Question 1

The primary economic function of the financial system is to

Accepted Answer

A)   keep interest rates low.
B)   provide expert advice to savers and investors.
C)   match one person's consumption expenditures with another person's capital expenditures.
D)   match one person's saving with another person's investment.E) All of the above
F) C) and D)

Question 2

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

Accepted Answer

A)   Bond A was issued by a financially weak corporation and Bond B was issued by a financially strong corporation.
B)   Bond A was issued by the Exxon Mobil Corporation and Bond B was issued by the state of New York.
C)   Bond A has a term of 1 year and Bond B has a term of 5 years.
D)   All of the above are correct.E) A) and B)
F) A) and C)

Question 3

Which of the following bond buyers did not buy the bond that best met his or her objective?

Accepted Answer

A)   Jackie wanted a bond with a high interest rate and was willing to take a lot of risk. She purchased a junk bond.
B)   Andrew wanted a bond that would allow him to legally avoid paying federal income taxes. He purchased a municipal bond.
C)   Suzy wanted to purchase a bond whose seller was unlikely to default. She purchased a bond that Standards and Poor's rated a low credit risk.
D)   Cecilia held long-term bonds rather than short-term bonds to avoid risk.E) None of the above
F) B) and D)

Question 4

A creditor of a corporation holds

Accepted Answer

A)   bonds sold by the corporation. If the corporation experiences financial difficulties stock holders are paid before bond holders.
B)   bonds sold by the corporation. If the corporation experiences financial difficulties bond holders are paid before stock holders.
C)   stocks sold by the corporation. If the corporation experiences financial difficulties stock holders are paid before bond holders.
D)   stocks sold by the corporation. If the corporation experiences financial difficulties bond holders are paid before stock holders.E) All of the above
F) A) and B)

Question 5

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. If the equilibrium quantity of loanable funds is $56 billion and if the rate of inflation is 4 percent, then the equilibrium real interest rate is

Accepted Answer

A)   lower than 6 percent.
B)   6 percent.
C)   between 6 percent and 8 percent.
D)   higher than 8 percent.E) All of the above
F) C) and D)

Question 6

Compared to bondholders, stockholders

Accepted Answer

A)   face higher risk and have the potential for higher returns.
B)   face higher risk but receive a fixed payment.
C)   face lower risk and have the potential for higher returns.
D)   face lower risk but receive a fixed payment.E) B) and D)
F) None of the above

Question 7

If Congress instituted an investment tax credit, the interest rate would

Accepted Answer

A)   rise and saving would rise.
B)   fall and saving would fall.
C)   rise and saving would fall.
D)   fall and saving would rise.E) All of the above
F) A) and C)

Question 8

Which of the following would shift the demand for loanable funds to the right?

Accepted Answer

A)   income tax increases
B)   government expenditures increase
C)   the interest rate falls
D)   Congress and the president pass an investment tax creditE) B) and D)
F) A) and B)

Question 9

Bonds issued by state and local governments are called _____ bonds. Bonds issued by financially shaky corporations are called _____ bonds. Of these two, which type of bond usually pays a relatively higher interest rate?

Accepted Answer

municipal,...

Question 10

Compared to short-term bonds, other things the same, long-term bonds generally have

Accepted Answer

A)   more risk and so they pay higher interest rates.
B)   less risk and so they pay lower interest rates.
C)   less risk and so they pay higher interest rates.
D)   about the same risk and so they pay about the same interest rate.E) B) and C)
F) A) and C)

Question 11

National saving

Accepted Answer

A)   is the total income in the economy that remains after paying for consumption.
B)   is the total income in the economy that remains after paying for consumption and government purchases.
C)   is always greater than investment for a closed economy.
D)   is equal to private saving minus public saving.E) All of the above
F) C) and D)

Question 12

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

Accepted Answer

A)   the interest it pays is taxed and it was issued by a financially strong corporation
B)   the interest it pays is taxed and it was issued by a financially weak corporation
C)   the interest it pays is tax exempt and it was issued by a financially strong corporation
D)   the interest it pays is tax exempt and it was issued by a financially weak corporationE) All of the above
F) C) and D)

Question 13

If at some interest rate desired investment is $400 billion, desired private saving is $600 billion, and the budget deficit is $300 billion, is there a surplus or a shortage in the market for loanable funds? What does this imply would happen to interest rates?

Accepted Answer

There is a...

Question 14

In a closed economy, GDP is $1000, government purchases are $200, and consumption is $700. If the government has a budget surplus of $25, what are investment, taxes, private saving, and national saving?

Accepted Answer

Investment = $100, T...

Question 15

If the supply for loanable funds shifts to the left, then the equilibrium interest rate

Accepted Answer

A)   and quantity of loanable funds rises.
B)   and quantity of loanable funds falls.
C)   rises and the quantity of loanable funds falls.
D)   falls and the quantity of loanable funds rises.E) All of the above
F) C) and D)

Question 16

The purchase of a new house is the one form of

Accepted Answer

A)   investment that is financed by private saving rather than public saving.
B)   household spending that is not counted as part of investment in the national income accounts.
C)   household spending that is investment rather than consumption.
D)   household spending that does not contribute to GDP.E) B) and C)
F) A) and C)

Question 17

To state that public saving is equal to investment, for a closed economy, is to state an accounting identity.

Accepted Answer

A) True 
 B)False

Question 18

An increase in the government budget deficit causes national saving to _____, the interest rate to _____, and investment to _____.

Accepted Answer

decrease, ...

Question 19

Other things the same, a higher interest rate induces people to

Accepted Answer

A)   save more, so the supply of loanable funds slopes upward.
B)   save less, so the supply of loanable funds slopes downward.
C)   invest more, so the supply of loanable funds slopes upward.
D)   invest less, so the supply of loanable funds slopes downward.E) A) and B)
F) All of the above

Question 20

Which of the following statements is correct?

Accepted Answer

A)   Stocks, bonds, and deposits are all similar in that each provides a common medium of exchange.
B)   Most buyers of stocks and bonds prefer those issued by large and familiar companies.
C)   Banks charge borrowers a slightly lower interest rate than they pay to depositors.
D)   None of the above is correct.E) C) and D)
F) None of the above

Exam 26: Saving, Investment, and the Financial System

In a closed economy, GDP is $1000, government purchases are $200, and consumption is $700. If the government has a budget surplus of $25, what are investment, taxes, private saving, and national saving?

Correct AnswerverifiedInvestment = $100, T...View AnswerShow Answer

If at some interest rate desired investment is $400 billion, desired private saving is $600 billion, and the budget deficit is $300 billion, is there a surplus or a shortage in the market for loanable funds? What does this imply would happen to interest rates?

Correct AnswerverifiedThere is a...View AnswerShow Answer

An increase in the government budget deficit causes national saving to _____, the interest rate to _____, and investment to _____.

Correct Answerverifieddecrease, ...View AnswerShow Answer

If Congress instituted an investment tax credit, the interest rate would

Correct AnswerverifiedShow Answer

To state that public saving is equal to investment, for a closed economy, is to state an accounting identity.

Correct AnswerverifiedShow Answer

If the supply for loanable funds shifts to the left, then the equilibrium interest rate

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The purchase of a new house is the one form of

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following bond buyers did not buy the bond that best met his or her objective?

Correct AnswerverifiedShow Answer

The primary economic function of the financial system is to

Correct AnswerverifiedShow Answer

Other things the same, a higher interest rate induces people to

Correct AnswerverifiedShow Answer

Compared to bondholders, stockholders

Correct AnswerverifiedShow Answer

A creditor of a corporation holds

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

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. If the equilibrium quantity of loanable funds is $56 billion and if the rate of inflation is 4 percent, then the equilibrium real interest rate is

Correct AnswerverifiedShow Answer

Bonds issued by state and local governments are called _____ bonds. Bonds issued by financially shaky corporations are called _____ bonds. Of these two, which type of bond usually pays a relatively higher interest rate?

Correct Answerverifiedmunicipal,...View AnswerShow Answer

National saving

Correct AnswerverifiedShow Answer

Which of the following would shift the demand for loanable funds to the right?

Correct AnswerverifiedShow Answer

Compared to short-term bonds, other things the same, long-term bonds generally have

Correct AnswerverifiedShow Answer

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Investment = $100, T...
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There is a...
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An increase in the government budget deficit causes national saving to ___, the interest rate to _, and investment to ___.

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decrease, ...
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Bonds issued by state and local governments are called _ bonds. Bonds issued by financially shaky corporations are called _ bonds. Of these two, which type of bond usually pays a relatively higher interest rate?

Correct Answer
verified
municipal,...
View Answer

Correct Answer
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