Question 1

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

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Question 2

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?

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Question 3

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

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Question 4

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

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Question 5

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

Accepted Answer

Economists generally agree that higher savings rates contribute to higher investment levels, which in turn fuel productivity improvements and economic growth. Reducing the saving rate can lower the funds available for investment, potentially hindering economic growth and reducing long-run living standards.

Question 6

What is the main function of the financial system?

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Question 7

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

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Question 8

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.

Accepted Answer

Financial markets play a crucial role in the efficient allocation of scarce resources in both the short-run and the long-run by directing funds from savers to borrowers, who can then invest in productive ventures.

Question 9

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?

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Question 10

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?

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Question 11

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.

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Question 12

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

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Question 13

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

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Question 14

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

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Question 15

What is a mutual fund?

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Question 16

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?

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Question 17

_____ and _____ are the two most important financial intermediaries.

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Question 18

What does the maturity of a bond indicate?

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Question 19

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

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Question 20

How do banks make profits?

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Quiz 26: Saving, Investment, and the Financial System