PE 26

Question 1

If you were to start a business delivering documents, you might need to purchase cellphones, bicycles, desks, and chairs.

a. These purchases are called capital investment. If you raise the funds to purchase them from others you are a saver.

b. These purchases are called capital investment. If you raise the funds to purchase them from others you are a borrower.

c. These purchases are called comsumption. If you raise the funds to purchase them from others you are a saver.

d. These purchases are called consumption. If you raise the funds to purchase them fromm others you are a borrower.

Answer 1

b. These purchases are called capital investment. If you raise the funds to purchase them from others you are a borrower.

Capital investment refers to spending money on physical assets like cellphones, bicycles, desks and chairs for business use. These are not consumed immediately but help in producing goods or services over time.

If you’re raising funds from others to buy these things, you’re borrowing, not saving. The savers are the people or institutions who provide the funds

Question 2

When a country saves a larger portion of its GDP than it did before, it will have

a. More capital and higher productivity

b. More capital and lower productivity

c. Less capital and higher productivity

d. Less capital and lower productivity

Answer 2

a. More capital and higher productivity

Saving larger portion of GDP means that more resources are available for investment in things like factories, equipment, infrastructure and technology.

These investments increase the capital stock, which boosts worker productivity - since each worker has more or better tools to work with.

Question 3

Given that Monika’s income exceeds her expenditures, Monika is best described as a

a. Saver or as a supplier of funds

b. Saver or as a demander of funds

c. Borrower or as a supplier of funds

d. Borrower or as a demander of funds

Answer 3

a. Saver or as a supplier of funds

Question 4

Most entrepreneurs do not have enough money of their own to start their businesses. When they acquire the necessary funds from someone else,

a. Their consumption expenditures are being financed by someone else’s saving.

b. Their consumption expenditures are being financed by someone else’s investment.

c. Their investments are being financed by someone else’s saving

d. Their saving is being financed by someone else’s investment.

Answer 4

c. Their investments are being financed by someone else’s saving

• When entrepreneurs start a business, money spent on things like equipment, buildings and tools is considered investment (not consumption).
• If they don’t have enough of their own money, they borrow or attract funds from others - and those funds come from someone else’s saving
• In macroeconomics, saving provides the funds for investment

Question 5

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

Answer 5

d. Savers to borrowers

Question 6

The fact that borrowers sometimes default on their loans by declaring bankruptcy is directly related to the characteristic of a bond called

a. credit risk

b. interest risk

c. term risk

d. private risk

Answer 6

a. credit risk

Question 7

When a largem well-known corporation wishes to borrow directly from the public, it can

a. sell bonds

b. sell shares of stock

c. go to a bank for a loan

d. all of the above

Answer 7

d. all of the above

a. It can sell bonds - borrowing directly from the public by issuing debt securities that promise to pay interest and repay principal later

b. It can sell shares of stock - raising money by giving ownership stakes to investors

c. It can also go to a bank for a loan - though this is borrowing indirectly through a financial intermediary

Question 8

Which of the following statements about the term of a bond is correct

a. Term refers to the various characteristics of a bond, including its interest rate and tax treatment

b. The term of a bond is determined entirely by its credit risk

c. The term of a bond is determined entirely by how much sales charge the buyer of the bond pays when he or she purchases the bond

d. Interest rates on long-term bonds are usually higher than interest rates on short-term bonds

Answer 8

d. Interest rates on long-term bonds are usually higher than interest rates on short-term bonds

• The term of a bond refers to the length of time until the bond matures (when the issuer must repay the principal to the bondholder)
• Generally, long-term bonds carry higher interest rates (yields) than short-term bonds to compensate investors for the additional risks associated with longer holding periods - like inflation, interest rate changes and credit risk over time

Question 9

Atlas Corporation is in sound financial condition. It sells a long-term bond. Which of the following make the interest rate on this bond lower than otherwise?

a. Both Atlas’ sound finances and the long term of the bond

b. Atlas’ sound finances but not the long term of the bond

c. The long term of the bond but not Atlas’ sound finances

d. Neither Atlas’ sound finances nor the long term of the bond

Answer 9

b. Atlas’ sound finances but not the long term of the bond

“sound finances” nghĩa là tình hình tài chính ổn định, vững chắc và lành mạnh

Question 10

Which of the following statements is correct?

a. The expected future profitability of a corporation influences the demand for that corporation’s stock

b. When a corporation sells stock as a means of raising funds, it engaging in debt finance

c. The owner of bonds sold by the Microsoft Corporation are part owners of that corporation

d. All bonds are, by definition, perpetuities

Answer 10

a. The expected future profitability of a corporation influences the demand for that corporation’s stock

b. Selling stock is equity finance - it raises funds by giving investors partial ownership, bot by borrowing

c. Bondholders are creditors, not owners. They lend money and receive interest, but don’t own part of the company

d. Most bonds have a fixed maturity date. A perpetuity is a bond that pays interest forever and never matures - but that’s rare and not the default for bonds.

Question 11

Which of the following statements is correct?

a. A corporation receives a monetary payment every time its shares of stock are traded by stockholders on organized stock exchanges

b. When a corporation sells bonds as a means of raising funds it is engaging in debt finance

c. A share of stock is an IOU

d. The two most important financial markets in the economy are the stock market and financial intermediaries

Answer 11

b. When a corporation sells bonds as a means of raising funds it is engaging in debt finance

a. The company gets money when it sells stock the first time (in an initial public offering - IPO - or when issuing new shares). After that, stock trades on exchanges are between investors.

c. A stock represents ownership in a company, not a debt obligation like an IOU. An IOU is what you’d get from a bond

d. 2 main types of financial insitutions are financial markets (the stock and bond markets) and financial intermediaries (banks, mutual funds, pension funds)

Question 12

If the government’s expenditures exceed its receipts, it would likely

a. Lend money to a bank or other financial intermediary

b. Borrow money from a bank or other financial intermediary

c. Buy bonds directly from the public

d. Sell bonds directly to the public

Answer 12

d. Sell bonds directly to the public

b. Governments usually raise funds by selling bonds, not borrowing directly from banks

Question 13

Which of the following makes sense?

a. British perpetuities about to mature

b. Disney issues new bonds with term of 7%

c. Corporate bonds currently pay higher interest rates than government bonds

d. Standard and Poor’s judges new junk bond to have very low credit risk.

Answer 13

c. Corporate bonds currently pay higher interest rates than government bonds

b. This is nonsense because 7% is a rate (interest rate), not a term (which should be a time period) It should say sth like (with a coupon of 7%” or “with a term of 10 years”

d. Junk bonds are, by definition, a high-risk bonds. If a bond has very low credit risk, it wouldn’t be classified as a junk bond

Question 14

A bond buyer is a

a. Saver. Bond buyers must hold their bonds until maturity

b. Saver. Bond buyers may sell their bonds prior to maturity

c. Borrower. Bond buyers must hold their bonds until maturity

d. Borrower. Bond buyers may sell their bonds prior to maturity

Answer 14

b. Saver. Bond buyers may sell their bonds prior to maturity

• A bond buyer is a saver because they’re lending money to whoever issued the bond (the government, corporation, etc.) in exchange for interest payments and repayment of principal in the future.

Question 15

On which of these bonds is the prospect of default most likely?

“Prospect of default” means the chance or likelihood that the bond issuer won’t be able to pay back the money they owe

a. A junk bond

b. A municipal bond

c. An US government bond

d. A corporate bond issued by Procter & Gamble Corporation

Answer 15

a. A junk bond

Question 16

Suppose the city of Des Moines has a high credit rating, and so when Des Moines borrows funds by selling bonds

a. The city’s high credit rating and the tax status of municipal bonds both contribute to a lower interest rate than it would otherwise apply

b. The city’s high credit rating and the tax status of municipal bonds both contribute to a higher interest rate than it would otherwise apply

c. The city’s high credit rating contributes to a lower interest rate than it would otherwise apply, while the tax status of municipal bonds contributes to a higher interest rate than it would otherwise apply

d. The city’s high credit rating contributes to a higher interest rate than it would otherwise apply, while the tax status of municipal bonds contributes to a lower interest rate than it would otherwise apply

Answer 16

a. The city’s high credit rating and the tax status of municipal bonds both contribute to a lower interest rate than it would otherwise apply

• High credit rating: means investors see the city as a safe, reliable borrower with a low prospect of default, so they’re willing to accept a lower interest rate
• tax status of municipal bonds: In the US, the interest earned on municipal bonds id often tax-free at the federal. Because investors get a tax break, they’re happy to accept a lower interest rate than they would on taxable bond

Question 17

The sale of stocks

a. And bonds to raise money is called debt finance

b. And bonds to raise money is called equity finance

c. To raise money is called debt finance, while the sale of bonds to raise funds is called equity finance

d. To raise money is called equity finance, while the sale of bonds to raise funds is called debt finance

Answer 17

d. To raise money is called equity finance, while the sale of bonds to raise funds is called debt finance

Question 18

ABC Co. sells newly issued bonds. JLG Co. sells newly issued stocks. Which company is raising funds in financial markets?

a. Only ABC

b. Only JLG

c. Both ABC and JLG

d. Neither ABC nor JLG

Answer 18

c. Both ABC and JLG

Question 19

Northwest Wholesale Foods sells common stock. The company is using

a. equity financing and the return shareholders earn is fixed

b. Equity financing and the return shakeholders earn depends on how profitable the company is

c. Debt financing and the return shareholders earn is fixed

d. Debt financing and the return shareholders earn depends on how profitable the company is

Answer 19

b. Equity financing and the return shakeholders earn depends on how profitable the company is

Question 20

page 35

If Huedepool Beer runs into financial difficulty, the stockholders as

a. part owners of Huedepool are paid before bondholders get paid anything at all

b. part owners of Huedepool are paid after bondholders get paid

c. Creditors of Huedepool are paid before bondholders get paid anything at all

d, creditors of Huedepool are paid after bondholders get paid

Answer 20

b. part owners of Huedepool are paid after bondholders get paid

• Stockholders are the owners of the company and they are last in line when it comes to getting paid if a company run into financial trouble (like bankruptcy)

Question 21

Which of the following people purchased the correct asset to meet his or her objective?

a. Michelle wanted to be a part owner of Mamma Rosa’s Pizza, so she purchased a bond issued by Mamma Rosa’s Pizza

b. Tim wanted a high return, even if it meant taking some risk, so he purchased stock issued by Specific Electric instead of bonds issued by Specific Electric

c. Jennifer wanted to buy equity in Honda, so she purchased bonds sold by Honda

d. All of the above

Answer 21

b. Tim wanted a high return, even if it meant taking some risk, so he purchased stock issued by Specific Electric instead of bonds issued by Specific Electric

Stocks generally offer higher potential returns than bonds, but they also come with higher risk

Question 22

World Wide Delivery Service Corporation develops a way to speed up its deliveries and reduce its costs. We would expect that this would

a. Raise the demand for existing shares of the stock, causing the price to rise

b. Decrease the demand for existing shares of the stock, causing the price to fall

c. Raise the supply of the existing shares of stock, causing the price to rise

d. Raise the supply of the existing shares of stock, causing the price to fall

Answer 22

a. Raise the demand for existing shares of the stock, causing the price to rise

The supply of existing shares doesn’t change here, no new shares are being issued just more people wanting to buy the ones already out there

Question 23

What will change the supply of stocks

Answer 23

When the company itself issues new shares or buys back its own shares

Question 24

A stock index is

a. An average of a group of stock prices

b. An average of a group of stock yields

c. A measure of the risk relative to the profitability of corporations

d. A report in a newspaper or other media outlet on the price of the stock and earnings of the corporation that issued the stock

Answer 24

a. An average of a group of stock prices

Question 25

After a corporation issues stock, the stock ## Footnote a. Cannot be resold b. Can be resold only if the corporation wants to buy it back c. Can be resold on exchanges; the resale will raise additional funds for the corporation d. None of the above are correct

Answer 25

d. None of the above are correct ## Footnote After a corporation issues stock, the stock can be resold, but the resale typically happens on the secondary market, such as a stock exchange, and does not raise additional funds for the corporation

Question 26

Volume, as reported in stock tables, refers to the ## Footnote a. Number of shares traded b. Percentage of shares outstanding traded c. Number of shares traded times the price they sold at d. Number of shares of a company traded divided by the shares of all companies traded

Answer 26

a. Number of shares traded ## Footnote In stock tables, volume refers to the total number of shares of a particular stock that were traded (bought and sold) during a specific period, usually within a trading day. It simply counts how many shares changed hands - it doesn't account for the price or compare to other stocks' volumes unless specifically stated

Question 27

A corporation's earnings are the amount of revenue it receives for the sale of its products ## Footnote a. Minus its cost of production as measured by its accountants. Earnings must be paid out as dividends b. Minus its cost of production as measured by its accountants. Earnings may be paid out as dividends or retained by the corporation c. Minus its direct and indirect costs as measured by its economists. Earnings must be paid out as dividends d. Minus its direct and indirect cost as measured by its economists. Earnings may be paid out as dividends or retained by the corporation

Answer 27

b. Minus its cost of production as measured by its accountants. Earnings may be paid out as dividends or retained by the corporation ## Footnote * Earnings (or net income) are calculated as the company's revenue minus all its expenses (cost of production, operating expenses, taxes, interest, etc.) based on accounting principles * After earnings are determined, the corporation's board of directors decides whether to pay out a portion as dividends to shareholders or retain some or all of it within the company as retained earnings to reinvest in the business

Question 28

A stock's dividend yield is the ## Footnote a. Dividend as a percentage of the price per share b. Stock price as a percentage of the dividend c. Dividend as a percentage of the retained earnings per share d. Retained earnings per share as the percentage of the dividend

Answer 28

a. Dividend as a percentage of the price per share ## Footnote The dividend yield tells investors how much cash flow they're getting for each dollar invested in a stock. It is calculated: Dividend Yield = Annual Dividend per Share / Price per Share

Question 29

# page 50 A corporation's earnings are ## Footnote a. The amount of revenue it receives for the sale of its products minus its costs of production as measured by its accountants minus the dividends paid out b. The amount of revenue it receives for the sale of its products minus its direct and indirect costs of production as measured by its economists minus the dividends paid out. c. The amount of revenue it receives for the sale of its products minus its costs of production as measured by its accountants. d. The amount of revenue it receives for the sale of its products minus its direct and indirect costs of production as measured by its economists.

Answer 29

c. The amount of revenue it receives for the sale of its products minus its costs of production as measured by its accountants. ## Footnote It doesn't subtract dividends paid out in this definition - dividends are a distribution of earnings, not part of calculating earnings

Question 30

A high-price earnings ratio for a stock indicates that either the stock is ## Footnote a. Undervalued or people are relatively optimistic about the corporation's prospects b. Overvalued or people are relatively optimistic about the corporation's prospects c. Overvalued or people are relatively pessimistic about the corporation's prospects d. Undervalued or people are relatively pessimistic about the corporation's prospects

Answer 30

b. Overvalued or people are relatively optimistic about the corporation's prospects ## Footnote High P/E = optimism about the growth

Question 31

If people expect future earnings of Galt Corporation to be high relative to current earnings, then

Answer 31

The P/E ratio of its stock will be high. A P/E ratio of 8 is relatively low. ## Footnote Average P/E in modern stock markets tends to hover around 15-20

Question 32

# Page 63 Higher education subsidies in the form of the federal government's student loan program have the potential to ## Footnote a. Reduce the number of people that attend college b. Reduce the number of universities and colleges in the future c. Create a credit bubble and debt crisis d. Reduce the default risk on student loans

Answer 32

c. Create a credit bubble and debt crisis ## Footnote When the government heavily subsidizes higher education through easy-access student loans, it can encourage more borrowing than what would naturally occur in the market. This can lead to inflated tuition prices (since schools know students can borrow), over-borrowing by students, and eventually a situation where many graduates struggle to repay loans - creating a debt crisis and in some views, a kind of credit bubble in the student loan market

Question 33

Which of the following is both a financial institution and a financial intermediary ## Footnote a. Banks b. Stock exchanges c. The bond market d. All of the above

Answer 33

a. Banks

Question 34

Which of the following statements is correct ## Footnote a. Stocks, bonds and deposits are all similar in that each provides a common medium of exchange b. Most buyers of stocks and bonds prefer those issued by large and familiar companies c. Banks charge borrowers a slightly lower interest rate than they pay to depositors d. None of the above is correct

Answer 34

b. Most buyers of stocks and bonds prefer those issued by large and familiar companies ## Footnote a. Stocks, bonds and deposits aren't mediums of exchange - money is c. Banks actually charge borrowers a higher interest rate than they pay depositors - that's literally how banks profit

Question 35

Which of the following statement is correct ## Footnote a. A large, well-known corporation such as Proctor & Gamble would generally use financial intermediation to finance expansion of its factories b. On average, indexed funds outperform managed fund c. Unlike corporate bonds and stocks, checking accounts are a store of value d. Financial intermediaries are institution through which savers can directly provide funds to borrowers

Answer 35

b. On average, indexed funds outperform managed fund ## Footnote a. Big firms usually raises capital directly through financial markets, not intermediaries like banks c. Checking accounts are a medium of exchange, not a store of value, their value doesn't grow and inflation eats away at their real purchasing power d. Indirectly

Question 36

Which of the following is both a store of value and a common medium of exchange ## Footnote a. Corporate bonds b. Mutual funds c. Checking account balances d. All of the above

Answer 36

c. Checking account balances ## Footnote * Store of value: a store of value is an asset that can be saved, retrieved and exchanged at a later time without deterioritating in value. Checking account balances are considered a store of value because they represent money that can be used in the future * Medium of exchange: A medium of exchange is anything that is widely accepted as a form of payment for goods and services. Checking account balances are also commonly used for this purpose, as they are typically accessed using checks or electronic transfers for transactions

Question 37

A checking deposit functions as ## Footnote a. A medium of exchange and as a store of value b. A medium of exchange but not as a store of value c. A store of value but not as medium of exchange d. Neither a medium of exchange nor as a store of value

Answer 37

a. A medium of exchange and as a store of value

Question 38

Mutual funds

Answer 38

Provide diversification. Shareholders assume all of the risk associated with the mutual fund

Question 39

It is claimed that a secondary advantage of mutual funds is that ## Footnote a. An investor can avoid investment charges and fees b. They give ordinary people access to loanable funds for investing c. They usually outperform stock market indexes d. They give ordinary people access to the skills of professional money managers

Answer 39

d. They give ordinary people access to the skills of professional money managers ## Footnote b. Mutual funds pools investors' money to invest in securities, but they do not lend money to individual investors or investing

Question 40

Index funds

Answer 40

Typically have a higher rate of return and lower costs than managed mutual funds

Question 41

Index funds ## Footnote a. Buy all the stocks in a given stock index b. Promise to beat the market by a certain percentage known as an index c. Provide a return that is adjusted for changes in the consumer price index d. Buy industries within a particular category of the North American Industry Classification System

Answer 41

a. Buy all the stocks in a given stock index

Question 42

Borrowers can (and sometimes do) default on their loans when ## Footnote a. The dividen yield on their shares of stock reaches zero b. They convert their bonds into perpetuities c. They declare bankruptcy d. They cannot find enough buyers of their bonds to sell all the bonds they wish to sell

Answer 42

c. They declare bankruptcy

Question 43

Which of the following is not correct ## Footnote a. Gross domestic product is both total income in an economy and total expenditures on the economy's output of goods and services b. In a closed economy net exports are zero c. National saving is the sum of private and public saving d. Purchases of capital goods are excluded from GDP

Answer 43

d. Purchases of capital goods are excluded from GDP ## Footnote Purchases of capital goods (machinery, equipment, buildings) are included in GDP under the Investment (I) component

Question 44

You observe a closed economy that has a government deficit and positive investment. Which of the following is correct ## Footnote a. Private and public saving are both positive b. Private saving is positive, public saving is negative c. Private saving is negative, public saving is positive d. Both private saving and public saving are negative

Answer 44

b. Private saving is positive, public saving is negative

Question 45

Which of the following is correct ## Footnote a. In the national income accounts, investment and private saving refer to the same thing b. In a closed economy, if national saving is greater than 0, then everyone must be saving c. The financial system channels funds from savers to borrowers d. People whose comsumption exceeds their income are savers

Answer 45

c. The financial system channels funds from savers to borrowers ## Footnote a. Investment is spending on capital goods (machines, buildings, housing, inventory). Private saving is the part of household income that's not consumed or paid in taxes (Y-T-C) They’re related through the saving-investment identity but they’re not the same thing.

Question 46

The purchase of a new house is the one form of ## Footnote a. Investment that is financed by private saving rather than public saving b. Household spending that is not counted as part of investment in the national income accounts c. Household spending that is investment rather than consumption d. Household spending that does not contribute to GDP

Answer 46

c. Household spending that is investment rather than consumption ## Footnote The purchaseof a new house is treated differently - it is counted as investment, specifically residental investment, because: * It is a long term asset * It contributes to future housing services, not just immediate consumption

Question 47

Y = C + I + G + NX is an identity because ## Footnote a. Each symbol identifies a macroeconomic variable b. The right-hand and left-hand sides are equal when an equilibrium is reached c. The equally holds due to the way the variables are defined d. None of the above

Answer 47

c. The equally holds due to the way the variables are defined

Question 48

The Eye of Horus incense company has $10 million in cash which it has accumulated from retained earnings. It was planning to use the money to build a new factory. Recently, the rate of interest has increased. The increase in the rate of interest would ## Footnote a. Not influence the decision to build the factory because The Eye of Horus doesn't have to borrow any money. b. Not influence the decision to build the factory because its stockholders are expecting a new factory. c. Make it more likely that The Eye of Horus will build the factory because a higher interest rate will make the factory more valuable. d. Make it less likely that The Eye of Horus will build the factory because the opportunity cost of the $10 million is now higher.

Answer 48

d. Make it less likely that The Eye of Horus will build the factory because the opportunity cost of the $10 million is now higher. ## Footnote Eventhough The Eye of Horus has the cash and does not need to borrow, it still faces an opportunity cost - which is the return it could earn by investing that $10 million elsewhere * When interest rate rises, the returns from safe financial investments (like bonds or savings) go up So, now they could earn money by simply parking that cash in the market instead of tying it up in a risky, long-term factory project **Higher interest rates -> Higher opportunity cost of investing cash in projects**

Question 49

Other things the same, when the interest rate rises ## Footnote a. People would want to lend more, making the supply of loanable funds increase b. People would want to lend less, making the supply of loanable funds decrease c. People would want to lend more, making the quantity of loanable funds supplied increase d. People would want to lend less, making the quantity of loanable funds supplied decrease

Answer 49

c. People would want to lend more, making the quantity of loanable funds supplied increase ## Footnote It is the quantity supplied that increases (movement along the supply curve), not the supply itself (which would shift the entire curve, and that only happens when factors like household saving behavior or government policy change) (dốc lên chứ không phải shift về bên phải)