Question 1

If the government reduces transfer payments, what happens to the budget deficit? What curve does this change in the market for loanable funds, which direction does it shift, and what happens to the equilibrium interest rate?

Accepted Answer

A reduction in transfer paymen...

Question 2

It is claimed that a secondary advantage of mutual funds is that

Accepted Answer

A)   an investor can avoid investment charges and fees.
B)   they give ordinary people access to loanable funds for investing.
C)   they usually outperform stock market indexes.
D)   they give ordinary people access to the skills of professional money managers.E) A) and C)
F) All of the above

Question 3

A closed economy does not engage in international trade, therefore

Accepted Answer

A)   national saving is less than investment S 
B)   net exports NX)  are zero.
C)   Y - C - G > I.
D)   national saving is zero.E) A) and B)
F) None of the above

Question 4

Scenario 26-2. Assume the following information for an imaginary, closed economy.
GDP = $5 trillion; consumption = $3.1 trillion; government purchases = $0.7 trillion; and taxes = $0.9 trillion.
-Refer to Scenario 26-2. Suppose, for this economy, the relationship between the real interest rate, r, and investment, I, is given by the equation I = 10.78 - 3.03r. If, for example, r = 10, this means that the real interest rate is 10 percent.)  The equilibrium real interest rate for this economy is

Accepted Answer

A)   3.19 percent.
B)   3.00 percent.
C)   3.16 percent.
D)   7.14 percent.E) A) and B)
F) None of the above

Question 5

Lenders sell bonds and borrowers buy them.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following both make the interest rate on a bond higher than otherwise?

Accepted Answer

A)   the interest it pays is taxed and it was issued by a financially strong corporation
B)   the interest it pays is taxed and it was issued by a financially weak corporation
C)   the interest it pays is tax exempt and it was issued by a financially strong corporation
D)   the interest it pays is tax exempt and it was issued by a financially weak corporationE) A) and D)
F) C) and D)

Question 7

To state that national saving is equal to investment, for a closed economy, is to state an accounting identity.

Accepted Answer

A) True 
 B)False

Question 8

In the late summer of 2005 some regions of the country were suffering from drought. What effect would we expect this to have on the stock of companies such as John Deere that manufacture farm equipment?

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 fallE) B) and C)
F) A) and D)

Question 9

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.E) C) and D)
F) B) and D)

Question 10

In a closed economy, if Y is 10,000, T is 1,000, G is 3,000, and C is 5,000, then

Accepted Answer

A)   the government has a budget surplus and investment is 1,000
B)   the government has a budget surplus and investment is 2,000
C)   the government has a budget deficit and investment is 1,000
D)   the government has a budget deficit and investment is 2,000E) None of the above
F) A) and D)

Question 11

A bond is a

Accepted Answer

A)   financial intermediary.
B)   certificate of indebtedness.
C)   certificate of partial ownership in an enterprise.
D)   None of the above is correct.E) A) and B)
F) All of the above

Question 12

A certificate of indebtedness that specifies the obligations of the borrower to the holder is called a

Accepted Answer

A)   bond.
B)   stock.
C)   mutual fund.
D)   All of the above are correct.E) None of the above
F) B) and C)

Question 13

You are thinking of buying a bond from Bluestone Corporation. You know that this bond is long term and you know that Bluestone's business ventures are risky and uncertain. You then consider another bond with a shorter term to maturity issued by a company with good prospects and an established reputation. Which of the following is correct?

Accepted Answer

A)   The longer term would tend to make the interest rate on the bond issued by Bluestone higher, while the higher risk would tend to make the interest rate lower.
B)   The longer term would tend to make the interest rate on the bond issued by Bluestone lower, while the higher risk would tend to make the interest rate higher.
C)   Both the longer term and the higher risk would tend to make the interest rate lower on the bond issued by Bluestone.
D)   Both the longer term and the higher risk would tend to make the interest rate higher on the bond issued by Bluestone.E) A) and B)
F) A) and C)

Question 14

Which of the following is a financial-market transaction?

Accepted Answer

A)   A saver buys shares in a mutual fund.
B)   A saver deposits money into a credit union.
C)   A saver buys a bond a corporation has just issued so it can purchase capital.
D)   None of the above is correct.E) A) and B)
F) B) and D)

Question 15

The Dow Jones Industrial Average has been computed regularly since

Accepted Answer

A)   1976.
B)   1948.
C)   1913.
D)   1896.E) C) and D)
F) A) and B)

Question 16

Other things the same, if the government decreases transfer payments, then

Accepted Answer

A)   both the interest rate and the equilibrium quantity of loanable funds fall.
B)   both the interest rate and the equilibrium quantity of loanable funds rise.
C)   the interest rate rises and the equilibrium quantity of loanable funds falls.
D)   the interest rate falls and the equilibrium quantity of loanable funds rises.E) A) and B)
F) All of the above

Question 17

Which bond is likely to have higher interest rate due to a higher default risk?

Accepted Answer

A)   A share of stock issued by Apple.
B)   A corporate bond issued by Apple.
C)   A junk bond.
D)   A U.S. government bond.E) A) and D)
F) C) and D)

Question 18

Credit risk refers to the probability that the issuer of a bond will fail to pay some or all of the interest or principal.

Accepted Answer

A) True 
 B)False

Question 19

A bond buyer is a

Accepted Answer

A)   saver. Long term bonds have less risk than short term bonds.
B)   saver. Long term bonds have more risk than short term bonds.
C)   borrower. Long term bonds have less risk than short term bonds.
D)   borrower. Long term bonds have more risk than short term bonds.E) All of the above
F) B) and C)

Question 20

In a closed economy, what does T - G)  represent?

Accepted Answer

A)   national saving
B)   investment
C)   private saving
D)   public savingE) A) and B)
F) None of the above

Exam 8: Saving, Investment, and the Financial System

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?

Correct Answer
verified

It is claimed that a secondary advantage of mutual funds is that

Correct Answer
verified

A bond buyer is a

Correct Answer
verified

Correct Answer
verified

Which of the following both make the interest rate on a bond higher than otherwise?

Correct Answer
verified

In a closed economy, what does T - G) represent?

Correct Answer
verified

If the government reduces transfer payments, what happens to the budget deficit? What curve does this change in the market for loanable funds, which direction does it shift, and what happens to the equilibrium interest rate?

Correct Answer
verified
A reduction in transfer paymen...
View Answer

Lenders sell bonds and borrowers buy them.

Correct Answer
verified

Which bond is likely to have higher interest rate due to a higher default risk?

Correct Answer
verified

Other things the same, if the government decreases transfer payments, then

Correct Answer
verified

In the late summer of 2005 some regions of the country were suffering from drought. What effect would we expect this to have on the stock of companies such as John Deere that manufacture farm equipment?

Correct Answer
verified

A closed economy does not engage in international trade, therefore

Correct Answer
verified

Which of the following is a financial-market transaction?

Correct Answer
verified

To state that national saving is equal to investment, for a closed economy, is to state an accounting identity.

Correct Answer
verified

Correct Answer
verified

A bond is a

Correct Answer
verified

A certificate of indebtedness that specifies the obligations of the borrower to the holder is called a

Correct Answer
verified

In a closed economy, if Y is 10,000, T is 1,000, G is 3,000, and C is 5,000, then

Correct Answer
verified

Credit risk refers to the probability that the issuer of a bond will fail to pay some or all of the interest or principal.

Correct Answer
verified

The Dow Jones Industrial Average has been computed regularly since

Correct Answer
verified

Exam 8: Saving, Investment, and the Financial System

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?

Correct AnswerverifiedShow Answer

It is claimed that a secondary advantage of mutual funds is that

Correct AnswerverifiedShow Answer

A bond buyer is a

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following both make the interest rate on a bond higher than otherwise?

Correct AnswerverifiedShow Answer

In a closed economy, what does T - G) represent?

Correct AnswerverifiedShow Answer

If the government reduces transfer payments, what happens to the budget deficit? What curve does this change in the market for loanable funds, which direction does it shift, and what happens to the equilibrium interest rate?

Correct AnswerverifiedA reduction in transfer paymen...View AnswerShow Answer

Lenders sell bonds and borrowers buy them.

Correct AnswerverifiedShow Answer

Which bond is likely to have higher interest rate due to a higher default risk?

Correct AnswerverifiedShow Answer

Other things the same, if the government decreases transfer payments, then

Correct AnswerverifiedShow Answer

In the late summer of 2005 some regions of the country were suffering from drought. What effect would we expect this to have on the stock of companies such as John Deere that manufacture farm equipment?

Correct AnswerverifiedShow Answer

A closed economy does not engage in international trade, therefore

Correct AnswerverifiedShow Answer

Which of the following is a financial-market transaction?

Correct AnswerverifiedShow Answer

To state that national saving is equal to investment, for a closed economy, is to state an accounting identity.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A bond is a

Correct AnswerverifiedShow Answer

A certificate of indebtedness that specifies the obligations of the borrower to the holder is called a

Correct AnswerverifiedShow Answer

In a closed economy, if Y is 10,000, T is 1,000, G is 3,000, and C is 5,000, then

Correct AnswerverifiedShow Answer

Credit risk refers to the probability that the issuer of a bond will fail to pay some or all of the interest or principal.

Correct AnswerverifiedShow Answer

The Dow Jones Industrial Average has been computed regularly since

Correct AnswerverifiedShow Answer

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A reduction in transfer paymen...
View Answer

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