Question 1

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 2

Which of the following would necessarily create a surplus at the original equilibrium interest rate in the loanable funds market?

Accepted Answer

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 fundsE) A) and D)
F) A) and C)

Question 3

The term crowding out refers to decreases in the interest rate caused by government budget surpluses.

Accepted Answer

A) True 
 B)False

Question 4

Assume the bonds below have the same term and principal and that the state or local government that issues the municipal bond has a good credit rating. Which list has bonds correctly ordered from the one that pays the highest interest rate to the one that pays the lowest interest rate?

Accepted Answer

A)  Corporate bond, municipal bond, U.S.government bond
B)  Corporate bond, U.S.government bond, municipal bond
C)  Municipal bond, U.S.government bond, corporate bond
D)  U.S.government bond, municipal bond, corporate bondE) A) and D)
F) A) and C)

Question 5

A government may use deficit financing to smooth tax rates over time.

Accepted Answer

A) True 
 B)False

Question 6

If the government reduces transfer payments, what happens to the budget deficit? What curve does this change in the market for loanable funds, which direction does it shift, and what happens to the equilibrium interest rate?

Accepted Answer

A reduction in transfer paymen...

Question 7

For an open economy, the equation Y = C + I + G + NX is an identity. If we define national saving, S, as the total income in the economy that is left after paying for consumption and government purchases, then for an open economy, it is true that

Accepted Answer

A)  S = I.
B)  S = 0.
C)  I = S + NX.
D)  S = I + NX.E) A) and B)
F) C) and D)

Question 8

Katleen is considering expanding her jewelry shop. If interest rates rise she is

Accepted Answer

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

Question 9

When a firm wants to borrow directly from the public to finance the purchase of new equipment, it does so by selling bonds.

Accepted Answer

A) True 
 B)False

Question 10

Other things the same, a higher interest rate induces people to

Accepted Answer

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.E) All of the above
F) C) and D)

Question 11

The sale of either stocks or bonds to raise money is known as equity finance.

Accepted Answer

A) True 
 B)False

Question 12

What is a mutual fund?

Accepted Answer

An institution that sells shar...

Question 13

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?

Accepted Answer

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

Question 14

Financial intermediaries are

Accepted Answer

A)  the same as financial markets.
B)  individuals who make profits by buying a stock low and selling it high.
C)  a more general name for financial assets such as stocks, bonds, and checking accounts.
D)  financial institutions through which savers can indirectly provide funds to borrowers.E) B) and C)
F) A) and D)

Question 15

To start a business delivering documents, you need to purchase cell phones, bicycles, and desks.

Accepted Answer

A)  These purchases are called capital investment.Raising the funds to purchase them makes you a borrower.
B)  These purchases are called capital investment.Raising the funds to purchase them makes you a saver.
C)  These purchases are called consumption.Raising the funds to purchase them makes you a saver.
D)  These purchases are called consumption.Raising the funds to purchase them makes you a borrower.E) A) and B)
F) None of the above

Question 16

When someone borrows to purchase capital goods, he is using someone else's _____ to fund his _____.

Accepted Answer

The answer of When someone borrows to purchase capital goods,...

Question 17

Given that Monica's income exceeds her expenditures, Monica is best described as a

Accepted Answer

A)  saver or as a supplier of funds.
B)  borrower or as a demander of funds.
C)  saver or as a demander of funds.
D)  borrower or as a supplier of funds.E) A) and B)
F) B) and D)

Question 18

Index funds are usually outperformed by mutual funds that are actively managed by professional money managers.

Accepted Answer

A) True 
 B)False

Question 19

Anything other than a change in the interest rate that decreases national saving shifts the supply of loanable funds to the left.

Accepted Answer

A) True 
 B)False

Question 20

Suppose private saving in a closed economy is $15b and investment is $7b.

Accepted Answer

A)  National saving must equal $15b.
B)  Public saving must equal $8b.
C)  The government budget surplus must equal $8b.
D)  The government budget deficit must equal $8b.E) B) and C)
F) None of the above

Exam 26: Saving, Investment, and the Financial System

For an open economy, the equation Y = C + I + G + NX is an identity. If we define national saving, S, as the total income in the economy that is left after paying for consumption and government purchases, then for an open economy, it is true that

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Other things the same, a higher interest rate induces people to

Correct AnswerverifiedShow Answer

Anything other than a change in the interest rate that decreases national saving shifts the supply of loanable funds to the left.

Correct AnswerverifiedShow Answer

To start a business delivering documents, you need to purchase cell phones, bicycles, and desks.

Correct AnswerverifiedShow Answer

The term crowding out refers to decreases in the interest rate caused by government budget surpluses.

Correct AnswerverifiedShow Answer

Katleen is considering expanding her jewelry shop. If interest rates rise she is

Correct AnswerverifiedShow Answer

Assume the bonds below have the same term and principal and that the state or local government that issues the municipal bond has a good credit rating. Which list has bonds correctly ordered from the one that pays the highest interest rate to the one that pays the lowest interest rate?

Correct AnswerverifiedShow Answer

Suppose private saving in a closed economy is $15b and investment is $7b.

Correct AnswerverifiedShow Answer

When someone borrows to purchase capital goods, he is using someone else's _____ to fund his _____.

Correct AnswerverifiedShow Answer

Which of the following would necessarily create a surplus at the original equilibrium interest rate in the loanable funds market?

Correct AnswerverifiedShow Answer

What is a mutual fund?

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

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?

Correct AnswerverifiedShow Answer

Index funds are usually outperformed by mutual funds that are actively managed by professional money managers.

Correct AnswerverifiedShow Answer

If the government reduces transfer payments, what happens to the budget deficit? What curve does this change in the market for loanable funds, which direction does it shift, and what happens to the equilibrium interest rate?

Correct AnswerverifiedA reduction in transfer paymen...View AnswerShow Answer

The sale of either stocks or bonds to raise money is known as equity finance.

Correct AnswerverifiedShow Answer

Financial intermediaries are

Correct AnswerverifiedShow Answer

A government may use deficit financing to smooth tax rates over time.

Correct AnswerverifiedShow Answer

Given that Monica's income exceeds her expenditures, Monica is best described as a

Correct AnswerverifiedShow Answer

When a firm wants to borrow directly from the public to finance the purchase of new equipment, it does so by selling bonds.

Correct AnswerverifiedShow Answer

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When someone borrows to purchase capital goods, he is using someone else's _ to fund his _.

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An institution that sells shar...
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A reduction in transfer paymen...
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