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, share of profits paid out to bondholders

Question 3

Which of the following is the correct formula for private saving?

Accepted Answer

$$Y - T - C$$

Question 4

Suppose a government has tax revenue of $$3 trillion and government spending of 2.5 $$trillion. What is the value of public saving?

Accepted Answer

$$T - G = 3 - 2.5 = 0.5$$ trillion

Question 5

Which of the following statements about stocks and bonds is correct?

Accepted Answer

Stocks represent partial ownership in a firm, while bonds are certificates of indebtedness.

Question 6

If a country’s GDP is $$12 trillion, consumption is 7 $$trillion, and government purchases are $3 trillion, what is national saving?

Accepted Answer

$$Y - C - G = 12 - 7 - 3 = 2$$ trillion

Question 7

Which of the following would be considered investment in the sense used by economists?

Accepted Answer

A business purchases new machinery for its factory.

Question 8

What is the effect of a government budget deficit on the market for loanable funds?

Accepted Answer

It reduces the supply of loanable funds, increases the equilibrium interest rate, and decreases investment.

Question 9

Which of the following is a key advantage of mutual funds for savers?

Accepted Answer

They allow savers to diversify their investments.

Question 10

If the government introduces a tax incentive for saving, what is the expected effect on the market for loanable funds?

Accepted Answer

The supply of loanable funds increases, the equilibrium interest rate falls, and the equilibrium quantity of loanable funds rises.

Question 11

Which formula correctly expresses national saving in a closed economy?

Accepted Answer

$$Y - C - G$$

Question 12

A municipal bond is attractive to investors primarily because:

Accepted Answer

Its interest income is often exempt from federal taxes.

Question 13

If the interest rate in the market for loanable funds increases, what happens to the quantity of loanable funds supplied?

Accepted Answer

It increases because saving becomes more attractive.

Question 14

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

Accepted Answer

Dividend payout

Question 15

A company sells new shares to the public to raise capital. This is an example of:

Accepted Answer

Equity finance

Question 16

If a government runs a budget deficit, which equation correctly expresses public saving?

Accepted Answer

$$G - T$$

Question 17

Which of the following would NOT be considered saving in the economic sense?

Accepted Answer

Purchasing a new car for personal use

Question 18

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

Accepted Answer

Reduced economic growth and lower future standard of living due to crowding out of investment.

Question 19

Which of the following best describes the concept of 'crowding out'?

Accepted Answer

Government borrowing reduces the funds available for private investment.

Question 20

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

Accepted Answer

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

The Financial System: Institutions, Saving, and Investment

Study Guide - Practice Questions