Question 1

Which of the following equations will always represent GDP in an open economy?

Accepted Answer

A)   S = I - G
B)   I = Y - C + G
C)   Y = C + I + G
D)   Y = C + I + G + NX

Question 2

If the budget deficit increases then

Accepted Answer

A)   saving and the interest rate rise
B)   saving rises and the interest rate falls
C)   saving falls and the interest rate rises
D)   saving and the interest rate falls

Question 3

An increase in the demand for loanable funds increases the equilibrium interest rate and decreases the equilibrium level of saving.

Accepted Answer

A) True 
 B)False

Question 4

If the government budget deficit increases, which curve in the market for loanable funds shifts, which direction does it shift, and what happens to the interest rate?

Accepted Answer

The supply of loanab...

Question 5

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

Accepted Answer

A)   S = I.
B)   S = 0.
C)   I = S + NX.
D)   S = I + NX.

Question 6

According to the loanable funds model, which of the following events would result in higher interest rates and greater saving?

Accepted Answer

A)   Firms become pessimistic about the future and, as a result, they cut back on their plans to buy new equipment and build new factories.
B)   The government goes from running a budget deficit to running a budget surplus.
C)   Congress passes a reform of the tax laws that encourages greater saving.
D)   Congress passes a reform of the tax laws that encourages greater investment.

Question 7

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.

Question 8

Which of the following involves financial intermediation?

Accepted Answer

A)   a bank makes a loan
B)   a household buys stock issued by a corporation
C)   a foreign government purchases U.S. government bonds
D)   All of the above are correct.

Question 9

If people expect future earnings of Galt Corporation to be high relative to current earnings, then

Accepted Answer

A)   the P/E ratio of its stock will be high. A P/E ratio of 8 is relatively high.
B)   the P/E ratio of its stock will be high. A P/E ratio of 8 is relatively low.
C)   the P/E ratio of its stock will be low. A P/E ratio of 8 is relatively high.
D)   the P/E ratio of its stock will be low. A P/E ratio of 8 is relatively low.

Question 10

What variable adjusts to balance demand and supply in the market for loanable funds?

Accepted Answer

The real i...

Question 11

Which of the following statements is correct?

Accepted Answer

A)   The total income in the economy that remains after paying for consumption and government purchases is called private saving.
B)   The sum of private saving and national saving is called public saving.
C)   For a closed economy, the sum of private saving and public saving must equal investment.
D)   For a closed economy, the sum of consumption, national saving, and taxes must equal GDP.

Question 12

According to the definitions of national saving and private saving, if Y, C, and G remained the same, an increase in taxes would

Accepted Answer

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.

Question 13

Which of the following is both a financial institution and a financial intermediary?

Accepted Answer

A)   banks
B)   stock exchanges
C)   the bond market
D)   All of the above are correct.

Question 14

If a firm sells a total of 100 shares of stock, then

Accepted Answer

A)   the supply of, and demand for, those shares determine the price per share.
B)   each share represents ownership of 1 percent of the firm.
C)   the firm is engaging in equity finance.
D)   All of the above are correct.

Question 15

Figure 26-3. The figure shows two demand-for-loanable-funds curves and two supply-of-loanable-funds curves. 
-Refer to Figure 26-3. A shift of the demand curve from D1 to D2 is called

Accepted Answer

A)   an increase in the demand for loanable funds, and that increase would originate from people who had some extra income they wanted to lend.
B)   an increase in the demand for loanable funds, and that increase would originate from households and firms who wish to borrow to make investments.
C)   a decrease in the demand for loanable funds, and that decrease would originate from people who had some extra income they wanted to lend.
D)   a decrease in the demand for loanable funds, and that decrease would originate from households and firms who wish to borrow to make investments.

Question 16

Which of the following statements about the term of a bond is correct?

Accepted Answer

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.

Question 17

A policy that induces people to save more shifts

Accepted Answer

A)   the supply of loanable funds rightward and increases investment.
B)   the supply of loanable funds leftward and decreases investment.
C)   the supply of loanable funds rightward and decreases investment.
D)   the supply of loanable funds leftward and increases investment.

Question 18

Figure 26-5. Figure 26-5 shows the loanable funds market for a closed economy. 
-Refer to Figure 26-5. Starting at point A, a reduction in government spending would cause

Accepted Answer

A)   the quantity of loanable funds traded to increase to $125 and the interest rate to rise to 7% (point 
C)  .
B)   the quantity of loanable funds traded to decrease to $75 and the interest rate to fall to 5% (point 
B)  .
C)   the quantity of loanable funds traded to increase to $125 and the interest rate to fall to 5% (point 
D)  .
D)   the quantity of loanable funds traded to decrease to $75 and the interest rate to rise to 7% (point 
E)  .

Question 19

Which of the following counts as part of the supply of loanable funds?

Accepted Answer

A)   bank deposits and purchases of bonds
B)   bank deposits but not purchases of bonds
C)   purchases of bonds but not bank deposits
D)   neither purchases of bonds nor bank deposits

Question 20

Lenders sell bonds and borrowers buy them.

Accepted Answer

A) True 
 B)False

Exam 26: Saving, Investment, and the Financial System

What variable adjusts to balance demand and supply in the market for loanable funds?

Correct AnswerverifiedThe real i...View AnswerShow Answer

If people expect future earnings of Galt Corporation to be high relative to current earnings, then

Correct AnswerverifiedShow Answer

If the budget deficit increases then

Correct AnswerverifiedShow Answer

Which of the following equations will always represent GDP in an open economy?

Correct AnswerverifiedShow Answer

If a firm sells a total of 100 shares of stock, then

Correct AnswerverifiedShow Answer

Which of the following is both a financial institution and a financial intermediary?

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

Which of the following counts as part of the supply of loanable funds?

Correct AnswerverifiedShow Answer

An increase in the demand for loanable funds increases the equilibrium interest rate and decreases the equilibrium level of saving.

Correct AnswerverifiedShow Answer

Which of the following involves financial intermediation?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Figure 26-5. Figure 26-5 shows the loanable funds market for a closed economy. -Refer to Figure 26-5. Starting at point A, a reduction in government spending would cause

Correct AnswerverifiedShow Answer

According to the loanable funds model, which of the following events would result in higher interest rates and greater saving?

Correct AnswerverifiedShow Answer

Figure 26-3. The figure shows two demand-for-loanable-funds curves and two supply-of-loanable-funds curves. -Refer to Figure 26-3. A shift of the demand curve from D1 to D2 is called

Correct AnswerverifiedShow Answer

According to the definitions of national saving and private saving, if Y, C, and G remained the same, an increase in taxes would

Correct AnswerverifiedShow Answer

If the government budget deficit increases, which curve in the market for loanable funds shifts, which direction does it shift, and what happens to the interest rate?

Correct AnswerverifiedThe supply of loanab...View AnswerShow Answer

Which of the following statements about the term of a bond is correct?

Correct AnswerverifiedShow Answer

Lenders sell bonds and borrowers buy them.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

A policy that induces people to save more shifts

Correct AnswerverifiedShow Answer

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The supply of loanab...
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