ECON 3330 - TEST 2

Idle

savings refer to savings that are hoarder. The money you stow under your mattress or in your piggy bank rather than deposit in your bank where it can be lent out would be an example of this.

Genuine

savings refer to savings that are invested. The money you deposited at the bank that is then lent out into investment projects would be an example of this.

Which three major factors determine the supply of savings?

interest rates, consumption smoothing, time preference

Which three major factors determined the demand to borrow and invest?

interest rates, the need to finance large-scale investment projects, consumption smoothing

Economists use the word “Investment” a bit differently than people in other disciplines? By “investment,” economists are specifically referring to:

The purchase of new physical capital (most often done by business)

Consumption Smoothing

Borrowing in periods of low income and saving in periods of high income to make consumption less variable than income.

Example of consumption smoothing

Taking student loans, acquiring mortgage to purchase a house, and depositing a portion of one’s salary into a retirement account

Time preference

The desire to have goods and services sooner rather than later - all other things being equal.

supply

The source of the _________ for loanable funds is saving.

demand

The source of the ________ for loanable funds is investment.

interest rate

represents the price of a loan

Quantity supplied will increase

What effect will an increase in interest rates have on the quantity of loanable funds supplied

Quantity demanded will increase

As interest rate decreases, what happens to the quantity of loanable funds demanded?

Interest rate

Which of the following terms denotes the “price” in the market for loanable funds?

The business will not out the loan

If the projected rate of return for a project is less than the interest rate required to obtain a loan for the project, how will the business proceed in considering the project?

Increases the interest rate:

An investment tax credit, and an increase in large investments

Decreases the interest rate:

An increase in savings, and a decrease in investor optimism

supply of loanable funds will increase.

If economic conditions deteriorate, prompting households to save a larger portion of their income, then _________

 demand for loanable funds will decrease.

In an effort to balance the budget, the government increases taxes paid by businesses. As a result, the _______

the demand for loanable funds will increase.

If economic conditions improve, increasing the demand for goods and services, then ________

demand for loanable funds will increase.

Innovations in robotics technology vastly improves productivity within manufacturing firms. As a result, the ______

Between savers and borrowers

Banks are known to act as financial intermediaries. Between whom do banks serve this function?

Increased interest rates, which reduces private spending

The crowding-out effect describes a scenario in which federal deficit spending causes:

Politicized lending and government control, Interest rate controls, Insecure property rights, and Bank failures and panics

Which of the following are the four factors that inhibits financial intermediation that we discussed:

Stock market indices

Are average stock prices for a group of companies meant to measure a section of the stock market.

Stock markets are a way of:

Raising capital for new investments

How do mutual funds reduce risk for the average individual investor?

Mutual funds reduce risk through portfolio diversification

The major difference between active and passive mutual funds is that active funds:

Involve stock picks by managers, while passive funds match the movements of a broad market index

The efficient markets hypothesis is the idea that:

Asset prices represent all publicly available information

The efficient markets hypothesis implies that:

It is not possible to systematically pick stocks that outperform the market

Investors face various choices regarding what they can invest in, and the choices carrying varying amounts of risk. For example, stock prices are much more volatile than bond prices.

What is the typical reason why investors would choose to put their money into an investment with higher risk rather than one with lower risk?

Riskier investments typically have higher returns

Portfolio A

Suppose you are looking at two investment portfolios. Portfolio A has an expected annual return of 10%, and portfolio B has an expected annual return of 5%. Which portfolio is likely to be riskier?

Choose the series that places these financial instruments in order of increasing average return

U.S. T-Bills, corporate bonds, S&P 500 Index fund, small stocks

A risky portfolio is one that:

Is poorly diversified and has a positive correlation between most of its stock prices

(1) $3400 in a mutual fund, $3300 in bonds, and $3300 in real estate, (2) $10000 in a mutual fund, (3) $5000 in one stock and $5000 in another stock, (4) $10000 in one stock

Caro has $10,000 to invest. Her best friend, Imelda, happens to be a stockbroker. Imelda tells Caro that her investments should be diversified. To make sure that Caro understands what diversification really means, Imelda asks her to rank a set of investments opportunities from most to last diversified. How will Caro’s ranking look?

Stock market bubbles have real effects in the economy because:

Overvalued stocks divert capital to less productive uses

Assume that the money in your investment account grew from $30,000 to $60,000 in nine years. What was your approximate annual rate of return?

7.8%

About 10 years

Using the rule of 70, how many years will it take an investment to double if the return is 7%? Round your answer to two decimal places

Bond prices and bond interest rates move:

In opposite directions

What is inflation?

An increase in the overall price level

Which Scenario provides the best evidence that inflation has occurred?

A person whose salary has increased can purchase fewer goods and services

Which of the following is a challenge that the Bureau of Labor Statistics faces when calculating the CPI?

The basket of goods and services the average consumer buys is constantly changing due to new and better quality goods

overstates

As a result of these problems in calculating the CPI, many economists argue that the CPI actually _______ inflation by a little bit each year.

which of the following statements highlights the differences between the CPI and GDP deflator?

The CPI measure the average prices of goods and services consumed by typical consumers, whereas the GDP deflator measures the average prices of a broader basket (all finished goods and services produced in an economy)

If the CPI was 100 in 2000 and 120 in 2010 and the price of a gallon of milk was $4.00 in 2000 and $4.80 in 2010, then in relative terms the real price of milk between 2000 and 2010:

Remained the same - it just went up with inflation

Decreased

If you earned $10 an hour in 2005 when the CPI was 100, and you earn $11 an hour today when the CPI is 120, then your real wage rate has ______ since 2005.

Which answer best explains why prices of some popular goods have fallen over time?

Technological advances have redacted production costs

The equation of exchange, M x V = P x Q, relates to the quantity theory of money. In this equation, M represents the supply of money, V represents the velocity of money, P represents the price level, and Q is real output. Which statement describes an implication of this equation in the long run?

Changes in the money supply will balance out with changes in prices

Which of the following statements is true regarding the neutrality of money with respect to the quantity theory of money?

The growth rate of the money supply can affect the growth rate of prices in the long-run and the growth rate of the money supply can affect the growth rate of real GDP, but only in the short run

Which is an example of money illusion, assuming that inflation is 5%?

You received a 5% raise at your part-time job and start sped=nding extra money on entertainment every weekend

winner

The United States federal government, which had over $30 trillion in debt in 2023, and Joy, who borrowed $40,000 to pay for her college education

loser

Karen, a retired school teacher, who relies on her fixed pension to cover her expenses, Third National, a bank that lent many people money for home purchases, and Herb, who keeps his savings in an old coffee can

What is the velocity of money?

refers to the rate at which money circulates in the economy. In other words, it measures how quickly a unit of currency is used to purchase goods and services within a given period.