PS9

1. Megasoft wants to finance the purchase of new equipment for developing security software called
Doors, but they have limited internal funds. Megasoft 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.

2. The length of time until a bond matures is called the

a. perpetuity.
b. term.
c. maturity.
d. intermediation.

3. Alonzo pays $10,000 to buy a bond from IBM that promises repayment ten years from today.
Which of the following is correct?

a. Alonzo is the principal of this bond.

b. The bond matures in 10 years.
c. The term of the bond is $10,000.
d. All of the above are correct.

4. You are thinking of buying a bond from Knight Corporation. You know that this bond is long term
and you know that Knight's business ventures are risky and uncertain. You then consider another
bond with a shorter term to maturity issued by a company with good prospects and an established
reputation. Which of the following is correct?

a. The longer term would tend to make the interest rate on the bond issued by Knight higher,
while the higher risk would tend to make the interest rate lower.
b. The longer term would tend to make the interest rate on the bond issued by Knight lower,
while the higher risk would tend to make the interest rate higher.
c. Both the longer term and the higher risk would tend to make the interest rate lower on the
bond issued by Knight.
d. Both the longer term and the higher risk would tend to make the interest rate higher on
the bond issued by Knight.

5. Compared to bonds, stocks offer the holder

a. higher risk.
b. potentially higher return.
c. ownership in a firm.
d. All of the above are correct.

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. Suppose that the government finds a major defect in one of a company's products and demands
them to take it off the market. We would expect that

a. the supply of the stock (and thus the price) rises.

b. the supply of the stock (and thus the price) falls.
c. the demand for the stock (and thus the price) rises.
d. the demand for the stock (and thus the price) falls.

8. 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
shares rises.
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.

9. Queen City Sausage stock is selling at $40 per share, it has retained earnings of $2.00 per share
and dividends of $.50 per share. What is the price-earnings ratio and what is the dividend yield?

a. 20, 1.25 percent

b. 20, 6.25 percent
c. 16, 1.25 percent
d. None of the above is correct.

10. Buskin's Corporation has issued 2 million shares of stocks. Its earnings were $10 million dollars of
which it retained $6 million. What was the dividend per share?

a. $2.
b. $3.
c. $5
d. None of the above is correct.

11. Dependable Appliances had a PE ratio of 25, earnings per share of $4, and retained earnings per
share of $3. What was its dividend yield?

a. 4%
b. 3%
c. 1%
d. None of the above is correct.

12. Which of the following is both a store of value and a common medium of exchange?

a. corporate bonds
b. mutual funds
 c. checking account balances
d. All of the above are correct.

13 . It is claimed that mutual funds have two advantages. The first is that mutual funds allow people
with small amounts of money to diversify. The second is that mutual funds provide the skills of
professional money managers who buy stocks they believe will be the most profitable and thereby
increase the return that mutual fund depositors earn on their savings.

a. Economists strongly agree with both claims.

b. Economists are skeptical of both claims.
c. Economists are skeptical of the first claim, but strongly agree with the second.
d. Economists strongly agree with the first claim, but are skeptical of the second.

14. Which of the following equations represents national saving in a closed economy?

a. Y - I - G - NX
b. Y-C-G
c. Y-I-C
d. G+C-Y

15. Suppose that in a closed economy GDP is equal to 8,000, Taxes are equal to 2,000, Consumption
equals 5,000, and Government expenditures equal 1,000. What are private saving and public saving?

a. 2000 and -2000

b. 2000 and 1000
c. 1000 and 1000
d. 1000 and 2000

16. If the tax revenue of the federal government exceeds spending, then the government

a. runs a national debt.

b. will increase taxes.
c. runs a budget deficit.
d. runs a budget surplus.

17. According to the definitions of national saving and private saving, if Y, C, and G remained the
same, an increase in taxes would

a. raise national saving and private saving.

b. raise national saving and reduce private saving.
c. leave national saving and private saving unchanged.
d. leave national saving unchanged and reduce private saving.

18. What would happen in the market for loanable funds if the government were to increase the tax
on interest income?

a. interest rates would rise

b. interest rates would be unaffected
c. interest rates would fall
d. the change in the interest rate would be ambiguous

19. Suppose Congress institutes an investment tax credit. What would happen in the market for
loanable funds?
 a. The interest rate and investment would rise.
b. The interest rate and investment would fall.
c. The interest rate would rise and investment would fall.
d. None of the above is necessarily correct.

20. An increase in the budget deficit

a. reduces public saving and so shifts the supply of loanable funds left.
b. reduces private saving and so shifts the supply of loanable funds left.
c. reduces investment and so shifts the demand for loanable funds left.
d. None of the above are correct.

21. Raphael is not working and is currently not looking for work. The BLS would count Raphael

a. as unemployed and in the labor force.

b. as unemployed, but not in the labor force.
c. in the labor force, but not as unemployed.
d. neither as unemployed nor in the labor force.

22. Sally is on a temporary layoff from her factory job. If Sally participates in the BLS survey, she will
be classified as

a. unemployed and in the labor force.

b. unemployed and out of the labor force.
c. employed and in the labor force.
d. employed and out of the labor force.

23. In 2004, based on concepts similar to those used to estimate U.S. employment figures, the
Swedish adult non-institutionalized population was 6.712 million, the labor force was 4.576 million,
and the number of people employed was 4.276 million. According to these numbers, the Swedish
labor-force participation rate and unemployment rate were about

a. 59.5%, 4.5%
b. 59.5%, 6.6%
c. 68.2%, 4.5%
d. 68.2%, 6.6%

24. The BLS reported in 2005 that there were 53.23 million people over age 25 who had at least a
bachelor's degree 40.59 million of them were employed and .98 million of them were unemployed.
What were the labor-force participation rate and the unemployment rate for this group?

a. 76.3% and 1.8%

b. 76.3% and 2.4%
c. 78.1% and 1.8%
d. 78.1% and 2.4%

25. Suppose some country had an adult population of about 46.5 million, the labor-force
participation rate was 63.5 percent, and the unemployment rate was 5.8 percent. What were the
number of people employed and the number of people unemployed?

a. about 29.5 million and 2.7 million.

b. about 29.5 million and 1.7 million.
c. about 27.8 million and 2.7 million.
 d. about 27.8 million and 1.7 million.

26. Tara just graduated from college. In order to devote all her efforts to college, she didn't hold a
job. She is going to cruise around the country on her motorcycle for awhile before she starts looking
for work. As a result, the unemployment rate

a. increases, and the labor-force participation rate increases.

b. is unaffected, and the labor-force participation rate is unaffected.
c. increases, and the labor-force participation rate decreases.
d. increases, and the labor-force participation rate is unaffected.

27. We would predict that the more generous unemployment compensation a country has,

a. the longer the duration of each spell of unemployment, and the higher the unemployment
rate.
b. the shorter the duration of each spell of unemployment, and the higher the unemployment
rate.
c. the longer the duration of each spell of unemployment, and the lower the unemployment
rate.
d. the shorter the duration of each spell of unemployment, and the lower the unemployment
rate.

28. Bob is looking for work after school, but everywhere he fills out an application the managers say
they always have a lot more applications than open positions. Tom has a law degree. Several firms
have made him offers, but he thinks he might be able to find a firm where his talents could be put to
better use.

a. Bob and Tom are both frictionally unemployed.

b. Bob and Tom are both structurally unemployed.
c. Bob is frictionally unemployed, and Tom is structurally unemployed.
d. Bob is structurally unemployed, and Tom is frictionally unemployed.

29. Providing training for unemployed individuals is primarily intended to reduce

a. frictional unemployment.
b. seasonal unemployment.
c. structural unemployment.
d. cyclical unemployment.

30. When unions raise wages in one sector of the economy, the supply of labor in other sectors of
the economy

a. increases, raising wages in industries that are not unionized.

b. increases, reducing wages in industries that are not unionized.
c. decreases, raising wages in industries that are not unionized.
d. decreases, reducing wages in industries that are not unionized.

31. Consumers decide to buy more computers and fewer typewriters. As a result, computer
companies expand production while typewriter companies lay-off workers. This is an example of

a. structural unemployment created by efficiency wages.

b. cyclical unemployment created by a recession.
c. frictional unemployment created by a sectoral shift in demand.
 d. None of the above is correct.

32. If the market for day care workers is in equilibrium at $5.00 per hour as shown in this diagram, a
minimum wage of $8.00 per hour will

a. increase unemployment by 300 workers.

b. increase unemployment by 500 workers.
c. increase unemployment by 600 workers.
d. None of the above is correct.

33. When a union bargains successfully with employers, in that industry

a. both the quantity of labor supplied and the quantity of labor demanded increase.
b. both the quantity of labor supplied and the quantity of labor demanded decrease.
c. the quantity of labor supplied increases and the quantity of labor demanded decreases.
d. the quantity of labor demanded increases and the quantity of labor supplied decreases.

34. Suppose that neither textile workers nor shoemakers are unionized. If textile workers unionize
and so are able to raise their wages, then the supply of shoemakers

a. rises and their wages rise.

b. rises and their wages fall.
c. falls and their wages fall.
d. falls and their wages rise.

35. Samantha, the CEO of a corporation operating in a comparatively poor country where wages are
low, decides to raise the wages of her workers even though she faces an excess supply of labor. Her
decision

a. might increase profits if it means that the wage is high enough for her workers to eat a
nutritious diet that makes them more productive.
b. will help eliminate the excess supply of labor if she raises it sufficiently.
c. may cause her workers to increase shirking.
 d. All of the above are correct.

36. Sectoral changes

a. create frictional unemployment. Firms paying wages above equilibrium to attract a better
pool of candidates create structural unemployment.
b. create structural unemployment. Firms paying wages above equilibrium to attract a better
pool of candidates create frictional unemployment.
c. and firms paying wages above equilibrium to attract a better pool of candidates both create
structural unemployment.
d. and firms paying wages above equilibrium to attract a better pool of candidates both create
frictional unemployment.