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Chapter 25 Saving, Investment, and the Financial System

Test A
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When a country saves a smaller portion of its GDP, it will have a. more investment, and so have more capital and higher productivity. b. more investment, and so have less capital and lower productivity. c. less investment, and so have more capital and higher productivity. d. less investment, and so have less capital and lower productivity. AN W!"# d. less investment, and so have less capital and lower productivity. $%P!# & '!%1# D ()*!+$,-!# 1 "AND(&# %
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What are the two basic categories of financial institutions/ a. the foreign e0change mar1ets and the stoc1 mar1ets b. the financial mar1ets and financial intermediaries c. the mar1et for loanable funds and the mar1et for capital d. the lending mar1et and the deposit mar1et AN W!"# b. the financial mar1ets and financial intermediaries $%P!# & '!%1# D !+$,(N# 1 ()*!+$,-!# 1 "AND(&# %
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Which of the following is not a nonsensical headline/ a. )ritish perpetuities about to mature. b. Disney issues new bonds with term of 31,444 each. c. Government bonds currently pay less interest than corporate bonds. d. tandard and Poor5s 6udges new 6un1 bond to have very low credit ris1. AN W!"# c. Government bonds currently pay less interest than corporate bonds. $%P!# & '!%1# D !+$,(N# 1 ()*!+$,-!# 1 "AND(&# %
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A certificate of indebtedness that specifies the obligations of the borrower to the holder is called a a. stoc1. b. mutual fund. c. bond. d. All of the above are correct. AN W!"# c. bond. $%P!# & '!%1# D !+$,(N# 1 ()*!+$,-!# 1 "AND(&# %
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"udolph has the choice of two bonds, one that pays 8 percent interest and the other that pays 14 percent interest. Which of the following is most li1ely/ a. $he 14 percent bond is less ris1y than the 8 percent bond b. $he 14 percent bond has a shorter term than the 8 percent bond c. $he 14 percent bond is a 9. . government bond, and the 8 percent bond is a 6un1 bond d. $he 14 percent bond is a corporate bond, and the 8 percent bond is a municipal bond AN W!"# d. $he 14 percent bond is a corporate bond, and the 8 percent bond is a municipal bond. $%P!# & '!%1# + !+$,(N# 1 ()*!+$,-!# 1 "AND(&# %

+opyright : ;arcourt, ,nc.

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.< +hapter .8= aving, ,nvestment, and the >inancial ystem


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People who buy stoc1 in a corporation such as &aytag become a. creditors of &aytag, so the benefits of holding the stoc1 depend on &aytag5s profits. b. creditors of &aytag, but the benefits of holding the stoc1 do not depend on &aytag5s profits. c. part owners of &aytag, so the benefits of holding the stoc1 depend on &aytag5s profits. d. part owners of &aytag, but the benefits of holding the stoc1 do not depend on &aytag5s profits. AN W!"# c. part owners of &aytag, so the benefits of holding the stoc1 depend on &aytag5s profits. $%P!# & '!%1# D !+$,(N# 1 ()*!+$,-!# 1 "AND(&# %
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toc1 inde0es are a. reports in the newspapers that report on the price of the stoc1 and earnings of individual corporations over time. b. the average of a group of stoc1 prices. c. measures of the ris1 relative to the profitability of corporations. d. measures of the price of a stoc1 relative to its ris1. AN W!"# b. the average of a group of stoc1 prices. $%P!# & '!%1# D !+$,(N# 1 ()*!+$,-!# 1 "AND(&# %
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A corporation has a price of 3.8, a dividend of 3.84, and retained earnings of 3.24 per share. $he dividend yield on this stoc1 is a. 2.. percent. b. . percent. c. 1.? percent. d. 1 percent. AN W!"# b. . percent. $%P!# & '!%1# D !+$,(N# 1 ()*!+$,-!# 1 "AND(&# %
A

A mutual fund a. is a financial mar1et where small firms sell stoc1s and bonds to raise funds. b. is money set aside by local governments to lend to small firms who want to invest in pro6ects that are mutually beneficial to the firm and community. c. sells stoc1s and bonds on behalf of small and notBveryBwellB1nown firms who would otherwise have to pay high interest to obtain credit. d. sells shares to the public and uses the proceeds to buy a selection of various types of stoc1s, bonds, or both stoc1s and bonds. AN W!"# d. sells shares to the public and uses the proceeds to buy a selection of various types of stoc1s, bonds, or both stoc1s and bonds. $%P!# & '!%1# D !+$,(N# 1 ()*!+$,-!# 1 "AND(&# %
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Which of the following eCuations represents national saving in a closed economy/ a. % D , D G D NE b. % D + D G c. % D , D + d. G F + D % AN W!"# b. % D + D G $%P!# & '!%1# ! !+$,(N# . ()*!+$,-!# . "AND(&# %
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,n a closed economy, national saving eCuals a. income minus private consumption. b. private saving minus public saving. c. investment. d. All of the above are correct. AN W!"# c. investment. $%P!# & D,>>,+9$G%# 2 '!%1# + !+$,(N# . ()*!+$,-!# . "AND(&# %

+opyright : ;arcourt, ,nc.

+hapter .8= aving, ,nvestment, and the >inancial ystem .?


1.

uppose that in a closed economy GDP is eCual to A,444, ta0es are eCual to 1,444, +onsumption eCuals <,444, and government e0penditures eCual .,444. What are private saving and public saving/ a. .444 and D1444 b. .444 and 1444 c. 1444 and D1444 d. 1444 and .444 AN W!"# a. .444 and D1444 $%P!# & '!%1# ! !+$,(N# . ()*!+$,-!# . "AND(&# %
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A budget surplus is created when the government a. sells more bonds than it buys bac1. b. spends more than it receives in ta0 revenue. c. receives more ta0 revenue than it spends. d. None of the above is correct. AN W!"# c. receives more ta0 revenue than it spends. $%P!# & '!%1# D !+$,(N# . ()*!+$,-!# . "AND(&# %
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$he source of the demand for loanable funds a. and the supply of loanable funds is saving. b. and the supply of loanable funds is investment. c. is saving and the source of the supply of loanable funds is investment. d. is investment and the source of the supply of loanable funds is saving. AN W!"# d. is investment and the source of the supply of loanable funds is saving. $%P!# & '!%1# D !+$,(N# 2 ()*!+$,-!# 2 "AND(&# %
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$he supply of loanable funds slopes a. downward because an increase in the interest rate induces people to save less. b. downward because an increase in the interest rate induces people to invest less. c. upward because an increase in the interest rate induces people to save more. d. upward because an increase in the interest rate induces people to invest more. AN W!"# c. upward because an increase in the interest rate induces people to save more. $%P!# & '!%1# D !+$,(N# 2 ()*!+$,-!# 2 "AND(&# %
1<

A lower interest rate induces people to a. save less, so the demand for loanable funds slopes upward. b. save less, so the demand for loanable funds slopes downward. c. invest more, so the demand for loanable funds slopes upward. d. invest more, so the demand for loanable funds slopes downward. AN W!"# d. invest more, so the demand for loanable funds slopes downward. $%P!# & '!%1# D !+$,(N# 2 ()*!+$,-!# 2 "AND(&# %
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,f the current mar1et interest rate for loanable funds is below the eCuilibrium level, then the Cuantity of loanable funds a. demanded e0ceeds the Cuantity of loanable funds supplied and the interest rate will fall. b. demanded e0ceeds the Cuantity of loanable funds supplied and the interest rate will rise. c. supplied e0ceeds the Cuantity of loanable funds demanded and the interest rate will fall. d. supplied e0ceeds the Cuantity of loanable funds demanded and the interest rate will rise. AN W!"# b. demanded e0ceeds the Cuantity of loanable funds supplied and the interest rate will rise. $%P!# & '!%1# D !+$,(N# 2 ()*!+$,-!# 2 "AND(&# %

+opyright : ;arcourt, ,nc.

.@ +hapter .8= aving, ,nvestment, and the >inancial ystem


1@

,f the inflation rate is 2 percent and the real interest rate is A percent, then the nominal interest rate is a. 1. percent. b. < percent. c. 2 percent. d. 1=2 percent. AN W!"# a. 1. percent. $%P!# & '!%1# D !+$,(N# 2 ()*!+$,-!# 2 "AND(&# %
1A

Promises of future payments have the largest present value when interest rates are a. high and the time until the future payment is received is long. b. high and the time until the future payment is received is short. c. low and the time until the future payment is received is long. d. low and the time until the future payment is received is short. AN W!"# d. low and the time until the future payment is received is short. $%P!# & '!%1# D !+$,(N# 2 ()*!+$,-!# 2 "AND(&# %
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What would happen in the mar1et for loanable funds if the government were to decrease the ta0 on interest income/ a. $he supply of loanable funds would shift right. b. $he supply of loanable funds would shift left. c. $he demand for loanable funds would shift right. d. $he demand for loanable funds would shift left. AN W!"# a. $he supply of loanable funds would shift right. $%P!# & '!%1# D !+$,(N# 2 ()*!+$,-!# 7 "AND(&# %
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,f +ongress raised the ta0 on interest income, investment a. and saving would increase. b. and saving would decrease. c. would increase and saving would decrease. d. would decrease and saving would increase. AN W!"# b. and saving would decrease. $%P!# & '!%1# D !+$,(N# 2 ()*!+$,-!# 2 "AND(&# %
..

Which of the following is incorrect/ a. $a0es on interest income do not substantially decrease future payments from current saving. b. American families save a smaller fraction of their incomes than their counterparts in many other countries such as Germany and *apan. c. aving is an important longBrun determinant of a nation5s standard of living. d. A change in the ta0 law that encouraged greater saving would reduce interest rates. AN W!"# a. $a0es on interest income do not substantially decrease future payments from current saving. $%P!# & '!%1# D !+$,(N# 2 ()*!+$,-!# 7 "AND(&# %
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uppose that +ongress were to institute an investment ta0 credit. What would happen in the mar1et for loanable funds/ a. $he supply of loanable funds would shift left. b. $he supply of loanable funds would shift right. c. $he demand for loanable funds would shift left. d. $he demand for loanable funds would shift right. AN W!"# d. $he demand for loanable funds would shift right. $%P!# & '!%1# D !+$,(N# 2 ()*!+$,-!# 7 "AND(&# %

+opyright : ;arcourt, ,nc.

+hapter .8= aving, ,nvestment, and the >inancial ystem .A


.7

An increase in the budget deficit shifts the a. demand for loanable funds left. b. demand for loanable funds right. c. supply of loanable funds left. d. supply of loanable funds right. AN W!"# c. supply of loanable funds left. $%P!# & '!%1# D !+$,(N# 2 ()*!+$,-!# 8 "AND(&# %
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Which of the following beliefs would ma1e someone less li1ely to oppose government deficits/ a. $he return on private investment is higher than the return on public investment. b. $a0es considerably distort private decision ma1ing. c. $he demand for loanable funds curve is very steep. d. All of the above would ma1e someone less li1ely to oppose government deficits. AN W!"# c. $he demand for loanable funds curve is very steep. $%P!# & '!%1# D !+$,(N# 2 ()*!+$,-!# 8 "AND(&# %

+opyright : ;arcourt, ,nc.

AN W!"# d. less investment, and so have less capital and lower productivity. $%P!# & '!%1# D ()*!+$,-!# 1 "AND(&# %
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AN W!"# b. the financial mar1ets and financial intermediaries $%P!# & '!%1# D !+$,(N# 1 ()*!+$,-!# 1 "AND(&# %
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AN W!"# c. Government bonds currently pay less interest than corporate bonds. $%P!# & '!%1# D !+$,(N# 1 ()*!+$,-!# 1 "AND(&# %
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AN W!"# c. bond. $%P!# & '!%1# D !+$,(N# 1 ()*!+$,-!# 1 "AND(&# %

AN W!"# d. $he 14 percent bond is a corporate bond, and the 8 percent bond is a municipal bond. $%P!# & '!%1# + !+$,(N# 1 ()*!+$,-!# 1 "AND(&# %
<

AN W!"# c. part owners of &aytag, so the benefits of holding the stoc1 depend on &aytag5s profits. $%P!# & '!%1# D !+$,(N# 1 ()*!+$,-!# 1 "AND(&# %
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AN W!"# b. the average of a group of stoc1 prices. $%P!# & '!%1# D !+$,(N# 1 ()*!+$,-!# 1 "AND(&# %
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AN W!"# b. . percent. $%P!# & '!%1# D !+$,(N# 1 ()*!+$,-!# 1 "AND(&# %


A

AN W!"# d. sells shares to the public and uses the proceeds to buy a selection of various types of stoc1s, bonds, or both stoc1s and bonds. $%P!# & '!%1# D !+$,(N# 1 ()*!+$,-!# 1 "AND(&# %
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AN W!"# b. %B+BG $%P!# & '!%1# ! !+$,(N# . ()*!+$,-!# . "AND(&# %


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AN W!"# c. investment. $%P!# & D,>>,+9$G%# 2 '!%1# + !+$,(N# . ()*!+$,-!# . "AND(&# %


1.

AN W!"# a. .444 and B1444 $%P!# & '!%1# ! !+$,(N# . ()*!+$,-!# . "AND(&# %
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AN W!"# c. receives more ta0 revenue than it spends. $%P!# & '!%1# D !+$,(N# . ()*!+$,-!# . "AND(&# %
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AN W!"# d.

is investment and the source of the supply of loanable funds is saving.

$%P!# & '!%1# D !+$,(N# 2 ()*!+$,-!# 2 "AND(&# %


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AN W!"# c. upward because an increase in the interest rate induces people to save more. $%P!# & '!%1# D !+$,(N# 2 ()*!+$,-!# 2 "AND(&# %
1<

AN W!"# d. invest more, so the demand for loanable funds slopes downward. $%P!# & '!%1# D !+$,(N# 2 ()*!+$,-!# 2 "AND(&# %
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AN W!"# b. demanded e0ceeds the Cuantity of loanable funds supplied and the interest rate will rise. $%P!# & '!%1# D !+$,(N# 2 ()*!+$,-!# 2 "AND(&# %
1@

AN W!"# a. 1. percent. $%P!# & '!%1# D !+$,(N# 2 ()*!+$,-!# 2 "AND(&# %


1A

AN W!"# d. low and the time until the future payment is received is short. $%P!# & '!%1# D !+$,(N# 2 ()*!+$,-!# 2 "AND(&# %
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AN W!"# a. $he supply of loanable funds would shift right. $%P!# & '!%1# D !+$,(N# 2 ()*!+$,-!# 7 "AND(&# %
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AN W!"# b. and saving would decrease. $%P!# & '!%1# D !+$,(N# 2 ()*!+$,-!# 2 "AND(&# %
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AN W!"# a. $a0es on interest income do not substantially decrease future payments from current saving. $%P!# & '!%1# D !+$,(N# 2 ()*!+$,-!# 7 "AND(&# %
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AN W!"# d. $he demand for loanable funds would shift right. $%P!# & '!%1# D !+$,(N# 2 ()*!+$,-!# 7 "AND(&# %
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AN W!"# c. supply of loanable funds left. $%P!# & '!%1# D !+$,(N# 2 ()*!+$,-!# 8 "AND(&# %
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AN W!"# c. $he demand for loanable funds curve is very steep. $%P!# & '!%1# D !+$,(N# 2 ()*!+$,-!# 8 "AND(&# %