Question 1

Suppose Congress institutes an investment tax credit. What would happen in the market for loanable funds?

Accepted Answer

A)   The interest rate and investment would fall.
B)   The interest rate and investment would rise.
C)   The interest rate would rise and investment would fall.
D)   None of the above is necessarily correct.E) A) and B)
F) A) and C)

Question 2

Which of the following involves financial intermediation?

Accepted Answer

A)   a bank makes a loan
B)   a household buys stock issued by a corporation
C)   a foreign government purchases U.S. government bonds
D)   All of the above are correct.E) B) and C)
F) A) and D)

Question 3

Suppose a government that taxed all interest income changed its tax law so that the first $5,000 of a taxpayer's interest income was tax free. This would shift the

Accepted Answer

A)   supply of loanable funds to the right, causing interest rates to fall.
B)   supply of loanable funds to the left, causing interest rates to rise.
C)   demand for loanable funds to the right, causing interest rates to rise.
D)   demand for loanable funds to the left, causing interest rates to fall.E) A) and B)
F) A) and C)

Question 4

If, for an imaginary closed economy, investment amounts to $10,000 and the government is running a $2,500 deficit, then private saving must amount to $12,500.

Accepted Answer

A) True 
 B)False

Question 5

Stock in Creole Cuisine Restaurants is selling at $25 per share. Creole Cuisine had earnings of $5 a share and a dividend yield of 5 percent. The dividend is

Accepted Answer

A)   $0.25 and the price-earnings ratio is 5.
B)   $.25 and the price-earnings ratio is 6.7.
C)   $1.25 and the price-earnings ratio is 5.
D)   $1.25 and the price-earnings ratio is 6.7.E) All of the above
F) A) and B)

Question 6

Suppose that Congress were to repeal an investment tax credit. What would happen in the market for loanable funds?

Accepted Answer

A)   The demand and supply of loanable funds would shift right.
B)   The demand and supply of loanable funds would shift left.
C)   The supply of loanable funds would shift right.
D)   The demand for loanable funds would shift left.E) B) and D)
F) C) and D)

Question 7

The U.S. government increases its budget deficit, but at the same time Congress eliminates an investment tax credit. Which of the following is correct?

Accepted Answer

A)   The interest rate will increase; investment may increase or decrease.
B)   The interest rate will decrease; investment may increase or decrease.
C)   The interest rate may increase or decrease; investment will decrease.
D)   The interest rate may increase or decrease; investment will increase.E) A) and B)
F) A) and C)

Question 8

Corporations receive no proceeds from the resale of their stock.

Accepted Answer

A) True 
 B)False

Question 9

Use the following table to answer the following questions.
Table 26-2
 
-Refer to Table 26-2. Which company had the highest earnings per share?

Accepted Answer

A)   Boeing Co.
B)   Eli Lilly and Co.
C)   Kraft
D)   Kellogg Co.E) A) and B)
F) A) and C)

Question 10

A stock's dividend yield is the

Accepted Answer

A)   dividend as a percentage of the price per share.
B)   stock price as a percentage of the dividend.
C)   dividend as a percentage of the retained earnings per share.
D)   retained earnings per share as the percentage of the dividend.E) A) and C)
F) A) and D)

Question 11

Which of the following is not correct?

Accepted Answer

A)   If you buy a bond from a corporation, you can sell the bond to someone else before it matures.
B)   Term refers to the scheduling of periodic interest rate payments on a bond.
C)   A bond is an IOU.
D)   There are millions of different bonds in the U.S. economy.E) None of the above
F) All of the above

Question 12

Which of the following events could explain an increase in interest rates together with an increase in investment?

Accepted Answer

A)   The government runs a larger deficit.
B)   The government institutes an investment tax credit.
C)   The government replaces the income tax with a consumption tax.
D)   None of the above is correct.E) A) and B)
F) B) and C)

Question 13

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

Accepted Answer

A)   credit risk.
B)   interest risk.
C)   term risk.
D)   private risk.E) A) and B)
F) A) and C)

Question 14

If we were to change the interpretation of the term "loanable funds" in such a way that government budget deficits would affect the demand for loanable funds, rather than the supply of loanable funds, then

Accepted Answer

A)   crowding out would not be a consequence of an increase in the budget deficit.
B)   higher interest rates would not be a consequence of an increase in the budget deficit.
C)   an increase in the budget deficit would cause the demand for loanable funds to decrease.
D)   we would be making only a semantic change in how we analyze the effects of government budget deficits.E) All of the above
F) C) and D)

Question 15

The prices of stock traded on exchanges are determined by

Accepted Answer

A)   the Corporate Stock Administration.
B)   the administrators of NASDAQ.
C)   the supply of, and demand for, the stock.
D)   All of the above are correct.E) B) and C)
F) B) and D)

Question 16

When the government's budget deficit increases

Accepted Answer

A)   the government is borrowing less and public savings falls.
B)   the government is borrowing less and public savings increases.
C)   the government is borrowing more and public savings falls.
D)   the government is borrowing more and public savings increases.E) A) and D)
F) B) and C)

Question 17

We interpret the term loanable funds to mean the flow of resources available to fund private investment.

Accepted Answer

A) True 
 B)False

Question 18

Bond A and Bond B have identical characteristics except that Bond A has a higher interest rate. Which bond has a higher credit risk?

Accepted Answer

The answer of Bond A and Bond B have identical...

Question 19

Use the following table to answer the following questions.
Table 26-2
 
-Refer to Table 26-2. Which company had the lowest dollar dividend per share?

Accepted Answer

A)   Boeing Co.
B)   Eli Lilly and Co.
C)   Kraft
D)   Kellogg Co.E) A) and B)
F) A) and C)

Question 20

A mutual fund

Accepted Answer

A)   is a financial institution that stands between savers and borrowers.
B)   is a financial intermediary.
C)   allows people with small amounts of money to diversify their holdings.
D)   All of the above are correct.E) A) and C)
F) B) and D)

Exam 13: Saving, Investment, and the Financial System

Stock in Creole Cuisine Restaurants is selling at $25 per share. Creole Cuisine had earnings of $5 a share and a dividend yield of 5 percent. The dividend is

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A mutual fund

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Suppose Congress institutes an investment tax credit. What would happen in the market for loanable funds?

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Bond A and Bond B have identical characteristics except that Bond A has a higher interest rate. Which bond has a higher credit risk?

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Use the following table to answer the following questions. Table 26-2 -Refer to Table 26-2. Which company had the highest earnings per share?

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Which of the following is not correct?

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If, for an imaginary closed economy, investment amounts to $10,000 and the government is running a $2,500 deficit, then private saving must amount to $12,500.

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A stock's dividend yield is the

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Which of the following involves financial intermediation?

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Suppose a government that taxed all interest income changed its tax law so that the first $5,000 of a taxpayer's interest income was tax free. This would shift the

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Use the following table to answer the following questions. Table 26-2 -Refer to Table 26-2. Which company had the lowest dollar dividend per share?

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We interpret the term loanable funds to mean the flow of resources available to fund private investment.

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Which of the following events could explain an increase in interest rates together with an increase in investment?

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Suppose that Congress were to repeal an investment tax credit. What would happen in the market for loanable funds?

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When the government's budget deficit increases

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The prices of stock traded on exchanges are determined by

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The U.S. government increases its budget deficit, but at the same time Congress eliminates an investment tax credit. Which of the following is correct?

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If we were to change the interpretation of the term "loanable funds" in such a way that government budget deficits would affect the demand for loanable funds, rather than the supply of loanable funds, then

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Corporations receive no proceeds from the resale of their stock.

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

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