Question 1

Which of the following statements is correct?

Accepted Answer

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

Question 2

Other things the same, a government budget deficit

Accepted Answer

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.E) B) and C)
F) A) and B)

Question 3

Suppose the city of Des Moines has a high credit rating, and so when Des Moines borrows funds by selling bonds,

Accepted Answer

A)   the city's high credit rating and the tax status of municipal bonds both contribute to a lower interest rate than would otherwise apply.
B)   the city's high credit rating and the tax status of municipal bonds both contribute to a higher interest rate than would otherwise apply.
C)   the city's 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 city's 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.E) B) and C)
F) A) and B)

Question 4

If the government budget deficit increases, which curve in the market for loanable funds shifts, which direction does it shift, and what happens to the interest rate?

Accepted Answer

The supply of loanab...

Question 5

Which of the following could explain an increase in the equilibrium interest rate and a decrease in the equilibrium quantity of loanable funds?

Accepted Answer

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

Question 6

A U.S. Treasury bond is a

Accepted Answer

A)   store of value and common medium of exchange.
B)   store of value, but not a common medium of exchange.
C)   a common medium of exchange, but not a store of value.
D)   neither a store of value nor a common medium of exchange.E) B) and C)
F) A) and D)

Question 7

People who buy newly issued stock in a corporation such as Crate and Barrel provide

Accepted Answer

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.E) None of the above
F) All of the above

Question 8

Bond A) and Bond B) are identical except Bond B has a longer term. Therefore, we expect Bond _____ to pay a higher rate of interest.

Accepted Answer

The answer of Bond A) and Bond B) are identical...

Question 9

Index funds

Accepted Answer

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

Question 10

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

Accepted Answer

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

Question 11

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 12

Long-term bonds are

Accepted Answer

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

Question 13

In a closed economy, what remains after paying for consumption and government purchases is

Accepted Answer

A)   national disposable income.
B)   national saving.
C)   public saving.
D)   private saving.E) B) and D)
F) B) and C)

Question 14

The country of Cedarland does not trade with any other country. Its GDP is $17 billion. Its government purchases $5 billion worth of goods and services each year and collects $6 billion in taxes. Private saving in Cedarland is $5 billion. For Cedarland,

Accepted Answer

A)   investment is $6 billion and consumption is $7 billion.
B)   investment is $6 billion and consumption is $6 billion.
C)   investment is $7 billion and consumption is $7 billion.
D)   investment is $7 billion and consumption is $6 billion.E) None of the above
F) A) and D)

Question 15

A corporation's earnings are the amount of revenue it receives for the sale of its products

Accepted Answer

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

Question 16

Suppose the economy is closed and consumption is 8 million, taxes are 2 million, and government purchases are 1.75 million. If national saving amounts to 1.25 million, then what is GDP?

Accepted Answer

A)   9 million.
B)   9.5 million.
C)   13 million.
D)   11 million.E) B) and D)
F) A) and C)

Question 17

Other things the same, which bond would you expect to pay the highest interest rate?

Accepted Answer

A)   a bond issued by the U.S. government
B)   a bond issued by Microsoft Corporation
C)   a bond issued by the state of Montana
D)   a bond issued by a new chain of Brazilian-style restaurantsE) A) and D)
F) None of the above

Question 18

Suppose the government ran a budget surplus in 2010 and a larger surplus in 2011. The loanable funds model would predict that, as a result of the increase in the surplus,

Accepted Answer

A)   both the government debt and interest rates increased between 2010 and 2011.
B)   both the government debt and interest rates decreased between 2010 and 2011.
C)   the government debt increased and interest rates decreased between 2010 and 2011.
D)   the government debt decreased and interest rates increased between 2010 and 2011.E) A) and B)
F) A) and C)

Question 19

What do we call financial institutions through which savers can indirectly provide funds to borrowers?

Accepted Answer

A)   stock markets
B)   financial institutions
C)   financial markets
D)   financial intermediariesE) None of the above
F) B) and C)

Question 20

Lenders buy bonds and borrowers sell them.

Accepted Answer

A) True 
 B)False

Exam 8: Saving, Investment, and the Financial System

A U.S. Treasury bond is a

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Suppose the government ran a budget surplus in 2010 and a larger surplus in 2011. The loanable funds model would predict that, as a result of the increase in the surplus,

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Bond A) and Bond B) are identical except Bond B has a longer term. Therefore, we expect Bond _____ to pay a higher rate of interest.

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Suppose the city of Des Moines has a high credit rating, and so when Des Moines borrows funds by selling bonds,

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Long-term bonds are

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People who buy newly issued stock in a corporation such as Crate and Barrel provide

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The country of Cedarland does not trade with any other country. Its GDP is $17 billion. Its government purchases $5 billion worth of goods and services each year and collects $6 billion in taxes. Private saving in Cedarland is $5 billion. For Cedarland,

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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

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What do we call financial institutions through which savers can indirectly provide funds to borrowers?

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A corporation's earnings are the amount of revenue it receives for the sale of its products

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Other things the same, a government budget deficit

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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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In a closed economy, what remains after paying for consumption and government purchases is

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Index funds

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Suppose the economy is closed and consumption is 8 million, taxes are 2 million, and government purchases are 1.75 million. If national saving amounts to 1.25 million, then what is GDP?

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Which of the following statements is correct?

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Which of the following could explain an increase in the equilibrium interest rate and a decrease in the equilibrium quantity of loanable funds?

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Other things the same, which bond would you expect to pay the highest interest rate?

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If the government budget deficit increases, which curve in the market for loanable funds shifts, which direction does it shift, and what happens to the interest rate?

Correct AnswerverifiedThe supply of loanab...View AnswerShow Answer

Lenders buy bonds and borrowers sell them.

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The supply of loanab...
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