ECON 2035 Final Exam Review
A Big Mac costs $4 in the United States and 3 euros in Portugal. The purchasing power parity theory would predict that the exchange rate in the long run is $1 = 12 euros. $1 = 1.33 euros. 1 euro = $0.75. $1 = 0.75 euros.
Answer: $1 = 0.75 euros 1 USD = 3/4 = 0.75
Suppose you have a fixed-rate mortgage. You expect annual inflation rate over the life of the mortgage to be 4%, and your expected real interest rate is 8%. What is the nominal interest rate? 16% 8% 4% 12%
Answer: 12% Nominal Interest Rate = Real Interest Rate + Inflation Rate = 8% + 4% = 12%
Suppose there is a 25% chance of a stock rising by 20% and a 75% chance of it rising by 10%. A risk-neutral investor would be indifferent between this stock and an investment with a guaranteed return of _____. 7.5% 5% 12.5% 15%
Answer: 12.5%
If a bank has $1 million in deposits and $400,000 in total reserves, with $200,000 in excess reserves, the required reserve ratio must be 20%. 5%. 30%. 10%.
Answer: 20% Reserve Ratio = (Cash Reserve Ratio Reserve Requirement/Bank Deposits) x 100
Suppose a pair of AirPods sells for $150 in New York while the same pair of AirPods costs 300 Japanese Yen in Tokyo. If the real exchange rate is 1 pair of AirPods in the U.S. for 2 pairs of AirPods in Japan, how many Japanese Yen would you receive in exchange for $1? 2 0.25 4 0.5
Answer: 4 The real exchange rate is 1pair of AirPods in NY for 2 pairs of AirPods in Japan This means the dollar is twice expensive as the yen For 1 pair of AirPods, NY price =150$ and Japan price 300 yen Now, if we calculate, according to the given real exchange rate 75$( half of 150) =300 yen So 1$= 4Yen
If the MPC is 0.75, the government purchases multiplier will equal 0.25. 0.75. 1.33. 4.
Answer: 4 Spending/Purchases Multiplier = 1/(1-MPC)
According to the quantity theory of money, if the long-run economic growth rate is 2.5%, by how much should the Fed increase the money supply if it wants inflation to be 2%? 0.5% 1.25% 4.5% 5%
Answer: 4.5% = 1.025*1.02-1 =4.5%
A one-year bond currently pays 5% interest. It's expected that it will pay 4% next year and 3% the following year. The two-year term premium is 0.25% while the three-year term premium is 0.50%. What is the interest rate on a three-year bond according to the liquidity premium theory? 3.00% 5.00% 4.50% 4.25%
Answer: 4.50 Current year interest rate = 5% Next year interest rate = 4% Term premium = 0.25% for 2.5 years According to liquidity premium theory: Interest on 2 year bond = (4+4.5)/2 + 0.25 = 4.25 + 0.25 = 4.50
Which of the following is TRUE about the Federal Reserve System? President of the Federal Reserve Bank of New York always votes on the target for the federal funds rate. It is impossible for an individual to serve more than 14 years on the Board of Governors. Conducting open market operations is part of the duties of the 12 Federal Reserve District Banks. The majority of the voting members of the FOMC is selected from the presidents of the Federal Reserve District Banks.
Answer: President of the Federal Reserve Bank of New York always votes on the target for the federal funds rate
Assuming equal year to maturity, which of the following coupon bonds has the highest yield to maturity? Price = $680; Coupon Rate = 6%; Face Value = $700 Price = $800; Coupon Rate = 5%; Face Value = $800 Price = $780; Coupon Rate = 5%; Face Value = $750 Price = $880; Coupon Rate = 6%; Face Value = $850
Answer: Price = $680; Coupon Rate = 6%; Face Value = $700
Which of the following is an example of moral hazard? A company uses the proceeds of a new stock sale to build an unnecessarily luxurious new headquarters. A company in serious financial trouble offers to pay you 30% on a loan. A terminal cancer patient buys life insurance. A family with a home ten feet from a large river buys flood insurance.
Answer: a company uses the proceeds of a new stock sale to build unnecessarily luxurious new headquarters
Which of the following would cause the realistic money multiplier to increase? A decrease in the discount rate. An increase in the currency-to-deposit ratio. An increase in the required reserve ratio. A decrease in excess reserves relative to deposits.
Answer: a decrease in excess reserves relative to deposits
Everything else held constant, which of the following changes would shift the demand curve for bonds to the right? an increase in expected return of stocks a decrease in wealth a decrease in expected inflation a reduction in corporate profit tax
Answer: a decrease in expected inflation
Which of the following assets is the least liquid? a savings account a house a U.S. Treasury bond a share of publicly traded stock
Answer: a house
All of the following are associated with rising inflation EXCEPT firms hesitating to enter into long-term contracts with suppliers. families having trouble deciding how much to save for retirement. income redistribution. a steady decrease in interest rates.
Answer: a steady decrease in interest rates
If you purchase a Treasury bond, the Treasury bond is an asset to you as well as an asset to the U.S government a liability to you as well as a liability to the U.S government an asset to you, but a liability to the U.S government a liability to you, but an asset to the U.S government
Answer: an asset to you, but a liability to the U.S. government
Suppose your fashion company, based in New York, has clothes manufactured in Vietnam. The company's main source of revenues is generated by sales in Italy. Everything else held constant, which of the following scenarios leads to an increase in your profit in the short-run. An increase in interest rates in Vietnam relative to interest rates in the U.S. An increase in demand for Italian cars in the U.S. An increase in demand for Apple MacBooks in Italy. An increase in demand for Vietnamese rice in the U.S .
Answer: an increase in demand for Italian cars in the U.S.
Suppose the Board of Governors decides to purchase a painting of Elvis (medium: oil on velvet) to grace the walls of the conference room at the Federal Reserve Branch Bank in Memphis and pays for the painting with a check. Everything else held constant, this purchase will cause _____ in the Fed's liabilities and _____ in checkable deposit account balances. an increase; an increase a decrease; no change no change; an increase a decrease; an increase
Answer: an increase; an increase
Assuming scarcity of reserve and a negative output gap, which of the following monetary policy should the Fed conduct under the Taylor rule? Increasing the IOER Increase the discount rate An open market purchase Decrease the ON RRP rate
Answer: an open market purchase
Which of the following would help the Federal Reserve to reduce the equilibrium quantity of reserves without affecting the equilibrium federal funds rate? an open market sale together with an increase in required reserve ratio an open market purchase together with an increase in required reserve ratio an open market purchase together with a reduction in required reserves ratio an open market sale together with a reduction in required reserve ratio
Answer: an open market sale together with a reduction in required reserve ratio
Which of the following is NOT a form of a short-term loan in the shadow banking system? bank deposits commercial paper repurchase agreements money market mutual fund shares
Answer: bank deposits
The facilities which allow the Fed to provide funds directly to non-financial firms and state and local governments are known as credit facilities disintermediation facilities crisis facilities liquidity facilities
Answer: credit facilities
The process of falling asset prices as a result of failing bank selling their assets, and falling price of goods and services, which further increases bankruptcies is called ____ . discounting process money supply process compounding process debt-deflation process
Answer: debt-deflation process
Suppose a branch of Bank of America in Texas deposits $1 million of currency into its account at the Federal Reserve Bank of Dallas. The branch's action, everything else held constant, will cause vault cash to ________ and Federal Reserve liabilities to________. remain unchanged; increase increase; remain unchanged decrease; remain unchanged remain unchanged; decrease
Answer: decreases; remain unchanged
Economists who have studied the Phillips curve have concluded that it can shift due to all of the following EXCEPT : demand shocks. changes in firms' expectations of inflation. changes in households' expectations of inflation. supply shocks.
Answer: demand shocks
Suppose that the Federal Reserve announces contractionary monetary policy while, at the same time, the Bank of England announces a more expansionary monetary policy. Everything else held constant, this would cause the UK pound to________ against the U.S. dollar be ambiguous appreciate depreciate remain constant
Answer: depreciate
Term structure of interest rates is the relationship among the interest rates on bonds that have ______ maturities and ______ characteristics. same; different same; same different; same different; different
Answer: different; same
If you transfer money from your savings account to your checking account, the value of M1 _______ and the value of M2 _______. increases; decreases. does not change; decreases. increases; does not change. does not change; does not change.
Answer: does not change; does not change
The FDIC ________ short-term borrowing by shadow banks, and shadow banks are normally ________ to receive loans from the Fed when they suffer liquidity problems. does not insure; eligible insures; not eligible does not insure; not eligible insures; eligible
Answer: does not insure; not eligible
The Federal Reserve district banks do not engage in monetary policy engage in monetary policy directly through discount lending engage in monetary policy directly through open market operations engage in monetary policy directly through their membership on the Federal Reserve committees
Answer: engage in monetary policy directly through discount lending
If market participants have rational expectations, then the best forcast of the price of a stock in the next period is equal to an average of the past prices of the stock equal to the current price of the stock Dependent upon all information available currently, including, but not limited to the current price of the stock dependent on all the past information
Answer: equal to the current price of the stock
Bank profit will increase following an increase in interest rates if the value of its fixed-rate assets is less than the value of its fixed-rate liabilities. fixed-rate assets is greater than the value of its variable-rate assets. fixed-rate assets is greater than the value of its fixed-rate liabilities. fixed-rate liabilities is greater than the value of its variable-rate liabilities.
Answer: fixed-rate assets is less than the value of its fixed-rate liabilities
By designating Federal Reserve currency as legal tender, the federal government has mandated that Federal Reserve currency be accepted by citizens of foreign countries has ensured that Federal Reserve currency will serve as money has mandated that Federal Reserve currency be accepted for payments of debts. has guaranteed that Federal Reserve currency may be exchanged for an equivalent amount of gold
Answer: has mandated that Federal Reserve currency be accepted for payments of debts
The original intention of the Fed's role as lender of last resort was to make loans to banks that were insolvent, but not illiquid. both illiquid and insolvent. illiquid, but not insolvent. not illiquid nor insolvent.
Answer: illiquid, but not insolvent
The era of bank panics in the United States was effectively ended by abandoning the gold standard. establishing the Fed as lender of last resort. implementing the gold standard. introducing deposit insurance.
Answer: introducing deposit insurance
According to the expectations theory of the yield curve, when the yield curve is downward-sloping buyers of short term bonds have different preferences and goals than buyers of long term bonds. investors expect short term rates to fall. the bond market is anticipating an econmic expansion. short-term yields are lower than long-term yields.
Answer: investors expect short term rates to fall
Which of the following is TRUE under the liquidity premium theory of the term structure of interest rates? Investors prefer bonds with shorter maturities over bonds with longer maturities, so they require a premium to invest in bonds with longer maturities. Markets for bonds of different maturities are completely separable. Investors always choose bonds with highest expected return, regardless of their maturities. Bonds of different maturities are perfect substitutes.
Answer: investors prefer bonds with shorter maturities over bonds with longer maturities, so they require a premium to invest in bonds with longer maturities
The problem of moral hazard is considerably more serious when an investor buys a firm's bonds than when the investor buys a firm's stock is equally serious whether an investor buys a firm's bonds or a firm's stock. is considerably more serious when an investor buys a firm's stock than when the investor buys a firm's bonds. is nonexistent for investors who buy corporate bonds or stock.
Answer: is considerably more serious when an investor buys a firm's stock than when the investor buys a firm's bonds
Which of the following is the most common goal for central banks of industrialized countries? high economic growth low inflation low interest rates high employment
Answer: low inflation
If a one-year bond currently yields 5% and is expected to yield 7% next year, the liquidity premium theory predicts that the yield today on a two-year bond should be less than 6%, but higher than 5%. more than 6%. 5% 6 %
Answer: more than 6%
While the Federal Reserve Act of 1913 required all _____ banks to become members of the Federal Reserve System, _____ banks were given the choice of becoming members of the system. A. state; municipal B. state ; national C. national; state D. municipal; state
Answer: national; state
Suppose firms become pessimistic about the future profitability of spending on new information technology. Holding everything else constant, this causes the output gap to become______ and inflation rate to_______. In order for the output gap to return to zero and inflation rate to return to its original rate, the Fed should ______ real interest rate. negative; decrease; decrease negative; increase; decrease positive; decrease; increase positive; increase; increase
Answer: negative, decrease, decrease
All of the following were actions taken by the government or the Fed in response to the financial crisis of 2007-2009 EXCEPT effective nationalization of Fannie Mae and Freddie Mac purchasing of most toxic assets such as mortgage-backed securities insuring deposits in money market mutual funds reducing the federal funds rate to near zero
Answer: purchasing of most toxic assets such as mortgage-backed securities
By providing and communicating information, the financial system relieves individual savers from the necessity of searching out individual borrowers. eliminates the risk in investing in the stock market. reduces the difference between the return on three-month U.S. Treasury bills and the return on thirty-year U.S. Treasury bonds guarantees investors a reasonable return on their money
Answer: relieves individual savers from the necessity of searching out individual borrowers
Suppose the Fed's trading desk expects that there are factors that will temporarily decrease the supply of reserves. Everything else held constant, the trading desk should undertake a _____ to counteract the effects of the decrease in the supply of reserves. If the Fed does nothing, however, the federal funds rate will _____. reverse repo; increase repo; decrease repo; increase reverse repo; decrease
Answer: repo; increase
The Paycheck Protection Program is part of the vast economic rescue package intended to help small businesses that are affected by the COVID-19 to raise funds to keep their workers on the payroll. The program requires that the federal money is used to cover payroll costs, mortgage interest, rent, or utilities. This is a real world example of using _____ to reduce _____ . credit rationing - adverse selection. credit rationing - moral hazard restrictive covenant - moral hazard restrictive covenant - adverse selection
Answer: restrictive covenant - moral hazard
An expansionary monetary policy causes a _____ in net worth, which ______ the information problem, thereby ________ lending to finance investment spending. A.rise; decreases; encouraging B.decline; increases; discouraging C.rise; increases; discouraging D.decline; decreases; encouraging
Answer: rise, decreases. encouraging
Suppose Exxon-Mobil announces that its profits in the third quarter of 2016 were $40 billion. This will cause the price of Exxon-Mobil stocks to A.rise B.remain unchanged C.fall D.rise, fall, or remain unchanged depending on the expectation of market participants prior to the announcement.
Answer: rise, fall, or remain unchanged depending on the expectation of market participants prior to the announcement.
Which of the following is LEAST likely to occur if the Fed responds to a negative demand shock by reducing the real interest rate? The MP curve shifts down. The output gap returns to zero. The IS curve shifts to the right. The inflation rate returns to its previous rate.
Answer: the IS curve shifts to the right
All of the following help make the Fed independent of the political pressure EXCEPT board members' terms expire at different times, reducing the possible number of appointees by any one president financial independence board members receive a long, nonrenewable appointment the chair of the Fed receives a lifetime appointment
Answer: the chair of the Fed receives a lifetime appointment
When the price of a coupon bond decreases the current yield increases. the coupon rate decreases. the coupon rate increases. the current yield decreases.
Answer: the current yield increases
Which of the following statements is correct? The Fed is fully insulated from external pressures because it does not need to go through the normal congressional appropriations process. The Fed is only partially insulated from external pressures. The Fed is fully insulated from external pressures because it has a constitutional mandate. The Fed is fully insulated from external pressures due to the long terms that members of the Board of Governors serve.
Answer: the fed is only partially insulated from external pressures
If, while you are holding a bond, its market price falls, you can be certain that the par value of the bond must have declined the interest rate on other similar bonds must have fallen the interest rate on other similar bonds must have risen the coupon payment you are receiving must have decreased
Answer: the interest rate on other similar bonds must have risen
According to the equation of exchange, if the quantity of money decreases and the velocity of money remains constant, then the level of inflation must decrease the price level must decrease the level of real GDP must decrease the level of nominal GDP must decrease
Answer: the level of nominal GDP must decrease
If the current price of a bond is greater than its face value the yield to maturity must be less than the coupon rate. the coupon rate must be less than the current yield. the coupon rate must be equal to the current yield. an investor will receive a capital gain by holding the bond until its maturity.
Answer: the yield to maturity must be less than the coupon rate
Suppose there is a decrease in labor productivity. Holding everything else constant, this will shift the Phillips curve______ resulting in a______ inflation gap. If the Fed wants to reduce the inflation gap, it should_______ its target for the federal funds rate, which results in a______ output gap. up; positive; increase; negative down; positive; increase; positive up; negative; decrease; negative down; negative; increase; positive
Answer: up; positive; increase; negative
The assumption that reserves are scarce was not accurate prior to or following the financial crisis of 2007-2009. was accurate prior to the financial crisis of 2007-2009 but not following the crisis. was accurate following the financial crisis of 2007-2009 but not prior to the crisis. was accurate prior to and following the financial crisis of 2007-2009.
Answer: was accurate prior to the financial crisis of 2007-2009 but not following the crisis
Which of the following statements is TRUE? The discount rate is deterred by the market forces. A reduction in the tendency of nonbank public to hold currency relative to checkable deposits would reduce the money supply in the economy. The Federal Reserve has no control over the realistic money multiplier. When banks hold excess reserves, the size of money multiplier is less than the simple deposit multiplier would suggest.
Answer: when banks hold excess reserves, the size of money multiplier is less than the simple deposit multiplier would suggest
If the Fed is able to permanently reduce the inflation rate, households will eventually lower their expectation of the inflation rate. Once that happens, the Phillips curve will shift ________, and the Fed can return output to potential GDP by ________ the real interest rate. down; lowering down; raising up; lowering up; raising
down; lowering
If the Fed decreases money supply and as a result, households and firms buy fewer short-term financial assets, the price of short-term financial assets will _______and the interest rates on those assets will________. rise, rise fall, fall fall, rise rise, fall
fall, rise