Question

5_____ are a higher-risk investment than _____ stocks.

U.S. Treasury securities; blue-chip

Growth stocks; blue-chip

Blue-chip stocks; growth

Certificates of deposit; growth

16Alco Electronics needs to borrow money to pay for a large capital investment. It is deciding between getting a bank loan and issuing bonds. Which statement is TRUE about the options Alco is considering?

A bank loan is borrowing a large amount from one lender, while issuing bonds is borrowing small amounts from many lenders.

A bank loan is borrowing from many savers, while issuing bonds is not.

Issuing bonds is part of the loanable funds market, but a bank loan is not.

A bank loan is part of a loanable funds market, but issuing bonds is not.

30Demand deposits are savings accounts that were offered when customers started to demand them.

False

True

31When the Federal Reserve buys bonds, it effectively lowers the nominal interest rate in the market.

True

False

32Which list represents monetary policy actions that are consistent with one another?

buy government bonds, lower reserve requirements, raise the discount rate

sell government bonds, raise reserve requirements, raise the discount rate

buy government bonds, raise reserve requirements, raise the discount rate

sell government bonds, raise reserve requirements, lower the discount rate

Answer 1

1. The correct answer is that the growth stocks are riskier investments than the blue chip stocks.

This is because growth stocks are those companies expected to grow sales and earnings at a rate faster than the market average. Since investors are paying a high price for a growth stock, based on expectations, if these expectations are not realised growth stocks can see dramatic declines. This is why these are riskier than the blue chip stocks which issues by financially sound companies with large market capitalisation.

2. The correct answer is that bank loan is borrowing large amount from one lender and bonds is borrowing small amounts from many lenders.

This is because many lenders can buy the bonds issued by the company. However, the loan granted by bank will have only bank as the lender.

The other options are incorrect because both loans and bonds are part of loanable funds market.

3. The given statement is false. This is because demand deposits are saving accounts of bank customers whereby they can withdraw the money they have deposited at any time in any number of transactions whenever the need arises to use that money. Customers are not bound to keep the demand deposits in the bank for a certain period of time before withdrawing it.

4. When federal reserve buys bonds, it implies that it is releasing money in the economy. Hence, expansionary monetary policy. This will lower the nominal interest rates in the economy. Thus, the given statement is true.

5. The correct anwer is sell government bonds, raise reserve requirements, raise the discount rate.

Selling government bonds will reduce the liquidy in the economy. Raising reserve requirements will lead to lesser loans. Raising the discount rate by reserve bank will signal the banks to lend carefully. Thus, all these actions are consistent with contractionary monetary policy.