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Money and Banking
Terms in this set (87)
A financial crisis is
a major disruption in the financial markets.
The stock market is important because it is
the most widely followed financial market in the United States.
From 1950-2011 the price level in the United States increased more than
________ policy involves decisions about government spending and taxation.
The management of money and interest rates is called ________ policy and is conducted by a nation's ________ bank.
Compared to interest rates on long-term U.S. government bonds, interest rates on three-month Treasury bills fluctuate ________ and are ________ on average.
A rising stock market index due to higher share prices
increases people's wealth and as a result may increase their willingness to spend.
___________ theory relates the quantity of money and monetary policy to changes in aggregate economic activity and inflation.
Federal funds are
loans made by banks to each other
U.S. Treasury bills pay no interest but are sold at a ________. That is, you will pay a lower purchase price than the amount you receive at maturity.
Bonds that are sold in a foreign country and are denominated in a currency other than that of the country in which it is sold are known as
The problem created by asymmetric information before the transaction occurs is called ________, while the problem created after the transaction occurs is called ________.
adverse selection; moral hazard
Assume that you borrow $2000 at 10% annual interest to finance a new business project. For this loan to be profitable, the minimum amount this project must generate in annual earnings is
If bad credit risks are the ones who most actively seek loans and, therefore, receive them from financial intermediaries, then financial intermediaries face the problem of
A breakdown of financial markets can result in
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
Economies of scale enable financial institutions to
reduce transactions costs
An important financial institution that assists in the initial sale of securities in the primary market is the
A debt instrument sold by a bank to its depositors that pays annual interest of a given amount and at maturity pays back the original purchase price is called
a negotiable certificate of deposit
Equity instruments are traded in the ________ market.
Equity and debt instruments with maturities greater than one year are called ________ market instruments.
Financial markets improve economic welfare because
they allow consumers to time their purchase better
Which of the following statements about financial markets and securities is true?
The maturity of a debt instrument is the number of years (term) to that instrument's expiration date.
Equity holders are a corporation's ________. That means the corporation must pay all of its debt holders before it pays its equity holders.
Paper currency that has been declared legal tender but is not convertible into coins or precious metals is called ________ money.
If an individual moves money from a demand deposit account to a money market deposit account,
M1 decreases and M2 stays the same
When we say that money is a stock variable, we mean that
the quantity of money is measured at a given point in time.
A fall in the level of prices
increases the value of money
________ is the narrowest monetary aggregate that the Fed reports
When compared to exchange systems that rely on money, disadvantages of the barter system include:
the requirement of a double coincidence of wants.
If the price level doubles, the value of money
falls by 50 percent.
Which of the following is not included in the M1 measure of money but is included in the M2 measure of money?
Small-denomination time deposits
money no longer functions as a good store of value and people may resort to barter transactions on a much larger scale.
Which of the following is not a form of e-money?
The evolution of the payments system from barter to precious metals, then to fiat money, then to checks can best be understood as a consequence of
innovations that reduced the costs of exchanging goods and services.
If there are four goods in a barter economy, then one needs to know ________ prices in order to exchange one good for another.
The difference between money and income is that
money is a stock and income is a flow.
Monetary aggregates are
measures of the money supply reported by the Federal Reserve.
When money prices are used to facilitate comparisons of value, money is said to function as a
unit of account
With an interest rate of 6 percent, the present value of $100 next year is approximately
An increase in the time to the promised future payment ________ the present value of the payment.
A coupon bond that has no maturity date and no repayment of principal is called a
The riskiness of an asset's returns due to changes in interest rates is
A ________ pays the owner a fixed coupon payment every year until the maturity date, when the ________ value is repaid.
coupon bond; face
The interest rate that equates the present value of payments received from a debt instrument with its value today is the
yield to maturity.
If the amount payable in two years is $2420 for a simple loan at 10 percent interest, the loan amount is
What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,200 next year?
A discount bond selling for $15,000 with a face value of $20,000 in one year has a yield to maturity of
The yield to maturity for a discount bond is ________ related to the current bond price.
Which of the following are true for a coupon bond?
When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate
When the ________ interest rate is low, there are greater incentives to ________ and fewer incentives to ________.
real; borrow; lend
The ________ is below the coupon rate when the bond price is ________ its par value
yield to maturity; above
What is the present value of $500.00 to be paid in two years if the interest rate is 5 percent?
For a 3-year simple loan of $10,000 at 10 percent, the amount to be repaid is
The price of a coupon bond and the yield to maturity are ________ related; that is, as the yield to maturity ________, the price of the bond ________
negatively; rises; falls
A consol paying $20 annually when the interest rate is 5 percent has a price of
The nominal interest rate minus the expected rate of inflation
defines the real interest rate
An equal increase in all bond interest rates
decreases long-term bond returns more than short-term bond returns
The price of a consol equals the coupon payment
divided by the interest rate.
The present value of a fixed-payment loan is calculated as the ________ of the present value of all cash flow payments
Which of the following are true of fixed payment loans?
Installment loans and mortgages are frequently of the fixed payment type
A ________ is bought at a price below its face value, and the ________ value is repaid at the maturity date.
discount bond; face
If a security pays $110 next year and $121 the year after that, what is its yield to maturity if it sells for $200?
The bond supply curve is ________ sloping, indicating a(n) ________ relationship between the price and quantity supplied of bonds.
An increase in the interest rate
decreases the quantity of money demanded
Everything else held constant, during a business cycle expansion, the supply of bonds shifts to the ________ as businesses perceive more profitable investment opportunities, while the demand for bonds shifts to the ________ as a result of the increase in wealth generated by the economic expansion.
Everything else held constant, when the inflation rate is expected to rise, interest rates will ________; this result has been termed the ________.
rise; Fisher effect
In a business cycle expansion, the ________ of bonds increases and the ________ curve shifts to the ________ as business investments are expected to be more profitable.
supply; supply; right
Holding everything else constant,
the more liquid is asset A, relative to alternative assets, the greater will be the demand for asset A.
The demand curve for bonds has the usual downward slope, indicating that at ________ prices of the bond, everything else equal, the ________ is higher.
lower; quantity demanded
Of the four factors that influence asset demand, which factor will cause the demand for all assets to increase when it increases, everything else held constant?
If the price of bonds is set ________ the equilibrium price, the quantity of bonds demanded exceeds the quantity of bonds supplied, a condition called excess ________.
If the interest rate on a bond is below the equilibrium interest rate, there is an excess ________ of bonds and the bond price will ________.
When the price of a bond decreases, all else equal, the bond demand curve
does not shift.
Keynes assumed that money has ________ rate of return.
In the 1990s Japan had the lowest interest rates in the world due to a combination of
deflation and recession.
Everything else held constant, if the expected return on ABC stock rises from 5 to 10 percent and the expected return on CBS stock is unchanged, then the expected return of holding CBS stock ________ relative to ABC stock and the demand for CBS stock ________.
Everything else held constant, an increase in the riskiness of bonds relative to alternative assets causes the demand for bonds to ________ and the demand curve to shift to the ________
Everything else held constant, if the expected return on U.S. Treasury bonds falls from 10 to 5 percent and the expected return on GE stock rises from 7 to 8 percent, then the expected return of holding GE stock ________ relative to U.S. Treasury bonds and the demand for GE stock ________.
In Keynes's liquidity preference framework, individuals are assumed to hold their wealth in two forms:
money and bonds.
The demand for Picasso paintings rises (holding everything else equal) when
Treasury securities become riskier
Everything else held constant, when stock prices become ________ volatile, the demand curve for bonds shifts to the ________ and the interest rate ________.
more; right; falls
In the market for money, an interest rate below equilibrium results in an excess ________ money and the interest rate will ________.
demand for; rise
In the bond market, the bond demanders are the ________ and the bond suppliers are the ________.
In Keynes's liquidity preference framework, if there is excess demand for money, there is
an excess supply of bonds
When real income ________, the demand curve for money shifts to the ________ and the interest rate ________, everything else held constant.
rises; right; rises
When the price of a bond is above the equilibrium price, there is an excess ________ bonds and price will ________.
supply of; fall
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