Exam 26: Saving, Investment, and the Financial System

If a share of stock in Skylight Chili sells for $75, the retained earnings per share are $5, and the dividend per share is $2, then the price-earnings ratio is 15.

In a closed economy, each unit of output is either consumed by households or invested.

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?

A larger budget deficit

Which of the following statements is correct?

If there is a surplus of loanable funds, then

Which of the two bonds in each example would you expect to generally pay the higher interest rate? Explain why. a.a U.S.government bond or a Venezuelan government bond b.a U.S.government bond or a municipal bond with the same term and issued by a creditworthy municipality. c.a 6-month Treasury bill or a 20-year Treasury bond d.a Microsoft bond or a bond issued by a new recording company

If there is a surplus of loanable funds, then the quantity of loanable funds

The slope of the demand for loanable funds curve represents the

Your brother-in-law wants to buy either stock or bonds in Cedar Valley Furniture, which manufactures wooden furniture. He wants your advice on whether to buy stock or bonds. Explain how each of his quotes below should affect his choice between the stock and the bond. a."I have reason to believe that people are soon going to find rocking chairs have health benefits." b."I would like to tell people I am part owner of Cedar Valley Furniture." c."I do not want to take on much risk."

We interpret the term loanable funds to mean the flow of resources available to fund private investment.

Identify each of the following acts as representing either saving or investment. a.Fred uses some of his income to buy government bonds. b.Julie takes some of her income and buys mutual funds. c.Alex purchases a new truck for his delivery business using borrowed funds. d.Elaine uses some of her income to buy stock in a major corporation. e.Henrietta hires a builder to construct a new building for her bicycle shop.

Credit risk refers to the probability that the issuer of a bond will fail to pay some or all of the interest or principal.

Figure 26-3 The figure shows two demand-for-loanable-funds curves and two supply-of-loanable-funds curves. ​ -Refer to Figure 26-3. Which of the following movements would be consistent with the government budget going from deficit to surplus and the simultaneous enactment of an investment tax credit?

​Index funds are financial intermediaries, but municipal bonds are not.

What is the source of the supply of loanable funds?

When tax code changes increase saving incentives, the interest rate will _____ and investment will _____.

A higher interest rate makes _____ more attractive. Therefore the quantity of loanable funds supplied increases.

Other things being constant, when a firm sells new shares of stock, the

An increase in the government budget deficit causes national saving to _____, the interest rate to _____, and investment to _____.