Question

5. The result of a government crowding out the loanable funds market is:
	a. A decrease in the real interest rate, crowding savers out of the loanable funds market.
	b. A decrease in the real interest rate, crowding borrowers out of the loanable funds market.
	c. Increased government borrowing increases loanable funds, increases the real interest rate, and thus crowds private borrowers out of the loanable funds market.
	d. Increased government borrowing reduces loanable funds, increases the real interest rate and, thus, crowds private borrowers out of the loanable funds market.

6. The role of financial intermediaries is to:
	a. Help savers find the best return on their savings.
	b. Match the buyers and sellers of goods in a market.
	c. Bundle the deposits of savers into funds that can be loaned to borrowers.
	d. Advise banks on the interest rates paid to savers and charged to borrowers.

7. Which of the following statements regarding stocks and bonds is true?
	a. Economists define both stocks and bonds as investments.
	b. Companies can finance expansion using bonds but not stocks.
	c. A bond is a loan to a company. A stock is part ownership in a company.
	d. Both stocks and bonds are financial instruments firms use to borrow money.

8. If you deposited money into a savings account that paid 2% interest, approximately how long would it take your money to double?
	a. 72 years
	b. 36 years
	c. 18 years
	d. 2 years

Answer 1

5) With increased government borrowing the amount of loanable funds available in the market reduces. As a result higher interest rate will be charged for the remaining funds available. Higher rate of interest will discourage private borrowers and crowding out effect takes place. Therefore the answer is option (d).

6) Financial intermediaries are institutions that act as middlemen in financial transactions. They channelize the savings into investment. Therefore the answer is option (c).

7) Bonds are part of the debt of the company whereas stocks represent ownership stakes. Bond is a way of debt financing whereas stock is a way of equity financing. Hence the correct answer is option (c).