Question 1

Suppose that Congress were to institute an investment tax credit. What would happen in the market for loanable funds?

Accepted Answer

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

Question 2

If the nominal interest rate is 7 percent and the rate of inflation is 3 percent, then the real interest rate is

Accepted Answer

A)   7 percent.
B)   4 percent.
C)   3 percent.
D)   10 percent.E) B) and C)
F) B) and D)

Question 3

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

Accepted Answer

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

Question 4

The term loanable funds refers to all income that is not used for consumption.

Accepted Answer

A) True 
 B)False  False

Question 5

Because of differences in tax treatment, municipal bonds pay a higher interest rate than do corporate bonds.

Accepted Answer

A) True 
 B)False

Question 6

If there is a surplus 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) A) and D)
F) C) and D)

Question 7

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,

Accepted Answer

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

Question 8

What is a mutual fund?

Accepted Answer

An institution that sells shar...

Question 9

Which of the following restrictions implies that investment exceeds private saving for a closed economy?

Accepted Answer

A)   The economy has no government.
B)   The economy's government is running a budget deficit.
C)   The economy's government is running a budget surplus.
D)   No restriction is necessary; investment and private saving are equal for all closed economies.E) C) and D)
F) A) and C)

Question 10

Alpha Corporation has a price of $5 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 which is

Accepted Answer

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

Question 11

We interpret the meaning of "loanable funds" as the

Accepted Answer

A)   flow of resources available from private saving.
B)   flow of resources available to fund private investment.
C)   resources borrowed by private investors and by government.
D)   resources lent by private investors and by government.E) None of the above
F) All of the above

Question 12

A is a certificate of indebtedness and a is a claim to partial ownership in a firm.

Accepted Answer

The answer of A is a certificate of indebtedness and...

Question 13

If the government currently has a budget deficit, then

Accepted Answer

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

Question 14

If in the past Congress had taken additional actions to make saving more rewarding, then today it is likely that the equilibrium interest rate

Accepted Answer

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

Question 15

On a graph that depicts the market for loanable funds, the nominal interest rate is measured along the vertical axis.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following would both make the interest rate on a bond higher than otherwise?

Accepted Answer

A)   the interest it pays is taxed and it is long term
B)   the interest it pays is taxed and it is short term
C)   the interest it pays is tax exempt and it is long term
D)   the interest it pays is tax exempt and it is short termE) A) and B)
F) A) and C)

Question 17

Your brother-in-law wants to buy either stock or bonds in Cedar Valley Furniture, which manufactures wooden furniture. He wants your advice on whether to buy stock or bonds. Explain how each of his quotes below should affect his choice between the stock and the bond.
a. "I have reason to believe that people are soon going to find rocking chairs have health benefits."
b. "I would like to tell people I am part owner of Cedar Valley Furniture."
c. "I do not want to take on much risk."

Accepted Answer

a. Presumably, when this happens, unless...

Question 18

In a closed economy, national saving equals

Accepted Answer

A)   investment.
B)   income minus the sum of consumption and government purchases.
C)   private saving plus public saving.
D)   All of the above are correct.E) A) and B)
F) A) and C)

Question 19

Bond A and Bond B have identical characteristics except that Bond A has a higher interest rate. Which bond has a higher credit risk?

Accepted Answer

The answer of Bond A and Bond B have identical...

Question 20

What is the main function of the financial system?

Accepted Answer

Matching savers with investors.

Exam 26: Saving, Investment, and the Financial System

Suppose that Congress were to institute an investment tax credit. What would happen in the market for loanable funds?

Correct Answer
verified
C

If the nominal interest rate is 7 percent and the rate of inflation is 3 percent, then the real interest rate is

Correct Answer
verified

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

Correct Answer
verified

The term loanable funds refers to all income that is not used for consumption.

Correct Answer
verified
False

Because of differences in tax treatment, municipal bonds pay a higher interest rate than do corporate bonds.

Correct Answer
verified

If there is a surplus of loanable funds, then

Correct Answer
verified

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,

Correct Answer
verified

What is a mutual fund?

Correct Answer
verified
An institution that sells shar...
View Answer

Which of the following restrictions implies that investment exceeds private saving for a closed economy?

Correct Answer
verified

Alpha Corporation has a price of $5 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 which is

Correct Answer
verified

We interpret the meaning of "loanable funds" as the

Correct Answer
verified

A is a certificate of indebtedness and a is a claim to partial ownership in a firm.

Correct Answer
verified

If the government currently has a budget deficit, then

Correct Answer
verified

If in the past Congress had taken additional actions to make saving more rewarding, then today it is likely that the equilibrium interest rate

Correct Answer
verified

On a graph that depicts the market for loanable funds, the nominal interest rate is measured along the vertical axis.

Correct Answer
verified

Which of the following would both make the interest rate on a bond higher than otherwise?

Correct Answer
verified

Correct Answer
verified
a. Presumably, when this happens, unless...
View Answer

In a closed economy, national saving equals

Correct Answer
verified

Bond A and Bond B have identical characteristics except that Bond A has a higher interest rate. Which bond has a higher credit risk?

Correct Answer
verified

What is the main function of the financial system?

Correct Answer
verified
Matching savers with investors.

Exam 26: Saving, Investment, and the Financial System

Suppose that Congress were to institute an investment tax credit. What would happen in the market for loanable funds?

Correct AnswerverifiedC

If the nominal interest rate is 7 percent and the rate of inflation is 3 percent, then the real interest rate is

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The term loanable funds refers to all income that is not used for consumption.

Correct AnswerverifiedFalse

Because of differences in tax treatment, municipal bonds pay a higher interest rate than do corporate bonds.

Correct AnswerverifiedShow Answer

If there is a surplus of loanable funds, then

Correct AnswerverifiedShow Answer

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,

Correct AnswerverifiedShow Answer

What is a mutual fund?

Correct AnswerverifiedAn institution that sells shar...View AnswerShow Answer

Which of the following restrictions implies that investment exceeds private saving for a closed economy?

Correct AnswerverifiedShow Answer

Alpha Corporation has a price of $5 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 which is

Correct AnswerverifiedShow Answer

We interpret the meaning of "loanable funds" as the

Correct AnswerverifiedShow Answer

A is a certificate of indebtedness and a is a claim to partial ownership in a firm.

Correct AnswerverifiedShow Answer

If the government currently has a budget deficit, then

Correct AnswerverifiedShow Answer

If in the past Congress had taken additional actions to make saving more rewarding, then today it is likely that the equilibrium interest rate

Correct AnswerverifiedShow Answer

On a graph that depicts the market for loanable funds, the nominal interest rate is measured along the vertical axis.

Correct AnswerverifiedShow Answer

Which of the following would both make the interest rate on a bond higher than otherwise?

Correct AnswerverifiedShow Answer

Correct Answerverifieda. Presumably, when this happens, unless...View AnswerShow Answer

In a closed economy, national saving equals

Correct AnswerverifiedShow Answer

Bond A and Bond B have identical characteristics except that Bond A has a higher interest rate. Which bond has a higher credit risk?

Correct AnswerverifiedShow Answer

What is the main function of the financial system?

Correct AnswerverifiedMatching savers with investors.

Correct Answer
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C

Correct Answer
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Correct Answer
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False

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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An institution that sells shar...
View Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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a. Presumably, when this happens, unless...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
Matching savers with investors.