CH 7- MACRO MIDTERM 2

Which of the following is not part of M1? A) Transaction accounts B) Checking accounts C) Time deposits D) Traveler's checks

Time deposits

Bonds sold by the U.S. government that offer a certain real interest rate are known as A) zero-coupon bonds. B) Treasury Inflation-Protected Securities. C) denominalized securities. D) savings bonds.

Treasury Inflation-Protected Securities.

The break-even inflation rate is the A) excess of the nominal interest rate over the TIPS interest rate. B) inflation rate that makes the nominal interest rate equal the real interest rate. C) negative of the real interest rate. D) inflation rate that is optimal according to the Friedman rule.

excess of the nominal interest rate over the TIPS interest rate

The idea that investors today compare the returns on bonds with differing times to maturity to see which is expected to give them the highest return is the underlying principle behind the ________ of the term structure of interest rates. A) expectations theory B) investors' viewpoint analysis C) segmented-markets theory D) yield comparison theory

expectations theory

People's best guesses about returns on assets are called A) expected returns. B) liquidity. C) risk. D) the term structure of returns.

expected returns

If the income elasticity of money demand is 3/4 and income increases 8%, by about how much does the price level change? A) Falls by 6% B) Unchanged C) Rises by 6% D) Rises by 8%

falls by 6%

For something to satisfy the medium-of-exchange function of money, it must be A) backed by gold. B) readily exchangeable for other goods. C) issued by a central bank. D) an inherently valuable commodity.

readily exchangeable for other goods

The use of money is more efficient than barter because the introduction of money A) reduces the need for economic specialization. B) reduces the need to exchange goods. C) reduces the need for other stores of value. D) reduces transaction costs.

reduces transaction costs

If real money demand increases 5% and real money supply increases 10%, by about how much does the price level change? A) Falls by 5% B) Unchanged C) Rises by 2% D) Rises by 5%

rises by 5%

The uncertainty about the return an asset will earn is A) liquidity. B) risk. C) time to maturity. D) stochastic dominance.

risk

The amount by which the expected return on a risky asset exceeds the return on an otherwise comparable safe asset is known as the A) CDS spread. B) risk premium. C) VIX. D) term spread.

risk premium

The existence of a ________ means that the interest rate on a two-year bond will exceed the average interest rate on two successive one-year bonds. A) risky asset. B) securitization premium. C) term structure. D) risk premium.

risk premium

The risk premium is A) the amount by which the expected return on a risky asset exceeds the return on an otherwise comparable safe asset. B) a measure of the riskiness of the overall economy in a domestic country compared with a foreign country. C) the amount an investor must pay to insure his or her stock portfolio to protect against a fall in value. D) the amount an investment bank charges to guarantee an annuity that pays a fixed rate of return in the future.

the amount by which the expected return on a risky asset exceeds the return on an otherwise comparable safe asset.

Which of the following best illustrates the medium of exchange function of money? A) The price of a new car is $25,000. B) A penny saved is a penny earned. C) A person owes $10,000 on his or her credit card. D) You pay $3 to purchase a bag of apples.

you pay $3 to purchase a bag of apples

Mr. Pierpont has wealth of $200,000. He wants to keep at least $80,000 in bonds at all times, and will shift $10,000 into bonds from his checking account for each percentage point that the interest rate on bonds exceeds the interest rate on his checking account. If the interest rate on checking accounts is 4% and the interest rate on bonds is 9%, how much does Mr. Pierpont keep in his checking account? A) $50,000 B) $70,000 C) $130,000 D) $150,000

$70,000

If nominal money supply grows 3% and real money demand grows 8%, the inflation rate is A) -5%. B) 8/3%. C) 5%. D) 11%.

-5%

If the interest elasticity of money demand is -0.1, by what percent does money demand change if the nominal interest rate rises from 2% to 3%? A) -0.1% B) 5% C) 0% D) -5%

-5%

If the nominal money supply grows 6%, real income rises 2%, and the inflation rate is 5%, then the income elasticity of money demand is A) 0.5. B) 0.75. C) 1.0. D) 1.5.

0.5

If the income elasticity of money demand is 3/4 and the interest elasticity of money demand is -1/4, by what percent does money demand rise if income rises 10% and the nominal interest rate rises from 4% to 5%? A) 7.50% B) 6.25% C) 5.00% D) 1.25%

1.25%

Money demand is given by Md/P = 1000 + .2Y - 1000i. Given that P = 200, Y = 2000, and i = .10, velocity is equal to A) 0.65. B) 0.75. C) 1.33. D) 1.54.

1.54

If real GDP is $4 billion, the price level is 1.25, and the nominal money stock is $500 million, then velocity is A) 0.1. B) 1. C) 10. D) 100.

10

Suppose the real interest rate is 4% and the expected inflation rate is 3%. If the money supply increases by 10% and output, the real interest rate, and the expected inflation rate are unchanged, then the price level increases by A) 3%. B) 4%. C) 7%. D) 10%.

10%

Suppose the real money demand function is Md/P = 2400 + 0.2Y - 10,000 (r + πe). Assume M = 4000, P = 2.0, πe = .03, and Y = 5000. The real interest rate that clears the asset market is A) 3%. B) 6%. C) 11%. D) 14%.

11%

Money demand is given by Md/P = 1000 + .2Y - 1000i. Given that P = 200, Y = 2000, and i = .10, real money demand is equal to A) 1300. B) 1500. C) 260,000. D) 300,000.

1300

Suppose the real money demand function is Md/P = 2400 + 0.2Y - 10,000 (r + πe). Assume M = 5000, P = 2.0, and πe = .03. If Y were to increase from 4000 to 5000, then the real interest rate would increase by how many percentage points? A) 2 B) 4 C) 5 D) 7

2

Suppose velocity is constant at 4, real output is 10, and the price level is 2. From this initial situation, the government increases the nominal money supply to 6. If velocity and output remain unchanged, by how much will the price level increase? A) 2.4% B) 20% C) 24% D) 50%

20%

If real income rises 4%, prices rise 1%, and nominal money demand rises 4%, what is the income elasticity of real money demand? A) 3/4 B) 4/5 C) 5/6 D) 1

3/4

Suppose velocity is 3, real output is 9000, and the price level is 1.5. What is the level of real money demand in this economy? A) 2000 B) 3000 C) 6000 D) 30,000

3000

If the nominal money supply grows 10%, the inflation rate is 6%, and the income elasticity of money demand is 1.0, then real income growth equals A) 1%. B) 2%. C) 3%. D) 4%.

4%

Suppose real money demand is L = 0.8 Y - 100,000 (r + πe). If the nominal money supply is 12,000, real output is 15,000, the real interest rate is .02, and the expected inflation rate is .01, then the price level is A) 3/4. B) 1. C) 4/3. D) 3.

4/3

If real income rises 5%, prices rise 3%, and nominal money demand rises 7%, what is the income elasticity of real money demand? A) 3/4 B) 4/5 C) 5/6 D) 6/7

4/5

Suppose the real money demand function is Md/P = 2400 + 0.2Y - 10,000 (r + πe). Assume M = 5000, πe = .03, and Y = 5000. If the price level were to decrease from 2.5 to 2.0, then the real interest rate would decrease by how many percentage points (assuming Md, πe, and Y are unchanged)? A) 4 B) 5 C) 9 D) 14

5

Mr. Pierpont has wealth of $200,000. He wants to keep at least $80,000 in bonds at all times, and will shift $10,000 into bonds from his checking account for each percentage point that the interest rate on bonds exceeds the interest rate on his checking account. Currently, he keeps $100,000 in bonds, which pay him 7%. What is the current interest rate on checking accounts? A) 5% B) 7% C) 9% D) 10%

5%

Suppose real money demand is 1000, real output is 6000, and the price level is 200. What is the level of velocity in this economy? A) 2 B) 3 C) 6 D) 12

6

A one-year bond has an interest rate of 5% today. Investors expect that in one year, a one year bond will have an interest rate equal to 7%. According to the expectations theory of the term structure of interest rates, in equilibrium, a two-year bond today will have an interest rate equal to A) 3.0%. B) 5.0%. C) 5.5%. D) 6.0%.

6.0%

If the nominal money supply grows 5%, real income falls 2%, and the income elasticity of money demand is 0.8, then the inflation rate is A) 3.0%. B) 3.4%. C) 6.6%. D) 7.0%.

6.6%

M2 includes A) large-denomination time deposits. B) institutional MMMFs. C) commercial paper. D) M1.

M1

Which of the following measures is the best measure of money as a medium of exchange? A) M1 B) M2 C) M3 D) None of the above

M1

Suppose your bank raises its minimum-balance requirement for free checking on checking accounts by $500. You take $500 out of your passbook savings account and put it in your checking account. What is the overall effect on M1 and M2? A) M1 rises by $500, M2 falls by $500. B) M1 is unchanged, M2 is unchanged. C) M1 rises by $500, M2 is unchanged. D) M1 is unchanged, M2 falls by $500.

M1 rises by $500, M2 is unchanged.

Which of the following statements about M1 and M2 is not true? A) Transaction accounts are part of M1. B) M2 is more liquid than M1. C) M2 is larger than M1. D) Transaction accounts are part of M2.

M2 is more liquid than M1

M1 does not include A) MMMFs. B) travelers' checks. C) currency. D) transaction accounts.

MMMFs

A good that is used as a medium of exchange as well as being a consumption good is called A) a barter money. B) a commodity money. C) a legal tender. D) a debased money.

a commodity money

An increase in expected inflation is likely to cause A) a decline in the demand for real balances. B) an increase in the demand for real balances. C) no change in the demand for real balances. D) no change in the demand for real balances only if the income elasticity of real money demand is zero.

a decline in the demand for real balances.

Which of the following is most likely to lead to a decrease of 10% in the nominal demand for money? A) An increase in real income of 5% B) A decrease in real income of 5% C) A decline of 10% in the price level D) An increase of 10% in the price level

a decline of 10% in the price level

A 10% decrease in real income usually leads to ________ in money demand. A) an increase B) no change C) a decrease of less than 10% D) a decrease of 10%

a decrease of less than 10%

The set of assets that a holder of wealth chooses to own is called A) an asset assortment. B) a wealth strategy. C) a portfolio. D) an investment envelope.

a portfolio

The interest rate on long-term bonds is somewhat higher than suggested by the expectations theory because A) the expectations theory doesn't account for taxes. B) a risk premium exists. C) an inflation premium must be added to long-term bonds. D) the Fed can only control short-term interest rates.

a risk premium exists

Time to maturity refers to the amount of time until A) an asset repays the principal to an investor. B) an asset pays interest for the first time. C) a bond can be sold on the secondary market. D) the yield curve shows an upward slope.

an asset repays the principal to an investor

Which of the following is most likely to lead to an increase of 1% in the nominal demand for money? A) An increase in real income of 0.5% B) A decrease in real income of 0.5% C) A decline of 1% in the price level D) An increase of 1% in the price level

an increase of 1% in the price level

A 5% increase in real income usually leads to ________ in money demand. A) a decrease B) no change C) an increase of less than 5% D) a decrease of 5%

an increase of less than 5%

When the real quantity of money supplied equals the real quantity of money demanded, there is said to be A) goods market equilibrium. B) asset market equilibrium. C) monetary neutrality. D) money illusion.

asset market equilibrium

In economics, money refers to A) income. B) wealth. C) assets used and accepted as payment. D) currency.

assets used and accepted as payment

Why do people keep currency in their pockets when bank deposits pay interest? A) Because banks might steal your money. B) Because currency is more liquid. C) Because bank deposits lose value due to inflation. D) Because bank deposits lose value due to changes in interest rates.

because currency is more liquid

The most likely explanation for the high inflation rates that countries like Russia and the Ukraine have suffered is that A) large inflows of foreign funds increase the money supply, causing inflation. B) without inflation, these countries would be unable to achieve high rates of growth. C) borrowing from the central bank is the most expedient method of funding the government's expenditures. D) the flood of financial innovations has increased liquidity in these nations' economies.

borrowing from the central bank is the most expedient method of funding the government's expenditures.

The excess of the nominal interest rate over the TIPS interest rate is known as the A) interest-rate differential. B) break-even inflation rate. C) yield spread. D) term structure.

break-even inflation rate

By spreading her investments out over many different assets, an investor achieves A) a higher expected return. B) increased risk. C) diversification. D) greater liquidity.

diversification

Over half of U.S. currency is A) held abroad. B) used in the underground economy. C) held by banks as reserves. D) held by businesses, especially retailers, for making transactions.

held abroad

The least liquid asset on this list is A) money. B) bonds. C) houses. D) stocks.

houses

An increase in the real interest rate would cause an increase in the real demand for money A) no matter what the change in expected inflation. B) if expected inflation fell by less than the rise in the real interest rate. C) if expected inflation fell by the same amount as the rise in the real interest rate. D) if expected inflation fell by more than the rise in the real interest rate.

if expected inflation fell by more than the rise in the real interest rate.

We shouldn't be concerned about U.S. currency held abroad because A) the currency will never return to the United States. B) foreigners use it to buy U.S. bonds. C) it represents an interest-free loan to the United States. D) foreigners can't spend it in their own countries.

it represents an interest-free loan to the United States

When a government prints money to finance its expenditures, it is likely to cause A) unemployment. B) inflation. C) deflation. D) reductions in the use of barter.

inflation

Which of these variables is not a variable in the equation for the asset market equilibrium condition? A) Nominal money supply B) Price level C) Real income D) Investment

investment

The ease and quickness with which an asset can be exchanged for goods, services, or other assets is its A) risk. B) time to maturity. C) velocity. D) liquidity.

liquidity

moneys primary role in the economy comes from the benefits of lowering transactions costs and allowing specialization. This function of money is called A) store of value. B) medium of exchange. C) standard of deferred payment. D) unit of account.

medium of exchange

If there is a financial panic and increased uncertainty about the returns in the stock market and bond market, what is the likely effect on money demand? A) Money demand declines first, then rises when inflation increases. B) Money demand rises. C) The overall effect is ambiguous. D) Money demand declines.

money demand rises

Suppose a new law imposes a tax on all trades of bonds and stock. What is the likely effect on money demand? A) Money demand declines first, then rises when inflation increases. B) Money demand rises. C) The overall effect is ambiguous. D) Money demand declines.

money demand rises

Which of the following is not included in M2? A) Money market mutual funds held by individuals B) Money market deposit accounts C) Money market mutual funds held by institutions D) Small-denomination time deposits

money market mutual funds held by institutions

AAA Company stock has a higher expected rate of return than ZZZ Company stock. All else being equal, you would expect that relative to ZZZ, AAA company stock provides A) less risk and less liquidity. B) less risk and more liquidity. C) more risk and less liquidity. D) more risk and more liquidity.

more risk and less liquidity

Compared with money, bonds have A) less risk and less liquidity. B) less risk and more liquidity. C) more risk and less liquidity. D) more risk and more liquidity.

more risk and less liquidity

The financial crisis occurred in 2008 in large part because of losses on securities consisting of bundles of mortgage loans known as A) home loan loss reserves. B) credit default swaps. C) mortgage-backed securities. D) naked put options.

mortgage-backed securities

Velocity is defined as A) nominal money stock/nominal GDP. B) nominal GDP/nominal money stock. C) real money stock/real GDP. D) mc2.

nominal GDP/nominal money stock.

Suppose you read in the paper that the Federal Reserve plans to expand the money supply. The Fed is most likely to do this by A) printing more currency and distributing it. B) purchasing government bonds from the public. C) selling government bonds to the public. D) buying newly issued government bonds directly from the government itself.

purchasing government bonds from the public

You are putting together a portfolio of assets. The four most important characteristics of the assets you will choose are expected return, time to maturity, A) risk, and liquidity. B) risk, and collateral C) risk, and reward. D) liquidity, and standard issue size.

risk, and liquidity

Which of these variables is not a variable in the equation for the asset market equilibrium condition? A) Saving B) Expected rate of inflation C) Real interest rate D) Real income

saving

Which of the following statements about M1 and M2 is true? A) Demand deposits are not part of M1. B) M2 is more liquid than M1. C) M1 is larger than M2. D) Savings deposits are part of M2.

savings deposits are part of M2

What's the most common way for a central bank to reduce the money supply? A) Collect higher taxes B) Sell bonds to the public C) Buy bonds from the government D) Buy bonds from the public

sell bonds to the public

A developing country does not have enough taxes to cover its expenditures and is unable to borrow. This government would be most likely to cover its deficit by A) purchasing government bonds from the public. B) selling government bonds to the public. C) selling newly issued government bonds directly to the central bank. D) buying newly issued government bonds directly from the central bank.

selling newly issued government bonds directly to the central bank

The following are all functions of money except A) medium of exchange. B) store of value. C) unit of account. D) source of anxiety.

source of anxiety

One of moneys primary roles in the economy comes from the use of money to transfer purchasing power to the future. This role of money is called A) store of value. B) unit of account. C) medium of exchange. D) standard of deferred payment.

store of value

People in other countries want to hold U.S. dollars as a A) medium of exchange. B) store of value. C) unit of account. D) standard of deferred payment.

store of value

In the early 2000s, lenders began issuing mortgage loans to people who would normally not be qualified to take out loans because they did not meet lending standards. Those borrowers are known as A) alternative borrowers. B) weak borrowers. C) subprime borrowers. D) credit risks.

subprime borrowers

When the quantity of money supplied equals the quantity of money demanded, then A) the goods market is in equilibrium. B) the asset market is in equilibrium. C) the money market is in equilibrium. D) the money market is not in equilibrium.

the asset market is in equilibrium

How does the break-even inflation rate differ from the expected inflation rate as measured in surveys? A) They are very close to each other. B) The break-even inflation rate varies less than the expected inflation rate from surveys. C) The break-even inflation rate varies more than the expected inflation rate from surveys. D) The break-even inflation rate is always several percentage points higher than the expected inflation rate from surveys.

the break-even inflation rate varies more than the expected inflation rate from surveys

In some countries, prices in stores are listed in terms of U.S. dollars, rather than in units of the local currency. That's most likely because A) the country's political system is unstable. B) interest rates are higher using U.S. dollars than using the local currency. C) there is no other store of value. D) the country has experienced high rates of inflation.

the country has experienced high rates of inflation

Large differences in inflation rates among countries are almost always the result of large differences in A) productivity. B) real income growth. C) the growth rates of real money demand. D) the growth rates of nominal money supplies.

the growth rates of nominal money supplies

If the asset market is in equilibrium, the growth rate of the nominal money supply minus the growth rate of real money demand equals A) the real interest rate. B) the inflation rate. C) the price level. D) the growth rate of real output.

the inflation rate

The opportunity cost of holding currency decreases when A) income decreases. B) the interest rate on bonds decreases. C) the interest rate on money decreases. D) wealth decreases.

the interest rate on bonds decreases

A disadvantage of the barter system is that A) no trade occurs. B) people must produce all their own food, clothing, and shelter. C) the opportunity to specialize is greatly reduced. D) gold is the only unit of account.

the opportunity to specialize is greatly reduced

Over time, the wealth of society increases and payments technologies get more efficient. What is the effect on money demand of these two changes? A) Money demand rises proportionately to the rise in wealth. B) Money demand rises, but less than proportionately to the rise in wealth. C) The overall effect is ambiguous. D) Money demand declines.

the overall effect is ambiguous

If the nominal money supply doubles while real money demand is unchanged, what happens to the price level? A) The price level increases by a factor of four. B) The price level doubles. C) The price level is unchanged. D) The price level falls by one-half.

the price level doubles

If real money demand doubles while the nominal money supply is unchanged, what happens to the price level? A) The price level increases by a factor of four. B) The price level doubles. C) The price level is unchanged. D) The price level falls by one-half.

the price level falls by one-half

Under a situation of asset market equilibrium, A) the quantity of money supplied equals the quantity of money demanded. B) the quantity of money supplied equals the quantity of nonmonetary assets demanded. C) the quantity of nonmonetary assets supplied equals the quantity of monetary assets demanded. D) the quantity of money supplied equals the quantity of nonmonetary assets supplied.

the quantity of money supplied equals the quantity of money demanded.

If the quantity of money demanded exceeds the quantity of money supplied, then A) the quantity of nonmonetary assets demanded exceeds the quantity supplied. B) the quantity of nonmonetary assets supplied exceeds the quantity demanded. C) the quantity of nonmonetary assets demanded will still equal the quantity supplied, all else being equal. D) you can make no conclusions about the relative supply and demand of nonmonetary assets.

the quantity of nonmonetary assets supplied exceeds the quantity demanded.

If the asset market is to remain in equilibrium, then if the money supply increases, output is unchanged, the price level is unchanged, and the expected inflation rate is unchanged, then A) the real interest rate must rise. B) the real interest rate must decline. C) the nominal interest rate must rise. D) the inflation rate must rise.

the real interest rate must decline

The number of units of one good that trade for one unit of alternative goods can be determined most easily when A) there is one unit of account. B) the goods all weigh about the same. C) the goods are all new. D) the goods are actively traded through barter.

there is one unit of account

M2 does not include A) Treasury bonds. B) passbook savings accounts. C) small-denomination time deposits. D) M1.

treasury bonds