Question 1

Which of the following statements is correct?

Accepted Answer

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

Question 2

Suppose a government that taxed all interest income changed its tax law so that the first $5,000 of a taxpayer's interest income was tax free. This would shift the

Accepted Answer

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

Question 3

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

Accepted Answer

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

Question 4

Which of the following is not correct?

Accepted Answer

A)   Gross domestic product is both total income in an economy and total expenditures on the economy's 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.E) None of the above
F) B) and D)

Question 5

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

Accepted Answer

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

Question 6

When the government budget deficit rises, national saving is reduced, interest rates rise, and investment falls.

Accepted Answer

A) True 
 B)False

Question 7

Scenario 26-2. Assume the following information for an imaginary, closed economy.
GDP = $5 trillion; consumption = $3.1 trillion; government purchases = $0.7 trillion; and taxes = $0.9 trillion.
-Refer to Scenario 26-2. For this economy, public saving is equal to

Accepted Answer

A)   $0.2 trillion and the government is running a budget surplus of $0.2 trillion.
B)   $0.2 trillion and the government is running a budget deficit of $0.2 trillion.
C)   -$0.2 trillion and the government is running a budget deficit of $0.2 trillion.
D)   -$0.2 trillion and the government is running a budget surplus of $0.2 trillion.E) B) and C)
F) All of the above

Question 8

Managed funds

Accepted Answer

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

Question 9

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?

Accepted Answer

The claim that an increase in the intere...

Question 10

The first element of a financial crisis is

Accepted Answer

A)   inflation.
B)   a decline in confidence in financial institutions.
C)   a relaxation of rules and regulations that pertain to the financial system.
D)   a large decline in some asset prices.E) B) and C)
F) None of the above

Question 11

The primary advantage of mutual funds is that they

Accepted Answer

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

Question 12

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

Accepted Answer

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

Question 13

Figure 26-5. Figure 26-5 shows the loanable funds market for a closed economy. 
-Refer to Figure 26-5. Starting at point A, a change in tax laws that encouraged households to save more would likely cause

Accepted Answer

A)   the quantity of loanable funds traded to increase to $125 and the interest rate fall to 5% point 
D)  .
B)   the quantity of loanable funds traded to increase to $125 and the interest rate to rise to 7% point 
C)  .
C)   the quantity of loanable funds traded to decrease to $75 and the interest rate to fall to 5% point 
B)  .
D)   the quantity of loanable funds traded to decrease to $75 and the interest rate to rise to 7% point 
E)  .E) B) and C)
F) A) and C)

Question 14

Which advantages)  do mutual funds claim to provide?

Accepted Answer

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

Question 15

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

Accepted Answer

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

Question 16

Bountiful Tractors has a share price of $60, retained earnings of $2 per share, and a dividend yield of 2 percent. What is Bountiful Tractor's price­earnings ratio?

Accepted Answer

A)   23.1
B)   18.75
C)   15
D)   30E) B) and C)
F) A) and C)

Question 17

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) A) and B)
F) A) and C)

Question 18

The purchase of a new house is the one form of

Accepted Answer

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

Question 19

If there is a shortage in the market for loanable funds, what happens to desired saving and desired investment as the interest rate moves to its equilibrium value?

Accepted Answer

A)   desired saving and desired investment both fall
B)   desired saving and desired investment both rise
C)   desired saving falls and desired investment rises
D)   desired saving rises and desired investment fallsE) None of the above
F) A) and D)

Question 20

Which of the following statements is correct?

Accepted Answer

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

Exam 8: Saving, Investment, and the Financial System

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

Suppose a government that taxed all interest income changed its tax law so that the first $5,000 of a taxpayer's interest income was tax free. This would shift the

Correct AnswerverifiedShow Answer

If there is a shortage in the market for loanable funds, what happens to desired saving and desired investment as the interest rate moves to its equilibrium value?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedThe claim that an increase in the intere...View AnswerShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

When the government budget deficit rises, national saving is reduced, interest rates rise, and investment falls.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which advantages) do mutual funds claim to provide?

Correct AnswerverifiedShow Answer

Which of the following is not correct?

Correct AnswerverifiedShow Answer

The primary advantage of mutual funds is that they

Correct AnswerverifiedShow Answer

Managed funds

Correct AnswerverifiedShow Answer

Figure 26-5. Figure 26-5 shows the loanable funds market for a closed economy. -Refer to Figure 26-5. Starting at point A, a change in tax laws that encouraged households to save more would likely cause

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

Bountiful Tractors has a share price of $60, retained earnings of $2 per share, and a dividend yield of 2 percent. What is Bountiful Tractor's price­earnings ratio?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The purchase of a new house is the one form of

Correct AnswerverifiedShow Answer

The first element of a financial crisis is

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Scenario 26-2. Assume the following information for an imaginary, closed economy. GDP = $5 trillion; consumption = $3.1 trillion; government purchases = $0.7 trillion; and taxes = $0.9 trillion. -Refer to Scenario 26-2. For this economy, public saving is equal to

Correct AnswerverifiedShow Answer

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The claim that an increase in the intere...
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Bountiful Tractors has a share price of $60, retained earnings of $2 per share, and a dividend yield of 2 percent. What is Bountiful Tractor's priceearnings ratio?

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