Financial Aspects of the Household, Firm, Government, and Rest-of-the-World Sectors1
CHAPTER 23
Financial Aspects of the Household, Firm, Government, and Rest-of-the-World Sectors
1.An accounting statement that measures the value of assets and liabilities held at a particular point in time is called a(n)
a.income statement.
b.balance sheet.
c.portfolio.
d.net worth statement.
ANSWER:b
- ______is the difference between one’s assets and liabilities.
a.Net worth
b.One’s portfolio
c.Income
d.All of the above
ANSWER:a
3.One’s collection of real and financial assets and liabilities is called a(n)
a.income statement.
b.balance sheet.
c.portfolio.
d.net worth statement.
ANSWER:c
4.Household portfolio decisions are guided by certain objectives. Which one of the following objectives are economists most concerned with?
a.Happiness
b.Good health
c.Profit maximization
d.A high standard of living
ANSWER:d
5.Which of the following is not associated with a firm’s balance sheet?
a.Real assets
b.Financial assets
c.Income flows
d.Net worth
ANSWER:c
6.Which of the following equations correctly describes the relationships among assets (A), liabilities (L), and net worth (NW) on a balance sheet?
a.NW = A + L
b.A = L + NW
c.L = A + NW
d.L + NW – A
ANSWER:b
7.The ratio of debt to equity on a firm's balance sheet is called
a.coverage ratio.
b.net worth.
c.the leverage ratio.
d.net investment ratio.
ANSWER:c
8. is gross investment minus depreciation.
a.Leverage
b.Net worth
c.Net investment
d.None of the above
ANSWER:c
9. is the difference between assets and liabilities at a point in time.
a.Net financial investment
b.Net worth
c.Net investment
d.None of the above
ANSWER:b
10.Which of the following is not an example of a real asset for a consumer?
a.A share of stock
b.An automobile
c.A house
d.A computer
ANSWER:a
11.Which of the following is not an example of business investment?
a.Net additions to inventory
b.Spending on new equipment
c.Buying stocks and bonds
d.Capital accumulation
ANSWER:c
12.Internal financing refers to
a.the spending of money balances on hand or the liquidation of financial or real assets to finance spending that exceeds current receipts.
b.the financing of spending that exceeds current receipts by expanding either debt or equity.
c.the increase in a firm's liabilities that is equal to the increase in assets held minus retained earnings.
d.the impediment to continuous borrowing that may come from the lender's unwillingness to keep lending or the borrower's unwillingness to keep borrowing.
ANSWER:a
13.External financing refers to
a.the spending of money balances on hand or the liquidation of financial or real assets to finance spending that exceeds current receipts.
b.the financing of spending that exceeds current receipts by expanding either debt or equity.
c.the increase in a firm's liabilities that is equal to the increase in assets held minus retained earnings.
d.the impediment to continuous borrowing that may come from the lender's unwillingness to keep lending or the borrower's unwillingness to keep borrowing.
ANSWER:b
14.A borrowing constraint refers to
a.the spending of money balances on hand or the liquidation of financial or real assets to finance spending that exceeds current receipts.
b.the financing of spending that exceeds current receipts by expanding either debt or equity.
c.the increase in a firm's liabilities that is equal to the increase in assets held minus retained earnings.
d.the impediment to continuous borrowing that may come from the lender's unwillingness to keep lending or the borrower's unwillingness to keep borrowing.
ANSWER:d
15.Fluctuations in aggregate demand lead to changes in the level of real economic activity, as measured by which of the following?
a.Dow-Jones Averages
b.Proctor and Gamble
c.Standard and Poor’s
d.Real GDP
ANSWER:d
16.The largest component of aggregate demand is which of the following?
a.Government expenditures
b.Consumption expenditures by households
c.Investment spending
d.Net exports
ANSWER:b
17.Which of the following changes would cause the largest increase in aggregate demand?
a.A 10 percent increase in investment spending
b.A 10 percent increase in consumption spending
c.A 10 percent increase in government spending
d.A 50 percent increase in savings
ANSWER:b
18.The most volatile component of aggregate demand is which of the following?
a.Government expenditures
b.Consumption expenditures by households
c.Investment spending
d.Net exports
ANSWER:c
19.The smallest component of aggregate demand is which of the following?
a.Government expenditures
b.Consumption expenditures by households
c.Investment spending
d.Net exports
ANSWER:d
20.While household portfolio decisions are guided by desires for happiness, good health, and a high standard of living, economists traditionally focus on which of the following?
a.Happiness
b.Saving for their offspring
c.Long life
d.Living standards
ANSWER:d
21.Economists take the position that households make
a.purposeful decisions.
b.haphazard choices.
c.few decisions without government.
d.planning decisions only when going through their first bankruptcy.
ANSWER:a
22.Real assets are not acquired when
a.durable goods are purchased.
b.a house is bought.
c.nondurable consumer goods are purchased.
d.an automobile is purchased for transportation.
ANSWER:c
23.In national income accounting terms, a newly constructed house is considered which of the following?
a.An investment good
b.A consumer good
c.A nondurable good
d.A tax shelter
ANSWER:a
24.Financial assets, from the household point of view, serve as which of the following?
a.A store of value
b.Immediate use but not future planning
c.Status symbols rather than purchasing power
d.Clever tax evasion
ANSWER:a
25.Which of the following statements about debt financing is false?
a.Debt financing can be either short term or long term.
b.Debt financing is a form of internal finance.
c.Under U.S. tax law, long-term debt is more favorably treated than equity financing.
d.Debt financing exposes a firm to more risk and, therefore, weakens its financial structure.
ANSWER:b
26.Which of the following changes would best explain why households might increase their net demand for nonmonetary financial assets and decrease their demand for real assets?
a.An increase in income
b.A decrease in wealth
c.A decrease in the return on real assets
d.A decrease in the interest rate
ANSWER:c
27.An increase in the market interest rate is likely to
a.increase household demand for real assets.
b.increase household demand for real money balances.
c.increase household demand for nonmonetary financial assets.
d.All of the above
ANSWER:c
28.A decision to borrow today is really
a.a decision to repay in the future what is borrowed today plus interest.
b.always based on earning potential.
c.a decision to invest today.
d.the quickest way to "make money."
ANSWER:a
29.The interest rate
a.specifies the terms on which present purchasing power can be traded for future purchasing power.
b.bears little or no relationship to the supply of and the demand for money.
c.is economic profit for the borrower.
d.is the cost for lending and the reward for borrowing.
ANSWER:a
30.If interest rates fall and the return on real assets goes up, the households will hold which of the following?
a.Fewer real assets and more financial assets
b.Fewer financial assets and more real assets
c.More long-term government bonds
d.More municipal bonds
ANSWER:b
31.Declines in wealth cause which of the following?
a.A decline in overall consumer spending
b.An increase in government spending
c.A decline in inflation
d.Increase in expenditures for many types of services
ANSWER:a
32.If the household sector has some reason or belief to be more optimistic about the future, then the households will
a.consume more.
b.invest less.
c.lend more.
d.consume less.
ANSWER:a
33.Real assets of a firm include which of the following?
a.Negotiable certificates of deposits (CDs)
b.Foreign deposits
c.Trade credit
d.Plant and equipment
ANSWER:d
34.Firms hold financial assets, which may include which of the following?
a.Demand deposits
b.Plant
c.Inventories
d.Equipment
ANSWER:a
35.Which is not a liability to a nonfinancial firm?
a.Bonds outstanding
b.Long-term mortgage loans owed
c.Short-term debts
d.Demand deposits held at the local bank
ANSWER:d
36.Even though investment spending is a smaller part of aggregate demand than consumption, it is much more
a.sluggish in movement or response.
b.short run in nature.
c.volatile.
d.dependent on business fluctuations.
ANSWER:c
37.Changes in business investment are important because
a.investment spending is the largest component of aggregate demand.
b.investment spending can be easily directed by government policy.
c.investment spending is the most volatile component of aggregate demand.
d.increases in investment spending increase capacity utilization and stimulate additional spending on inventories.
ANSWER:c
38.Which of the following is not a reason for business investment?
a.To replace worn out or obsolete plant and equipment
b.To acquire financial assets that will pay a future income stream to the business
c.To increase the capital stock
d.To add to inventories
ANSWER:b
39.In determining whether or not to invest, a firm will compare the rate of return on a project with which of the following?
a.Anticipated profits
b.Opportunity costs available in other businesses
c.Likelihood of "going broke"
d.Costs of financing the project
ANSWER:d
40.Investment spending by nonfinancial businesses depends on several different variables. Which of the following economic events would most likely lead to a decrease in net investment spending?
a.Growing capacity utilization
b.Decreased interest rates
c.Decreased corporate income taxes
d.Decreased expected returns
ANSWER:d
41.Investment spending by nonfinancial businesses depends on several different variables. Which of the following economic events would most likely lead to an increase in net investment spending?
a.Growing capacity utilization
b.Increased interest rates
c.Increased corporate income taxes
d.Decreased expected returns
ANSWER:a
42.The real interest rate is which of the following?
a.The nominal interest rate multiplied by the expected inflation rate
b.The nominal interest rate minus the expected inflation rate
c.The nominal interest rate plus the expected inflation rate
d.The average percentage rate (APR)
ANSWER:b
43.Which is not a major consideration in anticipating the accumulation of capital by firms in the aggregate?
a.The degree of capacity utilization
b.The business outlook
c.The government's tax policy
d.The average age of the work force is getting older
ANSWER:d
44.Inventory purchases are considered investments. Which of the following is not a reason to hold inventories?
a.Smooth and efficient production
b.Reduce taxes
c.Satisfy consumer demand
d.Anticipation of seasonal or cyclical flux in sales
ANSWER:b
45.Generally speaking, the higher the interest rate at which a firm has to borrow,
a.the smaller the upward adjustment of inventories in response to a surge in sales.
b.the larger the upward adjustment of inventories in response to a surge in sales.
c.the greater the return on capital investment.
d.None of the above
ANSWER:a
46.The largest source of funds for business firms is which of the following?
a.Expanding equity
b.Expanding debt
c.Reducing wages
d.Internal financing
ANSWER:d
47.External financing can be acquired by
a.expanding equity.
b.expanding debt.
c.reducing internal financing.
d.Both a and b
ANSWER:d
48.External financing via equity involves issuing which of the following?
a.Shares of stock
b.Bonds
c.Derivatives
d.Junk bonds
ANSWER:a
49.Borrowing to finance inventories has traditionally been through short-term bank loans or commercial paper with a maturity date of from 1-6 months because
a.any firm that has to borrow to finance inventories is not a good long-term risk.
b.a firm should only expand on the upswing.
c.inventories, hopefully, will not be held long.
d.equity financing is more expensive.
ANSWER:c
50.A major reason for using short-term debt for capital expenditures is which of the following?
a.Long-term interest rates are expected to come down in the future.
b.Technology in today's world has great fluctuations in cost, and long-term financing may not pay.
c.The project at hand may not be solid enough for long-term risk.
d.The accounting staff must have something to do now that computers do most of the work.
ANSWER:a
51.From the mid-1970s until 1991, much financing was done by long-term debt rather than equity because
a.lending institutions and people wanted a share of the "action."
b.dividends paid equity holders are tax deductible.
c.dividends are paid out of after-tax earnings.
d.United States tax laws were biased toward debt and away from equity.
ANSWER:d
52.Business spending on new plant and equipment and/or the accumulation of inventories is
a.capital spending.
b.always done through borrowing.
c.investment spending.
d.never profitable.
ANSWER:c
53.Net investment by business firms is which of the following?
a.Investment that leads to increases in the capital stock or inventories
b.Always negative
c.Investment that leads to increases in the capital stock only
d.Positive only if there is inventory investment
ANSWER:a
54.Which interest rate is the most important for investment decisions by firms?
a.The nominal interest rate
b.The real interest rate
c.The Treasury bill rate
d.The long-term nominal rate
ANSWER:b
55.The impediment to continuous borrowing and increases in the level of debt by households
a.is known as a borrowing constraint.
b.may come from a lender's unwillingness to keep lending.
c.may come from a borrower's unwillingness to keep borrowing.
d.All of the above
ANSWER:d
56.Which of the following is false?
a.Households accumulate assets and liabilities in an attempt to maximize their well being.
b.Assets may be real or financial.
c.Financial assets do not include money.
d.Money is demanded for the stream of services that it yields.
ANSWER:c
57.Gross investment minus net investment is which of the following?
a.Always negative
b.Positive for households and negative for businesses
c.Depreciation
d.Always positive
ANSWER:c
58.Which of the following is false?
a.Financing may be either internal or external.
b.External financing comes from retained earnings.
c.External financing may consist of either debt or equity.
d.Debt financing may be short or long term.
ANSWER:b
59.The ratio of debt to equity on a firm's balance sheet is which of the following?
a.The equity ratio
b.The yield ratio
c.The opportunity cost
d.The leverage ratio
ANSWER:d
60.Which form of financing is desired because of its tax advantages?
a.Internal financing
b.External financing
c.Equity financing
d.Debt financing
ANSWER:d
61.We say debt is when maturing debt is paid for with new borrowing. The borrowing used to pay off the maturing debt is called .
a.refunded, rolling over
b.crowded out, refunding
c.regularized, refunding
d.rolled over, refunding
ANSWER:d
62.The Treasury borrowing by making advance announcements of its intentions to borrow at standard intervals.
a.refunds
b.regularizes
c.rolls over
d.refinances
ANSWER:b
63.To minimize the disruptions that its financing operations can cause in the market, the Treasury has “regularized” a large part of its financing activity. By regularized, we mean that
a.new borrowing must occur to refinance that part of the debt that is coming due.
b.previously issued past debt is maturing, and the government is not in a position to pay it off.
c.the Treasury announces its borrowing intentions well in advance and tends to borrow at routine intervals.
d.government borrowing represents an increase in the government’s demand for funds.
ANSWER:c
64.The public debt is best defined as
a.the taxing and spending policies of the government to achieve economic stability and growth
b.the difference between government revenues and expenditures in any one year.
c.the sum of all past government deficits minus past government surpluses.
d.a situation in which the purchases of U.S. financial claims by foreigners exceed the purchases of foreign financial claims by U.S. entities.
ANSWER:c
65.Crowding out refers to a situation where
a.foreign imports successfully compete with domestic firms and crowd them out of the market.
b.ceteris paribus, government’s deficit financing tends to reduce the flow of funds to private borrowers as well as to municipal and state governments.
c.corporate bonds are crowded out of the market by municipal bonds.
d.record trade deficits are crowded out by capital inflows.
ANSWER:b
66.Net new borrowing by the government is usually referred to as the
a.government budget deficit.
b.national debt.
c.trade deficit.
d.public debt.
ANSWER:a
67.A trade deficit occurs when
a.the value of goods a country is importing is greater than the value of goods it is exporting.
b.the value of goods a country is exporting is greater than the value of goods it is importing.
c.the value of goods a country is importing is equal to the value of the goods it is exporting.
d.a government’s expenditures are greater than its tax receipts.
ANSWER:a
68.A trade surplus occurs when
a.the value of goods a country is importing is greater than the value of goods it is exporting.
b.the value of goods a country is exporting is greater than the value of goods it is importing.
c.the value of goods a country is importing is equal to the value of the goods it is exporting.
d.a government’s expenditures are greater than its tax receipts.
ANSWER:b
69.A occurs whenever the purchases of U.S. financial claims by foreigners exceed the purchases of foreign financial claims by U.S. entities.
a.budget deficit
b.trade surplus
c.net capital outflow
d.net capital inflow
ANSWER:d
70.A occurs whenever the purchases of foreign financial claims by U.S. entities exceed the purchases of U.S. financial claims by foreigners.
a.budget deficit
b.trade deficit
c.net capital outflow
d.net capital inflow
ANSWER:c
71.Which of the following is not a direct component of aggregate demand?
a.Consumption expenditures
b.Government transfer payments
c.Investment expenditures
d.Net foreign purchases of U.S. goods
ANSWER:b
72.If we propose to pay for increases in government spending with higher taxes, then the most immediate effect of higher taxes is which of the following?
a.Spending units will have more income
b.Consumption spending will increase
c.Investment spending will increase
d.Disposable income will fall
ANSWER:d
73.If government securities are sold to the public to increase government spending, then
a.interest rates will go down.
b.inventory investment will go up.
c.investment in capital will go up.
d.interest rates may go up, affecting interest-sensitive spending.
ANSWER:d
74.Before government spending is increased, the government needs to be certain that