Saving, Investment and The Financial System (Questions)

Saving, Investment and The Financial System 1. We would expect the interest rate on Bond A to be higher than the interest rate on Bond B if the two bonds have identical characteristics except that A. the credit risk associated with Bond A is lower than the credit risk associated with Bond B. B. Bond A was issued by the city of Philadelphia and Bond B was issued by Red Hat Corporation. C. Bond A has a term of 20 years and Bond B has a term of 2 years. D. All of the above are correct. 2. A national chain of grocery stores wants to finance the construction of several new stores. The firm has limited internal funds, so it likely will A. demand the required funds by buying bonds. B. demand the required funds by selling bonds. C. supply the required funds by buying bonds. D. supply the required funds by selling bonds. 3. Municipal bonds pay a relatively A. low rate of interest because of their high default risk and because the interest they pay is subject to federal income tax. B. low rate of interest because of their low default risk and because the interest they pay is not subject to federal income tax. C. high rate of interest because of their high default risk and because federal taxes must be paid on the interest they pay. D. high rate of interest because of their low default risk and because the interest they pay is not subject to federal income tax. 4. In the Coen Brothers’ movie The Hudsucker Proxy the board of directors picks someone to run the company who 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. rises. the price of a share of stock in the Hudsucker corporation should rise as the demand for shares 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. 5. In 2008, CDZ Corporation had total earnings of $500 million and CDZ retained 30 percent of its earnings for future investments. If the price of a share of CDZ stock is $70 and if 80 million shares of its stock were outstanding, then what is the price-earnings ratio? A. 0.14 B. 11.2 C. 16.0 D. 37.3 6. 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. Use the following table to answer the following questions. Table 26-1 Stock Sym Yld % P/E Vol 100s Hi Lo Close Net Chg. GenMills GIS 2.5 35 13758 44.3 43.5 43.97 –0.63 Gillette G 2.2 31 30428 31.1 29.7 30 0.17 Graco GGG 1.2 16 705 24.2 23.1 23.95 –0.53 Hershey HSY 2.1 38 5418 63.4 61.7 62.45 0.72 7. Refer to Table 26-1. In dollar terms, which company paid the highest dividend per share? A. GenMills B. Gillette C. Graco D. Hershey 8. Refer to Table 26-1. What was Hershey's earnings per share? A. $38 B. $1.64 C. $1.31 D. $0.61 9. Refer to Table 26-1. Assume that the closing price was also the average price at which each stock transaction took place. What was the total dollar volume of Gillette stock traded that day? A. $912,840,000 B. $91,284,000 C. $9,128,400 D. $912,840 10. Refer to Table 26-1. Which firm had the P/E ratio that was closest to the historically typical P/E ratio? A. GenMills B. Gillette C. Graco D. Hershey 11. Which of the following is an example of financial intermediation? A. John buys shares of stock issued by a fast food company. B. A foreign government buys bonds issued by the U.S. Treasury. C. Susan makes a deposit at a bank and the bank uses this money to make an auto loan to Ferguson. D. None of the above is correct. 12. Stocks and bonds A. and checking accounts are all stores of value and commonly function as mediums of exchange. B. and checking accounts are all stores of value, but only stocks and bonds commonly function as mediums of exchange. C. and checking accounts are all stores of value, but only checking accounts commonly function as mediums of exchange. D. and checking accounts all commonly function as mediums of exchange, but only stocks and bonds are a store of value. 13. In a closed economy, what remains after paying for consumption and government purchases is A. national disposable income. B. national saving. C. public saving. D. private saving. 14. In a closed economy, what does (Y - T - C) represent? A. national saving B. government tax revenue C. public saving D. private saving 15. In a small closed economy investment is $50 billion and private saving is $55 billion. What are public saving and national saving? A. $60 billion and $5 billion B. $50 billion and -$5 billion C. $5 billion and $60 billion D. -$5 billion and $50 billion 16. 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 both 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. 17. Suppose that in a closed economy GDP is 11,000, consumption is 7,500, and taxes are 2,000. What value of government purchases would make national savings equal to 1,000 and at that value would the government have a deficit or surplus? A. 2,500, deficit B. 2,500, surplus C. 1,000, deficit D. 1,000, surplus 18. In the small closed economy of San Lucretia, the currency is the denar. Statistics for last year show that private saving was 60 billion denars, taxes were 70 billion denars, government purchases of goods and services were 80 billion denars, there were no transfer payments by the government, and GDP was 400 billion denars. What were consumption and investment in San Lucretia? A. 270 billion denars, 50 billion denars B. 260 billion denars, 60 billion denars C. 250 billion denars, 70 billion denars D. None of the above is correct. 19. The slope of the demand for loanable funds curve represents the A. positive relation between the real interest rate and investment. B. negative relation between the real interest rate and investment. C. positive relation between the real interest rate and saving. D. negative relation between the real interest rate and saving. 20. If there is a surplus of loanable funds, then A. the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is above equilibrium. B. the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is below equilibrium. C. the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is above equilibrium. D. the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is below equilibrium. 21. Which of the following would necessarily increase the equilibrium interest rate? A. The demand for and the supply of loanable funds shift right. B. The demand for and the supply of loanable funds shift left. C. The demand for loanable funds shifts right and the supply of loanable funds shifts left. D. The demand for loanable funds shifts left and the supply of loanable funds shifts right. 22. According to the loanable funds model, which of the following events would result in higher interest rates and greater saving? A. Firms become pessimistic about the future and, as a result, they cut back on their plans to buy new equipment and build new factories. B. The government goes from running a budget deficit to running a budget surplus. C. Congress passes a reform of the tax laws that encourages greater saving. D. Congress passes a reform of the tax laws that encourages greater investment. Figure 26-1. The figure depicts a demand-for-loanable-funds curve and two supply-of-loanable-funds curves. S1 S2 Demand 23. Refer to Figure 26-1. What is measured along the vertical axis of the graph? A. the nominal interest rate B. the real interest rate C. the quantity of investment D. the quantity of saving 24. Refer to Figure 26-1. Which of the following events would shift the supply curve from S1 to S2? A. In response to tax reform, firms are encouraged to invest more than they previously invested. B. In response to tax reform, households are encouraged to save more than they previously saved. C. Government goes from running a balanced budget to running a budget deficit. D. Any of the above events would shift the supply curve from S1 to S2. Chapter 29: The Monetary System 1. Consider five individuals with different occupations. Mary (provides legal advice; Clark (grows tomatoes; Nathan (styles hair; wants knives sharpened) wants legal advice) wants tomatoes) Polly (brews beer; wants knives sharpened) Paul (sharpens knives; wants beer) Which of the following pairs of individuals has a double coincidence of wants? A. Mary and Clark B. Clark and Nathan C. Nathan and Polly D. Polly and Paul 2. You pay for cheese and bread from the deli with currency. Which function of money does this best illustrate? A. medium of exchange B. unit of account C. store of value D. liquidity 3. Paper dollars A. are commodity money and gold coins are fiat money. B. are fiat money and gold coins are commodity money. C. and gold coins are both commodity monies. D. and gold coins are both fiat monies. 4. Money market mutual funds are included in A. M1 but not M2. B. M1 and M2. C. M2 but not M1. D. neither M1 nor M2. 5. Values of Assets (Table). Refer to Value of Assets. What is the value of M1 in billions of dollars? Asset Amount in $Billions Small time deposits 780 Large time deposits 1,700 Demand deposits 450 Other checkable deposits 370 Savings deposits 4950 Traveler's checks 5 Money market mutual funds 740 Currency 880 Miscellaneous categories of M2 50 A. 1,705 B. 2,485 C. 6,295 D. 7,075 6. Values of Assets (Table). Refer to Value of Assets. What is the value of M2 in billions of dollars? A. 9,925 B. 8,225 C. 7,485 D. 7,445 7. Given the following information, what are the values of M1 and M2? A. M1 = $400 billion, M2 = $2,475 billion. B. M1 = $125 billion, M2 = $3,025 billion. C. M1 = $425 billion, M2 = $2, 450 billion. D. M1 = $425 billion, M2 = $1,875 billion. 8. The New York Federal Reserve Bank A. president always gets to vote at the FOMC meetings. B. conducts open market transactions. C. is one of 12 regional Federal Reserve Banks. D. All of the above are correct. 9. An open-market purchase A. increases the number of dollars and the number of bonds in the hands of the public. B. increases the number of dollars in the hands of the public and decreases the number of bonds in the hands of the public. C. decreases the number of dollars and the number of bonds in the hands of the public. D. decreases the number of dollars in the hands of the public and increases the number of bonds in the hands of the public. 10. The Fed can influence unemployment in A. the short run and in the long run. B. the short run, but not in the long run. C. the long run, but not in the short run. D. neither the short nor the long run. 11. Suppose the banking system currently has $300 billion in reserves; the reserve requirement is 10 percent; and excess reserves amount to $3 billion. What is the level of deposits? A. $3,300 billion B. $2,970 billion C. $2,700 billion D. $2,673 billion 12. A bank loans Kellie's Print Shop $350,000 to remodel a building near campus to use as a new store. On their respective balance sheets, this loan is A. an asset for the bank and a liability for Kellie's Print Shop. The loan increases the money supply. B. an asset for the bank and a liability for Kellie's Print Shop. The loan does not increase the money supply. C. a liability for the bank and an asset for Kellie's Print Shop. The loan increases the money supply. D. a liability for the bank and an asset for Kellie's Print Shop. The loan does not increase the money supply. 13. In the nation of Wiknam, the money supply is $80,000 and reserves are $18,000. Assuming that people hold only deposits and no currency, and that banks hold no excess reserves, then the reserve requirement is A. 29 percent. B. 22.5 percent. C. 16 percent. D. None of the above is correct. Table 29-2. Assets Reserves Liabilities $750 Deposits $10,000 Loans 9,250 14. An economy starts with $10,000 in currency. All of this currency is deposited into a single bank, and the bank then makes loans totaling $9,250. The T-account of the bank is shown below. Refer to Table 29-2. The bank’s reserve ratio is A. 7.50 percent. B. 8.12 percent. C. 92.50 percent. D. 100 percent. 15. Table 29-2. An economy starts with $10,000 in currency. All of this currency is deposited into a single bank, and the bank then makes loans totaling $9,250. The T-account of the bank is shown below. Refer to Table 29-2. If all banks in the economy have the same reserve ratio as this bank, then the value of the economy’s money multiplier is A. 1.33. B. 10.00. C. 10.81. D. 13.33. 16. Table 29-2. An economy starts with $10,000 in currency. All of this currency is deposited into a single bank, and the bank then makes loans totaling $9,250. The T-account of the bank is shown below. Refer to Table 29-2. If all banks in the economy have the same reserve ratio as this bank, then an increase in reserves of $150 for this bank has the potential to increase deposits for all banks by A. $866.67. B. $1,666.67. C. $2,000.00. D. an infinite amount. 17. To decrease the money supply, the Fed can A. buy government bonds or increase the discount rate. B. buy government bonds or decrease the discount rate. C. sell government bonds or increase the discount rate. D. sell government bonds or decrease the discount rate. 18. In a fractional-reserve banking system, a decrease in reserve requirements A. increases both the money multiplier and the money supply. B. decreases both the money multiplier and the money supply. C. increases the money multiplier, but decreases the money supply. D. decreases the money multiplier, but increases the money supply. 19. If the reserve ratio is 15 percent, and banks do not hold excess reserves, and people hold only deposits and no currency, then when the Fed sells $65 million worth of bonds to the public, bank reserves A. increase by $65 million and the money supply eventually increases by $266.67 million. B. increase by $65 million and the money supply eventually increases by $433.33 million. C. decrease by $65 million and the money supply eventually decreases by $266.67 million. D. decrease by $65 million and the money supply eventually decreases by $433.33 million. 20. The banking system currently has $100 billion of reserves, none of which are excess. People hold only de-posits and no currency, and the reserve requirement is 10 percent. If the Fed lowers the reserve requirement to 8 percent and at the same time buys $10 billion worth of bonds, then by how much does the money supply change? A. It rises by $225 billion. B. It rises by $375 billion. C. It rises by $675 billion. D. None of the above is correct.