ECON 380 Final Exam
The present value of a cash flow C to be received at the end of each of the next N periods equals:
(C/i)*(1-(1/((1+i)^N)))
Ceteris paribus, in the loanable funds market, an increase in expected inflation
-decreases the supply of loanable funds. -increases the demand for loanable funds. -increases the equilibrium interest rate.
Federal Deposit Insurance serves to reduce the severity of the _______ problem confronting depositors, but it may magnify the _________ problem of bankers assuming greater risks in lending.
Adverse Selection; Moral Hazard
Milton Friedman and ______________, in their classic work A Monetary History of the United States, 1867 to 1960, argue that a rise in both the currency to demand deposit ratio and the excess reserve to demand deposit ratio severely restricted available credit during the Great Depression.
Anna Schwartz
Inflation falls below the level lenders and borrowers expected to prevail. As the result the realized, or "ex post", real interest rate is _______ than the expected, or "ex ante," real interest rate. Wealth is transferred from ______________.
greater; debtors to creditors
If indeed financial markets are efficient perhaps the best investment advice you could offer a friend is to:
hold a fraction of her wealth in U.S. government Treasury Bills, with her remaining wealth invested in one or more mutual funds.
A coupon bond sells at a price below Par or Face Value. What is the relationship between the bond's current yield, iCurrent, the bond's interest yield to maturity, iYTM, and the bond's coupon rate of interest, iCoupon?
iCoupon < iCurrent < iYTM
Winners of state lotteries are often given the choice of receiving their winnings either as one lump sum (based upon a rate of time discount used by the state, iState) or as annual payments spread out over a period of twenty or more years. In states where it is allowed, investors will sometimes approach lottery winners and offer to pay them a lump sum in exchange for the lottery winner signing over to the investor the right to receive the stream of annual payments. Under what circumstances - if iWinner and iInvestor are the rates of time discount for the winner and investor - might we expect the winner to accept an offer from the investor?
iInvestor < iWinner < iState
A coupon bond sells at a price above Par or Face Value. What is the relationship between the bond's current yield, iCurrent, the bond's interest yield to maturity, iYTM, and the bond's coupon rate of interest, iCoupon?
iYTM < iCurrent < iCoupon
Consider three interest rates relevant when we consider coupon bonds: the interest yield to maturity (iYTM), the current yield (iCurrent) and the coupon rate (iCoupon). For a coupon bond that sells at a price above PAR, we will have
iYTM < iCurrent < iCoupon
A decrease in transfer payments will, ceteris paribus, ___________ net taxes and __________ disposable income.
increase; decrease
Following a devaluation of the domestic currency household consumption will ________ and the average propensity to consume will ________ in the neoclassical short run.
increase; decrease
Following a devaluation of the domestic currency, net tax revenue will ________ and the government budget deficit will ________ in the neoclassical short run.
increase; decrease
In the "Extreme Keynesian" short run, with fixed exchange rates, a revaluation of the domestic currency will cause the government budget deficit to _______ and the average propensity to tax to ________.
increase; decrease
In the "Neoclassical" short run, with floating exchange rates, a fall in foreign real income will cause the government budget deficit to _______ and the average propensity to tax to ________.
increase; decrease
In the LONG run, with flexible exchange rates, a decrease in the expected profitability of capital will cause the current account (trade) surplus to _______ and the capital (financial) account surplus to ________.
increase; decrease
In the neoclassical short run, following an increase in the interest rate paid by the FED on bank reserves, real wages will ________ and labor employment will ________.
increase; decrease
In the neoclassical short run, following an increase in the interest rate paid by the FED on bank reserves, the average propensity to consume will ________ and average propensity to tax will ________.
increase; decrease
The desired excess reserve to demand deposit ratio will increase following a(n) ___________________ in the interest paid by the FED on bank reserves, a(n) ____________________ in the interest rate at which banks can make loans, and/or a(n) _____________________ in the level of banker uncertainty.
increase; decrease; increase
A decrease in the savings rate of U.S. households will _____ the world interest rate and _____ net borrowing by U.S. households, firms and governments from the rest of the world.
increase; increase
This devaluation of the domestic currency will cause firm investment to ________ and net exports to ________ in the neoclassical short run.
increase; increase
The base (M1) money multiplier will decrease following a(n) __________________ in the currency to demand deposit ratio, a(n) ____________ in the required reserve ratio for demand deposits, and/or a(n) ____________ in the desired excess reserve to demand deposit ratio.
increase; increase; increase
Which of the following is not an advantage of a futures contract over a forward contract?
increased flexibility
Ceteris paribus, in the bond market, an increase in the expected risk of equities
increases the demand for bonds and decreases bond yields to maturity.
Fiat money
is money that would have no value if it were not usable as money
In implementing its "Operation Twist" policy in 2011, the FED
lengthened the average term to maturity of its asset portfolio, buying long term bonds as it sold short term bonds.
Inflation rises above the level lenders and borrowers expected to prevail. As the result the realized, or "ex post", real interest rate is _______ than the expected, or "ex ante," real interest rate. Wealth is transferred from ______________.
less; creditors to debtors
Evidence indicates that there's a strong relationship between money and inflation in:
long run, but not the short run.
Ceteris paribus, following a decrease in expected profitability of capital with flexible exchange rates, the FED should ______ its overnight federal funds rate target to avoid spiraling ______ in the long run.
lower; deflation
Ceteris paribus, following a fall in foreign real income with floating exchange rates, the FED should ______ its overnight federal funds rate target to avoid spiraling ______ in the long run.
lower; deflation
The existence of rating agencies has
lowered returns on corporate bonds.
If the government were to simultaneously increase the personal income tax and the corporate profits tax, bond prices:
might either rise or fall
As the economy moves from recessions to booms to recessions over the business cycle, empirical evidence suggests that the supply of and demand for bonds
move in the same direction, with shifts in supply being smaller than shifts in demand.
As the economy moves from recessions to booms to recessions over the business cycle, empirical evidence suggests that the supply of and demand for loanable funds
move in the same direction, with shifts in supply being smaller than shifts in demand.
The writer of a call option has a(n) _________ to ________ the underlying asset at the strike price.
obligation; sell
The buyer of a Put option
pays the option premium and receives the right to sell shares at the strike price
Ceteris paribus, following decrease in the labor force participation rate, the FED should ______ its overnight federal funds rate target to avoid spiraling ______.
raise; inflation
Research has shown that nations with highly independent central banks tend to have low
rates of inflation
The writer of a Put option
receives the option premium and assumes the obligation to buy shares at the strike price.
In the "Extreme Keynesian" short run, with fixed exchange rates, following a revaluation of the domestic currency, nominal wages will _______ and real wages will ________.
remain the same; remain the same
In the long run, with fixed exchange rates, a revaluation of the domestic currency will cause real wages to _______ and labor employment to ________.
remain the same; remain the same
In the long run, following a devaluation of the domestic currency, net exports will _________ and investment will __________.
remain unchanged; remain unchanged
As the economy adjusts in the long run to a decrease in the labor force participation rate, the level of interest rates will ______ and investment in new plant and equipment will ______.
rise; fall
As the economy adjusts in the long run to a decrease in the labor force participation rate, the relative price of domestic goods in terms of foreign goods will ______ and net exports will _______.
rise; fall
As the economy adjusts in the long run to a decrease in the labor force, the level of interest rates will ______ and investment in new plant and equipment will ______.
rise; fall
As the economy adjusts in the long run to a decrease in the labor force, the relative price of domestic goods in terms of foreign goods will ______ and net exports will _______.
rise; fall
As the economy adjusts in the short run to a decrease in the currency to demand ratio household consumption will ____ and the average propensity to consume will ____.
rise; fall
As the economy adjusts in the long run to a decrease in the labor force participation rate, nominal wages will ______ and real wages will ______.
rise; rise
As the economy adjusts in the long run to a decrease in the labor force, the real wage will ______ and the nominal wage will ______.
rise; rise
As the economy adjusts in the long run to improved technology, the government's budget surplus will ____ and average propensity to tax will ____.
rise; rise
If you sell futures contracts you are assuming a __________ position in the futures market. If the price of the underlying asset rises your margin account with the exchange will be ________.
short; debited
Kim sells Treasury Bond futures. A speculator, she is assuming a ________ position in the futures market which will be profitable if interest rates ________.
short; rise
If E is the Euro price of a US Dollar, PEurope is the Euro price of European goods, and PUS is the dollar price of US goods, the relative price of U.S. goods in terms of European goods is given by:
EPUS/PEurope
As was true with the original Operation Twist in the 1960's, the success of Operation Twist in 2011 depended most on the validity of the ____________ hypothesis.
Market Segmentation
"Inflation is everywhere and always a monetary phenomenon." This claim was made by
Milton Friedman
As the economy adjusts in the long run to improved technology, nominal wages will ____ and real wages will ____.
None of the above
If the rate of inflation in India is less than the rate of inflation in China, purchasing power parity predicts
a nominal appreciation of the Rupee against the Yuan.
If the rate of growth in real income in India is less than the rate of growth in real income in China we would expect in the very long run
a real appreciation of the Indian Rupee against the Chinese Yuan.
Under the segmented markets hypothesis, the upward slope of the yield curve can be explained by
a relative abundance of traders seeking to purchase short term bonds and a relative abundance of the supply of long term bonds.
A portfolio manager in the U.S. purchases British government discount bonds that mature 6 months from today. If she leaves her position uncovered her realized rate of return will depend upon the spot price of a pound that prevails in currency markets when her bonds mature. Her rate of return on this position in British bonds will fall if the dollar _______________ in value against the pound. She can hedge against this possibility by _________________ pound futures contracts or by buying pound _____________ options.
appreciates; selling; put
If the segmented markets hypothesis is correct, an increase in the average term to maturity of the national debt will cause the yield curve to __________.
become steeper
A flattening or inversion of the yield curve may signal that bond traders
believe the economy may be entering a recession.
To support a devaluation of the domestic currency, the central bank must _________ foreign exchange and or securities, which will ________ reserves in the domestic banking system.
buy; increase
Sometimes one observes that the price of a company's stock falls after the announcement of favorable earnings. This phenomenon is
consistent with the theory of efficient capital markets if the announced earnings were lower than had been anticipated.
If open market operations by the FED are guided by an interest rate rule changes in the monetary base will be _________ if the primary source of instability of Aggregate Demand is shifting perceptions of bond risk, and __________ if the primary source of instability of Aggregate Demand is shifting perceptions of profitability of capital.
countercyclical; procyclical
Over the business cycle we usually observe a ____ movement in bond prices and a _____ movement in interest rates.
countercyclical; procyclical
With its "Operation Twist" policy, the FED sought to
decrease long term interest rates and raise short term interest rates.
In the "Extreme Keynesian" short run, with fixed exchange rates, a revaluation of the domestic currency will cause the monetary base to ______ and the domestic money supply to ________.
decrease; decrease
In the long run, with fixed exchange rates, following a revaluation of the domestic currency, nominal wages will _______ and the price level will ________.
decrease; decrease
In the neoclassical short run with flexible exchange rates, following an increase in the interest rate paid by the FED on bank reserves, firm investment will ________ and net exports will ________.
decrease; decrease
In the neoclassical short run, following an increase in the interest rate paid by the FED on bank reserves, firm investment will ________ and net exports will ________.
decrease; decrease
In the neoclassical short run, following an increase in the interest rate paid by the FED on bank reserves, household consumption will ________ and net tax revenues for government will ________.
decrease; decrease
In the "Extreme Keynesian" short run, with fixed exchange rates, following a revaluation of the domestic currency Consumption will ____ and the APC will _____.
decrease; increase
In the "Neoclassical" short run, with floating exchange rates, a fall in foreign real income will cause household consumption to _______ and the average propensity consume to ________.
decrease; increase
In the "Neoclassical" short run, with floating exchange rates, a fall in foreign real income will cause interest rates to ______ and the level of investment in capital to ________.
decrease; increase
In the Keynesian very short run with flexible exchange rates, following a decrease in the expected profitability of capital, consumption will ________ and the average propensity to consume will ________.
decrease; increase
In the Keynesian very short run with flexible exchange rates, following a decrease in the expected profitability of capital, the relative price of domestic goods in terms of foreign goods will ________ and net exports will ________.
decrease; increase
In the Keynesian very short run, following a decrease in transfer payments, household consumption will ______ and the average propensity to consume will ______.
decrease; increase
In the Keynesian very short run, following a decrease in transfer payments, interest rates will ________ and investment will ________.
decrease; increase
In the Keynesian very short run, following a decrease in transfer payments, the relative price of domestic goods in terms of foreign goods will ______ and net exports will ________.
decrease; increase
In the neoclassical short run with flexible exchange rates, following an increase in the interest rate paid by the FED on bank reserves, household consumption will ________ and the average propensity to consume will ________.
decrease; increase
In the neoclassical short run with flexible exchange rates, following an increase in the interest rate paid by the FED on bank reserves, nominal wages will ________ and real wages will ________.
decrease; increase
If interest rate parity holds only if we include a positive currency premium, we can conclude that
domestic assets are considered less risky than foreign assets.
The risk premium of corporate bonds typically increases
during a recession
According to the quantity theory of money, if the long-run economic growth rate is 2.5%, by how much should the Fed increase the money supply each period if it wants the inflation rate to be 2%?
4.5%
Suppose nominal GDP is $14 trillion and the money supply is $2 trillion. What is the velocity of money?
7
All of the following were significant changes in the mortgage market in the 2000s EXCEPT:
Borrowers were increasing the amount of their down payments.
FED chairman ________ briefly abandoned short run interest rate targeting in favor of money stock targeting. This action led to (as we would expect in theory) ________ volatility in exchange rates in world currency markets.
Paul Volcker; increased
According to the preferred habitat or liquidity premium hypothesis, what does a flat yield curve indicate?
Short-term interest rates are expected to fall.
A flat, or horizontal, yield curve is explained under the Preferred Habitat or Liquidity Premium Hypothesis as
evidence that traders in U.S. Treasury Bills, Notes and Bonds expect interest rates to fall in the future.
As the economy adjusts in the long run to a decrease in the labor force, the government's budget surplus will ______ and the government's potential budget surplus will ______.
fall; fall
As the economy adjusts in the long run to improved technology, the level of interest rates will ____ and investment in new plant and equipment will ____.
fall; rise
As the economy adjusts in the long run to improved technology, the relative price of domestic goods in terms of foreign goods will ____ and net exports will ____.
fall; rise
As the economy adjusts in the short run to a decrease in the currency to demand deposit ratio real wages will ____ and labor employment will ____.
fall; rise
As the economy adjusts in the short run to a decrease in the currency to demand ratio the level of interest rates will ____ and investment in new plant and equipment will ____.
fall; rise
As the economy adjusts in the short run to a decrease in the currency to demand ratio a ____ in the foreign exchange price of the domestic currency will cause net exports to ____.
fall;rise
Ceteris paribus, as the equity or bank capital to asset ratio rises, return on equity for shareholders ______ and insolvency risk associated with interest rate changes ______.
falls; falls
