Question 1

Financial markets are:

Accepted Answer

A)  the institutions in which a person who wants to save can directly supply funds to a person who wants to borrow 
B)  the financial institutions through which savers can indirectly provide funds to borrowers 
C)  the institutions that sell shares to the public and use the proceeds to buy various types of stocks and/or bonds 
D)  the same thing as banks 
E)  all of the above 
A)  the institutions in which a person who wants to save can directly supply funds to a person who wants to borrow 
B)  the financial institutions through which savers can indirectly provide funds to borrowers 
C)  the institutions that sell shares to the public and use the proceeds to buy various types of stocks and/or bonds 
D)  the same thing as banks 
E)  all of the above

Question 2

Gina has the choice of two bonds, one that pays 5 per cent interest and one that pays 10 per cent interest. Which of the following is most likely?

Accepted Answer

A)  The 10 per cent bond has a shorter term than the 5 per cent bond 
B)  The 10 per cent bond is a government bond, and the 5 per cent bond is a junk bond 
C)  The 10 per cent bond is more risky than the 5 per cent bond 
D)  All of the above are equally likely 
A)  The 10 per cent bond has a shorter term than the 5 per cent bond 
B)  The 10 per cent bond is a government bond, and the 5 per cent bond is a junk bond 
C)  The 10 per cent bond is more risky than the 5 per cent bond 
D)  All of the above are equally likely

Question 3

Since all free markets, including financial markets, use the forces of supply and demand to determine prices, how do financial markets differ from other markets?

Accepted Answer

Financial markets, unlike most

Question 4

A bond is:

Accepted Answer

A)  a certificate of credit that specifies the credit of the holder of the bond 
B)  a capital investment 
C)  a certificate of indebtedness that specifies the obligations of the issuer to the holder of the bond 
D)  a factor of production 
A)  a certificate of credit that specifies the credit of the holder of the bond 
B)  a capital investment 
C)  a certificate of indebtedness that specifies the obligations of the issuer to the holder of the bond 
D)  a factor of production

Question 5

A company invested $50 million in building a factory 10 years ago when the annual interest rate was 2 per cent. What is the present value of the yield now?

Accepted Answer

A)  $49 million 
B)  $51 million 
C)  $61 million 
D)  $70 million 
A)  $49 million 
B)  $51 million 
C)  $61 million 
D)  $70 million

Question 6

If a company's bond can be purchased today and expects to earn investors 5% p.a, paying $100 at the end of 25 years, what is today's price? What could occur, to the price of the bonds if the company's level of risk increases? Why?

Accepted Answer

a. $29.53
b. The price would b

Question 7

The term of a bond is:

Accepted Answer

A)  the interest rate of the bond 
B)  the credit risk rating of the bond 
C)  the principal amount of the bond 
D)  the length of time until the bond matures 
A)  the interest rate of the bond 
B)  the credit risk rating of the bond 
C)  the principal amount of the bond 
D)  the length of time until the bond matures

Question 8

A dividend yield is:

Accepted Answer

A)  the stock price as a percentage of the dividend 
B)  the inflation-adjusted dividend payment 
C)  the dividend as a percentage of the stock price 
D)  the real rate of interest on the stock 
A)  the stock price as a percentage of the dividend 
B)  the inflation-adjusted dividend payment 
C)  the dividend as a percentage of the stock price 
D)  the real rate of interest on the stock

Question 9

What would happen to investment if the government were to increase the tax on interest income?

Accepted Answer

A)  Investment spending would fall 
B)  Investment spending would rise 
C)  Investment would be unaffected 
D)  Investment could rise, fall or remain unchanged 
A)  Investment spending would fall 
B)  Investment spending would rise 
C)  Investment would be unaffected 
D)  Investment could rise, fall or remain unchanged

Question 10

The supply of loanable funds shows the:

Accepted Answer

A)  quantity of loanable funds supplied at each possible nominal interest rate 
B)  equilibrium quantity of money that will be offered by savers at each possible nominal interest rate 
C)  equilibrium quantity of money that will be offered by savers at each possible real interest rate 
D)  quantity of loanable funds supplied at each possible real interest rate 
A)  quantity of loanable funds supplied at each possible nominal interest rate 
B)  equilibrium quantity of money that will be offered by savers at each possible nominal interest rate 
C)  equilibrium quantity of money that will be offered by savers at each possible real interest rate 
D)  quantity of loanable funds supplied at each possible real interest rate

Question 11

The financial system moves the economy's scarce resources from:

Accepted Answer

A)  the government to citizens 
B)  higher-valued uses to lower-valued uses 
C)  savers to borrowers 
D)  borrowers to savers 
A)  the government to citizens 
B)  higher-valued uses to lower-valued uses 
C)  savers to borrowers 
D)  borrowers to savers

Question 12

Which of the following is not necessarily a motive for investment?

Accepted Answer

A)  Desire to increase profits 
B)  Desire to improve market share in the long term 
C)  Desire to improve the status of the economy in the long term 
D)  Desire to satisfy consumer demand 
A)  Desire to increase profits 
B)  Desire to improve market share in the long term 
C)  Desire to improve the status of the economy in the long term 
D)  Desire to satisfy consumer demand

Question 13

Capital investments can be financed through:

Accepted Answer

A)  borrowing money from a bank 
B)  borrowing money from a friend or relative 
C)  sharing ownership and profits with someone who has sufficient money 
D)  all of the above 
A)  borrowing money from a bank 
B)  borrowing money from a friend or relative 
C)  sharing ownership and profits with someone who has sufficient money 
D)  all of the above

Question 14

When a country saves a small portion of its GDP:

Accepted Answer

A)  less investment will take place 
B)  less resources will be available for investment in capital 
C)  more resources will be available for investment in capital 
D)  the country's productivity will fall 
A)  less investment will take place 
B)  less resources will be available for investment in capital 
C)  more resources will be available for investment in capital 
D)  the country's productivity will fall

Question 15

The P/E ratio is the price of the share divided by the amount the corporation earned in the last financial year.

Accepted Answer

A) True 
 B)False

Question 16

The price of a share in the newspaper is the last price at which the share was traded.

Accepted Answer

A) True 
 B)False

Question 17

Public saving is:

Accepted Answer

A)  the amount of income that businesses have left after paying for the factors of production 
B)  the amount of tax revenue that the government has left after paying for its spending 
C)  the amount of income that households have left after paying their taxes and paying for their consumption 
D)  always equal to investment 
A)  the amount of income that businesses have left after paying for the factors of production 
B)  the amount of tax revenue that the government has left after paying for its spending 
C)  the amount of income that households have left after paying their taxes and paying for their consumption 
D)  always equal to investment

Question 18

Using the national income accounting identity, derive the relationship between national saving and investment. Also decompose national saving into private saving and public saving.

Accepted Answer

a.
Starting with the national income acc

Question 19

When James Tobin received a Nobel prize in economics, partly for demonstrating theoretically the rationale for diversifying a portfolio of assets, Charles Kindleberger, President of the American Economic Association, remarked that Tobin had received the prize for proving that 'it doesn't pay to put all your eggs in one basket'. Why might a saver decide to diversify his or her portfolio of assets?

Accepted Answer

Since it is more likely that a single co

Question 20

A low P/E ratio indicates that the share price of a company is expensive compared to the company's expected earnings.

Accepted Answer

A) True 
 B)False

Exam 27: Saving, Investment and the Financial System

Financial markets are:

Gina has the choice of two bonds, one that pays 5 per cent interest and one that pays 10 per cent interest. Which of the following is most likely?

Since all free markets, including financial markets, use the forces of supply and demand to determine prices, how do financial markets differ from other markets?

A bond is:

A company invested $50 million in building a factory 10 years ago when the annual interest rate was 2 per cent. What is the present value of the yield now?

If a company's bond can be purchased today and expects to earn investors 5% p.a, paying $100 at the end of 25 years, what is today's price? What could occur, to the price of the bonds if the company's level of risk increases? Why?

The term of a bond is:

A dividend yield is:

What would happen to investment if the government were to increase the tax on interest income?

The supply of loanable funds shows the:

The financial system moves the economy's scarce resources from:

Which of the following is not necessarily a motive for investment?

Capital investments can be financed through:

When a country saves a small portion of its GDP:

The P/E ratio is the price of the share divided by the amount the corporation earned in the last financial year.

The price of a share in the newspaper is the last price at which the share was traded.

Public saving is:

Using the national income accounting identity, derive the relationship between national saving and investment. Also decompose national saving into private saving and public saving.

A low P/E ratio indicates that the share price of a company is expensive compared to the company's expected earnings.

Ten Lessons From 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

Application: 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

Business Strategy

Competition Policy

Monopolistic Competition

The Markets for the Factors of Production

Earnings, Unions and Discrimination

Income Inequity and Poverty

The Theory of Consumer Choice

Frontiers of Microeconomics

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

The Natural Rate of Unemployment

The Monetary System

Inflation: Its Causes and Costs

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 Trade-Off Between Inflation and Unemployment

Five Debates Over Macroeconomic Policy

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