Question 1

A decrease in taxes on interest income would increase the interest rate.

Accepted Answer

A) True 
 B)False

Question 2

Two bonds have the same term to maturity.The first was issued by a 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) A) and C)
F) None of the above

Question 3

A budget surplus is created if

Accepted Answer

A)  the government sells more bonds than it buys back.
B)  the government spends more than it receives in tax revenue.
C)  private saving is greater than zero.
D)  None of the above is correct.E) A) and D)
F) All of the above

Question 4

Other things the same,when the interest rate rises,

Accepted Answer

A)  people would want to lend more,making the supply of loanable funds increase.
B)  people would want to lend less,making the supply of loanable funds decrease.
C)  people would want to lend more,making the quantity of loanable funds supplied increase.
D)  people would want to lend less,making the quantity of loanable funds supplied decrease.E) A) and B)
F) All of the above

Question 5

The identity that shows that total income and total expenditure are equal is

Accepted Answer

A)  GDP = Y.
B)  Y = DI + T + NX.
C)  GDP = GNP - NX.
D)  Y = C + I + G + NX.E) A) and B)
F) A) and C)

Question 6

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

Accepted Answer

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.E) A) and B)
F) B) and C)

Question 7

The fact that borrowers sometimes default on their loans by declaring bankruptcy is directly related to the characteristic of a bond called

Accepted Answer

A)  credit risk.
B)  interest risk.
C)  term risk.
D)  private risk.E) B) and C)
F) B) and D)

Question 8

Public saving is equal to national saving minus private saving.

Accepted Answer

A) True 
 B)False

Question 9

In 2002 mortgage rates fell and mortgage lending increased.Which of the following could explain both of these changes?

Accepted Answer

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.E) None of the above
F) All of the above C

Question 10

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.

Accepted Answer

A) True 
 B)False  True

Question 11

Which of the following is correct?

Accepted Answer

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.E) A) and B)
F) A) and C)

Question 12

When a firm wants to borrow directly from the public to finance the purchase of new equipment,it does so by selling shares of stock.

Accepted Answer

A) True 
 B)False

Question 13

On a graph that depicts the market for loanable funds,the nominal interest rate is measured along the vertical axis.

Accepted Answer

A) True 
 B)False

Question 14

Suppose that in a closed economy GDP is 11,000,consumption is 7,500,and taxes are 2,000.What value of government purchases would make national savings equal to 1,000 and at that value would the government have a deficit or surplus?

Accepted Answer

A)  2,500,deficit
B)  2,500,surplus
C)  1,000,deficit
D)  1,000,surplusE) B) and D)
F) C) and D)

Question 15

Figure 26-1. 
-Refer to Figure 26-1.Which of the following events would shift the supply curve from S1 to S2?

Accepted Answer

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.
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.E) None of the above
F) A) and D)

Question 16

If an economy is closed and if it has no government,then

Accepted Answer

A)  national saving = private saving.
B)  total income = consumption + investment.
C)  saving = total income - consumption.
D)  All of the above are correct.E) A) and B)
F) A) and C)

Question 17

Banks and mutual funds are examples of financial markets.

Accepted Answer

A) True 
 B)False

Question 18

The financial system coordinates investment and saving,which are important determinants of long-run real GDP.

Accepted Answer

A) True 
 B)False  True

Question 19

For an imaginary closed economy,T = 5,000; S =11,000; C = 50,000; and the government is running a budget deficit of 1,000.Then

Accepted Answer

A)  private saving = 10,000 and GDP = 54,000.
B)  private saving = 10,000 and GDP = 58,000.
C)  private saving = 12,000 and GDP = 67,000.
D)  private saving = 12,000 and GDP = 72,000.E) A) and B)
F) B) and D)

Question 20

Financial crises seldom involve economic downturns.

Accepted Answer

A) True 
 B)False

Exam 26: Saving,investment,and the Financial System

A decrease in taxes on interest income would increase the interest rate.

Correct AnswerverifiedShow Answer

Two bonds have the same term to maturity.The first was issued by a 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

A budget surplus is created if

Correct AnswerverifiedShow Answer

Other things the same,when the interest rate rises,

Correct AnswerverifiedShow Answer

The identity that shows that total income and total expenditure are equal is

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The fact that borrowers sometimes default on their loans by declaring bankruptcy is directly related to the characteristic of a bond called

Correct AnswerverifiedShow Answer

Public saving is equal to national saving minus private saving.

Correct AnswerverifiedShow Answer

In 2002 mortgage rates fell and mortgage lending increased.Which of the following could explain both of these changes?

Correct AnswerverifiedC

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.

Correct AnswerverifiedTrue

Which of the following is correct?

Correct AnswerverifiedShow Answer

When a firm wants to borrow directly from the public to finance the purchase of new equipment,it does so by selling shares of stock.

Correct AnswerverifiedShow Answer

On a graph that depicts the market for loanable funds,the nominal interest rate is measured along the vertical axis.

Correct AnswerverifiedShow Answer

Suppose that in a closed economy GDP is 11,000,consumption is 7,500,and taxes are 2,000.What value of government purchases would make national savings equal to 1,000 and at that value would the government have a deficit or surplus?

Correct AnswerverifiedShow Answer

Figure 26-1. -Refer to Figure 26-1.Which of the following events would shift the supply curve from S1 to S2?

Correct AnswerverifiedShow Answer

If an economy is closed and if it has no government,then

Correct AnswerverifiedShow Answer

Banks and mutual funds are examples of financial markets.

Correct AnswerverifiedShow Answer

The financial system coordinates investment and saving,which are important determinants of long-run real GDP.

Correct AnswerverifiedTrue

For an imaginary closed economy,T = 5,000; S =11,000; C = 50,000; and the government is running a budget deficit of 1,000.Then

Correct AnswerverifiedShow Answer

Financial crises seldom involve economic downturns.

Correct AnswerverifiedShow Answer

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C

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True

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True

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