1) In a(n) ________ market, dealers in different locations buy and sell securities to anyone who comes to them and is willing to accept their prices.
2) What is the present value of $500.00 to be paid in two years (in a single payment of $500.00) if the interest rate is 5 percent?
3) True or False: With a discount bond, the return on a bond is equal to the rate of capital gain.
*D). True: A discount bond has no coupon payments so the return on the bond is equal to the rate of capital gain.
4) To pay for college, you have just taken out a $1,000 government loan that makes you pay $126 per year for 25 years. However, you don't have to start making these payments until you graduate from college two years from now. Why is the yield to maturity necessarily less than 12% (this is the yield to maturity on a normal $1,000 fixed-payment loan in which you pay $126 per year for 25 years)?
*A). This is the case because the first payment due begins at a future date.
5) What effect will a sudden increase in the volatility of gold prices have on interest rates?
*B). Interest rates will decrease because bonds will become relatively less risky, which increases the demand for bonds.
6) Using the liquidity preference framework, when the economy expands:
*D). the demand for money will increase, shifting the money demand curve to the right.
7) Risk premiums on corporate bonds are usually anti-cyclical; that is, they decrease during business cycle expansions and increase during recessions. Why is this so?
*C). As the economy enters an expansion, there is greater likelihood that borrowers will be able to service their debt.
8) In 2010 and 2011, the government of Greece risked defaulting on its debt due to a severe budget crisis. Using bond market graphs, determine how default would affect the risk premium between U.S. Treasury debt and Greek debt with comparable maturity.
*D). The risk premium would increase, which corresponds to segment B on the graphs above.
9) Consider tight monetary policy and its effects on stock prices via the simplified Gordon growth model equation. Which of the following accurately describes the effects of tight monetary policy on stock prices, according to this model?
*A). The return on bonds and the required return on an equity investment (ke) would rise, while the price of stock (Po) would fall.
11) If an individual moves money from a small-denomination time deposit to a demand deposit account,
*B) M1 increases and M2 stays the same.
12) In prison, cigarettes are sometimes used among inmates as a form of payment. All of the following explain how cigarettes solve the "double coincidence of wants" problem, even if a prisoner does not smoke, except:
*C). exchanging cigarettes for other goods and services increases transaction costs.
13) Which of the following is a disadvantage of using fiat money?
*C). Public authorities may be tempted to produce too much of it.
14) Since they require less monitoring of firms, ________ contracts are used more frequently than ________ contracts to raise capital.
*D) debt; equity
15) Which of the following statements concerning external sources of financing for nonfinancial businesses in the United States is true?
*B). Bonds are a far more important source of financing than are stocks.
16) Recent research indicates that inflation performance (low inflation) has been found to be best in countries with
*C) the most independent central banks.
17) How does the Federal Reserve have a high degree of instrument independence?
*B). The Federal Reserve can choose any method it wants in order to achieve a given set of policy objectives.
18) Which of the following entities in the Federal Reserve System sets reserve requirements?
*C). The Board of Governors.
19) The effect of an open market purchase on reserves differs depending on how the seller of the bonds keeps the proceeds. If the proceeds are kept in ________, the open market purchase has no effect on reserves; if the proceeds are kept as ________, reserves increase by the amount of the open market purchase.
*D) currency; deposits
20) If reserves in the banking system increase by $100, then checkable deposits will increase by $500 in the simple model of deposit creation when the required reserve ratio is
21) Loans that the Fed makes to banks appear on the balance sheet as part of its __________ and
deposits made by banks appear on the Fed's balance sheet as part of its
*A). assets; liabilities
22) When the Fed wants to raise the federal funds rate after banks have accumulated large amounts of excess reserves (which is the case right now in 2012), it would
*C) increase the interest rate paid on excess reserves.
24) Everything else held constant, in the market for reserves, when the federal funds rate is 3%, raising the discount rate from 5% to 6%
*B) has no effect on the federal funds rate.
26) What happens to nominal GDP if the money supply grows by 15% but velocity declines by 22%? Nominal GDP ______ by approximately _______ %. (Round your response to the nearest integer.)
*A). declines, 7
27) If initially the money supply is $2 trillion, velocity is 5, the price level is 2, and real GDP is $5 trillion, a fall in the money supply to $1 trillion
*D) decreases the price level to 1.
28) Keynes's theory of the demand for money is consistent with ________ movements in interest rates and ________.
*D) procyclical; velocity
29) The portfolio theories of money demand state that the demand for real money balances is ________ related to income and ________ related to the nominal interest rate.
*C) positively; negatively
31) Assume that autonomous consumption equals $200 and that the mpc equals 0.8. If disposable income equals $1000, then total consumption equals
32) Aggregate output is ________ related to autonomous consumer expenditure, and is ________ related to planned investment spending.
*B) positively; positively
33) A tax increase ________ disposable income, ________ consumption expenditure, and shifts the IS curve to the ________, everything else held constant.
*B) decreases; decreases; left
34) The Taylor Principle states that central banks raise nominal rates by ________ than any rise in expected inflation so that real interest rates ________ when there is a rise in inflation.
*B) more; rise
35) In deriving the aggregate demand curve a ________ inflation rate leads the central bank to ________ real interest rates, thereby ________ the level of equilibrium aggregate output.
*C) higher; raise; lowering
36) Everything else held constant, a decrease in autonomous consumer spending will cause the IS curve to shift to the ________ and aggregate demand will ________.
A) left; decrease
37) When the financial crisis started in August 2007, inflation was rising and the Fed began an aggressive easing lowering of the federal funds rate, which indicated that
*C) the Fed pursued an autonomous monetary policy easing.
38) Classify the following situation as a supply or demand shock:
Favorable weather produces a record crop of wheat and corn in the Midwest.
*C). A positive (temporary) supply shock.
39) Favorable weather produces a record crop of wheat and corn in the Midwest. Determine the effects on inflation and output in the short run and the long run using AD/AS graph analysis.
*C). Graph C. (two arrows ...down then up between the shift of supply going down)
40) Everything else held constant, an increase in financial frictions ________ aggregate ________.
*C) decreases; demand
41) Suppose the economy is producing at the natural rate of output. An open market sale of bonds by the Fed will cause ________ in real GDP in the short run and ________ in inflation in the short run, everything else held constant.
*D) a decrease; a decrease
42) Suppose the economy is producing at the natural rate of output and the government passes legislation that severely restricts a company's ability to reduce production costs via outsourcing. Everything else held constant, this policy action will cause ________ in the unemployment rate in the short run and ________ in inflation in the short run.
*B) an increase; an increase
43) The rational expectations hypothesis implies that when macroeconomic policy changes,
*C) the way expectations are formed will change.
44) Arguments for adopting a policy rule include
*B) discretionary policies pursue overly expansionary monetary policies to boost employment in the short run but generate higher inflation in the long run.
45) Suppose that there is a positive aggregate demand shock and the central bank commits to an inflation rate target. If the commitment is credible, then
A) over time inflation will fall back down to the inflation target. B) the public's expected inflation will remain unchanged.
C) the short-run aggregate supply curve will not shift.*D) all of the above.
46) ________ imposes a conceptual structure and inherent discipline on policy makers, but without eliminating all flexibility.
*C) Constrained discretion
47) Suppose that there is a negative aggregate demand shock and the central bank commits to an inflation rate target. But if the commitment is not credible, then
B) the short-run aggregate supply curve will shift upward. C) economic contraction will be worse.
*D) both B and C.
1) The problem created by asymmetric information before the transaction occurs is called ________, while the problem created after the transaction occurs is called ________.
*A) adverse selection; moral hazard
3) You can borrow $5000 to finance a new business venture. This new venture will generate annual earnings of $251. The maximum interest rate that you would pay on the borrowed funds and still increase your income is
4) A credit market instrument that pays the owner a fixed coupon payment every year until the maturity date and then repays the face value is called a
*C) coupon bond.
7) If a perpetuity has a price of $500 and an annual interest payment of $25, the interest rate is
*B) 5 percent.
8) A discount bond selling for $15,000 with a face value of $20,000 in one year has a yield to maturity of
*D) 33.3 percent.
9) You would be more willing to buy AT&T bonds (holding everything else constant) if
*A) the brokerage commissions on bond sales become cheaper.
10) In the figure above, one factor not responsible for the decline in the demand for money from M1d to M2d is
*C) an increase in income.
11) If fluctuations in interest rates become smaller, then, other things equal, the demand for stocks ________ and the demand for long-term bonds ________.
*D) decreases; increases
12) When the Fed decreases the money stock, the money supply curve shifts to the ________ and the interest rate ________, everything else held constant.
*D) left; rises
14) When the Treasury bond market becomes less liquid, other things equal, the demand curve for corporate bonds shifts to the ________ and the demand curve for Treasury bonds shifts to the ________. Hint: Treasury bonds and corporate bonds are substitutes.
*B) right; left
15) Everything else held constant, an increase in marginal tax rates would likely have the effect of ________ the demand for municipal bonds, and ________ the demand for U.S. government bonds.
*B) increasing; decreasing
17) According to the liquidity premium theory of the term structure, a downward sloping yield curve indicates that short-term interest rates are expected to
*D) decline sharply in the future.
18) Using the one-period valuation model, assuming a year-end dividend of $0.11, an expected sales price of $110, and a required rate of return of 10%, the current price of the stock would be
19) One of the assumptions of the Gordon Growth Model is that dividends will continue growing at ________ rate.
*C) a constant
20) Using the Gordon growth formula, if D1 is $2.00, ke is 12% or 0.12, and g is 10% or 0.10,
then the current stock price is
1) ________ is used to make purchases while ________ is the total collection of pieces of property that serve to store value.
*D) Money; wealth
2) Compared to an economy that uses a medium of exchange, in a barter economy
*A) transaction costs are higher.
4) If an individual moves money from a small-denomination time deposit to a demand deposit account,
*A) M1 increases and M2 stays the same.
13) The monetary liabilities of the Federal Reserve include
*B) currency in circulation and reserves.
14) Both ________ and ________ are Federal Reserve assets.
*C) securities; loans to financial institutions
15) The effect of an open market purchase on reserves differs depending on how the seller of the bonds keeps the proceeds. If the proceeds are kept in ________, the open market purchase has no effect on reserves; if the proceeds are kept as ________, reserves increase by the amount of the open market purchase.
*C) currency; deposits
16) There are two ways in which the Fed can provide additional reserves to the banking system: it can ________ government bonds or it can ________ discount loans to commercial banks.
C) purchase; extend
17) If reserves in the banking system increase by $100, then checkable deposits will increase by $500 in the simple model of deposit creation when the required reserve ratio is
18) In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, then an open market ________ the supply of reserves, raising the federal funds interest rate, everything else held constant.
*A) sale decreases
19) Everything else held constant, in the market for reserves, when the federal funds rate is 3%, raising the discount rate from 5% to 6%
*C) has no effect on the federal funds rate.
20) Everything else held constant, in the market for reserves, when the demand for federal funds intersects the reserve supply curve along the horizontal section, increasing the discount rate
*A) increases the federal funds rate.
21) In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, an increase in the reserve requirement ________ the demand for reserves, ________ the federal funds rate, everything else held constant.
*C) increases; raising