Chapter 26 Savings and Investments

Transcription

1 Indicate the answer choice that best completes the statement or answers the question. 1. 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. 2. As real interest rates fall, firms desire to a. buy more new equipment and buildings. This response helps explain why the supply of loanable funds is upward sloping. b. buy more new equipment and buildings. This response helps explain why the demand for loanable funds is downward sloping. c. buy less new equipment and buildings. This response helps explain why the supply of loanable funds is upward sloping. d. buy less new equipment and buildings. This response helps explain why the demand for loanable funds is downward sloping. 3. Which of the following statements is not correct? 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 United States has always been less than one. c. Debts during wars may distribute the burden of fighting the war more evenly across generations. d. During times of peace in the United States, the ratio of debt to GDP sometimes rose. 4. Which of the following bond buyers did not buy the bond that best met his or her objective? a. Jackie wanted a bond with a high interest rate and was willing to take a lot of risk. She purchased a junk bond. b. Andrew wanted a bond that would allow him to legally avoid paying federal income taxes. He purchased a municipal bond. c. Suzy wanted to purchase a bond whose seller was unlikely to default. She purchased a bond that Standards and Poor's rated a low credit risk. d. Cecilia held long-term bonds rather than short-term bonds to avoid risk. 5. A checking deposit functions as a. a medium of exchange and as a store of value. b. a medium of exchange, but not as a store of value. c. a store of value, but not as a medium of exchange. d. neither a medium of exchange nor as a store of value. 6. Crowding out occurs when investment declines because a. a budget deficit makes interest rates rise. b. a budget deficit makes interest rates fall. c. a budget surplus makes interest rates rise. d. a budget surplus makes interest rates fall. Copyright Cengage Learning. Powered by Cognero. Page 1

2 7. Which of the following is not correct? a. By saving a larger portion of its GDP, a country can raise its output per worker. b. Savers supply their money to the financial system with the expectation that they will get it back with a return at a later date. c. Financial intermediaries are the only type of financial institution. d. The financial system helps match people s saving with other people s borrowing. 8. 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. 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. 9. 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. 10. 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. 11. When the government runs a budget deficit, a. interest rates are lower than they would be if the budget were balanced. b. national saving is higher than it would be if the budget were balanced. c. investment is lower than it would be if the budget were balanced. d. All of the above are correct. 12. As a money management fee, mutual funds usually charge their customers a. between 0.25 and 2.0 percent of assets each year. b. between 1.5 and 3.0 percent of assets each year. c. nothing, because they receive commissions from the firms whose stock they buy. d. a flat fee of about $50. Copyright Cengage Learning. Powered by Cognero. Page 2

3 13. Which of the following would a macroeconomist consider as investment? a. Marisa purchases a bond issued by Proctor and Gamble Corp. b. Karlee purchases stock issued by Texas Instruments, Inc. c. Charlie builds a new coffee shop. d. All of the above are correct. 14. 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. 15. The U.S. government increases its budget deficit, but at the same time Congress eliminates an investment tax credit. Which of the following is correct? a. The interest rate will increase; investment may increase or decrease. b. The interest rate will decrease; investment may increase or decrease. c. The interest rate may increase or decrease; investment will decrease. d. The interest rate may increase or decrease; investment will increase. 16. What do we call financial institutions through which savers can indirectly provide funds to borrowers? a. stock markets b. financial institutions c. financial markets d. financial intermediaries 17. In a closed economy, if Y is 10,000, T is 1,000, G is 3,000, and C is 5,000, then a. the government has a budget surplus and investment is 1,000 b. the government has a budget surplus and investment is 2,000 c. the government has a budget deficit and investment is 1,000 d. the government has a budget deficit and investment is 2, Which of the following counts as part of the supply of loanable funds? a. bank deposits and purchases of bonds b. bank deposits but not purchases of bonds c. purchases of bonds but not bank deposits d. neither purchases of bonds nor bank deposits 19. If the supply of and demand for loanable funds both shift left, which of the following necessarily happens? a. the equilibrium interest rate falls b. the equilibrium interest rate rises c. the equilibrium quantity of loanable funds rises d. the equilibrium quantity of loanable funds falls Copyright Cengage Learning. Powered by Cognero. Page 3

4 20. In a closed economy, what does (Y - T - C) represent? a. national saving b. government tax revenue c. public saving d. private saving 21. Kathleen is considering expanding her dress shop. If interest rates rise she 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. 22. For an imaginary economy, when the real interest rate is 5 percent, the quantity of loanable funds demanded is $100,000 and the quantity of loanable funds supplied is $100,000. Currently, the nominal interest rate is 6 percent and the inflation rate is 2 percent. Currently, a. the market for loanable funds is in equilibrium. b. the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded, and as a result the real interest rate will rise. c. the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded, and as a result the real interest rate will fall. d. the quantity of loanable funds demanded exceeds the quantity of loanable funds supplied, and as a result the real interest rate will rise. 23. 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. 24. Which of the following is a financial intermediary? a. a mutual fund b. the stock market c. a U.S. government bond d. a wealthy individual who regularly buys and holds large quantities of government bonds 25. Larry buys stock in A to Z Express Company. Curly Corporation builds a new factory. Whose transaction would be an act of investment in the language of macroeconomics? a. only Larry s b. only Curly Corporation s c. Larry s and Curly Corporation s d. neither Larry s nor Curly Corporation s Copyright Cengage Learning. Powered by Cognero. Page 4

5 26. Which of the following both make the interest rate on a bond higher than otherwise? a. the interest it pays is taxed and it was issued by a financially strong corporation b. the interest it pays is taxed and it was issued by a financially weak corporation c. the interest it pays is tax exempt and it was issued by a financially strong corporation d. the interest it pays is tax exempt and it was issued by a financially weak corporation 27. If a reform of the tax laws encourages greater saving, the result would be a. higher interest rates and greater investment. b. higher interest rates and less investment. c. lower interest rates and greater investment. d. lower interest rate and less investment. Figure On the horizontal axis of the graph, L represents the quantity of loanable funds in billions of dollars. 28. Refer to Figure If the equilibrium quantity of loanable funds is $56 billion and if the rate of inflation is 4 percent, then the equilibrium real interest rate is a. lower than 6 percent. b. 6 percent. c. between 6 percent and 8 percent. d. higher than 8 percent. 29. 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. Copyright Cengage Learning. Powered by Cognero. Page 5

6 30. Nastech Pharmaceuticals announced it has developed a nasal spray that would reduce hunger cravings. Other things the same we would expect a. the demand for existing shares of stock in this company to decrease, so the price would fall. b. the demand for existing shares of stock in this company to increase, so the price would rise. c. the supply of existing shares of stock in this company to decrease, so the price would fall. d. the supply of existing shares of stock in this company to increase, so the price would rise. Scenario Assume the following information for an imaginary, closed economy. GDP = $5 trillion; consumption = $3.1 trillion; government purchases = $0.7 trillion; and taxes = $0.9 trillion. 31. Refer to Scenario For this economy, private saving is equal to a. $0.3 trillion. b. $1.2 trillion. c. $1.0 trillion. d. $1.7 trillion. 32. 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 public and national saving? a. public and national saving would rise b. public and national saving would fall c. public saving would rise and national saving would fall d. public saving would fall and national saving would rise 33. The supply of loanable funds would shift to the right if either a. tax reforms encouraged greater saving or the budget deficit became smaller. b. tax reforms encouraged greater saving or investment tax credits were increased. c. the budget deficit became larger or investment tax credits were increased. d. the budget deficit became larger or tax reforms discouraged saving. 34. In 2013, XYZ Corporation had total earnings of $500 million and XYZ retained 20 percent of its earnings for future investments. If the price of a share of XYZ stock is $70 and if 100 million shares of its stock is outstanding, then what is the price-earnings ratio? a b c d Copyright Cengage Learning. Powered by Cognero. Page 6

7 35. In 2013, ABC Corporation had total earnings of $200 million and 40 million shares of the corporation s stock were outstanding. If the price-earnings ratio for ABC is 20, then what is the price of a share of its stock? a. $5 b. $10 c. $80 d. $ When the government increases spending (holding taxes constant), the budget balance. This causes the interest rate in the market for loanable funds to and investment to. 37. In a closed economy, Y - C - G equals. The variable Y is, C is, and G is. 38. A is a certificate of indebtedness and a is a claim to partial ownership in a firm. 39. Congress and the President implement an investment tax credit. Which curve in the market for loanable funds shifts, which direction does it shift, and what happens to the interest rate? 40. When someone borrows to purchase capital goods, he is using someone else s to fund his. Copyright Cengage Learning. Powered by Cognero. Page 7

8 Answer Key 1. c 2. b 3. b 4. d 5. a 6. a 7. c 8. b 9. b 10. c 11. c 12. a 13. c 14. d 15. c 16. d 17. d 18. a 19. d 20. d 21. c 22. d 23. b 24. a 25. b 26. b Copyright Cengage Learning. Powered by Cognero. Page 8

9 27. c 28. c 29. d 30. b 31. c 32. b 33. a 34. c 35. d 36. falls, increase, decrease 37. national saving/investment, output/gdp, consumption, government purchases 38. bond, stock 39. The demand for loanable funds shifts right. The interest rate rises. 40. saving, investment Copyright Cengage Learning. Powered by Cognero. Page 9