Font size
WorksheetsPE Chapter26
Total questions: 118
Worksheet time: 4hrs 56mins
When opening a print shop you need to buy printers, computers, furniture, and similar items. Economists call these expenditures
A. capital investment.
B. investment in human capital.
C. business consumption expenditures.
D. personal saving.
A
B
C
D
Institutions that help to match one person's saving with another person's investment are collectively called the
A. Federal Reserve system.
B. banking system.
C. monetary system.
D. financial system.
A
B
C
D
Norberto is opening a bicycle shop, and his monthly expenditures to get the shop up and running exceed his monthly income. Norberto is best described as a
A. saver or as a supplier of funds.
B. saver or as a demander of funds.
C. borrower or as a supplier of funds.
D. borrower or as a demander of funds.
A
B
C
D
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.
A
B
C
D
Which of the following statements about the term of a bond is correct?
Term refers to the various characteristics of a bond, including its interest rate and tax treatment.
The term of a bond is determined entirely by its credit risk.
The term of a bond is determined entirely by how much sales charge the buyer of the bond pays when he or she purchases the bond.
Interest rates on long-term bonds are usually higher than interest rates on short-term bonds.
We would expect the interest rate on Bond A to be lower than the interest rate on Bond B if the two bonds have identical characteristics except that
the credit risk associated with Bond A is lower than the credit risk associated with Bond B.
Bond A was issued by the Apple corporation and Bond B was issued by the city of Houston.
Bond A has a term of 20 years and Bond B has a term of 2 years.
All of the above are correct.
As an alternative to selling shares of stock as a means of raising funds, a large company could, instead,
A. invest in physical capital.
B. use equity finance.
C. sell bonds.
D. purchase bonds.
A
B
C
D
The economy’s two most important financial markets are
A. the investment market and the saving market.
B. the bond market and the stock market.
C. banks and the stock market.
D. financial markets and financial institutions.
A
B
C
D
A bond is a
A. financial intermediary.
B. certificate of indebtedness.
C. certificate of partial ownership in an enterprise.
D. None of the above is correct.
A
B
C
D
Long-term bonds are
riskier than short-term bonds, and so interest rates on long-term bonds are usually lower than interest rates on short-term bonds.
riskier than short-term bonds, and so interest rates on long-term bonds are usually higher than interest rates on short-term bonds.
less risky than short-term bonds, and so interest rates on long-term bonds are usually lower than interest rates on short-term bonds.
less risky than short-term bonds, and so interest rates on long-term bonds are usually higher than interest rates on short-term bonds.
Skyline Chili wants to finance the purchase of new equipment for its restaurants. The firm has limited internal funds, so Skyline likely will
demand funds from the financial system by buying bonds.
demand funds from the financial system by selling bonds.
supply funds to the financial system by buying bonds.
supply funds to the financial system by selling bonds.
Which of the following is not correct?
By saving a larger portion of its GDP, a country can raise its output per worker.
Savers supply their money to the financial system with the expectation that they will get it back with interest at a later date.
Financial intermediaries are the only type of financial institution.
The financial system helps match people’s saving with other people’s borrowing.
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.
A
B
C
D
A bond that never matures is known as a
A. perpetuity.
B. an intermediary bond.
C. an indexed bond.
D. a junk bond.
A
B
C
D
Which of the following is correct?
Lenders sell bonds and borrowers buy them.
Long-term bonds usually pay a lower interest rate than do short-term bonds because long-term bonds are riskier.
The term junk bonds refers to bonds that have been resold many times.
None of the above is correct.
On which of these bonds is the prospect of default most likely?
A. a junk bond
B. a municipal bond
C. a U.S. government bond
D. a corporate bond issued by Proctor & Gamble Corporation
A
B
C
D
Other things the same, as the maturity of a bond becomes longer, the bond will pay
a lower interest rate because it has less risk.
a lower interest rate because it has more risk.
a higher interest rate because it has more risk.
the same interest rate, because there is no relationship between term and risk.
Owners of municipal bonds
are not required to pay federal income tax on the interest income.
usually receive a higher interest rate compared to bonds issued by corporations.
usually receive a higher interest rate compared to stock issued by corporations.
pay taxes on the dividends earned from these bonds.
Other things the same, bonds are likely to have higher interest rates if they have
A. tax exemptions and short terms.
B. tax exemptions and long terms.
C. no tax exemptions and short terms.
D. no tax exemptions and long terms.
A
B
C
D
Jerry has the choice of two bonds, one that pays 5 percent interest and one that pays 2 percent interest. Which of the following is most likely?
The 2 percent bond is more risky than the 5 percent bond.
The 5 percent bond is a U.S. government bond, and the 2 percent bond is a junk bond.
The 2 percent bond has a longer term than the 5 percent bond.
The 2 percent bond is a municipal bond, and the 5 percent bond is a U.S. government bond.
ABC Co. sells newly issued bonds. JLG Co. sells newly issued stocks. Which company is raising funds in financial markets?
only ABC
only JLG
both ABC and JLG
neither ABC nor JLG
Stock represents
a claim to a share of the profits of a firm.
ownership in a firm.
equity finance.
All of the above are correct
Which of the following bonds has the highest interest rate?
A. a high credit risk and a short term.
B. a low credit risk and a short term.
C. a long term and a high credit risk.
D. a long term and a low credit risk.
A
B
C
D
If Huedepool Beer runs into financial difficulty, the stockholders as
part owners of Huedepool are paid before bondholders get paid anything at all.
part owners of Huedepool are paid after bondholders get paid.
creditors of Huedepool are paid before bondholders get paid anything at all.
creditors of Huedepool are paid after bondholders get paid.
If a firm sells a total of 100 shares of stock, then
each share represents 1 percent of the firm’s indebtedness.
each share represents ownership of 1 percent of the firm.
the firm is engaging in term finance.
All of the above are correct.
Which of the following is not an important stock exchange in the United States?
A. New York Stock Exchange
B. American Stock Exchange
C. Chicago Mercantile Exchange
D. NASDAQ
A
B
C
D
World Wide Delivery Service Corporation develops a way to speed up its deliveries and reduce its costs. We would expect that this would
raise the demand for existing shares of the stock, causing the price to rise.
decrease the demand for existing shares of the stock, causing the price to fall.
raise the supply of the existing shares of stock, causing the price to rise.
raise the supply of the existing shares of stock, causing the price to fall.
Suppose that the tires of a certain tire manufacturer are discovered to be defective. Other things the same, this news would cause
the demand for this company’s stock to decrease, so the price would rise.
the demand for this company’s stock to decrease, so the price would fall.
the supply of this company’s stock to decrease, so the price would fall.
the supply of this company’s stock to decrease, so the price would rise.
Which of the following is a certificate of indebtedness?
A. stocks and bonds
B. stocks but not bonds
C. bonds but not stocks
D. neither stocks nor bonds
A
B
C
D
A stock index is
an average of a group of stock prices.
an average of a group of stock yields.
a measure of the risk relative to the profitability of corporations.
a report in a newspaper or other media outlet on the price of the stock and earnings of the corporation that issued the stock.
The single most important piece of information about a stock is its
A. term.
B. dividend.
C. daily volume.
D. price.
A
B
C
D
After a corporation issues stock, the stock
A. cannot be resold.
B. can be resold only if the corporation wants to buy it back.
C. can be resold on exchanges; the resale will raise additional funds for the corporation.
D. None of the above are correct.
A
B
C
D
Volume, as reported in stock tables, refers to the
number of shares traded.
percentage of shares outstanding traded.
number of shares traded times the price they sold at.
number of shares of a company traded divided by the shares of all companies traded.
Profits not paid out to stockholders are
A. retained earnings.
B. known as dividends.
C. the denominator in the price-earnings ratio.
D. All of the above are correct.
A
B
C
D
In 2013, ABC Corporation had total earnings of $200 million and 40 million shares of the corporation’s stock were outstanding. If the price-earnings ratio for ABC is 20, then what is the price of a share of its stock?
a. $5
b. $10
c. $80
d. $100
A
B
C
D
Fortunade Corporation stock has a price of $100 per share, a dividend of $1.60 per share, and retained earnings of $2.00 per share. The dividend yield on this stock is
A. 2.8 percent.
B. 2.0 percent.
C. 1.6 percent.
D. 0.4 percent.
A
B
C
D
Stock in Tasty Greens Restaurants is selling at $80 per share with 1 million shares outstanding. Last year, Tasty Greens earned $4 million, of which it retained $2.4 million for future investments. The dividend yield on the stock is
8 percent.
2 percent.
3 percent.
5 percent.
XDF Corporation had a P/E 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.
A
B
C
D
The amount of revenue a firm receives for the sale of its products minus its costs of production as measured by its accountants is the firm's
earnings.
retained earnings.
economic, or real, profit.
dividend.
If people expect future earnings of Galt Corporation to be high relative to current earnings, then
the P/E ratio of its stock will be high. A P/E ratio of 8 is relatively high.
the P/E ratio of its stock will be high. A P/E ratio of 8 is relatively low.
the P/E ratio of its stock will be low. A P/E ratio of 8 is relatively high.
the P/E ratio of its stock will be low. A P/E ratio of 8 is relatively low.
A low P/E for a stock indicates that
people may expect earnings to fall in the future, perhaps because the firm will be faced with increased competition.
its dividends have been low so that no one is willing to pay very much for it.
the corporation is possibly overvalued.
All of the above are correct.
Assume that the closing price was also the average price at which each stock transaction took place. What was the total dollar volume of Graco stock traded that day?
$68,770,900
$6,877,090
$687,709
$6,877.1
Higher education subsidies in the form of the federal government’s student loan program have the potential to
reduce the number of people that attend college.
reduce the number of universities and colleges in the future.
create a credit bubble and debt crisis.
reduce the default risk on student loans.
A mutual fund
is a financial institution that stands between savers and borrowers.
is a financial intermediary.
allows people with small amounts of money to diversify their holdings.
All of the above are correct.
Which of the following statements is correct?
Stocks, bonds, and deposits are all similar in that each provides a common medium of exchange.
Most buyers of stocks and bonds prefer those issued by large and familiar companies.
Banks charge borrowers a slightly lower interest rate than they pay to depositors.
None of the above is correct.
Which of the following statements is correct?
A large, well-known corporation such as Proctor and Gamble would generally use financial intermediation to finance expansion of its factories.
On average, indexed funds outperform managed funds.
Unlike corporate bonds and stocks, checking accounts are a store of value.
Financial intermediaries are institutions through which savers can directly provide funds to borrowers.
A checking deposit functions as
A. a medium of exchange and as a store of value.
B. a medium of exchange, but not as a store of value.
C. a store of value, but not as a medium of exchange.
D. neither a medium of exchange nor as a store of value.
A
B
C
D
A U.S. Treasury bond is a
A. store of value and common medium of exchange.
B. store of value, but not a common medium of exchange.
C. a common medium of exchange, but not a store of value.
D. neither a store of value nor a common medium of exchange.
A
B
C
D
The primary advantage of mutual funds is that they
A. always provide the highest return.
B. always allow people to “beat the market.”
C.allow people to diversify and reduce risk.
D. allow people to diversify, which increases risk and return.
A
B
C
D
The old adage, “Don’t put all your eggs in one basket,” is very similar to a modern bit of advice concerning financial matters:
“Buy lowrisk bonds.”
“Use a medium of exchange.”
“Diversify.”
“Intermediate.”
Index funds
typically have a higher rate of return and higher costs than managed mutual funds.
typically have a higher rate of return and lower costs than managed mutual funds.
typically have a lower rate of return and higher costs than managed mutual funds.
typically have a lower rate of return and lower costs than managed mutual funds.
Which of the following statements about mutual funds is correct?
A mutual fund is a financial intermediary.
A mutual fund acquires its funds primarily by selling shares to the public.
People who buy shares from a mutual fund accept all of the risk and return associated with the mutual fund’s portfolio.
All of the above are correct.
Which of the following numbers is not associated with shares of a company’s stock?
A. term
B. dividend
C. price
D. price-earnings ratio
A
B
C
D
What do we call financial institutions through which savers can indirectly provide funds to borrowers?
A. stock markets
B. financial institutions
C. financial markets
D. financial intermediaries
A
B
C
D
Which of the following both make the interest rate on a bond higher than otherwise?
the interest it pays is taxed and it was issued by a financially strong corporation
the interest it pays is taxed and it was issued by a financially weak corporation
the interest it pays is tax exempt and it was issued by a financially strong corporation
the interest it pays is tax exempt and it was issued by a financially weak corporation
If a firm wants to borrow it can
supply bonds by selling them.
supply bonds by buying them.
demand bonds by selling them.
demand bonds by buying them.
Which of the following statements about mutual funds is correct?
A mutual fund is not a financial intermediary.
A disadvantage of buying mutual funds is a lack of diversification
People who buy shares from a mutual fund are guaranteed a minimum return.
On average index funds outperform managed funds.
Which of the following is not correct?
Gross domestic product is both total income in an economy and total expenditures on the economy’s output of goods and services.
In a closed economy net exports are zero.
National saving is the sum of private saving and public saving.
Purchases of capital goods are excluded from GDP.
A closed economy
A. does not trade with other economies.
B. is centrally-planned.
C. does not allow financial intermediation.
D. All of the above are correct.
A
B
C
D
In a closed economy, what does (T - G) represent?
A. national saving
B. investment
C. private saving
D. public saving
A
B
C
D
In a closed economy, what does (Y - T - C) represent?
A. national saving
B. government tax revenue
C. public saving
D. private saving
A
B
C
D
A closed economy does not engage in international trade, therefore
national saving is less than investment (S < I).
net exports (NX) are zero.
Y - C - G > I.
national saving is zero.
Net exports must equal zero for any economy
A. that is closed.
B. for which Y = C + I + G.
C. for which S = Y - C - G.
D. All of the above are correct.
A
B
C
D
Net exports must equal zero for any economy
A. that is closed.
B. for which Y = C + I + G.
C. for which S = Y - C - G.
D. All of the above are correct.
A
B
C
D
In a small closed economy investment is $50 billion and private saving is $45 billion. What are public saving and national saving?
A. $5 billion and $45 billion
B. -$5 billion and $45 billion
C. $5 billion and $50 billion
D. -$5 billion and $50 billion
A
B
C
D
Consider the expressions T - G and Y - T - C. Which of the following statements is correct?
Each one of these is equal to national saving.
Each one of these is equal to public saving.
The first of these is private saving; the second one is public saving.
The first of these is public saving; the second one is private saving.
Suppose that in a closed economy GDP is equal to 11,000, taxes are equal to 1,000, consumption equals 7,500, and government purchases equal 2,000. What is national saving?
-500
500
2,000
None of the above is correct.
Suppose that in a closed economy GDP is 11,000, consumption is 7,500, and taxes are 500. What value of government purchases would make national savings equal to 2,000 and at that value would the government have a deficit or surplus?
1,500, deficit
1,500, surplus
1,000, deficit
1,000, surplus
If in a closed economy Y = $11 trillion, which of the following combinations would be consistent with national saving of $3 trillion?
C = $8 trillion, G = $3 trillion
C = $13 trillion, G = -$1 trillion
C = $9 trillion, G = $5 trillion
C = $7 trillion, G = $1 trillion
a
b
c
d
In a closed economy, public saving is the amount of
income that households have left after paying for taxes and consumption.
income that businesses have left after paying for the factors of production.
tax revenue that the government has left after paying for its spending.
spending that the government undertakes in excess of the taxes it collects.
When the government has a budget surplus
it buys more of its bonds from the public than it sells to the public.
it spends more than it receives in tax revenue.
private saving is greater than zero.
exports are greater than imports.
An increase in the government’s budget deficit means
public saving is greater than $0 and increasing.
public saving is greater than $0 and decreasing.
public saving is less than $0 and increasing.
public saving is less than $0 and decreasing.
Which of the following would be included as investment in the GDP accounts?
the government buys goods from another country
someone buys stock in an American company
a firm increases its capital stock
All of the above are correct.
Fran buys 1,000 shares of stock issued by Miller Brewing. In turn, Miller uses the funds to buy new machinery for one of its breweries.
Fran and Miller are both investing.
Fran and Miller are both saving.
Fran is investing; Miller is saving.
Fran is saving; Miller is investing.
Ethan purchases a new house for $170,000. Ethan’s purchase of the house contributes $170,000 to which magnitude in the identity Y = C + I + G?
a. C
b. I
c. G
d. None of the above are correct.
a
b
c
d
a
b
c
d
National saving
is the total income in the economy that remains after paying for consumption.
is the total income in the economy that remains after paying for consumption and government purchases.
is always greater than investment for a closed economy.
is equal to private saving minus public saving.
If an economy is closed and if it has no government, then
national saving = private saving.
total income = consumption + investment.
saving = total income - consumption.
All of the above are correct.
Determine the quantity of loanable funds demanded.
a. $1.8 trillion
b. $1.6 trillion
c. $1.4 trillion
d. $0.8 trillion
a
b
c
d
Other things the same, when the interest rate rises,
people would want to lend more, making the supply of loanable funds increase.
people would want to lend less, making the supply of loanable funds decrease.
people would want to lend more, making the quantity of loanable funds supplied increase.
people would want to lend less, making the quantity of loanable funds supplied decrease.
The supply of loanable funds slopes
upward because an increase in the interest rate induces people to save more.
downward because an increase in the interest rate induces people to save less.
downward because an increase in the interest rate induces people to invest less.
upward because an increase in the interest rate induces people to invest more.
If there is a surplus of loanable funds, then
the quantity demanded is greater than the quantity supplied and the interest rate will rise.
the quantity demanded is greater than the quantity supplied and the interest rate will fall.
the quantity supplied is greater than the quantity demanded and the interest rate will rise.
the quantity supplied is greater than the quantity demanded and the interest rate will fall.
If the demand for loanable funds shifts to the right, then the equilibrium interest rate
and quantity of loanable funds rises.
and quantity of loanable funds falls.
rises and the quantity of loanable funds falls.
falls and the quantity of loanable funds rises.
Which of the following could explain an increase in the interest rate and the equilibrium quantity of loanable funds?
The demand for loanable funds shifted rightward.
The demand for loanable funds shifted leftward.
The supply of loanable funds shifted rightward.
The supply of loanable funds shifted leftward.
The nominal interest rate is the
interest rate corrected for inflation.
interest rate as usually reported by banks.
real rate of return to the lender.
real cost of borrowing to the borrower.
If the nominal interest rate is 3 percent and the inflation rate is 4 percent, then the real interest rate is
a. 7 percent.
b. -1 percent.
c. 3 percent.
d. 4 percent.
a
b
c
d
What would happen in the market for loanable funds if the government were to increase the tax on interest income?
Interest rates would rise.
Interest rates would be unaffected.
Interest rates would fall.
The effect on the interest rate is uncertain.
If a reform of the tax laws encourages greater saving, the result would be
higher interest rates and greater investment.
higher interest rates and less investment.
lower interest rates and greater investment.
lower interest rate and less investment.
If Congress instituted an investment tax credit, the interest rate would
a. rise and saving would rise.
b. fall and saving would fall.
c. rise and saving would fall.
d. fall and saving would rise.
a
b
c
d
Suppose that Congress were to repeal an investment tax credit. What would happen in the market for loanable funds?
The demand and supply of loanable funds would shift right.
The demand and supply of loanable funds would shift left.
The supply of loanable funds would shift right.
The demand for loanable funds would shift left.
If the government currently has a budget deficit, then
a. it does not necessarily have a debt.
b. its debt is increasing.
c. government expenditures are greater than taxes.
d. All of the above are correct.
a
b
c
d
Crowding out occurs when
investment declines because a budget deficit makes interest rates rise.
investment declines because a budget deficit makes interest rates fall.
investment increases because a budget surplus makes interest rates rise.
investment increases because a budget surplus makes interest rates fall.
Which of the following statements is not correct?
If GDP is rising faster than debt, the government is, in some sense, living within its means.
The ratio of debt to GDP in the United States has always been less than one.
Debts during wars may distribute the burden of fighting the war more evenly across generations.
During times of peace in the United States, the ratio of debt to GDP sometimes rose.
Suppose the government changed the tax laws, with the result that people were encouraged to consume more and save less. Using the loanable funds model, a consequence would be
lower interest rates and lower investment.
lower interest rates and greater investment.
higher interest rates and lower investment.
higher interest rates and higher investment.
A policy that induces people to save more shifts
the supply of loanable funds rightward and increases investment.
the supply of loanable funds leftward and decreases investment.
the supply of loanable funds rightward and decreases investment.
the supply of loanable funds leftward and increases investment.
If the budget deficit increases then
a. saving and the interest rate rise
b. saving rises and the interest rate falls
c. saving falls and the interest rate rises
d. saving and the interest rate falls
a
b
c
d
Which of the following events would shift the supply curve from S1 to S2?
In response to tax reform, firms are encouraged to invest more than they previously invested.
In response to tax reform, households are encouraged to save more than they previously saved.
Government goes from running a balanced budget to running a budget deficit.
Any of the above events would shift the supply curve from S1 to S2.
If the equilibrium quantity of loanable funds is $56 billion and if the rate of inflation is 4 percent, then the equilibrium real interest rate is
lower than 6 percent.
6 percent.
between 6 percent and 8 percent.
higher than 8 percent.
Which of the following policy changes would lead to a decrease in the real interest rate and an increase in investment and saving?
a larger investment tax credit
an expansion of eligibility for Individual Retirement Accounts
an increase in income-tax rates, with no change in the government budget deficit or surplus
an increase in government purchases, with no change in taxes
If the nominal interest rate is 2.5 percent and the inflation rate is 2 percent, what is the real interest rate?
a. 0.5 percent
b. 1.25 percent
c. 4.5 percent
d. None of the above is correct.
a
b
c
d
An increase in the quantity of loanable funds traded means that
firms are borrowing less and investment decreases.
firms are borrowing less and investment increases.
firms are borrowing more and investment increases.
firms are borrowing more and investment decreases.
Starting at point A, the enactment of an investment tax credit would likely cause
the quantity of loanable funds traded to increase to $125 and the interest rate to rise to 7% (point C).
the quantity of loanable funds traded to decrease to $75 and the interest rate to fall to 5% (point B).
the quantity of loanable funds traded to decrease to $75 and the interest rate to rise to 7% (point E).
the quantity of loanable funds traded to increase to $125 and the interest rate to fall to 5% (point D).
The first element of a financial crisis is
a. inflation.
b. a decline in confidence in financial institutions.
c. a relaxation of rules and regulations that pertain to the financial system.
d. a large decline in some asset prices.
a
b
c
d
At some point during the financial crisis of 2008–2009, people with uninsured deposits at financial institutions withdrew money from their accounts at those institutions. This phenomenon characterized which element of the financial crisis?
the decline in confidence in financial institutions
the credit crunch
the economic downturn
the decline in asset prices
When a firm wants to borrow directly from the public to finance the purchase of new equipment, it does so by selling shares of stock.
T
F
The financial system coordinates investment and saving, which are important determinants of long-run real GDP.
T
F
Lenders buy bonds and borrowers sell them.
T
F
The sale of either stocks or bonds to raise money is known as equity finance.
T
F
If a share of stock in Skylight Chili sells for $75, the retained earnings per share are $5, and the dividend per share is $2, then the price-earnings ratio is 15.
T
F
Because of differences in tax treatment, municipal bonds pay a higher interest rate than do corporate bonds.
T
F
Credit risk refers to the probability that the issuer of a bond will fail to pay some or all of the interest or principal.
T
F
Public saving is T - G, while private saving is Y - T - C.
T
F
If, for an imaginary closed economy, investment amounts to $12,000 and the government is running a $2,000 deficit, then private saving must amount to $10,000.
T
F
The conventions of national income accounting imply that saving and investment are equal for the economy as a whole and for individual households and firms.
T
F
The ratio of government debt to GDP was higher during the Reagan presidency than at any previous time in U.S. history.
T
F
The term loanable funds refers to all income that is not used for consumption or government expenditures.
T
F
When an economy’s government goes from running a budget deficit to running a budget surplus, the economy’s long-run growth prospects are improved.
T
F
