True/False
Indicate whether the
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
things.
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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
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. | c. | borrowers and lenders. | b. | banks and the
government. | 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. | public debt will fall | 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 shifts the
a. | supply of loanable funds to the right. | c. | demand for loanable funds to the
right. | b. | demand for loanable funds to the left. | d. | 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 | c. | an investment tax
credit | b. | an increase in the budget deficit | 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. | an indication of a spendthrift government. | 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. | c. | crowding out. | b. | equity finance. | 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, real interest rates
a. | rise and investment falls. | c. | fall and investment
rises. | b. | rise and investment rises. | d. | 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, the:
a. | real interest rate should fall. | b. | real interest rate should
rise. | c. | impact on the real interest rate is indeterminate. | d. | real interest rate
should not change. |
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35.
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An increase in the budget surplus shifts the
a. | supply of loanable funds to the left and increases the real interest
rate. | b. | supply of loanable funds to the right and reduces the real interest
rate. | c. | demand for loanable funds to the right and increases the real interest
rate. | d. | demand for loanable funds to the left and reduces the real interest
rate. |
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