Question 1

In the market for loanable funds, the government reduces tax breaks for saving and increases the penalties for corruption. What changes should be expected in the market for loanable funds due to these events?

Accepted Answer

Reducing tax breaks for saving decreases the incentive for saving, leading to a decrease in the supply of loanable funds, which increases the interest rate. Increasing penalties for corruption may reduce risky investments but its direct impact on the supply or demand for loanable funds is uncertain, hence the uncertainty about the change in the amount of borrowed funds.

Question 2

A barter system tends to work only

Accepted Answer

A barter system tends to work better in primitive economies with little product variety because people in these types of economies often have a simpler lifestyle where they can trade their goods for other goods they need. In more complex economies with a wide variety of goods and services, it becomes harder to find people who need what you have to offer and have something you need in return.

Question 3

Cryptocurrencies are used primarily for speculation.

Accepted Answer

While it is true that many people use cryptocurrencies for speculative trading, they can also be used for purchasing goods and services and for sending money internationally without the need for traditional financial intermediaries.

Question 4

Institutions that acquire funds from savers and then lend those funds to borrowers are called

Accepted Answer

Financial intermediaries, such as banks, credit unions, and investment companies, play a crucial role in the financial system by channeling funds from savers to borrowers. They take deposits from individuals and businesses and use those funds to make loans to individuals, businesses, and governments. This process is known as intermediation and is essential for the efficient functioning of the economy. State banks, monetary mediums, and Federal Reserve banks do not necessarily fit this description.

Question 5

When households decide to increase saving, real interest rates fall, and investment rises.

Accepted Answer

When households decide to increase saving, they supply more funds to the loanable funds market. This increased supply of loanable funds leads to a decrease in real interest rates. Lower real interest rates make borrowing more attractive for businesses, leading to an increase in investment.

Question 6

Student loans funded by the government typically offer lower interest rates than similar bank loans, but they must be paid back earlier.

Accepted Answer

Student loans funded by the government typically offer lower interest rates and longer repayment terms than bank loans, with some federal loans offering income-driven repayment plans that can stretch out payments over 20 or 25 years.

Question 7

As the real interest rate falls

Accepted Answer

When the real interest rate falls, the return on savings decreases, making saving less attractive. This leads to a decrease in the quantity of loanable funds supplied to the market, as people are less willing to save and lend out their money at lower interest rates.

Question 8

The Federal Reserve System measures the money supply in the United States.

Accepted Answer

The Federal Reserve System is responsible for measuring the money supply in the United States. This involves tracking the amount of money in circulation, including physical currency, deposits held in banks, and other financial assets. This information is used to help the Fed make decisions about monetary policy, such as setting interest rates and managing the supply of money in the economy.

Question 9

Because of the compounding effect

Accepted Answer

The compounding effect causes interest to be calculated on the initial principal, which includes all accumulated interest from previous periods, leading to a small loan balance growing larger over time.

Question 10

The quantity of loanable funds demanded by _____ is _____ related to the real interest rate.

Accepted Answer

The quantity of loanable funds demanded by borrowers is negatively related to the real interest rate because as interest rates increase, borrowing becomes more expensive, thus reducing the quantity of loans demanded.

Question 11

The supply curve for loanable funds slopes the way it does because if interest rates are low, fewer projects will have a rate of return high enough to justify the investment.

Accepted Answer

The supply curve for loanable funds slopes upwards because as interest rates increase, savers are more willing to save their money, thus increasing the amount of funds available for loans.

Question 12

A decrease in incomes tends to shift the supply of loanable funds curve leftward.

Accepted Answer

When incomes decrease, people tend to save less and consume more, which leads to a decrease in the supply of loanable funds. This shift is reflected in a leftward shift of the supply of loanable funds curve.

Question 13

A mortgage or home loan is a type of short-term debt.

Accepted Answer

A mortgage or home loan is a type of long-term debt, typically ranging from 15 to 30 years.

Question 14

Joan begins the month with $100 in her checking account. When she receives a paycheck for $1,200 on the 5th of the month, she uses that paycheck to put $1,000 in her checking account, takes $80 in cash, and deposit $120 in her savings account. During the month, she spends $550 on rent and utilities, $30 on household items, $10 on a T-shirt, and $350 on food, leaving a balance of $240 in her checking account. Based on the given information, which statement accurately describes the function of Joan's money?

Accepted Answer

The $120 in savings is functioning as a store of value because it is being saved and not immediately spent, preserving its value over time for future use.

Question 15

A share of stock represents one fraction of the total shares of ownership in the company that issued it.

Accepted Answer

This is because when a company issues stock, it is essentially selling a portion of ownership in the company to investors. Each share represents a fraction of that ownership, entitling the shareholder to a portion of the company's profits and voting rights in corporate decisions.

Question 16

Time deposits larger than $100,000 are included in

Accepted Answer

Time deposits larger than $100,000 are not included in M1 or M2. M1 includes currency and checkable deposits, while M2 includes M1 plus savings deposits, small time deposits, and money market mutual funds, but excludes large time deposits.

Question 17

Suppose a perpetuity bond with a face value of $1,000 has a 10% coupon rate. If market interest rates fall to 8%, the price of the bond

Accepted Answer

The price of a perpetuity bond is calculated by dividing the annual coupon payment by the market interest rate. Here, the annual coupon payment is 10% of $1,000, which is $100. With the market interest rate falling to 8%, the price of the bond rises to $100 / 0.08 = $1,250.

Question 18

If a $1,000 perpetuity bond has a coupon rate of 11% and the market interest rate falls to 7%, what would a person expect to pay for that bond?

Accepted Answer

The price of a perpetuity bond is calculated by dividing the annual coupon payment by the market interest rate. Here, the annual coupon payment is 11% of $1,000, which is $110. Dividing this by the new market interest rate of 7% (or 0.07) gives $110 / 0.07 = $1,571.43.

Question 19

Which statement correctly identifies a benefit or a drawback of a company offering its employees a pension plan compared to a retirement savings program with some employer matching of savings?

Accepted Answer

With a pension plan, the company is obligated to pay the employee a set amount of money for life, even after the employee retires, whereas with a retirement savings program, the company's obligation is met once the employee retires and uses the savings. This means the company has a long-term financial obligation with a pension plan that does not exist with a retirement savings program.

Question 20

Student loans funded by the government typically offer lower interest rates than similar bank loans, and they can be paid back later than bank loans.

Accepted Answer

This statement is true. Government-funded student loans often have lower interest rates and more flexible repayment options compared to private bank loans.

Quiz 11: Saving, Investment, and the Financial System