Ch 10 Credit Markets

16) Deposit made by the public into a savings account are referred to as:

B) demand deposits.

19) The biggest wave of bank failures in the U.S. occurred:

B) during the Great Depression.

4) One of the risks of maturity transformation is that:

B) it can lead to bank runs.

10) A bank is insolvent when:

B) its total liabilities exceed its total assets.

18) Borrowed funds that are to be repaid in a year or more are referred to as:

B) long-term debt.

3) The transfer of short-term liabilities into long-term investments is called:

B) maturity transformation.

10) Cash equivalents are:

B) riskless, liquid assets that banks can immediately access.

Assuming all else equal, any change that causes an increase in the credit supply at a given real interest rate will cause:

B) the credit supply curve to shift to the right.

An automobile manufacturer decides to increase its retained earnings. Assuming all else equal, this will cause:

B) the current credit supply curve of the firm to shift to the right.

If the quantity of credit demanded in a market exceeds the quantity of credit supplied in the market:

B) the real rate of interest tends to rise.

9) In the United States, bank reserves include:

B) vault cash and the bank's holdings on deposit at the Federal Reserve Bank.

An optimizing economic agent will use the ________ rate while calculating the economic cost of a loan.

real interest

13) Assuming all else equal, a rise in the rate of interest:

results in a fall in the quantity of credit demanded.

John is expecting to get a hike in his monthly salary after three months. Assuming all else equal, this is likely to cause a(n) ________ his current credit demand curve.

rightward shift in

All else equal, an increase in government borrowing is likely to cause a(n):

rightward shift of the credit demand curve.

Assuming all else equal, if households are optimistic about their future income, it is likely to cause a(n):

rightward shift of their credit demand curve.

Factors that cause a decrease in the demand for credit at a given real interest rate cause:

the credit demand curve to shift to the left.

Factors that cause an increase in the demand for credit at a given real interest rate cause:

the credit demand curve to shift to the right.

Credit is:

the loan that a debtor recieves

14) The real interest rate is given by:

the nominal interest rate adjusted for inflation.

When the credit demand curve is relatively steep:

the quantity of credit demanded is not very sensitive to changes in the real interest rate.

When the credit demand curve is relatively flat:

the quantity of credit demanded is relatively sensitive to changes in the real interest rates.

If the nominal interest rate increases without any change in the rate of inflation:

the real interest rate increases.

The credit demand curve is the schedule that reports the relationship between the quantity of credit demanded and ________ in an economy, assuming all else equal.

the real rate of interest

Assuming all else equal, if there is an increase in the real interest rate:

there will be an upward movement along the credit demand curve.

Savers are willing to lend out money because:

they prefer to spend money in the future rather than today.

Which of these financial intermediaries is most likely to invest in new companies that are just starting up and have no track record?

venture capital funds

If the annual inflation rate in an economy is positive, the purchasing power of a dollar kept in a bank:

will decrease over time.

If the annual inflation rate in an economy is negative, the purchasing power of a dollar:

will increase over time.

6) The annual price of a one dollar loan is referred to as the:

rate of interest.

If an individual borrows $200 at an annual rate of interest of 10%, what is the total amount that he will have to repay after one year?

$220

f the stockholders' equity of a bank is $30,000 and the total liabilities of the bank is $10,000, the total assets of the bank will equal:

$40,000

If an individual borrows $100 at an annual rate of interest of 5%, how much interest will he have to pay at the end of a year?

$5

If the annual inflation rate in an economy is "i", then $1 borrowed at the beginning of a year will have the same purchasing power as ________ dollars at the end of the year.

(1 + i)

If an individual borrows $100, and pays back $100 after a year to settle his loan, it implies that the rate of interest is:

0%

If the nominal interest rate in an economy is 4% and the real interest rate in the economy is 2%, the rate of inflation in the economy must be:

2%.

If the nominal interest rate in an economy is 6%, and the rate of inflation in the economy is 4%, the real interest rate in the economy is:

2%.

If the quantity of credit supplied in a market exceeds the quantity of credit demanded in the market:

A) the real rate of interest tends to fall.

Which of the following is likely to shift the credit demand curve of a computer manufacturer to the left, assuming all else equal?

A decrease in the scale of production

Which of the following is likely to shift the credit demand curve of an automobile manufacturer to the right, assuming all else equal?

A plan to increase production and expand to newer markets

2) Demand deposits have a ________ maturity.

A) 0-year

The following figure shows two credit demand curves, CD1 and CD2, and two credit supply curves, CS1 and CS2. Refer to the figure above. Which of the following statements is true when the credit demand curve is CD2 and the credit supply curve is CS1?

A) At all rates of interest below 5% there will be a tendency for the interest rate to rise.

The following figure shows two credit demand curves, CD1 and CD2, and two credit supply curves, CS1 and CS2. Refer to the figure above. Which of the following statements is true when the credit demand curve is CD2 and the credit supply curve is CS1?

A) At all rates of interest below 5% there will be an excess demand for credit.

Everything else remaining unchanged, what is likely to happen to the equilibrium real interest rate and quantity of credit if the credit demand curve shifts to the right?

A) Both equilibrium rate of interest and quantity of credit will increase.

24) Which of the following will NOT be included in a bank's liability?

A) Cash equivalents of the bank

50) Which of the following statements is true?

A) If the opportunity cost of current consumption is high, people will save more.

49) Which of the following statements is true?

A) If the real interest rate increases, the opportunity cost of current consumption increases.

21) Which of the following equations is correct?

A) Stockholders' equity + total liabilities = total assets.

8) The statement of assets and liabilities of an entity is referred to as:

A) a balance sheet.

John makes it a point to save a portion of his salary every month. Assuming all else equal, if the real interest rate increases, it is likely to cause:

A) an upward movement along John's credit supply curve.

19) If a bank borrows funds for three years, the borrowing will be classified as:

A) long-term debt.

15) A well-capitalized bank:

A) owns far more than it owes.

Assuming all else equal, any change that causes a decrease in the credit supply at a given real interest rate will cause:

A) the credit supply curve to shift to the left.

Assuming all else equal, if a firm decides to pay more dividends and lowers the amount of retained earnings it holds, it will cause:

A) the current credit supply curve of the firm to shift to the left.

Consider two banks: Bank A and Bank B. Suppose the value of liabilities of both the banks is equal. However, Bank A is solvent but Bank B is insolvent. This would imply that:

A) the value of Bank A's assets exceeds the value of Bank B's assets.

11) A bank is solvent when:

A) the value of its total assets exceeds the value of its liabilities.

The following figure shows two credit demand curves, CD1 and CD2, and two credit supply curves, CS1 and CS2. Refer to the figure above. What is the equilibrium quantity of credit when the credit demand curve is CD1 and the credit supply curve is CS1?

B) $30

If the total assets of a bank equals $50,000 and the total liabilities of the bank equal $20,000, stockholders' equity will equal

B) $30,000.

71) Which of the following statements is true?

B) An excess demand for credit exerts an upward pressure on the real rate of interest.

51) Which of the following statements is true?

B) An increase in the real interest rate always encourages higher savings.

Everything else remaining unchanged, what is likely to happen to the equilibrium real interest rate and quantity of credit if the credit demand curve shifts to the left?

B) Both equilibrium rate of interest and quantity of credit will decrease.

7) Which of the following statements is true?

B) If a firm deposits a sum of $500 in a bank, the sum is a part of the bank's liability.

1) ________ refers to the time until debt must be repaid.

B) Maturity

15) Which of the following is NOT an asset of a bank?

B) Stockholders' equity

Suppose Bank A holds $50,000 in deposits with other banks. In the balance sheet, this amount will be accounted as Bank A's:

B) cash equivalents.

64) The market where borrowers obtain funds from savers is referred to as the:

B) credit market.

65) The loanable funds market is also referred to as the:

B) credit market.

The following figure shows two credit demand curves, CD1 and CD2, and two credit supply curves, CS1 and CS2. Refer to the figure above. What is the equilibrium quantity of credit when the credit demand curve is CD2 and the credit supply curve is CS1?

C) $40

The following figure shows two credit demand curves, CD1 and CD2, and two credit supply curves, CS1 and CS2. Refer to the figure above. What is the equilibrium rate of interest when the credit demand curve is CD1 and the credit supply curve is CS1?

C) 4%

Which of the following is a role of the Federal Deposit Insurance Corporation in the United States?

C) It regulates banks that are insolvent.

Which of the following is a role of the Federal Deposit Insurance Corporation in the United States?

C) It safeguards deposits held with banks.

Everything else remaining unchanged, what is likely to happen to the equilibrium real interest rate and quantity of credit if the credit supply curve shifts to the left?

C) The equilibrium rate of interest will increase and the quantity of credit will decrease.

21) The theory of efficient markets suggests that:

C) all movements in stock markets are based on rational appraisals of new information.

55) Assuming all else equal, an increase in the real interest rate will cause:

C) an upward movement along the credit supply curve.

54) Assuming all else equal, the slope of the credit supply curve implies that:

C) as the real interest rate increases, the quantity of credit supplied increases.

17) Demand deposits are termed so because:

C) depositors can withdraw money from such deposits at any point of time.

Institutions that channel funds from suppliers of financial capital to users of financial capital are referred to as:

C) financial intermediaries.

14) An institutional bank run is most likely to occur when:

C) firms and other banks withdraw money from a weak bank.

20) The most established theory of stock prices relates a company's asset prices to:

C) future earning prospects of companies and future values of interest rates.

17) In the case of banks, "living wills" spell out:

C) how a bank would sell its assets and pay of its creditors in the event of shutdown.

12) An asset is liquid if:

C) it can be easily converted into cash without loss of value.

11) An asset is said to be riskless if:

C) its value does not change from day to day.

16) Systemically important financial institutions are:

C) large banks that have become a large market power.

6) Normally, the Federal Deposit Insurance Corporation would shut down a bank when:

C) liabilities of the bank exceed the assets of the bank.

14) The value of the real estate that a bank uses for its operations will be included in the bank's:

C) long-term investments.

9) One of the impacts of maturity transformation is that:

C) relatively liquid assets become relatively illiquid.

Assuming all else equal, if a household is pessimistic about future income, it is likely to cause a(n):

C) shift in the current credit supply curve of the household to the right.

66) At the equilibrium rate of interest:

C) the quantity of credit demanded equals the quantity of credit supplied.

67) If the real interest rate is greater than the equilibrium real interest rate:

C) the quantity of credit demanded falls short of the quantity of credit supplied.

48) The opportunity cost of current consumption is:

C) the real interest rate.

53) The credit supply curve is:

C) upward sloping.

The following figure shows two credit demand curves, CD1 and CD2, and two credit supply curves, CS1 and CS2. Refer to the figure above. What is the equilibrium rate of interest when the credit demand curve is CD2 and the credit supply curve is CS1?

D) 5%

The following figure shows two credit demand curves, CD1 and CD2, and two credit supply curves, CS1 and CS2. Refer to the figure above. Which of the following statements is true when the credit demand curve is CD1 and the credit supply curve is CS1?

D) At all rates of interest above 4% there will be a tendency for real interest rates to fall.

The following figure shows two credit demand curves, CD1 and CD2, and two credit supply curves, CS1 and CS2. Refer to the figure above. Which of the following statements is true when the credit demand curve is CD1 and the credit supply curve is CS1?

D) At all rates of interest above 4% there will be an excess supply of credit.

Everything else remaining unchanged, what is likely to happen to the equilibrium real interest rate and quantity of credit if the credit supply curve shifts to the right?

D) The equilibrium rate of interest will decrease and the quantity of credit will increase.

18) Which of the following statements is true of the U.S. economy?

D) The number of bank runs decreased after the FDIC was established.

13) A bank run occurs when:

D) a bank experiences an extraordinarily large volume of withdrawals.

56) Assuming all else equal, a decrease in the real interest rate will cause:

D) a downward movement along the credit supply curve.

Assuming all else equal, the credit supply curve shows the relationship between the quantity of credit supplied and the:

D) real interest rate.

20) The difference between a bank's assets and liabilities is referred to as:

D) stockholders' equity.

Assuming all else equal, if a household is optimistic about future income, it is likely to cause:

D) the current credit supply curve of the household to shift to the left.

68) If the real interest rate is lower than the equilibrium real interest rate:

D) the quantity of credit supplied falls short of the quantity of credit demanded.

5) As long as a bank's stockholders' equity is greater than zero:

D) the stockholders in the bank bear all the risk involved.

Which of the following statements is true?

Non-bank institutions are also a part of the credit market.

7) Which of the following statements is true?

Out of two loans, the interest accumulated after the end of a year will be more on the one that is a larger principal.

15) Which of the following equations is correct?

Real interest rate = Nominal interest rate - Inflation rate

Consider two economies: A and B. The nominal interest rate is the same in both economies, but the rate of inflation is higher in economy B. Which of the following statements will then be true?

The real interest rate will be higher in economy A.

Assuming all else equal, if the real interest rate increases, it will lead to:

a decrease in the quantity of credit demanded by a firm.

Assuming all else equal, a decrease in the real interest rate will cause:

a downward movement along the credit demand curve.

Assuming all else equal, if the real interest rate decreases, it will lead to:

an increase in the quantity of credit demanded by a firm.

Companies that enable investors to use their savings to buy financial securities are referred to as:

asset management companies

5) Investments that a bank makes are known as:

assets

Money or goods that parents leave to their children in their wills are referred to as:

bequests.

An individual may borrow a certain sum of money from any of the three banks in his town. Bank 1 offers him loans at an annual rate of 5%, Bank 2 offers him loans at an annual rate of 3% per year, and Bank 3 offers him a loan at an annual rate of interest of 10%. A rational individual will:

borrow from Bank 2.

The total interest that a borrower has to pay on a loan is equal to the:

principal times the rate of interest.

Economic agents who borrow funds are known as:

debtors

The credit demand curve is:

downward sloping.

Investment pools gathered from a small number of very wealthy individuals or institutions are referred to as:

hedge funds

The slope of the credit demand curve from the text book implies that the:

higher the real rate of interest, the lower the quantity of credit demanded.

If the real interest rate is greater than the nominal interest rate in an economy:

inflation must be negative in the economy.

If the nominal interest rate is greater than the real interest rate in an economy:

inflation must be positive in the economy.

If the real interest rate is equal to the nominal interest rate in an economy:

inflation must be zero in the economy.

The additional payment a borrower has to make on a loan is referred to as:

interest

Assuming all else equal, if an airline company decides to purchase new planes, it is likely to cause:

its credit demand curve to shift to the right.

All else equal, a decrease in government borrowing is likely to cause a(n):

leftward shift of the credit demand curve.

Assuming all else equal, if households are pessimistic about their future income, it is likely to cause a(n):

leftward shift of their credit demand curve.

6) Claims that economic agents have against banks are known as:

liabilities

A debtor's quantity of credit demanded and the rate of interest are likely to be:

negatively correlated