Practice Quizzes - Saving, Investment, and the Financial System

Topic 5: SAVING, INVESTMENT AND THE FINANCIAL SYSTEM

I. TERMS AND DEFINITIONS : Choose a definition for each key term

1. Financial system
2. Financial markets
3. Financial intermediaries
4. Bank
5. Bond
6. Mutual Fund
7. National saving
8. Private saving
9. Budget surplus
10. Budget deficit
11. Government debt
12. Investment
13. Demand for loanable funds
14. Supply of loanable funds
15. Crowding out

a. A shortfall of tax revenue relative to government spending causing public saving to be negative.
b. Financial institutions through which savers can indirectly lend to borrowers
c. The amount of borrowing for investment desired at each real interest
d. The income that remains after consumption expenditures and taxes
e. The accumulation of past budget deficits
f. The amount of saving made available for lending at each real interest rate
g. Institution that collects deposits and makes loans
h. Institution that sells shares and uses the proceeds to buy a diversified portfolio

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 Practice Quizzes - Saving, Investment, and the Financial System

i. Financial institutions through which savers can directly lend to borrowers

j. An excess of tax revenue over government spending causing public saving to be positive
k. The income that remains after consumption expenditures and government purchases
l. A decrease in investment as a result of government borrowing
m. Expenditures on capital equipment and structures
n. Certificate of indebtedness or IOU (I owe you)
o. The group of institutions in the economy that help match borrowers and lenders

II. TRUE OR FALSE? EXPLAIN YOUR CHOICE BRIEFLY

1. Other things the same, Vietnamese government bonds have lower interest rates than U.S.
government bonds.
2. The 20-year bond would likely pay a higher interest rate than would the 6-month bill.
3. The model of the market for loanable funds shows that an increase in government expenditure
will cause interest rates to rise and the quantity of loanable funds to fall.
4. The model of the market for loanable funds shows that an investment tax credit will cause interest
rates to rise and investment to rise.
5. The model of the market for loanable funds shows that if a government goes from a deficit to a
surplus, both interest rates and investment will rise.

III. PROBLEM SOLVING

Economists in Funlandia, a closed economy, have collected the following information about
the economy for a particular year:
Y = 10,000, C = 6,000, T = 1,500 G = 1,700
The economists also estimate that the investment function is:
I = 3,300 – 100 r, where r is the country’s real interest rate, expressed as a percentage.
Calculate private saving, public saving, national saving, investment, and the equilibrium real
interest rate.

IV. MULTIPLE-CHOICE QUESTIONS

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 Practice Quizzes - Saving, Investment, and the Financial System

1. Which of the following is correct?

a. Some bonds have terms as short as a few months.
b. Because they are so risky, junk bonds pay a low rate of interest.
c. Corporations buy bonds to raise funds.
d. All of the above are correct.
2. Long-term bonds are generally
a. less risky than short-term bonds and so pay higher interest.
b. less risky than short-term bonds and so pay lower interest.
c. more risky than short-term bonds and so pay higher interest.
d. more risky than short-term bonds and so pay lower interest.
3. The sale of stocks
a. and bonds to raise money is called debt finance.
b. and bonds to raise money is called equity finance.
c. to raise money is called debt finance, while the sale of bonds to raise funds is called equity
finance.
d. to raise money is called equity finance, while the sale of bonds to raise funds is called debt
finance.
4. People who buy stock in a corporation such as General Electric become
a. creditors of General Electric, so the benefits of holding the stock depend on General Electric’s
profits.
b. creditors of General Electric, but the benefits of holding the stock do not depend on General
Electric’s profits.
c. part owners of General Electric, so the benefits of holding the stock depend on General Electric’s
profits.
d. part owners of General Electric, but the benefits of holding the stock do not depend on General
Electric’s profits.
5. Which of the following equations will always represent GDP in an open economy?
a. S = I – G
b. I = Y – C + G
c. Y = C + I + G
d. Y = C + I + G + NX

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 Practice Quizzes - Saving, Investment, and the Financial System

6. In a closed economy, national saving equals

a. investment.
b. income minus the sum of consumption and government expenditures.
c. private saving plus public saving.
d. All of the above are correct.
7. In a closed economy, what remains after paying for consumption and government purchases is
a. national disposable income.
b. national saving.
c. public saving.
d. private saving.
8. In a closed economy, what does (T – G) represent?
a. national saving
b. investment
c. private saving
d. public saving
9. A higher interest rate induces people to
a. save more, so the supply of loanable funds slopes upward.
b. save less, so the supply of loanable funds slopes downward.
c. invest more, so the supply of loanable funds slopes upward.
d. invest less, so the supply of loanable funds slopes downward.
10. If the current market interest rate for loanable funds is above the equilibrium level, then
a. the quantity of loanable funds demanded will exceed the quantity of loanable funds supplied and
the interest rate will rise.
b. the quantity of loanable funds supplied will exceed the quantity of loanable funds demanded and
the interest rate will rise.
c. the quantity of loanable funds demanded will exceed the quantity of loanable funds supplied and
the interest rate will fall.
d. the quantity of loanable funds supplied will exceed the quantity of loanable funds demanded and
the interest rate will fall.

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 Practice Quizzes - Saving, Investment, and the Financial System

11. If the supply of loanable funds is very inelastic (steep), which policy would likely increase
saving and investment the most?
a. an investment tax credit.
b. a reduction in the budget deficit.
c. an increase in the budget deficit.
d. none of the above.
12. Which of the following sets of government policies is the most growth oriented?
a. lower taxes on the returns of saving, provide investment tax credits, and lower the deficit.
b. lower taxes on the returns of saving, provide investment tax credits, and increase the deficit.
c. increase taxes on the returns of saving, provide investment tax credits, and increase the deficit
d. increase taxes on the returns of saving, provide investment tax credits, and lower the deficit
13. If the government increases investment tax credits and reduces taxes on the return to saving at
the same time,
a. the real interest rate should rise.
b. the real interest rate should fall.
c. the real interest rate should not change.
d. the impact on the real interest rate is indeterminate.
14. Investment is
a. the purchase of stocks and bonds.
b. the purchase of capital equipment and structures.
c. when we place our saving in the bank.
d. the purchase of goods and services.
15. Suppose the interest rate is 8%. Which would you prefer to receive: $100 today or $116 two
year from today?
a. $100 today.
b. $116 two year from today.
c. You should be indifferent between the two values.
d. None of the above.

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