Chapter 13 Macroeconomics
4. 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 consumption expenditures are being financed by someone else's saving. b. their consumption expenditures are being financed by someone else's investment. c. their investments are being financed by someone else's saving. d. their saving is being financed by someone else's investment.
ANSWER: C.
15. Owners of municipal 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.
ANSWER: a
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 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 Apple corporation and Bond B was issued by the city of Houston. 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.
ANSWER: a
21. As chief financial officer you sell newly issued bonds on behalf of your firm. Your firm is a. borrowing directly. b. borrowing indirectly. c. lending directly. d. lending indirectly.
ANSWER: a
26. A stock index is a. an average of a group of stock prices. b. an average of a group of stock yields. c. a measure of the risk relative to the profitability of corporations. d. a report in a newspaper or other media outlet on the price of the stock and earnings of the corporation that issued the stock.
ANSWER: a
1. When a country saves a larger portion of its GDP than it did before, it will have a. more capital and higher productivity. b. more capital and lower productivity. c. less capital and higher productivity. d. less capital and lower productivity.
ANSWER: a. more capital and higher productivity.
10. When public saving falls by $2b and private saving falls by $1b in a closed economy, a. investment falls by $1b. b. investment falls by $3b. c. investment increases by $1b. d. investment falls by $2b.
ANSWER: b
11. 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, municipal bond, U.S. government bond b. corporate bond, U.S. government bond, municipal bond c. municipal bond, U.S. government bond, corporate bond d. U.S. government bond, municipal bond, corporate bond
ANSWER: b
12. 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. breach. b. default. c. risk. d. term failure.
ANSWER: b
13. A municipal bond is a. issued by the federal government. b. issued by state and local governments. c. issued by corporations. d. issued by households.
ANSWER: b
14. 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.
ANSWER: b
15. For a closed economy, GDP is $18 trillion, consumption is $13 trillion, taxes are $2 trillion and the government runs a deficit of $1 trillion. What are private saving and national saving? a. $3 trillion and $1 trillion, respectively b. $3 trillion and $2 trillion, respectively c. $2 trillion and $3 trillion, respectively d. $2 trillion and $2 trillion, respectively
ANSWER: b
16. For an imaginary closed economy, T = $5,000; S = $11,000; C = $48,000; and the government is running a budget surplus of $1,000. Then a. private saving = $10,000 and GDP = $55,000. b. private saving = $10,000 and GDP = $63,000. c. private saving = $12,000 and GDP = $67,000. d. private saving = $12,000 and GDP = $69,000.
ANSWER: b
17. 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 higher 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 lower 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 higher 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 lower interest rate than otherwise comparable bonds issued by the U.S. government.
ANSWER: b
20. 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.
ANSWER: b
24. Suppose that the tires of a certain tire manufacturer are discovered to be defective. Other things the same, this news would cause a. the demand for this company's stock to decrease, so the price would rise. b. the demand for this company's stock to decrease, so the price would fall. c. the supply of this company's stock to decrease, so the price would fall. d. the supply of this company's stock to decrease, so the price would rise.
ANSWER: b
25. Which of the following statements is correct? a. A general, persistent decline in stock prices may signal that the economy is about to enter a boom period because people will be able to buy stock for less money. b. A general, persistent decline in stock prices may signal that the economy is about to enter a recession because low stock prices may mean that people are expecting low corporate profits. c. A general, persistent decline in stock prices may signal that the economy is about to enter a recession because low stock prices mean that corporations have had low profits in the past. d. Expectations about the business cycle have no impact on stock prices.
ANSWER: b
3. The economy's two most important financial markets are a. the investment market and the saving market. b. the bond market and the stock market. c. banks and the stock market. d. financial markets and financial institutions.
ANSWER: b
4. A bond is a a. financial intermediary. b. certificate of indebtedness. c. certificate of partial ownership in an enterprise. d. None of the above is correct.
ANSWER: b
5. Long-term bonds are a. riskier than short-term bonds, and so interest rates on long-term bonds are usually lower than interest rates on short-term bonds. b. riskier than short-term bonds, and so interest rates on long-term bonds are usually higher than interest rates on short-term bonds. c. less risky than short-term bonds, and so interest rates on long-term bonds are usually lower than interest rates on short-term bonds. d. less risky than short-term bonds, and so interest rates on long-term bonds are usually higher than interest rates on short-term bonds.
ANSWER: b
7. A national chain of grocery stores wants to finance the construction of several new stores. The firm has limited internal funds, so it likely will a. demand the required funds by buying bonds. b. demand the required funds by selling bonds. c. supply the required funds by buying bonds. d. supply the required funds by selling bonds.
ANSWER: b
8. The length of time until a bond matures is called the a. perpetuity. b. term. c. maturity. d. intermediation.
ANSWER: b
10. On which of these bonds is the prospect of default least likely? a. a junk bond b. a bond issued by the state of Arizona c. a bond issued by the federal government d. a bond issued by General Electric Corporation
ANSWER: c
13. Suppose that in a closed economy GDP is equal to 20,000, consumption equal to 15,000, government purchases equal 4,000 and taxes equal 3,000. What are private saving, public saving, and national saving? a. -2,000, 1,000, and 2,000, respectively. b. 1,000, 2,000, and 3,000, respectively. c. 2,000, -1,000, and 1,000, respectively. d. 2,000, 1,000, and 2,000, respectively.
ANSWER: c
1. Which of the following is not correct? a. Gross domestic product is both total income in an economy and total expenditures on the economy's output of goods and services. b. In a closed economy net exports are zero. c. National saving is the sum of private saving and public saving. d. Purchases of capital goods are excluded from GDP.
ANSWER: d
16. Which of the following is true concerning interest rates on bonds? a. The tax treatment of interest earned on municipals bonds makes the interest rate on them higher than otherwise. High default risk makes the interest rate on a bond higher than otherwise. b. The tax treatment of interest earned on municipals bonds makes the interest rate on them higher than otherwise. High default risk makes the interest rate on a bond lower than otherwise. c. The tax treatment of interest earned on municipals bonds makes the interest rate on them lower than otherwise. High default risk makes the interest rate on a bond higher than otherwise. d. The tax treatment of interest earned on municipals bonds makes the interest rate on them lower than otherwise. High default risk makes the interest rate on a bond lower than otherwise.
ANSWER: c
19. People who buy newly issued stock in a corporation such as Crate and Barrel provide a. debt finance and so become part owners of Crate and Barrel. b. debt finance and so become creditors of Crate and Barrel. c. equity finance and so become part owners of Crate and Barrel. d. equity finance and so become creditors of Crate and Barrel.
ANSWER: c
22. Which of the following is not an important stock exchange in the United States? a. New York Stock Exchange b. American Stock Exchange c. Chicago Mercantile Exchange d. NASDAQ
ANSWER: c
23. All else equal, when people become more optimistic about a company's future, the a. supply of the stock and the price will both rise. b. supply of the stock and the price will both fall. c. demand for the stock and the price will both rise. d. demand for the stock and the price will both fall.
ANSWER: c
6. Which of the following statements is correct? a. The total income in the economy that remains after paying for consumption and government purchases is called private saving. b. The sum of private saving and national saving is called public saving. c. For a closed economy, the sum of private saving and public saving must equal investment. d. For a closed economy, the sum of consumption, national saving, and taxes must equal GDP.
ANSWER: c
9. A perpetuity is distinguished from other bonds in that it a. pays continuously compounded interest. b. pays interest only when it matures. c. never matures. d. will be used to purchase another bond when it matures unless the owner specifies otherwise.
ANSWER: c
9. In a small closed economy investment is $50 billion and private saving is $45 billion. What are public saving and national saving? a. $5 billion and $45 billion b. -$5 billion and $45 billion c. $5 billion and $50 billion d. -$5 billion and $50 billion
ANSWER: c
1. At the broadest level, the financial system moves the economy's scarce resources from a. the rich to the poor. b. financial institutions to business firms and government. c. households to financial institutions. d. savers to borrowers.
ANSWER: d
11. 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? a. -500 b. 500 c. 2,000 d. None of the above is correct.
ANSWER: d
12. 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? a. $5 trillion and $3 trillion, respectively b. $5 trillion and $1 trillion, respectively c. $2 trillion and $3 trillion, respectively d. $2 trillion and $1 trillion, respectively
ANSWER: d
14. Suppose the economy is closed with national saving of $3 trillion, consumption of $10 trillion, and government purchases of $4 trillion. What is GDP? a. $3 trillion b. $9 trillion c. $11 trillion d. $17 trillion
ANSWER: d
18. Other things the same, which bond would you expect to pay the highest interest rate? a. a bond issued by the U.S. government b. a bond issued by Microsoft Corporation c. a bond issued by the state of Montana d. a bond issued by a new chain of Brazilian-style restaurants
ANSWER: d
2. 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.
ANSWER: d
3. In a closed economy, what does (T - G) represent? a. national saving b. investment c. private saving d. public saving
ANSWER: d
4. In a closed economy, what does (Y - T - C) represent? a. national saving b. government tax revenue c. public saving d. private saving
ANSWER: d
5. In which of the following cases would it necessarily be true that national saving and private saving are equal for a closed economy? a. Private saving is equal to government expenditures. b. Public saving is equal to investment. c. After paying their taxes and paying for their consumption, households have nothing left. d. The government's tax revenue is equal to its expenditures.
ANSWER: d
6. If the government's expenditures exceeded its receipts, it would likely a. lend money to a bank or other financial intermediary. b. borrow money from a bank or other financial intermediary. c. buy bonds directly from the public. d. sell bonds directly to the public.
ANSWER: d
7. The identity that shows that total income and total expenditure are equal is a. GDP = Y. b. Y = DI + T + NX. c. GDP = GNP - NX. d. Y = C + I + G + NX.
ANSWER: d
8. Which of the following equations will always represent GDP in an open economy? a. S = I - G b. I = Y - C + G c. Y = C + I + G d. Y = C + I + G + NX
ANSWER: d
2. 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.
ANSWER: d. financial system.
3. Given that Monika's income exceeds her expenditures, Monika is best described as a a. saver or as a supplier of funds. b. saver or as a demander of funds. c. borrower or as a supplier of funds. d. borrower or as a demander of funds.
ANSWER:a. saver or as a supplier of funds.
