Question 1

What would happen in the market for loanable funds if the government were to increase the tax on interest income?

Accepted Answer

A)  Interest rates would rise. 
B)  Interest rates would be unaffected. 
C)  Interest rates would fall. 
D)  The effect on the interest rate is uncertain. 
A)  Interest rates would rise. 
B)  Interest rates would be unaffected. 
C)  Interest rates would fall. 
D)  The effect on the interest rate is uncertain.

Question 2

The slope of the supply of loanable funds is based on the logic that an increase in interest rates

Accepted Answer

A)  makes saving more attractive. 
B)  makes saving less attractive. 
C)  makes investment more attractive. 
D)  makes investment less attractive. 
A)  makes saving more attractive. 
B)  makes saving less attractive. 
C)  makes investment more attractive. 
D)  makes investment less attractive.

Question 3

In national income accounting, we use which of the following pairs of terms interchangeably?

Accepted Answer

A)  "investment" and "private saving" 
B)  "investment" and "purchases of stocks and bonds" 
C)  "saving" and "national saving" 
D)  "public saving" and "government tax revenue minus government spending" 
A)  "investment" and "private saving" 
B)  "investment" and "purchases of stocks and bonds" 
C)  "saving" and "national saving" 
D)  "public saving" and "government tax revenue minus government spending"

Question 4

What would happen in the market for loanable funds if the government were to increase the tax on interest income?

Accepted Answer

A)  The supply of loanable funds would shift right. 
B)  The demand for loanable funds would shift right. 
C)  The supply of loanable funds would shift left. 
D)  The demand for loanable funds would shift left. 
A)  The supply of loanable funds would shift right. 
B)  The demand for loanable funds would shift right. 
C)  The supply of loanable funds would shift left. 
D)  The demand for loanable funds would shift left.

Question 5

The Eye of Horus incense company has $10 million in cash which it has accumulated from retained earnings. It was planning to use the money to build a new factory. Recently, the rate of interest has increased. The increase in the rate of interest should

Accepted Answer

A)  not influence the decision to build the factory because The Eye of Horus doesn't have to borrow any money. 
B)  not influence the decision to build the factory because its stockholders are expecting a new factory. 
C)  make it more likely that The Eye of Horus will build the factory because a higher interest rate will make the factory more valuable. 
D)  make it less likely that The Eye of Horus will build the factory because the opportunity cost of the $10 million is now higher. 
A)  not influence the decision to build the factory because The Eye of Horus doesn't have to borrow any money. 
B)  not influence the decision to build the factory because its stockholders are expecting a new factory. 
C)  make it more likely that The Eye of Horus will build the factory because a higher interest rate will make the factory more valuable. 
D)  make it less likely that The Eye of Horus will build the factory because the opportunity cost of the $10 million is now higher.

Question 6

Suppose a small closed economy has GDP of $5 billion, consumption of $3 billion, and government expenditures of $1 billion. Then investment and national saving are both $1 billion.

Accepted Answer

A) True 
 B)False

Question 7

Northwest Wholesale Foods sells common stock. The company is using

Accepted Answer

A)  equity financing and the return shareholders earn is fixed. 
B)  equity financing and the return shareholders earn depends on how profitable the company is. 
C)  debt financing and the return shareholders earn is fixed. 
D)  debt financing and the return shareholders earn depends on how profitable the company is. 
A)  equity financing and the return shareholders earn is fixed. 
B)  equity financing and the return shareholders earn depends on how profitable the company is. 
C)  debt financing and the return shareholders earn is fixed. 
D)  debt financing and the return shareholders earn depends on how profitable the company is.

Question 8

A stock index is

Accepted Answer

A)  an average of a group of stock prices. 
B)  an average of a group of stock yields. 
C)  a measure of the risk relative to the profitability of corporations. 
D)  a report in a newspaper or other media outlet on the price of the stock and earnings of the corporation that issued the stock. 
A)  an average of a group of stock prices. 
B)  an average of a group of stock yields. 
C)  a measure of the risk relative to the profitability of corporations. 
D)  a report in a newspaper or other media outlet on the price of the stock and earnings of the corporation that issued the stock.

Question 9

The real interest rate is the

Accepted Answer

A)  interest rate corrected for inflation. 
B)  interest rate as usually reported by banks. 
C)  difference between the interest rate charged by banks on the loans they make and the interest rate paid by banks to their depositors. 
D)  difference between the average dividend yield on stocks and the average interest rate on bonds. 
A)  interest rate corrected for inflation. 
B)  interest rate as usually reported by banks. 
C)  difference between the interest rate charged by banks on the loans they make and the interest rate paid by banks to their depositors. 
D)  difference between the average dividend yield on stocks and the average interest rate on bonds.

Question 10

Suppose a country repealed its investment tax credit. The effects of this are represented by shifting the

Accepted Answer

A)  demand for and the supply of loanable funds to the right. 
B)  demand for and the supply of loanable funds to the left. 
C)  supply of loanable funds to the right and the demand for loanable funds to the left. 
D)  None of the above is correct. 
A)  demand for and the supply of loanable funds to the right. 
B)  demand for and the supply of loanable funds to the left. 
C)  supply of loanable funds to the right and the demand for loanable funds to the left. 
D)  None of the above is correct.

Question 11

Consider the expressions T - G and Y - T - C. Which of the following statements is correct?

Accepted Answer

A)  Each one of these is equal to national saving. 
B)  Each one of these is equal to public saving. 
C)  The first of these is private saving; the second one is public saving. 
D)  The first of these is public saving; the second one is private saving. 
A)  Each one of these is equal to national saving. 
B)  Each one of these is equal to public saving. 
C)  The first of these is private saving; the second one is public saving. 
D)  The first of these is public saving; the second one is private saving.

Question 12

Which of the following could explain a decrease in the interest rate and an increase in the equilibrium quantity of investment?

Accepted Answer

A)  the supply of loanable funds shifted right. 
B)  the supply of loanable funds shifted left. 
C)  the demand for loanable funds shifted right. 
D)  the demand for loanable funds shifted left. 
A)  the supply of loanable funds shifted right. 
B)  the supply of loanable funds shifted left. 
C)  the demand for loanable funds shifted right. 
D)  the demand for loanable funds shifted left.

Question 13

Suppose a government that taxed all interest income changed its tax law so that the first $5,000 of a taxpayer's interest income was tax free. This would shift the

Accepted Answer

A)  supply of loanable funds to the right, causing interest rates to fall. 
B)  supply of loanable funds to the left, causing interest rates to rise. 
C)  demand for loanable funds to the right, causing interest rates to rise. 
D)  demand for loanable funds to the left, causing interest rates to fall. 
A)  supply of loanable funds to the right, causing interest rates to fall. 
B)  supply of loanable funds to the left, causing interest rates to rise. 
C)  demand for loanable funds to the right, causing interest rates to rise. 
D)  demand for loanable funds to the left, causing interest rates to fall.

Question 14

A larger budget deficit

Accepted Answer

A)  raises the interest rate and investment. 
B)  reduces the interest rate and investment. 
C)  raises the interest rate and reduces investment. 
D)  reduces the interest rate and raises investment. 
A)  raises the interest rate and investment. 
B)  reduces the interest rate and investment. 
C)  raises the interest rate and reduces investment. 
D)  reduces the interest rate and raises investment.

Question 15

According to the definitions of national saving and public saving, if Y, C, and G remained the same, an increase in taxes would

Accepted Answer

A)  raise national saving and public saving. 
B)  raise national saving and raise public saving. 
C)  leave national saving and public saving unchanged. 
D)  leave national saving unchanged and raise public saving. 
A)  raise national saving and public saving. 
B)  raise national saving and raise public saving. 
C)  leave national saving and public saving unchanged. 
D)  leave national saving unchanged and raise public saving.

Question 16

The term loanable funds refers to all income that is not used for consumption.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following statements about the term of a bond is correct?

Accepted Answer

A)  Term refers to the various characteristics of a bond, including its interest rate and tax treatment. 
B)  The term of a bond is determined entirely by its credit risk. 
C)  The term of a bond is determined entirely by how much sales charge the buyer of the bond pays when he or she purchases the bond. 
D)  Interest rates on long-term bonds are usually higher than interest rates on short-term bonds. 
A)  Term refers to the various characteristics of a bond, including its interest rate and tax treatment. 
B)  The term of a bond is determined entirely by its credit risk. 
C)  The term of a bond is determined entirely by how much sales charge the buyer of the bond pays when he or she purchases the bond. 
D)  Interest rates on long-term bonds are usually higher than interest rates on short-term bonds.

Question 18

We interpret the meaning of "loanable funds" as the

Accepted Answer

A)  flow of resources available from private saving. 
B)  flow of resources available to fund private investment. 
C)  resources borrowed by private investors and by government. 
D)  resources lent by private investors and by government. 
A)  flow of resources available from private saving. 
B)  flow of resources available to fund private investment. 
C)  resources borrowed by private investors and by government. 
D)  resources lent by private investors and by government.

Question 19

Index funds are usually outperformed by mutual funds that are actively managed by professional money managers.

Accepted Answer

A) True 
 B)False

Question 20

Suppose that Congress were to institute an investment tax credit. What would happen in the market for loanable funds?

Accepted Answer

A)  The demand for loanable funds would shift left. 
B)  The supply of loanable funds would shift left. 
C)  The demand for loanable funds would shift right. 
D)  The supply of loanable funds would shift right. 
A)  The demand for loanable funds would shift left. 
B)  The supply of loanable funds would shift left. 
C)  The demand for loanable funds would shift right. 
D)  The supply of loanable funds would shift right.

Exam 18: Saving, Investment, and the Financial System

What would happen in the market for loanable funds if the government were to increase the tax on interest income?

The slope of the supply of loanable funds is based on the logic that an increase in interest rates

In national income accounting, we use which of the following pairs of terms interchangeably?

What would happen in the market for loanable funds if the government were to increase the tax on interest income?

The Eye of Horus incense company has $10 million in cash which it has accumulated from retained earnings. It was planning to use the money to build a new factory. Recently, the rate of interest has increased. The increase in the rate of interest should

Suppose a small closed economy has GDP of $5 billion, consumption of $3 billion, and government expenditures of $1 billion. Then investment and national saving are both $1 billion.

Northwest Wholesale Foods sells common stock. The company is using

A stock index is

The real interest rate is the

Suppose a country repealed its investment tax credit. The effects of this are represented by shifting the

Consider the expressions T - G and Y - T - C. Which of the following statements is correct?

Which of the following could explain a decrease in the interest rate and an increase in the equilibrium quantity of investment?

Suppose a government that taxed all interest income changed its tax law so that the first $5,000 of a taxpayer's interest income was tax free. This would shift the

A larger budget deficit

According to the definitions of national saving and public saving, if Y, C, and G remained the same, an increase in taxes would

The term loanable funds refers to all income that is not used for consumption.

Which of the following statements about the term of a bond is correct?

We interpret the meaning of "loanable funds" as the

Index funds are usually outperformed by mutual funds that are actively managed by professional money managers.

Suppose that Congress were to institute an investment tax credit. What would happen in the market for loanable funds?

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 Costs of Production

Firms in Competitive Markets

Monopoly

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

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

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