Econ 2 Chapters 26 and 27 HW Questions

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.

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

saver or as a supplier of funds.

If GDP = $1,000, consumption = $600, taxes = $100, and government purchases = $200, how much is saving and investment?

saving = $200, investment = $200

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

sell bonds.

Whenever the price of an asset rises above what appears to be its fundamental value, the market is said to be experiencing a

speculative bubble.

The largest reduction in a portfolio's risk is achieved when the number of stocks in the portfolio is increased from

1 to 10.

Figure 26-3 The figure shows two demand-for-loanable-funds curves and two supply-of-loanable-funds curves. Refer to Figure 26-3. Which of the following movements shows the effects of households' decision to save more?

A movement from Point C to Point F

Which of the following should cause the price of a share of stock to rise?

All of the above should cause the price to rise: reduction in market risk, an increase in expected dividends, a reduction in the interest rate

Figure 27-1 The following figure shows a utility function for Britney. Refer to Figure 27-1 . From the appearance of the utility function, we know that

Britney is risk averse.

Figure 27-1 The following figure shows a utility function for Britney. Refer to Figure 27-1 . Suppose the vertical distance between the points (0, A) and (0, B) is 5. If her wealth increased from $1,050 to $1,350, then

Britney's subjective measure of her well-being would increase by less than 5 units.

In a closed economy, if Y and T remained the same, but G rose and C fell but by less than the rise in G, what would happen to public and national saving?

Public and national saving would fall.

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

Historically, index funds have had ________ than most actively managed mutual funds.

better returns

Which of the following reduces risk in a portfolio the greatest?

increasing the number of stocks in the portfolio from 1 to 10

By definition, equity finance

is accomplished when firms sell shares of stock.

If the interest rate is 4 percent, then you would be equally happy if you received a gift of either $100 today or a gift of

$112.49 three years from today.

A bond promises to pay $500 in one year and $10,500 in two years. What is the correct way to find the present value of this bond?

$500/(1 + r) + $10,500/(1 + r)2

The country of Cedarland does not trade with any other country. Its GDP is $17 billion. Its government purchases $5 billion worth of goods and services each year and collects $6 billion in taxes. Private saving in Cedarland is $5 billion. For Cedarland, investment is

$6 billion and consumption is $6 billion.

Sari puts $100 into an account with an interest rate of 10 percent. According to the rule of 70, about how much does she have at the end of 21 years?

$800

When you were 10 years old, your grandparents put $500 into an account for you paying 7 percent interest. Now that you are 18 years old, your grandparents tell you that you can take the money out of the account. What is the balance to the nearest cent?

$859.09

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

Private saving

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.

Refer to Figure 27-4. Which of the following statements is correct?

The figure shows that the greater the risk, the greater the return.

In which of the following cases would it necessarily be true that national saving and private saving are equal for a closed economy?

The government's tax revenue is equal to its expenditures.

Figure 26-3 The figure shows two demand-for-loanable-funds curves and two supply-of-loanable-funds curves. Refer to Figure 26-3. What, specifically, does the vertical axis represent?

The interest rate

If people are risk averse, then

all of the above are true: they dislike bad things more than they like comparable good things, their utility functions exhibit the property of diminishing marginal utility of wealth, the utility they would lose from losing a $50 bet would exceed the utility they would gain from winning a $50 bet.

A budget deficit

changes the supply of loanable funds.

Crowding out occurs when investment declines because a budget

deficit makes interest rates rise.

Financial intermediaries are

financial institutions through which savers can indirectly provide funds to borrowers

Recently, Lisa's wealth increased by $500. If her wealth were to increase by another $500 in the near future, then her utility would increase, but not by as much as it increased with the recent increase to her wealth. Based on this information, and graphing wealth on each horizontal axis, Lisa's utility function

is upward sloping and her marginal utility function is downward sloping.

A bond tends to pay a high interest rate if it is

issued by a corporation of dubious credit quality.

Suppose that Thom experiences a greater loss in utility if he loses $50 than he would gain in utility if he wins $50. This implies that Thom's

marginal utility diminishes as wealth rises, so he must be risk averse.

The slope of the supply of loanable funds curve represents the

positive relation between the interest rate and saving.

If Americans become less concerned with the future and save less at each real interest rate,

real interest rates rise and investment falls.

In a closed economy, public saving is the amount of

tax revenue that the government has left after paying for its spending.

We associate the term debt finance with

the bond market, and we associate the term equity finance with the stock market.

If the efficient markets hypothesis is true, then

the stock market is informationally efficient so stock prices should follow a random walk.

National saving is

the total income in the economy that remains after paying for consumption and government purchases

If government spending exceeds tax collections,

there is a budget deficit.

It is claimed that a secondary advantage of mutual funds is that

they give ordinary people access to the skills of professional money managers.