Saving, Investment, and the Financial System 6359
161.
Index funds
a.
buy all the stocks in a given stock index.
b.
promise to beat the market by a certain percentage known as an index.
c.
provide a return that is adjusted for changes in the consumer price index.
d.
buy industries within a particular category of the North American Industry Classification
System.
162.
Managed funds
a.
typically have a higher rate of return and higher costs than index funds.
b.
typically have a higher rate of return and lower costs than index funds.
c.
typically have a lower rate of return and higher costs than index funds.
d.
typically have a lower rate of return and lower costs than index funds.
163.
Which of the following statements about mutual funds is correct?
a.
A mutual fund is a financial intermediary.
b.
A mutual fund acquires its funds primarily by selling shares to the public.
c.
People who buy shares from a mutual fund accept all of the risk and return associated with the
mutual fund’s portfolio.
d.
All of the above are correct.
164.
Which advantage(s) do mutual funds claim to provide?
a.
diversification and access to the skills of professional money managers
b.
diversification but not access to the skills of professional money managers
c.
access to the skills of professional money managers but not diversification
d.
neither diversification nor access to the skills of professional money managers.
165.
Which of the following is not a characteristic of a bond?
a.
its tax treatment
b.
its credit risk
c.
its term
d.
its dividend yield
166.
Borrowers can (and sometimes do) default on their loans when
a.
the dividend yield on their shares of stock reaches zero.
b.
they convert their bonds into perpetuities.
c.
they declare bankruptcy.
d.
they cannot find enough buyers of their bonds to sell all the bonds they wish to sell.
167.
Which of the following numbers is not associated with shares of a company’s stock?
a.
term
b.
dividend
c.
price
d.
price-earnings ratio
168.
Which of the following statements is correct?
a.
NASDAQ is an important stock exchange in the United States.
b.
The demand for a corporation’s stock is largely based on people’s perception of the
corporation’s profitability in the future.
c.
Compared to the Standard & Poor’s 500 Index, the Dow Jones Industrial Average
incorporates the stock prices of a much smaller number of corporations.
d.
All of the above are correct.
169.
Which of the following statements is correct?
a.
NASDAQ is an important stock exchange in the United States.
b.
The Standard & Poor’s 500 Index and the New York Stock Exchange are two examples of
stock indexes.
c.
The most significant influence on the demand for a corporation’s stock is the number of
shares of the stock that the corporation has issued.
d.
All of the above are correct.
170.
What do we call financial institutions through which savers can indirectly provide funds to
borrowers?
a.
stock markets
b.
financial institutions
c.
financial markets
d.
financial intermediaries
171.
Banks
a.
play a role in creating an asset that people can use as a medium of exchange.
b.
are financial intermediaries, but mutual funds are not financial intermediaries.
c.
are financial markets, as are bond markets.
d.
All of the above are correct.
172.
Who accepts all of the risk associated with a mutual fund’s portfolio of stocks and/or bonds?
a.
the fund’s managers
b.
the fund’s shareholders
c.
the federal government
d.
the corporations that originally issued the stocks and/or bonds held by the fund
173.
The bond market, the stock market, banks, pension funds, and insurance companies are all
financial
a.
systems.
b.
markets.
c.
institutions.
d.
intermediaries.
174.
Which of the following both make the interest rate on a bond higher than otherwise?
a.
the interest it pays is taxed and it was issued by a financially strong corporation
b.
the interest it pays is taxed and it was issued by a financially weak corporation
c.
the interest it pays is tax exempt and it was issued by a financially strong corporation
d.
the interest it pays is tax exempt and it was issued by a financially weak corporation
175.
Which of the following would both make the interest rate on a bond higher than otherwise?
a.
the interest it pays is taxed and it is long term
b.
the interest it pays is taxed and it is short term
c.
the interest it pays is tax exempt and it is long term
d.
the interest it pays is tax exempt and it is short term
176.
Midwestern corporation issues bonds. Southern corporation issues stock. Which corporation
used equity financing?
a.
both Midwestern corporation and Southern corporation
b.
Midwestern corporation but not Southern corporation
c.
Southern corporation but not Midwestern corporation
d.
neither Midwestern nor Southern corporation
177.
Which of the following is a certificate of indebtedness?
a.
both stocks and bonds
b.
stocks but not bonds
c.
bonds but not stocks
d.
neither stocks nor bonds
178.
Which of the following involves financial intermediation?
a.
a bank makes a loan
b.
a household buys stock issued by a corporation
c.
a foreign government purchases U.S. government bonds
d.
All of the above are correct.
179.
If a firm wants to borrow it can
a.
supply bonds by selling them.
b.
supply bonds by buying them.
c.
demand bonds by selling them.
d.
demand bonds by buying them.
180.
A bond buyer is a
a.
saver. Long term bonds have less risk than short term bonds.
b.
saver. Long term bonds have more risk than short term bonds.
c.
borrower. Long term bonds have less risk than short term bonds.
d.
borrower. Long term bonds have more risk than short term bonds.
181.
A creditor of a corporation holds
a.
bonds 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 bond holders
are paid
before stock holders.
c.
stocks sold by the corporation. If the corporation experiences financial difficulties stock
holders are paid
before bond holders.
d.
stocks sold by the corporation. If the corporation experiences financial difficulties bond holders
are paid
before stock holders.
182.
Which of the following statements about mutual funds is correct?
a.
A mutual fund is not a financial intermediary.
b.
A disadvantage of buying mutual funds is a lack of diversification
c.
People who buy shares from a mutual fund are guaranteed a minimum return.
d.
On average index funds outperform managed funds.
183.
By definition, equity finance
a.
is accomplished when units of government sell bonds.
b.
is accomplished when firms sell bonds.
c.
is accomplished when firms sell shares of stock.
d.
involves “fair” interest rates or dividend yields.
184.
The indirect provision of funds by savers to borrowers is accomplished by
a.
banks and other financial markets.
b.
banks and other financial intermediaries.
c.
stock markets and other financial markets.
d.
All of the above are correct.
185.
If a firm’s price-earnings ratio is relatively low, then it might be an indication that
a.
the demand for the stock is relatively high.
b.
the supply of the stock is relatively low.
c.
people expect the firm’s earnings to rise.
d.
people expect the firm’s earnings to fall.
Multiple Choice – Section 02: Saving and Investment in the National Income Accounts
1.
Which of the following is not correct?
a.
Gross domestic product is both total income in an economy and total expenditures on the
economy’s output of goods and services.
b.
In a closed economy net exports are zero.
c.
National saving is the sum of private saving and public saving.
d.
Purchases of capital goods are excluded from GDP.
2.
You observe a closed economy that has a government deficit and positive investment. Which of the
following is
correct?
a.
Private and public saving are both positive.
b.
Private saving is positive; public saving is negative.
c.
Private saving is negative; public saving is positive.
d.
Both private saving and public saving are negative.
3.
If national saving in a closed economy is greater than zero, which of the following must be true?
a. Either public saving or private saving must be greater than zero.
b. Investment is positive.
c. Y – C – G > 0.
d. All of the above are correct.
4.
Which of the following is correct?
a.
In the national income accounts, investment and private saving refer to the same thing.
b.
In a closed economy if national saving is greater than zero, then everyone must be saving.
c.
The financial system channels funds from savers to borrowers.
d.
People whose consumption exceeds their income are savers.
5.
A closed economy
a.
does not trade with other economies.
b.
is centrally-planned.
c.
does not allow financial intermediation.
d.
All of the above are correct.
6.
A closed economy
a.
does not engage in international trade of goods and services.
b.
does not engage in international borrowing or lending.
c.
both A and B
d.
engages in international borrowing and lending.
7.
The assumption of a closed economy
a.
applies to the world economy.
b.
applies to most national economies.
c.
requires us to assume that the government’s budget is always balanced.
d.
All of the above are correct.
8.
In a closed economy, what does (T – G) represent?
a.
national saving
b.
investment
c.
private saving
d.
public saving
9.
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.
10.
In a closed economy, what does (Y – T – C) represent?
a.
national saving
b.
government tax revenue
c.
public saving
d.
private saving
11.
In which of the following cases would it necessarily be true that national saving and private
saving are equal for a
closed economy?
a.
Private saving is equal to government expenditures.
b.
Public saving is equal to investment.
c.
After paying their taxes and paying for their consumption, households have nothing left.
d.
The government’s tax revenue is equal to its expenditures.
12.
Which of the following statements is correct?
a.
The total income in the economy that remains after paying for consumption and government
purchases is
called private saving.
b.
The sum of private saving and national saving is called public saving.
c.
For a closed economy, the sum of private saving and public saving must equal investment.
d.
For a closed economy, the sum of consumption, national saving, and taxes must equal GDP.
13.
A closed economy does not engage in international trade, therefore
a.
national saving is less than investment (S < I).
b.
net exports (NX) are zero.
c.
Y – C – G > I.
d.
national saving is zero.
14.
Net exports must equal zero for any economy
a.
that is closed.
b.
for which Y = C + I + G.
c.
for which S = Y – C – G.
d.
All of the above are correct.
15.
In national income accounting, we use which of the following pairs of terms interchangeably?
a.
“investment” and “private saving”
b.
“investment” and “purchases of stocks and bonds”
c.
“saving” and “national saving”
d.
“public saving” and “government tax revenue minus government spending”
16.
The purchase of a new house is the one form of
a.
investment that is financed by private saving rather than public saving.
b.
household spending that is not counted as part of investment in the national income accounts.
c.
household spending that is investment rather than consumption.
d.
household spending that does not contribute to GDP.
17.
The identity that shows that total income and total expenditure are equal is
a.
GDP = Y.
b.
Y = DI + T + NX.
c.
GDP = GNP – NX.
d.
Y = C + I + G + NX.
18.
Which of the following lists correctly identifies the four expenditure categories of GDP?
a.
consumption, government purchases, investment, net-exports
b.
consumption, investment, depreciation, net-exports
c.
consumption, saving, investment, depreciation,
d.
consumption, government purchases, investment, savings
20.
Which of the following equations will always represent GDP in an open economy?
a.
S = I – G
b.
I = Y – C + G
c.
Y = C + I + G
d.
Y = C + I + G + NX
21.
Which of the following equations represents GDP for a closed economy?
a.
Y = C + I + G + T
b.
S = I – G
c.
I = Y – C + G
d.
Y = C + I + G