Question

1. The primary economic function of the financial system is to a. keep interest rates low. b. provide expert advice to savers and investors. c. match one person's consumption expenditures with another person's capital expenditures. d. match one person's saving with another person's investment. 2. A mutual fund a. is a financial institution that stands between savers and borrowers, b. is a financial intermediary, c. allows people with small amounts of money to diversify their holdings. d. All of the above are correct. 3. You observe a closed economy that has a government deficit and positive investment. Which of the following is correct? a. Private and public saving are both positive. b. Private saving is positive; public saving is negative. c. Private saving is negative; public saving is positive. d. Both private saving and public saving are negative. 4.If national saving in a closed economy is greater than zero, which of the following must be true? a. Either public saving or private saving must be greater than zero. b. Investment is positive. c. Y-C-G> 0 d. All of the above are correct. 5.A budget surplus is created if a. the government sells more bonds than it buys back. b. the government spends more than it receives in tax revenue. c. private saving is greater than zero. d. None of the above is correct.

Answer 1

Ans1) the correct option is d. Match one person's saving with another person's investment

Ans2) the correct option is d) all of the above are correct

Ans3) the correct option is b) Private saving is positive; public saving is negative.

Ans4) the correct option is d) all of the above are correct

Ans5) the correct option is d) none of the above are correct

Answer 2

ANSWERS :

1. d. Match one person’s saving with another person’s investment. 

Option (a) is not correct as financial system does not control the interest rate to remain low. Market forces and money policy decisions decide whether interest rate will be low or high.

Option (b) is also not correct. Financial system is not an advisor to savers and investors.

Option (c) is misleading. How consumption expenditure matching with capital expenditure would  help the financial outcome?

Option (d) is correct. Financial system locates where are the savings and where are  the investment needs.

2. c. Allows people with small amounts of money to diversify their holdings. 

Mutual funds are the investing institutions and not an intermediary between savers and borrowers. It doesn’t lend money to borrowers. It invests the collected money from several investors, in stocks, bonds and other assets and distributes capital gain income to its investors. It facilitates small amount to be invested in a bunch of stocks/ bonds etc. 

3. b. Private saving is positive, public saving is negative.

Government deficit means negative public saving and positive investment means positive private savings.

4. d. All of the above are correct.

If national savings are positive , then either or both private savings and public savings must be positive. Savings are usually invested, so investment is also positive. Y - C - G = Investment, I  and I > 0 , so, Y - C - G > 0

5. d. None of the above is correct.

Selling and buying back of govt. bonds may affect money supply but not the budget surplus. If spending is more than revenue, then there is budget deficit and not surplus. Private saving doses not affect the budget deficit or surplus.