Chapter 25 Saving, Investment, and the Financial System

Test B
1

If Microsoft sells a bond they are a. borrowing directly from the public. b. borrowing indirectly from the public. c. lending directly to the public. d. lending indirectly to the public. ANSWER a. borrowing directly from the public. !"#E M $E"1 % SE&!I'N 1 '()E&!I*E 1 RAN%'M "
+

"ou buy a bond issued by %ole &orporation. Which of the following feature,s- of this bond refers to its term. a. It pays an interest rate of 1+/. b. It matures in fi0e years. c. It is selling for 123456. d. All of the abo0e are correct. ANSWER b. It matures in fi0e years. !"#E M $E"1 % SE&!I'N 1 '()E&!I*E 1 RAN%'M "
7

Which of the following is correct. a. %ifferences in credit ris8 mean that corporate bonds tend to ha0e higher interest rates than 9.S. go0ernment bonds. b. %ifferences in ta: treatment mean that 9.S. go0ernment bonds tend to ha0e a higher interest rate than municipal bonds. c. (oth of the abo0e are correct. d. Neither of the abo0e is correct. ANSWER c. (oth of the abo0e are correct. !"#E M $E"1 % SE&!I'N 1 '()E&!I*E 1 RAN%'M "
;

#apa Mario<s #i==a &ompany sells stoc8. a. !hey are using e>uity financing and the return shareholders earn depends on how profitable the company is. b. !hey are using debt financing and the return shareholders earn depends on how profitable the company is. c. !hey are using e>uity financing and the return shareholders earn is fi:ed. d. !hey are using debt financing and the return shareholders earn is fi:ed. ANSWER a. !hey are using e>uity financing and the return shareholders earn depends on how profitable the company is. !"#E M $E"1 % SE&!I'N 1 '()E&!I*E 1 RAN%'M "
5

Worldwide %eli0ery Ser0ice &orporation de0elops a way to speed up their deli0eries and reduce their costs. We e:pect the a. demand for e:isting shares of this stoc8 to rise causing its price to rise. b. demand for e:isting shares of this stoc8 to rise causing its price to fall. c. supply of the e:isting shares of this stoc8 to rise causing its price to rise. d. supply of the e:isting shares of this stoc8 to fall casing its price to fall. ANSWER a. demand for e:isting shares of this stoc8 to rise causing its price to rise. !"#E M $E"1 % SE&!I'N 1 '()E&!I*E 1 RAN%'M "

&opyright ? @arcourt3 Inc.

+A

76 &hapter +5BSa0ing3 In0estment3 and the Cinancial System

D

Suppose Sarah Eee &orporation stoc8 has a #BE ratio of 2. !his #BE ratio is relati0ely a. high3 indicating buyers may e:pect earnings to rise. b. high indicating buyers may e:pect earnings to fall. c. low3 indicating buyers may e:pect earnings to rise. d. low3 indicating buyers may e:pect earnings to fall. ANSWER d. low3 indicating buyers may e:pect earnings to fall. !"#E M $E"1 % SE&!I'N 1 '()E&!I*E 1 RAN%'M "
4

Retained earnings are a. paid out as di0idends. b. the amount of re0enues a firm recei0es for the sale of its products minus its costs of production as measured by its accountants. c. are the single most important piece of information about a stoc8. d. None of the abo0e is correct. ANSWER d. None of the abo0e is correct. !"#E M $E"1 % SE&!I'N 1 '()E&!I*E 1 RAN%'M "
2

Which of the following is correct. a. Smaller local firms borrow relati0ely more from ban8s than larger wellF8nown corporations do. b. (an8s charge borrowers a slightly lower interest rate than they pay to depositors. c. Stoc8s3 bonds3 and deposits are all similar in that each pro0ides a medium of e:change. d. None of the abo0e is correct. ANSWER a. Smaller local firms borrow relati0ely more from ban8s than larger wellF8nown corporations do. !"#E M $E"1 % SE&!I'N 1 '()E&!I*E 1 RAN%'M "
A

'ther things the same3 an increase in ta:es necessarily means a. the go0ernment has a surplus. b. public sa0ings increases. c. pri0ate sa0ings increases. d. None of the abo0e is correct. ANSWER b. public sa0ings increases. !"#E M $E"1 % SE&!I'N 1 '()E&!I*E + RAN%'M "
16

In a closed economy national sa0ings minus the go0ernment surplus is e>ual to a. in0estment. b. public sa0ing. c. pri0ate sa0ing. d. real G%# minus consumption minus go0ernment e:penditures. ANSWER c. pri0ate sa0ing. !"#E M $E"1 E SE&!I'N 1 '()E&!I*E + RAN%'M " NOTE: THE FOLLOWING QUESTION IS REPEATED FROM THE ON LINE QUI!!ES" #OUR STUDENTS MA# HA$E ALREAD# SEEN THIS QUESTION AND ITS ANSWER"
11

G%# last year was 1;6663 ta:es were 17663 go0ernment spending was 1+663 and consumption was 17666. What was national sa0ing. a. 11666 b. 1266 c. 1466 d. 1D66 ANSWER b. 1266 !"#E M $E"1 % SE&!I'N 1 '()E&!I*E + RAN%'M "

&opyright ? @arcourt3 Inc.

&hapter +5BSa0ing3 In0estment3 and the Cinancial System 71

1+

If people wanted to borrow more for mortgages3 perhaps because of changes in ta: laws that ma8e home ownership more desirable3 then the a. demand for loanable funds shifts right3 ma8ing the interest rate rise. b. demand for loanable funds shifts right3 ma8ing the interest rate fall. c. supply of loanable funds shifts right3 ma8ing the interest rate rise. d. supply of loanable funds shifts right3 ma8ing the interest rate fall. ANSWER a. demand for loanable funds shifts right3 ma8ing the interest rate rise. !"#E M $E"1 % SE&!I'N + '()E&!I*E 7 RAN%'M "
17

'ther things the same3 a fall in the interest rate induces borrowers to borrow a. less and sa0ers to sa0e less. b. more and sa0ers to sa0e less. c. less and sa0ers to sa0e more. d. more and sa0ers to sa0e more. ANSWER b. more and sa0ers to sa0e less. !"#E M $E"1 % SE&!I'N + '()E&!I*E 7 RAN%'M "
1;

If the demand for loanable funds shifts right3 the interest rate a. and lending increase. b. and lending decrease. c. increases and lending decreases. d. decreases and lending increases. ANSWER a. and lending increase. !"#E M $E"1 % SE&!I'N + '()E&!I*E 7 RAN%'M " NOTE: THE FOLLOWING QUESTION IS REPEATED FROM THE ON LINE QUI!!ES" #OUR STUDENTS MA# HA$E ALREAD# SEEN THIS QUESTION AND ITS ANSWER"
15

An increase in the supply of loanable funds will ,other things constanta. increase the e>uilibrium interest rate and decrease in0estment. b. increase the e>uilibrium interest rate and increase in0estment. c. decrease the e>uilibrium interest rate and increase in0estment. d. decrease the e>uilibrium interest rate and decrease in0estment. ANSWER c. decrease the e>uilibrium interest rate and increase in0estment. !"#E M $E"1 % SE&!I'N + '()E&!I*E 7 RAN%'M "
1D

'8sana put money in the ban8 one year ago at an interest rate of 5/H during that time prices rose by +/. !he dollar 0alue of '8sana<s account has increased a. 4/ and the real 0alue increased 5/. b. 4/ and the real 0alue increased +/. c. 5/ and the real 0alue increased 4/. d. 5/ and the real 0alue increased 7/. ANSWER d. 5/ and the real 0alue increased 7/. !"#E M $E"1 % SE&!I'N + '()E&!I*E 7 RAN%'M "
14

"our boss promises to pay you a retirement bonus of 1;63666 when you retire si: years from today. If the interest rate is 5/3 the present 0alue of this payment is a. 1;63666B,D 1.65-. b. 1;63666B,1.65-D. c. 1;636666B,D-1.65. d. 1;63666 ,1.65-D. ANSWER b. 1;63666B,1.65-D. !"#E M $E"1 % SE&!I'N + '()E&!I*E 7 RAN%'M "

&opyright ? @arcourt3 Inc.

7+ &hapter +5BSa0ing3 In0estment3 and the Cinancial System

12

Roth Indi0idual Retirement Accounts allow people to sa0e a limited amount of money without paying ta:es on the interest when funds are withdrawn. Go0ernment programs li8e these should increase the a. demand for loanable funds and lower the interest rate. b. demand for loanable funds and raise the interest rate. c. supply of loanable funds and lower the interest rate. d. supply of loanable funds and raise the interest rate. ANSWER c. supply of loanable funds and lower the interest rate. !"#E M $E"1 % SE&!I'N + '()E&!I*E ; RAN%'M "
1A

%uring the #residencies of $ennedy and Reagan ta: changes were made that reduced ta:es on in0estment. Go0ernment programs li8e these should increase the a. demand for loanable funds and lower the interest rate. b. demand for loanable funds and raise the interest rate. c. supply of loanable funds and lower the interest rate. d. supply of loanable funds and raise the interest rate. ANSWER b. demand for loanable funds and raise the interest rate. !"#E M $E"1 % SE&!I'N + '()E&!I*E ; RAN%'M "
+6

If the go0ernment wanted to decrease interest rates and increase in0estment it could a. raise the go0ernment deficit. b. reduce ta:es on interest income. c. pro0ide in0estment ta: credits. d. None of the abo0e is correct. ANSWER b. reduce ta:es on interest income. !"#E M $E"1 % SE&!I'N + '()E&!I*E 5 RAN%'M " NOTE: THE FOLLOWING QUESTION IS REPEATED FROM THE ON LINE QUI!!ES" #OUR STUDENTS MA# HA$E ALREAD# SEEN THIS QUESTION AND ITS ANSWER"
+1

Which of the following will shift the demand for loanable funds. a. a decrease in the mar8et rate of interest b. a law passed by &ongress granting special ta: brea8s for sa0ers c. a law passed by &ongress granting special ta: brea8s for borrowers d. an increase in the mar8et rate of interest ANSWER c. a law passed by &ongress granting special ta: brea8s for borrowers !"#E M $E"1 % SE&!I'N + '()E&!I*E ; RAN%'M "
++

Replacing the income ta: with a consumption ta: would a. increase interest rates and sa0ing. b. decrease interest rates and sa0ing. c. increase interest rates and decrease sa0ing. d. decrease interest rates and increase sa0ing. ANSWER d. decrease interest rates and increase sa0ing. !"#E M $E"1 % SE&!I'N + '()E&!I*E ; RAN%'M "
+7

(etween 121; and 12+A the national debt of the 9.S. go0ernment fell from about 11+2 million to about 156 million. !he model of the mar8et for loanable funds suggests that this reduction of the debt should ha0e a. increased the interest rate and in0estment. b. increased the interest rate and decreased in0estment. c. decreased the interest rate and increased in0estment. d. decreased the interest rate and in0estment. ANSWER c. decreased the interest rate and increased in0estment. !"#E M $E"1 % SE&!I'N + '()E&!I*E 5 RAN%'M "

&opyright ? @arcourt3 Inc.

&hapter +5BSa0ing3 In0estment3 and the Cinancial System 77

+;

An increase in the budget deficit is represented by shifting the a. demand for loanable funds right. b. demand for loanable funds left. c. supply of loanable funds right. d. supply of loanable funds left. ANSWER d. supply of loanable funds left. !"#E M $E"1 % SE&!I'N + '()E&!I*E 5 RAN%'M "
+5

Suppose the go0ernment reduced the ta: rate on interest income and used a current budget surplus to finance this ta: cut. a. !he reduction in ta: rates and the reduction in the surplus would both shift the supply of loanable funds right. b. !he reduction in ta: rates would shift the supply of loanable funds right. !he reduction in the surplus would shift the supply of loanable funds left. c. !he reduction in ta: rates would shift the supply of loanable funds left. !he reduction in the surplus would shift the supply of loanable funds right. d. None of the abo0e is correct. ANSWER b. !he reduction in ta: rates would shift the supply of loanable funds right. !he reduction in the surplus would shift the supply of loanable funds left. !"#E M $E"1 & SE&!I'N + '()E&!I*E 5 RAN%'M "

&opyright ? @arcourt3 Inc.

ANSWER a. borrowing directly from the public. !"#E M $E"1 % SE&!I'N 1 '()E&!I*E 1 RAN%'M "
+

ANSWER b. It matures in fi0e years. !"#E M $E"1 % SE&!I'N 1 '()E&!I*E 1 RAN%'M "
7

ANSWER c. (oth of the abo0e are correct. !"#E M $E"1 % SE&!I'N 1 '()E&!I*E 1 RAN%'M "
;

ANSWER a. !hey are using e>uity financing and the return shareholders earn depends on how profitable the company is. !"#E M $E"1 % SE&!I'N 1 '()E&!I*E 1 RAN%'M "
5

ANSWER a. demand for e:isting shares of this stoc8 to rise causing its price to rise. !"#E M $E"1 % SE&!I'N 1 '()E&!I*E 1 RAN%'M "
D

ANSWER d. low3 indicating buyers may e:pect earnings to fall. !"#E M $E"1 % SE&!I'N 1 '()E&!I*E 1 RAN%'M "
4

ANSWER d. None of the abo0e is correct. !"#E M $E"1 % SE&!I'N 1 '()E&!I*E 1 RAN%'M "
2

ANSWER a. Smaller local firms borrow relati0ely more from ban8s than larger wellF8nown corporations do. !"#E M $E"1 % SE&!I'N 1 '()E&!I*E 1 RAN%'M "
A

ANSWER b. public sa0ings increases. !"#E M $E"1 % SE&!I'N 1 '()E&!I*E + RAN%'M "
16

ANSWER c. pri0ate sa0ing. !"#E M $E"1 E SE&!I'N 1 '()E&!I*E + RAN%'M "

11

ANSWER b. 1266 !"#E M $E"1 % SE&!I'N 1 '()E&!I*E + RAN%'M "

1+

ANSWER a. demand for loanable funds shifts right3 ma8ing the interest rate rise. !"#E M $E"1 % SE&!I'N + '()E&!I*E 7 RAN%'M "
17

ANSWER b. more and sa0ers to sa0e less. !"#E M $E"1 % SE&!I'N + '()E&!I*E 7 RAN%'M "
1;

ANSWER a. and lending increase. !"#E M $E"1 % SE&!I'N + '()E&!I*E 7 RAN%'M "

15

ANSWER c. decrease the e>uilibrium interest rate and increase in0estment. !"#E M $E"1 % SE&!I'N + '()E&!I*E 7 RAN%'M "
1D

ANSWER d. 5/ and the real 0alue increased 7/. !"#E M $E"1 % SE&!I'N + '()E&!I*E 7 RAN%'M "
14

ANSWER b. 1;63666B,1.65-D. !"#E M $E"1 % SE&!I'N + '()E&!I*E 7 RAN%'M "

12

ANSWER c. supply of loanable funds and lower the interest rate. !"#E M $E"1 % SE&!I'N + '()E&!I*E ; RAN%'M "
1A

ANSWER b. demand for loanable funds and raise the interest rate. !"#E M $E"1 % SE&!I'N + '()E&!I*E ; RAN%'M "
+6

ANSWER b. reduce ta:es on interest income. !"#E M $E"1 % SE&!I'N + '()E&!I*E 5 RAN%'M "
+1

ANSWER c. a law passed by &ongress granting special ta: brea8s for borrowers !"#E M $E"1 % SE&!I'N + '()E&!I*E ; RAN%'M "
++

ANSWER d. decrease interest rates and increase sa0ing. !"#E M $E"1 % SE&!I'N + '()E&!I*E ; RAN%'M "
+7

ANSWER c. decreased the interest rate and increased in0estment. !"#E M $E"1 % SE&!I'N + '()E&!I*E 5 RAN%'M "
+;

ANSWER d. supply of loanable funds left. !"#E M $E"1 % SE&!I'N + '()E&!I*E 5 RAN%'M "
+5

ANSWER b. !he reduction in ta: rates would shift the supply of loanable funds right. !he reduction in the surplus would shift the supply of loanable funds left. !"#E M $E"1 & SE&!I'N + '()E&!I*E 5 RAN%'M "