Question 1

Institutions that serve as the bridge between savers and borrowers are known as:
A) commercial banks.
B) credit unions.
C) financial intermediaries.
D) securities firms.

Accepted Answer

Financial intermediaries are institutions that act as intermediaries between savers and borrowers by channeling funds from savers to borrowers. Examples of financial intermediaries include banks, insurance companies, pension funds, and mutual funds. They perform an essential function in the economy by facilitating the flow of funds from those who have surplus funds to those who need them.

Question 2

Suppose there is news of rising unemployment.Which scenario is most likely?
A) Firms invest more in automation;the demand for loanable funds rises;interest rates rise;borrowing drops,which makes the anticipated bad times a reality.
B) Households save in anticipation of bad times;the supply of loanable funds rises;interest rates fall;firms take advantage of lower interest rates and make more investments,which stimulates the economy.
C) Householders spend more in anticipation that they won't have the money if they lose their job;the supply of loanable funds falls;interest rates rise;firms cut back on borrowing and spending,which brings about more unemployment.
D) Householders borrow more to prepare for unemployment;the demand for loanable funds rises;interest rates rise;business cuts back on investment,which slows the economy.

Accepted Answer

When there is news of rising unemployment, households tend to save more in anticipation of bad times. This increases the supply of loanable funds, leading to a decrease in interest rates. Lower interest rates encourage firms to invest more, which stimulates the economy and helps to counter the rise in unemployment. Therefore, scenario B is the most likely in this situation. The other options either lead to a further increase in unemployment or a slowdown in the economy.

Question 3

Corporate bonds generally have a _____ return on investment than do checking deposits because they are _____.
A) higher;less risky
B) higher;riskier
C) lower;less risky
D) lower;riskier

Accepted Answer

Corporate bonds generally have a higher return on investment than do checking deposits because they are riskier. Checking deposits are considered low-risk investments, meaning they have lower returns. Corporate bonds, on the other hand, are debt securities issued by corporations and offer higher returns to compensate for the higher risk involved in investing in them.

Question 4

Bonds are considered to be _____ than stocks because ____.
A) less risky;bondholders are less affected by a firm's bankruptcy
B) riskier;stockholders earn dividends and bondholders do not
C) less risky;bondholders earn dividends and stockholders do not
D) riskier;stockholders are less affected by a firm's bankruptcy

Accepted Answer

Bonds are considered to be less risky than stocks because bondholders have a higher priority claim on a firm's assets in the event of bankruptcy, and are therefore more likely to recoup at least a portion of their investment. Stockholders, on the other hand, are more likely to see their investment lost entirely in the event of bankruptcy.

Question 5

Ceteris paribus,suppose an economy institutes reforms that reduce government regulations.In this case the demand for loanable funds shifts ______ and the equilibrium interest rate _______.
A) left;rises
B) right;rises
C) left;falls
D) right;falls

Accepted Answer

The reduction of government regulations increases business activity, which increases the demand for loanable funds, shifting the demand curve to the right. As a result, the equilibrium interest rate rises.

Question 6

Checking deposits generally have a _____ return on investment than do certificates of deposit because checking deposits are _____.
A) higher;less liquid
B) higher;more liquid
C) lower;less liquid
D) lower;more liquid

Accepted Answer

The answer of Checking deposits generally have a _____ return...

Question 7

Financial institutions:
A) reduce information costs,set interest rates for bonds,and diversify assets.
B) reduce information costs,reduce transaction costs,and diversify assets.
C) pool funds from lenders,reduce transaction costs,and diversify assets.
D) reduce information costs,reduce transaction costs,and pool funds from lenders.

Accepted Answer

The answer of Financial institutions:
A) reduce information costs,set interest rates...

Question 8

Suppose the government implements a policy reducing the rewards earned by savers.In this case the ________ loanable funds shifts _________.
A) supply of;left
B) supply of;right
C) demand for;left
D) demand for;right

Accepted Answer

If the rewards earned by savers are reduced, they will be less likely to save, causing a decrease in the supply of loanable funds. This would shift the supply of loanable funds curve to the left.

Question 9

Figure: Market for Loanable Funds (Figure: Market for Loanable Funds)The graph shows the supply and demand for loanable funds.If the market interest rate is 3%:
A) the market will reach equilibrium only if lenders decide to save more.
B) more funds will be demanded by firms than supplied by households.
C) there will be pressure for the interest rate to rise.
D) there will be an excess supply of funds.

Accepted Answer

The answer of Figure: Market for Loanable Funds (Figure: Market...

Question 10

Financial intermediaries match:
A) savers with lenders.
B) borrowers with savers.
C) banks with savers.
D) banks with lenders.

Accepted Answer

Financial intermediaries, such as banks and other lending institutions, match borrowers with savers by collecting funds from savers and using those funds to lend to borrowers who need access to capital. Therefore, option B is the best choice as it accurately reflects the main function of financial intermediaries.

Question 11

Which one of the following will cause the supply of loanable funds curve to shift rightward?
A) an improvement in firms' expectations about the economy
B) technological advances that result in new products
C) a perceived peak in an asset index like the Dow Jones Industrial Average
D) an increase in the government deficit

Accepted Answer

A perceived peak in an asset index like the Dow Jones Industrial Average may lead investors to move their funds from stocks to safer investments like bonds, increasing the supply of loanable funds.

Question 12

The demand curve for loanable funds represents _____ and is _____.
A) investors;horizontal
B) investors;downward sloping
C) savers;horizontal
D) savers;downward sloping

Accepted Answer

The answer of The demand curve for loanable funds represents...

Question 13

Suppose the economy enters a recession and income falls more than the demand for loanable funds.In this case the supply of loanable funds shifts ___________ and the equilibrium interest rate ______.
A) left;rises
B) right;rises
C) left;falls
D) right;falls

Accepted Answer

In a recession, income falls, which means that people have less money to save or invest. This results in a decrease in supply of loanable funds, shifting the supply curve to the left. However, the demand for loanable funds is also likely to decrease as businesses and households cut back on borrowing to finance investments. This decrease in demand would result in a smaller decrease in equilibrium interest rate or possibly a slight increase. Thus, the equilibrium interest rate would rise.

Question 14

Bond prices and their yields are ____ because the bond's _________ can fall below its __________.
A) positively related;sale price;face value
B) positively related;face value;sale price
C) negatively related;sale price;face value
D) negatively related;face value;sale price

Accepted Answer

The answer of Bond prices and their yields are ____...

Question 15

The supply curve for loanable funds represents _____ and is _____.
A) investors;vertical
B) investors;upward sloping
C) savers;vertical
D) savers;upward sloping

Accepted Answer

The supply curve for loanable funds represents savers and is upward-sloping. Savers are willing to lend more funds when the interest rate is higher, which is reflected in an upward-sloping supply curve. Option A is incorrect because the supply of loanable funds does not represent investors. Option B is incorrect because an upward-sloping curve represents supply, not demand. Option C is incorrect because the supply of loanable funds represents savers, not investors.

Question 16

The supply curve for loanable funds is:
A) positively sloped.
B) negatively sloped.
C) horizontal.
D) vertical.

Accepted Answer

The supply curve for loanable funds is positively sloped because as the interest rate increases, the quantity of funds supplied also increases due to higher incentives for individuals and institutions to save their money and earn a higher return.

Question 17

Suppose a one-year bond with a face value of $200 is sold for $188.What is the bond's yield?
A) 5.3%
B) 6.0%
C) 6.4%
D) 12.0%

Accepted Answer

The answer of Suppose a one-year bond with a face...

Question 18

José is putting money for college in a savings account.The bank makes the money available to business borrowers.In essence:
A) José is supplying loanable funds for business investment.
B) José is a demander of loanable funds.
C) the interest rates that businesses pay are independent of the actions of suppliers of funds such as José.
D) financial markets are not performing the role of intermediary.

Accepted Answer

José is supplying loanable funds for business investment by putting money in a savings account which the bank uses to make loans to businesses.

Answer: NOT B, NOT C, NOT D 
 Option B is incorrect because José is not borrowing money, he is saving money. Option C is incorrect because the interest rates that businesses pay are affected by the supply and demand of loanable funds, including the actions of suppliers of funds such as José. Option D is incorrect because financial markets are performing the role of intermediary by connecting suppliers of loanable funds such as José with demanders of loanable funds such as businesses.

Question 19

The reward for saving is called ____,and this variable is placed on the _____ axis of the loanable funds market graph.
A) interest;horizontal
B) interest;vertical
C) investment;horizontal
D) investment;vertical

Accepted Answer

The reward for saving is called interest, and in the loanable funds market graph, this variable is placed on the vertical axis, which typically represents the price or cost of something—in this case, the price of borrowing funds.

Question 20

The demand for loanable funds is downward-sloping because:
A) as interest rates fall,business find more projects to be profitable and thus want to borrow more.
B) higher interest rates are equivalent to higher returns on business projects.
C) as interest rates drop,the value of the money supply drops.
D) higher interest rates encourage firms to borrow more.

Accepted Answer

As interest rates fall, the cost of borrowing for businesses decreases. This makes it more profitable for them to take on more projects and invest in expansions or new ventures. Therefore, the demand for loanable funds increases as interest rates decrease. Conversely, as interest rates rise, the cost of borrowing increases, and businesses may seek alternative funding sources or delay projects, resulting in a lower demand for loanable funds.

Quiz 11: Saving, Investment, and the Financial System

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

Suppose there is news of rising unemployment.Which scenario is most likely?

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

Bonds are considered to be _ than stocks because .

Ceteris paribus,suppose an economy institutes reforms that reduce government regulations.In this case the demand for loanable funds shifts and the equilibrium interest rate _.

Checking deposits generally have a _ return on investment than do certificates of deposit because checking deposits are _.

Financial institutions:

Suppose the government implements a policy reducing the rewards earned by savers.In this case the loanable funds shifts _.

Figure: Market for Loanable Funds (Figure: Market for Loanable Funds) The graph shows the supply and demand for loanable funds.If the market interest rate is 3%:

Financial intermediaries match:

Which one of the following will cause the supply of loanable funds curve to shift rightward?

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

Suppose the economy enters a recession and income falls more than the demand for loanable funds.In this case the supply of loanable funds shifts _____ and the equilibrium interest rate .

Bond prices and their yields are because the bond's _ can fall below its ______.

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

The supply curve for loanable funds is:

Suppose a one-year bond with a face value of $200 is sold for $188.What is the bond's yield?

José is putting money for college in a savings account.The bank makes the money available to business borrowers.In essence:

The reward for saving is called ,and this variable is placed on the _ axis of the loanable funds market graph.

The demand for loanable funds is downward-sloping because: