Econ2105: Test 3

What is the present value of ​$250​, three years in the future if the interest rate is 5 ​percent? The present value of ​$250​, three years in the future if the interest rate is 5 percent is ​____?

$215.96

The table shows the amounts held as the various components of M1 and M2. The value of M1 is ​______ billion. The value of M2 is ​_______ billion.

$270; $1205

If the inflation rate is 6 percent and the nominal rate of interest is 4 percent, then the real interest rate is __________.

-2 percent

In September 2020​, the real interest rate was _______ percent. Between May 2020 and September 2020​, the real interest rate

0.9%; decreased

Choose the correct statement.

A bank's reserves are notes and coins in the bank's vault to in a deposit account at the Federal Reserve.

When is the opportunity cost of holding money higher?

When interest rates are high

The __________ the interest rate, the more investment projects firms can profitably undertake, and the __________ the quantity of loanable funds they will demand.

lower, greater

The stated rate of interest on a loan is the __________.

nominal interest rate

Credit cards are:

not part of the money supply.

How many Federal Reserve districts are there?

12

If the annual interest paid on a​ $500 loan is​ $25, the nominal interest rate is​ _____ percent per year. If the nominal interest rate is 5 percent per year and the inflation rate is 2 percent a​ year, the real interest rate is​ _____ per year.

5; 3

Which of these is a financial institution?

A commercial bank

Which of these will shift the money demand curve to the right?

An increase in real GDP

The actions the Federal Reserve takes to manage the money supply and interest rates in order to pursue economic objectives are called __________.

Monetary policy

Depository institutions provide four​ benefits, which are​ ______.

creating​ liquidity, lowering the cost of​ borrowing, lowering the cost of monitoring​ borrowers, and pooling risk

A decline in investment spending as a result of an increase in government spending and borrowing is known as:

crowding out

If increases in government budget deficits cause investment spending to fall it is known as __________.

crowding out

The price of a bond​ ______ and the interest rate in the short run​ ______.

falls; rises

A federal government budget deficit will __________.

increase the demand for loanable funds and increase the equilibrium interest rate

A central bank​ _______. A commercial bank​ _______.

is a​ bank's bank; is a firm that takes deposits from households and firms

Wealth is the value of all the things that people ________.

own

A stock is a certificate of ____ and claim to the ____ that a firm makes.

ownership; profits

Starting from a​ short-run equilibrium, when the Fed decreases the quantity of​ money, _______.

people enter the loanable funds market and sell bonds

In the long run, the amount of investment a firm can make is dependent on:

the amount of household savings

The demand for loanable funds increases and the supply of loanable funds decreases. As a​ result, the equilibrium real interest rate​ ______ and the equilibrium quantity of loanable funds​ ______.

​rises; increases,​ decreases, or remains the same

If the monetary base increases by​ $1 million and the quantity of money increases by​ $2.5 million, then the money multiplier is​ _____.

2.5

Daisy loans Alfred​ $10,000 and a year​ later, Alfred pays Daisy​ $10,400. If the inflation rate during that year is 1.5​ percent, what is the real interest rate that Alfred is paying to​ Daisy? The real interest rate that Alfred is paying to Daisy is​ _______.

2.5% a year

What is the relationship between real interest rates and investment, other things being equal?

A negative relationship

Which of these are financial instruments that represent promises to repay a fixed amount of funds?

Bonds

Choose the correct statement.

Deposits are​ money, checks are not​ money, and credit cards are not money.

Which of these statements about interest rates and inflation is true?

If there is zero inflation, the nominal interest rate is equal to the real interest rate.

What is the relationship between investment and real interest rates, all other things being equal?

Lower interest rates stimulate investment.

The sum of all currency in the hands of the public, checkable deposits and traveler's checks is the official definition of __________.

M1

The two main official measures of money in the United States today are​ ______. The two main official measures of money in the United States​ ______ really money.

M1 and​ M2; are

When we say that money serves as a unit of account, we mean that:

Prices are quoted in terms of money.

Which body of the Federal Reserve System sets the majority of U.S. monetary policy?

The Federal Open Market Committee

How can the change in U.S. wealth differ from U.S.​ saving?

The change in wealth includes changes in the prices of assets owned and saving excludes these items.

If technological change increases the profitability of new investment to firms, which of these will occur?

The demand for loanable funds will increase.

The table gives information about the commercial banks in Zap. If banks have no unplanned​ reserves, what is the​ banks' desired reserve​ ratio?

The desired reserve ratio is 5 percent.

The real interest rate is:

The nominal interest rate minus the inflation rate.

Consider a payment of ​$400​,which will be made three years in the future. The interest rate is 4 percent.

The present value of this payment is ​$355.60

Joe has a term deposit that pays 5 percent a year and its value after two years will be ​$12,000. What is the present value of​ Joe's term​ deposit?

The present value of​ Joe's term deposit is ​$10884.35

If the government begins running a budget surplus, what impact will the surplus have on the loanable funds market?

The supply of loanable funds will increase.

How would a reduction in income tax rates affect the loanable funds market?

The supply of loanable funds would increase.

Which of these determines the supply of loanable funds?

The willingness of households and governments to save

Tom took out a ​$5,000 loan to buy a boat at an interest rate of 10 percent a year. He plans to repay the loan after 2 years. How much will he have to​ pay?

Tom will have to pay ​$6,050.

A share of stock is __________.

a certificate of ownership and claim to the firm's profits

The Fed is the lender of last resort​, which means that if​ _____ is short of​ reserves, it can borrow from the​ _____.

a​ bank; Fed

To increase the money supply, the Fed __________.

buys securities from the public

An increase in the real interest rate will:

cause a movement along the demand curve for loanable funds

The functions of depository institutions include​ _______.

creating liquidity

The decline in capital's value over a period of time is known as __________.

depreciation

The best measure of the income households actually have available to spend is:

disposable personal income

In the long​ run, an increase in the quantity of money​ _______ the interest rate.

does not change

If the price level and the money wage rate rise by the same​ percentage, what happens to the quantity of real GDP​ supplied? Along which aggregate supply curve does the economy​ move? If the price level and the money wage rate rise by the same​ percentage, the quantity of real GDP supplied​ ______ and there is a movement up along the​ ______ aggregate supply curve.

does not​ change; long-run

Assuming there are no leakages out of the banking system, a money multiplier equal to 5 means that:

each additional dollar of reserves creates $5 of deposits.

The loanable funds market is the aggregate of all the individual​ _____ markets.

financial

A financial institiyoon is a firm that operates on both sides of the markets for _____: It. ______ in one market and ______ in another.

financial capital; borrows; lends

A depository institution is a​ _______.

financial firm that takes deposits from households and firms

The financial capital markets exist in order to __________.

funnel household savings to firms

The​ _______, the greater is the amount that a household decides to save.

greater a​ household's disposable income and the smaller a​ household's expected future income

A mortgage is a legal contract that gives ownership of a _____ to the ____ in the event that the _____ fails to meet the agreed loan payments (repayments and interest).

home; lender; borrower

The flow of funds from __________ into the financial system makes it possible for government and firms to borrow.

households

A government budget deficit​ _______ loanable funds.

increases the demand for

A government budget surplus​ _______ loanable funds.

increases the supply of

When we say that one of the functions of the Fed is to be a lender of last resort, we mean that the Fed __________.

lends to banks that are short of reserves and cannot find any other source of funds

Net worth is the total market value of what a financial institution has​ _____ minus the market value of what it has​ _____.

lent; borrowed

FDIC insurance helps to minimize the cost of bank failure by​ _______.

limiting the loss of each deposit to amounts over​ $250,000

The quantity theory of money is that in the​ _______, an increase in the quantity of money brings an equal percentage increase in the​ _______.

long​ run; increase in the price level

When interest rates on Treasury bills and other financial assets are low, the opportunity cost of holding money is __________ , so the quantity of money demanded will be __________.

low, high

If the government is attempting to spur investment spending it should adopt policies that are designed to:

lower interest rates

Saving is the amount of income that is _______ in net taxes or spent on ______ goods or services.

not paid; consumption

The Fed conducts monetary policy primarily through __________.

open market operations

Net present value is the​ _______.

present value of all the future flows of money that arise from a financial decision minus the initial cost of the decision

The ​crowding-out effect is the tendency for a government budget deficit to raise the​ _____ and​ _____ investment.

real interest​ rate; decrease

The risk that a​ borrower, also known as a​ creditor, might not​ _____ is called credit risk or default risk.

repay a loan

The name given to the fraction of deposits that a bank is legally required to hold in its vault, or as deposits at the Fed, is __________.

required reserves

The demand for loanable funds increases and the supply of loanable funds increases. As a​ result, the equilibrium real interest rate​ ______ and the equilibrium quantity of loanable funds​ ______.

rises, falls, or remains the​ same; increases

The supply of loanable funds is determined by the​ _________. The supply of loanable funds changes when​ _______.

saving decisions of​ households, which are influenced by the real interest​ rate, disposable​ income, expected future​ income, wealth, and default​ risk; disposable​ income, expected future​ income, wealth, or default risk change

Both graphs show a demand for money curve. In the left​ graph, draw a point to show the quantity of money demanded when the interest rate is 5 percent. Show the effect of an increase in the nominal interest rate. Draw either an arrow along the curve showing the direction of​ change, or a new demand for money curve. In the right​ graph, draw a point to show the quantity of money demanded when the interest rate is 5 percent. Show the effect of an increase in real GDP. Draw either an arrow along the curve showing the direction of​change, or a new demand for money curve.

see graph

The graph shows the demand for money curve and the supply of money curve. The Fed decreases the quantity of real money supplied to ​$4.0 trillion. Draw a new MS curve that shows the effect of the ​Fed's action. Label it. Draw a point at the new equilibrium quantity of money and interest rate. Before the Fed decreases the quantity of​ money, the equilibrium interest rate is ___ percent a year. After the Fed decreases the quantity of​ money, at an interest rate of 2 percent a​ year, people want to hold ​_______ money than the quantity​ supplied, so they ​_______ bonds. The price of a bond​ _______ and the interest rate​_______.

see graph 2% more; sell falls; rises

The figure shows the demand for money curve in Epsilon. Draw the supply of money curve if the Fed wants the interest rate to be 6 percent a year. Label it. Draw a point at the equilibrium in the money market. If the interest rate is 5​ percent, people will​ ______ bonds. Bond prices will​ ______. The interest rate will​ _______.

see graph sell;fall rise

The graph shows the loanable funds market when there is neither a government budget surplus nor a government budget deficit. Draw a point at the equilibrium quantity of loanable funds and the equilibrium real interest rate. Label it 1. Now suppose that the government has a budget surplus of​ $1 trillion. Draw a curve that shows the effect of this surplus in the loanable funds market. Label it. Draw a point at the new equilibrium real interest rate and quantity of investment. Label it 2. Draw a point to show private saving when the government budget surplus is​ $1 trillion. Label it 3.

see image

The graph shows demand for loanable funds curve. Suppose the real interest rate rises. Draw either an arrow along the demand curve showing the direction of change or a new demand curve. When the real interest rate rises​, the​ ______ because the​ ______ is the opportunity cost of loanable funds.

see image quantity of loanable funds demanded decreases​; real interest rate

An increase in households' expected future disposable income occurs. Draw a curve that shows the effect of this event. Draw a point at the new equilibrium quantity of loanable funds and the new equilibrium real interest rate. When a shortage or a surplus arises in the loanable funds market​ _______.

see image the real interest rate is pulled to the new equilibrium level

The​ long-run historical evidence and international evidence show us that the relationship between money growth and the inflation rate​ ______.

supports the quantity​ theory, but the correlation is not perfect

State the financial decision​ rule: If the net present value is positive​ _______ and if the net present value is negative​_______.

take the​ action; do not take the action

The Federal Reserve System is __________.

the central bank of the United States

The quantity of money that the banking system can create is limited by​ _______.

the monetary​ base, desired​ reserves, and desired currency holdings

If real GDP increases:

the money demand curve shifts to the right.

The demand for loanable funds is the relationship between​ _____ demanded and the​ _____ when all other influences on borrowing plans remain the same.

the quantity of loanable​ funds; real interest rate

The supply of loanable funds is the relationship between​ _____ supplied and the​ _____ when all other influences on lending plans remain the same

the quantity of loanable​ funds; real interest rate

The net present value is the​ _______ flows of money from a financial decision minus​ _____.

value today of all​ future; the initial cost of the decision

In an​ economy, there is ​$75 million in currency held outside​ banks, ​$100 million in​ traveler's checks, ​$200 million in currency held inside the​ banks, ​$300 million in checking​ deposits, ​$500 million in savings​ deposits, ​$1,000 million in time​ deposits, and ​$600 million in money market mutual funds and other deposits. The value of M1 is​ ______ and the value of M2 is​ ______

​$475 million; $2,575 million

We call the leakage of bank reserves into currency the currency​ drain, and we call the ratio of​ _____ to​ _____ the currency drain ratio.

​currency; deposits

An open market purchase​ ______ the monetary base. An open market sale​ ______ the monetary base.

​increases; decreases

If the price level rises and the money wage rate remains​ constant, what happens to the quantity of real GDP​ supplied? Along which aggregate supply curve does the economy​ move? If the price level rises and the money wage rate remains​ constant, the quantity of real GDP supplied​ ______ and there is a movement up along the​ ______ aggregate supply curve.

​increases; short-run

A government budget surplus​ _______ the real interest​ rate, decreases​ ______.

​lowers; private​ saving, and increases investment

FDIC insurance brings​ _______ stability to the banking system because​_______.

​more; depositors know that money they have deposited with a bank will be repaid making bank runs less likely

A government budget deficit​ _______ the real interest​ rate, increases​ ______

​raises; private​ saving, and decreases investment