Question 1

A type of money made from a substance that is also valuable is called:

Accepted Answer

Commodity money is made from a substance that has intrinsic value, such as gold or silver.

Question 2

If firms' product demand increases, then the demand for loanable funds will shift to the _____ and the real interest rate will _____.

Accepted Answer

When firms experience an increase in product demand, they are likely to invest more in production capacity, leading to an increased demand for loanable funds. This shifts the demand curve for loanable funds to the right, which typically results in an increase in the real interest rate due to higher competition for available funds.

Question 3

What are the two common measures of the money supply in use today?

Accepted Answer

M1 and M2 are the two common measures of the money supply in use today. M1 includes currency, demand deposits, and other liquid assets that can be easily converted into cash. M2 includes M1 plus savings deposits, small time deposits, and money market accounts.

Question 4

Which type of IRA uses after-tax money contributions, but has no tax upon withdrawal?

Accepted Answer

A Roth IRA uses after-tax money for contributions, and qualified withdrawals are tax-free.

Question 5

Cash is counted in the money supply as a part of:

Accepted Answer

Cash is included in both M1 and M2. M1 includes physical currency and demand deposits, while M2 includes all of M1 plus savings accounts and other near-money assets.

Question 6

What is the price of a perpetuity bond with an annual interest payment of $50 if market interest rates are 10%?

Accepted Answer

The price of a perpetuity bond is calculated by dividing the annual interest payment by the market interest rate. So, $50 / 0.10 = $500.

Question 7

Which retirement plan does NOT involve individuals managing their accounts by choosing the preferred risk-level of invested assets?

Accepted Answer

Employer-provided pension plans are typically defined benefit plans where the employer manages the investments and guarantees a specific retirement benefit, unlike the other options where individuals manage their accounts.

Question 8

Which statement is NOT true about Social Security?

Accepted Answer

Payroll taxes for Social Security are subject to an income cap, meaning there is a maximum limit on the amount of income that is subject to the Social Security tax.

Question 9

Which of these has the highest liquidity?

Accepted Answer

Cash is the most liquid asset because it can be easily converted into other assets or used to make purchases.

Question 10

Which of these is NOT part of the financial system?

Accepted Answer

The digital market is not traditionally considered a part of the financial system, which typically includes institutions like commercial banks and markets like the bond and stock markets.

Question 11

In the market for loanable funds, what can cause a rise in interest rates?

Accepted Answer

A rise in interest rates can occur when the supply of loanable funds shifts left (decreases) or when the demand for loanable funds shifts right (increases), both of which lead to higher equilibrium interest rates.

Question 12

When investors wish to increase their investment activities by using the market for loanable funds:

Accepted Answer

When investors wish to increase their investment activities by using the market for loanable funds, they will demand more funds, which will shift the demand curve to the right.

Question 13

Which source of short-term borrowing charges the highest average interest rates on unpaid balances?

Accepted Answer

Ordinary credit cards typically charge the highest average interest rates on unpaid balances compared to other forms of short-term borrowing.

Question 14

A bond's price and yield:

Accepted Answer

When bond prices increase, yields decrease, and vice versa. This inverse relationship is due to the fixed nature of bond coupon payments relative to changing market interest rates.

Question 15

According to the trade-off between risk and return, which asset would likely have the highest average return on investment over a 20-year period?

Accepted Answer

Shares of stock in social media companies are likely to have the highest average return over a 20-year period due to their higher risk and potential for growth compared to more stable and lower-risk investments like CDs, bonds, or government savings bonds.

Question 16

What function of money is BEST served by money that can last for hundreds of years?

Accepted Answer

Money that can last for hundreds of years best serves the function of a store of value, as it retains its value over time and can be used in the future.

Question 17

If a one-year bond with a face value of $1,000 is sold for $950, what is the bond's approximate yield?

Accepted Answer

The bond's yield is calculated as (Face Value - Purchase Price) / Purchase Price. Here, it is ($1,000 - $950) / $950 = $50 / $950 ≈ 5.26%.

Question 18

In the market for loanable funds, savers are shown:

Accepted Answer

In the market for loanable funds, savers are represented by the supply curve, which is upward-sloping because as the interest rate increases, savers are willing to supply more funds.

Question 19

If the government offers an incentive for individuals to save, the supply for loanable funds will shift to the _____ and the real interest rate will _____.

Accepted Answer

An incentive to save increases the supply of loanable funds, shifting it to the right, which typically leads to a decrease in the real interest rate.

Question 20

With the power of compounding, a $500 deposit in a savings account that earns 3% interest per year will earn how much in total interest after 10 years?

Accepted Answer

The total interest earned after 10 years is $157.63, which is more than 30% of the original deposit.

Quiz 11: Saving, Investment, and the Financial System