Question 1

A low price-earnings ratio 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 2

Cassie purchases 1,000 shares of a mutual fund for $1,000. Cassie's purchase of these shares contributes $1,000 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. 
A) C 
B) I 
C) G 
D) None of the above are correct.

Question 3

People who buy newly issued stock in a corporation such as Crate and Barrel provide

Accepted Answer

A) debt finance and so become part owners of Crate and Barrel. 
B) debt finance and so become creditors of Crate and Barrel. 
C) equity finance and so become part owners of Crate and Barrel. 
D) equity finance and so become creditors of Crate and Barrel. 
A) debt finance and so become part owners of Crate and Barrel. 
B) debt finance and so become creditors of Crate and Barrel. 
C) equity finance and so become part owners of Crate and Barrel. 
D) equity finance and so become creditors of Crate and Barrel.

Question 4

A mutual fund

Accepted Answer

A) is a financial market where small firms mutually agree to sell stocks and bonds to raise funds. 
B) is funds set aside by local governments to lend to small firms who want to invest in projects that are mutually beneficial to the firm and community. 
C) sells stocks and bonds on behalf of small and less known firms who would otherwise have to pay high interest to obtain credit. 
D) is an institution that sells shares to the public and uses the proceeds to buy a selection of various types of stocks, bonds, or both stocks and bonds. 
A) is a financial market where small firms mutually agree to sell stocks and bonds to raise funds. 
B) is funds set aside by local governments to lend to small firms who want to invest in projects that are mutually beneficial to the firm and community. 
C) sells stocks and bonds on behalf of small and less known firms who would otherwise have to pay high interest to obtain credit. 
D) is an institution that sells shares to the public and uses the proceeds to buy a selection of various types of stocks, bonds, or both stocks and bonds.

Question 5

The term crowding out refers to decreases in the interest rate caused by government budget surpluses.

Accepted Answer

A) True 
 B)False

Question 6

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. 
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 7

Long-term bonds are

Accepted Answer

A) riskier than short-term bonds, and so interest rates on long-term bonds are usually lower than interest rates on short-term bonds. 
B) riskier than short-term bonds, and so interest rates on long-term bonds are usually higher than interest rates on short-term bonds. 
C) less risky than short-term bonds, and so interest rates on long-term bonds are usually lower than interest rates on short-term bonds. 
D) less risky than short-term bonds, and so interest rates on long-term bonds are usually higher than interest rates on short-term bonds. 
A) riskier than short-term bonds, and so interest rates on long-term bonds are usually lower than interest rates on short-term bonds. 
B) riskier than short-term bonds, and so interest rates on long-term bonds are usually higher than interest rates on short-term bonds. 
C) less risky than short-term bonds, and so interest rates on long-term bonds are usually lower than interest rates on short-term bonds. 
D) less risky than short-term bonds, and so interest rates on long-term bonds are usually higher than interest rates on short-term bonds.

Question 8

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. 
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 9

A closed economy does not

Accepted Answer

A) trade with other economies. 
B) have free markets. 
C) allow financial intermediation. 
D) All of the above are correct. 
A) trade with other economies. 
B) have free markets. 
C) allow financial intermediation. 
D) All of the above are correct.

Question 10

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 
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 11

Suppose a small closed economy has GDP of $5 billion, consumption of $3 billion, and government expenditures of $1 billion. Then investment and national saving are both $1 billion.

Accepted Answer

A) True 
 B)False

Question 12

Index funds

Accepted Answer

A) buy all the stocks in a given stock index. 
B) promise to beat the market by a certain percentage known as an index. 
C) provide a return that is adjusted for changes in the consumer price index. 
D) buy industries within a particular category of the North American Industry Classification System. 
A) buy all the stocks in a given stock index. 
B) promise to beat the market by a certain percentage known as an index. 
C) provide a return that is adjusted for changes in the consumer price index. 
D) buy industries within a particular category of the North American Industry Classification System.

Question 13

Profits not paid out to stockholders are

Accepted Answer

A) retained earnings. 
B) known as dividends. 
C) the denominator in the price-earnings ratio. 
D) All of the above are correct. 
A) retained earnings. 
B) known as dividends. 
C) the denominator in the price-earnings ratio. 
D) All of the above are correct.

Question 14

Suppose a closed economy had public saving of $2 trillion and private saving of $4 trillion. What are national saving and investment for this country?

Accepted Answer

A) $6 trillion, $6 trillion 
B) $6 trillion, $2 trillion 
C) $1 trillion, $4 trillion 
D) $2 trillion, $2 trillion 
A) $6 trillion, $6 trillion 
B) $6 trillion, $2 trillion 
C) $1 trillion, $4 trillion 
D) $2 trillion, $2 trillion

Question 15

Retained earnings are

Accepted Answer

A) earnings of a company that are not paid out to stockholders. 
B) the amount of revenue a corporation receives for the sale of its products minus its costs of production as measured by its accountants. 
C) the single most important piece of information about a stock. 
D) computed by multiplying the dividend yield by the price of the stock. 
A) earnings of a company that are not paid out to stockholders. 
B) the amount of revenue a corporation receives for the sale of its products minus its costs of production as measured by its accountants. 
C) the single most important piece of information about a stock. 
D) computed by multiplying the dividend yield by the price of the stock.

Question 16

You observe a closed economy that has a government deficit and positive investment. Which of the following is correct?

Accepted Answer

A) Private and public saving are both positive. 
B) Private saving is positive; public saving is negative. 
C) Private saving is negative; public saving is positive. 
D) Both private saving and public saving are negative. 
A) Private and public saving are both positive. 
B) Private saving is positive; public saving is negative. 
C) Private saving is negative; public saving is positive. 
D) Both private saving and public saving are negative.

Question 17

We interpret the term loanable funds to mean the flow of resources available to fund private investment.

Accepted Answer

A) True 
 B)False

Question 18

Bay City Mining, Inc. has a price of $20 a share, outstanding shares of 2.5 million, retained earnings of $1 million dollars, and a dividend yield of 2 percent. It has a price-earnings ratio of

Accepted Answer

A) 50, which is high by historical standards. 
B) 50, which is low by historical standards. 
C) 25, which is high by historical standards. 
D) 25, which is low by historical standards. 
A) 50, which is high by historical standards. 
B) 50, which is low by historical standards. 
C) 25, which is high by historical standards. 
D) 25, which is low by historical standards.

Question 19

If national saving in a closed economy is greater than zero, which of the following must be true?

Accepted Answer

A) Either public saving or private saving must be greater than zero. 
B) Investment is positive. 
C)  $$Y - C - G > 0$$ 
D) All of the above are correct. 
A) Either public saving or private saving must be greater than zero. 
B) Investment is positive. 
C)  $$Y - C - G > 0$$ 
D) All of the above are correct.

Question 20

Compared to bondholders, stockholders

Accepted Answer

A) face higher risk and have the potential for higher returns. 
B) face higher risk but receive a fixed payment. 
C) face lower risk and have the potential for higher returns. 
D) face lower risk but receive a fixed payment. 
A) face higher risk and have the potential for higher returns. 
B) face higher risk but receive a fixed payment. 
C) face lower risk and have the potential for higher returns. 
D) face lower risk but receive a fixed payment.

Exam 13: Saving, Investment, and the Financial System

A low price-earnings ratio indicates that either the stock is

Cassie purchases 1,000 shares of a mutual fund for $1,000. Cassie's purchase of these shares contributes $1,000 to which magnitude in the identity Y = C + I + G?

People who buy newly issued stock in a corporation such as Crate and Barrel provide

A mutual fund

The term crowding out refers to decreases in the interest rate caused by government budget surpluses.

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

Long-term bonds are

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

A closed economy does not

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

Suppose a small closed economy has GDP of $5 billion, consumption of $3 billion, and government expenditures of $1 billion. Then investment and national saving are both $1 billion.

Index funds

Profits not paid out to stockholders are

Suppose a closed economy had public saving of $2 trillion and private saving of $4 trillion. What are national saving and investment for this country?

Retained earnings are

You observe a closed economy that has a government deficit and positive investment. Which of the following is correct?

We interpret the term loanable funds to mean the flow of resources available to fund private investment.

Bay City Mining, Inc. has a price of $20 a share, outstanding shares of 2.5 million, retained earnings of $1 million dollars, and a dividend yield of 2 percent. It has a price-earnings ratio of

If national saving in a closed economy is greater than zero, which of the following must be true?

Compared to bondholders, stockholders

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

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