Question 1

In a closed economy, each unit of output is either consumed or invested.

Accepted Answer

A) True 
 B)False

Question 2

Your brother-in-law wants to buy either stock or bonds in Cedar Valley Furniture, which manufactures wooden furniture. He wants your advice on whether to buy stock or bonds. Explain how each of his quotes below should affect his choice between the stock and the bond.
a."I have reason to believe that people are soon going to find rocking chairs have health benefits."
b."I would like to tell people I am part owner of Cedar Valley Furniture."
c."I do not want to take on much risk."

Accepted Answer

a.Presumably, when this happens, unless

Question 3

Which of the following is a certificate of indebtedness?

Accepted Answer

A) both stocks and bonds 
B) stocks but not bonds 
C) bonds but not stocks 
D) neither stocks nor bonds 
A) both stocks and bonds 
B) stocks but not bonds 
C) bonds but not stocks 
D) neither stocks nor bonds

Question 4

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

Accepted Answer

A) raise national saving and public saving. 
B) raise national saving and raise public saving. 
C) leave national saving and public saving unchanged. 
D) leave national saving unchanged and raise public saving. 
A) raise national saving and public saving. 
B) raise national saving and raise public saving. 
C) leave national saving and public saving unchanged. 
D) leave national saving unchanged and raise public saving.

Question 5

In a closed economy, investment must be equal to private saving.

Accepted Answer

A) True 
 B)False

Question 6

Suppose that in a closed economy GDP is 11,000, consumption is 7,500, and taxes are 2,000. What value of government purchases would make national savings equal to 1,000 and at that value would the government have a deficit or surplus?

Accepted Answer

A) 2,500, deficit 
B) 2,500, surplus 
C) 1,000, deficit 
D) 1,000, surplus 
A) 2,500, deficit 
B) 2,500, surplus 
C) 1,000, deficit 
D) 1,000, surplus

Question 7

Using a graph representing the market for loanable funds, show and explain what happens to interest rates and investment if the government budget goes from a deficit to a surplus.

Accepted Answer

As shown in the graph below, the economy

Question 8

Figure 13-4. On the horizontal axis of the graph, L represents the quantity of loanable funds in billions of dollars.  
-Refer to Figure 13-4. The position and/or slope of the Supply curve are influenced by

Accepted Answer

A) the level of public saving. 
B) the level of national saving. 
C) decisions made by people who have extra income they want to save and lend out. 
D) All of the above are correct. 
A) the level of public saving. 
B) the level of national saving. 
C) decisions made by people who have extra income they want to save and lend out. 
D) All of the above are correct.

Question 9

When a corporation experiences financial problems, bondholders are paid before stockholders.

Accepted Answer

A) True 
 B)False

Question 10

In 2008, XYZ Corporation had total earnings of $200 million and 50 million shares of the corporation's stock were outstanding. If the price-earnings ratio for XYZ is 20, then what is the price of a share of its stock?

Accepted Answer

A) $5 
B) $10 
C) $80 
D) $500 
A) $5 
B) $10 
C) $80 
D) $500

Question 11

Compared to stocks, bonds offer the holder

Accepted Answer

A) lower risk and lower potential return. 
B) lower risk and higher potential return. 
C) higher risk and lower potential return. 
D) higher risk and higher potential return. 
A) lower risk and lower potential return. 
B) lower risk and higher potential return. 
C) higher risk and lower potential return. 
D) higher risk and higher potential return.

Question 12

Which of the following would a macroeconomist consider as investment?

Accepted Answer

A) Marisa purchases a bond issued by Proctor and Gamble Corp. 
B) Karlee purchases stock issued by Texas Instruments, Inc. 
C) Charlie builds a new coffee shop. 
D) All of the above are correct. 
A) Marisa purchases a bond issued by Proctor and Gamble Corp. 
B) Karlee purchases stock issued by Texas Instruments, Inc. 
C) Charlie builds a new coffee shop. 
D) All of the above are correct.

Question 13

Lenders sell bonds and borrowers buy them.

Accepted Answer

A) True 
 B)False

Question 14

Stock in Creole Cuisine Restaurants is selling at $25 per share. Creole Cuisine had earnings of $5 a share and a dividend yield of 5 percent. The dividend is

Accepted Answer

A) $0.25 and the price-earnings ratio is 5. 
B) $.25 and the price-earnings ratio is 6.7. 
C) $1.25 and the price-earnings ratio is 5. 
D) $1.25 and the price-earnings ratio is 6.7. 
A) $0.25 and the price-earnings ratio is 5. 
B) $.25 and the price-earnings ratio is 6.7. 
C) $1.25 and the price-earnings ratio is 5. 
D) $1.25 and the price-earnings ratio is 6.7.

Question 15

Suppose in some country that the first $5,000 of interest income is exempt from income tax. If the government then removed this exemption

Accepted Answer

A) the interest rate and investment would rise. 
B) the interest rate would rise and investment would fall. 
C) the interest rate would fall and investment would rise. 
D) the interest rate and investment would fall. 
A) the interest rate and investment would rise. 
B) the interest rate would rise and investment would fall. 
C) the interest rate would fall and investment would rise. 
D) the interest rate and investment would fall.

Question 16

The financial system coordinates investment and saving, which are important determinants of long-run real GDP.

Accepted Answer

A) True 
 B)False

Question 17

If the nominal interest rate is 10 percent and the inflation rate is 4 percent, then the real interest rate is

Accepted Answer

A) 14 percent. 
B) 6 percent. 
C) 2.5 percent. 
D) .4 percent. 
A) 14 percent. 
B) 6 percent. 
C) 2.5 percent. 
D) .4 percent.

Question 18

Two bonds have the same term to maturity. The first was issued by a state government and the probability of default is believed to be low. The other was issued by a corporation and the probability of default is believed to be high. Which of the following is correct?

Accepted Answer

A) Because they have the same term to maturity the interest rates should be the same. 
B) Because of the differences in tax treatment and credit risk, the state bond should have the higher interest rate. 
C) Because of the differences in tax treatment and credit risk, the corporate bond should have the higher interest rate. 
D) It is not possible to say if one bond has a higher interest rate than the other. 
A) Because they have the same term to maturity the interest rates should be the same. 
B) Because of the differences in tax treatment and credit risk, the state bond should have the higher interest rate. 
C) Because of the differences in tax treatment and credit risk, the corporate bond should have the higher interest rate. 
D) It is not possible to say if one bond has a higher interest rate than the other.

Question 19

Which of the following statements is not correct?

Accepted Answer

A) If GDP is rising faster than debt, the government is, in some sense, living within its means. 
B) The ratio of debt to GDP in the United States has always been less than one. 
C) Debts during wars may distribute the burden of fighting the war more evenly across generations. 
D) During times of peace in the United States, the ratio of debt to GDP sometimes rose. 
A) If GDP is rising faster than debt, the government is, in some sense, living within its means. 
B) The ratio of debt to GDP in the United States has always been less than one. 
C) Debts during wars may distribute the burden of fighting the war more evenly across generations. 
D) During times of peace in the United States, the ratio of debt to GDP sometimes rose.

Question 20

On which of these bonds is the prospect of default most likely?

Accepted Answer

A) a junk bond 
B) a municipal bond 
C) a U.S. government bond 
D) a corporate bond issued by Proctor & Gamble Corporation 
A) a junk bond 
B) a municipal bond 
C) a U.S. government bond 
D) a corporate bond issued by Proctor & Gamble Corporation

Exam 13: Saving, Investment, and the Financial System

In a closed economy, each unit of output is either consumed or invested.

Which of the following is a certificate of indebtedness?

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

In a closed economy, investment must be equal to private saving.

Suppose that in a closed economy GDP is 11,000, consumption is 7,500, and taxes are 2,000. What value of government purchases would make national savings equal to 1,000 and at that value would the government have a deficit or surplus?

Using a graph representing the market for loanable funds, show and explain what happens to interest rates and investment if the government budget goes from a deficit to a surplus.

Figure 13-4. On the horizontal axis of the graph, L represents the quantity of loanable funds in billions of dollars. -Refer to Figure 13-4. The position and/or slope of the Supply curve are influenced by

When a corporation experiences financial problems, bondholders are paid before stockholders.

In 2008, XYZ Corporation had total earnings of $200 million and 50 million shares of the corporation's stock were outstanding. If the price-earnings ratio for XYZ is 20, then what is the price of a share of its stock?

Compared to stocks, bonds offer the holder

Which of the following would a macroeconomist consider as investment?

Lenders sell bonds and borrowers buy them.

Stock in Creole Cuisine Restaurants is selling at $25 per share. Creole Cuisine had earnings of $5 a share and a dividend yield of 5 percent. The dividend is

Suppose in some country that the first $5,000 of interest income is exempt from income tax. If the government then removed this exemption

The financial system coordinates investment and saving, which are important determinants of long-run real GDP.

If the nominal interest rate is 10 percent and the inflation rate is 4 percent, then the real interest rate is

Two bonds have the same term to maturity. The first was issued by a state government and the probability of default is believed to be low. The other was issued by a corporation and the probability of default is believed to be high. Which of the following is correct?

Which of the following statements is not correct?

On which of these bonds is the prospect of default most likely?

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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