Question 1

What is the primary advantage of mutual funds?

Accepted Answer

A)  They usually make a return that "beats the market." 
B)  They allow people with small amounts of money to diversify. 
C)  They provide customers with a medium of exchange. 
D)  They allow investing in the venture capital industry. 
A)  They usually make a return that "beats the market." 
B)  They allow people with small amounts of money to diversify. 
C)  They provide customers with a medium of exchange. 
D)  They allow investing in the venture capital industry.

Question 2

Which of the following is a financial intermediary?

Accepted Answer

A)  a mutual fund 
B)  the stock market 
C)  a Canadian government bond 
D)  a stock exchange company 
A)  a mutual fund 
B)  the stock market 
C)  a Canadian government bond 
D)  a stock exchange company

Question 3

What is most likely to happen if Canada increases its budget deficit?

Accepted Answer

A)  Private saving will decrease and so shift the supply of loanable funds left. 
B)  Investment will decrease and so shift the demand for loanable funds left. 
C)  Public saving will decrease and so shift the supply of loanable funds left. 
D)  Private saving will increase and so shift the supply of loanable funds to the right. 
A)  Private saving will decrease and so shift the supply of loanable funds left. 
B)  Investment will decrease and so shift the demand for loanable funds left. 
C)  Public saving will decrease and so shift the supply of loanable funds left. 
D)  Private saving will increase and so shift the supply of loanable funds to the right.

Question 4

What is the source of the supply of and demand for loanable funds, respectively?

Accepted Answer

A)  saving and investment 
B)  investment and saving 
C)  saving and saving 
D)  investment and investment 
A)  saving and investment 
B)  investment and saving 
C)  saving and saving 
D)  investment and investment

Question 5

Sunny Days Solar Panel Company is selling at $20 per share. It had earnings of $4 a share and a dividend yield of 10 percent. What is the dividend?

Accepted Answer

A)  $0.40 
B)  $2.00 
C)  $6.00 
D)  $16 
A)  $0.40 
B)  $2.00 
C)  $6.00 
D)  $16

Question 6

Compared to bonds, what does stock offer the holder?

Accepted Answer

A)  lower risk 
B)  partial ownership 
C)  lower return 
D)  higher return 
A)  lower risk 
B)  partial ownership 
C)  lower return 
D)  higher return

Question 7

Noel is considering expanding his bike shop. What will happen if interest rates fall?

Accepted Answer

A)  He is less likely to expand. This illustrates why the supply of loanable funds slopes downward. 
B)  He is more likely to expand. This illustrates why the supply of loanable funds slopes upward. 
C)  He is less likely to expand. This illustrates why the demand for loanable funds slopes downward. 
D)  He is more likely to expand. This illustrates why the demand for loanable funds slopes upward. 
A)  He is less likely to expand. This illustrates why the supply of loanable funds slopes downward. 
B)  He is more likely to expand. This illustrates why the supply of loanable funds slopes upward. 
C)  He is less likely to expand. This illustrates why the demand for loanable funds slopes downward. 
D)  He is more likely to expand. This illustrates why the demand for loanable funds slopes upward.

Question 8

Which statement best defines stock indexes?

Accepted Answer

A)  They are the average of a group of stock prices. 
B)  They are the average of a group of stock yields. 
C)  They are reports in the newspaper that report on the price of the stock and earnings of the corporation. 
D)  They are measures of the risk relative to the profitability of corporations. 
A)  They are the average of a group of stock prices. 
B)  They are the average of a group of stock yields. 
C)  They are reports in the newspaper that report on the price of the stock and earnings of the corporation. 
D)  They are measures of the risk relative to the profitability of corporations.

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

The country of Aquilonia does not trade with any other country. Its GDP is $30 billion. Its government purchases $5 billion worth of goods and services each year, collects $7 billion in taxes, and provides $3 billion in transfer payments to households. Private saving in Aquilonia is $5 billion. What is consumption?

Accepted Answer

A)  $10 billion 
B)  $13 billion 
C)  $18 billion 
D)  $21 billion 
A)  $10 billion 
B)  $13 billion 
C)  $18 billion 
D)  $21 billion

Question 11

What is a secondary advantage of mutual funds?

Accepted Answer

A)  They allow an investor to 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. 
A)  They allow an investor to 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.

Question 12

Suppose the following equations give the demand and supply for loanable funds in billions of dollars; r is the real interest rate in percentage points :
QD = 160 - 10r
QS = -20 + 20r
a) Calculate the equilibrium savings, investment, and interest rate.
b) How much is the total amount received by lenders in interest?
c) Calculate the gains to lenders from financial transactions (producer surplus).
d) Calculate the gains to borrowers (the equivalent of consumer surplus).

Accepted Answer

a) The equilibrium interest rate must so

Question 13

In terms of riskiness, how do long-term bonds and short-term bonds compare?

Accepted Answer

A)  Short-term bonds are more risky and so pay higher interest. 
B)  Short-term bonds are less risky and so pay lower interest. 
C)  Short-term bonds are less risky and so pay higher interest. 
D)  Short-term bonds have about the same degree of risk and so pay about the same interest. 
A)  Short-term bonds are more risky and so pay higher interest. 
B)  Short-term bonds are less risky and so pay lower interest. 
C)  Short-term bonds are less risky and so pay higher interest. 
D)  Short-term bonds have about the same degree of risk and so pay about the same interest.

Question 14

Which of the two bonds in each example would you expect to pay the higher interest rate? Explain why.
a. a Canadian government bond or a bond issued by the government of Guatemala
b. a government of Canada bond or a municipal bond of the same face value and term
c. a 6-month Treasury bill or a 20-year bond
d. an Air Canada company bond or a bond issued by a new high tech start-up

Accepted Answer

a. The Guatemalan government bond would

Question 15

Which statement best defines the nominal interest rate?

Accepted Answer

A)  It is the interest rate corrected for inflation. 
B)  It is the interest rate as usually reported by banks. 
C)  It is the real rate of return to the lender. 
D)  It is the real cost of borrowing to the borrower. 
A)  It is the interest rate corrected for inflation. 
B)  It is the interest rate as usually reported by banks. 
C)  It is the real rate of return to the lender. 
D)  It is the real cost of borrowing to the borrower.

Question 16

Other things being constant, when a business issues more stock, what happens?

Accepted Answer

A)  The supply of the stock is greater and thus the price will fall. 
B)  The supply of the stock is less and thus the price will rise. 
C)  The demand for the stock is greater and thus the price will rise. 
D)  The demand for the stock is less and thus the price will fall. 
A)  The supply of the stock is greater and thus the price will fall. 
B)  The supply of the stock is less and thus the price will rise. 
C)  The demand for the stock is greater and thus the price will rise. 
D)  The demand for the stock is less and thus the price will fall.

Question 17

The model of the market for loanable funds shows that an investment tax credit will cause interest rates and investment to rise. Yet our model of how investors behave claims that higher interest rates lead to lower investment. How can these two opposing statements be reconciled?

Accepted Answer

The claim that an increase in the intere

Question 18

Sunny Skies Solar Company stock is selling at $20 per share. It has retained earnings of $1.50 per share, and dividends of $0.50 per share. What is the price/earnings ratio?

Accepted Answer

A)  0.1 
B)  10 
C)  18 
D)  40 
A)  0.1 
B)  10 
C)  18 
D)  40

Question 19

When a country saves a larger portion of its GDP, will it have more or less investment?

Accepted Answer

A)  It will have less investment, and so it will have more capital and higher productivity. 
B)  It will have less investment, and so it will have less capital and higher productivity. 
C)  It will have more investment, and so it will have more capital and higher productivity. 
D)  It will have more investment, and so it will have less capital and higher productivity. 
A)  It will have less investment, and so it will have more capital and higher productivity. 
B)  It will have less investment, and so it will have less capital and higher productivity. 
C)  It will have more investment, and so it will have more capital and higher productivity. 
D)  It will have more investment, and so it will have less capital and higher productivity.

Question 20

What is the face value of a bond?

Accepted Answer

A)  the market price of the bond 
B)  the difference between the amount owned by the issuer and the market price of the bond 
C)  the amount owed by the issuer 
D)  the interest earned by the owner of the bond 
A)  the market price of the bond 
B)  the difference between the amount owned by the issuer and the market price of the bond 
C)  the amount owed by the issuer 
D)  the interest earned by the owner of the bond

What is the primary advantage of mutual funds?

Which of the following is a financial intermediary?

What is most likely to happen if Canada increases its budget deficit?

What is the source of the supply of and demand for loanable funds, respectively?

Sunny Days Solar Panel Company is selling at $20 per share. It had earnings of $4 a share and a dividend yield of 10 percent. What is the dividend?

Compared to bonds, what does stock offer the holder?

Noel is considering expanding his bike shop. What will happen if interest rates fall?

Which statement best defines stock indexes?

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

What is a secondary advantage of mutual funds?

In terms of riskiness, how do long-term bonds and short-term bonds compare?

Which statement best defines the nominal interest rate?

Other things being constant, when a business issues more stock, what happens?

The model of the market for loanable funds shows that an investment tax credit will cause interest rates and investment to rise. Yet our model of how investors behave claims that higher interest rates lead to lower investment. How can these two opposing statements be reconciled?

Sunny Skies Solar Company stock is selling at $20 per share. It has retained earnings of $1.50 per share, and dividends of $0.50 per share. What is the price/earnings ratio?

When a country saves a larger portion of its GDP, will it have more or less investment?

What is the face value of a bond?

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

Unemployment and Its Natural Rate

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Small Open Economy

Aggregate Demand and Aggregate Supply

The Influence of Monetary Policy on Aggregate Demand

The Influence of Fiscal Policy on Aggregate Demand

The Short-Run Tradeoff Between Inflation and Unemployment

Five Debates Over Macroeconomic Policy

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Exam 8: Saving, Investment, and the Financial System

What is the primary advantage of mutual funds?

Which of the following is a financial intermediary?

What is most likely to happen if Canada increases its budget deficit?

What is the source of the supply of and demand for loanable funds, respectively?

Sunny Days Solar Panel Company is selling at $20 per share. It had earnings of $4 a share and a dividend yield of 10 percent. What is the dividend?

Compared to bonds, what does stock offer the holder?

Noel is considering expanding his bike shop. What will happen if interest rates fall?

Which statement best defines stock indexes?

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

What is a secondary advantage of mutual funds?

In terms of riskiness, how do long-term bonds and short-term bonds compare?

Which statement best defines the nominal interest rate?

Other things being constant, when a business issues more stock, what happens?

The model of the market for loanable funds shows that an investment tax credit will cause interest rates and investment to rise. Yet our model of how investors behave claims that higher interest rates lead to lower investment. How can these two opposing statements be reconciled?

Sunny Skies Solar Company stock is selling at $20 per share. It has retained earnings of $1.50 per share, and dividends of $0.50 per share. What is the price/earnings ratio?

When a country saves a larger portion of its GDP, will it have more or less investment?

What is the face value of a bond?

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

Unemployment and Its Natural Rate

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Small Open Economy

Aggregate Demand and Aggregate Supply

The Influence of Monetary Policy on Aggregate Demand

The Influence of Fiscal Policy on Aggregate Demand

The Short-Run Tradeoff Between Inflation and Unemployment

Five Debates Over Macroeconomic Policy

Filters