Deck 11: Saving, Investment, and the Financial System

Question 1

Savings deposits are included in M1 but not M2.

Answer 1

False

Question 2

The fixed rate of interest on the face value of a bond is known as the

A) maturity date.
B) coupon rate.
C) face value interest rate.
D) price.

Answer 2

coupon rate.

Question 3

Which statement regarding money supply measures is incorrect?

A) M1 is the narrowest measure of the money supply.
B) Near monies are as liquid as cash.
C) Coins form only a small part of M1.
D) M2 is about four times the size of M1.

Answer 3

Near monies are as liquid as cash.

Question 4

When money is used to measure and compare the value of goods and services, it is used as a

A) unit of account.
B) store of value.
C) medium of exchange.
D) means of payment.

Question 5

If market interest rates increase to 9% and the yield on a bond is 7%, then the price of the bond will rise.

Question 6

Which of these is NOT a function of money?

A) a store of value
B) a unit of account
C) a double coincidence of wants
D) a medium of exchange

Question 7

Suppose the economy enters a recession and income falls more than the demand for loanable funds. In this case, the supply of loanable funds shifts _____ and the equilibrium interest rate _____.

A) left; rises
B) right; rises
C) left; falls
D) right; falls

Question 8

Which of these would cause both the equilibrium interest rate and the equilibrium quantity to fall in the market for loanable funds?

A) an increase in the average income of the population
B) expectations of greater job security
C) an adjustment to building codes that make it more difficult to get government permits to build new buildings
D) expectations of greater business profits

Question 9

A medium of exchange is necessary for economic growth.

Question 10

When general interest rates fall, the prices of bonds in the secondary market increase.

Question 11

(Table: Money Measure Components, January 2019) Based on the table, the near monies for January 2019 amounted to

A) $2,110.2 billion.
B) $10,701.6 billion.
C) $11,960.2 billion.
D) $12,811.8 billion.

Question 12

The most important function of money is a

A) medium of exchange.
B) unit of account.
C) store of value.
D) standard of deferred payment.

Question 13

Which list correctly names money's functions?

A) a unit of account, a store of value, a medium of exchange
B) barter, a double coincidence of wants, a unit of account
C) transaction costs, a medium of exchange, a unit of account
D) liquidity, barter, a medium of exchange

Question 14

Suppose Mary saves enough funds for a down payment on a house. When she buys her home, she withdraws the savings to make the down payment and borrows $200,000 on a mortgage loan. Which statement accurately describes Mary's interactions with her bank?

A) Mary is the intermediary or connection between the bank and her house.
B) Mary's house is the intermediary between Mary and the bank.
C) Mary is supplying loan funds and cash to the homeowner and demanding savings from her bank.
D) Mary goes from being a supplier to demanding loanable funds, with the bank acting as an intermediary.

Question 15

Which asset is MOST liquid?

A) a house
B) a U.S. savings bond
C) money
D) land

Question 16

If a person borrows $3,000 at 8% annual interest and never makes any payments, how much will the loan balance be after 10 years?

A) $4,500
B) $5,400
C) $6,476.77
D) $7,676.67

Question 17

The supply of loanable funds includes

A) only saving by the public.
B) only saving by government entities.
C) only saving by business firms.
D) saving by the public, government entities, and business firms.

Question 18

(Table: Money Measure Components, January 2019) Based on the table, currency as a percentage of M1 for January 2019 was

A) 36%.
B) 44%.
C) 52%.
D) 72%.

Question 19

M2 is calculated by adding _____ to the value of M1.

A) near monies.
B) narrow money.
C) commodity money.
D) fiat money.

Question 20

M1 is the most _____ of all assets because as a medium of exchange, it requires no conversion.

A) illiquid
B) insolvent
C) liquid
D) tangible

Question 21

(Table: IRA Contributions) The table shows the marginal income tax rate for four individuals and the annual contribution they make to their respective IRAs. Which woman has the smallest decrease in after-tax income after making her IRA contribution?

A) Mary
B) Kathleen
C) Isabelle
D) Patricia

Question 22

If you contribute $1,000 to your company's retirement savings program and your employer matches it with another $1,000, you will have instantly earned a 100% return on your investment, assuming the vesting period has been satisfied.

Question 23

The compounding effect _____ savers and _____ borrowers.

A) helps; hurts
B) helps; helps
C) hurts; hurts
D) hurts; helps

Question 24

There is a positive relationship between bond prices and interest rates.

Question 25

M1 includes

A) cash, savings deposits, demand deposits, money market deposit accounts, small-denomination time deposits, and shares in retail money market mutual funds.
B) cash, demand deposits, and small-denomination time deposits.
C) cash, demand deposits, and large-denomination time deposits.
D) cash and checkable deposits.

Question 26

All of these are included in the definition of M2 EXCEPT

A) coins.
B) large-denomination time deposits.
C) savings deposits.
D) demand deposits.

Question 27

All of these illustrate roles of financial intermediaries, which create incentives for individuals to use financial intermediaries, EXCEPT

A) a saver is able to get a return from his savings being loaned to others, yet is also able to withdraw funds when desired.
B) when savers can compare the terms of savings accounts across financial institutions, they are able to get lower interest rates than would be possible otherwise.
C) a bank makes so many loans it becomes skilled at predicting which loan applicants are trustworthy.
D) by offering standardized savings and loan products, a financial institution has fewer costs than negotiating each saving and loan agreements individually.

Question 28

The formula for calculating the price of a bond is Price of a Bond = Annual Interest Payment × Yield.

Question 29

Financial institutions

A) reduce information costs, set interest rates for bonds, and diversify assets.
B) reduce information costs, reduce transaction costs, and diversify assets.
C) pool funds from lenders, reduce transaction costs, and diversify assets.
D) reduce information costs, reduce transaction costs, and pool funds from lenders.

Question 30

Suppose the ZZZ Corporation sells a perpetuity coupon bond for $1,000 and its coupon payment is $100. In this example, the yield is _____. If the company sells the bond for $500 instead, the yield is _____.

A) 10%; 10%
B) 10%; 20%
C) 100%; 100%
D) 100%; 200%

Question 31

Barter

A) works as well as money in all cases.
B) involves a double coincidence of wants if an exchange takes place.
C) serves as store of value in primitive societies.
D) is any exchange, with or without the presence of money, in which the participants negotiate the terms of trade.

Question 32

Applying for multiple credit cards at one time can be good, because it raises your credit score.

Question 33

(Figure: Market for Loanable Funds 2) Based on the graph, if households decide to save a larger portion of their income because they fear job loss due to a recession, the loanable funds supply curve will shift from _____ to _____, and the new equilibrium will be at point _____, holding demand constant at D₀.

A) S₀; S₁; a
B) S₀; S₁; b
C) S₁; S₀; b
D) S₁; S₀; d

Question 34

The double coincidence of wants problem is made worse by the introduction of money.

Question 35

Who is responsible for paying off a deferment on a college loan?

A) the federal government
B) the student's parents or relatives
C) the student at a later date
D) It will not have to be paid off at all.

Question 36

An economy is expected to produce higher profits for business owners at the same time that the country's stock market surges. What changes can be expected in the country's market for loanable funds?

A) an increase in demand and a decrease in supply
B) a decrease in demand and an increase in supply
C) decreases in both demand and supply
D) increases in both demand and supply

Question 37

If a person borrows $3,000 at 8% annual interest and never makes any payments, how much will the loan balance be after three years?

A) $3,720
B) $3,779.14
C) $3,977.41
D) $7,239.27

Question 38

Money is anything that is accepted in exchange for other goods and services or for the payment of debt.

Question 39

M1 is equal to

A) currency plus small time deposits.
B) currency plus demand deposits plus savings deposits.
C) currency plus checkable deposits.
D) currency.

Question 40

If a $1,000 bond is issued with a coupon rate of 12%, the bondholder will receive $12 per year for the life of the bond.

Question 41

Which of these represents the rank from the smallest to largest components of M1?

A) coins, banknotes, demand deposits
B) banknotes, coins, demand deposits
C) demand deposits, coins, banknotes
D) demand deposits, banknotes, coins

Question 42

Fiat money

A) has a high intrinsic value.
B) is decreed by royalty.
C) is acceptable as money because the government has decreed it to be so.
D) is unacceptable as money.

Question 43

Which of these is an example of a teaser rate?

A) an interest rate for a mortgage on an unaffordable home
B) a temporarily low interest rate for a credit card
C) an interest rate on a car loan for a luxury automobile
D) an interest rate on loans of more than 30 years

Question 44

Liquid assets are assets that have high risk.

Question 45

The medium of exchange function of money allows an economy to avoid the problem of

A) lack of a double coincidence of wants.
B) unemployment.
C) loss of purchasing power during a period of high inflation.
D) rising interest rates.

Question 46

Firms demand more funds for investment opportunities as interest rates rise.

Question 47

Because of the compounding effect, a large loan balance becomes smaller.

Question 48

Which of these is an example of money being used as a store of value?

A) A customer buys a burger, fries, and a medium diet cola for $6.95.
B) A restaurant's profits for the week of October 3 to October 10 are $1,250.
C) A customer receives $3.05 in change and returns the next day to make another purchase.
D) A restaurant sells a large ice cream sundae and charges the customer's debit card.

Question 49

The direct exchange of goods and services is called

A) barter.
B) a medium of exchange.
C) GDP.
D) a stock exchange.

Question 50

Which asset is included in M1?

A) savings deposits
B) checkable deposits
C) reserves
D) small-denomination time deposits

Question 51

In the market for loanable funds, which of these would cause the equilibrium interest rate to rise, but would have an uncertain impact on the equilibrium quantity?

A) Job security for employees increases, and there is an advancement in technology that would reduce costs if adopted.
B) Job security for employees falls, and the government increases regulation of business production methods.
C) There is an increase in tax breaks for saving toward retirement, and there are reduced expectations for business profits.
D) There is a surge in the stock market and an increase in average household income.

Question 52

Which of these is NOT a function of money?

A) a medium of exchange
B) a unit of account
C) a method of making change
D) a store of value

Question 53

Which of these would increase M1 in the country where Joe, Nan, and the Hardware Store are located?

A) Joe withdraws $500 from his checking account and deposits it in his savings account.
B) Joe withdraws $500 from his checking account and gives it to his sister Nan, who deposits it in her checking account.
C) Joe withdraws $500 from his savings account and deposits it in his checking account.
D) Joe spends $500 cash at the Hardware Store, and the store deposits the $500 in its checking account.

Question 54

Checking accounts are not money.

Question 55

New technologies that increase productivity tend to shift the supply of loanable funds curve rightward.

Question 56

Which of these is included in M1?

A) savings deposits
B) large-denomination certificates of deposit
C) demand deposits
D) deposits in money market accounts

Question 57

Money that one puts into a 401(k) account is taxed when it is taken out.

Question 58

What is the yield on a perpetuity bond sold for $1,850 that pays $25.50 in interest annually?

A) 1.38%
B) 7.25%
C) 13.8%
D) 72.54%

Question 59

As interest rates rise

A) the demand for loanable funds shifts to the left.
B) the demand for loanable funds shifts to the right.
C) there is a movement upward along the demand curve for loanable funds.
D) there is a movement downward along the demand curve for loanable funds.

Question 60

Sasha buys a pair of shoes for $200. She pays for them with 200 one-dollar bills. The dollar bills, in this case, are functioning as a

A) unit of account.
B) store of value.
C) medium of exchange.
D) barter tool.

Question 61

In the market for loanable funds, the government reduces tax breaks for saving and increases the penalties for corruption. What changes should be expected in the market for loanable funds due to these events?

A) The interest rate will rise, but there is uncertainty about any change in the amount of borrowed funds.
B) The interest rate will fall, but there is uncertainty about any change in the amount of borrowed funds.
C) The amount of funds borrowed will rise, but there is uncertainty about the direction of any change in interest rates.
D) The amount of borrowed funds will fall, but there is uncertainty about the direction of any change in interest rates.

Question 62

A barter system tends to work only

A) in small U.S. towns and villages.
B) in primitive economies with little product variety.
C) when agricultural products are exchanged.
D) among large, multinational corporations.

Question 63

Cryptocurrencies are used primarily for speculation.

Question 64

Institutions that acquire funds from savers and then lend those funds to borrowers are called

A) state banks.
B) monetary mediums.
C) financial intermediaries.
D) Federal Reserve banks.

Question 65

When households decide to increase saving, real interest rates fall, and investment rises.

Question 66

Student loans funded by the government typically offer lower interest rates than similar bank loans, but they must be paid back earlier.

Question 67

As the real interest rate falls

A) the supply of loanable funds increases.
B) the supply of loanable funds decreases.
C) the quantity supplied of loanable funds decreases.
D) more saving is supplied to the market.

Question 68

The Federal Reserve System measures the money supply in the United States.

Question 69

Because of the compounding effect

A) people with high credit scores often have difficulty obtaining loans.
B) people with low credit scores often have difficulty obtaining loans.
C) a small loan balance becomes large.
D) a large loan balance becomes smaller.

Question 70

The quantity of loanable funds demanded by _____ is _____ related to the real interest rate.

A) savers; negatively
B) savers; positively
C) borrowers; negatively
D) borrowers; positively

Question 71

The supply curve for loanable funds slopes the way it does because if interest rates are low, fewer projects will have a rate of return high enough to justify the investment.

Question 72

A decrease in incomes tends to shift the supply of loanable funds curve leftward.

Question 73

A mortgage or home loan is a type of short-term debt.

Question 74

Joan begins the month with $100 in her checking account. When she receives a paycheck for $1,200 on the 5th of the month, she uses that paycheck to put $1,000 in her checking account, takes $80 in cash, and deposit $120 in her savings account. During the month, she spends $550 on rent and utilities, $30 on household items, $10 on a T-shirt, and $350 on food, leaving a balance of $240 in her checking account. Based on the given information, which statement accurately describes the function of Joan's money?

A) The $120 in savings is money functioning as a store of value.
B) Her expenditures use funds as a medium of exchange but not as a unit of account.
C) Buying goods and services uses money as a store of value and unit of account.
D) Depositing money in savings is using it as a medium of exchange.

Question 75

A share of stock represents one fraction of the total shares of ownership in the company that issued it.

Question 76

Time deposits larger than $100,000 are included in

A) M1.
B) M2.
C) M2 but not M1.
D) neither M1 nor M2.

Question 77

Suppose a perpetuity bond with a face value of $1,000 has a 10% coupon rate. If market interest rates fall to 8%, the price of the bond

A) falls to $750.
B) stays at $1,000.
C) rises to $1,080.
D) rises to $1,250.

Question 78

If a $1,000 perpetuity bond has a coupon rate of 11% and the market interest rate falls to 7%, what would a person expect to pay for that bond?

A) $636.36
B) $1,000
C) $1,371.33
D) $1,571.43

Question 79

Which statement correctly identifies a benefit or a drawback of a company offering its employees a pension plan compared to a retirement savings program with some employer matching of savings?

A) A company's obligation to an employee's retirement savings plan is met completely by the time the employee retires. A company maintains an annual obligation to an employee's pension until the former employee dies.
B) A company's obligation to an employee's pension is met completely by the time the employee retires. A company maintains an annual obligation to an employee's retirement savings plan until the former employee dies.
C) Pensions typically increase annually with cost-of-living-adjustments (COLAs), while the payout of a retirement savings plan will never have an annual increase.
D) A company can delay its costs for retirement savings until an employee retires, but it must make annual contributions to a pension fund during an employee's working years.

Question 80

Student loans funded by the government typically offer lower interest rates than similar bank loans, and they can be paid back later than bank loans.