ECON202 Ch. 13 - Part 2

Rank the following in order of highest to lowest interest rate:

-5 year corporate bond -1 year corporate bond -1 year AA municipal bond -1 year AAA municipal bond

Valerie is a closed economy, where consumption totals $3 billion, tax payments are $300 million, government spending is $1 billion, and GDP is $5 billion. Private saving amounts to...

$1.7 billion and Valerie's government runs a budget deficit.

When public saving falls by $2 billion and private saving falls by $1 billion, in a closed economy...

Investment falls by $3 billion.

The source of the supply of loanable funds...

Is saving and the source of demand for loanable funds is investment.

The Eye of Horus incense company has $10 million in cash which it has accumulated from retained earnings. It was planning to use the money to build a new factory. Recently, the rate of interest has increased. The increase in the rate of interest should...

Make it less likely that the Eye of Horus will build the factory because the opportunity cost of the $10 million is now higher.

A decrease in the budget deficit...

Makes investment spending rise.

If Congress instituted an investment tax credit, the interest rate would...

Rise and saving would rise.

At the broadest level, the financial system moves the economy's scarce resources from...

Savers to borrowers.

We would expect the interest rate on Bond A to be lower than the interest rate on Bond B if the two bonds have identical characteristics, except that...

The credit risk associated with Bond A is lower than the credit risk associated with Bond B.

Suppose that the tires of a certain tire manufacturer are discovered to be defective. Other things the same, this news would cause...

The demand for this company's stock to decrease, so the price would fall.

Which of the following events could explain an increase in interest rates together with a decrease in investment?

The government budget went from surplus to deficit.

For an imaginary economy, when the real interest rate is 5%, the quantity of loanable funds demanded is $1,000 and the quantity of loanable funds supplied is $1,000. Currently, the nominal interest rate is 9% and the inflation rate is 2%. Currently...

The quantity of loanable funds supplied exceeds the quantity of loanable funds demanded, and as a result, the real interest rate will fall.

In the market for loanable funds, the interaction of the demand for, and supply of, loanable funds determines the equilibrium level of...

The real interest rate.

The first element of a financial crisis is...

A large decline in some asset prices.

A creditor of a corporation holds...

Bonds sold by the corporation. If the corporation experiences financial difficulties, bond holders are paid before stockholders.

Mutual fund facts...

-A mutual fund is a financial intermediary. -A mutual fund acquires its funds primarily by selling shares to the public. -People who buy shares from a mutual fund accept all of the risk and return associated with the mutual fund's portfolio.

Which of the following bond buyers did not buy the bond that best met his or her objective?

-Jackie wanted a bond with a high interest rate and was willing to take a lot of risk. She purchased a junk bond. -Andrew wanted a bond that would allow him to legally avoid paying federal income taxes. He purchased a municipal bond. -Suzy wanted to purchase a bond whose seller was unlikely to default. She purchased a bond that Standards and Poor's rated a low credit risk. **Cecilia held long-term bonds rather than short-term bonds to avoid risk.

You observed a closed economy that has a government deficit and positive investment. Which of the following is correct?

-Private and public saving are both positive. **Private saving is positive; public saving is negative. -Private saving is negative; public saving is positive. -Both private saving and public saving are negative.

Which of the following could explain a decrease in the equilibrium interest rate and an increase in the equilibrium of loanable funds?

The supply of loanable funds shifted rightward.

Stock fact...

When a corporation sells bonds as a means of raising funds, it is engaging in debt finance.