Question 1

Which of the following statements is correct?

Accepted Answer

A) A general, persistent decline in stock prices may signal that the economy is about to enter a boom period because people will be able to buy stock for less money. 
B) A general, persistent decline in stock prices may signal that the economy is about to enter a recession because low stock prices may mean that people are expecting low corporate profits. 
C) A general, persistent decline in stock prices may signal that the economy is about to enter a recession because low stock prices mean that corporations have had low profits in the past. 
D) Expectations about the business cycle have no impact on stock prices. 
A) A general, persistent decline in stock prices may signal that the economy is about to enter a boom period because people will be able to buy stock for less money. 
B) A general, persistent decline in stock prices may signal that the economy is about to enter a recession because low stock prices may mean that people are expecting low corporate profits. 
C) A general, persistent decline in stock prices may signal that the economy is about to enter a recession because low stock prices mean that corporations have had low profits in the past. 
D) Expectations about the business cycle have no impact on stock prices.

Question 2

A perpetuity is distinguished from other bonds in that it

Accepted Answer

A) pays continuously compounded interest. 
B) pays interest only when it matures. 
C) never matures. 
D) will be used to purchase another bond when it matures unless the owner specifies otherwise. 
A) pays continuously compounded interest. 
B) pays interest only when it matures. 
C) never matures. 
D) will be used to purchase another bond when it matures unless the owner specifies otherwise.

Question 3

Jerry has the choice of two bonds, one that pays 3 percent interest and one that pays 6 percent interest. Which of the following is most likely?

Accepted Answer

A) The 6 percent bond is less risky than the 3 percent bond. 
B) The 6 percent bond is a U.S. government bond, and the 3 percent bond is a junk bond. 
C) The 6 percent bond has a longer term than the 3 percent bond. 
D) The 6 percent bond is a municipal bond, and the 3 percent bond is a U.S. government bond. 
A) The 6 percent bond is less risky than the 3 percent bond. 
B) The 6 percent bond is a U.S. government bond, and the 3 percent bond is a junk bond. 
C) The 6 percent bond has a longer term than the 3 percent bond. 
D) The 6 percent bond is a municipal bond, and the 3 percent bond is a U.S. government bond.

Question 4

It is claimed that mutual funds have two advantages. The first is that mutual funds allow people with small amounts of money to diversify. The second is that mutual funds provide the skills of professional money managers who buy stocks they believe will be the most profitable and thereby increase the return that mutual fund depositors earn on their savings.

Accepted Answer

A) Economists strongly agree with both claims. 
B) Economists are skeptical of both claims. 
C) Economists are skeptical of the first claim, but strongly agree with the second. 
D) Economists strongly agree with the first claim, but are skeptical of the second. 
A) Economists strongly agree with both claims. 
B) Economists are skeptical of both claims. 
C) Economists are skeptical of the first claim, but strongly agree with the second. 
D) Economists strongly agree with the first claim, but are skeptical of the second.

Question 5

Suppose the government ran a budget surplus in 2010 and a larger surplus in 2011. The loanable funds model would predict that, as a result of the increase in the surplus,

Accepted Answer

A) both the government debt and interest rates increased between 2010 and 2011. 
B) both the government debt and interest rates decreased between 2010 and 2011. 
C) the government debt increased and interest rates decreased between 2010 and 2011. 
D) the government debt decreased and interest rates increased between 2010 and 2011. 
A) both the government debt and interest rates increased between 2010 and 2011. 
B) both the government debt and interest rates decreased between 2010 and 2011. 
C) the government debt increased and interest rates decreased between 2010 and 2011. 
D) the government debt decreased and interest rates increased between 2010 and 2011.

Question 6

Consider the expressions T - G and Y - T - C. Which of the following statements is correct?

Accepted Answer

A) Each one of these is equal to national saving. 
B) Each one of these is equal to public saving. 
C) The first of these is private saving; the second one is public saving. 
D) The first of these is public saving; the second one is private saving. 
A) Each one of these is equal to national saving. 
B) Each one of these is equal to public saving. 
C) The first of these is private saving; the second one is public saving. 
D) The first of these is public saving; the second one is private saving.

Question 7

In a closed economy, national saving is

Accepted Answer

A) usually greater than investment. 
B) equal to investment. 
C) usually less than investment because of the leakage of taxes. 
D) always less than investment. 
A) usually greater than investment. 
B) equal to investment. 
C) usually less than investment because of the leakage of taxes. 
D) always less than investment.

Question 8

Suppose a government that taxed all interest income changed its tax law so that the first $5,000 of a taxpayer's interest income was tax free. This would shift the

Accepted Answer

A) supply of loanable funds to the right, causing interest rates to fall. 
B) supply of loanable funds to the left, causing interest rates to rise. 
C) demand for loanable funds to the right, causing interest rates to rise. 
D) demand for loanable funds to the left, causing interest rates to fall. 
A) supply of loanable funds to the right, causing interest rates to fall. 
B) supply of loanable funds to the left, causing interest rates to rise. 
C) demand for loanable funds to the right, causing interest rates to rise. 
D) demand for loanable funds to the left, causing interest rates to fall.

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. 
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.

Question 10

In the small closed economy of San Lucretia, the currency is the denar. Statistics for last year show that private saving was 60 billion denars, taxes were 70 billion denars, government purchases of goods and services were 80 billion denars, there were no transfer payments by the government, and GDP was 400 billion denars. What were consumption and investment in San Lucretia?

Accepted Answer

A) 270 billion denars, 50 billion denars 
B) 260 billion denars, 60 billion denars 
C) 250 billion denars, 70 billion denars 
D) None of the above is correct. 
A) 270 billion denars, 50 billion denars 
B) 260 billion denars, 60 billion denars 
C) 250 billion denars, 70 billion denars 
D) None of the above is correct.

Question 11

Which of the following statements is correct?

Accepted Answer

A) Stocks, bonds, and deposits are all similar in that each provides a common medium of exchange. 
B) Most buyers of stocks and bonds prefer those issued by large and familiar companies. 
C) Banks charge borrowers a slightly lower interest rate than they pay to depositors. 
D) None of the above is correct. 
A) Stocks, bonds, and deposits are all similar in that each provides a common medium of exchange. 
B) Most buyers of stocks and bonds prefer those issued by large and familiar companies. 
C) Banks charge borrowers a slightly lower interest rate than they pay to depositors. 
D) None of the above is correct.

Question 12

If a share of stock in Skylight Chili sells for $75, the retained earnings per share are $5, and the divided per share is $2, then the price-earnings ratio is 15.

Accepted Answer

A) True 
 B)False

Question 13

Figure 13-3. The figure shows two demand-for-loanable-funds curves and two supply-of-loanable-funds curves.  
-Refer to Figure 13-3. 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. 
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 14

Which of the following statements is correct?

Accepted Answer

A) A large, well-known corporation such as Proctor and Gamble would generally use financial intermediation to finance expansion of its factories. 
B) On average, indexed funds outperform managed funds. 
C) Unlike corporate bonds and stocks, checking accounts are a store of value. 
D) Financial intermediaries are institutions through which savers can directly provide funds to borrowers. 
A) A large, well-known corporation such as Proctor and Gamble would generally use financial intermediation to finance expansion of its factories. 
B) On average, indexed funds outperform managed funds. 
C) Unlike corporate bonds and stocks, checking accounts are a store of value. 
D) Financial intermediaries are institutions through which savers can directly provide funds to borrowers.

Question 15

World Wide Delivery Service Corporation develops a way to speed up its deliveries and reduce its costs. We would expect that this would

Accepted Answer

A) raise the demand for existing shares of the stock, causing the price to rise. 
B) decrease the demand for existing shares of the stock, causing the price to fall. 
C) raise the supply of the existing shares of stock, causing the price to rise. 
D) raise the supply of the existing shares of stock, causing the price to fall. 
A) raise the demand for existing shares of the stock, causing the price to rise. 
B) decrease the demand for existing shares of the stock, causing the price to fall. 
C) raise the supply of the existing shares of stock, causing the price to rise. 
D) raise the supply of the existing shares of stock, causing the price to fall.

Question 16

If the nominal interest rate is 5 percent and the rate of inflation is 2 percent, then the real interest rate is

Accepted Answer

A) 7 percent. 
B) 3 percent. 
C) 2.5 percent. 
D) .4 percent. 
A) 7 percent. 
B) 3 percent. 
C) 2.5 percent. 
D) .4 percent.

Question 17

A high price-earnings ratio for a stock indicates that either the stock is

Accepted Answer

A) undervalued or people are relatively optimistic about the corporation's prospects. 
B) overvalued or people are relatively optimistic about the corporation's prospects. 
C) overvalued or people are relatively pessimistic about the corporation's prospects. 
D) undervalued or people are relatively pessimistic about the corporation's prospects. 
A) undervalued or people are relatively optimistic about the corporation's prospects. 
B) overvalued or people are relatively optimistic about the corporation's prospects. 
C) overvalued or people are relatively pessimistic about the corporation's prospects. 
D) undervalued or people are relatively pessimistic about the corporation's prospects.

Question 18

Which of the following would be included as investment in the GDP accounts?

Accepted Answer

A) the government buys goods from another country 
B) someone buys stock in an American company 
C) a firm increases its capital stock 
D) All of the above are correct. 
A) the government buys goods from another country 
B) someone buys stock in an American company 
C) a firm increases its capital stock 
D) All of the above are correct.

Question 19

The primary advantage of mutual funds is that they

Accepted Answer

A) always make a return that "beats the market." 
B) allow people with small amounts of money to diversify. 
C) provide customers with a medium of exchange. 
D) All of the above are correct. 
A) always make a return that "beats the market." 
B) allow people with small amounts of money to diversify. 
C) provide customers with a medium of exchange. 
D) All of the above are correct.

Question 20

Suppose a country had a smaller increase in debt in 2011 than it had in 2010. Then other things the same, we would expect

Accepted Answer

A) lower interest rates and investment in 2011 than in 2010. 
B) lower interest rates and greater investment in 2011 than in 2010. 
C) higher interest rates and greater investment in 2011 than in 2010. 
D) higher interest rates and lower investment in 2011 than in 2010. 
A) lower interest rates and investment in 2011 than in 2010. 
B) lower interest rates and greater investment in 2011 than in 2010. 
C) higher interest rates and greater investment in 2011 than in 2010. 
D) higher interest rates and lower investment in 2011 than in 2010.

Exam 13: Saving, Investment, and the Financial System

Which of the following statements is correct?

A perpetuity is distinguished from other bonds in that it

Jerry has the choice of two bonds, one that pays 3 percent interest and one that pays 6 percent interest. Which of the following is most likely?

Suppose the government ran a budget surplus in 2010 and a larger surplus in 2011. The loanable funds model would predict that, as a result of the increase in the surplus,

Consider the expressions T - G and Y - T - C. Which of the following statements is correct?

In a closed economy, national saving is

Suppose a government that taxed all interest income changed its tax law so that the first $5,000 of a taxpayer's interest income was tax free. This would shift the

As real interest rates fall, firms desire to

Which of the following statements is correct?

If a share of stock in Skylight Chili sells for $75, the retained earnings per share are $5, and the divided per share is $2, then the price-earnings ratio is 15.

Figure 13-3. The figure shows two demand-for-loanable-funds curves and two supply-of-loanable-funds curves. -Refer to Figure 13-3. A shift of the demand curve from D1 to D2 is called

Which of the following statements is correct?

World Wide Delivery Service Corporation develops a way to speed up its deliveries and reduce its costs. We would expect that this would

If the nominal interest rate is 5 percent and the rate of inflation is 2 percent, then the real interest rate is

A high price-earnings ratio for a stock indicates that either the stock is

Which of the following would be included as investment in the GDP accounts?

The primary advantage of mutual funds is that they

Suppose a country had a smaller increase in debt in 2011 than it had in 2010. Then other things the same, we would expect

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Elasticity and Its Application

Supply, Demand, and Government Policies

Consumers, Producers, and the Efficiency of Markets

Application: The Costs of Taxation

Application: International Trade

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

The Basic Tools of Finance

Unemployment

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomic Models

A Macroeconomic Theory of the Open Economy

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

The Short-Run Trade-Off Between Inflation and Unemployment

Six Debates Over Macroeconomic Policy

Filters

Figure 13-3. The figure shows two demand-for-loanable-funds curves and two supply-of-loanable-funds curves. -Refer to Figure 13-3. A shift of the demand curve from D₁ to D₂ is called