Question 1

A corporation's earnings are the amount of revenue it receives for the sale of its products

Accepted Answer

A)  minus its cost of production as measured by its accountants.Earnings must be paid out as dividends. 
B)  minus its cost of production as measured by its accountants.Earnings may be paid out as dividends or retained by the corporation. 
C)  minus its direct and indirect costs as measured by its economists.Earnings must be paid out as dividends. 
D)  minus its direct and indirect cost as measure by its economists.Earnings may be paid out as dividends or retained by the corporation. 
A)  minus its cost of production as measured by its accountants.Earnings must be paid out as dividends. 
B)  minus its cost of production as measured by its accountants.Earnings may be paid out as dividends or retained by the corporation. 
C)  minus its direct and indirect costs as measured by its economists.Earnings must be paid out as dividends. 
D)  minus its direct and indirect cost as measure by its economists.Earnings may be paid out as dividends or retained by the corporation.

Question 2

Which of the following is an example of financial intermediation?

Accepted Answer

A)  Susan buys shares of stock issued by a fast food company. 
B)  A foreign government buys bonds issued by the U.S.Treasury. 
C)  John makes a deposit at a bank and the bank uses this money to make an auto loan to Luke. 
D)  None of the above is correct. 
A)  Susan buys shares of stock issued by a fast food company. 
B)  A foreign government buys bonds issued by the U.S.Treasury. 
C)  John makes a deposit at a bank and the bank uses this money to make an auto loan to Luke. 
D)  None of the above is correct.

Question 3

Managed funds

Accepted Answer

A)  typically have a higher rate of return and higher costs than index funds. 
B)  typically have a higher rate of return and lower costs than index funds. 
C)  typically have a lower rate of return and higher costs than index funds. 
D)  typically have a lower rate of return and lower costs than index funds. 
A)  typically have a higher rate of return and higher costs than index funds. 
B)  typically have a higher rate of return and lower costs than index funds. 
C)  typically have a lower rate of return and higher costs than index funds. 
D)  typically have a lower rate of return and lower costs than index funds.

Question 4

The nominal interest rate is the

Accepted Answer

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

Question 5

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 6

On which of these bonds is the prospect of default least likely?

Accepted Answer

A)  a junk bond 
B)  a bond issued by the state of Texas 
C)  a bond issued by the federal government 
D)  a bond issued by Exxon Mobil Corporation 
A)  a junk bond 
B)  a bond issued by the state of Texas 
C)  a bond issued by the federal government 
D)  a bond issued by Exxon Mobil Corporation

Question 7

Suppose the government deficit increases,but the interest rate remains the same.Which of the following things might have happened simultaneously to keep interest rates the same?

Accepted Answer

A)  The government reduces the amount that people may put into savings accounts on which the interest is tax exempt. 
B)  Because they are optimistic about the future of the economy,firms desire to borrow more to purchase physical capital. 
C)  Consumers decide to decrease consumption and work more. 
D)  All of the above could explain why the interest rate would be unchanged. 
A)  The government reduces the amount that people may put into savings accounts on which the interest is tax exempt. 
B)  Because they are optimistic about the future of the economy,firms desire to borrow more to purchase physical capital. 
C)  Consumers decide to decrease consumption and work more. 
D)  All of the above could explain why the interest rate would be unchanged.

Question 8

Other things the same,which bond would you expect to pay the highest interest rate?

Accepted Answer

A)  a bond issued by the U.S.government 
B)  a bond issued by IBM 
C)  a bond issued by New York State 
D)  a bond issued by a new restaurant chain 
A)  a bond issued by the U.S.government 
B)  a bond issued by IBM 
C)  a bond issued by New York State 
D)  a bond issued by a new restaurant chain

Question 9

Retained earnings are

Accepted Answer

A)  earnings of a company that are not paid out to stockholders. 
B)  the amount of revenue a corporation receives for the sale of its products minus its costs of production as measured by its accountants. 
C)  the single most important piece of information about a stock. 
D)  computed by multiplying the dividend yield by the price of the stock. 
A)  earnings of a company that are not paid out to stockholders. 
B)  the amount of revenue a corporation receives for the sale of its products minus its costs of production as measured by its accountants. 
C)  the single most important piece of information about a stock. 
D)  computed by multiplying the dividend yield by the price of the stock.

Question 10

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 11

In a closed economy,investment must be equal to private saving.

Accepted Answer

A) True 
 B)False

Question 12

If the inflation rate is 2 percent and the real interest rate is 3 percent,then the nominal interest rate is

Accepted Answer

A)  5 percent. 
B)  1 percent. 
C)  1.5 percent 
D)  0.67 percent. 
A)  5 percent. 
B)  1 percent. 
C)  1.5 percent 
D)  0.67 percent.

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

Other things the same,as the maturity of a bond becomes longer,the bond will pay

Accepted Answer

A)  a lower interest rate because it has less risk. 
B)  a lower interest rate because it has more risk. 
C)  a higher interest rate because it has more risk. 
D)  the same interest rate,because there is no relationship between term and risk. 
A)  a lower interest rate because it has less risk. 
B)  a lower interest rate because it has more risk. 
C)  a higher interest rate because it has more risk. 
D)  the same interest rate,because there is no relationship between term and risk.

Question 15

A perpetuity is distinguished from other bonds in that it

Accepted Answer

A)  pays continuously compounded interest. 
B)  pays interest only when it matures. 
C)  never matures. 
D)  will be used to purchase another bond when it matures unless the owner specifies otherwise. 
A)  pays continuously compounded interest. 
B)  pays interest only when it matures. 
C)  never matures. 
D)  will be used to purchase another bond when it matures unless the owner specifies otherwise.

Question 16

If,for an imaginary closed economy,investment amounts to $10,000 and the government is running a $2,500 deficit,then private saving must amount to $12,500.

Accepted Answer

A) True 
 B)False

Question 17

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 18

The ratio of government debt to GDP was higher during the Reagan presidency than at any previous time in U.S.history.

Accepted Answer

A) True 
 B)False

Question 19

In the late summer of 2005 some regions of the country were suffering from drought.What effect would we expect this to have on the stock of companies such as John Deere that manufacture farm equipment?

Accepted Answer

A)  raise the demand for existing shares of the stock,causing the price to rise 
B)  decrease the demand for existing shares of the stock,causing the price to fall 
C)  raise the supply of the existing shares of stock,causing the price to rise 
D)  raise the supply of the existing shares of stock,causing the price to fall 
A)  raise the demand for existing shares of the stock,causing the price to rise 
B)  decrease the demand for existing shares of the stock,causing the price to fall 
C)  raise the supply of the existing shares of stock,causing the price to rise 
D)  raise the supply of the existing shares of stock,causing the price to fall

Question 20

Suppose the economy is closed with national saving of $2 trillion,consumption of $7 trillion,and government purchases of $1 trillion.What is GDP?

Accepted Answer

A)  $8 trillion 
B)  $9 trillion 
C)  $10 trillion 
D)  $11 trillion 
A)  $8 trillion 
B)  $9 trillion 
C)  $10 trillion 
D)  $11 trillion

Exam 26: Saving, investment, and the Financial System

A corporation's earnings are the amount of revenue it receives for the sale of its products

Which of the following is an example of financial intermediation?

Managed funds

The nominal interest rate is the

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

On which of these bonds is the prospect of default least likely?

Suppose the government deficit increases,but the interest rate remains the same.Which of the following things might have happened simultaneously to keep interest rates the same?

Other things the same,which bond would you expect to pay the highest interest rate?

Retained earnings are

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

In a closed economy,investment must be equal to private saving.

If the inflation rate is 2 percent and the real interest rate is 3 percent,then the nominal interest rate is

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

Other things the same,as the maturity of a bond becomes longer,the bond will pay

A perpetuity is distinguished from other bonds in that it

If,for an imaginary closed economy,investment amounts to $10,000 and the government is running a $2,500 deficit,then private saving must amount to $12,500.

Which of the following statements is correct?

The ratio of government debt to GDP was higher during the Reagan presidency than at any previous time in U.S.history.

In the late summer of 2005 some regions of the country were suffering from drought.What effect would we expect this to have on the stock of companies such as John Deere that manufacture farm equipment?

Suppose the economy is closed with national saving of $2 trillion,consumption of $7 trillion,and government purchases of $1 trillion.What is GDP?

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

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

Monopolistic Competition

Oligopoly

The Markets for the Factors of Production

Earnings and Discrimination

Income Inequality and Poverty

The Theory of Consumer Choice

Frontiers of Microeconomics

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

The Basic Tools of Finance

Unemployment

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 Trade-Off Between Inflation and Unemployment

Five Debates Over Macroeconomic Policy

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