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1. To start a business delivering documents, you need to purchase cell phones, bicycles, and desks.
a. These purchases are called capital investment. Raising the funds to purchase them makes you a borrower.
b. These purchases are called capital investment. Raising the funds to purchase them makes you a saver.
c. These purchases are called consumption. Raising the funds to purchase them makes you a saver.
d. These purchases are called consumption. Raising the funds to purchase them makes you a borrower.
ANSWER: a
2. 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.
ANSWER: d
3. Given that Clara's expenditures exceeds her income, Clara is best described as a
a. borrower or as a demander of funds.
b. saver or as a supplier of funds.
c. borrower or as a supplier of funds.
d. saver or as a demander of funds.
ANSWER: a
4. At the broadest level, the financial system moves the economy's scarce resources from
a. the rich to the poor.
b. financial institutions to business firms and government.
c. households to financial institutions.
d. savers to borrowers.
ANSWER: d
5. Which of the following statements about the term of a bond is correct?
a. Term refers to the various characteristics of a bond, including its interest rate and tax treatment.
b. The term of a bond is determined entirely by its credit risk.
c. The term of a bond is determined entirely by how much sales commission the buyer of the bond pays when
they purchase the bond.
d. Interest rates on long-term bonds are usually higher than interest rates on short-term bonds.
ANSWER: d
6. 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.
d. Neither Atlas' sound finances nor the long term of the bond.
ANSWER: b
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7. 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.
ANSWER: c
8. Which of the following statements is correct?
a. The expected future profitability of a corporation influences the demand for its 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. A corporation is paid every time its shares of stock are traded organized stock exchanges.
ANSWER: a
9. The economy's two most important financial markets are
a. the investment market and the saving market.
b. the bond market and the stock market.
c. banks and the stock market.
d. financial markets and financial institutions.
ANSWER: b
10. 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.
ANSWER: a
11. Long-term bonds are
a. riskier than short-term bonds, and so interest rates on long-term bonds are usually lower than interest rates on
short-term bonds.
b. riskier than short-term bonds, and so interest rates on long-term bonds are usually higher than interest rates on
short-term bonds.
c. less risky than short-term bonds, and so interest rates on long-term bonds are usually lower than interest rates
on short-term bonds.
d. less risky than short-term bonds, and so interest rates on long-term bonds are usually higher than interest rates
on short-term bonds.
ANSWER: b
12. If the government's expenditures exceeded its receipts, it would likely
a. lend money to a bank or other financial intermediary.
b. borrow money from a bank or other financial intermediary.
c. buy bonds directly from the public.
d. sell bonds directly to the public.
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ANSWER: d
13. If the Apple corporation sells a bond, it is
a. borrowing directly from the public.
b. borrowing indirectly from the public.
c. selling shares of ownership directly to the public.
d. selling shares of ownership indirectly to the public.
ANSWER: a
14. 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.
ANSWER: d
15. A bond that never matures is known as
a. a perpetuity.
b. an intermediary bond.
c. an indexed bond.
d. a junk bond.
ANSWER: a
16. 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.
ANSWER: b
17. 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?
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.
ANSWER: c
18. On which of these bonds is the prospect of default most likely?
a. A junk bond
b. A municipal bond
c. A U.S. government bond
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d. A corporate bond issued by Proctor & Gamble Corporation
ANSWER: a
19. Assume the bonds below have the same term and principal and that the state or local government that issues the
municipal bond has a good credit rating. Which list has bonds correctly ordered from the one that pays the highest interest
rate to the one that pays the lowest interest rate?
a. Corporate bond, municipal bond, U.S. government bond
b. Corporate bond, U.S. government bond, municipal bond
c. Municipal bond, U.S. government bond, corporate bond
d. U.S. government bond, municipal bond, corporate bond
ANSWER: b
20. Other things the same, as the maturity of a bond becomes longer, the bond will pay
a. a lower interest rate because it has less risk.
b. a lower interest rate because it has more risk.
c. a higher interest rate because it has more risk.
d. the same interest rate, because there is no relationship between term and risk.
ANSWER: c
21. Suppose the city of Des Moines has a high credit rating, and so when Des Moines borrows funds by selling bonds, the
city's high credit rating
a. and the tax status of municipal bonds both contribute to a lower interest rate than would otherwise apply.
b. and the tax status of municipal bonds both contribute to a higher interest rate than would otherwise apply.
c. contributes to a lower interest rate than would otherwise apply, while the tax status of municipal bonds
contributes to a higher interest rate than would otherwise apply.
d. contributes to a higher interest rate than would otherwise apply, while the tax status of municipal bonds
contributes to a lower interest rate than would otherwise apply.
ANSWER: a
22. Which of the following is true concerning interest rates on bonds?
a. Because of the tax advantage, municipal bonds pay higher interest rate than other bonds. High default risk
makes the interest rate on a bond higher than otherwise.
b. Because of the tax advantage, municipal bonds pay higher interest rate than other bonds. High default risk
makes the interest rate on a bond lower than otherwise.
c. Because of the tax advantage, municipal bonds pay lower interest rate than other bonds. High default risk
makes the interest rate on a bond higher than otherwise.
d. Because of the tax advantage, municipal bonds pay lower interest rate than other bonds. High default risk
makes the interest rate on a bond lower than otherwise.
ANSWER: c
23. You hold bonds issued by the city of Sacramento, California. The interest you earn each year on these bonds
a. is not subject to federal income tax and so these bonds pay a higher interest rate than otherwise comparable
bonds issued by the U.S. government.
b. is not subject to federal income tax and so these bonds pay a lower interest rate than otherwise comparable
bonds issued by the U.S. government.
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c. is subject to federal income tax and so these bonds pay a higher interest rate than otherwise comparable bonds
issued by the U.S. government.
d. is subject to federal income tax and so these bonds pay a lower interest rate than otherwise comparable bonds
issued by the U.S. government.
ANSWER: b
24. Other things the same, which bond would you expect to pay the lowest interest rate?
a. A bond issued by a state with a very good credit rating
b. A bond issued by the U.S. government
c. A bond issued by a fairly new company doing genetic research
d. A bond issued by Nabisco
ANSWER: a
25. 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?
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.
ANSWER: d
26. Cole, a financial advisor, has told his clients the following things. Which of his statements is not correct?
a. "U.S. government bonds generally pay a higher rate of interest than corporate bonds."
b. "The interest received on corporate bonds is taxable."
c. "U.S. government bonds have the lowest default risk."
d. "If you purchase a municipal bond, you can sell it before it matures."
ANSWER: a
27. Northwest Wholesale Foods sells common stock. The company is using
a. equity financing and the return shareholders earn is fixed.
b. equity financing and the return shareholders earn depends on how profitable the company is.
c. debt financing and the return shareholders earn is fixed.
d. debt financing and the return shareholders earn depends on how profitable the company is.
ANSWER: b
28. Which of the following bonds has the highest interest rate?
a. A high credit risk and a short term
b. A low credit risk and a short term
c. A long term and a high credit risk
d. A long term and a low credit risk
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ANSWER: c
29. As chief financial officer you sell newly issued bonds on behalf of your firm. Your firm is
a. borrowing directly.
b. borrowing indirectly.
c. lending directly.
d. lending indirectly.
ANSWER: a
30. Suppose the government finds a major defect in one of a company's products and demands that the product be taken
off the market. We would expect that the
a. supply of existing shares of the stock and the price will both rise.
b. supply of existing shares of the stock and the price will both fall.
c. demand for existing shares of the stock and the price will both rise.
d. demand for existing shares of the stock and the price will both fall.
ANSWER: d
31. Other things being constant, when a firm sells new shares of stock, the
a. supply of the stock increases and the price decreases.
b. supply of the stock decreases and the price increases.
c. demand for the stock increases and the price increases.
d. demand for the stock decreases and the price decreases.
ANSWER: a
32. The price of a stock will rise if the
a. managers of a stock exchange decide the price should be higher.
b. demand for the stock rises.
c. supply of the stock rises.
d. demand for the stock falls.
ANSWER: b
33. 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.
ANSWER: d
34. Which of the following statements is correct?
a. A large, well-known corporation such as Proctor and Gamble would generally use financial intermediation to
finance expansion of its factories.
b. On average, index funds outperform managed funds.
c. Unlike corporate bonds and stocks, checking accounts are a store of value.
d. Financial intermediaries are institutions through which savers can directly provide funds to borrowers.
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ANSWER: b
35. A mutual fund
a. is a financial market where small firms mutually agree to sell stocks and bonds to raise funds.
b. is funds set aside by local governments to lend to small firms who want to invest in projects that are mutually
beneficial to the firm and community.
c. sells stocks and bonds on behalf of small and less known firms who would otherwise have to pay high interest
to obtain credit.
d. is an institution that sells shares to the public and uses the proceeds to buy a selection of various types of both
stocks and bonds.
ANSWER: d
36. The old adage, "Don't put all your eggs in one basket," is very similar to a modern bit of advice concerning financial
matters:
a. "Buy low-risk bonds."
b. "Use a medium of exchange."
c. "Diversify."
d. "Intermediate."
ANSWER: c
37. It is claimed that a secondary advantage of mutual funds is that
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.
ANSWER: d
38. Index funds typically have a
a. higher rate of return and higher costs than managed mutual funds.
b. higher rate of return and lower costs than managed mutual funds.
c. lower rate of return and higher costs than managed mutual funds.
d. lower rate of return and lower costs than managed mutual funds.
ANSWER: b
39. What do economists call financial institutions through which savers can indirectly provide funds to borrowers?
a. Stock markets
b. Monetary institutions
c. Financial markets
d. Financial intermediaries
ANSWER: d
40. A bond is a
a. financial intermediary.
b. certificate of partial ownership in an enterprise.
c. certificate of indebtedness.
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d. certificate of deposit.
ANSWER: c
41. A bond buyer is a
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.
ANSWER: b
42. By definition, equity finance
a. is accomplished when units of government sell bonds.
b. is accomplished when firms sell bonds.
c. is accomplished when firms sell shares of stock.
d. involves 'fair' interest rates or dividend yields.
ANSWER: c
43. In a closed economy, what does the difference between the tax revenue and government purchases, (T − G), represent?
a. National saving
b. Investment
c. Private saving
d. Public saving
ANSWER: d
44. Consider a closed economy. What remains after paying for consumption and government purchases is
a. national disposable income.
b. national saving.
c. public saving.
d. private saving.
ANSWER: b
45. Which of the following statements is correct?
a. The total income minus 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 consumption, national saving, and taxes must equal GDP.
d. For a closed economy, the sum of private saving and public saving must equal investment.
ANSWER: d
46. Consider a closed economy. National saving is
a. usually greater than investment.
b. usually less than investment because of the leakage of taxes.
c. always less than investment.
d. equal to investment.
ANSWER: d
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47. In national income accounting, we use which of the following pairs of terms interchangeably?
a. "Investment" and "private saving"
b. "Investment" and "purchases of stocks and bonds"
c. "Saving" and "national saving"
d. "Public saving" and "government tax revenue minus government spending"
ANSWER: d
48. Suppose private saving in a closed economy is $12b and investment is $8b.
a. National saving must equal $12b.
b. Public saving must equal $4b.
c. The government budget surplus must equal $4b.
d. The government budget deficit must equal $4b.
ANSWER: d
49. Suppose a closed economy had public saving of −$6 trillion and private saving of $16 trillion. What are national
saving and investment for this country?
a. $10 trillion, $10 trillion
b. $10 trillion, $22 trillion
c. $22 trillion, $10 trillion
d. $22 trillion, $22 trillion
ANSWER: a
50. Consider the expressions T − G and Y − T − C. Which of the following statements is correct?
a. Each one of these is equal to national saving.
b. Each one of these is equal to public saving.
c. The first of these is private saving; the second one is public saving.
d. The first of these is public saving; the second one is private saving.
ANSWER: d
51. Suppose that in a closed economy GDP is equal to $39,000, consumption equal to $20,000, government purchases
equal $7,000, and taxes equal $7,750. What are private saving, public saving, and national saving?
a. $750, $11,250, and $12,000, respectively
b. $19,000, $31,250, and $14,750, respectively
c. $11,250, $750, and $12,000, respectively
d. $31,250, $19,000, and $14,750, respectively
ANSWER: c
52. For a closed economy, GDP is $29 trillion, consumption is $9 trillion, taxes are $2.0 trillion and the government runs
a surplus of $4 trillion. What are private saving and national saving?
a. $18.0 trillion and $22.0 trillion, respectively
b. $22.0 trillion and $18.0 trillion, respectively
c. −$18.0 trillion and −$22.0 trillion, respectively
d. −$18.0 trillion and $22.0 trillion, respectively
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ANSWER: a
Scenario 27-1.
Assume the following information for an
imaginary, closed economy.
Category
In Dollars
GDP
$170,000
Taxes
$29,000
Government Purchases
$34,000
National Saving
$17,000
53. Refer to Scenario 27-1. For this economy, investment amounts to
a. $5,000.
b. $29,000.
c. $34,000.
d. $17,000.
ANSWER: d
54. Refer to Scenario 27-1. This economy's government is running a budget
a. surplus of $5,000.
b. deficit of $12,000.
c. deficit of $5,000.
d. surplus of $12,000.
ANSWER: c
55. Refer to Scenario 27-1. For this economy, private saving amounts to
a. $12,000.
b. $22,000.
c. $17,000.
d. −$22,000.
ANSWER: b
56. The country of Cedarland does not trade with any other country. Its GDP is $17 billion. Its government purchases $5
billion worth of goods and services each year and collects $6 billion in taxes. Private saving in Cedarland is $5 billion. For
Cedarland, investment is
a. $6 billion and consumption is $7 billion.
b. $6 billion and consumption is $6 billion.
c. $7 billion and consumption is $7 billion.
d. $7 billion and consumption is $6 billion.
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ANSWER: b
57. In a closed economy, private saving is
a. the amount of income that households have left after paying for their taxes and consumption.
b. the amount of income that businesses have left after paying for the factors of production.
c. the amount of tax revenue that the government has left after paying for its spending.
d. always equal to investment.
ANSWER: a
58. In a closed economy, public saving is the amount of
a. income that households have left after paying for taxes and consumption.
b. income that businesses have left after paying for the factors of production.
c. tax revenue that the government has left after paying for its spending.
d. spending that the government undertakes in excess of the taxes it collects.
ANSWER: c
59. When the government's budget deficit increases the government is borrowing
a. less and public savings falls.
b. less and public savings increases.
c. more and public savings falls.
d. more and public savings increases.
ANSWER: c
60. An increase in the government's budget surplus means public saving is
a. positive and increasing.
b. positive and decreasing.
c. negative and increasing.
d. negative and decreasing.
ANSWER: a
61. Alex buys 10,000 shares of stock issued by Greg Brewing. In turn, Greg uses the funds to buy new machinery for one
of its breweries.
a. Alex and Greg are both investing.
b. Alex and Greg are both saving.
c. Alex is investing; Greg is saving.
d. Alex is saving; Greg is investing.
ANSWER: d
62. For an open economy, the equation Y = C + I + G + NX is an identity. If we define national saving, S, as the total
income in the economy that is left after paying for consumption and government purchases, then for an open economy, it
is true that
a. S = I.
b. S = 0.
c. I = S + NX.
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d. S = I + NX.
ANSWER: d
63. In a closed economy, if Y, C, and T remained the same, a decrease in G would
a. reduce private saving and public saving.
b. increase private saving but not public saving.
c. increase public saving but not private saving.
d. increase neither private nor public saving.
ANSWER: c
64. In a closed economy, if Y and T remained the same, but G rose and C fell but by less than the rise in G, what would
happen to private and national saving?
a. Private and national saving would rise.
b. Private saving would rise and national saving would fall.
c. Private and national saving would fall.
d. Private saving would fall and national saving would rise.
ANSWER: b
65. National saving is
a. the total income in the economy that remains after paying for consumption.
b. the total income in the economy that remains after paying for consumption and government purchases.
c. always greater than investment for a closed economy.
d. equal to private saving minus public saving.
ANSWER: b
66. The source of the supply of loanable funds
a. is saving and the source of demand for loanable funds is investment.
b. is investment and the source of demand for loanable funds is saving.
c. and the demand for loanable funds is saving.
d. and the demand for loanable funds is investment.
ANSWER: a
Table 27-1.
The following table presents information about
a closed economy whose market for loanable
funds is in equilibrium.
In Trillions of
Category
Dollars
GDP
$8.9
Consumer Spending
$5.2
Taxes Minus Transfers $1.6
Government Purchases $0.5
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67. Refer to Table 27-1. The quantity of private saving is
a. $3.7 trillion.
b. $2.1 trillion.
c. $3.2 trillion.
d. $7.3 trillion.
ANSWER: b
68. Refer to Table 27-1. The quantity of loanable funds demanded is
a. $3.2 trillion.
b. $2.1 trillion.
c. $3.7 trillion.
d. $7.3 trillion.
ANSWER: a
69. The slope of the demand for loanable funds curve represents the
a. positive relation between the real interest rate and investment.
b. negative relation between the real interest rate and investment.
c. positive relation between the real interest rate and saving.
d. negative relation between the real interest rate and saving.
ANSWER: b
70. Other things the same, when the interest rate rises, people would want to lend
a. more, making the supply of loanable funds decrease.
b. less, making the supply of loanable funds increase.
c. more, making the quantity of loanable funds supplied increase.
d. less, making the quantity of loanable funds supplied decrease.
ANSWER: c
71. Katherine is considering expanding her jewelry shop. If interest rates fall she is
a. more likely to expand. This illustrates why the supply of loanable funds slopes downward.
b. less likely to expand. This illustrates why the supply of loanable funds slopes upward.
c. more likely to expand. This illustrates why the demand for loanable funds slopes downward.
d. less likely to expand. This illustrates why the demand for loanable funds slopes upward.
ANSWER: c
72. The slope of the supply of loanable funds curve represents the
a. positive relation between the interest rate and investment.
b. positive relation between the interest rate and saving.
c. negative relation between the interest rate and investment.
d. negative relation between the interest rate and saving.
ANSWER: b
73. Other things the same, a higher interest rate induces people to
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a. save more, so the supply of loanable funds slopes upward.
b. save less, so the supply of loanable funds slopes downward.
c. invest more, so the supply of loanable funds slopes upward.
d. invest less, so the supply of loanable funds slopes downward.
ANSWER: a
74. If the quantity of loanable funds demanded exceeds the quantity of loanable funds supplied, there is a
a. shortage and the interest rate is below the equilibrium level.
b. surplus and the interest rate is above the equilibrium level.
c. surplus and the interest rate is below the equilibrium level.
d. shortage and the interest rate is above the equilibrium level.
ANSWER: a
75. If there is a surplus of loanable funds, then the quantity of loanable funds
a. demanded is greater than the quantity of loanable funds supplied and the interest rate will rise.
b. demanded is greater than the quantity of loanable funds supplied and the interest rate will fall.
c. supplied is greater than the quantity of loanable funds demanded and the interest rate will fall.
d. supplied is greater than the quantity of loanable funds demanded and the interest rate will rise.
ANSWER: c
76. If there is a shortage of loanable funds, then
a. neither curve shifts, but the quantity of loanable funds supplied
increases and the quantity demanded decreases as the interest rate rises to equilibrium.
b. the supply for loanable funds shifts right and the demand shifts left.
c. the supply for loanable funds shifts left and the demand shifts right.
d. neither curve shifts, but the quantity of loanable funds supplied
decreases and the quantity demanded increases as the interest rate falls to equilibrium.
ANSWER: a
77. If the supply of loanable funds shifts to the right, then the equilibrium interest rate
a. and quantity of loanable funds rises.
b. and quantity of loanable funds falls.
c. rises and the quantity of loanable funds falls.
d. falls and the quantity of loanable funds rises.
ANSWER: d
78. Which of the following would necessarily create a surplus at the original equilibrium interest rate in the loanable funds
market?
a. An increase in the supply of or a decrease in the demand for loanable funds
b. An increase in the supply of or an increase in the demand for loanable funds
c. A decrease in the supply of or a decrease in the demand for loanable funds
d. A decrease in the supply of or an increase in the demand for loanable funds
ANSWER: a
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79. In 2002 mortgage rates fell and mortgage lending increased. Which of the following could explain both of these
changes?
a. The demand for loanable funds shifted rightward.
b. The demand for loanable funds shifted leftward.
c. The supply of loanable funds shifted rightward.
d. The supply of loanable funds shifted leftward.
ANSWER: c
80. If the nominal interest rate is 5 percent and the inflation rate is 6 percent, then the real interest rate is
a. 1 percent.
b. 11 percent.
c. –1 percent.
d. 1 percent.
ANSWER: c
81. Which of the following could explain a decrease in the equilibrium interest rate and an increase in the equilibrium
quantity of loanable funds?
a. The demand for loanable funds shifted rightward.
b. The demand for loanable funds shifted leftward.
c. The supply of loanable funds shifted leftward.
d. The supply of loanable funds shifted to the right.
ANSWER: d
82. What would happen, all else equal, in the market for loanable funds if the government were to decrease the tax rate on
interest income?
a. There would be an increase in the equilibrium quantity of loanable funds.
b. There would be a reduction in the equilibrium quantity of loanable funds.
c. There would be no change in the equilibrium quantity of loanable funds.
d. The change in loanable funds is uncertain.
ANSWER: a
83. Suppose a country has only a sales tax. Now suppose it replaces the sales tax with an income tax that includes a tax on
interest income. This would make equilibrium
a. interest rates and the equilibrium quantity of loanable funds rise.
b. interest rates rise and the equilibrium quantity of loanable funds fall.
c. interest rates fall and the equilibrium quantity of loanable funds rise.
d. interest rates and the equilibrium quantity of loanable funds fall.
ANSWER: b
84. Suppose the U.S. offered a tax credit for firms that built new factories in the U.S. Then the
a. demand for loanable funds would shift rightward, initially creating a surplus of loanable funds at the original
interest rate.
b. demand for loanable funds would shift rightward, initially creating a shortage of loanable funds at the original
interest rate.
c. supply of loanable funds would shift rightward, initially creating a surplus of loanable funds at the original
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interest rate.
d. supply of loanable funds would shift rightward, initially creating a shortage of loanable funds at the original
interest rate.
ANSWER: b
85. A budget deficit
a. changes the supply of loanable funds.
b. changes the demand for loanable funds.
c. changes both the supply of and demand for loanable funds.
d. does not influence the supply of or the demand for loanable funds.
ANSWER: a
86. A larger budget deficit
a. raises the interest rate and investment.
b. reduces the interest rate and investment.
c. raises the interest rate and reduces investment.
d. reduces the interest rate and raises investment.
ANSWER: c
87. Crowding out occurs when investment declines because a budget
a. deficit makes interest rates rise.
b. deficit makes interest rates fall.
c. surplus makes interest rates rise.
d. surplus makes interest rates fall.
ANSWER: a
88. If we were to change the interpretation of the term "loanable funds" in such a way that government budget deficits
would affect the demand for loanable funds, rather than the supply of loanable funds, then
a. crowding out would not be a consequence of an increase in the budget deficit.
b. higher interest rates would not be a consequence of an increase in the budget deficit.
c. an increase in the budget deficit would cause the demand for loanable funds to decrease.
d. we would be making only a semantic change in how we analyze the effects of government budget deficits.
ANSWER: d
89. Suppose the government changed the tax laws, with the result that people were encouraged to consume more and save
less. Using the loanable funds model, a consequence would be
a. lower interest rates and lower investment.
b. lower interest rates and greater investment.
c. higher interest rates and lower investment.
d. higher interest rates and higher investment.
ANSWER: c
90. Which of the following counts as part of the supply of loanable funds?
a. Bank deposits and purchases of bonds
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b. Bank deposits but not purchases of bonds
c. Purchases of bonds but not bank deposits
d. Neither purchases of bonds nor bank deposits
ANSWER: a
91. If the government instituted an investment tax credit, then which of the following would be higher in equilibrium?
a. Saving and the interest rate
b. Saving but not the interest rate
c. The interest rate but not saving
d. Neither saving nor the interest rate
ANSWER: a
Figure 27-1
The figure depicts a demand-for-loanable-funds curve and two supply-of-loanable-funds curves.
92. Refer to Figure 27-1. What is measured along the vertical axis of the graph?
a. The tax rate
b. The interest rate
c. The quantity of investment
d. The quantity of saving
ANSWER: b
93. Refer to Figure 27-1. Which of the following events would shift the supply curve from S1 to S2?
a. In response to tax reform, firms are encouraged to invest more than they previously invested.
b. In response to tax reform, households are encouraged to save more than they previously saved.
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c. Government goes from running a balanced budget to running a budget deficit.
d. Any of the above events would shift the supply curve from S1 to S2.
ANSWER: b
Figure 27-2
The figure depicts a supply-of-loanable-funds curve and two demand-for-loanable-funds curves.
94. Refer to Figure 27-2. What is measured along the horizontal axis of the graph?
a. The quantity of loanable funds
b. The size of the government budget deficit or surplus
c. The interest rate
d. Private saving
ANSWER: a
95. Refer to Figure 27-2. Which of the following events would shift the demand curve from D1 to D2?
a. The government goes from running a budget deficit to running a budget surplus.
b. Firms become optimistic about the future and, as a result, they plan to increase their purchases of new
equipment and construction of new factories.
c. A change in the tax laws encourages people to consume less and save more.
d. A change in the tax laws encourages people to consume more and save less.
ANSWER: b
Figure 27-3
The figure shows two demand-for-loanable-funds curves and two supply-of-loanable-funds curves.
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96. Refer to Figure 27-3. A shift of the demand curve from D1 to D2 is called
a. a decrease in the quantity of loanable funds demanded.
b. an increase in the demand for loanable funds.
c. an increase in the quantity of loanable funds demanded.
d. a decrease in the demand for loanable funds.
ANSWER: b
97. Refer to Figure 27-3. A shift of the supply curve from S1 to S2 is called
a. a decrease in the supply of loanable funds.
b. a decrease in the quantity of loanable funds supplied.
c. an increase in the supply of loanable funds.
d. an increase in the quantity of loanable funds supplied.
ANSWER: c
98. Refer to Figure 27-3. Which of the following movements shows the effects of households' decision to save more?
a. A movement from Point A to Point B
b. A movement from Point F to Point A
c. A movement from Point C to Point F
d. A movement from Point F to Point C
ANSWER: c
99. Refer to Figure 27-3. Which of the following movements would be consistent with the government budget going
from deficit to surplus and the simultaneous enactment of an investment tax credit?
a. A movement from Point A to Point C
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b. A movement from Point B to Point A
c. A movement from Point B to Point F
d. A movement from Point F to Point B
ANSWER: c
Figure 27-4
This figure shows the loanable funds market for a closed economy.
100. Refer to Figure 27-4. Starting at point A, the enactment of an investment tax credit would likely cause the quantity
of loanable funds traded to
a. increase to $195 and the interest rate to rise to 6% (point C).
b. decrease to $65 and the interest rate to fall to 2% (point B).
c. decrease to $65 and the interest rate to rise to 6% (point E).
d. increase to $195 and the interest rate to fall to 2% (point D).
ANSWER: a
101. Refer to Figure 27-4. Starting at point A, a change in tax laws that encouraged households to save more would
likely cause the quantity of loanable funds traded to
a. increase to $195 and the interest rate to fall to 2% (point D).
b. increase to $195 and the interest rate to rise to 6% (point C).
c. decrease to $65 and the interest rate to fall to 2% (point B).
d. decrease to $65 and the interest rate to rise to 6% (point E).
ANSWER: a
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