MOCK QUIZ #4

Chapter 26 Savings, Investment and the Financial System

Set A
1. When opening a construction company, you might need to buy trucks, tools, and a
storage shed. Economists call these expenditures
a.
business consumption expenditures.
b.
investment in human capital.
c.
capital investment.
d.
None of the above are correct.
2. When a country saves a larger portion of its GDP, it will have
a. more investment, and so have more capital and higher productivity.
b. more investment, and so have less capital and higher productivity.
c. less investment, and so have more capital and higher productivity.
d. less investment, and so have less capital and higher productivity.
3. Savers
a.
and borrowers demand money from the financial system.
b.
and borrowers supply money to the financial system.
c.
demand money from the financial system; borrowers supply money to the financial
system.
d.
supply money to the financial system; borrowers demand money from the financial
system.
4. What are the two basic categories of financial institutions?
a. the foreign exchange markets and the stock markets
b. the market for loanable funds and the market for capital
c. the financial markets and financial intermediaries
d. the lending market and the checkable deposit market
5. Financial markets are
a. the financial institutions through which savers can indirectly provide funds to
borrowers.
b. the financial institutions through which savers can directly provide funds to
borrowers.
c. the financial institutions that sell shares to the public and use the proceeds to buy a
selection of various types of stocks and/or bonds.
d. None of the above are correct.
6. The two most important financial markets in our economy are the
a. foreign exchange market and the mutual fund market.
b. bond market and stock market.
c. stock market and the mutual fund market.
d. bond market and the market for loanable funds.
7. A certificate of indebtedness that specifies the obligations of the borrower to the holder is
called a
a. mutual fund.
b. bond.
c. stock.
d. All of the above are correct.
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8. When large corporations and the governments need to borrow to finance their
purchases, they usually borrow
a. directly from the public by selling bonds.
b. directly from the public by buying bonds.
c. indirectly from the public by buying bonds.
d. None of the above are correct.
9. Alonzo pays $10,000 to buy a bond from IBM that promises repayment ten years from
today. Which of the following is correct?
a. Alonzo is the principal of this bond.
b. The bond matures in 10 years.
c. The term of the bond is $10,000.
d. All of the above are correct.
10. The term of a bond is the
a. interest rate of the bond.
b. credit risk rating of the bond.
c. principal amount of the bond.
d. length of time until the bond matures.
11. A perpetuity is distinguished from other bonds in that it
a. never matures.
b. pays continuously compounded interest.
c. is issued only by the Philippine government.
d. will be used to purchase another bond when it matures unless the owner specifies
otherwise.
12. Which of the following is correct?
a. Some bonds have terms as short as a few months.
b. Because they are so risky, junk bonds pay a low rate of interest.
c. Corporations buy bonds to raise funds.
d. All of the above are correct.
13. Rudolph has the choice of two bonds, one that pays 5 percent interest and the other that
pays 10 percent interest. Which of the following is most likely?
a. the 10 percent bond is more risky than the 5 percent bond
b. the 10 percent bond has a shorter term than the 5 percent bond
c. the 10 percent bond is a Philippine government bond, and the 5 percent bond is a
junk bond
d. the 10 percent bond is a municipal bond, and the 5 percent bond is a corporate bond
14. The sale of stocks
a. and bonds to raise money is called debt finance.
b. and bonds to raise money is called equity finance.
c. to raise money is called debt finance, while the sale of bonds to raise funds is called
equity finance.
d. to raise money is called equity finance, while the sale of bonds to raise funds is
called debt finance.
15. If Quaker Oats runs into financial difficulty, the stockholders
a. as part owners of Quaker Oats are paid before bondholders get paid anything at all.
b. as part owners of Quaker Oats are paid after bondholders get paid.
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c. as creditors of Quaker Oats are paid before bondholders get paid anything at all.
d. as creditors of Quaker Oats are paid after bondholders get paid.
16. People who buy stock in a corporation such as Coca Cola become
a. part owners of Coca Cola, so the benefits of holding the stock depend on Coca
Colas profits.
b. part owners of Coca Cola, but the benefits of holding the stock do not depend on
Coca Colas profits.
c. creditors of Coca Cola, so the benefits of holding the stock depend on Coca Colas
profits.
d. creditors of Coca Cola, but the benefits of holding the stock do not depend on Coca
Colas profits.
17. Compared to bonds, stocks offer the holder
a. higher risk.
b. potentially higher return.
c. ownership in a firm.
d. All of the above are correct.
18. All else equal, when people become more optimistic about a company's future,
a. the supply of the stock (and thus the price) rises.
b. the supply of the stock (and thus the price) falls.
c. the demand for the stock (and thus the price) rises.
d. the demand for the stock (and thus the price) falls.
19. Suppose that the government finds a major defect in one of a companys product and
demands them to take it off the market. We would expect that
a. the supply of the stock (and thus the price) rises.
b. the supply of the stock (and thus the price) falls.
c. the demand for the stock (and thus the price) rises.
d. the demand for the stock (and thus the price) falls.
20. A corporation has a price of $50, a dividend of $.60, and retained earnings of $1.00 per
share. The dividend yield on this stock is
a. 3.2 percent.
b. 2 percent.
c. 1.2 percent.
d. .8 percent.
21. A corporation's earnings is
a. the amount of revenue it receives for the sale of its products minus its costs of
production as measured by its accountants.
b. the amount of revenue it receives for the sale of its products minus its direct and
indirect costs of production as measured by its economists.
c. the amount of revenue it receives for the sale of its products minus its costs of
production as measured by its accountants minus the dividends paid out.
d. the amount of revenue it receives for the sale of its products minus its direct and
indirect costs of production as measured by its economists minus the dividends paid
out.

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22. The amount of revenue a firm receives for the sale of its products minus its costs of
production (as measured by its accountants) is the firms
a. earnings.
b. retained earnings.
c. economic, or real, profit.
d. dividend.
23. A high priceearnings ratio indicates that
a. either the stock is overvalued or people have become more optimistic about the
corporations prospects.
b. either the stock is overvalued or people have become less optimistic about the
corporations prospects.
c. either the stock is undervalued or people have become more optimistic about the
corporations prospects.
d. either the stock is undervalued or people have become less optimistic about the
corporations prospects.
24. Financial intermediaries are
a. the same as financial markets.
b. individuals who make a profit 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.
25. A mutual fund
a. sells stocks and bonds on behalf of small and not-very-well-known firms who would
otherwise have to pay high interest to obtain credit.
b. is an institution that sells shares to the public and uses the proceeds to buy a
selection of various types of stocks, bonds, or both stocks and bonds.
c. is a financial market where small firms sell stocks and bonds to raise funds.
d. is money 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.
26. The primary advantage of mutual funds is that they
a. eliminate brokerage fees.
b. provide customers with a medium of exchange.
c. always make a return that beats the market.
d. allow people with small amounts of money to diversify.
27. The identity that shows that GDP is both total income and total expenditure is
represented by
a. Y = PI + DI + NX.
b. Y = C + I + G + NX.
c. GDP = GNP - NX.
d. GDP = Y.
28. Y = C + I + G + NX is an identity because
a. the right-hand and left-hand sides are equal.
b. the equality holds due to the way the variables are defined.
c. each symbol identifies a variable.
d. None of the above are correct.

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29. Which of the following equations most simply represents the GDP in a closed economy?
a. Y = C + I + G + NX
b. S = I - G
c. I = Y - C + G
d. Y = C + I + G
30. Which of the following equations represents national saving in a closed economy?
a. Y - I G - NX
b. Y - I C
c. Y - C - G
d. G + C - Y
31. In a closed economy, the total income that remains after paying for consumption and
government purchases is
a. public saving.
b. private saving.
c. national saving.
d. national disposable income.
32. In a closed economy, what does (T - G) represent?
a. private saving
b. public saving
c. national saving
d. investment
33. In a closed economy, what does (Y - T - C) represent?
a. national saving
b. government tax revenue
c. public saving
d. private saving
34. Suppose that in a closed economy GDP is equal to 8,000, Taxes are equal to 2,000,
Consumption equals 5,000, and Government expenditures equal 1,000. What is
national saving?
a. 0
b. 2000
c. 3000
d. None of the above are correct.
35. A budget deficit is created when the government
a. buys back more bonds than it issues.
b. spends more than it receives in tax revenue.
c. receives more tax revenue than it spends.
d. None of the above are correct.
36. Henry buys a bond issued by Speedo Corporation, which uses the funds to buy new
machinery for one of its factories.
a. Henry and Speedo are both investing.
b. Henry and Speedo are both saving.
c. Henry is investing; Speedo is saving.
d. Henry is saving; Speedo is investing.

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37. The source of the supply of loanable funds

a. and the demand for loanable funds is saving.
b. and the demand for loanable funds is investment.
c. is saving and the source of demand for loanable funds is investment.
d. is investment and the source of demand for loanable funds is saving.
38. The slope of the demand for loanable funds curve represents the
a. positive relation between the real interest rate and investment.
b. positive relation between the real interest rate and saving.
c. negative relation between the real interest rate and investment.
d. negative relation between the real interest rate and saving.
39. A higher interest rate induces people to
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.
40. The supply of loanable funds
a. slopes upward because an increase in the interest rate induces people to save more.
b. slopes upward because an increase in the interest rate induces people to invest
more.
c. slopes downward because an increase in the interest rate induces people to save
less.
d. slopes downward because an increase in the interest rate induces people to invest
less.
41. A higher interest rate induces people to
a. save more, so the demand for loanable funds slopes upward.
b. save less, so the demand for loanable funds slopes downward.
c. invest more so the demand for loanable funds slopes upward.
d. invest less so the demand for loanable funds slopes downward.
42. If the current market interest rate for loanable funds is below the equilibrium level, then
a. the quantity of loanable funds demanded will exceed the quantity of loanable funds
supplied and the interest rate will rise.
b. the quantity of loanable funds supplied will exceed the quantity of loanable funds
demanded and the interest rate will rise.
c. the quantity of loanable funds demanded will exceed the quantity of loanable funds
supplied and the interest rate will fall.
d. the quantity of loanable funds supplied will exceed the quantity of loanable funds
demanded and the interest rate will fall.
43. If the current market interest rate for loanable funds is above the equilibrium level, then
a. there is a surplus of loanable funds and the interest rate will rise.
b. there is a surplus of loanable funds and the interest rate will fall.
c. there is a shortage of loanable funds and the interest rate will rise.
d. there is a shortage of loanable funds and the interest rate will fall.
44. If there is surplus of loanable funds, then
a. the supply for loanable funds shifts right and the demand shifts left.
b. the supply for loanable funds shifts left and the demand shifts right.
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c. neither curve shifts, but the quantity of loanable funds supplied increases and the
quantity demanded decreases as the interest rate rises to equilibrium.
d. neither curve shifts, but the quantity of loanable funds supplied decreases and the
quantity demanded increases as the interest rate falls to equilibrium.
45. If the nominal interest rate is 6 percent and the rate of inflation is 2 percent, then the real
interest rate is
a. 12 percent.
b. 8 percent.
c. 4 percent.
d. 3 percent.
46. Your eccentric Uncle has promised to give you $50,000 when you graduate. You think
that you will graduate in three years and could get about 7 percent on any money you
saved. What is the present value of the $50,000?
a. $50,000
b. $50,000(1.07)3
c. $50,000/(1.07)3
d. None of the above are correct.
47. Your company has a project that will provide $1,000 of revenue today and $2,000 of
revenue one year from today. The present value of this project is
a. $3,000.
b. $1,000 + $2,000/(1 + r).
c. $1,000/(1 + r) + $2,000/(1 + r)2.
d. None of the above are correct.
48. What would happen in the market for loanable funds if the government were to increase
the tax on interest income?
a. interest rates would rise
b. interest rates would be unaffected
c. interest rates would fall
d. the change in the interest rate would be ambiguous
49. The effects of a reduction in tax on interest income suggest that, other things the same,
countries that tax saving less will have
a. higher interest rates and higher investment than other countries.
b. higher interest rates and lower investment than other countries.
c. lower interest rates and higher investment than other countries.
d. lower interest rates and lower investment than other countries.
50. Suppose that Congress were to repeal an investment tax credit. What would happen in
the market for loanable funds?
a. The demand and supply of loanable funds would shift right.
b. The demand and supply of loanable funds would shift left.
c. The supply of loanable funds would shift right.
d. The demand for loanable funds would shift left.
51. An increase in the budget deficit
a. drives the price of loanable funds higher.
b. drives the price of loanable funds lower.
c. does not affect the price of loanable funds.
d. has an ambiguous effect on the price of loanable funds.
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52. If a government went from a deficit to a surplus, government

a. debt would rise, the supply of loanable funds would shift right, and interest rates
would rise.
b. debt would rise, the supply of loanable funds would shift right, and interest rates
would fall.
c. debt would fall, the supply of loanable funds would shift left, and interest rates would
rise.
d. debt would fall, the supply of loanable funds would shift right, and interest rates
would fall.
53. The fall in investment due to government borrowing is called
a. the reverse equity premium.
b. crowding out.
c. the reshuffle effect.
d. the Ricardian Principle.
54. Which of the following is incorrect?
a. If GDP is rising faster than debt, the government is, in some sense, living within its
means.
b. The ratio of debt to GDP in the U.S. has always been less than one.
c. Debts during wars may distribute the burden of fighting the war more evenly across
generations.
d. Some increases in debt to GDP took place during peacetime.
55. The price of loanable funds
a. is governed by the forces of supply and demand.
b. is the interest rate.
c. rations the available loanable funds to those who value them the most.
d. All of the above are correct.

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