True/False
Indicate whether the
sentence or statement is true or false.
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1.
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When a business firm sells a bond, it has obtained
equity finance.
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2.
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People who buy shares in a firm have loaned money
to the firm.
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3.
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Investment funds reduce a shareholder's risk
by purchasing a diversified portfolio.
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4.
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UK government bonds pay less interest than
corporate bonds issued by UK companies because the government bonds carry less credit
risk.
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5.
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In a closed economy, saving is what remains after
consumption expenditures and government purchases.
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6.
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Public saving is always positive.
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7.
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In a closed economy, investment is always equal to
saving regardless of where the saving came from - public or private sources.
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8.
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Investment is the purchase of capital equipment and
structures.
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9.
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If you save money this week and lend it to your
flatmate to buy food for consumption, your act of personal saving has increased national
saving.
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10.
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The quantity supplied of loanable funds is greater
if real interest rates are higher.
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11.
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If the real interest rate in the loanable funds
market is temporarily held above the equilibrium rate, desired borrowing will exceed desired lending
and the real interest rate will fall.
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12.
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A reduction in the budget deficit should shift the
supply of loanable funds to the right, lower the real interest rate, and increase the quantity
demanded of loanable funds.
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13.
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Public saving and the government's budget
surplus are the same thing.
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14.
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If the government wanted to increase the rate of
growth, it should raise taxes on interest and dividends to shift the supply of loanable funds to the
right.
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15.
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An increase in the budget deficit that causes the
government to increase its borrowing shifts the demand for loanable funds to the right.
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Multiple Choice
Identify the
letter of the choice that best completes the statement or answers the question.
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16.
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Which of the following is an example of equity
finance?
a. | Corporate bonds | b. | Bank loan | c. | All of these
answers are equity finance. | d. | Government
bonds | e. | Company shares |
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17.
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Credit risk refers to a bond's
a. | probability of default. | b. | price-earnings ratio. | c. | dividend. | d. | tax
treatment. | e. | term to
maturity. |
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18.
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A financial intermediary is a middleperson
between
a. | buyers and sellers. | b. | husbands and wives. | c. | borrowers and
lenders. | d. | labour unions and
firms. |
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19.
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National saving (or just saving) is equal
to
a. | none of these answers. | b. | investment + consumption expenditures. | c. | private saving + public saving. | d. | GDP - government purchases. | e. | GDP + consumption expenditures + government
purchases. |
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20.
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Which of the following statements is
true?
a. | Long-term bonds tend to pay less interest than
short-term bonds. | b. | Government bonds
pay less interest than comparable corporate bonds. | c. | Investment funds are riskier than single stock purchases because the
performance of so many different firms can affect the return of a mutual
fund. | d. | A stock index is a directory used to locate information
about selected stocks. |
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21.
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If government spending exceeds tax
collections,
a. | there is a budget deficit. | b. | none of these answers | c. | there is a budget
surplus. | d. | private saving is positive. | e. | public saving is positive. |
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22.
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If GDP = €1,000, consumption = €600,
taxes = €100, and government purchases = €200, how much is saving and
investment?
a. | saving = €300, investment =
€300 | b. | saving =
€200, investment = €100 | c. | saving =
€100, investment = €200 | d. | saving = €0,
investment = €0 | e. | saving =
€200, investment = €200 |
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23.
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If the public consumes €100 billion less and
the government purchases €100 billion more (other things unchanging), which of the following
statement is true?
a. | Saving is unchanged. | b. | There is an increase in saving and the economy should grow more
quickly. | c. | There is a decrease in saving and the economy should
grow more slowly. | d. | There is not
enough information to determine what will happen to saving. |
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24.
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Which of the following financial market securities
would probably pay the highest interest rate?
a. | A bond issued by a start up
company | b. | A government bond issued by the government of
France. | c. | A bond issued by a blue chip
company | d. | An investment fund with a portfolio of corporate bonds
issued by blue chip companies. |
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25.
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Investment is
a. | the purchase of goods and
services. | b. | the purchase of capital equipment and
structures. | c. | when we place our
saving in the bank. | d. | the purchase of
stocks and bonds. |
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26.
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If UK citizens become more thrifty, we would
expect
a. | the supply of loanable funds in the UK loanable funds
market to shift to the right and the real interest rate to fall. | b. | the demand for loanable funds in the UK loanable funds market to shift to the
right and the real interest rate to rise. | c. | the demand for
loanable funds in the UK loanable funds market to shift to the right and the real interest rate to
fall. | d. | the supply of loanable funds in the UK loanable funds
market to shift to the right and the real interest rate to
rise. |
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27.
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Which of the following sets of government policies
is the most growth oriented?
a. | Lower taxes on the returns to saving, provide investment
tax credits, and lower the deficit. | b. | Increase tax on
the returns to saving, provide investment tax credits, and increase the
deficit. | c. | Increase tax on the returns to saving, provide
investment tax credits, and lower the deficit | d. | Lower taxes on the
returns to saving, provide investment tax credits, and increase the
deficit. |
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28.
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An increase in the budget deficit that causes the
government to increase its borrowing
a. | shifts the supply of loanable funds to the
right. | b. | shifts the demand for loanable funds to the
left. | c. | shifts the demand for loanable funds to the
right. | d. | shifts the supply of loanable funds to the
left. |
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29.
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An increase in the budget deficit
will
a. | raise the real interest rate and decrease the quantity
of loanable funds demanded for investment. | b. | lower the real
interest rate and increase the quantity of loanable funds demanded for
investment. | c. | raise the real
interest rate and increase the quantity of loanable funds demanded for
investment. | d. | lower the real
interest rate and decrease the quantity of loanable funds demanded for
investment. |
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30.
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If the supply of loanable funds is very inelastic
(steep), which policy would likely increase saving and investment the most?
a. | a reduction in the budget
deficit | b. | an increase in the budget
deficit | c. | an investment tax credit | d. | none of these answers |
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31.
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An increase in the budget deficit is
a. | an increase in public saving. | b. | a decrease in private saving. | c. | none of these answers. | d. | a decrease in
public saving. | e. | an increase in
private saving. |
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32.
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If an increase in the budget deficit reduces
national saving and investment, we have witnessed a demonstration of
a. | intermediation. | b. | equity finance. | c. | crowding
out. | d. | the investment fund
effect. |
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33.
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If UK citizens become less concerned with the
future and save less at each real interest rate,
a. | real interest rates rise and investment
falls. | b. | real interest rates rise and investment
rises. | c. | real interest rates fall and investment
rises. | d. | real interest rates fall and investment
falls. |
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34.
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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
fall. | b. | the real interest rate should
rise. | c. | the impact on the real interest rate is
indeterminate. | d. | the real interest
rate should not change. |
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35.
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An increase in the budget surplus
a. | shifts the supply of loanable funds to the left and
increases the real interest rate. | b. | shifts the supply
of loanable funds to the right and reduces the real interest rate. | c. | shifts the demand for loanable funds to the right and increases the real
interest rate. | d. | shifts the demand
for loanable funds to the left and reduces the real interest
rate. |
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