Econ chapter 29
A bond is a(n) A) liability for the issuer. B) asset for the purchaser. C) promise by the issuer to pay. D) Each of these answers is correct
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A corporation is planning to finance the construction of new offices but has limited funds. The corporation is likely to A) supply loanable funds by selling bonds. B) supply loanable funds by buying bonds. C) demand loanable funds by selling bonds. D) demand loanable funds by buying bonds.
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A decrease in investment demand A) results in the same equilibrium as an increase in savings. B) decreases both the amount saved and the interest rate. C) increases the amount saved but decreases the interest rate. D) increases the demand for loanable funds.
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A saver buys a $10,000 zero-coupon government bond for $9,375. When it matures a year from now, what will be the approximate implied interest rate? A) 625 percent B) 6.25 percent C) 6.67 percent D) 12.67 percent
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According to the consumption-smoothing theory, a person typically saves the most A) during working years. B) during retirement years. C) as an infant. D) as a full-time student.
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All else being equal, a working-age person who has more patience tends to have A) more savings. B) fewer savings. C) more collateral. D) less investment.
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An investment tax credit will cause the interest rate to ______ and borrowing to ______. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase
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At an 8 percent interest rate, the quantity of savings is $250 billion. What would the quantity of savings be if the interest rate falls to 5 percent? A) $190 billion B) $250 billion C) $300 billion D) $500 billion
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At an interest rate of 8 percent, borrowers demand is $30 billion. At 4 percent, borrowers would want to borrow A) $20 billion. B) $25 billion. C) $30 billion. D) $45 billion
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Crowding out occurs because the government increases the demand for loanable funds, drives up interest rates, and I. stops private savers from saving. II. causes investment to fall. III. causes consumption to fall. A) I only B) II C) II and III only D) I and III only
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Financial intermediation can break down as a result of I. low and stable inflation II. government controls on interest rates III. bank failures A) I and II only B) I and III only C) II and III only D) I, II, and III
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How do banks engage in specialization and division of labor? A) Banks are the only avenue for savers to save their money and for borrowers to borrow for projects. B) Banks specialize in lending to risky borrowers. C) Banks coordinate the collection of lenders' funds and employ specialists in risk assessment to assure their safety. D) Banks specialize in the use of ATM cards.
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How do insecure property rights break the links between savings and economic growth? A) If people think they may lose the money they save in banks, they will not save as much, leading to decreased investment and thus decreased economic growth. B) If governments tend to nationalize companies, then people will not buy stock in those companies, leading to decreased investment and decreased economic growth. C) If governments tend to nationalize companies, then investors will hesitate to invest, leading to lower physical capital stocks and decreased economic growth. D) Each of these answers is correct
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If the government raises taxes on investment returns, then A) the demand for loanable funds will increase, and the equilibrium interest rate will increase. B) the demand for loanable funds will decrease, and the equilibrium interest rate will decrease. C) the supply of loanable funds will decrease, and the equilibrium interest rate will increase. D) the supply of loanable funds will increase, and the equilibrium interest rate will decrease.
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If the interest rate increases, then A) the quantity saved will decrease but the quantity supplied of loanable funds will increase. B) the quantity saved will increase but the quantity supplied of loanable funds will decrease. C) both the quantity saved and the quantity supplied of loanable funds will decrease. D) both the quantity saved and the quantity supplied of loanable funds will increase
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If the interest rate is 3 percent in this loanable funds market, then A) investment exceeds savings by $200 million. B) investment exceeds savings by $100 million. C) borrowing demands exceed savings by $200 million. D) borrowing demands exceed savings by $100 million
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If the interest rate rises from 5 percent to 9 percent, the number of new businesses will A) increase. B) decrease. C) remain the same. D) sharply increase, then level off.
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In economics, investment refers to A) saving. B) dissaving. C) the purchase of consumption goods. D) the purchase of capital goods.
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In order to be binding, an interest rate ceiling must A) shift the supply of savings function outward. B) shift the demand to borrow function outward. C) be placed above equilibrium. D) be placed below equilibrium
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In the loanable funds market, an increase in government borrowing will most likely A) decrease bond prices and increase interest rates. B) increase bond prices and decrease interest rates C) increase both bond prices and interest rates D) decrease both bond prices and interest rates.
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Insecure property rights typically lead to A) an increase in the supply of savings. B) a decrease in the supply of savings. C) an increase in the demand to borrow. D) a decrease in the demand to borrow.
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Junk bonds are bonds A) issued by garbage companies. B) backed by subprime mortgages. C) rated lower than BBB-. D) that mature 30 years into the future.
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Problems in the banking and financial systems can remove the bridge between lenders and borrowers. Which of the following would be a consequence? A) Banking fees and other costs of intermediation rise. B) Consumers decide to become savers. C) There is decreased insider trading. D) Each of these answers is correct
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Savings is A) the purchase of new capital goods. B) the purchase of new consumption goods. C) income that is not spent on capital goods. D) income that is not spent on consumption goods.
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The demand to borrow function is A) upward sloping. B) downward sloping. C) vertical. D) horizontal.
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The lifecycle theory of savings predicts individuals will save during A) the early years of life. B) the middle years of life. C) the later years of life. D) all phases of life
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The supply of loanable funds comes from ______ and the demand for loanable funds comes from ______. A) saving; investment B) investment; saving C) saving; consumption D) investment; consumption
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The supply of savings function is A) upward sloping. B) downward sloping. C) vertical. D) horizontal.
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The supply of savings function shows the relationship between saving and A) consumption. B) income. C) age. D) the interest rate.
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Time preference is the desire to A) save for a time when income will be reduced. B) have goods and services sooner rather than later. C) maximize return on investment in the shortest amount of time. D) increase longevity in order to have a greater income
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Trading in the market for loanable funds determines the equilibrium A) level of savings. B) amount of borrowing. C) interest rate. D) It determines all three of these.
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What do we call income that is NOT spent on consumption goods? A) investment B) profit C) asset retention D) saving
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What does crowding out mean? A) Government borrowing causes private investment and consumption to decrease. B) Too many private lenders make it difficult for the government to borrow. C) Too many private savers compete for higher rates of return. D) The government gives tax breaks to many segments of the economy at one time.
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What effect will an investment tax credit have on interest rates and the quantity of savings? A) None, investment tax credits only affect the amount of taxes paid by firms. B) Both interest rates and the quantity of savings will increase. C) Interest rates will decrease and the quantity of savings will increase. D) Interest rates will not change, but the quantity of savings decreases.
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What is a frequent temporary government solution to combat the decreased investment demand during a recession? A) decrease government spending B) reduce regulation affecting firms C) sell more bonds D) offer an investment tax credit
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What is a service that banks specialize in providing? A) providing the highest return available in the market B) seeking to pass all of the returns on investment to the savers C) evaluating the quality of investment opportunities D) making sure all funds are distributed in the most equitable fashion
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What is the largest stock exchange in the world? A) the Börse in Frankfurt B) the NYSE C) the NASDAQ in New York D) the Tokyo Stock Exchange
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What is the most harmful consequence to GDP from interest rate ceilings? A) Lenders cannot earn a normal market return. B) Investment falls, dragging down GDP and future growth. C) Consumption increases and savings get too high. D) Each of these answers is correct.
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What is the potential of a bond lender not being able to repay the bond holder called? A) moral hazard B) default risk C) payment jeopardy D) repayment peril
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When a given bond's price increases, we know that the interest rate on this bond A) remains unchanged. B) must increase. C) must decrease. D) could increase, decrease, or remain unchanged
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When a person's income is greater than her spending on consumption goods, then she is A) dissaving B) saving. C) investing. D) disinvesting
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When business firms become more pessimistic about the state of the economy, the A) demand to borrow shifts outward. B) demand to borrow shifts inward. C) supply of savings shifts outward. D) supply of savings shifts inward.
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When governments freeze bank accounts, they fail to A) regulate the banking industry. B) guarantee savings accounts. C) promote consumption and spending. D) secure property rights.
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When the U.S. government borrows, it sells A) federal paper. B) treasury bonds. C) government stocks. D) Each of these answers is correct
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Which of the following would be the most likely to cause an increase in the demand for loanable funds? A) a decrease in the interest rate B) an increase in savings C) a decrease in consumption D) an increase in government borrowing
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Which variable is determined in the market for loanable funds? A) income B) consumption C) investment D) the interest rate
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Why do people borrow? A) to engage in consumption smoothing B) to sustain themselves through periods of unemployment C) to fund unexpected expenditures D) Each of these answers is correct
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Why do people save during their working lifetimes? A) So they do not have to drastically reduce their consumption once they retire. B) To consume later in life. C) To take precautionary measures in case of job loss. D) Each of these answers is correct.
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Why do ratings agencies rate bonds? A) to indicate the chance of a bond being repaid B) to show a bond's probable rate of return C) to validate the amount of collateral involved D) Each of these answers is correct.
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if consumers expect to have shorter life expectancy and desire to save less, then the A) demand for loanable funds will increase, and the equilibrium interest rate will increase. B) demand for loanable funds will decrease, and the equilibrium interest rate will decrease. C) supply of loanable funds will decrease, and the equilibrium interest rate will increase. D) the supply of loanable funds will increase, and the equilibrium interest rate will decrease.
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ll else equal, time preference is the desire to A) have goods and services sooner rather than later. B) delay the purchase of goods and services. C) have goods and services in retirement years. D) have goods and services that are made in the current year
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