ECON1040 Chapter 8 – Flashcards

1. Most entrepreneurs do not have enough money of their own to start their businesses. When they acquire the necessary funds from someone else, a. their consumption expenditures are being financed by someone else's saving. b. their consumption expenditures are being financed by someone else's investment. c. their investments are being financed by someone else's saving. d. their saving is being financed by someone else's investment.

2. The economy's two most important financial markets are a. the investment market and the saving market. b. the bond market and the stock market. c. banks and the stock market. d. financial markets and financial institutions.

3. Two of the economy's most important financial intermediaries are a. suppliers of funds and demanders of funds. b. banks and the bond market. c. the stock market and the bond market. d. banks and mutual funds.

4. If the Apple corporation sells a bond it is a. borrowing directly from the public. b. borrowing indirectly from the public. c. selling shares of ownership directly to the public. d. selling shares of ownership indirectly to the public.

5. Municipal bonds pay a relatively a. low rate of interest because of their high default risk and because the interest they pay is subject to federal income tax. b. low rate of interest because of their low default risk and because the interest they pay is not subject to federal income tax. c. high rate of interest because of their high default risk and because federal taxes must be paid on the interest they pay. d. high rate of interest because of their low default risk and because the interest they pay is not subject to federal income tax.

6. People who buy stock in a corporation such as General Electric become a. creditors of General Electric, so the benefits of holding the stock depend on General Electric's profits. b. creditors of General Electric, but the benefits of holding the stock do not depend on General Electric's profits. c. part owners of General Electric, so the benefits of holding the stock depend on General Electric's profits. d. part owners of General Electric, but the benefits of holding the stock do not depend on General Electric's profits.

7. All else equal, when people become more optimistic about a company's future, the a. supply of the stock and the price will both rise. b. supply of the stock and the price will both fall. c. demand for the stock and the price will both rise. d. demand for the stock and the price will both fall.

8. A stock index is a. an average of a group of stock prices. b. an average of a group of stock yields. c. a measure of the risk relative to the profitability of corporations. d. a report in a newspaper or other media outlet on the price of the stock and earnings of the corporation that issued the stock.

9. A mutual fund a. is a financial market where small firms mutually agree to sell stocks and bonds to raise funds. 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.

10. Y = C + I + G + NX is an identity because a. each symbol identifies a macroeconomic variable. b. the right-hand and left-hand sides are equal when an equilibrium is reached. c. the equality holds due to the way the variables are defined. d. None of the above is correct.

11. When public saving falls by $2b and private saving falls by $1b in a closed economy, a. investment falls by $1b. b. investment falls by $3b. c. investment increases by $1b. d. investment falls by $2b.

12. Suppose that in a closed economy GDP is 11,000, consumption is 7,500, and taxes are 500. What value of government purchases would make national savings equal to 2,000 and at that value would the government have a deficit or surplus? a. 1,500, deficit b. 1,500, surplus c. 1,000, deficit d. 1,000, surplus

13. For an imaginary closed economy, T = $5,000; S = $11,000; C = $48,000; and the government is running a budget surplus of $1,000. Then a. private saving = $10,000 and GDP = $55,000. b. private saving = $10,000 and GDP = $63,000. c. private saving = $12,000 and GDP = $67,000. d. private saving = $12,000 and GDP = $69,000.

Consumption = $1,000; investment = $200; net exports = -$50; taxes = $230; private saving = $225; and national saving = $150. 14. Refer to Scenario 26-3. This economy's government is running a a. budget deficit of $75. b. budget deficit of $80. c. budget deficit of $50. d. budget deficit of $100

Consumption = $1,000; investment = $200; net exports = -$50; taxes = $230; private saving = $225; and national saving = $150 15. Refer to Scenario 26-3. For this economy, government purchases amount to a. $330. b. $280. c. $305. d. $310.

Consumption = $1,000; investment = $200; net exports = -$50; taxes = $230; private saving = $225; and national saving = $150 16. Refer to Scenario 26-3. For this economy, GDP equals a. $1,480. b. $1,505. c. $1,460 d. $1,455

17. If the inflation rate is 2 percent and the real interest rate is 7 percent, then the nominal interest rate is a. 3.5 percent. b. 5 percent. c. 9 percent d. 7 percent.

18. If the nominal interest rate is 3 percent and the inflation rate is 4 percent, then the real interest rate is a. 7 percent. b. -1 percent. c. 3 percent. d. 4 percent.

19. Other things the same, a government budget deficit a. reduces public saving, but not national saving. b. reduces national saving, but not public saving. c. reduces both public and national saving. d. reduces neither public saving nor national saving.

20. Bolivia had a smaller budget deficit in 2003 than in 2002. Other things the same, we would expect this reduction in the budget deficit to have a. increased both interest rates and investment. b. increased interest rates and decreased investment. c. decreased interest rates and increased investment. d. decreased both interest rates and investment.

21. Crowding out occurs when a. investment declines because a budget deficit makes interest rates rise. b. investment declines because a budget deficit makes interest rates fall. c. investment increases because a budget surplus makes interest rates rise. d. investment increases because a budget surplus makes interest rates fall.

22. The source of the supply of loanable funds is a. saving, and the source of the demand for loanable funds is investment. b. consumption, and the source of the demand for loanable funds is investment. c. investment, and the source of the demand for loanable funds is saving. d. the interest rate, and the source of the demand for loanable funds is saving.

23. Which of the following is included in the demand for loanable funds? a. investment and government borrowing b. investment but not government borrowing c. government borrowing but not investment d. neither government borrowing nor investment

31. The slope of the supply of loanable funds is based on the logic that an increase in interest rates a. makes saving more attractive. b. makes saving less attractive. c. makes investment more attractive. d. makes investment less attractive.

32. If the quantity of loanable funds demanded exceeds the quantity of loanable funds supplied, a. there is a surplus so interest rates will rise. b. there is a surplus so interest rates will fall. c. there is a shortage so interest rates will rise. d. there is a shortage so interest rates will fall.