Question 1

In the first century and a half of the United States' existence, paper money was backed by precious metals. Today, the U.S. dollar is no longer backed by gold or silver. The dollar today is _____ money.
A) commodity
B) fiat
C) pseudo-commodity
D) polymer

Accepted Answer

The term "fiat" refers to money that is not backed by a physical commodity, such as gold or silver. Instead, the value of fiat money is based on government decree or faith in the economy. This is the case with the U.S. dollar today.

Question 2

An asset's liquidity is determined by how quickly, easily, and reliably it can be converted to cash.

Accepted Answer

Liquidity refers to an asset's ability to be easily and quickly converted to cash without significant loss in value. It is an important factor in assessing an asset's overall value and risk level.

Question 3

Alco Electronics needs to borrow money to pay for a large capital investment. It is deciding between getting a bank loan and issuing bonds. Which statement is TRUE about the options Alco is considering?
A) A bank loan is part of a loanable funds market, but issuing bonds is not.
B) A bank loan is borrowing from many savers, while issuing bonds is not.
C) A bank loan is borrowing a large amount from one lender, while issuing bonds is borrowing small amounts from many lenders.
D) Issuing bonds is part of the loanable funds market, but a bank loan is not.

Accepted Answer

A bank loan typically involves borrowing a large amount from one lender, while issuing bonds involves splitting the borrowing among many lenders by selling small denominations of bonds. Therefore, the statement that is true about the options is C.

Question 4

Time deposits greater than $100,000 are included in M2.

Accepted Answer

Time deposits greater than $100,000 are not included in M2; they are considered large time deposits and are categorized separately from M1 and M2, which typically include savings deposits, small-denomination time deposits, and retail money market mutual funds.

Question 5

(Table: IRA Contributions) The table shows the marginal income tax rate for four individuals and the annual contribution they make to their respective IRAs. Which woman will receive the largest dollar amount of tax breaks for her annual IRA contribution? 
A) Mary
B) Kathleen
C) Isabelle
D) Patricia

Accepted Answer

The answer of (Table: IRA Contributions) The table shows the...

Question 6

Which statement is incorrect?
A) Near money cannot be drawn upon instantaneously but is nonetheless accessible.
B) Near money includes money market mutual fund accounts with check-writing features.
C) Near money includes savings accounts.
D) Near money includes individual stocks and bonds.

Accepted Answer

Near money refers to assets that can easily be converted into cash, but are not actual cash themselves. Individual stocks and bonds are not considered near money as they cannot be readily accessed or converted into cash without first being sold.

Question 7

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 less risky than stocks because bondholders are less affected by a firm's bankruptcy. When a company goes bankrupt, bondholders are usually paid back before stockholders, making bonds a safer investment option.

Question 8

The yield on a perpetuity bond that has an interest payment of $60 and a price of $1,200 is
A) 5%.
B) 6%.
C) 12%.
D) 25%.

Accepted Answer

The yield on a perpetuity bond is calculated as the annual interest payment divided by the bond price. 
In this case, the annual interest payment is $60 and the bond price is $1,200. 
Therefore, the yield is:
$60 / $1,200 = 0.05 or 5%

Question 9

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 loanable funds supplied also increases. This is because higher interest rates incentivize individuals and institutions to save more and lend their funds, increasing the amount of loanable funds available in the market.

Question 10

Which of these would cause the equilibrium interest rate to rise and the equilibrium quantity in the loanable funds market to fall?
A) an increase in the average income in the population
B) expectations of greater job security
C) increases in the demand for the products of several firms
D) an advance in technology

Accepted Answer

The answer of Which of these would cause the equilibrium...

Question 11

(Table: Money Measure Components, January 2019) Based on the table, M2 for January 2019 was 
A) $13,046.3 billion.
B) $13,592.9 billion.
C) $13,815.0 billion.
D) $14,444.5 billion.

Accepted Answer

The answer of (Table: Money Measure Components, January 2019) Based...

Question 12

The use of money as a medium of exchange helps reduce the inefficiencies inherent in
A) unstable commodity values.
B) an inflationary period.
C) a time of political uncertainty.
D) a barter economy.

Accepted Answer

In a barter economy, there is no standardized exchange medium, which can lead to transactional inefficiencies such as difficulty in finding trading partners, lack of agreement on the relative value of goods and services, and difficulties in making change. Money, as a standardized medium of exchange, reduces these inefficiencies.

Question 13

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, and borrowing falls, all of 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, and firms take advantage of lower interest rates and make more investments, all of which stimulates the economy.
C) Householders spend more in anticipation that they will not have the money if they lose their jobs, the supply of loanable funds falls, interest rates rise, and firms cut back on borrowing and spending, all of which brings about more unemployment.
D) Householders borrow more to prepare for unemployment, the demand for loanable funds rises, interest rates rise, and businesses cut back on investment, all of which slows the economy.

Accepted Answer

In times of rising unemployment, households tend to save more as a precautionary measure, which increases the supply of loanable funds. This, in turn, leads to a fall in interest rates, making it easier for firms to borrow and invest, which stimulates the economy and creates job opportunities. Therefore, option B is the most likely scenario. The other options suggest actions that would lead to a contraction in economic activity, exacerbating unemployment.

Question 14

Which of these is NOT a reason many countries are using polymer banknotes?
A) Polymer banknotes last more than twice as long as cotton-paper banknotes.
B) Polymer banknotes do not cost as much to replace as cotton-paper banknotes.
C) Polymer banknotes reduce counterfeiting.
D) The rising cost of cotton in recent years makes producing polymer banknotes more appealing.

Accepted Answer

Polymer banknotes cost more to replace than cotton-paper banknotes.

Question 15

Which statement about M1 and M2 is correct?
A) M1 is the broader measure of money.
B) M2 is greater than M1.
C) M1 includes savings deposits.
D) M2 excludes currency.

Accepted Answer

M2 includes all components of M1 (cash, checks, and checking deposits) as well as additional types of deposits, such as savings deposits, time deposits, and money market funds. Therefore, M2 is always greater than M1.

Question 16

Jody purchases a stock from her employer, Acme Corporation. This is an example of _____ finance.
A) unregulated
B) indirect
C) direct
D) investment

Accepted Answer

This is an example of direct finance, where the investor (Jody) purchases securities directly from the issuer (Acme Corporation).

Question 17

The demand for loanable funds is downward sloping because
A) as interest rates fall, businesses 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 fall, the value of the money supply drops.
D) higher interest rates encourage firms to borrow more.

Accepted Answer

As interest rates fall, businesses find more projects to be profitable and thus want to borrow more. This leads to an increase in demand for loanable funds. Conversely, as interest rates rise, some previously profitable projects may no longer be attractive and businesses may reduce their demand for loans. Therefore the demand curve for loanable funds is downward sloping.

Question 18

A perpetuity bond is sold with the following terms: coupon rate = 5% and face value = $1,000. Five years after the bond is issued, the market rate of interest on similar bonds is 6%. Which statement accurately describes the situation if the bond is sold in the secondary bond market at that time (five years after its initial issue)?
A) The annual interest payment will rise from $50 to $60.
B) The face value will fall from $1,000 to $833.33.
C) The bond will sell for about $833.33 in the secondary market.
D) The annual interest rate will fall from 5% to 3%.

Accepted Answer

The price of a perpetuity bond is calculated as the annual payment divided by the market interest rate. Here, the annual payment is $50 (5% of $1,000), and the new market rate is 6%. So, the price is $50 / 0.06 = $833.33. The bond's price adjusts to reflect the higher market interest rate, not the coupon rate or face value.

Question 19

_____ are near money.
A) Money market deposit accounts
B) American Express cards
C) Demand deposits
D) Bonds

Accepted Answer

Money market deposit accounts are considered near money because they are liquid assets that can be quickly converted into cash with minimal loss of value.

Question 20

Savings account deposits are more liquid than currency is.

Accepted Answer

Currency is immediately available for transactions and purchases, making it more liquid than savings account deposits, which may require a trip to the bank or an electronic transfer to access.

Quiz 11: Saving, Investment, and the Financial System

In the first century and a half of the United States' existence, paper money was backed by precious metals. Today, the U.S. dollar is no longer backed by gold or silver. The dollar today is _____ money.

An asset's liquidity is determined by how quickly, easily, and reliably it can be converted to cash.

Alco Electronics needs to borrow money to pay for a large capital investment. It is deciding between getting a bank loan and issuing bonds. Which statement is TRUE about the options Alco is considering?

Time deposits greater than $100,000 are included in M2.

(Table: IRA Contributions) The table shows the marginal income tax rate for four individuals and the annual contribution they make to their respective IRAs. Which woman will receive the largest dollar amount of tax breaks for her annual IRA contribution?

Which statement is incorrect?

Bonds are considered to be _ than stocks because _.

The yield on a perpetuity bond that has an interest payment of $60 and a price of $1,200 is

The supply curve for loanable funds is

Which of these would cause the equilibrium interest rate to rise and the equilibrium quantity in the loanable funds market to fall?

(Table: Money Measure Components, January 2019) Based on the table, M2 for January 2019 was

The use of money as a medium of exchange helps reduce the inefficiencies inherent in

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

Which of these is NOT a reason many countries are using polymer banknotes?

Which statement about M1 and M2 is correct?

Jody purchases a stock from her employer, Acme Corporation. This is an example of _____ finance.

The demand for loanable funds is downward sloping because

_____ are near money.

Savings account deposits are more liquid than currency is.