Economics #11
Classify each of the given events according to the category that best describes how it affects the equilibrium interest rate in the market for loanable funds. Increases the interest rate & Decreases the interest rate a.) an increase in large investments b.) an increase in savings c.) an investment tax credit d.) a decrease in investor optimism
Increases the interest rate a.) an increase in large investments c.) an investment tax credit Decreases the interest rate b.) an increase in savings d.) a decrease in investor optimism
What would be the price of a perpetuity bond that has a $100 interest payment and a 4% yield? a.) $4,000 b.) $2,500 c.) $2,000 d.) $1,000
b.) $2,500
Which of these will cause the supply of loanable funds to shift? a.) product demand b.) investment tax incentives c.) business expectations d.) economic outlook
d.) economic outlook
When the interest rate decreases, the amount of loanable funds supplied to the market a.) decreases; this is a movement down and to the left along the supply curve b.) increases; this is a movement up and to the right along the supply curve c.) decreases; the entire supply curve shifts left d.) increases; the entire supply curve shifts right
a.) decreases; this is a movement down and to the left along the supply curve
What are financial intermediaries? a.) financial firms that acquire funds from savers and then lend these funds to borrowers b.) the authorities that implement a nation's monetary policy c.) programs that require current contributors to pay for benefits of the recipients through a payroll tax d.) institutions that conduct open market operations, set reserve requirements, and set the discount rate
a.) financial firms that acquire funds from savers and then lend these funds to borrowers
Financial firms that acquire funds from savers and then lend these funds to borrowers are known as a.) financial intermediaries b.) the Federal Reserve c.) Social Security d.) a central bank.
a.) financial intermediaries
Because banks are in the business of lending money, they will _____ so savers don't need to. a.) gather information from borrowers b.) concentrate all funds on a single borrower c.) issue stock as part of lending activities d.) encourage additional deposits
a.) gather information from borrowers
All else remaining equal, if the amount of small-denomination time deposits increases, this will increase the size of a.) only M2 b.) only M1 c.) neither M1 nor M2 d.) M1 and M2.
a.) only M2
The price of loanable funds is the: a.) real interest rate. b.) savings rate. c.) spending rate. d.) capital gains rate.
a.) real interest rate.
Which of these will NOT cause the supply of loanable funds to shift? a.) regulations b.) income c.) incentives to save d.) asset prices
a.) regulations
Compared to bonds, stocks tend to be riskier investments because a.) shares of a company become worthless when the company goes bankrupt b.) bonds yield a higher average return on investment over the long run c.) lower rewards are associated with the higher risks of stocks d.) stocks are more liquid than savings and checking accounts.
a.) shares of a company become worthless when the company goes bankrupt
All else remaining equal, if the amount of demand deposits increases, this will increase the size of a.) only M1 b.) only M2 c.) M1 and M2 d.) neither M1 nor M2.
c.) M1 and M2
Which of these is advisable with respect to holding credit card debt? a.) Apply for many credit cards in order to get the lowest rate b.) Find high-cost credit borrowing opportunities c.) Never miss a minimum payment d.) Keep credit card balances high to earn points.
c.) Never miss a minimum payment
_____ pay(s) the lowest interest rate. a.) Homeowners b.) Corporations c.) The U.S. government d.) Credit card borrowers
c.) The U.S. government
What happens to the amount of funds supplied to the loanable funds market when the interest rate increases? a.) The amount of loanable funds supplied fluctuates up and down as the interest rate increases b.) The amount of loanable funds supplied decreases c.) The amount of loanable funds supplied increases d.) The amount of loanable funds supplied stays the same.
c.) The amount of loanable funds supplied increases
If the projected rate of return for a project is less than the interest rate for a loan that is necessary to complete the project, how will the borrowing business act? a.) The business will proceed anyway, knowing that the return is only an estimate. b.) The business will take out the loan. c.) The business will not take out the loan. d.) The business will demand more funds to cover the shortfall.
c.) The business will not take out the loan.
A double coincidence of wants is a.) a situation in which money is used to facilitate economic transactions. b.) literally trading one good for another without using money. c.) a situation where two individuals each want some or service that the other can provide.
c.) a situation where two individuals each want some or service that the other can provide.
Barter is best defined as a.) an informal market such as a flea market. b.) a situation where two individuals each want some or service that the other can provide. c.) literally trading one good for another without using money.
c.) literally trading one good for another without using money.
The quantity demanded for funds in the loanable funds market is _____ related to the interest rate. a.) not b.) nearly c.) negatively d.) positively
c.) negatively
Money has three roles in an economy. It is a medium of exchange, a unit of account, and a(n): a.) economic value. b.) economic lubricant. c.) store of value. d.) way to grow.
c.) store of value.
Money is best defined as a.) whatever the government allows money to be. b.) paper bills and coins. c.) whatever serves society in three functions: medium of exchange, store of value, and unit of account.
c.) whatever serves society in three functions: medium of exchange, store of value, and unit of account.
An investor purchased a share of stock for $100 and had a return on investment of −5%. What was the selling price of the share of stock? a.) $170 b.) $97.50 c.) $105 d.) $95
d.) $95
Why has cryptocurrency not had the same level of use as traditional money? a.) It cannot be used as a medium of exchange b.) It can be stored electronically in digital wallets c.) It fails to serve as a unit of account d.) It does not efficiently satisfy the functions of money.
d.) It does not efficiently satisfy the functions of money.
Which of these must be true of a commodity for it to be used as money? a.) Its value must differ for all users b.) It must not be divisible c.) It must be perishable d.) It must be readily accepted by many people.
d.) It must be readily accepted by many people.
A Wall Street Journal story in October 2008 reported that inmates in federal prisons could use packaged mackerel fillets (called macks) to obtain goods and services, such as haircuts (the barber charged two macks). Some prisons provide lockers in which inmates can store their macks. Macks could be considered a form of money in prison because macks serve as a a.) medium of exchange b.) unit of account c.) store of value d.) Macks serve all the functions listed
d.) Macks serve all the functions listed
As interest rate decreases, what happens to the quantity of loanable funds demanded? a.) There will be no change in quantity demanded. b.) Some borrowers will demand more funds whereas others will demand less. c.) Quantity demanded will decrease. d.) Quantity demanded will increase.
d.) Quantity demanded will increase.
What happens to the amount of funds demanded in the loanable funds market when the interest rate increases? a.) The amount of loanable funds demanded fluctuates up and down as the interest rate increases b.) The amount of loanable funds demanded stays the same c.) The amount of loanable funds demanded increases d.) The amount of loanable funds demanded decreases.
d.) The amount of loanable funds demanded decreases.
The market for loanable funds most specifically connects: a.) buyers and sellers. b.) firms and investors. c.) governments and financial institutions. d.) borrowers and savers.
d.) borrowers and savers.
The Fed defines M1 as _____, including _____ and checkable deposits. a.) a broader definition of money; money market accounts b.) a broader definition of money; currency in circulation c.) highly liquid instruments; money market accounts d.) highly liquid instruments; currency in circulation
d.) highly liquid instruments; currency in circulation
Bonds are an IOU from a business or a government promising to pay back the value of the bond plus: a.) additional principal. b.) premium payments. c.) bond insurance payments. d.) interest payments.
d.) interest payments.
Identify which asset is the most liquid. a.) stock certificate b.) checking account c.) 6 month certificate of deposit d.) real estate
d.) real estate
Lauren has a savings account into which she puts money every month so she will eventually have enough money for a down payment on a house. This is an example of which function of money? a.) medium of exchange b.) unit of account c.) barter d.) store of value
d.) store of value
Which of these will NOT cause the supply of loanable funds to shift? a.) asset prices b.) economic outlook c.) incentives to save d.) technological advancements
d.) technological advancements
Liquidity is best defined as a.) the direct exchange of goods and services for other goods and services. b.) anything that is accepted in exchange for goods or for the payment of debt. c.) money with no intrinsic value. d.) the ease of converting an asset into cash.
d.) the ease of converting an asset into cash.
Identify each type of retirement account according to whether the individual contributor pays income taxes on the contribution (posttax) or not (pretax) at the time of the contribution. a.) Roth IRA b.) Traditional IRA c.) Social security d.) 401(k)
posttax a.) Roth IRA pretax b.) Traditional IRA c.) Social security d.) 401(k)
What happens to the amount of funds demanded in the loanable funds market when the interest rate decreases? a.) The amount of loanable funds demanded increases b.) The amount of loanable funds demanded decreases c.) The amount of loanable funds demanded stays the same d.) The amount of loanable funds demanded fluctuates up and down as the interest rate decreases.
a.) The amount of loanable funds demanded increases
Suppose Congress enacted investment tax credits to spur more business investment. What impact would this have on the loanable funds market? a.) There would be an increase in demand; the entire demand curve shifts right b.) There would be a decrease in demand; the entire demand curve shifts left c.) There would be an increase in supply; the entire supply curve shifts right d.) There would be a decrease in supply; the entire supply curve shifts left.
a.) There would be an increase in demand; the entire demand curve shifts right
Among the roles that money serves in an economy, money is considered a unit of account. a.) True b.) False
a.) True
Which of the following best defines a financial intermediary? a.) a financial institution that transforms investor funds into financial assets b.) a claim by a buyer to a future payment by a seller c.) a collection of stocks and bonds issued to investors d.) an asset sold by a company which entitles the buyer to partial ownership
a.) a financial institution that transforms investor funds into financial assets
Many credit card companies provide teaser rates offering low interest rates to a.) attract new customers and encourage spending b.) reduce financial costs for borrowers c.) encourage customers to save more and spend less d.) offer the lowest cost of borrowing until customers' income rises.
a.) attract new customers and encourage spending
The M1 definition of the money supply used by the government includes: a.) currency and demand deposits (checking/debit accounts). b.) savings accounts and money market deposits. c.) money market mutual funds and small time deposits. d.) total bank deposits and mutual fund balances.
a.) currency and demand deposits (checking/debit accounts).
Which of these would be considered a teaser rate for a credit card? a.) 0% b.) 12% c.) 18% d.) 28%
a.) 0%
How much interest will be earned on $900 at 10% interest over nine years? Assume compounding interest. a.) $1,222.15 b.) $810 c.) $2,122.15 d.) $990
a.) $1,222.15
What is the interest earned during year 10, if the year 1 starting value is $900 at 10% interest? Assume compounding interest. a.) $212.22 b.) $192.92 c.) $90 d.) $108.9
a.) $212.22
What would be the price of a perpetuity bond that has a $100 interest payment and a 10% yield? a.) $1,000 b.) $2,000 c.) $5,000 d.) $10,000
a.) $1,000
Investors face various choices regarding what they can invest in, and the choices carry varying amounts of risk. For example, stock prices are much more volatile than bond prices. What is the typical reason why investors would choose to put their money into an investment with higher risk rather than one with lower risk? a.).Riskier investments typically have higher returns b.) Riskier investments are insured by the FDIC c.) They want to signal their courage to other investors and scare them away d.) They are irrational or are thrill‑seekers e.) Assuming enough risk in a portfolio qualifies investors for a large government tax credit.
a.).Riskier investments typically have higher returns
From the standpoint of an investor, investing in a stock or a bond is similar. a.) True b.) False
b.) False
When the demand for loanable funds increases, interest rates decline. a.) True b.) False
b.) False
What effect will an increase in interest rates have on the quantity of loanable funds supplied? a.) Quantity supplied will decrease. b.) Quantity supplied will increase. c.) Some lenders will offer more whereas others offer less. d.) There will be no change in quantity supplied.
b.) Quantity supplied will increase.
Which of these is NOT a financial intermediary in the loanable funds market model? a.) insurance companies b.) corporations c.) mutual funds d.) banks
b.) corporations
Which of the terms acts as the "price" in the market for loanable funds? a.) demand b.) interest rate c.) capital d.) supply
b.) interest rate
Barbara just purchased a car for $14,000. This is an example of which function of money? a.) barter b.) medium of exchange c.) unit of account d.) store of value
b.) medium of exchange
All else remaining equal, if the amount of money market deposit accounts increases, this will increase the size of a.) only M1 b.) only M2 c.) neither M1 nor M2 d.) M1 and M2
b.) only M2
Money represents anything that can be exchanged for goods and services or for the: a.) return of defective goods. b.) payment of debt. c.) benefits of ownership. d.) personal well-being of holders.
b.) payment of debt.
When a company issues stock, it is agreeing to share the company's _____ and _____ with the investor. a.) good-will; products b.) profits; control c.) patents; technology d.) debt; long-term assets
b.) profits; control
In a barter economy, each good must be valued in terms of every other good with which it can be traded. Which function of money addresses this problem of a barter economy? a.) medium of exchange b.) unit of account c.) store of value d.) unit of credit
b.) unit of account
_________ minimize the risk of lending money by pooling money from many savers and by lending to many borrowers. a.) Stock markets b.) Government programs c.) Banks d.) Equity funds
c.) Banks
Which of these is NOT advisable with respect to holding credit card debt? a.) Avoid applying for too many credit cards b.) Find lower-cost borrowing opportunities c.) Keep credit card balances high to earn points d.) Keep credit card balances to a minimum.
c.) Keep credit card balances high to earn points
