Chapter 13/Saving, Investment, and the Financial System  351

Chapter13
Savi
ng,Inves
tme
nt,andt
heFi
nanc
ialSys
tem
MULTI
PLECHOI
CE

1. Whe nope ningar es

tauranty ouma yneedt
obyovens
,fr
eeze
rs,
tabl
es,
andc
ashr
egi
ster
s.Ec
onomi
stsc
allt
hes
e
expenditur es
a.c apit
a linve st
me nt.
b.i nvestme nti nhuma nc api t
al.
c. busines sc onsumpt i
one xpe ndit
ures
.
d.Noneoft hea bovearec orrect
.
ANSWER:a . ca pit
alinvestme nt.
TYPE:M DI FFICULTY:1SECTI ON:1 3.
0

2. Whe nac ountrys a

ve salar
gerportionofitsGDP ,i
twillhave
a.lessinve s
tme nt
,a ndsohavemor ec api
talandhi gherproducti
vit
y.
b.lessinve s
tment,a ndsohavelesscapitalandhi gherproduct
ivi
ty.
c. morei nvest
me nt,andsoha vemor ecapitalandhigherproducti
vity
.
d.mor ei nvest
me nt,andsoha veles
sc api
tala ndhigherproducti
vit
y.
ANSWER:c . mor einve s
tment,
ands oha vemor ec api
talandhigherproduc
tivi
ty.
TYPE:M DIFFICULTY:1SECTI ON:1 3.0

3. Ins
tit
utionsint hee conomyt ha
the l
ptoma
tchoneper
son'
ssavi
ngwi
thanot
herper
son'
sinv
est
menta
rec
oll
ect
ive
ly
cal
ledthe
a.Fe deralRese rvesystem.
b.ba nkingsys tem.
c. mone tar
ys ys t
em.
d.fina ncialsys t
em.
ANSWER:d. fina ncialsyst
em.
TYPE:M DI FFICULTY:1SECTI ON:1 3.
0

4. Alf
red’sincomee xc
e edshisexpendit
ures
.Alfr
edisa
a.s averwhode ma ndsmone yf r
om thefinancialsystem.
b.s averwhos uppliesmoneyt othefina nc
ials
ystem.
c. borrowerwhode ma ndsmone yfr
om thefinanc ialsys
tem.
d.bor rowerwhode ma ndsmone yfr
om thefinanc ialsys
tem.
ANSWER:b . sa
ve rwhos uppli
e smoneytothefina ncialsyst
em.
TYPE:M DI FFICULTY:1SECTI ON:1 3.
1

5. Lucywa nt
stost
artherownps y
c hiatri
cpract
ice
,buthe rexpendit
uresex
cee
dheri
ncome.
Lucyi
sa
a.s averwhode mandsmone yfrom t hefinanc i
als ystem.
b.s averwhosuppliesmoneytot hefina nci
alsystem.
c. borrowerwhode mandsmone yf r
om t
hefinanc ialsys
tem.
d.bor rowerwhos uppli
esmone yt othefina ncialsystem.
ANSWER:c . bor
rowe rwhodema ndsmone yfrom thefina ncials
yst
e m.
TYPE:M DI FFICULTY:1SECTI ON:13.1

6. A bondisa
a.fina nci
a li
nt er
me diary.
b.c ert
ifica t
eofi ndebtedness.
c.c ert
ifica t
eofpa r
tialownershipi
nanent
erpr
ise
.
d.Noneoft hea bovea r
ec orr
ect
.
ANSWER:b . c
e rt
ific ateofindebtedne
ss.
TYPE:M DI FFICULTY:1SECTI ON:13.1
352  Chapter 13/Saving, Investment, and the Financial System

7. Acertificateofinde
btednes
sthats
pec
ifiest
heobl
iga
tionsoft
hebor
rowe
rtot
hehol
deri
scal
leda
a.bond.
b.stock.
c. mutualfund.
d.Al loft
hea bovearec
orrec
t.
ANSWER:a . bond.
TYPE:M DIFFICULTY:1SECTI ON:1 3.
1

8. Ift
hegovernment’
sexpendit
urese x
ceededit
sr e
ceipts
,itwoul
dli
kel
y
a.lendmone ytoabankorot herfina nci
alinter
me diar
y.
b.borrow moneyfrom abankorot herfinanc i
alinter
media
ry.
c. di
rect
lybuybondsfrom thepublic
.
d.direct
lysel
lbondstothepublic.
ANSWER:d. dir
ectl
ysel
lbondst othepubli
c.
TYPE:M DIFFICULTY:2SECTI ON:1 3.
1

9. IfMi
crosofts el
lsabondt heyare
a.borrowingdi r
ectlyfr
om thepublic.
b.borrowingi ndirectl
yfrom thepubli
c.
c.lendingdi rect
lytothepublic.
d.lendingi ndirec
tlytothepublic.
ANSWER:a . borrowingdi re
ctl
yf r
om thepubl
ic.
TYPE:M DIFFICULTY:2SECTI ON:1 3.1

10. Whi chofthef ollowingiscorrect

?
a.Thema turityofabondr eferstotheamounttobepa i
dba c
k.
b.Thepr incipalofthebondr e
ferstotheper
sonsell
ingthebond.
c. A bondbuy erc a
nnots el
labondbe f
orei
tmatures.
d.Noneoft hea bovea r
ecorrect.
ANSWER:d. No neoft heabovearec or
rect
.
TYPE:M DIFFICULTY:1SECTI ON:1 3.1

11. Whi choft hefol

lowingi sNOTanons ensi
calheadl
ine?
a.Briti
shpe rpetuit
iesaboutt
omat ure.
b.Di s
neyi ss
ue snew bondswithterm of$ 1,
000each.
c. Governme ntbondsc urr
entl
ypayl essi
nterestt
hancorpor a
tebonds.
d.Standa rdandPoor ’sj
udgesnewjunkbondt ohaveveryl ow cr
edi
tris
k.
ANSWER:c . Gove r
nmentbondsc urrentl
ypayl essi
nter
estthanc or
porat
ebonds
.
TYPE:M DIFFICULTY:2SECTI ON:13.1

12. Thel e
ngt hofti
meunti
labondmatur
esi
scal
ledt
he
a.dura t
ion.
b.term.
c. maturit
y.
d.intermediat
ion.
ANSWER:b . t
erm.
TYPE:M DIFFICULTY:1SECTION:13.
1

13. A perpe t
uityisdist
inguishedfrom otherbondsi
ntha
tit
a.pa ysconti
nuous l
yc ompounde dinteres
t.
b.pa ysint
e r
estonl
ywhe nitma tur
es.
c. ne
ve rma t
ures.
d.wi l
lbeus edtopur chaseanotherbondwhe nitmat
ure
sunl
esst
heo
wne
rspec
ifie
sot
her
wis
e.
ANSWER:c . neverma t
ur es
.
TYPE:M DIFFICULTY:1SECTI ON:13 .
1

14. Whi choft hefol

lowingi
sc orrect?
a.Somebondsha veter
msa sshor tasaf
ew mont
hs.
b.Be causetheyaresor
isky,junkbondspa yalow r
ateofi
nteres
t.
c. Corporati
onsbuybondst or ais
efunds.
d.Al loftheabovearec
or rec
t .
ANSWER:a . Somebondsha vet ermsasshorta
safew months.
TYPE:M DIFFI CULTY:1SECTION:1 3 .
1
 Chapter 13/Saving, Investment, and the Financial System  353

15. Whi chofthefoll

o wingiscorrec
t?
a.Lenderssellbondsa ndborrowe r sbuythem.
b.Long-t
e r
m bondsus ual
lypayal owe ri
nter
estr
atet
handoshor
t-t
erm bondsbec
aus
elong-
ter
m bondsar
eri
ski
er.
c.Junkbondsr efertobondstha tha vebeenresol
dma nyt
imes
.
d.Noneoft hea bovea r
ecorrect
.
ANSWER:d. No neoft heabovearec orrect.
TYPE:M DIFFI
CULTY:1SECTI ON:1 3.
1

16. Long-term bondsaregeneral

ly
a.lessri
skyt hanshor
t-t
erm bondsa ndsopayhigherint
erest
.
b.lessri
skyt hanshor
t-t
erm bondsands opaylowerinter
est.
c. moreriskythanshort
-t
erm bondsa ndsopayhigherinter
est.
d.mor eriskythanshort
-te
rm bondsa ndsopaylowerinteres
t.
ANSWER:c . moreris
kythans hort
-te
rm bondsandsopa yhigherint
ere
st.
TYPE:M DIFFICULTY:1SECTI ON: 13.
1

17. Compa redtolong-ter

m bonds ,otherthingsthesame,short
-t
erm bondsge
ner
all
yha
ve
a. mor eri
skands opa yhi gherinterest.
b.lessr i
skands opayl owe rinteres
t.
c.lessr i
skands opayhi ghe rinter
es t
.
d.a boutthesamer iska nds opa yaboutt hesameinte
r e
st.
ANSWER:b . l
essriskands opa ylowe rinte
rest
.
TYPE:M DI FFICULTY:1SECTI ON: 13.1

18. Onwhi chbondi sdef

aultmostl
ikel
y?
a. aj
unkbond
b.amuni c
ipalbond
c. aU.S.governmentbond
d.ac orporat
ebondissuedbyProctorandGambl
e.
ANSWER:a . aj
unkbond
TYPE:M DIFFICULTY:1SECTI ON: 13.
1

19. As sumi ngtha tthebondsbe low ha vet hes a

met erma ndpri
ncipalandt
hatthest
ateorl
ocalgo
vernmentwhi
ch
i
ssuesthemuni cipalbondha sagoodc r
e di
trat
ing,whichl
isthasbondsor
de r
edfrom t
heonetha
tpaysthemost
i
nteresttotheonet hatpaysthel eastinterest
?
a.c orporatebond,muni ci
pa lbond,U. S.gover
nme ntbond
b.c orporatebond,U. S.gover nmentbond,muni ci
palbond
c. muni ci
pa lbond, U.S.gover nmentbond,c or
poratebond
d.U. S.gove rnme ntbond,muni ci
pa lbond,c or
poratebond
ANSWER:b . cor poratebond,U. S .gove rnmentbond,muni ci
palbond
TYPE:M DI FFICULTY:2SECTI ON: 13 .
1

20. Ot herthingsthesame,asthema turi

tyofabondbecomesl
onge
r,t
hebondwi
llpa
y
a.lessintere
stbecausei
tha sles
sr i
sk.
b.lessintere
stbecausei
tha smor eris
k.
c. morei nt
eres
tbecauseithasmor erisk
d.The reisnor e
lat
ionbetwe e
nt ermtoma t
uri
tyandri
sk.
ANSWER:c . moreinter
estbecauseithasmoreri
sk
TYPE:M DIFFICULTY:2SECTI ON: 13.
1

21. Whi chofthef oll

owingbondbuye rsdidNOTbuyt hebondt ha tbestme tthei
robjecti
ve?
a. Miawa ntedabondwi thahi ghinter
estra
te,regardl
e s
soft her i
sk.Shepur chasedajunkbond.
b.Annawa ntedabondt hatwoul dletherbestavoidtaxes.Shepur c
hasedamuni ci
palbond.
c. Bi
llwantedt opurchaseabondt hatwasunl i
kelytoha vedefa ul
t.Hepur chasedabondt ha
tStandar
dsandPoor
’s
ra
tedal owc redi
tris
k.
d.Tor educer i
sk,Tobypur chas
e dalong-t
erm bondr atherthanas hort
-te
r m one.
ANSWER:d. Toreducerisk,Tobypur chas
edal ong-ter
m bondr atherthanas hort-
ter
m one.
TYPE:M DIFFICULTY:1SECTI ON: 13.
1
354  Chapter 13/Saving, Investment, and the Financial System

22. S t
epha nieisi nt
erest
e donlyinther at
eofi
nte
res
tandi
swi
ll
ingt
otakeagr
eatde
alofr
iski
nex
changef
orahi
gh
re
tur n.Shes houldlookforbondswi th
a.t axex empt i
onsa ndshortterms .
b.t axex e
mpt i
onsa ndlongt e
rms .
c. not axex emptionsands hortterms.
d.not axexe mptionsandl ongt e
rms .
ANSWER:d. not axexemptionsa ndlongte
rms.
TYPE:M DI FFICULTY:1SECTI ON: 13.1

23. Muni cipa

lbondspa ya
a.l ow rat
eofinte r
e s
tbecauseofthei
rhigh- defaultri
skandbe causetheinteresttheypayissubj
ecttof eder
a l
i
nc ometa x.
b.l ow rat
eofinte r
e s
tbecauseofthei
rlow- de f
aultris
kandbec aus et
heinteresttheypayisnotsubjecttofederal
i
nc ometa x.
c. highrateofinterestbe
caus eofthe
irhigh- defaultr
iskandbe causefe
de r
alt axesmustbepaidont hei nt
erestthey
pay.
d.hi ghrateofinterestbe
ca useofthe
irlow- defaultri
skandbe causetheinterestthe
ypa yisnotsubj
ec ttofederal
i
nc ometa x.
ANSWER:b . low rateofint
ere s
tbecaus
eoft he i
rlow- def
aultr
iska ndbecauset heinter
estt
heypa yisnots ubj
e c
tto
federalincometa x.
TYPE:M DI FFICULTY:2SECTI ON: 13.
1

24. Whi chbondwouldyoue xpe ctt

opa yt hehighes
tint
ere
str
ate
?
a. abondis
suedbytheU. S.governme nt
b.abondi s
suedbyGene ralMot ors
c. abondis
suedbyNe w YorkSt at
e
d.abondi s
suedbyane wr estaurantchain
ANSWER:d. abondi s
suedbyane wr estaurantcha
in
TYPE:M DIFFICULTY:1SECTON:2 6.
1

25. J er
ryha sthechoiceoftwobonds,onethatpays3pe r
centinter
estandonethatpays6per
centi
nte
res
t.Whi
choft
he
fol
lowingismos tli
kel
y?
a. The6pe rcentbondisle
ssris
kyt hanthe3pe r
c entbond.
b.The6pe rcentbondisaU.S.governmentbond,a ndt he3pe rc
entbondisajunkbond.
c. The6pe rcentbondhasalongertermt hanthe3pe rcentbond.
d.The6pe rcentbondisamuni c
ipalbond, andthe3pe rcentbondisaU.S.governme
ntbond.
ANSWER:c . The6pe rce
ntbondha salonge rt
ermt hanthe3pe rcentbond.
TYPE:M DI FFICULTY:2SECTI ON: 1
3.1

26. La c
ey,afina ncialadvisorhastoldhe rc
lie
nt sthef oll
owingt hi
ngs.Whi c
hofhe rst
atement
sisi
ncor
rec
t?
a.“U.S.gover
nme ntbondsge neral
lyhaveal owe rra t
eofintere
stthanmuni ci
palbonds.
”
b.“Thei nt
ere
strec ei
vedonmos tbondsistaxabl e
.”
c.“U.S.gover
nme ntbondsha vethelowestde f
a ultrisk.
”
d.“Ifyoupurcha s
eabond,youdon’ tha
vet ohol di tunti
litma t
ures.
”
ANSWER:a . “U.S.governme ntbondsge ner
allyha veal owe rra
teofinter
estthanmunici
palbonds
.”
TYPE:M DIFFICULTY:2SECTI ON: 13.
1

27. Thes al
eofstoc
ks
a.andbondst orai
semoneyi scal
leddebtfina nc
e.
b.andbondst orai
semoneyi scal
ledequit
yfina nce.
c.torai
semone yiscal
leddebtfina nce,whi
lethesal
eofbondstorai
sefundsisca
lledequi
tyfinanc
e.
d.torai
s emoneyiscal
ledequit
yfina nce
,whilet
hesaleofbondst
or a
isef
undsiscall
eddebtfinanc
e.
ANSWER:d. tor
aisemoneyiscall
ede qui
tyfina nce
,whilethesal
eofbondstora
isefundsisc
all
edde
btfina
nce
.
TYPE:M DIFFICULTY:1SECTION: 13.1

28. Pa paMa ri
o'sPi
zzaCompanyse
llscommons t
ock.
a. Theyareusi
ngequit
yfina nci
ngandthere t
urns harehol
de r
se ar
nisfix ed.
b.The yareusi
ngequit
yfina nci
ngandthere t
urns harehol
de r
se ar
nde pe
ndsonhow profitabl
ethecompanyi
s.
c. Theyareusi
ngdebtfinancingandtheret
ur nshareholdersearnisfixed.
d.The yareusi
ngdebtfinancingandtheret
ur nshareholdersearndependsonhow pr
ofitablethec
ompanyis.
ANSWER:b . Theyareusi
ngequi
tyfina nci
nga ndther et
ur nsharehol
dersearndepe
ndsonhow profitabl
ethe
companyis
.
TYPE:M DI FFI
CULTY:1SECTION:13.1
 Chapter 13/Saving, Investment, and the Financial System  355

29. S t
ockr epres
ents
a. ac l
aimtotheprofitsofafir m.
b.o wne rs
hipinafir m.
c.e quityfina nc
e.
d.Al loftheabovear
ecorrec
t
ANSWER:d. Alloft
heabovearecorr
ect
TYPE:M DI FFICULTY:1SECTION: 13.
1

30. Pe oplewhobuynewlyiss
uedstockinacorporat
ionsucha sRockwoodPot
ter
ypr
ovi
de
a. debtfinanceandsobec
omepa rtowne r
sofRoc kwood.
b.de btfinanceandsobec
omec redi
torsofRockwood.
c.e quit
yfinanceandsobecomepar townersofRo c
kwood.
d.e quit
yfina nc
eandsobecomec re
ditor
sofRoc kwood.
ANSWER:c . equi
tyfinanceands obecomepa r
to wnersofRockwood.
TYPE:M DI FFI
CULTY:1SECTION:13.1

31. I fHuedepoolBe err

unsintofina nci
aldiffic ul
ty,thes t
ockholdersas
a. partowne r
sofHue depoolarepaidbe f
orebondholdersge tpaidanythingatall
.
b.pa rtowne r
sofHue depoolarepaidafterbondhol
de rsgetpa i
d.
c.c r
editorsofHuedepoolarepa i
dbe f
orebondholdersge tpaidanythinga tal
l.
d.c r
editorsofHuedepoolarepa i
da f
terbondholder
sge tpa i
d.
ANSWER:b . partowner
sofHue depoolarepaidaft
erbondhol dersgetpa i
d.
TYPE:M DIFFI CULTY:1SECTION: 13.
1

32. Pe opl
ewhobuys t
ockinac orporati
ons uchasGe neralEl
e ct
ricbecome
a.c r
editorsofGeneralElect
ric
,sot hebenefit sofholdingthes t
ockde pendonGe ner
alElec
tric
’sprofit s.
b.c r
editorsofGeneralElect
ric
,butt hebenefit sofholdingt hest
ockdonotde pe
ndonGe neralElect
ric’
sprofit s
.
c. partowne r
sofGe neralEl
ectric
,sothebe nefitsofhol dingthestockde pendonGenera
lElectric
’sprofit s
.
d.pa rtowne r
sofGe neralEl
ectric
,butthebe nefitsofhol dingthes t
ockdonotde pe
ndonGe neralEl
ectri
c’sprofits
.
ANSWER:c . partownersofGe neralElect
ric
,sothebe nefit sofholdingthes t
ockdepe
ndonGe neralEl
ectri
c’sprofits
.
TYPE:M DIFFI CULTY:1SECTI ON: 13.1

33. Whi chofthefollowingpe oplepur chasedt

hec orre
ctass
e ttome ett
heirobj
ect
ive?
a. Michel
lewa ntedtobeapar towne rofMa mmaRos a’
sPi zza ,soshepurchase
dabondi ss
uedbyMa mmaRosa’
s
Pi
zza.
b.Tim want e
dahi ghr eturn,eveni fi
tmeantt a
kingsomer isk, sohepurchas
eds t
ockis
suedbySpeci
ficEl
ectr
ic
i
nsteadofbondsi ss
ue db ySpe ci
ficEl ect
ric.
c.Jennif
erwa ntedtobuye qui
t yinHonda ,soshepurcha sedbondss oldbyHonda .
d.Alloft heabovearec orr
ect.
ANSWER:b . Ti
m wa ntedahi ghr et
urn,evenifitmeanttakings omer is
k,sohepur c
hase
ds t
ocki
ssue
dbySpeci
fic
El
ectri
cinste
a dofbondsi s
suedbySpe cificEl ect
r ic
.
TYPE:M DIFFICULTY:1SECTI ON: 13.1

34. Compa redtobonds ,s

toc
ksoffe rt
hehol
der
a.lowerris
k.
b.parti
alownership.
c.theli
keli
hoodofal owerr e
tur
n.
d.Alloftheabovea r
ecorrect
.
ANSWER:b . par
tialownership.
TYPE:M DIFFICULTY:1SECTI ON: 13.
1

35. Thepr i
ceofstoc
ktradedone xchangesarede
termine
dby
a.theCorporat
eStockAdmi nist
rat
ion.
b.NASDAQ.
c.thesupplyandde mandforthes t
ock.
d.Alloftheabovearecorr
ect.
ANSWER:c . t
hesupplyandde mandf orthest
ock.
TYPE:M DIFFI
CULTY:1SECTI ON:13 .
1
356  Chapter 13/Saving, Investment, and the Financial System

36. Whi chofthefol

lowingi snotanimportants
toc
kex
cha
ngei
ntheUni
tedS
tat
es?
a. New YorkSt
oc kExchange
b.Ame ricanSt
oc kExc
ha nge
c. Chi
cagoMe rcant
il
eEx change
d.NASDAQ
ANSWER:c . ChicagoMe rcant
il
eEx cha
nge
TYPE:M DIFFICULTY:1SECTI ON: 1
3.1

37. Al lelsee
qua l
,whe npeoplebecomemor eopt i
misti
ca boutacompany'
sfut
ure
,the
a.s upplyofthes t
ockandthepricewillbothris
e.
b.s upplyofthes t
ockandthepricewillbothfal
l.
c. dema ndforthestockandthepric
ewi llbothri
s e
.
d.de ma ndforthes t
ockandthepric
ewi llbothfall
.
ANSWER:c . dema ndforthest
ockandt hepricewillbothris
e.
TYPE:M DI FFI
CULTY:2SECTI ON: 13.
1

38. S upposethatthegovernme ntfindsama j

orde f
ectinoneofac
ompa
ny’
spr
oduc
tsandde
mandst
hatt
heyt
akei
toff
themarket.
Wewo ulde xpectthatthe
a.s upplyofthestocka ndthepr i
c ewil
lbothrise
.
b.s upplyofthestocka ndthepr i
c ewil
lbothfal
l.
c. dema ndforthestocka ndt hepric
ewi l
lbothrise
.
d. dema ndforthestockandt hepric
ewi l
lbothfal
l.
ANSWER:d. de
ma ndfort hestockandt hepric
ewi l
lbothfal
l.
TYPE:M DIFFICULTY:2SECTI ON: 13.
1

39. Wor l
dWi deDe l
iverySe r
vic
eCor porat
ionde velopsawa ytos peedupt hei
rdeli
ver
iesandr
educ
ethe
irc
ost
s.We
woul
de xpectthatthiswould
a.rai
sethede ma ndf orexi
sti
ngs har
esoft hestock,caus i
ngitspricet
or ise
.
b.decre
a s
et hede ma ndforexi
stingsharesofthes t
ock,c ausingitspr
icetofal
l.
c.rai
sethes upplyoft heexi
sti
ngs haresofstock,causingi t
spr i
cetori
s e
.
d.rai
sethes upplyoft heexi
sti
ngs haresofstock,causingi t
spr i
cetofall
.
ANSWER:a . raisethedemandf ore xi
sti
ngs haresofthes tock,causi
ngitspricet
oris
e.
TYPE:M DIFFI
CULTY:2SECTI ON:13.
1

40. Ot herthi
ngsbeingconsta
nt,whe nabus i
nessissuesmores t
ock,t
he
a.s uppl
yofthestockisgreat
e randt husthepr i
cewillf
a l
l.
b.s uppl
yofthestockislessandt husthepricewi l
lri
se.
c. demandforthestockisgreaterandt husthepricewillri
se.
d.de mandforthestockisles
sandt husthepr i
cewillfa
ll.
ANSWER:a . supplyofthestocki sgreat
erandt husthepricewillf
all
.
TYPE:M DI FFI
CULTY:2SECTI ON: 1 3.1

41. Whi c
hoft hefollowings t
ateme ntsi
smos tli
kelytobec or r
ect?
a. A general
,pe rs
ist
e ntdecl
inei nst
oc kpri
cesisasigna lthatthee c
onomyi sabouttoenteraboom per
iodbe cause
peoplewillbea bletobuys tockforlessmone y
.
b.A ge neral
,pe rs
ist
e ntdecl
inei nst
oc kpri
cesisasigna lthatthee c
onomyi sabouttoenterarec
essi
onbecausel ow
st
ockpr i
cesma yme anthatpe opleareexpect
inglow c orporatepr ofit s
.
c. A general
,pe rs
ist
e ntdecl
inei nst
oc kpri
cesdoesno tt e
llusa nythingaboutt hebusi
ne s
scycl
ebecausest
oc k
pric
escanf al
lformanyr easons.
d.A ge neral
,pe rs
ist
entde cl
inei nst
oc kpri
cesisasigna lthatthee conomyi sabouttoenterarec
essi
onbecausel ow
st
ockpr i
cesme ant hatcorporati
onsha vehadlow pr ofit sint hepa st
.
ANSWER:b . A gene r
al,persi
stentdeclinei
ns t
ockpr i
cesisas ignaltha ttheeconomyisa boutt
oenterarece
ssion
becauselows tockpr i
cesma yme anthatpeopl earee xpec t
inglow corpor
ateprofits.
TYPE:M DI FFICULTY:2SECTI ON 2 6 .
1

42. S t
ockindexesare
a.theave r
ageofagroupofstockpr ic
e s
.
b.theave r
ageofagroupofstockyi el
ds.
c.reportsinthenewspa
pertha treportonthepric
eofthest
ocka ndear
ningsoft
hec
orpor
ati
on.
d.me asuresofther
iskr
ela
tiv
et ot heprofitabil
ityofc
orpora
tions.
ANSWER:a . t
heavera
geofagroupofs tockpri
ces
.
TYPE:M DIFFICULTY:1SECTI ON:1 3.1
 Chapter 13/Saving, Investment, and the Financial System  357

43. TheDow J onesIndus

tri
alAve
ragehasbe
enc
omput
edr
egul
arl
ysi
nce
a.1976.
b.1948.
c.1913.
d.1896
.
ANSWER:d. 1896.
TYPE:M DI
FFICULTY:1SECTI ON: 13.
1

44. TheDow J one sIndus t

rialAve rageisnow ba
sedont
hepr
ice
soft
hes
toc
ksof
a.30ma j
orU. S.corporations.
b.100ma jorU. S.corporations.
c.500repres e
nt a
tiveU.S .corporati
ons.
d.1000repre sentat
iveU. S.corporati
ons.
ANSWER:a . 30ma jorU.S.c orporat
ions.
TYPE:M DIFFI
CULTY:1SECTI ON: 13.1

45. Thes inglemos timport

antpi
eceofi
nfor
mat
iona
boutas
toc
kist
he
a. price-
earni
ngsrati
o.
b.di vidend.
c. volume
d.pr ice.
ANSWER:d. pri
c e
.
TYPE:M DI FFICULTY:1SECTI ON:13.
1

46. Volume ,asreport

edinstoc
ktablesref
e r
stothe
a. numbe rofs har
estr
aded.
b.pe rcenta
geofs har
esoutst
andingtraded.
c. numbe rofs har
estr
adedtime st
hepr ic
etheys
olda
t.
d.numbe rofs har
esofacompanyt radeddivi
dedbyt
heshar
esofal
lcompani
est
rade
d.
ANSWER:a . numbe rofshar
estraded.
TYPE:M DI FFICULTY:1SECTI ON: 13.
1

47. Pr ofitspa idoutt os

tockhol
dersare
a.retai
ne dea rni
ngs.
b.dividends .
c.thede nomi natori
nthepric
e-ear
ningsr
ati
o.
d.Alloft hea bovearec
orrec
t.
ANSWER:b . dividends
.
TYPE:M DIFFICULTY:1SECTI ON: 13.
1

48. Pr ofitsnotpa idouttos tockhol

dersare
a.retai
ne dearnings.
b.knowna sdividends.
c.thede nomina t
orinthepr ice-
ear
ningsra
tio.
d.Alloft heabov ear
ec orrect
.
ANSWER:a . r
etainedearnings.
TYPE:M DIFFICULTY:1SECTI ON: 13.
1

49. A di videndyie
ldisthe
a. dividendasapercenta
geoft hest
ockpr ic
e .
b.s tockpri
ceasape r
centageofthedividend.
c. dividendasapercenta
geoft heret
ainede arni
ngspershar
e.
d.r etai
nedearni
ngspe rshar
ea sthepercentageofthedi
vidend.
ANSWER:a . di
videndasape rcenta
geoft hestockpri
ce.
TYPE:M DI FFICULTY:1SECTI ON: 13.
1
358  Chapter 13/Saving, Investment, and the Financial System

50. MountAda msJaz

zCorporat
ionhasapr
iceof$5
0,adi
vide
ndof$
0.60
,andr
etai
nede
arni
ngsof$
1.00pe
rsha
re.The
di
videndyiel
donthiss
tocki
s
a.3 .
2perc
ent.
b.2pe r
cent.
c.1 .
2perc
ent.
d..8perce
nt.
ANSWER:c . 1.
2perce
nt.
TYPE:M DIFFICULTY:1SECTION: 1
3.1

51. Que enCit

yS ausagest
ockissel
li
nga t$
40pe rs
har
e,i
thasre
tai
nedearningsof$2
.00pe
rsha
rea
nddi
vide
ndsof$
.50
pers
hare
.Wha tisthepric
e-e
arningsra
tioandwhati
sthedi
videndyi
eld?
a.20,1.
25pe r
cent
b.20,6.
25pe r
cent
c.16,1.
25pe r
cent
d.Noneoft heabovearecorr
ect
.
ANSWER:c . 16,1.
25perce
nt
TYPE:M DIFFI
CULTY:3SECTI ON:13.1

52. S t
ockinS ynergyi
sti
cCorpor
ati
oniss
ell
ingat$25pershare.I
tha
dea
rni
ngsof$5as
har
eandadi
vide
ndyi
eldof5
per
cent.Wha tist
hedivi
dendandthepric
e-e
arningsr
atio?
a.$ .
25,5
b.$ .
25,6.7
c.$ 1.
25,5
d.$ 1.
25,6.
7
ANSWER:c . $1.
25,5
TYPE:M DIFFICULTY:3SECTI ON: 1
3.1

53. Bus kinsCor

porat
ionhasissued2milli
onshar
e sofs
toc
ks.The
ire
arni
ngswe
re$
10mi
ll
iondol
lar
sofwhi
cht
hey
re
tained$6mil
li
on.Wha twa sthedi
videndpershar
e?
a.$ 2.
b.$ 3.
c.$ 5
d.Noneoft heabovear
ec orre
c t
.
ANSWER:a . $2.
TYPE:M DI FFI
CULTY:1SECTI ON: 13.
1

54. Ac orporat
ion'
se ar
ningsis
a.theamountofr evenuei trecei
vesforthesal
eofit
sproduct
sminusit
scost
sofproductiona sme as
uredbyi t
s
accountant
smi nusthedi videndspaidout.
b.theamountofr evenuei trecei
vesforthesal
eofit
sproduct
sminusit
sdir
ectandindirectcost
sofpr oduc
tionas
me asur
edb yitseconomi st
smi nusthedivi
dendspaidout
.
c.theamountofr evenuei trecei
vesforthesal
eofit
sproduct
sminusit
scost
sofproductionasme as
uredbyi t
s
accountant
s.
d.theamountofr evenuei trecei
vesforthesal
eofit
sproduct
sminusit
sdir
ectandindirectcost
sofpr oduc
tionas
me asur
edb yitseconomi st
s.
ANSWER:c . theamountofr evenueitrecei
vesf
orthesal
eofit
sproduc
tsminusit
scostsofpr oduct
iona smeasured
byitsaccountants.
TYPE:M DIFFICULTY:2SECTI ON: 1 3.
1

55. Re t
a inedearni ngsare
a. pa i
douta sdividends .
b.t hea mountofr evenue sacorpora
tionrece
ivesf
orthesa
leofit
spr
oduc
tsmi
nusi
tsc
ost
sofpr
oduc
tionas
me asure
db yitsa cc
ount ants
.
c.t hesinglemos timpor tantpie
ceofinfor
ma t
ionaboutast
ock.
d.Noneoft hea bovea recorrect
.
ANSWER:d. No neoft hea bovearecorr
e c
t.
TYPE:M DI FFICULTY:1SECTI ON: 13.
1
 Chapter 13/Saving, Investment, and the Financial System  359

56. Thea mountofr ev enueafir mr e

cei
vesf
ort
hes
aleofi
tspr
oduc
tsmi
nusi
tsc
ost
sofpr
oduc
tionasme
asur
edbyi
ts
ac
countantsisthefir m’s
a.earnings.
b.retai
nede ar nings.
c.economi c,orr eal,profit
.
d.dividend.
ANSWER:a . e
a rnings .
TYPE:M DIFFICULTY:1SECTI ON:13.
1

57. Hi s
tori
call
y,t
hetypi
calpr
ice
-earni
ngsr
ati
oisabout
a.3
b.8
c.15
d.26
ANSWER:c . 15
TYPE:M DIFFICULTY:1SECTION: 13.
1

58. A hi ghpr i
ce-ear
ningsrat
ioindicat
esthateitherthestockis
a. unde r
va l
uedorpe oplehavebe c
omemor eopti
mi sti
ca boutt
hec orporati
on’sprospects.
b.o vervaluedorpe opl
eha vebecomemor eoptimisti
ca boutthecorporati
on’ spr
os pect
s.
c.o vervaluedorpe opl
eha vebecomel e
ssopt imist
ica boutthecorporati
on’sprospe c
ts.
d.unde r
va l
uedorpe oplehavebe c
omel essopt i
misticaboutthecor por
ation’sprospect
s.
ANSWER:b . ove
rvaluedorpeopleha vebecomemor eopt imist
icaboutthec orpora
tion’sprospe
cts
.
TYPE:M DI FFICULTY:1SECTI ON: 13.
1

59. Pa c
knCa mpCor por
ationhasapr iceof$50 ,hasissued2 ,
000,000s ha
resofst
ock,
hasre
tai
nede
arni
ngsof$
2mi
ll
ion
dol
lars,a
ndadividendyi el
dof2pe r
cent.Thepr i
ce-e
arningsratioofPacknCampis
a.5 0,whic
hishighc omparedtohi st
ori
ca lstandardsofthema rket
.
b.5 0,whic
hislow compa re
dt ohist
oric
a lstandardsofthema rket.
c.2 5,whic
hislow compa re
dt ohist
oric
a lstandardsofthema rket.
d.2 5,whic
hishighc omparedtohi s
tori
ca lstandardsofthema rket
.
ANSWER:d. 25,
whi chi shi
ghc ompa r
edtohi storic
alstandardsoft hemarket
.
TYPE:M DIFFICULTY:3SECTI ON: 13.
1

60. Al ow P/Ef oras t

ockindicatesthat
a. peoplema yexpectearningst ofallinthef
utureperhapsbecausethefir m wil
lbef
acedwit
hincr
eased
compe t
iti
on.
b.itsdividendsha vebeenl ow sotha tnooneiswill
ingtopayve rymuc hf
orit.
c.t hecorporat
ionispos s
iblyove rvalued.
d.Al loftheabovea recorrect.
ANSWER:a . peoplema yexpe ctearningstofal
linthefuturepe
rha psbecaus
ethefir m wi
llbef
ace
dwi t
hincr
eas
ed
compe t
it
ion.
TYPE:M DI FFICULTY:1SECTI ON: 13.1

61. S upposeSarahLe eCorpora

t i
onstockhasaP/Er a t
ioof8 .
ThisP/Era
tioi
sre
lat
ive
ly
a.low,indica
tingthatbuyersma yexpec
tearningstor i
se.
b.low,indica
tingthatbuyersma yexpec
tearningstof a
ll.
c. hi
gh,indic
atingthatbuyersma yexpe
ctearningstor i
se.
d.highindicati
ngthatbuye r
sma yexpecte
arningst ofal
l.
ANSWER:b . low,indica
tingthatbuyersmayexpe ctearni
ngstofal
l.
TYPE:M DIFFICULTY:2SECTI ON: 13.
1
360  Chapter 13/Saving, Investment, and the Financial System

Us
ethef
oll
owi
ngt
abl
etoans
wert
hef
oll
owi
ngt
hre
eque
sti
ons
.

St
ock Sym Yl
d% PE Vol100s Hi Lo Clos
e Ne tChg
GenMi l
ls GIS 2.
5 35 13758 44.
3 43.
5 43
.97 –0.63
Gil
lett
e G 2.
2 31 30428 31.
1 29.
7 30 0.1
7
Graco GGG 1.
2 16 705 24.
2 23.
1 23
.95 –0.
5 3
Hershey HSY 2.
1 38 5418 63.
4 61.
7 62
.45 0.
72

62. I ndol
larte
rms,whic
hcompanypaidt
hehi
ghe
stdi
vide
ndpe
rsha
re?
a. GenMill
s
b.Gille
tte
c. Gr
a c
o
d.He rs
hey
ANSWER:d. Hers
hey
TYPE:M DIFFICULTY:3SECTI
ON: 1
3.1

63. Wha twa sHershe

y’se
arni
ngspershar
e?
a.$38
b.$1.64
c.$1.31
d.$0.61
ANSWER:b . $1.
64
TYPE:M DIFFICULTY:3SECTION 26.
1

64. As sumet hattheclosi

ngpricewasal
sothea
vera
gepric
eatwhi
che
achs
toc
ktr
ans
act
iont
ookpl
ace
.Wha
twa
sthe
tot
aldoll
arvol umeofGi l
let
test
ockt
radedt
hatday?
a.$ 912,
840,000
b.$ 91,
284,
0 0
0
c.$ 9,
128,400
d.$ 912,
840
ANSWER:b . $91,284
,000
TYPE:M DIFFICULTY:2SECTI ON 26.1

65. Financi
alint
ermediariesar e
a.thesamea sfina nc ialma rket
s.
b.indi
vidualswhoma keapr ofit sbybuyi ngastocklow andsell
ingithi
gh.
c. amoregeneralnamef orfina nci
alasset
ssucha sstoc
ks,bonds,andchecki
ngaccounts.
d.fina nci
alinsti
tutionst hr
oughwhi chsaversca
ni ndir
ectl
yprovidefundstobor
rowe r
s.
ANSWER:d. fina ncialinsti
tutionsthroughwhi chsaver
sc anindi
rectl
yprovi
defundstoborrowe
rs.
TYPE:M DIFFICULTY:1SECTI ON: 1 3.
1

66. Whi choft hef oll

owi ngiscor r
e ct
?
a.S t
ocks,bonds ,andde pos i
tsareallsi
mila
rint hateachprovidesamedium ofe x
change
b.Ba nksle ndmos tl
ytol argeandf amil
iarcompa niesra
therthansmal
lerlocalfir ms.
c. Banksc ha r
gebor rowe r
sas l
ightl
ylowerinter
e s
tratethantheypayt
ode posi
tor
s.
d.Noneoft hea bovea r
ec orrect
.
ANSWER:d. No neoft heabovea recorrec
t.
TYPE:M DIFFICULTY:1SECTI ON: 13.1

67. Whi chofthefoll

owingisafina nc
iali
nte
rme
diar
y?
a. amutualfund
b.thest
oc kma r
ket
c. aU.
S.governmentbond
d.Noneoft heabovearecor
rect
.
ANSWER:a . amut ualf
und
TYPE:M DIFFI
CULTY:1SECTI ON:13.
1
 Chapter 13/Saving, Investment, and the Financial System  361

68. Whi choft hefollowingi scorrect

?
a. Al arge
,we ll
-knownc orporat
ionl i
kePr oc
torandGa mblet
ypical
lyus
esfinanc
iali
nter
me di
ati
ontofina
nce
expansionofi t
sfactories.
b.Ona verage,i
nde xe
df undsout perf
orm ma nagedfunds.
c. Unlikecorpor a
tebondsa ndstocks,checkingacc
ountsareast
oreofval
ue.
d.Fi nanci
a li
ntermediar i
esa r
eins t
it
utionsthroughwhichsaver
scandir
ectl
ypr
ovi
defundstoborrowe
rs.
ANSWER:b . Ona ve r
age,inde xe
df undsout perfor
m ma na
gedfunds.
TYPE:M DI FFICULTY:1SECTI ON: 13.1

69. Whi chofthefollowingi

sbot hastoreofva
lueandac
ommonme
dium ofe
xchange
?
a.corporat
ebonds
b.mut ualfunds
c.checkingaccountbal
a nce
s
d.Allofthea bovearecorr
ect.
ANSWER:c . checkingacc
ountba lanc
es
TYPE:M DIFFICULTY:1SECTI ON: 13.
1

70. A mut ualfund

a.isafina nc ialma rke
twhe resmal lfir msmut ual
lyagre
etose
llstocksandbondst ora i
sefunds.
b.isfundss eta si
deb ylocalgovernme ntstolendtosmallfirmswhowa nttoinvestinproject
stha
ta r
emut ual
ly
benefic i
a ltothefir ma ndc ommuni ty.
c.sel
lsstocksa ndbondsonbe halfofsma l
la ndle
ssknownfir mswhowo ul
dot herwis
eha vetopayhi ghi
nter
estt
o
obtainc r
edi t.
d.isanins t
it
ut iontha ts
ell
ssha r
est othepubl i
candusesthepr
oceedstobuyas elec
tionofva ri
oustypesofst
ocks,
bonds ,orbot hs t
ocksandbonds .
ANSWER:d. i
sa ni nst
ituti
onthatsellssharestothepubli
candusest
hepr oceedstobuyas electi
onofvarioust
ypesof
s
toc ks,bonds,orboths tocksandbonds .
TYPE:M DIFFICULTY:1SECTI ON:13 .
1

71. Thepr i
ma ryadvant
ageofmut ualfundsisthatthey
a.a l
wa ysma kearet
urnt hat“bea
tsthema rket
.”
b.a l
low peoplewit
hs ma l
lamount sofmone ytodive
rsi
fy.
c. pr
o videcust
omerswi t
hame dium ofexc
ha nge.
d.Al loftheabovearecorrect
.
ANSWER:b . al
low pe
oplewi thsmallamountsofmone ytodive
rsi
fy.
TYPE:M DIFFI CULTY:1SECTI ON: 13.
1

72. Asamone yma nageme ntfe

e,mut ualfundsus uall
ycha r
gethei
rcus
tomers
a. between0.5and2 .
0pe rcentofassetseachyear.
b.be tween1.5and3 .
0pe rcentofassetseachyear.
c. nothi
ng,becausethe yrec
e i
vecommi s
sionsfrom thefir mswhoses
tockt
heybuy
.
d.afla tfeeofabout$ 50.
ANSWER:a . bet
we en0.5and2 .0perc
e ntofa s
setseachyear.
TYPE:M DI FFI
CULTY:1SECTI ON: 13.
1

73. I ti
scla
imedt hatasecondaryadva ntageofmut ua lf
undsisthat
a.a ninvestorcanavoidinvestme ntcharge sandf ees
.
b.theygiv eordinarypeoplea cc
e sstoloana blefundsforinve
sti
ng.
c.theyus ua l
lyoutperf
orms tockma rketindex e
s.
d.theygiveor dinarypeoplea cc
e sstothes kil
lsofpr of
ess
ionalmoneymanager
s.
ANSWER:d. theygiveordinarype oplea c
c e
s stotheskill
sofprofe
ssi
onalmoneymana
ger
s.
TYPE:M DIFFICULTY:1SECTI ON: 13.
1

74. I nde
xfunds
a.typic
a l
lyhaveaboutthesamera teofret
urnasmor eact
ivel
yma nagedfunds.
b.typic
a l
lyhavelowerrat
esofreturnthanmor eact
ivel
yma nagedfunds.
c.contai
nt hest
ocksandbondsf rom asingleSt
andardIndexClassi
fic at
ionofi
ndus
try
.
d.typic
a l
lyhavehigherra
tesofreturnthanmor eac
tive
lyma nagedfunds.
ANSWER:d. typic
all
yhavehigherratesofreturnt
hanmor eacti
velyma na
gedfunds.
TYPE:M DIFFICULTY:1SECTI ON: 13.
1
362  Chapter 13/Saving, Investment, and the Financial System

75. Whi chofthefollowi ngiscor r

ec t
?
a.Joantakessomeofhe rincomea ndbuysmut ualfundshar
e s
. A ma
croeconomi s
tr e
fer
stoJoan'
spur
chaseas
inves
tment.
b.Ifashareofs tocki nVirtualPizz aCorpora
tions e
llsf
or$77,theear
ningspe rshareare$5,andt
hedivi
dedper
shareis$2,the ntheP/Er at
ioi s11.
c.Inordertous ee quityfina nce ,afir m mus tsel
laboute
qualvaluesofstocksa ndbonds.
d.Noneoft hea bo vea r
ecor re
c t
.
ANSWER:d. No neoft heabovea rec orr
ect
.
TYPE:M DIFFICULTY:2SECTI ON: 13.1

76. Thei de
ntit
ythatshowst
hatGDPisbot
htot
ali
ncomea
ndt
ota
lexpe
ndi
tur
eisr
epr
ese
nte
dby
a. GDP=Y.
b.Y=PI+DI+NX.
c. GDP=GNP–NX.
d.Y=C+I+G+NX.
ANSWER:d. Y=C+I+G+NX.
TYPE:M DIFFICULTY:1SECTI
ON: 13.
2

77. Y=C+I+G+NXi sanide nt

itybecause
a.eachsymbolide
ntifie sava r
iable.
b.theri
ght-
handandl ef
t-
ha ndsidesareequal.
c.theequal
it
yholdsduet othewa ythevariabl
esar
edefine d.
d.Noneoftheabovea r
ec orr
ect.
ANSWER:c . theequali
tyholdsduet othewa ytheva
riabl
esar
edefine
d.
TYPE:M DIFFI
CULTY:1SECTI ON: 1
3.2

78. Ac losedeconomydoesnot
a.tradewi t
hot he
re conomies.
b.ha vefr
eema rkets
.
c.a l
low i
mmi grat
ion.
d.Al loft
hea bovearec orr
ect
.
ANSWER:a . t
radewi t
hot herec
onomi
es.
TYPE:M DIFFICULTY:1SECTI ON:13.
2

79. Whi chofthef

oll
owi
ngequat
ionswi
llal
waysr
epr
ese
ntGDPi
nanope
nec
onomy
?
a. S=I–G
b.I=Y–C+G
c. Y=C+I+G
d.Y=C+I+G+NX
ANSWER:d. Y=C+I+G+NX
TYPE:M DIFFI
CULTY:1SECTION:13.
2

80. Whi chofthef

oll
owi
ngequat
ionsmos
tsi
mpl
yre
pre
sent
sGDPi
nac
los
ede
conomy?
a. Y=C+I+G+NX
b.S=I–G
c. I=Y–C+G
d.Y=C+I+G
ANSWER:d. Y=C+I+G
TYPE:M DIFFI
CULTY:1SECTION:13.
2

81. Whi chofthef

oll
owi
ngequat
ionsrepr
ese
ntsna
tionals
avi
ngi
nac
los
ede
conomy?
a. Y–I–G–NX
b.Y–C–G
c. Y–I–C
d.G+C–Y
ANSWER:b . Y–C–G
TYPE:M DIFFI
CULTY:1SECTION:13.
2
 Chapter 13/Saving, Investment, and the Financial System  363

82. I nacl
osedeconomy ,na t
ionalsavingequals
a.inves
tment.
b.incomemi nusthes um ofc onsumptionandgo
ver
nme
nte
xpe
ndi
tur
es.
c. pr
iva
tesavingpluspubl icsaving.
d.Alloftheabovea recorrect
.
ANSWER:d. Alloft
hea bovea r
ec orre
ct.
TYPE:M DIFFICULTY:2SECTI ON: 1 3.
2

83. I nac l
osedeconomy ,nati
onalsavingis
a. usuall
ygr ea
te rthaninvestment.
b.e qualtoinves t
me nt.
c. usuall
ylesstha ninvestmentbe c
auseoft
hel
eaka
geoft
axes
.
d.a lwayslesstha ninvest
ment .
ANSWER:b . equa ltoinvest
me nt.
TYPE:M DI FFICULTY:1SECTI ON: 13.
2

84. I naclos edeconomy ,whatre

mai nsa
fte
rpa
yingf
orc
ons
umpt
ionandgove
rnme
ntpur
chas
esi
s
a. nationaldisposabl
eincome.
b.na tionalsaving.
c. publ i
csaving.
d.pr ivatesaving.
ANSWER:b . nat
ionalsavi
ng.
TYPE:M DI FFICULTY:1SECTI ON: 13.
2

85. I nacl
os edec onomy ,whatdoe
s(T–G)r
epr
ese
nt?
a. na
tionals aving
b.investme nt
c. pr
ivatesavi ng
d.publ i
csavi ng
ANSWER:d. publ ics
a vi
ng
TYPE:M DIFFICULTY:1SECTI ON:13.
2

86. I naclos edeconomy ,wha tdoe

s(Y–T–C)r
epr
ese
nt?
a. nationalsaving
b.go ve r
nme ntt axrevenue
c. publ i
csaving
d.pr ivatesaving
ANSWER:d. pri
va tes
aving
TYPE:M DI FFICULTY:1SECTI ON:13.
2

87. S upposetha
tinac l
osedeconomyGDPi se
qualt
o1 0,
000,Ta
xesar
eequalt
o1,
500
,Cons
umpt
ione
qual
s6,
500,and
Governmentexpendi
turesequal2,
000
.Whati
snati
onalsavi
ng?
a.– 500
b.0
c.1 5
0 0
d.Noneoft heabovearecorre
ct.
ANSWER:c . 1500
TYPE:M DIFFICULTY:2SECTI ON: 13.
2

88. S upposethatinac l
osedeconomyGDPi se
qualto10,
000,Ta
xesar
eequalt
o2 ,
000,Cons
umpt
ione
qual
s6,
500,and
Governmente xpendi
ture
se qual2,
500
.Whatar
epri
vatesavi
ngandpubl
icsaving?
a.1 500and– 500
b.1 500and5 00
c.1 000and– 500
d.1 000and5 00
ANSWER:a . 1 500and–500
TYPE:M DIFFICULTY:2SECTI ON: 13.
2
364  Chapter 13/Saving, Investment, and the Financial System

89. S upposethatinac losedeconomyGDPi se

qualto10,
000
,taxesar
eequalto2,
500Consumpti
onequal
s6,
500a
nd
Governme ntexpendituresequal2,000.
Wha tar
epriva
tesavi
ng,publ
ics
a vi
ng,andnat
iona
lsavi
ng?
a.1 500,
100 0,500
b.1 000,
50 0,150
0
c.5 00,
150 0,100
0
d.Noneoft heabovea recorre
c t
.
ANSWER:b . 1000,500,1500
TYPE:M DIFFICULTY:3SECTI ON: 13.
2

90. S upposetha
tinac los
e deconomyGDPis10 ,
000,c
onsumpti
oni
s6,5
00,andtaxe
sare2,000.Whatva
lueof
Governmentexpe nditure
swoul dmakena
tionalsavi
ngse
qualt
o1000a
nda tthatva
luewo uldt
hegover
nmentha
ve
adefic i
torsur plus?
a.2 ,
500defic it
b.2 ,
500surpl
us
c.1 ,
000defic it
d.1 ,
000surpl
us
ANSWER:a . 2,500de fic i
t
TYPE:M DIFFICULTY:2SECTI ON: 1
3.2

91. S upposethatconsumpti
onis6,
500,t
axesar
e1,
500
,andgo
ver
nme
nte
xpe
ndi
tur
esar
e2,
000.I
fna
tionals
avi
ngsar
e
1,
000andt heeconomyiscl
osedwhatisGDP?
a.9 ,
500
b.1 0,
000
c.1 0
,500
d.Noneoft heabovear
ecorr
ect
.
ANSWER:a . 9,
500
TYPE:M DIFFICULTY:2SECTI ON:13.2

92. Thec ountryofHyka niadoe snottra

dewi thanyothercountry.
ItsGDPis$20bil
lion.I
tsgover
nmentpurcha
ses$
3
bil
li
onwor thofgoodsa nds ervi
ceseac
hye ar
,col
lect
s$3bi l
li
oni nt
axes
,andprovides$2bil
li
onintr
ansf
erpayment
s
tohouseholds.Pri
vates
a vinginHyrkaniais$4bil
li
on.Wha tisinve
stmenti
nHyr kania?
a.$ 4bil
li
on
b.$ 3bil
li
on
c.$ 2bil
li
on
d.The reisno te
noughi nformati
ontoa ns
we rt
heque s
tion.
ANSWER:c . $2bill
ion
TYPE:M DI FFI
CULTY:3SECTI ON 26.
2

93. Thec ount ryofNe me di

adoe snottradewithanyothercountr
y.ItsGDPis$20bil
li
on.It
sgovernmentcol
lec
ts$4
bi
lli
oni ntaxesandpa ysout$ 3bil
li
ont ohouse
holdsintheform oftra
nsf
erpayments
.Consumptionequal
s$15
bi
lli
ona ndi nvest
me ntequals$2bil
lion.Whatispubli
csavi
nginNe medi
a,andwhatistheva
lueofthegoodsand
se
rvicespur chase
db ythegov er
nme ntofNe media?
a.– $2bill
iona nd$ 3bil
lion
b.$ 1bill
iona nd$ 3bil
li
on
c.– $1bill
iona nd$ 4bil
lion
d.The reisno tenoughi nfor
ma t
iontoa ns
werthequesti
on.
ANSWER:a . – $2bil
li
ona nd$ 3bil
li
on
TYPE:M DI FFICULTY:3SECTI ON: 13.
2

94. Thec ountryofAqui l

oni
adoe snott r
adewitha nyothe
rcountry.It
sGDPi s$30bil
li
on.I
tsgover
nmentpurc
hases$5
bil
li
onwor thofgoodsa nds ervic
e se
achyear,col
lec
ts$7bil
li
oni ntaxes
,andprovi
des$3bil
li
onint
ransf
erpayments
tohouseholds.Privat
esavinginAqui l
oniais$5bil
li
on.Wha ti
sc onsumpti
onandinvest
ment?
a.$ 18bil
liona nd$5bil
lion
b.$ 21bil
liona nd$4bil
lion
c.$ 13bil
liona nd$7bil
lion
d.The reisno tenoughinforma t
iontoanswerthequesti
on.
ANSWER:b . $21billi
onand$ 4bi l
li
on
TYPE:M DI FFI
CULTY:3SECTI ON: 13.
2
 Chapter 13/Saving, Investment, and the Financial System  365

95. I nacl
osedeconomy,pri
vatesavingi s
a.theamountofincomet hathous eholdshavel
eftaf
terpa yingforthei
rtaxesandconsumpti
on.
b.theamountofincomet hatbusine ss
eshavelef
taft
erpayi ngforthefactor
sofproducti
on.
c.theamountoftaxrevenuetha tthegovernmenthaslefta ft
erpayingforitss
pending
.
d.alwaysequalt
oinvest
me nt.
ANSWER:a . t
hea mountofincomet ha thouse
holdshavelefta f
terpayingforthe
irt
axesandconsumpt
ion.
TYPE:M DIFFICULTY:1SECTION: 13.
2

96. I nacl
osedeconomy,publi
cs a
vingi st
he
a.amountofincomet ha
thous eholdshavel
eftaf
terpayingf ortaxesandcons umption.
b.amountofincomet ha
tbus i
ne s
seshavele
ftaft
erpayingf orthefact
orsofpr oduction.
c.amountoft a
xrevenuethatthegov er
nmenthasleftaft
e rpayingforit
sspe nding.
d.sum oft
heA,B,a ndC.
ANSWER:c . amountoft axrevenuethatthegover
nme ntha sleftaf
terpayingforitsspe ndi
ng.
TYPE:M DIFFI
CULTY:1SECTI ON: 13.
2

97. Whi choft hefoll

owingi snota l
wa yscorre
c ti
naclosedec
onomy?
a. Nati
ona lsa
vingequa lsprivatesavi
ngpl uspubli
csavi
ng.
b.Ne texportsequalze r
o .
c. Re
a lGDPme asuresbothi ncomea nde xpendi
tures
.
d.Privatesavingequalsinvestme nt.
ANSWER:d. Pri
vatesavinge qual
si nvest
me nt.
TYPE:M DIFFICULTY:1SECTI ON: 13.2

98. I ft
het axrevenueofthefeder
algover
nme
nte
xce
edss
pendi
ng,t
hent
hegover
nment
a.r unsabudge tdefic it
.
b.r unsabudge tsurpl
us .
c.r unsana ti
onaldebt.
d.wi llinc
reasetaxe
s.
ANSWER:b . runsabudge tsur
plus.
TYPE:M DI FFICULTY:1SECTI ON: 13.
2

99. A budge tsurplusi

screatedif
a.t hegovernmentsell
smor ebondsthanitbuysba
ck.
b.t hegovernmentspendsmor ethanitr
eceive
sintaxr
eve
nue
.
c. priva
tesavi
ngsa r
egr eat
erthanzer
o.
d.Noneoft heabovearecorrect
.
ANSWER:d. Noneofthea bovearecor
rect
.
TYPE:M DI FFICULTY:1SECTI ON: 13.2

100.I nt
helanguageofma c
roeconomics,i
nvest
mentre
ferst
o
a.savi
ng .
b.thepurchaseofnewc apit
al.
c.thepurchaseofst
ocks,bonds,ormutualf
unds.
d.Alloftheabovearecorrect
.
ANS WER:b. thepurc
haseofne wc api
tal
.
TYPE:M DIFFICULTY:1SECTI ON: 13.
2

101. Whichoft hefollowingwo uldamac r

oe c
onomistc
ons
ide
rasi
nve
stme
nt?
a. Ernestpurcha s
esabondi ssuedb yS t
ar-
Kis
t.
b.J err
ypur c
ha sesstockissuedb yIBM.
c. Alicebui
ldsane wr estaurant
.
d.Al loftheabov ea r
ec orrect
.
ANS WER:c . Alicebuildsane wr e
staurant.
TYPE:M DI FFICULTY:1SECTI ON: 13.2

102. Henrybuysabondi ssuedbyRalstonPurina,whichus e

sthef
undst
obuyne
w mac
hine
ryf
oroneofi
tsf
act
ori
es.
a. Henr
ya ndRalstonPurinaarebothinvesti
ng.
b.He nr
ya ndRa l
stonPurinaarebothsaving.
c. Henr
yisinvesti
ng;Ralst
onPur i
naissaving.
d.He nr
yissaving;Rals
tonPurinaisinvesti
ng.
ANS WER:d. Henryissaving;Ral
stonPurinaisinves
ting.
TYPE:M DIFFI
CULTY:2SECTI ON: 13.
2
366  Chapter 13/Saving, Investment, and the Financial System

103. Thesourceofthes upplyofl oanabl

efunds
a.issavingandt hesour ceofde mandforloanablefundsisinves
tment.
b.isinvest
me ntandt hes ourceofdemandf orloanablefundsissavi
ng.
c.andt hedema ndf orloanabl ef
undsissaving.
d.andt hedema ndf orloa nablef
undsisinvestment.
ANS WER:a. issavi
nga ndthes ourceofdema ndforloanablefundsisi
nvest
ment
.
TYPE:M DIFFICULTY:1SECTI ON: 1
3.2

104. Theslopeofthede mandforloanablef undscurverepr

es e
nt st
he
a. posit
ivere
lati
onbetweenther ealinter
estrat
eandinve stment
.
b.ne gati
verela
tionbetweenther eali
nteres
trateandinvestment.
c. posit
ivere
lati
onbetweenther ealinter
estrat
eands aving.
d.ne gati
verela
tionbet
we enther ea
linteres
trateandsaving.
ANS WER:b . negat
ivere
lati
onbe tweent hereali
nter
estr
a t
eandi nvest
ment
.
TYPE:M DI FFI
CULTY:1SECTI ON: 13.3

105.F r
edisconsideri
ngex pandinghisdr essshop.Ifi
nter
estrat
esr i
s eheis
a.le
sslikel
yt oexpand.Thisil
lus t
rateswhyt hesupplyofloana bl
ef undsslopesdownwar d.
b.mor eli
kelytoexpa nd.Thi
si l
lustra
teswhyt hesupplyofloa nablefundss l
opesupwa r
d.
c.le
sslikel
yt oexpand.Thisil
lus t
rateswhyt hedema ndforloana bl
ef undsslopesdownwa rd.
d.mor eli
kelytoexpa nd.Thi
si l
lustra
teswhyt hedema ndforl oanablefundss l
opesupwar d.
ANS WER:c. lessl
ikel
yt oexpand.Thi sill
ust
rateswhythede ma ndf orloanablefundssl
opesdownwa
rd.
TYPE:M DIFFICULTY:1SECTI ON: 13.
3

106. TheEyeofHor usi ncens

ec ompa nyhas$1 0mi l
lioninc ashwhi chithasa cc
umul a
tedfrom retainedearnings.Itwas
planningt ouset hemone yt obuildane wf ac
tory .Rec
ent l
y,therateofinter
e s
tha sinc
reased.Thei ncreaseintherate
ofinterestshould
a. noti nflue nc ethede c
isiontobuildthefactor ybecauseTheEyeofHor usdoe sn’
thavet oborrow a nymone y.
b.noti nflue nc ethede c
isiontobuildthefactor ybecauseitsstockholder
sar eexpecti
ngane wf act
or y.
c. ma kei tmor eli
ke l
ythatTheEy eofHor uswi llbui
ldt hefact
or ybecauseahi gherinte
restratewi l
lma kethe
factorymor eva luabl
e.
d.ma kei tle
sslike l
ythatTheEyeofHor uswi llbuildthef act
orybe causetheoppor t
unityc ostofthe$ 10mill
ionis
now hi gher.
ANS WER:d. ma keitlessli
kelythatTheEy eofHor uswi llbuil
dt hefact
orybe causetheoppor tunitycostofthe$1 0
mill
ioni snow highe r
.
TYPE:M DI FFI CULTY:3SECTI ON: 13.
3

107. Theslopeofthesuppl
yofloana bl
ef undscurverepres
e ntsthe
a. posit
iverel
ati
onbet
we ent
her ealinter
estrat
ea ndinve st
ment .
b.pos it
iverel
ati
onbet
we e
nther ealinter
estrat
ea ndsaving.
c. negati
verel
ati
onbetweenther eali
nteres
trateandinv estment.
d.ne gati
verel
ati
onbetweenther ea
linteres
trateands aving.
ANS WER:b . posi
ti
vere
lat
ionbetwe entherealint
e r
estr
a t
ea nds aving.
TYPE:M DI FFI
CULTY:1SECTI ON:1 3.3

108. Ahigherint
erestrat
ei nduce
spe oplet o
a.savemor e,s
ot hesupplyofl oana bl
efundssl
opesupward.
b.saveless
,sot hesupplyofloana blefundssl
opesdownwa r
d.
c.investmore,sothes uppl
yofl oa nabl
efundssl
opesupwa r
d.
d.investl
ess,sothesupplyofl oana bl
efundssl
opesdownwa rd.
ANS WER:a. savemor e,sothesuppl yofloanabl
efundssl
opesupwa r
d.
TYPE:M DIFFICULTY:1SECTI ON: 13.3

109. Thesupplyofloanabl
ef undsslopes
a. upwa r
dbec a
us eanincreas
ei ntheint
eres
tratei
nduc e
spe opl
etos a
vemor e.
b. downwa r
dbe c
ausea ninc
re as
eintheinte
restra
teinducespeopletosaveless
.
c. downwa r
dbe c
ausea ninc
re as
eintheinte
restra
teinducespeopletoinves
tless.
d. upwa r
dbec auseanincreas
ei ntheint
eres
tratei
nduc e
spe opl
etoinvestmor e
.
ANS WER:a. upwa rdbecauseani ncre
aseintheint
erestr
ateinducespeopletosavemore
.
TYPE:M DIFFICULTY:1SECTI ON: 13.3
 Chapter 13/Saving, Investment, and the Financial System  367

110.I fthecur
rentma r
ketinte
re s
trat
ef orloanablef undsi sbel
ow theequil
ibri
um l
eve l
,thent
hequa nt
it
yofloanabl
e
funds
a. demande dwille
xceedt hequant i
tyofl oana bl
ef undssuppli
eda ndtheint
erestrat
ewillr
ise
.
b.s uppl
iedwi l
lexc
ee dthequa ntit
yofl oanablefundsde mandeda ndtheint
erestrat
ewillr
ise
.
c. demande dwille
xceedt hequa nti
tyofl oana bl
ef undssuppli
eda ndtheint
erestrat
ewillf
all
.
d.s uppl
iedwi l
lexce
e dthequant it
yofl oanablef undsde mandeda ndtheint
erestrat
ewillf
all
.
ANS WER:a . demandedwi llexc
ee dthequa ntityofl oanabl
efundss uppli
edandt heint
ere
strat
ewi l
lri
se.
TYPE:M DI FFI
CULTY:2SECTI ON: 13.3

111.I ft
hec urr
entma rke ti
nter
es trat
eforloanablef
undsisabovetheequil
ibri
um level,then
a.thequa nti
tyofl oanablef undsdemande dwi l
lexc
eedthequantit
yofl oanabl
ef undssuppli
edandthei
nter
est
ratewil
lrise
.
b.thequant i
tyofl oanablef undssuppliedwille
xceedthequant
ityofloanablefundsde mandedandthei
nter
est
ratewil
lrise
.
c.thequant i
tyofl oanablef undsdema ndedwi l
lexc
eedthequantit
yofl oanabl
ef undssuppli
edandthei
nter
est
ratewil
lfall
.
d.t hequantit
yofl oanablef undssuppliedwille
xceedthequant
ityofloanablefundsde mandedandthei
nter
est
ratewil
lfall
.
ANS WER:d. t
hequa nti
tyofloana bl
efundss uppli
edwi l
lexc
eedthequa nt
ityofloana bl
efundsdemandedandthe
i
nterestrat
ewi llfall
.
TYPE:M DI FFI
CULTY:2SECTI ON: 13.
3

112.I ft
hec urr
entma r
ketintere
stra
teforloanablefundsisbe l
ow theequi
li
bri
um l
eve
l,t
hent
her
eisa
a.s urpl
usofloanablefundsandt heinter
estratewillri
se.
b.s hort
ageofloanablefundsandt heint
erestratewillri
se.
c.s hort
ageofloanablefundsandt heint
erestratewillf
all.
d.s urpl
usofloanablefundsandt heinte
restratewillfal
l.
ANS WER:b . s
hortageofloanabl
efundsandt heinter
estratewil
lri
se.
TYPE:M DI FFI
CULTY:2SECTI ON: 13.
3

113.I ft
hec urr
entma r
ketintere
stra
teforloanablefundsisabovetheequi
li
bri
um l
eve
l,t
hent
her
eisa
a.s urpl
usofloanablefundsandt heinter
estrat
ewi l
lris
e.
b.s hort
ageofloanablefundsandt heint
erestra
tewi l
lris
e.
c.s hort
ageofloanablefundsandt heint
erestra
tewi l
lfal
l.
d.s urpl
usofloanablefundsandt heinte
restrat
ewi l
lfal
l.
ANS WER:d. s
urplusofloanabl
efundsa ndt heinter
estrat
ewillf
all
.
TYPE:M DI FFI
CULTY:2SECTI ON: 13.
3

114.I ft
he r
eiss hortageofl oanablefunds ,the
n
a.t hesuppl yforl oanablefundsshi ft
srighta ndt hedemandshift
slef
t.
b.t hesuppl yforl oanablefundsshi ft
slefta ndthede mandshif
tsri
ght.
c. neit
he rcurves hif
t s
,butthequa nt i
tyofl oanablefundssuppl
iedincr
easesandthequant
it
ydemandeddecr
eases
asthei nter
estr at
er i
sestoequilibrium.
d.ne it
he rcurves hif
t s
,butthequa nt i
tyofl oanablefundssuppl
ieddecreas
esandthequanti
tydemande
dincr
eases
asthei nter
estr at
ef al
lstoequil
ibr i
um.
ANS WER:c . nei
the rcurves hi
fts
,butt hequa nt i
tyofloanabl
efundssuppli
edi nc
reas
esandthequa
nti
tydemanded
decreasesasthei nt
erestr a
terisestoe quil
ibr
ium.
TYPE:M DI FFICULTY:3SECTI ON: 13.
3

115.I ft
he r
eiss urplusofloanablefunds,then
a.t hesuppl yforloanablefundsshif
t sri
ghta ndthede mandshift
slef
t.
b.t hesuppl yforloanablefundsshif
t slef
ta ndthede mandshif
tsri
ght.
c. neit
he rcurveshifts
,butthequa ntityofloanablefundssuppl
iedincr
easesandthequant
it
ydemandedde c
reas
es
asthei nter
estrateri
sestoequili
brium.
d.ne it
he rcurveshifts
,butthequa ntityofloanablefundssuppl
ieddecreas
esandthequanti
tyde
ma ndedinc
reas
es
asthei nter
estratefal
lstoequil
ibrium.
ANS WER:d. nei
thercurves hi
fts
,butthequa nt i
tyofloanabl
efundssuppli
eddec r
ease
sandthequant
itydemanded
i
ncreasesastheinteres
tratefall
st oequil
ibri
um.
TYPE:M DI FFICULTY:3SECTI ON: 13.
3
368  Chapter 13/Saving, Investment, and the Financial System

116. Thenomi na li
nteres trateisthe
a.int
e r
es tratecorr ect
e dforinfla tion.
b.int
e r
es trateasus uall
yr eporte
db yba nks
.
c.realrateofr etur ntot helender.
d.realcos tofbor rowi ngtot heborrower.
ANS WER:b. i
nter
e str at
ea susua l
lyreport
e dbyba
nks
.
TYPE:M DIFFICULTY:1SECTI ON: 1
3.3

117.I ft
henomi nalint
eres
tra
tei
s5perc
enta
ndt
her
ateofi
nfla
tioni
s2pe
rce
nt,t
hent
her
eali
nte
res
tra
tei
s
a. 7pe r
cent.
b.3pe r
cent.
c.2 .
5pe rc
ent.
d.2 /5pe r
cent.
ANS WER:b . 3perce
nt.
TYPE:M DI FFICULTY:1SECTION:1
3.3

118.I ft
hei nflationrat
eis2pe
rce
ntandt
her
eali
nte
res
tra
tei
s3pe
rce
nt,t
hent
henomi
nali
nte
res
tra
tei
s
a. 5pe r
cent.
b.1pe r
cent.
c.1 .
5pe rc
ent
d.2 /3pe r
cent.
ANS WER:a . 5perce
nt.
TYPE:M DI FFICULTY:1SECTION:13.
3

119.I ft
henomi nalint
erestr
atei
s10perc
enta
ndt
hei
nfla
tionr
atei
s4pe
rce
nt,t
hent
her
eali
nte
res
tra
tei
s
a.1 4pe rc
e nt.
b.6pe r
cent .
c.2 .
5pe rcent.
d.4 /10pe rcent.
ANS WER:b . 6percent
.
TYPE:M DI FFICULTY:1SECTI ON:13.
3

120. Thenominalint
eres
tra
teis6perc
enta
ndt
her
eali
nte
res
tra
tei
s2pe
rce
nt,wha
tist
hei
nfla
tionr
ate
?
a. 8per
cent
b.4pe r
cent
c. 3per
cent
d.Noneoft heabovear
ecorr
ect.
ANS WER:b. 4perce
nt
TYPE:M DIFFICULTY:1SECTION: 1
3.3

121. Gene
rall
ywhe ne conomistsandt het
exttal
kofthe"
int
ere
str
ate
,"t
heya
ret
alki
ngaboutt
he
a.reali
ntere
strate.
b.curre
ntnomi nalinter
estrate.
c.reali
ntere
strateminust heinfla t
ionrat
e.
d.equil
ibri
um nomi nalinter
estrat
e.
ANS WER:a. reali
nteres
trate.
TYPE:M DIFFICULTY:1SECTI ON: 13.
3

122. Wha twouldhappeni nthemar ketf

orl
oanabl
efundsifthegove
rnme
ntwe
ret
oinc
reas
ethet
axoni
nte
res
tinc
ome
?
a. Thesuppl
yofl oanablefundswouldshi
ftri
ght.
b.Thede mandf orl
oa nablefundswoulds
hiftri
ght.
c. Thesuppl
yofl oanablefundswouldshi
ftl
e f
t.
d.Thede mandf orl
oa nablefundswoulds
hiftlef
t.
ANS WER:c . Thesuppl yofloanablef
undswoulds hi
ftl
eft
.
TYPE:M DI FFI
CULTY:2SECTI ON: 13.
3
 Chapter 13/Saving, Investment, and the Financial System  369

123. Wha twouldhappeni nthema rketf

orloanablefundsifthegovernmentwe r
etodecr
easet
hetaxr
ateonint
ere
st
i
ncome ?
a. Thesupplyofandde mandf orloanablefundswoul dshi
ftri
ght.
b.Thes upplyofandde ma ndforloanablefundswoul dshi
ftle
ft.
c. Thesupplyofloanablefundswoul dshif
trightandthedema ndforloanabl
efundswoulds
hif
tlef
t.
d.Noneoft hea bovearecorre
c t
.
ANS WER:d. No neofthea bovearecorr
ect.
TYPE:M DI FFI
CULTY:2SECTI ON: 13.
3

124.S upposet hatthego ve

r nmentwe retorepl
acethei
ncomet
axwi
thac
ons
umpt
iont
ax.Thi
swoul
dmaket
hei
nte
res
t
ra
te
a.a ndinv est
me ntincrease.
b.a ndinve st
me ntde cre
ase.
c.inc r
eas eandinve s
tme ntdecrease.
d.de creaseandi nvestmentincrease.
ANS WER:d. decr
easea ndinvest
me nti
ncre
ase.
TYPE:M DI FFICULTY:3SECTI ON: 13.
3

125. Whic hofthefol

lowingwo uldnotbear e
sultofreplac
ingt
hei
ncomet
axwi
thac
ons
umpt
iont
ax?
a. Theinter
estrat
ewoul dde c
rease
.
b.I nves
tmentwo ulddecrease.
c. Thestandardoflivi
ngwoul deventual
lyris
e .
d.Thes upplyofloanablefundswoul dshif
tright.
ANS WER:b . I
nvestmentwouldde creas
e.
TYPE:M DI FFI
CULTY:1SECTI ON: 13.
3

126.I n1995CongresspersonBi l
lAr cherproposedtha tt
heincomet axbereplacedwithacons
umpti
ont
ax.I
fhi
spr
ogr
am
hadbe enpass
ed,thent odayitislike
lythatthee quil
ibr
ium int
e r
estra
te
a.a ndqua nt
it
yofl oanablefundswoul dbel ower.
b.a ndqua nt
it
yofl oanablefundswoul dbehi gher
.
c. wouldbehi gherandt hee quil
ibr
ium qua ntit
yofloanablefundswoul dbelower
.
d.wo ul
dbel owerandt hee quili
bri
um qua nti
tyofloanablefundswoul dbehigher
.
ANS WER:d. wouldbel owe randt heequil
ibri
um qua nti
tyofloanablefundswouldbehigher
.
TYPE:M DI FFICULTY:2SECTI ON: 13.3

127. Whatwoul dhappeninthema rketf

orl oana
blefundsifthegove
rnme
ntwe
ret
oinc
rea
set
het
axoni
nte
res
tinc
ome
?
a.Inte
restrat
eswouldrise
.
b.Inte
restrat
eswouldbeuna ffe cted.
c.Inte
restrat
eswouldfall
.
d.Thec hangeinthei
nteres
tratewo uldbea mbiguous.
ANS WER:a. Int
eres
trat
eswoul drise
.
TYPE:M DIFFICULTY:2SECTI ON: 13.
3

128. Wha twouldhappeni

nt hema rketforloanabl
efundsifthego ve
rnme ntwer
etodec
reas
ethet
axoni
nte
res
tinc
ome
?
a. Therewouldbeanincreaseinthea mountofloanablefundsborrowed.
b.The rewouldbeareduc t
ionintheamountofl oanablefundsborrowed.
c. Therewouldbenocha ngeinthea mountofloanablefundsborrowed.
d.Thec hangeinl
oanablefundsbor rowedwouldbea mbiguous.
ANS WER:a . Therewoul
dbea nincreaseintheamountofl oanablef
undsborrowe
d.
TYPE:M DI FFI
CULTY:2SECTI ON: 13.
3

129.I fCongres
sr educedthetaxr a
teoni nt
ere
stinc
ome
,inve
stme
nt
a. wouldincreaseandsavingwo ulddecr
ease
.
b.woul dde creas
ea nds
a vingwoul dincr
ease
.
c.a ndsavingwoul dinc
r ease.
d.a ndsavingwoul ddecrease.
ANS WER:c . ands a
vingwoul dincrease
.
TYPE:M DI FFI
CULTY:2SECTI ON: 13.
3
370  Chapter 13/Saving, Investment, and the Financial System

130.S upposeac ountryha sac onsumpt iont axt

ha tiss i
mila
rtoas t
atesal
estax
.Ifit
sgov
ernmentel
iminat
esthe
consumptiontaxa ndr eplace
si twitha nincomet axthati
ncl
ude sa
ni nc
omet axoni
nter
estf
rom s
a vi
ngs
,what
happens?
a. Thereisnoc hangeint hei nte
restrateorsa ving.
b.Thei nteres
tra t
ede crease
sa nds avingincre ases
.
c. Theinteres
tra t
eincreasesa nds avi
ngde cre ases
.
d.Noneoft hea bovear ecorrect
.
ANS WER:c . Theinterestrateincreasesands avingde creas
es.
TYPE:M DI FFI
CULTY:3SECTI ON: 13.3

131.S upposetheU.S.governmentall
owedtax pa
ye r
st oe arntheirfir st$5,
000ofi
nte
res
tinc
omet
axf
ree
.Thi
swoul
dshi
ft
the
a.s uppl
yforloanablefundsri
ghtmaki nginter
es tratesf
a l
l.
b.s uppl
yofloanablefundslef
tma ki
ngi nt
e r
estra t
esr i
se.
c. demandforloanablefundsri
ghtma kingthei nterestr
a t
erise.
d.de mandforloanablefundslef
tmakingt heinte r
e s
tratefal
l.
ANS WER:a . supplyforloanabl
efundsrightma kingi ntere
stratesfal
l.
TYPE:M DI FFI
CULTY:2SECTI ON:13.3

13
2. Othe
rthingsthesame ,c
ount riesthattaxs avinglesswi l
lhave
a.lowerinter
estrat
esa ndhi gheri nvest
me ntthanot hercountri
es.
b.lowerinter
estrat
esa ndl owe rinvest
me ntthanot hercountri
es.
c. hi
gherinte
restra
tesa ndhi ghe rinvest
me ntthanot hercountr
ies.
d.higherinte
restra
tesa ndl owe rinvest
me ntthanot hercountri
es.
ANSWER:a . lowerinter
estr a
tesa ndhi gheri nvestmentt hanothercount
ries
.
TYPE:M DIFFICULTY:2SECTI ON: 13.3

133. Whichoft hef oll

owi ngi sincorrect?
a. Ame r
ic anfa mil
iess aveal argerfrac
tionofthei
rincome st hant
he i
rc ounterpart
sinma nyothe
rcountr
iessuchas
Germa nyandJ apa n.
b.S a
vingi sa nimpor tantlong-runde t
erminantofana ti
on’ss t
andardofl i
ving .
c. Acha ngei nthet axl awt hatencouragedgreat
ersavingwoul dlowe rint
erestrat
es.
d.Ta xe
soni nteres
ti ncomec ans ubst
antial
lydecr
easethef uturevalueofc urrentsavi
ng.
ANS WER:a. Ame ri
canf amiliessavealargerfra
cti
onoft hei
ri ncomest hantheircounterpar
tsi
nma nyothe
rc ount
rie
s
suc hasGe rmanya ndJ apa
n.
TYPE:M DIFFICULTY:1SECTI ON: 13.
3

134.S upposethatCongre
s sweretoi nst
it
uteaninves
tme nttaxcr
edit
.Wha
two
uldhappe
nint
hemar
ketf
orl
oanabl
e
funds
?
a. Thede mandforl
oa nabl
ef undswoul dshi
ftlef
t.
b.Thes upplyofloanabl
ef undswoul dshif
tlef
t.
c. Thedema ndforl
oa nabl
ef undswoul dshi
ftri
ght.
d.Thes upplyofloanabl
ef undswoul dshif
tri
ght.
ANS WER:c . Thedema ndforloanablefundswoulds hi
ftri
ght.
TYPE:M DI FFI
CULTY:1SECTI ON: 13.3

135.S upposethatCongre
s sweretor epealaninvest
me ntta
xc re
dit.Wha
twoul
dha
ppe
nint
hemar
ketf
orl
oanabl
e
funds
?
a. Thede mandands upplyofl oanabl
efundswoul ds hi
ftri
ght.
b.Thede ma ndands upplyofl oanabl
efundswoul ds hi
ftl
eft
.
c. Thesupplyofloanabl
ef undswoul dshiftri
ght.
d.Thede ma ndforl
oa nabl
ef undswoul ds hi
ftl
eft.
ANS WER:d. Thedema ndforloanablefundswoul dshiftl
eft
.
TYPE:M DI FFI
CULTY:1SECTI ON: 13.3

136. Acountr
yrepe al
e dit
sinvestme nttaxcredit
.Theeffe c
tsofthisarere
pres
entedbyshif
ti
ngt
he
a. demandf orandt hesupplyofl oanablefundst
otheright.
b. demandf orandt hesupplyofl oanablefundst
otheleft
.
c.supplyofloana bl
efundst other i
ghta ndthedemandforloanablef
undstothele
ft.
d.Noneoft hea bovearecorrect.
ANS WER:d. No neofthea bovearec orr
ect.
TYPE:M DIFFI
CULTY:2SECTI ON: 13.3
 Chapter 13/Saving, Investment, and the Financial System  371

137.I fCongres
sins t
itut
edaninvest
me ntt
axcr
edi
t,t
hei
nte
res
tra
tewoul
d
a.r i
seands avingwouldris
e.
b.f al
landsavingwoul dfal
l.
c.r i
seands avingwouldfal
l.
d.f a
llandsavingwoul dri
se.
ANS WER:a . r
isea ndsa
vingwoul dri
se.
TYPE:M DI FFI
CULTY:2SECTI ON: 13.
3

138.S upposeCongr es
sinsti
tutesaninves
tmenttaxc r
edi
t.Whatwoul
dha
ppe
nint
hemar
ketf
orl
oanabl
efunds
?
a. Theinte
re s
trat
ea ndinvestmentwouldfall
.
b.Thei nte
re s
trat
ea ndinvestmentwouldrise.
c. Theinte
re s
trat
ewoul dr i
seandinves
tme ntwoul
df al
l.
d.Noneoft heaboveisnecessar
ilyc
orre
ct.
ANS WER:b . Thei nte
restrat
ea ndinve
stmentwoul dr
ise.
TYPE:M DI FFI
CULTY:2SECTI ON: 13.
3

139. Apoorc ountrydecidestoinsti

tuteaninvestmenttaxc
redi
t.Asar
esul
t
a.i nt
erestr
atesr
iseandi nvest
me ntfal
ls.
b.i nt
erestr
atesf
allandinve s
tme ntri
ses.
c. bothinter
estr
atesandi nvest
me ntfal
l.
d.bo thinte
restr
atesandi nvest
me ntri
se.
ANS WER:d. bothi
nterestr
a t
esandi nves
tme ntr
ise.
TYPE:M DI FFI
CULTY:2SECTI ON: 13.3

140.I ft
hego ve rnmentc urr
e ntlyha sabudge tde
fic i
t,
a.i tdoesnotne cessaril
yha veade bt
.
b.t hede btisincr
ea si
ng .
c. governme ntexpe nditure saregreat
erthant
axes.
d.Al loft heabovea rec orrect
.
ANS WER:d. Allofthea bo vea r
ec or
rect
.
TYPE:M DI FFICULTY:2SECTI ON: 13.3

141. Anincr
easeinthebudgetdefic it
a.changesthesupplyofloanabl
ef unds.
b.changesthedema ndforl
oa nablefunds.
c.changesboththesupplyofandde mandforloanablef
unds
.
d.doesnotinflue ncethesupplyofort hedema ndforl
oana
blef
unds
.
ANS WER:a. changest
hesuppl yofloanablef
unds.
TYPE:M DIFFI
CULTY:1SECTI ON: 13.
3

142. Otherthi
ngsthesame ,agovernme ntbudge tde fic it
a.increas
esbothprivatesavi
nga ndna tiona ls
a ving.
b.increas
espublicsavingbutreduc e
sna t
ionals aving.
c.reducesbothpublica ndnati
ona lsa
vi ng.
d.reducespriva
tesaving,butincrease
sna t
iona lsaving.
ANS WER:c . reducesbothpublicandna tiona lsaving.
TYPE:M DIFFICULTY:2SECTI ON:1 3.
3

143.I nthelas
tfe
w yearstheU. S.governme nthasgonef
rom as
urpl
ust
oade
fic
it.Ot
hert
hingst
hes
ame
,thi
sme
anst
hat
a.s uppl
yofloanabl
ef undss hif
tedr i
ght.
b.s uppl
yofloanabl
ef undss hif
tedleft.
c. demandforloanablefundss hift
edr i
ght.
d.de mandforloanablefundss hift
edl e
ft.
ANS WER:b . supplyofloanablefundss hifte
dleft
.
TYPE:M DI FFI
CULTY:2SECTI ON: 13.3

144.I fCana dainc r

easesitsbudge tdefic it
,itwil
lreduce
a. privatesavinga nds os hi
ftt
hes upplyofloanabl
ef undsle
ft.
b.inve stme ntands os hif
tthede mandf orl
oanablefundslef
t.
c. publ i
csavinga nds os hif
tthesupplyofloanablefundsleft
.
d.Noneoft hea bovea recorre
ct.
ANS WER:c . publicsavinga ndsos hif
tthesupplyofloa na
blefundsl
eft
.
TYPE:M DI FFICULTY:2SECTI ON: 13.
3
372  Chapter 13/Saving, Investment, and the Financial System

145. Anincre
a seinthebudge tdeficitwouldcaus ea
a.shortageofloanablefundsattheor
iginalinterestr
ate,whichwoul
dl eadtofal
lingint
erestrat
es.
b.surplusofloanablefundsattheori
ginalinterestra
te,whichwouldleadtoris
inginterestra
tes.
c.shortageofloanablefundsattheor
iginalinterestr
ate,whic
hwouldl eadtori
singinterestr
ates.
d.surplusofloanablefundsattheori
ginalinterestra
te,whichwouldleadtofal
li
ngi nte
restrate
s.
ANS WER:c. s
hortageofloanabl
efundsattheor iginali
nteres
trate
,whic
hwoul dleadt ori
singinterestr
ate
s.
TYPE:M DIFFICULTY:3SECTI ON: 1
3.3

146. Ani ncre

a s
eint hebudgetde ficit
a. ma kesinvestmentspendingfall
.
b.ma kesinvestmentspendingrise
.
c. doesnota ffe c
tinves
tme nts
pe ndi
ng.
d.ma yincreas
e ,decr
ease
,ornota ffe c
tinves
tme
nts
pendi
ng.
ANS WER:a . ma ke si
nvest
me ntspendingfal
l.
TYPE:M DI FFICULTY:1SECTI ON: 13.
3

14
7. Othert hi
ngst hesame ,i
fthego vernmenti
ncr
easest
rans
ferpa
yme
ntst
ohous
ehol
ds,t
hen
a.inve s
tme ntwi llr
ise.
b.t herateofinterestwil
lrise.
c. publicsavingwi l
lrise.
d.t hema rketforloanablefundswi llbeunaffect
ed.
ANSWER:b . t
her a
teofinterestwil
lr i
se.
TYPE:M DI FFICULTY:3SECTI ON 2 6.3

148. Youa rerequi

redtotesti
fybefor
ec ongressconcerni
ngt
hee
ffe
ctsofa
ninc
reas
eint
hegove
rnme
nts
urpl
us.Whi
chi
s
thecorrectt
hingtosay?
a. Thede btandinter
e s
trat
eswi l
lrise.
b.Thede btandinter
e s
trat
eswi l
lfall
.
c. Thede btwillr
iseandinteres
trateswillfal
l.
d.Thede btwillf
allandint
erestrat
eswi llr
ise.
ANS WER:b . Thede bta
ndi nt
erestrat
eswi llf
all
.
TYPE:M DI FFICULTY:1SECTI ON: 13.3

149. Bet
we en2 0
00a nd2 001thedebtofBoli
viar
ose
.Ot
hert
hingst
hes
ame
,wewoul
dexpe
ctt
hati
nte
res
tra
tes
a.a ndinvestmentrose.
b.ros eandi nves
tmentfell
.
c.fellandinve s
tmentros e
.
d.andi nvestmentfall
.
ANS WER:b . roseandinve s
tmentfe
ll.
TYPE:M DI FFI
CULTY:1SECTI ON:13.
3

150. Thefal
lininvest
me ntduet ogovernme
ntbor
rowi
ngi
scal
led
a.theBa r
roRe duction.
b.theSolow Rresi
dual .
c.theRicardianPrincipl
e.
d.crowdingout .
ANS WER:d. crowdingout .
TYPE:M DIFFICULTY:1SECTI ON: 13.
3

151. Whenthego ve r
nme ntrunsabudge tdeficit
,
a.inte
restratesarelowe rthantheywouldbeot herwise
.
b.nati
ona lsavingishighe rt
hanitwouldbeot herwise.
c.invest
me ntislowert hanitwouldbeot her
wi se
.
d.Allofthea bovea r
ec orrec
t.
ANS WER:c. i
nvestmentisl owerthanitwouldbeot her
wi s
e.
TYPE:M DIFFICULTY:1SECTI ON: 13.
3
 Chapter 13/Saving, Investment, and the Financial System  373

152.I nves
tmentri
sesandinterestratesf al
l.Whi c
hoft hefol
lowingc
oul
dexpl
aint
hes
echange
s?
a. Thegover
nme ntwe ntfrom sur plust odefic it
.
b.Thego ver
nme nti
ns ti
tuteda ni nves t
menttaxc r
edit
.
c. Thegover
nme ntreduc e
dt het axr ateonsavings.
d.Noneoft heabovea recorrect
.
ANS WER:c . Thegovernme ntre duc edt hetaxrat
eons avings
.
TYPE:M DI FFI
CULTY:2SECTI ON: 13.3

153.I nt
eres
trate
sa ndinvest
me ntr i
se.Whi chofthefol
lowingcoulde
xplai
nthe
sec
hange
s?
a.theg over
nme ntrunsal ar
ge rde fic i
t
b.theg over
nme ntinst
it
utesani nvest
me ntt
axc r
edit
c.theg over
nme ntreplac
est heinc ometaxwi t
hac onsumpti
ontax
d.Noneoft hea bovearecorrect.
ANS WER:b . thegov er
nme ntinstit
ut esaninves
tmenttaxcre
dit
TYPE:M DIFFICULTY:2SECTI ON: 13.
3

154.I nt
eres
trate
sfal
landinvestmentfall
s.Whi c
hofthefol
lowingc
ouldex
plai
nthe
sec
hange
s?
a.theg over
nmentgoesfrom asurplustoade fici
t
b.theg over
nmentrepeal
sani nvest
me nttaxcr
edi
t
c.theg over
nmentrepl
acesac onsumpt i
ontaxwit
ha nincometax
d.Noneoft heabovearecorr
ec t
.
ANS WER:b . thegover
nme ntre
pe al
sa ninvest
mentta
xc re
dit
TYPE:M DIFFICULTY:2SECTI ON:1 3.
3

155. Ac hangeint
hetaxlawswhi chincr
easesthesupplyofloanabl
efundswi l
lhaveabiggereffectoninves
tme
nt
whe n
a.t hedema ndf
orl
oa nablefundsi smoreelasti
candthesupplyofloanabl
ef undsismoreine
las
tic
.
b.t hedema ndf
orl
oa nablefundsi smoreinelast
icandthesupplyofloanabl
efundsismoreelas
tic
.
c. boththedemandfora nds upplyofloanablefundsaremoree l
ast
ic.
d.bo ththedemandforands uppl yofloanablefundsaremoreinelas
tic
.
ANSWER:a . t
hedemandf orloa na
blefundsismor eelas
tica
ndt hesupplyofloanabl
efundsismoreine
last
ic.
TYPE:M DI FFI
CULTY:3SECTI ON: 13.
3

156. Whichofthefollowingisincorrect
?
a.IfGDPi sris
ingf ast
erthande bt,t
hego vernmenti
s,i
nsomes ens
e,livi
ngwi t
hinit
sme ans
.
b.Ther at
ioofde bttoGDPi ntheUni t
edSt a
teshasal
waysbeenles
st hanone.
c. Debt
sdur i
ngwa rsmaydi st
ributetheburdenoffight i
ngthewa rmor eevenl
yacros
sgener
ati
ons
.
d.Dur i
ngt i
me sofpe ac
et herati
oofde bttoGDPs ometi
me sr
ose.
ANS WER:b. Ther ati
oofde bttoGDPi ntheUni t
edSta
teshasal
waysbe enlesst
hanone.
TYPE:M DIFFICULTY:2SECTI ON: 13.3

157.F r
om 2000t
o2 002theU.S.na
tionalde
btha
sbee
nabout
a.10percentofGDP .
b.35percentofGDP .
c.50percentofGDP .
d.75perce
ntofGDP .
ANS WER:b. 3 5perc
e ntofGDP.
TYPE:M DIFFI
CULTY:1SECTI ON:1 3.
3

158. Thera t
ioofdebtt oGDPi ntheUni t
edStat
e st
ende
dtof
all
a. duringwa r
s.
b.dur ingthelate1990s
.
c. duringmos toftheReagana dminis
tra
tion.
d.Noneoft hea bovear
ec orr
ect.
ANS WER:b . duringthelat
e1 990s.
TYPE:M DI FFICULTY:1SECTI ON: 13.3
374  Chapter 13/Saving, Investment, and the Financial System

Us
ethefigur
ebe
low f
ort
hene
xtt
woque
sti
ons
.

159. Whi c
hoft hegraphsint
hefigur ea
boves
howst
hee
ffe
ctsofa
ninc
rea
sei
nthet
axr
ateons
avi
ng?
a. graph1
b.gr aph2
c. graph3
d.Noneoft heabovear
ecor
rect
.
ANS WER:a . graph1
TYPE:M DI FFI
CULTY:2SECTI ON:13.
3

160. Whi c
hoft hegra phsinthefigur ea
boves
howst
hee
ffe
ctsofi
nst
it
uti
ngana
tionals
ale
staxands
imul
tane
ous
ly
l
owe ri
ngthei ncomet axrat
e?
a. graph1
b.gr aph2
c. graph3
d.Noneoft hea bovearecorr
ect
.
ANS WER:b . graph2
TYPE:M DI FFI
CULTY:2SECTI ON:13.
3

TRUE/
FALSE

1. Mos tent
repr
eneursfinanc
etheirpur
chas
esofr
ealc
api
talus
ingt
hei
rpa
sts
avi
ng.
ANSWER:F
TYPE:TFDI
FFICULTY:1SECTI
ON: 13
.1

2. Otherthi
ngst
hesame,t
hehighe
rther
ateofs
avi
nga
ndi
nve
stme
nti
nac
ount
ry,t
hehi
ghe
rwi
llbet
hes
tandar
dof
l
ivi
ng.
ANSWER:T
TYPE:TFDI FFI
CULTY:1SECTION:13.
1

3. Le nde
rss
ellbondsandborr
owersbuyt
hem.
ANSWER:F
TYPE:TFDI
FFI
CULTY:1S ECTION:13
.1

4. Cor porat
ebondsgener
all
yha
vehighe
rint
ere
str
ate
stha
nU.
S.gov
ernme
ntbonds
.
ANSWER:T
TYPE:TFDIFFICULTY:1SECTI
ON:13
.1

5. Thes al
eofst
ocksorbondst
orai
semone
yisknowna
sequi
tyfinanc
e.
ANSWER:F
TYPE:TFDI
FFICULTY:1SECTION:13
.1

6. Whe nacorpor
ati
onexpe
rie
nce
sfinanc
ialpr
obl
ems
,bondhol
der
sar
epa
idbe
for
est
ockhol
der
s.
ANSWER:T
TYPE:TFDIFFI
CULTY:1SECTION:261.
 Chapter 13/Saving, Investment, and the Financial System  375

7. Cor porat
ionsr
ecei
venoproc
eedsfrom t
her
esal
eoft
hei
rst
ock.
ANSWER:T
TYPE:TFDIFFICULTY:1SECTI
ON: 13.
1

8. General
ly,i
fpe
opl
ee xpe
ctacompanyt
ohavehi
ghe
rfut
urepr
ofit
s,t
hepr
iceoft
hes
toc
kwi
llbedr
ive
ndown.
ANSWER:FTYPE:TFDIFFICULTY:1SECTI
ON:13.
1

9. I
fyouknowthatCol
oradoDreamsCor
porat
ion,at
rave
lequi
pmentandcl
othi
ngc ompa
ny,ha
sre
venue
sof$
30
mil
li
onandacc
ounti
ngc os
tsof$1
0mil
li
on,youknow t
heire
arni
ngsar
e$20mill
ion.
ANSWER:TTYPE:TFDIFFICULTY:1SECTI
ON: 13.
1

10. I
fas har
eofst
ockinS kyl
ightChi
lis
ell
sfor$7
5,ther
etai
nede
arni
ngspe
rsha
rea
re$5
,andt
hedi
vide
dpe
rsha
rei
s
$2,
thenthepri
ce-
earningsrat
ioi
s15.
ANSWER:FTYPE:TFDI FFICULTY:2SECTI ON:13.
1

11. I
fpeoplebe
comel
essopt
imi
sti
caboutt
hef
uturee
arni
ngsofHydePar
kRe
cor
ds,t
hepr
iceofs
toc
kint
hec
ompa
ny
wil
lfal
l.
ANSWER:TTYPE:TFDIFFI
CULTY:1SECTION:13.
1

12. Mutualf
undsar
eatypeoffina
nciali
nte
rmediar
y.
ANSWER:TTYPE:TFDIFFI
CULTY:1SECTION:13.
1

13. I
ndexf
undsareus
ua l
lyout
perf
ormedbymutualf
undst
hatar
eac
tive
lymana
gedbypr
ofe
ssi
ona
lmone
ymana
ger
s.
ANSWER:FTYPE:TFDIFFICULTY:1SECTI
ON:13
.1

14. Na
tionals
avi
ngi
sequalt
oY–T–C.
ANSWER:FTYPE:TFDIFFI
CULTY:1SECTI
ON:1
3.2

15. Publ
ics
avi
ngisT–G,whi
lepri
vates
avingi
sY–T–C.
ANSWER:TTYPE:TFDIFFI
CULTY:1SECTION:13.
2

16. Publ
ics
avi
ngise
qualt
onati
onals
avi
ngmi
nuspri
vat
esa
ving.
ANSWER:TTYPE:TFDIFFI
CULTY:2SECTI
ON:13.
2

17. I
naclos
edeconomy,i
nves
tmentmustbee
qualt
opr
iva
tes
avi
ng.
ANSWER:FTYPE:TFDIFFICULTY:1SECTI
ON:13
.2

18. S upposeasmallc
los
edeconomyha sGDPof$ 5bil
li
on,Consumpti
onof$ 3bi
ll
ion,andGover
nmente
xpe
ndi
tur
esof
$1bil
li
on.The
ndome st
ici
nvest
me ntandna
tionalsavi
ngarebot
h$ 1bi
ll
ion.
ANSWER:T
TYPE:TFDI FFI
CULTY:1SECTION: 13.
2

19. J
oanuse
ssomeofherinc
ometobuymutualf
unds
har
es.A mac
roe
conomi
str
efe
rst
oJoan'
spur
cha
seasi
nve
stme
nt.
ANSWER:FTYPE:TFDIFFI
CULTY:1SECTI
ON:1 3
.2

20. Alber
tabuysapai
ntspra
yera
ndalif
tforhe
rcarc
ust
omi
zings
hop.A mac
roe
conomi
stwoul
dre
fert
othe
se
purc
hasesasi
nves
tment.
ANSWER:TTYPE:TFDI FFI
CULTY:1SECTION:13.
2

21. Thedema
ndforl
oa nabl
efundsc
ome sfr
om s
avingandt
hes
uppl
yofl
oana
blef
undsc
omesf
rom i
nve
stme
nt.
ANSWER:FTYPE:TFDIFFICULTY:1SECTION:13.
3

22. Manyec
onomist
sbe l
ievethati
fthecur
rentinc
omet
axwerer
eplac
edwit
hacons
umpt
iont
ax,s
avi
ng,i
nve
stme
nt,
e
conomi
cgrowth,andt hest
andardofli
vingofAme
ric
answoul
dincr
eas
e.
ANSWER:TTYPE:TFDIFFICULTY:1S ECTI
ON: 13.
3

23. A de
cre
asei
ntax
esonint
ere
sti
ncomewoul
dincr
eas
ethei
nte
res
tra
te.
ANSWER:FTYPE:TFDIFFI
CULTY:1SECTI
ON:13.
3

24. I
fCongr
essi
nst
it
utedani
nves
tmentt
axcr
edit,
thede
mandf
orl
oanabl
efundswoul
dshi
ftr
ight
.
ANSWER:TTYPE:TFDIFFI
CULTY:1SECTI
ON: 1
3.3

25. Whent
hegovernmentrunsabudge
tdefic
it,nat
ionals
avi
ngi
sre
duc
ed,i
nte
res
tra
tesr
ise
,andi
nves
tme
ntf
all
s.
ANSWER:TTYPE:TFDIFFICULTY:1SECTI
ON:13.3
376  Chapter 13/Saving, Investment, and the Financial System

26
. Whe ntheU.
S.gove
rnmenti
sinde
bt,i
tfol
lowstha
tthe
yha
veadefic
it.
ANSWER:FTYPE:TFDIFFI
CULTY1SECTION 26.3

27
. Ther ati
oofgo
ver
nme ntde
bttoGDPwa shi
gherdur
ingt
heRe
aga
nPr
esi
denc
ythana
tanypr
evi
oust
imei
nU.
S.
hi
stor
y.
ANSWER:FTYPE:TFDI FFI
CULTY:1SECTI
ON:1 3.
3

SHORTANSWER

1. Wha
tar
etheba
sicdi
ffe
renc
esbe
twe
enbondsa
nds
toc
ks?

ANSWER:A bondi sac e

rtific at
eofi
ndebte
dnessthatspe
cifie stheobli
ga t
ionsoftheborr
owe rt
othehol de
rofthebond,
whilest
ockr epr
esentsowne r
shi
pinafir ma ndis,t
heref
ore,ac l
aim onthepr ofitst
hatthefirm ma kes
.Thesal
eof
bondstoraisemone yiscall
eddebtfinance,whil
ethesaleofstockiscall
e dequi
tyfinanc e.Whe
re astheownerof
shar
esofstockinac ompa nysha
resint
heprofit sofacompa ny,theowne rofbondsrece
ivesafix edinteres
tra
te.
Compa r
edt obonds,stoc
ksoffe rthehol
derbothhigherriskandhighe rretur
n.
TYPE:SDI FFI
CULTY:2SECTI ON:1 3.
1

2. Whi c
hoft het wobondsi ne ac
he xamplewoul dyoue xpe cttopayt hehigherinte
restra
te?Expla
inwhy .
a. aU. S. gov ernme ntbondoraBr azi
liango vernme ntbond
b.aU. S. gov ernme ntbondoramuni c
ipa lbondoft hes amer iskandt e
rm
c. a6 -
mont hTr easurybillora2 0-
yearbond
d.aGe ne ralMo t
orsbondorabondi s
s uedbyane wr e cor
dc ompany
ANSWER:
a. TheBr a zil
iango vernme ntbondwo ul dlikelypa yahi ghe rinter
estrat
ebe causethemarke
tpe rc
eivesahigher
l
ev elofr iskf ortheBr a
zili
anbondr e l
ativetot heU. S.bond.
b.Be c
a us eoft heta xadvantagesofmuni c i
palbonds ,theU. S.governme ntbondwoul dli
kel
ypa ythehigherint
eres
t
rate
.
c. The2 0-ye arbondwoul dlikelypayahi ghe rinterestratethanwoul dt he6-mont hbi
ll
,bec
a us
ethef ut
ureis
unce rtain,the re
foremor er i
skyfora2 0-yearbondt ha nfora6 -monthbi l
l.
d.Si nceGe ne ralMo torsisles
slikel
ytode fa
ultthani st heissuerofajunkbond,t hej
unkbondwi llli
kel
ypa ya
highe rint erestrat
e.
TYPE:SDI FFICULTY:2SECTI ON:1 3.1

3. Suppos ethatyoua reabr okera ndpe opletel

lyout hefollowinga boutthemsel
ves.Wha tsor
tofbondwouldyou
r
e c
omme ndt oe ach?De f
endyourc hoices.
a
.“ Ia minahi ghf ederalincomet axbr a
cketandIdon’ twantt otakeverymuchr i
sk.”
b.“ Iwa ntahi ghr e
turna ndIa m wi ll
ingtotakeal otofr i
skt ogetit
.”
c
.“ Iwa ntade c entreturna ndIha vee noughde duc t
ionstha tIdon’tval
uetaxbreakshighl
y.”
ANSWER:
a
. A muni ci
pa lbond,be causegene r
allytheyha velow creditriskanda r
enotsubjectt
ofederali
ncometax
.
b.A j unkbond.Be causeofthe i
rhighr is
k,theyha veahi ghr eturn.
c
. Ac orporatebondt hatisn’tajunkbond.Be c
a usetheyha vemor eri
skthangovernmentbondsa ndha
venospec
ial
taxtreat
me nt ,theypa ymode r
ater a
tesofreturn.
TYPE:SDI FFICULTY:2SECTI ON:1 3.
1

4. Yourbr other
-in-law want stobuye ithe rstockorbondsi nCe darVall
eyFur niture,buthei sn’
tsur ewhe thertobuy
thestockorbonds .Explainhow e achofhi squotesbe l
ows houlda ffecthi schoicebetwe enthes tockandt hebond.
a.“ Iha vereasont obelievet hatpe opl earesoongoi ngtofindr ockingc hair
sha vehe al
thbe ne fits.”
b.“ Iwo uldl i
ket otel
lpe opleIa m pa rtowne rofCe darValleyFurnit
ure.”
c.“ Idonotwa nttotakeonmuc hr isk.”
ANSWER:
a. Presuma bly,whe nthi shappe ns ,unl esseveryoneelsehasa nt
ici
patedi t
,divi
de nds,thepriceoft hestock, orboth
wi l
lincrease.Theinte res
tr at
eonbondswi llnotchangea sprofit sincrease,sothisquotes uggestsbuyi ngstock
woul dbe tt
ersuityourbr other-i
nl aw’spur poses
.
b.Bondhol dersa resi
mpl ycr e
ditors ,whi lest
ockholdersarepartowne rs.Sothisquot eindica
te syourbr other-
in-l
aw
woul dpre f
ertobuys tock.
c.I nc aseoffina ncialdiffic ul ti
esstockholdersgetpaida f
terbondhol ders,sothes t
ockiss ome wha tmor eri
sky.So
,
yourbr other-i
n-la
w ma ypr efert hebond.
TYPE:SDI FFICULTY:1SECTI ON:1 3.
1
 Chapter 13/Saving, Investment, and the Financial System  377

5. SupposetheGe tUpOffof YourButtexerc

isecha i
nha srevenue sof$ 45mi l
lion,cost
sof$ 15mi l
li
on,andcurre
ntl
yhas
i
ssued1 0milli
ons haresofstoc
kss el
li
nga t$90e ac
h.Comput ethepr icetoear ni
ngratio.Show yourwork.Ist
his
ra
tiorel
a t
ive
lyhighorl ow?Wha tmightaninc rea
seint hepr i
cet oearningra t
ioindica
te?
ANSWER:Thee ar
ningspe rshareis($45mill
ion–$ 15mi ll
ion)/10mi lli
on=$ 3.So,theprice-e
a r
ningsrat
iois$9
0/$3=30.
ThisisahighP/Er at
io,asthehist
ori
calaverageforthema r
ke tisabout15.Ani ncre
asei ntheP/Er at
ioof
ten
i
ndicate
st hatpeoplethinkthecorporat
ionwi llhavebetterfuturee ar
nings .
TYPE:SDI FFICULTY:2SECTI ON:13 .
1

6. I
nt hena t
ionalincomeac c
ount i
ngi dentit
ys howingtheequali
tybe t
weenna t
ionalsavi
nga ndinves t
me nt,whatis
therepresent
ationofpr i
vatesa vinga ndwha tistherepres
enta
tionofpublicsavi
ng?
ANSWER:S tart
ingwi thY=C+I+G,s ubtractCa ndGf rom bothsi
de s
,obtai
ningY–C–G=I .Thel ef
t-
ha nds ide
repr
es e
ntsna t
ionalsaving,thet otalincomeoft heeconomythatremainsaft
e rpa
yingforcons umpt i
onand
governme ntpurchases.He nce,subs t
itutingSf orY–C–G, weobt ai
nS=I .
Tos e
parateprivat
ea ndpubl i
cs a
ving,
adda ndsubtractTi nS=Y–C–G,obt ainingS=( Y–T–C)+( T–G) .Here,(Y–T–C)r e
pr e
s ent
spr ivatesavi
ng,
thepartofdisposableincome( Y–T)l eftafte
rs ubt
racti
ngconsumption,and( T–G),thego ve
r nmentbudge tsurpl
us
repr
es e
ntspubl i
csaving.
TYPE:SDI FFICULTY:2SECTI ON:13 .
2

7. Identi
fye achoft hefollowi nga c
tsasr e
pres
entinge i
thers a
vingorinve
stment.
a. Fredus ess omeofhi sinc omet obuygov er
nme ntbonds .
b.J ul
ietake ss omeofhe rinc omea ndbuysmut ualfunds .
c. Alexpur cha se sane wt r uckf orhisdel
iver
ybus inessus i
ngborrowedfunds.
d.El aineuse ss omeofhe rinc omet obuystockinama jorcorpor
ati
on,
e. He nri
ettahi resabui ldert oconstructanew homeus ingborro
we dfunds.
ANSWER:
a. Frediss aving.
b.J ul
ieissa ving.
c. Alexisinv es t
ing.
d.El aineissa ving .
e. He nri
ettaisi nve s
ting.
TYPE:SDI FFICULTY:1SECTI ON:13 .
2

8. Dr awandlabe
lagra
phs
howi
nge
qui
li
bri
um i
nthemar
ketf
orl
oanabl
efunds
.
ANSWER:
Mar
ketf
orLoana
bleFunds

TYPE:SDI
FFI
CULTY:1SECTI
ON:13
.2

9. Ex plainwhythede mandforl
oanabl
ef undsslopesdownwa r dandthesupplyofl oanabl efundsslopesupwa rd.
ANSWER:Whe ntheint
eres
trat
eris
esinves
tme ntspendingbecome smoreexpensive,sope oplei nve
stle
s s.Astheinter
est
rat
er i
sessa
vingbecomesmorerewarding,sopeoplewa nttos a
vemore.Thei nver
s erelationbetweeni nt
eres
ta nd
borrowingisreflect
edinthedownwa rdslopeoft hedema ndforl
oanablefundsc ur ve.Thepos i
tiverel
ati
onbet ween
int
erestandsavi
ngisreflect
edintheupwa rdsl
opeoft hesupplyofloanablefundsc urve.
TYPE:SDI FFICULTY:2SECTION:13 .
2
378  Chapter 13/Saving, Investment, and the Financial System

10. Aus t
ral
iahasre
centl
yi mpl
e me nte
dana t
ionalsal
estax.Ift
heyusetheproc
eedsfr
om thistaxtoreducei
ncometax
r
ate
s,whathappensintheloa nabl
ef undsmar ke
t?
ANSWER:Thes upplyofloanabl
ef undss hif
tsri
ght.Thisc
aus esthei
nte
restr
atet
ofal
l.Bot
hi nve
s t
me ntandsa
vingr
ise.
TYPE:SDIFFICULTY:2SECTI ON:1 3.2

11. Themode lofthema rketforloana blefundss howst hataninve stme nttaxc r

editwillcausei
nter
estr
atestori
seand
investmenttoris
e.Ye twea ls
os uppos ethathi gherinter
estratesleadt olowe rinvest
me nt
.How canthesetwo
conclusi
onsber econcil
e d?
ANSWER:Thec lai
mt hatani ncr
easeint hei nterestr a
tedec r
easesinve s
tme ntsuppos esthatonlythei
nter
estratec
hanges
ande veryt
hinge l
seisc onst
ant.Thei nvestme nttaxc r
editcaus esinvestme nttoris
ea teac
hinter
estr
ate.Asfir ms
wa nttoborrow mor etheinterestratewi llri
se .Ther i
seininterestratesdoe sma keinvest
mentlesst
hanitwould
otherwisebebutdoe snotoffs etthei ncreasei ninvest
me ntc rea
tedbyt hetaxc r
edit.
TYPE:SDI FFICULTY:3SECTI ON:1 3.
2

12
. Us i
ngagr aphr epresentingthemar ketforloana bl
ef unds ,show ande x plai
nwha thappe nst ointe
re s
tr a
tesand
invest
me ntifago vernme ntgoesfrom adefic itt
oas urplus.
ANSWER:Ass howni nt hegra phbelow,thee conomys t
ar t
si nequi li
brium atpointE0wi t
hi nter
estrater0 and equi
li
bri
um
quantit
yofs avinga ndinve s
tmenta tq0.Iftheg overnme nts ucc ee
dsinobt ai
ningas urplus,therewillbemor epubli
c
savinginthee c
onomya teachint
erestrate,andt hes upplyofl oanabl
ef undscurvewi llshif
tfrom S0toS1. Thenew
equili
bri
um wi llbea tE1,withalowe rinterestrate
,r1a ndahi gherquant i
tyofsavinga ndinve s
tme nt,q1.Hence,i
f
thefederalgovernme nts ucc
eedsinha vingas urplus,i
nt erestrateswil
lf a
llandinvestme ntwi l
lincrease.

Mar
ketf
orLoana
bleFunds

TYPE:S