Deck 14: The Basics of Finance

Question 1

An example of a buyer in a financial market would be:

A) families buying new houses.
B) students saving for college.
C) corporations loaning money to other firm.
D) families putting money away for the future.

Answer 1

families buying new houses.

Question 2

Because a bank has a very large pool of buyers and savers, it can:

A) act as an intermediary between firms and government.
B) provide liquidity to some individuals that deposit funds.
C) diversify the risk of saving and borrowing for individuals.
D) act in the best interest of society by ensuring there is enough money for people.

Answer 2

diversify the risk of saving and borrowing for individuals.

Question 3

The market for loanable funds is a market in which:

A) savers supply funds to those who want to borrow for their investment spending needs.
B) borrowers buy and sell loans.
C) savers interact to set the interest rate for loans.
D) borrowers supply funds to savers, who want loans for their investment spending needs.

Answer 3

savers supply funds to those who want to borrow for their investment spending needs.

Question 4

Moral hazard describes a scenario in which:

A) behaving morally produces a negative consequence.
B) people behave more risky or renege on agreements when they do not face the full consequences of their actions
C) people behave in a riskier fashion because they don't understand the consequences of their actions.
D) when people behave morally they put themselves in a hazardous situation.

Question 5

A bank provides:

A) liquidity; that is, access to cash when and where you want it.
B) liquidity; that is, it connects buyers to sellers to ease saving and borrowing.
C) risk diversification; that is, access to cash when and where you want it.
D) risk diversification; that is, connecting buyers and sellers to ease saving and borrowing.

Question 6

Banks act as:

A) an organizer among firms in a specific market.
B) intermediaries between borrowers and savers.
C) informants to various buyers about prices and contracts.
D) a negotiator for buyers.

Question 7

Two common economic problems that may arise from asymmetric information are:

A) moral consequence and adverse selection.
B) moral hazard and adverse selection.
C) moral hazard and adverse decisions.
D) moral consequence and adverse decisions.

Question 8

An example of a seller in a financial market would be:

A) entrepreneurs starting new ventures.
B) the government when it needs to finance public spending.
C) individuals who have a savings account.
D) families buying new cars

Question 9

Information asymmetries are defined to be when:

A) one party to a transaction has more information that another.
B) information isn't readily available to anyone.
C) both sides to a transaction have equal information.
D) one party withholds information from the other party.

Question 10

A bank acts as _________________ between buyers and sellers.

A) an intermediary
B) a negotiator
C) an agent
D) an interpersonal communicant

Question 11

Banks act as an intermediary between savers and borrowers by determining the:

A) price at which the quantity of funds saved will be equal to the quantity invested.
B) quantity of funds that will be saved depending on the price.
C) quantity of funds that will be borrowed, for any given quantity of savings.
D) price at which the quantity of funds saved will be more than enough for those who want to borrow.

Question 12

Adverse selection refers to when:

A) one party to a transaction has more information than the other and this results in a bargaining dispute.
B) one party selects the wrong strategy and they are displeased with their selection.
C) one party to a transaction has more information than the other and transactions occur less frequently due to the information asymmetry.
D) neither party is willing to be party to a transaction because they don't have enough information.

Question 13

A financial market is where people trade:

A) future claims on funds or goods.
B) current claims for future goods.
C) current goods for future funds.
D) future funds or goods for reduced current risk.

Question 14

In financial markets, buyers are people who:

A) want to spend money on something of value right now, but don't have cash on hand.
B) have cash on hand and are willing to let others use it, for a price.
C) want to spend money on something of big value in the future, but don't know how to save for it.
D) have cash promised to them at some future date.

Question 15

The transactions that take place in the financial markets:

A) can be very complex.
B) are very simple.
C) are always to the buyer's advantage.
D) are always to the seller's advantage.

Question 16

The basic purpose of financial markets is:

A) match people who want money to spend now with people who want to save their money for later.
B) buy and sell different currencies in order to make a profit.
C) sell commodities to firms as inputs.
D) buy commodities from firms and the government to sell to the public.

Question 17

In general, information asymmetries are _________________ within financial markets.

A) common
B) not accounted for
C) uncommon
D) not easily accounted for

Question 18

In financial markets, sellers are people who:

A) have cash on hand and are willing to let others use it, for a price.
B) want to spend money on something of value right now, but don't have cash on hand.
C) want to spend money on something of big value in the future, but don't know how to save for it.
D) have cash promised to them at some future date.

Question 19

The financial system:

A) brings together savers and borrowers in a set of interconnected markets where people trade a variety of financial products.
B) connects the government to those truly in need of public services.
C) is used to help individuals keep track of the general price level.
D) gathers information about the economy in an effort to inform the public.

Question 20

A bank allows us to diversify risk because it has a:

A) big pool of borrowers and savers, so the risk of repayment is spread among many.
B) small amount of borrowers, but many savers, so it can combine savings to make larger loans.
C) small amount of borrowers and savers, so it can connect the optimal saver to the best-matched borrower.
D) big pool of borrowers, but not many savers, so it can choose the riskiest person to borrow from.

Question 21

The supply of loanable funds comes from:

A) savings.
B) investment.
C) borrowers.
D) taxes.

Question 22

The principal of a loan is the:

A) original amount of the loan.
B) set of rules and conditions borrowers agree to when taking out a loan.
C) set of rules and conditions savers agree to when agreeing to let someone borrow their money.
D) original amount that people want to borrow.

Question 23

The quantity of savings that people are willing to supply will depend on:

A) the price they will receive.
B) the amount they have left over after consumption.
C) their disposable income.
D) their age, since people tend to stop saving once they retire.

Question 24

Borrowing is like:

A) selling the right to use your money for a time.
B) buying the right to use someone else's money.
C) selling the right to use someone else's money.
D) buying the right to use your money for a time.

Question 25

The equilibrium in the market for loanable funds is:

A) at the interest rate set by the Fed.
B) at the price at which the quantity supplied is slightly greater than quantity demanded.
C) where the amount being borrowed and the amount being saved is the same.
D) where the amount being saved is enough for banks to cover required reserves.

Question 26

The supply of loanable funds comes from all the following, but:

A) businesses.
B) individuals.
C) government.
D) borrowers.

Question 27

In the market for loanable funds, the supply curve:

A) represents savers.
B) is downward sloping.
C) reflects that more people will choose to save the lower is the interest rate.
D) is made up of people who want to borrow funds.

Question 28

The price of borrowing is known as the:

A) equilibrium price.
B) interest rate.
C) transaction cost.
D) None of these is true.

Question 29

The portion of income that is spent on productive inputs, such as factories, machinery, and inventories, is called:

A) investment.
B) savings.
C) consumption spending.
D) loanable funds.

Question 30

If Jen takes out a $2,000 loan for one year at 10 percent interest annually, the price she will pay for borrowing is:

A) $2,000.
B) $2,200.
C) $200.
D) $2,400.

Question 31

Saving is like:

A) selling the right to use your money for a time.
B) buying the right to use someone else's money.
C) selling the right to use someone else's money.
D) buying the right to use your money for a time.

Question 32

The demand for loanable funds comes from:

A) investment.
B) savings.
C) the government printing money.
D) households spending on nondurable goods.

Question 33

Savers supply funds to those who want to borrow for their investment spending needs in the:

A) market for loanable funds.
B) market for savings.
C) market for interest rates.
D) stock market.

Question 34

Savings and investment are equal:

A) at the equilibrium in the market for loanable funds.
B) because banks regulate their flow.
C) at an interest rate set by the Fed.
D) when banks operate according to banking regulations.

Question 35

Savings is considered the portion of income:

A) that is not immediately spent on consumption of goods and services.
B) that is spent on productive inputs, such as factories, machinery, and inventories.
C) that is placed in an individual's savings account.
D) in any interest-bearing account.

Question 36

Economists use the word investment to refer to the portion of income that is:

A) spent on productive inputs, such as factories, machinery, and inventories.
B) not immediately spent on consumption of goods and services.
C) placed in an individual's savings account.
D) in any interest-bearing account.

Question 37

If Nate takes out a $5,000 loan for one year at 10 percent annual interest, the principal is:

A) $5,000.
B) $5,500.
C) $500.
D) $1000.

Question 38

The interest rate:

A) is the price of borrowing money for a specified period of time.
B) is expressed as a percentage per dollar borrowed and per unit of time.
C) determines the total amount that must be paid back on a loan.
D) All of these are true.

Question 39

If Howard takes out a $400 loan for one year at 5 percent interest annually, he will pay back a total of:

A) $400.
B) $440.
C) $420.
D) $20.

Question 40

The portion of income that is not immediately spent on consumption of goods and services is:

A) savings.
B) consumption spending.
C) investment.
D) loanable funds.

Question 41

Sarah is able to take out a loan for $5000 for one year at an annual interest rate of 10 percent. After calculating her return to be $450, Sarah will:

A) make $450 on net, and should take out the loan.
B) lose $450 on net, and should not take out the loan.
C) make $50 on net, and should take out the loan.
D) lose $50 on net, and should not take out the loan.

Question 42

Suppose investors become more optimistic that the economy will be doing well over the next decade. How will the market for loanable funds as depicted in the accompanying graph be affected?

A) Supply will shift to the right from S₁ to S₂.
B) Supply will shift to the left from S₂ to S₁.
C) Demand will shift to the right from D₁ to D₂.
D) Demand will shift to the left from D₂ to D₁.

Question 43

Good current economic conditions incent people to save _______, and a good outlook on future economic conditions incent people to save _________.

A) more; less
B) more; more
C) less; more
D) less; less

Question 44

If the rate of return is lower than the cost of borrowing the:

A) investor will lose money on net after paying back the loan.
B) investor should take out the loan.
C) borrower will make money by taking out the loan.
D) savers will lose out by taking a loan.

Question 45

In the market for loanable funds, the demand curve:

A) represents savers.
B) is downward sloping.
C) reflects that more people will choose to save the higher is the interest rate.
D) is upward sloping.

Question 46

If the rate of return is higher than the cost of borrowing the:

A) investor will lose money on net after paying back the loan.
B) investor will make money on net after paying back the loan.
C) saver will make less money on net than the borrower.
D) borrower will make more money on net than the saver.

Question 47

Studies show that __________ households tend to save more of their income than others, and also show that ____________ households save more out of tax cuts than others do.

A) richer; poorer
B) richer; richer
C) poorer; richer
D) poorer; poorer

Question 48

Considering the market for loanable funds as depicted in the given graph, a change that increased the quantity people want to save at any given interest rate would cause a new equilibrium at a:

A) lower interest rate and a higher equilibrium quantity of funds saved and invested.
B) higher interest rate and a higher equilibrium quantity of funds saved and invested.
C) lower interest rate and a lower equilibrium quantity of funds saved and invested.
D) higher interest rate and a lower equilibrium quantity of funds saved and invested.

Question 49

After taking out a one year loan with an annual interest rate of 10 percent, Tommy pays $3,300 back to the bank. The principal of the loan must be ___________ and the interest payment must be ___________.

A) $3,000; $300
B) $3,300; $300
C) $300; $3,300
D) $300; $3,000

Question 50

The fact that U.S. citizens expect to receive retirement benefits through Social Security and Medicare pushes their:

A) demand for loanable funds further right than it would otherwise be.
B) demand for loanable funds further left than it would otherwise be.
C) supply of loanable funds further right than it would otherwise be.
D) supply of loanable funds further left than it would otherwise be.

Question 51

If citizens expect to bear more of the burden for their own health care and retirement costs in the future, then we would expect their:

A) demand for loanable funds further right than it would otherwise be.
B) demand for loanable funds further left than it would otherwise be.
C) supply of loanable funds further right than it would otherwise be.
D) supply of loanable funds further left than it would otherwise be.

Question 52

John is able to take out a loan for $1,000 for one year at an annual interest rate of 10 percent. After calculating his return to be $200, John will:

A) make money on net, and should take out the loan.
B) make money on net, and should not take out the loan.
C) not make money on net, and should take out the loan.
D) not make money on net, and should not take out the loan.

Question 53

When people expect their income to be lower in the future, they will be:

A) more inclined to save.
B) less inclined to save.
C) unaffected in their present choices.
D) People only react and change their savings decisions based on recent history.

Question 54

After taking out a one year loan with an annual interest rate of 5 percent, Tommy pays $2,100 back to the bank. The principal of the loan must be ___________ and the interest payment must be ___________.

A) $2,000; $100
B) $2,100; $100
C) $100; $2,100
D) $100; $2,000

Question 55

The rate of return in loanable funds describes the:

A) expected profit that a project will generate per dollar invested.
B) cost of borrowing.
C) interest rate on loans.
D) the profit firms should make when investing borrowed funds.

Question 56

In the recession that started in 2008, the savings rate:

A) increased.
B) decreased.
C) stayed the same.
D) became negative.

Question 57

In the market for loanable funds, the law of supply:

A) reflects that more people will choose to borrow the lower is the interest rate.
B) reflects that more people will choose to save the lower is the interest rate.
C) reflects that more people will choose to save the higher is the interest rate.
D) reflects that more people will choose to borrow the higher is the interest rate.

Question 58

If expectations about the future don't change at all, then an economic downturn will generally:

A) decrease savings at a given interest rate and shift the supply curve for loanable funds to the left.
B) increase savings at a given interest rate and shift the supply curve for loanable funds to the left.
C) decrease savings at a given interest rate and shift the supply curve for loanable funds to the right.
D) increase savings at a given interest rate and shift the supply curve for loanable funds to the right.

Question 59

Schyler is able to take out a loan for $3,000 for one year at an annual interest rate of 10 percent. After calculating her return to be $200, Schyler will realize she will:

A) lose $100 overall if she takes out the loan.
B) make $200 overall if she takes out the loan.
C) make $100 overall if she takes out the loan.
D) lose $200 overall if she takes out the loan.

Question 60

Determinants of the supply of loanable funds are all except:

A) wealth.
B) expectations of future economic conditions.
C) social welfare policies.
D) rate of return on investment.

Question 61

A bank will charge a higher interest rate the:

A) longer is the length of the loan, and the higher the risk of repayment.
B) longer is the length of the loan, and the lower the risk of repayment.
C) shorter is the length of the loan, and the higher the risk of repayment.
D) shorter is the length of the loan, and the lower the risk of repayment.

Question 62

Differences in interest rates for different type of loans are due to:

A) the length of time the borrower has to repay the loan.
B) the amount of the loan.
C) government policy.
D) exchange rate

Question 63

Crowding out is reduction in:

A) private borrowing that is caused by an increase in government borrowing.
B) government borrowing that is caused by an increase in private borrowing.
C) private borrowing that is caused by an increase in corporate borrowing.
D) corporate borrowing that is caused by an increase in private borrowing.

Question 64

The fact that there are fewer and fewer potential investments that will generate returns high enough to make the cost of paying back a loan worthwhile is reflected in the:

A) upward-slope of the supply curve in the market for loanable funds.
B) downward-slope of the supply curve in the market for loanable funds.
C) upward-slope of the demand curve in the market for loanable funds.
D) downward-slope of the demand curve in the market for loanable funds.

Question 65

Since the future holds more uncertainty over longer periods of time, lenders generally want a:

A) higher interest rate for loans over a longer period.
B) lower interest rate for loans over a longer period.
C) higher interest rate for loans over a shorter period.
D) constant interest rate for loans over the period of the loan.

Question 66

Loans that are secured against an asset:

A) generally have lower interest rates.
B) generally have higher interest rates.
C) are much longer in length than unsecured loans.
D) are much shorter in length than unsecured loans.

Question 67

When the government runs deficit, it causes the cost of borrowing to:

A) increase, which decreases private demand for loanable funds.
B) decrease, which decreases private demand for loanable funds.
C) increase, which increases private demand for loanable funds.
D) decrease, which increases private demand for loanable funds.

Question 68

Investment decisions are based on the trade-off between the:

A) potential profit that could be generated by investment and the cost of borrowing money to finance the investment.
B) interest rate that savers will earn and the interest rate that the borrowers will have to pay.
C) future value of the loan and the present value of the loan.
D) potential profit that could be generated and the willingness of a lender to make the loan.

Question 69

The reduction in private borrowing that is caused by an increase in government borrowing is called:

A) the crowding out effect.
B) surplus investment.
C) the dissaving effect.
D) the savings effect.

Question 70

When the government increases its demand for loanable funds, it causes the demand:

A) for loanable funds curve to shift to the right, which increases interest rates.
B) for loanable funds curve to shift to the left, which increases interest rates.
C) of loanable funds curve to shift to the right, which decreases interest rates.
D) of loanable funds curve to shift to the left, which decreases interest rates.

Question 71

A booming economy can make investors:

A) eager to borrow money, and shift the demand curve for loanable funds to the right.
B) eager to borrow money, and shift the supply curve for loanable funds to the right.
C) wary of future downturns, and shift the demand curve for loanable funds to the left.
D) wary of future downturns, and shift the supply curve for loanable funds to the left.

Question 72

When a borrower fails to pay back a loan according to the agreed-upon terms, it is called:

A) credit risk.
B) default.
C) opportunity cost.
D) inflation.

Question 73

When current economic conditions are bad, people are ____________ inclined to save, and when they predict bad future economic conditions they are ____________ inclined to save now.

A) less; more
B) less; less
C) more; more
D) more; less

Question 74

A default happens when a:

A) borrower fails to pay back a loan according to the agreed-upon terms.
B) lender fails to allot money according to the terms set by the government.
C) bank fails to have enough cash on hand to give all depositors their money.
D) borrow pays back a loan early.

Question 75

If lenders think that a particular borrower might default, they will demand a:

A) higher interest rate to make it worth taking that risk.
B) lower interest rate to make it worth taking that risk.
C) higher interest rate to decrease the amount of risk incurred.
D) lower interest rate to decrease the amount of risk incurred.

Question 76

A determinant of the supply of loanable funds is:

A) current economic conditions.
B) expected profit on an investment.
C) investors' confidence.
D) All of these are determinants of the supply of loanable funds.

Question 77

In 2006, before the Great Recession, the economy was booming and consumer demand was high, making the:

A) demand for loanable funds increase and shift to the right.
B) demand for loanable funds decrease and shift to the left.
C) supply of loanable funds increase and shift to the right.
D) supply of loanable funds decrease and shift to the left.

Question 78

When the government increases its demand for loanable funds, it causes the:

A) demand for loanable funds curve to shift to the right.
B) demand for loanable funds curve to shift to the left.
C) supply of loanable funds curve to shift to the right.
D) supply of loanable funds curve to shift to the left.

Question 79

Evidence from the Great Recession suggests that the crowding out effect:

A) was minimal at that time.
B) had a very detrimental effect on private savings.
C) can be quite large in times of recession, and is reinforced with recent research from 2008.
D) may hold, although the evidence is somewhat contradictory.

Question 80

Lenders generally want a higher interest rate to compensate them when loans stretch over a longer period because:

A) the opportunity cost increases over time.
B) there's more uncertainty about potential future investment opportunities.
C) lenders want to be compensated for being unable to get their money back quickly.
D) All of these are true.