Deck 26: Saving, investment, and the Financial System

Question 1

When economists refer to investment,they mean the purchasing of stocks and bonds and other types of saving.

Answer 1

False

Question 2

Mutual funds are a type of financial intermediary.

Answer 2

True

Question 3

Most entrepreneurs finance their purchases of real capital using their past saving.

Answer 3

False

Question 4

To state that national saving is equal to investment,for a closed economy,is to state an accounting identity.

Question 5

Index funds are usually outperformed by mutual funds that are actively managed by professional money managers.

Question 6

Banks and mutual funds are examples of financial markets.

Question 7

When a firm wants to borrow directly from the public to finance the purchase of new equipment,it does so by selling shares of stock.

Question 8

Generally,if people begin to expect a company to have higher future profits,the price of the company's stock will begin to decrease.

Question 9

National saving is equal to Y - T - C.

Question 10

If a share of stock in Skylight Chili sells for $75,the retained earnings per share are $5,and the divided per share is $2,then the price-earnings ratio is 15.

Question 11

Other things the same,the higher the rate of saving and investment in a country,the higher will be the standard of living.

Question 12

The financial system coordinates investment and saving,which are important determinants of long-run real GDP.

Question 13

When a corporation experiences financial problems,bondholders are paid before stockholders.

Question 14

Public saving is T - G,while private saving is Y - T - C.

Question 15

If people become less optimistic about the future earnings of Hyde Park Jazz Studio,then the price of the company's stock will fall.

Question 16

When a firm wants to borrow directly from the public to finance the purchase of new equipment,it does so by selling bonds.

Question 17

The sale of either stocks or bonds to raise money is known as equity finance.

Question 18

Other things the same,corporate bonds generally feature higher interest rates than U.S.government bonds.

Question 19

Corporations receive no proceeds from the resale of their stock.

Question 20

Lenders sell bonds and borrowers buy them.

Question 21

A decrease in taxes on interest income would increase the interest rate.

Question 22

The term loanable funds refers to all income that is not used for consumption.

Question 23

An increase in the demand for loanable funds increases the equilibrium interest rate and increases the equilibrium level of saving.

Question 24

To state that public saving is equal to investment,for a closed economy,is to state an accounting identity.

Question 25

In a closed economy,investment must be equal to private saving.

Question 26

If Congress instituted an investment tax credit,the demand for loanable funds would shift rightward.

Question 27

Public saving is equal to national saving minus private saving.

Question 28

The term crowding out refers to decreases in the interest rate caused by government budget surpluses.

Question 29

If,for an imaginary closed economy,investment amounts to $12,000 and the government is running a $2,000 deficit,then private saving must amount to $10,000.

Question 30

The demand for loanable funds comes from saving and the supply of loanable funds comes from investment.

Question 31

Alberta buys a paint sprayer and a lift for her car customizing shop.A macroeconomist would refer to these purchases as investment.

Question 32

The ratio of government debt to GDP was higher during the Reagan presidency than at any previous time in U.S.history.

Question 33

We interpret the term loanable funds to mean the flow of resources available to fund private investment.

Question 34

When the government budget deficit rises,national saving is reduced,interest rates rise,and investment falls.

Question 35

Suppose a small closed economy has GDP of $5 billion,consumption of $3 billion,and government expenditures of $1 billion.Then investment and national saving are both $1 billion.

Question 36

If,for an imaginary closed economy,investment amounts to $10,000 and the government is running a $2,500 deficit,then private saving must amount to $12,500.

Question 37

Joan uses some of her income to buy mutual fund shares.A macroeconomist refers to Joan's purchase as investment.

Question 38

The term loanable funds refers to all income that is not used for consumption or government expenditures.

Question 39

When the U.S.government is in debt during a given year,it follows that its budget is in deficit for that year.

Question 40

An increase in the demand for loanable funds increases the equilibrium interest rate and decreases the equilibrium level of saving.

Question 41

Your brother-in-law wants to buy either stock or bonds in Cedar Valley Furniture,which manufactures wooden furniture.He wants your advice on whether to buy stock or bonds.Explain how each of his quotes below should affect his choice between the stock and the bond.
a.
"I have reason to believe that people are soon going to find rocking chairs have health benefits."
b.
"I would like to tell people I am part owner of Cedar Valley Furniture."
c.
"I do not want to take on much risk."

Question 42

A government may use deficit financing to smooth tax rates over time.

Question 43

Given that Lekeisha's income exceeds her expenditures,Lekeisha is best described as a

A) saver or as a supplier of funds.
B) saver or as a demander of funds.
C) borrower or as a supplier of funds.
D) borrower or as a demander of funds.

Question 44

Identify each of the following acts as representing either saving or investment.
a.
Fred uses some of his income to buy government bonds.
b.
Julie takes some of her income and buys mutual funds.
c.
Alex purchases a new truck for his delivery business using borrowed funds.
d.
Elaine uses some of her income to buy stock in a major corporation.
e.
Henrietta hires a builder to construct a new building for her bicycle shop.

Question 45

The model of the market for loanable funds shows that an investment tax credit will cause interest rates to rise and investment to rise.Yet we also suppose that higher interest rates lead to lower investment.How can these two conclusions be reconciled?

Question 46

When opening a print shop you need to buy printers,computers,furniture,and similar items.Economists call these expenditures

A) capital investment.
B) investment in human capital.
C) business consumption expenditures.
D) personal saving.

Question 47

An increase in the budget deficit shifts the demand for loanable funds to the right.

Question 48

Using a graph representing the market for loanable funds,show and explain what happens to interest rates and investment if the government budget goes from a deficit to a surplus.

Question 49

Suppose that you are a broker and people tell you the following about themselves.What sort of bond would you recommend to each? Defend your choices.
a.
"I am in a high federal income tax bracket and I don't want to take very much risk."
b.
"I want a high return and I am willing to take a lot of risk to get it."
c.
"I want a decent return and I have enough deductions that I don't value tax breaks highly."

Question 50

Suppose the Move It! exercise chain has revenues of $45 million,accounting costs of $15 million,and currently has issued 10 million shares of stocks selling at $90 each.Compute the price-earning ratio.Show your work.Is this ratio relatively high or low? What might an increase in the price-earnings ratio indicate?

Question 51

When a country saves a larger portion of its GDP than it did before,it will have

A) more capital and higher productivity.
B) more capital and lower productivity.
C) less capital and higher productivity.
D) less capital and lower productivity.

Question 52

In the national income accounting identity showing the equality between national saving and investment,what are the algebraic expressions for private saving and public saving?

Question 53

Alyssa is opening a bicycle shop,and her monthly expenditures to get the shop up and running exceed her monthly income.Alyssa is best described as a

A) saver or as a supplier of funds.
B) saver or as a demander of funds.
C) borrower or as a supplier of funds.
D) borrower or as a demander of funds.

Question 54

If you were to start a business delivering documents,you might need to purchase cell phones,bicycles,desks,and chairs.

A) These purchases are called capital investment.If you raise the funds from others to purchase them you are a saver.
B) These purchases are called capital investment.If you raise the funds from others to purchase them you are a borrower.
C) These purchases are called consumption.If you raise the funds from others to purchase them you are a saver.
D) These purchases are called consumption.If you raise the funds from others to purchase them you are a borrower.

Question 55

Draw and label a graph showing equilibrium in the market for loanable funds.

Question 56

Which of the two bonds in each example would you expect to generally pay the higher interest rate? Explain why.
a.
a U.S.government bond or a Brazilian government bond
b.
a U.S.government bond or a municipal bond with the same term and issued by a creditworthy municipality.
c.
a 6-month Treasury bill or a 20-year Treasury bond
d.
a Microsoft bond or a bond issued by a new recording company

Question 57

Explain why the demand for loanable funds slopes downward and why the supply of loanable funds slopes upward.

Question 58

Institutions that help to match one person's saving with another person's investment are collectively called the

A) Federal Reserve system.
B) banking system.
C) monetary system.
D) financial system.

Question 59

What are the basic differences between bonds and stocks?

Question 60

The primary economic function of the financial system is to

A) keep interest rates low.
B) provide expert advice to savers and investors.
C) match one person's consumption expenditures with another person's capital expenditures.
D) match one person's saving with another person's investment.

Question 61

As an alternative to selling shares of stock as a means of raising funds,a large company could,instead,

A) invest in physical capital.
B) use equity finance.
C) sell bonds.
D) purchase bonds.

Question 62

The fact that borrowers sometimes default on their loans by declaring bankruptcy is directly related to the characteristic of a bond called

A) credit risk.
B) interest risk.
C) term risk.
D) private risk.

Question 63

Which of the following statements about the term of a bond is correct?

A) Term refers to the various characteristics of a bond,including its interest rate and tax treatment.
B) The term of a bond is determined entirely by its credit risk.
C) The term of a bond is determined entirely by how much sales charge the buyer of the bond pays when he or she purchases the bond.
D) Interest rates on long-term bonds are usually higher than interest rates on short-term bonds.

Question 64

Two of the economy's most important financial intermediaries are

A) suppliers of funds and demanders of funds.
B) banks and the bond market.
C) the stock market and the bond market.
D) banks and mutual funds.

Question 65

When a large,well-known corporation wishes to borrow directly from the public,it can

A) sell bonds.
B) sell shares of stock.
C) go to a bank for a loan.
D) All of the above are correct.

Question 66

At the broadest level,the financial system moves the economy's scarce resources from

A) the rich to the poor.
B) financial institutions to business firms and government.
C) households to financial institutions.
D) savers to borrowers.

Question 67

Skyline Chili wants to finance the purchase of new equipment for its restaurants.The firm has limited internal funds,so Skyline likely will

A) demand funds from the financial system by buying bonds.
B) demand funds from the financial system by selling bonds.
C) supply funds to the financial system by buying bonds.
D) supply funds to the financial system by selling bonds.

Question 68

Which of the following statements is correct?

A) The expected future profitability of a corporation influences the demand for that corporation's stock.
B) When a corporation sells stock as a means of raising funds it is engaging in debt finance.
C) The owners of bonds sold by the Microsoft Corporation are part owners of that corporation.
D) All bonds are,by definition,perpetuities.

Question 69

Long-term bonds are

A) riskier than short-term bonds,and so interest rates on long-term bonds are usually lower than interest rates on short-term bonds.
B) riskier than short-term bonds,and so interest rates on long-term bonds are usually higher than interest rates on short-term bonds.
C) less risky than short-term bonds,and so interest rates on long-term bonds are usually lower than interest rates on short-term bonds.
D) less risky than short-term bonds,and so interest rates on long-term bonds are usually higher than interest rates on short-term bonds.

Question 70

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.

Question 71

A bond is a

A) financial intermediary.
B) certificate of indebtedness.
C) certificate of partial ownership in an enterprise.
D) None of the above is correct.

Question 72

The economy's two most important financial markets are

A) the investment market and the saving market.
B) the bond market and the stock market.
C) banks and the stock market.
D) financial markets and financial institutions.

Question 73

We would expect the interest rate on Bond A to be higher than the interest rate on Bond B if the two bonds have identical characteristics except that

A) Bond A was issued by a financially weak corporation and Bond B was issued by a financially strong corporation.
B) Bond A was issued by the General Electric Corporation and Bond B was issued by the state of California.
C) Bond A has a term of 20 years and Bond B has a term of 1 year.
D) All of the above are correct.

Question 74

If the government's expenditures exceeded its receipts,it would likely

A) lend money to a bank or other financial intermediary.
B) borrow money from a bank or other financial intermediary.
C) buy bonds directly from the public.
D) sell bonds directly to the public.

Question 75

A certificate of indebtedness that specifies the obligations of the borrower to the holder is called a

A) bond.
B) stock.
C) mutual fund.
D) All of the above are correct.

Question 76

Most entrepreneurs do not have enough money of their own to start their businesses.When they acquire the necessary funds from someone else,

A) their consumption expenditures are being financed by someone else's saving.
B) their consumption expenditures are being financed by someone else's investment.
C) their investments are being financed by someone else's saving.
D) their saving is being financed by someone else's investment.

Question 77

We associate the term debt finance with

A) the bond market,and we associate the term equity finance with the stock market.
B) the stock market,and we associate the term equity finance with the bond market.
C) financial intermediaries,and we associate the term equity finance with financial markets.
D) financial markets,and we associate the term equity finance with financial intermediaries.

Question 78

Which of the following statements is correct?

A) A corporation receives a monetary payment every time its shares of stock are traded by stockholders on organized stock exchanges.
B) When a corporation sells bonds as a means of raising funds it is engaging in debt finance.
C) A share of stock is an IOU.
D) The two most important financial markets in the economy are the stock market and financial intermediaries.

Question 79

We would expect the interest rate on Bond A to be higher than the interest rate on Bond B if the two bonds have identical characteristics except that

A) the credit risk associated with Bond A is lower than the credit risk associated with Bond B.
B) Bond A was issued by the state of New York and Bond B was issued by the Exxon Mobil Corporation.
C) Bond A has a term of 20 years and Bond B has a term of 2 years.
D) All of the above are correct.

Question 80

A national chain of grocery stores wants to finance the construction of several new stores.The firm has limited internal funds,so it likely will

A) demand the required funds by buying bonds.
B) demand the required funds by selling bonds.
C) supply the required funds by buying bonds.
D) supply the required funds by selling bonds.