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Test Macroeconomics Chapter Practice 13 Saving, Investment, and the Financial System Spring 2008 MULTIPLE CHOICE 1. Papa Mario's Pizza Company sells common stock. a. They are using equity financing and the return shareholders earn is fixed. b. They are using equity financing and the return shareholders earn depends on how profitable the company is. c. They are using debt financing and the return shareholders earn is fixed. d. They are using debt financing and the return shareholders earn depends on how profitable the company is. Register to View AnswerOBJ: TYPE: M DIF: 1 REF: SECTION: 13.1 2. People who buy newly issued stock in a corporation such as Rockwood Pottery provide a. debt finance and so become part owners of Rockwood. b. debt finance and so become creditors of Rockwood. c. equity finance and so become part owners of Rockwood. d. equity finance and so become creditors of Rockwood. Register to View AnswerOBJ: TYPE: M DIF: 1 REF: SECTION: 13.1 3. If Huedepool Beer runs into financial difficulty, the stockholders as a. part owners of Huedepool are paid before bondholders get paid anything at all. b. part owners of Huedepool are paid after bondholders get paid. c. creditors of Huedepool are paid before bondholders get paid anything at all. d. creditors of Huedepool are paid after bondholders get paid. Register to View AnswerOBJ: TYPE: M DIF: 1 REF: SECTION: 13.1 4. The price of stock traded on exchanges are determined by a. the Corporate Stock Administration. b. NASDAQ. c. the supply and demand for the stock. d. All of the above are correct. Register to View AnswerOBJ: TYPE: M DIF: 1 REF: SECTION: 13.1 5. Buskins Corporation has issued 2 million shares of stocks. Their earnings were $10 million dollars of which they retained $6 million. What was the dividend per share? a. $2. b. $3. c. $5 d. None of the above are correct. Register to View AnswerOBJ: TYPE: M DIF: 1 REF: SECTION: 13.1 1 6. Which of the following is a financial intermediary? a. a mutual fund b. the stock market c. a U.S. government bond d. None of the above are correct. Register to View AnswerOBJ: TYPE: M DIF: 1 REF: SECTION: 13.1 7. A mutual fund a. is a financial market where small firms mutually agree to sell stocks and bonds to raise funds. b. is funds set aside by local governments to lend to small firms who want to invest in projects that are mutually beneficial to the firm and community. c. sells stocks and bonds on behalf of small and less known firms who would otherwise have to pay high interest to obtain credit. d. is an institution that sells shares to the public and uses the proceeds to buy a selection of various types of stocks, bonds, or both stocks and bonds. Register to View AnswerOBJ: TYPE: M DIF: 1 REF: SECTION: 13.1 8. The primary advantage of mutual funds is that they a. always make a return that "beats the market." b. allow people with small amounts of money to diversify. c. provide customers with a medium of exchange. d. All of the above are correct. Register to View AnswerOBJ: TYPE: M DIF: 1 REF: SECTION: 13.1 9. In a closed economy, national saving is a. usually greater than investment. b. equal to investment. c. usually less than investment because of the leakage of taxes. d. always less than investment. Register to View AnswerOBJ: TYPE: M DIF: 1 REF: SECTION: 13.2 10. 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. Register to View AnswerOBJ: TYPE: M DIF: 1 REF: SECTION: 13.2 11. Suppose that in a closed economy GDP is equal to 10,000, Taxes are equal to 1,500, Consumption equals 6,500, and Government expenditures equal 2,000. What is national saving? a. -500 b. 0 c. 1500 d. None of the above are correct. Register to View AnswerOBJ: TYPE: M DIF: 2 REF: SECTION: 13.2 2 12. Suppose that in a closed economy GDP is equal to 10,000, Taxes are equal to 2,000, Consumption equals 6,500, and Government expenditures equal 2,500. What are private saving and public saving? a. 1500 and -500 b. 1500 and 500 c. 1000 and -500 d. 1000 and 500 Register to View AnswerOBJ: TYPE: M DIF: 2 REF: SECTION: 13.2 13. Suppose that in a closed economy GDP is equal to 10,000, taxes are equal to 2,500 Consumption equals 6,500 and Government expenditures equal 2,000. What are private saving, public saving, and national saving? a. 1500, 1000, 500 b. 1000, 500, 1500 c. 500, 1500, 1000 d. None of the above are correct. Register to View AnswerOBJ: TYPE: M DIF: 3 REF: SECTION: 13.2 14. Suppose that consumption is 6,500, taxes are 1,500, and government expenditures are 2,000. If national savings are 1,000 and the economy is closed what is GDP? a. 9,500 b. 10,000 c. 10,500 d. None of the above are correct. Register to View AnswerOBJ: TYPE: M DIF: 2 REF: SECTION: 13.2 15. The country of Aquilonia does not trade with any other country. Its GDP is $30 billion. Its government purchases $5 billion worth of goods and services each year, collects $7 billion in taxes, and provides $3 billion in transfer payments to households. Private saving in Aquilonia is $5 billion. What is consumption and investment? a. $18 billion and $5 billion b. $21 billion and $4 billion c. $13 billion and $7 billion d. There is not enough information to answer the question. Register to View AnswerOBJ: TYPE: M DIF: 3 REF: SECTION: 13.2 16. Which of the following is not always correct in a closed economy? a. National saving equals private saving plus public saving. b. Net exports equal zero. c. Real GDP measures both income and expenditures. d. Private saving equals investment. Register to View AnswerOBJ: TYPE: M DIF: 1 REF: SECTION: 13.2 3 17. If the tax revenue of the federal government exceeds spending, then the government a. runs a budget deficit. b. runs a budget surplus. c. runs a national debt. d. will increase taxes. Register to View AnswerOBJ: TYPE: M DIF: 1 REF: SECTION: 13.2 18. A budget surplus is created if a. the government sells more bonds than it buys back. b. the government spends more than it receives in tax revenue. c. private savings are greater than zero. d. None of the above are correct. Register to View AnswerOBJ: TYPE: M DIF: 1 REF: SECTION: 13.2 19. Henry buys a bond issued by Ralston Purina, which uses the funds to buy new machinery for one of its factories. a. Henry and Ralston Purina are both investing. b. Henry and Ralston Purina are both saving. c. Henry is investing; Ralston Purina is saving. d. Henry is saving; Ralston Purina is investing. Register to View AnswerOBJ: TYPE: M DIF: 2 REF: SECTION: 13.2 20. Fred is considering expanding his dress shop. If interest rates rise he is a. less likely to expand. This illustrates why the supply of loanable funds slopes downward. b. more likely to expand. This illustrates why the supply of loanable funds slopes upward. c. less likely to expand. This illustrates why the demand for loanable funds slopes downward. d. more likely to expand. This illustrates why the demand for loanable funds slopes upward. Register to View AnswerOBJ: TYPE: M DIF: 1 REF: SECTION: 13.3 21. The slope of the supply of loanable funds curve represents the a. positive relation between the real interest rate and investment. b. positive relation between the real interest rate and saving. c. negative relation between the real interest rate and investment. d. negative relation between the real interest rate and saving. Register to View AnswerOBJ: TYPE: M DIF: 1 REF: SECTION: 13.3 4 22. If the current market interest rate for loanable funds is below the equilibrium level, then the quantity of loanable funds a. demanded will exceed the quantity of loanable funds supplied and the interest rate will rise. b. supplied will exceed the quantity of loanable funds demanded and the interest rate will rise. c. demanded will exceed the quantity of loanable funds supplied and the interest rate will fall. d. supplied will exceed the quantity of loanable funds demanded and the interest rate will fall. Register to View AnswerOBJ: TYPE: M DIF: 2 REF: SECTION: 13.3 23. If the current market interest rate for loanable funds is above the equilibrium level, then a. the quantity of loanable funds demanded will exceed the quantity of loanable funds supplied and the interest rate will rise. b. the quantity of loanable funds supplied will exceed the quantity of loanable funds demanded and the interest rate will rise. c. the quantity of loanable funds demanded will exceed the quantity of loanable funds supplied and the interest rate will fall. d. the quantity of loanable funds supplied will exceed the quantity of loanable funds demanded and the interest rate will fall. Register to View AnswerOBJ: TYPE: M DIF: 2 REF: SECTION: 13.3 24. If the current market interest rate for loanable funds is below the equilibrium level, then there is a a. surplus of loanable funds and the interest rate will rise. b. shortage of loanable funds and the interest rate will rise. c. shortage of loanable funds and the interest rate will fall. d. surplus of loanable funds and the interest rate will fall. Register to View AnswerOBJ: TYPE: M DIF: 2 REF: SECTION: 13.3 25. What would happen in the market for loanable funds if the government were to increase the tax on interest income? a. The supply of loanable funds would shift right. b. The demand for loanable funds would shift right. c. The supply of loanable funds would shift left. d. The demand for loanable funds would shift left. Register to View AnswerOBJ: M DIF: TYPE: 2 REF: SECTION: 13.3 26. Suppose that the government were to replace the income tax with a consumption tax. This would make the interest rate a. and investment increase. b. and investment decrease. c. increase and investment decrease. d. decrease and investment increase. Register to View AnswerOBJ: TYPE: M DIF: 3 REF: SECTION: 13.3 5 27. In 1995, Congressperson Bill Archer proposed that the income tax be replaced with a consumption tax. If his program had been passed, then today it is likely that the equilibrium interest rate a. and quantity of loanable funds would be lower. b. and quantity of loanable funds would be higher. c. would be higher and the equilibrium quantity of loanable funds would be lower. d. would be lower and the equilibrium quantity of loanable funds would be higher. Register to View AnswerOBJ: TYPE: M DIF: 2 REF: SECTION: 13.3 28. What would happen in the market for loanable funds if the government were to decrease the tax on interest income? a. There would be an increase in the amount of loanable funds borrowed. b. There would be a reduction in the amount of loanable funds borrowed. c. There would be no change in the amount of loanable funds borrowed. d. The change in loanable funds borrowed would be ambiguous. Register to View AnswerOBJ: TYPE: M DIF: 2 REF: SECTION: 13.3 29. If Congress reduced the tax rate on interest income, investment a. would increase and saving would decrease. b. would decrease and saving would increase. c. and saving would increase. d. and saving would decrease. Register to View AnswerOBJ: TYPE: M DIF: 2 REF: SECTION: 13.3 30. Suppose a country has a consumption tax that is similar to a state sales tax. If its government eliminates the consumption tax and replaces it with an income tax that includes an income tax on interest from savings, what happens? a. There is no change in the interest rate or saving. b. The interest rate decreases and saving increases. c. The interest rate increases and saving decreases. d. None of the above are correct. Register to View AnswerOBJ: TYPE: M DIF: 3 REF: SECTION: 13.3 31. Suppose the U.S. government allowed taxpayers to earn their first $5,000 of interest income tax free. This would shift the a. supply for loanable funds right making interest rates fall. b. supply of loanable funds left making interest rates rise. c. demand for loanable funds right making the interest rate rise. d. demand for loanable funds left making the interest rate fall. Register to View AnswerOBJ: TYPE: M DIF: 2 REF: SECTION: 13.3 32. Other things the same, countries that tax saving less will have a. lower interest rates and higher investment than other countries. b. lower interest rates and lower investment than other countries. c. higher interest rates and higher investment than other countries. d. higher interest rates and lower investment than other countries. Register to View AnswerOBJ: TYPE: M DIF: 2 REF: SECTION: 13.3 6 33. Suppose that Congress were to institute an investment tax credit. What would happen in the market for loanable funds? a. The demand for loanable funds would shift left. b. The supply of loanable funds would shift left. c. The demand for loanable funds would shift right. d. The supply of loanable funds would shift right. Register to View AnswerOBJ: TYPE: M DIF: 1 REF: SECTION: 13.3 34. Suppose that Congress were to repeal an investment tax credit. What would happen in the market for loanable funds? a. The demand and supply of loanable funds would shift right. b. The demand and supply of loanable funds would shift left. c. The supply of loanable funds would shift right. d. The demand for loanable funds would shift left. Register to View AnswerOBJ: TYPE: M DIF: 1 REF: SECTION: 13.3 35. A country repealed its investment tax credit. The effects of this are represented by shifting the a. demand for and the supply of loanable funds to the right. b. demand for and the supply of loanable funds to the left. c. supply of loanable funds to the right and the demand for loanable funds to the left. d. None of the above are correct. Register to View AnswerOBJ: TYPE: M DIF: 2 REF: SECTION: 13.3 36. 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. Register to View AnswerOBJ: TYPE: M DIF: 2 REF: SECTION: 13.3 37. Suppose Congress institutes an investment tax credit. What would happen in the market for loanable funds? a. The interest rate and investment would fall. b. The interest rate and investment would rise. c. The interest rate would rise and investment would fall. d. None of the above is necessarily correct. Register to View AnswerOBJ: TYPE: M DIF: 2 REF: SECTION: 13.3 38. A poor country decides to institute an investment tax credit. As a result a. interest rates rise and investment falls. b. interest rates fall and investment rises. c. both interest rates and investment fall. d. both interest rates and investment rise. Register to View AnswerOBJ: TYPE: M DIF: 2 REF: SECTION: 13.3 7 39. If the government currently has a budget deficit, a. it does not necessarily have a debt. b. the debt is increasing. c. government expenditures are greater than taxes. d. All of the above are correct. Register to View AnswerOBJ: TYPE: M DIF: 2 REF: SECTION: 13.3 40. In the last few years the U.S. government has gone from a surplus to a deficit. Other things the same, this means that a. supply of loanable funds shifted right. b. supply of loanable funds shifted left. c. demand for loanable funds shifted right. d. demand for loanable funds shifted left. Register to View AnswerOBJ: TYPE: M DIF: 2 REF: SECTION: 13.3 41. If Canada increases its budget deficit, it will reduce a. private saving and so shift the supply of loanable funds left. b. investment and so shift the demand for loanable funds left. c. public saving and so shift the supply of loanable funds left. d. None of the above are correct. Register to View AnswerOBJ: TYPE: M DIF: 2 REF: SECTION: 13.3 42. An increase in the budget deficit would cause a a. shortage of loanable funds at the original interest rate, which would lead to falling interest rates. b. surplus of loanable funds at the original interest rate, which would lead to rising interest rates. c. shortage of loanable funds at the original interest rate, which would lead to rising interest rates. d. surplus of loanable funds at the original interest rate, which would lead to falling interest rates. Register to View AnswerOBJ: TYPE: M DIF: 3 REF: SECTION: 13.3 43. An increase in the budget deficit a. makes investment spending fall. b. makes investment spending rise. c. does not affect investment spending. d. may increase, decrease, or not affect investment spending. Register to View AnswerOBJ: TYPE: M DIF: 1 REF: SECTION: 13.3 44. Other things the same, if the government increases transfer payments to households, then a. investment will rise. b. the rate of interest will rise. c. public saving will rise. d. the market for loanable funds will be unaffected. Register to View AnswerOBJ: TYPE: M DIF: 3 REF: SECTION: 26.3 8 45. You are required to testify before congress concerning the effects of an increase in the government surplus. Which is the correct thing to say? a. The debt and interest rates will rise. b. The debt and interest rates will fall. c. The debt will rise and interest rates will fall. d. The debt will fall and interest rates will rise. Register to View AnswerOBJ: TYPE: M DIF: 1 REF: SECTION: 13.3 46. Between 2000 and 2001 the debt of Bolivia rose. Other things the same, we would expect that interest rates a. and investment rose. b. rose and investment fell. c. fell and investment rose. d. and investment fall. Register to View AnswerOBJ: TYPE: M DIF: 1 REF: SECTION: 13.3 47. When the government runs a budget deficit, a. interest rates are lower than they would be otherwise. b. national saving is higher than it would be otherwise. c. investment is lower than it would be otherwise. d. All of the above are correct. Register to View AnswerOBJ: TYPE: M DIF: 1 REF: SECTION: 13.3 48. Investment rises and interest rates fall. Which of the following could explain these changes? a. The government went from surplus to deficit. b. The government instituted an investment tax credit. c. The government reduced the tax rate on savings. d. None of the above are correct. Register to View AnswerOBJ: TYPE: M DIF: 2 REF: SECTION: 13.3 49. Interest rates and investment rise. Which of the following could explain these changes? a. the government runs a larger deficit b. the government institutes an investment tax credit c. the government replaces the income tax with a consumption tax d. None of the above are correct. Register to View AnswerOBJ: TYPE: M DIF: 2 REF: SECTION: 13.3 50. Interest rates fall and investment falls. Which of the following could explain these changes? a. the government goes from a surplus to a deficit b. the government repeals an investment tax credit c. the government replaces a consumption tax with an income tax d. None of the above are correct. Register to View AnswerOBJ: TYPE: M DIF: 2 REF: SECTION: 13.3 9 Use the figure below for the following questions. Figure 13-1 51. Refer to Figure 13-1. Which of the graphs in the figure above shows the effects of an increase in the tax rate on saving? a. graph 1 b. graph 2 c. graph 3 d. None of the above are correct. Register to View AnswerOBJ: TYPE: M DIF: 2 REF: SECTION: 13.3 10 ... 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