Macro Tut 4 - Saving, Investment and the Financial System

Multiple Choice: Identify the choice that best completes the statement or answers the question.
1. At the broadest level, the financial system moves the economy’s scarce resources from
a. the rich to the poor.
b. financial institutions to business firms and government.
c. households to financial institutions.
d. savers to borrowers.
2. A perpetuity is distinguished from other bonds in that it
a. pays continuously compounded interest.
b. pays interest only when it matures.
c. never matures.
d. will be used to purchase another bond when it matures unless the owner specifies
otherwise.
3. The prices of stock traded on exchanges are determined by
a. the Corporate Stock Administration.
b. the administrators of NASDAQ.
c. the supply of, and demand for, the stock.
d. All of the above are correct.
4. A high demand for a company’s stock is an indication that
a. the company is in need of funds.
b. the company has recently sold a large quantity of bonds.
c. people are optimistic about the company’s future.
d. people are pessimistic about the company’s future.
Use the following table to answer the following questions.
Table 26-2
Stock Sym Yld % P/E Vol 100s Hi Lo Close Net
Chg.
Boeing Co. BA 1.55 30.48 4,531,600 64.78 63.70 64.62 +.93
Eli Lily and LLY 2.60 29.71 3,765,700 58.98 58.21 58.52 +.16
Co.
H. J. Heinz HNZ 3.30 15.33 1,350,200 36.55 36.26 36.33 +.21
and Co.
Kellog Co. K 2.22 20.50 1,990,600 45.72 45.20 45.50 +.24
5. Refer to Table 26-2. Which company had the highest earnings per share?
a. Boeing Co.
b. Eli Lilly and Co.
c. H. J. Heinz and Co.
d. Kellog Co.
6. Which of the following statements is correct?
a. Stocks, bonds, and deposits are all similar in that each provides a common medium of
exchange.
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.

Page 1 of 4
7. Which of the following are financial intermediaries?
a. both banks and mutual funds
b. banks but not mutual funds
c. mutual funds but not banks
d. neither banks or mutual funds
8. Index funds
a. typically have a higher rate of return and higher costs than managed mutual funds.
b. typically have a higher rate of return and lower costs than managed mutual funds.
c. typically have a lower rate of return and higher costs than managed mutual funds.
d. typically have a lower rate of return and lower costs than managed mutual funds.
9. Index funds
a. buy all the stocks in a given stock index.
b. promise to beat the market by a certain percentage known as an index.
c. provide a return that is adjusted for changes in the consumer price index.
d. buy industries within a particular category of the North American Industry
Classification System.
10. 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
11. 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.
12. The country of Hykenia does not trade with any other country. Its GDP is $20 billion. Its
government collects $4 billion in taxes and pays out $3 billion to households in the form of
transfer payments. Consumption equals $15 billion and investment equals $2 billion. What is
public saving in Hykenia, and what is the value of the goods and services purchased by the
government of Hykenia?
a. -$2 billion and $3 billion
b. $1 billion and $3 billion
c. -$1 billion and $4 billion
d. There is not enough information to answer the question.
13. In a closed economy, public saving is the
a. amount of income that households have left after paying for taxes and consumption.
b. amount of income that businesses have left after paying for the factors of production.
c. amount of tax revenue that the government has left after paying for its spending.
d. sum of A, B, and C.
14. A budget surplus is created if
a. the government sells more bonds than it buys back.
b. the government spends more than it receives in tax revenue.
c. private saving is greater than zero.
d. None of the above is correct.

Page 2 of 4
15. The slope of the demand for loanable funds curve represents the
a. positive relation between the real interest rate and investment.
b. negative relation between the real interest rate and investment.
c. positive relation between the real interest rate and saving.
d. negative relation between the real interest rate and saving.
16. In the loanable funds model, an increase in an investment tax credit would create a
a. shortage at the former equilibrium interest rate. This shortage would lead to a rise in
the interest rate.
b. shortage at the former equilibrium interest rate. This shortage would lead to a fall in
the interest rate.
c. surplus at the former equilibrium interest rate. This surplus would lead to a rise in the
interest rate.
d. surplus at the former equilibrium interest rate. This surplus would lead to a fall in the
interest rate.
17. An increase in the budget deficit
a. makes investment spending fall.
b. makes investment spending rise.
c. does not affect investment spending.
d. may increase, decrease, or not affect investment spending.
18. 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.
19. If the government instituted an investment tax credit, then which of the following would be
higher in equilibrium?
a. saving and the interest rate
b. saving but not the interest rate
c. the interest rate but not saving
d. neither saving nor the interest rate
Figure 26-1. The figure depicts a demand-for-loanable-funds curve and two
supply-of-loanable-funds curves.

S1 S2

Demand

Page 3 of 4
20. Refer to Figure 26-1. Which of the following events would shift the supply curve from S1
to S2?
a. In response to tax reform, firms are encouraged to invest more than they previously
invested.
b. In response to tax reform, households are encouraged to save more than they
previously saved.
c. Government goes from running a balanced budget to running a budget deficit.
d. Any of the above events would shift the supply curve from S1 to S2.

PROBLEM

Problem 1:
Identify each of the following acts as representing either saving or investment.
a. Lan uses some of his income to buy government bonds.
b. Minh takes some of his income and buys mutual funds.
c. Linh purchases a new truck for his delivery business using borrowed funds.
d. Peter uses some of his income to buy stock in a major corporation,
e. Dave hires a builder to construct a new home using borrowed funds.

Problem 2:
Suppose GDP equals $10 trillion, consumption equals $6.5 trillion, the government spends $2 trillion and
has a budget deficit of $300 billion.
a. Find public saving, taxes, private saving, national saving, and investment.
b. Suppose now that the government cuts taxes by $200 billion. In each of the following two scenarios,
determine what happens to public saving, private saving, national saving, and investment.
(1). Consumers save the full proceeds of the tax cut. (2). Consumers save 1/4 of the tax cut and spend the
other 3/4

Problem 3:
Graphically show the impact on the loanable fund in each of the following scenario
a. The economy í in a recession and buinesses begin to expect it will continue indefinitely.
b. Technological advancements increase productivity for firms who make new investements.
c. The Government increases taxes by $100 million and decreases spending by $100 million
d. Hyper inflation increase the incentive for consumers to spend
e. There is a significant increase in business confidence
f. The government increases spending by $1 trillion to fund infrastructure projects like roads, bridges and
upgrades to the electrical grid.

Page 4 of 4