Question 1

Investment is the purchase of capital equipment and structures.

Accepted Answer

A) True 
 B)False  True

Question 2

The quantity of loanable funds supplied is

Accepted Answer

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. 
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. D

Question 3

Why were Collateralized Debt Obligations (CDOs) based on residential mortgages developed and why did they fail?

Accepted Answer

CDOs based on residential mortgages were developed in the early 21^st century when interest rates were low and investors were anxious to buy assets that offered better yields. Packaging up lots of sub-prime mortgages into CDOs seemed to be a way of reducing risk and providing attractive yields for investors. When interest rates started to rise, sub-prime mortgage borrowers began to default in large numbers, causing major problems for the CDOs based on them. It was this problem in the housing market that led to the crisis.

Question 4

A(n) __________ allows a firm to decrease its tax liability by a fraction of the investment it makes during a particular period.

Accepted Answer

A)  tax on corporate profits 
B)  tax on retained earnings 
C)  investment tax credit 
D)  personal income tax 
A)  tax on corporate profits 
B)  tax on retained earnings 
C)  investment tax credit 
D)  personal income tax

Question 5

If the government increases investment tax credits and reduces taxes on the return to saving at the same time, the:

Accepted Answer

A)  real interest rate should fall. 
B)  real interest rate should rise. 
C)  impact on the real interest rate is indeterminate. 
D)  real interest rate should not change. 
A)  real interest rate should fall. 
B)  real interest rate should rise. 
C)  impact on the real interest rate is indeterminate. 
D)  real interest rate should not change.

Question 6

When interest rates rise, the quantity of loanable funds demanded by

Accepted Answer

A)  firms decreases. 
B)  government decreases. 
C)  firms increases. 
D)  government increases. 
A)  firms decreases. 
B)  government decreases. 
C)  firms increases. 
D)  government increases.

Question 7

A reduction in the budget deficit should shift the supply of loanable funds to the right, lower the real interest rate, and increase the quantity demanded of loanable funds.

Accepted Answer

A) True 
 B)False

Question 8

If GDP = €1,000, consumption = €600, taxes = €100, and government purchases = €200, how much is saving and investment?

Accepted Answer

A)  saving = €300, investment = €300 
B)  saving = €200, investment = €100 
C)  saving = €100, investment = €200 
D)  saving = €0, investment = €0 
E)  saving = €200, investment = €200 
A)  saving = €300, investment = €300 
B)  saving = €200, investment = €100 
C)  saving = €100, investment = €200 
D)  saving = €0, investment = €0 
E)  saving = €200, investment = €200

Question 9

An increase in the budget surplus shifts the

Accepted Answer

A)  supply of loanable funds to the left and increases the real interest rate. 
B)  supply of loanable funds to the right and reduces the real interest rate. 
C)  demand for loanable funds to the right and increases the real interest rate. 
D)  demand for loanable funds to the left and reduces the real interest rate. 
A)  supply of loanable funds to the left and increases the real interest rate. 
B)  supply of loanable funds to the right and reduces the real interest rate. 
C)  demand for loanable funds to the right and increases the real interest rate. 
D)  demand for loanable funds to the left and reduces the real interest rate.

Question 10

Which of the two bonds in each example would you expect to generally pay the higher interest rate? Explain why.
a. a German government bond or a Greek government bond
b. a 6-month Treasury bill or a 20-year Treasury bond
c. a Microsoft bond or a bond issued by a new recording company

Accepted Answer

a. The Greek government bond would likel

Question 11

National saving (or just saving) is equal to

Accepted Answer

A)  none of these answers. 
B)  investment + consumption expenditures. 
C)  private saving + public saving. 
D)  GDP - government purchases. 
E)  GDP + consumption expenditures + government purchases. 
A)  none of these answers. 
B)  investment + consumption expenditures. 
C)  private saving + public saving. 
D)  GDP - government purchases. 
E)  GDP + consumption expenditures + government purchases.

Question 12

If the government wants to increase the level of employment and real output, it could

Accepted Answer

A)  increase corporate income taxes. 
B)  provide an investment tax credit. 
C)  decrease expenditures on roads and schools. 
D)  increase the personal income tax. 
A)  increase corporate income taxes. 
B)  provide an investment tax credit. 
C)  decrease expenditures on roads and schools. 
D)  increase the personal income tax.

Question 13

What are the basic differences between bonds and stocks?

Accepted Answer

A bond is a certificate of indebtedness

Question 14

An increase in the budget deficit that causes the government to increase its borrowing shifts the demand for loanable funds to the right.

Accepted Answer

A) True 
 B)False

Question 15

The major advantage of investment funds is that

Accepted Answer

A)  they allow people with limited funds to diversify their investment. 
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. 
A)  they allow people with limited funds to diversify their investment. 
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.

Question 16

The stock market is an institution that facilitates

Accepted Answer

A)  buying and selling of debt financing. 
B)  the purchase and sale of company shares. 
C)  the purchase and sale of investment funds. 
D)  bank borrowing and lending. 
A)  buying and selling of debt financing. 
B)  the purchase and sale of company shares. 
C)  the purchase and sale of investment funds. 
D)  bank borrowing and lending.

Question 17

A financial intermediary is a middleperson between

Accepted Answer

A)  buyers and sellers. 
B)  banks and the government. 
C)  borrowers and lenders. 
D)  labour unions and firms. 
A)  buyers and sellers. 
B)  banks and the government. 
C)  borrowers and lenders. 
D)  labour unions and firms.

Question 18

Which of the following financial market securities would probably pay the lowest interest rate?

Accepted Answer

A)  A bond issued by a start-up company 
B)  A government bond issued by the government of France. 
C)  A bond issued by a blue chip company 
D)  An investment fund with a portfolio of corporate bonds issued by blue chip companies. 
A)  A bond issued by a start-up company 
B)  A government bond issued by the government of France. 
C)  A bond issued by a blue chip company 
D)  An investment fund with a portfolio of corporate bonds issued by blue chip companies.

Question 19

In a closed economy, saving is what remains after consumption expenditures and government purchases.

Accepted Answer

A) True 
 B)False

Question 20

People who buy shares in a firm have loaned money to the firm.

Accepted Answer

A) True 
 B)False

Exam 24: Saving, Investment and the Financial System

Investment is the purchase of capital equipment and structures.

The quantity of loanable funds supplied is

Why were Collateralized Debt Obligations (CDOs) based on residential mortgages developed and why did they fail?

A(n) __________ allows a firm to decrease its tax liability by a fraction of the investment it makes during a particular period.

If the government increases investment tax credits and reduces taxes on the return to saving at the same time, the:

When interest rates rise, the quantity of loanable funds demanded by

A reduction in the budget deficit should shift the supply of loanable funds to the right, lower the real interest rate, and increase the quantity demanded of loanable funds.

If GDP = €1,000, consumption = €600, taxes = €100, and government purchases = €200, how much is saving and investment?

An increase in the budget surplus shifts the

Which of the two bonds in each example would you expect to generally pay the higher interest rate? Explain why. a. a German government bond or a Greek government bond b. a 6-month Treasury bill or a 20-year Treasury bond c. a Microsoft bond or a bond issued by a new recording company

National saving (or just saving) is equal to

If the government wants to increase the level of employment and real output, it could

What are the basic differences between bonds and stocks?

An increase in the budget deficit that causes the government to increase its borrowing shifts the demand for loanable funds to the right.

The major advantage of investment funds is that

The stock market is an institution that facilitates

A financial intermediary is a middleperson between

Which of the following financial market securities would probably pay the lowest interest rate?

In a closed economy, saving is what remains after consumption expenditures and government purchases.

People who buy shares in a firm have loaned money to the firm.

What Is Economics

Thinking Like an Economist

The Market Forces of Supply and Demand

Elasticity and Its Applications

Background to Demand: Consumer Choices

Background to Supply: Firms in Competitive Markets

Consumers, Producers and the Efficiency of Markets

Supply, Demand and Government Policies

The Tax System

Public Goods, Common Resources and Merit Goods

Market Failure and Externalities

Information and Behavioural Economics

Firms Production Decisions

Market Structures I: Monopoly

Market Structures Ii: Monopolistic Competition

Market Structures Iii: Oligopoly

The Economics of Factor Markets

Income Inequality and Poverty

Interdependence and the Gains From Trade

Measuring a Nations Well-Being

Measuring the Cost of Living

Production and Growth

Unemployment

The Basic Tools of Finance

Issues in Financial Markets

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Open Economy

Business Cycles

Keynesian Economics and the Is-Lm Analysis

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

The Short-Run Trade-Off Between Inflation and Unemployment

Supply-Side Policies

Common Currency Areas and European Monetary Union

The Financial Crisis and Sovereign Debt

Filters