Deck 9: Saving, Investment, and the Financial System

Question 1

On the basis of their role in the financial system, venture capitalists are BEST described as:

A) borrowers.
B) savers.
C) financial intermediaries.
D) investors.

Answer 1

savers.

Question 2

Investment is:

A) the purchase of new capital goods.
B) income that is not spent on consumption goods.
C) the desire to have goods and services sooner rather than later (all else being equal).
D) a sophisticated IOU that documents who owes how much and when payment must be made.

Answer 2

the purchase of new capital goods.

Question 3

Individuals typically enjoy _____ consumption.

A) volatile
B) periodic
C) smooth
D) layered

Answer 3

smooth

Question 4

Savings is:

A) the purchase of new capital goods.
B) the purchase of new consumption goods.
C) income that is not spent on capital goods.
D) income that is not spent on consumption goods.

Question 5

Which of the following do economists consider an investment?

A) the purchase of bonds
B) the purchase of stocks
C) the construction of a new factory
D) the acquisition of gold

Question 6

The AIDS epidemic _____ the savings rate in Africa.

A) maintains
B) increases
C) decreases
D) indeterminately changes

Question 7

Which of the following is NOT considered saving?

A) making a deposit in a savings account at the bank
B) buying a share of stock in a computer company
C) buying a corporate bond
D) paying tuition for a college education

Question 8

In financial markets, which group best represents the demand side of the market?

A) stock markets
B) banks
C) borrowers
D) savers

Question 9

Investment is defined as:

A) income not spent on investment goods.
B) income not spent on consumption goods.
C) income not taxed by the government.
D) the purchase of new capital goods.

Question 10

What do we call income that is NOT spent on consumption goods?

A) investments
B) profits
C) asset retention
D) savings

Question 11

Savings is defined as:

A) income not spent on investment goods.
B) income not spent on consumption goods.
C) income not taxed by the government.
D) the purchase of new capital goods.

Question 12

In economics, investment refers to the:

A) purchase of new capital goods.
B) purchase of stocks and bonds.
C) amount of personal savings in a bank.
D) fund used to settle a debt.

Question 13

If income and consumption are equal, saving must be:

A) zero.
B) positive and rising.
C) positive and remaining relatively constant.
D) negative.

Question 14

Which of the following can be defined as saving according to economics?

A) General Motors issues corporate bonds.
B) Microsoft sells stock at an initial public offering.
C) Sandra purchases a certificate of deposit from a bank.
D) Andrea finances her new car through an auto loan.

Question 15

Investment is:

A) the purchase of new capital goods.
B) the purchase of new consumption goods.
C) the purchase of gold and silver during inflationary times.
D) the purchase of shares of stock on the New York Stock Exchange.

Question 16

Individual savings contributes to:

A) the supply of loanable funds.
B) the demand for loanable funds.
C) both the supply of loanable funds and the demand for loanable funds.
D) neither the supply of loanable funds nor the demand for loanable funds.

Question 17

Saving is:

A) the purchase of new capital goods.
B) income that is not spent on consumption goods.
C) the desire to have goods and services sooner rather than later (all else being equal).
D) a sophisticated IOU that documents who owes how much and when payment must be made.

Question 18

Buying stock in a company is:

A) investment.
B) divestment.
C) a transfer of ownership rights.
D) leverage.

Question 19

When a person's income is greater than her spending on consumption goods, then she is:

A) dissaving.
B) saving.
C) investing.
D) disinvesting.

Question 20

Which of the following is NOT a reason individuals typically choose to save?

A) to smooth their consumption over the life cycle
B) to offset fluctuations in income
C) as a way to transfer income from good times to bad times
D) to increase investment

Question 21

The desire to have goods and services soon rather than later is called:

A) investment.
B) consumption smoothing.
C) savings.
D) time preference.

Question 22

China has a higher saving rate than the United States. One economic explanation for this fact is that:

A) Americans are more irrational than the Chinese.
B) Americans are more rational than the Chinese.
C) there is a lower rate of time preference for Americans than for the Chinese.
D) there is a higher rate of time preference for Americans than for the Chinese.

Question 23

According to the consumption-smoothing theory, people with a longer life expectancy:

A) invest more in their lifetimes than those with shorter life expectancy.
B) have the same saving rates in their lifetimes as those with shorter life expectancy.
C) have higher savings rates in their lifetimes than those with shorter life expectancy.
D) have lower saving rates in their lifetimes than those with shorter life expectancy.

Question 24

Which is NOT a reason people save during their working lifetimes?

A) They save for retirement, especially if average life expectancy is higher.
B) They save to prepare for periods of unemployment.
C) They save to prepare for unexpected hospitalizations or illnesses.
D) They save to match income and spending from year to year.

Question 25

Workers who put 10% of their income into a retirement account each year are:

A) consuming all of their income.
B) smoothing consumption.
C) dissaving.
D) trying to match income and spending.

Question 26

In reference to the consumption-smoothing theory, a person typically saves the most:

A) during working years.
B) during retirement years.
C) as an infant.
D) as a full-time student.

Question 27

When a family's income becomes more uncertain, we expect its saving to:

A) increase.
B) decrease.
C) remain unchanged.
D) become more uncertain.

Question 28

People with a high time preference are less likely to:

A) engage in crime.
B) use heroin.
C) drop out of school.
D) save.

Question 29

Which of the following best represents time preference?

A) Sarah is spending $20,000 per year in tuition and other expenses to attend college with the hopes of earning a higher income in the future.
B) Max saves $300 per month from his paychecks for retirement.
C) Alex smokes a pack of cigarettes per day even though he knows that he may face poor health down the road because of his smoking habit.
D) Thomas invests money in Apple today, which is subsequently used by Apple to fund additional investment purchases that will benefit future shareholders.

Question 30

The consumption-smoothing theory implies that a country whose people have a very low life expectancy has:

A) low consumption.
B) high investment.
C) a low savings rate.
D) a high borrowing rate.

Question 31

An increase in life expectancy should cause saving in the United States to:

A) increase.
B) decrease.
C) remain unchanged.
D) become more volatile.

Question 32

Time preference is:

A) the purchase of new capital goods.
B) income that is not spent on consumption goods.
C) the desire to have goods and services sooner rather than later (all other things being equal).
D) a sophisticated IOU that documents who owes how much and when payment must be made.

Question 33

Why is saving so minimal in nations with a high population of AIDS victims?

A) People with a short life expectancy tend to save less.
B) Governments provide an extensive social safety net.
C) Interest rates are not high enough.
D) Unemployment rates are too high.

Question 34

All else equal, time preference is the desire to:

A) have goods and services sooner rather than later.
B) delay the purchase of goods and services.
C) have goods and services in retirement years.
D) have goods and services that are made in the current year.

Question 35

The main reason people save during their working years is:

A) a preference toward a smooth consumption path over time.
B) a high time preference for the present.
C) an expectation that they will die early.
D) a preference toward matching income with spending over time.

Question 36

All else being equal, a working-age person who has more patience tends to have:

A) more savings.
B) fewer savings.
C) more collateral.
D) less investment.

Question 37

Time preference is the desire to:

A) save for a time when income will be reduced.
B) have goods and services sooner rather than later.
C) maximize return on investment in the shortest amount of time.
D) increase longevity in order to have a greater income.

Question 38

Which of the following is NOT a reason people save during their working lifetimes?

A) so they do not have to drastically reduce their consumption once they retire
B) to consume later in life
C) to take precautionary measures in case of job loss
D) to allow for a more volatile consumption path over time

Question 39

Fluctuations in income cause most people to:

A) invest.
B) save.
C) spend all their income each year.
D) retire at an early age.

Question 40

A seasonal worker saves more when her income rises and saves less when her income falls. This behavior is referred to as:

A) dissaving.
B) consumption smoothing.
C) impatience.
D) time preference.

Question 41

Most individuals save during:

A) the early years of life only.
B) the middle years of life only.
C) the later years of life just before retirement.
D) the middle and later years of life before retirement.

Question 42

The supply of savings function shows the relationship between saving and:

A) consumption.
B) income.
C) age.
D) the interest rate.

Question 43

The supply of savings curve shows the relationship between savings and:

A) income.
B) investment.
C) age
D) the interest rate.

Question 44

Other things being equal, a person typically has the largest pool of savings:

A) upon completing school.
B) during the first year of working full time.
C) immediately before retirement.
D) at the time of death.

Question 45

Consumption smoothing means:

A) never borrowing.
B) borrowing every year to consume more than one earns.
C) borrowing to consume more than one's income in high-income years and consuming less than one's income in low-income years.
D) borrowing to consume more than one's income in low-income years and consuming less than one's income in high-income years.

Question 46

If $100 is saved at an annual interest rate of 10%, the return in one year will be:

A) $11.
B) $110.
C) $10.
D) $111.

Question 47

According to the life cycle theory of savings, a typical person's:

A) saving is smooth over their entire lifetime.
B) consumption is smooth over their entire lifetime.
C) consumption in a given year is related to their income in that year.
D) saving is the highest when they die.

Question 48

The supply of savings is positively sloped because:

A) firms borrow more when interest rates are low.
B) people are enticed to forgo consumption when interest rates are higher.
C) when people have more incomes they save more.
D) of time preference.

Question 49

If the interest rate increases, then:

A) the quantity saved will decrease but the quantity supplied of loanable funds will increase.
B) the quantity saved will increase but the quantity supplied of loanable funds will decrease.
C) both the quantity saved and the quantity supplied of loanable funds will decrease.
D) both the quantity saved and the quantity supplied of loanable funds will increase.

Question 50

The savings supply curve is:

A) upward sloping.
B) downward sloping.
C) horizontal.
D) vertical.

Question 51

What is an example of impatience in economic behavior?

A) taking the first job you are offered
B) insisting on getting a physical exam every year
C) asking for your grade right after finishing a test
D) eating a healthy diet every day

Question 52

Economist Franco Modigliani's lifecycle theory of savings proposes that in order to maximize lifetime satisfaction, consumers:

A) practice consumption smoothing by borrowing and saving.
B) borrow equal amounts throughout the life cycle.
C) save equal amounts throughout their life cycle.
D) consume what they earn each year.

Question 53

The price of savings is:

A) the interest rate.
B) the investment rate.
C) the savings rate.
D) the rate of time preference.

Question 54

People smooth their consumption over their lifetime by:

A) saving.
B) borrowing.
C) both borrowing and saving.
D) neither borrowing nor saving.

Question 55

People will usually save more if the interest rate:

A) is higher.
B) is lower.
C) moves erratically.
D) is zero.

Question 56

The lifecycle theory of savings predicts individuals will save during:

A) the early years of life.
B) the middle years of life.
C) the later years of life.
D) all phases of life.

Question 57

Higher interest rates typically _____ saving, ceteris paribus.

A) decrease
B) maintain
C) increase
D) indeterminately change

Question 58

Which of the following explains why the supply of savings is upward sloping?

A) An increase in the interest rate leads to an increase in the quantity of saving.
B) An increase in the interest rate leads to an increase in the opportunity cost of saving.
C) An increase in investment leads to an increase in the level of saving.
D) An increase in time preference leads to an increase in the quantity of saving.

Question 59

The supply of savings function is:

A) upward sloping.
B) downward sloping.
C) vertical.
D) horizontal.

Question 60

The supply curve for savings indicates that the higher the interest rate, the:

A) larger the quantity saved.
B) smaller the quantity saved.
C) larger the saver's income.
D) smaller the saver's income.

Question 61

Which of the following is NOT an example of the need to borrow to finance large investments?

A) Megan takes out a mortgage in order to purchase her first home.
B) The government issues additional bonds in order to build a new interstate highway system.
C) Jamie pays for college by working two jobs on the weekends.
D) Donald Trump applies for a $1 million loan in order to build a new golf course.

Question 62

At which stage in life does someone generally dissave the most?

A) shortly after taking the first job
B) during middle age
C) while raising a family
D) during retirement

Question 63

Businesses will take out additional loans only if:

A) they have no other way to obtain funds.
B) the interest rate is less than the expected rate of return on their investment.
C) the demand for investment is equal to the supply of savings.
D) the interest rate is less than the cost of borrowing.

Question 64

When the interest rate increases, the:

A) amount of savings in banks decreases.
B) amount of borrowing to finance investments decreases.
C) cost of borrowing decreases.
D) return on investments increases.

Question 65

The demand to borrow shows the relationship between borrowing and:

A) income.
B) investment.
C) age
D) the interest rate.

Question 66

The supply of loanable funds comes from _____, and the demand for loanable funds comes from _____.

A) saving; investment
B) investment; saving
C) saving; consumption
D) investment; consumption

Question 67

The demand to borrow function is:

A) upward sloping.
B) downward sloping.
C) horizontal.
D) vertical.

Question 68

In economics, investment refers to:

A) saving.
B) dissaving.
C) the purchase of consumption goods.
D) the purchase of capital goods.

Question 69

Which of the following is NOT a reason people borrow?

A) to engage in consumption smoothing
B) to sustain themselves through periods of unemployment
C) to fund unexpected expenditures
D) to equalize income and spending period by period

Question 70

What theory describes a pattern of early borrowing followed by a period of saving and then dissaving late in a worker's lifetime?

A) the lifecycle theory of savings
B) the career theory of dissaving
C) the demand theory of borrowing
D) the theory of cyclical smoothing

Question 71

In the lifecycle theory of savings, the sequence of behavior is as follows:

A) borrow, dissave, save.
B) borrow, save, dissave.
C) save, borrow, dissave.
D) save, dissave, borrow.

Question 72

People will usually borrow more if the interest rate:

A) is higher.
B) is lower.
C) moves erratically.
D) is stable.

Question 73

Some businesses can't start small, and therefore:

A) they must borrow or attract venture capitalists to start at all.
B) none of these businesses ever get off the ground.
C) they are no different from any other business.
D) these businesses are always owned by the government.

Question 74

Which of the following is NOT a reason firms and individuals borrow?

A) They want to smooth consumption.
B) Debt is often necessary for large purchases.
C) They believe their return will be greater than the interest rate.
D) They desire to have equal income and spending every period.

Question 75

In the lifecycle theory of saving, one's consumption path is _____ one's income path.

A) more volatile than
B) less volatile than
C) as volatile as
D) equal to

Question 76

Why is the demand for loanable funds downward sloping?

A) People save less when the interest rate is low.
B) More people borrow money when interest rates are low than when they are high.
C) Fewer investment projects have returns that can beat higher interest rates, so people are more willing to invest at higher interest rates.
D) People save more when the interest rate is high.

Question 77

Which of the following is TRUE about the lifecycle theory of savings?

A) People tend to save during the early years of their lifetimes, dissave during their prime working years, and borrow during their retirement years.
B) People tend to borrow during the early years of their lifetimes, invest during their prime working years, and save during their retirement years.
C) People tend to borrow during the early years of their lifetimes, save during their prime working years, and dissave during their retirement years.
D) People tend to save during the early years of their lifetimes, borrow during their prime working years, and invest during their retirement years.

Question 78

Why is the demand to borrow positively related to the rate of economic growth?

A) Lenders obtain additional wealth.
B) It provides motivation to keep spending to a minimum.
C) The incentive to invest is enhanced by economic growth.
D) It increases the opportunity cost of borrowing.

Question 79

The demand to borrow function shows the relationship between borrowing money and:

A) consumption.
B) income.
C) age.
D) the interest rate.

Question 80

Higher interest rates typically _____ borrowing, ceteris paribus.

A) decrease
B) maintain
C) increase
D) indeterminately change