Name: ________________________ Class: ___________________ Date: __________ ID: A
problem set 8
Identify the letter of the choice that best completes the statement or answers the question.
____ 1. Institutions in the economy that help to match one person's saving with another person's investment are
collectively called the
a. Federal Reserve system.
b. banking system.
c. monetary system.
d. financial system.
____ 2. If the government's expenditures exceeded its receipts, it would likely
a. lend money to a bank or other financial intermediary.
b. borrow money from a bank or other financial intermediary.
c. buy bonds directly from the public.
d. sell bonds directly to the public.
____ 3. Skyline Chili wants to finance the purchase of new equipment for its restaurants, but they have limited
internal funds. Skyline will likely
a. demand loanable funds by buying bonds.
b. demand loanable funds by selling bonds.
c. supply loanable funds by buying bonds.
d. supply loanable funds by selling bonds.
____ 4. If Proctor and Gamble sells a bond it is
a. borrowing directly from the public.
b. borrowing indirectly from the public.
c. lending directly to the public.
d. lending indirectly to the public.
____ 5. Compared to long-term bonds, other things the same, short-term bonds generally have
a. more risk and so pay higher interest.
b. less risk and so pay lower interest.
c. less risk and so pay higher interest.
d. about the same risk and so pay about the same interest.
____ 6. Other things the same, bonds are likely to have higher interest rates if they have
a. tax exemptions and short terms.
b. tax exemptions and long terms.
c. no tax exemptions and short terms.
d. no tax exemptions and long terms.
____ 7. Other things the same, which bond would you expect to pay the highest interest rate?
a. a bond issued by the U.S. government
b. a bond issued by IBM
c. a bond issued by New York State
d. a bond issued by a new restaurant chain
____ 8. Papa Mario's Pizza Company sells common stock.
a. They are using equity financing and the return shareholders earn is fixed.
b. They are using equity financing and the return shareholders earn depends on how
profitable the company is.
c. They are using debt financing and the return shareholders earn is fixed.
d. They are using debt financing and the return shareholders earn depends on how profitable
the company is.
1 Name: ________________________ ID: A
a. a claim to a share of the profits of a firm.
b. ownership in a firm.
c. equity finance.
d. All of the above are correct
____ 10. Which of the following people purchased the correct asset to meet their objective?
a. Michelle wanted to be a part owner of Mamma Rosa's Pizza, so she purchased a bond
issued by Mamma Rosa's Pizza.
b. Tim wanted a high return, even if it meant taking some risk, so he purchased stock issued
by Specific Electric instead of bonds issued by Specific Electric.
c. Jennifer wanted to buy equity in Honda, so she purchased bonds sold by Honda.
d. All of the above are correct.
____ 11. In the Coen Brothers? movie The Hudsucker Proxy the board of directors picks someone to run the
company that they believe will make poor decisions. If things turn out as they plan
a. The price of a share of stock in the Hudsucker corporation should decline as the demand
for shares falls.
b. The price of a share of stock in the Hudsucker corporation should rise as the demand for
c. The price of a share of stock in the Hudsucker corporation should decline as the supply of
existing shares falls.
d. The price of a share of stock in the Hudsucker corporation should rise as the supply of
existing shares rises.
____ 12. Nastech Pharmaceuticals announced they have developed a nasal spray that would reduce hunger
cravings. Other things the same we抎 expect
a. the demand for existing shares of stock in this company decreased, so the price fell.
b. the demand for existing shares of stock in this company increased, so the price rose.
c. the supply of stock of existing shares of stock in this company decreased, so the price
d. the supply of stock of existing shares of stock in this company increased, so the price
____ 13. Which of the following statements is correct?
a. A general, persistent decline in stock prices may signal that the economy is about to enter
a boom period because people will be able to buy stock for less money.
b. A general, persistent decline in stock prices may signal that the economy is about to enter
a recession because low stock prices may mean that people are expecting low corporate
c. A general, persistent decline in stock prices may signal that the economy is about to enter
a recession because low stock prices mean that corporations have had low profits in the
d. Expectations about the business cycle have no impact on stock prices.
____ 14. Which of the following is correct?
a. Stocks, bonds, and deposits are all similar in that each provides a common medium of
b. Most buyers of stocks and bonds prefer those issued by large and familiar companies.
c. Banks charge borrowers a slightly lower interest rate than they pay to depositors.
d. None of the above is correct.
2 Name: ________________________ ID: A
____ 15. A mutual fund
a. is a financial market where small firms mutually agree to sell stocks and bonds to raise
b. is funds set aside by local governments to lend to small firms who want to invest in
projects that are mutually beneficial to the firm and community.
c. sells stocks and bonds on behalf of small and less known firms who would otherwise
have to pay high interest to obtain credit.
d. is an institution that sells shares to the public and uses the proceeds to buy a selection of
various types of stocks, bonds, or both stocks and bonds.
____ 16. The identity that shows that GDP is both total income and total expenditure is represented by
a. GDP = Y.
b. Y = DI + T + NX.
c. GDP = GNP - NX.
d. Y = C + I + G + NX.
____ 17. Which of the following correctly includes the four expenditure categories of GDP?
a. consumption, government purchases, investment, net-exports
b. consumption, investment, depreciation, net-exports
c. consumption, saving, investment, depreciation,
d. consumption, government purchases, investment, savings
____ 18. A closed economy does not
a. trade with other economies.
b. have free markets.
c. allow financial intermediation.
d. All of the above are correct.
____ 19. Which of the following equations will always represent GDP in an open economy?
a. S = I - G
b. I = Y - C + G
c. Y = C + I + G
d. Y = C + I + G + NX
____ 20. Which of the following equations most simply represents GDP in a closed economy?
a. Y = C + I + G + NX
b. S = I - G
c. I = Y - C + G
d. Y = C + I + G
____ 21. In a closed economy, national saving is
a. usually greater than investment.
b. equal to investment.
c. usually less than investment because of the leakage of taxes.
d. always less than investment.
____ 22. In a small closed economy investment is $20 billion and private saving is $22 billion. What is public
saving and national saving?
a. $24 billion and $2 billion
b. $20 billion and -$2 billion
c. $2 billion and $24 billion
d. -$2 billion and $20 billion
____ 23. In a closed economy, what remains after paying for consumption and government purchases is
a. national disposable income.
b. national saving.
c. public saving.
d. private saving.
3 Name: ________________________ ID: A
____ 24. In a closed economy, what does (T - G) represent?
a. national saving
c. private saving
d. public saving
____ 25. Consider T-G and Y-T-C.
a. Each one of these is equal to national saving.
b. Each one of these is equal to public saving.
c. The first of these is private saving, the second one is public saving.
d. The first of these is public saving, the second one is private saving.
____ 26. Suppose that in a closed economy GDP is equal to 11,000, Taxes are equal to 1,500, Consumption equals
7,500, and Government purchases equal 2,000. What is national saving?
d. None of the above is correct.
____ 27. Suppose that in a closed economy GDP is $11 trillion, consumption is $7 trillion, taxes are $3 trillion and
the government runs a surplus of $1 trillion. What are private saving and national saving?
a. $4 trillion and $1 trillion
b. $4 trillion and $5 trillion
c. $1 trillion and $2 trillion
d. $1 trillion and $1 trillion
____ 28. Consider three different closed economies with the following national income statistics. Country A has
taxes of $40 billion, transfers of $20 billion, and government expenditures on goods and services of $30
billion. County B has private savings of $60 billion, and investment expenditures of $50 billion. Country
C has GDP of $300 billion, investment of $70, consumption of $180 billion, taxes of $60 billion and
transfers of $20 billion. From this information we know that there is a $10 billion deficit for
a. only country A.
b. only country B.
c. only country C.
d. all three countries.
____ 29. The country of Aquolina does not trade with any other country. Its GDP is $20 billion. Its government
purchases $3 billion worth of goods and services each year, collects $3 billion in taxes, and provides $2
billion in transfer payments to households. Private saving in Aquolina is $4 billion. What is investment in
a. $4 billion
b. $3 billion
c. $2 billion
d. There is not enough information to answer the question.
____ 30. In a closed economy, private saving is
a. the amount of income that households have left after paying for their taxes and
b. the amount of income that businesses have left after paying for the factors of production.
c. the amount of tax revenue that the government has left after paying for its spending.
d. always equal to investment.
____ 31. Which of the following is not always correct in a closed economy?
a. National saving equals private saving plus public saving.
b. Net exports equal zero.
c. Real GDP measures both income and expenditures.
d. Private saving equals investment.
4 Name: ________________________ ID: A
____ 32. If the tax revenue of the federal government exceeds spending, then the government necessarily
a. runs a budget deficit.
b. runs a budget surplus.
c. runs a national debt.
d. will increase taxes.
____ 33. The source of the supply of loanable funds
a. is saving and the source of demand for loanable funds is investment.
b. is investment and the source of demand for loanable funds is saving.
c. and the demand for loanable funds is saving.
d. and the demand for loanable funds is investment.
____ 34. The Eye of Horus incense company has $10 million in cash which it has accumulated from retained
earnings. It was planning to use the money to build a new factory. Recently, the rate of interest has
increased. The increase in the rate of interest should
a. not influence the decision to build the factory because The Eye of Horus doesn't have to