Econ 426 Midterm 1

Equation of Exchange

MV=PQ

Store of Value

is the accumulation of wealth by holding dollars or other assets that can be used to buy goods and services in the future.

A Stock

is a financial security that represents partial ownership of a firm.

Foreign Exchange

is a unit of foreign currency.

Unit of Account

is a way of measuring value in an economy in terms of money.

Money

is anything that people are willing to accept in payment for goods and services or to pay off debts.

Medium of Exchange

is something that is generally accepted as payment for goods and services.

What are the key differences between using a deerskin as money and using a dollar bill as​ money? A. Using a deerskin as money may not be as widely accepted as using paper money. B. Using a deerskin as money incurs a much larger transactions cost because it is bigger and heavier than paper money. C. Using a deerskin as money cannot fulfill the key functions of​ money: a medium of​ exchange, a unit of​ account, a store of​ value, and a standard of deferred payment. D. A and B only. E. All of the above.

A & B only

Choose in which category of debt instrument a​ three-month U.S. Treasury bill belongs. A. Discount bond B. ​Fixed-payment loan C. Simple loan D. Coupon bond

A

How do the​ Fed's current responsibilities compare with its responsibilities when it was first created by​ Congress? A. In addition to its original role as a lender of last​ resort, the modern Fed is now responsible for monetary policy. B. In addition to its original role as regulator of the banking​ system, the modern Fed is now the lender of last resort. C. The role of the modern Fed has not changed from the role of the original Fed. D. In addition to its original role of taking in deposits and making​ loans, the modern Fed is now responsible for solving the financial crisis.

A

What is a​ hyperinflation? A. Hyperinflation is inflation that exceeds​ 100% per year. B. Hyperinflation is inflation that is equal to​ 100% per year. C. Hyperinflation is inflation that is less than​ 100% per year. D. All of the above.

A

What is commodity​ money? A. A good used as money that has value independent of its use as money. B. Money accepted as payment of taxes and must be accepted by individuals and firms in payment of debts. C. Money that has no value apart from its use as money. D. Any form of money used to purchase a commodity.

A

What is the Federal​ Reserve? A. The central bank of the United States. B. The agency that regulates financial markets. C. The agency that insures deposits in banks. D. The agency that regulates federally chartered banks.

A

Your boss gives you a​ 10% raise. A. Income increases. B. Wealth increases. C. Money increases. D. All of the above.

A

​Typically, you will receive a very low interest rate on money you deposit in a bank. Interest rates on car loans and business loans are much higher. Which of the following is not a reason why most people prefer putting their money in a bank to lending it directly to individuals or​ businesses? A. Direct lending would allow a saver the opportunity to participate in spreading out the risk of lending. B. There is less risk of default or losing money if an individual were to make a deposit in a bank. C. Deposits in a bank offer individuals more liquidity than making a direct loan. D. A saver would have difficulties or require substantial costs to acquire the necessary information to make a solid direct loan to other individuals or businesses.

A

What are the costs and sources of inefficiency in a barter​ system? ​(Check all that​ apply.) A. There is increased time and effort spent looking for trading partners. B. There is difficulty in accumulating wealth. C. There is a lack of standardization. D. Transactions costs are almost always high. E. Each good has only one price. F. Productivity is increased by specialization.

A, B, C, D

Are the assets included in M1 more or less liquid than the assets included in​ M2? A. M1 assets have no liquidity. B. M1 assets are more liquid than M2 assets. C. M1 assets have the same liquidity as M2 assets. D. M1 assets are less liquid than M2 assets.

B

Choose in which category of debt instrument a U.S. Treasury bond belongs. A. Discount bond B. Coupon bond C. ​Fixed-payment loan D. Simple loan

B

Has the growth rate of M1 been more or less stable than the growth rate of​ M2? A. The growth rate of M1 has been more stable than the growth rate of M2. B. The growth rate of M2 has been more stable than the growth rate of M1. C. The growth rate of M1 and M2 have grown at the same rate. D. More data is required before economists can determine this.

B

How does commodity money differ from fiat​ money? A. Commodity money is designated by the government as legal​ tender, while fiat money is used in bartering. B. Commodity money has value beyond its use as​ currency, while fiat money has no intrinsic value. C. Commodity money has no intrinsic​ value, while fiat money has value beyond its use as currency. D. Consumers have more confidence that commodity money will retain its value and thus is the preferred medium of exchange.

B

If interest rates​ rise, bonds become more attractive to​ investors, so bond prices will rise.​ Therefore, when interest rates​ rise, bond prices will also rise. The above statement​ is: A. ​true, since an increase in interest rates will increase bond demand and cause higher prices. B. ​false, because higher interest rates make the interest payments on previously issued bonds less valuable. C. ​true, because the time value of money shows an increase in interest rates will increase the present value of the bond. D. ​false, since an increase in interest rates causes bond supply to increase which lowers bond prices.

B

What are the four main functions of​ money? Describe each function. A. Money should serve as commodity​ money, a medium of​ exchange, a unit of​ account, and a store of value. B. Money should serve as a medium of​ exchange, a unit of​ account, a store of​ value, and a standard of deferred payment. C. Money should serve as a medium of​ exchange, a unit of​ account, a standard of deferred​ payment, and wealth. D. Money should serve as a unit of​ account, a store of​ value, a standard of deferred​ payment, and legal tender.

B

What does the statistical evidence show about the link between the growth rate of the money supply and the inflation rate in the long​ run? A. Inflation will occur when real GDP and the quantity of money increase at the same rate. B. Inflation will occur when the quantity of money increases faster than real GDP. C. Inflation will occur when real GDP increases faster than the quantity of money. D. There is no link between the growth rate of the money supply and the inflation rate in the long run.

B

What is the cause of​ hyperinflation? A. An undervalued currency. B. A very high rate of growth in the money supply. C. A very large tax increase. D. All of the above.

B

What​ factors, if​ changed, would affect your willingness to accept a dollar bill or a check as​ money? A. If the dollar bill or check was no longer a sign of wealth. B. If others were unwilling to accept a dollar bill or a check as a means of payment. C. If others were unwilling to accept a dollar bill or a check as commodity money. D. The dollar bill or check will always be accepted as money.

B

You take cash out of the bank and use it to buy an Apple iPad. A. Wealth increases. B. Money increases. C. Income increases. D. All of the above

B

Suppose that an economy in 10000 B.C. used a rare stone as its money. Suppose also that the number of stones declined over time as stones were accidentally destroyed or used as weapons. What probably happened to the value of the stones over​ time? A. If the number of stones​ declined, the value of the remaining stones would have decreased​ (inflation). B. If the number of stones​ declined, the value of the remaining stones would have increased​ (deflation). C. If the number of stones​ declined, the value of the remaining stones would have remained the same. D. If the number of stones​ declined, the remaining stones would have no value. What would the consequences likely have been if someone had discovered a large quantity of new​ stones? A. If new stones were​ found, the value of the stones would increase​ (deflation). B. If new stones were​ found, the value of the stones would remain the same. C. If new stones were​ found, the value of the stones may or may not change. D. If new stones were​ found, the value of the stones would fall​ (inflation).

B, D

Ford Motor Company has issued bonds with a maturity date of November​ 1, 2046 that have a coupon rate of​ 7.40%, and coupon bonds with a maturity of February​ 15, 2047 that have a coupon rate of​ 9.80%. Why would Ford issue bonds with coupons of​ $74 and then a little more than a year later issue bonds with coupons of​ $98? Why​ didn't the company continue to issue bonds with the lower​ coupon? A. It is likely that Ford had to increase the coupon rate because both the price and interest rate fell. B. It is likely that Ford had to increase the coupon rate because either the price or the interest rate rose. C. It is likely that Ford had to increase the coupon rate because either the price increased or the interest rate fell. D. None of the above.

C

Is the equation of exchange a​ theory? A. ​No, it is not a theory because velocity is assumed to be constant. B. ​Yes, the equation of exchange is a statement about the world that might possibly be false. C. ​No, a theory is a statement about the world that might possibly be false. D. None of the above.

C

The value of your house increases. A. Income increases. B. Money increases. C. Wealth increases. D. All of the above.

C

What is the difference between the yield to maturity on a coupon bond and the rate of​ return? A. There is no fundamental difference between the yield to maturity and the rate of return. B. Yield to maturity is the value of the coupon expressed as a percentage of the price of the bond. Rate of return is the return over a specific holding period that takes into account not just the coupon rate but the price change. C. Yield to maturity is the return on a bond assuming the bondholder holds the bond for the full maturity. Rate of return is the return over a specific holding period that takes into account not just the coupon rate but the price change. D. None of the above.

C

What makes a personal check​ money? A. Checks serve as wealth. B. Checks serve as commodity money. C. Checks are accepted as a medium of exchange. D. All of the above.

C

Which involves financial​ intermediaries, and which involves financial​ markets? A. Both direct and indirect finance require financial intermediaries and financial markets. B. Indirect finance requires financial​ markets, while direct finance involves financial intermediaries. C. Direct finance requires financial​ markets, while indirect finance involves financial intermediaries. D. Neither direct or indirect finance requires the use of financial intermediaries and financial markets.

C

Which of the following is not a debt​ instrument? A. Coupon bonds B. Discount bonds C. Stocks D. Simple loans

C

Why​ aren't credit cards included in M1 or​ M2? A. Credit is not a form of​ money, since it is a debt that is owed to the owner of the card. B. Credit is not a form of​ money, since it is a liability that is owed to the owner of the card. C. Credit is not a form of​ money, since it is a debt that is owed to the issuer of the card. D. None of the above.

C

Choose in which category of debt instrument a car loan belongs. A. Coupon bond B. Discount bond C. Simple loan D. ​Fixed-payment loan

D

Choose in which category of debt instrument a mortgage loan belongs. A. Discount bond B. Coupon bond C. Simple loan D. ​Fixed-payment loan

D

How does the link between the growth rate of the money supply and the inflation rate differ between the short run and the long​ run? A. There is no link between the growth rate of the money supply and the inflation rate in the short run. B. There is no link between the growth rate of the money supply and the inflation rate in the long run. C. The link between the growth rate of the money supply and the inflation rate is stronger in the short run than in the long run. D. The link between the growth rate of the money supply and the inflation rate is stronger in the long run than in the short run.

D

Since the​ 1975, which measure of the money supply has grown more​ rapidly, M1 or​ M2? A. Since the​ 1960s, M1 has grown more rapidly. B. Since the​ 1960s, M1 and M2 have grown at the same rate. C. Since the​ 1960s, the size of M2 has remained constant. D. Since the​ 1960s, M2 has grown more rapidly. Your answer is correct.

D

Until​ 1933, the United States was on the gold standard and people could receive gold in exchange for their paper currency. Although no one today can exchange paper currency for​ gold, the Federal Reserve still stores more than 500,000 gold bars in the basement of the New York Federal Reserve building in Manhattan. Which measure of the money supply would include these gold​ bars? A. M1. B. M2. C. M1 and M2. D. Neither M1 nor M2.

D

What is the yield to​ maturity? A. The value of the coupon expressed as a percentage of the par value of the bond. B. The length of time before a bond expires and the issuer makes the face value payment to the buyer. C. The amount to be repaid by the bond issuer​ (the borrower) at maturity. D. The interest rate that equates the present value of future payments of an asset with its current value.

D

What makes a dollar bill​ money? A. A dollar bill is accepted as a means of payment and standardized in terms of quality. B. A dollar bill is easily divisible. C. A dollar bill is durable yet easily transportable. D. All of the above.

D

Who appoints the members of the Federal​ Reserve's Board of​ Governors? A. They are appointed by the president and confirmed by the chairman of the Fed. B. They are appointed by the vice president and confirmed by the Senate. C. They are appointed by the president and confirmed by the House of Representatives. D. They are appointed by the president and confirmed by the Senate.

D

Why is the yield to maturity a better measure of the interest rate on a bond than is the coupon​ rate? A. Because the coupon rate takes into account the present value adjusted yield on the purchase price. B. Because the coupon rate can change whereas the yield to maturity is always constant. C. Because the coupon rate often calculates a much lower return than the yield to maturity. D. Because the coupon rate does not take into account the present value adjusted yield on the purchase price.

D

What are the main reasons that lenders charge interest on​ loans? A. To compensate for inflation. B. To compensate for the opportunity cost of spending the funds being loaned. C. To compensate for default risk. D. A and B only. E. All of the above.

E

What a saver would consider a financial asset a borrower would consider a financial liability. Is this statement true or​ false?

True

A Bond

is a financial security issued by a corporation or government to borrow money in exchange for the rights to an interest payment.

Standard of Deferred Payment

is a characteristic of money by which it facilitates exchange over time.

A Securitized Loan

is a collection of loans packaged together that pays an interest payment to the owner of the loan.

Simple Loan

is a debt instrument in which the borrower receives from the lender an amount called the principal and agrees to repay the lender the principal plus interest on a specific date when the loan matures.

Discount Bond

is a debt instrument in which the borrower repays the amount of the loan in a single payment at maturity but receives less than the face value of the bond initially.

Coupon Bond

is a debt instrument that requires multiple payments of interest on a regular​ basis, such as semiannually or​ annually, and a payment of the face value at maturity. pays interest before the instrument matures

Fixed-payment loan

is a debt instrument that requires the borrower to make regular periodic payments of principal and interest to the lender. pays back principal before the instrument matures