quiz 4

The demand and supply of loanable funds increase simultaneously. This would cause the equilibrium a. quantity of loanable funds to decrease and the equilibrium interest rate to increase. b. quantity of loanable funds to increase and the equilibrium interest rate to decrease. c. quantity of loanable funds to increase, but the effect on the equilibrium interest rate would be uncertain. d. interest rate to increase, but the new equilibrium quantity would be uncertain. e. interest rate to decrease, but the new equilibrium quantity would be uncertain.

c

The interest rate of a bond is equal to the a. difference between the face value and the initial price all divided by the face value. b. difference between the face value and the initial price. c. difference between the face value and the initial price all divided by the initial price. d. sum of the face value and the initial price all divided by the face value. e. sum of the face value and the initial price all divided by the initial price.

c

Which of the following would explain why a firm would want to sell bonds instead of stocks? a. The owners do not want the burden of bills to be paid. b. The owners are trying to finance production. c. The owners want to retain control of the business. d. There are more fees associated with issuing stocks. e. Bonds are easier to issue than stocks are.

c

Why do corporations find high bond ratings desirable? a. Higher interest rates on the bonds mean higher corporate profits. b. Higher ratings improve a company's image with consumers. c. Higher ratings mean lowered corporate operating costs. d. Firms can sell more bonds when they are highly rated. e. Bonds with higher ratings are less likely to have to be repaid.

c

Why does the demand curve for loanable funds slope downward from left to right? a. Interest rates on loanable funds typically decline over time. b. The interest rate on a loan is directly proportional to demand. c. The higher a loan's interest rate, the fewer firms want the loan. d. Demand for loanable funds decreases more often than it increases. e. The greater the demand for loanable funds, the more the curve shifts.

c

Why would an increase in capital resources lead to an increase in worker productivity? a. More capital means that fewer workers are needed, increasing output. b. More capital leads to a decrease in wages, leading employees to work harder. c. More capital means that workers have better tools and equipment and can produce more. d. More capital means that the owners of a company reap all of the benefits of labor. e. More capital causes decreasing returns to scale.

c

Direct finance occurs when a. savers go directly to borrowers for funds. b. borrowers deposit funds into banks, which then loan these funds to savers. c. savers deposit funds into banks, which then loan these funds to borrowers. d. borrowers go directly to savers for funds. e. banks get involved with financing.

d

If interest rates rise but the quantity of loanable funds demanded and supplies remains constant, this implies that a. both the demand and the supply of loanable funds increased. b. both the demand and the supply of loanable funds decreased. c. the demand and the supply of loanable funds both remained the same. d. the demand for loanable funds decreased while the supply increased. e. the demand for loanable funds increased while the supply decreased..

d

Rating agencies assign their ratings of a firm's bonds based on the a. market value of the firm. b. value of the firm's capital assets. c. rate of interest paid by the bond. d. likelihood of default on the bond. e. total number of the firm's bonds in circulation.

d

Someone considering a bond purchase knows two things for certain ahead of time: the ________ and the ________. a. rate of interest; purchase price b. default risk; rate of interest c. value at maturity; default risk d. maturity date; value at maturity e. purchase price; maturity date

d

The interest rate is a. the price of labor. b. the price of land. c. both the price of capital and the price of labor. d. the price of loanable funds. e. the marginal rate of investment supply.

d

The nominal interest rate is a. the rate of interest charged to most large commercial borrowers. b. equal to the real interest rate minus the inflation rate. c. the rate charged on loans for automobiles and other personal loans but not the rate charged on home loans. d. the interest rate that is not corrected for inflation. e. the interest rate that is corrected for inflation.

d

The percent change in nominal gross domestic product (GDP) minus the percent change in prices and the rate of population growth equals a. real per capita GDP. b. the percent change in real GDP. c. the percent change in per capita GDP. d. the percent change in per capita real GDP. e. real GDP.

d

The two different paths through the loanable funds market are ________ finance and ________ finance. a. indirect; security b. internal; external c. saver; borrower d. indirect; direct e. bond; stock

d

Which of the following are the three major categories of resources? a. physical capital, technology, institutions b. land, labor, technology c. institutions, human capital, land d. natural resources, physical capital, human capital e. labor, physical capital, technology

d

Who determines when the loan associated with a bond becomes due? a. the bondholder, by declaring a desire to collect on the loan b. anyone who sells or resells the bond, by assigning a maturity date at the time of sale c. anyone who buys the bond, by assigning a maturity date at the time of purchase d. the bond issuer, by assigning a maturity date when the bond is issued e. the bond issuer, by declaring a desire to repay the loan

d

Who is most easily able to borrow money via direct finance? a. private individuals b. financial intermediaries c. government agencies d. large established firms e. nonprofit corporations

d

You are thinking about buying a new car and will borrow $20,000 for this purchase at a 5 percent fixed rate for exactly one year. The lender (correctly) assumes that inflation will be 2 percent this year. Based on the above information and assuming you adhere to the terms of the loan, you will pay back the lender exactly ________, which will represent ________ of purchasing power. a. $20,000; $19,000 b. $21,000; $21,000 c. $21,000; $21,400 d. $21,000; $20,600 e. $19,600; $20,000

d

You deposit $1,000 in the bank and leave it for five years at 3 percent annual interest, making no additional transactions on this account. At the end of the five years, you withdraw the principal and any accumulated interest; the amount you would withdraw would be a. $1,000. b. $1,030. c. $1,150. d. more than $1,150 but less than $1,500. e. more than $1,500.

d

An increase in the supply of loanable funds means a. borrowers want to borrow more at every interest rate. b. savers want to borrow more at every interest rate. c. borrowers want to borrow more at a specific interest rate. d. savers want to save more at a specific interest rate. e. savers want to save more at every interest rate.

e

Bonds contain three important pieces of information. These three pieces are the a. date of issue, the date of repayment, and the interest rate. b. name of the borrower, the name of the issuer, and the date of issue. c. maturity date, the face value of the bond, and the issuing bank. d. issuing bank, the interest rate, and the date of issue. e. name of the borrower, the repayment date, and the amount due at repayment.

e

If the U.S. government wants to increase total spending, what is the alternative to borrowing money by selling bonds? a. bringing in money by selling stocks b. selling off government assets, such as land c. shrinking the money supply d. printing money e. raising taxes

e

The securitization of home mortgages a. neither harms nor benefits most home buyers. b. harms most home buyers, by raising the sales prices of homes. c. benefits most home buyers, by lowering the sales prices of homes. d. harms most home buyers, by raising the cost of borrowing. e. benefits most home buyers, by lowering the cost of borrowing.

e

U.S. Treasury securities are generally considered a. riskier than any other bond. b. of average risk in relation to other bonds. c. a riskier investment than stocks. d. to have a high default risk. e. less risky than any other bond.

e

Which combination of events could have caused the equilibrium interest rate to rise and the equilibrium quantity of loanable funds (both borrowed and lent) to fall? a. A baby boom begins, and investor confidence falls. b. A baby boom begins, and investor confidence rises. c. People have lower time preferences, and governments run larger deficits. d. People have lower time preferences, and capital is more productive. e. A baby boom begins, and people have higher time preferences.

e

Economic growth equals the percent change in nominal gross domestic product (GDP) minus the a. percent change in prices and the rate of population growth. b. percent change in prices. c. rate of population growth. d. percent change in prices and the federal budget deficit. e. rate of population growth and the percent change in investment.

a

Stocks are a. ownership shares in a firm. b. securities that represent a debt to be paid. c. markets in which securities are bought and sold. d. contracts that represent a guaranteed payment. e. not available for individual investors.

a

The purpose for which firms seek funding in the loanable funds market is to a. pay for resources for production. b. pay the tax obligations on their profits. c. be able to begin issuing bonds. d. establish themselves as financial intermediaries. e. eliminate their reliance on indirect financing.

a

The risk that the borrower will not pay the face value of a bond on the maturity date is called the ________ risk. a. default b. maturity c. timing d. full-pay e. par value

a

Which description implies a drop in interest rates? a. either a leftward shift of the demand curve for loanable funds, or a rightward shift of the supply curve b. either a leftward shift of the supply curve for loanable funds, or a rightward shift of the demand curve c. a rightward shift of both the supply and the demand curves for loanable funds d. a leftward shift of both the supply and the demand curves for loanable funds e. simultaneous downward movement along fixed demand and supply curves for loanable funds

a

Which of the following do stocks and bonds have in common? a. Both are means for the issuing firm to raise money for operations. b. Both come with part ownership in the issuing firm. c. Both have a fixed rate of return. d. Both impose a debt obligation on the issuing firm. e. Both have a fixed maturity date.

a

Assuming inflation is positive, the real interest rate a. must always be larger than the nominal interest rate. b. must always be smaller than the nominal interest rate. c. could be larger or smaller than the nominal interest rate, depending on the rate of inflation. d. would normally be larger than the nominal interest rate. e. increases exactly as fast as inflation.

b

Competitive markets contribute significantly to economic growth because a. they encourage firms to exploit consumers via high prices. b. people who want to participate don't face barriers to entry. c. they employ high levels of government regulations. d. they prevent foreign firms (with better ideas) from entering markets. e. they create an incentive for firms to differentiate their products.

b

Gross domestic product requires a. inflation equal to the nominal rate of interest, which means lending equals borrowing. b. investment, which requires borrowing, which requires a functioning loanable funds market. c. borrowing, which requires the real rate of interest to be equal to inflation, which requires a functioning loanable funds market. d. borrowing, which requires sufficiently high interest rates to prevent free riders. e. investment, which requires borrowing, which requires sufficiently low interest rates to prevent free riders.

b

The notion of the loanable funds market is the method by which a. consumers get payday loans and auto-title loans. b. savers (typically households and individuals) supply funds to borrowers (typically firms). c. savers (typically firms) supply funds to borrowers (typically the government). d. borrowers are exploited by loan sharks. e. the government lends money to big corporations.

b

The two factors that must be subtracted from the percent change in nominal gross domestic product (GDP) to yield the percent change in per capita real GDP are the a. percent change in prices and the rate of investment. b. percent change in prices and the rate of population growth. c. rate of investment and the rate of savings. d. rate of population growth and the rate of savings. e. rate of investment and the rate of population growth.

b

Which of the following statements is true about bonds? a. Bonds are ownership shares in a firm. b. The dollar price and interest rate of a bond have an inverse relationship. c. A bond's dollar price is calculated as growth rate. d. Bonds can never default. e. The dollar price and interest rate of a bond have a positive relationship.

b

Economic growth is defined as the percent change of a. gross domestic product (GDP). b. real gross domestic product (GDP). c. real per capita gross domestic product (GDP). d. per capita gross domestic product (GDP). e. population.

c

Equilibrium in the loanable funds market means the a. interest rate at which savings equals consumption. b. interest rate at which investment equals consumption. c. interest rate at which investment equals savings. d. dollar price at which investment equals savings. e. dollar price at which savings equals consumption.

c

If your income increases at a rate of 2 percent per year, how long will it take to double your income? a. 10 years b. 25 years c. 35 years d. 50 years e. 75 years

c

A profit-maximizing firm will borrow money at a given interest rate, and use that money to fund an investment, if and only if the a. interest rate is less than the expected rate of return on the investment. b. interest rate is lower than rates expected in the near future. c. planned investment is expected to be profitable. d. interest rate is lower than it has been in the recent past. e. interest rate is less than the firm's historic profitability rate.

a

The notion of consumption smoothing means a. people tend to spend about the same amount each month. b. people tend to spend about the same amount each year, and if more is spent this year than in the past, they would tend to spend less next year. c. consumption varies less than income over a person's lifetime. In early life people tend to borrow, in late life people tend to dissave, but in their middle years they tend to save. d. consumption patterns tend to correlate perfectly with income. People spend the exact amount of their incomes over their lifetimes. e. consumption tends to vary more than income over a person's lifetime. Although people should smooth their consumption over the years, they don't. If consumption were smoothed, people would be better off.

c

The sellers (or lenders) in financial markets are a. financial intermediaries. b. firms and governments in search of funds to undertake their daily operations. c. savers looking for opportunities to earn a return on their savings. d. not concerned with the interest rate in the market. e. located on the demand side of the loanable funds market.

c

The supply of loanable funds comes from a. households and is downward sloping. b. firms and is upward sloping. c. households and is upward sloping. d. the government and is upward sloping. e. either foreign entities or firms and is upward sloping.

c

When considering nominal gross domestic product (GDP) growth, inflation has ________ effect on real GDP growth. a. a negligible b. a positive c. a negative d. a mixed e. zero

c