Question 1

Institutions that help to match one person's saving with another person's investment are collectively called the

Accepted Answer

The financial system includes institutions like banks, credit unions, and investment firms that help match savings with investments, making it the most appropriate answer. Choices A-C are not as broad and inclusive as the term "financial system."

Question 2

Two of the economy's most important financial intermediaries are

Accepted Answer

D

Question 3

Which of the following statements about the term of a bond is correct?

Accepted Answer

The term of a bond refers to the length of time until the bond matures and the principal is repaid. Interest rates on long-term bonds are usually higher than interest rates on short-term bonds because there is more uncertainty about the future and investors demand a higher return for tying up their money for a longer period of time. Choices A, B, and C are incorrect as they do not accurately describe the term of a bond.

Question 4

When opening a print shop you need to buy printers, computers, furniture, and similar items. Economists call these expenditures

Accepted Answer

Capital investment refers to the purchase of physical assets such as equipment, machinery, and buildings that are used to generate income in a business. Opening a print shop involves significant capital investment in the form of purchasing printers, computers, and furniture.

Question 5

Which of the following statements is correct?

Accepted Answer

Option B is correct as selling bonds is a form of debt financing. Option A is incorrect because a corporation does not receive payment every time its shares are traded; instead, it only receives payment when it issues new shares. Option C is incorrect because a share of stock represents ownership in a company, not an IOU. Option D is incorrect because financial markets also include bond markets, foreign exchange markets, and commodity markets, among others.

Question 6

The primary economic function of the financial system is to

Accepted Answer

The primary economic function of the financial system is to match one person's saving with another person's investment. This is achieved mainly through banks and other financial intermediaries, who collect funds from savers and lend them to borrowers. This allows capital to be allocated efficiently to those who need it for productive investment, leading to economic growth and development.

Question 7

We would expect the interest rate on Bond A to be higher than the interest rate on Bond B if the two bonds have identical characteristics except that

Accepted Answer

The answer of We would expect the interest rate on...

Question 8

When a large, well-known corporation wishes to borrow directly from the public, it can

Accepted Answer

Selling bonds is the most common way for a corporation to borrow directly from the public. Selling shares of stock is an option, but it does not necessarily involve borrowing and may dilute the ownership of the corporation. Going to a bank for a loan is also an option, but it would not be directly borrowing from the public.

Question 9

At the broadest level, the financial system moves the economy's scarce resources from

Accepted Answer

The financial system facilitates the transfer of funds from savers to borrowers. Savers include households, businesses, and governments that have excess funds beyond what they need for their own use. Borrowers include businesses, governments, and individuals who need additional funds to finance their investments or consumption. Financial intermediaries such as banks and other financial institutions facilitate this transfer by collecting funds from savers and lending them to borrowers. Therefore, the correct answer is D, savers to borrowers.

Question 10

The economy's two most important financial markets are

Accepted Answer

The bond market and the stock market are the two most important financial markets in the economy. The bond market allows companies and governments to borrow money by issuing bonds, while the stock market allows companies to raise capital by selling stock. Both of these markets are critical for allocating financial resources and determining the overall health of the economy.

Question 11

Most entrepreneurs do not have enough money of their own to start their businesses. When they acquire the necessary funds from someone else,

Accepted Answer

When entrepreneurs acquire funds from someone else, it means that they are taking on debt - which is a form of investment. Therefore, their investments are being financed by someone else's saving. Option A is incorrect because the funds given are not for consumption. Option B is incorrect because the investor is not directly financing the entrepreneur's consumption expenditures. Option D is incorrect because the entrepreneur is not the one providing the investment; they are the recipient of it.

Question 12

Which of the following statements is correct?

Accepted Answer

The expected future profitability of a corporation influences the demand for that corporation's stock. This is because investors buy stock in hopes that the corporation will be profitable in the future, allowing them to earn a return on their investment.

Answer: None of the other choices are correct.

B) When a corporation sells stock, it is engaging in equity finance, not debt finance. Debt finance generally involves borrowing money in the form of loans or issuing bonds.

C) The owners of bonds are creditors of the corporation, not owners. They have a legal claim to receive repayment of the principal amount of the bond plus interest, but they do not own any part of the corporation.

D) Not all bonds are perpetuities. A perpetuity is a type of bond that has no maturity date and pays periodic interest forever. Most bonds, however, have a fixed maturity date and pay interest until that date.

Question 13

When a country saves a larger portion of its GDP than it did before, it will have

Accepted Answer

When a country saves a larger portion of its GDP, it is able to invest more in capital formation, such as building new factories, improving technology, and increasing research and development. This results in a larger stock of capital and higher productivity levels, which can lead to economic growth and an improvement in living standards.

Question 14

We associate the term debt finance with

Accepted Answer

Debt finance typically refers to borrowing money through the issuance of bonds, which are traded in the bond market. Equity finance refers to raising money by selling shares of ownership in a company, which is typically done through the stock market.

Question 15

Norberto is opening a bicycle shop, and his monthly expenditures to get the shop up and running exceed his monthly income. Norberto is best described as a

Accepted Answer

Norberto is in need of funds to cover his monthly expenditures, therefore he is a borrower. Additionally, he is looking for these funds from an external source, making him a demander of funds.

Question 16

Given that Monika's income exceeds her expenditures, Monika is best described as a

Accepted Answer

If Monika's income exceeds her expenditures, it means she has money left over that she can save or invest. This makes her a saver or a supplier of funds.

Question 17

The fact that borrowers sometimes default on their loans by declaring bankruptcy is directly related to the characteristic of a bond called

Accepted Answer

Credit risk is the risk of the borrower defaulting on their loan or bond payment. This can occur due to bankruptcy or other financial problems.

Question 18

If you were to start a business delivering documents, you might need to purchase cell phones, bicycles, desks, and chairs.

Accepted Answer

The answer of If you were to start a business...

Question 19

As an alternative to selling shares of stock as a means of raising funds, a large company could, instead,

Accepted Answer

Selling bonds is an alternative method of raising funds without diluting ownership by selling shares of stock. Bonds are a type of debt financing where investors lend money to the company for a fixed period of time and receive regular interest payments. This provides the company with funds to finance their operations without giving up ownership or control to shareholders. Other alternatives such as investing in physical capital or using equity finance may still require the sale of shares or dilution of ownership. Purchasing bonds would not raise additional funds for the company.

Question 20

We would expect the interest rate on Bond A to be higher than the interest rate on Bond B if the two bonds have identical characteristics except that

Accepted Answer

The answer of We would expect the interest rate on...

Quiz 8: Saving, Investment, and the Financial System

Institutions that help to match one person's saving with another person's investment are collectively called the

Two of the economy's most important financial intermediaries are

Which of the following statements about the term of a bond is correct?

When opening a print shop you need to buy printers, computers, furniture, and similar items. Economists call these expenditures

Which of the following statements is correct?

The primary economic function of the financial system is to

We would expect the interest rate on Bond A to be higher than the interest rate on Bond B if the two bonds have identical characteristics except that

When a large, well-known corporation wishes to borrow directly from the public, it can

At the broadest level, the financial system moves the economy's scarce resources from

The economy's two most important financial markets are

Most entrepreneurs do not have enough money of their own to start their businesses. When they acquire the necessary funds from someone else,

Which of the following statements is correct?

When a country saves a larger portion of its GDP than it did before, it will have

We associate the term debt finance with

Norberto is opening a bicycle shop, and his monthly expenditures to get the shop up and running exceed his monthly income. Norberto is best described as a

Given that Monika's income exceeds her expenditures, Monika is best described as a

The fact that borrowers sometimes default on their loans by declaring bankruptcy is directly related to the characteristic of a bond called

If you were to start a business delivering documents, you might need to purchase cell phones, bicycles, desks, and chairs.

As an alternative to selling shares of stock as a means of raising funds, a large company could, instead,

We would expect the interest rate on Bond A to be higher than the interest rate on Bond B if the two bonds have identical characteristics except that