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Other things the same, an increase in the budget deficit


A) shifts the demand for loanable funds right, so the interest rate rises.
B) shifts the demand for loanable funds left, so the interest rate falls.
C) shifts the supply of loanable funds right, so the interest rate falls.
D) shifts the supply of loanable funds left, so the interest rate rises.

E) A) and D)
F) None of the above

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In a closed economy, if Y is 10,000, T is 1,000, G is 3,000, and C is 5,000, then


A) the government has a budget surplus and investment is 1,000
B) the government has a budget surplus and investment is 2,000
C) the government has a budget deficit and investment is 1,000
D) the government has a budget deficit and investment is 2,000

E) A) and D)
F) B) and C)

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Figure 8-2. The figure depicts a supply-of-loanable-funds curve and two demand-for-loanable-funds curves. Figure 8-2. The figure depicts a supply-of-loanable-funds curve and two demand-for-loanable-funds curves. -Refer to Figure 8-2. What is measured along the horizontal axis of the graph? A) the quantity of loanable funds B) the size of the government budget deficit or surplus C) the real interest rate D) the nominal interest rate -Refer to Figure 8-2. What is measured along the horizontal axis of the graph?


A) the quantity of loanable funds
B) the size of the government budget deficit or surplus
C) the real interest rate
D) the nominal interest rate

E) All of the above
F) A) and B)

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If the inflation rate is 2 percent and the real interest rate is 3 percent, then the nominal interest rate is


A) 5 percent.
B) 1 percent.
C) 1.5 percent
D) 0.67 percent.

E) A) and B)
F) B) and C)

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Index funds


A) typically have a higher rate of return and higher costs than managed mutual funds.
B) typically have a higher rate of return and lower costs than managed mutual funds.
C) typically have a lower rate of return and higher costs than managed mutual funds.
D) typically have a lower rate of return and lower costs than managed mutual funds.

E) All of the above
F) None of the above

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A stock index is


A) an average of a group of stock prices.
B) an average of a group of stock yields.
C) a measure of the risk relative to the profitability of corporations.
D) a report in a newspaper or other media outlet on the price of the stock and earnings of the corporation that issued the stock.

E) None of the above
F) A) and C)

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If there is a surplus of loanable funds, then


A) the quantity demanded is greater than the quantity supplied and the interest rate will rise.
B) the quantity demanded is greater than the quantity supplied and the interest rate will fall.
C) the quantity supplied is greater than the quantity demanded and the interest rate will rise.
D) the quantity supplied is greater than the quantity demanded and the interest rate will fall.

E) All of the above
F) B) and C)

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Long-term bonds are


A) riskier than short-term bonds, and so interest rates on long-term bonds are usually lower than interest rates on short-term bonds.
B) riskier than short-term bonds, and so interest rates on long-term bonds are usually higher than interest rates on short-term bonds.
C) less risky than short-term bonds, and so interest rates on long-term bonds are usually lower than interest rates on short-term bonds.
D) less risky than short-term bonds, and so interest rates on long-term bonds are usually higher than interest rates on short-term bonds.

E) B) and C)
F) None of the above

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Mutual funds are a type of financial intermediary.

A) True
B) False

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A high price-earnings ratio for a stock indicates that either the stock is


A) undervalued or people are relatively optimistic about the corporation's prospects.
B) overvalued or people are relatively optimistic about the corporation's prospects.
C) overvalued or people are relatively pessimistic about the corporation's prospects.
D) undervalued or people are relatively pessimistic about the corporation's prospects.

E) All of the above
F) A) and B)

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A corporation's earnings are the amount of revenue it receives for the sale of its products


A) minus its cost of production as measured by its accountants. Earnings must be paid out as dividends.
B) minus its cost of production as measured by its accountants. Earnings may be paid out as dividends or retained by the corporation.
C) minus its direct and indirect costs as measured by its economists. Earnings must be paid out as dividends.
D) minus its direct and indirect cost as measure by its economists. Earnings may be paid out as dividends or retained by the corporation.

E) All of the above
F) A) and D)

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Suppose in some country that the first $5,000 of interest income is exempt from income tax. If the government then removed this exemption


A) the interest rate and investment would rise.
B) the interest rate would rise and investment would fall.
C) the interest rate would fall and investment would rise.
D) the interest rate and investment would fall.

E) C) and D)
F) B) and D)

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Lenders sell bonds and borrowers buy them.

A) True
B) False

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A particular stock pays an annual dividend of $2 per share and the annual dividend yield is 4 percent. The price of a share of this stock is


A) $2.08.
B) $5.00.
C) $8.00
D) $50.00.

E) A) and D)
F) B) and C)

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Figure 8-4. On the horizontal axis of the graph, L represents the quantity of loanable funds in billions of dollars. Figure 8-4. On the horizontal axis of the graph, L represents the quantity of loanable funds in billions of dollars. -Refer to Figure 8-4. Regard the position of the Supply curve as fixed, as on the graph. If the real interest rate is 8 percent, the inflation rate is 3 percent, and the market for loanable funds is in equilibrium, then the position of the demand-for-loanable-funds curve must be A) D<sub>1</sub>. B) D<sub>2</sub>. C) between D<sub>1</sub>and D<sub>2</sub>. D) to the right of D<sub>2</sub>. -Refer to Figure 8-4. Regard the position of the Supply curve as fixed, as on the graph. If the real interest rate is 8 percent, the inflation rate is 3 percent, and the market for loanable funds is in equilibrium, then the position of the demand-for-loanable-funds curve must be


A) D1.
B) D2.
C) between D1and D2.
D) to the right of D2.

E) B) and D)
F) B) and C)

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It is claimed that a secondary advantage of mutual funds is that


A) an investor can avoid investment charges and fees.
B) they give ordinary people access to loanable funds for investing.
C) they usually outperform stock market indexes.
D) they give ordinary people access to the skills of professional money managers.

E) B) and C)
F) None of the above

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The country of Cedarland does not trade with any other country. Its GDP is $17 billion. Its government purchases $4 billion worth of goods and services each year, collects $6 billion in taxes, and provides $1 billion in transfer payments to households. Private saving in Cedarland is $4 billion. For Cedarland,


A) investment is $6 billion and consumption is $9 billion.
B) investment is $6 billion and consumption is $8 billion.
C) investment is $5 billion and consumption is $8 billion.
D) investment is $5 billion and consumption is $7 billion.

E) A) and B)
F) A) and C)

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Suppose the government ran a budget surplus in 2010 and a larger surplus in 2011. The loanable funds model would predict that, as a result of the increase in the surplus,


A) both the government debt and interest rates increased between 2010 and 2011.
B) both the government debt and interest rates decreased between 2010 and 2011.
C) the government debt increased and interest rates decreased between 2010 and 2011.
D) the government debt decreased and interest rates increased between 2010 and 2011.

E) B) and D)
F) None of the above

Correct Answer

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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.

E) A) and C)
F) B) and D)

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Suppose a country had a smaller increase in debt in 2011 than it had in 2010. Then other things the same, we would expect


A) lower interest rates and investment in 2011 than in 2010.
B) lower interest rates and greater investment in 2011 than in 2010.
C) higher interest rates and greater investment in 2011 than in 2010.
D) higher interest rates and lower investment in 2011 than in 2010.

E) None of the above
F) A) and D)

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