ECON 485 Midterm
One of the things that made the Savings & Loans eager to lend money for home mortgages was the existence of the
Federal Housing Administration
In a 2003 analysis of the Federal Reserve's role in the stock market collapse in October of 1929, Allan Meltzer concluded that the
Federal Reserve followed the wrong policy doctrine and thus contributed to the onset of the Great Depression
__________, __________, and __________ are part of the "shadow banking industry."
Finance companies; mutual funds; private equity partnerships
The term monetary aggregates refers to things like
M1 and M2
Harold would be equally happy with receiving $95 today or $100 one year from today. Harold's friend Maud would be just as happy receiving $90 today or $100 one year from today. Based on this information, which of the following best describes the difference between Harold and Maud?
Maud has a higher rate of time preference than Harold
Throughout time, many commodities have performed the function of money. Which of the following would NOT be a likely commodity to serve as money?
Milk
The graph in Figure 4-1 shows the supply and demand for bonds for Charter Corp. (Sc and Dc) and US Treasury Securities (Sus and Dus). The default risk premium paid by Charter Corp. in this market is represented by
PusPc
At the conclusion of World War II, an explosion in the home mortgage market was led by depository institutions known as
Savings & Loans
Harper just got a big raise at work, which pushed her from the 15% federal marginal tax bracket to the 25% marginal tax bracket. Which of the following best describes how this might affect her decision to buy municipal bonds?
This will make her more likely to buy municipal bonds because it will increase the difference between the nominal interest rate paid on the bonds and the after-tax interest rate she will receive relative to corporate bonds.
Assets are things that are useful or things that have value. T/F
True
The expansion of the "junk bond" market in the 1980s was one factor that allowed for the rapid increase in the number of leveraged buyouts. T/F
True
When resource markets are efficient, recessionary gaps close by themselves without any government intervention. T/F
True
One of the tools the US government used to control inflation during World War II was wage and price controls. T/F
True
Following World War II, inflation became so bad that Germans stopped using Reichsmarks for transactions, and instead used cigarettes for small transactions and cognac (a type of brandy) for large transactions. Which of the following best describes this situation?
cigarettes and cognac functioned as money in Germany in this period following World War II
Today, in the United States, several assets function as money. Which of the following would NOT be considered money?
credit cards
When stagflation began to appear in the US economy in the late 1960s, economists and policymakers were perplexed because they had never seen __________ and __________ at the same time.
high inflation rates; high unemployment rates
A person who believes the pure expectations theory of interest rates would explain a steeply upward-sloping yield curve is suggesting that
higher inflation is in the future, or more rapid economic growth is on the horizon
If the market for loanable funds is currently in equilibrium, a(n) __________ will cause an increase in the interest rate.
increase in business confidence
In the country of Trivia, it is widely believed that the marginal propensity to consume is 0.75. This means that a onetime increase in spending of $50 billion will result in a(n) __________ in GDP equal to __________.
increase; $200 billion
A decrease in aggregate demand would be caused by a(n) __________ in __________.
increase; imports
As the federal marginal tax rate rises, the advantage of municipal bonds over corporate bonds
increases
The relationship between the economy-wide price level and the level of real GDP illustrated by the aggregate demand curve is
indirect
A major concern of US policymakers as a result of the dramatic increase in wartime spending was
inflation
When there is too much money chasing too few goods, the likely impact is
inflation
One of the most important prices determined in financial markets is the __________ rate.
interest
Financial assets include which of the following?
money, bonds, and stocks
Commercial banks face competition from a variety of institutions, including
mutual funds, investment banks, and insurance companies
A 10-year, $10,000 bond with a coupon rate of 5% is a promise by the issuer of the bond to
pay the bondholder $500 every year for 10 years and also a $10,000 payment in 10 years
A bond's maturity refers to the
period of time when the issuer of the bond makes repayment of the bond's principal
Nominal interest rates are made up of
real interest rates plus inflation
Shareen buys a 30-year, $10,000 US Treasury bond with a coupon rate of 5%. After two years she needs some cash so she decides to sell her bond. Shareen will sell her bond in the __________ market.
secondary bond
Jenny has had a portion of stock in an e-commerce company for some time. She is ready to resell her stock. On what market would she do this?
secondary market
Institutions that compete with commercial banks because they perform some but not all of the functions of commercial banks are said to be part of the __________ banking industry.
shadow
Some of the most important central banks in the world include
the Federal Reserve, the European Central Bank, and the Bank of England
The three reasons that the economy-wide price level and the level of real GDP move in opposite directions are
the Pigou effect, Keynes's interest rate effect, and the foreign trade effect
Financial deregulation in the 1980s ultimately led to
the Savings & Loan crisis and the end of the Savings & Loan industry
A major advantage that municipal bonds have over corporate bonds for investors is that
the income earned on municipal bonds is not subject to federal income tax
Consider the graph in Figure 3-2. Which of the following is considered a decrease in the quantity demanded?
the movement of A to C
The quantity of loanable funds supplied is directly related to interest rates because as interest rates increase
the opportunity cost of household consumption increases, causing households to bring more of their after-tax income to the pool of loanable funds
The aggregate demand, three-part aggregate supply model has performed relatively well in all but which of the following situations?
understanding the stagflation of the late 1960s and early 1970s
Suppose that the interest rate on a one-year bond is currently 3% and the market believes that the rate on a one-year bond one year from now will be 5%. If you follow the pure expectations theory of interest rates, then you would expect to see a(n) __________ yield curve.
upward-sloping
The rational expectations approach postulates two aggregate supply curves:
an upward-sloping short-run aggregate supply curve and a vertical long-run supply curve at the full-employment level of GDP
Inflation is a benefit to
borrowers
Financial markets bring together __________ and __________.
borrowers; lenders
Money that has no intrinsic value is known as
fiat money
It is found that when the disposable income of Elvania increases by $100 billion, household consumption spending increases by $70 billion. In Elvania, the marginal propensity to consume is
0.7
Emily is in the 10% marginal income tax bracket and earned a 4.5% return on the corporate bonds that just matured. The nominal interest rate paid on these bonds was
5%
Consider the graph in Figure 3-1. An increase in the quantity supplied is best illustrated by a movement from
A to B
Which of the following is included in the M1 definition of the money supply?
Demand deposits and other checkable deposits
In the early 1980s, Paul Volcker used an easy monetary policy to bring inflation under control. T/F
False
Rational expectations refers to the idea that people are adaptive in nature, and once something happens they will adapt to it. T/F
False
The Panic of 1907 was essentially ended by one person, John D. Rockefeller. T/F
False
The higher a person's rate of time preference, the lower the interest rate needed to get them to defer their consumption to the future. T/F
False
With measurements of monetary aggregates such as M1 and M2, the money supply is relatively easy to measure. T/F
False
Dollarization occurs when
a country officially adopts another country's currency as their legal tender
A decrease in the demand for loanable funds would be caused by
a decrease in expectations about future inflation
One of the most important functions of the US Federal Reserve is to serve as
a lender of last resort
Consider Figure 6-1. Which of the following will cause a shift in aggregate demand from AD2 to AD1?
an increase in interest rates
Money is generally thought of as
anything generally accepted in exchange for goods or services
When a newly issued bond sells above its face value, it is said to sell
at a premium
If the market interest rate is the same as the coupon rate on a newly issued bond, then the bond will sell
at par
The risk that a bond issuer will not be able to live up to the promise they make when they issue a bond is known as __________ risk.
default
An inverted yield curve likely means the
economy is headed for recession