Question 1

Which of the following best describes the role of the financial system in an economy?

Accepted Answer

It matches the saving of one person with the investment of another.

Question 2

A bond is characterized by all of the following EXCEPT:

Accepted Answer

Dividend payout

Question 3

Which of the following is TRUE regarding the difference between equity finance and debt finance?

Accepted Answer

Equity finance involves selling stock, which offers higher risk and higher average return than debt finance.

Question 4

Suppose a government has tax revenue of $$T$$ and government spending of $$G. $$Which formula correctly represents public saving?

Accepted Answer

$$T - G$$

Question 5

If a country has a budget deficit, which of the following is TRUE?

Accepted Answer

Government spending exceeds tax revenue, so $$G \u003e T$$ and public saving is negative.

Question 6

Which of the following is NOT considered investment in the context of macroeconomics?

Accepted Answer

Buying shares of a mutual fund

Question 7

Given the national income accounting identity for a closed economy, $$Y = C + I + G$$, which formula represents national saving?

Accepted Answer

$$Y - C - G$$

Question 8

If GDP ($$Y) is$$ $$10$$ trillion, consumption ($$C) is$$ $$6.5$$ trillion, and government spending ($$G) is$$ $$2$$ trillion, what is national saving ($$S) in $$trillions?

Accepted Answer

$$S = Y - C - G = 10 - 6.5 - 2 = 1.5$$

Question 9

Which of the following would increase the supply of loanable funds in the market for loanable funds?

Accepted Answer

An increase in public saving due to a government budget surplus

Question 10

What is the effect of a tax incentive for saving on the market for loanable funds?

Accepted Answer

It increases the supply of loanable funds, lowers the equilibrium interest rate, and raises the equilibrium quantity of loanable funds.

Question 11

Which of the following is a function of financial intermediaries such as commercial banks?

Accepted Answer

Reducing search and monitoring costs and creating a medium of exchange

Question 12

If the government introduces an investment tax credit, what is the expected effect on the market for loanable funds?

Accepted Answer

The demand for loanable funds increases, raising the equilibrium interest rate and quantity of loanable funds.

Question 13

Which formula correctly represents private saving?

Accepted Answer

$$Y - T - C$$

Question 14

What is the likely long-run effect of persistent government budget deficits on economic growth?

Accepted Answer

They reduce investment, which lowers the economy's growth rate and future standard of living.

Question 15

Which of the following is a plausible consequence of crowding out caused by government budget deficits?

Accepted Answer

Private investment decreases due to higher interest rates.

Question 16

A mutual fund allows savers to:

Accepted Answer

Diversify their investments by pooling resources to buy a portfolio of stocks and bonds.

Question 17

Which of the following is NOT a key characteristic of a bond?

Accepted Answer

PE Ratio

Question 18

If the equilibrium interest rate in the market for loanable funds rises, which of the following is most likely to occur?

Accepted Answer

The quantity of loanable funds supplied increases.

Question 19

Which formula represents national saving in terms of private and public saving?

Accepted Answer

$$(Y - T - C) + (T - G)$$

The Financial System: Institutions, Saving, and Investment

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