Chapter 28 — Quiz

Multiple choice

Q1. In the loanable funds market, the supply comes from: a) Firms b) Saving c) Government d) Exports Q2. Crowding out occurs when: a) The government cuts spending b) Government borrowing raises interest rates and displaces private investment c) Banks fail d) Exports fall Q3. The real interest rate equals: a) Nominal rate + inflation b) Nominal rate − inflation c) GDP growth d) The federal funds rate Q4. A stock represents: a) A loan to a company b) An ownership share in a company c) A government bond d) A bank deposit Q5. Diversification reduces risk by: a) Concentrating investments b) Spreading investments across many assets c) Avoiding all risk d) Only investing in bonds Q6. EMH says: a) Markets are always right b) Asset prices reflect all available information, making it hard to consistently beat the market c) Prices never change d) Everyone gets rich Q7. Most actively managed funds over 15 years: a) Outperform index funds b) Underperform index funds after fees c) Perform identically d) Are risk-free Q8. The risk premium is: a) The Fed's interest rate b) The extra return demanded for holding riskier assets c) The inflation rate d) The saving rate Q9. Crowding out is small during a recession because: a) The government doesn't borrow b) Saving is abundant and investment demand is weak c) Interest rates are always high d) Banks don't lend Q10. The personal finance takeaway is: a) Day-trade aggressively b) Save early, diversify, keep fees low, buy index funds c) Put everything in one stock d) Don't save until age 40

Short answer

SA1. How does the loanable funds model determine the real interest rate? SA2. What is crowding out? SA3. What is the efficient market hypothesis? SA4. Why does diversification reduce risk? SA5. State the Fisher equation.

True / False

TF1. Government deficits always crowd out private investment equally. (T/F) TF2. Stocks are riskier than bonds but earn higher returns on average. (T/F) TF3. Most stock pickers consistently beat the market. (T/F) TF4. Diversification eliminates all risk. (T/F) TF5. The real interest rate can be negative. (T/F)

Selected answers in appendices/answers-to-selected.md.