ECON 330 Test #1
When economists say that money promotes ______, they mean that money encourages specialization and the division of labor.
efficiency
An important characteristic of the modern payments system has been the rapidly increasing use of...?
electronic fund transfers
If the price level doubles, the value of money...?
falls by 50 percent
Paper currency that has been declared legal tender but is not convertible into coins or precious metals is called ______ money.
fiat
An individual's annual salary is her..?
income
Which of the following is a true statement?
income is a flow variable
With direct finance funds are channeled through the financial market from the _____ directly to the _____:
Savers; spenders
When paper currency is decreed by government as legal tender, legally it must be _______.
accepted as payment for debts
The evolution of the payments system from barter to precious metals, then to fiat money, then to checks can best be understood as a consequence of ...
innovations that reduced the costs of exchanging goods and services
_______ money can be used for some other purpose other than as a medium of exchange, for example, gold coins could be melted down and turning into gold jewelry.
commodity
Which of the following is included in both M1 and M2?
currency
The components of the US M1 money supply are demand and checkable deposits plus....
currency plus travelers checks
All of the following are necessary criteria for a commodity to function as money except...
it must deteriorate quickly
The M2 monetary aggregate contains everything that is in M1 plus other assets that are highly ______ (can be turned into cash quickly at very little cost).
liquid
Which of the following is a long-term financial instrument?
A U.S. treasury bond
You have just won $20,000 in the state lottery, which promises to pay you $1,000 (tax free) every year for the next twenty years. The interest rate is 5%. In reality you receive the first payment of $1,000 today, which is worth _____ today. The value of the second $1,000 payment is worth _____ today. Your total lottery winnings are actually worth (1)_____ $20,000 to you today.
$1,000; 952.38; (1) less than CF / (1 + i)^n
Complete the following table related to the structure of financial markets. Direct Finance Savers: ___(1)____ Indirect Finance Savers: ___(2)____ Direct Finance Borrowers:___(3)____ Indirect Finance Borrowers:___(4)____
(1) Buy securities; (2) Make deposits; (3) Sell securities; (4) Take out loans
Relate the following flow variables to its corresponding stock variable: Investment: ___(1)______ Deficit spending: ___(2)______ Quantity supplied (produced): ____(3)_____ Profits: ____(4)_____ Savings per month: _____(5)_____
(1) Capital stock (2) Debt (3) Inventory (4) Owner's Equity (5) Wealth
The maturity of a debt instrument is the number of years (term) until that instrument's expiration date. Identify the term to maturity of the following financial instruments: A 30-year corporate bond. (1)_____ A money-market instrument with a maturity of 6 months. (2)_____ A treasury note with a maturity of 5 or 10 years. (3)_____ A 90-day treasury bill. (4)_____
(1) Long-term; (2) Short-term; (3) Intermediate-term; (4) Short-term
Assume that you are interested in earning some return on idle balances you usually keep in your checking account and decide to buy some money market mutual fund shares by writing a check. Everything else the same, M1 will ____(1)____ and M2 will ____(2)____
(1) decrease (2) stay the same
If a $10,000 face-value discount bond maturing in one year is selling for $5,000, then its yield to maturity is:
100% (F - P)/ P
If the nominal rate of interest is 2%, and the expected inflation is -10%, the real rate of interest is:
12%
If you expect the inflation rate to be 4% next year and a one year bond has a yield to maturity of 7%, then the real interest rate on this bond is:
3% (YTM - Inflation)
If there are 5 goods in a barter economy, one needs to know 10 prices in order to exchange one good for another. If, however, there are 10 goods in a barter economy, then one needs to know ________ prices in order to exchange one good for another.
45 [N(N-1)] / 2
If $22,050 is the amount payable in two years for a $20,000 simple loan made today, the interest rate is:
5%
You can borrow $5,000 to finance a new business venture. This new venture will generate annual earnings of $251. The maximum interest rate that you would pay on the borrowed funds and still increase your income is:
5% (Annual earnings) / (Amount borrowed)
If a perpetuity has a price of $500 and an annual interest payment of $25, the interest rate is:
5% (Interest Payment / Price)
A $1,000 face value coupon with a $60 coupon payment every year has a coupon rate of:
6% (Coupon Payment / Face Value)
Assume you just deposited $1,000 into a bank account. The current real interest rate is 3%, and inflation is expected to be 6% over the next year. What nominal rate would you require from the bank over the next year? The required nominal rate would be _____%. How much money will you have at the end of one year? You will have $_____ at the end of the year. If you are saving to buy a fancy bicycle that currently sells for $1,050 will you have enough to buy it?
9%; $1,090; Uncertain. It depends on whether the price of the bicycle increases with inflation (current + inflation) = nominal Amount deposited * rate = money after year 1
Which of the following is a depository institution?
A mutual savings bank
If you were going to get a loan to purchase a new car, which financial intermediary would you choose?
A pension fund and a credit union
Which of the following benefit directly from any increase in the corporation's profitability?
A shareholder
Choose the correct description for the following money market instrument. A repurchase agreement is:
A short-term debt instrument issued by the United States government to cover immediate spending obligations
Which of the following is an example of an intermediate-term debt?
A sixty-month car loan
Which of the following is a disadvantage of using checks as a means of payment?
All the paper shuffling required to process checks is costly
Collateral is ____ the lender receives if the borrower does not pay back the loan.
An asset
In September 2008, the growth rate of the M1 money supply was zero, while the growth rate of the M2 money supply was about 5%. In July 2009, the growth rate of M1 was about 17% and the growth rate of M2 was about 8%. When interpreting changes in the growth rates of M1 and M2, Federal Reserve policymakers should recognize:
An inflationary problem may exist in the future as the growth of M1 to 17% is alarmingly high, the growth rate of M2 should be higher than the 3% increase shown over this period
A goal of the Securities and Exchange Commission is to reduce problems arising from:
Asymmetric information
Typically, borrowers have superior information relative to lenders about the potential returns and risks associated with an investment project. The difference in information is called:
Asymmetric information
Equity instruments are traded in the _____ market.
Capital
Which of the following instruments are traded in a money market?
Commercial paper
Match each money market instrument with its description: Commercial paper: _____ Treasury bills: _____ Repurchase agreements: _____ Federal funds: _____ Bankers acceptances: _____
Commercial paper: A short-term debt instrument issued by large banks and well-known corporations Treasury bills: These short-term debt instruments of the US government are issued in three, six, and 12-month maturities to finance the federal government Repurchase agreements: These instruments are effectively short-term loans (usually with a maturity of less than two weeks) for which Treasury bills serve as collateral, which the lender receives if the borrower does not pay back the loan Federal funds: These instruments are typically overnight loans between banks of their deposits at the Federal Reserve Banker's acceptances: These money market instruments are created in the course of carrying out international trade. This is a bank draft (a promise of payment similar to a check) issued by a firm, payable at some future date, and guaranteed for a fee by a bank
The interest rate on a console equals the:
Coupon payment divided by the price
Which of the following are not contractual savings institutions?
Credit unions
A discount bond will have a negative nominal interest rate when the:
Current bond price is greater than its face value
If Microsoft sells a bond in London and it is denominated in dollars, the bond is a _____.
Eurobond
Relate each concept to its corresponding definition: Debt: _______ Money: ________ Income: _______ Savings: _______ Wealth: _______
Debt: What you owe - the accumulation of spending our and above periodic earnings Money: A tool used to facilitate transactions, store wealth, or to be used as a yardstick to compare values Income: Earnings received from working, property rentals, entrepreneurship, or the ownership of financial assets Savings: The difference between what is earned and what is spent. This adds to total wealth. Wealth: What you own - the total collection of assets that serve to store value. This includes not only money but also other assets such as bonds, common stock, art, land, furniture, cars, and houses.
The primary liabilities of a commercial bank are:
Deposits
A _____ is bought at a price below its face value, and the _____ value is repaid at the maturity date.
Discount bond; face
The provision of several types of financial services by one firm may be beneficial because of:
Economies of scope and problematic because of conflicts of interest
Which of the following is not a goal of financial regulation?
Ensuring that investors never suffer loses
A significant number of European banks held large amounts of assets as mortgage-backed securities derived from the U.S. housing market, which crashed after 2006. Which of the following statements correctly describes the benefits of the internationalization of financial markets.
European banks provided needed capital to U.S. financial markets to support borrowing for new home construction. The European banks that held U.S. mortgages earned a return on these holdings.
The present value of an expected future payment _____ as the interest rate increases.
Falls
Financial markets have the basic function of:
Getting people with funds to lend together with people who want to borrow funds
The yield to maturity is _____ than the _____ rate when the bond price is _____ its face value.
Greater; coupon; below
Which of the following are true of fixed payment loans?
Installment loans and mortgages are frequently of the fixed payment type
One of the factors contributing to the financial crisis of 2007-2009 was the widespread issuance of subprime mortgages. How does this demonstrate adverse selection?
Lenders loaned money to a pool of potential homeowners with the highest credit risk and lowest net wealth
Secondary markets make financial instruments more:
Liquid
An important function of secondary markets is to:
Make it easier to sell financial instruments to raise funds
Financial markets perform the basic function of:
Matching savers with funds to lend to people who want to borrow funds
An example of the problem of _____ is when a corporation uses the funds raised from selling bonds to fund corporate expansion to pay for Caribbean cruises for all of its employees and their families.
Moral hazard
As a bank, you make a loan to an individual seeking funds to open a coffee shop. When the loan is made, the borrower uses the funds to take a vacation to Greenland. This is an example of _____.
Moral hazard
Which of the following is an investment intermediary?
Mutual funds
Which of the following statements is true?
Only a coupon bond can have a negative nominal interest rate
In a(n) _____ market, dealers in different locations buy and sell securities to anyone who comes to them and is willing to accept their prices.
Over-the-counter
What does the previous answer say about the value of better information regrading risk?
Paying a all amount to improve risk assessment can be very beneficial
Which of the following can be described as involving direct finance?
People buy shares of common stock in the primary markets
The primary purpose of deposit insurance is to:
Prevent banking panics
A corporation acquires new funds only when its securities are sold in the:
Primary market by an investment bank
Suppose you have just inherited $10,200 and are considering different options for investing the money to maximize your return. If you are risk-neutral (that is, neither seek out or shy away from risk), which of the following options should you choose to maximize your expected return?
Put the money in an interest-bearing checking account, which earns 3%. The FDIC insures the account against bank failure.
Economies of scale enable financial institutions to:
Reduce transactions costs
Which of the following are not traded in a capital market?
Repurchase agreements
Which of the following does not provide banking charters?
The Federal Reserve System
An important feature of money market mutual fund shares is:
The ability to write checks against shareholdings
Why might you be willing to make a loan to your neighbor by putting funds in a savings account earning a 5% interest rate at the bank and having the bank lend her the funds at a 10% interest rate rather than lend her the funds yourself?
The costs of writing up the loan contract might exceed the 5% difference between your deposit rate and the bank lending rate
One reason for the extraordinary growth of foreign financial markets is:
The deregulation of foreign financial markets
Assuming the same coupon rate and maturity length, the difference between the yield on a treasury inflation indexed security and the yield on a non indexed treasury security provides insight into:
The expected inflation rate
Calculate the present value of a $1,200 discount bond with 4 years to maturity if the yield to maturity is 3%.
The present value is $1,066.18
Which of the following are true for discount bonds?
The purchaser receives the face value of the bond at the maturity date
Which of the following statements about the characteristics of debt and equities is true?
They can both be long-term financial instruments
Financial markets improve economic welfare because:
They channel funds from savers to investors and they allow consumers to time their purchases better
In Brazil, a country that underwent a rapid inflation before 1994, many transactions were conducted in dollars rather than in reals, the domestic currency. During this period, the US dollar served what proper or properties in Brazil?
Unit of account, medium of exchange, and store of value
Which of the following statements correctly describes a disadvantage of the internationalization of financial markets:
With the sharp decline in the U.S. housing market, the value of mortgage-backed securities held by European banks fell sharply
Suppose the only possibility is to loan the money to one of your friend's roommates. If you could pay your friend $200 to find out extra information about Mike that would indicate with certainty whether he will leave town without paying or not, would you pay the $200?
Yes, it is worth it, because it increases your expected return and reduces the downside risk that the loan will default
In a barter economy, the number of prices in a economy with N goods is...
[N(N-1)]/2
Money is ...
anything that is generally accepted in payment for goods and services or in the repayment of debt
Compared to checks, paper currency and coins have the major drawbacks that they ....
are easily stolen
A smart card is the equivalent of ...?
cash
Compared to an electronic payments system, a payment system based on checks has the major drawback that...
checks take longer to process, meaning that it may take several days before the depositor can get her cash.
When money is used as acceptance for payment of goods and services, it is being used as a ______
medium of exchange
During hyperinflation, .....
money no longer functions as a good store of value and people may resort to barter transactions on a much larger scale.
Which of the following is not included in the M1 measure of money but is included in the M2 measure of money?
small - denomination time deposits
In ancient Greece, what property made gold a more likely candidate for use as money than wine? Gold's property as a _______ made it a more likely candidate for use as money when compared to wine.
store of value
When money is used to hold purchasing power for future use, it is being used as a
store of value
The payments system is..?
the method of conducting transactions in the economy
Why is simply counting currency an inadequate measure of money?
there are other liquid assets similar to currency that can be used as money to purchase goods and services
Compared to an economy that uses a medium of exchange, in a barter economy....?
transaction costs are higher
Money may serve as an instrument that allows for comparison of the relative worth of various goods and services. What function of money does this describe?
unit of account
When money is used to express the relative value of goods and services, it is being used as a _______
unit of account
A person's house is part of her ...
wealth