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ECN 5200 MASTER
Terms in this set (70)
What is the main reason that economists focus so much attention on money?
The money supply is empirically related to the health of the economy.
Which of the following statements is true?
It can be efficient for people and firms to purchase goods or invest in projects before they have earned enough income to pay for these things on their own.
An allocation is efficient if
it is not possible to make someone better off without making someone worse off.
If the Fed increases the money supply, we should expect in the long run that
There is no clear relationship between interest rates and the money supply in the long run.
Suppose that you borrow $1500 and agree to pay back $2000 in a year. The interest rate on this loan is
Which of the following statements about interest rates is most correct?
Interest rates are much lower than they have been on average in the past few decades, but some interest rates are still in the double digits.
The development of financial markets is important for the economy because
they improve efficiency.
When talking about a bond, its term structure relates to
how long the bond will yield payments to the bond holder.
What kind of economic behavior is directly responsible for producing the funds traded in financial markets?
The payments due to the owner of a share of stock are
dependent on the earnings of the company that the share represents ownership in.
An asset is
something that may grant you a claim to payments in the future.
Which of the following is NOT a financial intermediary?
When a firm seeks financing for an investment project, it might
sell an asset to an investor that will become a liability for the firm.
Asset transformation is when
a financial intermediary reinvests a client's funds in assets with different liquidity or risk characteristics.
Financial intermediaries are an essential part of
The most indispensable function of the financial system is to
rectify the mismatch between those who currently have purchasing power and those who currently have opportunities to employ that purchasing power.
Which market for a security determines how liquid the security is?
the secondary market
Which market for a security provides financing for the issuer of the security?
the primary market
Which market deals in securities that provide short term financing?
the money market
Mortgages are sold in which market?
the capital market
Which of the following is the primary function of money that only money is capable of?
eliminating the need for a double coincidence of wants
Suppose that real GDP is 20 trillion dollars, the price level is 2, and the velocity of money is 0.5. What is the money supply?
80 trillion dollars
How long have economists understood the functions of money?
They were identified over 2000 years ago.
People often say this person has a lot of "money" to describe a person who has a lot of purchasing power. What more precise term would economists substitute for "money" in this context?
What is included in M2 but not in M1?
savings account deposits
What entity is ultimately responsible for investing a dollar with value?
What property would characterize something that is a very good store of value?
a high rate of return
The velocity of money is supposed to measure
how often a dollar of money exchanges hands on average in a year.
Which of the following is another name for a unit of account?
Why do we have multiple measures of the money supply?
There is not universal agreement about what should count as money and what should not.
Which of the following is a geometric sequence?
1, 1/2, 1/4, 1/8, 1/16, 1/32, . . .
Suppose the monthly interest rate on a loan is 3.5%. What will the exact annual interest rate be?
You take out a fixed-payment loan for $60,000, which you agree to repay in 60 monthly payments at an interest rate of 1.5% per month. What will the payments be?
You borrow $30000 with a fixed-payment loan in which you make 60 monthly payments of $1000. What is the monthly interest rate on this loan?
You purchase a zero-coupon bond with a face value of $1000 so its yield to maturity is -3%. How much did you pay for the bond?
Suppose that you purchase a ten-year bond that pays coupons of $50 every year for $1000. If the face value of the bond is $1000, what must the yield to maturity be?
You buy a 10-year bond for $1100 with a face value of $1000 that pays coupons of $50 at the end of each year. After a year, the interest rate is 5%. What is the rate of return that you earn on the bond after one year?
When calculating the present value of a stream of cash flows, should you use nominal or real cash flows and should you use the nominal or real interest rate?
You can use nominal or real variables as long as you are consistent, using nominal cash flows with nominal interest rates or real cash flows with real interest rates.
The Fisher equation depends on expected inflation rather than ex post inflation because
you can only base investment decisions on your expectation of future returns.
Suppose the real interest rate is 5% and the nominal interest rate is 10%. What must expected inflation be according to the exact Fisher equation?
The original Avengers #1 comic book sold for 12 cents in 1963. An issue sold for $274,850 in 2012. What was the annual rate of return?
How does the demand for bonds depend on their price and return?
The demand for bonds increases with their return and decreases with their price.
Which of the following would shift the demand for a zero-coupon bond to the right?
an increase in aggregate income
Under what circumstances will a shock to the bond market have an ambiguous effect on either the price or the quantity of bonds sold?
If the supply of and the demand for bonds both shift in response to the shock.
The effect of the business cycle on interest rates is most easily explained in terms of
the money market.
A change in the liquidity of an asset will
affect the demand for the asset.
A change in expected inflation will
affect both the demand and the supply of the asset.
When someone chooses to hold cash they are making a tradeoff of
liquidity at the cost of a lower return.
One factor that helps to maintain an equilibrium with the gigantic money supply present today
is near-zero interest rates.
Higher inflation will in the long run tend to
increase nominal interest rates while leaving real interest rates the same.
Municipal bonds sometimes have the lowest yield of all bonds because
interest on municipal bonds is not subject to federal tax.
Which of the following statements is true?
Most credit rating agencies rate the U.S. federal government at their highest credit rating, but Standard and Poor's downgraded the federal government from AAA to AA+ in 2011 after a debt ceiling crisis.
Rates on U.S. Treasury bonds of different maturities usually move up or down together because
the short rate is highly persistent.
Over the next five years, people expect the one-year bond rate to be 1% for one year, 0% for the next two years, and 2% for the two years after that. According to Expectations Theory, the yield on bonds with respectively one, two, three, four, and five year maturities should be
1, 0.5, 0.33, 0.75, 1
Which of the following does not contribute to the risk premium of a bond?
uncertainty about the value of scheduled payments
As of this writing, the yield on three-month Treasuries has been less than 0.1% since the beginning of the year. Based on the normal behavior of yield curves, what would you guess the shape of the yield curve is?
Risk premia are primarily the result of
the demand for riskless assets being higher than the demand for risky assets.
We focus on the yield curve for Treasuries because
Treasuries are issued with many different maturities, and few other bonds are issued with as many maturities.
Which of the following stylized facts can be explained by the segmented markets theory but not the expectations theory?
The yield curve is usually upward sloping.
What is the liquidity premium for Treasuries?
If the short rate is expected to be constant in the future, long-term Treasuries have a lower price than short-term Treasuries.
The price of a share of stock should be
slightly more than the second highest price anyone is willing to pay for the share.
Suppose that inflation can either be 2% or 10%. If inflation is 2% in the current year, there is a 0.6 probability it will be 2% next year and a 0.4 probability it will be 10%. If inflation is 10% in the current year, there is a 0.6 probability it will be 10% next year and a 0.4 probability it will be 2%. Inflation has been 10% for the last 50 years. What is the rational expectation of inflation next period?
Suppose that McDonald's and Wendy's have similar risk and liquidity properties and the same projected future earnings. (Burger King is not publically traded.) McDonald's stock is selling with a price-earnings ratio of 22 and Wendy's stock is selling with a price-earnings ratio of 19. What should happen?
There is an arbitrage opportunity. Investors will sell all the McDonald's stock they can to buy up Wendy's stock.
Suppose that a stock's current dividend is $2. You believe an appropriate discount factor for this stock is 10% per annum. What would the growth rate of dividends have to be in order for you to price the stock at $50 according to the Gordon growth model?
According to the Efficient Markets Hypothesis, what is the best way to invest in the stock market?
You should invest in an index fund.
The GameStop bubble happened as a consequence of
people hoarding shares of GameStop that short sellers were desperate to purchase to close their short-sale contracts.
There is a bubble in an asset market when
the price of an asset stays above its fundamental value for a sustained period.
Assuming rational expectations, which of the following is not a valid reason why the stock market might go up after a report that unemployment increased more than expected?
Households may default on their loans, causing a financial crisis.
Which of the following contributes to a stock's fundamental value?
EDIT EDIT EDIT
Suppose it is 2024, and Biden is running against Trump again. Biden has spent the ensuing four years restoring life to normal in the United States with GDP growth averaging to 1.5% per year and the stock market earning an average return of 10% per year over his term. Prediction markets believe Biden has a 90% chance of winning. If the Efficient Markets Hypothesis is correct, how should markets react the next day if Biden wins?
The stock market should either not react or increase slightly.
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