Question 1

According to your text, the principal determinant of the volume of saving by households (i.e., individuals and families) is:
A) The level of interest rates
B) Desired savings target of each household
C) Tastes and preferences of consumers
D) Level of household income
E) Stage of the business cycle

Accepted Answer

The principal determinant of the volume of saving by households is the level of household income. Generally, as household income increases, the ability and likelihood to save also increase.

Question 2

A rise in the overall level of interest rates results in a greater volume of saving generated in the economy. The foregoing sentence describes the:
A) Income Effect
B) Substitution Effect
C) Wealth Effect
D) Liquidity Effect
E) None of the above

Accepted Answer

The substitution effect refers to the tendency of people to save more when interest rates rise because the opportunity cost of consuming today increases, making saving more attractive.

Question 3

Saving by business firms, according to your text, depends upon two key factors: one of these factors is the level of business profits; the other is:
A) Credit availability
B) Appearance of viable investment opportunities
C) Management's attitude toward thrift
D) Dividend policies of corporations
E) None of the above

Accepted Answer

The answer of Saving by business firms, according to your...

Question 4

A popular method of calculating the expected rate of return from a business investment project is the:
A) Operating capacity method
B) Marginal cost-of -capital approach
C) Internal rate-of-return method
D) Risk-adjusted net-cash-flow approach
E) Certainty-equivalent cost analysis
F) None of the above

Accepted Answer

The Internal Rate of Return (IRR) method is a popular method for calculating the expected rate of return from a business investment project. It estimates the profitability of potential investments using a percentage rate, which is a widely recognized criterion for investment decision-making.

Question 5

The motive for holding money to purchase goods and services is referred to as the:
A) Transactions motive
B) Precautionary motive
C) Speculative motive
D) Liquidity motive
E) None of the above

Accepted Answer

The transactions motive refers to the need to hold money for the everyday purpose of purchasing goods and services. This is a primary reason for holding money in a liquid form, facilitating daily transactions.

Question 6

The motive for holding money as a reserve for future emergencies and to cover extraordinary expenses is referred to as the:
A) Transactions motive
B) Precautionary motive
C) Speculative motive
D) Liquidity motive
E) None of the above

Accepted Answer

The precautionary motive for holding money refers to the desire to hold cash to guard against unexpected events and emergencies that may require immediate expenditure. This contrasts with the transactions motive, which is about holding money for everyday transactions, and the speculative motive, which involves holding money to take advantage of future investment opportunities.

Question 7

The motive for holding money in response to expected changes in interest rates is known as the:
A) Transactions motive
B) Precautionary motive
C) Speculative motive
D) Liquidity motive
E) None of the above

Accepted Answer

The speculative motive for holding money is related to expectations about future changes in interest rates. People hold money if they expect interest rates to rise, so they can lend it or invest it at higher rates later. Conversely, if they expect rates to fall, they might be more inclined to invest or lend money now. This motive is based on speculation about future interest rate movements.

Question 8

Suppose a $1,000 par-value bond was issued last year with a promised annual rate of return (yield) of 6 percent when market interest rates on comparable securities were also 6 percent. Thus, the bond pays its holder $60 annually in interest. Today, one year later, market interest rates on comparable securities are 10 percent. The price of the 6 percent bond will approach what dollar figure?
A) $1,060
B) $940
C) $750
D) $600
E) $500

Accepted Answer

The answer of Suppose a $1,000 par-value bond was issued...

Question 9

Suppose the price of a perpetual bond (i.e., a bond with infinite maturity) is $500 and it pays the holder $25 in interest income annually. What is its interest rate, yield or rate or return?
A) 25%
B) 15%
C) 10%
D) 5%
E) 2%

Accepted Answer

The interest rate, yield, or rate of return of a perpetual bond is calculated by dividing the annual interest income by the price of the bond. In this case, $25 / $500 = 0.05, or 5%.

Question 10

The equilibrium rate of interest as determined in the loanable funds theory of interest will rise if:
A) The supply of loanable funds increases with the demand curve unchanged
B) The demand for loanable funds declines with supply unchanged
C) The supply of loanable funds is unchanged but demand increases
D) The demand for loanable funds is unchanged while the supply decreases
E) None of the above

Accepted Answer

The equilibrium rate of interest will rise if the supply of loanable funds is unchanged but demand increases. This is because an increase in demand will shift the demand curve to the right, causing the equilibrium interest rate to rise.

Question 11

The equilibrium rate of interest as determined in the loanable funds theory of interest will fall if:
A) The supply of loanable funds increases with the demand curve unchanged
B) The demand for loanable funds declines with supply unchanged
C) The supply of loanable funds is unchanged but demand increases
D) The demand for loanable funds is unchanged while the supply decreases
E) None of the above

Accepted Answer

The answer of The equilibrium rate of interest as determined...

Question 12

Factors influencing the investment decision-making process of business firms include all of the following except:
A) Comparison of current production levels with the capacity of existing facilities
B) Estimates of net cash flow
C) Expected rates of return
D) Amount of outstanding common stock
E) All of the above

Accepted Answer

The amount of outstanding common stock is not directly related to the investment decision-making process of business firms. Investment decisions are typically influenced by factors such as production capacity, cash flow projections, and expected returns, rather than the quantity of issued common stock.

Question 13

According to the Liquidity Preference Theory which of the following statements is correct?
A) Interest rates are a "reward" to savers
B) Transactions, precautionary and speculative motives are principal reasons why businesses borrow
C) The total demand for money is the sum of the transactions, precautionary and speculative demands
D) The supply of money is assumed to be elastic
E) Government decisions concerning the money supply are based primarily on interest rates

Accepted Answer

The Liquidity Preference Theory, proposed by John Maynard Keynes, suggests that the demand for money is not only for transactions purposes but also includes precautionary and speculative motives. The theory posits that individuals prefer liquidity and must be enticed to part with their liquidity for the promise of a future return, hence the demand for money encompasses transactions, precautionary, and speculative demands, making the total demand for money the sum of these components.

Question 14

The equilibrium rate of interest in the Liquidity Preference Theory is determined by:
A) Demand for investment and the volume of savings
B) Demand for loanable funds and the supply of loanable funds
C) The transactions, precautionary and speculative demands for money
D) The demand for money and the volume of savings
E) The total demand for money and the supply of money

Accepted Answer

The Liquidity Preference Theory, proposed by John Maynard Keynes, suggests that the equilibrium rate of interest is determined by the total demand for money (which includes transactions, precautionary, and speculative motives) and the supply of money set by the central bank or monetary authority.

Question 15

The theory of interest which assumes that the money and capital markets are highly efficient social institutions in digesting and reacting to new information is known as:
A) Rational Expectations
B) Classical Theory
C) Liquidity Preference
D) Loanable Funds
E) None of the above

Accepted Answer

Rational Expectations theory posits that individuals and institutions make decisions optimally based on all available information, including how they expect others to behave and future policy actions. This theory implies that markets are efficient in processing information, which aligns with the description given.

Question 16

According to the Classical Theory's long-run view of the forces driving interest rates people's consumption and savings habits tend to follow a predictable ____ younger workers borrowing heavily and older workers saving more. The word or phrase that correctly fills in the above blank is:
A) Life cycle
B) Time preference
C) Consumption-savings component
D) Pattern of deferred consumption
E) None of the above

Accepted Answer

The correct term is "Life cycle," which refers to the predictable pattern of younger workers borrowing for consumption and older workers saving more, typically for retirement. This concept is part of the life-cycle hypothesis in economics, which explains how individuals plan their consumption and savings behaviour over their lifetime.

Question 17

The money and capital markets make a vital contribution by directing the savings of older individuals into the:
A) Accumulation of financial assets which only they can access when needed for retirement
B) Safest stocks and bonds so they can be assured of a set income at retirement
C) Hands of younger individuals who desire to improve their current standard of living by borrowing
D) Pockets of other, older individuals who may have to borrow more than they save because of a threatened fall off in their personal incomes
E) None of the above

Accepted Answer

The money and capital markets facilitate the transfer of savings from those who have excess funds (such as older individuals saving for retirement) to those who need funds for various purposes, including younger individuals who may borrow to improve their current standard of living. This process is essential for economic growth and development, as it ensures that savings are channeled into productive uses.

Question 18

Suppose the interest rate grows from 6 percent to 8 percent and the volume of current saving advances at the same time from $125 billion to $130 billion. This simultaneous movement in interest and savings volume describes the:
A) Income Effect
B) Substitution Effect
C) Wealth Effect
D) Inflation Effect
E) None of the above

Accepted Answer

The increase in interest rates from 6 percent to 8 percent makes saving more attractive relative to spending, which is a classic example of the substitution effect. The substitution effect occurs when consumers change their consumption of goods or services in response to changes in relative prices or in this case, the relative return on savings versus spending.

Question 19

A stable equilibrium interest rate in the loanable funds market requires that:
A) Planned saving equals planned investment
B) Money supply equals money demand
C) Quantity of loanable funds supplied equals quantity of loanable funds demanded
D) Difference between foreign demand for loanable funds and volume of loanable funds supplied by foreigners to the domestic economy equals the difference between current exports from and imports into the domestic economy
E) All of the above

Accepted Answer

All the statements describe conditions that contribute to a stable equilibrium interest rate in the loanable funds market. A) reflects the basic equilibrium condition in the loanable funds theory, where savings provide the supply of loanable funds and investment demands them. B) is related because the money supply and demand affect interest rates, which in turn influence the loanable funds market. C) is a direct statement of what equilibrium in the loanable funds market means. D) ties the international flow of capital to domestic equilibrium, showing how external factors can influence the balance of loanable funds through trade and investment flows.

Question 20

In the rational expectations theory concerning interest rates business and household decision-makers are assumed to be:
A) Risk neutral
B) Rational agents
C) Speculators
D) Risk minimizers
E) None of the above

Accepted Answer

Rational expectations theory posits that individuals and businesses make decisions optimally based on all available information, hence they are considered rational agents. This means they form expectations about the future that are the best guess possible given the information available, including how they believe interest rates will change.

Quiz 5: Understanding Interest Rates, Savings, and the Wealth Effect

According to your text, the principal determinant of the volume of saving by households (i.e., individuals and families) is:

A rise in the overall level of interest rates results in a greater volume of saving generated in the economy. The foregoing sentence describes the:

Saving by business firms, according to your text, depends upon two key factors: one of these factors is the level of business profits; the other is:

A popular method of calculating the expected rate of return from a business investment project is the:

The motive for holding money to purchase goods and services is referred to as the:

The motive for holding money as a reserve for future emergencies and to cover extraordinary expenses is referred to as the:

The motive for holding money in response to expected changes in interest rates is known as the:

Suppose the price of a perpetual bond (i.e., a bond with infinite maturity) is $500 and it pays the holder $25 in interest income annually. What is its interest rate, yield or rate or return?

The equilibrium rate of interest as determined in the loanable funds theory of interest will rise if:

The equilibrium rate of interest as determined in the loanable funds theory of interest will fall if:

Factors influencing the investment decision-making process of business firms include all of the following except:

According to the Liquidity Preference Theory which of the following statements is correct?

The equilibrium rate of interest in the Liquidity Preference Theory is determined by:

The theory of interest which assumes that the money and capital markets are highly efficient social institutions in digesting and reacting to new information is known as:

According to the Classical Theory's long-run view of the forces driving interest rates people's consumption and savings habits tend to follow a predictable ____ younger workers borrowing heavily and older workers saving more. The word or phrase that correctly fills in the above blank is:

The money and capital markets make a vital contribution by directing the savings of older individuals into the:

Suppose the interest rate grows from 6 percent to 8 percent and the volume of current saving advances at the same time from $125 billion to $130 billion. This simultaneous movement in interest and savings volume describes the:

A stable equilibrium interest rate in the loanable funds market requires that:

In the rational expectations theory concerning interest rates business and household decision-makers are assumed to be: