UNIT 26: SAVING, INVESTMENT AND THE FINANCIAL SYSTEM

Question 1
Nina wants to buy and operate an ice-cream truck but doesn’t have the financial resources to
start the business. She borrows $5,000 from her friend Max, to whom she promises an interest
rate of 7 percent, and gets another $10,000 from her friend David, to whom she promises a
third of her profits. What best describes this situation?
Select one:
a. Max is a stockholder, and Nina is a bondholder.
b. Max is a stockholder, and David is a bondholder.
c. David is a stockholder, and Max is a bondholder.
d. David is a stockholder, and Nina is a bondholder.
Question 2
If the government collects more in tax revenue than it spends, and households consume more
than they get in after-tax income, then
Select one:
a. private saving is positive, but public saving is negative.
b. private and public saving are both negative.
c. private saving is negative, but public saving is positive.
d. private and public saving are both positive.
Question 3
A closed economy has income of $1,000, government spending of $200, taxes of $150, and
investment of $250. What is private saving?
Select one:
a. $300
b. $100
c. $200
d. $400
Question 4
The primary economic function of the financial system is to
Select one:
a. match one person’s consumption expenditures with another person’s capital
expenditures.
b. provide expert advice to savers and investors.
c. keep interest rates low.
d. match one person’s saving with another person’s investment.
Question 5
The fact that borrowers sometimes default on their loans by declaring bankruptcy is directly
related to the characteristic of a bond called
Select one:
a. private risk.
b. interest risk.
c. credit risk.
d. term risk.
Question 6
Which of the following statements is correct?
Select one:
a. The owners of bonds sold by the Microsoft Corporation are part owners of that
corporation.
b. The expected future profitability of a corporation influences the demand for that
corporation’s stock.
c. All bonds are, by definition, perpetuities.
d. When a corporation sells stock as a means of raising funds it is engaging in debt
finance.
Question 7
We associate the term debt finance with
Select one:
a. the bond market, and we associate the term equity finance with the stock market.
b. financial intermediaries, and we associate the term equity finance with financial markets.
c. the stock market, and we associate the term equity finance with the bond market.
d. financial markets, and we associate the term equity finance with financial intermediaries.
Question 8
Two bonds have the same term to maturity. The first was issued by a central government and
the probability of default is believed to be low. The other was issued by a corporation and the
probability of default is believed to be high. Which of the following is correct?
Select one:
a. It is not possible to say if one bond has a higher interest rate than the other.
b. Because of the differences in tax treatment and credit risk, the state bond should have
the higher interest rate.
c. Because of the differences in tax treatment and credit risk, the corporate bond
should have the higher interest rate.
d. Because they have the same term to maturity the interest rates should be the same.
Question 9
The sale of bonds
Select one:
a. to raise money is called debt finance, while the sale of stocks to raise funds is
called equity finance.
b. to raise money is called equity finance, while the sale of stocks to raise funds is called
debt finance.
c. and stocks to raise money is called debt finance.
d. and stocks to raise money is called equity finance.
Question 10
In the early 2020 Vietnam is suffering from Corona virus threat. What effect would we expect
this to have on the stock of companies?
Select one:
a. raise the supply of the existing shares of stock, causing the price to fall
b. raise the supply of the existing shares of stock, causing the price to rise
c. decrease the demand for existing shares of the stock, causing the price to fall
d. raise the demand for existing shares of the stock, causing the price to rise
Question 11
Which of the following statements is correct?
Select one:
a. Expectations about the business cycle have no impact on stock prices.
b. A general, persistent decline in stock prices may signal that the economy is about
to enter a recession because low stock prices may mean that people are
expecting low corporate profits.
c. A general, persistent decline in stock prices may signal that the economy is about to
enter a boom period because people will be able to buy stock for less money.
d. A general, persistent decline in stock prices may signal that the economy is about to
enter a recession because low stock prices mean that corporations have had low profits
in the past.
Question 12
Stocks and bonds
Select one:
a. and checking accounts are all stores of value, but only checking accounts
commonly function as mediums of exchange.
b. and checking accounts all commonly function as mediums of exchange, but only stocks
and bonds are a store of value.
c. and checking accounts are all stores of value and commonly function as mediums of
exchange.
d. and checking accounts are all stores of value, but only stocks and bonds commonly
function as mediums of exchange.
Question 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.
Select one:
a. Economists are skeptical of both claims.
b. Economists are skeptical of the first claim, but strongly agree with the second.
c. Economists strongly agree with the first claim, but are skeptical of the second.
d. Economists strongly agree with both claims.
Question 14
The old adage, “Don’t put all your eggs in one basket,” is very similar to a modern bit of advice
concerning financial matters:
Select one:
a. “Diversify.”
b. “Use a medium of exchange.”
c. “Intermediate.”
d. “Buy lowrisk bonds.”
Question 15
Which of the following is a certificate of indebtedness?
Select one:
a. both stocks and bonds
b. stocks but not bonds
c. neither stocks nor bonds
d. bonds but not stocks
Question 16
A creditor of a corporation holds
Select one:
a. stocks sold by the corporation. If the corporation experiences financial difficulties stock
holders are paid before bond holders.
b. bonds sold by the corporation. If the corporation experiences financial difficulties stock
holders are paid before bond holders.
c. stocks sold by the corporation. If the corporation experiences financial difficulties bond
holders are paid before stock holders.
d. bonds sold by the corporation. If the corporation experiences financial difficulties
bond holders are paid before stock holders.
Question 17
You observe a closed economy that has a government deficit and positive investment. Which of
the following is correct?
Select one:
a. Private saving is negative; public saving is positive.
b. Private saving is positive; public saving is negative.
c. Private and public saving are both positive.
d. Both private saving and public saving are negative.
Question 18
In which of the following cases would it necessarily be true that national saving and private
saving are equal for a closed economy?
Select one:
a. After paying their taxes and paying for their consumption, households have nothing left.
b. The government’s tax revenue is equal to its expenditures.
c. Private saving is equal to government expenditures.
d. Public saving is equal to investment.
Question 19
For a closed economy, GDP is $12 trillion, consumption is $7 trillion, taxes net of transfers are
$3 trillion and the government runs a deficit of $1 trillion. What are private saving and national
saving?
Select one:
a. $2 trillion and $3 trillion, respectively GDP=Y=C+I+G=>12=7+I+G
b. $5 trillion and $3 trillion, respectively SG=BD=T-G=-1
c. $5 trillion and $1 trillion, respectively SP=Y-T-C=12-3-7=2
d. $2 trillion and $1 trillion, respectively S=SP+SG=2+(-1)=1
Question 20
In a closed economy, if Y remained the same, but G rose, T rose by the same amount as G,
and C fell but by less than the increase in T, what would happen to private and national saving?
Select one:
a. national saving would fall and private saving would rise
b. national saving would rise and private saving would fall
c. both national saving and private saving would fall
d. None of the above is correct.
Y’=Y
G’=G+x
T’=T+x
C’=C-y (y<x=>x-y>0)
SP=Y-T-C SP’=Y’-T’-C’=Y-T-x-C+y=(Y-T-C)-(x-y)
SG=T-G SG’=T’-G’=T+x-G-x=T-G