Economics Test 2

Lacey, a financial advisor has told her clients the following things. Which of her statements is incorrect?

"If you purchase a bond, you dont have to hold it until it matures"

If the reserve ratio is 100 percent, depositing $500 of paper money in a bank will eventually increase the money supply by

$0

If the reserve ratio is 10 percent, $1,000 of excess reserves can make

$10,000 of new money

If the reserve ratio is 15 percent, an additional $1,000 of reserves will increase the money supply by

$6667

What is the present value of a payment of $100 to be made one year from today if the interest rate is 5%?

$95.24

The labor force participation rate is defined as

(Labor Force/Adult Population) x100

If the reserve ratio is 10 percent, the money multiplier is

100

In Wellville, the money supply is $80,000 and reserves are $18,000. Assuming that people hold only deposits and no currency, and that banks hold only required reserves, the required reserve ratio is

22.5%

If the reserve is 20 percent, the money multiplier is

5

A rough estimate of the natural rate of unemployment

5.5

Consider two people who are currently out of work. Tim is not looking for work because there have been many job cuts where he lives and he deoesnt think it is likely that he will find work. Bev is not currently looking for work, but she would like a job.

Only Bev is a marginally attached worker

Some people who are employed or who are not making serious effort to find a job will report themselves as unemployed. Some people who want to find work will be counted as out of the labor force

The first fact tends to make the reported unemployment rate higher than the actual rate. The second fact tends to make the reported unemployment rate lower than the actual rate.

Between 2001 and 2002, the country of Aquilonia reported an increase in the number of people who were employed. It also reported an increase in the unemployment rate.

There was an increase in the size of the labor force between 2001 and 2002

Which bond would you expect to pay the highest interest rate?

a bond issued by a new restaurant chain

On which bond is default most likely

a junk bond

Which of the following are correct?

adults have higher labor-force participation rates and lower unemployment rates than teenagers

If an unemployed person quits looking for work, the unemployment rate

and the labor force participation rate stay the same

Discouraged workers

are counted as part of the adult population, but not as part of the labor force

Marginally attached workers are

are not working and are not looking for work, but would work if asked. (CHECK)

If you deposited $3000 into first hawkeye bank, the

banks required reserves increase by the reserve ratio times $3000

Consider two people who are currently out of work. Deb is not currently searching for work, she has done so at some point in the recent past. Ted is not looking for work, because he doesnt think there are jobs that he would qualify for available.

both deb and ted would be discouraged workers

President Bigego is running for reelection against senator pander. Bigego proclaims that more people are working now than when he took office. Pander says that the unemployment rate is higher now than when Bigego took office, you conclude

both of them could be telling the truth if the labor force grew faster than employment

Some people are counted as out of the labor force because they have made no serious or recent effort to look for work. However, some of these people may want to work even though they are too discouraged to make a serious effort to look for work. If these persons were counted as unemployed instead of out of the labor force,

both the unemployment rate and labor force participation rate would be higher

When the Fed conducts open market operations, it

buys or sells government bonds from the public

Which of the following is not a tool of monetary policy?

changing the discount rate

When the Fed wants to change the money supply, it most frequently

conducts open market operations

Assuming that the bonds below have the same term and principal and that the state or local government which issues the municipal bond has a good credit rating, which list has bonds ordered from the one that pays the most interest to the one that pays the least interest?

corporate bond, U.S. government bond, municipal bond

Matt loses his job and decides to sit around at home for a few months, the unemployment rate

decreases, and the labor force participation rate decreases

If you deposit $100 into a demand deposit at a bank, this action by itself

does not change the money supply

If the reserve ratio increased from 10 percent to 20 percent, the money multiplier would

fall from 10 to 5

Under a fractional reserve banking system, banks

generally lend out a majority of the funds deposited

The present value of a payment to be made in the future is lower at

higher interest rates and as the time until the payment is made increases

The Fed can influence unemployment

in the short term but not the long term

In 1991 the federal reserve lowered the reserve requirement ratio from 12 percent to 10 percent

increased both the money multiplier and the money supply

Since World War II, the labor force participation rate

increased for women and decreased for men

When a bank loans out $1000 the money supply

increases

Anna has just finished school and started looking for a job, but has not yet found one. As a result the unemployment rate

increases, and the labor force participation rate increases

You are expecting to receive $750 at some time in the future. Which of the following would increase the present value of the future payment.

interest rates fall and you get the payment sooner

You are expecting to receive $650 at some point in the future. Which of the following would decrease the present value of this future payment?

interest rates rise and you have to wait longer for the payment

Tara has just finished school, but she is going to roam around the country awhile before she starts looking for work. The unemployment rate

is unaffected, and the labor force participation rate is unaffected

When the Fed conducts open market purchases

it buys treasury securities, which increases the money supply

When the Fed conducts open market sales,

it sells Treasury securities, which decreases the money supply

Municipal bonds pay a

low rate of interest because of their low-default risk and because the interest they pay is not subject to federal income tax

Which list contains only actions that increase the money supply

lower the discount rate, lower the reserve requirement ratio

Other things the same, as the maturity of a bond becomes longer, the bond will pay

more interest because it has more risk

The Fed can increase the money supply by conducting open market

purchases and lowering the discount rates

On a banks T account

reserves are assets and deposits are liabilities

If the Fed wanted to increase the money supply, it would make open market

sales and lower the discount rate

Jerry has the choice of two bonds, one that pays 3 percent interest and one that pays 6 percent interest. Which of the following is most likely?

the 6 percent bond has a longer term than the 3 percent bond

Suppose that some people report themselves as unemployed when, in fact, they are working in the underground economy. If these persons were counted as employed

the employment rate would be lower and the labor force would be unaffected

If the bank uses $100 of reserves to make a new loan when the reserve ratio is 20 percent

the money supply increases by $100 while wealth does not change

The sale of stocks

to raise money is called equity finance, while the sale of bonds to raise funds is called debt finance