Chapter 8 (6)

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1.
If a reform of the tax laws encourages greater saving, the result would be
A. higher interest rates and less investment.
B. lower interest rates and greater investment.
C. higher interest rates and greater investment.
D. lower interest rate and less investment.

B

2.
Banks and mutual funds are examples of financial markets.
a. TRUE
b. FALSE

B

3.
Given that Monika’s income exceeds her expenditures, Monika is best described as a
A. saver or as a demander of funds.
B. borrower or as a supplier of funds.
C. borrower or as a demander of funds.
D. saver or as a supplier of funds.

D

4. aplia

aplia

5.
National saving is equal to Y – T – C.
a. TRUE
b. FALSE

B

6.
Which of the following is a certificate of indebtedness?
A. stocks but not bonds
B. stocks and bonds
C. neither stocks nor bonds
D. bonds but not stocks

D

7.
We associate the term debt finance with
A. financial intermediaries, and we associate the term equity finance with financial markets.
B. the stock market, and we associate the term equity finance with the bond market.
C. the bond market, and we associate the term equity finance with the stock market.
D. financial markets, and we associate the term equity finance with financial intermediaries.

C

8.
Most entrepreneurs finance their purchases of real capital using their past saving.
a. TRUE
b. FALSE

B

9.
What would happen in the market for loanable funds if the government were to increase the tax on interest income?
A. The demand for loanable funds would shift right.
B. The supply of loanable funds would shift right.
C. The demand for loanable funds would shift left.
D. The supply of loanable funds would shift left

D

11.
Which of the following is not a nonsensical headline?
A. Corporate bonds currently pay higher interest rates than government bonds.
B. British perpetuities about to mature.
C. Disney issues new bonds with term of 7 percent.
D. Standard and Poor’s judges new junk bond to have very low credit risk.

A

12.
By definition, equity finance
A. is accomplished when units of government sell bonds.
B. is accomplished when firms sell shares of stock.
C. involves "fair" interest rates or dividend yields.
D. is accomplished when firms sell bonds.

B

Other things the same, if the government increases transfer payments to households, then the effect of this on the government’s budget
A. will make investment rise.
B. will make public saving rise.
C. will make the rate of interest rise.
D. All of the above are correct.

C

An article in the textbook suggests that one method to correct the higher education inefficiency is to
A. provide free higher education to all Americans.
B. reduce interest rates on student loans.
C. increase the number of colleges and universities in the United States.
D. have college students sell equity in themselves.

D

15.
Which of the following bonds has the highest interest rate?
A. a long term and a low credit risk.
B. a long term and a high credit risk.
C. a high credit risk and a short term.
D. a low credit risk and a short term.

B

16.
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. supply of loanable funds to the right, causing interest rates to fall.
B. demand for loanable funds to the left, causing interest rates to fall.
C. supply of loanable funds to the left, causing interest rates to rise.
D. demand for loanable funds to the right, causing interest rates to rise.

A

17. Managed funds
A. typically have a higher rate of return and lower costs than index funds.
B. typically have a lower rate of return and lower costs than index funds.
C. typically have a lower rate of return and higher costs than index funds.
D. typically have a higher rate of return and higher costs than index funds.

C

18.
A corporation’s earnings are the amount of revenue it receives for the sale of its products
A. minus its cost of production as measured by its accountants. Earnings may be paid out as dividends or retained by the corporation.
B. minus its direct and indirect costs as measured by its economists. Earnings must be paid out as dividends.
C. minus its cost of production as measured by its accountants. Earnings must be paid out as dividends.
D. minus its direct and indirect cost as measure by its economists. Earnings may be paid out as dividends or retained by the corporation.

A

19.
We interpret the meaning of "loanable funds" as the
A. resources borrowed by private investors and by government.
B. resources lent by private investors and by government.
C. flow of resources available to fund private investment.
D. flow of resources available from private saving.

C

20.
Most entrepreneurs do not have enough money of their own to start their businesses. When they acquire the necessary funds from someone else,
A. their saving is being financed by someone else’s investment.
B. their consumption expenditures are being financed by someone else’s saving.
C. their consumption expenditures are being financed by someone else’s investment.
D. their investments are being financed by someone else’s saving.

D

21.
In examining the national income accounts of the closed economy of Nepotocracy you see that this year it had taxes of $100 billion, transfers of $20 billion, and government purchases of goods and services of $70 billion. You also notice that last year it had private saving of $70 billion and investment of $50 billion. In which year did Nepotocracy have a budget deficit of $20 billion?
A. neither this year nor last year
B. this year but not last year
C. this year and last year
D. last year but not this year

D

22.
Joan uses some of her income to buy mutual fund shares. A macroeconomist refers to Joan’s purchase as investment.
a. TRUE
b. FALSE

B

23.
Which of the following is a certificate of indebtedness?
A. stocks but not bonds
B. both stocks and bonds
C. bonds but not stocks
D. neither stocks nor bonds

C

24.
Scenario 26-1. Assume the following information for an imaginary, closed economy.
GDP = $100,000; taxes = $22,000; government purchases = $25,000; national
saving = $15,000.
Refer to Scenario 26-1. For this economy, investment amounts to
A. $12,000.
B. $18,000.
C. $15,000.
D. $38,000

C

25.
Which of the following is correct?
A. Corporations buy bonds to raise funds.
B. Some bonds have terms as short as a few months.
C. Because they are so risky, junk bonds pay a low rate of interest.
D. All of the above are correct

B

25.
Which of the following is correct?
A. Corporations buy bonds to raise funds.
B. Some bonds have terms as short as a few months.
C. Because they are so risky, junk bonds pay a low rate of interest.
D. All of the above are correct.

B

26.
Which of the following is not a characteristic of a bond?
A. its term
B. its credit risk
C. its dividend yield
D. its tax treatment

C

27.
The slope of the supply of loanable funds is based on the logic that an increase in interest rates
A. makes saving less attractive.
B. makes investment more attractive.
C. makes saving more attractive.
D. makes investment less attractive

C

28.
Which of the following statements is correct?
A. Compared to the Standard & Poor’s 500 Index, the Dow Jones Industrial Average incorporates the stock prices of a much smaller number of corporations.
B. The demand for a corporation’s stock is largely based on people’s perception of the corporation’s profitability in the future.
C. NASDAQ is an important stock exchange in the United States.
D. All of the above are correct

D

29.

If there is a surplus of loanable funds, then
A. the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is above equilibrium.
B. the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is below equilibrium.
C. the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is above equilibrium.
D. the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is below equilibrium.

C

30.
You hold bonds issued by the city of Sacramento, California. The interest you earn each year on these bonds
A. is not subject to federal income tax and so these bonds pay a lower interest rate than otherwise comparable bonds issued by the U.S. government.
B. is not subject to federal income tax and so these bonds pay a higher interest rate than otherwise comparable bonds issued by the U.S. government.
C. is subject to federal income tax and so these bonds pay a lower interest rate than otherwise comparable bonds issued by the U.S. government.
D. is subject to federal income tax and so these bonds pay a higher interest rate than otherwise comparable bonds issued by the U.S. government.

A

31.
Which of the following equations represents GDP for an open economy?
A. I = Y – C + G + NX
B. Y = C + I + G
C. NX = I – G
D. Y = C + I + G + NX

D

32.important. EPS

aplia

aplia

33.
When the government has a budget surplus
A. it spends more than it receives in tax revenue.
B. private saving is greater than zero.
C. it buys more of its bonds from the public than it sells to the public.
D. exports are greater than imports

C

34.
Which of the following is included in the demand for loanable funds?
A. investment but not government borrowing
B. investment and government borrowing
C. neither government borrowing nor investment
D. government borrowing but not investment

A

35. aplia

aplia

36.
Other things the same, an increase in the budget deficit
A. shifts the supply of loanable funds right, so the interest rate falls.
B. shifts the demand for loanable funds left, so the interest rate falls.
C. shifts the demand for loanable funds right, so the interest rate rises.
D. shifts the supply of loanable funds left, so the interest rate rises.

D

37.
If national saving in a closed economy is greater than zero, which of the following must be true?
A.
B. Either public saving or private saving must be greater than zero.
C. Investment is positive.
D. All of the above are correct.

D

38.
A policy that induces people to save more shifts
A. the supply of loanable funds leftward and decreases investment.
B. the supply of loanable funds rightward and increases investment.
C. the supply of loanable funds leftward and increases investment.
D. the supply of loanable funds rightward and decreases investment.

B

39.
In a closed economy, public saving is the amount of
A. income that businesses have left after paying for the factors of production.
B. tax revenue that the government has left after paying for its spending.
C. income that households have left after paying for taxes and consumption.
D. spending that the government undertakes in excess of the taxes it collects.

B

Scenario 26-3. Assume the following information for an imaginary, open economy.
Consumption = $1,000; investment = $200; net exports = -$50; taxes = $230; private saving = $225; and national saving = $150.

Refer to Scenario 26-3. For this economy, government purchases amount to
A. $305.
B. $280.
C. $330.
D. $310.

A

41.
Suppose the issuer of a bond fails to pay some of the interest or principal that was promised to the bondholders. This failure is referred to as a
A. term failure.
B. risk.
C. default.
D. breach.

C

42.
Suppose the Congress and president decreased the maximum annual contributions limits to retirement accounts and at the same time reduced the budget deficit. What would happen to the interest rate?
A. It would increase.
B. It would decrease.
C. It would stay the same.
D. It might do any of the above.

D

43.
Which of the following lists correctly identifies the four expenditure categories of GDP?
A. consumption, government purchases, investment, net-exports
B. consumption, saving, investment, depreciation,
C. consumption, government purchases, investment, savings
D. consumption, investment, depreciation, net-exports

A

44.
If there is shortage of loanable funds, then
A. the supply for loanable funds shifts left and the demand shifts right.
B. the supply for loanable funds shifts right and the demand shifts left.
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.

C

45.
Crowding out occurs when
A. investment increases because a budget surplus makes interest rates rise.
B. investment declines because a budget deficit makes interest rates rise.
C. investment increases because a budget surplus makes interest rates fall.
D. investment declines because a budget deficit makes interest rates fall.

B

46.
A closed economy
A. does not engage in international trade of goods and services.
B. does not engage in international borrowing or lending.
C. both A and B
D. engages in international borrowing and lending.

C

47.
A municipal bond is
A. issued by households.
B. issued by state and local governments.
C. issued by corporations.
D. issued by the federal government.

B

48.
Which of the following are financial intermediaries?
A. banks but not mutual funds
B. both banks and mutual funds
C. mutual funds but not banks
D. neither banks or mutual funds

B

49.
Assume the bonds below have the same term and principal and that the state or local government that issues the municipal bond has a good credit rating. Which list has bonds correctly ordered from the one that pays the highest interest rate to the one that pays the lowest interest rate?
A. corporate bond, U.S. government bond, municipal bond
B. municipal bond, U.S. government bond, corporate bond
C. U.S. government bond, municipal bond, corporate bond
D. corporate bond, municipal bond, U.S. government bond

A

50.
Bolivia had a smaller budget deficit in 2003 than in 2002. Other things the same, we would expect this reduction in the budget deficit to have
A. increased both interest rates and investment.
B. decreased interest rates and increased investment.
C. decreased both interest rates and investment.
D. increased interest rates and decreased investment

B

51.
Which of the following is both a store of value and regularly used as a medium of exchange?
A. cash but not stocks
B. stocks but not cash
C. cash and stocks
D. neither cash nor stocks

A

52.
The federal funds rate is the
A. percentage of deposits that banks must hold as reserves.
B. percentage of face value that the Federal Reserve is willing to pay for Treasury Securities.
C. interest rate at which banks lend reserves to each other overnight.
D. interest rate at which the Federal Reserve makes short-term loans to banks.

C

53.
Members of the Board of Governors are appointed by the president of the U.S. and confirmed by the U.S. Senate.
a. TRUE
b. FALSE

A

54.
Money allows people to specialize in what they do best, thereby raising everyone’s standard of living.
a. TRUE
b. FALSE

A

55.
If the reserve ratio is 20 percent, then $100 of new reserves can generate
A. $500 of new money in the economy.
B. $250 of new money in the economy.
C. $2,000 of new money in the economy.
D. $60 of new money in the economy.

A

56.
The Fed increases the reserve requirement, but it wants to offset the effects on the money supply. Which of the following should it do?
A. buy bonds to increase reserves
B. sell bonds to decrease reserves
C. sell bonds to increase reserves
D. buy bonds to decrease reserves

A

57.
If the discount rate is raised then banks borrow
A. less from the Fed so reserves increase.
B. more from the Fed so reserves decrease.
C. less from the Fed so reserves decrease.
D. more from the Fed so reserves increase.

C

58.
Which of the following can banks use to borrow from the Federal Reserve?
A. Banks cannot borrow from the Federal Reserve, only the government can.
B. the discount window but not the term auction facility
C. the discount window or the term auction facility
D. the term auction facility but not the discount window

C

59.
Banks cannot influence the money supply if they are required to hold all deposits in reserve.
a. TRUE
b. FALSE

A

60.
Banks can hold deposits at the Federal Reserve. Balances in these accounts can be used by banks to meet their reserve requirements, but the Fed pays no interest on these deposits.
a. TRUE
b. FALSE

B

61.
In the United States, currency holdings per person average about
A. $110; one explanation for this relatively small average is that many people use credit and debit cards to make transactions.
B. $4,490; one explanation for this relatively large average is that U.S. citizens hold a lot of foreign currency.
C. $4,490; one explanation for this relatively large amount is that criminals probably prefer currency as a medium of exchange.
D. $110; one explanation for this relatively small average is that U.S. citizens hold a lot of foreign currency.

C

62.
The Fed increases reserves if it conducts open market
A. purchases or auctions term credit.
B. sales but not if it auctions term credit
C. sales or auctions term credit
D. purchases but not if it auctions term credit

A

63.
Suppose a bank is operating with a leverage rate of 10. A 6 percent increase in the value of assets
A. will result in a 60percent decrease in owner’s equity.
B. will reduce liabilities by 6 percent.
C. will result in a 60 percent increase in owner’s equity.
D. will reduce liabilities by 10 percent.

C

64.
Suppose that in a country people gain more confidence in the banking system and so hold relatively less currency and more deposits. As a result, bank reserves will
A. decrease and the money supply will eventually decrease.
B. decrease and the money supply will eventually increase.
C. increase and the money supply will eventually increase.
D. increase and the money supply will eventually decrease.

C

65.
Fiat money
A. is backed by gold.
B. is a medium of exchange but not a unit of account.
C. has no intrinsic value.
D. is any close substitute for currency such as checkable deposits

C

66.
Which of the following is a liability of a bank and an asset of its customers?
A. neither the deposits of its customers nor the loans to its customers
B. loans of its customers but not the deposits of its customers
C. deposits of its customers but not loans to its customers
D. deposits of its customers and loans to its customers

C

67.
If the reserve ratio is 5 percent, then $500 of additional reserves can create up to
A. $10,000 of new money.
B. $9,500 of new money.
C. $10,500 of new money.
D. $2,500 of new money.

A

68.
The primary difference between commodity money and fiat money is that
A. fiat money is a medium of exchange but commodity money is not.
B. commodity money has intrinsic value but fiat money does not.
C. commodity money is a medium of exchange but fiat money is not.
D. fiat money has intrinsic value but commodity money does not

B

69.
In the months of November and December, people in the United States hold a larger part of their money in the form of currency because they intend to shop and travel for the holidays. As a result, other things the same, the money supply increases.
a. TRUE
b. FALSE

B

70.
To increase the money supply, the Fed could
A. auction more loans to banks.
B. increase the reserve requirement.
C. sell government bonds.
D. None of the above is correct.

A

71.
The amount of currency per person in the United States is about
A. $300.
B. $110.
C. $4,490.
D. $2,450

C

72 .aplia

aplia

73.
Economists call an institution designed to oversee the banking system and regulate the quantity of money in the economy
A. a charter bank.
B. a state bank.
C. a central bank.
D. a national bank

C

74 aplia

aplia

75.
The tool most often used by the Fed to control the money supply is
A. changing reserve requirements.
B. buying and selling of equities.
C. open market operations.
D. altering the discount rate.

C

76.
Which of the following is included in M2 but not in M1?
A. demand deposits
B. currency
C. savings deposits
D. All of the above are included in both M1 and M2.

C

77.
If the Federal Reserve increases the interest rate on bank deposits at the Fed, banks will want to hold
A. more reserves, so the reserve ratio will fall.
B. fewer reserves, so the reserve ratio will rise.
C. more reserves, so the reserve ratio will rise.
D. fewer reserves, so the reserve ratio will fall.

C

78.
To decrease the money supply, the Fed could
A. increase the reserve requirement.
B. increase the discount rate.
C. sell government bonds.
D. All of the above are correct

D

79.
If the reserve ratio is 5 percent, banks do not hold excess reserves, and people do not hold currency, then when the Fed purchases $20 million worth of government bonds, bank reserves
A. increase by $20 million and the money supply eventually increases by $400 million.
B. decrease by $20 million and the money supply eventually decreases by $100 million.
C. decrease by $20 million and the money supply eventually decreases by $400 million.
D. increase by $20 million and the money supply eventually increases by $100 million.

A

80.
The agency responsible for regulating the money supply in the United States is
A. the U.S. Bank.
B. the U.S. Treasury.
C. the Comptroller of the Currency.
D. the Federal Reserve.

D

81.
The Fed’s primary tool to change the money supply is
A. changing the reserve requirement.
B. redeeming Federal Reserve notes.
C. changing the interest rate on reserves.
D. conducting open market operations.

D

82.
Members of the Board of Governors of the Federal Reserve System are appointed for life.
a. TRUE
b. FALSE

B

83.
When a bank loans out $1,000, the money supply
A. decreases.
B. increases.
C. does not change.
D. may do any of the above.

B

85. aplia

aplia

86.
As opposed to a payments system based on barter, a payments system based on money
A. makes trades less costly.
B. leads to less specialization.
C. requires a double coincidence of wants.
D. None of the above is correct.

A

87.
The Federal Reserve primarily uses open-market operations to change the money supply.
a. TRUE
b. FALSE

A

88.
Many societies used gold as money, because
A. it is relatively rare.
B. it is durable.
C. it has a relatively low melting point.
D. All of the above are correct.

D

89.
The money supply decreases if the Fed
A. sells Treasury bonds. The larger the reserve requirement, the larger the decrease will be.
B. sells Treasury bonds. The smaller the reserve requirement, the larger the decrease will be.
C. buys Treasury bonds. The smaller the reserve requirement, the larger the decrease will be.
D. buys Treasury bonds. The larger the reserve requirement, the larger the decrease will be.

B

90.
If the Fed increases the reserve ratio from 5 percent to 12.5 percent, then the money multiplier
A. decreases from 12.5 to 5.
B. decreases from 20 to 8.
C. increases from 5 to 12.5.
D. increases from 8 to 20

B

91.
M1 includes
A. other checkable deposits.
B. savings deposits.
C. small time deposits.
D. money market mutual funds.

A

92.
The most common method employed by the Fed to increase the money supply is the
A. sale of U.S. government bonds.
B. purchase of U.S. government bonds.
C. sale of gold.
D. increase of the federal debt ceiling.

B

93.
Which of the following defer payments?
A. credit cards but not debit cards
B. neither credit cards nor debit cards
C. debit cards but not credit cards
D. credit cards and debit cards

A

94.
Which of the following is included in both M1 and M2?
A. demand deposits
B. small time deposits
C. savings deposits
D. money market mutual funds

A

95.
Other things the same if reserve requirements are decreased, the reserve ratio
A. decreases, the money multiplier increases, and the money supply decreases.
B. decreases, the money multiplier increases, and the money supply increases.
C. increases, the money multiplier increases, and the money supply decreases.
D. increases, the money multiplier increases, and the money supply increases

B

96.
Marc puts prices on surfboards and skateboards at his sporting goods store. He is using money as a unit of account.
a. TRUE
b. FALSE

A

97.
The discount rate is the rate the Federal Reserve charges banks for loans. By lowering this rate, the Fed provides banks with a greater incentive to borrow from it.
a. TRUE
b. FALSE

A

98.
A bank loans Greg’s Ice Cream $250,000 to remodel a building near campus to use as a new store. On their respective balance sheets, this loan is
A. a liability for the bank and an asset for Greg’s Ice Cream. The loan increases the money supply.
B. an asset for the bank and a liability for Greg’s Ice Cream. The loan increases the money supply.
C. a liability for the bank and an asset for Greg’s Ice Cream. The loan does not increase the money supply.
D. an asset for the bank and a liability for Greg’s Ice Cream. The loan does not increase the money supply.

B

99.
If people decide to hold more currency relative to deposits, the money supply
A. falls. The Fed could lessen the impact of this by buying Treasury bonds.
B. falls. The Fed could lessen the impact of this by selling Treasury bonds.
C. rises. The Fed could lessen the impact of the by selling Treasury bonds.
D. rises. The Fed could lessen the impact of this by buying Treasury bonds.

A

100.
The Soviet government in the 1980’s never abandoned the ruble as the official currency. However, the people of Moscow preferred to accept
A. American dollars in exchange for goods and services, because rubles were extremely hard to come by.
B. cigarettes in exchange for goods and services, because they were convinced that cigarettes were going to soon become hard to come by.
C. goods such as cigarettes or American dollars in exchange for goods and services, reminding us of the fact that government decree by itself is not sufficient for the success of a commodity money.
D. All of the above are correct.

C

Historically, the typical price-earnings ratio for stocks is about:

15

A country’s trade balance will fall if..

either saving falls or investment rises.

As the number of stocks in a person’s portfolio increases,

the risk of the portfolio decreases, as indicated by the decreasing value of the standard deviation of the portfolio.

Which of the following is generally an opportunity cost of investment in human capital?

forgone present wages

If traveler’s checks were $1000 higher and saving deposits were $500 higher, M1 would be

$1,000 higher and M2 would be $1,500 higher.

In a closed economy, private saving is

the amount of income that households have left after paying for their taxes and consumption.

If the exchange rate rises from .65 British pounds per dollar to .70 pounds per dollar, then compared to British goods, U.S. goods become

relatively more expensive for both British and U.S. residents.

If there were no factors keeping wages from reaching equilibrium then there would be no

structural unemployment.

Which of the following is correct?

A bank’s deposits at the Federal Reserve counts as part of the bank’s reserves. The Federal Reserve pays interest on these deposits.

Which of the following statements is correct? In the special case of the 100-percent reserve banking the money multiplier is

1 and banks do not create money.

Rafael is the newly-appointed plant manager for a company that manufactures head phones. Rafael’s senior supervisors told him that the output the firm produces, given the number of workers employed, indicates that some workers may be shirking. According to efficiency wage theory, what should he do?

pay all workers more than the equilibrium wage rate

If there are diminishing returns to capital, then

increases in the capital stock increase output by ever smaller amounts.

A U.S. firm exchanges dollars for yen and then uses them to buy Japanese goods. Overall as a result of these transactions

both U.S. net capital outflow and U.S. net exports fall.

If the exchange rate is .60 British pounds = $1, a bottle of ale that costs 3 pounds costs

$5

Frictional unemployment is

inevitable, because at any given time, jobs are being created in some firms and destroyed in other firms.

A central bank’s setting (or altering) of the money supply is known as

monetary policy

The money supply decreases if

households decide to hold relatively more currency and relatively fewer deposits and banks decide to hold relatively more excess reserves and make fewer loans.

Net capital outflow equals the purchase of

foreign assets by domestic residents – the purchase of domestic assets by foreign residents

Industrial machinery is an example of

a factor of production that in the past was an output from the production process.

Which of the following is not correct?

Economists who study the effects of unions typically find that union workers earn about 25 to 35 percent more than those who are not in a union

Which of the following statements is true?

a.The quantity of natural resources per worker can influence productivity. b. Technological knowledge and human capital are closely related. c. Over long periods of time, the prices of most natural resources are stable or falling, relative to other prices. d. All of the above are correct.

If the Mexican nominal exchange rate does not change, but prices rise faster in Mexico than in all other countries, then the Mexican real exchange rate

rises The nominal exchange rate simply states how much of one currency can be traded for a unit of another currency. The real exchange rate, on the other hand, describes how many of a good or service in one country can be traded for one of that good or service in another country.

Which of the following people purchased the correct asset to meet his or her objective?

Tim wanted a high return, even if it meant taking some risk, so he purchased stock issued by Specific Electric instead of bonds issued by Specific Electric.

In the fourteenth century it is estimated that deaths resulting from the bubonic plague reduced the population by about a third. Assuming diminishing returns, the decrease in population should have

increased productivity and real GDP per person.

A creditor of a corporation holds

bonds sold by the corporation. If the corporation experiences financial difficulties bond holders are paid before stock holders

Net exports must equal zero for any economy

a. that is closed. b. for which Y = C + I + G. c. for which S = Y – C – G.

In an economy that relies upon barter,

there is no item in the economy that is widely accepted in exchange for goods and services.

At some point during the financial crisis of 2008-2009, people with uninsured deposits at financial institutions withdrew money from their accounts at those institutions. This phenomenon characterized which element of the financial crisis?

the decline in confidence in financial institutions

An economy’s natural rate of unemployment is the

amount of unemployment that the economy normally experiences.

During the past century the average growth rate of U.S. real GDP per person implies that it doubled, on average, about every

35 years.

Which of the following best illustrates diversification?

Instead of holding only the stocks of companies engaged in the banking business, a person decides to hold stock in a number of different companies producing different goods and services.

Which of the following is not always correct for a closed economy?

a. National saving equals private saving plus public saving. b. Net exports equal zero. c. Real GDP measures both income and expenditures. d. Private saving equals investment.

moral hazard

is a situation in which one party gets involved in a risky event knowing that it is protected against the risk and the other party will incur the cost.

adverse selection

is the tendency of those in dangerous jobs or high risk lifestyles to get life insurance. 2. A situation where sellers have information that buyers don’t (or vice versa) about some aspect of product quality.

risk-return tradeoff

is the principle that potential return rises with an increase in risk

The Bureau of Labor Statistics produces data on

a. unemployment. b. types of employment. c. length of the average workweek.

fundamental analysis

is the foundation of solid investing. It helps you determine the underlying health of a company by examining the business’ core numbers: its income statements, its earnings releases, its balance sheet, and other indicators of economic health.

Unemployment insurance

a. may improve the ability of the economy to match workers with appropriate jobs. b. reduces the job search efforts of the unemployed. c. increases the amount of frictional unemployment in the economy.

The curve becomes flatter as the amount of capital per worker increases because of

diminishing returns to capital.

If a bank that desires to hold no excess reserves and has just enough reserves to meet the required reserve ratio of 15 percent receives a deposit of $600, it has a

$510 increase in excess reserves and a $90 increase in required reserves.

Evidence indicates that the typical person who becomes unemployed will

soon find a job.

Which of the following is included in the demand for loanable funds?

government borrowing but not investment

The available evidence indicates that

outperforming the market on a consistent basis is extremely difficult to do.

Measured in 2010 dollars, real GDP per person in the United States in 2010 was about 14 times that in

India

Institutions that help to match one person’s saving with another person’s investment are collectively called the

a. Federal Reserve system.
b. banking system.
c. monetary system.
d. financial system.

D

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

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.

D

Municipal bonds pay a relatively

a. low rate of interest because of their high default risk and because the interest they pay is subject to federal income tax.
b. low rate of interest because of their low default risk and because the interest they pay is not subject to federal income tax.
c. high rate of interest because of their high default risk and because federal taxes must be paid on the interest they pay.
d. high rate of interest because of their low default risk and because the interest they pay is not subject to federal income tax.

B

The sale of stocks

a. and bonds to raise money is called debt finance.
b. and bonds to raise money is called equity finance.
c. to raise money is called debt finance, while the sale of bonds to raise funds is called equity finance.
d. to raise money is called equity finance, while the sale of bonds to raise funds is called debt finance.

D

If Huedepool Beer runs into financial difficulty, the stockholders as

a. part owners of Huedepool are paid before bondholders get paid anything at all.
b. part owners of Huedepool are paid after bondholders get paid.
c. creditors of Huedepool are paid before bondholders get paid anything at all.
d. creditors of Huedepool are paid after bondholders get paid.

B

The Dow Jones Industrial Average is now based on the prices of the stocks of

a. 30 major U.S. corporations.
b. 100 major U.S. corporations.
c. 500 representative U.S. corporations.
d. 1,000 representative U.S. corporations.

A

Which of the following is an example of financial intermediation?

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.

C

The primary advantage of mutual funds is that they

a. always provide the highest return.
b. always allow people to "beat the market."
c. allow people to diversify and reduce risk.
d. allow people to diversify, which increases risk and return.

C

If national saving in a closed economy is greater than zero, which of the following must be true?

a. Either public saving or private saving must be greater than zero.
b. Investment is positive.
c. Y – C – G > 0.
d. All of the above are correct.

D

In a closed economy, what does (Y – T – C) represent?

a. national saving
b. government tax revenue
c. public saving
d. private saving

D

Suppose private saving in a closed economy is $12b and investment is $10b.

a. National saving must equal $12b.
b. Public saving must equal $2b.
c. The government budget surplus must equal $2b.
d. The government budget deficit must equal $2b.

D

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

a. raise both national saving and private saving.
b. raise national saving and reduce private saving.
c. leave national saving and private saving unchanged.
d. leave national saving unchanged and reduce private saving.

D

Other things the same, when the interest rate rises,

a. people would want to lend more, making the supply of loanable funds increase.
b. people would want to lend less, making the supply of loanable funds decrease.
c. people would want to lend more, making the quantity of loanable funds supplied increase.
d. people would want to lend less, making the quantity of loanable funds supplied decrease.

C

If the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded,

a. there is a surplus and the interest rate is above the equilibrium level.
b. there is a surplus and the interest rate is below the equilibrium level.
c. there is a shortage and the interest rate is above the equilibrium level.
d. there is a shortage and the interest rate is below the equilibrium level.

A

If the government institutes policies that diminish incentives to save, then in the loanable funds market

a. the demand for loanable funds shifts rightward.
b. the demand for loanable funds shifts leftward.
c. the supply of loanable funds shifts rightward.
d. the supply of loanable funds shifts leftward.

D

Crowding out occurs when investment declines because

a. a budget deficit makes interest rates rise.
b. a budget deficit makes interest rates fall.
c. a budget surplus makes interest rates rise.
d. a budget surplus makes interest rates fall.

A

Corporations receive no proceeds from the resale of their stocks.

True
False

True

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

True
False

True

National saving is equal to Y – T – C.

True
False

False

Most entrepreneurs do not have enough money of their own to start their businesses. When they acquire the necessary funds from someone else,

their investments are being financed by someone else’s saving.

When a large, well-known corporation wishes to borrow directly from the public, it can

sell bonds.

The economy’s two most important financial markets are

the bond market and the stock market.

Two of the economy’s most important financial intermediaries are

banks and mutual funds.

A bond is a

certificate of indebtedness.

The sale of stocks

to raise money is called equity finance, while the sale of bonds to raise funds is called debt finance.

The Dow Jones Industrial Average is now based on the prices of the stocks of

30 major U.S. corporations.

Financial intermediaries are

financial institutions through which savers can indirectly provide funds to borrowers.

Which of the following is both a financial institution and a financial intermediary?

Banks

Which of the following are financial intermediaries?

both banks and mutual funds

A checking deposit functions as

a medium of exchange and as a store of value.

In a closed economy, what does (T – G) represent?

public saving

In a closed economy, what does (Y – T – C) represent?

private saving

The identity that shows that total income and total expenditure are equal is

Y = C + I + G + NX.

Which of the following equations represents GDP for a closed economy?

Y = C + I + G

For an open economy, the equation Y = C + I + G + NX is an identity. If we define national saving, S, as the total income in the economy that is left after paying for consumption and government purchases, then for an open economy, it is true that

S = I + NX.

The slope of the demand for loanable funds curve represents the

negative relation between the real interest rate and investment.

The slope of the supply of loanable funds curve represents the

positive relation between the real interest rate and saving.

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

and quantity of loanable funds fall.

The financial system

the group of institutions that helps math the saving of one person with the investment of another

2 types of financial institutions

1. Financial markets 2. Financial intermediaries

Financial Markets

institutions through which savers can directly provide funds to borrowers

The bond market

a bond is a certificate of indebtness

The stock market

a stock is a claim to partial ownership in a firm

Financial Intermediaries

institutions through which savers can indirectly provide funds to borrowers

3 types of financial intermediaries

1. Banks 2. Mutual Funds: sell shares and use the proceeds to buy stocks and bonds 3. other institutions: Credit unions, pension funds, insurance

Market for loanable funds

the market in which those want to save supply funds and those who want to borrow to invest demand funds

Loanable Funds

refer to all income that people have chosen to save and lend out, rather than use for their own consumption, and to the amount that investors have chosen to borrow to fund new investment projects

Saving Incentives

increasing the supply of loanable funds

Investment incentive

an investment tax credit which gives a tax advantage to any firm building a new factory or buying a new piece of equipment

3 characteristics of bonds

1. a bonds term- whether short term or long term (prefer short term) 2.credit risk: the probability that the issuer fails to make payments 3. tax treatment

municipal bonds

bonds issued by state and local government- exempted from tax

Bond prices

are always negatively affected by interest rates

equity finance

the sale of stocks to raise money

debt finance

the sale of bonds to raise money

GDP equation

Y=C+I+G+Nx Y = GDP, output, total income, total expenditure C = consumption I = investment G = government purchases of goods and services NX = export – imports T=Tax

Closed Economy

one that does not interact with other economies

Private Saving Equation

Y-C-T=

private saving income

the income that households have left after paying for tax and consumption and tax

National Savings Equation (investment is national saving)

Y-C-G=

Calculate Tax

Government deficit= G-Public Saving

Public Saving Equation (gov. saving)

T-G=

crowd out effect

decrease in investment that results from government borrowing

As an alternative to selling shares of stock as a means of raising funds, a large company could, instead

sell bonds

Long term bonds are

riskier than short- term bonds, and so interest rates on long- term bonds are usually higher than interest rates on short term bonds

Owners of municipal bonds

are not requires to pay federal income tax on the interest income

The primary economic function of the financial system is to

match one person’s saving with another person’s investment.

Most entrepreneurs do not have enough money of their own to start their businesses. When they acquire the necessary funds from someone else,

their investments are being financed by someone else’s saving.

The fact that borrowers sometimes default on their loans by declaring bankruptcy is directly related to the characteristic of a bond called

credit risk.

When a large, well-known corporation wishes to borrow directly from the public, it can

sell bonds

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

Interest rates on long-term bonds are usually higher than interest rates on short-term bonds.

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

Bond A has a term of 20 years and Bond B has a term of 1 years.

Two of the economy’s most important financial intermediaries are

banks and mutual funds

A bond is a

certificate of indebtedness.

Long-term bonds are

riskier than short-term bonds, and so interest rates on long-term bonds are usually higher than interest rates on short-term bonds.

If the government’s expenditures exceeded its receipts, it would likely

sell bonds directly to the public.

Two bonds have the same term to maturity. The first was issued by a state government and the probability of default is believed to be low. The other was issued by a corporation and the probability of default is believed to be high. Which of the following is correct?

Because of the differences in tax treatment and credit risk, the corporate bond should have the higher interest rate.

Assume the bonds below have the same term and principal and that the state or local government that issues the municipal bond has a good credit rating. Which list has bonds correctly ordered from the one that pays the highest interest rate to the one that pays the lowest interest rate?

corporate bond, U.S. government bond, municipal bond

The sale of stocks

to raise money is called equity finance, while the sale of bonds to raise funds is called debt finance.

Stock represents

-a claim to a share of the profits of a firm. –ownership in a firm. —equity finance.

Which of the following bonds has the highest interest rate?

a long term and a high credit risk.

If a firm sells a total of 100 shares of stock, then

each share represents ownership of 1 percent of the firm.

A closed economy

does not trade with other economies.

A closed economy

-does not engage in international trade of goods and services. –does not engage in international borrowing or lending.

In a closed economy, what does (T – G) represent?

public saving

In a closed economy, what does (Y – T – C) represent?

private saving

In a closed economy, national saving equals

-investment. –income minus the sum of consumption and government purchases. —private saving plus public saving.

Suppose that in a closed economy GDP is equal to 11,000, taxes are equal to 1,000, consumption equals 7,500, and government purchases equal 2,000. What is national saving?

-500 500 2,000 Correct None of the above is correct.

For a closed economy, GDP is $12 trillion, consumption is $7 trillion, taxes net of transfers are $3 trillion and the government runs a deficit of $1 trillion. What are private saving and national saving?

$2 trillion and $1 trillion, respectively

GDP = $100,000; taxes = $22,000; government purchases = $25,000; national
saving = $15,000.

Refer to Scenario 26-1. For this economy, investment amounts to

$15,000.

GDP = $100,000; taxes = $22,000; government purchases = $25,000; national
saving = $15,000.

Refer to Scenario 26-1. This economy’s government is running a

budget deficit of $3,000.

GDP = $100,000; taxes = $22,000; government purchases = $25,000; national
saving = $15,000.

Refer to Scenario 26-1. For this economy, consumption amounts to

$60,000.

Which of the following would a macroeconomist consider as investment?

Charlie builds a new coffee shop

The slope of the demand for loanable funds curve represents the

negative relation between the real interest rate and investment.

If Congress increased the tax rate on interest income, investment

and saving would decrease.

If a reform of the tax laws encourages greater saving, the result would be

lower interest rates and greater investment.

A larger budget surplus

reduces the interest rate and raises investment.

A larger budget deficit

raises the interest rate and reduces investment

In 2009, the U.S. government’s budget deficit increased substantially. Other things the same, this means the

supply of loanable funds shifted to the left.

Institutions that help to match one person’s saving with another person’s investment are collectively called the

financial system

Given that Monika’s income exceeds her expenditures, Monika is best described as a

saver or as a supplier of funds

Most entrepreneurs do not have enough money of their own to start their businesses. When they acquire the necessary funds from someone else,

their consumption expenditures are being financed by someone else’s saving

At the broadest level, the financial system moves the economy’s scarce resources from

savers to borrowers

The fact that borrowers sometimes default on their loans by declaring bankruptcy is directly related to the characteristic of a bond called

credit risk

As an alternative to selling shares of stock as a means of raising funds, a large company could, instead

sell bonds

Two of the economy’s most important financial intermediaries are

banks and mutual funds

A bond is a

certificate of indebtedness

If the government’s expenditures exceeded its receipts, it would likely

sell bonds directly to the public

The sell of bonds to raise money is called

debt finance, while the sale of stocks to raise funds is called equity finance

What makes the interest rate on a bond higher than normal?

both high credit risk and long time

As chief financial officer you sell newly issued bonds on behalf of your firm. Your firm is

borrowing directly

financial system

institutions that match one person’s savings with another person’s invesments

savers and borrowers

people who lend money, people who need to borrow

2 categories of financial institutions

financial markets and financial intermediaries

financial markets

institutions where one who wants to save can directly supply money to those who want to borrow. ex: bond markets and stock markets

bond

an iou that specifies the indebtness of a borrower to a supplier. has a date of maturity when it must be paid with interest

3 characteristics of a bond

term: length of time until it matures. credit risk: probability borrower will fail to pay. tax treatment: the way tax laws affect one’s bond

perpetuity

bond that never matures

default

when a borrower fails to pay a bond

junk bond

high credit risks meaning they may never be paid. have very high interest rates to make up for that

municipal bonds

state/local government bonds where buyers don’t pay an income tax. low interest rates

stocks

claim to partial ownership and profit of a firm. stocks are sold separately outside of business in stock exchanges

equity finance

sale of a stock for money

debt finance

sale of bonds for money

stock index

average of a group of stock prices. show buyers what’s good and what’s not

financial intermediaries

institutions where savers directly provide funds to borrowers

banks

take deposits from savers and use that money to provide loans to borrowers. the interest they pay tos savers is lower than the interest they demand form borrowers so that they can make money

mediums of exchange

debit cards, checks, etc that are used to engage in transactions

mutual funds

institutions that sell shares to the public and buy portfolios of stocks and bonds. decrease risk of shareholders because their money is invested in multiple companies

index funds

mutual funds that buy all stocks of a given stock index

3 key numbers of following a stock

price: interest rate, dividend: profits paid to shareholders by companies, price-earnings ratio: price of stock/amount earned per share in the last year (higher p/e means an expensive stock)

6 elements of financial crisis

large decline in prices, insolvencies, decline in confidence, credit crunch, economic downtown, vicious circles

accounting

how various numbers are defined and added

nation saving

total income of economy that remains after taking out consumption and government purchases. s=i, s=y-c-g-nx

saving must equal

investment

private saving

amount households have left after paying taxes and consumption

public saving

amount government has left after paying for its spending

saving is money towards _____, investment is money towards _______

banks, capital

market for loanable funds

hypothetical situation where all savers and borrowers deal with their money in the same market. saving is the supply of the market, investment is the demand of the market

supply and demand curve of market for loanable funds

demand is downward because people don’t borrow when interest rates are high. supply is upward because people loan money when interest is high

3 steps of analyzing policies

is the shift in supply or demand? which way is the shift? how is equilibrium affected

policy 1: saving incentives

reform taxes so that it isn’t as expensive to save. supply increases, shifts to right: greater saving, lower interest rates, greater investment

policy 2: investment incentives

investment tax credit that gives firms tax advantage when they’re building new factories or buying equipment. increases demand, shifts to the right: greater investment, interest rates, and saving

policy 3: government budget deficits

government debt results when gov. borrows money from bonds to relieve defecits. causes a decrease in supply, shift to the left: lower interest rates, lower investment

policy 3: government budget surplus

increase in supply, shift to the right: reduces interest rates, encourages investment

interest rates are equal to

the price of loanable funds

crowding out

decrease in investment because of government borrowing

at the broadest level the financial system moves economy’s scarce resources from

savers to borrowers

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