Deck 26: Saving, Investment, and the Financial System

Question 1

All financial intermediaries are financial institutions, but not all financial institutions are financial intermediaries.

Answer 1

True

Question 2

Most entrepreneurs finance their purchases of real capital using their past saving.

Answer 2

False

Question 3

Other things the same, corporate bonds generally feature higher interest rates than U.S. government bonds.

Answer 3

True

Question 4

When economists refer to investment, they mean the purchasing of stocks and bonds and other types of saving.

Question 5

Index funds are usually outperformed by mutual funds that are actively managed by professional money managers.

Question 6

When a corporation experiences financial problems, bondholders are paid before stockholders.

Question 7

Generally, if people begin to expect a company to have higher future profits, the price of the company's stock will begin to decrease.

Question 8

Banks and mutual funds are examples of financial markets.

Question 9

The sale of either stocks or bonds to raise money is known as equity finance.

Question 10

When a firm wants to borrow directly from the public to finance the purchase of new equipment, it does so by selling bonds.

Question 11

Corporations receive no proceeds from the resale of their stock.

Question 12

Other things the same, the higher the rate of saving and investment in a country, the higher will be the standard of living in the future.

Question 13

If a share of stock in Skylight Chili sells for $75, the retained earnings per share are $5, and the dividend per share is $2, then the price-earnings ratio is 15.

Question 14

When a firm wants to borrow directly from the public to finance the purchase of new equipment, it does so by selling shares of stock.

Question 15

Mutual funds are a type of financial intermediary.

Question 16

If people become less optimistic about the future earnings of Hyde Park Jazz Studio, then the price of the company's stock will fall.

Question 17

Lenders buy bonds and borrowers sell them.

Question 18

The financial system coordinates investment and saving, which are important determinants of long-run real GDP.

Question 19

Lenders sell bonds and borrowers buy them.

Question 20

Because of differences in tax treatment, municipal bonds pay a higher interest rate than do corporate bonds.

Question 21

If a share of stock in Dell sells for $70, the retained earnings per share are $5, and the dividend per share is $2, then the price-earnings ratio is 10.

Question 22

Public saving is T - G, while private saving is Y - T - C.

Question 23

National saving is equal to Y - T - C.

Question 24

To state that national saving is equal to investment, for a closed economy, is to state an accounting identity.

Question 25

Joan uses some of her income to buy mutual fund shares. A macroeconomist refers to Joan's purchase as investment.

Question 26

In a closed economy, if taxes fall and consumption rises, then private saving must fall.

Question 27

If, for an imaginary closed economy, investment amounts to $10,000 and the government is running a $2,500 deficit, then private saving must amount to $12,500.

Question 28

Public saving is equal to national saving minus private saving.

Question 29

Credit risk refers to the probability that the issuer of a bond will fail to pay some or all of the interest or principal.

Question 30

Skeptics of government policy to reduce taxes on saving argue that it would primarily benefit the rich.

Question 31

Suppose a small closed economy has GDP of $5 billion, consumption of $3 billion, and government expenditures of $1 billion. Then investment and national saving are both $1 billion.

Question 32

If the tax rate fell, holding municipal bonds would be less desirable so the interest rates on them would fall.

Question 33

Owners of bonds that were issued by the federal government are not required to pay federal income tax on the interest income.

Question 34

To state that public saving is equal to investment, for a closed economy, is to state an accounting identity.

Question 35

Alberta buys a paint sprayer and a lift for her car customizing shop. A macroeconomist would refer to these purchases as investment.

Question 36

Financial crises seldom involve economic downturns.

Question 37

Anything other than a change in the interest rate that decreases national saving shifts the supply of loanable funds to the left.

Question 38

By definition, government purchases and taxes are zero for a closed economy.

Question 39

If, for an imaginary closed economy, investment amounts to $12,000 and the government is running a $2,000 deficit, then private saving must amount to $10,000.

Question 40

In a closed economy, investment must be equal to private saving.

Question 41

An increase in the demand for loanable funds increases the equilibrium interest rate and decreases the equilibrium level of saving.

Question 42

The demand for loanable funds comes from saving and the supply of loanable funds comes from investment.

Question 43

The ratio of government debt to GDP was higher during the Reagan presidency than at any previous time in U.S. history.

Question 44

The term loanable funds refers to all income that is not used for consumption or government expenditures.

Question 45

When the U.S. government is in debt during a given year, it follows that its budget is in deficit for that year.

Question 46

An increase in the budget deficit shifts the demand for loanable funds to the right.

Question 47

In a closed economy, each unit of output is either consumed by households or invested.

Question 48

A government may use deficit financing to smooth tax rates over time.

Question 49

The term loanable funds refers to all income that is not used for consumption.

Question 50

On a graph that depicts the market for loanable funds, the nominal interest rate is measured along the vertical axis.

Question 51

The conventions of national income accounting imply that saving and investment are equal for the economy as a whole and for individual households and firms.

Question 52

An increase in the demand for loanable funds increases the equilibrium interest rate and increases the equilibrium level of saving.

Question 53

The term crowding out refers to decreases in the interest rate caused by government budget surpluses.

Question 54

When the government budget deficit rises, national saving is reduced, interest rates rise, and investment falls.

Question 55

We interpret the term loanable funds to mean the flow of resources available to fund private investment.

Question 56

If Congress instituted an investment tax credit, the demand for loanable funds would shift rightward.

Question 57

​Index funds are financial intermediaries, but municipal bonds are not.

Question 58

When an economy's government goes from running a budget deficit to running a budget surplus, the economy's long-run growth prospects are improved.

Question 59

Managed mutual funds perform better on average than index funds because stock prices are usually a good predictor of a company's true value.

Question 60

A decrease in taxes on interest income would increase the interest rate.

Question 61

Bond A and Bond B have identical characteristics except that Bond A has a higher interest rate. Which bond has a higher credit risk?

Question 62

A _____ is a certificate of indebtedness and a _____ is a claim to partial ownership in a firm.

Question 63

If federal tax rates increased, what would happen to the interest rate on municipal bonds?

Question 64

What is a mutual fund?

Question 65

The financial system is important because it helps to match one person's _____ with another person's _____.

Question 66

_____ and _____ are the two most important financial intermediaries.

Question 67

Stock in Frozen Dreams, an ice cream manufacturer, has a price to earnings ratio of 24. Is this comparatively high or low? What are two explanations for the size of this company's price to earnings ratio?

Question 68

What does the maturity of a bond indicate?

Question 69

List three characteristics of a bond that would make its interest rate higher than otherwise.

Question 70

Bond A and Bond B are identical except Bond B has a longer term. Therefore, we expect Bond _____ to pay a higher rate of interest.

Question 71

Bonds issued by state and local governments are called _____ bonds. Bonds issued by financially shaky corporations are called _____ bonds. Of these two, which type of bond usually pays a relatively higher interest rate?

Question 72

The majority of economists believe that policies that reduce the saving rate will reduce long-run living standards.

Question 73

A restaurant chain announces declining revenues. What's the name of the type of risk that this news raises for holders of this chain's bonds? What does this news to do the interest rate on this chain's bonds?

Question 74

Taking out a mortgage to buy a condo, buying a mutual fund, and building a new factory are all examples of investment.

Question 75

How do banks make profits?

Question 76

What is the main function of the financial system?

Question 77

Concerns about the bankruptcy of an appliance manufacturer diminish after a new CEO is appointed and some of the company's less productive factories are sold. What type of risk for bondholders falls? What happens to the interest rate on this company's bonds?

Question 78

When someone borrows to purchase capital goods, he is using someone else's _____ to fund his _____.

Question 79

Financial markets are important for bringing equilibrium to the loanable funds market, but do not affect the efficient allocation of scarce resources in the long-run.

Question 80

What is a bond buyer promised when she buys a bond?