Question 1

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 2

If Congress instituted an investment tax credit, the demand for loanable funds would shift rightward.

Accepted Answer

A) True 
 B)False

Question 3

The U.S. government increases its budget deficit, but at the same time Congress eliminates an investment tax credit. Which of the following is correct?

Accepted Answer

A) The interest rate will increase; investment may increase or decrease. 
B) The interest rate will decrease; investment may increase or decrease. 
C) The interest rate may increase or decrease; investment will decrease. 
D) The interest rate may increase or decrease; investment will increase. 
A) The interest rate will increase; investment may increase or decrease. 
B) The interest rate will decrease; investment may increase or decrease. 
C) The interest rate may increase or decrease; investment will decrease. 
D) The interest rate may increase or decrease; investment will increase.

Question 4

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. 
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.

Question 5

Suppose government expenditures on goods and services increase, transfers are unchanged, and taxes rise by less than the increase in expenditures. These changes in the government's budget 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. 
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.

Question 6

Which of the following policy changes would lead to a decrease in the real interest rate and an increase in investment and saving?

Accepted Answer

A) a larger investment tax credit 
B) an expansion of eligibility for Individual Retirement Accounts 
C) an increase in income-tax rates, with no change in the government budget deficit or surplus 
D) an increase in government purchases, with no change in taxes 
A) a larger investment tax credit 
B) an expansion of eligibility for Individual Retirement Accounts 
C) an increase in income-tax rates, with no change in the government budget deficit or surplus 
D) an increase in government purchases, with no change in taxes

Question 7

The supply of loanable funds would shift to the right if either

Accepted Answer

A) tax reforms encouraged greater saving or the budget deficit became smaller. 
B) tax reforms encouraged greater saving or investment tax credits were increased. 
C) the budget deficit became larger or investment tax credits were increased. 
D) the budget deficit became larger or tax reforms discouraged saving. 
A) tax reforms encouraged greater saving or the budget deficit became smaller. 
B) tax reforms encouraged greater saving or investment tax credits were increased. 
C) the budget deficit became larger or investment tax credits were increased. 
D) the budget deficit became larger or tax reforms discouraged saving.

Question 8

It is claimed that mutual funds have two advantages. The first is that mutual funds allow people with small amounts of money to diversify. The second is that mutual funds provide the skills of professional money managers who buy stocks they believe will be the most profitable and thereby increase the return that mutual fund depositors earn on their savings.

Accepted Answer

A) Economists strongly agree with both claims. 
B) Economists are skeptical of both claims. 
C) Economists are skeptical of the first claim, but strongly agree with the second. 
D) Economists strongly agree with the first claim, but are skeptical of the second. 
A) Economists strongly agree with both claims. 
B) Economists are skeptical of both claims. 
C) Economists are skeptical of the first claim, but strongly agree with the second. 
D) Economists strongly agree with the first claim, but are skeptical of the second.

Question 9

Suppose Sarah Lee Corporation stock has a P/E ratio of 8. This P/E ratio is relatively

Accepted Answer

A) low, indicating that buyers may expect earnings to rise. 
B) low, indicating that buyers may expect earnings to fall. 
C) high, indicating that buyers may expect earnings to rise. 
D) high, indicating that buyers may expect earnings to fall. 
A) low, indicating that buyers may expect earnings to rise. 
B) low, indicating that buyers may expect earnings to fall. 
C) high, indicating that buyers may expect earnings to rise. 
D) high, indicating that buyers may expect earnings to fall.

Question 10

Which of the following statements is correct?

Accepted Answer

A) The expected future profitability of a corporation influences the demand for that corporation's stock. 
B) When a corporation sells stock as a means of raising funds it is engaging in debt finance. 
C) The owners of bonds sold by the Microsoft Corporation are part owners of that corporation. 
D) All bonds are, by definition, perpetuities. 
A) The expected future profitability of a corporation influences the demand for that corporation's stock. 
B) When a corporation sells stock as a means of raising funds it is engaging in debt finance. 
C) The owners of bonds sold by the Microsoft Corporation are part owners of that corporation. 
D) All bonds are, by definition, perpetuities.

Question 11

Mallard Corporation had a price-earnings ratio of 15, paid a dividend of $3, and retained earnings of $1 a share. What was the price of a share of Mallard stock?

Accepted Answer

A) $15 
B) $30 
C) $45 
D) $60. 
A) $15 
B) $30 
C) $45 
D) $60.

Question 12

Suppose the government changed the tax laws, with the result that people were encouraged to consume more and save less. Using the loanable funds model, a consequence would be

Accepted Answer

A) lower interest rates and lower investment. 
B) lower interest rates and greater investment. 
C) higher interest rates and lower investment. 
D) higher interest rates and higher investment. 
A) lower interest rates and lower investment. 
B) lower interest rates and greater investment. 
C) higher interest rates and lower investment. 
D) higher interest rates and higher investment.

Question 13

For an economy that engages in international trade, GDP is divided into four components. Which of the following items is not one of those components?

Accepted Answer

A) consumption. 
B) national saving. 
C) government purchases. 
D) net exports. 
A) consumption. 
B) national saving. 
C) government purchases. 
D) net exports.

Question 14

Other things the same, if the government decreases transfer payments, then

Accepted Answer

A) both the interest rate and the equilibrium quantity of loanable funds fall. 
B) both the interest rate and the equilibrium quantity of loanable funds rise. 
C) the interest rate rises and the equilibrium quantity of loanable funds falls. 
D) the interest rate falls and the equilibrium quantity of loanable funds rises. 
A) both the interest rate and the equilibrium quantity of loanable funds fall. 
B) both the interest rate and the equilibrium quantity of loanable funds rise. 
C) the interest rate rises and the equilibrium quantity of loanable funds falls. 
D) the interest rate falls and the equilibrium quantity of loanable funds rises.

Question 15

The income that households have left after paying their taxes and paying for their consumption is known as _____.

Accepted Answer

The answer of The income that households have left after...

Question 16

Congress and the President implement an investment tax credit. Which curve in the market for loanable funds shifts, which direction does it shift, and what happens to the interest rate?

Accepted Answer

The demand for loana

Question 17

Suppose the market for loanable funds is in equilibrium. What would happen in the market for loanable funds, other things the same, if the Congress and President increased the maximum contribution limits to 401(k) and 403(b) tax-deferred retirement accounts?

Accepted Answer

A) the interest rate and quantity of loanable funds would increase 
B) the interest rate and quantity of loanable funds would decrease. 
C) the interest rate would increase and the quantity of loanable funds would decrease. 
D) the interest rate would decrease and the quantity of loanable funds would increase. 
A) the interest rate and quantity of loanable funds would increase 
B) the interest rate and quantity of loanable funds would decrease. 
C) the interest rate would increase and the quantity of loanable funds would decrease. 
D) the interest rate would decrease and the quantity of loanable funds would increase.

Question 18

Other things the same, an increase in taxes with no change in government purchases makes national saving

Accepted Answer

A) rise. The supply of loanable funds shifts right. 
B) rise. The demand for loanable funds shifts right. 
C) fall. The supply of loanable funds shifts left. 
D) fall. The demand for loanable funds shifts left. 
A) rise. The supply of loanable funds shifts right. 
B) rise. The demand for loanable funds shifts right. 
C) fall. The supply of loanable funds shifts left. 
D) fall. The demand for loanable funds shifts left.

Question 19

Over-the-Rhine Cheese Corporation had a P/E ratio of 20, retained earnings of $0.80 per share and a dividend of $1.70. What was its dividend yield?

Accepted Answer

A) 1.25%. 
B) 5.0%. 
C) 3.4%. 
D) 10.6%. 
A) 1.25%. 
B) 5.0%. 
C) 3.4%. 
D) 10.6%.

Question 20

For an imaginary economy, when the real interest rate is 5 percent, the quantity of loanable funds demanded is $1,000 and the quantity of loanable funds supplied is $1,000. Currently, the nominal interest rate is 9 percent and the inflation rate is 2 percent. Currently,

Accepted Answer

A) the market for loanable funds is in equilibrium. 
B) the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded, and as a result the real interest rate will rise. 
C) the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded, and as a result the real interest rate will fall. 
D) the quantity of loanable funds demanded exceeds the quantity of loanable funds supplied, and as a result the real interest rate will rise. 
A) the market for loanable funds is in equilibrium. 
B) the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded, and as a result the real interest rate will rise. 
C) the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded, and as a result the real interest rate will fall. 
D) the quantity of loanable funds demanded exceeds the quantity of loanable funds supplied, and as a result the real interest rate will rise.

Exam 26: Saving, Investment, and the Financial System

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

If Congress instituted an investment tax credit, the demand for loanable funds would shift rightward.

The U.S. government increases its budget deficit, but at the same time Congress eliminates an investment tax credit. Which of the following is correct?

The primary advantage of mutual funds is that they

Suppose government expenditures on goods and services increase, transfers are unchanged, and taxes rise by less than the increase in expenditures. These changes in the government's budget cause

Which of the following policy changes would lead to a decrease in the real interest rate and an increase in investment and saving?

The supply of loanable funds would shift to the right if either

Suppose Sarah Lee Corporation stock has a P/E ratio of 8. This P/E ratio is relatively

Which of the following statements is correct?

Mallard Corporation had a price-earnings ratio of 15, paid a dividend of $3, and retained earnings of $1 a share. What was the price of a share of Mallard stock?

Suppose the government changed the tax laws, with the result that people were encouraged to consume more and save less. Using the loanable funds model, a consequence would be

For an economy that engages in international trade, GDP is divided into four components. Which of the following items is not one of those components?

Other things the same, if the government decreases transfer payments, then

The income that households have left after paying their taxes and paying for their consumption is known as _____.

Congress and the President implement an investment tax credit. Which curve in the market for loanable funds shifts, which direction does it shift, and what happens to the interest rate?

Suppose the market for loanable funds is in equilibrium. What would happen in the market for loanable funds, other things the same, if the Congress and President increased the maximum contribution limits to 401(k) and 403(b) tax-deferred retirement accounts?

Other things the same, an increase in taxes with no change in government purchases makes national saving

Over-the-Rhine Cheese Corporation had a P/E ratio of 20, retained earnings of $0.80 per share and a dividend of $1.70. What was its dividend yield?

For an imaginary economy, when the real interest rate is 5 percent, the quantity of loanable funds demanded is $1,000 and the quantity of loanable funds supplied is $1,000. Currently, the nominal interest rate is 9 percent and the inflation rate is 2 percent. Currently,

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Elasticity and Its Application

Supply, Demand, and Government Policies

Consumers, Producers, and the Efficiency of Markets

Applications: the Costs of Taxation

Application: International Trade

Externalities

Public Goods and Common Resources

The Design of the Tax System

The Costs of Production

Firms in Competitive Markets

Monopoly

Monopolistic Competition

Oligopoly

The Markets for the Factors of Production

Earnings and Discrimination

Income Inequality and Poverty

The Theory of Consumer Choice

Frontiers in Microeconomics

Measuring a Nation S Income

Measuring the Cost of Living

Production and Growth

Tools of Finance

Unemployment and Its Natural Rate

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Open Economy

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

The Short-Run Tradeoff Between Inflation and Unemployment

Six Debates Over Macroeconomic Policy

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