Chapter 9

Sydney purchases a newly issued, two-year government bond with a principal amount of $10,000 and a coupon rate of 6% paid annually. One year before the bonds matures (and after receiving the coupon payment for the first year), Sydney sells the bond in the bond market. What price (rounded to the nearest dollar) will Sydney receive for his bond if newly issued one-year government bonds are paying a 5% coupon rate?

$10,095

In Macroland there is $10,000,000 in currency. The public holds half of the currency and banks hold the rest as reserves. If banks' desired reserve/deposit ratio is 10%, deposits in Macroland equal ______ and the money supply equals _______.

$50,000,000; $55,000,000

You expect a share of EconNews.Com to sell for $65 a year from now and to pay a $2 dividend per share in one year. What should you pay (rounded to the nearest dollar) for the stock today if you require an 8% return?

$62

In Macroland, currency held by the public is 2,000 econs, bank reserves are 300 econs, and the desired reserve/deposit ratio is 10%. If the Central Bank prints an additional 200 econs and uses this new currency to buy government bonds from the public, the money supply in Macroland will increase from ______ econs to ______ econs, assuming that the public does not wish to change the amount of currency it holds.

5,000; 7,000

In the long run, countries with higher rates of money growth usually have: A. Higher rates of inflation. B. Lower rates of inflation. C. Faster growth rates of real output. D. Smaller budget deficits.

A. Higher rates of inflation.

Money is: A. any asset used to make purchase B. the same as income. C. the sum of assets minus debts. D. all financial assets.

A. any asset used to make purchases.

The M1 measure of money consists of the sum of: A. currency, checking deposits, and traveler's checks B. currency, checking deposits, and savings deposits. C. checking deposits and travelers' checks. D. currency and travelers' checks.

A. currency, checking deposits, and traveler's checks

If the Central Bank of Macroland puts an additional 1,000 dollars of currency into the economy, the public deposits all currency into the banking system, and banks have a desired reserve/deposit ratio of 0.10, then the banks will eventually make new loans totaling ______ and the money supply will increase by _______. A. $1,000; $9,000 B. 9,000, 10,000 C. $1,000; $1,000 D. $9,000; $9,000

B. $9,000; $10,000

If you post your car on eBay with a Buy-It-Now price of $1,800, you are using money as: A. bank reserves. B. a unit of accounts C. a medium of exchange. D. a store of value.

B. a unit of account.

Privately-owned firms that accept deposits from individuals and businesses and use those deposits to make loans are called: A. brokerage firms. B. commercial banks. C. investment banks. D. mortgage banks.

B. commercial banks.

According to the quantity equation, if velocity and real GDP are constant, and the Federal Reserve increases the money supply by 5 percent, then the price level: A. decreases by more than 5 percent. B. increases by 5 percent. C. increases by more than 5 percent. D. decreases by 5 percent.

B. increases by 5 percent.

A financial intermediary that sells shares in itself to the public, and then uses the funds to buy a wide variety of financial assets is called a: A. credit union. B. mutual fund. C. commercial bank. D. stock exchange.

B. mutual fund

Decentralized market-based financial systems improve the allocation of saving by: A. ensuring capital gains exceed dividend payments. B. providing information and risk-sharing services. C. eliminating the need for commercial banks or other financial intermediaries. D. matching net capital inflows to net capital outflows.

B. providing information and risk-sharing services.

When your grandfather keeps a bundle of $100 dollar bills behind a brick in the basement, this is an example of dollars serving as: A. bank reserves. B. a unit of account. C. a store of value. D. a medium of exchange.

C. a store of value.

Banks help savers find productive uses for their funds because banks are specialized in: A. evaluating the riskiness of stocks. B. securing government guarantees for loans. C. gathering information about and evaluating potential borrowers. D. obtaining preferential tax treatment for savers.

C. gathering information about and evaluating potential borrowers.

An increase in the perceived riskiness of Company A stock ______ the risk premium investors require to purchase Company A stock and ______ the price of Company A stock. A. decreases; increases B. decreases; decreases C. increases; decreases D. increases; increases

C. increases; decreases

The most important, most convenient, and most flexible way in which the Federal Reserve affects the supply of bank reserves is through: A. changing bank reserve requirement ratios. B. changing interest rates. C. changing the Federal Reserve discount rate. D. conducting open-market operations.

D. conducting open-market operations.

In Macroland there is $1,000,000 in currency that can either be held by the public as currency or deposited into banks. Banks' desired reserve/deposit ratio is 10%. If the public of Macroland decides to hold more currency, increasing the proportion they hold from 50% to 75%, the money supply in Macroland will ______. A. increase B. either increase or decrease. C. remain the same D. decrease.

D. decrease.

When the interest rate on newly issued bonds increases, the price of existing bonds: A. increases. B. may either increase or decrease. C. increases only if the coupon rate is below the new rate. D. decrease

D. decreases

The practice of spreading one's wealth over a variety of different financial investments in order to reduce overall risk is called: A. following the risk premium. B. allocation. C. risk reservation. D. diversification

D. diversification.

Pat pays $10,000 for a newly issued two-year government bond with a $10,000 face value and a 6 percent coupon rate. One year later, after receiving the first coupon payment, Pat sells the bond. If the current one-year interest rate on government bonds is 5 percent, then the price Pat receives is: A. less than $10,000. B. $500. C. $10,000. D. greater than $10,000

D. greater than $10,000

Stock prices increase when expected future dividends ____, interest rates _____, and/or the risk premium ______ A. decrease; decrease; increases B. increase; increase; increases C. increase; increase; decreases D. increase; decrease; decreases

D. increase; decrease; decreases

Commercial banks create new money: A. when they buy government bonds from the Federal Reserve. B. by issuing checks. C. when they increase their desired reserve/deposit ratio. D. through multiple rounds of lending.

D. through multiple rounds of lending.

Banks hold reserves: A. to increase profits. B. to earn interest. C. only because the government requires them to hold reserves. D. to meet depositor withdrawals and payments.

D. to meet depositor withdrawals and payments.

Money serves as a medium of exchange when: A. B. C. D.

payment for goods and services???