Chapter 29: Saving, Investment, and the Financial System
Which statement is TRUE?
An insolvent firm has liabilities that exceed its assets
Which statement is TRUE?
The rate of return on a zero-coupon bond currently selling for $850 that will pay $900 one year from now is 5.9 percent.
Which event would cause the equilibrium quantity of savings to increase?
a downward shift in the supply of loanable funds
Which event would cause the equilibrium quantity of savings to increase?
a rightward shift in the demand for loanable funds
Which event would cause the equilibrium interest rate in the market for loanable funds to decrease?
a rightward shift in the supply of loanable funds
If a company's profits are relatively high
shareholders benefit.
All else equal, if consumers decide to save more, the:
supply of funds in the loanable funds market will increase.
In order to counteract the decrease in investment demand during a recession, the government sometimes offers a:
temporary investment tax credit.
In today's economy, if the people with the best ideas are not also the people with the most savings:
they will have to borrow funds to bring their ideas to fruition.
Which statement is TRUE?
Crowding out is the decrease in private consumption and investment that occurs when government borrows more.
All else equal, if consumer preferences changed so that they generally decided to borrow more, what would occur?
Demand in the market for loanable funds would increase, and the interest rate would rise.
Which statement is TRUE?
If the current interest rate is below the equilibrium interest rate, a shortage will be created, pushing the interest rate up.
Which statement is TRUE?
The seller of a securitized asset gets up-front cash while the buyer gets the right to a stream of future payments.
Which statement is TRUE?
When interest rates rise, bond prices fall.
Which event would definitely cause the equilibrium quantity of savings to increase?
a simultaneous increase in the demand for loanable funds and an increase in the supply of loanable funds
Financial intermediation may fail if something causes:
an increase in the politicization of lending. a reduction in the supply of savings.
Which factor is NOT one of the four major factors that economists believe determine the supply of savings?
arbitrage
The amount that people save for retirement:
can be affected by simple psychological factors and effective marketing.
Suppose two assets are equally risky but have different prices. In this case, demand for the _____ asset would increase and its price would _____.
cheaper; rise
A ceiling on interest rates can:
create a shortage of savings.
All else equal, if consumers decide to borrow more, the:
demand for funds in the loanable funds market will increase.
An investment tax credit offered during a recession is most likely to be temporary so that:
firms have an incentive to invest quickly.
The market where savers of funds trade with borrowers of funds is called the:
market for loanable funds.
Time preference reflects the fact that today feels more _____ than tomorrow.
real
Imagine that last year, Jennifer earned $80,000 in salary and consumed $50,000 in goods and $23,000 in services. How could we best categorize the remaining $7,000?
saving
People whose incomes fluctuate (like salespeople, writers, and homebuilders) smooth consumption by:
saving.
The benefit of a high leverage ratio to a firm is that a
small increase in prices leads to large profits
The market for loanable funds is the market where:
suppliers of funds trade with demanders of funds.
One of the benefits to a bank of securitizing its loans is that:
the bank gets more liquid.
The _____ the interest rate, the greater the quantity of funds demanded for _____.
lower; investment
Which statement is TRUE?
The shadow banking system includes investment banks.
Suppose a homeowner owes $300,000 on a house that is worth $330,000. What is the homeowner's leverage ratio?
10
Which statement is TRUE?
Once assets are securitized, the revenue streams from them can be divided up and sold in a variety of ways.
Which statement is TRUE?
Owner's equity is the value of the asset minus the debt associated with it.
All else equal, if consumer preferences changed so that they generally decided to save less, what would occur?
Supply in the market for loanable funds would decrease, and the interest rate would rise.
All else equal, if consumer preferences changed so that they generally decided to save more, what would occur?
Supply in the market for loanable funds would increase, and the interest rate would fall.
Which statement is TRUE?
The 2007-2008 crisis was brought about by high leverage and falling asset prices that created a panic in the shadow banking system and hence sharply reduced the amount of lending in the economy.
All else equal, lower _____ rates usually result in _____ savings.
interest; less
