Question 1

If an economy is closed and if it has no government, then

Accepted Answer

A)   national saving = 0.
B)   national saving = private saving.
C)   public saving = investment.
D)   gross domestic product = consumption.E) A) and B)
F) A) and C)

Question 2

If the supply for loanable funds shifts to the left, then the equilibrium interest rate

Accepted Answer

A)   and quantity of loanable funds rises.
B)   and quantity of loanable funds falls.
C)   rises and the quantity of loanable funds falls.
D)   falls and the quantity of loanable funds rises.E) C) and D)
F) B) and C)

Question 3

A closed economy

Accepted Answer

A)   does not trade with other economies.
B)   is centrally-planned.
C)   does not allow financial intermediation.
D)   All of the above are correct.E) B) and C)
F) C) and D)

Question 4

Melinda buys new equipment for her dental office with funds she borrowed from a bank that raised funds from depositors. Which of the following is correct?

Accepted Answer

A)   Melinda is an investor.
B)   The depositors are investors.
C)   Both Melinda and the depositors are investors.
D)   Neither Melinda nor the depositors are investors.E) A) and D)
F) B) and C)

Question 5

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 6

Buskin's Corporation has issued 2 million shares of stock. Its earnings were $10 million, of which it retained 40 percent. What was the dividend per share?

Accepted Answer

A)   $2.
B)   $3.
C)   $5.
D)   $8.E) None of the above
F) B) and C)

Question 7

Crowding out occurs when

Accepted Answer

A)   investment declines because a budget deficit makes interest rates rise.
B)   investment declines because a budget deficit makes interest rates fall.
C)   investment increases because a budget surplus makes interest rates rise.
D)   investment increases because a budget surplus makes interest rates fall.E) A) and B)
F) C) and D)

Question 8

Explain why the demand for loanable funds slopes downward and why the supply of loanable funds slopes upward.

Accepted Answer

When the interest rate rises investment ...

Question 9

By definition, government purchases and taxes are zero for a closed economy.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following could explain a decrease in the equilibrium interest rate and an increase in 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) C) and D)
F) B) and D)

Question 11

If the quantity of loanable funds demanded exceeds the quantity of loanable funds supplied,

Accepted Answer

A)   there is a surplus so interest rates will rise.
B)   there is a surplus so interest rates will fall.
C)   there is a shortage so interest rates will rise.
D)   there is a shortage so interest rates will fall.E) None of the above
F) B) and C)

Question 12

A budget surplus

Accepted Answer

A)   occurs when the government has debt equal to zero.
B)   causes government debt to increase.
C)   exists when government spending is greater than tax revenues.
D)   reduces the government's debt.E) All of the above
F) C) and D)

Question 13

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) None of the above

Question 14

It is claimed that a secondary advantage of mutual funds is that

Accepted Answer

A)   an investor can avoid investment charges and fees.
B)   they give ordinary people access to loanable funds for investing.
C)   they usually outperform stock market indexes.
D)   they give ordinary people access to the skills of professional money managers.E) A) and D)
F) B) and C)

Question 15

When an economy's government goes from running a budget deficit to running a budget surplus, the economy's long-run growth prospects are improved.

Accepted Answer

A) True 
 B)False

Question 16

Midwestern corporation issues bonds. Southern corporation issues stock. Which corporation used equity financing?

Accepted Answer

A)   both Midwestern corporation and Southern corporation
B)   Midwestern corporation but not Southern corporation
C)   Southern corporation but not Midwestern corporation
D)   neither Midwestern nor Southern corporationE) B) and C)
F) B) and D)

Question 17

Suppose the U.S. offered a tax credit for firms that built new factories in the U.S. Then

Accepted Answer

A)   the demand for loanable funds would shift rightward, initially creating a surplus of loanable funds at the original interest rate.
B)   the demand for loanable funds would shift rightward, initially creating a shortage of loanable funds at the original interest rate.
C)   the supply of loanable funds would shift rightward, initially creating a surplus of loanable funds at the original interest rate.
D)   the supply of loanable funds would shift rightward, initially creating a shortage of loanable funds at the original interest rate.E) A) and D)
F) A) and B)

Question 18

When the government goes from running a balanced budget to running a budget surplus,

Accepted Answer

A)   national saving decreases, the interest rate rises, and the economy's long­run growth rate is likely to decrease.
B)   national saving increases, the interest rate falls, and the economy's long­run growth rate is likely to decrease.
C)   national saving decreases, the interest rate rises, and the economy's long­run growth rate is likely to increase.
D)   national saving increases, the interest rate falls, and the economy's long­run growth rate is likely to increase.E) C) and D)
F) All of the above

Question 19

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) All of the above
F) B) and D)

Question 20

Banks

Accepted Answer

A)   play a role in creating an asset that people can use as a medium of exchange.
B)   are financial intermediaries, but mutual funds are not financial intermediaries.
C)   are financial markets, as are bond markets.
D)   All of the above are correct.E) None of the above
F) All of the above

Exam 18: Saving, Investment, and the Financial System

It is claimed that a secondary advantage of mutual funds is that

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Buskin's Corporation has issued 2 million shares of stock. Its earnings were $10 million, of which it retained 40 percent. What was the dividend per share?

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If the supply for loanable funds shifts to the left, then the equilibrium interest rate

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Midwestern corporation issues bonds. Southern corporation issues stock. Which corporation used equity financing?

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Banks

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Crowding out occurs when

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If the quantity of loanable funds demanded exceeds the quantity of loanable funds supplied,

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A budget surplus

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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

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

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A closed economy

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If an economy is closed and if it has no government, then

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

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Melinda buys new equipment for her dental office with funds she borrowed from a bank that raised funds from depositors. Which of the following is correct?

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When the government goes from running a balanced budget to running a budget surplus,

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When an economy's government goes from running a budget deficit to running a budget surplus, the economy's long-run growth prospects are improved.

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Suppose the U.S. offered a tax credit for firms that built new factories in the U.S. Then

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Explain why the demand for loanable funds slopes downward and why the supply of loanable funds slopes upward.

Correct AnswerverifiedWhen the interest rate rises investment ...View AnswerShow Answer

By definition, government purchases and taxes are zero for a closed economy.

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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

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When the interest rate rises investment ...
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The claim that an increase in the intere...
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