Chapter 26: GAP 6

B. $1.6 trillion

#32 Refer to Table 26-3. Determine the quantity of private saving. A. $0.2 trillion B. $1.6 trillion C. $1.8 trillion D. $2.6 trillion

B. perpetuity.

A bond that never matures is known as a A. a junk bond. B. perpetuity. C. an indexed bond. D. an intermediary bond.

A. bond.

A certificate of indebtedness that specifies the obligations of the borrower to the holder is called a A. bond. B. mutual fund. C. stock. D. All of the above are correct.

A. makes investment spending rise.

A decrease in the budget deficit A. makes investment spending rise. B. does not affect investment spending. C. may increase, decrease, or not affect investment spending if private saving doesn't change. D. makes investment spending fall.

D. All of the above are correct.

A mutual fund A. is a financial intermediary. B. allows people with small amounts of money to diversify their holdings. C. is a financial institution that stands between savers and borrowers. D. All of the above are correct.

D. dividend as a percentage of the price per share.

A stock's dividend yield is the A. stock price as a percentage of the dividend. B. retained earnings per share as the percentage of the dividend. C. dividend as a percentage of the retained earnings per share. D. dividend as a percentage of the price per share.

A. True

Alberta buys a paint sprayer and a lift for her car customizing shop. A macroeconomist would refer to these purchases as investment. A. True B. False

D. low, perhaps indicating that people expect future earnings to fall.

Alpha Corporation has a price of $5 a share, outstanding shares of 2.5 million, retained earnings of $1 million dollars, and a dividend yield of 2 percent. It has a price-earnings ratio which is A. high, perhaps indicating that people expect future earnings to rise. B. low, perhaps indicating that people expect future earnings to rise. C. high, perhaps indicating that people expect future earnings to fall. D. low, perhaps indicating that people expect future earnings to fall.

D. between 0.5 and 2.0 percent of assets each year.

As a money management fee, mutual funds usually charge their customers A. nothing, because they receive commissions from the firms whose stock they buy. B. between 1.5 and 3.0 percent of assets each year. C. a flat fee of about $50. D. between 0.5 and 2.0 percent of assets each year.

D. they declare bankruptcy.

Borrowers can (and sometimes do) default on their loans when A. they convert their bonds into perpetuities. B. the dividend yield on their shares of stock reaches zero. C. they cannot find enough buyers of their bonds to sell all the bonds they wish to sell. D. they declare bankruptcy.

A. Firms become optimistic about the future and, as a result, they plan to increase their purchases of new equipment and construction of new factories.

Figure 26-2. The figure depicts a supply-of-loanable-funds curve and two demand-for-loanable-funds curves. http://sjc.cengagenow.com/ilrn/books/mank07t/mank07t.188.108.1.png Refer to Figure 26-2. Which of the following events would shift the demand curve from D1 to D2? A. Firms become optimistic about the future and, as a result, they plan to increase their purchases of new equipment and construction of new factories. B. The government goes from running a budget deficit to running a budget surplus. C. A change in the tax laws encourages people to consume less and save more. D. A change in the tax laws encourages people to consume more and save less.

D. $1.5 trillion and $2.5 trillion, respectively

For a closed economy, GDP is $11 trillion, consumption is $7 trillion, taxes are $2.5 trillion and the government runs a surplus of $1 trillion. What are private saving and national saving? A. $2.5 trillion and $2.5 trillion, respectively B. $1.5 trillion and $1.5 trillion, respectively C. $2.5 trillion and $1.5 trillion, respectively D. $1.5 trillion and $2.5 trillion, respectively

D. there is a shortage and the interest rate is below the equilibrium level.

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

B. there is a shortage so interest rates will rise.

If the quantity of loanable funds demanded exceeds the quantity of loanable funds supplied, A. there is a surplus so interest rates will fall. B. there is a shortage so interest rates will rise. C. there is a shortage so interest rates will fall. D. there is a surplus so interest rates will rise.

C. runs a budget deficit.

If the tax revenue of the federal government is less than its spending, then the federal government necessarily A. runs a national debt. B. will increase taxes. C. runs a budget deficit. D. runs a budget surplus.

A. neither curve shifts, but the quantity of loanable funds supplied decreases and the quantity demanded increases as the interest rate falls to equilibrium.

If there is surplus of loanable funds, then A. neither curve shifts, but the quantity of loanable funds supplied decreases and the quantity demanded increases as the interest rate falls to equilibrium. 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. the supply for loanable funds shifts left and the demand shifts right.

D. public saving

In a closed economy, what does (T - G) represent? A. national saving B. investment C. private saving D. public saving

B. performing financial intermediation, banks are important in that they help create a medium of exchange.

In addition to A. serving as financial markets, mutual funds are important in that they help create a store of value. B. performing financial intermediation, banks are important in that they help create a medium of exchange. C. serving as stores of value, stocks and bonds also serve as media of exchange. D. All of the above are correct.

D. the price of a share of stock in the Hudsucker corporation should decline as the demand for shares falls.

In the Coen Brothers' movie The Hudsucker Proxy the board of directors picks someone to run the company who they believe will make poor decisions. If things turn out as they plan, A. the price of a share of stock in the Hudsucker corporation should decline as the supply of existing shares falls. B. the price of a share of stock in the Hudsucker corporation should rise as the supply of existing shares rises. C. the price of a share of stock in the Hudsucker corporation should rise as the demand for shares rises. D. the price of a share of stock in the Hudsucker corporation should decline as the demand for shares falls.

B. Economists strongly agree with the first claim, but are skeptical of the second.

It is claimed that mutual funds have two advantages. The first is that mutual funds allow people with small amounts of money to diversify. The second is that mutual funds provide the skills of professional money managers who buy stocks they believe will be the most profitable and thereby increase the return that mutual fund depositors earn on their savings. A. Economists are skeptical of the first claim, but strongly agree with the second. B. Economists strongly agree with the first claim, but are skeptical of the second. C. Economists are skeptical of both claims. D. Economists strongly agree with both claims.

C. The 2 percent bond is a municipal bond, and the 5 percent bond is a U.S. government bond.

Jerry has the choice of two bonds, one that pays 5 percent interest and one that pays 2 percent interest. Which of the following is most likely? A. The 2 percent bond has a longer term than the 5 percent bond. B. The 5 percent bond is a U.S. government bond, and the 2 percent bond is a junk bond. C. The 2 percent bond is a municipal bond, and the 5 percent bond is a U.S. government bond. D. The 2 percent bond is more risky than the 5 percent bond.

C. their investments are being financed by someone else's saving.

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 investment. B. their saving is being financed by someone else's investment. C. their investments are being financed by someone else's saving. D. their consumption expenditures are being financed by someone else's saving.

A. True

Mutual funds are a type of financial intermediary. A. True B. False

A. reduces both public and national saving.

Other things the same, a government budget deficit A. reduces both public and national saving. B. reduces national saving, but not public saving. C. reduces neither public saving nor national saving. D. reduces public saving, but not national saving.

C. rise. The supply of loanable funds shifts right.

Other things the same, an increase in taxes with no change in government purchases makes national saving A. fall. The demand for loanable funds shifts left. B. fall. The supply of loanable funds shifts left. C. rise. The supply of loanable funds shifts right. D. rise. The demand for loanable funds shifts right.

B. XYZ Corporation bonds carry less default risk than do ABC Corporation bonds.

Potential buyers of ABC Corporation bonds are concerned about ABC Corporation declaring bankruptcy. Potential buyers of XYZ Corporation bonds are not concerned that XYZ Corporation may declare bankruptcy. Which of the following statements is correct? A. Other things equal, the interest rate on XYZ Corporation bonds will be high relative to the interest rate on ABC Corporation bonds. B. XYZ Corporation bonds carry less default risk than do ABC Corporation bonds. C. An ABC Corporation bond must have a longer term than an XYZ Corporation. D. All of the above are correct.

C. $1.2 trillion.

Scenario 26-2. Assume the following information for an imaginary, closed economy. GDP = $5 trillion; consumption = $3.1 trillion; government purchases = $0.7 trillion; and taxes = $0.9 trillion. Refer to Scenario 26-2. For this economy, national saving is equal to A. $1.1 trillion. B. $2.9 trillion. C. $1.2 trillion. D. $1.7 trillion.

D. $1.0 trillion.

Scenario 26-2. Assume the following information for an imaginary, closed economy. GDP = $5 trillion; consumption = $3.1 trillion; government purchases = $0.7 trillion; and taxes = $0.9 trillion. Refer to Scenario 26-2. For this economy, private saving is equal to A. $1.2 trillion. B. $0.3 trillion. C. $1.7 trillion. D. $1.0 trillion.

C. demand funds from the financial system by selling bonds.

Skyline Chili wants to finance the purchase of new equipment for its restaurants. The firm has limited internal funds, so Skyline likely will A. supply funds to the financial system by buying bonds. B. demand funds from the financial system by buying bonds. C. demand funds from the financial system by selling bonds. D. supply funds to the financial system by selling bonds.

B. higher interest rates and lower investment.

Suppose the government changed the tax laws, with the result that people were encouraged to consume more and save less. Using the loanable funds model, a consequence would be A. lower interest rates and lower investment. B. higher interest rates and lower investment. C. higher interest rates and higher investment. D. lower interest rates and greater investment.

C. would decrease and investment would increase.

Suppose the government were to replace the income tax with a consumption tax so that interest on savings was not taxed. The result would be that the interest rate A. and investment both would decrease. B. and investment both would increase. C. would decrease and investment would increase. D. would increase and investment would decrease.

B. 1896.

The Dow Jones Industrial Average has been computed regularly since A. 1948. B. 1896. C. 1976. D. 1913.

A. 30 major U.S. corporations.

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. 1,000 representative U.S. corporations. D. 500 representative U.S. corporations.

B. $3 billion

The country of Growpaw does not trade with any other country. Its GDP is $20 billion. Its government purchases $3 billion worth of goods and services each year, collects $4 billion in taxes, and provides $2 billion in transfer payments to households. Private saving in Growpaw is $4 billion. What is investment in Growpaw? A. $4 billion B. $3 billion C. $5 billion D. $11 billion

B. the demand for the stock rises.

The price of a stock will rise if A. the supply of the stock rises. B. the demand for the stock rises. C. the managers of a stock exchange decide the price should be higher. D. None of the above are correct.

B. False

The ratio of government debt to GDP was higher during the Reagan presidency than at any previous time in U.S. history. A. True B. False

A. True

We interpret the term loanable funds to mean the flow of resources available to fund private investment. A. True B. False

A. There would be an increase in the amount of loanable funds borrowed.

What would happen in the market for loanable funds if the government were to decrease the tax rate on interest income? A. There would be an increase in the amount of loanable funds borrowed. B. There would be no change in the amount of loanable funds borrowed. C. The change in loanable funds is uncertain. D. There would be a reduction in the amount of loanable funds borrowed.

C. The government reduced the tax rate on savings.

Which of the following events could explain a decrease in interest rates together with an increase in investment? A. The government went from surplus to deficit. B. The government instituted an investment tax credit. C. The government reduced the tax rate on savings. D. None of the above is correct.

B. bonds but not stocks

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

A. Some bonds have terms as short as a few months.

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

D. term

Which of the following numbers is not associated with shares of a company's stock? A. price-earnings ratio B. price C. dividend D. term

A. an expansion of eligibility for Individual Retirement Accounts

Which of the following policy changes would lead to a decrease in the real interest rate and an increase in investment and saving? A. an expansion of eligibility for Individual Retirement Accounts B. an increase in government purchases, with no change in taxes C. a larger investment tax credit D. an increase in income-tax rates, with no change in the government budget deficit or surplus

C. The economy's government is running a budget surplus.

Which of the following restrictions implies that investment exceeds private saving for a closed economy? A. The economy has no government. B. The economy's government is running a budget deficit. C. The economy's government is running a budget surplus. D. No restriction is necessary; investment and private saving are equal for all closed economies.

B. Unlike corporate bonds and stocks, checking accounts are a medium of exchange.

Which of the following statements is correct? A. A mutual fund is a financial market. B. Unlike corporate bonds and stocks, checking accounts are a medium of exchange. C. A large, well-known corporation such as Intel generally would use financial intermediation to finance expansion of its facilities. D. On average, managed funds outperform indexed funds.

C. 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.

Which of the following statements is correct? A. Expectations about the business cycle have no impact on stock prices. B. 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. C. 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. D. 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.

D. The expected future profitability of a corporation influences the demand for that corporation's stock.

Which of the following statements is correct? A. When a corporation sells stock as a means of raising funds it is engaging in debt finance. B. All bonds are, by definition, perpetuities. C. The owners of bonds sold by the Microsoft Corporation are part owners of that corporation. D. The expected future profitability of a corporation influences the demand for that corporation's stock.

B. the interest it pays is taxed and it is long term

Which of the following would both make the interest rate on a bond higher than otherwise? A. the interest it pays is tax exempt and it is short term B. the interest it pays is taxed and it is long term C. the interest it pays is taxed and it is short term D. the interest it pays is tax exempt and it is long term

B. $5 billion surplus, and in the second case a $10 billion deficit.

You have some estimates of national accounts numbers for a closed economy for the coming year. Under one set of expectations, government purchases will be $30 billion, transfer payments will be $10 billion, and taxes will be $45 billion. Under another set of expectations, GDP will be $200 billion, taxes will be $50 billion, transfer payments will be $20 billion, consumption will be $120 million, and investment will be $40 billion. Based on these numbers in the first case there should be a A. $15 billion surplus, and in the second case a $10 billion surplus. B. $5 billion surplus, and in the second case a $10 billion deficit. C. $5 billion surplus, and in the second case a $30 billion deficit. D. $15 billion surplus, and in the second case a $30 billion deficit.

C. 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.

You hold bonds issued by the city of Sacramento, California. The interest you earn each year on these bonds A. 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. B. 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. C. 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. D. 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.