Question 1

The supply curve for loanable funds represents _____ and is _____.

Accepted Answer

The supply curve for loanable funds represents savers and is upward sloping. The higher the interest rate, the more incentive savers have to save and supply funds to the market. Therefore, as the interest rate increases, the quantity of loanable funds supplied increases as well, resulting in an upward sloping supply curve.

Question 2

When a financial institution accepts funds from savers and pools this money into a portfolio of diversified financial instruments, it is

Accepted Answer

Pooling funds into a diversified portfolio allows for the spreading of risk across many different financial instruments, reducing the overall risk of the investment.

Question 3

Among these options, the LEAST risky portfolio is 50% _____ and 50% _____.

Accepted Answer

Certificates of deposit and blue-chip stocks are considered low-risk investments. The mixture of the two in equal proportion would result in a less risky portfolio compared to the other options which involve growth stocks or high-return bonds that carry higher risk.

Question 4

Institutions that serve as the bridge between savers and borrowers are known as

Accepted Answer

Financial intermediaries are institutions or companies that act as middlemen between savers and borrowers. They include banks, credit unions, insurance companies, and investment companies. Their primary function is to collect funds from savers and then invest those funds in financial assets or lend them to borrowers who need funds for their business or personal expenses. By offering a range of financial products and services, financial intermediaries provide an efficient channel for the flow of funds in the economy.

Question 5

If a perpetuity bond has an interest payment of $80 and your required yield is 10%, the most you would be willing to pay for the bond is

Accepted Answer

The formula to calculate the price of a perpetuity bond is: Interest payment/ Required yield

Price = $80/ 10% = $800

Therefore, the most you would be willing to pay for the bond is $800.

Question 6

Money is employed as a _____ because it enables people to save the money they earn today and use it to buy goods and services later.

Accepted Answer

Money serves as a store of value because it can be saved and used in the future to purchase goods and services. While it also functions as a medium of exchange (A) because it is used to facilitate transactions and as a unit of account (B) because it is used to measure the value of goods and services, these functions do not directly relate to the ability to save money for future use. The term "barter instrument" (D) is not a commonly used concept in economics.

Question 7

A reduction in the government budget deficit tends to lead to lower interest rates.

Accepted Answer

When the government reduces its deficit, it borrows less money from the market, resulting in a decrease in demand for loanable funds. This decrease in demand leads to a decrease in interest rates.

Question 8

Which statement is TRUE?

Accepted Answer

According to the given options, the only statement that says paper money constitutes 90% of currency is option C. The other options either talk about M1 (which is a narrower definition of currency) or coins (which are only a fraction of currency).

Question 9

Which of these is NOT a financial intermediary in the market for loanable funds?

Accepted Answer

Schools are not financial intermediaries in the market for loanable funds. While credit unions, mutual funds, and insurance companies all collect funds from lenders and provide financial services to borrowers, schools do not have a primary role in facilitating lending or investment.

Question 10

(Figure: Market for Loanable Funds 2) Based on the graph, if technological advances increase productivity, the demand for loanable funds curve will shift from _____ to _____ and the new equilibrium will be at point _____, holding supply constant at S₀.

Accepted Answer

The answer of (Figure: Market for Loanable Funds 2) Based...

Question 11

Which of these is NOT a way financial institutions reduce risk?

Accepted Answer

Guaranteeing a high rate of return for all lenders would actually increase the risk for financial institutions, as it may force them to make riskier investments to meet those guarantees. Therefore, this is not a way that financial institutions reduce risk. The other options (performing credit checks, diversifying funds, and collecting information for risk assessment) are all common methods for reducing risk in financial institutions.

Question 12

The primary purpose of financial markets and institutions is to help transfer funds from lenders to borrowers.

Accepted Answer

Financial markets and institutions facilitate the movement of funds from those who have excess to those who need it for investment and consumption purposes. This transfer is achieved through various instruments such as stocks, bonds, and loans, thereby promoting economic growth and development.

Question 13

All of these are classified as "near monies" rather than money for the reasons specified EXCEPT

Accepted Answer

Credit cards are not classified as "near monies" because they do provide a store of value. Although credit cards are not a physical form of currency, they allow for deferred payment and can be used as a means of payment for goods and services, which makes them a form of near money.

Question 14

Corporate bonds generally have a higher return on investment than do checking deposits because they are riskier.

Accepted Answer

Corporate bonds are considered riskier than checking deposits as there is a chance of default by the corporation. Therefore, investors demand a higher return on investment to compensate for the additional risk.

Question 15

The return on investment of an asset largely depends on the risk of the asset, with lower-risk assets generally earning a higher return.

Accepted Answer

The return on investment of an asset is not solely determined by the risk of the asset. Other factors such as market conditions, inflation, and management performance also play a role in determining the return on investment. Additionally, higher-risk assets may earn a higher return, but there is also a greater chance of losing money.

Question 16

How much is a bond worth if it pays $55 per year in interest forever and the market interest rate is 8%?

Accepted Answer

The bond pays $55 per year and we can use the perpetuity formula to calculate the value:

Value = annual payment / interest rate
Value = $55 / 0.08
Value = $687.50

Therefore, the bond is worth $687.50.

Question 17

Money is considered a _____ because it is generally accepted as payment for goods and services.

Accepted Answer

Money is considered a medium of exchange because it is widely accepted in exchange for goods and services. It facilitates transactions and simplifies trade by serving as a common intermediary between buyers and sellers. The other options - unit of account and store of value - are also functions of money, but they do not fully capture its role as a means of exchange.

Question 18

If the government offers firms investment tax credits for building new factories, the after-tax rate of return _____, causing the loanable funds _____ curve to shift _____, leading to _____ interest rates.

Accepted Answer

Investment tax credits increase the after-tax rate of return for firms, making investment more attractive. This increases the demand for loanable funds and shifts the demand curve rightward, leading to higher interest rates.

Question 19

If employees leave a company before the vesting period is satisfied, they lose both their own and their employer's contributions to their company retirement savings program.

Accepted Answer

Employees always retain 100% of their own contributions to their company retirement savings program. However, they may forfeit their employer's contributions if they leave before the vesting period is satisfied.

Question 20

In times of hyperinflation, barter takes the place of money.

Accepted Answer

In times of hyperinflation, the value of money decreases rapidly and people lose faith in it as a medium of exchange. In such situations, people resort to bartering goods and services as a means of trading and acquiring necessary items.

Quiz 11: Saving, Investment, and the Financial System

The supply curve for loanable funds represents _ and is _.

When a financial institution accepts funds from savers and pools this money into a portfolio of diversified financial instruments, it is

Among these options, the LEAST risky portfolio is 50% _ and 50% _.

Institutions that serve as the bridge between savers and borrowers are known as

If a perpetuity bond has an interest payment of $80 and your required yield is 10%, the most you would be willing to pay for the bond is

Money is employed as a _____ because it enables people to save the money they earn today and use it to buy goods and services later.

A reduction in the government budget deficit tends to lead to lower interest rates.

Which statement is TRUE?

Which of these is NOT a financial intermediary in the market for loanable funds?

(Figure: Market for Loanable Funds 2) Based on the graph, if technological advances increase productivity, the demand for loanable funds curve will shift from ___ to _ and the new equilibrium will be at point ___, holding supply constant at S₀.

Which of these is NOT a way financial institutions reduce risk?

The primary purpose of financial markets and institutions is to help transfer funds from lenders to borrowers.

All of these are classified as "near monies" rather than money for the reasons specified EXCEPT

Corporate bonds generally have a higher return on investment than do checking deposits because they are riskier.

The return on investment of an asset largely depends on the risk of the asset, with lower-risk assets generally earning a higher return.

How much is a bond worth if it pays $55 per year in interest forever and the market interest rate is 8%?

Money is considered a _____ because it is generally accepted as payment for goods and services.

If the government offers firms investment tax credits for building new factories, the after-tax rate of return ___, causing the loanable funds _ curve to shift _, leading to ___ interest rates.

If employees leave a company before the vesting period is satisfied, they lose both their own and their employer's contributions to their company retirement savings program.

In times of hyperinflation, barter takes the place of money.

Quiz 11: Saving, Investment, and the Financial System

The supply curve for loanable funds represents _____ and is _____.

When a financial institution accepts funds from savers and pools this money into a portfolio of diversified financial instruments, it is

Among these options, the LEAST risky portfolio is 50% _____ and 50% _____.

Institutions that serve as the bridge between savers and borrowers are known as

If a perpetuity bond has an interest payment of $80 and your required yield is 10%, the most you would be willing to pay for the bond is

Money is employed as a _____ because it enables people to save the money they earn today and use it to buy goods and services later.

A reduction in the government budget deficit tends to lead to lower interest rates.

Which statement is TRUE?

Which of these is NOT a financial intermediary in the market for loanable funds?

(Figure: Market for Loanable Funds 2) Based on the graph, if technological advances increase productivity, the demand for loanable funds curve will shift from _____ to _____ and the new equilibrium will be at point _____, holding supply constant at S0.

Which of these is NOT a way financial institutions reduce risk?

The primary purpose of financial markets and institutions is to help transfer funds from lenders to borrowers.

All of these are classified as "near monies" rather than money for the reasons specified EXCEPT

Corporate bonds generally have a higher return on investment than do checking deposits because they are riskier.

The return on investment of an asset largely depends on the risk of the asset, with lower-risk assets generally earning a higher return.

How much is a bond worth if it pays $55 per year in interest forever and the market interest rate is 8%?

Money is considered a _____ because it is generally accepted as payment for goods and services.

If the government offers firms investment tax credits for building new factories, the after-tax rate of return _____, causing the loanable funds _____ curve to shift _____, leading to _____ interest rates.

If employees leave a company before the vesting period is satisfied, they lose both their own and their employer's contributions to their company retirement savings program.

In times of hyperinflation, barter takes the place of money.

The supply curve for loanable funds represents _ and is _.

Among these options, the LEAST risky portfolio is 50% _ and 50% _.

(Figure: Market for Loanable Funds 2) Based on the graph, if technological advances increase productivity, the demand for loanable funds curve will shift from ___ to _ and the new equilibrium will be at point ___, holding supply constant at S₀.

If the government offers firms investment tax credits for building new factories, the after-tax rate of return ___, causing the loanable funds _ curve to shift _, leading to ___ interest rates.