Question 1

If a share of stock in Skylight Chili sells for $75,the retained earnings per share are $5,and the divided per share is $2,then the price-earnings ratio is 15.

Accepted Answer

A) True 
 B)False

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

Suppose the economy is closed with national saving of $2 trillion,consumption of $7 trillion,and government purchases of $1 trillion.What is GDP?

Accepted Answer

A)   $8 trillion
B)   $9 trillion
C)   $10 trillion
D)   $11 trillionE) A) and B)
F) A) and C)

Question 4

Suppose the government deficit increases,but the interest rate remains the same.Which of the following things might have happened simultaneously to keep interest rates the same?

Accepted Answer

A)   The government reduces the amount that people may put into savings accounts on which the interest is tax exempt.
B)   Because they are optimistic about the future of the economy,firms desire to borrow more to purchase physical capital.
C)   Consumers decide to decrease consumption and work more.
D)   All of the above could explain why the interest rate would be unchanged.E) A) and C)
F) B) and C)

Question 5

If the inflation rate is 2 percent and the real interest rate is 3 percent,then the nominal interest rate is

Accepted Answer

A)   5 percent.
B)   1 percent.
C)   1.5 percent
D)   0.67 percent.E) None of the above
F) A) and D)

Question 6

Which of the following is an example of financial intermediation?

Accepted Answer

A)   Susan buys shares of stock issued by a fast food company.
B)   A foreign government buys bonds issued by the U.S.Treasury.
C)   John makes a deposit at a bank and the bank uses this money to make an auto loan to Luke.
D)   None of the above is correct.E) B) and C)
F) C) and D)

Question 7

If,for an imaginary closed economy,investment amounts to $10,000 and the government is running a $2,500 deficit,then private saving must amount to $12,500.

Accepted Answer

A) True 
 B)False

Question 8

A corporation's earnings are the amount of revenue it receives for the sale of its products

Accepted Answer

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 measure by its economists.Earnings may be paid out as dividends or retained by the corporation.E) A) and B)
F) A) and C)

Question 9

In a closed economy,investment must be equal to private saving.

Accepted Answer

A) True 
 B)False

Question 10

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

Accepted Answer

A)   a junk bond
B)   a bond issued by the state of Texas
C)   a bond issued by the federal government
D)   a bond issued by Exxon Mobil CorporationE) B) and D)
F) A) and D)

Question 11

Which of the following statements is correct?

Accepted Answer

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 is engaging in debt finance.
C)   The owners of bonds sold by the Microsoft Corporation are part owners of that corporation.
D)   All bonds are,by definition,perpetuities.E) B) and C)
F) A) and C)

Question 12

Other things the same,as the maturity of a bond becomes longer,the bond will pay

Accepted Answer

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)   the same interest rate,because there is no relationship between term and risk.E) All of the above
F) A) and D)

Question 13

Other things the same,which bond would you expect to pay the highest interest rate?

Accepted Answer

A)   a bond issued by the U.S.government
B)   a bond issued by IBM
C)   a bond issued by New York State
D)   a bond issued by a new restaurant chainE) A) and C)
F) A) and B)

Question 14

A perpetuity is distinguished from other bonds in that it

Accepted Answer

A)   pays continuously compounded interest.
B)   pays interest only when it matures.
C)   never matures.
D)   will be used to purchase another bond when it matures unless the owner specifies otherwise.E) All of the above
F) B) and C)

Question 15

Managed funds

Accepted Answer

A)   typically have a higher rate of return and higher costs than index funds.
B)   typically have a higher rate of return and lower costs than index funds.
C)   typically have a lower rate of return and higher costs than index funds.
D)   typically have a lower rate of return and lower costs than index funds.E) All of the above
F) C) and D)

Question 16

Retained earnings are

Accepted Answer

A)   earnings of a company that are not paid out to stockholders.
B)   the amount of revenue a corporation receives for the sale of its products minus its costs of production as measured by its accountants.
C)   the single most important piece of information about a stock.
D)   computed by multiplying the dividend yield by the price of the stock.E) A) and B)
F) None of the above

Question 17

In the late summer of 2005 some regions of the country were suffering from drought.What effect would we expect this to have on the stock of companies such as John Deere that manufacture farm equipment?

Accepted Answer

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

Question 18

The nominal interest rate is the

Accepted Answer

A)   interest rate corrected for inflation.
B)   interest rate as usually reported by banks.
C)   real rate of return to the lender.
D)   real cost of borrowing to the borrower.E) B) and C)
F) A) and D)

Question 19

Suppose the government changed the tax laws,with the result that people were encouraged to consume more and save less.Using the loanable funds model,a consequence would be

Accepted Answer

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

Question 20

Suppose Sarah Lee Corporation stock has a P/E ratio of 8.This P/E ratio is relatively

Accepted Answer

A)   low,indicating that buyers may expect earnings to rise.
B)   low,indicating that buyers may expect earnings to fall.
C)   high,indicating that buyers may expect earnings to rise.
D)   high,indicating that buyers may expect earnings to fall.E) All of the above
F) None of the above

Exam 26: Saving, investment, and the Financial System

Suppose Sarah Lee Corporation stock has a P/E ratio of 8.This P/E ratio is relatively

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Suppose the government deficit increases,but the interest rate remains the same.Which of the following things might have happened simultaneously to keep interest rates the same?

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Which of the following is an example of financial intermediation?

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Suppose the government changed the tax laws,with the result that people were encouraged to consume more and save less.Using the loanable funds model,a consequence would be

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

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A corporation's earnings are the amount of revenue it receives for the sale of its products

Correct AnswerverifiedShow Answer

Retained earnings are

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In a closed economy,investment must be equal to private saving.

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The nominal interest rate is the

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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.

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

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A perpetuity is distinguished from other bonds in that it

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Other things the same,which bond would you expect to pay the highest interest rate?

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If,for an imaginary closed economy,investment amounts to $10,000 and the government is running a $2,500 deficit,then private saving must amount to $12,500.

Correct AnswerverifiedShow Answer

If a share of stock in Skylight Chili sells for $75,the retained earnings per share are $5,and the divided per share is $2,then the price-earnings ratio is 15.

Correct AnswerverifiedShow Answer

Managed funds

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In the late summer of 2005 some regions of the country were suffering from drought.What effect would we expect this to have on the stock of companies such as John Deere that manufacture farm equipment?

Correct AnswerverifiedShow Answer

Suppose the economy is closed with national saving of $2 trillion,consumption of $7 trillion,and government purchases of $1 trillion.What is GDP?

Correct AnswerverifiedShow Answer

Other things the same,as the maturity of a bond becomes longer,the bond will pay

Correct AnswerverifiedShow Answer

If the inflation rate is 2 percent and the real interest rate is 3 percent,then the nominal interest rate is

Correct AnswerverifiedShow Answer

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