Question 1

Which of the following is NOT a reason people save during their working lifetimes?

Accepted Answer

A)  so they do not have to drastically reduce their consumption once they retire 
B)  to consume later in life 
C)  to take precautionary measures in case of job loss 
D)  to allow for a more volatile consumption path over time 
A)  so they do not have to drastically reduce their consumption once they retire 
B)  to consume later in life 
C)  to take precautionary measures in case of job loss 
D)  to allow for a more volatile consumption path over time

Question 2

Some businesses can't start small,and therefore:

Accepted Answer

A)  they must borrow or attract venture capitalists to start at all. 
B)  none of these businesses ever get off the ground. 
C)  they are no different from any other business. 
D)  these businesses are always owned by the government. 
A)  they must borrow or attract venture capitalists to start at all. 
B)  none of these businesses ever get off the ground. 
C)  they are no different from any other business. 
D)  these businesses are always owned by the government.

Question 3

If the demand for loanable funds decreases,ceteris paribus,the quantity of loanable funds exchanged will:

Accepted Answer

A)  increase. 
B)  decrease. 
C)  remain the same. 
D)  change indeterminately. 
A)  increase. 
B)  decrease. 
C)  remain the same. 
D)  change indeterminately.

Question 4

One function of banks is to spread risk.

Accepted Answer

A) True 
 B)False

Question 5

As a result of an increase in the supply of savings:

Accepted Answer

A)  both the interest rate and the demand for borrowing decrease. 
B)  the interest rate increases,but the demand for borrowing decreases. 
C)  both the interest rate and the demand for borrowing increase. 
D)  the interest rate decreases,but the amount of borrowing increases. 
A)  both the interest rate and the demand for borrowing decrease. 
B)  the interest rate increases,but the demand for borrowing decreases. 
C)  both the interest rate and the demand for borrowing increase. 
D)  the interest rate decreases,but the amount of borrowing increases.

Question 6

If consumers expect to have a shorter life expectancy and desire to save less,then the:

Accepted Answer

A)  demand for loanable funds will increase and the equilibrium interest rate will increase. 
B)  demand for loanable funds will decrease and the equilibrium interest rate will decrease. 
C)  supply of loanable funds will decrease and the equilibrium interest rate will increase. 
D)  the supply of loanable funds will increase and the equilibrium interest rate will decrease. 
A)  demand for loanable funds will increase and the equilibrium interest rate will increase. 
B)  demand for loanable funds will decrease and the equilibrium interest rate will decrease. 
C)  supply of loanable funds will decrease and the equilibrium interest rate will increase. 
D)  the supply of loanable funds will increase and the equilibrium interest rate will decrease.

Question 7

During the financial crisis,because of high leverage,losses on mortgages:

Accepted Answer

A)  pushed banks toward insolvency. 
B)  were fully hedged against. 
C)  increased the amount of credit available in the economy. 
D)  prevented a financial meltdown. 
A)  pushed banks toward insolvency. 
B)  were fully hedged against. 
C)  increased the amount of credit available in the economy. 
D)  prevented a financial meltdown.

Question 8

What do we call income that is NOT spent on consumption goods?

Accepted Answer

A)  investments 
B)  profits 
C)  asset retention 
D)  savings 
A)  investments 
B)  profits 
C)  asset retention 
D)  savings

Question 9

Which of the following do economists consider an investment?

Accepted Answer

A)  the purchase of bonds 
B)  the purchase of stocks 
C)  the construction of a new factory 
D)  the acquisition of gold 
A)  the purchase of bonds 
B)  the purchase of stocks 
C)  the construction of a new factory 
D)  the acquisition of gold

Question 10

Arbitrage means that financial assets with different levels of risk can have the same returns.

Accepted Answer

A) True 
 B)False

Question 11

What theory describes a pattern of early borrowing followed by a period of saving and then dissaving late in a worker's lifetime?

Accepted Answer

A)  the lifecycle theory of savings 
B)  the career theory of dissaving 
C)  the demand theory of borrowing 
D)  the theory of cyclical smoothing 
A)  the lifecycle theory of savings 
B)  the career theory of dissaving 
C)  the demand theory of borrowing 
D)  the theory of cyclical smoothing

Question 12

Explain why there is an inverse relationship between bond prices and the bond interest rate.

Accepted Answer

FV is the face value of the bond and Pri

Question 13

Which of the following is NOT an example of the need to borrow to finance large investments?

Accepted Answer

A)  Megan takes out a mortgage in order to purchase her first home. 
B)  The government issues additional bonds in order to build a new interstate highway system. 
C)  Jamie pays for college by working two jobs on the weekends. 
D)  Donald Trump applies for a $1 million loan in order to build a new golf course. 
A)  Megan takes out a mortgage in order to purchase her first home. 
B)  The government issues additional bonds in order to build a new interstate highway system. 
C)  Jamie pays for college by working two jobs on the weekends. 
D)  Donald Trump applies for a $1 million loan in order to build a new golf course.

Question 14

Investment is defined as:

Accepted Answer

A)  income not spent on investment goods. 
B)  income not spent on consumption goods. 
C)  income not taxed by the government. 
D)  the purchase of new capital goods. 
A)  income not spent on investment goods. 
B)  income not spent on consumption goods. 
C)  income not taxed by the government. 
D)  the purchase of new capital goods.

Question 15

Higher interest rates typically _____ saving,ceteris paribus.

Accepted Answer

A)  decrease 
B)  maintain 
C)  increase 
D)  indeterminately change 
A)  decrease 
B)  maintain 
C)  increase 
D)  indeterminately change

Question 16

-(Figure: Loanable Funds Market)Refer to the figure of the loanable funds market.The equilibrium quantity of loanable funds in this market is:

Accepted Answer

A)  $180. 
B)  $250. 
C)  $500. 
D)  more than $500. 
A)  $180. 
B)  $250. 
C)  $500. 
D)  more than $500.

Question 17

At an interest rate of 8%,borrowers' demand is $30 billion.At 4%,borrowers would want to borrow:

Accepted Answer

A)  $20 billion. 
B)  $25 billion. 
C)  $30 billion. 
D)  $45 billion 
A)  $20 billion. 
B)  $25 billion. 
C)  $30 billion. 
D)  $45 billion

Question 18

Economist Franco Modigliani's lifecycle theory of savings proposes that in order to maximize lifetime satisfaction,consumers:

Accepted Answer

A)  practice consumption smoothing by borrowing and saving. 
B)  borrow equal amounts throughout the life cycle. 
C)  save equal amounts throughout their life cycle. 
D)  consume what they earn each year. 
A)  practice consumption smoothing by borrowing and saving. 
B)  borrow equal amounts throughout the life cycle. 
C)  save equal amounts throughout their life cycle. 
D)  consume what they earn each year.

Question 19

If the supply of loanable funds increases,ceteris paribus,interest rates will:

Accepted Answer

A)  increase. 
B)  decrease. 
C)  remain the same. 
D)  change indeterminately. 
A)  increase. 
B)  decrease. 
C)  remain the same. 
D)  change indeterminately.

Question 20

A corporation is planning to finance the construction of new offices,but it has limited funds.The corporation is likely to:

Accepted Answer

A)  supply loanable funds by selling bonds. 
B)  supply loanable funds by buying bonds. 
C)  demand loanable funds by selling bonds. 
D)  demand loanable funds by buying bonds. 
A)  supply loanable funds by selling bonds. 
B)  supply loanable funds by buying bonds. 
C)  demand loanable funds by selling bonds. 
D)  demand loanable funds by buying bonds.

Exam 9: Saving,investment,and the Financial System

Which of the following is NOT a reason people save during their working lifetimes?

Some businesses can't start small,and therefore:

If the demand for loanable funds decreases,ceteris paribus,the quantity of loanable funds exchanged will:

One function of banks is to spread risk.

As a result of an increase in the supply of savings:

If consumers expect to have a shorter life expectancy and desire to save less,then the:

During the financial crisis,because of high leverage,losses on mortgages:

What do we call income that is NOT spent on consumption goods?

Which of the following do economists consider an investment?

Arbitrage means that financial assets with different levels of risk can have the same returns.

What theory describes a pattern of early borrowing followed by a period of saving and then dissaving late in a worker's lifetime?

Explain why there is an inverse relationship between bond prices and the bond interest rate.

Which of the following is NOT an example of the need to borrow to finance large investments?

Investment is defined as:

Higher interest rates typically _____ saving,ceteris paribus.

-(Figure: Loanable Funds Market)Refer to the figure of the loanable funds market.The equilibrium quantity of loanable funds in this market is:

At an interest rate of 8%,borrowers' demand is $30 billion.At 4%,borrowers would want to borrow:

Economist Franco Modigliani's lifecycle theory of savings proposes that in order to maximize lifetime satisfaction,consumers:

If the supply of loanable funds increases,ceteris paribus,interest rates will:

A corporation is planning to finance the construction of new offices,but it has limited funds.The corporation is likely to:

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Price Ceilings and Floors

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Stock Markets and Personal Finance

Unemployment and Labor Force Participation

Inflation and the Quantity Theory of Money

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