Saving, Investment, and the Financial System 6499
4. When a firm wants to borrow directly from the public to finance the purchase of new equipment, it
does so by selling shares of stock.
a. True
b. False
5. Most entrepreneurs finance their purchases of real capital using their past saving.
a. True
b. False
6. Other things the same, the higher the rate of saving and investment in a country, the higher will be
the standard of living in the future.
a. True
b. False
6500 Saving, Investment, and the Financial System
7. Lenders sell bonds and borrowers buy them.
a. True
b. False
8. Lenders buy bonds and borrowers sell them.
a. True
b. False
9. When a firm wants to borrow directly from the public to finance the purchase of new equipment, it
does so by selling bonds.
a. True
b. False
Saving, Investment, and the Financial System 6501
10. Other things the same, corporate bonds generally feature higher interest rates than U.S.
government bonds.
a. True
b. False
11. The sale of either stocks or bonds to raise money is known as equity finance.
a. True
b. False
12. When a corporation experiences financial problems, bondholders are paid before stockholders.
a. True
b. False
6502 Saving, Investment, and the Financial System
13. Corporations receive no proceeds from the resale of their stock.
a. True
b. False
14. Generally, if people begin to expect a company to have higher future profits, the price of the
company’s stock will begin to decrease.
a. True
b. False
15. If a share of stock in Skylight Chili sells for $75, the retained earnings per share are $5, and the
dividend per share is $2, then the price-earnings ratio is 15.
a. True
b. False
Saving, Investment, and the Financial System 6503
16. If people become less optimistic about the future earnings of Hyde Park Jazz Studio, then the
price of the company’s stock will fall.
a. True
b. False
17. Mutual funds are a type of financial intermediary.
a. True
b. False
18. Index funds are usually outperformed by mutual funds that are actively managed by professional
money managers.
a. True
b. False
6504 Saving, Investment, and the Financial System
19. All financial intermediaries are financial institutions, but not all financial institutions are financial
intermediaries.
a. True
b. False
20. Because of differences in tax treatment, municipal bonds pay a higher interest rate than do
corporate bonds.
a. True
b. False
21. If the tax rate fell, holding municipal bonds would be less desirable so the interest rates on them
would fall.
a. True
b. False
Saving, Investment, and the Financial System 6505
22. If a share of stock in Dell sells for $70, the retained earnings per share are $5, and the dividend
per share is $2, then the price-earnings ratio is 10.
a. True
b. False
23. In a closed economy, if taxes fall and consumption rises, then private saving must fall.
a. True
b. False
24. Anything other than a change in the interest rate that decreases national saving shifts the supply of
loanable funds to the left.
a. True
b. False
6506 Saving, Investment, and the Financial System
25. Skeptics of government policy to reduce taxes on saving argue that it would primarily benefit the
rich.
a. True
b. False
26. Credit risk refers to the probability that the issuer of a bond will fail to pay some or all of the
interest or principal.
a. True
b. False
27. Owners of bonds that were issued by the federal government are not required to pay federal
income tax on the interest income.
a. True
b. False
Saving, Investment, and the Financial System 6507
28. Financial crises seldom involve economic downturns.
a. True
b. False
29. To state that national saving is equal to investment, for a closed economy, is to state an accounting
identity.
a. True
b. False
30. By definition, government purchases and taxes are zero for a closed economy.
a. True
b. False
6508 Saving, Investment, and the Financial System
31. National saving is equal to Y – T – C.
a. True
b. False
32. Public saving is T – G, while private saving is Y – T – C.
a. True
b. False
33. Public saving is equal to national saving minus private saving.
a. True
b. False
Saving, Investment, and the Financial System 6509
34. To state that public saving is equal to investment, for a closed economy, is to state an accounting
identity.
a. True
b. False
35. In a closed economy, investment must be equal to private saving.
a. True
b. False
36. If, for an imaginary closed economy, investment amounts to $10,000 and the government is
running a $2,500 deficit, then private saving must amount to $12,500.
a. True
b. False
6510 Saving, Investment, and the Financial System
37. If, for an imaginary closed economy, investment amounts to $12,000 and the government is
running a $2,000 deficit, then private saving must amount to $10,000.
a. True
b. False
38. Suppose a small closed economy has GDP of $5 billion, consumption of $3 billion, and government
expenditures of $1 billion. Then investment and national saving are both $1 billion.
a. True
b. False
39. Joan uses some of her income to buy mutual fund shares. A macroeconomist refers to Joan’s
purchase as investment.
a. True
b. False
Saving, Investment, and the Financial System 6511
40. Alberta buys a paint sprayer and a lift for her car customizing shop. A macroeconomist would
refer to these purchases as investment.
a. True
b. False
41. In a closed economy, each unit of output is either consumed by households or invested.
a. True
b. False
42. The conventions of national income accounting imply that saving and investment are equal for the
economy as a whole and for individual households and firms.
a. True
b. False
6512 Saving, Investment, and the Financial System
43. The demand for loanable funds comes from saving and the supply of loanable funds comes from
investment.
a. True
b. False
44. A decrease in taxes on interest income would increase the interest rate.
a. True
b. False
45. If Congress instituted an investment tax credit, the demand for loanable funds would shift
rightward.
a. True
b. False
Saving, Investment, and the Financial System 6513
46. When the government budget deficit rises, national saving is reduced, interest rates rise, and
investment falls.
a. True
b. False
47. The term crowding out refers to decreases in the interest rate caused by government budget
surpluses.
a. True
b. False
48. When the U.S. government is in debt during a given year, it follows that its budget is in deficit for
that year.
a. True
b. False
6514 Saving, Investment, and the Financial System
49. The ratio of government debt to GDP was higher during the Reagan presidency than at any
previous time in U.S. history.
a. True
b. False
50. An increase in the demand for loanable funds increases the equilibrium interest rate and increases
the equilibrium level of saving.
a. True
b. False
51. An increase in the demand for loanable funds increases the equilibrium interest rate and decreases
the equilibrium level of saving.
a. True
b. False
Saving, Investment, and the Financial System 6515
52. The term loanable funds refers to all income that is not used for consumption.
a. True
b. False
53. The term loanable funds refers to all income that is not used for consumption or government
expenditures.
a. True
b. False
54. We interpret the term loanable funds to mean the flow of resources available to fund private
investment.
a. True
b. False
6516 Saving, Investment, and the Financial System
55. An increase in the budget deficit shifts the demand for loanable funds to the right.
a. True
b. False
56. A government may use deficit financing to smooth tax rates over time.
a. True
b. False
57. On a graph that depicts the market for loanable funds, the nominal interest rate is measured along
the vertical axis.
a. True
b. False
Saving, Investment, and the Financial System 6517
58. When an economy’s government goes from running a budget deficit to running a budget surplus,
the economy’s long-run growth prospects are improved.
a. True
b. False
59. What are the basic differences between bonds and stocks?
6518 Saving, Investment, and the Financial System
60. Which of the two bonds in each example would you expect to generally pay the higher interest
rate? Explain why.
a. a U.S. government bond or a Venezuelan government bond
b. a U.S. government bond or a municipal bond with the same term and issued by a
creditworthy municipality.
c. a 6-month Treasury bill or a 20-year Treasury bond
d. a Microsoft bond or a bond issued by a new recording company