Question 1

By doing research on the companies in their portfolios, mutual funds reduce transactions costs for their investors.

Accepted Answer

Mutual funds typically employ teams of analysts to research and select the stocks in their portfolios. By doing this research, they aim to make informed investment decisions and avoid unnecessary transactions costs. Investors in the mutual fund benefit from this research, as they do not need to incur the costs and effort of researching individual companies themselves.

Question 2

If the price of a share of stock is expected to rise, then demanders will demand more of it today, owners will be less willing to sell it today, and its price will rise today.

Accepted Answer

If the expected price of a share of stock is to rise, demanders will want to buy more of it today at a lower price before it rises. Owners will be less willing to sell it today because they believe it will increase in value, creating a situation of increased demand and limited supply, resulting in a rise in the stock price.

Question 3

Banks are nonprofit financial intermediaries that collect the savings of their members and invest those funds in a diversified portfolio of assets to provide income to members when they retire.

Accepted Answer

Banks are for-profit financial intermediaries that collect the savings of their customers and use those funds to make loans and investments to generate profits for the bank and potentially provide returns for customers. While some banks offer retirement savings accounts and investment options, their primary goal is to make a profit for their shareholders.

Question 4

The value of a stock depends primarily on investors' assessments of its value in the past.

Accepted Answer

The value of a stock depends primarily on investors' assessments of its perceived future profitability, along with other economic and market factors. While past performance may be considered, it is not the sole determinant of a stock's value.

Question 5

The purchaser of a share of stock receives interest each year from the stock and then receives the purchase price of the stock at its maturity.

Accepted Answer

This statement is false. Shareholders do not receive interest payments but instead receive dividends, and the purchase price of the stock is not guaranteed at maturity as it depends on the market value of the stock at that time.

Question 6

Changes in the prices of stock are the result of changes in the supply and demand for stocks of investors.

Accepted Answer

Changes in supply and demand for stocks can affect the prices of stocks. When demand for a stock increases, its price will rise because investors are willing to pay more for it. When supply of a stock increases, its price will fall because there are more stocks available to purchase. Therefore, changes in supply and demand directly impact the prices of stocks.

Question 7

Implicit rent is an estimate of the amount that homeowners would pay if they had to rent their home and is also an estimate of the benefit of owning a home.

Accepted Answer

Implicit rent is indeed an estimate of the amount that homeowners would pay if they had to rent their home and is also considered an estimate of the benefit of owning a home.

Question 8

About 75% of the financial assets that Americans own are held through financial intermediaries rather than directly.

Accepted Answer

This statement is true. According to the Federal Reserve, about three quarters (or 75%) of household financial assets in the United States are held indirectly through financial intermediaries such as banks, mutual funds, pension funds, and insurance companies. The remaining 25% are held as direct investments in stocks, bonds, and other securities.

Question 9

A bubble is a large decrease in asset prices caused by unrealistic expectations about future prices.

Accepted Answer

A bubble is a large increase in asset prices driven by speculative demand and unrealistic expectations, often followed by a sharp decline.

Question 10

Mutual funds allow investors with a relatively small amount of money to indirectly hold a diversified portfolio, which allows them to invest in stocks more safely than they could otherwise.

Accepted Answer

Mutual funds enable investors to pool their money together in a professionally managed investment portfolio that provides diversification, allowing them to spread their risk across multiple stocks or other assets. This way, even investors with a relatively small amount of money can benefit from the advantages of diversification and invest in stocks more safely than they could on their own.

Question 11

Life insurance companies are financial intermediaries that sell policies to savers and guarantee a payment to the policyholder's beneficiaries when the policyholder dies.

Accepted Answer

This statement accurately describes the role of life insurance companies as financial intermediaries and their function in guaranteeing a payment to beneficiaries upon the policyholder's death.

Question 12

The efficient markets hypothesis says that asset prices embody all publicly available information.

Accepted Answer

According to the efficient markets hypothesis, all publicly available information is reflected in asset prices, which means that it is impossible to consistently achieve above-average returns by outsmarting the market or analyzing information that is already reflected in asset prices.

Question 13

Suppose the federal government has a budget deficit and the economy is closed. Using the savings-investment spending identity, explain how this affects investment spending.

Accepted Answer

The answer of Suppose the federal government has a budget...

Question 14

Fundamentals are the underlying determinants of a company's future profits.

Accepted Answer

Fundamentals, such as revenue growth, profit margins, and competitive position, have a significant impact on a company's future profitability.

Question 15

Suppose the federal government has a balanced budget, the economy is open, and there is a positive capital inflow from foreign citizens. Using the savings-investment spending identity, explain how this affects investment spending.

Accepted Answer

The answer of Suppose the federal government has a balanced...

Question 16

The primary purpose of financial intermediaries is to redistribute wealth by implementing a progressive income tax.

Accepted Answer

The primary purpose of financial intermediaries is to facilitate financial transactions between savers and borrowers, thereby mobilizing savings and channeling them into productive investments. Redistributing wealth through implementing a progressive income tax is the responsibility of government tax authorities.

Question 17

Some economists have challenged the efficient markets hypothesis because they believe that stocks may be incorrectly priced when markets behave irrationally.

Accepted Answer

The efficient markets hypothesis assumes that all information, including past prices, is immediately reflected in a stock's price, making it impossible to consistently achieve higher returns than the market average. However, some economists have argued that markets can behave irrationally, leading to incorrectly priced stocks.

Question 18

Assume that an economy is open to capital inflows and that the inflows are equal to imports minus exports (IM - X). Answer the following questions.
a. Budget balance = -$20; X = $60; IM = $90; Private saving = $150. Calculate investment spending.
b. Private saving = $200; Investment = $220; Budget balance = -$30. Calculate (IM - X).

Accepted Answer

The answer of Assume that an economy is open to...

Question 19

A life insurance company is a financial intermediary that sets up a stock portfolio of shares of companies and then sells shares of the stock portfolio to investors.

Accepted Answer

A life insurance company may invest in stocks, but it primarily sells life insurance policies to individuals and may also offer other financial products such as annuities. It is not primarily focused on setting up stock portfolios and selling shares of those portfolios to investors.

Question 20

The primary purpose of financial intermediaries it to transform funds gathered from savers into financial assets.

Accepted Answer

Financial intermediaries such as banks, mutual funds, and insurance companies gather funds from savers and then use those funds to create financial assets such as loans, stocks, bonds, and insurance policies. This process is called financial intermediation.

Quiz 10: Savings, Investment Spending, and the Financial System