Question 1

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. C

Question 2

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

Accepted Answer

A) True 
 B)False  False

Question 3

What is the main function of the financial system?

Accepted Answer

Matching savers with investors.

Question 4

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 5

In a closed economy, national saving equals

Accepted Answer

A)  investment. 
B)  income minus the sum of consumption and government purchases. 
C)  private saving plus public saving. 
D)  All of the above are correct. 
A)  investment. 
B)  income minus the sum of consumption and government purchases. 
C)  private saving plus public saving. 
D)  All of the above are correct.

Question 6

If there is a surplus of loanable funds, then

Accepted Answer

A)  the quantity demanded is greater than the quantity supplied and the interest rate will rise. 
B)  the quantity demanded is greater than the quantity supplied and the interest rate will fall. 
C)  the quantity supplied is greater than the quantity demanded and the interest rate will rise. 
D)  the quantity supplied is greater than the quantity demanded and the interest rate will fall. 
A)  the quantity demanded is greater than the quantity supplied and the interest rate will rise. 
B)  the quantity demanded is greater than the quantity supplied and the interest rate will fall. 
C)  the quantity supplied is greater than the quantity demanded and the interest rate will rise. 
D)  the quantity supplied is greater than the quantity demanded and the interest rate will fall.

Question 7

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 8

If the government currently has a budget deficit, then

Accepted Answer

A)  it does not necessarily have a debt. 
B)  its debt is increasing. 
C)  government expenditures are greater than taxes. 
D)  All of the above are correct. 
A)  it does not necessarily have a debt. 
B)  its debt is increasing. 
C)  government expenditures are greater than taxes. 
D)  All of the above are correct.

Question 9

Alpha Corporation has a price of $5 a share, outstanding shares of 2.5 million, retained earnings of $1 million dollars, and a dividend yield of 2 percent. It has a price-earnings ratio which is

Accepted Answer

A)  high, perhaps indicating that people expect future earnings to rise. 
B)  high, perhaps indicating that people expect future earnings to fall. 
C)  low, perhaps indicating that people expect future earnings to rise. 
D)  low, perhaps indicating that people expect future earnings to fall. 
A)  high, perhaps indicating that people expect future earnings to rise. 
B)  high, perhaps indicating that people expect future earnings to fall. 
C)  low, perhaps indicating that people expect future earnings to rise. 
D)  low, perhaps indicating that people expect future earnings to fall.

Question 10

On a graph that depicts the market for loanable funds, the nominal interest rate is measured along the vertical axis.

Accepted Answer

A) True 
 B)False

Question 11

If in the past Congress had taken additional actions to make saving more rewarding, then today it is likely that the equilibrium interest rate

Accepted Answer

A)  and the equilibrium quantity of loanable funds both would be lower. 
B)  and the equilibrium quantity of loanable funds both would be higher. 
C)  would be higher and the equilibrium quantity of loanable funds would be lower. 
D)  would be lower and the equilibrium quantity of loanable funds would be higher. 
A)  and the equilibrium quantity of loanable funds both would be lower. 
B)  and the equilibrium quantity of loanable funds both would be higher. 
C)  would be higher and the equilibrium quantity of loanable funds would be lower. 
D)  would be lower and the equilibrium quantity of loanable funds would be higher.

Question 12

Because of differences in tax treatment, municipal bonds pay a higher interest rate than do corporate bonds.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following restrictions implies that investment exceeds private saving for a closed economy?

Accepted Answer

A)  The economy has no government. 
B)  The economy's government is running a budget deficit. 
C)  The economy's government is running a budget surplus. 
D)  No restriction is necessary; investment and private saving are equal for all closed economies. 
A)  The economy has no government. 
B)  The economy's government is running a budget deficit. 
C)  The economy's government is running a budget surplus. 
D)  No restriction is necessary; investment and private saving are equal for all closed economies.

Question 14

Which of the following would both make the interest rate on a bond higher than otherwise?

Accepted Answer

A)  the interest it pays is taxed and it is long term 
B)  the interest it pays is taxed and it is short term 
C)  the interest it pays is tax exempt and it is long term 
D)  the interest it pays is tax exempt and it is short term 
A)  the interest it pays is taxed and it is long term 
B)  the interest it pays is taxed and it is short term 
C)  the interest it pays is tax exempt and it is long term 
D)  the interest it pays is tax exempt and it is short term

Question 15

If the nominal interest rate is 7 percent and the rate of inflation is 3 percent, then the real interest rate is

Accepted Answer

A)  7 percent. 
B)  4 percent. 
C)  3 percent. 
D)  10 percent. 
A)  7 percent. 
B)  4 percent. 
C)  3 percent. 
D)  10 percent.

Question 16

Your brother-in-law wants to buy either stock or bonds in Cedar Valley Furniture, which manufactures wooden furniture. He wants your advice on whether to buy stock or bonds. Explain how each of his quotes below should affect his choice between the stock and the bond.
a. "I have reason to believe that people are soon going to find rocking chairs have health benefits."
b. "I would like to tell people I am part owner of Cedar Valley Furniture."
c. "I do not want to take on much risk."

Accepted Answer

a. Presumably, when this happens, unless

Question 17

Bond A and Bond B have identical characteristics except that Bond A has a higher interest rate. Which bond has a higher credit risk?

Accepted Answer

The answer of Bond A and Bond B have identical...

Question 18

In the Coen Brothers' movie The Hudsucker Proxy the board of directors picks someone to run the company who they believe will make poor decisions. If things turn out as they plan,

Accepted Answer

A)  the price of a share of stock in the Hudsucker corporation should decline as the demand for shares falls. 
B)  the price of a share of stock in the Hudsucker corporation should rise as the demand for shares rises. 
C)  the price of a share of stock in the Hudsucker corporation should decline as the supply of existing shares falls. 
D)  the price of a share of stock in the Hudsucker corporation should rise as the supply of existing shares rises. 
A)  the price of a share of stock in the Hudsucker corporation should decline as the demand for shares falls. 
B)  the price of a share of stock in the Hudsucker corporation should rise as the demand for shares rises. 
C)  the price of a share of stock in the Hudsucker corporation should decline as the supply of existing shares falls. 
D)  the price of a share of stock in the Hudsucker corporation should rise as the supply of existing shares rises.

Question 19

What is a mutual fund?

Accepted Answer

An institution that sells shar

Question 20

A is a certificate of indebtedness and a is a claim to partial ownership in a firm.

Accepted Answer

The answer of A is a certificate of indebtedness and...

Exam 26: Saving, Investment, and the Financial System

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

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

What is the main function of the financial system?

We interpret the meaning of "loanable funds" as the

In a closed economy, national saving equals

If there is a surplus of loanable funds, then

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

If the government currently has a budget deficit, then

Alpha Corporation has a price of $5 a share, outstanding shares of 2.5 million, retained earnings of $1 million dollars, and a dividend yield of 2 percent. It has a price-earnings ratio which is

On a graph that depicts the market for loanable funds, the nominal interest rate is measured along the vertical axis.

If in the past Congress had taken additional actions to make saving more rewarding, then today it is likely that the equilibrium interest rate

Because of differences in tax treatment, municipal bonds pay a higher interest rate than do corporate bonds.

Which of the following restrictions implies that investment exceeds private saving for a closed economy?

Which of the following would both make the interest rate on a bond higher than otherwise?

If the nominal interest rate is 7 percent and the rate of inflation is 3 percent, then the real interest rate is

Bond A and Bond B have identical characteristics except that Bond A has a higher interest rate. Which bond has a higher credit risk?

In the Coen Brothers' movie The Hudsucker Proxy the board of directors picks someone to run the company who they believe will make poor decisions. If things turn out as they plan,

What is a mutual fund?

A is a certificate of indebtedness and a is a claim to partial ownership in a firm.

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

Six Debates Over Macroeconomic Policy

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