Macro Test 3 Ch.11

If the real interest rate is below the equilibrium real interest rate,

borrowers will be unable to borrow all of the funds they want to borrow and the real interest rate will rise.

Suppose you paid $1,000 for a perpetuity bond that pays $40 a year forever to the bondholder. Now suppose that due to aggressive policy by the Fed, general interest rates fall from 4% to 1%. How much would the price of the bond be worth if it continues to pay $40 per year?

$4,000

In an open economy, which of these statements about bond prices and interest rates is TRUE?

Bond prices and interest rates share an inverse relationship.

How do recessions affect the market for loanable funds?

Individuals save more money and borrow less during recessions.

Which statement explains what happens to savings if the real interest rate increases and what happens to the demand for borrowing?

It causes an increase in savings account balances and a decline in the demand for borrowing.

Is it better to put $1,000 each year into a retirement account or wait ten years and put in $10,000 all at once?

It is better to put $1,000 a year since it helps retirement accounts grow immediately.

Identify a statement that is TRUE about the barter system of exchange

It is difficult for barter system to exist in a modern economy because modern economy is too complex with too many goods.

Suppose a small country has the following money in circulation: Cash/currency: 1 million Small denomination time deposits: 4 million Demand deposits: 2 million Savings deposits: 5 million Other checkable deposits: 2 million Money Market deposit accounts: 5 million What are the values of M1 and M2?

M1 is 5 million; M2 is 19 million

M2 and M1

M2 contains savings account balances, but M1 does not.

In the United States, what gives our money value?

Our money is fiat money which has value because of what it can buy.

What are functions of money?

Store of value, Medium of exchange, Unit of account

Why have pensions become a less common form of retirement benefit offered by companies?

The cost of funding pensions has risen substantially for employers due to an increase in the number of retirees and life expectancies.

A proposal in the government budget set forth in 2013 placed a limit on the total amount of savings that can be accumulated in tax-preferred retirement accounts to about $2 million (U.S. News and World Report, April 10, 2013). The White House has argued that wealthy individuals have accumulated "substantially more than is needed to fund reasonable levels of retirement saving," and that the tax deductions from these excess savings cost the government billions each year. How do these sorts of proposals affect the market for loanable funds?

The effect of this proposal will most likely reduce the supply of loanable funds.

At the trough of the last recession in 2009, major stock market indexes had dropped in half from their peak in 2007. This led many stock analysts to argue that bonds had outperformed stocks and were a safer investment. However, a report published by Morningstar Investment Management titled "Are Bonds Going to Outperform Stocks over the Long Run? Not Likely" contradicted these analysts by comparing returns on stocks and bonds over periods of more than 40 years, and showing that stock returns easily beat those of bonds. Would the argument that bonds perform better than stocks lead to a self-fulfilling prophecy if investors sell stocks and buy bonds?

Yes, this action would cause more investors to sell their stocks and purchase bonds.

If disposable income increases, people will decide to ________ saving, the supply of loanable funds will ________ and the real interest rate will ________.

increase; increase; fall.

An increase in the real interest rate ________ the quantity of loanable funds supplied and ________ the quantity of loanable funds demanded.

increases; decreases

If the real interest rate is above the equilibrium real interest rate,

lenders will be unable to find borrowers willing to borrow all of the available funds and the real interest rate will fall.

Identify an asset that is the most liquid and an asset that is the least liquid from the following list of assets: a house (real estate); cash; a one-carat diamond; a savings account; 100 shares of Google stock; a Harley Davidson motorcycle; a checking account; your old leather jacket.

most liquid is cash; least liquid is a house.

In the loanable funds market, as the real interest rate rises the ________ and the ________.

quantity of loanable funds supplied increases; quantity of loanable funds demanded decreases

Most individuals with average wealth choose to save their money using a financial intermediary such as a bank or a mutual fund. However, individuals with greater wealth are more likely to invest in individual stocks or directly in new or existing businesses. Which statement explains the role of financial intermediaries? They:

reduce information costs of borrowers and savers.

Technological progress that increases expected profits will cause the demand for loanable funds curve to shift:

rightward and increases the real interest rate.

Suppose expected profits decrease. This change means

the demand curve for loanable funds shifts leftward and the real interest rate falls.

If the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded, then:

the real interest rate will fall

At many game centers (such as Chuck E. Cheese), it is common for kids to play carnival-type games to win prize tickets, which are then redeemed for a variety of prizes based on the number of tickets earned. All of these statements are incorrect EXCEPT:

the tickets represent all three of the functions of money—they can be redeemed for a prize, the prizes cost a certain amount of tickets, and the children can save and redeem the tickets at a later date.

Suppose the current real interest rate is 4 percent and the equilibrium real interest rate is 3 percent. Then

there is a surplus of loanable funds.

Money makes it possible to easily compare the prices of different products with one another. In this capacity, money is functioning as a

unit of account.