macro ch 13

Suppose that in a closed economy GDP is equal to 11,000, taxes are equal to 2,500, consumption equals 7,000, and government purchases equal 3,000. What are private saving and public saving?

1,500 and -500, respectively

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.

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.

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

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.

Cassie purchases 1,000 shares of a mutual fund for $1,000. Cassie's purchase of these shares contributes $1,000 to which magnitude in the identity Y = C + I + G?

None of the above are correct.

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

credit risk

The sale of stocks

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

The supply of loanable funds slopes

upward because an increase in the interest rate induces people to save more.

Which of the following is a certificate of indebtedness?

bonds but not stocks

When opening a print shop you need to buy printers, computers, furniture, and similar items. Economists call these expenditures

capital investment.

A budget deficit

changes the supply of loanable funds.

Which of the following is both a store of value and a common medium of exchange?

checking account balances

The old adage, "Don't put all your eggs in one basket," is very similar to a modern bit of advice concerning financial matters:

"Diversify."

For a closed economy, GDP is $11 trillion, consumption is $7 trillion, taxes are $2 trillion and the government runs a deficit of $1 trillion. What are private saving and national saving?

$2 trillion and $1 trillion, respectively

If the inflation rate is 2 percent and the real interest rate is 3 percent, then the nominal interest rate is

5 percent

Ethan purchases a new house for $170,000. Ethan's purchase of the house contributes $170,000 to which magnitude in the identity Y = C + I + G?

I

You observe a closed economy that has a government deficit and positive investment. Which of the following is correct?

Private saving is positive; public saving is negative.

Which of the following events could explain a decrease in interest rates together with an increase in investment?

The government reduced the tax rate on savings.

A checking deposit functions as

a medium of exchange and as a store of value.

Which of the following is a financial intermediary?

a mutual fund

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.

All else equal, when people become more optimistic about a company's future, the

demand for the stock and the price will both rise.

Which advantage(s) do mutual funds claim to provide?

diversification and access to the skills of professional money managers

A stock's dividend yield is the

dividend as a percentage of the price per share.

Northwest Wholesale Foods sells common stock. The company is using

equity financing and the return shareholders earn depends on how profitable the company is.

Compared to bondholders, stockholders

face higher risk and have the potential for higher returns.

A mutual fund

is an institution that sells shares to the public and uses the proceeds to buy a selection of various types of stocks, bonds, or both stocks and bonds.

The source of the supply of loanable funds is

is saving and the source of demand for loanable funds is investment

If Congress instituted an investment tax credit

it would make buying capital goods more desirable, so the demand for loanable funds would shift.

The primary economic function of the financial system is to

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

If a firm's price-earnings ratio is relatively low, then it might be an indication that

people expect the firm's earnings to fall.

Other things the same, a government budget deficit

reduces both public and national saving

A larger budget surplus

reduces the interest rate and raises investment

If Congress instituted an investment tax credit, the equilibrium quantity of loanable funds would

rise

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

rises and the quantity of loanable funds falls.

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

save more, so the supply of loanable funds slopes upward.

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

saver or as a supplier of funds.

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

sell bonds

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

sell bonds directly to the public.

In the loanable funds model, an increase in an investment tax credit would create a

shortage at the former equilibrium interest rate. This shortage would lead to a rise in the interest rate.

In the first part of the decade that began in 2000, the U.S. government went from a surplus to a deficit. Other things the same, this means the

supply of loanable funds shifted to the left.

The economy's two most important financial markets are

the bond market and the stock market.

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

Who accepts all of the risk associated with a mutual fund's portfolio of stocks and/or bonds?

the fund's shareholders

In which case would people desire to borrow the most?

the nominal interest rate is 8% and the inflation rate is 7%

A policy that induces people to save more shifts

the supply of loanable funds and reduces interest rates.

The prices of stock traded on exchanges are determined by

the supply of, and demand for, the stock.

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.

A closed economy does not

trade with other economies