Chapter 26 Study Guide

Multiple Choice
1. Most entrepreneurs do not have enough money of their own to start their businesses. When they acquire the necessary funds from someone else, 2. Which of the following is both a store of value and a common medium of exchange? 3. All or part of a firm’s profits may be paid out to the firm’s stockholders in the form of 4. Compared to stocks, bonds offer the holder 5. You are thinking of buying a bond from Knight Corporation. You know that this bond is long term and you know that Knight’s business ventures are risky and uncertain. You then consider another bond with a shorter term to maturity issued by a company with good prospects and an established reputation. Which of the following is correct? 6. Other things the same, as the maturity of a bond becomes longer, the bond will pay
 * a. their consumption expenditures are being financed by someone else’s saving through the Federal Reserve System.
 * b. their consumption expenditures are being financed by someone else’s investment through the Federal Reserve System.
 * c. their investments are being financed by someone else’s saving through the financial system.
 * d. their saving is being financed by someone else’s investment through the financial system.
 * e. their investments are being financed by someone else’s saving through the Federal Reserve system.
 * a. corporate bonds
 * b. mutual funds
 * c. checking account balances
 * d. savings account balances
 * e. All of the above are correct.
 * a. retained earnings.
 * b. dividends.
 * c. interest payments.
 * d. capital accounts.
 * e. transfer payments.
 * a. lower risk and lower potential return.
 * b. lower risk and higher potential return.
 * c. lower risk and equal potential return.
 * d. higher risk and lower potential return.
 * e. higher risk and higher potential return.
 * a. The longer term would tend to make the interest rate on the bond issued by Knight higher, while the higher risk would tend to make the interest rate lower.
 * b. The longer term would tend to make the interest rate on the bond issued by Knight lower, while the higher risk would tend to make the interest rate higher.
 * c. Both the longer term and the higher risk would tend to make the interest rate lower on the bond issued by Knight.
 * d. Both the longer term and the higher risk would tend to make the interest rate higher on the bond issued by Knight.
 * e. The bonds from both companies would carry the same interest rate as those rates are set by the Federal Reserve.
 * a. a lower interest rate because it has less risk.
 * b. a lower interest rate because it has more risk.
 * c. a higher interest rate because it has more risk.
 * d. a higher interest rate because it has less risk.
 * e. the same interest rate because there is no relationship between term and risk.

7. Refer to Figure 26-1. Which of the following movements shows the effects of a new law that makes more people than before eligible for Individual Retirement Accounts? 8. Suppose the government changed the tax laws, with the result that people were encouraged to spend a larger percentage of their disposable income on consumption. Using the loanable funds model, a consequence would be 9. Investment declines when crowding out occurs because 10. If there is surplus of loanable funds, at the current interest rate, then
 * a. a movement from Point A to Point B
 * b. a movement from Point B to Point F
 * c. a movement from Point C to Point F
 * d. a movement from Point C to Point B
 * e. a movement from Point F to Point B
 * a. lower interest rates and lower investment.
 * b. lower interest rates and greater investment.
 * c. higher interest rates and lower investment.
 * d. higher interest rates and higher investment.
 * e. higher interest rates and higher savings.
 * 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.
 * e. a balance of payment deficit makes interest rates rise.
 * a. the supply of loanable funds shifts right and the demand shifts left.
 * b. the supply of loanable funds shifts left and the demand shifts right.
 * c. the supply of loanable funds and the demand both shift until a new equilibrium is achieved.
 * d. neither curve shifts, but the quantity of loanable funds supplied increases and the quantity demanded decreases as the interest rate rises to equilibrium.
 * e. neither curve shifts, but the quantity of loanable funds supplied decreases and the quantity demanded increases as the interest rate falls to equilibrium.

Answers

 * C
 * C
 * B
 * A
 * D
 * C
 * C
 * C
 * A
 * E

Free Response
1. Draw and label a graph showing equilibrium in the market for loanable funds.

2. Identify each of the following acts as representing either saving or investment.
 * a. Fred uses some of his income to buy government bonds.
 * b. Julie takes some of her income and buys mutual funds.
 * c. Alex purchases a new truck for his delivery business using borrowed funds.
 * d. Elaine uses some of her income to buy stock in a major corporation.
 * e. Henrietta hires a builder to construct a new building for her bicycle shop.