ECON 380 FINAL COMBINED SET

Which of the following types of orders does not involve specifying a price limit or trigger price as part of the order?

A spread order

In a blog​ post, former Federal Reserve Chair Ben Bernanke described the four "basic elements" of a financial​ crisis: "​broad-based loss of confidence in​ banks, runs by providers of​ short-term funding, fire sales of bank loans and other​ assets, [and] disruption of credit flows." ​Source: Ben S.​ Bernanke, "Ending Too Big to​ Fail: What's the Right ​Approach?" brookings.edu​, May​ 13, 2016. Why might each of these four elements occur during a financial​ crisis?

Each of these elements is connected to another.

C. The breakout of war in the Europe.

Economist Peter Temin of MIT argues​ that, open double quoteIf the crash of 1929 was an important independent shock to the​ economy, then the crash of 1987 should have been equally disastrous.close double quote ​Source: Peter​ Temin, Lessons from the Great Depression​, ​Cambridge, MA: MIT University​ Press, 1989 p. 41. Which of the following events would be considered an "important independent shock to an economy"? A. Inflation. B. An increase in the Federal Funds rate. C. The breakout of war in the Europe. D. A stock market crash.

Consider a ratio spread comprising a call at strike and short two calls at strike . The current stock price is at . The market view for this trade is most likely to be:

That the stock will rise but not by an indefinite amount.

Forward pricing by replication depends on the following assumption:

That the underlying is a traded asset which is storable.

What is​ pegging?

The decision by a country to keep the exchange rate fixed between its currency and another​ country's currency.

decreasing, more increasing, lowering

The decline in spreads between yields on​ AAA-rated corporate bonds and government bonds indicates that investors view the default risk on corporate bonds to be _____ . As​ such, these bonds are becoming _____ ​desirable, _____ their price and _____ their yield.

C. the Fed's deflationary policies.

The depression continued well beyond​ June, 1930 because of A. the increase in wealth. B. the increase in international trade. C. the Fed's deflationary policies. D. bank success.

D. bank failures.

The depression continued well beyond​ June, 1930 because of A. the increase in wealth. B. the increase in international trade. C. the Fed's inflationary policies. D. bank failures.

What would have to be true of a derivatives security if the security were to help you to hedge this​ risk?

The derivative would need to go up in value if corn prices fell.

When the futures-spot basis weakens

The difference between futures and spot prices drops.

Consider five put options at strikes 40, 45, 50, 55, and 60. The price of the 40-strike option is $4, the price of the 50-strike put is $5, and the price of the 60-strike option is $8. Which of the following statements is most accurate? (Assume all options have the same maturity.)

The difference between the maximum prices of the 55-strike put and the 45-strike put is $2.00

what is the shadow banking system

a collection of non bank financial insitutions that channel money from savers to borrowers

Depreciation

a decrease in value of a currency in exchange for another currency

Spot

market transactions involve an exchange of currencies or bank deposits immediately at the current exchange rate

speculating

may increase risk by placing bets on assets in an attempt to earn higher profits in the market

slope of capital market line

mean m - rf / theta m - 0

capital market line

mean p = rf + [mean m - rf)/theta m]theta p

burton malkiel sleep test

are you sleeping well with your current choice? if no, hold smaller percentage of wealth in stocks and reduce risk

the demand for agricultural products are typically price inelastic because....

fluctuations in supply cause large swings in the equilibrium price

All else being equal, a bond with a higher coupon has a duration that is ________ than that of a bond with a lower coupon

greater than.

bond price, interest rate

in the bond market, the price is the _________ and in the loanable funds market, the price is the ________

borrower, lender

in the bond market, the seller is the _______ and in the loanable funds market, the seller is the _________

The supply of dollars in exchange for yen

is determined by the willingness of households an firms that own dollars to exchange them for yen

yen91 ​= $1 to yen79 ​= $1, Because US Goods are now ___ expensive, this is __ news for Japanese consumers

less, good

When the correlation between two assets is exactly , which of the following statements is true?

There is no basis risk in hedging.

What happens to the long position in a 90-100-110-strike call butterfly spread if all the calls are replaced with puts of identical strike and maturity?

There is no change in the risks and cash flows of the original position.

There are three- and six-month European calls on stock. Suppose the three-month option costs $5 and the six-month option costs $3. Then, there is an arbitrage strategy that involves, among other things,

There is not enough information given to answer this question.

The risk-free interest rate drops but the futures on a stock market index rises. Which of the following statements is the most accurate?

There is not enough information in the question to identify if there is an arbitrage or not

The price of oil is $100 per barrel. Oil prices are expected to grow at 4% a year. The one-year risk-free rate of interest is 2% in simple terms. It costs $1 to store a barrel of oil for one year. If you observe a one-year forward price of oil of $98, what inference could you draw?

There may be a benefit of carry in the oil market.

The problem that managers of a financial firm will take on riskier investments because they believe the federal government will save them from bankruptcy.

What is the moral hazard​ problem?

What are the main reasons that​ interest-rate parity may not hold​ exactly?

Transaction costs. B. Differences in default risk and liquidity. C. ​Exchange-rate risk.

real rate

relative prices

C

the lower the price of bonds, the smaller the quantity of bonds supplied A. false- the price of bonds does not influence the quantity of bonds supplied B. false- the lower the price, the lower the yield, which increases the cost of borrowing C. true- the lower the price, the higher the yield, which increases the cost of borrowing D. true- the lower the price, the higher the yield, which decreases the cost of borrowing

A call option is :in the money" if ..

the market price of the underlying asset is greater than the strike price

Real Exchange Rate

the rate at which goods and services in one country can be exchanged for goods and services in another country

interest rates, maturity

the term structure of interest rates is the relationship among the ________ on bonds that are otherwise similar but differ in _________.

What effect would these increases in household wealth have on consumption​ spending? A. Consumption spending would increase. B. Consumption spending would decrease. C. Consumption spending would not change.

A. Consumption spending would increase.

Instead of​ fine-tuning, what do economists generally advocate that policymakers​ do? ​(Check all that apply.​) A. Focus on promoting low inflation. B. Focus on keeping interest rates as low as possible. C. Focus on eliminating both public and private debt. D. Focus on achieving steady economic growth.

A. Focus on promoting low inflation. D. Focus on achieving steady economic growth.

In​ 2016, in an opinion column in the Wall Street Journal​, Harvard economist Martin Feldstein referred to "a possible negative shock--such as a sharp fall in exports or in construction--that could push the economy into a new recession.close double quote ​Source: Martin​ Feldstein, "Federal Reserve Oblivious to Its Effect on Financial ​Markets," Wall Street Journal​, January​ 13, 2016. A sharp fall in exports or in construction would be a negative shock to aggregate___.

demand

Explain whether each of the following shifts the aggregate demand curve to the right or to the left. The Federal Reserve sells ​$12 billion of U.S. Treasury securities. It would ___ the interest​ rate, causing the AD curve to shift to the ___. The federal government launches a massive program to rebuild the​ nation's highways. It would directly ___ aggregate​ expenditure, causing the AD curve to shift to the ___. The federal government cuts the corporate profits tax. It would ___ the​ after-tax rate of return on investment​ projects, ___ investment spending and causing the AD curve to shift to the ___. The foreign exchange value of the dollar falls. It would ___ the cost of U.S. exports and ___ the cost of foreign​ imports, causing the AD curve to shift to the ___. Firms become optimistic about the future profitability of spending on factories and machinery. It would ___ current investment​ spending, causing the AD curve to shift to the ___.

increase, left increase, right increase, increasing, right decrease, increase, right increase, right

"Turning more stimulative" means that fiscal policy was becoming more expansionary with ___ in government spending or ___ in taxes.

increases, decreases

Fiscal policy is intended to achieve ___ policy objectives.

macroeconomic

A. Underwriting is financial intermediation because the bank brings together savers and the issuers of securities.

In what sense is an investment bank that engages in underwriting acting as a financial​ intermediary? A. Underwriting is financial intermediation because the bank brings together savers and the issuers of securities. B. The statement is not correct and an investment bank that engages in underwriting does not act as a financial intermediary. C. Underwriting is financial intermediation because the bank creates the financial instruments. D. Underwriting is financial intermediation because the bank gains profit from the procedure.

positive intrinsic value

"in the money"

Suppose that National Bank of Guerneville has ​$30 million in checkable​ deposits, Commonwealth Bank has ​$41 million in checkable​ deposits, and the required reserve ratio for checkable deposits is​ 10%. If National Bank of Guerneville has​ $4 million in reserves and Commonwealth has​ $5 million in​ reserves, how much in excess reserves does each bank​ have? ​(Enter your answers rounded to one decimal​ place.) National Bank of Guerneville has ​_________ in excess reserves. Commonwealth Bank has ​____________ in excess reserves. Now suppose that a customer of National Bank of Guerneville writes a check for ​$2 million to a real estate broker who deposits the check at Commonwealth. After the check​ clears, how much in excess reserves does each bank​ have? National Bank of Guerneville has ​____ in excess reserves. Commonwealth Bank has ​________ in excess reserves.

$1 million ​$.9 million ​$−.8 million $2.7 million

Which of the following features distinguish futures markets from forwards markets?

(a) Standardization of contracts. (b) The use of margin accounts to manage risk. (c) Ease in reversing positions. (d) All of the above. Answer d.

Would General Mills buy or sell futures contracts in​ wheat? What would General Mills hope to gain by doing​ so?

General Mills would buy futures contracts in wheat to reduce the risk of prices rising .

B. It was difficult to determine whether an asset bubble existed.

Given the subsequent crash of technology​ stocks, why might the Fed have not intervened during this period of​ time? A. Professional investors were raising alarms. B. It was difficult to determine whether an asset bubble existed. C. Buffet's changed his mind and bought technology stocks. D. The Fed determined no asset bubble existed.

March what futures are trading at $4.20 a bushel and May wheat futures are trading at $4.35 a bushel. You expect the spread between May and March futures prices to widen. To speculate on this view, you would

Go long May futures and short March futures.

September corn futures are currently trading at $3.80 a bushel while the spot price of corn is $3.65 a bushel, so the "basis" (the futures price minus the spot price) is $0.15 a bushel. If you expect the basis to weaken (i.e., to fall) significantly in the next few days, you can speculate on your view by

Going long spot corn and short September futures

A yen depreciation is ____________ news for Sony.

Good.

This is _________ news for U.S.​ consumers, as Japanese goods become _____________ expensive, and __________ news for U.S.​ firms, as the dollar has ____________ against the yen.

Good; less; bad; appreciated.

What is a long position in the futures​ market?

The right and obligation of the buyer to receive or buy the underlying asset on the specified future date.

An option gives the buyer

The right but not the obligation to undertake the trade specified in the contract at maturity

Exchange rate risk

The risk that a firm will suffer losses because of fluctuations in exchange rates

The replication method identifies the price of a USD/GBP forward rate as a function of

The spot USD/GBP exchange rate, the GBP interest rates, and the USD interest rates

At maturity of the forward contract, the following is true of the spot price and delivery price locked-in using the forward contract:

The spot price can be greater, equal to, or less than the delivery price.

In the absence of arbitrage, the futures price at maturity should equal

The spot price of the underlying asset at that point.

Theory of purchasing power parity (PPP)

The theory that exchange rates move to equalize the purchasing power of different currencies

Forward transactions

traders agree today to a forward contract to exchange currencies or bank deposits on a future data at an exchange rate known as the forward rate

Suppose that the interest rate on a​ one-year Treasury bill is currently 7​% and that investors expect that the interest rates on​ one-year Treasury bills over the next three years will be 8​%, 9​%, and 7​%. Use the expectations theory to calculate the current interest rates on​ two-year, three-year, and​ four-year Treasury notes.

two: 7 + 8 = 15/2 = 7.5 three: 7 + 8 + 9 = 24/3 = 8 four: 7 + 8 + 9 + 7 =31/4 7.75

how do you calculate the intrinsic value of a call option?

underlying stock price - strike price

In describing the performance of the Federal Reserve during the Great​ Depression, former Federal Reserve Chairman Ben Bernanke has​ written: "The Fed proved far too passive during the Depression. It was ineffective in its role of lender of last​ resort, failing to stop the runs that forced thousands of small banks to close ...." ​Source: Ben S.​ Bernanke, The Courage to​ Act: The Financial Crisis and Its Aftermath​, New​ York: W.W.​ Norton, 2015, p. 47. A lender of last resort is a ________ that acts as the ultimate source of credit to the _____​, making loans to solvent banks against their ______, but ​illiquid, loans.

central bank banking system good

A ____ increases asset or expense accounts, and decreases liability, revenue or equity accounts.

debit

The foreign exchange value of the dollar falls. It would _______ the cost of U.S. exports and ____ the cost of foreign​ imports, causing the AD curve to shift to the ____

decrease increase right

Which of the following statements is true of the value of European (E) options, American (A) options, and Bermudan (B) options?

(a) (b) (c) (d) Answer a.

A US-based exporter anticipated receiving €100 million in six months, and took a short forward position, locking-in an exchange rate of $1.38/€. If after six months, at maturity, the exporter calculates that she has made a profit of $2 million from the hedging strategy, the spot exchange rate at maturity must be

(a) $ 0.50/€. (b) $ 1.36/€ (c) $1.40/€ (d) $ 2.00/€ Answer b.

An investor enters into a long position in 10 gold futures contracts at a futures price of $1000/oz and closes out the position at a price of $1020/oz. If one gold futures contract is for 50 ounces, what are the investor's gains or losses?

(a) $100 (b) $1,000 (c) $5,000 (d) $10,000 Answer d

The price of oil is $100 per barrel. Oil prices are expected to grow at 4% a year. The one-year risk-free rate of interest is 2% in simple terms. It costs $1 to store a barrel of oil for one year. If oil has no costs or benefits of carry, what is the theoretical one-year forward price of oil?

(a) $100.00 (b) $102.00 (c) $103.02 (d) $104.00 Answer c.

A stock has a current price of $20. The risk-free interest rate for a half-year maturity is 6% and the dividend rate is 3%. Assume continuous compounding. What is the six-month forward price of the stock?

(a) $20.30 (b) $20.61 (c) $20.92 (d) $21.24 Answer a.

Plutonium is trading at a one-year futures price of $5,000 per gram. A futures contract comprises 100 grams. The initial margin is $100,000 and the maintenance margin is $80,000. You are short one futures contract. There is a margin call when the price per gram of plutonium changes to

(a) $4,750 (b) $4,900 (c) $5,100 (d) $5,250 Answer d.

A forward contract is struck at a forward price of $40. At maturity the spot price of the asset is $45. The short forward position earns the following payoff:

(a) $5 (b) -$5 (c) $45 (d) -$45 Answer b.

The spot price of an asset is $50. The expected return on the asset is 10% a year (in simple terms) and the standard deviation of these returns is 20%. The risk-free rate of interest is 5% a year in simple terms. Assuming no costs or benefits of carry, what is the one-year forward price of the asset?

(a) $52.50 (b) $55.00 (c) $57.50 (d) $60.00 Answer a.

How many options does a callable, convertible bond contain?

(a) 0 (b) 1 (c) 2 (d) 3 Answer c. There are two options: (a) the issuer holds a call on the bond, and (b) the buyer has the right to convert the bond into equity. One may extend the idea and say that there is an additional option—the option to default held by the issuer of the convertible. If such a response is provided, then the correct answer would be 3 options, i.e., answer (d).

Eurodollar deposits follow the money-market day-count convention. Suppose a deposit is made for 92 days at a Libor rate of 4% on a notional amount of $100. The interest amount is

(a) 1.0082 (b) 1.0099 (c) 1.0101 (d) 1.0222 Answer d. The eurodollar money-market convention is Actual/360, so the interest is 100×4×92/360 = 1.0222.

The US dollar-euro spot exchange rate is $1.50/€. If the one-year simple interest rate on dollars is 1% and on euro is 2%, what is the one-year forward rate of dollars per euro?

(a) 1.4748 (b) 1.4853 (c) 1.5000 (d) 1.5149 Answer b.

How many years does it take to double your money if the continuously-compounded interest rate is 6%?

(a) 11.55 (b) 12.66 (c) 13.77 (d) 16.66 Answer a. The answer is the solution to the following equation: ln(2) / 0.06 = 11.55

State which of these statements is false

(a) A futures contract is traded on an exchange. (b) A futures contract involves counterparty credit risk. (c) A futures contract is fully customizable. (d) A futures contract may be reversed unilaterally. Answer c.

An investor enters into a forward contract to buy 4,000 barrels of oil in three months at $80 a barrel. At the maturity of the contract, the spot price of oil is $65 a barrel. The investor's payoff (gain/loss) from the forward contract is

(a) A gain of $60,000 (b) A loss of $60,000 (c) A gain of $260,000 (d) A loss of $260,000 Answer b.

The value of the following position for options at the same strike price is always zero

(a) A long call and a long put. (b) A short call and a short put. (c) Both (a) and (b). (d) Neither (a) nor (b). Answer d.

A forward contract may be used for

(a) Hedging price exposure at a future date. (b) Speculating on price. (c) Locking-in a price for a future transaction. (d) All of the above. Answer d.

The relationship of forwards and futures is best represented by the following statement(s)

(a) If futures price movements and interest rate movements are positively correlated, then futures prices will be higher than forward prices. (b) If futures price movements and interest rate movements are negatively correlated, then futures prices will be lower than forward prices. (c) If futures price movements and interest rate movements are uncorrelated, then futures and forward prices will coincide. (d) All of the above. Answer d

If your directional view is that stock prices are going to fall, you should

(a) Sell stock now. (b) Sell call options. (c) Buy put options. (d) All of the above are profitable strategies. Answer d. All or any of these in combination will gain when stock prices fall. Some of the alternatives have less downside in the even that your view is wrong, so depending on your risk appetite, choose the one that is most palatable.

If the market is in backwardation

(a) Spot prices are less than forward prices. (b) Futures prices are less than forward prices. (c) Spot prices are less than futures prices. (d) None of the above. Answer d.

Which of the following statements is true of forward contracts?

A forward contract is customizable and traded over-the-counter.

Quota

A limit a government imposes on the quantity of a good that can be imported

The combination of a position in a covered call and a position in a protective put on a stock index (where the options have the same strike and maturity) is similar to

A long position in a balanced index fund (i.e., long stock and long investment at the risk-free rate).

A calendar spread futures position comprises

A long position in a futures contract of one maturity and a short position in another futures contract of a different maturity.

If you go short a covered call and buy a protective put portfolio on a given stock (with the options having the same strike and maturity), what you have is

A long position in a straddle.

If you are interested in creating a retirement portfolio where the downside is protected and you retain at least some upside, the following portfolio will be consistent with your goal

A long stock position plus a long collar position

A replicating portfolio for a derivative security is

A portfolio that has the same payoffs as the derivative.

C. A high net worth or high income individual.

A publication of the Securities and Exchange Commission​ (SEC) notes that to invest in a hedge​ fund: open double quoteYou generally must be an accredited investor.close double quote ​Source: Securities and Exchange​ Commission, Investor Bulletin​: Hedge Funds. What is an accredited​ investor? A. An investor who has been accredited by the SEC. B. An investor who only buys accredited investments. C. A high net worth or high income individual. D. An investor who completes a financial literacy course.

A long position in a bearish 90/100 call spread plus a long position in a bullish 90/100 put spread for the same maturity is:

A sophisticated approach to borrowing money.

A long position in a FRA can be replicated using

A six-month investment combined with a 9-month borrowing

Suppose that​ Coca-Cola is currently paying a dividend of ​$2.71 per​ share, the dividend is expected to grow at a rate of 7​% per​ year, and the rate of return investors require to buy​ Coca-Cola's stock is 10​%. Calculate the price per share for​ Coca-Cola's stock. The price per share of​ Coca-Cola stock is ​$____. ​(Round your response to two decimal​ places.)

$96.66 Gordon's Growth Model: Pt = Dt x (1+g)/(re - g)

Suppose that an Apple iPhone costs ​$180 in the United​ States, ​£70 in the United​ Kingdom, and ​¥35000 in Japan. what is real exchange rate? for pound and dolalr

($1.80 X​ £70 / $180_

Suppose that the current exchange rate between the yen and the dollar is yen99=​$1 and that the interest rate is 6​% on a​ one-year bond in Japan and 5​% on a comparable bond in the United States. According to the​ interest-rate parity​ condition, what do investors expect the exchange rate between the yen and the dollar to be in one​ year Formula for exchange rate is

(.06-.05) X yen99, then add previous yen

"Basis" risk may arise in a hedging situation if

(a) The expiry date of the futures contract and the date on which the hedge is unwound do not coincide. (b) The futures contract used for hedging relates to a commodity that is somewhat different than that being hedged. (c) A disconnect between spot and futures markets causes the failure of the convergence of futures to spot at expiry of the futures contract. (d) All of the above. Answer d. While (c) is not mentioned explicitly in the text, it evidently causes uncertainty in the cash flows of the hedged position.

The premium of an option is

(a) The price of the option. (b) The value of the right but not the obligation to undertake a purchase or sale of the underlying asset. (c) Is always non-negative. (d) All of the above. Answer d.

You are long an at-the-money straddle on a stock index. Which of the following statements is valid?

(a) Your position increases in value if, ceteris paribus, the index rises. (b) Your position increases in value if, ceteris paribus, the index falls. (c) Your position increases in value if, ceteris paribus, the volatility of the index rises. (d) All of the above. Answer d.

Futures flexibility that lacks compared to forward:

- forwards can choose any date - future may only be given several dates to choose from

futures are better than forwards becasue:

- less counterparty risk (said to be reduced because exchange serves as a "clearing house" that matches up buyers and sellers and the exchange) - lower information costs - more liquid (An asset is said to be liquid if it is easy to sell or convert into cash without any loss in its value)

Consider a condor made up of calls at strikes 90, 95, 100, 105, and a butterfly call spread at strikes 90, 97.5, 105. Which of the following statements is valid?

-A condor is worth more than the butterfly spread irrespective of the level of the stock price. -The condor pays off at least as much as the butterfly spread at all possible stock price levels at maturity. Therefore, it will always be worth more irrespective of what the current stock price might be.

Suppose your portfolio consists of one share of Goldman Sachs (GS) and a European put option on GS with a strike of $105 and a maturity of a year. At maturity, the value of your portfolio must be

-Equal to or greater than $105 -This is a protective put position

You hold the following portfolio: a long position in a European call option on gold with a strike of $975 per oz, a short position in a European put option on gold with a strike of $975 per oz, and a short forward position in gold with a delivery price of $1,000 per oz. All three contracts expire in one month. The value of your position is

-Positive -The combined portfolio results in a guaranteed payoff of $25 after one month, so its value today must be positive

Consider a position in a long straddle at strike 90 and a short straddle at strike 100, both for the same maturity. which of the following properties is valid for this position?

-The payoff is increasing in the stock price. -The portfolio is which is the same thing as being long a 90/100 call bull spread and long a 90/100 put bull spread. Both spreads are bullish, so the combined position is also bullish.

There are three- and six-month American calls on stock. Suppose the three-month option costs $5 and the six-month option costs $3. Which of the following statements is most accurate given this information?

-There is an arbitrage strategy which involves buying the six-month call and selling the three-month call. -American calls must be non-decreasing in price with maturity. Else one can buy the long-dated call, sell the short-dated call, and exercise the long-dated call whenever the short-dated one is exercised.

All of the following are reasons why the Fed​ didn't take action to rescue insolvent​ banks, except:

. Many Fed officials believe that taking such action was poor policy. Your answer is not correct. B. Some Fed officials believed they were barred from lending to insolvent banks. C.answer Some Fed officials​ didn't think the problem was as bad as it was. This is the correct answer. D. Moral hazard.

For each of the following events, is the immediate problem of a typical bank most likely to be illiquidity or insolvency: 1) The government closes the FDIC and there is no longer deposit insurance. 2) The economy goes into a recession. 3) The central bank doubles the required reserve requirements.

1) Illiquidity 2) Insolvency 3) Illiquidity

Which of the following are advantages of pegging?

1) Protection for firms that have taken out loans in foreign currencies. 2) A check against inflation.

What are the​ Fed's traditional monetary policy​ tools?

1) Reserve requirements. 2) Open market operations. 3) Discount policy.

Which of the following is true of quantitative easing​ (QE)?

1) The Fed increases the supply of reserves beyond the level needed maintain its target federal funds rate. 2) It is a useful tool when the target federal funds rate is near zero.

If Europeans become​ wealthier, what changes should we observe in the​ dollar-euro market?

1) The demand for dollars will increase. 2) The euro will depreciate relative to the dollar.

What key assumptions does the Gordon growth model​ make?

1-The required rate of return is greater than the dividend growth rate of the stock. 2-The growth rate of dividends is constant. 3-Investors receive their first dividend immediately rather than at the end of the year.

Suppose that the U.S. firm Alcoa sells ​$3 million worth of aluminum to a British firm. If the exchange rate is currently $1.72=£1 and the British firm will pay Alcoa £1,744,186.05 in 90​ days, answer the following questions. 1. What​ exchange-rate risk does Alcoa face in this​ transaction? 2. What alternatives does Alcoa have to hedge this​ exchange-rate risk? 3.To hedge this​ exchange-rate risk, Alcoa can sell ________________pounds for dollars at the forward rate to hedge the risk of the pound __________

1. A falling British pound. 2. Alcoa can buy options contracts. Alcoa can enter into a forward contract. Alcoa can sell currency futures. 3. 1,744,186.05, falling

most important derivatives:

1. forward contracts 2. futures contracts 3. options contracts 4. swaps

If the exchange rate between the yen and the dollar changes from ¥74 ​= $1 to ¥82 ​= $1, the yen has _________ against the​ dollar, and the dollar has __________ against the yen.

1. depreciated 2. appreciated

After the United​ Kingdom's electorate voted on June​ 23, 2016 to leave the European Union an article in the Wall Street Journal​ noted: "​Credit-default swaps on the debt of Bank of America and Citigroup Inc. are up​ 25% from a day earlier." ​Source: John​ Carney, "Bank Credit Default Swaps Surge on Brexit ​Fears," Wall Street Journal​, June​ 24, 2016. The increase in the ________ of​ credit-default swaps on these bonds indicates investors believe the default________ on Bank of America and Citigroup Inc. debt has _________ from the previous day. What likely happened to the yields on those​ bonds?

1. price 2. risk 3. increased The yield increased as the price of the bonds decreased.

An option writer is the _____________ of an option and​ he/she has _______________ the underlying asset.

1. seller 2. the obligation to sell

hedging involves taking a ____ position in the futures market to offset a ___ position in the spot market or taking a ____ position in the futures market to offset ____ in the spot market

1. short 2. long 3. long 4. lomg

Consider the following listing for​ 10-year Treasury note futures on the Chicago Board of Trade. One futures contract for Treasury note=$100,000 face value of​ 10-year 6% notes. Month Last Chg Open High Low Volume OpenInt Dec​ '12 ​108'18.5 ​0'03.5 ​108'13.0 ​108'21.0 ​108'06.5 ​564,322 ​2,380,328 Mar​ '13 ​108'07.0 ​0'05.5 ​108'00.0 ​108'05.0 ​107'26.0 ​4,325 ​118,728 Jun​ '13 ​107'27.0 ​0'05.5 ​107'27.0 ​107'27.0 ​107'21.5 2 19 Sep​ '13 ​107'21.5 ​0'05.5 ​107'21.5 ​107'21.5 ​107'21.5 0 0 Dec​ '13 ​107'21.5 ​0'05.5 ​107'21.5 ​107'21.5 ​107'21.5 0 0 If on this day you bought two contracts expiring in December​ 2012, you would have paid ​$ ______. ​(Round your response to the nearest whole​ number.) The OpenInt on the contract expiring in March 2013 was______.

217156 The last price for the contract in the first row is​ $108. Thus: 18.5/32 =0.578125 ​, or ​$108.578125 per​ $100 of face value. The futures contracts for U.S. Treasury notes are standardized at a face value of​ $100,000 of​ notes, or the equivalent of​ 1,000 notes of​ $100 face value each.​ Therefore, the price of this contract​ is: $ 108.578125 * 1,000 = $ 108,578.125. ​So, the price of two contracts​ is: $ 108,578.125 * 2 = $ 217,156.250. 118728

Now suppose that a customer of National Bank of Guerneville writes a check for ​$2 million to a real estate broker who deposits the check at Commonwealth. After the check​ clears, how much in excess reserves does each bank​ have?

35 (checkable deposits)- 2 = 33 33 x .1 = 3.3 2-3.3 = -1.3 42 + 2 = 44 44 x .1 = 4.4 5 million in reserves + 2 = 7 7-4.4 = 2.6

Suppose that National Bank of Guerneville has ​$35 million in checkable​ deposits, Commonwealth Bank has ​$42 million in checkable​ deposits, and the required reserve ratio for checkable deposits is​ 10%. If National Bank of Guerneville has​ $4 million in reserves and Commonwealth has​ $5 million in​ reserves, how much in excess reserves does each bank​ have? ​(Enter your answers rounded to one decimal​ place.)

35 x 0.1 = 3.5 4-3.5 = 0.5 national bank of G had 0.5 in excess reserves 42 x 0.1 - 4.2 5 - 4.2 = 0.8 common wealth bank has 0.8

Suppose that at the beginning of the​ year, you buy a share of IBM stock for ​$146. If during the year you receive a dividend of ​$1.26 and IBM stock is selling for ​$159 at the end of​ year, what was your rate of return from investing in the​ stock? The rate of return is ___________%. ​(Round your response to two decimal​ places.)

9.77%

A long position in a eurodollar futures contracts expiring in June may be used to hedge interest-rate exposure resulting from a planned

90-day investment beginning in June

What is the difference between a spot transaction and a forward transaction in the​ foreign-exchange market?

A spot transaction is trade today​, and a forward transaction is trade in the future.

standard of deferred payment

A ______ is a characteristic of money by which it facilitates exchange over time.

unit of account

A ______ is a way of measuring value in an economy in terms of money.

large open economy

A __________ is an economy in which total saving is large enough to affect the world interest rate

small open economy

A ____________ is an economy in which total saving is too small to affect the world real interest rate

closed economy

A ____________ is an economy where households, firms, and governments do not borrow or lend internationally

B. is the process by which depositors who have lost confidence in a bank simultaneously withdraw enough funds to force the bank to close.

A bank run A. occurs when the majority of commercial banks in the country withdraw their reserve funds from the central bank. B. is the process by which depositors who have lost confidence in a bank simultaneously withdraw enough funds to force the bank to close. C. involves a bank increasing its holdings of demand deposits. D. is a reduction of the interest below zero.

What do the authors mean by a​ "contagion of​ fear"?

A bank run that is fueled by fear of bank failure.

Which of the following securities is not a derivative?

A bond issued by a BBB-rated corporate firm

What are the two methods that governments typically use to avoid bank​ panics? ​(Check all that apply.​)

A central bank can act as a lender of last resort. Your answer is correct. C. The government can insure deposits.

C. Technology stocks were rising with the​ dot-com boom.

A column in the Wall Street Journal mentions the famous billionaire investor "Warren ​Buffet, who in 1999 and early 2000 was widely derided as​ 'a dinosaur' and​ 'out of​ touch' for his refusal to buy technology stocks." ​Source: Jason​ Zweig, "When Does A Bubble Spell ​Trouble?" Wall Street Journal​, January​ 10, 2014. Why would anyone refer to an investor as out of touch if he​ wasn't investing in technology stocks in 1999 and early​ 2000? A. Investor expectations for technology stocks were based on the proven performance of​ long-term market leaders. B. Technology stocks were overvalued in what is known as a "bubble". C. Technology stocks were rising with the​ dot-com boom. D. Technology companies were generated huge profits at the time.

A profit from the sale of an investment.

A column in the Wall Street Journal​, asks the​ question: open double quoteAre capital gains so different from earned income that they should be taxed at a different ​rate?close double quote ​Source: Scott Sumner and Leonard E.​ Burman, open double quoteIs It Fair to Tax Capital Gains at Lower Rates Than Earned ​Income?close double quote Wall Street Journal​, March​ 1, 2015. What is a capital​ gain?

C. A and B only.

A columnist in the Economist argues​ that: The past ten years have dealt a series of blows to​ efficient-market theory, the idea that asset prices accurately reflect all available information. In the late 1990s dotcom companies with no profits and barely any earnings were valued in billions of​ dollars; and in 2006 investors massively underestimated the risks in bundling together portfolios of American subprime mortgages. Source​: ​Buttonwood, "The Grand​ Illusion," Economist​, May​ 5, 2009. Explain how the incidents this columnist discusses may be inconsistent with the efficient markets hypothesis. A. Despite the availability of​ information, investors overvalued the price of tech stocks for an extended period of​ time, which may indicate that asset prices do not accurately reflect all available information. B. The magnitude of the​ market's inability to assess value in technology stocks and to assess risk in​ mortgage-backed securities may indicate that asset prices do not accurately reflect all available information. C. A and B only. D. Neither answer is correct.

Suppose that the U.S. firm Alcoa sells ​$4 million worth of aluminum to a British firm. If the exchange rate is currently $ 1.84 equals pound 1 and the British firm will pay Alcoa pound2 comma 173 comma 913.04 in 90​ days, what exchange risk do they face? What alternatives do they have to exchange change risk?

A falling British pound. Alcoa can enter into a forward contract. Alcoa can buy options contracts. Alcoa can sell currency futures.

Would a farmer buy or sell futures​ contracts? What would a farmer hope to gain by doing​ so?

A farmer would sell futures contracts to reduce the risk of agricultural prices falling

Suppose you are short a call and long a put on the S&P 500 index with the same strike and same maturity. Then, you are essentially holding

A short forward on the S&P 500 index

A combination of a long position in a strip and a long position in a strap for the same strike and maturity (and with similar but opposite proportions of calls and puts) is similar to:

A straddle position.

You anticipate a recession with increased stock volatility and greater negative skewness in stock prices. Which of the following option positions would be most consistent with your view?

A strip.

No, exchange rates do not measure the wealth of a country.

A student makes the following​ observation: It currently takes 80 yen to buy 1 U.S.​ dollar, which shows that the United States must be a much wealthier country than Japan. But it takes more than 1 U.S. dollar to buy 1 British​ pound, which shows that Great Britain must be a wealthier country than the United States. Do you agree with the​ student's reasoning?​ Why?

No, these indexes are averages of stock prices and indicate the overall performance of the stock market.

A student makes the following​ observation: "The Dow Jones Industrial Average currently has a value of​ 13,500, while the​ S&P 500 has a value of​ 1,500. Therefore, the prices of the stocks in the DJIA are nine times as high as the price of the stocks in the​ S&P 500." Is the​ student's observation​ correct?

No, these shares were likely traded in the secondary​ market, so General Electric would not receive any of the money.

A student​ remarks: "135,000,000 shares of General Electric were sold yesterday on the New York Stock​ Exchange, at an average price of​ $25 per share. That means General Electric just received a little over​ $3.4 billion from​ investors." Do you agree with the​ student's analysis?

What difficulties did credit default swaps cause during the financial crisis of 2007-​2009?

A. Because credit default swaps were NOT issued against collateralized debt​ obligations, but should​ have, (CDOs), owners of those securities experienced severe losses when the price of the underlying security declined in value. B. Those selling credit default swaps undercharged buyers relative to the actual risk involved.​ Thus, when buyers attempted to collect on payments from the price​ declines, firms lacked sufficient collateral to meet their obligations and faced possible bankruptcy.

Despite these potential​ drawbacks, economists and members of Congress overwhelmingly support deposit insurance for all of the following​ reasons, except:

A. FDIC monitors and addresses risks to deposit insurance funds. B. FDIC limits the effect on the economy when a bank fails. C. answer FDIC protects every dollar a customer has in a bank. This is the correct answer. D. FDIC promotes public confidence in the U.S. financial system.

Which from the following are​ off-balance-sheet activities? ​(Check all that​ apply.)

A. Loan sales. D. Standby letters of credit. E. Trading activities. . F. Loan commitment.

Which of the following is true regarding the bursting of the housing bubble in the U.S.​ economy?

A. Many financial assets were based on the bet that housing prices would only increase. B. Once housing prices started to​ fall, the banks that owned​ mortgaged-backed securities experienced losses. C. Once housing prices started to​ fall, homeowners realized their mistake and began defaulting on their mortgages.

According to the theory of purchasing power​ parity, what should happen to the value of the U.S. dollar relative to the Mexican peso if the following​ occurs? Over the next 10 years, the U.S. experiences an average annual inflation rate of 3%, while Mexico experiences an average annual inflation rate of 8%.

A. The peso depreciates relative to the dollar.

A columnist writing in the Wall Street Journal​ observed: "Franklin D.​ Roosevelt's March 1933 inaugural line​ 'that the only thing we have to fear is fear​ itself' was​ inspiring, but wrong. There was plenty to​ fear, not least the deflation that then gripped the nation". ​Source: George​ Melloan, "Rising Global Debt and the Deflation ​Threat," Wall Street Journal​, March​ 7, 2016. All of the following are reasons why deflation might not be good for​ consumers, except:

A. it causes higher interest rates. B. it causes nominal wage cuts. C.answer it causes lower interest rates. Your answer is correct. D. it causes a higher burden of debt ratio.

Suppose that the Dow Jones Industrial Average is above the 12,500 level. If the Dow were to fall to 9,500​, who would gain the​ most? A. Investors who had bought put options. B. Investors who had sold call options. C. Investors who had sold put options. D. Investors who had bought call options. Who would be hurt the​ most? A. Investors who had sold put options. B. Investors who had bought put options. C. Investors who had bought call options. D. Investors who had sold call options.

A. Investors who had bought put options. A. Investors who had sold put options.

The presence of the delivery option in a futures contract means that

All else remaining the same, a futures contract will trade at a lower price than a forward

What services do forward contracts provide in the financial​ system? ​(Check all that apply​) A. They allow an agreement in the present to exchange a given amount of a commodity or a financial asset at a particular date in the future for a set price. B. They allow firms to delay signing contracts until a commodity or financial asset is actually delivered. C. They allow transactions to be agreed to in the present but to be settled in the future. D. They add additional risk to the market which increases the returns that farmers earn since demand for agricultural products is usually price elastic. E. They give firms and investors an opportunity to hedge the risk on transactions that depend on future prices.

A. They allow an agreement in the present to exchange a given amount of a commodity or a financial asset at a particular date in the future for a set price. C. They allow transactions to be agreed to in the present but to be settled in the future. E. They give firms and investors an opportunity to hedge the risk on transactions that depend on future prices.

All of the following are​ ways, other than through their effects on aggregate​ demand, that higher exchange rates can affect the U.S.​ economy, except: A. increase the prices of imports. B. help U.S. firms that import products for resale. C. reduce the price of imports. D. hurt U.S. exporters.

A. increase the prices of imports.

Two stocks, A and B, have expected returns for one year of and respectively. The stocks have identical prices of $100 each, do not pay dividends, and the one-year risk-free rate of return is 2% in simple terms. The one-year forward prices of the two stocks are:

A; 102; B: 102

A. Day-to-day movements in currencies are driven by the news. B. Day-to-day movements in currencies are driven by​ short-term economic events. C. Day-to-day movements in currencies can be driven by a large degree of random movements. long-run, long

According to a survey of professional​ foreign-exchange traders, the theory of purchasing power parity is considered to be​ "academic jargon." ​Source:​ Cheung, Yin-Wong, and Menzie David​ Chinn, "Currency Traders and Exchange Rate​ Dynamics: A Survey of the​ U.S.Market," Journal of International Money and​ Finance, Volume​ 20, Issue​ 4, August​ 2001, pp.​ 439-471. Which of the following are reasons why​ foreign-exchange traders might not find PPP to be useful as they trade currencies​ day-to-day? ​(Check all that ​apply): A. Day-to-day movements in currencies are driven by the news. B. Day-to-day movements in currencies are driven by​ short-term economic events. C. Day-to-day movements in currencies can be driven by a large degree of random movements. D. Day-to-day movements in currencies are driven by​ long-term economic events. PPP is a ______ theory that generally only holds over a ______ period of time.

Invest in index funds.

According to an article in the New York Times​, "millions of amateur investors continue to actively buy and sell securities regularly." ​Source: Gary​ Belsky, "Why We Think​ We're Better Investors Than We ​Are," New York Times​, March​ 25, 2016. What alternative strategy might be better for an investor to follow instead of actively buying and selling securities​ regularly?

leftward, rightward, lower increase, greater, greater

According to an article in the Wall Street Journal in early​ 2016, "U.S. government bonds maturing in more than 25 years returned a negative​ 1.2% in the month through Thursday ... after chalking up a​ 8.7% gain between January and March.... The reversal reflects a shift in financial​ markets' preoccupation from the prospect of a recession to the risk of higher inflation." ​Source: Min​ Zeng, "It ​Didn't Pay to Bet Against Inflation in ​April," Wall Street Journal​, April​ 29, 2016. An increase in expected inflation will shift the demand curve _____ and the supply curve _____, resulting in a new equilibrium with a _____ price. An increase in expected inflation will _____ the nominal interest rate on both​ short-term and​ long-term bonds. The longer the maturity of a​ bond, the _____ the change in price as a result of a change in market interest rates. As a​ result, capital losses on​ long-term bonds will be _____ than capital losses on​ short-term bonds.

Aaa

According to an article in the Wall Street Journal​, in May​ 2016, open double quoteSocial Finance​ Inc., known as​ SoFi, for the first time received the highest possible credit rating from​ Moody's on a new bond deal.close double quote ​Source: Telis Demos and Peter​ Rudegeair, open double quoteOnline Lender​ SoFi's Bond Deal Receives Highest​ Moody's ​Rating,close double quote Wall Street Journal​, May​ 21, 2016. What is​ Moody's highest possible credit​ rating?

appreciate, lower

According to the theory of purchasing power​ parity, if the inflation rate in Japan is lower than the inflation rate in​ Canada, what should happen to the exchange rate between the Japanese yen and the Canadian dollar in the long​ run? In the long​ run, the Japanese yen will ______ relative to the Canadian dollar because of _____ inflation in Japan.

B. The peso depreciates relative to the dollar.

According to the theory of purchasing power​ parity, what should happen to the value of the U.S. dollar relative to the Mexican peso if the following​ occurs? The United States puts quotas and tariffs on many imported goods. nothing. A. The value of the peso does not change relative to the dollar. B. The peso depreciates relative to the dollar. C. The peso appreciates relative to the dollar. D. There is not enough information to answer the question.

The obligation the bond issuer has to pay the bond holder.

According to​ Moody's, "Obligations rated Aaa are judged to be of the highest​ quality, with minimal credit​ risk." ​Source: ​Moody's Investors​ Services, ​Moody's Rating Symbols and Definitions​, September​ 2012, p.5. What​ "obligations" is​ Moody's referring​ to?

What is the difference between adaptive expectations and rational​ expectations?

Adaptive expectations assume that​ investors' expectations are based on past values of a​ variable, whereas rational expectations assume that investors make forecasts of future values using all available information.

Why does the article describe additional easing as​ "pushing on a​ string"?

Additional easing would only create more reserves in the economy and since the​ "policy rate is effectively​ zero", those increases would not stimulate additional loans.

What is the difference between moral hazard and adverse​ selection?

Adverse selection occurs when bad risks are more likely to​ seek/accept a financial contract than are good risks. Moral hazard occurs in financial markets when borrowers use borrowed funds differently than they would have used their own funds.

"Insurance companies often suspect the only people who buy insurance are the ones most likely to​ collect." What do economists call the problem being described​ here?

Adverse selection.

​"A bank that expects interest rates to fall will want the duration of its assets to be greater than the duration of its liabilities​ - a positive duration​ gap." Do you agree with this​ statement?

Agree. A fall in interest rates with a positive duration gap will increase a​ bank's capital.

"Simply put, the Fed must choose between managing the level of reserves and managing rates. It cannot do​ both." Do you agree?

Agree. In the federal funds​ market, the federal funds rate is the​ "price" and reserves are the​ "quantity". Only one of these variables can be controlled at any one time.

​"A bank that expects interest rates to increase in the future will want to hold more​ rate-sensitive assets and fewer​ rate-sensitive liabilities." Do you agree with this​ statement?

Agree.​ Rate-sensitive assets will increase in value thus holding more of them as​ assets, while reducing them as​ liabilities, will increase bank profits.

D. noise trading.

All of the following are concepts from behavioral economics that help us understand how people make choices in financial​ markets, except: A. overconfidence. B. loss aversion. C. hindsight bias. D. noise trading.

C. Rating agencies charge investors for their services.

All of the following are reasons why investors might be concerned about​ Moody's rating of these​ bonds, except: A. Rating agencies charge issuers for their services. B. SoFi chose the agency that rated its bonds. C. Rating agencies charge investors for their services. D. Moody's may have an incentive to give higher ratings than might be justified.

Which option gives the right to sell an asset at any time prior to or at maturity?

American put

A swap​ is:

An agreement between two or more counterparties to exchange sets of cash flows over some future period.

The term is sometimes used to refer to borrowing at a low​ short-term interest rate and then using the borrowed funds to invest at a higher​ long-term interest rate.

An anonymous billionaire investor was quoted in the Wall Street Journal as​ asking: "Has there ever been a carry trade that​ hasn't ended​ badly?" What is a carry​ trade?

That demand was​ decreasing, causing interest rates to rise.

An article appeared in the New York Times in 2012 under the headline​ "Spanish Bond Yields​ Soar." ​Source: Raphael Minder and Liz​ Alderman, "Spanish Bond Yields​ Soar," New York Times​, July​ 23, 2012. What does this headline tell us about the demand for Spanish government​ bonds?

impossible, existing

An article in the Economist notes that according to the efficient markets​ hypothesis: "Buying shares in Google because its latest profits were​ good, or because of a particular pattern in the price​ charts, was unlikely to deliver an excess return." ​Source: "​What's Wrong with ​Finance," Economist​, May​ 1, 2015. The efficient market hypothesis states it is ______ to "beat the market" because stock market efficiency causes ______ share prices to always incorporate and reflect all relevant information.

fewer D. Japanese products become more expensive in foreign markets. A. A high yen makes imports less​ expensive, which could lead to deflationary​ conditions, boosting the purchasing power of the elderly population.

An article in the New York Times observes that the high value of the yen "is dealing crippling blows to the​ country's once​ all-important export machine." The article also​ observes, though, that "a high yen benefits​ Japan's rapidly expanding elderly population." ​Source: Martin​ Fackler, "Strong Yen Is Dividing Generations in ​Japan," New York Times​, July​ 31, 2012. A "high yen" means that it takes ______ yen to exchange for one U.S. dollar. How does a high yen hurt Japanese​ exports? A. Japanese producers would rather sell their products in the domestic market. B. Japan's domestic demand outstrips​ supply, leading to a decrease in exports. C. Japanese products become less expensive in foreign markets. D. Japanese products become more expensive in foreign markets. How might a high yen help the elderly population in​ Japan? A. A high yen makes imports less​ expensive, which could lead to deflationary​ conditions, boosting the purchasing power of the elderly population. B. The debt of the elderly population is now cheaper to repay. C. A high yen counteracts the inflation that accompanies​ it, boosting the purchasing power of the elderly population. D. The savings of the elderly population is now worth more.

B. Traditional plans are​ "defined benefit​ plans" whereas​ 401(k) plans are​ "defined contribution​ plans."

An article in the New York Times observes that​ 401(k) plans: have largely supplanted traditional pensions and become the central pillar of​ America's employer-sponsored retirement​ system, with 60 million workers participating in them. ​Source: Steven​ Greenhouse, "Should the​ 401(k) Be Reformed or​ Replaced?" New York Times​, September​ 11, 2012. What are​ "traditional pension​ plans," and how do they differ from​ 401(k) plans? A. Traditional plans grant employees ownership of the funds while​ 401(k) plans give employers ownership of the funds. B. Traditional plans are​ "defined benefit​ plans" whereas​ 401(k) plans are​ "defined contribution​ plans." C. Traditional plans yield a contingent dollar benefit payment while​ 401(k) plans promise employees a particular dollar benefit payment. D. All of the above. E. A and C only.

C. occurs when house prices move beyond their fundamental values.

An article in the New York Times quoted former Fed Chairman Alan Greenspan as arguing in​ 2010: ​"The global house price bubble was a consequence of lower interest​ rates, but it was​ long-term interest rates that galvanized home asset​ prices, not the overnight rates of central​ banks, as has become the seemingly conventional​ wisdom." Source​: Sewell​ Chan, "Greenspan Concedes That the Fed Failed to Gauge the​ Bubble," New York Times​, March​ 18, 2010. A house price bubble A. means that asset prices have increased beyond the point that could be justified by property appraisers. B. means that asset prices have decreased below the point that could be justified by fundamental evaluation. C. occurs when house prices move beyond their fundamental values. D. means that the decline in the housing market caused a decrease not only in spending on residential​ construction, but also affected markets for furniture and appliances.

D. all of the above

An article in the Wall Street Journal contained the​ following: "Burberry Group issued a surprise profit warning on Tuesday. . . . The announcement sent​ Burberry's stock down​ 21%." ​Source: Paul Sonne and Peter​ Evans, "Burberry Sends a​ Warning," Wall Street Journal​, September​ 12, 2012. Buying stock in a company gives an investor a legal claim on​ _____. A. a​ firm's profits B. a​ firm's equity C. the value of a​ firm's assets minus the value of its liabilities D. all of the above

Index funds.

An article in the Wall Street Journal described "a sea change in the fund business in which investors are increasingly opting for products that track the market rather than relying on managers to pick winners." ​Source: Kirsten​ Grind, "Investors Pour Into​ Vanguard, Eschewing Stock ​Pickers," Wall Street Journal​, August​ 21, 2014. Based on the information in the​ article, which of the following investments are investors increasingly​ choosing?

C. Efficient markets hypothesis.

An article in the Wall Street Journal in​ 2016, observed that the price of​ Apple's stock had started to decline a year before "when fears of an iPhone slowdown surfaced." At the time the article was​ written, the author claims​ that, "The iPhone slump is now more than priced in." ​Source: Dan​ Gallagher, "Apple Has Upside as Investors ​Worry," Wall Street Journal​, April​ 24, 2016. Which of the following best explains the​ author's comment, "The iPhone slump is now more than priced in"? A. Unsystematic risk component of equity premium. B. Equity premium. C. Efficient markets hypothesis. D. Systematic risk component of equity premium.

sells, to, buy

An article in the Wall Street Journal noted that the Fed sets "the lower​ bound, or a floor under​ short-term rates, with the interest rate it pays institutions like​ money-market funds on ... reverse repurchase agreements." ​Source: Michael S. Derby and Katy​ Burne, "Fed Bolsters Tool Kit for Lifting Interest ​Rates,"Wall Street Journal​, December​ 16, 2015. With a reverse repurchase agreement the Fed ___a security ___ a financial firm while at the same time promising to ___ the security back the next day.

buy a set portfolio of stocks, frequently buy and sell individual stocks

An article in the Wall Street Journal says this about Burton​ Malkiel: "Even before index funds​ existed, the​ now-retired Princeton University professor argued that they could outperform actively managed funds....." ​Source: Silvia​ Ascarelli, "Burton Malkiel Is Still an Indexing​ Fan, but a​ 'Smart Beta' ​Skeptic," Wall Street Journal​, May​ 8, 2016. Index funds ______, whereas actively managed funds ______ .

Dollar deposits in banks outside the United States.

An article on the web site of the Financial Times describes Eurodollars as "dollars which somehow escaped the US system.close double quote ​Source: Izabella​ Kaminska, open double quoteAll about the ​Eurodollars," ft.com​, September​ 5, 2014. Eurodollars​ are:

Why is the AD curve downward​ sloping?

An increase in the price level decreases real money​ balances, which raises the interest rate. The higher interest rate decreases consumption​ spending, investment​ spending, and net exports.

Foreign Exchange Market

An over the counter market where international currencies are traded

3. A derivative security derives its value from an "underlying" security that is

Any other security

According to the theory of purchasing power​ parity, if the inflation rate in Japan is lower than the inflation rate in​ Canada, what should happen to the exchange rate between the Japanese yen and the Canadian dollar in the long​ run? -In the long​ run, the Japanese yen will _____________ relative to the Canadian dollar because of _____________ inflation in Japan.

Appreciate; lower.

C. Yes, employees must now make informed decisions minus not an easy task.

Are there any reasons why​ 401(k) plans might be less desirable to employees​? A. Yes, these plans invite government intrusion into the​ employer-employee relationship. B. No, employees are unambiguously better off with these plans. C. Yes, employees must now make informed decisions minus not an easy task. D. A and C are correct.

C. Yes, employers may no longer reap any excess of plan funds.

Are there any reasons why​ 401(k) plans might be less desirable to employers​? A. Yes, these plans invite government intrusion into the​ employer-employee relationship. B. No, employers are unambiguously better off with these plans. C. Yes, employers may no longer reap any excess of plan funds. D. A and C are correct.

A. Yes. Some would argue that the Bank of United States was not as interconnected as​ Friedman/Schwartz argue because there is not a lot of evidence that other bank failures were tied to this particular​ bank's failure.

Are there counterarguments to​ Rolnick's view? A. Yes. Some would argue that the Bank of United States was not as interconnected as​ Friedman/Schwartz argue because there is not a lot of evidence that other bank failures were tied to this particular​ bank's failure. B. No. There are no counterarguments to this view.

A. one of the largest banks at the​ time, and it failed in December​ 1930, largely from falling real estate prices.

Arthur Rolnick of the Federal Reserve Bank of Minneapolis has argued that in their account of the failure of the Bank of United​ States: Friedman and Schwartz provide the rationale for the policy that today is known as​ "too big to ​fail"long dashthat there are some institutions that are so big that we​ can't afford to let them fail because of the systemic impact on the rest of the economy.... They suggest that if the Fed had rescued this​ bank, the Great Depression might only have been a​ short, albeit​ severe, recession. Source​: Arthur J.​ Rolnick, "Interview with Ben S.​ Bernanke," Federal Reserve Bank of​ Minneapolis, The Region​, June 2004. What was the Bank of United​ States, when did it​ fail, and why did it​ fail? The Bank of United States was A. one of the largest banks at the​ time, and it failed in December​ 1930, largely from falling real estate prices. B. labeled by​ Friedman/Schwartz as too big to​ fail, but it failed in October 1929 largely from falling​ T-bills. C. one of the largest banks at the​ time, and it failed in August 1929 largely from a real estate boom. D. labeled by​ Friedman/Schwartz as too big to​ fail, but it failed in October 1929 largely from mortgage defaults.

Why is the demand curve for foreign exchange downward​ sloping?

As the exchange rate​ falls, it becomes cheaper to convert a foreign currency into​ dollars, so there is a larger quantity of dollars demanded.

Using a linear regression of changes in spot asset prices on changes in futures asset prices, the minimum-variance hedge ratio may be obtained

As the slope coefficient in the regression.

Two assets and have the same spot price today. Asset is expected to grow at 10% over the year and asset is expected to grow at 12%. Which of the following is true if there are no holding costs or benefits for either asset?

Asset 's one-year forward price will be equal to that of asset .

Two assets and have the same spot price today. The price of asset is expected to grow at 10% over the next year and that of asset is expected to grow at 10% also. Asset has a standard deviation of returns of 10% over the year and asset has standard deviation of 15%. Which of the following is true if there are no holding costs or benefits?

Asset 's one-year forward price will be equal to that of asset .

Suppose that​ Lena, who has an account at SunTrust​ Bank, writes a check for ​$110 to​ Jose, who has an account at National City Bank. Use following the​ T-account for SunTrust Bank to show how it is affected after the check clears. Use following the​ T-account for National City Bank to show how it is affected after the check clears.

Assets Liabilities Reserves (110) Checkable deposits (110) Assets Liabilities Reserves 110 Checkable deposits 110

describe derivatives

Assets that derive their economic value from an underlying​ asset, such as a stock or bond, often used to hedge against risk, used to speculate.

The key accounting equation on which balance sheets are based is given by

Assets​ = Liabilities​ + Shareholders' Equity.

​15/(1.04^3) + 15/(1.04^2) + 15/1.04 = $39.4 million

Assume for simplicity that Scherzer receives his​ $15 million per year salaries for​ 2018, 2019, and 2020 at the end of each calendar year. The interest rate for this period of time is​ 7%. The present value of the salaries he will receive for these three years on January​ 1, 2018 is approximately______

$92 four years from now

Assume that the interest rate is 13​%. What would you prefer to​ receive?

A. At the interest rate the Fed pays on​ banks' reserve balances.

At what interest rate does the demand curve for reserves become perfectly​ elastic? A. At the interest rate the Fed pays on​ banks' reserve balances. B. At the equilibrium federal funds rate. C. At the discount rate the Fed sets. D. The demand curve for reserves never becomes perfectly elastic.

Which of the following will NOT shift the aggregate demand curve to the​ right? A. an increase in investment B. an increase in the money supply C. a decline in the price level D. an increase in government expenditures

C. a decline in the price level

In the early to​ mid-2000s, stock prices and housing prices rose substantially. What effect would these increases in household wealth have on the savings​ rate? A. The savings rate would not change. B. The savings rate would decrease. C. The savings rate would increase.

B. The savings rate would decrease. Your answer is correct.

Which of the following would shift the aggregate demand curve to the​ left? A. an increase in the money supply B. an expected decrease in future income C. a cut in federal income taxes D. an increase in the price level

B. an expected decrease in future income Your answer is correct.

Why would low oil prices cause airlines to be "burned"? A. Airlines would be on the hook to sell oil at an above market cost. B. Airlines would be on the hook to buy oil at an above market cost. C. Airlines would be on the hook to buy oil at a below market cost. D. Airlines would be on the hook to sell oil at a below market cost.

B. Airlines would be on the hook to buy oil at an above market cost.

Which of the following is a correctly explained key feature of the financial​ system? ​(Check all that​ apply.) A. Debt contracts usually require collateral or restrictive covenants. The purpose of the collateral is to reduce adverse selection. B. Debt contracts usually require collateral or restrictive covenants. The purpose of the collateral is to reduce moral hazard. C. Loans from financial intermediaries are the most important external source of funds for​ small- to​ medium-sized firms. Financial intermediaries can reduce the transaction costs of borrowing for small firms. D. The stock market is a less important source of external funds to corporations than is the bond market. This is because there is less moral hazard involved with bonds than with stocks. E. The bond market is a less important source of external funds to corporations than is the stock market. This is because there is less moral hazard involved with stocks than with bonds. F. Trade credit is the most important external source of funds for​ small- to​ medium-sized firms. Trade credit can reduce the transaction costs of borrowing for small firms.

B. Debt contracts usually require collateral or restrictive covenants. The purpose of the collateral is to reduce moral hazard. C. Loans from financial intermediaries are the most important external source of funds for​ small- to​ medium-sized firms. Financial intermediaries can reduce the transaction costs of borrowing for small firms. D. The stock market is a less important source of external funds to corporations than is the bond market. This is because there is less moral hazard involved with bonds than with stocks.

if you think interest rates will be lower, you will

BUY as a speculator. Margin account will be debited

Suppose that Bank of America sells ​$10 million in Treasury bills to PNC Bank. Use​ T-accounts to show the effect of this transaction on the balance sheet of each bank.

Bank of America Assets Liabilities Reserves ​ $10 mil Securities ​$−10 mil PNC Bank Assets Liabilities Reserves ​ $−10 mil Securities ​$10mil

What do the authors mean that​ "such contagion knows no geographical​ limits"?

Bank panics may start in an isolated​ area, but the fear they engender quickly spreads to banks elsewhere.

How do banks manage liquidity​ risk? ​(Check all that apply.​)

Banks can increase their borrowings to cover liquidity risk. Banks manage this risk by keeping some funds very​ liquid, such as in the federal funds market. Banks manage this risk by keeping some funds very​ liquid, such as a reverse repurchase agreement.

How does deposit insurance encourage banks to take on too much​ risk?

Banks can make riskier investments without worrying about deposit withdrawals because the government has insured depositors against losses.

How do banks manage credit​ risk?

Banks can manage credit risk by diversifying their assets. B. Banks can manage credit risk by performing credit risk​ analysis, requiring borrowers to put up​ collateral, and using credit rationing. C. Banks can manage risk by creating​ long-term business relationships by which the bank could acquire information about the creditor

decreasing, inversely

Based on the headline above the price of Spanish government bonds were ______ since the price of a bond and its yield are ______ related.

An investor who holds a short call option on IBM stock is implicitly

Bearish on direction and volatility

A history of deposit insurance on the Web site of the FDIC notes​ that: "Some have argued at different points in time that there have been too few bank failures because of deposit​ insurance, that it undermines market​ discipline, ... and that it amounts to a federal subsidy for banking companies." ​Source: FDIC Bureau of Research and​ Statistics, "A Brief History of Deposit Insurance in the United ​States," https://www.fdic.gov/bank/historical/brief/brhist.pdf. What does it mean to describe deposit insurance as undermining "market discipline"​? From this​ perspective, why might there be too few bank failures as the result of deposit​ insurance?

Because most depositors are fully​ insured, they have little incentive to withdraw their money and cause their bank to fail. This encourages risk-taking by bank managers as depositors are protected regardless of how the bank actually performs. Rather than let banks​ fail, the FDIC steps in to minimize the amount of money it will have to pay out.

Do depositors today face similar​ fears?

Because FDIC insurance did not exist in the early​ 1930s, depositors today do not face similar fears.

The Fed has expanded its balance sheet since​ 2008:

Because the Fed was trying to stimulate the economy and maintain financial market stability.

Achieving the goal of price stability with low and steady inflation allows the Fed to achieve other​ goals, such as stable interest rates and stable foreign exchange rates. If the Fed fails to achieve low and steady​ inflation, why will it be hard to achieve stable interest​ rates?

Because the nominal interest rate includes an inflation premium.

If the futures contract used to hedge a spot position is marked-to-market daily, then the minimum-variance hedge ratio formula computed ignoring daily resettlement is, in absolute terms,

Biased upwards.

are not, debt for a firm

Bonds ______ equities because they represent ______.

For a call and a put written on the same underlying but at at possibly different strike prices,

Both call and put options may be in-the-money at the same time.

B

Briefly explain what typically happens to interest rates during a recession A. the demand for bonds increases, while the supply of bonds decreases, resulting in a lower equilibrium interest rate. B. the demand for bonds decreases, while the supply of bonds decreases by a greater magnitude than demand, resulting in a lower equilibrium interest rate C. the demand for bonds increases, while the supply of bonds increases by a greater magnitude of demand, resulting in a higher equilibrium interest rate D. the demand for bonds decreases, while the supply of bonds increases, resulting in a higher equilibrium interest rate

A. The demand for bonds​ decreases, while the supply of bonds decreases by a greater magnitude than​ demand, resulting in a lower equilibrium interest rate.

Briefly explain what typically happens to interest rates during a recession. Use a demand and supply graph for bonds to illustrate your answer. A. The demand for bonds​ decreases, while the supply of bonds decreases by a greater magnitude than​ demand, resulting in a lower equilibrium interest rate. B. The demand for bonds​ increases, while the supply of bonds increases by a greater magnitude than​ demand, resulting in a higher equilibrium interest rate. C. The demand for bonds​ increases, while the supply of bonds​ decreases, resulting in a lower equilibrium interest rate. D. The demand for bonds​ decreases, while the supply of bonds​ increases, resulting in a higher equilibrium interest rate.

You borrow money at Libor with a floating-rate note for one year with two semi-annual payments. What position do you need to add to this note to fix the cost of borrowing for the entire year?

Buy a 6x12 FRA.

If you believe that stock prices are going to fall for sure, then given a fixed amount of capital, you should

Buy put options.

If you expect stock volatility to rise but have no particular view of direction, then you should

Buy put options.

Which of the following is an example of speculating using financial​ futures?

Buying Treasury futures expecting future interest rates to be lower than indicated by the current price of Treasury futures.

Which of the following is an example of speculating using commodity​ futures?

Buying a wheat futures contract expecting the future spot price to exceed the current futures price.

XYZ stock is currently trading at 100. The stock is not expected to pay any dividends over the next three months. A three-month European call option on the stock with a strike of 95 is quoted at 3. Then, an arbitrage can be created by:

Buying the call, selling the stock, and investing the present value of for three months.

How might an investor use excess volatility to earn​ above-average returns?

By buying stocks when they are below their fundamental values. By selling stocks when they are above their fundamental values.

How might an investor use mean reversion to earn​ above-average returns?

By buying stocks whose returns have recently been low. By selling stocks whose returns have recently been high.

Mutual funds that follow a​ "momentum trading" strategy are known on Wall Street as​ "momos." How might a mutual fund manager use a momentum trading​ strategy?

By buying when stock prices are rising and selling when prices are falling.

What effect would these increases in household wealth have on consumption​ spending? A. Consumption spending would decrease. B. Consumption spending would not change. C. Consumption spending would increase.

C. Consumption spending would increase.

How would the increase in stock prices and housing prices have affected aggregate​ demand? A. The aggregate demand curve would not change. B. The aggregate demand curve would shift leftward. C. The aggregate demand curve would shift rightward.

C. The aggregate demand curve would shift rightward.

The article also noted​ that: "Speculative investors in oil cut their bullish bets on the price of crude ..." What does the article mean by a "cut their bullish bet"​? A. Investors were betting oil futures would not continue to fall. B. Investors were betting oil prices would rise. C. Investors were betting oil prices would not continue to rise. D. Investors were betting oil prices would fall.

C. Investors were betting oil prices would not continue to rise.

An article in the Wall Street Journal on the futures market for oil in the United Kingdom noted that on the day the article was​ published, "the number of long positions ... fell by ​6%." ​Source: Georgi​ Kantchev, "Speculative Investors Cut Bullish Crude Oil Price ​Bets," Wall Street Journal​, May​ 9, 2016. What is a long position in the futures​ market? A. The right of the buyer to sell the underlying asset on the specified future date. B. The right and obligation of the buyer to sell the underlying asset on the specified future date. C. The right and obligation of the buyer to receive or buy the underlying asset on the specified future date. D. The right of the buyer to receive or buy the underlying asset on the specified future date.

C. The right and obligation of the buyer to receive or buy the underlying asset on the specified future date.

1929, consumer confidence, lack

Christina Romer would argue that the impact of the crash of ______ was more severe because of its effect on ______ as well as the ______ of regulations in place at the time.

bond, use of funds lender, borrower borrower, lender the bond price, the interest rate

Compare the bond market approach to the loanable funds approach by explaining the following for each approach. What the good is In the bond​ market, the good is the _____ and in the loanable funds​ market, the good is the _____. Who the buyer is In the bond​ market, the buyer is the _____ and in the loanable funds​ market, the buyer is the _____. Who the seller is In the bond​ market, the seller is the _____ and in the loanable funds​ market, the seller is the _____. What the price is In the bond​ market, the price is _____ and in the loanable funds​ market, the price is _____.

11% Price = Face Value / ((1+i)^2) (sqrt(1000/810)-1)*100% = 11.11%

Consider the case of a​ two-year discount bond——that ​is, a bond that pays no coupon and pays its face value after two years rather than one year. Suppose the face value of the bond is ​$1 comma 000​, and the price is ​$810. What is the​ bond's yield to​ maturity? The​ bond's yield to maturity is _____.

Bond A has a low coupon rate and a lower price. Bond B has a higher coupon rate and a higher price. Because of the bond price​ formula, if coupon rates​ fall, the yield will​ fall, which requires prices to fall to keep the yield the same. If both bonds have the same risk​ profile, the law of one price brings bond yields to the same level.

Consider the following information on two U.S. Treasury​ bonds: Maturity Coupon Bid Asked Chg Asked Yield Bond A 2018 Nov 15 3.375 ​100:26 ​100:27 ​+1 2.26 Bond B 2018 Nov 15 4.750 ​101:29 ​101:30 ​+1 2.26 Briefly explain how two securities that have the same yield to maturity can have different prices.

Ignoring convenience yields, the theoretical futures price for a commodity with a positive cost of carry should typically exhibit

Contango.

For commodity forwards and futures, which of the following statements is valid?

Convenience yields may lead to the market being in backwardation.

Yes, financial firms such as Bear Stearns may continue taking on riskier investments because they believe a federal bailout is likely.

Could the actions of the Federal Reserve and Treasury be viewed as a moral hazard​ problem?

For a futures contract on an asset to be successful compared to the alternative of forward contracts, which of the following features would help?

Counterparty credit risk is high

1. Which class of derivatives have been blamed most widely for causing the financial crisis of 2008?

Credit Derivatives

In what way is a credit swap different from an​ interest-rate swap?

Credit swaps reduce default​ risk, or credit​ risk, rather than​ interest-rate risk.

Movements in the exchange rate affect all of the​ following, except: A. net exports. B. aggregate demand. C. aggregate expenditures. D. aggregate supply.

D. aggregate supply.

All of the following are​ ways, other than through their effects on aggregate​ demand, that higher exchange rates can affect the U.S.​ economy, except: A. hurt U.S. exporters. B. help U.S. firms that import products for resale. C. reduce the price of imports. D. increase the prices of imports.

D. increase the prices of imports.

An increase in the price level reduces net exports because A. it leads indirectly to a lower real interest rate. B. it leads directly to higher real money balances. C. it leads indirectly to a lower exchange rate. D. it leads indirectly to a higher exchange rate.

D. it leads indirectly to a higher exchange rate.

Stanley​ Fischer, vice-chair of the Federal​ Reserve, remarked that the exchange rate would affect aggregate demand in the United​ States: "So that is the channel through which the exchange rate will affect our decisions." ​Source: Ben​ Leubsdorf, "Fischer Says Fed Officials Will Watch Dollar for Impact on Aggregate ​Demand," Wall Street Journal​, October​ 9, 2014. The decisions Fischer would likely have been referring to include all of the​ following, except: A. asset purchases under quantitative easing. B. target range for the federal funds rate. C. monetary policy decisions on interest rates. D. target range for the monetary base.

D. target range for the monetary base.

What difficulties did credit default swaps cause during the financial crisis of 2007dash​2009? A. Those selling credit default swaps undercharged buyers relative to the actual risk involved.​ Thus, when buyers attempted to collect on payments from the price​ declines, firms lacked sufficient collateral to meet their obligations and faced possible bankruptcy. B. Because credit default swaps were NOT issued against collateralized debt​ obligations, but should​ have, (CDOs), owners of those securities experienced severe losses when the price of the underlying security declined in value. C. Credit default swaps were issued against​ mortgage-backed securities without having sufficient reserves to offset the losses incurred when the housing bubble burst.​ Thus, when the value of the underlying asset​ plummeted, firms were liable to the buyers of CDSs. D. A and B are correct. E. All of the above.

D. A and B are correct.

An article in the Wall Street Journal quoted a young investor who works for the social network site LinkedIn who explained that after losing money trading securities linked to crude oil futures prices he was going to "stick to investing in what he​ knows, like tech." ​Source: Ben​ Eisen, Nicole​ Friedman, and Saumya​ Vaishampayan, "The New Oil​ Traders: Moms and ​Millennials," Wall Street Journal​, May​ 26, 2016. All of the following are reasons why might someone like this investor who has a​ full-time job would have trouble earning a profit buying and selling oil futures​ (or other securities linked to the prices of oil​ futures), except: A. He would need a superior knowledge of how the oil market works. B. He would need to have a better understanding than Wall Street professionals of how news is likely to affect oil prices. C. He would need to follow news about the oil industry carefully. D. His trading costs are higher than those of Wall Street professionals. Is it likely that the investor would have more success buying and selling derivatives or other securities related to tech​ firms? A. No; few individual investors are able consistently to earn a profit by buying and selling derivatives. B. Yes; everyone is making money in tech derivatives and securities. C. ​No; he's not a Wall Street professional so he​ wouldn't have success in the derivatives market. D. Yes; his has a more intimate working knowledge of the tech industry.

D. His trading costs are higher than those of Wall Street professionals. A. No; few individual investors are able consistently to earn a profit by buying and selling derivatives.

How would these investors have cut their​ bets? A. Buy futures in coal. B. Buy futures in natural gas. C. Take short positions in crude. D. Liquidate their futures contracts.

D. Liquidate their futures contracts.

An article in the Wall Street Journal in 2016​ states: "After decades of spending billions of dollars to hedge against rising fuel​ costs, more​ airlines, including some of the​ world's largest, are backing off after getting burned by low oil prices." ​Source: Susan​ Carey, "Airlines Pull Back on Hedging Fuel ​Costs," Wall Street Journal​, March​ 20, 2016. How would airlines hedge against rising fuel​ costs? A. Take short positions in the futures market. B. Purchase more fuel efficient planes. C. Increase ticket prices. D. Take long positions in the futures market.

D. Take long positions in the futures market.

How does a credit default swap differ from the other swap contracts discussed in this​ chapter? Credit default swaps​ are: A. contracts where counterparties agree to swap interest payments over a specified period on a fixed dollar amount. B. contracts in which​ interest-rate payments are​ exchanged, with the intention of reducing default risk. C. contracts where counterparties agree to exchange principle amounts denominated in different currencies. D. derivatives requiring sellers to make payments to buyers if the price of the underlying security declines in value.

D. derivatives requiring sellers to make payments to buyers if the price of the underlying security declines in value.

Differences in interest rates on similar bonds in different countries do not always reflect expectations of future changes in exchange rates for several reasons

Differences in default risk and liquidity Transactions costs Exchange-rate risk

​"If a bank manager expects interest rates to fall in the​ future, he should increase the duration of his​ bank's liabilities." Do you agree with this​ statement?

Disagree. Higher duration of its liabilities will reduce the value of the​ bank's capital.

The following appeared in a feature in the New York Times that provides an overview of the Federal Reserve​ System: ​"The federal funds rate is set by the​ Fed's Open Market​ Committee, composed of the​ chairman, the six other​ governors, and five of the 12 regional bank​ presidents, on a rotating​ basis." Do you agree that the federal funds rate is set by the​ FOMC?

Disagree. The federal funds rate is actually determined by the demand for and supply of reserves. The FOMC only sets a target for the federal funds rate.

The ____________ is typically higher than the _____________.

Discount rate; federal funds rate.

A. Because FDIC insurance did not exist in the early​ 1930s, depositors today do not face similar fears.

Do depositors today face similar​ fears? A. Because FDIC insurance did not exist in the early​ 1930s, depositors today do not face similar fears. B. Because TARP insurance did not exist in the early​ 1930s, depositors today do not face similar fears. C. Depositors face the same fears now as in the early 1930s. D. It is impossible to compare problems depositors face now and those in the early 1930s.

No

Does a bank have to be insolvent to experience a​ run?

Eurodollar deposits are

Dollar denominated deposits made in banks in Europe

Eurodollars​ are:

Dollar deposits in banks outside the United States.

Bonds A and B both have a duration of exactly one year. An equally-weighted portfolio of these bonds will have a duration of

Equal to one year because the average duration is still one year.

Suppose that the euro falls in value relative to the dollar. What is the likely effect on European exports to the United​ States? What is the likely effect on U.S. exports to​ Europe?

European exports will increase and U.S. exports will decrease .

Suppose that the euro falls in value relative to the dollar. What is the likely effect on European exports to the United​ States? What is the likely effect on U.S. exports to​ Europe?

European exports will increase and U.S. exports will decrease .

Suppose that the euro RISES in value relative to the dollar. What is the likely effect on European exports to the United​ States? What is the likely effect on U.S. exports to​ Europe?

European exports will decrease and US exports will increase

Suppose that the euro FALLS in value relative to the dollar. What is the likely effect on European exports to the United​ States? What is the likely effect on U.S. exports to​ Europe?

European exports will increase and US exports will decrease

is not

Every financial asset ______ a financial security.

Draw a graph of the demand and supply of U.S. dollars in exchange for Japanese yen to illustrate the following​ situation: The interest rate on one minus year Japanese government bonds rises relative to the interest rate on one minus year U.S. Treasury bills.

Exchange rate supply moves right

Asset purchases _________the​ Fed"s balance sheet by _________the amount of assets and _____________ liabilities typically through reserve balances.

Expand; increasing; increasing.

In what sense might deposit insurance be considered a federal subsidy for​ banks?

FDIC insurance is backed by the full faith and credit of the United States government.

Other things being​ equal, if the Fed makes open market purchases of securities to increase the amount of reserves in the banking​ system, the federal funds rate is expected​ to:

Fall.

Suppose you are buying Treasury bonds to finance your child's future college tuition. What risk do you face from price​ fluctuations?

Falling bond prices

Suppose you are a corn farmer. What risk do you face from price​ fluctuations?

Falling corn prices.

Suppose you are a corn farmer. What risk do you face from price​ fluctuations? What would have to be true of a derivatives security if the security were to help you to hedge this​ risk?

Falling corn prices. The derivative need to go up in value if corn prices fell.

All else the same, when the interest rate rises, the lower bound on a put option

Falls or stays the same.

The FDIC stands for Why was it​ established?

Federal Deposit Insurance Corporation The FDIC was established to ameliorate bank runs. The FDIC was established in 1934 after a series of bank failures.

The ___________ is the interest rate that banks charge each other on very​ short-term loans, while the ____________ is the interest rate the Fed charges banks for loans.

Federal funds rate; discount rate.

C. A and B are correct.

Financial journalist David Wessel has described what happened with the Reserve Primary​ Fund, a money market mutual​ fund, on September​ 16, 2008: At​ 4:15 P.M., the fund issued a press release. The Lehman paper in its portfolio was worthless and the​ fund's shares were worth not​ $1, but only 97​ cents: breaking the buck. The news triggered a run that spread through the​ $3.4 trillion​ [money market mutual​ fund] industry. ​Source: David​ Wessel, In Fed We Trust​, New​ York: Crown​ Business, 2009, p. 207. What is​ "Lehman paper"? A. Lehman Brothers debt. B. Lehman Brothers commercial paper. C. A and B are correct. D. Neither​ A, nor B is correct.

Which of the following might explain why a country without a strong financial system would struggle to achieve high rates of economic​ growth?

Firms are unable to acquire funds they need to expand.

The demand curve shifts to the left and the supply curve shifts to the right.

For each of the following​ situations, explain whether the demand curve for​ bonds, the supply curve for​ bonds, or both would shift. Be sure to indicate whether the​ curve(s) would shift to the right or to the left. The Federal Reserve publishes a forecast that the inflation rate will average​ 5% over the next five years.​ Previously, the Fed had been forecasting an inflation rate of​ 3%.

Why might bubbles be difficult to​ identify?

For every overvalued​ asset, there is always an investor willing to buy the asset at an even higher price. B. Investors may not exhibit rational behavior when purchasing an overvalued stock. C. Poor investor​ psychology, such as herd​ behavior, may not allow investors to see an asset as overvalued.

B. The value of a​ bank's assets is more than the value of its​ liabilities, so its net​ worth, or​ capital, is positive.

Former Federal Reserve Chair Ben Bernanke has observed​ that; open double quoteEven a bank that is solvent under normal conditions can rarely survive a sustained run.close double quote ​Source: Ben S.​ Bernanke, The Courage to​ Act: The Financial Crisis and Its Aftermath​, New​ York: W.W.​ Norton, 2015, p. 45. What does Bernanke mean by "solvent under normal conditions"? A. The value of a​ bank's assets is more than the value of its​ liabilities, so its net​ worth, or​ capital, is negative. B. The value of a​ bank's assets is more than the value of its​ liabilities, so its net​ worth, or​ capital, is positive. C. The value of a​ bank's assets is less than the value of its​ liabilities, so its net​ worth, or​ capital, is negative. D. The value of a​ bank's assets is less than the value of its​ liabilities, so its net​ worth, or​ capital, is positive.

rises above D. All of the above.

Former Federal Reserve Chairman Alan Greenspan once argued that it is very difficult to identify bubbles until after they pop. What is a​ bubble, and why might they be difficult to​ identify? A bubble is a situation in which the price of an asset ______ its fundamental value. Why might bubbles be difficult to​ identify? A. Investors may not exhibit rational behavior when purchasing an overvalued stock. B. For every overvalued​ asset, there is always an investor willing to buy the asset at an even higher price. C. Poor investor​ psychology, such as herd​ behavior, may not allow investors to see an asset as overvalued. D. All of the above.

What are the key differences between​ foreign-exchange forward contracts and​ foreign-exchange futures​ contracts?

Forward contracts are private agreements among traders to exchange any amount of currency on any future​ date, while futures contracts are traded on exchanges and are​ standardized, including a stated settlement date. With futures ​contracts, the exchange rate changes continually as contracts are bought and sold on the​ exchange, and with forward ​contracts, the exchange rate is fixed at the time the contract is agreed to.

Why are forward contracts more widely used in the​ foreign-exchange market than are futures​ contracts?

Forward contracts are used 10 times more than futures contracts because the counterparty risk between big banks is relatively low ​, and these banks value the flexibility of the forward contract.

What are the key differences between​ foreign-exchange forward contracts and​ foreign-exchange futures​ contracts? ___contracts are private agreements among traders to exchange any amount of currency on any future date, while ____ contracts are traded on exchanges and are standardized, including a stated settlement dat

Forward, future

What is the difference between a spot transaction and a forward transaction in the​ foreign-exchange market? A __forward transaction is trade in the future and a __spot transaction is trade today

Forward, spot

The FTSE index is at 5,100. You are short a straddle on the FTSE 100. struck at 5,100 and long a 5,000/5,200 strangle. You are also short a 5,000-5,100-5,200 butterfly. Ceteris paribus, an increase in the level of the FTSE

Has no effect on the value of your portfolio

Consider hedging an exposure with (i) a futures contract, or (ii) an option with a strike price close to the futures price. The hedge with the futures contract

Has no upfront cost

The growth rate of M2 has been more stable than the growth rate of M1.

Has the growth rate of M1 been more or less stable than the growth rate of​ M2?

The writer of a put option on a stock

Has the obligation but not the right to buy the stock

What is the difference between hedging and​ speculating?

Hedging serves to reduce risk in financial​markets, while speculating may increase risk by placing financial bets on assets in an attempt to earn higher profits in the market.

What is the difference between hedging and​ speculating? ______ serves to reduce risk in financial​ markets, while ______ may increase risk by placing financial bets on assets in an attempt to earn higher profits in the market. Which of the following is an example of speculating using commodity​ futures? Which of the following is an example of speculating using financial​ futures?

Hedging, speculating Buying a wheat futures contract expecting the future spot price to exceed the current futures price. Buying Treasury futures expecting future interest rates to be lower than indicated by the current price of Treasury futures.

An article in the Wall Street Journal quoted a young investor who works for the social network site LinkedIn who explained that after losing money trading securities linked to crude oil futures prices he was going to "stick to investing in what he​ knows, like tech." ​Source: Ben​ Eisen, Nicole​ Friedman, and Saumya​ Vaishampayan, "The New Oil​ Traders: Moms and ​Millennials," Wall Street Journal​, May​ 26, 2016. All of the following are reasons why might someone like this investor who has a​ full-time job would have trouble earning a profit buying and selling oil futures​ (or other securities linked to the prices Is it likely that the investor would have more success buying and selling derivatives or other securities related to tech​ firms?

His trading costs are higher than those of Wall Street professionals. ​No; few individual investors are able consistently to earn a profit by buying and selling derivatives.

A. short term in the repo​ market, the refusal of lenders to renew their repos is akin to a commercial​ bank's depositors withdrawing funds.

How can an investment bank experience a​ "run"? Because investment banks borrow A. short term in the repo​ market, the refusal of lenders to renew their repos is akin to a commercial​ bank's depositors withdrawing funds. B. from the U.S.​ Treasury, a​ "run" can happen to an investment bank if the Treasury allows expenditures to exceed tax revenues. C. short term from commercial​ banks, they will experience a​ "run" whenever commercial banks do. D. long term from a variety of​ lenders, they cannot experience a​ "run."

B. Banks can make riskier investments without worrying about deposit withdrawals because the government has insured depositors against losses.

How does deposit insurance encourage banks to take on too much​ risk? A. Deposit insurance encourages banks to increase investments in riskless assets. B. Banks can make riskier investments without worrying about deposit withdrawals because the government has insured depositors against losses. C. With deposit​ insurance, depositors have more incentive to withdraw their deposits if the managers make reckless investments. D. Banks can make riskier investments because the government has insured banks against losses on their investments.

Interest rates are usually higher on a bond with high information costs.

How does the interest rate on a bond with high information costs compare with the interest rate on a bond with low information​ costs?

Interest rates are usually higher on an illiquid bond.

How does the interest rate on an illiquid bond compare with the interest rate on a liquid​ bond?

D. The differences reflect expected changes in the exchange rate. D. All of the above.

How does the​ interest-rate parity condition account for differences in interest rates in different countries on similar​ bonds? A. The differences expected changes in the​ bond's interest rate. B. The differences unexpected changes in the​ bond's interest rate. C. The differences expected changes in inflation. D. The differences reflect expected changes in the exchange rate. What are the main reasons that​ interest-rate parity may not hold​ exactly? A. Transaction costs. B. Exchange-rate risk. C. Differences in default risk and liquidity. D. All of the above.

D. A and B only.

How might an investor use excess volatility to earn​ above-average returns? A. By selling stocks when they are above their fundamental values. B. By buying stocks when they are below their fundamental values. C. By repeatedly buying and selling stocks in a short period of time. D. A and B only. E. All of the above.

D. A and B only.

How might an investor use mean reversion to earn​ above-average returns? A. By selling stocks whose returns have recently been high. B. By buying stocks whose returns have recently been low. C. By buying only​ blue-chip stocks. D. A and B only.

A. Fed raised the rate it pays on excess reserves and reverse purchase agreements.

How was the Fed able to use its new monetary policy tools to increase the federal funds rate in December​ 2015? A. Fed raised the rate it pays on excess reserves and reverse purchase agreements. B. The Fed raised the rate it pays on reverse purchase agreements. C. The Fed established a new federal funds rate. D. The Fed raised the rate it pays on excess reserves.

C. Net expected profitability would​ fall, so the demand for loanable funds would fall.

How would the following events affect the demand for loanable funds in the United​ States? Many U.S. cities increase business taxes to help close their budget deficits. A. Net expected profitability would​ fall, but the demand for loanable fund would rise. B. The demand for loanable funds would remain constant. C. Net expected profitability would​ fall, so the demand for loanable funds would fall. D. Net expected profitability would​ rise, so the demand for loanable funds would rise.

The cheapest-to-deliver option

Hurts the holder of the long position in the futures contract.

What did bank depositors have to fear in the early​ 1930s?

If a bank​ failed, then depositors would potentially lose all their money.

4.1% rate of return = (51 + (1027.7 - 1036.21) /1036.21 = 4.1%

If another investor had bought the bond a year ago for the amount that was calculated in​ (b), the total return would have been _____%.

an increase, an increase

If a​ firm's profits are expected to increase there will be ______ in demand for that​ firm's stock and therefore _____ in its price.

A. No, the share price already reflects the expected future sales decline.

If iPhone sales continue to decline as investors expect them​ to, will the decline lead to a further fall in the price of​ Apple's stock? A. No, the share price already reflects the expected future sales decline. B. Yes, a decline in sales will lead to a decline in profit. C. No, Apple will make up for the decline by selling more Apple Watches. D. Yes, a decline in sales will lead to a price decrease.

The classic account of bank panics was published in 1879 by Walter​ Bagehot, editor of the Economist​, in his book Lombard Street​: "In wild periods of​ alarm, one failure makes​ many, and the best way to prevent the derivative failures is to arrest the primary failure which causes them." ​Source: Walter​ Bagehot, Lombard​ Street: A Description of the Money Market​, New​ York: John​ Wiley, 1999​ (first published​ 1873), p. 51. All of the following are reasons why one bank failure might lead to many bank​ failures, except: What are the two main ways in which the government can keep one bank failure from leading to a bank​ panic?

If multiple banks have to sell the same​ assets, the prices of those assets are likely to rise. A central bank can act as a lender of last​ resort, and the government can insure deposits.

PPP makes an important prediction about movements in exchange rates in the long run

If one country has a higher inflation rate than anther, the currency of the high inflation country will depreciate relative to the currency of the low inflation country

an increase, an increase

If the Fed uses the federal funds rate as a policy​ instrument, then increases in the demand for reserves will lead to _____ in the level of reserves. If the Fed uses the level of reserves as a policy​ instrument, then increases in the demand for reserves will lead to _____ in the federal funds rate.

In what sense is preferred stock more like bonds than like common​ stock? ​(Check all that apply​)

If the corporation declares bankruptcy preferred stockholders are paid before common stockholders. Your answer is correct. Preferred stockholders get fixed dividend payments while common stockholders receive fluctuating dividend payments.

Yes, investors would have already decreased their demand for this stock causing its price to drop before the announcement was made.

If the decrease in​ Burberry's profits had not been a​ surprise, would the effect of the announcement on its stock price have been​ different?

bad bad, more, good, depreciated less, good

If the exchange rate between the yen and the dollar changes from yen95 ​= $1 to yen71 ​= $1, is this good news for​ Sony? A yen appreciation is ______ news for Sony. This is ______ news for U.S.​ consumers, as Japanese goods become ______​expensive, and ______ news for U.S.​ firms, as the dollar has ______ against the yen. Because U.S. goods are now ______​expensive, this is ______ news for Japanese consumers.

Why might the fund manager expect to earn an​ above-average return through a momentum strategy?

If the fund manager follows a momentum strategy and buys a stock as the price is increasing and other investors also follow a momentum​ strategy, then it is likely the stock price will continue to rise.

1/0.18=5.56 simple deposit multiplier = 1/required reserve ratio

If the required reserve ratio is 18​%, the value of the simple deposit multiplier is _____.

What is the difference between illiquidity and insolvency?

Illiquidity is when the bank does not have enough cash+reserves needed. Insolvency is when the banks assets is less than the banks capital.

A. two months before the October 1929 stock market crash.

In June​ 1930, a delegation of businessmen appeared at the White House to urge President Herbert Hoover to propose an economic stimulus package. Hoover told​ them: ​"Gentlemen, you have come sixty days too late. The depression is​ over." Source​: Arthur M.​ Schlesigner, Jr., The Crisis of the Old Order​, ​Boston: Houghton-Mifflin,​ 1957, p. 331. The Great Depression began A. two months before the October 1929 stock market crash. B. in October 1929. C. two months after the October 1929 stock market crash. D. four months before the October 1929 stock market crash.

A. In the event of a nonbank financial institution​ run, there is no equivalent of the FDIC. B. Nonbank financial institutions are not required to maintain the equivalent of reserve requirements even​ though, like traditional​ banks, they borrow short and lend long.

In a paper written in April​ 2010, looking back at the financial​ crisis, former Fed Chair Alan Greenspan​ argued: At least partly responsible​ [for the severity of the financial​ collapse] may have been the failure of risk managers to fully understand the impact of the emergence of shadow banking that increased financial​ innovation, but as a​ consequence, also increased the level of risk. The added risk had not been compensated by higher capital. Source​: Alan​ Greenspan, "The​ Crisis," April​ 15, 2010, p. 21. How did the emergence of shadow banking increase the risk to the financial​ system? ​(Check all that apply.​) A. In the event of a nonbank financial institution​ run, there is no equivalent of the FDIC. B. Nonbank financial institutions are not required to maintain the equivalent of reserve requirements even​ though, like traditional​ banks, they borrow short and lend long. C. Nonbank financial institutions are required to maintain the equivalent of reserve requirements. D. Nonbank financial institutions are not required to maintain the equivalent of reserve requirements even​ though, like traditional​ banks, they borrow long and lend short.

C. Reserves are so large that banks have little need to borrow reserves from other banks.

In a speech to the Fed conference in Jackson​ Hole, Wyoming mentioned in the chapter​ opener, Fed Chair Janet Yellen observed that the financial crisis revealed the​ Fed's "inability to control the federal funds rate once reserves were no longer relatively scarce." She went on to state​ that: "To address the challenges posed by the financial crisis ...the Federal Reserve significantly expanded its monetary policy toolkit.... Our current toolkit proved effective last December. In an environment of superabundant​ reserves, the FOMC raised the effective federal funds rate" ​Source: Janet L.​ Yellen, "The Federal​ Reserve's Monetary Policy​ Toolkit: Past,​ Present, and ​Future,"Remarks at "Designing Resilient Monetary Policy Frameworks for the Future" a symposium sponsored by the Federal Reserve Bank of Kansas​ City, Jackson​ Hole, Wyoming, August​ 26, 2016. What does Yellen mean by saying that "reserves were no longer relatively scarce"​? A. Reserves are so large that banks can easily increase their lending activities. B. Reserves are so large that banks can easily borrow reserves from other banks. C. Reserves are so large that banks have little need to borrow reserves from other banks. D. Reserves are so large that banks have little need to increase the level of their depository accounts.

What​ trade-offs does the Fed​ face, particularly in the short​ run, in attempting to reach its​ goals?

In attempting to reach high economic growth or high​ employment, the Fed would pursue expansionary monetary​ policy, but this policy could cause higher inflation.

A. A bank run that is fueled by fear of bank failure.

In describing the bank panic that occurred in the fall of​ 1930, Milton Friedman and Anna Schwartz​ wrote: A contagion of fear spread among​ depositors, starting from the agricultural​ areas, which had experienced the heaviest impact of bank failures in the twenties. But such contagion knows no geographical limits. Source​: Milton Friedman and Anna​ Schwartz, A Monetary History of the United States​, ​1867-1960, Princeton,​ NJ: Princeton University​ Press, 1963, p. 308. What do the authors mean by a​ "contagion of​ fear"? A. A bank run that is fueled by fear of bank failure. B. The fear of bad​ weather, which causes an increase in the prices of agricultural goods. C. The bankruptcy of depositors. D. A recession.

A. credit unions

In discussing the​ 2007-2009 financial​ crisis, Federal Reserve Vice Chair Stanley Fischer observed​ that: "The fact that losses in what was a relatively small part of the mortgage market quickly spread through the rest of the financial system illustrates how the complex interconnections among banks and nonbanks can amplify shocks in significant and unanticipated ways." ​Source: Stanley​ Fischer, "The Importance of the Nonbank Financial ​Sector," remarks at a conference on "Debt and Financial Stability--Regulatory Challenges" sponsored by the Bundesbank and the German Ministry of​ Finance, March​ 27, 2015. All of the following are considered "nonbanks," except: A. credit unions B. investment banks C. mutual funds D. hedge funds

B. No. Because of​ deflation, real rates were high.

In the context of the early​ 1930s, were low nominal interest rates a good indicator that policy was​ easy? A. Yes. Because of​ inflation, real rates were low. B. No. Because of​ deflation, real rates were high. C. Yes. Because of​ deflation, real rates were low. D. No. Because of​ inflation, real rates were high.

​[Related to the Chapter Opener​] In a paper written in April​ 2010, looking back at the financial​ crisis, former Fed Chair Alan Greenspan​ argued: At least partly responsible​ [for the severity of the financial​ collapse] may have been the failure of risk managers to fully understand the impact of the emergence of shadow banking that increased financial​ innovation, but as a​ consequence, also increased the level of risk. The added risk had not been compensated by higher capital. Source​: Alan​ Greenspan, "The​ Crisis," April​ 15, 2010, p. 21. How did the emergence of shadow banking increase the risk to the financial​ system? ​(Check all that apply.​)

In the event of a nonbank financial institution​ run, there is no equivalent of the FDIC. Your answer is correct. C. Nonbank financial institutions are not required to maintain the equivalent of reserve requirements even​ though, like traditional​ banks, they borrow short and lend long.

Is PPP a theory of exchange rate determination in the long run or in the short​ run?

In the long run.

According to the theory of purchasing power​ parity, if the inflation rate in Japan is lower than the inflation rate in​ Canada, what should happen to the exchange rate between the Japanese yen and the Canadian dollar in the long​ run?

In the long​ run, the Japanese yen will appreciate relative to the Canadian dollar because of lower inflation in Japan.

A. A recession that includes a financial crisis is generally more complex and has more severe consequences comma such as increasing asset prices and lending comma which affects the economy for a longer time period than a traditional recession.

In their book This Time Is Different​, Carmen Reinhart and Kenneth Rogoff​ conclude: ​"An examination of the aftermath of severe postwar financial crises shows that they have had a deep and lasting effect on asset​ prices, output, and​ employment." Source​: Carmen M. Reinhart and Kenneth S.​ Rogoff, This Time Is​ Different: Eight Centuries of Financial Folly​, ​Princeton, NJ: Princeton University​ Press, 2009, p. 248. Why should a recession connected with a financial crisis be more severe than a recession that did not involve a financial​ crisis? A. A recession that includes a financial crisis is generally more complex and has more severe consequences comma such as increasing asset prices and lending comma which affects the economy for a longer time period than a traditional recession. B. When financial institutions fail comma credit markets can be damaged comma and the amount of borrowing comma and hence economic activity comma can decrease comma further affecting real output. C. Both A and B are correct. D. None of the above. A recession connected with a financial crisis will be less severe than a recession that did not involve a financial crisis.

The higher the risk that an asset​ has, the lower the demand for the asset. This raises the yield or return if the asset performs well.​ Low-risk assets have a high​ demand, which lowers their yield or return.

In what sense do investors face a​ trade-off between risk and​ return?

A. The higher the risk that an asset​ has, the lower the demand for the asset. This raises the yield or return if the asset performs well.​ Low-risk assets have a high​ demand, which lowers their yield or return.

In what sense do investors face a​ trade-off between risk and​ return? A. The higher the risk that an asset​ has, the lower the demand for the asset. This raises the yield or return if the asset performs well.​ Low-risk assets have a high​ demand, which lowers their yield or return. B.The lower the risk that an asset​ has, the lower the demand for the asset. This raises the yield or return if the asset performs well.​ High-risk assets have a high​ demand, which lowers their yield or return. C. The higher the risk that an asset​ has, the higher the demand for the asset. This raises the yield or return if the asset performs well.​ Low-risk assets have a lower​ demand, which lowers their yield or return. D. If an investor acquires enough accurate​ information, there should be no​ trade-off involved.

Capital gains are taxed at a lower rate than salary and wage income.

In what way are capital gains taxed differently than salary and wage​ income?

A. They both borrow short and lend long.

In what ways are investment institutions similar to commercial​ banks? A. They both borrow short and lend long. B. They both provide monetary policies. C. They both offer traditional banking​ activities, such as taking deposits and making loans. D. They are completely different financial organizations.

C. Investment institutions are different from commercial banks because they do not engage in traditional commercial banking​ activities, such as taking deposits and making loans.

In what ways are they​ different? A. Commercial banks are different from investment institutions because they do not offer​ short-term assets to borrow short and thus are unable to lend long. B. Investment institutions are different from commercial banks because they do not research the financial markets as commercial banks do. C. Investment institutions are different from commercial banks because they do not engage in traditional commercial banking​ activities, such as taking deposits and making loans. D. There are no differences between investment institutions and commercial banks.

D. All of the above are correct.

In what ways does the shadow banking system differ from the commercial banking​ system? A. The shadow banking​ system, unlike the commercial banking​ system, does not offer traditional banking services such as taking in deposits. B. The commercial banking​ system, unlike the shadow banking​ system, is heavily regulated by the government. C. The shadow banking system invests in more risky assets and tends to be highly leveraged than commercial banks. D. All of the above are correct.

A. This Taylor rule federal funds rate target is lower than the​ Fed's actual target range.

In your​ calculations, the inflation gap is negative if the current inflation rate is below the target inflation rate. How does the targeted federal funds rate calculated using the Taylor rule compare to the actual federal funds rate of​ 0% to​ 0.25%? A. This Taylor rule federal funds rate target is lower than the​ Fed's actual target range. B. This Taylor rule federal funds rate target is higher than the​ Fed's actual target range. C. This Taylor rule federal funds rate target fits within the​ Fed's actual target range.

All else the same, when the interest rate rises, the lower bound on a call option

Increases or stays the same.

"Additional easing" occurs when the Fed:

Increases the quantity of money with open market purchases.

How could the Federal Reserve use the interest rate it pays on bank reserves to restrain banks from lending large amounts of excess reserves and increasing the money supply​ excessively? -By _____________ the interest rate it pays on bank​ reserves, the Fed can ______________ the level of reserves banks are willing to​ hold, thereby restraining bank lending and increases in the money supply.

Increasing; increase.

You are hedging a spot position with futures. If the spot asset is more volatile than the corresponding futures, the minimum-variance hedge ratio is

Indeterminate, given the information available

Which of the following statements about index futures is false?

Index futures are rarely shorted because it is very difficult to borrow all the stocks in the index in the correct proportions in order to effect the short.

What is the difference between a direct quotation of an exchange rate and an indirect​ quotation?

Indirect quotations express exchange rates as units of foreign currency per unit of domestic​currency, whereas direct quotations are exchange rates as units of domestic currency per unit of foreign currency.

What is the difference between a direct quotation of an exchange rate and an indirect​ quotation?

Indirect quotations: 10 pesos per dollar Direct quotation: 0.10 dollars per peso If the exchange rate between the yen and the dollar changes from yen88 ​= $1 to yen80 ​= $1, the yen has appreciated against the​ dollar, and the dollar has depreciated against the yen (dollar is worth less yen).

Which of the following does not describe​ derivatives?

Insurance is required when purchasing derivative securities.

The most widely traded futures are of the following type

Interest Rate

Interest rate on domestic bond = Interest

Interest rate on foreign bond-expected appreciation of the domestic currency

To account for the additional risk or investing in a foreign asset can include a currency premium in the interest rate parity equation:

Interest rate on the domestic bond = interest rate on the foreign bond = expected appreciation of the domestic currency - currency premium

Backwardation becomes more likely when, ceteris paribus,

Interest rates decline

Consider futures on a stock market index. Which of the following scenarios is most likely to increase the futures-spot basis?

Interest rates increase and dividend yields decline.

The tailed hedge ratio becomes lower in comparison to the untailed one when

Interest rates rise and hedge maturity increases.

All of the following are reasons why savers with small amounts to invest rarely make loans directly to individuals or​ firms, except -Transaction costs associated with these loans are too high. -Information costs associated with these loans are too high. -Interest rates would not be high enough. -They cannot take advantage of economies of scale.

Interest rates would not be high enough.

Suppose the December futures contract is​ sold, and one day later the Chicago Board of Trade informs you that it has credited funds to your margin account. What happened to interest rates during that​ day?

Interest rates​ increased, bond prices​ decreased, and the value of the contract increased.

Suppose that you are an investor who owns​ $10,000 in U.S. Treasury notes. Will you be more worried about market interest rates rising or​ falling?

Interest rates​ rising, as that forces bond prices down.

2. Which class of derivatives accounts for the largest dollar share in the world market in terms of notional amount outstanding?

Interest-Rate Derivatives

The largest markets for derivatives based on notional outstandings are

Interest-rate derivatives.

The demand curve shifts to the left.

Investors believe that the level of risk in the stock market has declined.

Suppose that the current exchange rate between the yen and the dollar is yen 110=​$1 and that the interest rate is 5​% on a​ one-year bond in Japan and 4​% on a comparable bond in the United States. According to the​ interest-rate parity​ condition, what do investors expect the exchange rate between the yen and the dollar to be in one​ year?

Investors believe the dollar will appreciate by​ 1%, which would change the exchange rate​ to: yen110 x ( 1 + 0.01) = yen 111.1

Suppose that the Dow Jones Industrial Average is above the 12,500 level. If the Dow were to fall to 9,500​, who would gain the​ most?

Investors who had bought put options.

Who would be hurt the​ most?

Investors who had sold put options.

the corporations will​ default: interest rates will rise

In​ 2012, an article in the Wall Street Journal had the headline​ "As Corporate-Bond Yields​ Sink, Risks for Investors​ Rise." ​Source: Matt​ Wirz, "As​ Corporate-Bond Yields​ Sink, Risks for Investors​ Rise," Wall Street Journal​, August​ 14, 2012. The risks of holding​ long-term corporate bonds at low interest rates include the risk that​ _______​ and, more importantly for​ investors, the risk that​ ________.

The actual value of the contract is less than​ $30 million for each year he plays. The longer the time period of future​ payments, the less the present value of those payments. In this​ case, although the face value of the contract is​ $30 million for each year​ played, because the payments are spread out further into the​ future, the actual value of those payments is less than​ $30 million for each year played.

In​ 2015, the Washington Nationals baseball team signed pitcher Max Scherzer to a contract to play for them for seven years. He would be paid​ $15 million dollars per year for 14 years——an additional 7 years beyond the end of the time he would be committed to play for the Nationals. The contract was widely reported as being worth​ $210 million​ (or $15 million per year times 14 ​years). One baseball writer​ argued, though, that "this deal serves as a nice reminder that the payment terms of a deal can have an impact on the actual value of the contract." Which of the following statements best represents the actual value of the​ contract?

Who would be interested in exchanging yen for​ dollars?

Japanese companies importing or buying U.S. products.

The Expectations Theory.

In​ 2016, when the interest rate on​ 10-year German government bonds became​ negative, an article in the Wall Street Journal noted that the interest rate on​ 10-year bonds depended in part on​ investors' expectations of future​ short-term interest rates. The article also noted that open double quoteinvestors ​don't seem to have changed their perception of ...​ [short-term] interest rates in the future ....close double quote ​Source: Jon​ Sindreu, open double quoteAre German Bonds Riding a ​Bubble?close double quote Wall Street Journal​, June​ 14, 2016. Which of the following theories best explains the scenario​ described?

R = D<t+1>^e/P<t> + (P<t+1>^e - P<t>)/P<t>

In​ symbols, write the two components of the rate of return on a stock investment.

The rate of return is equal to the rate of return on the dividend plus the rate of return on the price change from the purchase price.

In​ words, write the two components of the rate of return on a stock investment.

C. A and B are correct.

Is an investment bank that buys securities with its own capital acting as a financial​ intermediary? A. An investment bank that buys securities with its own capital is not acting as a financial intermediary. B. By buying securities with its own capital the bank expects to get profit from the yield or the changes in price. C. A and B are correct. D. Neither​ A, nor B is correct.

Which of the following is a valid completion of the sentence—"An American option ..."?

Is exercisable prior to maturity whereas European options are not.

D. All of the above.

Is it possible that these incidents might have occurred even though the efficient markets hypothesis is​ correct? A. Rational expectations does not mean perfect foresight. B. It is possible that even with full information investors overestimated the profitability of tech companies. C. It is possible that even with full information investors underestimated the risk of​ mortgage-backed securities. D. All of the above.

No, a theory is a statement about the world that might possibly be false.

Is the equation of exchange a​ theory?

The payoff of the FRA has the following property

It is concave in the Libor rate.

When a currency is described as​ overvalued, this​ implies:

It is overvalued relative to purchasing power parity.

When the Fed changes the composition of its​ assets, for​ example, by selling Treasury securities and using the proceeds to buy​ mortgage-backed securities:

It leaves the size of the​ Fed's balance sheet unchanged.

Consider two six-month European calls at strikes 90 and 100. The risk free rate is 2%. Which of the following alternatives best describes the condition that must be met by the difference in prices ?

It must be strictly less than $10.

Was deflation during the early 1930s good or bad for​ firms?

It was bad because it effectively raised interest rates.

How would these investors have cut their​ bullish bets?

Liquidate their futures contracts.

You anticipate a three-month borrowing in 6 months' time. To hedge the interest-rate exposure you can go either

Long a 6x9 FRA or short a eurodollar futures contract maturing in 6 months

If you expect the price of a stock to decrease and its volatility to increase, then the most appropriate strategy to use is a

Long put

You go short oil 10 futures contracts on NYMEX when the futures price of oil is $79 a barrel and close out your position three days later at a futures price of $83 a barrel. One futures contract is for 1,000 barrels. Ignoring interest on the margin account, the futures trading has resulted in a

Loss of $40,000

An article in the Wall Street Journal contained the following​ observation: "Falling interest rates tend to boost bond prices ... but weigh on currencies." ​Source: James Glynn and James​ Ramage, "Aussie Dollar Parity Talk ​Resumes," Wall Street Journal​, July​ 1, 2014. Why do falling interest rates increase bond​ prices? Falling interest rates would "weigh on currencies" as a decrease in rates will shift the supply curve ____ resulting in a _____ equilibrium exchange rate.

Lower interest rates increase the present value of bonds. right, lower

Why might the managers of a bank want the bank to be highly​ leveraged?

Managers of the bank make bonuses on quarterly performance of the company and on its​ stock, which gives them an incentive to take high risks and keep the banks highly leveraged to increase ROE.

I hold a long position in a call option on IBM stock. If the price of IBM goes down and its volatility goes up, then the value of my call option

May increase, decrease, or stay the same.

Aaron​ Levie, one of the founders of the Internet​ file-sharing site​ Box, Inc. explained the difficulty the firm had in raising funds from​ investors: "...investors had a hard time investing in a company where the founders acted​ 40, were 19 and looked 12. They thought​ we'd run off to Disneyland with the funding money." What do economists call the problem Levie​ encountered?

Moral hazard.

Because U.S. goods are now __________ expensive, this is ___________ new for Japanese consumers.

More; bad.

If the minimum-variance hedge ratio is +1, then which of the following is true?

Neither (a) nor (b) is necessarily true.

Can the economy be in a long-run macroeconomic equilibrium without being in a short-run macroeconomic equilibrium?

No

If the​ short-run aggregate supply curve​ shifts, does the​ long-run aggregate supply curve also have to​ shift? (Hint: Consider the factors that shift each curve and determine whether these factors also shift the other​ curve.)

No

Would derivative markets be better off if the only people buying and selling derivative contracts were​ hedgers?

No, as in all​ markets, at least two parties are required for each​ transaction, and speculators help provide liquidity and efficiency in financial markets.

A student makes the following​ observation: "The Dow Jones Industrial Average currently has a value of​ 13,500, while the​ S&P 500 has a value of​ 1,500. Therefore, the prices of the stocks in the DJIA are nine times as high as the price of the stocks in the​ S&P 500." Is the​ student's observation​ correct?

No, these indexes are averages of stock prices and indicate the overall performance of the stock market.

Would an investor be able to earn an​ above-average return on her stock investments by selling industrial stocks whenever she saw declines in transportation stocks and buying industrial stocks whenever she saw increases in transportation​ stocks?

No, this strategy neglects all available information except for past stock prices.

Is a firm likely to have a long position in both the spot market and the futures​ market?

No, this would imply the firm intends to both buy and sell the same asset in the future.

Is a firm likely to have a long position in both the spot market and the futures​ market? Hedging involves taking a long position in the futures market to offset a _____ position in the spot market.

No, this would imply the firm intends to both buy and sell the same asset in the future. short

Financial intermediaries take advantage of economies of scale, which refers to the reduction in average cost that results from an increase in the volume of a good or a service produced. If we lived in a world in which everyone was perfectly​ honest, would the difference in the transactions costs faced by financial intermediaries when they make loans and those faced by small savers when they make loans​ disappear?

No; while information costs might decrease there are still significant legal and other transaction costs involved in matching savers and borrowers.

What is the difference between the nominal exchange rate and the real exchange​ rate?

Nominal exchange rates tell you how​ many, say, euros you will receive in exchange for a U.S.​ dollar, but they do not tell you how much of another​ country's goods and services you can buy with that U.S. dollar.

What is the difference between the nominal exchange rate and the real exchange​ rate?

Nominal exchange rates tell you how​ many, say, euros you will receive in exchange for a U.S.​ dollar, but they do not tell you how much of another​ country's goods and services you can buy with that U.S. dollar. Real includes PPP (purchasing power parity)

The tailed minimum-variance hedge ratio becomes lower in comparison to the untailed one when

Nominal interest rates rise and hedge maturity increases.

When a newspaper article uses the term​ "the exchange​ rate," it is typically referring to the ____________ exchange rate.

Nominal.

Three real world complications keep PPP from being a complete explanation of exchange rates

Not all products can be traded internationally Products are differentiated Governments impose barriers to trade

1027.7 P = 51 / 1.041 + 51 / 1.041^2 + 51 / 1.041^3 + 1000 / 1.041^3 = 1027.7

Now suppose that one year has gone by since you bought the​ bond, and you have received the first coupon payment. The market interest rate on similar bonds is still 4.1​%. The price of the bond another investor will be willing to pay is ​$ _____. ​

914.96 P = 51/1.1 + 51/1.1^2 + 1000/1.1^2 = 914.96

Now suppose that two years have gone by since you bought the bond and that you have received the first two coupon payments. At this​ point, the market interest rate on similar bonds unexpectedly rises to 10​%. The price of the bond another investor will be willing to pay is ​$ _____. ​

writing/selling a put option

OBLIGATION to buy the underlying commodity or financial instrument at the strike price

writing/selling a call option

OBLIGATION to sell the underlying commodity or financial instrument at the strike price

A firm enters into a one-year forward contract to buy refined oil. To hedge itself, the firm simultaneously sells one-year futures contracts on crude oil. In which of the following scenarios might the firm come under cash flows pressure related to these contracts?

Oil prices skyrocket a day after the firm enters the contracts

nominal, without an adjustment

One economic argument for taxing capital gains differently than other income is that investors have to pay taxes on their ______ gain ______ for inflation.

Forward contracts have counterparty risk since​ _______.

One of the parties may go bankrupt after signing the contract and be unable to fulfill their obligation.

What are the​ Fed's traditional monetary policy​ tools? ​

Open market operations Reserve requirements. Discount policy.

Which of the​ Fed's traditional monetary policy tools is the most​ important?

Open market operations.

policy tools, policy instruments, intermediate targets, policy goals

Place the following in​ sequence, from what the Fed has the most influence on to what the Fed has the least influence​ on: policy​ goals, policy​ tools, policy​ instruments, intermediate targets. From the most influence to the least​ influence: _____ ​, _____, ______, and _____.

The law of one price states that

Portfolios with identical cashflows will have the same price.

An embedded option is one where the security contains features that are option-like. Which of the following is not an example of a security with an embedded option?

Preferred stock.

Write the equation for the Gordon growth model.

Pt = Dt * (1+g)/(re-g)

Gordon's Growth Model:

Pt = Dt x (1+g)/(re - g)

buying a call option

RIGHT to buy the underlying commodity or financial instrument at the strike price

buying a put option

RIGHT to sell the underlying commodity or financial instrument at the strike price

Suppose First National Bank has ​$260 million in assets and ​$26 million in equity capital. If First National has a 4​% ​ROA, what is its​ ROE? ​(Enter your answer rounded to two decimal places​). Now suppose First​ National's equity capital declines to ​$13 ​million, while its assets and ROA are unchanged. What is First​ National's ROE​ now?​ (Enter your answer rounded to two decimal places​)

ROE=40​% ​ROE=80​%

The most important bank assets are

Real estate loans and U.S.​ government/agency securities.

How have the types of loans banks make changed over​ time?

Real estate loans have become a much higher percentage of total loans since​ 1973, while commercial loans have declined.

If you expect stock volatility to fall but have no particular view of direction, then you should

Sell call options.

Suppose you are a manufacturer of cornbread. What risk do you face from price​ fluctuations? What would have to be true of a derivatives security if the security were to help you to hedge this​ risk?

Rising corn prices. The derivative need to go up in value if corn prices rose.

Suppose that the price of Goldman Sachs stock is currently ​$145 per share. You expect that the firm will pay a dividend of ​$1.24 per share at the end of the​ year, at which time you expect that the stock will be selling for ​$173 per share. If you require a return of 18​% to invest in this​ stock, you ____________ buy the stock.

SHOULD R= [(Det + 1 )/Pt] + [(Pet+1 - Pt)/Pt] ((1.24+1)/145) + ((173-145)/145) = 20% 20% > 18% thus, yes should invest

If the implied repo rate is lower than the borrowing rate and the lending rate for the same maturity, what strategy would you adopt to undertake an arbitrage?

Sell the asset spot, buy it forward, lend at rate .

A short position is the right and obligation of the ____________ the underlying asset on the specified future date.

Seller to deliver.

Using the spot and forward markets to borrow at the implied repo rate entails

Selling the spot asset and buying it forward.

Speculators​ "liquidate" their positions by​ _______.

Selling their futures contracts for cash.

Why might the​ bank's shareholders want the bank to be less highly​ leveraged?

Shareholders who have invested in the company often want the best return over​ 10-20 years, and want the bank to take less risk which would typically be associated with less leverage.

You anticipate that volatility will increase sharply and the stock price will fall. Select the most profitable of the following portfolios to hold, given your views:

Short stock and long puts.

When you are short a position in a FRA, you are effectively

Short the three-month zero-coupon bond, and long the six-month zero-coupon bond.

Suppose that the price of Goldman Sachs stock is currently ​$141 per share. You expect that the firm will pay a dividend of ​$2.25 per share at the end of the​ year, at which time you expect that the stock will be selling for ​$172 per share.If you require a return of 22​% to invest in this​ stock, you _____ buy the stock.

Should

Someone with no connection to an industry that places financial bets on futures contracts within the industry in an attempt to profit from changes in asset prices is called a

Speculator.

The traders the article describes are most likely​ _______ who had been​ _______ of coffee futures contracts.

Speculator: buyers.

Quantitative easing is the central bank policy that attempts to:

Stimulate the economy by buying​ long-term securities.

D. A and B only.

Stocks are called​ "equities" because: A. ownership of a​ firm's stock represents a legal claim on the​ firm's profits. B. ownership of a​ firm's stock represents partial ownership of the firm. C. owners of a​ firm's stock are protected by the legal provision of limited liability. D. A and B only. E. all of the above.

Draw Graph Interest rate on one year Japanese Government bond rises relative to the interest rate on one year U treasury build.

Supply Shifts Right

133.33 16/0.12=133.33

Suppose that a company is expected to pay a dividend per share of ​$16 per year forever. If investors require a rate of return of 12​% to invest in this​ stock, what is its​ price? The stock price is ​$______. ​(Round your response to two decimal​ places.)

-6.01% rate of return = (51+914.96 - 1027.7)/1027.7 = -6.01%

Suppose that another investor had bought the bond at the price you calculated in​ (c). The total return would have been negative _____%. ​

9.51 (1000-913.15)/913.15 = 9.51% nominal interest rate = YTM = (face value - price) / price

Suppose that on January​ 1, 2018​, the price of a​ one-year Treasury billlong dashwith a face value of ​$1000long dash is ​$913.15. Investors expect that the inflation rate will be 8​% during 2018​, but at the end of the​ year, the inflation rate turns out to have been 1​%. The nominal interest rate on the bill is ___​%. ​

B. A falling British pound. D. All of the above. sell 2,051,282.05, falling

Suppose that the U.S. firm Alcoa sells ​$4 million worth of aluminum to a British firm. If the exchange rate is currently $ 1.95 equals pound 1 and the British firm will pay Alcoa pound2 comma 051 comma 282.05 in 90​ days, answer the following questions. What​ exchange-rate risk does Alcoa face in this​ transaction? A. A rising British pound. B. A falling British pound. C. A falling dollar. D. As long as the British firm pays​ Alcoa, there is no risk. What alternatives does Alcoa have to hedge this​ exchange-rate risk? A. Alcoa can enter into a forward contract. B. Alcoa can sell currency futures. C. Alcoa can buy options contracts. D. All of the above. To hedge this​ exchange-rate risk, Alcoa can ______ pounds for dollars at the forward rate to hedge the risk of the pound _____.

a. （270e6/108）*（1/1.07）=2336448.60 b. 270e6/106/1.09=2336853.04 c. D. Both A and B are correct. d. D. Hedges are provided by​ (a) and​ (b) but not​ (c), and Halliburton prefers​ (a) because it costs less.

Suppose that the U.S. firm Halliburton buys construction equipment from the Japanese firm Komatsu at a price of yen270 million. The equipment is to be delivered to the United States and paid for in one year. The current exchange rate is yen 108 equals $ 1. The current interest rate on​ one-year U.S. Treasury bills is 9​%, and on​ one-year Japanese government bonds the interest rate is 7​%. a. If Halliburton exchanges dollars for yen today and invests the yen in Japan for one​ year, it will need ​$______ to exchange today in order to have yen270 million in one year. ​(Round your response to the nearest​ dollar.) b. If Halliburton enters a forward​ contract, agreeing to buy yen270 million in one year at an exchange rate of yen 106 equals $ 1​, it will need ​$______ today if it plans to invest the dollars at the U.S. interest rate of 9​%. ​(Round your response to the nearest​ dollar.) c. If Halliburton invests today at the U.S. interest rate of 9​%, without entering into any other type of​ contract, does the firm know how many dollars it needs today to fulfill its equipment contract in one​ year? A. No, it depends on the exchange rate at the end of the contract. B. No, but it takes the risk. C. Yes, it would need ​$2 comma 336 comma 853. D. Both A and B are correct. d. Which​ method(s) described in​ (a) through​ (c) provide(s) a hedge against​ exchange-rate risk? Which​ do(es) not? Which method is Halliburton likely to​ prefer? A. Hedges are provided by​ (a) and​ (c) but not​ (b), and Halliburton prefers​ (c) because it costs less. B. A hedge is provided by​ (a) but not​ (b) and​ (c), and thus Halliburton only prefers​ (a). C. Hedges are provided by​ (a) and​ (b) but not​ (c), and Halliburton prefers​ (b) because it costs less. D. Hedges are provided by​ (a) and​ (b) but not​ (c), and Halliburton prefers​ (a) because it costs less.

103.02 102*(1+(7%-6%))=103.02

Suppose that the current exchange rate between the yen and the dollar is yen102=​$1 and that the interest rate is 7​% on a​ one-year bond in Japan and 6​% on a comparable bond in the United States. According to the​ interest-rate parity​ condition, what do investors expect the exchange rate between the yen and the dollar to be in one​ year? The exchange rate will be yen _____=​$1.

1.84/1.06=1.7358 1.7358/1.78=0.9752 1-0.9572=0.248=2.48%

Suppose that the current exchange rate is euro1.84=pound​1, but it is expected to be euro1.78=pound1 in one year. If the current interest rate on a​ one-year government bond in the United Kingdom is 6​%, what does the​ interest-rate parity condition indicate the interest rate will be on a​ one-year government bond in​ Germany? Assume that there are no differences in​ risk, liquidity,​ taxation, or information costs between the bonds. The German interest rate will be 2.48​%. ​

decrease, increase

Suppose that the euro rises in value relative to the dollar. What is the likely effect on European exports to the United​ States? What is the likely effect on U.S. exports to​ Europe? European exports will ______ and U.S. exports will ______.

(3%+4%)/2 = 3.5% (3%+4%+5%)/3 = 4% (3%+4%+5%+3%)/4 = 3.75%

Suppose that the interest rate on a​ one-year Treasury bill is currently 3​% and that investors expect that the interest rates on​ one-year Treasury bills over the next three years will be 4​%, 5​%, and 3​%. Use the expectations theory to calculate the current interest rates on​ two-year, three-year, and​ four-year Treasury notes. The current interest rate on​ two-year Treasury notes is ______. The current interest rate on​ three-year Treasury notes is ______. The current interest rate on​ four-year Treasury notes is ______.

(6%+7%)/2 = 6.5% (6%+7%+8%)/3 = 7% (6%+7%+8%+6%)/4 = 6.75%

Suppose that the interest rate on a​ one-year Treasury bill is currently 6​% and that investors expect that the interest rates on​ one-year Treasury bills over the next three years will be 7​%, 8​%, and 6​%. Use the expectations theory to calculate the current interest rates on​ two-year, three-year, and​ four-year Treasury notes. The current interest rate on​ two-year Treasury notes is 6.5​%. ​(Round your response to two decimal​ places.) The current interest rate on​ three-year Treasury notes is 7​%. ​(Round your response to two decimal​ places.) The current interest rate on​ four-year Treasury notes is 6.75​%. ​(Round your response to two decimal​ places.)

should

Suppose that the price of Goldman Sachs stock is currently ​$146 per share. You expect that the firm will pay a dividend of ​$1.54 per share at the end of the​ year, at which time you expect that the stock will be selling for ​$159 per share. If you require a return of 8​% to invest in this​ stock, you ______ buy the stock.

1000 P=C/(1+i) + C/((1+i)^2) + C/((1+i)^3) + ... + C/((1+i)^n) + FV/((1+i)^n) P = (0.051*1000) / (1+0.051) + (0.051*1000) / ((1+0.051)^2) + (0.051*1000) / ((1+0.051)^3) + (0.051*1000) / ((1+0.051)^4) + 1000 / ((1+0.051)^4) = 1000

Suppose that you are considering investing in a​ four-year bond that has a face value of ​$1 comma 000 and a coupon rate of 5.1​%. If the market interest rate on similar bonds is 5.1​%, the price of the bond is ​$ _____. ​(Round your response to the nearest​ cent.)

1036 P=C/(1+i) + C/((1+i)^2) + C/((1+i)^3) + ... + C/((1+i)^n) + FV/((1+i)^n) P = (0.051*1000) / (1+0.041) + (0.051*1000) / ((1+0.041)^2) + (0.051*1000) / ((1+0.041)^3) + (0.051*1000) / ((1+0.041)^4) + 1000 / ((1+0.041)^4) = 1036

Suppose that you purchase the​ bond, and the next day the market interest rate on similar bonds falls to 4.1​%. The price of the bond will be ​$ _____. ​(Round your response to the nearest​ cent.)

53 P= (1+g)*D/(r-g) (1.06)*1.5/0.03=53

Suppose that​ Coca-Cola is currently paying a dividend of ​$1.5 per​ share, the dividend is expected to grow at a rate of 6​% per​ year, and the rate of return investors require to buy​ Coca-Cola's stock is 9​%. Calculate the price per share for​ Coca-Cola's stock. The price per share of​ Coca-Cola stock is ​$______. ​(Round your response to two decimal​ places.)

5%, 7.94% 5%/(1-37%) = 7.94%

Suppose​ that, holding yield​ constant, investors are indifferent as to whether they hold bonds issued by the federal government or bonds issued by state and local governments​ (that is, they consider the bonds the same with respect to default​ risk, information​ costs, and​ liquidity). Suppose that state governments have issued perpetuities​ (or consoles) with ​$71 coupons and that the federal government has also issued perpetuities with ​$71 coupons. If the state and federal perpetuities both have​ after-tax yields of 5​%, what are their​ pre-tax yields?​ (Assume that the relevant federal income tax rate is 37​%.) The​ pre-tax yield on the state perpetuity will be ______. The​ pre-tax yield on the federal perpetuity will be ______.

5%, 7.66% 5%/(1-34.77%) = 7.66%

Suppose​ that, holding yield​ constant, investors are indifferent as to whether they hold bonds issued by the federal government or bonds issued by state and local governments​ (that is, they consider the bonds the same with respect to default​ risk, information​ costs, and​ liquidity). Suppose that state governments have issued perpetuities​ (or consoles) with ​$81 coupons and that the federal government has also issued perpetuities with ​$81 coupons. If the state and federal perpetuities both have​ after-tax yields of 5​%, what are their​ pre-tax yields?​ (Assume that the relevant federal income tax rate is 34.77​%.) The​ pre-tax yield on the state perpetuity will be ______ The​ pre-tax yield on the federal perpetuity will b ______

A swap is different from a futures contract​ because:

Swaps are private agreements between counterparties and its terms are flexible.

ABC Inc. has to borrow money to undertake a seasonal business expansion in six months time. They will need additional working capital funding for six months and wish to hedge themselves against a rise in interest rates in six month's time. They should

Take a long position in a 6×12 FRA.

D. The default risk premium on the AMD bond is higher than on the Aflac bond.

The Aflac bond mentioned in the chapter opener was rated​ A- by​ Moody's, while the AMD bond was rated CCC. Based on these​ ratings, which of the following statements is​ true? A. The default risk premium on the Aflac bond is higher than on the AMD bond. B. The AMD bond is a safer investment. C. The Aflac bond is a riskier investment. D. The default risk premium on the AMD bond is higher than on the Aflac bond.

Which of the following statements in an FOMC Press Release would be an example of forward​ guidance?

The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate.

Asset purchases by the Fed occur​ when:

The Fed buys any type of security from​ banks, financial​ institutions, or the public.

How might the Fed have stopped the bank runs during the early​ 1930s?

The Fed could have lent money to insolvent banks.

Suppose that the current exchange rate is €1.09=£​1, but it is expected to be €1.07=£1 in one year. If the current interest rate on a​ one-year government bond in the United Kingdom is 2​%, what does the​ interest-rate parity condition indicate the interest rate will be on a​ one-year government bond in​ Germany? Assume that there are no differences in​ risk, liquidity,​ taxation, or information costs between the bonds.

The German interest rate will be 0.17​%. 2% + ((1.07-1.09)/1.09) x 100%

Suppose that the current exchange rate is 1.09 euros = 1pound but it is expected to be euro1.07=1 pound in one year. If the current interest rate on a​ one-year government bond in the United Kingdom is 5​%, what does the​ interest-rate parity condition indicate the interest rate will be on a​ one-year government bond in​ Germany? HINT: The​ interest-rate parity condition states that the interest rate on a domestic bond is equal to the interest rate on a foreign bond minus the expected appreciation of the domestic currency​ (expressed as the percentage change in the indirect exchange​ rate).

The German interest rate will be 5% + (1.07 - 1.09)/1.09 x 100% = 3.17​%

liquidity premium theory

The ______ holds that interest rates on​ long-term bonds are averages of the expected interest rates on​ short-term bonds plus a term premium.

segmented markets theory

The ______ holds that the interest rate on a bond of a particular maturity is determined only by the demand and supply of bonds of that maturity.

expectations theory

The ______ states that interest rates on​ long-term bonds are an average of the interest rates investors expect on​ short-term bonds over the lifetime of the​ long-term bond.

Borrowing at a low interest rate in one currency to lend at a higher interest rate in another currency is sometimes called a​ "carry trade." An article in the New York Times describes an investment strategy of this​ type: "A speculative carry trade in which investors borrowed euros at low interest rates to buy the​ higher-yielding Hungarian​ currency." -The article notes that the Hungarian​ currency, the​ forint, was​ "buoyed" by this strategy. Why would investors engaging in this carry trade cause an increase in the exchange value of the​ forint?

The acquisition of assets denominated in the Hungarian currency​ requires, as a first​ step, that the Hungarian forint be acquired. This entails an increase in the demand for that currency and thus a rise in its exchange value.

8.51 9.51-1=8.51 actual real interest rate = nominal - actual inflation

The actual real interest rate is ___​%

B. increased spending resulted in unmanageable levels of government debt. C. unchecked spending can increase the default risk on government bonds. E. investors worry about whether Spain will be able to pay off its large spending programs without drastic action.

The article​ states, in​ part, that Spain is​ "reaping the bitter harvest of a decade of ambitious and often unchecked spending on infrastructure and​ services." This observation directly relates to the headline​ "Spanish Bond Yields​ Soar" since: ​(Check all that apply​) A. this ambitious spending resulted in significantly greater tax revenues during the recession. B. increased spending resulted in unmanageable levels of government debt. C. unchecked spending can increase the default risk on government bonds. D. spending on infrastructure instead of social programs increases the default risk on government bonds. E. investors worry about whether Spain will be able to pay off its large spending programs without drastic action.

Futures contracts are more likely to be cash-settled when

The asset underlying the contract is too costly to deliver physically

Yes, according to the efficient markets​ hypothesis, if you could derive an efficient model to forecast stock​ returns, it is possible to earn infinitely high profits.

The business writer Michael Lewis has quoted Michael​ Burry, a fund​ manager, as​ saying: "I also immediately internalized the idea that no school could teach someone how to be a great investor. If that were​ true, it'd be the most popular school in the​ world, with an impossibly high tuition. So it must not be​ true." Do you agree with​ Burry's reasoning? Source​: Michael​ Lewis, The Big​ Short: Inside the Doomsday Machine​, New​ York: W.W.​ Norton, 2010, p. 35.

Suppose that oil prices decline by​ 50%. Which counterparty to a forward contract in oil has an incentive to default on the​ contract?

The buyer of the forward contract since the price they have committed to pay is now above the market price.

The forward price of an asset that has no holding costs or benefits is equal to

The compounded price of the spot asset, where the compounding takes place at the risk-free rate

4.92% coupon yield = face value * coupon rate bond's current yield = coupon / current price 1000*5.1% / 1036 = 4.92%

The current yield will be ____%. ​(Round your response to two decimal​ places.)

How does the​ interest-rate parity condition account for differences in interest rates in different countries on similar​ bonds?

The differences reflect expected changes in the exchange rate.

If Americans lose their taste for​ Mexican-made goods, we should see which of the following changes in the​ dollar-peso market?

The dollar will appreciate relative to the peso.

duration gap

The duration gap is an accounting term for the difference between the duration of assets and liabilites. The duration gap measures how well cash flows for assets and liabilities are matched. When the duration of assets exceeds the duration of liabilities the duration gap is positive. A positive duration gap means greater exposure to rising interest rates; if interest rates go up then the price of assets fall more than the price of liabilities. Conversely, when the duration of assets is less than the duration of liabilities the duration gap is negative; if interest rates fall then the price of assets goes up less than the price of liabilities. Duration has a double-facet view. While a positive duration gap means greater risk, it also means that, on average, payables became due before receivables.

Ceteris paribus, as interest rates rise, which of these statements is most likely to be true?

The duration of bonds falls.

The supply curve shifts to the right.

The economy experiences a period of rapid​ growth, with rising corporate profits.

If it is true that investors rely on​ "animal spirits" rather than expected values when making​ investments, is the efficient markets hypothesis​ accurate?

The efficient markets hypothesis assumes people are perfectly​ rational, whereas animal spirits by definition are people acting irrational. If people act upon animal​ spirits, then the efficient markets hypothesis might not hold.

Suppose that the current exchange rate between the yen and the dollar is ¥109=​$1 and that the interest rate is 4​% on a​ one-year bond in Japan and 3​% on a comparable bond in the United States. According to the​ interest-rate parity​ condition, what do investors expect the exchange rate between the yen and the dollar to be in one​ year?

The exchange rate will be ¥110.09=​$1. 109 x (1+0.01) ​

1.51 9.51-8=1.51 expected real interest rate = nominal - expected inflation

The expected real interest rate is ___%

What is the required return on​ equities?

The expected return necessary to compensate investors for the risk of investing in the stock.

Both the demand and supply curves shift to the left.

The federal government imposes a tax of​ $10 per bond on bond sales and bond purchases.

The supply curve shifts to the left.

The federal government runs a series of budget surpluses.

6.48% coupon yield = face value * coupon rate bond's current yield = coupon / current price 1000*7.5%/1158=6.48%

The following information from the close of trading on November​ 24, 2010 is for an IBM bond with a face value of ​$1 comma 000 and a maturity date of June 15 comma 2013​: Coupon​ rate: 7.5​% ​Price: ​$1 comma 158 Yield to​ maturity: 1.22​% The​ bond's current yield was _____%.

If there is a convenience yield, then the following is true of the forward price:

The forward price is lower than it would be with no convenience yield.

Consider that the one-year Euro interest rate is greater than the US one-year interest rate. How does the one-year forward exchange rate (USD per EUR) compare to the spot exchange rate (USD per EUR)?

The forward rate is smaller than the spot rate

Law of one price

The fundamental economic idea that identical products should sell for the same price everywhere

Counterparty risk in a futures contract is lower than in a forward contract because

The futures exchange bears the counterparty risk.

When a counterparty to a futures contract fails to perform under the contract,

The futures exchange bears the loss,

The following is not a point of difference between futures and forwards

The futures payoff depends on the spot price of the asset at contract maturity

The volatility of a stock index falls sharply, the index drops in value, and its expected return increases. Assuming all else (dividend yield, interest rates, etc.) are constant, which of the following is true?

The futures price decreases because of the drop in the level of the index.

The convexity bias between FRAs and eurodollar futures implies that

The futures results in greater cash inflows or lower cash outflows than the FRA.

D. The increase in the expected​ after-tax real interest rate would reduce the demand for loanable funds.

The government eliminates the tax deduction for interest homeowners pay on mortgage loans. A. The demand for loanable funds would remain constant. B. An​ individual's desire to earn more due to changes in the interest rate would increase the demand for loanable funds. C. The increase in the expected​ after-tax real interest rate would increase the demand for loanable funds. D. The increase in the expected​ after-tax real interest rate would reduce the demand for loanable funds.

Financial crisis typically results in a recession for all of the following reasons​ EXCEPT?

The government is unwilling to intervene during a financial crisis.

Which of the following statements is true of an option's payoff?

The gross payoff can be greater or less than than the net payoff

In a covered call strategy:

The gross payoff is smaller than the net payoff.

Why is the demand for real money balances downward​ sloping?

The higher the interest rate on​ short-term assets, the more households and firms give up when they hold large money balances.

A

The higher the price of bonds, the greater the quantity of bonds demanded A. false-- the higher the price of bonds the lower the quantity of bonds demanded B. false-- the price of bonds does not influence the quantity of bonds demanded C. true -- the higher the price of bonds, the higher the interest paid on the bonds is and therefore the greater the quantity of bonds demanded. D. true -- the higher the price of bonds, the higher their future value and therefore the greater the quantity of bonds demanded

What is the efficient markets​ hypothesis?

The hypothesis that the equilibrium price of a stock is equal to its fundamental value. The application of rational expectations to financial markets. The assumption that stock prices are not predictable and follow a random walk.

The tailed hedge ratio (which takes into account daily resettlement of the futures contract) is smaller than the untailed one in absolute value. Which of these statements is true in relation to this mathematical fact?

The interest earned or lost on the daily mark-to-market gains and losses increases the volatility of the changes in value of the hedging futures position, thereby reducing the hedge ratio.

Rolling over short-dated futures contracts is the same as taking one long-dated futures contract if

The interest rates are constant

How is it related to the theory of purchasing power parity​ (PPP)? (law of one price)

The law of one price is the basis for PPP.

C. identical products should sell for the same price everywhere. B. The law of one price is the basis for PPP.

The law of one price states​ that: A. arbitrage profits are always possible with identical products. B. all products should sell for the same price everywhere. C. identical products should sell for the same price everywhere. D. similar​ (yet differentiated) products should sell for the same price everywhere. How is it related to the theory of purchasing power parity​ (PPP)? A. As the law of one price states that identical products should sell for the same​ price, PPP predicts that in the long​ run, the purchasing power of one unit of a currency should be the same in another country. B. The law of one price is the basis for PPP. C. As the law of one price states that identical products should sell for the same​ price, PPP predicts that in the short run​ only, the purchasing power of one unit of a currency should be the same in another country. D. Both A and B are correct. E. Both A and C are correct.

It is now​ November, and you sell 40,000 bushels of wheat at the spot price of ​$2.86 per bushel. If the futures price is ​$3.11 and you settle your position in the futures​ market, what was your gain or loss on your futures market​ position?

The loss on your futures market position was ​$4,000. ​(Enter your response as an integer.​) The gain on your spot market position was ​$4,000. ​(Enter your response as an integer.​) ​Therefore, you were successful in completely hedging your risk from price fluctuations in the wheat market. to calculate gain/loss: Profit (loss) = contracts value in september - contracts value in november

pension and retirement accounts, tax advantages

The majority of wealth held by households is in ______. One reason for this might be that such accounts offer ______.

What does it mean to describe the​ foreign-exchange market as an "​over-the-counter market"​?

The market consists of market makers linked together by computers.

A "stack-and-roll" strategy makes profits from the "roll" part when

The market is in backwardation

Which of the following statements is TRUE?

The maximum possible loss to the seller of a call option is unlimited

A price tick is

The minimum amount by which the price can move

Which of the following statements is true when comparing the payoffs at maturity of a long forward contract with a long position in a call option, assuming the strike price of the option is the same as the delivery price in the forward contract?

The minimum payoff of the option exceeds that of the forward contract.

Consider a pair of at-the-money European call and a put options written on the same non-dividend-paying stock with the same maturity. Which of the following statements is most accurate?

The minimum price of the call is at least as much as that of the put.

If changes in spot and futures prices are uncorrelated, then

The minimum variance hedge ratio is zero.

If the minimum-variance hedge ratio is , then which of the following statements is true?

The minimum-variance hedge for a long spot exposure is a short futures exposure of the same size

You are hedging a spot position with futures. If the spot asset is less volatile than the futures, and there is basis risk, which of the following is surely false:

The minimum-variance hedge ratio is greater than 1

What are real money​ balances? ​(Check all that apply.​)

The money supply adjusted for inflation. The money​ supply, such as​ M1, divided by the price level.

A month ago, the price of an IBM stock was $110 and its volatility was 28%. Today, its price is still $110 but its volatility has gone up to 40%. If the one-month interest rate has not changed over the last month and IBM stock does not pay any dividends (i.e., there are no costs or benefits of carry,) then

The one-month forward prices of IBM today equals the one-month forward price a month ago

Which of the following statements about forwards is false?

The payoff at maturity from a long forward contract is always non-negative (either positive or zero).

According to the theory of purchasing power​ parity, what should happen to the value of the U.S. dollar relative to the Mexican peso if the following​ occurs? The US enters a period of deflation while Mexico experiences inflation?

The peso depreciates relative to the dollar

A "no-arbitrage restriction" on option prices is the statement that

The price of an option is such that no strategy can be constructed using the option and the underlying that generates arbitrage profits.

Interest-Rate Parity Condition.

The proposition that differences in interest rates on similar bonds in different countries reflect expectations of future changes in exchange rates

increase, more

The publication also notes that hedge funds often use leverage and​ that: "The use of leverage can turn an otherwise conservative investment into an extremely risky investment." Leverage increases the risk of an investment because although borrowing may ______ the potential return of an​ investment, in a market downturn a company may owe ______ than the value of the underlying asset.

What do open market operations ​imply?

The purchase or sale of securities, typically U.S. Treasury securities, in financial markets.

The​ Fed's purchase of Treasury bills leads to​ "multiple deposit​ expansion" because:

The purchase raises the amount of reserves at banks.

Why is the supply curve for foreign exchange upward​ sloping?

The quantity of dollars supplied will increase as the exchange rate increases.

Suppose that you manage a bank that has made many loans at a fixed interest rate. You are worried that inflation might rise and the value of the loans will decline. Why would an increase in inflation cause the value of your​ fixed-rate loans to​ decline?

The real return of​ fixed-rate loans will be lower.

What key assumptions does the Gordon growth model​ make? ​(Check all that​ apply.)

The required rate of return is greater than the dividend growth rate of the stock. The growth rate of dividends is constant. Investors receive their first dividend immediately rather than at the end of the year.

What is the relationship between the required return on equities and the cost of equity​ capital?

The required return on equities and the cost of equity capital are the same rate.

Borrowing at a low interest rate in one currency to lend at a higher interest rate in another currency is sometimes called a​ "carry trade." An article in the New York Times describes an investment strategy of this​ type: "A speculative carry trade in which investors borrowed euros at low interest rates to buy the​ higher-yielding Hungarian​ currency." -Why does the article describe the strategy as​ speculative? Wouldn't investors be certain to make a profit by following this​ strategy? Briefly explain.

The strategy is speculative because the future value of the exchange rate between the Hungarian currency and the euro is unknown.

What is the fundamental value of a share of​ stock?

The sum of the present value of all dividend payments expected to be received into the infinite future time.

Why did futures markets originate in agricultural​ markets?

The supply of agricultural products depends on the weather and can be subject to wide price fluctuations.

Why did futures markets originate in agricultural​ markets? Would a farmer buy or sell futures​ contracts? What would a farmer hope to gain by doing​ so? A farmer would _______ futures contracts to reduce the risk of agricultural prices ______. Would General Mills buy or sell futures contracts in​ wheat? What would General Mills hope to gain by doing​ so? General Mills would ______ futures contracts in wheat to reduce the risk of prices _______.

The supply of agricultural products depends on the weather and can be subject to wide price fluctuations. sell, falling buy, rising

Suppose you want to hedge a futures contract A with another futures contract B. You calculate the minimum-variance hedge ratio ignoring daily resettlement (for example, by regressing daily changes in Contract A's prices on daily changes in Contract B's prices). Suppose, however, that both contracts are marked-to-market daily. Which of the following statements is always true?

The tailed hedge ratio is equal to the untailed one

The​ Fed's "policy​ rate" is:

The target federal funds rate.

interest rates, maturity graph, Treasury yield curve

The term structure of interest rates is the relationship among the _______ on bonds that are otherwise similar but differ in _______. The most common way to analyze the term structure is by using a _____ known as the ______.

Consider two European call options, with maturities three months and six months on the same stock and same strike price. The stock pays dividends in two months time and every quarter thereafter. Which of the following statements is most accurate?

The three-month option may be worth more than the six-month option.

Consider two European put options, with maturities three months and six months on the same stock and same strike price. The stock pays no dividends. Which of the following statements is most accurate?

The three-month option may be worth more than the six-month option.

Consider two American call options, with maturities three months and six months on the same stock and same strike price. The stock pays dividends in two months time and every quarter thereafter. Which of the following statements is most accurate?

The three-month option must be worth less than the six-month option.

7.87% rate of return = (51 + (1027.7 - 1000) ) / 1000 = 7.87%

The total return on the bond was _____​%.

-3.4% rate of return = (51 + 914.96 - 1000)/1000 = -3.4%

The total return on the bond was negative _____%. ​

Commodity forward contracts differ from financial forwards in the following manner:

The underlying asset in a commodity forward is an asset that may be used in production and that gets consumed in the process

Former Federal Reserve Chair Ben Bernanke has observed​ that; "Even a bank that is solvent under normal conditions can rarely survive a sustained run." ​Source: Ben S.​ Bernanke, The Courage to​ Act: The Financial Crisis and Its Aftermath​, New​ York: W.W.​ Norton, 2015, p. 45. What does Bernanke mean by "solvent under normal conditions"​? What does he mean by a "sustained run"​? Why​ can't a bank by itself survive a sustained​ run?

The value of a​ bank's assets is more than the value of its​ liabilities, so its net​ worth, or​ capital, is positive. By​ "sustained run," Bernanke means a bank run that lasts for a significant period of time. A bank cannot by itself survive a sustained run because it does not have enough reserves to match the deposit withdrawals and its assets are long term and not easily liquidated.

You are long a forward on the S&P 500 index that you entered into two months ago and has a month left to maturity. If the one-month rate of interest increases, then, ceteris paribus,

The value of your forward contract is unaffected since the delivery price on your contract was already locked in two months ago

The FTSE index is at 5,100. You are short a straddle on the FTSE 100 struck at 5,100 and long a 5,000/5,200 strangle. If volatility were to increase

The value of your position would decrease.

If changes in spot and futures prices are perfectly correlated over the horizon of a hedge, then

The variance of cash flows from a hedged position under the minimum-variance hedge ratio is zero

If changes in spot and futures prices have a correlation of , then

The variance of cash flows from a hedged position under the minimum-variance hedge ratio is zero

The level of margining in a futures contract takes as an important input

The volatility of the asset underlying the futures contract.

HW5, Question 7 (do math problem) What is meant by the​ "OpenInt" on a futures​ contract?

The volume of contracts outstanding.

What is meant by the​ "OpenInt" on a futures​ contract?

The volume of contracts outstanding.

Suppose the duration of a bond portfolio is 2. This means

The weighted-average maturity of the portfolio's cash flows is 2 years

What services do forward contracts provide in the financial​ system?

They allow an agreement in the present to exchange a given amount of a commodity or a financial asset at a particular date in the future for a set price, allow transactions to be agreed to in the present but to be settled in the future, give firms and investors an opportunity to hedge the risk on transactions that depend on future prices.

Future contracts

They are traded on exchanges, such as the CBOT, and are standardized in terms of quantity and settlement date. The exchange reduced counterparty risk, which in turn reduced default risk

5.1% coupon yield = face value * coupon rate bond's current yield = coupon / current price 1000*5.1% / 1000=5.1%

The​ bond's current yield is ______​%. ​(Round your response to two decimal​ places.)

increasing bankruptcies and defaults increasing increased more

The​ debt-deflation process is the process of ______ that can increase the severity of an economic downturn. The​ debt-deflation process contributed to the severity of the Great Depression by ______ the real interest rate and the real value of​ debts, which ______ the burden on borrowers and led to ______ loan defaults.

Explain the effect on the demand for reserves or the supply of reserves of the following Fed policy​ action: An increase in the discount rate?

This would raise the interest rate at which the supply for reserves becomes horizontal.

What is the primary reason that households and firms demand​ money?

To facilitate buying and selling.

Why did the Fed use it during the financial crisis of​ 2007-2009?

To reduce the interest rates on mortgages and other​ long-term rates.

Direct lending would allow a saver the opportunity to participate in spreading out the risk of lending.

Typically, you will receive a very low interest rate on money you deposit in a bank. Interest rates on car loans and business loans are much higher. Which of the following is not a reason why most people prefer putting their money in a bank to lending it directly to individuals or​ businesses?

Who would be interested in exchanging dollars for​ yen?

U.S. companies importing or buying Japanese products.

Real exchange rate formula

US consumer price index / British price index times nominal exchange rate

What is the controversy over​ China's pegging the value of the​ yuan? -The value of the yuan is ____________ , making Chinese exports ___________ and imports into China _______________.

Undervalued; cheaper; more expensive.

The sum of the present value of all dividend payments expected to be received into the infinite future time.

What is the fundamental value of a share of​ stock?

The liquidity of the investment compared with other investments. The total amount of savings to be allocated among investments. The expected rate of return and the degree of risk for an investment compared to alternative investments.

What are the determinants of asset​ demand?

A. To meet their legal obligation to hold required reserves. B. To hold excess reserves to meet their​ short-term liquidity needs.

What are the reasons banks demand​ reserves? ​(Check all that apply.​) A. To meet their legal obligation to hold required reserves. B. To hold excess reserves to meet their​ short-term liquidity needs. C. To make money by earning interest on reserve balances. D. To hold excess reserves to meet their​ long-term liquidity needs.

A. NASDAQ Composite. B. Dow Jones Industrial Average. C. S&P 500.

What are the three most important stock market​ indexes? ​(Check all that​ apply.) A. NASDAQ Composite. B. Dow Jones Industrial Average. C. S&P 500. D. Standard​ & Poor's. E. AMERITRADE.

D. All of the above.

What is the efficient markets​ hypothesis? A. The application of rational expectations to financial markets. B. The hypothesis that the equilibrium price of a stock is equal to its fundamental value. C. The assumption that stock prices are not predictable and follow a random walk. D. All of the above.

B. The government can insure deposits. D. A central bank can act as a lender of last resort.

What are the two methods that governments typically use to avoid bank​ panics? ​(Check all that apply.​) A. The government can nationalize banks. B. The government can insure deposits. C. The government can increase the refinance rate. D. A central bank can act as a lender of last resort.

Interest income from coupon payments and capital gains from price changes.

What are the two types of income an investor can earn on a​ bond?

TIPS are Treasury Inflation Protected​ Securities, which are securities that adjust the interest rate to compensate for inflation. Investors would buy TIPS to hedge against high expected inflation rates.

What are​ TIPS? Why would investors buy TIPS rather than conventional Treasury​ bonds?

C. If a bank​ failed, then depositors would potentially lose all their money.

What did bank depositors have to fear in the early​ 1930s? A. Depositors had fear of a reduction of interest rates. B. Depositors had fear of the nationalization of commercial banks. C. If a bank​ failed, then depositors would potentially lose all their money. D. Depositors had fear of hyperinflation.

A. Bank panics may start in an isolated​ area, but the fear they engender quickly spreads to banks elsewhere.

What do the authors mean that​ "such contagion knows no geographical​ limits"? A. Bank panics may start in an isolated​ area, but the fear they engender quickly spreads to banks elsewhere. B. Bank panics always start in agricultural area​ banks, then spread to urban area banks. C. Bank panics produce a contagion that spreads from country to country. D. None of the above.

A. increased their capital.

What does Greenspan mean that​ "the added risk had not been compensated by higher​ capital"? In order to compensate for the​ risk, Greenspan believes that nonbank financial institutions should have voluntarily A. increased their capital. B. decreased excess reserves. C. increased the interest rate. D. decreased their debt.

B. Simultaneous withdrawals by a​ bank's depositors result in the bank closing.

What does he mean by a "sustained run"? Why​ can't a bank survive a sustained​ run? A. Simultaneous devaluation of assets result in a bank closing. B. Simultaneous withdrawals by a​ bank's depositors result in the bank closing. C. The closing of other banks causes a bank to close. D. Simultaneous deposits result in a bank closing.

D. asset prices have increased beyond the point that could be justified by fundamental evaluation.

What does it mean to say that there is a bubble in the housing​ market? A bubble means that A. asset prices have increased beyond the point that could be justified by property appraisers. B. the decline in the housing market caused not only decreases in spending on residential​ construction, but also affected markets for furniture and appliances. C. asset prices have decreased below the point that could be justified by fundamental evaluation. D. asset prices have increased beyond the point that could be justified by fundamental evaluation.

B. Breaking the buck occurs when a money market mutual​ fund's share price falls below​ $1.00.

What does​ "breaking the​ buck" mean? A. Breaking the buck occurs when a money market mutual​ fund's share price falls below​ $0.50. B. Breaking the buck occurs when a money market mutual​ fund's share price falls below​ $1.00. C. Breaking the buck occurs when a money market mutual​ fund's share price falls below​ $1.50. D. Breaking the buck occurs when a money market mutual​ fund's share price falls below​ $0.98.

The risk that the bond issuer will fail to make payments of interest or principal.

What does​ Moody's mean by​ "credit risk"?

B. The failure of Lehman Brothers marked a turning point in the crisis. C. Many parts of the financial system became​ frozen, as trading in securitized loans largely stopped.

What effects did the run on Lehman Brothers have on the U.S.​ economy? ​(Check all that apply.​) A. Large firms had difficulty arranging for even​ short-term loans, while small firms were able to escape this difficulty. B. The failure of Lehman Brothers marked a turning point in the crisis. C. Many parts of the financial system became​ frozen, as trading in securitized loans largely stopped. D. The failure of Lehman Brothers had no effect on the U.S. economy.

A. Nominal exchange rates tell you how​ many, say, euros you will receive in exchange for a U.S.​ dollar, but they do not tell you how much of another​ country's goods and services you can buy with that U.S. dollar. nominal

What is the difference between the nominal exchange rate and the real exchange​ rate? A. Nominal exchange rates tell you how​ many, say, euros you will receive in exchange for a U.S.​ dollar, but they do not tell you how much of another​ country's goods and services you can buy with that U.S. dollar. B. The real exchange rate is the price of one​ country's currency in terms of another​ country's currency. C. The nominal exchange rate measures the rate at which goods and services of one country can be exchanged for goods and services of another country. D. All of the above. When a newspaper article uses the term​ "the exchange​ rate," it is typically referring to the ______ exchange rate.

A single statistic summarizing a rating​ agency's view of the bond​ issuer's likely creditworthiness.

What is a bond​ rating?

If the price of an asset​ increases, it is called a capital gain. When the market interest rate​ increases, the price of the bond falls and you incur a capital loss.

What is a capital gain on a financial​ security? If you own a bond and market interest rates​ increase, will you experience a capital gain or a capital​ loss?

B. A​ "run" is a rush to withdraw money before everyone else does.

What is a​ "run"? A. A​ "run" is a rush to invest money before everyone else does. B. A​ "run" is a rush to withdraw money before everyone else does. C. A​ "run" means that investors froze all current investing activities. D. A​ "run" has no special meaning in the context of mutual​ funds' performance.

The ability of a bond issuer to make the required payments on its bonds.

What is meant by a bond​ issuer's creditworthiness?

C

What is meant by the term "risk averse"? A. it refers to investors who prefer risk to safe investment, meaning that risk-averse investors would choose gambling over any form of investment B. it refers to investors who have an aversion to risk, meaning that when choosing between two assets, risk-averse investors would ignore risk and only consider expected return C. it refers to investors who have an aversion to risk, meaning that when choosing between two assets with the same expected returns, risk-averse investors would choose the asset with the lower risk

indirect, direct appreciated, depreciated

What is the difference between a direct quotation of an exchange rate and an indirect​ quotation? ______ quotations express exchange rates as units of foreign currency per unit of domestic​ currency, whereas ______ quotations are exchange rates as units of domestic currency per unit of foreign currency. If the exchange rate between the yen and the dollar changes from yen95 ​= $1 to yen70 ​= $1, the yen has ______ against the​ dollar, and the dollar has ______ against the yen.

spot, forward Forward, futures futures, forward low, flexibility

What is the difference between a spot transaction and a forward transaction in the​ foreign-exchange market? A ______ transaction is trade today​, and a ______ transaction is trade in the future. What are the key differences between​ foreign-exchange forward contracts and​ foreign-exchange futures​ contracts?______ contracts are private agreements among traders to exchange any amount of currency on any future​ date, while______ contracts are traded on exchanges and are​ standardized, including a stated settlement date. With ______ contracts, the exchange rate changes continually as contracts are bought and sold on the​ exchange, and with ______ contracts, the exchange rate is fixed at the time the contract is agreed to. Why are forward contracts more widely used in the​ foreign-exchange market than are futures​ contracts? Forward contracts are used 10 times more than futures contracts because the counterparty risk between big banks is relatively ______​ , and these banks value the ______ of the forward contract.

A stock exchange is a physical location where trading occurs​ face-to-face, while​ over-the-counter markets are virtual markets where dealers are linked by computers to buy and sell stocks.

What is the difference between a stock exchange and an​ over-the-counter market?

B. Adaptive expectations assume that​ investors' expectations are based on past values of a​ variable, whereas rational expectations assume that investors make forecasts of future values using all available information.

What is the difference between adaptive expectations and rational​ expectations? A. Adaptive expectations assume that​ investors' expectations are based on the future values of a​ variable, whereas rational expectations assume that investors make forecasts using all available information. B. Adaptive expectations assume that​ investors' expectations are based on past values of a​ variable, whereas rational expectations assume that investors make forecasts of future values using all available information. C. Rational expectations assume that​ investors' expectations are based on past values of a​ variable, whereas adaptive expectations assume that investors make forecasts of future values using all available information. D. Adaptive expectations assume that​ investors' expectations are based on one​ variable, whereas rational expectations assume that investors make forecasts of future values using multiple variables.

Yield to maturity is the return on a bond assuming the bondholder holds the bond for the full maturity. Rate of return is the return over a specific holding period that takes into account not just the coupon rate but the price change.

What is the difference between the yield to maturity on a coupon bond and the rate of​ return?

1500/(1.14^4) = 888.12

What is the present value of ​$1,500 to be received in four years if the interest rate is 14​%? The present value is ​_____. ​ (Round your response to the nearest​ cent.)

P = D<t+1>^e/(1+r<e>) + D<t+2>^e/(1+r<e>)^2 + P<t+2>^e/(1+r<e>)^2

What is the relationship between the price of a financial asset and the payments investors will receive from owning that​ asset?

A. A collection of nonbank financial institutions that channel money from savers to borrowers.

What is the shadow banking​ system? A. A collection of nonbank financial institutions that channel money from savers to borrowers. B. A part of the banking​ system, which is not regulated by law. C. An addition to the commercial banking​ system, created by the Fed after the financial​ crisis, in order to reduce banking instability. D. A small system of financial institutions that offer traditional banking services.

D

What is the tax treatment of the coupons on a bond issued by GE? A. the bond is subject to state and local taxes only B. the bond is not subject to federal, state, or local taxes C. the bond is subject to federal tax only D. the bond is subject to federal, state, and local taxes

The bond is subject to federal tax only.

What is the tax treatment of the coupons on a bond issued by the U.S.​ Treasury?

C

What is the tax treatment of the coupons on a bond issued by the city of Houston? A. the bond is subject to federal, state, and local taxes B. the bond is subject to state and local taxes only C. the bond is not subject to federal, state, or local taxes D. the bond is subject to federal tax only

The bond is not subject to​ federal, state, or local taxes.

What is the tax treatment of the coupons on a bond issued by the city of​ Houston?

The bond is subject to​ federal, state, and local taxes.

What is the tax treatment of the coupons on a bond issued by​ GE?

The interest rate that equates the present value of future payments of an asset with its current value.

What is the yield to​ maturity?

B. Congress authorized NOW accounts on which banks can pay interest. D. Banks developed automated transfer of saving​ accounts, which move checkable deposit balances into​ higher-interest CDs each night and then back into checkable deposit balances in the morning.

What legislative change and financial innovations occurred after 1979 that changed M1 from representing a pure medium of exchange to also representing a store of​ value? ​(Check all that apply.​) A. The shadow banking system was created by Congress to compete with traditional banks. B. Congress authorized NOW accounts on which banks can pay interest. C. Banks developed sweep​ accounts, which move savings deposits of businesses into checkable deposits each morning and then move the funds back into savings deposits at the end of the day. D. Banks developed automated transfer of saving​ accounts, which move checkable deposit balances into​ higher-interest CDs each night and then back into checkable deposit balances in the morning.

Economic conditions were more severe after the crash of 1929 even th

What reason might Temin give to support his argument that what happened to the economy following the crash of 1987 is evidence against the crash of 1929 being an important shock to the​ economy?

Economic conditions were more severe after the crash of 1929 even though the decline in the market in 1987 was twice as large as the decline in the market in 1929.

What reason might Temin give to support his argument that what happened to the economy following the crash of 1987 is evidence against the crash of 1929 being an important shock to the​ economy?

D. The potential freezing of​ $1 trillion of positions due to the​ fund's high leverage posed a systemic risk to the system.

What risks did it pose to the financial​ system? A. The financial system in most countries is regulated by the​ government, so no individual firm can disrupt the​ system's stability. B. The high leverage of a firm posed the risk of decreased equilibrium prices in the given market. C. The high leverage of a firm does not pose any risk to the financial system. D. The potential freezing of​ $1 trillion of positions due to the​ fund's high leverage posed a systemic risk to the system.

B. Leverage is a​ double-edged sword: it can increase​ profits, but it can also magnify losses.

What risks did​ Long-Term Capital​ Management's high leverage pose to the​ firm? A. High leverage increases the moral hazard problem to the firm. B. Leverage is a​ double-edged sword: it can increase​ profits, but it can also magnify losses. C. Leverage increases the​ interest-rate risk to the firm. D. High leverage does not pose any risk to the firm.

B. Bank panics exacerbated the effects of the Great Depression by reducing the ability for people to safely store their money comma which further reduced economic activity.

What role did the bank panics of the early 1930s play in explaining the severity of the Great​ Depression? A. Bank panics aggravated the effects of the Great Depression by making residential and commercial loans easier to get comma which further reduced economic activity. B. Bank panics exacerbated the effects of the Great Depression by reducing the ability for people to safely store their money comma which further reduced economic activity. C. Bank panics of the early 1930s did not play any role in explaining the severity of the Great Depression. D. Both A and B are correct.

$55 one year from now

What would you prefer to receive if the interest rate is 26​%?

If others were unwilling to accept a dollar bill or a check as a means of payment.

What​ factors, if​ changed, would affect your willingness to accept a dollar bill or a check as​ money?

C

When are economists most likely to use the bond market approach to analyze changes in interest rates? when are economists most likely to use the loanable funds approach? A. both models are used to identify the relationship between bond prices and interest rates B. the bond market model is generally a long-term model that focuses on movements in the bond market. the loanable funds model is a medium-term model that focuses on movements in the loan market C. the bond market model is a medium-term model that focuses on movements in the bond market. the loanable funds model is generally a long-term model when discussing global savings and long-term global interest rates D. the bond market model is a medium term-model that focuses on movements in the bond market. the loanable funds model distinguishes the correlation bw the interest rate and the exchange rate

B. The Board of Governors since they control reserve​ requirements, the discount​ rate, and hold a majority of the seats on the Federal Open Market Committee.

Which body is more important within the Federal Reserve​ System, the Board of Governors or the Federal Open Market​ Committee? A. The Board of Governors since it is made up of the top 7 of the 12 Federal Reserve branch bank presidents who directly control monetary policy in their regions. B. The Board of Governors since they control reserve​ requirements, the discount​ rate, and hold a majority of the seats on the Federal Open Market Committee. C. The Federal Open Market Committee since they control reserve​ requirements, the discount​ rate, and are independent of any influence from Congress. D. The Federal Open Market Committee since they are the main policy making arm of the Federal Reserve System and took over control of monetary policy from the Board of Governors during the​ 2007-2009 financial crisis.

Real GDP growth Unemployment rate

Which from the following variables is most likely to be a goal of monetary​ policy?

Open market purchases, Discount rate

Which from the following variables is most likely to be a monetary policy​ tool? ​(Check all that apply.​)

M2, Monetary base, M1

Which from the following variables is most likely to be an intermediate target of monetary​ policy?

Nonborrowed reserves, Federal funds rate

Which from the following variables is most likely to be an operating target of monetary​ policy?

Direct finance requires financial​ markets, while indirect finance involves financial intermediaries.

Which involves financial​ intermediaries, and which involves financial​ markets?

B. Employees bear the risk of bad investments by the plan. C. Employers are no longer liable for plans being underfunded. D. Employers no longer promise to make a particular benefit payment.

Which of the following are reasons why​ 401(k) plans might be more desirable to employers than traditional pension​ plans? ​(Check all that apply​.) A. Employers retain managerial control over the plans. B. Employees bear the risk of bad investments by the plan. C. Employers are no longer liable for plans being underfunded. D. Employers no longer promise to make a particular benefit payment.

The increased savings in the rest of the world increases international​ lending, lowering the world interest​ rate, and increasing international borrowing in the United States.

Which of the following best describes the effect of a global savings​ glut?

A. The Fed failed to understand that with deflation, low nominal interest rates did not imply low real interest rates.

Which of the following is a reason that the Federal reserve failed to intervene to stabilize the banking system in the early​ 1930s? A. The Fed failed to understand that with deflation, low nominal interest rates did not imply low real interest rates. B. The Fed wanted to purge speculative excess, believing that it was necessary for the price level to rise and weak banks and weak firms to fail before a recovery could begin. C. Power within the Federal Reserve was much more unified than today comma making it more difficult for the Fed to act. D. The Fed was reluctant to rescue insolvent banks comma believing that doing so would discourage risky behavior by bank managers (the moral hazard problem).

C. Falling prices of​ mortgage-backed securities and other​ housing-related assets led to losses at banks and other intermediaries.

Which of the following is an example of the interconnections among banks and nonbanks he was referring​ to? A. Customers could transfer money through ACH from banks to nonbanks. B. Banks would purchase​ short-term commercial paper from​ non-banks. C. Falling prices of​ mortgage-backed securities and other​ housing-related assets led to losses at banks and other intermediaries. D. Banks made money off​ mortgage-backed securities they purchased as a steep discount.

Stocks

Which of the following is not a debt​ instrument?

D. All of the above.

Which of the following is true regarding the bursting of the housing bubble in the U.S.​ economy? A. Once housing prices started to​ fall, the banks that owned​ mortgaged-backed securities experienced losses. B. Once housing prices started to​ fall, homeowners realized their mistake and began defaulting on their mortgages. C. Many financial assets were based on the bet that housing prices would only increase. D. All of the above.

It is extremely difficult to outperform the​ long-run average return on stocks.

Which of the following might explain why investors might expect to receive a higher return in the long run from buying index funds rather than actively managed​ funds?

An arbitrage opportunity is any situation in which

You can construct a strategy whose cash flows are non-negative at all times with at least one positive cash flow at one or more points in time.

A. Expected inflation increases. C. The expected return on stocks increases. D. Households' wealth decreases.

Which of the following would shift the demand curve for bonds to the​ left? ​(Check all correct​ answers.) A. Expected inflation increases. B. The liquidity of bonds increases. C. The expected return on stocks increases. D. Households' wealth decreases. E. The expected return on bonds relative to other assets increases.

A. Firm's expected profitability increases. B. Government borrowing increases. D. Subsidies to business increase.

Which of the following would shift the supply curve for bonds to the​ right? ​(Check all correct​ answers.) A. Firm's expected profitability increases. B. Government borrowing increases. C. Corporate taxes increase. D. Subsidies to business increase. E. Expected inflation decreases.

B C E

Who are the major credit rating agencies? (check all that apply) A. Dow Jones Industrial Average B. Moody's Investors Service C. Fitch Ratings D. NASDAQ E. Standard & Poor's

B. Fitch Ratings D. Moody's Investors Service E. Standard​ & Poor's

Who are the major credit rating​ agencies? ​(Check all that​ apply.) A. Dow Jones Industrial Average B. Fitch Ratings C. Nasdaq D. Moody's Investors Service E. Standard​ & Poor's

increases, goes up

Why does an increase in the federal funds rate decrease the quantity of reserves​ demanded? As the federal funds rate increases​, the opportunity cost to banks of holding excess reserves _____ because the return they could earn from lending out those reserves _____.

Because the coupon rate does not take into account the present value adjusted yield on the purchase price.

Why is the yield to maturity a better measure of the interest rate on a bond than is the coupon​ rate?

The price is higher than the face​ value, which lowers the yield to maturity.

Why is the​ bond's yield to maturity less than its coupon​ rate?

A. Low nominal interest rates would indicate to the Federal Reserve that it did not need to intervene in the banking system.

Why might Fed officials have believed that low nominal interest rates were a good indicator that policy was​ easy? A. Low nominal interest rates would indicate to the Federal Reserve that it did not need to intervene in the banking system. B. In the Fed's view comma low nominal interest rates indicated that there was not an adequate supply of excess reserves to beused for losses or loans. C. Both A and B are correct. D. None of the above is correct.

A. Hoover did not foresee the financial panic that would ensue for the next three​ years, and which would magnify the impact of the recession.

Why might Hoover have reasonably expected that it would have ended by​ June, 1930? A. Hoover did not foresee the financial panic that would ensue for the next three​ years, and which would magnify the impact of the recession. B. Hoover did not foresee that hyperinflation would occur and the unemployment rate would remain high. C. Hoover did not have any mathematical models​ (as we have​ today) that would have given him an accurate forecast. D. All of the above.

The spot price of gold is $1000 per oz. The one-year risk-free rate is 2% in simple terms. There are no costs or benefits of holding gold. If the one-year forward price of gold is $103, what can you say about the market?

You can make arbitrage profits by selling forward and buying spot

D. A and B only.

Why might a carry trade end​ badly? A. Because the average of expected​ short-term interest rates should be almost equal to the interest rate of the​ long-term investment, thus wiping out potential profits from the carry trade. B. Because if interest rates rise more rapidly than​ expected, the price of the​ long-term investment will decrease and create a capital loss for the investor. C. Because there is an increased risk of default on​ high-yield bonds, the price of the investment will​ decrease, thus eliminating any potential profits from the carry trade. D. A and B only. E. All of the above.

A. Friedman/Schwartz argue that the Bank of United States had so many deposits and was so interconnected to other banks that letting this bank fail caused a cascade of other bank failures.

Why might the​ Fed's failure to save the Bank of United States provide a rationale for the policy of​ "too big to​ fail"? A. Friedman/Schwartz argue that the Bank of United States had so many deposits and was so interconnected to other banks that letting this bank fail caused a cascade of other bank failures. B. According to​ Friedman/Schwartz, the Fed does not need to help huge banks if they have trouble because no one would be hurt from the failure. C. The​ Fed's failure to save the Bank of United States does not provide a rationale for the policy of​ "too big to​ fail" because the bankruptcy of the Bank of United States was the main cause of the Great Depression. D. The​ Fed's failure to save the Bank of United States has no connection to the policy of​ "too big to​ fail."

There is a debate over whether the Federal Reserve was responsible for low interest rates or whether the global savings glut was responsible. If the global savings glut was​ responsible, we could argue that the Federal Reserve should take less blame for the artificially low interest rates that helped facilitate the housing bubble.

Why should a debate over the cause of low interest rates matter to Alan​ Greenspan?

A. It signaled an unanticipated decline in value of a money market mutual​ fund's assets.

Why was it significant to the financial​ system? A. It signaled an unanticipated decline in value of a money market mutual​ fund's assets. B. It signaled an unanticipated increase of​ investors' interest to money market mutual funds. C. It signaled an unexpected rise of inflation. D. It signaled an unexpected rise of deflation.

C. Lehman brothers went bankrupt which substantially reduced the value of its commercial paper.

Why was the Lehman paper in the​ fund's portfolio​ worthless? A. The value of its commercial paper was underestimated before the financial crisis. B. Lehman brothers was bought by the Fed. C. Lehman brothers went bankrupt which substantially reduced the value of its commercial paper. D. A and C are correct.

C. To lessen the Federal​ Reserve's responsibility under​ Greenspan's watch as Chairman for​ causing, at least​ partially, the housing bubble with low interest rates.

Why would it matter to Greenspan whether low​ long-term interest rates were more responsible for the housing bubble than low​ short-term interest​ rates? A. Mortgage-backed securities are usually​ short-term loans. B. Buying a house is linked with​ short-term borrowings, which were insured by​ mortgage-backed securities. C. To lessen the Federal​ Reserve's responsibility under​ Greenspan's watch as Chairman for​ causing, at least​ partially, the housing bubble with low interest rates. D. All of the above.

D. It signals that the​ firm's assets are less secure than anticipated.

Why would one money market fund having broken the buck cause a run on other money market​ funds? A. It signals an unexpected rise of deflation. B. It signals an unexpected rise of inflation. C. It signals that the role of government will​ increase, which will definitely lead to decrease in​ investors' profit. D. It signals that the​ firm's assets are less secure than anticipated.

B. Financial institutions would be unlikely to lend elsewhere at a lower rate.

Why would the interest rate the Fed pays on reverse repurchase agreements set a floor under​ short-term interest​ rates? A. Financial institutions use the interest rate on reverse purchase agreements to set the rates for institutional loans. B. Financial institutions would be unlikely to lend elsewhere at a lower rate. C. Financial institutions use the interest rate on reverse purchase agreements to set the rates for​ inter-bank loans. D. Financial institutions are prohibited from lending at rates lower than that set in reverse purchase agreements.

C. M1 became more a store of value than a pure medium of exchange.

Why would this change in M1 break the​ short-run link between money and​ inflation? A. M1 became more a world currency than a currency for usage within the country. B. M1 narrowed significantly. C. M1 became more a store of value than a pure medium of exchange. D. M1 became more a medium of exchange than a pure store of value.

C. The average holding of a house is 10 years.

Why would​ long-term interest rates have a closer connection to house prices than overnight interest​ rates? A. The Fed can control and change​ long-term interest rates more easily than​ short-term interest rates. B. Mortgage companies generally markup mortgages 8 - 10 % above the 10 - year Treasury bond yield. C. The average holding of a house is 10 years. D. Housing purchases are typically​ short-term investments.

The spot price trades at a bid/ask quote of 100-101 (you can buy at 101 and sell at 100). The one-year forward trades at 99-101.90 (you can buy forward at 101.90 and sell forward at 99). If the simple interest rate for one year is 2%, which of the following statements is most accurate?

You can execute an arbitrage by selling spot, buying forward, and investing the proceeds of the spot sale at 2%.

D. Using the tools the Fed had available would have disrupted the financial system.

Why, with the monetary policy tools it had used prior to the financial​ crisis, could the Fed not control the federal funds​ rate? A. Reserves would have needed to be increased by too large an amount. B. Investor and consumer behavior was not conforming to normal patterns. C. The Fed would have needed to conduct a massive open market purchase of government securities. D. Using the tools the Fed had available would have disrupted the financial system.

C. Expected profitability would​ rise, so the demand for loanable funds would rise.

Widespread use of handheld computers helps reduce business costs. A. Expected profitability would​ fall, so the demand for loanable funds would fall. B. Expected profitability would​ rise, but the demand for loanable funds would fall. C. Expected profitability would​ rise, so the demand for loanable funds would rise. D. The demand for loanable funds would remain constant.

A long position in a strangle is:

Worth less than a straddle whose strike lies within that of the strangle.

With​ short-term interest rates at or near zero and​ long-term interest rates at historic​ lows, additional quantitative easing by the​ Fed:

Would be more than pushing on a string because the Fed can utilize policies outside of just interest rates and doing so could stimulate spending and increase aggregate demand.

A. Unanticipated deflation redistributes income just as unanticipated inflation​ does, but from borrowers to lenders rather than from lenders to borrowers. D. ​Deflation, just like​ inflation, complicates the ability to distinguish overall price changes from relative price​ changes, which determine resource allocation.

Would deflation create some of the same problems as inflation in terms of the information communicated by price changes and the arbitrary redistribution of​ income? ​(Check all that apply.​) A. Unanticipated deflation redistributes income just as unanticipated inflation​ does, but from borrowers to lenders rather than from lenders to borrowers. B. Unanticipated deflation redistributes income just as unanticipated inflation​ does, with lower income households losing purchasing power to higher income households. C. Deflation does not create any problem for the​ economy; on the​ contrary, it helps to spur economic growth. D. ​Deflation, just like​ inflation, complicates the ability to distinguish overall price changes from relative price​ changes, which determine resource allocation.

YTM= (required loan payment - principal) / principal

Write an expression showing the relationship among the amount borrowed on a simple​ loan, the required loan​ payment, and the yield to maturity.

Loan value = FP/(1+i) + FP/((1+i)^2) + ... +FP/((1+i)^n)

Write an expression showing the relationship among the amount borrowed on a​ fixed-payment loan, the payments on the​ loan, and the yield to maturity.

P=C/(1+i) + C/((1+i)^2) + C/((1+i)^3) + ... + C/((1+i)^n) + FV/((1+i)^n)

Write an expression showing the relationship among the price of a coupon​ bond, the coupon​ payments, the face​ value, and the yield to maturity.

YTM = (face value - price) / price

Write an expression showing the relationship among the price of a discount​ bond, the​ bond's face​ value, and the yield to maturity.

Is it difficult for a lender of last resort to tell the difference between insolvency and illiquidity? Why does the distinction matter?

Yes because he definitely does not want to lend to an insolvent bank.

You are a lender of last resort and a bank asks you for a loan. The bank has $700 million in assets, mostly in long-term loans, and $500 million in liabilities. It has unusually high withdrawal rates on its deposits and needs a loan to tide it over. Should you grant the loan?

Yes because the bank has a good amount of bank capital so the bank is solvent.

A student makes the following​ observation: This month the euro depreciated sharply against the U.S. dollar. That was good news for attendance at Disneyland Paris and bad news for attendance at Walt Disney World in​ Orlando, Florida. Do you agree with the​ student?

Yes, as the euro​ depreciates, it becomes less expensive for U.S. citizens to travel to Disneyland Paris.

According to an article in the Wall Street Journal​, Canadian firms that import goods that are priced in U.S. dollars​ "buy futures contracts that guarantee that they can exchange Canadian dollars for U.S.​ [dollars] at fixed​ prices..." ​Source: Phred Dvorak and Andy​ Georgiades, "Strong Loonie Sets Off a Retail​ Tiff," Wall Street Journal​, May​ 19, 2010. Do you agree that futures contracts make it possible to fix the price of the underlying​ asset?

Yes, futures contracts make it possible to lock into a price if futures contracts are not sold for profit or loss.

If the decrease in​ Burberry's profits had not been a​ surprise, would the effect of the announcement on its stock price have been​ different?

Yes, investors would have already decreased their demand for this stock causing its price to drop before the announcement was made.

Dow Theory

Yes. The Dow Jones Industrial Average and the Dow Jones Transportation Average rarely move in opposite directions because the Dow Jones Transportation Average influences the Dow Jones Industrial Average.

The spot price trades at the following bid/ask quote: 100-101 (i.e., you can buy at 101 and sell at 100). The one-year forward trades at 102-103 (you can buy forward at 103 or sell forward at 102). If the simple interest rate for one year is 2%, which of the following statements is most accurate?

You cannot execute an arbitrage at these prices.

An arbitrage is a strategy where

You construct a series of trades that lead to non-negative cash flows at all points in time and at least one positive cash flow

Suppose that you are a wealthy investor. Although you have no connection with the oil​ industry, you are convinced from studying the determinants of demand and supply in the oil market that the price of oil will decline sharply in the future. How might you use forward contracts to profit from your​ forecast?

You could sell oil futures with the intention of buying them back at the lower price on or before the settlement date.

You are short an FRA and short a eurodollar futures contract expiring in 3 months. Assume the fixed rate in the FRA is the same as the rate locked in via the eurodollar futures contract. If interest rates jump up by 100 basis points,

You lose money on the FRA but make money on the eurodollar futures.

You are long an FRA and long a eurodollar futures contract expiring in 3 months. Assume the fixed rate in the FRA is the same as the rate locked-in via the eurodollar futures contract. If interest rates jump down by 100 basis points

You will lose more on the FRA than you will make on the eurodollar futures.

If you were a speculator who expected interest rates to​ fall, would you have bought or sold these futures​ contracts?

You would buy these futures​ contracts, anticipating a rise in the price.

How might you hedge against the risk of interest rates rising and bond prices falling?

You would sell Treasury futures.

Suppose that you are an investor who owns​ $10,000 in U.S. Treasury notes. How might you hedge against this risk you identified​ above?

You would sell Treasury futures.

Suppose that you manage a bank that has made many loans at a fixed interest rate. You are worried that inflation might rise and the value of the loans will decline. How might you use swaps to reduce your​ risk?

You would swap some of the​ fixed-interest rate loans for variable​ interest-rate payments.

You have a portfolio with long positions in both puts and calls. The volatility in the market rises

Your portfolio gains in value.

Market risk, idiosyncratic risk C. By allocating savings among many different​ assets, if one asset class performs​ poorly, the rest of the portfolio may perform well.

_____ is the risk that is common to all assets of a certain​ type, while _____ is the risk that pertains to a particular asset rather than to the market as a whole. How does diversification reduce the risk of a financial​ portfolio? A. By determining if an asset produces market risk or idiosyncratic​ risk, an investor can then determine how well the asset will perform. B. By accurately calculating the expected return of an​ asset, investors will be guaranteed a strong return. C. By allocating savings among many different​ assets, if one asset class performs​ poorly, the rest of the portfolio may perform well. D. By allocating savings to only one asset​ class, if the asset performs​ well, the benefit from the investment will be huge.

A stock

______ is a financial security that represents partial ownership of a firm.

Interest income, a capital gain

______ is taxed at the same rate as wage and salary income while ______ is taxed at a lower rate.

interest income

____________ is taxed at the same rate as wage and salary income

capital gain

a ________ is taxed at a lower rate than interest income

Loan sales is

a financial contract in which a bank agrees to sell the expected future returns from an underlying bank loan to a third party.

Buying stock in a company gives an investor a legal claim on​ ______

a firm's equity, a firm's profit, value of a firm's assets minus the value of its liabilities

Standby letters of credit are

a promise by a bank to lend​ funds, if​ necessary, to the seller of commercial paper at the time that the commercial paper matures.

define depreciation

a reduction in the value of an asset with the passage of time, due in particular to wear and tear.

zero-sum game

a situation in which one person's gain is another's loss

Suppose that the U.S. firm Halliburton buys construction equipment from the Japanese firm Komatsu at a price of ¥260 million. The equipment is to be delivered to the United States and paid for in one year. The current exchange rate is ¥106=$1. The current interest rate on​ one-year U.S. Treasury bills is 8​%, and on​ one-year Japanese government bonds the interest rate is 6​%. a. If Halliburton exchanges dollars for yen today and invests the yen in Japan for one​ year, it will need ​_________ to exchange today in order to have ¥260 million in one year. b. If Halliburton enters a forward​ contract, agreeing to buy ¥260 million in one year at an exchange rate of ¥104=$1​, it will need _________ today if it plans to invest the dollars at the U.S. interest rate of 8​%. c. If Halliburton invests today at the U.S. interest rate of 8​%, without entering into any other type of​ contract, does the firm know how many dollars it needs today to fulfill its equipment contract in one​ year? d. Which​ method(s) described in​ (a) through​ (c) provide(s) a hedge against​ exchange-rate risk? Which​ do(es) not? Which method is Halliburton likely to​ prefer? e. In order for the results in​ (a) and​ (b) to be​ equivalent, the forward contract exchange rate in​ (b) has to be ¥104.00 per dollar

a. 260 M yen in one year / (1+.06) = $2313991 b. 260 M yen / 104 yen/$ = $2,500,000 $2,500,000/(1.08) = ​$2314815 c.​No, it depends on the exchange rate at the end of the contract. ​No, but it takes the risk. d. Hedges are provided by​ (a) and​ (b) but not​ (c), and Halliburton prefers​ (a) because it costs less. e. 260,000,000 / 2,500,000 = 104 yen

​Off-balance-sheet activities are

activities that do not affect a​ bank's balance sheet because they do not change either the​ bank's assets or its liabilities.

Trading activities are

activities that include trading in the​ futures, options, or swaps market.

Monetary policy aims to

advance the economic​ well-being of the​ country's citizens.

To hedge

against a fall in the value of the pound , a firm sells pounds in the forward market; to hedge against a rise in the value of the pound. A firm buys pounds in the forward market

Appreciation

an increase in the value of a currency in exchange for another currency

If a​ firm's profits are expected to increase there will be __ ________ in demand for that​ firm's stock and therefore __ ______ in its price.

an increase, an increase

Bonds ____ ____ equities because they represent ____ to a firm

are not, debt

D

as the wealth of investors increases, all else held constant, the interest rate on bonds should fall A. true-- a shift to the left in the demand curve will push prices down and yield up B. False-- a shift to the right in the demand curve will push both prices and yield down C. false-- a shift to the left in the demand curve will push prices down and yield up D. true-- a shift to the right in the demand curve will push prices up and yield down

futures market

as you go to the settlement date, futures price converges to the spot price futures price will be the same as the spot price

What does it mean to say that there is a bubble in the housing​ market? A bubble means that

asset prices have increased beyond the point that could be justified by fundamental evaluation.

Loan commitment is

a​ bank's consent to provide a borrower with a stated amount of funds during some specified time.

If the exchange rate between the yen and the dollar changes from yen91 ​= $1 to yen79 ​= $1, is this good news for​ Sony? A yen appreciation is ____ news for Sony.

bad

yen91 ​= $1 to yen79 ​= $1, This is __ news for US consumers as Japanese goods become ___ expensive and ___news for Us firms as the dolalr has depcreated against the yen

bad, more, good, depreciated

n article in the Wall Street Journal in​ mid-2016 noted the persistence of slow economic growth and very low interest rates seven years after the end of the financial crisis. One consequence was "the persistence of the​ Fed's large balance sheet and financial​ institutions' desire to store large amounts of reserves at the central bank.'' ​Source: David​ Harrison, "Fed Discussed New Ways of Making Policy at July ​Meeting," Wall Street Journal​, August​ 17, 2016. Slow U.S. economic growth rate impacts the size of the​ Fed's balance sheet​ as:

banks maintain high levels of excess reserves.

Suppose that the Dow Jones Industrial Average is above the 13,500 level. If the Dow were to fall to 10,500, who would gain the​ most? Investors who _____ ______ options.

bought put

The difference between a call option and a put option is that a call option gives the buyer the right to​ _______ while the buyer of a put option has the right to​ _______.

buy the underlying asset at a predetermined price before its expiration​ date: sell the underlying asset asset at a predetermined price during a set period of time

The difference between a call option and a put option is that a call option gives the buyer the right to​ _______ the underlying asset at a predetermined price before its expiration​ date, while the buyer of a put option has the right to​ _______ the underlying asset at a predetermined price during a set period of time.

buy, sell

what is a derivative contract giving the buyer the right to buy the underlying asset at a set price during a set period of time?

call option

If the future price of Facebook stock increased above the current market​ price, traders would exercise the ______ options​, ______ Facebook stock for less than the then market price. If the price of Facebook stock decreased from the current market​ price, traders would exercise the ______ options, ______ Facebook stock for more than the then market price

call, buying, put, selling

The​ $18 ______ is cheaper than the​ $17 ______ because the stock price will reach​ $17 before it hits​ $18, making the option _____ valuable at​ $17 than​ $18.

call, call, more

in what ways does the shadow banking system differ from the commercial banking system

commercial banking system is heavily regulated; the shadow banking system does not offer traditional banking services such as taking deposits; the shadow banking system invests in more risky assets and tends to be highly leveraged than commercial banks

Selling oil futures to hedge against falling oil prices and selling corn futures to hedge against falling corn prices are examples of ...

commodity futures

Commodity futures take a long or short position in the _______, while financial futures take a long or short position on a _______

commodity market, financial asset

Credit swaps​ are:

contracts in which​ interest-rate payments are​ exchanged, with the intention of reducing default risk.

A ______ is always positioned on the right side of an entry. It increases liability, revenue or equity accounts and decreases asset or expense accounts.

credit

forward transactions started in ag markets

demand for ag products are typically price inelastic, thus fluctuations in supply cause large seings in the equilibrium price

If the exchange rate between the yen and the dollar changes from yen76 ​= $1 to yen93 ​= $1, the yen has __against the dollar, and the dollar has ___appreciated against the yen

depreciated, appreciated

How does a credit default swap differ from the other swap contracts discussed in this​ chapter? Credit default swaps​ are:

derivatives requiring sellers to make payments to buyers if the price of the underlying security declines in value.

___ quotations are exchange rates as units of domestic currency per unit of foreign currency.

direct

Many companies issue preferred stock with a provision that allows the company to buy back the preferred stock at its original price after five years. The article notes that this provision​ "can produce unexpected losses for​ investors." Companies would be likely to buy back their preferred shares when​ _______.

dividends on new issues of preferred stock are lower than those on outstanding shares

Law of one price

ePf/P = 1 if they are the same good in different counties, their relative price has to be one

Futures contracts are traded on ______

exchanges

futures contracts are traded on

exchanges - specify the quantity of the underlying asset but not the price - standardized in terms of quantity of underlying asset to be delivered

required return on equities

expected amount necessary to compensate investors for the risk of investing in the stock

Suppose that the current exchange rate is euro1.28=pound​1, but it is expected to be euro1.22=pound1 in one year. If the current interest rate on a​ one-year government bond in the United Kingdom is 5​%, what does the​ interest-rate parity condition indicate the interest rate will be on a​ one-year government bond in​ Germany? Assume that there are no differences in​ risk, liquidity,​ taxation, or information costs between the bonds german interest rate is formula

expected(1.22)-current(1.28)/(current(1.28)+5%(.05_ then times 100%

Indirect quotations

express exchange rates as units of foreign currency per unit of domestic currency

derivative securities

financial contracts whose values are derived from the values of underlying assets

Selling Treasury note futures contracts and selling U.S. dollar futures contracts are examples of...

financial futures

futures markets

first evolved in the commodity markets to keep risk sharing benefits of a forward contract while increasing the liquidity and lowering counterparty risk and information costs - traded on exchanges - specify the quantity of the underlying asset, not the price - standardized in terms of quantity of the underlying asset to be delivered

we face lower transaction costs and eliminate counter party risk when we fo to ___________ rather than _______

future markets forward markets

futures contract, profit to seller:

futures price at purchase - spot price at settlement

profit to seller:

futures price at purchase - spot price at settlement

With ___ contracts the exchange rate changes continually as contracts are bought and sold on the exchange, and with ___contracts the exchange rate is fixed at the time the contract is agreed to

futures, forward

With ______​ contracts, buyers and sellers have symmetric rights and​ obligations; however, with _______​ contracts, buyers have rights and sellers have obligations.

futures, options

forward contracts

give investors and firms an opportunity to hedge against risk on transactions that depend on future prices - farmer plants wheat that will not be harvested for months, profit and loss will depend on the price of wheat at the time it is harvested - make possible forward transactions which are transactions agreed upon now, but settled in the future. - agreed in present for given commodity: wheat, oil, gold, tbill, at a particular date in the future for a set price

The fact that airlines were burned by their fuel hedges in 2016 means that hedging their fuel costs was a _____ idea because _____.

good, market conditions at the time indicated prices would continue to rise

derivatives enable individuals and firms to ____, or reduce risk they face from price fluctuations

hedge ex: both firms that use oil, such as airlines, and firms that help produce oil, such as drilling companies, can use derivatives to hedge against fluctuations in the price of oil

B

how does the interest rate on a bond with high information costs compare with the interest rate on a bond with low information costs? A. interest rates are usually lower on a bond with high information costs B. interest rates are usually higher on a bond with high information costs C. interest rates are usually the same regardless of information costs D. the bond rating is needed to determine the effect on interest rates

A

how does the interest rate on an illiquid bond compare with the interest rate on a liquid bond? A. interest rates are usually higher on an illiquid bond B. interest rates are usually lower on an illiquid bond C. interest rates are usually the same on liquid and illiquid bonds D. the bond rating is needed to determine the effect on interest rates

lender, borrower

in the bond market, the buyer is the ________ and in the loanable funds market the buyer is the _________

bond, use of funds

in the bond market, the good is the _______ and in the loanable funds market, the good is the ________

D

how is default risk measured? A. by measuring the difference between the interest rate on the bond and the interest rate of a similar bond with the same maturity B. By measuring the demand of the bond and the demand for a Treasury bond with the same maturity C. by measuring the demand of the bond and the demand for a Treasury bond with the same interest rate D. by measuring the difference between the interest rate on the bond and the interest rate on a treasury bond with the same maturity

The law of one price states​ that:

identical products should sell for the same price everywhere.

The law of one price states​ that ____ and how it does it relate to purchasing power parity (PPP)?

identical products should sell for the same price everywhere. The law of one price is the basis for PPP.

A

if investors start to believe that the U.S. government might default on its bonds, the interest rate on those bonds will fall A. false-- this would cause a shift to the left, pushing price down and yield up B. true-- this would cause a shift to the left, pushing both price and yield down C. false-- this would cause a shift to the left, pushing both price and yield up D. True-- this would cause a shift to the right, pushing price down and yield up

C

if the current price in the bond market is above the equilibrium price, explain how the bond market adjusts to equilibrium A. the price of bonds would fall, reducing both the quantity demanded and quantity supplied B. the price of bonds would fall, reducing the quantity demanded and increasing the quantity supplied C. the price of bonds would fall, increasing the quantity demanded and reducing the quantity supplied D. none of the above

C

in the loanable funds model, why is the demand curve downward sloping? why is the supply curve upward sloping? A. the demand curve is downward sloping because the lower the interest rate, the less demand for borrowing. the supply curve is upward sloping because the higher the interest rate, the more willing supplier of loanable funds will be to lend money B. the demand curve is downward sloping because the higher the interest rate, the less demand for borrowing, the supply curve is upward sloping because the higher the interest rate, the less willing suppliers of loanable funds will be to lend lend money C. the demand curve is downward sloping because the higher the interest rate, the less demand for borrowing. the supply curve is upward sloping because the higher the interest rate, the more willing suppliers of loanable funds will be to lend money D. the demand curve is downward sloping because the higher the bond price, the less demand for borrowing. the supply curve is upward sloping because the higher the loan price, the more willing suppliers of loanable funds will be to lend money

How does a decrease in the interest rate affect the following type of spending on aggregate​ output? Consumption spending by households would ________ .

increase

How does a decrease in the interest rate affect the following type of spending on aggregate​ output? Consumption spending by households would ___.

increase

The federal government cuts the corporate profits tax. It would ______ the​ after-tax rate of return on investment​ projects, _____ investment spending and causing the AD curve to shift to the ___

increase increase right

The Federal Reserve sells ​$19 billion of U.S. Treasury securities. It would ____ the interest​ rate, causing the AD curve to shift to the ____.

increase left

Firms become optimistic about the future profitability of spending on factories and machinery. It would increase current investment​ spending, causing the AD curve to shift to the right.

increase right

The federal government launches a massive program to rebuild the​ nation's highways.It would directly ____aggregate​ expenditure, causing the AD curve to shift to the _____

increase right

define appreciation

increase in monetary value.

A seller of a naked put option will want the value of the underlying asset to _______ and a buyer of a naked call option will want the value of the underlying asset to ______.

increase, increase

The increase in the price of​ credit-default swaps on these bonds indicates investors believe the default risk on Bank of America and Citigroup Inc. debt has ______ from the previous day

increased

What does Greenspan mean that​ "the added risk had not been compensated by higher​ capital"? In order to compensate for the​ risk, Greenspan believes that nonbank financial institutions should have voluntarily

increased their capital.

S&P stock ____ up to recession. S&P stock ______ _______ during recession. S&P stock ____ __ _____ __ _____ just after recession.

increasing, decreased significantly, began to regain its value

_____quotations express exchange rates as units of foreign currency per unit of domestic​ currency,

indirect

option premium =

intrinsic value of option + time value

what are the key differences between investment banks and central banks?

investment banks, among other activities, underwrite new security issues ans provide advice on mergers and acquisitions, whereas commercial banks primarily take deposits and issue loans

in what ways are investment inst. and commercial banks different

investment inst. are different from commercial banks because they do not engage in traditional commercial banking activities such as taking deposits and making loans

A bank run

is the process by which depositors who have lost confidence in a bank simultaneously withdraw enough funds to force the bank to close.

counterparty/default risk

is the risk that the buyer will not fulfill his/her obligation to the seller or that the seller will not fulfill his/her obligation to the buyer

Futures contracts _____ the flexibility of forward contracts

lack

According to an article in the Wall Street Journal​, in 2016 J.P. Morgan​ Chase's leverage ratio was 6.2​%. The​ bank's return on equity was 9​%. Calculate the​ bank's ROA. ​Source: Stephen​ Grocer, open double quote​Citigroup, Wells Fargo Report Earnings dash ​Recap,close double quote Wall Street Journal​, July​ 15, 2016. The banks ROA was

leverage ratio = net income/ total assets 0.62 = net income/ total assets 0.62 x total assets = net income 0.62 x .09 = 0.558

What is the relationship between the price of a financial asset and the payments investors will receive from owning that​ asset?

look at formula hw 5 q 20

Why are forward contracts more widely used in the​ foreign-exchange market than are futures​ contracts? Forward contracts are used 10 times more than futures contracts because the counterparty risk between big banks is relatively ___ and these banks value the ___ of the forward contract.

low, flexibility

D. an increasing money supply and falling interest rates.

n his history of the Federal​ Reserve, Allan Meltzer of Carnegie Mellon University describes the views of Federal Reserve officials in the fall of​ 1930: Most of the policymakers regarded the substantial decline in​ short-term market interest rates ... as the main ... indicators of the current position of the monetary system....​ [Policy] was​ "easy" and had never been easier in the experience of the policymakers of the Federal Reserve System. Source​: Alan H.​ Meltzer, A History of the Federal​ Reserve: Volume​ 1: ​1913-1951​, ​Chicago: University of Chicago​ Press, 2003, p. 315. What does it mean to say that Fed policy is​ "easy"? An​ "easy" Fed policy suggests A. a decreasing money supply and rising interest rates. B. an increasing money supply and rising interest rates. C. a decreasing money supply and falling interest rates. D. an increasing money supply and falling interest rates.

Does a bank have to be insolvent to experience a​ run?

no

When a newspaper article uses the term​ "the exchange​ rate," it is typically referring to the _______ exchange rate

nominal

purchasing power of parity does not hold for _____ since arbitrage involving such goods is not possible.

non-traded goods

Seller (writer of the option) PUT

obligation to buy underlying asset at the strike price

seller (writer of the option) CALL

obligation to sell underlying asset at the strike price

nominal rate:

one currency in terms of another

Forward contracts have counterparty risk since​ _______.

one of the parties may go bankrupt after signing the contract and be unable to fulfill their obligation

Put: time value =

option premium - intrinsic value

time value (of our option) =

option premium - intrinsic value of option

The payoff to the buyer of the option from exercising it immediately is the...

option's intrinsic value

Stocks are called equities because:

ownership of a firm's stock represents legal claim on the firm's profits, and partial ownership of the firm

Suppose​ that, holding yield​ constant, investors are indifferent as to whether they hold bonds issued by the federal government or bonds issued by state and local governments​ (that is, they consider the bonds the same with respect to default​ risk, information​ costs, and​ liquidity). Suppose that state governments have issued perpetuities​ (or consoles) with ​$83 coupons and that the federal government has also issued perpetuities with ​$83 coupons. If the state and federal perpetuities both have​ after-tax yields of 8​%, what are their​ pre-tax yields?​ (Assume that the relevant federal income tax rate is 30.26​%.)

pre tax yield on state perpetuity is 8% pre tax yield on federal perpetuity is 11.47 AS FEDERAL TAXES ARE THERE, THE PRE TAX YIELD ON FEDERAL PERPETUITY WILL BE = AFTER TAX YIELD/(1-TAX RATE) = 8%/(1-0.3026) SO ANSWER = 8%/0.6974 = 11.47%

call: time value =

premium - intrinsic value

An option premium is​ the ______ of the option

price

Suppose that a company is expected to pay a dividend per share of ​$27 per year forever. If investors require a rate of return of 14​% to invest in this​ stock, what is its​ price? The stock price is ​$________. ​(Round your response to two decimal​ places.)

price = D/re = 27/.14 = $192.86

After the United​ Kingdom's electorate voted on June​ 23, 2016 to leave the European Union an article in the Wall Street Journal​ noted: "​Credit-default swaps on the debt of Bank of America and Citigroup Inc. are up​ 25% from a day earlier." ​Source: John​ Carney, "Bank Credit Default Swaps Surge on Brexit ​Fears," Wall Street Journal​, June​ 24, 2016. The increase in the _____ of​ credit-default swaps on these bonds indicates investors believe the default _____ on Bank of America and Citigroup Inc. debt has _____ from the previous day. What likely happened to the yields on those​ bonds? A. The yield decreased as the price of the bonds increased. B. The yield increased as the price of the bonds decreased. C. The yield decreased as the price of the bonds decreased. D. The yield increased as the price of the bonds increased.

price, risk, increased B. The yield increased as the price of the bonds decreased.

what is a derivative contract giving the buyer the right to sell the underlying asset at a set price during a set period of time?

put option

The​ $18 _____ is more expensive than the​ $17 ______ because the stock price will reach​ $17 before it hits​ $18, making the option _____ valuable at​ $95 than​ $105.

put, put, less

Borrowing at a low interest rate in one currency to lend at a higher interest rate in another currency is sometimes called a​ "carry trade." An article in the New York Times describes an investment strategy of this​ type: "A speculative carry trade in which investors borrowed euros at low interest rates to buy the​ higher-yielding Hungarian​ currency." -The phrase​ "higher-yielding Hungarian​ currency" refers to:

relatively high returns on assets denominated in the Hungarian currency.

Dow Theory is considered technical analysis rather than fundamental analysis because it _____.

relies on patterns of past stock prices to predict future stock prices

Mean p = rf + beta(Mr - rf)

rf = risk free rate B= fraction of wealth in risky asset mr - rf = spread

short

right and obligation of seller to sell / deliver underlying asset on a specified date

futures contracts - short

right and obligation of seller to sell/deliver underlying asset on specified future date

long

right/obligation of buyer to receive / buy underlying asset on specified date

futures contract - long

right/obligation of the buyer to receive.buy the underlying asset on a soecified future date

A bubble is a situation in which the price of an asset _____ _____ its fundamental value.

rises above

Suppose that on​ January, 1,​ 2013, you purchased a coupon bond with the following​ characteristics: bullet Face​ value: ​$1000 bullet Coupon​ rate: 8 1​/4 bullet Current​ yield: 7.6​% bullet Maturity​ date: 2015 If the bond is selling for ​$870 on January​ 1, 2014, then the rate of return on this bond during the holding period of calendar year 2013 was

ror = coupon + cap gain/ purchase price coupon 1000 x 8.25% =82.50 inital price 82.50/7.6% =1085.526 ror = 82.5 + (870-1085.526) / 1085.526 82.5 - (-215.526)/ 1085.526 -133.026/ 1085.526 =-0.1225 or - 12.255%

Suppose that for a price of ​$900 you purchase a 7​-year Treasury bond that has a face value of ​$1000 and a coupon rate of 3​%. If you sell the bond one year later for ​$1140​, what was your rate of return for that​ one-year holding​ period? The rate of return for the​ one-year holding period was

ror = coupon/ initial price + change in price/initial price 30/900 + 240/ 900 = 29.99 0r 30.00%

Suppose that you just bought a​ four-year ​$1000 coupon bond with a coupon rate of 6.7​% when the market interest rate is 6.7​%. One year​ later, the market interest rate falls to 4.7​%. The rate of return earned on the bond during the year was

ror = coupon/ purchase price + change in price/ purchase price you paid $1000 one year later= 67x(1-(1/(1.047^3)))/0.047+(1000/1.047^3 1055.50 coupon 67 (add) one year ago 1000 (subtract) 115.5 115.5/ 1000 = 11.55

Suppose that you are a wheat farmer. Answer the following questions. It is September​, and you intend to have 50,000 bushels of wheat harvested and ready to sell in November. The current spot market price of wheat is ​$2.67 per​ bushel, and the current December futures price of wheat is ​$2.92 per bushel. If each wheat futures contract is for 5,000 ​bushels, how many contracts will you buy or​ sell? You will (buy/sell) ___ contracts. ​ The total value of these futures contracts is ​$_____. It is now​ November, and you sell 50,000 bushels of wheat at the spot price of ​$2.77 per bushel. If the futures price is ​$3.02 and you settle your position in the futures​ market, what was your gain or loss on your futures market​ position? The (gain/loss) on your futures market position was ​$_____. The (gain/loss) on your spot market position was ​$_____. Therefore, you (were/ were not) successful in completely hedging your risk from price fluctuations in the wheat market.

sell, 10 14600 2.92*10*5000=146000 loss, 5000 Profit​ (or ​loss)=​Contract's value in September - ​Contract's value in November. That​ is: ​$146,000​(10 * 5,000*$ 2.92​)-$151,000​(10 * 5,000*$ 3.02​)=Loss of ​$5,000. ​gain, 5000 Profit​ (or ​loss) = Spot value in November - Spot value in September. That is: $138,500​(10* 5,000 *$ 2.77​)-$133,500​(10*5,000*$ 2.67​) ​= Gain of ​$5,000. were

An option writer is the _____ of an option and​ he/she has the _______ the underlying asset.

seller, obligation to sell

forward contracts tend to be illiquid because

selling contract is difficult because a buyer would have to accept the same terms

forward contracts tend to be ILLIQUID because...

selling contracts is diificult becasue buyer would have to accept the same terms

hedging

serves to reduce risk in financial markets

Futures contracts have a price that changes up until the ______ with _______

settlement date, standardized settlement dates

Hedging involves taking a ____ position in the futures market to offset a ____ position in the spot market.

short, long

the lower the volatility in the price of the underlying​ asset, the ______ the option​ premium, and thus _______ the option

smaller, cheaper

Homework 5 Question 10

solve the problem

what became of the large, standalone investment banks during the financial crisis of 2007-2009

some large investment banks were taken over, went bankrupt, and were converted to financial holding companies to get access to fed reserve lending to survive the financial meltdown

speculator

someone with no connection to an industry that places financial bets on futures contracts within the industry in an attempt to profit from changes in asset prices

Someone with no connection to an industry that places financial bets on futures contracts within the industry in an attempt to profit from changes in asset prices is called a _______ Suppose that you are a wealthy investor. Although you have no connection with the oil​ industry, you are convinced from studying the determinants of demand and supply in the oil market that the price of oil will decline sharply in the future. How might you use forward contracts to profit from your​ forecast?

speculator You could sell oil futures with the intention of buying them back at the lower price on or before the settlement date.

market functions much better with ...

speculators and not just hedgers!

profit to buyer:

spot price at settlement - futures price at purchase

futures contract, profit to buyer:

spot price at settlement date - future price at purchase

futures contracts:

standardized contract to buy/sell a specified amount of a commodity/asset on a specific future date - first evolved in commodity markets to keep risk sharing benefits of forward contracts while increasing liquidity and lowering counterparty risk and information costs

how do you calculate the intrinsic value of a put option?

strike price - underlying stock price

intrinsic value of a put option =

strike price - underlying stock price

A flight to safety is a ___ shift in investments where investors seek to ___assets perceived as risk and ___assets perceived as safe ___shifts ____

sudden, sell. buy, d shifts right

The disadvantage of speculation with options contracts

that their prices are higher than are the prices of forward contracts

expectations

the ______ theory states that interest rates on long-term bonds are an average of the interest rates investors expect on short-term bonds over the lifetime of the long-term bond

segmented markets

the _______ theory holds that the interest rate on a bond of a particular maturity is determined only by the demand and supply of bonds of that maturity

liquidity premium

the ________ theory holds that interest rates on long-term bonds are averages of the expected interest rates on short-term bonds plus a term premium

world real interest rate

the ______________ is the interest rate that is determined in the international capital market

Settlement Date

the date on which the delivery of a commodity or financial asset specified in a forward contract must take place

settlement date

the date on which the delivery of a commodity or financial asset specified in a forward contract must take place

The demand for US dollars represents

the demand by households and firms outside the US for US goods and financial assets

What would have to be true of a derivatives security if the security were to help you to hedge this​ risk?

the derivative would need to earn a profit if bond prices fall

A

the determinants of portfolio choice include all of the following except: A. current economic policy B. expected return C. risk D. wealth

To eliminate the possibility of arbitrage profits

the difference between the interest rates on a Japanese bond and a US bond must equal the expected change in the exchange rate between the yen and the dollar

Treasury yield curve

the most common way to analyze the term structure is by using a graph known as the ________

spot price

the price at which a commodity or financial asset can be sold at the current date

spot price:

the price at which a commodity or financial asset can be sold at the current date

Nominal exchange rate

the price of one currency in terms of another currency, also called the exchange rate

Suppose that an Apple iPhone costs ​$180 in the United​ States, ​£70 in the United​ Kingdom, and ​¥30,000 in Japan. If the exchange rate between the pound and the dollar is ​$1.50 ​= £1, what's the exchange rate between the pound and dollar? If the exchange rate between the dollar and the yen is yen120 ​= $1, what is the exchange rate between the dollar and the yen?

the real exchange rate between the pound and the dollar is 0.58. the real exchange rate between the dollar and the yen is 0.72

If spot price > strike price

then intrinsic value = 0, out the money

If spot Price < strike price

then put is in the money and intrinsic value >0

Forward contracts have counterparty risk since​ _______

there is a chance that either the buyer or the seller may default on their obligations under the contract

Forward contracts have counterparty risk since​ _______.

there is a chance that either the buyer or the seller may default on their obligations under the contract one of the parties may go bankrupt after signing the contract and be unable to fulfill their obligation

in what ways are investment institutions similar to commercial banks?

they both short and lend long

Explain the effect on the demand for reserves or the supply of reserves of the following Fed policy​ action: A decrease in the required reserve ratio.

this would decrease the demand for reserves

Explain the effect on the demand for reserves or the supply of reserves of the following Fed policy​ action: An increase in the interest rate paid on reserves.

this would raise the interest rate at which the demand curve becomes horizontal.

derivatives were subject to lots of debate during the financial crisis of 2007-2009 ... buffet said they were ___

time bombs for parties dealing with them and the economic system

A shift of the AD curve

to the right is considered​ expansionary, and a shift to the left is considered contractionary.

Exchange rates quoted

units of domestic currency per unit of foreign currency are referred to as direct quotations.

effiecincy frontier

upward sloping, risk aversion, concave because of gains to diversification

relative price of foreign goods and services in terms of US goods and services

us goods / foreign goods - if real prices rise we can say we have a real appreciation of foreign currency if real prices fall, real appreciation of the $ - amount of US goods have to give up for foreign

A hedger

used derivates markets to reduce risk, while a speculator uses derivative markets to place a bet on the future value of a currency

Put option

want the strike price to be GREATER THAN the spot price to be "in the money" - because you have the right to sell and you want to sell it for more money

Call option

we want the strike price to be LESS THAN the spot price to be "in the money" - because you have the right to buy, you want to buy it for less money

D

what are the determinants of asset demand A. the liquidity of the investment compared to other investments B. the expected rate of return and the degree of risk for an investments compared to alternative investments C. the total amount of savings to be allocated among investments D. all of the above

B

what are the two types of income an investor can earn on a bond? A. tax-free interest income from coupon payments and realized capital gains B. interest income from coupon payments and capital gains from price changes C. realized capital gains and unrealized capital gains D. interest income from coupon payments and any increase in the principal of the bond

C

what is a bond rating? A. a system developed by the US Treasury to identify and rank the most profitable bonds B. a financial statistic ranking the popularity of bonds among investors C. a single statistic summarizing a rating agency's view of the bond issuer's likely creditworthiness D. an average determined by all rating agency's summarizing the bond issuer's likely creditworthiness

A

what is default risk? A. the risk that the bond issuer will fail to make payments of interest or principal B. the risk that investors will demand less of an asset C. the risk that the bond issuer will issue new bonds with a higher interest rate D. the risk that the buyer of a bond will sell the bond prior to maturity

C

what is meant by a bond issuer's creditworthiness? A. the ability of a bond issuer to issue new bonds B. the ability of a bond issuer to obtain credit C. the ability of a bond issuer to make the required payments on its bonds D. all of the above

A

what is the FIsher effect? A. an assertion by Irving Fisher that the nominal interest rate rises or falls point-for-point with changes in the expected inflation rate B. an assertion by irving fisher that the nominal interest rate rises or falls point-for-point with changes in the real interest rate C. a contradiction by irving fisher that the nominal interest rate rises or falls point-for-point with changes in the real interest rate

B

what is the risk structure of interest rates? A. the relationship among the interest rates on bonds and the bond ratings assigned to each bond B. the relationship among the interest rates on bonds that have different characteristics but the the same maturity C. the relationship among interest rates on bonds that have the same characteristics but a different maturity D. the relationship among the interest rates on bonds and the level of risk associated with each bond

C

what is the tax treatment of the coupons on a bond issued by the U.S. Treasury? A. the bond is subject to federal, state, and local taxes B. the bond is not subject to federal, state, or local taxes C. the bond is subject to federal tax only D. the bond is subject to state and local taxes only

Why should a recession connected with a financial crisis be more severe than a recession that did not involve a financial​ crisis?

when financial institutions fail, credit marekts can be damaged, and the amount of borrowing/economic activity, can decrease, further affecting real outout

The​ principal-agent problem occurs

when managers follow their own self interests rather than the interest of the shareholders.

A

which of the following is NOT a key fact about the term structure? A. interest rates on short-term bonds are usually higher than interest rates on long-term bonds B. interest rates on bonds of all maturities tend to rise and fall together C. interest rates on long-term bonds are usually higher than interest rates on short-term bonds D. interest rates on short-term bonds are occasionally higher than interest rates on long-term bonds

B C D

which of the following would shift the demand curve for bonds to the left? (check all correct answers) A. the liquidity of bonds increases B. expected inflation increases C. the expected return on stocks increases D. households' wealth decreases E. the expected return on bonds relative to other assets increases.

A D E

which of the following would shift the supply curve for bonds to the right (check all correct answers) A. government borrowing increases. B. corporate taxes increase C. expected inflation decreases D. subsidies to business increase E. firm's expected profitability increases

D

why do bonds that have the same maturities often have different interest rates? A. interest rates may vary due to risk B. interest rates may vary due to liquidity C. interest rates may vary due to information costs and costs from taxation D. all of the above

B

why does the demand curve for bonds slope down? why does the supply curve for bonds slope up? A. as the price of bonds increases, the interest rate on bonds increases, thus increasing the quantity of bonds demanded. likewise, as the price of bonds increases, the interest rates on the bonds will increase, thus holders of bonds will be less willing to sell them, decreasing the quantity supplied. B. as the price of bonds increases, the interest rates on the bonds will fall, thus reducing the quantity of bonds demanded. likewise, as the price of bonds increases, the interest rates on the bonds will fall, thus holders of bonds will be more willing to sell them, increasing the quantity supplied C. as wealth increases, all else constant, the demand for bonds will decrease as investors choose assets with higher returns, thus decreasing the quantity of bonds demanded. likewise, as wealth increases, all else constant, holders of bonds will be seeking assets with higher returns, thus increasing the quantity of bonds supplied.

"Speculative investors in oil cut their bullish bets on the price of crude ..." What does the article mean by a "cut their bullish bet"​? Investors were betting oil prices _____________

would not continue to rise.

If the exchange rate between the dollar and the yen is yen 120 ​= $1, the real exchange rate between the dollar and the yen is . 62

yen120/yen35000 X $180

Someone with no connection to an industry that places financial bets on futures contracts within the industry in an attempt to profit from changes in asset prices is called a speculator. Suppose that you are a wealthy investor. Although you have no connection with the oil​ industry, you are convinced from studying the determinants of demand and supply in the oil market that the price of oil will decline sharply in the future. How might you use forward contracts to profit from your​ forecast?

you could sell oil futures with the intention of buying them back at a lower price on or before the settlement date

call option

you have the right to purchase the underlying asset at the strike price (buyer)

put option

you have the right to sell underlying asset at strike price (buyer)

if you think prices are going to fall

you want to SELL as a speculator and for each contract you sell, $ is credited to your margin account

Suppose that you are a wheat farmer. Answer the following questions. It is September​, and you intend to have 40,000 bushels of wheat harvested and ready to sell in November. The current spot market price of wheat is ​$2.76 per​ bushel, and the current December futures price of wheat is ​$3.01 per bushel. If each wheat futures contract is for 5,000 ​bushels, how many contracts will you buy or​ sell? The total value of these futures contracts is ​$120,400

you will sell 8 contracts 40,000/5,000 = 8 you will SELL future contracts contracts to reduce risk of agricultural prices falling To get the total value of these future contract: multiply the number of contracts by the number of bushels included in the futures contract by the futures price of wheat per bushel

What are the main reasons that​ interest-rate parity may not hold​ exactly?

​Exchange-rate risk. Transaction costs. Differences in default risk and liquidity.

How do banks manage​ interest-rate risk? ​(Check all that apply.​)

​Interest-rate swaps can reduce​ interest-rate risk exposure. Banks can reduce​ interest-rate risk by making more floating rate​ loans, or ARMs.

Would derivative markets be better off if the only people buying and selling derivative contracts were​ hedgers?

​No, as in all​ markets, at least two parties are required for each​ transaction, and speculators help provide liquidity and efficiency in financial markets.

A student makes the following​ observation: It currently takes 80 yen to buy 1 U.S.​ dollar, which shows that the United States must be a much wealthier country than Japan. But it takes more than 1 U.S. dollar to buy 1 British​ pound, which shows that Great Britain must be a wealthier country than the United States. Do you agree with the​ student's reasoning?​ Why?

​No, exchange rates do not measure the wealth of a country.

The most important bank liabilities are

​Small-denomination time deposits and Checkable deposits.

A student makes the following​ observation: This month the euro depreciated sharply against the U.S. dollar. That was good news for attendance at Disneyland Paris and bad news for attendance at Walt Disney World in​ Orlando, Florida. Do you agree with the​ student?

​Yes, as the euro​ depreciates, it becomes less expensive for U.S. citizens to travel to Disneyland Paris.

An article in the Wall Street Journal in 2016 noted that banks in China have been experiencing problems with business borrowers defaulting on loans and have had difficulty attracting enough deposits to fund new loans. Are these problems likely to matter for the future growth of the Chinese​ economy?

​Yes; banks will have less funds available and will be hesitant to make loans to Chinese businesses.

In July​ 2010, Congress was considering having the federal government set up a​ "lending fund" for small banks. The U.S. Treasury would lend the funds to banks. The more of the funds the banks loaned to small​ businesses, the lower the interest rate the Treasury would charge the banks on the loans. Congressman Walt Minnick of Idaho was asked to comment on whether the bill would be helpful to small businesses. Here is part of his​ response: ​"The bank​ that's struggling to write down their commercial real estate assets is having to take a hit to​ capital, and this provides replacement capital on​ very, very favorable terms. So it deals with the left side of the balance​ sheet..." Source​: Robb​ Mandelbaum, "Can Government Help Small​ Businesses?" New York Times​, July​ 29, 2010. a. Would a loan from the Treasury be counted as part of a​ bank's capital? b. Does a​ bank's capital appear on the left side of the​ bank's balance​ sheet?

​a. No, a loan from the treasury would not be counted as bank capital. b. Bank capital appears on the right side of the balance​ sheet, because it is the difference between assets and liabilities.

1.With respect to the theory of purchasing power​ parity, the statistics in this table are (homework 6 question 8) 2.If the purchasing power parity theory allowed us to exactly determine exchange rates in the short​ run, the exchange rate between the Brazilian real and the Israeli shekel would be ________________reals per shekel.

​inconsistent, since purchasing power parity implies that​ $4.33, when converted into other​ currencies, should be sufficient to just purchase a Big Mac in the​ non-U.S. countries. inconsistent since the domestic currency prices of Big Macs​ (for the​ non-U.S. countries), when converted into​ dollars, differ markedly from​ $4.33. 2. 0.8470

If preferred stocks are initially purchased at above face value a buyback might cause​ _______ for investors since the buyback price is​ _______.

​losses: below the initial purchase price resulting in a capital loss

store of value

A ______ is the accumulation of wealth by holding dollars or other assets that can be used to buy goods and services in the future.

medium of exchange

A _______ is something that is generally accepted as payment for goods and services.

B. Underwriting is an activity in which an investment bank guarantees to the issuing corporation the price of a new security and then resells the security for a profit.

A review of a biography of the British investment banker Siegmund Warburg states that Warburg​ believed: ​"Investment banking should not be about gambling but about ... financial intermediation built on client​ relationships, not speculative trading...Warburg was always queasy about profits made from​ [investing] the​ firm's own​ capital, preferring income from advisory and underwriting​ fees." ​Source:​ "Taking the Long​ View," Economist​, July​ 24, 2010. What is​ underwriting? A. Underwriting is the first time a firm sells stock to the general public. B. Underwriting is an activity in which an investment bank guarantees to the issuing corporation the price of a new security and then resells the security for a profit. C. Underwriting is the signing of contract for buying or selling debt. D. Underwriting is the creation of sophisticated financial instruments.

Which of the following are components of aggregate​ expenditure? ​(Check all that apply.​) A. Net exports​ (spending by foreign firms and households on goods and services produced in the U.S. minus spending by U.S. firms and households on goods and services produced in other​ countries). B. Consumption spending by households on goods and services. C. Government purchases on goods and services. D. Social Security payments.

A. Net exports​ (spending by foreign firms and households on goods and services produced in the U.S. minus spending by U.S. firms and households on goods and services produced in other​ countries). B. Consumption spending by households on goods and services. C. Government purchases on goods and services.

Why is the demand for real money balances downward​ sloping? A. The higher the interest rate on​ short-term assets, the more households and firms give up when they hold large money balances. B. As the​ short-term real interest rate​ increases, the opportunity cost of holding money​ increases, and households and firms hold more real money balances. C. As the​ short-term nominal interest rate​ increases, the opportunity cost of holding money​ decreases, and households and firms hold less real money balances. D. The higher the​ short-term nominal interest​ rate, the larger the quantity of real balances households and firms want to hold.

A. The higher the interest rate on​ short-term assets, the more households and firms give up when they hold large money balances.

What are real money​ balances? ​(Check all that apply.​) A. The money​ supply, such as​ M1, divided by the price level. B. The value of money held by the government adjusted for changes in the price level. C. The value of consumer spending divided by the price level. D. The money supply adjusted for inflation.

A. The money​ supply, such as​ M1, divided by the price level. D. The money supply adjusted for inflation.

D. All answers are correct.

Adam​ Posen, a member of the Bank of​ England's Monetary Policy​ Committee, was quoted as arguing in a speech​ that: Central​ banks' purchases of government debt . . . far from undermining their independence . . . should enhance their credibility. . . . Mr. Posen​ said, . . .​ "What matters for our independence is our ability to say no and to mean​ it, and to be responsible about when we choose to say​ yes." ​Source: Natasha​ Brereton, "BOE's Posen Defends​ ECB's Actions," Wall Street Journal​, June​ 15, 2010. Why might purchasing government debt be seen as undermining a central​ bank's independence? A. Purchasing government debt is almost like printing money. B. If the Bank of England starts purchasing government​ debt, it may be interpreted as a sign that the government is forcing the Bank of England to monetize the debt. C. When the central bank purchases government​ debt, it serves as a way for the government to spend money without having to pay for it. D. All answers are correct.

Are all business cycles the same in length and​ severity? A. Most business cycles have the same length but have various degrees of severity. B. Business cycles possess various lengths and degree of severity. C. All business cycles follow the same pattern of length and severity. D. Most business cycles have different lengths with equal degrees of severity.

B. Business cycles possess various

In​ 2015, the Chinese government announced that it would switch from relying on stimulating the economy through expansions in aggregate demand to relying on expansions in aggregate supply. According to a Chinese news​ site, the government had decided that "the best way to stimulate economic growth is to lower barriers to​ production, particularly through tax cuts." ​Source: open double quoteWhat Is​ China's Supply-Side ​Reform?close double quote news.xinhuanet.com​, December​ 22, 2015. What kind of tax cuts did the government likely have in​ mind? A. Import taxes B. Business taxes C. Export taxes D. Real-estate transfer taxes

B. Business taxes

What problems does it pose for the​ economy? ​(Check all that apply.​) A. It increases interest rates. B. It implies that negative shocks to aggregate demand can have​ long-lasting negative effects on unemployment. C. It raises the natural rate of unemployment. D. It leads to fiscal policy becoming ineffective.

B. It implies that negative shocks to aggregate demand can have​ long-lasting negative effects on unemployment. C. It raises the natural rate of unemployment.

How would the increase in stock prices and housing prices have affected aggregate​ demand? A. The aggregate demand curve would shift leftward. B. The aggregate demand curve would shift rightward. C. The aggregate demand curve would not change.

B. The aggregate demand curve would shift rightward.

How could the​ Fed's expansionary monetary policy hurt the economy given the lags in the impact of monetary policy​ actions? ​(Check all that​ apply.) A. The expansionary monetary​ policy, given the lags in the impact of monetary policy​ actions, could return the economy to recession. B. The amount of stimulus could be wrong by the time the policy fully impacts the economy. C. The expansionary monetary policy could hurt the economy by returning it to full employment. D. The expansionary monetary policy could be the wrong policy by the time the policy fully impacts the economy.

B. The amount of stimulus could be wrong by the time the policy fully impacts the economy. D. The expansionary monetary policy could be the wrong policy by the time the policy fully impacts the economy.

What is​ hysteresis? A. A temporary deviation from an economic​ equilibrium, especially after severe economic shocks. B. The idea that when high rates of unemployment​ persist, workers lose skills or are seen by employers as lacking current​ skills, and some of the​ long-term unemployed become discouraged and quit the labor force permanently. C. It refers to the extreme reaction​ (hysteria) savers and investors sometimes have to declining conditions in equity​ (stock) markets. D. The idea that when a country has a low interest rate for a long​ time, the natural rate of unemployment will increase.

B. The idea that when high rates of unemployment​ persist, workers lose skills or are seen by employers as lacking current​ skills, and some of the​ long-term unemployed become discouraged and quit the labor force permanently.

What is the primary reason that households and firms demand​ money? A. To feel rich. B. To facilitate buying and selling. C. To make investments. D. For speculative purposes.

B. To facilitate buying and selling.

Normally we think of the factors that cause the AD curve to shift as different from the factors that cause the LRAS curve to shift. Is this still true in the case of​ hysteresis? A. To the extent that hysteresis​ occurs, factors that decrease AD would increase LRAS. B. To the extent that hysteresis​ occurs, factors that decrease AD would decrease LRAS. C. Yes it is. Under no circumstances do the factors shifting AD have anything to do with shifts in LRAS. D. Hysteresis only involves simultaneous shifts in the SRAS and LRAS curves.

B. To the extent that hysteresis​ occurs, factors that decrease AD would decrease LRAS.

What is aggregate​ expenditure? A. Total spending on goods and services produced by firms owned by domestic residents. B. Total spending on the​ economy's output of goods and services. C. Total spending by domestic entities on an​ economy's output of goods and services. D. The sum of household and business purchases of domestically produced goods and services.

B. Total spending on the​ economy's output of goods and services.

In​ 2016, a columnist for the Wall Street Journal wrote​ that: For​ years, the world has looked to central banks to deploy whatever tools they had to prop up economic growth.​ Now, just as those tools reach their​ limits, governments are quietly stepping up. Fiscal policy across the developed world is collectively turning more stimulative ... ​Source: Greg​ Ip, "Fiscal Policy Makes a Quiet Turn Toward ​Stimulus," Wall Street Journal​, September​ 14, 2016. All of the following are tools central banks were using to "prop up ​growth," except: A. lowering​ short-term interest rates. B. raising​ short-term interest rates. C. lowering​ long-term interest rates. D. increasing the monetary base.

B. raising​ short-term interest rates.

Stanley​ Fischer, vice-chair of the Federal​ Reserve, remarked that the exchange rate would affect aggregate demand in the United​ States: open double quoteSo that is the channel through which the exchange rate will affect our decisions.close double quote ​Source: Ben​ Leubsdorf, "Fischer Says Fed Officials Will Watch Dollar for Impact on Aggregate ​Demand," Wall Street Journal​, October​ 9, 2014. The decisions Fischer would likely have been referring to include all of the​ following, except: A. target range for the federal funds rate. B. target range for the monetary base. C. asset purchases under quantitative easing. D. monetary policy decisions on interest rates.

B. target range for the monetary base.

Money, A stock, A bond, Foreign exchange, A securitized loan

Briefly define each of the five key financial assets.

fell, rose

Briefly explain what happened to the​ currency-to-deposit ratio​ (C/D) and the excess​ reserves-to-deposit ratio​ (ER/D) during the financial crisis of 2007-2009. The​ currency-to-deposit ratio​ (C/D) _______ ​, and the excess​ reserves-to-deposit ratio​ (ER/D) _____ during the financial crisis.

D. All of the above.

By the​ 2000s, what significant changes had taken place in the mortgage​ market? A. Investment banks began buying​ mortgages, bundling large numbers of them together as​ mortgage-backed securities, and reselling them to investors. B. Lenders loosened the standards for obtaining a mortgage loanlong dashoften lending to subprime borrowers and​ Alt-A borrowers. C. Lenders created new types of​ non-traditional loans, allowing borrowers to pay a very low interest rate for the first few years of the mortgage and then pay a higher rate in later years. D. All of the above.

Movements in the exchange rate affect all of the​ following, except: A. aggregate expenditures. B. aggregate demand. C. net exports. D. aggregate supply.

D. aggregate supply.

Given that the economy can correct itself and return to potential​ GDP, why would the Federal Reserve pursue expansionary monetary policy following a negative aggregate demand​ shock? How could the Fed pursuing expansionary monetary policy be preferable to the economy correcting​ itself? A. Self-adjusting methods of economic stabilization deny politicians the chance to show that they are in control of the situation. B. Self-adjusting methods of economic stabilization are more expensive for the government than is expansionary monetary policy. C. Expansionary monetary policy might more quickly return the economy to full employment than the adjustment of the economy by itself. D. Expansionary monetary policy has fewer negative effects on unemployment than​ self-adjustment does.

C. Expansionary monetary policy might more quickly return the economy to full employment than the adjustment of the economy by itself.

Does monetary neutrality mean that changes in the money supply can never affect real​ GDP? A. No, monetary neutrality only means that changes in the money supply will not affect real GDP in the short run. Changes in the money supply can and do affect real GDP in the long run. B. Yes, monetary neutrality means that money supply changes only affect one​ variable, the price level. Real GDP is never impacted. C. No, monetary neutrality only means that changes in the money supply will not affect real GDP in the long run. Changes in the money supply can and do affect real GDP in the short run. D. Yes, monetary neutrality means that money supply changes only affect one​ variable, the nominal interest rate. Real GDP is never impacted.

C. No, monetary neutrality only means that changes in the money supply will not affect real GDP in the long run. Changes in the money supply can and do affect real GDP in the short run.

In the early to​ mid-2000s, stock prices and housing prices rose substantially. What effect would these increases in household wealth have on the savings​ rate? A. The savings rate would not change. B. The savings rate would increase. C. The savings rate would decrease.

C. The savings rate would decrease.

Why is the AD curve downward​ sloping? A. The higher interest rate produced by a lower price level leads to more consumption​ spending, investment​ spending, and net exports. B. AD slopes downward for the same reasons the demand for an individual good slopes​ downward: because of income and substitution effects. C. If nothing else​ changes, a decrease in the price level reduces aggregate expenditure on goods and services. D. An increase in the price level decreases real money​ balances, which raises the interest rate. The higher interest rate decreases consumption​ spending, investment​ spending, and net exports.

D. An increase in the price level decreases real money​ balances, which raises the interest rate. The higher interest rate decreases consumption​ spending, investment​ spending, and net exports.

Why might some economists have believed that in 2016 those tools had reached their​ limits? A. The monetary base was beginning to expand. B. Interest rates were beginning to rise. C. The monetary base was beginning to contract. D. Interest rates were at historically low levels.

D. Interest rates were at historically low levels.

Why might attempts to​ fine-tune the economy be​ ineffective? A. The policy instruments which are used in short run are inefficient in the long run. B. The policy of​ fine-tuning does not take into account the fluctuations in aggregate supply. C. The policy of​ fine-tuning does not take into account the fluctuations in aggregate demand. D. There are potentially long lags in formulating and implementing stabilization policies. This is the correct answer.

D. There are potentially long lags in formulating and implementing stabilization policies. This is the correct answer.

These tax cuts would increase aggregate supply​ by: A. slowing down the pace of technological change. B lowering the return to​ entrepreneurship, encouraging the opening of new businesses. C. decrease the incentive for individuals to​ work, increasing the supply of labor. D. increasing the​ after-tax return to investment spending.

D. increasing the​ after-tax return to investment spending.

D. A and B only.

How does the creation of a secondary market in mortgages help to promote home​ ownership? A. By allowing banks to transfer the risk of holding a loan to firms that have economies of scale in risk assessment. B. By allowing banks to offer a lower interest rate than if they held the loan themselves. C. By allowing banks to offer​ non-securitized loans to​ high-risk borrowers. D. A and B only. E. All of the above.

win, win

During the 2007minus2009 ​recession, many people who had taken out mortgages to buy homes found that they were having trouble making the payments on their mortgage. Because housing prices were​ falling, many found that the amount they owed on their mortgage was greater than the price of their home. Significant numbers of people defaulted on their mortgages. The following appeared in an article discussing this issue in the Economist​ magazine: Since foreclosures are costly for lenders as well as painful for​ borrowers, both sides could be better off by renegotiating a mortgage. The​ sticking-point, according to conventional​ wisdom, is securitization. When mortgages are sliced into numerous pieces it is far harder to get lenders to agree on changing their terms. When a mortgage is​ renegotiated, lenders _____ and borrowers ______.

D. This is not necessarily correct. For​ instance, despite the apolitical setup of the​ Fed, each member of the Federal Reserve Board still has an incentive to maximize personal​ well-being, power, and​ influence, and may make decisions that promote those factors.

Evaluate the following​ statement: "Because the Fed does not have to ask Congress for money to fund its​ operations, the​ principal-agent view of the​ Fed's motivation cannot be​ correct." A. The​ principal-agent view of the​ Fed's motivation has no connection with Fed independence from Congress. B. This statement is accurate since the​ Fed's financial independence from the congressional budgeting process effectively means there is no principal for the agent to go against. C. Since the Fed is completely independent of​ Congress, there is no​ principal-agent relationship at​ all, so the​ principal-agent view of the​ Fed's motivation cannot be correct. D. This is not necessarily correct. For​ instance, despite the apolitical setup of the​ Fed, each member of the Federal Reserve Board still has an incentive to maximize personal​ well-being, power, and​ influence, and may make decisions that promote those factors.

B. Disagree: If the required reserve ratio equaled​ zero, the simple deposit multiplier would equal​ infinity, implying that multiple deposit expansion would go on forever.​ However, the realistic money​ multiplier, which includes currency and excess reserve​ holdings, would not equal infinity even if the required reserve ratio equaled zero.

Explain whether you agree with the following​ observation: ​"If the required reserve ratio were​ zero, the process of multiple deposit expansion would go on​ forever." A. Disagree: If the required reserve ratio was equal to​ zero, the simple deposit multiplier would be equal to​ zero, too.​ So, the multiple deposit expansion would not go on forever. B. Disagree: If the required reserve ratio equaled​ zero, the simple deposit multiplier would equal​ infinity, implying that multiple deposit expansion would go on forever.​ However, the realistic money​ multiplier, which includes currency and excess reserve​ holdings, would not equal infinity even if the required reserve ratio equaled zero. C. Agree: If the required reserve ratio equaled​ zero, the simple deposit multiplier would equal​ zero, implying that multiple deposit expansion would go on forever and the realistic money​ multiplier, which includes currency and excess reserve​ holdings, would also equal zero. D. Agree: If the required reserve ratio equaled​ zero, the simple deposit multiplier would equal​ infinity, implying that multiple deposit expansion would go on forever and the realistic money​ multiplier, which includes currency and excess reserve​ holdings, would also equal infinity.

D. It would be able to conduct monetary policy free from political interference.

Fed Chair Janet Yellen was quoted in an article in the Wall Street Journal as asserting​ that: "Academic studies establish beyond a shadow of a doubt that independent central banks perform better." ​Source: David​ Harrison, "Senate Defeats​ 'Audit the​ Fed' ​Bill," Wall Street Journal​, January 12 2016. Why would a central bank that is independent be expected to perform​ better? A. It would be generate higher profits. B. It would be able to offer lower interest rates to borrowers. C. It would be able to offer higher interest rates to savers. D. It would be able to conduct monetary policy free from political interference.

B. The political business cycle would be more likely with the​ principal-agent view where the Fed lowers interest rates to stimulate the economy before an election to avoid conflict with groups that could limit its power and influence.

How are the​ principal-agent view and the public interest view connected to the theory of the political business​ cycle? A. These views are unrelated to the theory of the political business cycle. B. The political business cycle would be more likely with the​ principal-agent view where the Fed lowers interest rates to stimulate the economy before an election to avoid conflict with groups that could limit its power and influence. C. The political business cycle would be more likely with the public interest view where the Fed lowers interest rates to stimulate the economy before an election to avoid conflict with groups that could limit its power and influence. D. Under the both views the Fed lowers interest rates to stimulate the economy before an election to avoid conflict with groups that could limit its power and influence.

In addition to its original role as a lender of last​ resort, the modern Fed is now responsible for monetary policy.

How do the​ Fed's current responsibilities compare with its responsibilities when it was first created by​ Congress?

Because the loans have been bundled with other loans and resold to other investors.

How does securitization result in mortgages being​ "sliced into numerous​ pieces"?

D. The financing of investments by borrowing rather than using capital.

In referring to the collapse of the​ Long-Term Capital Management hedge fund in​ 1998, an article in the New York Times noted​ that: Starting with just​ $5 billion in​ capital, the fund was able to get​ $125 billion in additional funds. Using that​ leverage, it took on trading positions with an estimated potential value of​ $1.25 trillion. Despite the​ fund's seemingly brilliant​ strategy, the high leverage meant that it did not take much of a setback to wipe out the​ fund's underlying capital. And the potential freezing of​ $1 trillion of​ positions, even​ temporarily, was seen as a major risk to the system. ​Source: Anna​ Bernasek, "Hedge​ Funds" Heft Raises Increasing Concern About Their​ Risks," New York Times​, July​ 5, 2005. What is​ leverage? A. The financing of investments by using capital rather than borrowing. B. The financing of investments by using equity rather than borrowing. C. The financing of investments by using financial assets. D. The financing of investments by borrowing rather than using capital.

A. The Congress can amend the​ Fed's charter and powers or even abolish it entirely. B. The president can exercise control over the membership of the Board of Governors and appoint a new chairman every four years.

In what ways is the Fed subject to external​ pressure? ​(Check all that apply.​) A. The Congress can amend the​ Fed's charter and powers or even abolish it entirely. B. The president can exercise control over the membership of the Board of Governors and appoint a new chairman every four years. C. Through negative reporting journalists can rally public sentiment against Fed policies. D. The Congress scrutinizes​ Fed's budgetary requests and can reduce the amounts requested if the Fed has fallen out of favor with key members of the House or Senate.

D. It is often difficult for a central bank to act independently in a​ low-income country.

Is it easier for a central bank to be independent in a​ high-income country or in a​ low-income country? A. It is often difficult for a central bank to act independently in a​ high-income country. B. The independence of a central bank does not depend on the level of a​ country's income. C. ​Low-income countries rarely have central banks. D. It is often difficult for a central bank to act independently in a​ low-income country.

Since the​ 1960s, M2 has grown more rapidly.

Since the​ 1975, which measure of the money supply has grown more​ rapidly, M1 or​ M2?

B. The amendment would likely have little effect on the Fed and would simply quiet dissenters who​ don't believe the Fed is constitutional. D. The Fed already serves the role described in the hypothetical amendment.

Suppose that the U.S. Constitution were amended to include the​ following: "Congress shall establish a central bank that will be responsible for conducting the monetary policy of the United​ States." What effect would such an amendment be likely to have on the​ Fed? ​(Check all that apply.​) A. The amendment would cause the making of monetary policy to be transferred from a private organization to a public agency. B. The amendment would likely have little effect on the Fed and would simply quiet dissenters who​ don't believe the Fed is constitutional. C. If such an amendment were​ enacted, the U.S. dollar would likely undergo a large depreciation. D. The Fed already serves the role described in the hypothetical amendment.

Suppose that in Year 1 the price level equals 103 and the output level equals ​$12 trillion and that in Year 2 the price level equals 104 and the output level equals ​$20 trillion. In the AD​-AS​ model, what shift in the aggregate demand curve or the aggregate supply curve would explain the movement in the price level and the output level that occurred from Year 1 to Year​ 2? ___ curve must have ___.

The aggregate demand, increased

True

What a saver would consider a financial asset a borrower would consider a financial liability. Is this statement true or​ false?

D. All of the above.

What actions did the Federal Reserve and Treasury take in dealing with the financial​ crisis? A. The Fed aggressively lowered interest rates and created several new credit windows for distressed banks. B. The Federal Reserve and the Treasury worked together to find a buyout partner for Bear Stearns. C. Congress passed the Troubled Asset Relief Program​ (TARP) and the Treasury actively worked with the Fed to ensure financial stability. D. All of the above.

A. true.

What actions does a central bank need to have the independence to say​ "no" to? A central bank needs to be able to say no to actions that would harm the​ economy, like excessive inflation from buying government bonds. The statement above is A. true. B. false.

Transactions costs are almost always high. There is increased time and effort spent looking for trading partners. There is a lack of standardization. There is difficulty in accumulating wealth.

What are the costs and sources of inefficiency in a barter​ system? ​(Check all that​ apply.)

B. The increase in​ ER/D was significantly larger than the decrease in​ C/D, causing the value of the money multiplier to decline.

What impact did these changes have on the size of the money​ multiplier? A. The increase in​ ER/D was significantly larger than the decrease in​ C/D, causing the value of the money multiplier to increase. B. The increase in​ ER/D was significantly larger than the decrease in​ C/D, causing the value of the money multiplier to decline. C. The increase in​ C/D was significantly larger than the decrease in​ ER/D, causing the value of the money multiplier to increase. D. The decrease in​ C/D was significantly larger than the increase in​ ER/D, causing the value of the money multiplier to decline.

A. Research has shown that the more independent a central bank​ is, the lower the inflation rate will be.​ Thus, one would expect the average inflation rate in​ less-developed countries to be higher than in industrial countries.

What implications does your answer have for what the average inflation rate is likely to be in​ high-income countries as opposed to​ low-income countries? A. Research has shown that the more independent a central bank​ is, the lower the inflation rate will be.​ Thus, one would expect the average inflation rate in​ less-developed countries to be higher than in industrial countries. B. The average inflation rate will be higher in​ low-income countries, but only because of the limited ability of the economy to expand production. C. Research has shown that the more independent a central bank​ is, the lower the inflation rate will be.​ Thus, one would expect the average inflation rate in​ less-developed countries to be lower than in industrial countries. D. Research has shown that the rate of inflation does not depend on the level of the central​ bank's independence.

C. The article indicates that​ $5 billion in capital was leveraged to​ $125 billion.

What information from this excerpt indicates that​ Long-Term Capital Management was highly​ leveraged? A. The article indicates that​ $1.25 trillion in capital was leveraged to​ $1 trillion. B. The article indicates that​ $125 billion in capital was leveraged to​ $5 billion. C. The article indicates that​ $5 billion in capital was leveraged to​ $125 billion. D. The article indicates that​ $1.25 trillion in capital was leveraged to​ $5 billion.

Hyperinflation is inflation that exceeds​ 100% per year.

What is a​ hyperinflation?

The central bank of the United States.

What is the Federal​ Reserve?

A very high rate of growth in the money supply.

What is the cause of​ hyperinflation?

C. A theory of central bank decision making that holds that officials act in the best interests of the public.

What is the public interest view of the​ Fed's motivation? A. A theory of central banking that holds that officials maximize their personal​ well-being rather than that of the general public. B. A theory of central banking that holds that officials maximize the​ public's interest in​ (and attitude​ toward) the affairs of the monetary authority. C. A theory of central bank decision making that holds that officials act in the best interests of the public. D. A theory of central bank decision making that holds that officials act in the best interests of the shareholders.

B. the ratio of the amount of deposits created by banks to the amount of new reserves.

What is the simple deposit​ multiplier? The simple deposit multiplier is A. the ratio of the amount of new reserves to the amount of deposits created by banks. B. the ratio of the amount of deposits created by banks to the amount of new reserves. C. the percentage of checkable deposits that the Fed specifies that banks must hold as reserves. D. the ratio of the amount of deposits created by banks to the amount of already existing reserves.

A. A theory of central banking that holds that officials maximize their personal​ well-being rather than that of the general public.

What is the​ principal-agent view? A. A theory of central banking that holds that officials maximize their personal​ well-being rather than that of the general public. B. A theory of central bank decision making that holds that officials act in the best interest of the public. C. A theory of central banking that holds that officials maximize the general​ public's well-being rather than their personal​ well-being. D. A theory of central bank decision making that holds that officials act in the best interest of the shareholders.

D. All of the above.

What problems did the decline in housing prices that began in 2006 cause for the financial​ system? A. Banks began to restrict credit to all but the safest borrowers--limiting the flow of funds from savers to borrowers. B. Many subprime and​ Alt-A borrowers, borrowers with adjustable rate​ mortgages, and borrowers who had made only small down payments defaulted on their mortgages. C. The value of​ mortgage-backed securities declined sharply--causing heavy losses for the investment institutions owning these securities. D. All of the above.

B. Congress wanted the Federal Reserve to operate independently of external political pressures.

When Kentucky Senator Rand Paul was running for the 2016 Republican presidential​ nomination, an article in the New York Times noted​ that: "Mr. Paul opposes the Federal​ Reserve's control of the money supply and interest​ rates, suggesting that such powers should be exercised by Congress." ​Source: "Rand Paul on the ​Issues,"New York Times​, April​ 7, 2015. Why does Congress directly control fiscal policy--the federal​ government's decisions with respect to spending and taxes--but delegate the authority over monetary policy to the Federal​ Reserve? A. Congress​ doesn't have the expertise to set monetary policy. B. Congress wanted the Federal Reserve to operate independently of external political pressures. C. Congress​ wasn't able to agree on a monetary policy. D. Member banks refused to join the Federal Reserve System unless they had authority over monetary policy.

They are appointed by the president and confirmed by the Senate.

Who appoints the members of the Federal​ Reserve's Board of​ Governors?

Because a house is likely to increase in price while automobiles and refrigerators are less likely to gain in value.

Why is a bubble more likely to occur in the housing market rather than in the market for automobiles or the market for​ refrigerators?

D. All answers are correct.

Why might a central bank sometimes want to say​ "yes" to the above​ actions? A. These actions may be positive in times of extreme economic circumstances. For​ instance, in the fall of 2010 the Federal Reserve undertook​ "quantitative easing," which was the purchase of government debt. The action flooded banks with excess liquidity. B. When these actions can put downward pressure on exchange​ rates, increasing exports to spur recovery. C. When these actions can lower the cost of government borrowing in bad economic times. D. All answers are correct.

To make it easier for families to borrow money to purchase a home.

Why might the federal government decide to intervene in the housing market to promote home​ ownership?

The cost of negotiation with every investor holding the security may be prohibitively costly.

Why would securitization make renegotiating a loan more​ difficult?

Can the economy be in a short​-run macroeconomic equilibrium without being in a long​-run macroeconomic​ equilibrium?

Yes

If the​ long-run aggregate supply curve​ shifts, does the​ short-run aggregate supply curve also have to​ shift? (Hint: Consider the factors that shift each curve and determine whether these factors also shift the other​ curve.)

Yes

Direct, indirect

______ finance is a transaction between two parties where one party lends directly to the other​ party, whereas ______ finance involves three​ parties: the​ borrower, the​ lender, and a third party -- such as a bank.

A subprime borrower, An Alt-A borrower

______ is a borrower with a flawed credit history and ______ is a borrower who states his or her income but does not document or prove the amount of income.

A securitized loan

______ is a collection of loans packaged together that pays an interest payment to the owner of the loan.

A bond

______ is a financial security issued by a corporation or government to borrow money in exchange for the rights to an interest payment.

Foreign exchange

______ is a unit of foreign currency.

Money

______ is anything that people are willing to accept in payment for goods and services or to pay off debts.

What policies might the Federal Reserve use to counteract an aggregate demand​ shock? The Fed would conduct a contractionary monetary policy to counteract a ___ demand​ shock, and it would implement this by ___ Treasury securities and ___ interest rates.

positive, selling, raising