Question 1

A corporation's earnings are the amount of revenue it receives for the sale of its products

Accepted Answer

A)   minus its cost of production as measured by its accountants. Earnings must be paid out as dividends.
B)   minus its cost of production as measured by its accountants. Earnings may be paid out as dividends or retained by the corporation.
C)   minus its direct and indirect costs as measured by its economists. Earnings must be paid out as dividends.
D)   minus its direct and indirect cost as measure by its economists. Earnings may be paid out as dividends or retained by the corporation.E) A) and B)
F) None of the above

Question 2

Mutual funds

Accepted Answer

A)   provide diversification. Shareholders assume all of the risk associated with the mutual fund.
B)   provide diversification. Government insurance eliminates the risk of mutual fund shareholders.
C)   do not provide diversification. Shareholders assume all of the risk associated with the mutual fund
D)   do not provide diversification. Government insurance eliminates the risk of mutual fund shareholders.E) B) and D)
F) None of the above

Question 3

Suppose a country had a smaller increase in debt in 2011 than it had in 2010. Then other things the same, we would expect

Accepted Answer

A)   lower interest rates and investment in 2011 than in 2010.
B)   lower interest rates and greater investment in 2011 than in 2010.
C)   higher interest rates and greater investment in 2011 than in 2010.
D)   higher interest rates and lower investment in 2011 than in 2010.E) A) and D)
F) C) and D)

Question 4

Suppose that in a closed economy GDP is 11,000, consumption is 7,500, and taxes are 500. What value of government purchases would make national savings equal to 2,000 and at that value would the government have a deficit or surplus?

Accepted Answer

A)   1,500, deficit
B)   1,500, surplus
C)   1,000, deficit
D)   1,000, surplusE) C) and D)
F) B) and D)

Question 5

A larger budget surplus

Accepted Answer

A)   raises the interest rate and investment.
B)   reduces the interest rate and investment.
C)   raises the interest rate and reduces investment.
D)   reduces the interest rate and raises investment.E) A) and B)
F) B) and D)

Question 6

If federal tax rates increased, what would happen to the interest rate on municipal bonds?

Accepted Answer

the intere...

Question 7

National saving is the sum of and . In a closed economy it is equal to in equilibrium.

Accepted Answer

private saving, publ...

Question 8

Table 26-1 
-Refer to Table 26-1. Assume that the closing price was also the average price at which each stock transaction took place. What was the total dollar volume of Graco stock traded that day?

Accepted Answer

A)   $68,770,900
B)   $6,877,090
C)   $687,709
D)   $6,877.1E) A) and B)
F) All of the above

Question 9

The term crowding out refers to decreases in the interest rate caused by government budget surpluses.

Accepted Answer

A) True 
 B)False

Question 10

Suppose government expenditures on goods and services and net taxes both decrease, and expenditures fall by more than net taxes. The effects of these changes on the budget deficit cause

Accepted Answer

A)   both the equilibrium interest rate and the equilibrium quantity of loanable funds to fall.
B)   both the equilibrium interest rate and the equilibrium quantity of loanable funds to rise.
C)   the equilibrium interest rate to rise and the equilibrium quantity of loanable funds to fall.
D)   the equilibrium interest rate to fall and the equilibrium quantity of loanable funds to rise.E) B) and C)
F) A) and B)

Question 11

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 B)
F) B) and C)

Question 12

If the nominal interest rate is 7 percent and the real interest rate is 2 percent, then what is the inflation rate?

Accepted Answer

A)   9.0 percent
B)   5 percent
C)   3.5 percent
D)   None of the above is correct.E) A) and C)
F) B) and D)

Question 13

After a corporation issues stock, the stock

Accepted Answer

A)   cannot be resold.
B)   can be resold only if the corporation wants to buy it back.
C)   can be resold on exchanges; the resale will raise additional funds for the corporation.
D)   None of the above are correct.E) A) and B)
F) A) and C)

Question 14

If there is a shortage of loanable funds, then

Accepted Answer

A)   the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is above equilibrium.
B)   the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is below equilibrium.
C)   the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is above equilibrium.
D)   the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is below equilibrium.E) C) and D)
F) A) and D)

Question 15

Which of the following would necessarily increase the equilibrium interest rate?

Accepted Answer

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

Question 16

If the nominal interest rate is 2.5 percent and the inflation rate is 2 percent, what is the real interest rate?

Accepted Answer

A)   .5 percent
B)   1.25 percent
C)   4.5 percent
D)   None of the above is correct.E) A) and D)
F) None of the above

Question 17

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

A)   Bond A was issued by a financially weak corporation and Bond B was issued by a financially strong corporation.
B)   Bond A was issued by the Exxon Mobil Corporation and Bond B was issued by the state of New York.
C)   Bond A has a term of 20 years and Bond B has a term of 1 year.
D)   All of the above are correct.E) None of the above
F) C) and D)

Question 18

Table 26-2 
-Refer to Table 26-2. For which stock(s)  is(are)  the P/E ratio less than what is historically typical?

Accepted Answer

A)   Boeing Co.
B)   Eli Lilly and Co.
C)   Boeing Co. and Eli Lilly and Co.
D)   All are higher than what is historically typical.E) B) and C)
F) A) and C)

Question 19

Figure 26-2. The figure depicts a supply-of-loanable-funds curve and two demand-for-loanable-funds curves. 
-Refer to Figure 26-2. Which of the following events would shift the demand curve from D1 to D2?

Accepted Answer

A)   The government goes from running a budget deficit to running a budget surplus.
B)   Firms become optimistic about the future and, as a result, they plan to increase their purchases of new equipment and construction of new factories.
C)   A change in the tax laws encourages people to consume less and save more.
D)   A change in the tax laws encourages people to consume more and save less.E) A) and B)
F) A) and C)

Question 20

Which of the following is correct?

Accepted Answer

A)   Joan takes some of her income and buys mutual fund shares. Joan's purchase will be included in the investment category of GDP.
B)   If a share of stock in Virtual Pizza Corporation sells for $77, the earnings per share are $5, and the dividend per share is $2, then the P/E ratio is 11.
C)   In order to use equity finance, a firm must sell about equal values of stocks and bonds.
D)   None of the above is correct.E) B) and C)
F) A) and D)

Exam 26: Saving, Investment, and the Financial System

Which of the following would necessarily increase the equilibrium interest rate?

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Suppose a country had a smaller increase in debt in 2011 than it had in 2010. Then other things the same, we would expect

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If the nominal interest rate is 2.5 percent and the inflation rate is 2 percent, what is the real interest rate?

Correct AnswerverifiedShow Answer

Suppose that in a closed economy GDP is 11,000, consumption is 7,500, and taxes are 500. What value of government purchases would make national savings equal to 2,000 and at that value would the government have a deficit or surplus?

Correct AnswerverifiedShow Answer

If the nominal interest rate is 7 percent and the real interest rate is 2 percent, then what is the inflation rate?

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A larger budget surplus

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Suppose government expenditures on goods and services and net taxes both decrease, and expenditures fall by more than net taxes. The effects of these changes on the budget deficit cause

Correct AnswerverifiedShow Answer

After a corporation issues stock, the stock

Correct AnswerverifiedShow Answer

National saving is the sum of and . In a closed economy it is equal to in equilibrium.

Correct Answerverifiedprivate saving, publ...View AnswerShow Answer

The term crowding out refers to decreases in the interest rate caused by government budget surpluses.

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Mutual funds

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A corporation's earnings are the amount of revenue it receives for the sale of its products

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If federal tax rates increased, what would happen to the interest rate on municipal bonds?

Correct Answerverifiedthe intere...View AnswerShow Answer

Table 26-2 -Refer to Table 26-2. For which stock(s) is(are) the P/E ratio less than what is historically typical?

Correct AnswerverifiedShow Answer

A mutual fund

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If there is a shortage of loanable funds, then

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Figure 26-2. The figure depicts a supply-of-loanable-funds curve and two demand-for-loanable-funds curves. -Refer to Figure 26-2. Which of the following events would shift the demand curve from D1 to D2?

Correct AnswerverifiedShow Answer

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

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Which of the following is correct?

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Table 26-1 -Refer to Table 26-1. Assume that the closing price was also the average price at which each stock transaction took place. What was the total dollar volume of Graco stock traded that day?

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private saving, publ...
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the intere...
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