Question 1

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?

Accepted Answer

A)   It would decrease.
B)   It would increase.
C)   It would stay the same.
D)   It might do any of the above.E) All of the above
F) A) and D)

Question 2

In which case would people desire to borrow the most?

Accepted Answer

A)   the nominal interest rate is 8% and the inflation rate is 7%
B)   the nominal interest rate is 7% and the inflation rate is 5%
C)   the nominal interest rate is 6% and the inflation rate is 3%
D)   the nominal interest rate is 5% and the inflation rate is 1%E) A) and D)
F) A) and C)

Question 3

Which of the following is not a characteristic of a bond?

Accepted Answer

A)   its tax treatment
B)   its credit risk
C)   its term
D)   its dividend yieldE) C) and D)
F) B) and C)

Question 4

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?

Accepted Answer

A)   20, 1.25 percent
B)   20, 6.25 percent
C)   16, 1.25 percent
D)   None of the above is correct.E) A) and D)
F) A) and C)

Question 5

The financial system coordinates investment and saving, which are important determinants of long-run real GDP.

Accepted Answer

A) True 
 B)False

Question 6

As an alternative to selling shares of stock as a means of raising funds, a large company could, instead,

Accepted Answer

A)   invest in physical capital.
B)   use equity finance.
C)   sell bonds.
D)   purchase bonds.E) A) and C)
F) C) and D)

Question 7

Figure 8-3. The figure shows two demand-for-loanable-funds curves and two supply-of-loanable-funds curves.
 
-Refer to Figure 8-3. What, specifically, does the label on the vertical axis, i, represent?

Accepted Answer

A)   the nominal interest rate
B)   the real interest rate
C)   the inflation rate
D)   the dividend yieldE) None of the above
F) A) and D)

Question 8

For an imaginary economy, when the real interest rate is 7 percent, the quantity of loanable funds demanded is $500 and the quantity of loanable funds supplied is $500. Currently, the nominal interest rate is 9 percent and the inflation rate is 4 percent. Currently,

Accepted Answer

A)   the market for loanable funds is in equilibrium.
B)   the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded, and as a result the real interest rate will rise.
C)   the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded, and as a result the real interest rate will fall.
D)   the quantity of loanable funds demanded exceeds the quantity of loanable funds supplied, and as a result the real interest rate will rise.E) A) and D)
F) B) and D)

Question 9

The slope of the demand for loanable funds curve represents the

Accepted Answer

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.E) A) and B)
F) All of the above

Question 10

In a closed economy, public saving is the amount of

Accepted Answer

A)   income that households have left after paying for taxes and consumption.
B)   income that businesses have left after paying for the factors of production.
C)   tax revenue that the government has left after paying for its spending.
D)   spending that the government undertakes in excess of the taxes it collects.E) B) and C)
F) None of the above

Question 11

Other things the same, the higher the rate of saving and investment in a country, the higher will be the standard of living in the future.

Accepted Answer

A) True 
 B)False

Question 12

If there is a shortage of loanable funds, then

Accepted Answer

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.E) C) and D)
F) A) and C)

Question 13

Skyline Chili wants to finance the purchase of new equipment for its restaurants. The firm has limited internal funds, so Skyline likely will

Accepted Answer

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.E) B) and D)
F) B) and C)

Question 14

Figure 8-4. On the horizontal axis of the graph, L represents the quantity of loanable funds in billions of dollars.
 
-Refer to Figure 8-4. If the equilibrium quantity of loanable funds is $56 billion and if the rate of inflation is 4 percent, then the equilibrium real interest rate is

Accepted Answer

A)   lower than 6 percent..
B)   6 percent.
C)   between 6 percent and 8 percent.
D)   higher than 8 percent.E) A) and C)
F) B) and C)

Question 15

On which of these bonds is the prospect of default least likely?

Accepted Answer

A)   a junk bond
B)   a bond issued by the state of Arizona
C)   a bond issued by the federal government
D)   a bond issued by General Electric CorporationE) A) and B)
F) None of the above

Question 16

A mutual fund

Accepted Answer

A)   is a financial institution that stands between savers and borrowers.
B)   is a financial intermediary.
C)   allows people with small amounts of money to diversify their holdings.
D)   All of the above are correct.E) C) and D)
F) All of the above

Question 17

Scenario 8-3. Assume the following information for an imaginary, open economy.
Consumption = $1,000; investment = $300; net exports = $100;
taxes = $230; private saving = $200; and national saving = $150.
-Refer to Scenario 8-3. This economy's government is running a

Accepted Answer

A)   budget deficit of $50.
B)   budget deficit of $80.
C)   budget surplus of $50.
D)   budget surplus of $80.E) A) and B)
F) A) and C)

Question 18

Which of the following would a macroeconomist consider as investment?

Accepted Answer

A)   Marisa purchases a bond issued by Proctor and Gamble Corp.
B)   Karlee purchases stock issued by Texas Instruments, Inc.
C)   Charlie builds a new coffee shop.
D)   All of the above are correct.E) C) and D)
F) B) and D)

Question 19

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.

Accepted Answer

A) True 
 B)False

Question 20

Compared to short-term bonds, other things the same, long-term bonds generally have

Accepted Answer

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.E) None of the above
F) B) and C)

Exam 8: Saving, Investment, and the Financial System

On which of these bonds is the prospect of default least likely?

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Skyline Chili wants to finance the purchase of new equipment for its restaurants. The firm has limited internal funds, so Skyline likely will

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Scenario 8-3. Assume the following information for an imaginary, open economy. Consumption = $1,000; investment = $300; net exports = $100; taxes = $230; private saving = $200; and national saving = $150. -Refer to Scenario 8-3. This economy's government is running a

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Which of the following would a macroeconomist consider as investment?

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If there is a shortage of loanable funds, then

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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?

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A mutual fund

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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.

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For an imaginary economy, when the real interest rate is 7 percent, the quantity of loanable funds demanded is $500 and the quantity of loanable funds supplied is $500. Currently, the nominal interest rate is 9 percent and the inflation rate is 4 percent. Currently,

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In which case would people desire to borrow the most?

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The financial system coordinates investment and saving, which are important determinants of long-run real GDP.

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Figure 8-4. On the horizontal axis of the graph, L represents the quantity of loanable funds in billions of dollars. -Refer to Figure 8-4. If the equilibrium quantity of loanable funds is $56 billion and if the rate of inflation is 4 percent, then the equilibrium real interest rate is

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Which of the following is not a characteristic of a bond?

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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?

Correct AnswerverifiedShow Answer

Compared to short-term bonds, other things the same, long-term bonds generally have

Correct AnswerverifiedShow Answer

The slope of the demand for loanable funds curve represents the

Correct AnswerverifiedShow Answer

Other things the same, the higher the rate of saving and investment in a country, the higher will be the standard of living in the future.

Correct AnswerverifiedShow Answer

As an alternative to selling shares of stock as a means of raising funds, a large company could, instead,

Correct AnswerverifiedShow Answer

Figure 8-3. The figure shows two demand-for-loanable-funds curves and two supply-of-loanable-funds curves. -Refer to Figure 8-3. What, specifically, does the label on the vertical axis, i, represent?

Correct AnswerverifiedShow Answer

In a closed economy, public saving is the amount of

Correct AnswerverifiedShow Answer

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