Question 1

Which of the following best represents time preference?

Accepted Answer

A)  Sarah is spending $20,000 per year in tuition and other expenses to attend college with the hopes of earning a higher income in the future. 
B)  Max saves $300 per month from his paychecks for retirement. 
C)  Alex smokes a pack of cigarettes per day even though he knows that he may face poor health down the road because of his smoking habit. 
D)  Thomas invests money in Apple today,which is subsequently used by Apple to fund additional investment purchases that will benefit future shareholders. 
A)  Sarah is spending $20,000 per year in tuition and other expenses to attend college with the hopes of earning a higher income in the future. 
B)  Max saves $300 per month from his paychecks for retirement. 
C)  Alex smokes a pack of cigarettes per day even though he knows that he may face poor health down the road because of his smoking habit. 
D)  Thomas invests money in Apple today,which is subsequently used by Apple to fund additional investment purchases that will benefit future shareholders.

Question 2

Which of the following is TRUE about the lifecycle theory of savings?

Accepted Answer

A)  People tend to save during the early years of their lifetimes,dissave during their prime working years,and borrow during their retirement years. 
B)  People tend to borrow during the early years of their lifetimes,invest during their prime working years,and save during their retirement years. 
C)  People tend to borrow during the early years of their lifetimes,save during their prime working years,and dissave during their retirement years. 
D)  People tend to save during the early years of their lifetimes,borrow during their prime working years,and invest during their retirement years. 
A)  People tend to save during the early years of their lifetimes,dissave during their prime working years,and borrow during their retirement years. 
B)  People tend to borrow during the early years of their lifetimes,invest during their prime working years,and save during their retirement years. 
C)  People tend to borrow during the early years of their lifetimes,save during their prime working years,and dissave during their retirement years. 
D)  People tend to save during the early years of their lifetimes,borrow during their prime working years,and invest during their retirement years.

Question 3

If investors become less optimistic about the economy,which of the following best describes behavior in the loanable funds market?

Accepted Answer

A)  An increase in supply results in an increase in the interest rate. 
B)  A decrease in supply results in a decrease in the interest rate. 
C)  A decrease in demand results in a decrease in the interest rate. 
D)  An increase in demand results in an increase in the interest rate. 
A)  An increase in supply results in an increase in the interest rate. 
B)  A decrease in supply results in a decrease in the interest rate. 
C)  A decrease in demand results in a decrease in the interest rate. 
D)  An increase in demand results in an increase in the interest rate.

Question 4

Crowding out occurs when private individuals and firms increase investment and consumption at the same time that the government increases borrowing.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following best describes the role of banks in the loanable funds market?

Accepted Answer

A)  Banks own the supply of loanable funds and distribute them to borrowers. 
B)  Banks act as a nonprofit middleman whose primary goal is to facilitate trade in the loanable funds market. 
C)  Banks act as profit-seeking institutions,taking the supply of loanable funds from households and distributing them to borrowers. 
D)  Banks are the primary demanders of loanable funds and thus have an important role in setting interest rates. 
A)  Banks own the supply of loanable funds and distribute them to borrowers. 
B)  Banks act as a nonprofit middleman whose primary goal is to facilitate trade in the loanable funds market. 
C)  Banks act as profit-seeking institutions,taking the supply of loanable funds from households and distributing them to borrowers. 
D)  Banks are the primary demanders of loanable funds and thus have an important role in setting interest rates.

Question 6

A firm can become insolvent with a small decrease in its asset value if it has:

Accepted Answer

A)  more assets. 
B)  a high collateral-to-debt ratio. 
C)  a high leverage ratio. 
D)  more equity. 
A)  more assets. 
B)  a high collateral-to-debt ratio. 
C)  a high leverage ratio. 
D)  more equity.

Question 7

If someone buys a bond,economists would say that person is investing,not saving.

Accepted Answer

A) True 
 B)False

Question 8

Individuals typically enjoy _____ consumption.

Accepted Answer

A)  volatile 
B)  periodic 
C)  smooth 
D)  layered 
A)  volatile 
B)  periodic 
C)  smooth 
D)  layered

Question 9

The process of bundling loans together and selling them on the market as financial assets is called:

Accepted Answer

A)  collaterallization. 
B)  crowding out. 
C)  securitization. 
D)  arbitrage. 
A)  collaterallization. 
B)  crowding out. 
C)  securitization. 
D)  arbitrage.

Question 10

Fluctuations in income cause most people to:

Accepted Answer

A)  invest. 
B)  save. 
C)  spend all their income each year. 
D)  retire at an early age. 
A)  invest. 
B)  save. 
C)  spend all their income each year. 
D)  retire at an early age.

Question 11

An increase in government borrowing will cause the interest rate to:

Accepted Answer

A)  rise and private spending to rise. 
B)  rise and private spending to fall. 
C)  fall and private spending to fall. 
D)  fall and private spending to rise. 
A)  rise and private spending to rise. 
B)  rise and private spending to fall. 
C)  fall and private spending to fall. 
D)  fall and private spending to rise.

Question 12

Businesses will take out additional loans only if:

Accepted Answer

A)  they have no other way to obtain funds. 
B)  the interest rate is less than the expected rate of return on their investment. 
C)  the demand for investment is equal to the supply of savings. 
D)  the interest rate is less than the cost of borrowing. 
A)  they have no other way to obtain funds. 
B)  the interest rate is less than the expected rate of return on their investment. 
C)  the demand for investment is equal to the supply of savings. 
D)  the interest rate is less than the cost of borrowing.

Question 13

A ceiling on interest rates is likely to result in a surplus in the loanable funds market.

Accepted Answer

A) True 
 B)False

Question 14

What temporary policy is often used by the government to combat the decreased investment demand during a recession?

Accepted Answer

A)  decreasing government spending 
B)  reducing regulations affecting firms 
C)  selling more bonds 
D)  offering an investment tax credit 
A)  decreasing government spending 
B)  reducing regulations affecting firms 
C)  selling more bonds 
D)  offering an investment tax credit

Question 15

A fortunate investor purchases a bond with a 10% return and watches interest rates fall to 5%.

Accepted Answer

A) True 
 B)False

Question 16

If the demand for loanable funds decreases,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 17

People smooth their consumption over their lifetime by:

Accepted Answer

A)  saving. 
B)  borrowing. 
C)  both borrowing and saving. 
D)  neither borrowing nor saving. 
A)  saving. 
B)  borrowing. 
C)  both borrowing and saving. 
D)  neither borrowing nor saving.

Question 18

Briefly discuss the four major factors that determine the supply of savings.

Accepted Answer

The first major factor for the supply of

Question 19

Equilibrium in the market for loanable funds takes place when:

Accepted Answer

A)  the quantity supplied of savings is greater than the quantity demanded for borrowing. 
B)  the quantity supplied of savings is less than the quantity demanded for borrowing. 
C)  the quantity supplied of savings is equal to the quantity demanded for borrowing. 
D)  the supply of savings is greater than the demand for borrowing. 
A)  the quantity supplied of savings is greater than the quantity demanded for borrowing. 
B)  the quantity supplied of savings is less than the quantity demanded for borrowing. 
C)  the quantity supplied of savings is equal to the quantity demanded for borrowing. 
D)  the supply of savings is greater than the demand for borrowing.

Question 20

Interest rates and bond prices move in the same direction.

Accepted Answer

A) True 
 B)False

Exam 9: Saving,investment,and the Financial System

Which of the following best represents time preference?

Which of the following is TRUE about the lifecycle theory of savings?

If investors become less optimistic about the economy,which of the following best describes behavior in the loanable funds market?

Crowding out occurs when private individuals and firms increase investment and consumption at the same time that the government increases borrowing.

Which of the following best describes the role of banks in the loanable funds market?

A firm can become insolvent with a small decrease in its asset value if it has:

If someone buys a bond,economists would say that person is investing,not saving.

Individuals typically enjoy _____ consumption.

The process of bundling loans together and selling them on the market as financial assets is called:

Fluctuations in income cause most people to:

An increase in government borrowing will cause the interest rate to:

Businesses will take out additional loans only if:

A ceiling on interest rates is likely to result in a surplus in the loanable funds market.

What temporary policy is often used by the government to combat the decreased investment demand during a recession?

A fortunate investor purchases a bond with a 10% return and watches interest rates fall to 5%.

If the demand for loanable funds decreases,ceteris paribus,interest rates will:

People smooth their consumption over their lifetime by:

Briefly discuss the four major factors that determine the supply of savings.

Equilibrium in the market for loanable funds takes place when:

Interest rates and bond prices move in the same direction.

The Big Ideas

The Power of Trade

Supply and Demand

Equilibrium- How Supply and Demand

Price Ceilings and Floors

GDP and the Measurement of Progress

The Wealth of Nations and Economic Growth

Growth,capital Accumulation

Stock Markets and Personal Finance

Unemployment and Labor Force Participation

Inflation and the Quantity Theory of Money

Business Fluctuations

Transmission and Amplification Mechanisms

The Federal Reserve System

Monetary Policy

The Federal Budget- Taxes and Spending

Fiscal Policy

International Trade

International Finance

Political Economy and Public Choice

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