Question 1

Potential buyers of ABC Corporation bonds are not concerned about ABC Corporation declaring bankruptcy. Potential buyers of XYZ Corporation bonds are concerned that XYZ Corporation may declare bankruptcy. Which of the following statements is correct?

Accepted Answer

A)   Other things equal, the interest rate on XYZ Corporation bonds will be high relative to the interest rate on ABC Corporation bonds.
B)   An ABC Corporation bond is a perpetuity, whereas an XYZ Corporation bond is not a perpetuity.
C)   XYZ Corporation bonds carry more interest-rate risk than do ABC Corporation bonds.
D)   All of the above are correct.E) All of the above
F) B) and C)

Question 2

A policy that induces people to save more shifts

Accepted Answer

A)   the supply of loanable funds and raises interest rates.
B)   the supply of loanable funds and reduces interest rates.
C)   the demand for loanable funds and raises interest rates.
D)   the demand for loanable funds and reduces interest rates.E) C) and D)
F) B) and C)

Question 3

Figure 8-4. On the horizontal axis of the graph, L represents the quantity of loanable funds in billions of dollars.
 
-Refer to Figure 8-4. If the equilibrium quantity of loanable funds is $50 billion and if the equilibrium nominal interest rate is 8 percent, then

Accepted Answer

A)   there is an excess supply of loanable funds at a real interest rate of 6 percent.
B)   there is an excess demand for loanable funds at a real interest rate of 8 percent.
C)   the rate of inflation is approximately 2 percent.
D)   the rate of inflation is approximately 14 percent.E) A) and B)
F) A) and C)

Question 4

Ethan purchases a new house for $170,000. Ethan's purchase of the house contributes $170,000 to which magnitude in the identity Y = C + I + G?

Accepted Answer

A)   C
B)   I
C)   G
D)   None of the above are correct.E) A) and B)
F) None of the above

Question 5

Banks and mutual funds are examples of financial markets.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following is correct?

Accepted Answer

A)   In the national income accounts, investment and private saving refer to the same thing.
B)   In a closed economy if national saving is greater than zero, then everyone must be saving.
C)   The financial system channels funds from savers to borrowers.
D)   People whose consumption exceeds their income are savers.E) A) and D)
F) A) and C)

Question 7

Scenario 8-2. Assume the following information for an imaginary, closed economy.
GDP = $200,000; consumption = $120,000;
government purchases = $35,000; and taxes = $25,000.
-Refer to Scenario 8-2. For this economy, investment amounts to

Accepted Answer

A)   $25,000.
B)   $30,000.
C)   $35,000.
D)   $45,000.E) None of the above
F) A) and B)

Question 8

Other things the same, which bond would you expect to pay the lowest interest rate?

Accepted Answer

A)   a bond issued by a state with a very good credit rating
B)   a bond issued by the U.S. government
C)   a bond issued by a fairly new company doing genetic research
D)   a bond issued by NabiscoE) A) and B)
F) C) and D)

Question 9

As real interest rates fall, firms desire to

Accepted Answer

A)   buy more new equipment and buildings. This response helps explain why the supply of loanable funds is upward sloping.
B)   buy more new equipment and buildings. This response helps explain why the demand for loanable funds is downward sloping.
C)   buy less new equipment and buildings. This response helps explain why the supply of loanable funds is upward sloping.
D)   buy less new equipment and buildings. This response helps explain why the demand for loanable funds is downward sloping.E) B) and D)
F) A) and C)

Question 10

Which of the following could explain an increase in the interest rate and an increase in the equilibrium quantity of investment?

Accepted Answer

A)   the supply of loanable funds shifted right.
B)   the supply of loanable funds shifted left.
C)   the demand for loanable funds shifted right.
D)   the demand for loanable funds shifted left.E) A) and D)
F) A) and C)

Question 11

For a closed economy, GDP is $11 trillion, consumption is $7 trillion, taxes are $2 trillion and the government runs a deficit of $1 trillion. What are private saving and national saving?

Accepted Answer

A)   $4 trillion and $1 trillion, respectively
B)   $4 trillion and $-1 trillion, respectively
C)   $2 trillion and $1 trillion, respectively
D)   $2 trillion and $-1 trillion, respectivelyE) A) and B)
F) A) and C)

Question 12

Figure 8-1. The figure depicts a demand-for-loanable-funds curve and two supply-of-loanable-funds curves.
 
-Refer to Figure 8-1. Which of the following events would shift the supply curve from S1 to S2?

Accepted Answer

A)   In response to tax reform, firms are encouraged to invest more than they previously invested.
B)   In response to tax reform, households are encouraged to save more than they previously saved.
C)   Government goes from running a balanced budget to running a budget deficit.
D)   Any of the above events would shift the supply curve from S1 to S2.E) C) and D)
F) A) and D)

Question 13

The amount of revenue a firm receives for the sale of its products minus its costs of production as measured by its accountants is the firm's

Accepted Answer

A)   earnings.
B)   retained earnings.
C)   economic, or real, profit.
D)   dividend.E) A) and B)
F) All of the above

Question 14

Compared to stocks, bonds offer the holder

Accepted Answer

A)   lower risk and lower potential return.
B)   lower risk and higher potential return.
C)   higher risk and lower potential return.
D)   higher risk and higher potential return.E) A) and B)
F) B) and C)

Question 15

The term loanable funds refers to all income that is not used for consumption.

Accepted Answer

A) True 
 B)False

Question 16

A stock's dividend yield is the

Accepted Answer

A)   dividend as a percentage of the price per share.
B)   stock price as a percentage of the dividend.
C)   dividend as a percentage of the retained earnings per share.
D)   retained earnings per share as the percentage of the dividend.E) A) and C)
F) A) and B)

Question 17

What would happen in the market for loanable funds if the government were to decrease the tax rate on interest income?

Accepted Answer

A)   The supply of loanable funds would shift rightward and investment would increase.
B)   The supply of loanable funds would shift leftward and investment would decrease.
C)   The demand for loanable funds would shift rightward and investment would increase.
D)   The demand for loanable funds would shift leftward and investment would decrease.E) C) and D)
F) A) and B)

Question 18

If the quantity of loanable funds demanded exceeds the quantity of loanable funds supplied,

Accepted Answer

A)   there is a surplus so interest rates will rise.
B)   there is a surplus so interest rates will fall.
C)   there is a shortage so interest rates will rise.
D)   there is a shortage so interest rates will fall.E) None of the above
F) B) and C)

Question 19

Longview Corporation has a stock price of $50, has issued 2,000,000 shares of stock, has retained earnings of $4 million dollars, and a dividend yield of 4 percent. The price-earnings ratio for Longview stock is

Accepted Answer

A)   25, which is high compared to historical standards of the market.
B)   25, which is low compared to historical standards of the market.
C)   12.5, which is low compared to historical standards of the market.
D)   12.5, which is high compared to historical standards of the market.E) A) and B)
F) All of the above

Question 20

We interpret the meaning of "loanable funds" as the

Accepted Answer

A)   flow of resources available from private saving.
B)   flow of resources available to fund private investment.
C)   resources borrowed by private investors and by government.
D)   resources lent by private investors and by government.E) B) and D)
F) A) and C)

Exam 8: Saving, Investment, and the Financial System

Figure 8-1. The figure depicts a demand-for-loanable-funds curve and two supply-of-loanable-funds curves. -Refer to Figure 8-1. Which of the following events would shift the supply curve from S1 to S2?

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The term loanable funds refers to all income that is not used for consumption.

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Ethan purchases a new house for $170,000. Ethan's purchase of the house contributes $170,000 to which magnitude in the identity Y = C + I + G?

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For a closed economy, GDP is $11 trillion, consumption is $7 trillion, taxes are $2 trillion and the government runs a deficit of $1 trillion. What are private saving and national saving?

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Figure 8-4. On the horizontal axis of the graph, L represents the quantity of loanable funds in billions of dollars. -Refer to Figure 8-4. If the equilibrium quantity of loanable funds is $50 billion and if the equilibrium nominal interest rate is 8 percent, then

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Scenario 8-2. Assume the following information for an imaginary, closed economy. GDP = $200,000; consumption = $120,000; government purchases = $35,000; and taxes = $25,000. -Refer to Scenario 8-2. For this economy, investment amounts to

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Which of the following could explain an increase in the interest rate and an increase in the equilibrium quantity of investment?

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Other things the same, which bond would you expect to pay the lowest interest rate?

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A policy that induces people to save more shifts

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What would happen in the market for loanable funds if the government were to decrease the tax rate on interest income?

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We interpret the meaning of "loanable funds" as the

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Banks and mutual funds are examples of financial markets.

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As real interest rates fall, firms desire to

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If the quantity of loanable funds demanded exceeds the quantity of loanable funds supplied,

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A stock's dividend yield is the

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The amount of revenue a firm receives for the sale of its products minus its costs of production as measured by its accountants is the firm's

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Compared to stocks, bonds offer the holder

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Which of the following is correct?

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Longview Corporation has a stock price of $50, has issued 2,000,000 shares of stock, has retained earnings of $4 million dollars, and a dividend yield of 4 percent. The price-earnings ratio for Longview stock is

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Potential buyers of ABC Corporation bonds are not concerned about ABC Corporation declaring bankruptcy. Potential buyers of XYZ Corporation bonds are concerned that XYZ Corporation may declare bankruptcy. Which of the following statements is correct?

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