Ch.
26 - Sample Questions
Multiple Choice
Identify the choice that best completes the statement or answers the question.
____ 1. We would expect the interest rate on Bond A to be higher than the interest rate on Bond B if the two bonds
have identical characteristics except that
a. the credit risk associated with Bond A is lower than the credit risk associated with Bond
B.
b. Bond A was issued by the state of New York and Bond B was issued by the Exxon Mobil
Corporation.
c. Bond A has a term of 20 years and Bond B has a term of 2 years.
d. All of the above are correct.
____ 2. The primary economic function of the financial system is to
a. keep interest rates low.
b. provide expert advice to savers and investors.
c. match one person’s consumption expenditures with another person’s capital expenditures.
d. match one person’s saving with another person’s investment.
____ 3. Net exports must equal zero for any economy
a. that is closed.
b. for which Y = C + I + G.
c. for which S = Y - C - G.
d. All of the above are correct.
____ 4. In a small closed economy investment is $20 billion and private saving is $22 billion. What are public saving
and national saving?
a. $24 billion and $2 billion
b. $20 billion and -$2 billion
c. $2 billion and $24 billion
d. -$2 billion and $20 billion
____ 5. Suppose that in a closed economy GDP is 11,000, consumption is 7,500, and taxes are 2,000. What value of
government purchases would make national savings equal to 1,000 and at that value would the government
have a deficit or surplus?
a. 2,500, deficit
b. 2,500, surplus
c. 1,000, deficit
d. 1,000, surplus
____ 6. Which of the following could explain a decrease in the equilibrium interest rate and an increase in the
equilibrium quantity of loanable funds?
a. The demand for loanable funds shifted rightward.
b. The demand for loanable funds shifted leftward.
c. The supply of loanable funds shifted rightward.
d. The supply of loanable funds shifted leftward.
____ 7. Suppose a country has only a sales tax. Now suppose it replaces the sales tax with an income tax that includes
a tax on interest income. This would make equilibrium
a. interest rates and the equilibrium quantity of loanable funds rise.
b. interest rates rise and the equilibrium quantity of loanable funds fall.
c. interest rates fall and the equilibrium quantity of loanable funds rise.
d. interest rates and the equilibrium quantity of loanable funds fall.
____ 8. Crowding out occurs when investment declines because
a. a budget deficit makes interest rates rise.
b. a budget deficit makes interest rates fall.
c. a budget surplus makes interest rates rise.
d. a budget surplus makes interest rates fall.
Figure 26-2. The figure depicts a supply-of-loanable-funds curve and two demand-for-loanable-funds
curves.
Supply
D2
D1
____ 9. Refer to Figure 26-2. What is measured along the horizontal axis of the graph?
a. the quantity of loanable funds
b. the size of the government budget deficit or surplus
c. the real interest rate
d. the nominal interest rate
____ 10. Refer to Figure 26-2. Which of the following events would shift the demand curve from D1 to D2?
a. The government goes from running a budget deficit to running a budget surplus.
b. Firms become optimistic about the future and, as a result, they plan to increase their
purchases of new equipment and construction of new factories.
c. A change in the tax laws encourages people to consume less and save more.
d. A change in the tax laws encourages people to consume more and save less.
Ch.26 - Sample Questions
Answer Section
MULTIPLE CHOICE
1. ANS: C PTS: 1 DIF: 2 REF: 26-1
NAT: Analytic LOC: The study of economics and definitions in economics
TOP: Bonds MSC: Applicative
2. ANS: D PTS: 1 DIF: 2 REF: 26-0
NAT: Analytic LOC: The study of economics and definitions in economics
TOP: Financial system MSC: Interpretive
3. ANS: D PTS: 1 DIF: 2 REF: 26-2
NAT: Analytic LOC: The study of economics and definitions in economics
TOP: Closed economies MSC: Applicative
4. ANS: D PTS: 1 DIF: 2 REF: 26-2
NAT: Analytic LOC: The study of economics and definitions in economics
TOP: National saving | Public saving MSC: Applicative
5. ANS: A PTS: 1 DIF: 2 REF: 26-2
NAT: Analytic LOC: The study of economics and definitions in economics
TOP: National saving | Budget deficits MSC: Applicative
6. ANS: C PTS: 1 DIF: 1 REF: 26-3
NAT: Analytic LOC: Understanding and applying economic models
TOP: Market for loanable funds MSC: Interpretive
7. ANS: B PTS: 1 DIF: 3 REF: 26-3
NAT: Analytic LOC: Understanding and applying economic models
TOP: Taxes | Market for loanable funds MSC: Analytical
8. ANS: A PTS: 1 DIF: 1 REF: 26-3
NAT: Analytic LOC: Understanding and applying economic models
TOP: Crowding out MSC: Definitional
9. ANS: A PTS: 1 DIF: 1 REF: 26-3
NAT: Analytic LOC: Understanding and applying economic models
TOP: Market for loanable funds MSC: Interpretive
10. ANS: B PTS: 1 DIF: 2 REF: 26-3
NAT: Analytic LOC: Understanding and applying economic models
TOP: Market for loanable funds MSC: Interpretive
