Liberty University BUSI 321 test 1 exam 1 complete solutions correct answers A+ work

Liberty University BUSI 321 test 1 exam 1 complete solutions correct answers A+ work

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Question 1 Which of the following is a money market security?

Question 2 Funds are provided to the initial issuer of securities in the

Question 3 When particular securities are perceived to be ____ by the market, their prices decrease when they are sold by investors.

Question 4 Money market securities generally have ____. Capital market securities are typically expected to have a ____.

Question 5 ____ are long­term debt obligations issued by corporations and government agencies to support their operations.

Question 6 Which of the following transactions would not be considered a secondary market transaction?

Question 7 Which of the following is not a reason why depository financial institutions are popular?

Question 8  ____ are classified as a depository institution.

Question 9 Canada and the U.S. are major trading partners. If Canada experiences a major increase in economic growth, it could place ____ pressure on Canadian interest rates and ____ pressure on U.S. interest rates.

Question 10 The substantial decline in interest rates during the credit crisis is attributed to which of the following changes in the market for loanable funds?

Question 11 If inflation and nominal interest rates move more closely together over time than they did in earlier periods, this would ____ the volatility of the real interest rate movements over time.

Question 12 If a strong economy allows for a large ____ in households income, the supply curve will shift ____.

Question 13 The required return to implement a given business project will be ____ if interest rates are lower. This implies that businesses will demand a ____ quantity of loanable funds when interest rates are lower.

Question 14 If economic expansion is expected to increase, then demand for loanable funds should ____ and interest rates should ____.

Question 15 The federal government demand for loanable funds is ____. If the budget deficit was expected to increase, the federal government demand for loanable funds would ____.

Question 16 If the real interest rate was negative for a period of time, then

Question 17 At any given point in time, households would demand a ____ quantity of loanable funds at ____ rates of interest.

Question 18 In some time periods there is evidence that corporations initially financed long­term projects with short­term funds. They planned to borrow long­term funds once interest rates were lower. This specifically supports the ____ for explaining the term structure of interest rates.

Question 19 The ____ theory suggests that although investors and borrowers may normally concentrate on a particular natural maturity market, certain events may cause them to wander from it.

Question 20 You are considering the purchase of a tax­exempt security that is paying a yield of 10.08 percent. You are in the 28 percent tax bracket. To match this after­tax yield, you would consider taxable securities that pay

Question 21 Holding other factors such as risk constant, the relationship between the maturity and annualized yield of securities is called the

Question 22 According to segmented markets theory, if investors have mostly short­term funds available and borrowers want long­term funds, there would be ____ pressure on the supply of short­term funds provided by investors and ____ pressure on the yield of longterm securities.

Question 23 The yield offered on a debt security is ____ related to the prevailing risk­free rate and ____ related to the security's risk premium.

Question 24 If the liquidity premium exists, a flat yield curve would be interpreted as the market expecting ____ in interest rates.

Question 25 The annualized yield on a three­year security is 13 percent; the annualized two­year interest rate is 12 percent, while the one­year interest rate is 9 percent. The forward rate two years ahead is ____ percent.

Question 26 If the liquidity premium theory completely describes the term structure of interest rates, then, on the average, the yield curve should be

Question 27 The advisory committee making recommendations to the Fed about economic and banking related issues is the

Question 28 The voting members of the Federal Open Market Committee consist of the Board of Governors plus the

Question 29 When open market operations are used to ____ bank funds, the yield on debt instruments ____.

Question 30 The ____ is directly responsible for setting reserve requirements.

Question 31 The Monetary Control Act of 1980 subjected

Question 32 Which of the following did the Fed not do during the credit crisis?

Question 33 When the Fed purchases securities, the total funds of commercial banks ____ by the market value of securities purchased by the Fed. This activity initiated by the FOMC's policy directive is referred to as a(n) ____ of money supply growth.

Question 34 The ____ is made up of seven individual members, and each member is appointed by the president of the U.S.

Question 35 A ____­money policy can reduce unemployment, and a ____­money policy can reduce inflation.

Question 36 When the Fed purchases Treasury securities, the account balances of the investors who sell their securities to the Fed _________, and there are _________ in the account balances of other financial institutions.

Question 37 If the Fed uses a passive monetary policy during weak economic conditions,

Question 38 Global crowding out is described in the text to mean the impact of

Question 39 In the “operation twist” strategy used in 2011 and 2012, the Fed sold _______ Treasury securities and used the proceeds to purchase ________ Treasury securities.

Question 40 A purchase of Treasury securities by the Fed leads to a(n) ____ in interest rates and a(n) ____ in the level of business investment.

Question 41 Which of the following is not a reason that a stimulative monetary policy may be ineffective?

Question 42 Historical evidence has shown that, when the Fed significantly increases money supply, U.S. inflation tends to ____ shortly thereafter which in turn places ____ pressure on U.S. interest rates.

Question 43 The money market interest rate paid by corporations that borrow short­term funds in a particular country is typically:

Question 44 If an investor buys a T­bill with a 90­day maturity and $50,000 par value for $48,500 and holds it to maturity, what is the annualized yield?

Question 45 When a bank guarantees a future payment to a firm, the financial instrument used is called

Question 46 Robbins Corp. frequently invests excess funds in the Mexican money market. One year ago, Robbins invested in a one­year Mexican money market security that provided a yield of 25 percent. At the end of the year, when Robbins converted the Mexican pesos to dollars, the peso had depreciated from $.12 to $.11. What is the effective yield earned by Robbins?

Question 47 The rate at which depository institutions effectively lend or borrow funds from each other is the ____.

Question 48 Commercial paper is

Question 49 ____ is a short­term debt instrument issued only be well­known, creditworthy firms and is normally issued to provide liquidity or finance a firm's investment in inventory and accounts receivable.

Question 50 T­bills and commercial paper are sold

       1.    Financial market participants who provide funds are called

a.

deficit units.

b.

surplus units.

c.

primary units.

d.

secondary units.

       2.    The main provider(s) of funds to the U.S. Treasury is (are)

a.

households and businesses.

b.

foreign financial institutions.

c.

the Federal Reserve System.

d.

foreign nonfinancial sectors.

       3.    The largest deficit unit is (are)

a.

households and businesses.

b.

foreign financial institutions.

c.

the U.S. Treasury.

d.

foreign nonfinancial sectors.

       4.    Those financial markets that facilitate the flow of short-term funds are known as

a.

money markets.

b.

capital markets.

c.

primary markets.

d.

secondary markets.

       5.    Funds are provided to the initial issuer of securities in the

a.

secondary market.

b.

primary market.

c.

deficit market.

d.

surplus market.

       6.    Which of the following is a capital market instrument?

a.

a six-month CD

b.

a three-month Treasury bill

c.

a ten-year bond

d.

an agreement for a bank to loan funds directly to a company for nine months

       7.    Which of the following is a money market security?

a.

Treasury note

b.

municipal bond

c.

mortgage

d.

commercial paper

       8.    The creditors in the federal funds market are

a.

households.

b.

depository institutions.

c.

firms.

d.

government agencies.

       9.    Equity securities have a ____ expected return than most long-term debt securities, and they exhibit a ____ degree of risk.

a.

higher; higher

b.

lower; lower

c.

lower; higher

d.

higher; lower

    10.    Money market securities generally have ____. Capital market securities are typically expected to have a ____.

a.

less liquidity; higher annualized return

b.

more liquidity; lower annualized return

c.

less liquidity; lower annualized return

d.

more liquidity; higher annualized return

    11.    If security prices fully reflect all available information, the markets for these securities are

a.

efficient.

b.

primary.

c.

overvalued.

d.

undervalued.

    12.    If markets are ____, investors could use available information ignored by the market to earn abnormally high returns.

a.

perfect

b.

active

c.

inefficient

d.

in equilibrium

    13.    If financial markets are efficient, this implies that all securities should earn the same return.

a. True

b. False

    14.    The Securities Act of 1933

a.

required complete disclosure of relevant financial information for publicly offered securities in the primary market.

b.

declared trading strategies to manipulate the prices of public secondary securities illegal.

c.

declared misleading financial statements for public primary securities illegal.

d.

required complete disclosure of relevant financial information for securities traded in the secondary market.

e.

all of the above

    15.    The Securities Exchange Commission (SEC) was established by the

a.

Federal Reserve Act.

b.

McFadden Act.

c.

Securities Exchange Act of 1934.

d.

Glass-Steagall Act.

e.

none of the above

    16.    Common stock is an example of a(n)

a.

debt security.

b.

money market security.

c.

equity security.

d.

A and B

    17.    If financial markets were ____, all information about any securities for sale in primary and secondary markets would be continuously and freely available to investors.

a.

efficient

b.

inefficient

c.

perfect

d.

imperfect

    18.    The typical role of a securities firm in a public offering of securities is to

a.

purchase the entire issue for its own investment.

b.

place the entire issue with a single large investor.

c.

spread the issue across several investors until the entire issue is sold.

d.

provide all large investors with loans so that they can invest in the offering.

    19.    Without the participation of financial intermediaries in financial market transactions,

a.

information and transaction costs would be lower.

b.

transaction costs would be higher but information costs would be unchanged.

c.

information costs would be higher but transaction costs would be unchanged.

d.

information and transaction costs would be higher.

    20.    Which of the following is most likely to be described as a depository institution?

a.

finance companies

b.

securities firms

c.

credit unions

d.

pension funds

e.

insurance companies

    21.    In aggregate, ____ are the most dominant depository institution, with more total assets than other depository institutions.

a.

commercial banks

b.

savings banks

c.

credit unions

d.

S&Ls

    22.    Which of the following is a nondepository financial institution?

a.

savings banks

b.

commercial banks

c.

savings and loan associations

d.

mutual funds

    23.    Which of the following distinguishes credit unions from commercial banks and savings institutions?

a.

Credit unions are non-profit

b.

Credit unions accept deposits but do not make loans

c.

Credit unions make loans but do not accept deposits

d.

Savings institutions restrict their business to members who share a common bond

    24.    When a securities firm acts as a broker, it

a.

guarantees the issuer a specific price for newly issued securities.

b.

makes a market in specific securities by adjusting its own inventory.

c.

executes transactions between two parties.

d.

purchases securities for its own account.

    25.    When a securities firm acts as a(n) ____, it maintains a position in securities.

a.

adviser

b.

dealer

c.

broker

d.

none of the above

    26.    ____ obtain funds by issuing securities, then lend the funds to individuals and small businesses.

a.

Finance companies

b.

Securities firms

c.

Mutual funds

d.

Insurance companies

    27.    Households with ____ are served by ____.

a.

deficient funds; depository institutions and finance companies

b.

deficient funds; finance companies only

c.

savings; finance companies only

d.

savings; pension funds and finance companies

    28.    ____ concentrate on mortgage loans.

a.

Finance companies

b.

Commercial banks

c.

Savings institutions

d.

Credit unions

    29.    ____ securities have a maturity of one year or less; ____ securities are generally more liquid.

a.

Money market; capital market

b.

Money market; money market

c.

Capital market; money market

d.

Capital market; capital market

    30.    Which of the following is not a major investor in stocks?

a.

commercial banks

b.

insurance companies

c.

mutual funds

d.

pension funds

    31.    Which of the following financial intermediaries commonly invests in stocks and bonds?

a.

pension funds

b.

insurance companies

c.

mutual funds

d.

all of the above

    32.    Securities are certificates that represent a claim on the issuer.

a. True

b. False

    33.    Debt securities are certificates that represent debt (borrowed funds) by the issuer.

a. True

b. False

    34.    A five-year security was purchased two years ago by an investor who plans to resell it. The security will be sold by the investor in the so-called

a.

secondary market.

b.

primary market.

c.

deficit market.

d.

surplus market.

    35.    When security prices fully reflect all available information, the markets for these securities are said to be efficient.

a. True

b. False

    36.    If markets are perfect, securities buyers and sellers to not have full access to information and cannot always break down securities to the precise size they desire.

a. True

b. False

    37.    A broker executes securities transactions between two parties and charges a fee reflected in the bid-ask spread.

a. True

b. False

    38.    The euro increased business between European countries and created a more competitive environment in Europe.

a. True

b. False

    39.    In recent years, financial institutions have consolidated to capitalize on economies of scale and on economies of scope.

a. True

b. False

    40.    Securities are certificates that represent a claim on the provider of funds.

a. True

b. False

    41.    Debt securities include commercial paper, Treasury bonds, and corporate bonds.

a. True

b. False

    42.    Common types of capital market securities include Treasury bills and commercial paper.

a. True

b. False

    43.    Common types of money market securities include negotiable certificates of deposit and Treasury bills.

a. True

b. False

    44.    Money market securities are commonly issued in order to finance the purchase of assets such as buildings, equipment, or machinery.

a. True

b. False

    45.    The total asset value of savings institutions is larger than that of commercial banks.

a. True

b. False

    46.    Financial markets facilitating the flow of short-term funds with maturities of less than one year are known as

a.

secondary markets.

b.

capital markets.

c.

primary markets.

d.

money markets.

e.

none of the above

    47.    Which of the following transactions would not be considered a secondary market transaction?

a.

An individual investor purchases some existing shares of stock in IBM through his broker.

b.

An institutional investor sells some Disney stock through its broker.

c.

A firm that was privately held engages in an offering of stock to the public.

d.

All of the above are secondary market transactions.

    48.    If investors speculate in the underlying asset rather than derivative contracts on the underlying asset, they will probably achieve ____ returns, and they are exposed to relatively ____ risk.

a.

lower; lower

b.

lower; higher

c.

higher; lower

d.

higher; higher

    49.    ____ maintain a larger amount of assets in aggregate than the other types of nondepository institutions.

a.

Finance companies

b.

Mutual funds

c.

Life insurance companies

d.

Securities firms

    50.    A common use of funds for ____ is investment in stocks and businesses, while their main use of funds is providing loans to households and businesses.

a.

savings institutions

b.

commercial banks

c.

mutual funds

d.

finance companies

    51.    Long-term debt securities tend to have a ____ expected return and ____ risk than money market securities.

a.

lower; lower

b.

lower; higher

c.

higher; lower

d.

higher; higher

    52.    Common types of capital market securities include Treasury bills and commercial paper.

a. True

b. False

    53.    Common types of money market securities include negotiable certificates of deposit and Treasury bills.

a. True

b. False

    54.    Capital market securities are commonly issued in order to finance the purchase of assets such as buildings, equipment, or machinery.

a. True

b. False

    55.    Commercial banks in aggregate have more assets than credit unions.

a. True

b. False

    56.    Those participants who receive more money than they spend are referred to as

a.

deficit units.

b.

surplus units.

c.

borrowing units.

d.

government units.

    57.    Equity securities

a.

have a maturity.

b.

pay interest on a periodic basis.

c.

represent ownership in the issuer.

d.

repay the principal amount at maturity.

    58.    The term ____ involves decisions such as how much funding to obtain, and how to invest the proceeds to expand operations.

a.

corporate finance

b.

investment management

c.

financial markets and institutions

d.

none of the above

    59.    There is a ____ relationship between the risk of a security and the expected return from investing in the security.

a.

positive

b.

negative

c.

indeterminable

d.

none of the above

    60.    If a security is undervalued, some investors would capitalize from this by purchasing that security. As a result, the security's price will ____, resulting in a ____ return for those investors.

a.

rise; lower

b.

fall; higher

c.

fall; lower

d.

rise; higher

    61.    The credit crisis in the 2008-2009 period was caused by weak economies in Asia.

a. True

b. False

    62.    ____ are classified as a depository institution.

a.

Credit unions

b.

Pension funds

c.

Finance companies

d.

Securities firms

    63.    The main reason that depository institutions experienced financial problems during the credit crisis was their investment in:

a.

mortgages.

b.

money market securities.

c.

stock.

d.

Treasury bonds.

    64.    Those financial markets that facilitate the flow of short-term funds (with maturities of less than one year) are known as capital markets, while those that facilitate the flow of long-term funds are known as money markets.

a. True

b. False

    65.    Treasury bonds have a maturity of one to three years.

a. True

b. False

    66.    Since markets are efficient, institutional and individual investors should ignore the various investment instruments available.

a. True

b. False

    67.    Speculating with derivative contracts on an underlying asset typically results in both higher risk and higher returns than speculating in the underlying asset itself.

a. True

b. False

    68.    When security prices fully reflect all available information, the markets for these securities are said to be perfect.

a. True

b. False

    69.    Securities that are not as safe and liquid as other securities are never considered for investment by anyone.

a. True

b. False

    70.    By requiring full disclosure of information, securities laws prevent investors from making poor investment decisions.

a. True

b. False

    71.    When a depository institution offers a loan, it is acting as a creditor.

a. True

b. False

    72.    Savings institutions represent a nondepository institution.

a. True

b. False

    73.    Most mutual funds obtain funds by issuing securities, then lend the funds to individuals and small businesses.

a. True

b. False

    74.    Institutional investors not only provide financial support to companies but exercise some degree of corporate control over them.

a. True

b. False

    75.    Which of the following is not a reason why depository financial institutions are popular?

a.

They offer deposit accounts that can accommodate the amount and liquidity characteristics desired by most surplus units.

b.

They repackage funds received from deposits to provide loans of the size and maturity desired by deficit units.

c.

They accept the risk on loans provided.

d.

They use their information resources to act as a broker, executing securities transactions between two parties.

e.

They have more expertise than individual surplus units in evaluating the creditworthiness of deficit units.

    76.    According to your text, which of the following is not considered a money market security?

a.

Treasury bills

b.

Treasury notes

c.

retail CD

d.

banker's acceptance

e.

commercial paper

    77.    ____ are not considered capital market securities.

a.

Repurchase agreements

b.

Municipal bonds

c.

Corporate bonds

d.

Equity securities

e.

Mortgages

    78.    ____ are long-term debt obligations issued by corporations and government agencies to support their operations.

a.

Common stock

b.

Derivative securities

c.

Bonds

d.

None of the above

    79.    Equity securities should normally have a ____ expected return and ____ risk than money market securities.

a.

lower; lower

b.

lower; higher

c.

higher; lower

d.

higher; higher

    80.    If investors speculate in derivative contracts rather than the underlying asset, they will probably achieve ____ returns, and they are exposed to relatively ____ risk.

a.

lower; lower

b.

lower; higher

c.

higher; lower

d.

higher; higher

    81.    When particular securities are perceived to be ____ by the market, their prices decrease when they are sold by investors.

a.

undervalued

b.

overvalued

c.

fairly priced

d.

efficient

e.

none of the above

    82.    Which of the following are not considered depository financial institutions?

a.

finance companies

b.

commercial banks

c.

savings institutions

d.

credit unions

e.

All of the above are depository financial institutions.

    83.    The main source of funds for ____ is proceeds from selling securities to households and businesses, while their main use of funds is providing loans to households and businesses.

a.

savings institutions

b.

commercial banks

c.

mutual funds

d.

finance companies

e.

pension funds

    84.    Which of the following statements is incorrect?

a.

Financial markets attract funds from investors and channel the funds to corporations.

b.

Money markets enable corporations to borrow funds on a short-term basis so that they can support their existing operations.

c.

Financial institutions serve solely as intermediaries with the financial markets and never serve as investors.

d.

Investors seek to invest their funds in the stock of firms that are presently undervalued and have much potential to improve.

    85.    Which of the following is not a typical money market security?

a.

Treasury bills

b.

Treasury bonds

c.

Commercial paper

d.

Negotiable certificates of deposit

       1.    According to the loanable funds theory, market interest rates are determined by the factors that control the supply of and demand for loanable funds.

a. True

b. False

       2.    The level of installment debt as a percentage of disposable income is generally ____ during recessionary periods.

a.

higher

b.

lower

c.

zero

d.

negative

       3.    At any given point in time, households would demand a ____ quantity of loanable funds at ____ rates of interest.

a.

greater; higher

b.

greater; lower

c.

smaller; lower

d.

none of the above

       4.    Businesses demand loanable funds to

a.

finance installment debt.

b.

subsidize other companies.

c.

invest in fixed and short-term assets.

d.

none of the above

       5.    The required return to implement a given business project will be ____ if interest rates are lower. This implies that businesses will demand a ____ quantity of loanable funds when interest rates are lower.

a.

greater; lower

b.

lower; greater

c.

lower; lower

d.

greater; greater

       6.    If interest rates are ____, ____ projects will have positive NPVs.

a.

higher; more

b.

lower; more

c.

lower; no

d.

none of the above

       7.    The demand for funds resulting from business investment in short-term assets is ____ related to the number of projects implemented, and is therefore ____ related to the interest rate.

a.

inversely; positively

b.

positively; inversely

c.

inversely; inversely

d.

positively; positively

       8.    If economic conditions become less favorable, then:

a.

expected cash flows on various projects will increase.

b.

more proposed projects will have expected returns greater than the hurdle rate.

c.

there would be additional acceptable business projects.

d.

there would be a decreased demand by business for loanable funds.

       9.    As a result of more favorable economic conditions, there is a(n) ____ demand for loanable funds, causing an ____ shift in the demand curve.

a.

decreased; inward

b.

decreased; outward

c.

increased; outward

d.

increased; inward

    10.    The federal government demand for loanable funds is ____. If the budget deficit was expected to increase, the federal government demand for loanable funds would ____.

a.

interest elastic; decrease

b.

interest elastic; increase

c.

interest inelastic; increase

d.

interest inelastic; decrease

    11.    Other things being equal, foreign governments and corporations would demand ____ U.S. funds if their local interest rates were lower than U.S. rates. Therefore, for a given set of foreign interest rates, foreign demand for U.S. funds is ____ related to U.S. interest rates.

a.

less; inversely

b.

more; positively

c.

less; positively

d.

more; inversely

    12.    For a given set of foreign interest rates, the quantity of U.S. loanable funds demanded by foreign governments or firms will be ____ U.S. interest rates.

a.

positively related to

b.

inversely related to

c.

unrelated to

d.

none of the above

    13.    The quantity of loanable funds supplied is normally

a.

highly interest elastic.

b.

more interest elastic than the demand for loanable funds.

c.

less interest elastic than the demand for loanable funds.

d.

equally interest elastic as the demand for loanable funds.

e.

A and B

    14.    The ____ sector is the largest supplier of loanable funds.

a.

household

b.

government

c.

business

d.

none of the above

    15.    The supply of loanable funds in the U.S. is partly determined by the monetary policy implemented by the Federal Reserve System.

a. True

b. False

    16.    If a strong economy allows for a large ____ in households income, the supply curve will shift ____.

a.

decrease; outward

b.

increase; inward

c.

increase; outward

d.

none of the above

    17.    The equilibrium interest rate

a.

equates the aggregate demand for funds with the aggregate supply of loanable funds.

b.

equates the elasticity of the aggregate demand and supply for loanable funds.

c.

decreases as the aggregate supply of loanable funds decreases.

d.

increases as the aggregate demand for loanable funds decreases.

    18.    The equilibrium interest rate should

a.

fall when the aggregate supply funds exceeds aggregate demand for funds.

b.

rise when the aggregate supply of funds exceeds aggregate demand for funds.

c.

fall when the aggregate demand for funds exceeds aggregate supply of funds.

d.

rise when aggregate demand for funds equals aggregate supply of funds.

e.

B and C

    19.    Which of the following is likely to cause a decrease in the equilibrium U.S. interest rate, other things being equal?

a.

a decrease in savings by foreign savers

b.

an increase in inflation

c.

pessimistic economic projections that cause businesses to reduce expansion plans

d.

a decrease in savings by U.S. households

    20.    The Fisher effect states that the

a.

nominal interest rate equals the expected inflation rate plus the real rate of interest.

b.

nominal interest rate equals the real rate of interest minus the expected inflation rate.

c.

real rate of interest equals the nominal interest rate plus the expected inflation rate.

d.

expected inflation rate equals the nominal interest rate plus the real rate of interest.

    21.    If the real interest rate was negative for a period of time, then

a.

inflation is expected to exceed the nominal interest rate in the future.

b.

inflation is expected to be less than the nominal interest rate in the future.

c.

actual inflation was less than the nominal interest rate.

d.

actual inflation was greater than the nominal interest rate.

    22.    If inflation is expected to decrease, then

a.

savers will provide less funds at the existing equilibrium interest rate.

b.

the equilibrium interest rate will increase.

c.

the equilibrium interest rate will decrease.

d.

borrowers will demand more funds at the existing equilibrium interest rate.

    23.    If inflation turns out to be lower than expected

a.

savers benefit.

b.

borrowers benefit while savers are not affected.

c.

savers and borrowers are equally affected.

d.

savers are adversely affected but borrowers benefit.

    24.    If the economy weakens, there is ____ pressure on interest rates. If the Federal Reserve increases the money supply there is ____ pressure on interest rates (assume that inflationary expectations are not affected).

a.

upward; upward

b.

upward; downward

c.

downward; upward

d.

downward; downward

    25.    What is the basis of the relationship between the Fisher effect and the loanable funds theory?

a.

the saver's desire to maintain the existing real rate of interest

b.

the borrower's desire to achieve a positive real rate of interest

c.

the saver's desire to achieve a negative real rate of interest

d.

B and C

    26.    Assume that foreign investors who have invested in U.S. securities decide to decrease their holdings of U.S. securities and to instead increase their holdings of securities in their own countries. This should cause the supply of loanable funds in the United States to ____ and should place ____ pressure on U.S. interest rates.

a.

decrease; upward

b.

decrease; downward

c.

increase; downward

d.

increase; upward

    27.    Assume that foreign investors who have invested in U.S. securities decide to increase their holdings of U.S. securities. This should cause the supply of loanable funds in the United States to ____ and should place ____ pressure on U.S. interest rates.

a.

decrease; upward

b.

decrease; downward

c.

increase; downward

d.

increase; upward

    28.    If the federal government needs to borrow additional funds, this borrowing reflects a(n) ____ in the supply of loanable funds, and a(n) ____ in the demand for loanable funds.

a.

increase; no change

b.

decrease; no change

c.

no change; increase

d.

no change; decrease

    29.    If the federal government reduces its budget deficit, this causes a(n) ____ in the supply of loanable funds, and a(n) ____ in the demand for loanable funds.

a.

increase; no change

b.

decrease; no change

c.

no change; increase

d.

no change; decrease

    30.    Due to expectations of higher inflation in the future, we would typically expect the supply of loanable funds to ____ and the demand for loanable funds to ____.

a.

increase; decrease

b.

increase; increase

c.

decrease; increase

d.

decrease; decrease

    31.    Due to expectations of lower inflation in the future, we would typically expect the supply of loanable funds to ____ and the demand for loanable funds to ____.

a.

increase; decrease

b.

increase; increase

c.

decrease; increase

d.

decrease; decrease

    32.    If the real interest rate is expected by a particular person to become negative, then the purchasing power of his or her savings would be ____, as the inflation rate is expected to be ____ the existing nominal interest rate.

a.

decreasing; less than

b.

decreasing; greater than

c.

increasing; greater than

d.

increasing; less than

    33.    If economic expansion is expected to increase, then demand for loanable funds should ____ and interest rates should ____.

a.

increase; increase

b.

increase; decrease

c.

decrease; decrease

d.

decrease; increase

    34.    If economic expansion is expected to decrease, the demand for loanable funds should ____ and interest rates should ____.

a.

increase; increase

b.

increase; decrease

c.

decrease; decrease

d.

decrease; increase

    35.    If the real interest rate was stable over time, this would suggest that there is ____ relationship between inflation and nominal interest rate movements.

a.

a positive

b.

an inverse

c.

no

d.

an uncertain (cannot be determined from information above)

    36.    If inflation and nominal interest rates move more closely together over time than they did in earlier periods, this would ____ the volatility of the real interest rate movements over time.

a.

increase

b.

decrease

c.

have an effect, which cannot be determined with above information, on

d.

have no effect on

    37.    Canada and the U.S. are major trading partners. If Canada experiences a major increase in economic growth, it could place ____ pressure on Canadian interest rates and ____ pressure on U.S. interest rates.

a.

upward; upward

b.

upward; downward

c.

downward; downward

d.

downward; upward

    38.    If investors shift funds from stocks into bank deposits, this ____ the supply of loanable funds, and places ____ pressure on interest rates.

a.

increases; upward

b.

increases; downward

c.

decreases; downward

d.

decreases; upward

    39.    When Japanese interest rates rise, and if exchange rate expectations remain unchanged, the most likely effect is that the supply of loanable funds provided by Japanese investors to the United States will ____, and the U.S. interest rates will ____.

a.

increase; increase

b.

increase; decrease

c.

decrease; decrease

d.

decrease; increase

    40.    Which of the following will probably not result in an increase in the business demand for loanable funds?

a.

an increase in positive net present value (NPV) projects

b.

a reduction in interest rates on business loans

c.

a recession

d.

none of the above

    41.    If the aggregate demand for loanable funds increases without a corresponding ____ in aggregate supply, there will be a ____ of loanable funds.

a.

increase; surplus

b.

increase; shortage

c.

decrease; surplus

d.

decrease; shortage

    42.    A ____ federal government deficit increases the quantity of loanable funds demanded at any prevailing interest rate, causing an ____ shift in the demand schedule.

a.

higher; inward

b.

higher; outward

c.

lower; outward

d.

none of the above

    43.    Which of the following is not true regarding foreign interest rates?

a.

The large flow of funds between countries causes interest rates in any given country to become more susceptible to interest rate movements in other countries.

b.

The expectations of a strong dollar should cause a flow of funds to the U.S.

c.

An increase in a foreign country's interest rates will encourage investors in that country to invest their funds in other countries.

d.

All of the above are true regarding foreign interest rates.

    44.    Which of the following is least likely to affect household demand for loanable funds?

a.

a decrease in tax rates

b.

an increase in interest rates

c.

a reduction in positive net present value (NPV) projects available

d.

All of the above are equally likely to affect household demand for loanable funds.

    45.    Which of the following statements is incorrect?

a.

The Fed's monetary policy is intended to control the economic conditions in the U.S.

b.

The Fed's monetary policy affects the supply of loanable funds, which affects interest rates.

c.

By influencing interest rates, the Fed is able to influence the amount of money that corporations and households are willing to borrow and spend.

d.

All of the statements above are true.

    46.    At any point in time, households and businesses demand a greater quantity of loanable funds at lower rates of interest.

a. True

b. False

    47.    The business demand for funds resulting from short-term investments is inversely related to the number of projects implemented and inversely related to the interest rate.

a. True

b. False

    48.    Other things being equal, a smaller quantity of U.S. funds would be demanded by foreign governments and corporatio