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The financial system coordinates investment and saving, which are important determinants of long-run real GDP.

A) True
B) False

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Figure 26-1 The figure depicts a demand-for-loanable-funds curve and two supply-of-loanable-funds curves. Figure 26-1 The figure depicts a demand-for-loanable-funds curve and two supply-of-loanable-funds curves. -Refer to Figure 26-1. What is measured along the vertical axis of the graph? A) The tax rate B) The interest rate C) The quantity of investment D) The quantity of saving -Refer to Figure 26-1. What is measured along the vertical axis of the graph?


A) The tax rate
B) The interest rate
C) The quantity of investment
D) The quantity of saving

E) B) and D)
F) None of the above

Correct Answer

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Which of the following bonds has the highest interest rate?


A) A high credit risk and a short term
B) A low credit risk and a short term
C) A long term and a high credit risk
D) A long term and a low credit risk

E) C) and D)
F) A) and D)

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Suppose that you are a broker and people tell you the following about themselves. What sort of bond would you recommend to each? Defend your choices. a."I am in a high federal income tax bracket and I don't want to take very much risk." b."I want a high return and I am willing to take a lot of risk to get it." c."I want a decent return and I have enough deductions that I don't value tax breaks highly."

Correct Answer

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a.
A municipal bond. Municipal bonds gen...

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Index funds typically have a


A) higher rate of return and higher costs than managed mutual funds.
B) higher rate of return and lower costs than managed mutual funds.
C) lower rate of return and higher costs than managed mutual funds.
D) lower rate of return and lower costs than managed mutual funds.

E) All of the above
F) None of the above

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What is the main function of the financial system?

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Matching s...

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The price of a stock will rise if the


A) managers of a stock exchange decide the price should be higher.
B) demand for the stock rises.
C) supply of the stock rises.
D) demand for the stock falls.

E) A) and B)
F) A) and C)

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Which of the following is a certificate of indebtedness?


A) Both stocks and bonds
B) Stocks but not bonds
C) Bonds but not stocks
D) Neither stocks nor bonds

E) B) and C)
F) B) and D)

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An increase in the demand for loanable funds increases the equilibrium interest rate and decreases the equilibrium level of saving.

A) True
B) False

Correct Answer

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Managed mutual funds perform better on average than index funds because stock prices are usually a good predictor of a company's true value.

A) True
B) False

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Figure 26-4 This figure shows the loanable funds market for a closed economy. Figure 26-4 This figure shows the loanable funds market for a closed economy. ​ -Refer to Figure 26-4. Starting at point A, the enactment of an investment tax credit would likely cause the quantity of loanable funds traded to A) increase to $180 and the interest rate to rise to 12% (point C) . B) decrease to $60 and the interest rate to fall to 4% (point B) . C) decrease to $60 and the interest rate to rise to 12% (point E) . D) increase to $180 and the interest rate to fall to 4% (point D) . ​ -Refer to Figure 26-4. Starting at point A, the enactment of an investment tax credit would likely cause the quantity of loanable funds traded to


A) increase to $180 and the interest rate to rise to 12% (point C) .
B) decrease to $60 and the interest rate to fall to 4% (point B) .
C) decrease to $60 and the interest rate to rise to 12% (point E) .
D) increase to $180 and the interest rate to fall to 4% (point D) .

E) B) and C)
F) A) and C)

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Owners of bonds that were issued by the federal government are not required to pay federal income tax on the interest income.

A) True
B) False

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On a graph that depicts the market for loanable funds, the nominal interest rate is measured along the vertical axis.

A) True
B) False

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Institutions that help to match one person's saving with another person's investment are collectively called the


A) Federal Reserve system.
B) banking system.
C) monetary system.
D) financial system.

E) B) and C)
F) None of the above

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At the broadest level, the financial system moves the economy's scarce resources from


A) the rich to the poor.
B) financial institutions to business firms and government.
C) households to financial institutions.
D) savers to borrowers.

E) None of the above
F) A) and B)

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The ratio of government debt to GDP was higher during the Reagan presidency than at any previous time in U.S. history.

A) True
B) False

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Robert buys bonds. Rachel buys a new truck for her landscaping business. Identify both as savers, investors, both, or neither.

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Robert is ...

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The term loanable funds refers to all income that is not used for consumption or government expenditures.

A) True
B) False

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In a closed economy, public saving is the amount of


A) income that households have left after paying for taxes and consumption.
B) income that businesses have left after paying for the factors of production.
C) tax revenue that the government has left after paying for its spending.
D) spending that the government undertakes in excess of the taxes it collects.

E) A) and B)
F) A) and C)

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Explain why the demand for loanable funds slopes downward and why the supply of loanable funds slopes upward.

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When the interest rate rises investment ...

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