Chapter 8 (8)
Stock in Telecom is selling at $25 per share. It had earnings of $5 a share and a dividend yield of 5 percent. What is the dividend and the price-earnings ratio
$1.25, 5
GDP = $100,000; taxes = $22,000; government purchases = $25,000; national saving = $15,000. Refer to Scenario 26-1. For this economy, investment amounts to
$15,000.
For a closed economy, GDP is $12 trillion, consumption is $7 trillion, taxes net of transfers are $3 trillion and the government runs a deficit of $1 trillion. What are private saving and national saving?
$2 trillion and $1 trillion, respectively
The country of Aquilonia does not trade with any other country. Its GDP is $30 billion. Its government purchases $5 billion worth of goods and services each year, collects $7 billion in taxes, and provides $3 billion in transfer payments to households. Private saving in Aquilonia is $5 billion. What is consumption and investment
$21 billion and $4 billion
If the exchange rate is .60 British pounds = $1, a bottle of ale that costs 3 pounds costs
$5
If a bank that desires to hold no excess reserves and has just enough reserves to meet the required reserve ratio of 15 percent receives a deposit of $600, it has a
$510 increase in excess reserves and a $90 increase in required reserves.
GDP = $100,000; taxes = $22,000; government purchases = $25,000; national saving = $15,000. Refer to Scenario 26-1. For this economy, consumption amounts to
$60,000.
The country of Nemedia does not trade with any other country. Its GDP is $20 billion. Its government collects $4 billion in taxes and pays out $3 billion to households in the form of transfer payments. Consumption equals $15 billion and investment equals $2 billion. What is public saving in Nemedia, and what is the value of the goods and services purchased by the government of Nemedia
-$2 billion and $3 billion
Suppose that in a closed economy GDP is equal to 11,000, taxes are equal to 1,000, consumption equals 7,500, and government purchases equal 2,000. What is national saving?
-500 500 2,000 Correct None of the above is correct.
Stock represents
-a claim to a share of the profits of a firm. --ownership in a firm. ---equity finance.
A closed economy
-does not engage in international trade of goods and services. --does not engage in international borrowing or lending.
In a closed economy, national saving equals
-investment. --income minus the sum of consumption and government purchases. ---private saving plus public saving.
Which of the following statements is correct? In the special case of the 100-percent reserve banking the money multiplier is
1 and banks do not create money.
3 types of financial intermediaries
1. Banks 2. Mutual Funds: sell shares and use the proceeds to buy stocks and bonds 3. other institutions: Credit unions, pension funds, insurance
2 types of financial institutions
1. Financial markets 2. Financial intermediaries
3 characteristics of bonds
1. a bonds term- whether short term or long term (prefer short term) 2.credit risk: the probability that the issuer fails to make payments 3. tax treatment
Historically, the typical price-earnings ratio for stocks is about:
15
Suppose that in a closed economy GDP is equal to 10 000, Taxes are equal to 2000, Consumption equals 6500, and Government expenditures equal 2500. What are private saving and public saving
1500 and -500
Late in the 2000-2009 decade, real estate prices in the U.S. fell by a greater percentage than they had fallen since the:
1930s
During the past century the average growth rate of U.S. real GDP per person implies that it doubled, on average, about every
35 years.
If the inflation rate is 2 per cent and the real interest rate is 3 per cent, then the nominal interest rate is
5 per cent
11. Which of the following is not a nonsensical headline? A. Corporate bonds currently pay higher interest rates than government bonds. B. British perpetuities about to mature. C. Disney issues new bonds with term of 7 percent. D. Standard and Poor's judges new junk bond to have very low credit risk.
A
16. Suppose a government that taxed all interest income changed its tax law so that the first $5,000 of a taxpayer's interest income was tax free. This would shift the A. supply of loanable funds to the right, causing interest rates to fall. B. demand for loanable funds to the left, causing interest rates to fall. C. supply of loanable funds to the left, causing interest rates to rise. D. demand for loanable funds to the right, causing interest rates to rise.
A
If traveler's checks were $1000 higher and saving deposits were $500 higher, M1 would be
$1,000 higher and M2 would be $1,500 higher.
Suppose that in a closed economy GDP is 10 000, consumption is 6500, and taxes are 2000. What value of Government expenditures would make national savings equal to 1000 and at that value would the government have a deficit or surplus
2500 deficit
The Dow Jones Industrial Average is now based on the prices of the stocks of
30 major U.S. corporations.
Which of the following is correct?
A bank's deposits at the Federal Reserve counts as part of the bank's reserves. The Federal Reserve pays interest on these deposits.
8. Most entrepreneurs finance their purchases of real capital using their past saving. a. TRUE b. FALSE
B
82. Members of the Board of Governors of the Federal Reserve System are appointed for life. a. TRUE b. FALSE
B
83. When a bank loans out $1,000, the money supply A. decreases. B. increases. C. does not change. D. may do any of the above.
B
Papa Mario's Pizza Company sells shares
They are using equity financing and the return shareholders earn depends on how profitable the company is
The stock market
a stock is a claim to partial ownership in a firm
The fall in investment due to government borrowing is called
crowding out
saving must equal
investment
index funds
mutual funds that buy all stocks of a given stock index
A perpetuity is distinguished from other bonds in that it:
never matures
The available evidence indicates that
outperforming the market on a consistent basis is extremely difficult to do.
Compared to bonds, shares offer the holder
partial ownership
savers and borrowers
people who lend money, people who need to borrow
If there were no factors keeping wages from reaching equilibrium then there would be no
structural unemployment.
Crowding out occurs when investment declines because a. a budget deficit makes interest rates rise. b. a budget deficit makes interest rates fall. c. a budget surplus makes interest rates rise. d. a budget surplus makes interest rates fall.
A
If the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded, a. there is a surplus and the interest rate is above the equilibrium level. b. there is a surplus and the interest rate is below the equilibrium level. c. there is a shortage and the interest rate is above the equilibrium level. d. there is a shortage and the interest rate is below the equilibrium level.
A
Scenario 26-3. Assume the following information for an imaginary, open economy. Consumption = $1,000; investment = $200; net exports = -$50; taxes = $230; private saving = $225; and national saving = $150. Refer to Scenario 26-3. For this economy, government purchases amount to A. $305. B. $280. C. $330. D. $310.
A
The Dow Jones Industrial Average is now based on the prices of the stocks of a. 30 major U.S. corporations. b. 100 major U.S. corporations. c. 500 representative U.S. corporations. d. 1,000 representative U.S. corporations.
A
Which of the following statements is most likely to be correct
A general, persistent decline in stock prices is a signal that the economy is about to enter a recession because low stock prices may mean that people are expecting low corporate profits
The first element of a financial crisis is
A large decline in some asset prices.
1. If a reform of the tax laws encourages greater saving, the result would be A. higher interest rates and less investment. B. lower interest rates and greater investment. C. higher interest rates and greater investment. D. lower interest rate and less investment.
B
12. By definition, equity finance A. is accomplished when units of government sell bonds. B. is accomplished when firms sell shares of stock. C. involves "fair" interest rates or dividend yields. D. is accomplished when firms sell bonds.
B
15. Which of the following bonds has the highest interest rate? A. a long term and a low credit risk. B. a long term and a high credit risk. C. a high credit risk and a short term. D. a low credit risk and a short term.
B
2. Banks and mutual funds are examples of financial markets. a. TRUE b. FALSE
B
22. Joan uses some of her income to buy mutual fund shares. A macroeconomist refers to Joan's purchase as investment. a. TRUE b. FALSE
B
25. Which of the following is correct? A. Corporations buy bonds to raise funds. B. Some bonds have terms as short as a few months. C. Because they are so risky, junk bonds pay a low rate of interest. D. All of the above are correct
B
25. Which of the following is correct? A. Corporations buy bonds to raise funds. B. Some bonds have terms as short as a few months. C. Because they are so risky, junk bonds pay a low rate of interest. D. All of the above are correct.
B
38. A policy that induces people to save more shifts A. the supply of loanable funds leftward and decreases investment. B. the supply of loanable funds rightward and increases investment. C. the supply of loanable funds leftward and increases investment. D. the supply of loanable funds rightward and decreases investment.
B
39. In a closed economy, public saving is the amount of A. income that businesses have left after paying for the factors of production. B. tax revenue that the government has left after paying for its spending. C. income that households have left after paying for taxes and consumption. D. spending that the government undertakes in excess of the taxes it collects.
B
45. Crowding out occurs when A. investment increases because a budget surplus makes interest rates rise. B. investment declines because a budget deficit makes interest rates rise. C. investment increases because a budget surplus makes interest rates fall. D. investment declines because a budget deficit makes interest rates fall.
B
47. A municipal bond is A. issued by households. B. issued by state and local governments. C. issued by corporations. D. issued by the federal government.
B
48. Which of the following are financial intermediaries? A. banks but not mutual funds B. both banks and mutual funds C. mutual funds but not banks D. neither banks or mutual funds
B
5. National saving is equal to Y - T - C. a. TRUE b. FALSE
B
50. Bolivia had a smaller budget deficit in 2003 than in 2002. Other things the same, we would expect this reduction in the budget deficit to have A. increased both interest rates and investment. B. decreased interest rates and increased investment. C. decreased both interest rates and investment. D. increased interest rates and decreased investment
B
60. Banks can hold deposits at the Federal Reserve. Balances in these accounts can be used by banks to meet their reserve requirements, but the Fed pays no interest on these deposits. a. TRUE b. FALSE
B
68. The primary difference between commodity money and fiat money is that A. fiat money is a medium of exchange but commodity money is not. B. commodity money has intrinsic value but fiat money does not. C. commodity money is a medium of exchange but fiat money is not. D. fiat money has intrinsic value but commodity money does not
B
69. In the months of November and December, people in the United States hold a larger part of their money in the form of currency because they intend to shop and travel for the holidays. As a result, other things the same, the money supply increases. a. TRUE b. FALSE
B
89. The money supply decreases if the Fed A. sells Treasury bonds. The larger the reserve requirement, the larger the decrease will be. B. sells Treasury bonds. The smaller the reserve requirement, the larger the decrease will be. C. buys Treasury bonds. The smaller the reserve requirement, the larger the decrease will be. D. buys Treasury bonds. The larger the reserve requirement, the larger the decrease will be.
B
90. If the Fed increases the reserve ratio from 5 percent to 12.5 percent, then the money multiplier A. decreases from 12.5 to 5. B. decreases from 20 to 8. C. increases from 5 to 12.5. D. increases from 8 to 20
B
92. The most common method employed by the Fed to increase the money supply is the A. sale of U.S. government bonds. B. purchase of U.S. government bonds. C. sale of gold. D. increase of the federal debt ceiling.
B
95. Other things the same if reserve requirements are decreased, the reserve ratio A. decreases, the money multiplier increases, and the money supply decreases. B. decreases, the money multiplier increases, and the money supply increases. C. increases, the money multiplier increases, and the money supply decreases. D. increases, the money multiplier increases, and the money supply increases
B
98. A bank loans Greg's Ice Cream $250,000 to remodel a building near campus to use as a new store. On their respective balance sheets, this loan is A. a liability for the bank and an asset for Greg's Ice Cream. The loan increases the money supply. B. an asset for the bank and a liability for Greg's Ice Cream. The loan increases the money supply. C. a liability for the bank and an asset for Greg's Ice Cream. The loan does not increase the money supply. D. an asset for the bank and a liability for Greg's Ice Cream. The loan does not increase the money supply.
B
If Huedepool Beer runs into financial difficulty, the stockholders as a. part owners of Huedepool are paid before bondholders get paid anything at all. b. part owners of Huedepool are paid after bondholders get paid. c. creditors of Huedepool are paid before bondholders get paid anything at all. d. creditors of Huedepool are paid after bondholders get paid.
B
Municipal bonds pay a relatively a. low rate of interest because of their high default risk and because the interest they pay is subject to federal income tax. b. low rate of interest because of their low default risk and because the interest they pay is not subject to federal income tax. c. high rate of interest because of their high default risk and because federal taxes must be paid on the interest they pay. d. high rate of interest because of their low default risk and because the interest they pay is not subject to federal income tax.
B
Which of the following is both a financial institution and a financial intermediary?
Banks
Two bonds have the same term to maturity. The first was issued by a state government and the probability of default is believed to be low. The other was issued by a corporation and the probability of default is believed to be high. Which of the following is correct?
Because of the differences in tax treatment and credit risk, the corporate bond should have the higher interest rate.
We would expect the interest rate on Bond A to be higher than the interest rate on Bond B if the two bonds have identical characteristics except that
Bond A has a term of 20 years and Bond B has a term of 1 years.
100. The Soviet government in the 1980's never abandoned the ruble as the official currency. However, the people of Moscow preferred to accept A. American dollars in exchange for goods and services, because rubles were extremely hard to come by. B. cigarettes in exchange for goods and services, because they were convinced that cigarettes were going to soon become hard to come by. C. goods such as cigarettes or American dollars in exchange for goods and services, reminding us of the fact that government decree by itself is not sufficient for the success of a commodity money. D. All of the above are correct.
C
17. Managed funds A. typically have a higher rate of return and lower costs than index funds. B. typically have a lower rate of return and lower costs than index funds. C. typically have a lower rate of return and higher costs than index funds. D. typically have a higher rate of return and higher costs than index funds.
C
19. We interpret the meaning of "loanable funds" as the A. resources borrowed by private investors and by government. B. resources lent by private investors and by government. C. flow of resources available to fund private investment. D. flow of resources available from private saving.
C
23. Which of the following is a certificate of indebtedness? A. stocks but not bonds B. both stocks and bonds C. bonds but not stocks D. neither stocks nor bonds
C
24. Scenario 26-1. Assume the following information for an imaginary, closed economy. GDP = $100,000; taxes = $22,000; government purchases = $25,000; national saving = $15,000. Refer to Scenario 26-1. For this economy, investment amounts to A. $12,000. B. $18,000. C. $15,000. D. $38,000
C
26. Which of the following is not a characteristic of a bond? A. its term B. its credit risk C. its dividend yield D. its tax treatment
C
27. The slope of the supply of loanable funds is based on the logic that an increase in interest rates A. makes saving less attractive. B. makes investment more attractive. C. makes saving more attractive. D. makes investment less attractive
C
29. If there is a surplus of loanable funds, then A. the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is above equilibrium. B. the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is below equilibrium. C. the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is above equilibrium. D. the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is below equilibrium.
C
44. If there is shortage of loanable funds, then A. the supply for loanable funds shifts left and the demand shifts right. B. the supply for loanable funds shifts right and the demand shifts left. C. neither curve shifts, but the quantity of loanable funds supplied increases and the quantity demanded decreases as the interest rate rises to equilibrium. D. neither curve shifts, but the quantity of loanable funds supplied decreases and the quantity demanded increases as the interest rate falls to equilibrium.
C
46. A closed economy A. does not engage in international trade of goods and services. B. does not engage in international borrowing or lending. C. both A and B D. engages in international borrowing and lending.
C
52. The federal funds rate is the A. percentage of deposits that banks must hold as reserves. B. percentage of face value that the Federal Reserve is willing to pay for Treasury Securities. C. interest rate at which banks lend reserves to each other overnight. D. interest rate at which the Federal Reserve makes short-term loans to banks.
C
57. If the discount rate is raised then banks borrow A. less from the Fed so reserves increase. B. more from the Fed so reserves decrease. C. less from the Fed so reserves decrease. D. more from the Fed so reserves increase.
C
33. When the government has a budget surplus A. it spends more than it receives in tax revenue. B. private saving is greater than zero. C. it buys more of its bonds from the public than it sells to the public. D. exports are greater than imports
C
41. Suppose the issuer of a bond fails to pay some of the interest or principal that was promised to the bondholders. This failure is referred to as a A. term failure. B. risk. C. default. D. breach.
C
58. Which of the following can banks use to borrow from the Federal Reserve? A. Banks cannot borrow from the Federal Reserve, only the government can. B. the discount window but not the term auction facility C. the discount window or the term auction facility D. the term auction facility but not the discount window
C
28. Which of the following statements is correct? A. Compared to the Standard & Poor's 500 Index, the Dow Jones Industrial Average incorporates the stock prices of a much smaller number of corporations. B. The demand for a corporation's stock is largely based on people's perception of the corporation's profitability in the future. C. NASDAQ is an important stock exchange in the United States. D. All of the above are correct
D
3. Given that Monika's income exceeds her expenditures, Monika is best described as a A. saver or as a demander of funds. B. borrower or as a supplier of funds. C. borrower or as a demander of funds. D. saver or as a supplier of funds.
D
6. Which of the following is a certificate of indebtedness? A. stocks but not bonds B. stocks and bonds C. neither stocks nor bonds D. bonds but not stocks
D
In a closed economy, what does (Y - T - C) represent? a. national saving b. government tax revenue c. public saving d. private saving
D
Stock represents A) A claim to a share of the profits of a firm B) Ownership in a firm C) Equity finance D) All of the above
D) All of the above
20. Most entrepreneurs do not have enough money of their own to start their businesses. When they acquire the necessary funds from someone else, A. their saving is being financed by someone else's investment. B. their consumption expenditures are being financed by someone else's saving. C. their consumption expenditures are being financed by someone else's investment. D. their investments are being financed by someone else's saving.
D
Public Saving Equation (gov. saving)
T-G=
21. In examining the national income accounts of the closed economy of Nepotocracy you see that this year it had taxes of $100 billion, transfers of $20 billion, and government purchases of goods and services of $70 billion. You also notice that last year it had private saving of $70 billion and investment of $50 billion. In which year did Nepotocracy have a budget deficit of $20 billion? A. neither this year nor last year B. this year but not last year C. this year and last year D. last year but not this year
D
31. Which of the following equations represents GDP for an open economy? A. I = Y - C + G + NX B. Y = C + I + G C. NX = I - G D. Y = C + I + G + NX
D
36. Other things the same, an increase in the budget deficit A. shifts the supply of loanable funds right, so the interest rate falls. B. shifts the demand for loanable funds left, so the interest rate falls. C. shifts the demand for loanable funds right, so the interest rate rises. D. shifts the supply of loanable funds left, so the interest rate rises.
D
37. If national saving in a closed economy is greater than zero, which of the following must be true? A. B. Either public saving or private saving must be greater than zero. C. Investment is positive. D. All of the above are correct.
D
42. Suppose the Congress and president decreased the maximum annual contributions limits to retirement accounts and at the same time reduced the budget deficit. What would happen to the interest rate? A. It would increase. B. It would decrease. C. It would stay the same. D. It might do any of the above.
D
78. To decrease the money supply, the Fed could A. increase the reserve requirement. B. increase the discount rate. C. sell government bonds. D. All of the above are correct
D
80. The agency responsible for regulating the money supply in the United States is A. the U.S. Bank. B. the U.S. Treasury. C. the Comptroller of the Currency. D. the Federal Reserve.
D
81. The Fed's primary tool to change the money supply is A. changing the reserve requirement. B. redeeming Federal Reserve notes. C. changing the interest rate on reserves. D. conducting open market operations.
D
88. Many societies used gold as money, because A. it is relatively rare. B. it is durable. C. it has a relatively low melting point. D. All of the above are correct.
D
9. What would happen in the market for loanable funds if the government were to increase the tax on interest income? A. The demand for loanable funds would shift right. B. The supply of loanable funds would shift right. C. The demand for loanable funds would shift left. D. The supply of loanable funds would shift left
D
According to the definitions of national saving and private saving, if Y, C, and G remained the same, an increase in taxes would a. raise both national saving and private saving. b. raise national saving and reduce private saving. c. leave national saving and private saving unchanged. d. leave national saving unchanged and reduce private saving.
D
An article in the textbook suggests that one method to correct the higher education inefficiency is to A. provide free higher education to all Americans. B. reduce interest rates on student loans. C. increase the number of colleges and universities in the United States. D. have college students sell equity in themselves.
D
If national saving in a closed economy is greater than zero, which of the following must be true? a. Either public saving or private saving must be greater than zero. b. Investment is positive. c. Y - C - G > 0. d. All of the above are correct.
D
If the government institutes policies that diminish incentives to save, then in the loanable funds market a. the demand for loanable funds shifts rightward. b. the demand for loanable funds shifts leftward. c. the supply of loanable funds shifts rightward. d. the supply of loanable funds shifts leftward.
D
Institutions that help to match one person's saving with another person's investment are collectively called the a. Federal Reserve system. b. banking system. c. monetary system. d. financial system.
D
Suppose private saving in a closed economy is $12b and investment is $10b. a. National saving must equal $12b. b. Public saving must equal $2b. c. The government budget surplus must equal $2b. d. The government budget deficit must equal $2b.
D
The sale of stocks a. and bonds to raise money is called debt finance. b. and bonds to raise money is called equity finance. c. to raise money is called debt finance, while the sale of bonds to raise funds is called equity finance. d. to raise money is called equity finance, while the sale of bonds to raise funds is called debt finance.
D
Which of the following statements about the term of a bond is correct? a. Term refers to the various characteristics of a bond, including its interest rate and tax treatment. b. The term of a bond is determined entirely by its credit risk. c. The term of a bond is determined entirely by how much sales charge the buyer of the bond pays when he or she purchases the bond. d. Interest rates on long-term bonds are usually higher than interest rates on short-term bonds.
D
If the government currently has a budget deficit, then A) It does not necessarily have a debt B) Its debt is increasing C) Government expenditures are greater than taxes D) All of the above are correct
D) All of the above are correct.
Measured in 2010 dollars, real GDP per person in the United States in 2010 was about 14 times that in
India
Which of the following best illustrates diversification?
Instead of holding only the stocks of companies engaged in the banking business, a person decides to hold stock in a number of different companies producing different goods and services.
Which of the following statements about the term of a bond is correct?
Interest rates on long-term bonds are usually higher than interest rates on short-term bonds.
What would happen in the market for loanable funds if the government were to increase the tax on interest income
Interest rates would rise
Crowding out occurs when
Investment declines because a budget deficit makes interest rates rise
Which of the following would not be a result of replacing the income tax with a consumption tax
Investment would decrease
The economys two most important financial markets are
The bond market and the stock market
Investment rises and interest rates fall. Which of the following could explain these changes
The government reduced the tax rate on savings
Interest rates fall and investment falls. Which of the following could explain these changes
The government repeals an investment tax credit
If the government institutes policies that diminish incentives to save, then in the loanable funds market
The supply of loanable funds shifts leftward.
Which of the following people purchased the correct asset to meet his or her objective?
Tim wanted a high return, even if it meant taking some risk, so he purchased stock issued by Specific Electric instead of bonds issued by Specific Electric.
Anything other than a change in the interest rate that decreases national saving shifts the supply of loanable funds to the left. True False
True
Corporations receive no proceeds from the resale of their stocks. True False
True
Alberta buys a paint sprayer and a lift for her car customizing shop. A macroeconomist would refer to these purchases as investment. A) True B) False
True.
Credit risk refers to the probability that the issuer of a bond will fail to pay some or all of the interest or principle. A) True B) False
True.
Which of the following equations represents national saving in a closed economy
Y - C - G
Which of the following equations represents GDP for a closed economy?
Y = C + I + G
Which of the following equations will always represent GDP in an open economy
Y = C + I + G + NX
The identity that shows that total income and total expenditure are equal is
Y = C + I + G + NX.
National Savings Equation (investment is national saving)
Y-C-G=
Private Saving Equation
Y-C-T=
GDP equation
Y=C+I+G+Nx Y = GDP, output, total income, total expenditure C = consumption I = investment G = government purchases of goods and services NX = export - imports T=Tax
The bond market
a bond is a certificate of indebtness
Industrial machinery is an example of
a factor of production that in the past was an output from the production process.
Which of the following bonds has the highest interest rate?
a long term and a high credit risk.
A checking deposit functions as
a medium of exchange and as a store of value.
Which of the following is not always correct for a closed economy?
a. National saving equals private saving plus public saving. b. Net exports equal zero. c. Real GDP measures both income and expenditures. d. Private saving equals investment.
Unemployment insurance
a. may improve the ability of the economy to match workers with appropriate jobs. b. reduces the job search efforts of the unemployed. c. increases the amount of frictional unemployment in the economy.
Net exports must equal zero for any economy
a. that is closed. b. for which Y = C + I + G. c. for which S = Y - C - G.
The Bureau of Labor Statistics produces data on
a. unemployment. b. types of employment. c. length of the average workweek.
Which of the following statements is true?
a.The quantity of natural resources per worker can influence productivity. b. Technological knowledge and human capital are closely related. c. Over long periods of time, the prices of most natural resources are stable or falling, relative to other prices. d. All of the above are correct.
The primary advantage of managed funds is that they
allow people with small amounts of money to diversify
public saving
amount government has left after paying for its spending
private saving
amount households have left after paying taxes and consumption
An economy's natural rate of unemployment is the
amount of unemployment that the economy normally experiences.
Investment incentive
an investment tax credit which gives a tax advantage to any firm building a new factory or buying a new piece of equipment
bond
an iou that specifies the indebtness of a borrower to a supplier. has a date of maturity when it must be paid with interest
If the demand for loanable funds shifts to the left, then the equilibrium interest rate
and quantity of loanable funds fall.
If Congress increased the tax rate on interest income, investment
and saving would decrease.
If the government reduced the tax rate on interest income, investment
and saving would increase
32.important. EPS aplia
aplia
35. aplia
aplia
4. aplia
aplia
72 .aplia
aplia
74 aplia
aplia
85. aplia
aplia
Bond prices
are always negatively affected by interest rates
Owners of municipal bonds
are not requires to pay federal income tax on the interest income
stock index
average of a group of stock prices. show buyers what's good and what's not
Two of the economy's most important financial intermediaries are
banks and mutual funds
Two of the economy's most important financial intermediaries are
banks and mutual funds.
saving is money towards _____, investment is money towards _______
banks, capital
perpetuity
bond that never matures
municipal bonds
bonds issued by state and local government- exempted from tax
A creditor of a corporation holds
bonds sold by the corporation. If the corporation experiences financial difficulties bond holders are paid before stock holders
As chief financial officer you sell newly issued bonds on behalf of your firm. Your firm is
borrowing directly
If Microsoft Corporation sells a bond they are
borrowing directly from the public
A U.S. firm exchanges dollars for yen and then uses them to buy Japanese goods. Overall as a result of these transactions
both U.S. net capital outflow and U.S. net exports fall.
Which of the following are financial intermediaries?
both banks and mutual funds
What makes the interest rate on a bond higher than normal?
both high credit risk and long time
GDP = $100,000; taxes = $22,000; government purchases = $25,000; national saving = $15,000. Refer to Scenario 26-1. This economy's government is running a
budget deficit of $3,000.
A bond is a
certificate of indebtedness
A bond is a
certificate of indebtedness.
stocks
claim to partial ownership and profit of a firm. stocks are sold separately outside of business in stock exchanges
Assume the bonds below have the same term and principal and that the state or local government that issues the municipal bond has a good credit rating. Which list has bonds correctly ordered from the one that pays the highest interest rate to the one that pays the lowest interest rate?
corporate bond, U.S. government bond, municipal bond
The fact that borrowers sometimes default on their loans by declaring bankruptcy is directly related to the characteristic of a bond called
credit risk
The fact that borrowers sometimes default on their loans by declaring bankruptcy is directly related to the characteristic of a bond called
credit risk.
mediums of exchange
debit cards, checks, etc that are used to engage in transactions
The sell of bonds to raise money is called
debt finance, while the sale of stocks to raise funds is called equity finance
Suppose that the government were to replace the income tax with a consumption tax. This would make the interest rate
decrease and investment increase
crowding out
decrease in investment because of government borrowing
crowd out effect
decrease in investment that results from government borrowing
supply and demand curve of market for loanable funds
demand is downward because people don't borrow when interest rates are high. supply is upward because people loan money when interest is high
The curve becomes flatter as the amount of capital per worker increases because of
diminishing returns to capital.
If the government's expenditures exceeded its receipts, it would likely
directly sell bonds to the public
Profits paid out to stockholders are
dividends
A closed economy
does not trade with other economies.
If a firm sells a total of 100 shares of stock, then
each share represents ownership of 1 percent of the firm.
A country's trade balance will fall if..
either saving falls or investment rises.
Financial intermediaries are:
financial institutions through which savers can indirectly provide funds to borrowers
Financial intermediaries are
financial institutions through which savers can indirectly provide funds to borrowers.
2 categories of financial institutions
financial markets and financial intermediaries
Institutions in the economy that help to match one person's saving with another person's investment are collectively called the
financial system
Institutions that help to match one person's saving with another person's investment are collectively called the
financial system
Net capital outflow equals the purchase of
foreign assets by domestic residents - the purchase of domestic assets by foreign residents
Which of the following is generally an opportunity cost of investment in human capital?
forgone present wages
Which of the following is included in the demand for loanable funds?
government borrowing but not investment
policy 3: government budget deficits
government debt results when gov. borrows money from bonds to relieve defecits. causes a decrease in supply, shift to the left: lower interest rates, lower investment
junk bond
high credit risks meaning they may never be paid. have very high interest rates to make up for that
The money supply decreases if
households decide to hold relatively more currency and relatively fewer deposits and banks decide to hold relatively more excess reserves and make fewer loans.
accounting
how various numbers are defined and added
market for loanable funds
hypothetical situation where all savers and borrowers deal with their money in the same market. saving is the supply of the market, investment is the demand of the market
policy 3: government budget surplus
increase in supply, shift to the right: reduces interest rates, encourages investment
In the fourteenth century it is estimated that deaths resulting from the bubonic plague reduced the population by about a third. Assuming diminishing returns, the decrease in population should have
increased productivity and real GDP per person.
If there are diminishing returns to capital, then
increases in the capital stock increase output by ever smaller amounts.
Saving Incentives
increasing the supply of loanable funds
Frictional unemployment is
inevitable, because at any given time, jobs are being created in some firms and destroyed in other firms.
financial system
institutions that match one person's savings with another person's invesments
mutual funds
institutions that sell shares to the public and buy portfolios of stocks and bonds. decrease risk of shareholders because their money is invested in multiple companies
Financial Markets
institutions through which savers can directly provide funds to borrowers
Financial Intermediaries
institutions through which savers can indirectly provide funds to borrowers
financial markets
institutions where one who wants to save can directly supply money to those who want to borrow. ex: bond markets and stock markets
financial intermediaries
institutions where savers directly provide funds to borrowers
policy 2: investment incentives
investment tax credit that gives firms tax advantage when they're building new factories or buying equipment. increases demand, shifts to the right: greater investment, interest rates, and saving
moral hazard
is a situation in which one party gets involved in a risky event knowing that it is protected against the risk and the other party will incur the cost.
fundamental analysis
is the foundation of solid investing. It helps you determine the underlying health of a company by examining the business' core numbers: its income statements, its earnings releases, its balance sheet, and other indicators of economic health.
risk-return tradeoff
is the principle that potential return rises with an increase in risk
3 steps of analyzing policies
is the shift in supply or demand? which way is the shift? how is equilibrium affected
adverse selection
is the tendency of those in dangerous jobs or high risk lifestyles to get life insurance. 2. A situation where sellers have information that buyers don't (or vice versa) about some aspect of product quality.
6 elements of financial crisis
large decline in prices, insolvencies, decline in confidence, credit crunch, economic downtown, vicious circles
Compared to long-term bonds, short-term bonds generally have
less risk and so pay lower interest
If a reform of the tax laws encourages greater saving, the result would be
lower interest rates and greater investment.
The primary economic function of the financial system is to
match one person's saving with another person's investment.
A central bank's setting (or altering) of the money supply is known as
monetary policy
When a country saves a larger portion of its GDP, it will have:
more investment, and so have more capital and higher productivity
The slope of the demand for loanable funds curve represents the
negative relation between the real interest rate and investment.
If there is shortage of loanable funds, then
neither curve shifts but the quantity of loanable funds supplied increases and the quantity demanded decreases as the interest rate rises to equilibrium
If there is surplus of loanable funds, then:
neither curve shifts, but the quantity of loanable funds supplied decreases and the quantity demanded increases as the interest rate falls to equilibrium
Closed Economy
one that does not interact with other economies
Rafael is the newly-appointed plant manager for a company that manufactures head phones. Rafael's senior supervisors told him that the output the firm produces, given the number of workers employed, indicates that some workers may be shirking. According to efficiency wage theory, what should he do?
pay all workers more than the equilibrium wage rate
The slope of the supply of loanable funds curve represents the
positive relation between the real interest rate and saving
The slope of the supply of loanable funds curve represents the
positive relation between the real interest rate and saving.
3 key numbers of following a stock
price: interest rate, dividend: profits paid to shareholders by companies, price-earnings ratio: price of stock/amount earned per share in the last year (higher p/e means an expensive stock)
In a closed economy, what does (Y - T - C) represent?
private saving
In a closed economy, what does (T - G) represent?
public saving
A larger budget deficit
raises the interest rate and reduces investment
A government budget deficit
reduces both public and national saving
A larger budget surplus
reduces the interest rate and raises investment.
Loanable Funds
refer to all income that people have chosen to save and lend out, rather than use for their own consumption, and to the amount that investors have chosen to borrow to fund new investment projects
policy 1: saving incentives
reform taxes so that it isn't as expensive to save. supply increases, shifts to right: greater saving, lower interest rates, greater investment
If the exchange rate rises from .65 British pounds per dollar to .70 pounds per dollar, then compared to British goods, U.S. goods become
relatively more expensive for both British and U.S. residents.
If the government introduced an investment tax credit, the interest rate would
rise and saving would rise
If the Mexican nominal exchange rate does not change, but prices rise faster in Mexico than in all other countries, then the Mexican real exchange rate
rises The nominal exchange rate simply states how much of one currency can be traded for a unit of another currency. The real exchange rate, on the other hand, describes how many of a good or service in one country can be traded for one of that good or service in another country.
Long term bonds are
riskier than short- term bonds, and so interest rates on long- term bonds are usually higher than interest rates on short term bonds
Long-term bonds are
riskier than short-term bonds, and so interest rates on long-term bonds are usually higher than interest rates on short-term bonds.
If the tax revenue of the government exceeds spending, then the government:
runs a budget surplus
equity finance
sale of a stock for money
debt finance
sale of bonds for money
A higher interest rate induces people to
save more so the supply of loanable funds slopes upward
Given that Monika's income exceeds her expenditures, Monika is best described as a
saver or as a supplier of funds
At the broadest level, the financial system moves the economy's scarce resources from
savers to borrowers
at the broadest level the financial system moves economy's scarce resources from
savers to borrowers
As an alternative to selling shares of stock as a means of raising funds, a large company could, instead
sell bonds
When a large, well-known corporation wishes to borrow directly from the public, it can
sell bonds
If the government's expenditures exceeded its receipts, it would likely
sell bonds directly to the public
If the government's expenditures exceeded its receipts, it would likely
sell bonds directly to the public.
When a large, well-known corporation wishes to borrow directly from the public, it can
sell bonds.
Evidence indicates that the typical person who becomes unemployed will
soon find a job.
municipal bonds
state/local government bonds where buyers don't pay an income tax. low interest rates
In 2009, the U.S. government's budget deficit increased substantially. Other things the same, this means the
supply of loanable funds shifted to the left.
banks
take deposits from savers and use that money to provide loans to borrowers. the interest they pay tos savers is lower than the interest they demand form borrowers so that they can make money
The length of time until a bond matures is called the
term
3 characteristics of a bond
term: length of time until it matures. credit risk: probability borrower will fail to pay. tax treatment: the way tax laws affect one's bond
In a closed economy, private saving is
the amount of income that households have left after paying for their taxes and consumption.
The economy's two most important financial markets are
the bond market and the stock market.
At some point during the financial crisis of 2008-2009, people with uninsured deposits at financial institutions withdrew money from their accounts at those institutions. This phenomenon characterized which element of the financial crisis?
the decline in confidence in financial institutions
The financial system
the group of institutions that helps math the saving of one person with the investment of another
private saving income
the income that households have left after paying for tax and consumption and tax
Market for loanable funds
the market in which those want to save supply funds and those who want to borrow to invest demand funds
interest rates are equal to
the price of loanable funds
In the language of macroeconomics, investment refers to
the purchase of new capital
If the current market interest rate for loanable funds is above the equilibrium level, then
the quantity of loanable funds supplied will exceed the quantity of loanable funds demanded and the interest rate will fall
f the government increases transfer payments to households, then
the rate of interest will rise
As the number of stocks in a person's portfolio increases,
the risk of the portfolio decreases, as indicated by the decreasing value of the standard deviation of the portfolio.
debt finance
the sale of bonds to raise money
equity finance
the sale of stocks to raise money
The price of shares traded on exchanges are determined by
the supply and demand for the stock
Most entrepreneurs do not have enough money of their own to start their businesses. When they acquire the necessary funds from someone else,
their consumption expenditures are being financed by someone else's saving
Most entrepreneurs do not have enough money of their own to start their businesses. When they acquire the necessary funds from someone else,
their investments are being financed by someone else's saving.
In an economy that relies upon barter,
there is no item in the economy that is widely accepted in exchange for goods and services.
It is claimed that a secondary advantage of managed funds is that
they give ordinary people access to the skills of professional money managers
The sale of stocks
to raise money is called equity finance, while the sale of bonds to raise funds is called debt finance.
nation saving
total income of economy that remains after taking out consumption and government purchases. s=i, s=y-c-g-nx
Index funds
typically have higher rates of return than more actively managed funds
default
when a borrower fails to pay a bond
Which of the following would a macroeconomist consider an investment?
Mariah builds a new coffee shop.
18. A corporation's earnings are the amount of revenue it receives for the sale of its products A. minus its cost of production as measured by its accountants. Earnings may be paid out as dividends or retained by the corporation. B. minus its direct and indirect costs as measured by its economists. Earnings must be paid out as dividends. C. minus its cost of production as measured by its accountants. Earnings must be paid out as dividends. D. minus its direct and indirect cost as measure by its economists. Earnings may be paid out as dividends or retained by the corporation.
A
30. You hold bonds issued by the city of Sacramento, California. The interest you earn each year on these bonds A. is not subject to federal income tax and so these bonds pay a lower interest rate than otherwise comparable bonds issued by the U.S. government. B. is not subject to federal income tax and so these bonds pay a higher interest rate than otherwise comparable bonds issued by the U.S. government. C. is subject to federal income tax and so these bonds pay a lower interest rate than otherwise comparable bonds issued by the U.S. government. D. is subject to federal income tax and so these bonds pay a higher interest rate than otherwise comparable bonds issued by the U.S. government.
A
34. Which of the following is included in the demand for loanable funds? A. investment but not government borrowing B. investment and government borrowing C. neither government borrowing nor investment D. government borrowing but not investment
A
43. Which of the following lists correctly identifies the four expenditure categories of GDP? A. consumption, government purchases, investment, net-exports B. consumption, saving, investment, depreciation, C. consumption, government purchases, investment, savings D. consumption, investment, depreciation, net-exports
A
49. Assume the bonds below have the same term and principal and that the state or local government that issues the municipal bond has a good credit rating. Which list has bonds correctly ordered from the one that pays the highest interest rate to the one that pays the lowest interest rate? A. corporate bond, U.S. government bond, municipal bond B. municipal bond, U.S. government bond, corporate bond C. U.S. government bond, municipal bond, corporate bond D. corporate bond, municipal bond, U.S. government bond
A
51. Which of the following is both a store of value and regularly used as a medium of exchange? A. cash but not stocks B. stocks but not cash C. cash and stocks D. neither cash nor stocks
A
53. Members of the Board of Governors are appointed by the president of the U.S. and confirmed by the U.S. Senate. a. TRUE b. FALSE
A
54. Money allows people to specialize in what they do best, thereby raising everyone's standard of living. a. TRUE b. FALSE
A
55. If the reserve ratio is 20 percent, then $100 of new reserves can generate A. $500 of new money in the economy. B. $250 of new money in the economy. C. $2,000 of new money in the economy. D. $60 of new money in the economy.
A
56. The Fed increases the reserve requirement, but it wants to offset the effects on the money supply. Which of the following should it do? A. buy bonds to increase reserves B. sell bonds to decrease reserves C. sell bonds to increase reserves D. buy bonds to decrease reserves
A
59. Banks cannot influence the money supply if they are required to hold all deposits in reserve. a. TRUE b. FALSE
A
62. The Fed increases reserves if it conducts open market A. purchases or auctions term credit. B. sales but not if it auctions term credit C. sales or auctions term credit D. purchases but not if it auctions term credit
A
67. If the reserve ratio is 5 percent, then $500 of additional reserves can create up to A. $10,000 of new money. B. $9,500 of new money. C. $10,500 of new money. D. $2,500 of new money.
A
70. To increase the money supply, the Fed could A. auction more loans to banks. B. increase the reserve requirement. C. sell government bonds. D. None of the above is correct.
A
79. If the reserve ratio is 5 percent, banks do not hold excess reserves, and people do not hold currency, then when the Fed purchases $20 million worth of government bonds, bank reserves A. increase by $20 million and the money supply eventually increases by $400 million. B. decrease by $20 million and the money supply eventually decreases by $100 million. C. decrease by $20 million and the money supply eventually decreases by $400 million. D. increase by $20 million and the money supply eventually increases by $100 million.
A
86. As opposed to a payments system based on barter, a payments system based on money A. makes trades less costly. B. leads to less specialization. C. requires a double coincidence of wants. D. None of the above is correct.
A
87. The Federal Reserve primarily uses open-market operations to change the money supply. a. TRUE b. FALSE
A
91. M1 includes A. other checkable deposits. B. savings deposits. C. small time deposits. D. money market mutual funds.
A
93. Which of the following defer payments? A. credit cards but not debit cards B. neither credit cards nor debit cards C. debit cards but not credit cards D. credit cards and debit cards
A
94. Which of the following is included in both M1 and M2? A. demand deposits B. small time deposits C. savings deposits D. money market mutual funds
A
96. Marc puts prices on surfboards and skateboards at his sporting goods store. He is using money as a unit of account. a. TRUE b. FALSE
A
97. The discount rate is the rate the Federal Reserve charges banks for loans. By lowering this rate, the Fed provides banks with a greater incentive to borrow from it. a. TRUE b. FALSE
A
99. If people decide to hold more currency relative to deposits, the money supply A. falls. The Fed could lessen the impact of this by buying Treasury bonds. B. falls. The Fed could lessen the impact of this by selling Treasury bonds. C. rises. The Fed could lessen the impact of the by selling Treasury bonds. D. rises. The Fed could lessen the impact of this by buying Treasury bonds.
A
61. In the United States, currency holdings per person average about A. $110; one explanation for this relatively small average is that many people use credit and debit cards to make transactions. B. $4,490; one explanation for this relatively large average is that U.S. citizens hold a lot of foreign currency. C. $4,490; one explanation for this relatively large amount is that criminals probably prefer currency as a medium of exchange. D. $110; one explanation for this relatively small average is that U.S. citizens hold a lot of foreign currency.
C
63. Suppose a bank is operating with a leverage rate of 10. A 6 percent increase in the value of assets A. will result in a 60percent decrease in owner's equity. B. will reduce liabilities by 6 percent. C. will result in a 60 percent increase in owner's equity. D. will reduce liabilities by 10 percent.
C
64. Suppose that in a country people gain more confidence in the banking system and so hold relatively less currency and more deposits. As a result, bank reserves will A. decrease and the money supply will eventually decrease. B. decrease and the money supply will eventually increase. C. increase and the money supply will eventually increase. D. increase and the money supply will eventually decrease.
C
65. Fiat money A. is backed by gold. B. is a medium of exchange but not a unit of account. C. has no intrinsic value. D. is any close substitute for currency such as checkable deposits
C
66. Which of the following is a liability of a bank and an asset of its customers? A. neither the deposits of its customers nor the loans to its customers B. loans of its customers but not the deposits of its customers C. deposits of its customers but not loans to its customers D. deposits of its customers and loans to its customers
C
7. We associate the term debt finance with A. financial intermediaries, and we associate the term equity finance with financial markets. B. the stock market, and we associate the term equity finance with the bond market. C. the bond market, and we associate the term equity finance with the stock market. D. financial markets, and we associate the term equity finance with financial intermediaries.
C
71. The amount of currency per person in the United States is about A. $300. B. $110. C. $4,490. D. $2,450
C
73. Economists call an institution designed to oversee the banking system and regulate the quantity of money in the economy A. a charter bank. B. a state bank. C. a central bank. D. a national bank
C
75. The tool most often used by the Fed to control the money supply is A. changing reserve requirements. B. buying and selling of equities. C. open market operations. D. altering the discount rate.
C
76. Which of the following is included in M2 but not in M1? A. demand deposits B. currency C. savings deposits D. All of the above are included in both M1 and M2.
C
77. If the Federal Reserve increases the interest rate on bank deposits at the Fed, banks will want to hold A. more reserves, so the reserve ratio will fall. B. fewer reserves, so the reserve ratio will rise. C. more reserves, so the reserve ratio will rise. D. fewer reserves, so the reserve ratio will fall.
C
Other things the same, if the government increases transfer payments to households, then the effect of this on the government's budget A. will make investment rise. B. will make public saving rise. C. will make the rate of interest rise. D. All of the above are correct.
C
Other things the same, when the interest rate rises, a. people would want to lend more, making the supply of loanable funds increase. b. people would want to lend less, making the supply of loanable funds decrease. c. people would want to lend more, making the quantity of loanable funds supplied increase. d. people would want to lend less, making the quantity of loanable funds supplied decrease.
C
The primary advantage of mutual funds is that they a. always provide the highest return. b. always allow people to "beat the market." c. allow people to diversify and reduce risk. d. allow people to diversify, which increases risk and return.
C
Which of the following is an example of financial intermediation? a. John buys shares of stock issued by a fast food company. b. A foreign government buys bonds issued by the U.S. Treasury. c. Susan makes a deposit at a bank and the bank uses this money to make an auto loan to Ferguson. d. None of the above is correct.
C
Which of the following would a macroeconomist consider as investment?
Charlie builds a new coffee shop
Which of the following is both a store of value and a common medium of exchange
Checking account balances
Which of the following is not correct?
Economists who study the effects of unions typically find that union workers earn about 25 to 35 percent more than those who are not in a union
National saving is equal to Y - T - C. True False
False
Financial crises seldom involve economic downturns. A) True B) False
False.
Generally, if the people begin to expect a company to have higher future profits, the price of the companies stock will begin to decrease. A) True B) False
False.
Calculate Tax
Government deficit= G-Public Saving
In a closed economy, what does (Y - T - C) represent?
Private saving
In a closed economy, what does (T - G) represent
Public saving
A large budget deficit
Raises the interest rate and reduces investment
For an open economy, the equation Y = C + I + G + NX is an identity. If we define national saving, S, as the total income in the economy that is left after paying for consumption and government purchases, then for an open economy, it is true that
S = I + NX.
At the broadest level, the financial system moves the economy's scarce resources from
Savers to borrowers.