Quiz 4. Multiple Choice Identify the choice that best completes the statement or answers the question.

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1 Quiz 4 Multiple Choice Identify the choice that best completes the statement or answers the question. 1. When opening a restaurant you may need to buy ovens, freezers, tables, and cash registers. Economists call these expenditures a. capital investment. b. investment in human capital. c. business consumption expenditures. 2. Institutions in the economy that help to match one person's saving with another person's investment are collectively called the a. the Bank of Canada b. banking system. c. monetary system. d. financial system. 3. Compared to long-term bonds, other things the same, short-term bonds generally have a. more risk and so pay higher interest. b. less risk and so pay lower interest. c. less risk and so pay higher interest. d. about the same risk and so pay about the same interest. 4. If Huedepool Beer runs into financial difficulty, the stockholders as a. part owners of Huedepool are paid before bondholders get paid anything at all. b. part owners of Huedepool are paid after bondholders get paid. c. creditors of Huedepool are paid before bondholders get paid anything at all. d. creditors of Huedepool are paid after bondholders get paid. e. both b and c are correct. 5. Queen City Sausage stock is selling at $40 per share, it has retained earnings of $2.00 per share and dividends of $.50 per share. What is the price-earnings ratio and what is the dividend yield? a. 20, 1.25 percent b. 20, 6.25 percent c. 16, 1.25 percent 6. Retained earnings are a. paid out as dividends. b. the amount of revenues a corporation receives for the sale of its products minus its costs of production as measured by its accountants. c. the single most important piece of information about a stock. Table 26-2 Stock Sym Yld% PE Vol 100s Hi Lo Close Net Chg Boeing and Co. BA ,531, Eli Lily and Co. LLY ,765, H.J. Heinz and Co. HNZ ,350,

2 Kellog Co. K ,990, Refer to Table Which company had the highest dollar dividend? a. Boeing Co. b. Eli Lily and Co. c. H.J. Heinz and Co. d. Kellog CO. e. Both Boeing and Heinz had the same dollar dividend 8. The primary advantage of mutual funds is that they a. always make a return that "beats the market." b. allow people with small amounts of money to diversify. c. provide customers with a medium of exchange. d. All of the above are correct. 9. The identity that shows that GDP is both total income and total expenditure is represented by a. GDP = Y. b. Y = PI + DI + NX. c. GDP = GNP - NX. d. Y = C + I + G + NX. 10. In a closed economy, national saving is a. usually greater than investment. b. equal to investment. c. usually less than investment because of the leakage of taxes. d. always less than investment. 11. Suppose that in a closed economy GDP is 10,000, consumption is 6,500, and taxes are 2,000. What value of Government expenditures would make national savings equal to 1000 and at that value would the government have a deficit or surplus? a. 2,500 and a deficit b. 2,500 and a surplus c. 1,000 and a deficit d. 1,000 and a surplus e. None of the above are correct. 12. Fred is considering expanding his dress shop. If interest rates rise he is a. less likely to expand. This illustrates why the supply of loanable funds slopes downward. b. more likely to expand. This illustrates why the supply of loanable funds slopes upward. c. less likely to expand. This illustrates why the demand for loanable funds slopes downward. d. more likely to expand. This illustrates why the demand for loanable funds slopes upward. 13. Suppose the market for loanable funds is in equilibrium. Using the table below, determine the quantity of funds demanded. GDP $100 billion Consumption $65 billion Taxes minus Transfers $15 billion Government purchases $20 billion a. $25 billion b. $20 billion

3 c. $15 billion d. $10 billion e. $5 billion 14. 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. 15. Other things the same, countries that tax saving less will have a. lower interest rates and higher investment than other countries. b. lower interest rates and lower investment than other countries. c. higher interest rates and higher investment than other countries. d. higher interest rates and lower investment than other countries. 16. An increase in the 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. 17. Other things the same, if the government increases transfer payments to households, then a. investment will rise. b. the rate of interest will rise. c. public saving will rise. d. the market for loanable funds will be unaffected. e. None of the above will occur. 18. You are required to testify before Parliament concerning the effects of an increase in the government surplus. Which is the correct thing to say? a. The debt and interest rates will rise. b. The debt and interest rates will fall. c. The debt will rise and interest rates will fall. d. The debt will fall and interest rates will rise. 19. When the government runs a budget deficit, a. interest rates are lower than they would be otherwise. b. national saving is higher than it would be otherwise. c. investment is lower than it would be otherwise. d. All of the above are correct. Use the figure below for the following questions. Figure 26-1

4 20. Refer to Figure Which of the graphs in the figure above shows the effects of instituting a national sales tax and simultaneously lowering the income tax rate? a. graph 1 b. graph 2 c. graph 3 Short Answer 21. In the national income accounting identity showing the equality between national saving and investment, what is the representation of private saving and what is the representation of public saving? 22. Explain why the demand for loanable funds slopes downward and the supply of loanable funds slopes upward.

5 Quiz 4 Answer Section MULTIPLE CHOICE 1. ANS: A PTS: 1 DIF: Easy REF: ANS: D PTS: 1 DIF: Easy REF: ANS: B PTS: 1 DIF: Easy REF: ANS: B PTS: 1 DIF: Easy REF: ANS: C PTS: 1 DIF: Challenging REF: ANS: D PTS: 1 DIF: Easy REF: ANS: B PTS: 1 DIF: Average REF: ANS: B PTS: 1 DIF: Easy REF: ANS: D PTS: 1 DIF: Easy REF: ANS: B PTS: 1 DIF: Easy REF: ANS: A PTS: 1 DIF: Average REF: ANS: C PTS: 1 DIF: Easy REF: ANS: C PTS: 1 DIF: Average REF: ANS: A PTS: 1 DIF: Average REF: ANS: A PTS: 1 DIF: Average REF: ANS: A PTS: 1 DIF: Easy REF: ANS: B PTS: 1 DIF: Challenging REF: ANS: B PTS: 1 DIF: Easy REF: ANS: C PTS: 1 DIF: Easy REF: ANS: B PTS: 1 DIF: Average REF: SHORT ANSWER 21. ANS: Starting with Y = C + I + G, subtract C and G from both sides, obtaining Y - C - G = I. The left-hand side represents national saving, the total income of the economy that remains after paying for consumption and government purchases. Hence, substituting S for Y - C - G, we obtain S = I. To separate private and public saving, add and subtract T in S = Y - C - G, obtaining S = (Y - T - C) + (T - G). Here, (Y - T - C) represents private saving, the part of disposable income (Y - T) left after subtracting consumption, and (T - G), the government budget surplus represents public saving. PTS: 1 DIF: Average REF: ANS: When the interest rate rises investment spending becomes more expensive, so people invest less. As the interest rate rises saving becomes more rewarding, so people want to save more. The inverse relation between interest and borrowing is reflected in the downward slope of the demand for loanable funds curve. The positive relation between interest and saving is reflected in the upward slope of the supply of loanable funds curve. PTS: 1 DIF: Average REF: