Chapter 7

Question 1

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

Answer 1

saver or as a supplier of funds.

Question 2

If the Apple corporation sells a bond it is

Answer 2

borrowing directly from the public.

Question 3

Two bonds have the same term to maturity. The first was issued by a state government and the probability of default is believed to be low. The other was issued by a corporation and the probability of default is believed to be high. Which of the following is correct?

Answer 3

Because of the differences in tax treatment and credit risk, the corporate bond should have the higher interest rate.

Question 4

Suppose the government finds a major defect in one of a company’s products and demands that the product be taken off the market. We would expect that the

Answer 4

demand for existing shares of the stock and the price will both fall.

Question 5

Suppose a closed economy had public saving of −$7 trillion and private saving of $16 trillion. What are national saving and investment for this country?

Answer 5

$9 trillion, $9 trillion

Question 6

Suppose that in a closed economy GDP is equal to $33,000, consumption equal to $18,000, government purchases equal $6,500, and taxes equal $6,750. What are private saving, public saving, and national saving?

Answer 6

$8,250, $250, and $8,500, respectively

Question 7

Alex buys 1,000 shares of stock issued by Greg Brewing. In turn, Greg uses the funds to buy new machinery for one of its breweries. are they saving or investing.

Answer 7

Alex is saving; Greg is investing.