Question 1

Which of the following is an example of financial intermediation?

Accepted Answer

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

Question 2

Anything other than a change in the interest rate that decreases national saving shifts the supply of loanable funds to the left.

Accepted Answer

A) True 
 B)False

Question 3

Owners of municipal bonds

Accepted Answer

A)  are not required to pay federal income tax on the interest income. 
B)  usually receive a higher interest rate compared to bonds issued by corporations. 
C)  usually receive a higher interest rate compared to stock issued by corporations. 
D)  pay taxes on the dividends earned from these bonds. 
A)  are not required to pay federal income tax on the interest income. 
B)  usually receive a higher interest rate compared to bonds issued by corporations. 
C)  usually receive a higher interest rate compared to stock issued by corporations. 
D)  pay taxes on the dividends earned from these bonds.

Question 4

In the market for loanable funds, the interaction of the demand for, and supply of, loanable funds determines the equilibrium level of

Accepted Answer

A)  the inflation rate. 
B)  gross domestic product. 
C)  the real interest rate. 
D)  the nominal interest rate. 
A)  the inflation rate. 
B)  gross domestic product. 
C)  the real interest rate. 
D)  the nominal interest rate.

Question 5

In the language of macroeconomics, investment refers to

Accepted Answer

A)  saving. 
B)  the purchase of new capital. 
C)  the purchase of stocks, bonds, or mutual funds. 
D)  All of the above are correct. 
A)  saving. 
B)  the purchase of new capital. 
C)  the purchase of stocks, bonds, or mutual funds. 
D)  All of the above are correct.

Question 6

Congress and the President implement an investment tax credit. Which curve in the market for loanable funds shifts, which direction does it shift, and what happens to the interest rate?

Accepted Answer

The demand for loana

Question 7

A budget deficit

Accepted Answer

A)  changes the supply of loanable funds. 
B)  changes the demand for loanable funds. 
C)  changes both the supply of and demand for loanable funds. 
D)  does not influence the supply of or the demand for loanable funds. 
A)  changes the supply of loanable funds. 
B)  changes the demand for loanable funds. 
C)  changes both the supply of and demand for loanable funds. 
D)  does not influence the supply of or the demand for loanable funds.

Question 8

All or part of a firm's profits may be paid out to the firm's stockholders in the form of

Accepted Answer

A)  retained earnings. 
B)  dividends. 
C)  interest payments. 
D)  capital accounts. 
A)  retained earnings. 
B)  dividends. 
C)  interest payments. 
D)  capital accounts.

Question 9

If there is shortage of loanable funds, then

Accepted Answer

A)  the supply for loanable funds shifts right and the demand shifts left. 
B)  the supply for loanable funds shifts left and the demand shifts right. 
C)  neither curve shifts, but the quantity of loanable funds supplied increases and the quantity demanded decreases as the interest rate rises to equilibrium. 
D)  neither curve shifts, but the quantity of loanable funds supplied decreases and the quantity demanded increases as the interest rate falls to equilibrium. 
A)  the supply for loanable funds shifts right and the demand shifts left. 
B)  the supply for loanable funds shifts left and the demand shifts right. 
C)  neither curve shifts, but the quantity of loanable funds supplied increases and the quantity demanded decreases as the interest rate rises to equilibrium. 
D)  neither curve shifts, but the quantity of loanable funds supplied decreases and the quantity demanded increases as the interest rate falls to equilibrium.

Question 10

If the demand for loanable funds shifts to the right, then initially there is a

Accepted Answer

A)  surplus so the interest rate will fall. 
B)  surplus so the interest rate will rise. 
C)  shortage so the interest rate will fall. 
D)  shortage so the interest rate will rise. 
A)  surplus so the interest rate will fall. 
B)  surplus so the interest rate will rise. 
C)  shortage so the interest rate will fall. 
D)  shortage so the interest rate will rise.

Question 11

Figure 26-5. Figure 26-5 shows the loanable funds market for a closed economy.  
-Refer to Figure 26-5. Starting at point A, the enactment of an investment tax credit would likely cause

Accepted Answer

A)  the quantity of loanable funds traded to increase to $125 and the interest rate to rise to 7% (point 
C) . 
B)  the quantity of loanable funds traded to decrease to $75 and the interest rate to fall to 5% (point 
B) . 
C)  the quantity of loanable funds traded to decrease to $75 and the interest rate to rise to 7% (point 
E) . 
D)  the quantity of loanable funds traded to increase to $125 and the interest rate to fall to 5% (point 
D) . 
A)  the quantity of loanable funds traded to increase to $125 and the interest rate to rise to 7% (point 
C) . 
B)  the quantity of loanable funds traded to decrease to $75 and the interest rate to fall to 5% (point 
B) . 
C)  the quantity of loanable funds traded to decrease to $75 and the interest rate to rise to 7% (point 
E) . 
D)  the quantity of loanable funds traded to increase to $125 and the interest rate to fall to 5% (point 
D) .

Question 12

The sale of bonds

Accepted Answer

A)  and stocks to raise money is called debt finance. 
B)  and stocks to raise money is called equity finance. 
C)  to raise money is called debt finance, while the sale of stocks to raise funds is called equity finance. 
D)  to raise money is called equity finance, while the sale of stocks to raise funds is called debt finance. 
A)  and stocks to raise money is called debt finance. 
B)  and stocks to raise money is called equity finance. 
C)  to raise money is called debt finance, while the sale of stocks to raise funds is called equity finance. 
D)  to raise money is called equity finance, while the sale of stocks to raise funds is called debt finance.

Question 13

Which of the following equations represents GDP for an open economy?

Accepted Answer

A)  Y = C + I + G + NX 
B)  NX = I - G 
C)  I = Y - C + G + NX 
D)  Y = C + I + G 
A)  Y = C + I + G + NX 
B)  NX = I - G 
C)  I = Y - C + G + NX 
D)  Y = C + I + G

Question 14

Explain why the demand for loanable funds slopes downward and why the supply of loanable funds slopes upward.

Accepted Answer

When the interest rate rises investment

Question 15

Other things the same, an increase in the budget deficit

Accepted Answer

A)  shifts the demand for loanable funds right, so the interest rate rises. 
B)  shifts the demand for loanable funds left, so the interest rate falls. 
C)  shifts the supply of loanable funds right, so the interest rate falls. 
D)  shifts the supply of loanable funds left, so the interest rate rises. 
A)  shifts the demand for loanable funds right, so the interest rate rises. 
B)  shifts the demand for loanable funds left, so the interest rate falls. 
C)  shifts the supply of loanable funds right, so the interest rate falls. 
D)  shifts the supply of loanable funds left, so the interest rate rises.

Question 16

Figure 26-4. On the horizontal axis of the graph, L represents the quantity of loanable funds in billions of dollars.  
-Refer to Figure 26-4. The position and/or slope of the Supply curve are influenced by

Accepted Answer

A)  the level of public saving. 
B)  the level of national saving. 
C)  decisions made by people who have extra income they want to save and lend out. 
D)  All of the above are correct. 
A)  the level of public saving. 
B)  the level of national saving. 
C)  decisions made by people who have extra income they want to save and lend out. 
D)  All of the above are correct.

Question 17

The supply of loanable funds would shift to the right if either

Accepted Answer

A)  tax reforms encouraged greater saving or the budget deficit became smaller. 
B)  tax reforms encouraged greater saving or investment tax credits were increased. 
C)  the budget deficit became larger or investment tax credits were increased. 
D)  the budget deficit became larger or tax reforms discouraged saving. 
A)  tax reforms encouraged greater saving or the budget deficit became smaller. 
B)  tax reforms encouraged greater saving or investment tax credits were increased. 
C)  the budget deficit became larger or investment tax credits were increased. 
D)  the budget deficit became larger or tax reforms discouraged saving.

Question 18

We would expect the interest rate on Bond A to be higher than the interest rate on Bond B if the two bonds have identical characteristics except that

Accepted Answer

A)  the credit risk associated with Bond A is lower than the credit risk associated with Bond B. 
B)  Bond A was issued by the city of Philadelphia and Bond B was issued by Red Hat Corporation. 
C)  Bond A has a term of 20 years and Bond B has a term of 2 years. 
D)  All of the above are correct. 
A)  the credit risk associated with Bond A is lower than the credit risk associated with Bond B. 
B)  Bond A was issued by the city of Philadelphia and Bond B was issued by Red Hat Corporation. 
C)  Bond A has a term of 20 years and Bond B has a term of 2 years. 
D)  All of the above are correct.

Question 19

Stock in Tasty Greens Restaurants is selling at $80 per share with 1 million shares outstanding. Last year, Tasty Greens earned $4 million, of which it retained $2.4 million for future investments. The dividend yield on the stock is

Accepted Answer

A)  8 percent. 
B)  2 percent. 
C)  3 percent. 
D)  5 percent. 
A)  8 percent. 
B)  2 percent. 
C)  3 percent. 
D)  5 percent.

Question 20

In a closed economy, if taxes fall and consumption rises, then private saving must fall.

Accepted Answer

A) True 
 B)False

Exam 26: Saving, Investment, and the Financial System

Which of the following is an example of financial intermediation?

Anything other than a change in the interest rate that decreases national saving shifts the supply of loanable funds to the left.

Owners of municipal bonds

In the market for loanable funds, the interaction of the demand for, and supply of, loanable funds determines the equilibrium level of

In the language of macroeconomics, investment refers to

Congress and the President implement an investment tax credit. Which curve in the market for loanable funds shifts, which direction does it shift, and what happens to the interest rate?

A budget deficit

All or part of a firm's profits may be paid out to the firm's stockholders in the form of

If there is shortage of loanable funds, then

If the demand for loanable funds shifts to the right, then initially there is a

Figure 26-5. Figure 26-5 shows the loanable funds market for a closed economy. -Refer to Figure 26-5. Starting at point A, the enactment of an investment tax credit would likely cause

The sale of bonds

Which of the following equations represents GDP for an open economy?

Explain why the demand for loanable funds slopes downward and why the supply of loanable funds slopes upward.

Other things the same, an increase in the budget deficit

Figure 26-4. On the horizontal axis of the graph, L represents the quantity of loanable funds in billions of dollars. -Refer to Figure 26-4. The position and/or slope of the Supply curve are influenced by

The supply of loanable funds would shift to the right if either

We would expect the interest rate on Bond A to be higher than the interest rate on Bond B if the two bonds have identical characteristics except that

Stock in Tasty Greens Restaurants is selling at $80 per share with 1 million shares outstanding. Last year, Tasty Greens earned $4 million, of which it retained $2.4 million for future investments. The dividend yield on the stock is

In a closed economy, if taxes fall and consumption rises, then private saving must fall.

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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