Question 1

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

Accepted Answer

To match the saving of one person with the investment of another.

Question 2

A bond with a longer term to maturity, all else equal, typically:

Accepted Answer

Is more sensitive to interest rate changes and may offer a higher yield.

Question 3

Which of the following is an example of equity finance?

Accepted Answer

A corporation issues new shares of stock to raise funds.

Question 4

Suppose a closed economy has GDP $$Y = 12$$ trillion, consumption $$C = 7$$ trillion, government spending $$G = 3$$ trillion, and taxes $$T = 2.5$$ trillion. What is the value of national saving?

Accepted Answer

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

Question 5

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

Accepted Answer

Government borrowing raises interest rates, reducing private investment.

Question 6

If the government introduces a tax incentive for saving, what is the most likely effect in the market for loanable funds?

Accepted Answer

The supply curve of loanable funds shifts right, lowering the equilibrium interest rate.

Question 7

Which of the following is NOT considered investment in the sense used by economists?

Accepted Answer

An individual buys shares of stock in a corporation.

Question 8

Given the national income identity for a closed economy $$Y = C + I + G$$, and knowing that $$I = Y - C - G$$, which of the following statements is true?

Accepted Answer

Investment equals national saving in a closed economy.

Question 9

Suppose the government runs a budget deficit of $$400$$ billion. If private saving is $$1.2$$ trillion and GDP is $$10$$ trillion with consumption $$C = 6$$ trillion, what is the value of national saving?

Accepted Answer

$$Y - C - G = 10 - 6 - (G)$$, but since $$G - T = 0.4$$, $$T = G - 0.4. $$National saving = private saving + public saving = 1.2 + (-0.4) = 0.8$ trillion

Question 10

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

Accepted Answer

They allow savers to diversify their investments across many assets.

Question 11

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

Accepted Answer

The quantity of loanable funds supplied increases.

Question 12

A municipal bond typically offers a lower interest rate than a corporate bond with similar risk and maturity. What is the main reason for this?

Accepted Answer

Interest income from municipal bonds is often exempt from federal income taxes.

Question 13

If the government enacts 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.

Question 14

Which of the following equations correctly represents private saving in a closed economy?

Accepted Answer

$$Y - T - C$$

Question 15

A country has the following data: $$Y = 15$$ trillion, $$C = 10$$ trillion, $$G = 3$$ trillion, $$T = 3.5$$ trillion. What is public saving?

Accepted Answer

$$T - G = 3.5 - 3 = 0.5$$ trillion

Question 16

Which of the following would cause a leftward shift in the supply curve of loanable funds?

Accepted Answer

An increase in the government budget deficit.

Question 17

If a country’s government increases its spending without raising taxes, what is the most likely short-run effect on the market for loanable funds?

Accepted Answer

The supply of loanable funds decreases, raising the equilibrium interest rate.

Question 18

Which of the following best describes the relationship between the interest rate and the quantity of loanable funds supplied?

Accepted Answer

As the interest rate increases, the quantity of loanable funds supplied increases.

Question 19

A firm is considering borrowing funds to build a new factory. If the real interest rate rises, what is the most likely effect on the firm's investment decision?

Accepted Answer

The firm is less likely to invest because the cost of borrowing increases.

Question 20

Suppose the government runs a budget surplus. What is the effect on national saving and the supply of loanable funds?

Accepted Answer

National saving increases, shifting the supply of loanable funds to the right.

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

Study Guide - Practice Questions

Study Guide - Flashcards