Deck 30: The Basics of Finance

Question 1

A financial market is where people trade:

A)future claims on funds or goods.
B)current claims for future goods.
C)current goods for future funds.
D)future funds or goods for reduced current risk.

Answer 1

future claims on funds or goods.

Question 2

An example of a buyer in a financial market would be:

A)families buying new houses.
B)students paying for college.
C)corporations building new factories.
D)All of these are buyers in financial markets.

Answer 2

All of these are buyers in financial markets.

Question 3

A bank acts as _________________ between buyers and sellers.

A)an intermediary
B)a negotiator
C)an agent
D)an interpersonal communicant

Answer 3

an intermediary

Question 4

The portion of income that is not immediately spent on consumption of goods and services is:

A)savings.
B)consumption spending.
C)investment.
D)loanable funds.

Question 5

Savers supply funds to those who want to borrow for their investment spending needs in the:

A)market for loanable funds.
B)market for savings.
C)market for interest rates.
D)stock market.

Question 6

One of the main benefits a bank provides is:

A)it acts as an intermediary between buyers and sellers.
B)liquidity.
C)the diversification of risk.
D)Banks provide all of these.

Question 7

A bank provides:

A)liquidity;that is,access to cash when and where you want it.
B)liquidity;that is,it connects buyers to sellers to ease saving and borrowing.
C)risk diversification;that is,access to cash when and where you want it.
D)risk diversification;that is,connecting buyers and sellers to ease saving and borrowing.

Question 8

Economists use the word investment to refer to the portion of income that:

A)is spent on productive inputs,such as factories,machinery,and inventories.
B)is not immediately spent on consumption of goods and services.
C)is placed in an individual's savings account.
D)is in any interest-bearing account.

Question 9

The basic purpose of financial markets is:

A)to match people who want money to spend now with people who want to save their money for later.
B)to buy and sell different currencies in order to make a profit.
C)to sell commodities to firms as inputs.
D)to buy commodities from firms and the government to sell to the public.

Question 10

In financial markets,buyers are people who:

A)want to spend money on something of value right now,but don't have cash on hand.
B)have cash on hand and are willing to let others use it,for a price.
C)want to spend money on something of big value in the future,but don't know how to save for it.
D)have cash promised to them at some future date.

Question 11

An example of a seller in a financial market would be:

A)entrepreneurs starting new ventures.
B)the government when it needs to finance public spending.
C)individuals who have a savings account.
D)All of these are sellers in financial markets.

Question 12

Banks act as:

A)an organizer among firms in a specific market.
B)intermediaries between buyers and sellers.
C)informants to various buyers about prices and contracts.
D)None of these is true.

Question 13

The financial system:

A)brings together savers and borrowers in a set of interconnected markets where people trade a variety of financial products.
B)connects the government to those truly in need of public services.
C)is used to help individuals keep track of the general price level.
D)gathers information about the economy in an effort to inform the public.

Question 14

The transactions that take place in the financial markets:

A)can be very complex.
B)are very simple.
C)are always to the buyer's advantage.
D)are always to the seller's advantage.

Question 15

The market for loanable funds is a market in which:

A)savers supply funds to those who want to borrow for their investment spending needs.
B)borrowers buy and sell loans.
C)savers interact to set the interest rate for loans.
D)borrowers supply funds to savers,who want loans for their investment spending needs.

Question 16

Banks act as an intermediary between buyers and sellers by:

A)determining the price at which the quantity of funds saved will be equal to the quantity invested.
B)determining the quantity of funds that will be saved depending on the price.
C)determining the quantity of funds that will be borrowed,for any given quantity of savings.
D)None of these is an intermediary function of a bank.

Question 17

Because banks have a very large pool of buyers and savers,it can:

A)act as an intermediary between buyers and sellers.
B)provide liquidity to individuals.
C)diversify the risk of saving and borrowing for individuals.
D)With access to such large pools of people,banks can provide all these things.

Question 18

A bank allows us to diversify risk because:

A)it has a big pool of borrowers and savers,so the risk of repayment is spread among many.
B)it has a small amount of borrowers,but many savers,so it can combine savings to make larger loans.
C)it has a small amount of borrowers and savers,so it can connect the optimal saver to the best-matched borrower.
D)it has a big pool of borrowers,but not many savers,so it can choose the riskiest person to borrow from.

Question 19

Savings is considered the portion of income:

A)that is not immediately spent on consumption of goods and services.
B)that is spent on productive inputs,such as factories,machinery,and inventories.
C)that is placed in an individual's savings account.
D)in any interest-bearing account.

Question 20

In financial markets,sellers are people who:

A)have cash on hand and are willing to let others use it,for a price.
B)want to spend money on something of value right now,but don't have cash on hand.
C)want to spend money on something of big value in the future,but don't know how to save for it.
D)have cash promised to them at some future date.

Question 21

In the market for loanable funds,the supply curve:

A)represents savers.
B)is upward sloping.
C)reflects that more people will choose to save the higher is the interest rate.
D)All of these are true.

Question 22

The portion of income that is spent on productive inputs,such as factories,machinery,and inventories,is called:

A)investment.
B)savings.
C)consumption spending.
D)loanable funds.

Question 23

The principal of a loan is:

A)the original amount of the loan.
B)the set of rules and conditions borrowers agree to when taking out a loan.
C)the set of rules and conditions savers agree to when agreeing to letting someone borrow their money.
D)None of these is true.

Question 24

If Nate takes out a $5,000 loan for one year at 10 percent annual interest,the principal is:

A)$5,000.
B)$5,500.
C)$500.
D)Cannot be calculated without more information.

Question 25

In the market for loanable funds,the demand curve:

A)represents savers.
B)is downward sloping.
C)reflects that more people will choose to save the higher is the interest rate.
D)All of these are correct.

Question 26

The supply of loanable funds come from:

A)businesses.
B)individuals.
C)government.
D)Any of these could be the source of loanable funds.

Question 27

The price of borrowing is known as the:

A)equilibrium price.
B)interest rate.
C)transaction cost.
D)None of these is true.

Question 28

The interest rate:

A)is the price of borrowing money for a specified period of time.
B)is expressed as a percentage per dollar borrowed and per unit of time.
C)determines the total amount that must be paid back on a loan.
D)All of these are true.

Question 29

If the rate of return is higher than the cost of borrowing:

A)the investor will lose money on net after paying back the loan.
B)the investor will make money on net after paying back the loan.
C)the saver will make less money on net than the borrower.
D)the borrower will make more money on net than the borrower.

Question 30

The demand for loanable funds comes from:

A)investment.
B)savings.
C)the government printing money.
D)None of these is true.

Question 31

If Jen takes out a $2,000 loan for one year at 10 percent interest annually,the price she will pay for borrowing is:

A)$2,000.
B)$2,200.
C)$200.
D)$2,400.

Question 32

The equilibrium in the market for loanable funds is:

A)where savings and investment are equal.
B)at the price at which the quantity supplied and the quantity demanded are equal.
C)where the amount being borrowed and the amount being saved is the same.
D)All of these are true.

Question 33

Saving is like:

A)selling the right to use your money for a time.
B)buying the right to use someone else's money.
C)selling the right to use someone else's money.
D)buying the right to use your money for a time.

Question 34

If Howard takes out a $400 loan for one year at 5 percent interest annually,he will pay back a total of:

A)$400.
B)$440.
C)$420.
D)$20.

Question 35

If the rate of return is lower than the cost of borrowing:

A)the investor will lose money on net after paying back the loan.
B)the investor should take out the loan.
C)the borrower will make money by taking out the loan.
D)All of these are true.

Question 36

Borrowing is like:

A)selling the right to use your money for a time.
B)buying the right to use someone else's money.
C)selling the right to use someone else's money.
D)buying the right to use your money for a time.

Question 37

The rate of return describes the:

A)expected profit that a project will generate per dollar invested.
B)the cost of borrowing.
C)interest rate on loans.
D)All of these are true.

Question 38

Savings and investment are equal:

A)at the equilibrium in the market for loanable funds.
B)because banks regulate their flow.
C)at an interest rate set by the Fed.
D)All of these are true.

Question 39

The supply of loanable funds comes from:

A)savings.
B)investment.
C)borrowers.
D)None of these is true.

Question 40

The quantity of savings that people are willing to supply will depend on:

A)the price they will receive.
B)the amount they have left over after consumption.
C)their disposable income.
D)their age,since people tend to dissave once they retire.

Question 41

The fact that U.S.citizens expect to receive retirement benefits through Social Security and Medicare pushes their:

A)demand for loanable funds further right than it would otherwise be.
B)demand for loanable funds further left than it would otherwise be.
C)supply of loanable funds further right than it would otherwise be.
D)supply of loanable funds further left than it would otherwise be.

Question 42

After taking out a one year loan with an annual interest rate of 10 percent,Tommy pays $3,300 back to the bank.The principal of the loan must be ___________ and the interest payment must be ___________.

A)$3,000;$300
B)$3,300;$300
C)$300;$3,300
D)$300;$3,000

Question 43

Because the United States has a more consumer-oriented culture,while China's culture is traditionally more frugal,we would expect:

A)the U.S.demand curve for loanable funds to be to the right of China's demand curve.
B)the U.S.demand curve for loanable funds to be to the left of China's demand curve.
C)the U.S.supply curve for loanable funds to be to the right of China's demand curve.
D)the U.S.supply curve for loanable funds to be to the left of China's demand curve.

Question 44

Sarah is able to take out a loan for $5000 for one year at an annual interest rate of 10 percent.After calculating her rate of return to be $450,Sarah will:

A)make $450 on net,and should take out the loan.
B)lose $450 on net,and should not take out the loan.
C)make $50 on net,and should take out the loan.
D)lose $50 on net,and should not take out the loan.

Question 45

If citizens expect to bear more of the burden for their own health care and retirement costs in the future,then we would expect their:

A)demand for loanable funds further right than it would otherwise be.
B)demand for loanable funds further left than it would otherwise be.
C)supply of loanable funds further right than it would otherwise be.
D)supply of loanable funds further left than it would otherwise be.

Question 46

When people expect their income to be lower in the future,they will be:

A)more inclined to save.
B)less inclined to save.
C)unaffected in their present choices.
D)People only react and change their savings decisions based on recent history,and generally work on a lag.

Question 47

When current economic conditions are bad,people are ____________ inclined to save,and when they predict bad future economic conditions they are ____________ inclined to save now.

A)less;more
B)less;less
C)more;more
D)more;less

Question 48

Good current economic conditions incent people to save _______,and a good outlook on future economic conditions incent people to save _________.

A)more;less
B)more;more
C)less;more
D)less;less

Question 49

If expectations about the future don't change at all,then an economic downturn will generally:

A)decrease savings at a given interest rate and shift the supply curve for loanable funds to the left.
B)increase savings at a given interest rate and shift the supply curve for loanable funds to the left.
C)decrease savings at a given interest rate and shift the supply curve for loanable funds to the right.
D)increase savings at a given interest rate and shift the supply curve for loanable funds to the right.

Question 50

John is able to take out a loan for $1,000 for one year at an annual interest rate of 10 percent.After calculating his rate of return to be $200,John:

A)will make money on net,and should take out the loan.
B)will make money on net,and should not take out the loan.
C)will not make money on net,and should take out the loan.
D)will not make money on net,and should not take out the loan.

Question 51

A determinant of the supply of loanable funds is:

A)current economic conditions.
B)wealth.
C)culture.
D)All of these are determinants of the supply of loanable funds.

Question 52

In 2006,the economy was booming and consumer demand was high,making:

A)the demand for loanable funds increase and shift to the right.
B)the demand for loanable funds decrease and shift to the left.
C)the supply of loanable funds increase and shift to the right.
D)the supply of loanable funds decrease and shift to the left.

Question 53

The fact that there are fewer and fewer potential investments that will generate returns high enough to make the cost of paying back a loan worthwhile is reflected in the:

A)upward-slope of the supply curve in the market for loanable funds.
B)downward-slope of the supply curve in the market for loanable funds.
C)upward-slope of the demand curve in the market for loanable funds.
D)downward-slope of the demand curve in the market for loanable funds.

Question 54

In the recession that started in 2008,the savings rate:

A)increased.
B)decreased.
C)stayed the same.
D)became negative.

Question 55

A booming economy can make investors:

A)eager to borrow money,and shift the demand curve for loanable funds to the right.
B)eager to borrow money,and shift the supply curve for loanable funds to the right.
C)wary of future downturns,and shift the demand curve for loanable funds to the left.
D)wary of future downturns,and shift the supply curve for loanable funds to the left.

Question 56

A determinant of the supply of loanable funds is:

A)wealth.
B)expectations of future economic conditions.
C)social welfare policies.
D)All of these are determinants of the supply of loanable funds.

Question 57

Schyler is able to take out a loan for $3,000 for one year at an annual interest rate of 10 percent.After calculating her rate of return to be $200,Schyler will realize she will:

A)lose $100 overall if she takes out the loan.
B)make $200 overall if she takes out the loan.
C)make $100 overall if she takes out the loan.
D)lose $200 overall if she takes out the loan.

Question 58

Studies show that __________ households tend to save more of their income than others,and also show that ____________ households save more out of tax cuts than others do.

A)richer;poorer
B)richer;richer
C)poorer;richer
D)poorer;poorer

Question 59

Investment decisions are based on the trade-off between:

A)the potential profits that could be generated by an investment and the cost of borrowing money to finance that investment.
B)the interest rate that savers will earn and the interest rate that the borrowers will have to pay.
C)the future value of the loan and the present value of the loan.
D)None of these is true.

Question 60

After taking out a one year loan with an annual interest rate of 5 percent,Tommy pays $2,100 back to the bank.The principal of the loan must be ___________ and the interest payment must be ___________.

A)$2,000;$100
B)$2,100;$100
C)$100;$2,100
D)$100;$2,000

Question 61

When the government increases its demand for loanable funds,it causes:

A)the demand for loanable funds curve to shift to the right.
B)the demand for loanable funds curve to shift to the left.
C)the supply of loanable funds curve to shift to the right.
D)the supply of loanable funds curve to shift to the left.

Question 62

Lenders generally want a higher interest rate to compensate them when loans stretch over a longer period because:

A)the opportunity cost increases over time.
B)there's more uncertainty about potential future investment opportunities.
C)lenders want to be compensated for being unable to get their money back quickly.
D)All of these are true.

Question 63

A bank will charge a higher interest rate the:

A)longer is the length of the loan,and the higher the risk of repayment.
B)longer is the length of the loan,and the lower the risk of repayment.
C)shorter is the length of the loan,and the higher the risk of repayment.
D)shorter is the length of the loan,and the lower the risk of repayment.

Question 64

Differences in interest rates are due to:

A)the length of time the borrower has to repay the loan.
B)the amount of the loan.
C)government policy.
D)All of these are true.

Question 65

A default happens when:

A)a borrower fails to pay back a loan according to the agreed-upon terms.
B)a lender fails to allot money according to the terms set by the government.
C)a bank fails to have enough cash on hand to give all depositors their money.
D)All of these are considered defaults.

Question 66

When a borrower fails to pay back a loan according to the agreed-upon terms,it is called:

A)credit risk.
B)default.
C)opportunity cost.
D)inflation.

Question 67

If lenders think that a particular borrower might default,they will demand:

A)a higher interest rate to make it worth taking that risk.
B)a lower interest rate to make it worth taking that risk.
C)a higher interest rate to decrease the amount of risk incurred.
D)a lower interest rate to decrease the amount of risk incurred.

Question 68

Evidence from the Great Depression suggests that the crowding out effect:

A)was minimal then.
B)had a very detrimental effect on private savings.
C)can be quite large in times of recession,and is reinforced with recent research from 2008.
D)may hold,although the evidence is somewhat contradictory.

Question 69

The risk-free rate is usually approximated by interest rates on U.S.government debt,because:

A)the U.S.government is considered extremely unlikely to default.
B)the U.S.government sets all policy concerning interest rates.
C)the U.S.government backs all loans secured with that rate.
D)None of these is true.

Question 70

The risk-free rate is:

A)the interest rate at which one would lend if there were no risk of default.
B)the interest rate borrowers get when the loan is extremely short term.
C)the interest rate the government charges for the loans it gives out.
D)None of these is true.

Question 71

The reduction in private borrowing that is caused by an increase in government borrowing is called:

A)the crowding out effect.
B)surplus investment.
C)the dissaving effect.
D)the savings effect.

Question 72

The difference between the risk-free rate and the interest rate a particular investor has to pay is called the:

A)credit spread.
B)risk premium.
C)Both of these are true.
D)Neither of these is true.

Question 73

When the government increases its demand for loanable funds,it causes:

A)the cost of borrowing to increase,which decreases private demand for loanable funds.
B)the cost of borrowing to decrease,which decreases private demand for loanable funds.
C)the cost of borrowing to increase,which increases private demand for loanable funds.
D)the cost of borrowing to decrease,which increases private demand for loanable funds.

Question 74

Loans that are secured against an asset:

A)generally have lower interest rates.
B)generally have higher interest rates.
C)are much longer in length than unsecured loans.
D)are much shorter in length than unsecured loans.

Question 75

Crowding out is reduction in:

A)private borrowing that is caused by an increase in government borrowing.
B)government borrowing that is caused by an increase in private borrowing.
C)private borrowing that is caused by an increase in corporate borrowing.
D)corporate borrowing that is caused by an increase in private borrowing.

Question 76

Since the future holds more uncertainty over longer periods of time,lenders generally want:

A)a higher interest rate for loans over a longer period.
B)a lower interest rate for loans over a longer period.
C)a higher interest rate for loans over a shorter period.
D)None of these is true.

Question 77

When the government increases its demand for loanable funds,it causes:

A)the demand for loanable funds curve to shift to the right,which increases interest rates.
B)the demand for loanable funds curve to shift to the left,which increases interest rates.
C)the demand of loanable funds curve to shift to the right,which decreases interest rates.
D)the demand of loanable funds curve to shift to the left,which decreases interest rates.

Question 78

The risk of a borrower defaulting on a loan is known as:

A)credit risk.
B)default risk.
C)loan risk.
D)None of these is true.

Question 79

Credit risk is:

A)the risk of a borrower defaulting on a loan.
B)lower,the longer the length of the loan.
C)lower,the larger the amount of the loan.
D)All of these are true.

Question 80

The risk-free rate is:

A)usually approximated by interest rates on U.S.government debt.
B)the interest rate at which one would lend if there were no risk of default.
C)lower than any other interest rate.
D)All of these are true.