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| Chapter 26: Saving, Investment, and the Financial System |
1. Bond markets allow firms to pursue
a. equity financing.
b. debt financing.
c. limited-growth policies.
d. government loans and subsidy programs.
2. Junk bonds are
issues by firms with
a. high degrees of financial security.
b. business ties to the trash-hauling industry.
c. high degrees of financial insecurity.
d. the ability to offer lower interest rates to lenders.
3. The stock market
is an institution that promotes
a. buying and selling of debt financing.
b. the purchase and sale of firm equities.
c. the purchase and sale of mutual funds.
d. bank borrowing and lending.
4. The major
advantage of mutual funds is that
a. they allow people with limited funds to diversify.
b. they encourage households to spend their money on current
consumption.
c. fund managers are replaced by household administrators.
d. they always use index funds to limit investor risk.
5. If an asset
functions as a medium of exchange it
a. holds its value over a long period of time.
b. can be used by people to cover transactions.
c. can be used by firms for debt financing.
d. can be used by firms for equity financing.
6. The four
categories of expenditures that make up GDP are consumption,
a. investment, net exports, and government expenditures.
b. investment, government purchases, and depreciation.
c. interest, government purchases, and net exports.
d. investment, exports, and rental expenditures.
7. Economists say
that investment occurs when
a. someone buys stock on the New York Stock Exchange.
b. someone buys a U.S. government bond.
c. a firm increases its capital stock.
d. a government buys goods from another country.
8. Which of the
following would be counted as a private investment expenditure in the national
income accounts?
a. The Navy builds a new battleship.
b. Microsoft expands plant capacity to produce new software.
c. A public high school builds a new football stadium.
d. All of the above are correct.
9. If a series of
major technological breakthroughs occur in the economy at the same time, then
the most likely outcome would be that the economy’s
a. investment demand curve will shift downward.
b. investment demand curve will shift upward.
c. consumption curve will shift downward.
d. position along the existing investment curve will move
upward.
10. Households make
their savings available to borrowers through
a. resource markets.
b. the loanable funds market.
c. the labor market.
d. taxes.
11. What is the price
of funds in the loanable funds market?
a. the real wage rate
b. the consumer price index
c. the nominal interest rate
d. the average firm profit rate
12. Assuming the
economy is in equilibrium, use the following information to determine the
amount of funds supplied to the loanable funds market.
Consumption Spending $3.5 trillion
Net Taxes $2.7 trillion
Household Saving $2.5 trillion
Investment Spending $2.2 trillion
Government Purchases $3.0 trillion.
a. $2.2 trillion
b. $2.5 trillion
c. $2.7 trillion
d. $3.0 trillion
13. The quantity of
loanable funds supplied is
a. positively related to the level of income.
b. negatively related to the price level.
c. positively related to the price level.
d. positively related to the interest rate.
14. The supply of
loanable funds curve is upward sloping because a rise in the interest rate
a. decreases the opportunity cost of firms’ investment
spending.
b. increases the opportunity cost of firms’ investment
spending.
c. decreases the opportunity cost to households of
consuming.
d. increases the opportunity cost to households of
consuming.
15. The investment
demand curve
a. is upward sloping.
b. is downward sloping.
c. is horizontal.
d. begins sloping upward, then becomes horizontal.
16. When interest
rates rise, the quantity of loanable funds demanded by
a. firms decreases.
b. government decreases.
c. firms increases.
d. government increases.
17. Market clearing
in the loanable funds market
a. guarantees that total spending will be just sufficient to
purchase whatever output is produced.
b. means that the interest rate never changes.
c. guarantees that total spending will equal the quantity of
loanable funds demanded.
d. requires that the government run a budget deficit.
18. If taxes are
reduced with no change in government spending, and people spend all the money
from the tax cut on consumption
a. the demand for loanable funds will increase and the
interest rate will increase.
b. the demand for loanable funds will increase and the
interest rate will decrease.
c. the supply of loanable funds will decrease and the
interest rate will increase.
d. neither the demand nor the supply of loanable funds will
change.
19. If taxes are
reduced with no change in government spending, and people save all the money
from the tax cut,
a. the demand for loanable funds will increase and the
interest rate will increase.
b. the demand for loanable funds will increase and the
interest rate will remain constant.
c. the supply of loanable funds will increase and the
interest rate will decrease.
d. neither the demand nor the supply of loanable funds will
change.
20. A(n) __________
allows a firm to decrease its tax liability by a fraction of the investment it
initiates during a particular period.
a. tax on corporate profits
b. tax on retained earnings
c. investment tax credit
d. personal income tax
21. If the U.S.
government wants to increase the level of employment and real output, it could
a. increase corporate income taxes.
b. provide an investment tax credit.
c. decrease expenditures on roads and dams.
d. increase the personal income tax.
22. Assuming the
economy was in equilibrium, use the following information to determine the
government’s budget deficit or surplus.
Consumption Spending $3.5 trillion
Net Taxes $2.7 trillion
Household Saving $2.5 trillion
Investment Spending $2.2 trillion
The government’s
deficit (surplus) was
a. $.3 trillion surplus.
b. $.2 trillion surplus.
c. $.3 trillion deficit.
d. $.5. trillion deficit.
23. The government
budget deficit is
a. the difference between government purchases and government
revenues from bonds and taxes.
b. caused by a lack of business sector investment.
c. created when the government expenditures exceed net
taxes.
d. caused by leakages in the economy.
24. If the government
budget deficit increases, the
a. supply of loans increases and the equilibrium interest
rate increases.
b. supply of loans increases and the equilibrium interest
rate decreases.
c. demand for loans increases and the equilibrium interest
rate decreases.
d. demand for loans increases and the equilibrium interest
rate increases.
25. If technical
progress raises productivity permanently, then
a. the equilibrium interest rate will increase.
b. equilibrium saving will increase.
c. real GDP will increase.
d. All of the above are correct.
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