Questions on Chapter 13 – Saving, Investment and the Financial System 30 multiple choice question plus 5 true or false 1. When opening a print shop you need to buy printers, computers, furniture, and similar items. Economists call these expenditures a. capital investment. b. investment in human capital. c. business consumption expenditures. d. personal saving. 2. If you were to start a business delivering documents, you might need to purchase cell phones, bicycles, desks, and chairs. a. These purchases are called capital investment. If you raise the funds to purchase them from others you are a saver. b. These purchases are called capital investment. If you raise the funds to purchase them from others you are a borrower. c. These purchases are called consumption. If you raise the funds to purchase them from others you are a saver. d. These purchases are called consumption. If you raise the funds to purchase them from others you are a borrower. 3. When a country saves a larger portion of its GDP than it did before, it will have a. more capital and higher productivity. b. more capital and lower productivity. c. less capital and higher productivity. d. less capital and lower productivity. 4. Institutions that help to match one person's saving with another person's investment are collectively called the a. Federal Reserve system. b. banking system. c. monetary system. d. financial system. 5. The primary economic function of the financial system is to a. keep interest rates low. b. provide expert advice to savers and investors. c. match one person’s consumption expenditures with another person’s capital expenditures. d. match one person’s saving with another person’s investment. 6. A bond buyer is a a. saver. Bond buyers must hold their bonds until maturity. b. saver. Bond buyers may sell their bonds prior to maturity. c. borrower. Bond buyers must hold their bonds until maturity. d. borrower. Bond buyers may sell their bonds prior to maturity. 7. Which of the following is correct? a. Lenders sell bonds and borrowers buy them. b. Long-term bonds usually pay a lower interest rate than do short-term bonds because long-term bonds are riskier. c. The term junk bonds refers to bonds that have been resold many times. d. None of the above is correct. 8. Financial intermediaries are a. the same as financial markets. b. individuals who make profits by buying a stock low and selling it high. c. a more general name for financial assets such as stocks, bonds, and checking accounts. d. financial institutions through which savers can indirectly provide funds to borrowers. 9. Which of the following is both a financial institution and a financial intermediary? a. banks b. stock exchanges c. the bond market d. All of the above are correct. 10. In which of the following cases would it necessarily be true that national saving and private saving are equal for a closed economy? a. Private saving is equal to government expenditures. b. Public saving is equal to investment. c. After paying their taxes and paying for their consumption, households have nothing left. d. The government’s tax revenue is equal to its expenditures. 11. Which of the following statements is correct? a. The total income in the economy that remains after paying for consumption and government purchases is called private saving. b. The sum of private saving and national saving is called public saving. c. For a closed economy, the sum of private saving and public saving must equal investment. d. For a closed economy, the sum of consumption, national saving, and taxes must equal GDP. 12. Net exports must equal zero for any economy a. that is closed. b. for which Y = C + I + G. c. for which S = Y - C - G. d. All of the above are correct. information for an imaginary, closed economy. GDP = $200,000; consumption = $120,000; government purchases = $35,000; and taxes = $25,000. 13. Refer to Scenario 13-2. For this economy, investment amounts to a. $25,000. b. $30,000. c. $35,000. d. $45,000. 14. Refer to Scenario 13-2. For this economy, public saving is equal to a. $-10,000 and the government is running a budget deficit of $10,000. b. $-10,000 and the government is running a budget surplus of $10,000. c. $10,000 and the government is running a budget deficit of $10,000. d. $10,000 and the government is running a budget surplus of $10,000. 15. Refer to Scenario 13-2. For this economy, private saving is equal to a. $40,000. b. $50,000. c. $55,000. d. $60,000. 16. Refer to Scenario 13-2. For this economy, national saving is equal to a. $30,000. b. $35,000. c. $45,000. d. $60,000. 17. Refer to Scenario 13-2. Suppose, for this economy, the relationship between the real interest rate, r, and investment, I, is given by the equation I = 69,000 – 3,000r. (If, for example, r = 10, this means that the real interest rate is 10 percent.) The equilibrium real interest rate for this economy is a. 6 percent. b. 7 percent. c. 8 percent. d. 9 percent. 18. Suppose a government that taxed all interest income changed its tax law so that the first $5,000 of a taxpayer’s interest income was tax free. This would shift the a. supply of loanable funds to the right, causing interest rates to fall. b. supply of loanable funds to the left, causing interest rates to rise. c. demand for loanable funds to the right, causing interest rates to rise. d. demand for loanable funds to the left, causing interest rates to fall. 19. Which of the following is not correct? a. American families save a larger fraction of their incomes than their counterparts in many other countries such as Germany and Japan. b. Saving is an important long-run determinant of a nation's standard of living. c. A change in tax laws that encouraged greater saving would lower interest rates. d. Taxes on interest income can substantially decrease the future value of current saving. 20. Other things the same, an increase in government expenditures with no change in taxes makes national saving a. rise. The supply of loanable funds shifts right. b. rise. The demand for loanable funds shifts right. c. fall. The supply of loanable funds shifts left. d. fall. The demand for loanable funds shifts left. 21. Other things the same, an increase in the budget deficit a. shifts the demand for loanable funds right, so the interest rate rises. b. shifts the demand for loanable funds left, so the interest rate falls. c. shifts the supply of loanable funds right, so the interest rate falls. d. shifts the supply of loanable funds left, so the interest rate rises. 22. We would expect the interest rate on Bond A to be higher than the interest rate on Bond B if the two bonds have identical characteristics except that a. Bond A was issued by a financially weak corporation and Bond B was issued by a financially strong corporation. b. Bond A was issued by the Exxon Mobil Corporation and Bond B was issued by the state of New York. c. Bond A has a term of 20 years and Bond B has a term of 1 year. d. All of the above are correct. 23. Atlas Corporation is in sound financial condition. It sells a long-term bond. Which of the following make the interest rate on this bond lower than otherwise? a. Both Altas’ sound finances and the long term of the bond. b. Atlas’ sound finances but not the long term of the bond. c. The long term of the bond but not Atlas’ sound finances.3 d. Neither Atlas’ sound finances nor the long term of the bond. 24. As an alternative to selling shares of stock as a means of raising funds, a large company could, instead, a. invest in physical capital. b. use equity finance. c. sell bonds. d. purchase bonds. 25. Which of the following statements is correct? a. The expected future profitability of a corporation influences the demand for that corporation’s stock. b. When a corporation sells stock as a means of raising funds it is engaging in debt finance. c. The owners of bonds sold by the Microsoft Corporation are part owners of that corporation. d. All bonds are, by definition, perpetuities. 26. Two of the economy’s most important financial intermediaries are a. suppliers of funds and demanders of funds. b. banks and the bond market. c. the stock market and the bond market. d. banks and mutual funds. 27. We associate the term debt finance with a. the bond market, and we associate the term equity finance with the stock market. b. the stock market, and we associate the term equity finance with the bond market. c. financial intermediaries, and we associate the term equity finance with financial markets. d. financial markets, and we associate the term equity finance with financial intermediaries. 28. A bond is a a. financial intermediary. b. certificate of indebtedness. c. certificate of partial ownership in an enterprise. d. None of the above is correct. 29. Which of the following is a financial-market transaction? 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. 30. On which of these bonds is the prospect of default least likely? a. a junk bond b. a bond issued by the state of Arizona c. a bond issued by the federal government d. a bond issued by General Electric Corporation True or False 1. A government may use deficit financing to smooth tax rates over time. 2. On a graph that depicts the market for loanable funds, the nominal interest rate is measured along the vertical axis. 3. When an economy’s government goes from running a budget deficit to running a budget surplus, the economy’s long-run growth prospects are improved. 4. If the tax rate fell, holding municipal bonds would be less desirable so the interest rates on them would fall. 5. In a closed economy, if taxes fall and consumption rises, then private saving must fall.
