Macroeconomics Chapter 13
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."
Suppose the market for loanable funds is in equilibrium. Given the numbers below, determine the quantity of loanable funds demanded. GDP$200 billion, Consumption$130 billion, Taxes Net of Transfers$30 billion, Government Spending$40 billion.
$30 billion
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
We would expect the interest rate on Bond A to be higher than the interest rate on Bond B if the two bonds have identical characteristics except that
Bond A has a term of 20 years and Bond B has a term of 2 years.
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?
C I G None of the above are correct.
A stock's dividend yield is the
Divided as a percentages of the price per share NOT retained earnings per share as the percentage of the dividend.
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.
Assuming the market for loanable funds is in equilibrium, use the following numbers to determine the quantity of loanable funds supplied. GDP$8.7 trillion, Consumption Spending$3.2 trillion, Taxes Net of Transfers$2.7 trillion, Government Purchases$3.0 trillion
NOT $2.2 trillion $2.5 trillion
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?
NOT $4 trillion and $-1 trillion, respectively NOT $2 trillion and $-1 trillion, respectively $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
NOT 1 percent. 5 percent.
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.
NOT Economists strongly agree with both claims. Economists strongly agree with the first claim, but are skeptical of the second.
A perpetuity is
NOT a financial intermediary that has existed throughout recorded history. NOT an instrument of equity finance. NOT a stock that pays dividends forever.
If the government's expenditures exceeded its receipts, it would likely
NOT borrow money from a bank or other financial intermediary. sell bonds directly to the public.
An increase in capital will increase real GDP per person
NOT more in a poor country than a rich country. The increase in real GDP per person will be larger if the addition to capital is from domestic rather than foreign investment.
Because of its effect on the amount of capital per worker, in the short term an increase in the working population is likely to
NOT raise productivity. Other things the same, this increase will be larger in a poor country.
A larger budget deficit
NOT raises the interest rate and reduces investment.
The supply of loanable funds would shift to the right if either
NOT the budget deficit became larger or tax reforms discouraged saving. NOT tax reforms encouraged greater saving or investment tax credits were increased. NOT the budget deficit became larger or investment tax credits were increased. NOT tax reforms encouraged greater saving or investment tax credits were increased.
Suppose the U.S. offered a tax credit for firms that built new factories in the U.S.. Then
NOT the demand for loanable funds would shift rightward, initially creating a surplus of loanable funds at the original interest rate. the demand for loanable funds would shift rightward, initially creating a shortage of loanable funds at the original interest rate.
If a firm's price-earnings ratio is relatively low, then it might be an indication that
NOT the demand for the stock is relatively high.
All else equal, if there are diminishing returns, then if a country raised its capital by 100 units last year and by 100 units this year,
NOT the increase in output is the same in both years.
Suppose the market for loanable funds is in equilibrium. What would happen in the market for loanable funds, other things the same, if the Congress and President increased the maximum contribution limits to 401(k) and 403(b) tax-deferred retirement accounts?
NOT the interest rate would increase and the quantity of loanable funds would decrease. NOT the interest rate and quantity of loanable funds would decrease. NOT the interest rate and quantity of loanable funds would increase the interest rate would decrease and the quantity of loanable funds would increase.
The economy's two most important financial markets are
NOT the investment market and the saving market.
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.
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.
Consider the expressions T - G and Y - T - C. Which of the following statements is correct?
The first of these is public saving; the second one is private saving.
What would happen in the market for loanable funds if the government were to decrease the tax rate on interest income?
The supply of loanable funds would shift rightward and investment would increase. NOT The demand for loanable funds would shift rightward and investment would increase.
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
If the demand for loanable funds shifts to the right, then the equilibrium interest rate
and quantity of loanable funds rise.
Index funds
buy all the stocks in a given stock index.
When opening a print shop you need to buy printers, computers, furniture, and similar items. Economists call these expenditures
capital investment.
Which of the following is both a store of value and a common medium of exchange?
checking account balances
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 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, the interest rate would
rise and saving would rise.
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.
At the broadest level, the financial system moves the economy's scarce resources from
savers to borrowers.
When a large, well-known corporation wishes to borrow directly from the public, it can
sell bonds.
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
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.
The sale of stocks
to raise money is called equity finance, while the sale of bonds to raise funds is called debt finance.
A closed economy does not
trade with other economies
The supply of loanable funds slopes
upward because an increase in the interest rate induces people to save more.
The final element of a financial crisis is
vicious circle
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.
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
Suppose that Congress were to institute an investment tax credit. What would happen in the market for loanable funds?
The demand for loanable funds would shift right.
Crowding out occurs when investment declines because
a budget deficit makes interest rates rise.
Which of the following is a certificate of indebtedness?
bonds but not stocks
Which of the following are financial intermediaries?
both banks and mutual funds
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
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.
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.
A corporation's earnings are the amount of revenue it receives for the sale of its products
minus its cost of production as measured by its accountants. Earnings may be paid out as dividends or retained by the corporation.
When a country saves a larger portion of its GDP than it did before, it will have
more capital and higher productivity.
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.
In a closed economy, what does (Y - T - C) represent?
private saving
A larger budget deficit
raises the interest rate and reduces investment
A larger budget surplus
reduces the interest rate and raises investment.
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.
Who accepts all of the risk associated with a mutual fund's portfolio of stocks and/or bonds?
the fund's shareholders