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Multiple ChoiceEdit

1. Most entrepreneurs do not have enough money of their own to start their businesses. When they acquire the necessary funds from someone else,

  • a. their consumption expenditures are being financed by someone else’s saving through the Federal Reserve System.
  • b. their consumption expenditures are being financed by someone else’s investment through the Federal Reserve System.
  • c. their investments are being financed by someone else’s saving through the financial system.
  • d. their saving is being financed by someone else’s investment through the financial system.
  • e. their investments are being financed by someone else’s saving through the Federal Reserve system.

2. Which of the following is both a store of value and a common medium of exchange?

  • a. corporate bonds
  • b. mutual funds
  • c. checking account balances
  • d. savings account balances
  • e. All of the above are correct.

3. All or part of a firm’s profits may be paid out to the firm’s stockholders in the form of

  • a. retained earnings.
  • b. dividends.
  • c. interest payments.
  • d. capital accounts.
  • e. transfer payments.

4. Compared to stocks, bonds offer the holder

  • a. lower risk and lower potential return.
  • b. lower risk and higher potential return.
  • c. lower risk and equal potential return.
  • d. higher risk and lower potential return.
  • e. higher risk and higher potential return.

5. You are thinking of buying a bond from Knight Corporation. You know that this bond is long term and you know that Knight’s business ventures are risky and uncertain. You then consider another bond with a shorter term to maturity issued by a company with good prospects and an established reputation. Which of the following is correct?

  • a. The longer term would tend to make the interest rate on the bond issued by Knight higher, while the higher risk would tend to make the interest rate lower.
  • b. The longer term would tend to make the interest rate on the bond issued by Knight lower, while the higher risk would tend to make the interest rate higher.
  • c. Both the longer term and the higher risk would tend to make the interest rate lower on the bond issued by Knight.
  • d. Both the longer term and the higher risk would tend to make the interest rate higher on the bond issued by Knight.
  • e. The bonds from both companies would carry the same interest rate as those rates are set by the Federal Reserve.

6. Other things the same, as the maturity of a bond becomes longer, the bond will pay

  • a. a lower interest rate because it has less risk.
  • b. a lower interest rate because it has more risk.
  • c. a higher interest rate because it has more risk.
  • d. a higher interest rate because it has less risk.
  • e. the same interest rate because there is no relationship between term and risk.
Figure 26-1

Figure 26-1










7. Refer to Figure 26-1. Which of the following movements shows the effects of a new law that makes more people than before eligible for Individual Retirement Accounts?

  • a. a movement from Point A to Point B
  • b. a movement from Point B to Point F
  • c. a movement from Point C to Point F
  • d. a movement from Point C to Point B
  • e. a movement from Point F to Point B

8. Suppose the government changed the tax laws, with the result that people were encouraged to spend a larger percentage of their disposable income on consumption. Using the loanable funds model, a consequence would be

  • a. lower interest rates and lower investment.
  • b. lower interest rates and greater investment.
  • c. higher interest rates and lower investment.
  • d. higher interest rates and higher investment.
  • e. higher interest rates and higher savings.

9. Investment declines when crowding out occurs because

  • a. a budget deficit makes interest rates rise.
  • b. a budget deficit makes interest rates fall.
  • c. a budget surplus makes interest rates rise.
  • d. a budget surplus makes interest rates fall.
  • e. a balance of payment deficit makes interest rates rise.

10. If there is surplus of loanable funds, at the current interest rate, then

  • a. the supply of loanable funds shifts right and the demand shifts left.
  • b. the supply of loanable funds shifts left and the demand shifts right.
  • c. the supply of loanable funds and the demand both shift until a new equilibrium is achieved.
  • d. neither curve shifts, but the quantity of loanable funds supplied increases and the quantity demanded decreases as the interest rate rises to equilibrium.
  • e. neither curve shifts, but the quantity of loanable funds supplied decreases and the quantity demanded increases as the interest rate falls to equilibrium.

AnswersEdit

  1. C
  2. C
  3. B
  4. A
  5. D
  6. C
  7. C
  8. C
  9. A
  10. E

Free ResponseEdit

1. Draw and label a graph showing equilibrium in the market for loanable funds.

2. Identify each of the following acts as representing either saving or investment.

  • a. Fred uses some of his income to buy government bonds.
  • b. Julie takes some of her income and buys mutual funds.
  • c. Alex purchases a new truck for his delivery business using borrowed funds.
  • d. Elaine uses some of her income to buy stock in a major corporation.
  • e. Henrietta hires a builder to construct a new building for her bicycle shop.

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