $100 billion, transfers of $40 billion, and government purchases of goods and services of $80 billion. You also notice that last year it had private saving of $50 billion and investment of $70 billion. In which year did Nepotocracy have a budget deficit of $20 billion? a. this year and last year b. this year but not last year c. last year but not this year d. neither this year nor last year
ANS: B DIF: 3 REF: 26-2 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Budget deficits MSC: Applicative
ANS: D DIF: 3 REF: 26-2 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Budget deficits | Budget surpluses MSC: Analytical 49. The country of Cedarland does not trade with any other country. Its GDP is $20 billion. Its government purchases $3 billion worth of goods and services each year, collects $6 billion in taxes, and provides $2 billion in transfer payments to households. Private saving in Cedarland is $4 billion. What is investment in Cedarland? a. $5 billion b. $4 billion c. $3 billion d. $2 billion DIF: 3 REF: 26-2 LOC: The Study of economics, and definitions of economics MSC: Applicative
The country of Growpaw does not trade with any other country. Its GDP is $17 billion. Its government purchases $4 billion worth of goods and services each year, collects $6 billion in taxes, and provides $1 billion in transfer payments to households. Private saving in Growpaw is $4 billion. For Growpaw, a. investment is $6 billion and consumption is $9 billion. b. investment is $6 billion and consumption is $8 billion. c. investment is $5 billion and consumption is $8 billion. d. investment is $5 billion and consumption is $7 billion.
ANS: C DIF: 3 REF: 26-2 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Investment | Consumption MSC: Applicative 51. The country of Hykenia does not trade with any other country. Its GDP is $20 billion. Its government collects $4 billion in taxes and pays out $3 billion to households in the form of transfer payments. Consumption equals $15 billion and investment equals $2 billion. What is public saving in Hykenia, and what is the value of the goods and services purchased by the government of Hykenia? a. -$2 billion and $3 billion b. $1 billion and $3 billion c. -$1 billion and $4 billion d. There is not enough information to answer the question.
ANS: A DIF: 3 REF: 26-2 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Public saving | Government purchases MSC: Analytical 52. The country of Yokovia does not trade with any other country. Its GDP is $30 billion. Its government purchases $5 billion worth of goods and services each year, collects $7 billion in taxes, and provides $3 billion in transfer payments to households. Private saving in Yokovia amounts to $5 billion. What are consumption and investment in Yokovia? a. $18 billion and $5 billion, respectively b. $21 billion and $4 billion, respectively c. $13 billion and $7 billion, respectively d. There is not enough information to answer the question.
ANS: B DIF: 3 REF: 26-2 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Consumption | Investment MSC: Analytical
ANS: A DIF: 1 REF: 26-2 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Private saving MSC: Definitional 54. In a closed economy, public saving is the a. amount of income that households have left after paying for taxes and consumption. b. amount of income that businesses have left after paying for the factors of production. c. amount of tax revenue that the government has left after paying for its spending. d. sum of A, B, and C. DIF: 1 REF: 26-2 LOC: The Study of economics, and definitions of economics MSC: Definitional
Which of the following is not always correct for a closed economy? a. National saving equals private saving plus public saving. b. Net exports equal zero. c. Real GDP measures both income and expenditures. d. Private saving equals investment.
ANS: D DIF: 1 REF: 26-2 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Closed economies MSC: Interpretive 56. If the tax revenue of the federal government exceeds spending, then the government necessarily a. runs a budget deficit. b. runs a budget surplus. c. runs a national debt. d. will increase taxes.
ANS: B DIF: 1 REF: 26-2 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Budget deficits MSC: Interpretive 57. A budget surplus is created if a. the government sells more bonds than it buys back. b. the government spends more than it receives in tax revenue. c. private saving is greater than zero. d. None of the above is correct.
ANS: D DIF: 1 REF: 26-2 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Budget surpluses MSC: Definitional 58. In the language of macroeconomics, investment refers to a. saving. b. the purchase of new capital. c. the purchase of stocks, bonds, or mutual funds. d. All of the above are correct. DIF: 1 REF: 26-2 LOC: The Study of economics, and definitions of economics MSC: Definitional
Which of the following would be included as investment in the GDP accounts? a. the government buys goods from another country b. someone buys stock in an American company c. a firm increases its capital stock d. All of the above are correct. DIF: 2 REF: 26-2 LOC: The Study of economics, and definitions of economics MSC: Interpretive
Which of the following would a macroeconomist consider as investment? a. Charlie purchases a bond issued by Proctor and Gamble Corp. b. Karlee purchases stock issued by Texas Instruments, Inc. c. Mariah builds a new coffee shop. d. All of the above are correct. DIF: 1 REF: 26-2 LOC: The Study of economics, and definitions of economics MSC: Interpretive
Fran buys 1,000 shares of stock issued by Miller Brewing. In turn, Miller uses the funds to buy new machinery for one of its breweries. a. Fran and Miller are both investing. b. Fran and Miller are both saving. c. Fran is investing; Miller is saving. d. Fran is saving; Miller is investing. DIF: 2 REF: 26-2 LOC: The Study of economics, and definitions of economics MSC: Interpretive
Sec03 - Saving, Investment, and the Financial System - The Market for Loanable Funds
MULTIPLE CHOICE 1. The source of the supply of loanable funds a. is saving and the source of demand for loanable funds is investment. b. is investment and the source of demand for loanable funds is saving. c. and the demand for loanable funds is saving. d. and the demand for loanable funds is investment.
ANS: A DIF: 1 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Market for loanable funds MSC: Definitional
a. b. c. d.
ANS: A DIF: 2 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Market for loanable funds MSC: Applicative 3. Suppose the market for loanable funds is in equilibrium. Given the numbers below, determine the quantity of loanable funds demanded. GDP Consumption Taxes Net of Transfers Government Spending a. b. c. d. $25 billion $20 billion $15 billion $10 billion $100 billion $65 billion $15 billion $20 billion
ANS: C DIF: 2 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Market for loanable funds MSC: Applicative 4. The slope of the demand for loanable funds curve represents the a. positive relation between the real interest rate and investment. b. negative relation between the real interest rate and investment. c. positive relation between the real interest rate and saving. d. negative relation between the real interest rate and saving.
ANS: B DIF: 2 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Market for loanable funds MSC: Interpretive 5. The Eye of Horus incense company has $10 million in cash which it has accumulated from retained earnings. It was planning to use the money to build a new factory. Recently, the rate of interest has increased. The increase in the rate of interest should a. not influence the decision to build the factory because The Eye of Horus doesn't have to borrow any money. b. not influence the decision to build the factory because its stockholders are expecting a new factory. c. make it more likely that The Eye of Horus will build the factory because a higher interest rate will make the factory more valuable. d. make it less likely that The Eye of Horus will build the factory because the opportunity cost of the $10 million is now higher.
ANS: D DIF: 3 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Investment | Market for loanable funds MSC: Applicative
ANS: C DIF: 2 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Market for loanable funds MSC: Interpretive 7. Fred is considering expanding his dress shop. If interest rates rise he is a. less likely to expand. This illustrates why the supply of loanable funds slopes downward. b. more likely to expand. This illustrates why the supply of loanable funds slopes upward. c. less likely to expand. This illustrates why the demand for loanable funds slopes downward. d. more likely to expand. This illustrates why the demand for loanable funds slopes upward.
ANS: C DIF: 2 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Investment | Market for loanable funds MSC: Interpretive 8. The slope of the supply of loanable funds curve represents the a. positive relation between the real interest rate and investment. b. positive relation between the real interest rate and saving. c. negative relation between the real interest rate and investment. d. negative relation between the real interest rate and saving.
ANS: B DIF: 2 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Market for loanable funds MSC: Interpretive 9. Other things the same, a higher interest rate induces people to a. save more, so the supply of loanable funds slopes upward. b. save less, so the supply of loanable funds slopes downward. c. invest more, so the supply of loanable funds slopes upward. d. invest less, so the supply of loanable funds slopes downward.
ANS: A DIF: 1 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Market for loanable funds MSC: Interpretive 10. The supply of loanable funds slopes a. upward because an increase in the interest rate induces people to save more. b. downward because an increase in the interest rate induces people to save less. c. downward because an increase in the interest rate induces people to invest less. d. upward because an increase in the interest rate induces people to invest more.
ANS: A DIF: 1 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Market for loanable funds MSC: Interpretive 11. Other things the same, an increase in the interest rate a. would shift the demand for loanable funds to the right. b. would shift the demand for loanable funds to the left. c. would increase the quantity of loanable funds demanded. d. would decrease the quantity of loanable funds demanded.
ANS: D DIF: 2 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Market for loanable funds MSC: Interpretive
ANS: D DIF: 2 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Market for loanable funds MSC: Interpretive 13. If the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded, a. there is a surplus and the interest rate is above the equilibrium level. b. there is a surplus and the interest rate is below the equilibrium level. c. there is a shortage and the interest rate is above the equilibrium level. d. there is a shortage and the interest rate is below the equilibrium level.
ANS: A DIF: 2 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Market for loanable funds MSC: Interpretive 14. If there is a surplus of loanable funds, then a. the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is above equilibrium. b. the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is below equilibrium. c. the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is above equilibrium. d. the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is below equilibrium.
ANS: C DIF: 2 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Market for loanable funds MSC: Interpretive 15. If there is a shortage of loanable funds, then a. the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is above equilibrium. b. the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is below equilibrium. c. the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is above equilibrium. d. the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is below equilibrium.
ANS: B DIF: 2 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Market for loanable funds MSC: Interpretive 16. If there is a surplus of loanable funds, then a. the quantity demanded is greater than the quantity supplied and the interest rate will rise. b. the quantity demanded is greater than the quantity supplied and the interest rate will fall. c. the quantity supplied is greater than the quantity demanded and the interest rate will rise. d. the quantity supplied is greater than the quantity demanded and the interest rate will fall.
ANS: D DIF: 2 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Market for loanable funds MSC: Interpretive
ANS: A DIF: 2 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Market for loanable funds MSC: Interpretive 18. If there is shortage of loanable funds, then a. the supply for loanable funds shifts right and the demand shifts left. b. the supply for loanable funds shifts left and the demand shifts right. c. neither curve shifts, but the quantity of loanable funds supplied increases and the quantity demanded decreases as the interest rate rises to equilibrium. d. neither curve shifts, but the quantity of loanable funds supplied decreases and the quantity demanded increases as the interest rate falls to equilibrium.
ANS: C DIF: 3 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Market for loanable funds MSC: Interpretive 19. If there is surplus of loanable funds, then a. the supply for loanable funds shifts right and the demand shifts left. b. the supply for loanable funds shifts left and the demand shifts right. c. neither curve shifts, but the quantity of loanable funds supplied increases and the quantity demanded decreases as the interest rate rises to equilibrium. d. neither curve shifts, but the quantity of loanable funds supplied decreases and the quantity demanded increases as the interest rate falls to equilibrium.
ANS: D DIF: 3 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Market for loanable funds MSC: Interpretive 20. If the demand for loanable funds shifts to the right, then the equilibrium interest rate a. and quantity of loanable funds rise. b. and quantity of loanable funds fall. c. rises and the quantity of loanable funds falls. d. falls and the quantity of loanable funds rises.
ANS: A DIF: 1 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Market for loanable funds MSC: Interpretive 21. If the demand for loanable funds shifts to the left, then the equilibrium interest rate a. and quantity of loanable funds rise. b. and quantity of loanable funds fall. c. rises and the quantity of loanable funds falls. d. falls and the quantity of loanable funds rises.
ANS: B DIF: 1 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Market for loanable funds MSC: Interpretive 22. If the supply for loanable funds shifts to the left, then the equilibrium interest rate a. and quantity of loanable funds rise. b. and quantity of loanable funds fall. c. rises and the quantity of loanable funds falls. d. falls and the quantity of loanable funds rises.
ANS: C DIF: 1 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Market for loanable funds MSC: Interpretive
ANS: D DIF: 1 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Market for loanable funds MSC: Interpretive 24. Which of the following could explain an increase in the interest rate and the equilibrium quantity of loanable funds? a. The demand for loanable funds shifted rightward. b. The demand for loanable funds shifted leftward. c. The supply of loanable funds shifted rightward. d. The supply of loanable funds shifted leftward.
ANS: A DIF: 2 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Market for loanable funds MSC: Interpretive 25. Which of the following would necessarily create a surplus at the original equilibrium interest rate in the loanable funds market? a. an increase in the supply of or a decrease in the demand for loanable funds b. an increase in the supply of or an increase in the demand for loanable funds c. a decrease in the supply of or a decrease in the demand for loanable funds d. a decrease in the supply of or an increase in the demand for loanable funds
ANS: A DIF: 2 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Market for loanable funds MSC: Interpretive 26. Which of the following could explain a decrease in the equilibrium interest rate and in the equilibrium quantity of loanable funds? a. The demand for loanable funds shifted rightward. b. The demand for loanable funds shifted leftward. c. The supply of loanable funds shifted rightward. d. The supply of loanable funds shifted leftward.
ANS: B DIF: 2 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Market for loanable funds MSC: Interpretive 27. Which of the following could explain a decrease in the equilibrium interest rate and an increase in the equilibrium quantity of loanable funds? a. The demand for loanable funds shifted rightward. b. The demand for loanable funds shifted leftward. c. The supply of loanable funds shifted rightward. d. The supply of loanable funds shifted leftward.
ANS: C DIF: 1 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Market for loanable funds MSC: Interpretive 28. Which of the following could explain an increase in the equilibrium interest rate and a decrease in the equilibrium quantity of loanable funds? a. The demand for loanable funds shifted right. b. The demand for loanable funds shifted left. c. The supply of loanable funds shifted right. d. The supply of loanable funds shifted left.
ANS: D DIF: 1 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Market for loanable funds MSC: Interpretive
ANS: C DIF: 2 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Market for loanable funds MSC: Interpretive 30. In 2002 mortgage rates fell and mortgage lending increased. Which of the following could explain both of these changes? a. The demand for loanable funds shifted right. b. The demand for loanable funds shifted left. c. The supply of loanable funds shifted right. d. The supply of loanable funds shifted left.
ANS: C DIF: 2 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Market for loanable funds MSC: Applicative 31. The nominal interest rate is the a. interest rate corrected for inflation. b. interest rate as usually reported by banks. c. real rate of return to the lender. d. real cost of borrowing to the borrower.
ANS: B DIF: 1 REF: 26-3 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Nominal interest rate MSC: Definitional 32. If the nominal interest rate is 5 percent and the rate of inflation is 2 percent, then the real interest rate is a. 7 percent. b. 3 percent. c. 2.5 percent. d. .4 percent.
ANS: B DIF: 1 REF: 26-3 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Nominal interest rate | Real interest rate MSC: Definitional 33. If the inflation rate is 2 percent and the real interest rate is 3 percent, then the nominal interest rate is a. 5 percent. b. 1 percent. c. 1.5 percent d. 0.67 percent.
ANS: A DIF: 1 REF: 26-3 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Nominal interest rate | Real interest rate MSC: Definitional 34. If the nominal interest rate is 10 percent and the inflation rate is 4 percent, then the real interest rate is a. 14 percent. b. 6 percent. c. 2.5 percent. d. .4 percent.
ANS: B DIF: 1 REF: 26-3 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Nominal interest rate | Real interest rate MSC: Definitional
ANS: B DIF: 1 REF: 26-3 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Nominal interest rate | Real interest rate MSC: Definitional 36. Which of the following statements is correct? a. As a group, economists see no purpose in distinguishing between the nominal interest rate and the real interest rate. b. The interest rate that is usually reported is the nominal interest rate. c. If the nominal interest rate increases and the inflation rate remains unchanged, then the real interest rate decreases. d. All of the above are correct.
ANS: B DIF: 2 REF: 26-3 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Nominal interest rate | Real interest rate MSC: Interpretive 37. Which of the following statements is correct? a. The interest rate that is usually reported is the interest rate that has been corrected for inflation. b. The supply of, and demand for, loanable funds depend on the real (rather than nominal) interest rate. c. If the nominal interest rate has decreased and the real interest rate has also decreased, then the inflation rate must have decreased as well. d. All of the above are correct.
ANS: B DIF: 2 REF: 26-3 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Nominal interest rate | Real interest rate MSC: Interpretive 38. Suppose the market for loanable funds is in equilibrium. What would happen in the market for loanable funds, other things the same, if the Congress and President increased the maximum contribution limits to 401(k) and 403(b) tax-deferred retirement accounts? a. the interest rate and quantity of loanable funds would increase b. the interest rate and quantity of loanable funds would decrease. c. the interest rate would increase and the quantity of loanable funds would decrease. d. the interest rate would decrease and the quantity of loanable funds would increase. DIF: 2 REF: 26-3 LOC: Understanding and Applying Economic Models MSC: Analytical
What would happen in the market for loanable funds if the government were to increase the tax on interest income? a. Interest rates would rise. b. Interest rates would be unaffected. c. Interest rates would fall. d. The effect on the interest rate is uncertain.
ANS: A DIF: 2 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Saving | Market for loanable funds MSC: Applicative
ANS: A DIF: 2 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Saving | Market for loanable funds MSC: Applicative 41. If Congress reduced the tax rate on interest income, investment a. would increase and saving would decrease. b. would decrease and saving would increase. c. and saving would increase. d. and saving would decrease.
ANS: C DIF: 2 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Saving | Investment | Market for loanable funds MSC: Analytical 42. If the government institutes policies that increase incentives to save, then in the loanable funds market a. the demand for loanable funds shifts right. b. the demand for loanable funds shifts left. c. the supply of loanable funds shifts right. d. the supply of loanable funds shifts left.
ANS: C DIF: 2 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Saving | Market for loanable funds MSC: Analytical 43. If a reform of the tax laws encourages greater saving, the result would be a. higher interest rates and greater investment. b. higher interest rates and less investment. c. lower interest rates and greater investment. d. lower interest rate and less investment.
ANS: C DIF: 2 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Saving | Investment | Interest rates MSC: Analytical 44. What would happen in the market for loanable funds if the government were to increase the tax on interest income? a. The supply of loanable funds would shift right. b. The demand for loanable funds would shift right. c. The supply of loanable funds would shift left. d. The demand for loanable funds would shift left.
ANS: C DIF: 2 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Market for loanable funds MSC: Applicative 45. What would happen in the market for loanable funds if the government were to decrease the tax rate on interest income? a. The supply of and demand for loanable funds would shift right. b. The supply of and demand for loanable funds would shift left. c. The supply of loanable funds would shift right and the demand for loanable funds would shift left. d. None of the above is correct.
ANS: D DIF: 2 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Taxes | Market for loanable funds MSC: Applicative
ANS: A DIF: 2 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Taxes | Market for loanable funds MSC: Analytical 47. Suppose the government were to replace the income tax with a consumption tax so that interest on savings was not taxed. The result would be that the interest rate a. and investment both would increase. b. and investment both would decrease. c. would increase and investment would decrease. d. would decrease and investment would increase.
ANS: D DIF: 3 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Taxes | Interest rates | Investment MSC: Analytical 48. Which of the following would not be a result of replacing the income tax with a consumption tax so that interest income was no longer taxed? a. The interest rate would decrease. b. Investment would decrease. c. The standard of living would eventually rise. d. The supply of loanable funds would shift right.
ANS: B DIF: 2 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Taxes | Interest rates | Investment MSC: Analytical 49. If in the past Congress had taken additional actions to make saving more rewarding, then today it is likely that the equilibrium interest rate a. and the equilibrium quantity of loanable funds both would be lower. b. and the equilibrium quantity of loanable funds both would be higher. c. would be higher and the equilibrium quantity of loanable funds would be lower. d. would be lower and the equilibrium quantity of loanable funds would be higher.
ANS: D DIF: 2 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Saving | Market for loanable funds MSC: Applicative 50. Suppose a country has a consumption tax that is similar to a state sales tax. If its government were to eliminate the consumption tax and replace it with an income tax that includes an income tax on interest from savings, what would happen? a. There would be no change in the interest rate or saving. b. The interest rate would decrease and saving would increase. c. The interest rate would increase and saving would decrease. d. None of the above is correct.
ANS: C DIF: 3 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Saving | Interest rates MSC: Analytical
ANS: B DIF: 3 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Taxes | Market for loanable funds MSC: Analytical 52. Suppose a government that taxed all interest income changed its tax law so that the first $5,000 of a taxpayers interest income was tax free. This would shift the a. supply of loanable funds to the right, causing interest rates to fall. b. supply of loanable funds to the left, causing interest rates to rise. c. demand for loanable funds to the right, causing interest rates to rise. d. demand for loanable funds to the left, causing interest rates to fall.
ANS: A DIF: 2 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Taxes | Interest rates | Market for loanable funds MSC: Applicative 53. Which of the following is not correct? a. American families save a larger fraction of their incomes than their counterparts in many other countries such as Germany and Japan. b. Saving is an important long-run determinant of a nation's standard of living. c. A change in tax laws that encouraged greater saving would lower interest rates. d. Taxes on interest income can substantially decrease the future value of current saving. DIF: 1 REF: 26-3 LOC: Understanding and Applying Economic Models MSC: Interpretive
If Congress instituted an investment tax credit, the interest rate would a. rise and saving would rise. b. fall and saving would fall. c. rise and saving would fall. d. fall and saving would rise.
ANS: A DIF: 2 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Investment tax credit | Interest rates | Saving MSC: Analytical 55. If Congress instituted an investment tax credit, the equilibrium quantity of loanable funds would a. rise. b. fall. c. be unchanged. d. move in an uncertain direction.
ANS: A DIF: 1 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Investment tax credit | Market for loanable fundsMSC: Applicative
ANS: B DIF: 2 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Investment tax credit | Market for loanable fundsMSC: Applicative 57. Suppose that Congress were to institute an investment tax credit. What would happen in the market for loanable funds? a. The demand for loanable funds would shift left. b. The supply of loanable funds would shift left. c. The demand for loanable funds would shift right. d. The supply of loanable funds would shift right.
ANS: C DIF: 1 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Investment tax credit | Market for loanable fundsMSC: Applicative 58. Suppose that Congress were to repeal an investment tax credit. What would happen in the market for loanable funds? a. The demand and supply of loanable funds would shift right. b. The demand and supply of loanable funds would shift left. c. The supply of loanable funds would shift right. d. The demand for loanable funds would shift left.
ANS: D DIF: 1 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Investment tax credit | Market for loanable fundsMSC: Applicative 59. Suppose a country repealed its investment tax credit. The effects of this are represented by shifting the a. demand for and the supply of loanable funds to the right. b. demand for and the supply of loanable funds to the left. c. supply of loanable funds to the right and the demand for loanable funds to the left. d. None of the above is correct.
ANS: D DIF: 2 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Investment tax credit | Market for loanable fundsMSC: Applicative 60. Suppose Congress institutes an investment tax credit. What would happen in the market for loanable funds? a. The interest rate and investment would fall. b. The interest rate and investment would rise. c. The interest rate would rise and investment would fall. d. None of the above is necessarily correct.
ANS: B DIF: 2 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Investment tax credit | Market for loanable fundsMSC: Applicative
ANS: A DIF: 3 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Investment tax credit | Market for loanable fundsMSC: Analytical 62. If the government currently has a budget deficit, then a. it does not necessarily have a debt. b. its debt is increasing. c. government expenditures are greater than taxes. d. All of the above are correct.
ANS: D DIF: 2 REF: 26-3 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Budget deficits MSC: Interpretive 63. A budget deficit a. changes the supply of loanable funds. b. changes the demand for loanable funds. c. changes both the supply of and demand for loanable funds. d. does not influence the supply of or the demand for loanable funds.
ANS: A DIF: 1 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Budget deficits MSC: Interpretive 64. Other things the same, a government budget deficit a. reduces public saving, but not national saving.. b. reduces national saving, but not public saving. c. reduces both public and national saving. d. reduces neither public saving nor national saving.
ANS: C DIF: 2 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Budget deficits | Public saving | National saving MSC: Interpretive 65. A larger budget surplus a. raises the interest rate and investment. b. reduces the interest rate and investment. c. raises the interest rate and reduces investment. d. reduces the interest rate and raises investment.
ANS: D DIF: 1 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Budget surpluses MSC: Definitional 66. A larger budget deficit a. raises the interest rate and investment. b. reduces the interest rate and investment. c. raises the interest rate and reduces investment. d. reduces the interest rate and raises investment.
ANS: C DIF: 2 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Budget surpluses MSC: Interpretive
ANS: B DIF: 2 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Budget deficits | Market for loanable funds MSC: Interpretive 68. If Canada increases its budget deficit, it will reduce a. private saving and so shift the supply of loanable funds left. b. investment and so shift the demand for loanable funds left. c. public saving and so shift the supply of loanable funds left. d. None of the above is correct.
ANS: C DIF: 2 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Budget deficits | Market for loanable funds MSC: Applicative 69. An increase in the budget deficit would cause a a. shortage of loanable funds at the original interest rate, which would lead to falling interest rates. b. surplus of loanable funds at the original interest rate, which would lead to rising interest rates. c. shortage of loanable funds at the original interest rate, which would lead to rising interest rates. d. surplus of loanable funds at the original interest rate, which would lead to falling interest rates.
ANS: C DIF: 3 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Budget deficits | Interest rates MSC: Analytical 70. An increase in the budget deficit a. makes investment spending fall. b. makes investment spending rise. c. does not affect investment spending. d. may increase, decrease, or not affect investment spending. DIF: 2 REF: 26-3 LOC: Understanding and Applying Economic Models MSC: Interpretive
Suppose the government deficit increases, but the interest rate remains the same. Which of the following things might have happened simultaneously to keep interest rates the same? a. The government reduces the amount that people may put into savings accounts on which the interest is tax exempt. b. Because they are optimistic about the future of the economy, firms desire to borrow more to purchase physical capital. c. Consumers decide to decrease consumption and work more. d. All of the above could explain why the interest rate would be unchanged.
ANS: C DIF: 3 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Budget deficits MSC: Analytical 72. Other things the same, if the government increases transfer payments to households, then the effect of this on the governments budget a. will make investment rise. b. will make the rate of interest rise. c. will make public saving rise. d. All of the above are correct.
ANS: B DIF: 3 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Budget deficits | Interest rates MSC: Analytical
ANS: C DIF: 2 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Budget deficits | Market for loanable funds MSC: Analytical 74. Suppose government expenditures on goods and services and net taxes both decrease, and expenditures fall by more than net taxes. The effects of these changes on the budget deficit cause a. both the equilibrium interest rate and the equilibrium quantity of loanable funds to fall. b. both the equilibrium interest rate and the equilibrium quantity of loanable funds to rise. c. the equilibrium interest rate to rise and the equilibrium quantity of loanable funds to fall. d. the equilibrium interest rate to fall and the equilibrium quantity of loanable funds to rise. DIF: TOP: 2 REF: 26-3 Budget deficits | Market for loanable funds
Bolivia had a smaller budget deficit in 2003 than in 2002. Other things the same, we would expect this reduction in the budget deficit to have a. increased both interest rates and investment. b. increased interest rates and decreased investment. c. decreased interest rates and increased investment. d. decreased both interest rates and investment. DIF: TOP: 2 REF: 26-3 Budget deficits | Market for loanable funds
Suppose a country had a smaller increase in debt in 2008 than it had in 2007. Then other things the same, we would expect a. lower interest rates and investment in 2008 than in 2007. b. lower interest rates and greater investment in 2008 than in 2007. c. higher interest rates and greater investment in 2008 than in 2007. d. higher interest rates and lower investment in 2008 than in 2007.
ANS: B DIF: 2 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Budget deficits | Market for loanable funds MSC: Analytical 77. Suppose the government ran a budget surplus in 2008 and a larger surplus in 2009. The loanable funds model would predict that, as a result of the increase in the surplus, a. both the government debt and interest rates increased between 2008 and 2009. b. both the government debt and interest rates decreased between 2008 and 2009. c. the government debt increased and interest rates decreased between 2008 and 2009. d. the government debt decreased and interest rates increased between 2008 and 2009.
ANS: B DIF: 1 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Budget surpluses | Market for loanable funds MSC: Interpretive 78. Crowding out occurs when investment declines because a. a budget deficit makes interest rates rise. b. a budget deficit makes interest rates fall. c. a budget surplus makes interest rates rise. d. a budget surplus makes interest rates fall. DIF: 1 REF: 26-3 LOC: Understanding and Applying Economic Models MSC: Definitional
ANS: C DIF: 1 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Budget deficits | Crowding out MSC: Interpretive 80. Suppose the Congress and president decreased the maximum annual contributions limits to retirement accounts and at the same time reduced the budget deficit. What would happen to the interest rate? a. It would decrease. b. It would increase. c. It would stay the same. d. It might do any of the above.
ANS: D DIF: 3 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Budget deficits | Saving | Interest rates MSC: Analytical 81. Which of the following events could explain a decrease in interest rates together with an increase in investment? a. The government went from surplus to deficit. b. The government instituted an investment tax credit. c. The government reduced the tax rate on savings. d. None of the above is correct.
ANS: C DIF: 3 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Taxes | Saving MSC: Analytical 82. Which of the following events could explain an increase in interest rates together with a decrease in investment? a. The government budget went from surplus to deficit. b. The government instituted an investment tax credit. c. The government reduced the tax rate on savings. d. None of the above is correct.
ANS: A DIF: 2 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Budget surpluses | Budget deficits MSC: Analytical 83. Which of the following events could explain an increase in interest rates together with an increase in investment? a. The government runs a larger deficit. b. The government institutes an investment tax credit. c. The government replaces the income tax with a consumption tax. d. None of the above is correct. DIF: 2 REF: 26-3 LOC: Understanding and Applying Economic Models MSC: Analytical
Interest rates fall and investment falls. Which of the following could explain these changes? a. The government goes from a surplus to a deficit. b. The government repeals an investment tax credit. c. The government replaces a consumption tax with an income tax. d. None of the above is correct.
ANS: B DIF: 2 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Investment tax credit MSC: Analytical
ANS: A DIF: 2 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Taxes | Budget deficits MSC: Analytical 86. A change in the tax laws that increases the supply of loanable funds will have a bigger effect on investment when a. the demand for loanable funds is more elastic and the supply of loanable funds is more inelastic. b. the demand for loanable funds is more inelastic and the supply of loanable funds is more elastic. c. both the demand for and supply of loanable funds are more elastic. d. both the demand for and supply of loanable funds are more inelastic.
ANS: A DIF: 3 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Taxes | Market for loanable funds MSC: Analytical 87. A government budget deficit affects the supply of loanable funds, rather than the demand for loanable funds, because a. in our model of the loanable funds market, we define loanable funds as the flow of resources available to fund private investment. b. in our model of the loanable funds market, we define loanable funds as the flow of resources available from private saving. c. markets for government debt are fundamentally different from markets for private debt. d. of our assumption that the economy is closed.
ANS: A DIF: 2 REF: 26-3 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Budget deficits | Market for loanable funds MSC: Interpretive 88. If we were to change the interpretation of the term loanable funds in such a way that government budget deficits would affect the demand for loanable funds, rather than the supply of loanable funds, then a. crowding out would not be a consequence of an increase in the budget deficit. b. higher interest rates would not be a consequence of an increase in the budget deficit. c. an increase in the budget deficit would cause the demand for loanable funds to decrease. d. we would be making only a semantic change in how we analyze the effects of government budget deficits.
ANS: D DIF: 2 REF: 26-3 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Budget deficits | Market for loanable funds MSC: Interpretive 89. Which of the following statements is not correct? a. If GDP is rising faster than debt, the government is, in some sense, living within its means. b. The ratio of debt to GDP in the United States has always been less than one. c. Debts during wars may distribute the burden of fighting the war more evenly across generations. d. During times of peace the ratio of debt to GDP sometimes rose.
ANS: B DIF: 2 REF: 26-3 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Government debt MSC: Interpretive 90. In recent years the U.S. national debt has been about a. 10-20 percent of GDP. b. 30-40 percent of GDP. c. 50-60 percent of GDP. d. 70-80 percent of GDP.
ANS: B DIF: 1 REF: 26-3 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Government debt MSC: Definitional
ANS: B DIF: 1 REF: 26-3 NAT: Analytic LOC: The Study of economics, and definitions of economics TOP: Government debt MSC: Definitional 92. The source of the supply of loanable funds is a. saving, and the source of the demand for loanable funds is investment. b. consumption, and the source of the demand for loanable funds is investment. c. investment, and the source of the demand for loanable funds is saving. d. the interest rate, and the source of the demand for loanable funds is saving.
ANS: A DIF: 1 REF: 26-3 NAT: Analytic LOC: Understanding and applying economic models TOP: Market for loanable funds MSC: Interpretive 93. In the market for loanable funds, the interaction of the demand for, and supply of, loanable funds determines the equilibrium level of a. the inflation rate. b. gross domestic product. c. the real interest rate. d. the nominal interest rate.
ANS: C DIF: 1 REF: 26-3 NAT: Analytic LOC: Understanding and applying economic models TOP: Market for loanable funds MSC: Interpretive 94. Suppose the government changed the tax laws, with the result that people were encouraged to consume more and save less. Using the loanable funds model, a consequence would be a. lower interest rates and lower investment. b. lower interest rates and greater investment. c. higher interest rates and lower investment. d. higher interest rates and higher investment.
ANS: C DIF: 2 REF: 26-3 NAT: Analytic LOC: Understanding and applying economic models TOP: Market for loanable funds MSC: Interpretive 95. According to the loanable funds model, which of the following events would result in higher interest rates and greater saving? a. Firms become pessimistic about the future and, as a result, they cut back on their plans to buy new equipment and build new factories. b. The government goes from running a budget deficit to running a budget surplus. c. Congress passes a reform of the tax laws that encourages greater saving. d. Congress passes a reform of the tax laws that encourages greater investment.
ANS: D DIF: 2 REF: 26-3 NAT: Analytic LOC: Understanding and applying economic models TOP: Market for loanable funds MSC: Interpretive 96. Which of the following counts as part of the supply of loanable funds? a. bank deposits and purchases of bonds b. bank deposits but not purchases of bonds c. purchases of bonds but not bank deposits d. neither purchases of bonds nor bank deposits
ANS: A DIF: 1 REF: 26-3 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: Market for loanable funds MSC: Definitional
ANS: B DIF: 2 REF: 26-3 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: Market for loanable funds MSC: Definitional 98. Which of the following is correct? a. In a closed economy equilibrium in the market for loanable funds occurs where saving = investment. b. Investment is the source for the supply of loanable funds. c. If there is a surplus in the market for loanable funds, the interest rate rises. d. All of the above are correct
ANS: A DIF: 2 REF: 26-3 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: Equilibrium | Market for loanable funds MSC: Analytic 99. A policy that induces people to save more shifts a. the supply of loanable funds and raises interest rates. b. the supply of loanable funds and reduces interest rates. c. the demand for loanable funds and raises interest rates. d. the demand for loanable funds and reduces interest rates. DIF: 2 REF: 26-3 LOC: The study of economics, and definitions of economics MSC: Interpretive
100. If the government instituted an investment tax credit, then which of the following would be higher in equilibrium? a. saving and the interest rate b. saving but not the interest rate c. the interest rate but not saving d. neither saving nor the interest rate ANS: A DIF: 2 REF: 26-3 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: Investment tax credit MSC: Analytic 101. If the budget deficit increases then a. saving and the interest rate rise b. saving rises and the interest rate falls c. saving falls and the interest rate rises d. saving and the interest rate falls ANS: C DIF: 2 REF: 26-3 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: Budget deficits MSC: Analytic 102. Which of the following are effects of an increased budget deficit? a. the supply of loanable funds does not change; a higher interest rate reduces private saving b. the supply of loanable funds does not change; a higher interest rate raises private saving c. at any interest rate the supply of loanable funds is less; a higher interest rate reduces private saving d. at any interest rate the supply of loanable funds is less; a higher interest rate raises private saving ANS: D DIF: 3 REF: 26-3 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: Budget deficits MSC: Analytic
S1
S2
Demand
103. Refer to Figure 26-1. What is measured along the vertical axis of the graph? a. the nominal interest rate b. the real interest rate c. the quantity of investment d. the quantity of saving ANS: B DIF: 1 REF: 26-3 NAT: Analytic LOC: Understanding and applying economic models TOP: Market for loanable funds MSC: Interpretive 104. Refer to Figure 26-1. Which of the following events would shift the supply curve from S1 to S2? a. In response to tax reform, firms are encouraged to invest more than they previously invested. b. In response to tax reform, households are encouraged to save more than they previously saved. c. Government goes from running a balanced budget to running a budget deficit. d. Any of the above events would shift the supply curve from S1 to S2. ANS: B DIF: 2 REF: 26-3 NAT: Analytic LOC: Understanding and applying economic models TOP: Market for loanable funds MSC: Interpretive
Supply
D2 D1
105. Refer to Figure 26-2. What is measured along the horizontal axis of the graph? a. the quantity of loanable funds b. the size of the government budget deficit or surplus c. the real interest rate d. the nominal interest rate ANS: A DIF: 1 REF: 26-3 NAT: Analytic LOC: Understanding and applying economic models TOP: Market for loanable funds MSC: Interpretive 106. Refer to Figure 26-2. Which of the following events would shift the demand curve from D1 to D2? a. The government goes from running a budget deficit to running a budget surplus. b. Firms become optimistic about the future and, as a result, they plan to increase their purchases of new equipment and construction of new factories. c. A change in the tax laws encourages people to consume less and save more. d. A change in the tax laws encourages people to consume more and save less. ANS: B DIF: 2 REF: 26-3 NAT: Analytic LOC: Understanding and applying economic models TOP: Market for loanable funds MSC: Interpretive
i
S2 C B
S1 F
D2
D1
107. Refer to Figure 26-3. What, specifically, does the label on the vertical axis, i, represent? a. the nominal interest rate b. the real interest rate c. the inflation rate d. the dividend yield ANS: B DIF: 1 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Market for loanable funds MSC: Interpretive 108. Refer to Figure 26-3. A shift of the supply curve from S1 to S2 is called a. an increase in the supply of loanable funds. b. an increase in the quantity of loanable funds supplied. c. a decrease in the supply of loanable funds. d. a decrease in the quantity of loanable funds supplied. ANS: C DIF: 2 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Market for loanable funds MSC: Interpretive 109. Refer to Figure 26-3. A shift of the demand curve from D1 to D2 is called a. an increase in the demand for loanable funds, and that increase would originate from people who had some extra income they wanted to lend. b. an increase in the demand for loanable funds, and that increase would originate from households and firms who wish to borrow to make investments. c. a decrease in the demand for loanable funds, and that decrease would originate from people who had some extra income they wanted to lend. d. a decrease in the demand for loanable funds, and that decrease would originate from households and firms who wish to borrow to make investments. ANS: B DIF: 2 REF: 26-3 NAT: Analytic LOC: Understanding and Applying Economic Models TOP: Market for loanable funds MSC: Interpretive