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 its term, credit risk, and tax treatment. Which of the following bonds is most likely to offer the lowest interest rate, all else equal?

Accepted Answer

A municipal bond with low credit risk and favorable tax treatment.

Question 3

Which of the following is an example of equity finance?

Accepted Answer

A company sells shares of stock to raise capital.

Question 4

Suppose GDP $$(Y) is$$ $$10$$ trillion, consumption $$(C) is$$ $$6.5$$ trillion, government spending $$(G) is$$ $$2$$ trillion, and the budget deficit is $$0.3$$ trillion. What is the value of taxes $$(T)$$?

Accepted Answer

$$T = G - 0.3 = 2.0 - 0.3 = 1.7$$ trillion

Question 5

Which formula correctly represents national saving in a closed economy?

Accepted Answer

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

Question 6

In the market for loanable funds, what happens if the government introduces a tax incentive for saving?

Accepted Answer

The supply curve shifts right, equilibrium interest rate falls, and quantity of loanable funds rises.

Question 7

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

Accepted Answer

Purchasing shares of a mutual fund.

Question 8

If the government runs a budget deficit, what is the likely effect on the market for loanable funds?

Accepted Answer

The supply of loanable funds decreases, interest rates rise, and investment falls.

Question 9

Which equation correctly defines private saving?

Accepted Answer

$$Y - T - C$$

Question 10

A fall in the interest rate in the market for loanable funds will most likely:

Accepted Answer

Increase the quantity of loanable funds demanded.

Question 11

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

Accepted Answer

Reducing search and monitoring costs for savers and borrowers.

Question 12

If public saving is negative, what does this imply about the government's budget?

Accepted Answer

The government is running a budget deficit.

Question 13

Which of the following best describes 'crowding out' in the context of government budget deficits?

Accepted Answer

Government borrowing reduces funds available for private investment.

Question 14

A mutual fund allows savers to:

Accepted Answer

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

Question 15

Given the national income identity for a closed economy $$Y = C + I + G$$, solve for investment $$I in $$terms of $$Y$$, $$C$$, and $$G.$$

Accepted Answer

$$I = Y - C - G$$

Question 16

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

Accepted Answer

Demand for loanable funds increases, equilibrium interest rate rises, and quantity of loanable funds increases.

Question 17

Which of the following is NOT a key characteristic that differentiates bonds?

Accepted Answer

Dividend payout ratio.

Question 18

If national saving in a closed economy is $$2$$ trillion, what is the level of investment?

Accepted Answer

$$2$$ trillion

Question 19

Which of the following actions by a household is considered saving, not investment, in macroeconomic terms?

Accepted Answer

Depositing money into a savings account.

Question 20

If the government increases its spending without raising taxes, what is the immediate effect on public saving?

Accepted Answer

Public saving decreases.

The Financial System: Saving, Investment, and the Market for Loanable Funds

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