Saving, Investment, and the Financial System
Multiple Choice – Section 00: Introduction
1.
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.
2.
If you were to start a business delivering documents, you might need to purchase cell phones,
bicycles, desks, and
chairs.
a.
These purchases are called capital investment. If you raise the funds to purchase them from
others you are a
saver.
b.
These purchases are called capital investment. If you raise the funds to purchase them from
others you are a
borrower.
c.
These purchases are called consumption. If you raise the funds to purchase them from others
you are a saver.
d.
These purchases are called consumption. If you raise the funds to purchase them from others
you are a
borrower.
3.
When a country saves a larger portion of its GDP than it did before, it will have
a.
more capital and higher productivity.
b.
more capital and lower productivity.
c.
less capital and higher productivity.
d.
less capital and lower productivity.
4.
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.
5.
The primary economic function of the financial system is to
a.
keep interest rates low.
b.
provide expert advice to savers and investors.
c.
match one person’s consumption expenditures with another person’s capital expenditures.
d.
match one person’s saving with another person’s investment.
6.
Given that Monika’s income exceeds her expenditures, Monika 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.
7.
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.
8.
Most entrepreneurs do not have enough money of their own to start their businesses. When they
acquire the
necessary funds from someone else,
a.
their consumption expenditures are being financed by someone else’s saving.
b.
their consumption expenditures are being financed by someone else’s investment.
c.
their investments are being financed by someone else’s saving.
d.
their saving is being financed by someone else’s investment.
Saving, Investment, and the Financial System 6283
Multiple Choice – Section 01: Financial Institutions in the U.S. Economy
1.
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.
2.
The fact that borrowers sometimes default on their loans by declaring bankruptcy is directly related
to the
characteristic of a bond called
a.
credit risk.
b.
interest risk.
c.
term risk.
d.
private risk.
3.
When a large, well-known corporation wishes to borrow directly from the public, it can
a.
sell bonds.
b.
sell shares of stock.
c.
go to a bank for a loan.
d.
All of the above are correct.
4.
Which of the following statements about the term of a bond is correct?
a.
Term refers to the various characteristics of a bond, including its interest rate and tax treatment.
b.
The term of a bond is determined entirely by its credit risk.
c.
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.
d.
Interest rates on long-term bonds are usually higher than interest rates on short-term bonds.
5.
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.
6.
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.
Bond A was issued by a financially weak corporation and Bond B was issued by a financially
strong
corporation.
b.
Bond A was issued by the Exxon Mobil Corporation and Bond B was issued by the state of
New York.
c.
Bond A has a term of 20 years and Bond B has a term of 1 year.
d.
All of the above are correct.
7.
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
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 Apple corporation and Bond B was issued by the city of Houston.
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.
8.
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
a.
Bond A was issued by a financially weak corporation and Bond B was issued by a financially
strong
corporation.
b.
Bond A was issued by the Exxon Mobil Corporation and Bond B was issued by the state of
New York.
c.
Bond A has a term of 1 year and Bond B has a term of 5 years.
d.
All of the above are correct.
9.
Atlas Corporation is in sound financial condition. It sells a long-term bond. Which of the following
make the interest
rate on this bond lower than otherwise?
a.
Both Altas’ sound finances and the long term of the bond.
b.
Atlas’ sound finances but not the long term of the bond.
c.
The long term of the bond but not Atlas’ sound finances.
d.
Neither Atlas’ sound finances nor the long term of the bond.
10.
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.
11.
Which of the following statements is correct?
a.
The expected future profitability of a corporation influences the demand for that corporation’s
stock.
b.
When a corporation sells stock as a means of raising funds it is engaging in debt finance.
c.
The owners of bonds sold by the Microsoft Corporation are part owners of that corporation.
d.
All bonds are, by definition, perpetuities.
12.
Which of the following statements is correct?
a.
A corporation receives a monetary payment every time its shares of stock are traded by
stockholders on
organized stock exchanges.
b.
When a corporation sells bonds as a means of raising funds it is engaging in debt finance.
c.
A share of stock is an IOU.
d.
The two most important financial markets in the economy are the stock market and financial
intermediaries.
13.
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.
14.
Two of the economy’s most important financial intermediaries are
a.
suppliers of funds and demanders of funds.
b.
banks and the bond market.
c.
the stock market and the bond market.
d.
banks and mutual funds.
15.
We associate the term debt finance with
a.
the bond market, and we associate the term equity finance with the stock market.
b.
the stock market, and we associate the term equity finance with the bond market.
c.
financial intermediaries, and we associate the term equity finance with financial markets.
d.
financial markets, and we associate the term equity finance with financial intermediaries.
16.
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.
17.
Which of the following is a financial-market transaction?
a.
A saver buys shares in a mutual fund.
b.
A saver deposits money into a credit union.
c.
A saver buys a bond a corporation has just issued so it can purchase capital.
d.
None of the above is correct.
18.
A certificate of indebtedness that specifies the obligations of the borrower to the holder is called a
a.
bond.
b.
stock.
c.
mutual fund.
d.
All of the above are correct.
19.
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.
20.
If the government‘s expenditures exceeded its receipts, it would likely
a.
lend money to a bank or other financial intermediary.
b.
borrow money from a bank or other financial intermediary.
c.
buy bonds directly from the public.
d.
sell bonds directly to the public.
21.
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.
22.
Skyline Chili wants to finance the purchase of new equipment for its restaurants. The firm has
limited internal
funds, so Skyline likely will
a.
demand funds from the financial system by buying bonds.
b.
demand funds from the financial system by selling bonds.
c.
supply funds to the financial system by buying bonds.
d.
supply funds to the financial system by selling bonds.
23.
If the Apple corporation sells a bond it is
a.
borrowing directly from the public.
b.
borrowing indirectly from the public.
c.
selling shares of ownership directly to the public.
d.
selling shares of ownership indirectly to the public.
24.
Which of the following is correct?
a.
The maturity of a bond refers to the amount to be paid back.
b.
The principal of the bond refers to the person selling the bond.
c.
A bond buyer cannot sell a bond before it matures.
d.
None of the above is correct.
25.
Which of the following is not correct?
a.
By saving a larger portion of its GDP, a country can raise its output per worker.
b.
Savers supply their money to the financial system with the expectation that they will get it back
with interest
at a later date.
c.
Financial intermediaries are the only type of financial institution.
d.
The financial system helps match people’s saving with other people’s borrowing.
26.
Which of the following is not a nonsensical headline?
a.
British perpetuities about to mature.
b.
Disney issues new bonds with term of 7 percent.
c.
Corporate bonds currently pay higher interest rates than government bonds.
d.
Standard and Poor’s judges new junk bond to have very low credit risk.
27.
The length of time until a bond matures is called the
a.
perpetuity.
b.
term.
c.
maturity.
d.
intermediation.
28.
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.
29.
Which of the following is correct?
a.
Some bonds have terms as short as a few months.
b.
Because they are so risky, junk bonds pay a low rate of interest.
c.
Corporations buy bonds to raise funds.
d.
All of the above are correct.
30.
Which of the following is not correct?
a.
If you buy a bond from a corporation, you can sell the bond to someone else before it matures.
b.
Term refers to the scheduling of periodic interest rate payments on a bond.
c.
A bond is an IOU.
d.
There are millions of different bonds in the U.S. economy.
31.
A bond that never matures is known as a
a.
perpetuity.
b.
an intermediary bond.
c.
an indexed bond.
d.
a junk bond.
32.
A perpetuity is
a.
a financial intermediary that has existed throughout recorded history.
b.
an instrument of equity finance.
c.
a stock that pays dividends forever.
d.
a bond that pays interest forever.
33.
A bond buyer is a
a.
saver. Bond buyers must hold their bonds until maturity.
b.
saver. Bond buyers may sell their bonds prior to maturity.
c.
borrower. Bond buyers must hold their bonds until maturity.
d.
borrower. Bond buyers may sell their bonds prior to maturity.
34.
Which of the following is correct?
a.
Lenders sell bonds and borrowers buy them.
b.
Long-term bonds usually pay a lower interest rate than do short-term bonds because long-term
bonds are
riskier.
c.
The term junk bonds refers to bonds that have been resold many times.
d.
None of the above is correct.
35.
Short-term bonds are generally
a.
less risky than long-term bonds and so they feature higher interest rates.
b.
less risky than long-term bonds and so they feature lower interest rates.
c.
more risky than long-term bonds and so they feature higher interest rates.
d.
more risky than long-term bonds and so they feature lower interest rates.
36.
Compared to short-term bonds, other things the same, long-term bonds generally have
a.
more risk and so they pay higher interest rates.
b.
less risk and so they pay lower interest rates.
c.
less risk and so they pay higher interest rates.
d.
about the same risk and so they pay about the same interest rate.