Macroeconomics Chapter 9

bond buyers hope that interest rates do what?

Hope interest rates will fall because the value of the actual bond then increases

The lower the interest rate, the greater the quantity of funds demanded for investment follows what law?

The law of demand

Investment

The purchase of new capital goods

Stock

a certificate of ownership in a corporation

Collateral is a) something of value that by agreement becomes the property of the lender if the borrower defaults. b) a sophisticated IOU that documents who owes how much and when payment must be made. c) the decrease in private consumption and investment that occurs when government borrows more. d) the first time a corporation sells stock to the public in order to raise capital.

a) something of value that by agreement becomes the property of the lender if the borrower defaults.

Some businesses can't start small, and therefore a) they must borrow or attract venture capitalists to start at all. b) none of these businesses ever get off the ground. c) they are no different from any other business. d) these businesses are always owned by the government.

a) they must borrow or attract venture capitalists to start at all.

A shortage of savings in the loanable funds market will a) increase the demand for loanable funds. b) drive market interest rates up. c) increase the supply of loanable funds. d) drive market interest rates down.

b) drive market interest rates up.

An initial public offering is a) something of value that by agreement becomes the property of the lender if the borrower defaults. b) the first time a corporation sells stock to the public in order to raise capital. c) the decrease in private consumption and investment that occurs when government borrows more. d) a sophisticated IOU that documents who owes how much and when payment must be made.

b) the first time a corporation sells stock to the public in order to raise capital.

Investment is defined as a) income not taxed by the government. b) the purchase of new capital goods. c) income not spent on consumption goods. d) income not spent on investment goods.

b) the purchase of new capital goods.

Interest rates and bond prices move in what direction?

Opposite directions

What is securitization?

Securitization is the process of taking an illiquid asset, or group of assets, (debt) and through financial engineering, transforming it (or them) into a security by selling them to investors so the firm can have liquidity now and not wait for the payoff of the debt in the long term.

Arbitrage

The buying and selling of equally risky assets, ensures that equally risky assets earn equal returns

The lifecycle theory of saving

borrowing, saving, and dissaving help smooth out peoples consumption path overtime

A zero-coupon bond matures in one year. The price of the bond is $500, and it will pay $1,000 in one year's time. What is the rate of return on the bond? a) 50 percent b) 500 percent c) 100 percent d) 20 percent

c) 100 percent

Which of the following best describes the role of banks in the loanable funds market? a) Banks own the supply of loanable funds and distribute them to borrowers. b) Banks act as a nonprofit middleman whose primary goal is to facilitate trade in the loanable funds market. c) Banks act as profit-seeking institutions, taking the supply of loanable funds from households and distributing them to borrowers. d) Banks are the primary demanders of loanable funds and thus have an important role in setting interest rates.

c) Banks act as profit-seeking institutions, taking the supply of loanable funds from households and distributing them to borrowers.

China has a higher saving rate than the United States. One economic explanation for this phenomenon is a) Americans are more irrational than Chinese. b) Americans are more rational than Chinese. c) a higher rate of time preference for Americans than for Chinese. d) a lower rate of time preference for Americans than for Chinese.

c) a higher rate of time preference for Americans than for Chinese.

If the supply of loanable funds increases and the demand for loanable funds decreases at the same time, interest rates will a) increase, decrease, or remain the same. b) increase. c) decrease. d) remain the same.

c) decrease.

A person who buys a bond is a a) banker. b) stockholder. c) lender. d) borrower.

c) lender.

Time preference is a) a sophisticated IOU that documents who owes how much and when payment must be made. b) income that is not spent on consumption goods. c) the desire to have goods and services sooner rather than later (all other things being equal). d) the purchase of new capital goods.

c) the desire to have goods and services sooner rather than later (all other things being equal).

Which of the following is NOT a reason individuals typically choose to save? a) as a way to transfer income from good times to bad times b) to offset fluctuations in income c) to increase investment d) to smooth their consumption over the life cycle

c) to increase investment

Savings are necessary for what?

capital accumulation and the more it can invest, the higher the GDP

In the life cycle theory of saving, one's consumption path is ______ one's income path. a) as volatile as b) more volatile than c) identical to d) less volatile than

d) less volatile than

The process of bundling loans together and selling them on the market as financial assets is called a) arbitrage. b) collaterallization. c) crowding out. d) securitization.

d) securitization.

insolvent

firm has liabilities that exceed its assets

The ability to borrow leads to higher investment which leads to what?

increase in standard of living and economic growth rate

What happens when there is no savings?

investment dries up, economic growth declines, and standard of living declines

crowding out

is the decrease in private consumption and investment that occurs when government borrows more

Time preference

is the desire to have goods and services sooner rather than later

How to calculate zero-coupon bonds

maturity value-price/price x 100

market for loanable funds

occurs when suppliers of loanable funds trade with demanders of loanable funds. This trade determines the equilibrium interest rate

Leverage ratio

ratio of debt to equity.... debt/equity

What happens when there are controls on interest rates?

the loanable funds market malfunctions

owners equity

the value of an asset minus the debt

Why do people borrow?

to smooth consumption

default risk

when a borrower will not be able to pay when a bond payment is due

What determines the supply of savings (4)

1. smoothing consumption 2. impatience 3. market and phycological factors 4. interest rates

Which of the following best describes the role of banks in the loanable funds market? 1. Banks own the supply of loanable funds and distribute them to borrowers. 2. Banks act as profit-seeking institutions, taking the supply of loanable funds from households and distributing them to borrowers. 3. Banks are the primary demanders of loanable funds and thus have an important role in setting interest rates. 4. Banks act as a nonprofit middleman whose primary goal is to facilitate trade in the loanable funds market.

2. Banks act as profit-seeking institutions, taking the supply of loanable funds from households and distributing them to borrowers.

Banks do all of the following EXCEPT 1. facilitate the payment system. 2. issue government bonds. 3. evaluate business ideas. 4. spread risk.

2. issue government bonds

A higher leverage ratio means that 1. the firm's debts exceed the value of its assets. 2. the firm is at a greater risk for becoming insolvent. 3. the firm has a lower risk of defaulting on loans. 4. the firm is better able to securitize its assets.

2. the firm is at a greater risk for becoming insolvent.

If the supply of loanable funds increases and the demand for loanable funds decreases at the same time, interest rates will 1. remain the same. 2. increase, decrease, or remain the same. 3. increase. 4. decrease.

4. decrease.

A shortage of savings in the loanable funds market will 1. increase the demand for loanable funds. 2. increase the supply of loanable funds. 3. drive market interest rates down. 4. drive market interest rates up.

4. drive market interest rates up.

Name some intermediaries?

Banks, bond markets, and stock markets

Savins

Income not spent on consumption goods

collateral

Is something of value that by agreement becomes the property of the lender if the borrower defaults