Exam 3

a bond issue 10 years ago had a face value of $2,000, a coupon rate of 5% and a yield of 6% when it was sold last month in the secondary bond market. At what price did the bond sell in the secondary market? a) $1,666.67 b) $1,880.00 c) $2,120.00 d) $2,220.00

a) $1,666.67

Monetary policy would be involved in which of these scenarios? I. Raising the money supply II. Congress lowering the budget deficit III. The Federal Reserve raising interest rates a) I, II, and III b) I and III c) II and III c) I only

b) I and III

How much interest will be earned on $1,000 at 10% interest over three years? Assume compounding interest. a) $210.00 b) $100 c) $610.51 d) $331.00

d) $331.00

How much interest will be earned on $900 at 10% interest over four years? Assume compounding interest. a) $297.9 b) $360 c) $119.79 d) $417.69

d) $417.69

Which of these would be considered a teaser rate for a credit card? a) 28% b) 18% c) 12% d) 0%

d) 0%

which lists represent monetary policy actions that are consistent with one another... a) Buy government bonds, raise reserve requirements, raise the discount rate b) Sell government bonds, raise reserve requirements, lower the discount rate c) Sell government bonds, lowers reserve requirements, raise the discount rate d) Buy government bonds, lower reserve requirements, lower the discount rate.

d) Buy government bonds, lower reserve requirements, lower the discount rate.

In the short run, what happens to the aggregate price level when the Fed increases reserve requirements? a) The aggregate price level rises and then falls. b) The aggregate price level does not change. c) The aggregate price level rises. d) The aggregate price level falls.

d) The aggregate price level falls.

Which of these scenarios would be most likely to cause the shift in the demand of loanable funds from D0 to D1, shown in the following diagram? a) an increase in investment tax credits b) a technological advance that increases productivity c) a decrease in business taxes d) an expectation of recession

d) an expectation of recession

Which of these is a financial intermediary in the loanable funds market model? a) the stock market b) corporations c)the government d)banks

d)banks

If Zachary deposits $500 cash into his checking account, his bank's assets then a. rise by $500 but liabilities do not change. b. rise by $500 and liabilities fall by $500. c. do not change but liabilities rise by $500. d. rise by $500 and liabilities rise by $500.

not a

If the economy is facing inflationary pressures, the Federal Reserve will -decrease government spending. -lower interest rates. -raise interest rates. -raise taxes.

not b

Which of these will increase aggregate supply? a) The Environmental Protection Agency (EPA) announces new, tighter standards for lead in dust on floors and windowsills b) The president asks Congress for $200 billion for rebuilding roads and bridges. c) The president raises tariffs on Chinese imports d) The Secretary of Education finalizes rules that make it more difficult for students to obtain federal loans.

not c

A bond issued 10 years ago had a face value of $2000; a coupon rate of 5% and a yield of 6% when it was sold last month in the secondary bond market. At what price did the bond sell in the secondary market? a)$1,666 b)$1,880 c)$2,220 d)$2,120

$1,666

A bond has a face value of $1,000 and an annual interest payment of $44. What is its coupon rate, and what is its yield if it is sold for $1,100 in the secondary market? a. 4.4% and 10%, respectively b.4.0% and 4.4%, respectively C. 4.4% and 4.0%, respectively d. 44% and 4.4%, respectively

C. 4.4% and 4.0%, respectively

How much interest will be earned on $1,000 at 10% interest over five years? Assume compounding interest. a)$610.51 b)$210 c) $100 d) $331

a)$610.51

A higher interest rate_________consumption, investment, and__________which_________aggregate demand. -decreases; exports; decreases -decreases; imports; decreases -increases; exports; increases -increases; imports; increases

-decreases; exports; decreases

Which activity is an example of a nonmarket transaction? -hiring a maid to clean your home -hiring a nanny to take care of your children -employing a lawn service worker to trim your bushes -growing your own food in a vegetable garden

-growing your own food in a vegetable garden

A lower reserve requirement -restricts the borrowing capability of borrowers. -further limits deposit creation. -increases the ability of banks to make loans. -lowers the money multiplier.

-increases the ability of banks to make loans.

What is the yield of a perpetuity bond that has an interest payment of $500 and a price of $10,000? a) 5% b) 2.5% c)0.05% d) 0.5%

a) 5%

Which statement is NOT true about the role of a central bank? a) A central bank controls the money supply by targeting interest rates in order to create fluctuation in the business cycle. b) A central bank of a country is the authority that controls a nation's monetary policy. c) The central bank of the U.S. is the Federal Reserve, an independent organization unaffiliated with any political party. d) The U.S. central bank sets reserve requirements and the discount rate to manage the money supply in the economy.

a) A central bank controls the money supply by targeting interest rates in order to create fluctuation in the business cycle.

which is more liquid a) Demand deposits b) Real estate c) Stocks d) Art collection

a) Demand deposits

Which groups benefit from an unanticipated rise in the inflation rate? a) Homeowners with a fixed-rate mortgages b) Senior citizens living on a fixed income c) Creditors or lenders d) Workers on contracts without escalator clauses.

a) Homeowners with a fixed-rate mortgages

The FED announced in Sep 2013 that it would postpone winding down its monetary stimulus until the economic recovery was stronger. When the FED does begin to reduce bond purchases a) Interest rates will rise b) Interest rates will fall c) Stock prices will rise d) Bond prices will fall

a) Interest rates will rise

Jose is putting money for college in a savings account. The bank makes the money available to business borrowers. In essence: a) Jose is supplying loanable funds for business investment b) Jose is a demander of loanable funds c) The interest rates that businesses pay are independent of the action of suppliers of funds such as Jose d) Financial markets are not performing the role of an intermediary.

a) Jose is supplying loanable funds for business investment

In the short run, what happens to the aggregate price level when the Fed conducts open market operations and sells government securities? a) The aggregate price level falls. b)The aggregate price level rises. c) The aggregate price level rises and then falls. d) The aggregate price level does not change.

a) The aggregate price level falls.

What happens to the amount of funds supplied to the loanable funds market when the interest rate decreases? a) The amount of loanable funds supplied decreases. b)The amount of loanable funds supplied stays the same. c)The amount of loanable funds supplied increases. d)The amount of loanable funds supplied fluctuates up and down as the interest rate decreases.

a) The amount of loanable funds supplied decreases.

If monetary policy is tight a) The value of the dollar will rise b) It will become easier for businesses to obtain loans c) U.S. exports will increase d) U.S. imports will decrease

a) The value of the dollar will rise

As interest rates rise a) There is a movement upward along the supply curve for loanable funds b) The supply curve for loanable funds shifts to the left c) There is a movement downward along the supply curve for loanable funds d) The supply curve for loanable funds shifts to the right

a) There is a movement upward along the supply curve for loanable funds

Which of these requires a double coincidence of wants? a) barter b) fiat money c) medium of exchange d) store of value

a) barter

Which of these will cause the supply of loanable funds to shift? a) economic outlook b)product demand c) business expectations d) investment tax incentives

a) economic outlook

The ability to use physical resources in creative ways to produce goods and services is known as a) entrepreneurial ability, technology, and ideas. b) physical capital. c) natural resources. d) labor.

a) entrepreneurial ability, technology, and ideas.

If a customer deposits $500 cash in a checking account, the bank's a) liabilities increase by $500. b) assets decrease by $500. c)liabilities decrease by $500. d)liabilities stay the same

a) liabilities increase by $500

Which function of money provides the solution to the problem of needing a double coincidence of wants for trade to occur? a) medium of exchange b) barter c) store of value d) unit of account

a) medium of exchange

The Fed selling government bonds is considered a) restrictive monetary policy. b) accommodative monetary policy. c) quantitative easing. d) easy money.

a) restrictive monetary policy.

Monetary policy is LEAST effective in maintaining low inflation and high GDP when a) there has been a supply shock. b) consumers do not want to save. c) the government is running a deficit. d) there has been a demand shock.

a) there has been a supply shock.

Assume initially that market interest rates are 7% and the bondholder is receiving a $70 coupon payment per year on a perpetuity bond with a face value of $1,000. If market interest rates rise to 8%, the bond price a.falls to $875. b. rises to $1,125. c. falls to $700. d.falls to $800.

a.falls to $875.

A bank has $50,000 in deposits from its checking account customers and loans of $49,000. Of the $49,000 loaned out, $43,000 had remained in the checking accounts of the loan a) 0.002%is not b) 14% is not c) 20% is d) 53.76% is

b) 14% is not

Suppose that a bank has accepted $20,000 in checking deposits, $40,000 in savings deposits, has $10,000 in cash reserves, and made $50,000 in loans. What is the bank's reserve ratio? a) 10% b) 16.6% c) 20% d) 25%

b) 16.6%

Suppose that the central bank increases interest rates in an economy. How would this affect aggregate demand and inflation? a) Aggregate demand would fall and inflation would rise. b) Aggregate demand would fall and inflation would fall. c) Aggregate demand would rise and inflation would rise. d) Aggregate demand would rise and inflation would fall.

b) Aggregate demand would fall and inflation would fall.

the federal government can finance its debt by all measures except a) Increase in the money supply b) Increase in the federal funds rate c) Sale of Treasury bond d) Sale of government assets.

b) Increase in the federal funds rate

which of these is likely to lead to a higher interest rates a) A less positive economic outlook b) The end of a government program that provides taxpayers with additional incentives to invest with their retirement plans c) A decrease in asset prices d) A decrease in firms' expectations about the economy

b) The end of a government program that provides taxpayers with additional incentives to invest with their retirement plans

How does a government budget deficit affect the market for loanable funds? a) The demand for loanable funds would increase. b) The supply of loanable funds would decrease. c) The supply of loanable funds would increase. d) The demand for loanable funds would decrease.

b) The supply of loanable funds would decrease.

What happens to bond prices when the interest rate decreases? a) They decrease. b) They increase. c) They stay the same d) They fluctuate based on the quantity of money.

b) They increase.

If the Fed raises interest rates, how would higher interest rates affect U.S. exports? a) They would reduce U.S. exports as the value of the U.S. dollar decreases. b) They would reduce U.S. exports, making U.S. exports more expensive. c) They would increase U.S. exports as the value of the U.S. dollar increases. d) They would increase U.S. exports, making U.S. exports more affordable.

b) They would reduce U.S. exports, making U.S. exports more expensive.

if the federal reserve pursues an expansionary monetary policy... a) Aggregate supply will increase b) U.S. exports to other countries will rise c) The dollar will rise d) U.S. import for other countries will rise

b) U.S. exports to other countries will rise

How do banks create money? a) with a printing press b) by making loans c) by selling bonds d) by charging interest

b) by making loans

When the interest rate decreases, the amount of loanable funds demanded in the market a) increases; the entire demand curve shifts right. b) increases; this is a movement down and to the right along the demand curve c) decreases; the entire demand curve shifts left. d) decreases; this is a movement up and to the left along the demand curve.

b) increases; this is a movement down and to the right along the demand curve

Which of these is a way banks reduce risk? a)monitoring borrowers b) pooling money into portfolios c) evaluating borrowers d) screening borrowers

b) pooling money into portfolios

Suppose the government introduces a new incentive for individuals to save money for retirement. How would this affect the market for loanable funds and the interest rate? a) supply of loanable funds would decrease and interest rates would fall b) supply of loanable funds would increase and interest rates would fall c) supply of loanable funds would decrease and interest rates would rise d) supply of loanable funds would increase and interest rates would rise

b) supply of loanable funds would increase and interest rates would fall

In a barter economy, each good must be valued in terms of every other good with which it can be traded. Which function of money addresses this problem of a barter economy? Answer choices a) medium of exchange b) unit of account c) unit of credit d) store of value

b) unit of account

Financial institutions a. pool funds from lenders, reduce transaction costs, and diversify assets b. reduce information costs, reduce transaction costs, and diversify assets c. reduce information costs, reduce transaction costs, land pool funds from lenders d. reduce information costs, set interest rates for bonds, and diversify assets

b. reduce information costs, reduce transaction costs, and diversify assets

What would be the price of a perpetuity bond that has a $100 interest payment and a 4% yield? a) $2,000 b)$4,000 c) $2,500 d) $1,000

c) $2,500

An investor purchased $1,000 bond that paid $50 in coupon payments over the life of the bond. What is the return on investment? a) 20% b) 50% c) 5% d) 15%

c) 5%

Which of these is true when discussing risk tolerance? a) A risky portfolio would contain a large portion of savings in high-rated bonds. b) A less risky portfolio would contain mostly growth stocks. c) A risk-averse person is more likely to invest in government bonds instead of stocks d) A portfolio that contains high-rated bonds, CDs, and "blue chip" stocks has no risk

c) A risk-averse person is more likely to invest in government bonds instead of stocks

Which of the following is not true about the stock market? a) A person who owns shares of stock becomes an owner of the company. b) A stockholder likely loses its entire investment if the company goes bankrupt. c) A stockholder receives the amount it invests plus interest at a fixed time in the future. d) When a company earns profits or rises in value, the stockholder will earn more money.

c) A stockholder receives the amount it invests plus interest at a fixed time in the future.

monetary policy is LEAST effective in reversing a) Rapid growth in consumption expenditures b) A decrease in private spending c) An adverse supply shock d) Demand-pull inflation

c) An adverse supply shock

when interest rates rise, exports __________ and imports ____________ a) Rise;rise b) Rise;fall c) Fall;rise d) Fall;rise

c) Fall;rise

if the government buys back bonds form the Federal Reserve while making no changes to the number of bonds held by the public and makes no asset sales, this means that the a) Government is monetizing its rising debts b) Money supply has increased c) Government budgets (G-T) has decrease d) Government budgets (G-T) have increased.

c) Government budgets (G-T) has decrease

_____ is anything that is accepted in exchange for goods and services or for the payment of debt. a) Commodity money b) A unit of account c) Money d) A market

c) Money

If the economy is facing inflationary pressures, the Federal Reserve will ... a) Raise taxes b) Lower interest rates c) Raise interest rates d) Decrease government spending

c) Raise interest rates

if a country's currency appreciates. What impact will it have on AD or AS a) AD will rise because the currency will buy more abroad b) LRAS will rise because invest returns will rise c) SRAS will rise due to lower prices on imported inputs d) LRAS will fall because imports will rise

c) SRAS will rise due to lower prices on imported inputs

In the short run, what happens to the aggregate price level when the Fed decreases reserve requirements? a) The aggregate price level does not change. b) The aggregate price level falls and then rises. c) The aggregate price level rises. d) The aggregate price level falls.

c) The aggregate price level rises.

What is a financial system? a) authority that implements a nation's monetary policy b) financial institutions that set reserve requirements c) a complex set of institutions that allocate scarce resources from savers to borrowers d) a complex set of institutions that conduct open market operations and set the discount rate

c) a complex set of institutions that allocate scarce resources from savers to borrowers

Chaletland should _____ interest rates during a recession and _____ interest rates during an economic boom in order to maintain long-run equilibrium. a) increase; increase b) decrease; decrease c) decrease; increase d) increase; decrease

c) decrease; increase

The Fed has recently talked about minimizing the risk of inflation. Which of these tools would accomplish this? a) lowering the reserve requirement b) open market purchases c) lowering the discount rate d) increasing the discount rate

c) lowering the discount rate

Assume that the reserve requirement is 10% and no excess reserves are held. If an initial cash depository of $10,000 is made, the money supply has the potential to increase to. a)$11,000 b)$90,000 c)$100,000 d)$110,000

c)$100,000

What would be the price of a perpetuity bond that has a $100 interest payment and a 5% yield? a) $5,000 b)$10,000 c)$2,000 d)$1,000

c)$2,000

The yield on a perpetuity bond that has an interest payment of $60 and a price of $1,200 is a. 25%. b. 6%. c. 5%. d. 12%.

c. 5%.

If the FED reduces the money supply through open market operations a) Interest rates fall b) Bond prices rise c) The speculative demand for money rises d) Bond prices fall

d) Bond prices fall

Suppose Congress enacted investment tax credits to spur more business investment. What impact would this have on the loanable funds market? a) There would be a decrease in supply; the entire supply curve shifts left. b) There would be an increase in supply; the entire supply curve shifts right. c) There would be a decrease in demand; the entire demand curve shifts left d) There would be an increase in demand; the entire demand curve shifts right.

d) There would be an increase in demand; the entire demand curve shifts right.

What is the Fractional Reserve Banking System? Please choose the correct answer from the following choices, and then select the submit answer button. a) a 12-member committee that is composed of members of the Board of Governors of the Fed and selected presidents of the regional Federal Reserve Banks b) a banking system in which a portion of bank deposits are held as vault cash or on deposit with the government, whereas the rest of the deposits are loaned out to generate the money creation process c) a banking system in which all deposits within the bank are loaned out to the public to make profits d) a banking system in which a portion of bank deposits are held as vault cash or on deposit with the regional Federal Reserve Bank, whereas the rest of the deposits are loaned out to generate the money creation process

d) a banking system in which a portion of bank deposits are held as vault cash or on deposit with the regional Federal Reserve Bank, whereas the rest of the deposits are loaned out to generate the money creation process

The Fed has recently talked about minimizing the risk of inflation. Which of these tools would accomplish this? a) lowering the reserve requirement b) open market purchases c) lowering the discount rate d) increasing the discount rate

d) increasing the discount rate

Using expansionary fiscal policy when the economy is already at full employment can lead to a) a very healthy and strong economy. b) long-term deflation. c) higher standard of living. d) long-term inflation.

d) long-term inflation.

The Fed is worried about rising unemployment. Which of these tools would it use if it wanted to lower unemployment? a) increasing the discount rate b) open market sales c) increase the reserve requirement d) lower the discount rate

d) lower the discount rate

When the Fed intends to increase the amount people consume or increase the amount businesses invest for building new stores and factories, it would _____ interest rates by engaging in _____ monetary policy. a) raise; contractionary b) raise; expansionary c) lower; contractionary d) lower; expansionary

d) lower; expansionary

The Federal Reserve Bank uses three important tools to conduct monetary policy. Which of these is NOT one of them? a) discount rates b) reserve requirements c)open market operations d) taxes

d) taxes

A bank has $50,000 in checking account deposits and loans of $49,000. Of the $49,000 loaned out, $43,000 remains in the checking accounts of the loan recipients. The bank has $50,000 cash on hand, and the reserve requirement is 25%. The amount of its required reserves equals a. $26,750. b. $50,000. c. $27,000. d. $23,250.

d. $23,250.

If both the supply of and the demand for a good increase simultaneously, and if demand grows relatively less than supply, then a. be indeterminate and quantity will rise. b. rise and quantity will fall. c. be indeterminate and quantity will fall. d. fall and quantity will rise.

d. fall and quantity will rise.

Loosening monetary policy causes interest rates to__________ and consumption and investment to __________ • a.fall; increase • b. rise; increase -C. fall; decrease -d. rise; decrease

not D

As interest rates fall • a. the supply curve for loanable funds shifts to the left. • b. the supply curve for loanable funds shifts to the right. • c. there is a movement upward along the supply curve for loanable funds. • d. there is a movement downward along the supply curve for loanable funds.

not a

If a $1,000 perpetuity bond has a coupon rate of 11% and the market interest rate falls to 7%, what would a person expect to pay for that bond? -$636.36 -$1571.43 -$1000 -$1371.33

not a

Which of these is an alternative to monetary policy and aims to reduce inflation? a. reduce the money supply b. increase taxes c. raise government purchases d. reduce taxes

not a

in the market for loanable funds, the goverment announces new tax breaks for saving for retirement while there is an increase in demand for products. What should be expected in the market for loanable funds as a result of these two events? • a.The amount of borrowed funds will fall, but there is uncertainty about the direction of any change in interest rates. • b. The interest rate will rise, but there is uncertainty about any change in the amount of borrowed funds. • c. The amount of funds borrowed will rise, but there is uncertainty about the direction of any change in interest rates. • d. The interest rate will fall, but there is uncertainty about any change in the amount of borrowed funds

not a

The short-run aggregate supply curve is positively sloped because a) a short-run increase in GDP usually is accompanied by a slower rise in the price level. b) a short-run increase in GDP usually is accompanied b a rise in the price level. c) all variables are fixed in the short run. d) many input prices are slow to change in the short run.

not b

Suppose short-run aggregate supply shifts to the left because of a decrease in the supply of steel. The Federal Reserve fights the resulting recession with expansionary monetary policy. This will a. increase unemployment. b. cause inflation. c. increase interest rates. d. decrease inflation.

not c

In counteracting demand shocks, the Federal Reserve can achieve • a. price stability but not full employment. b. both full employment and price stability. • c. neither full employment nor price stability. d. full employment but not price stability.

not d

Sumit deposits $1,500 cash into his checking account, which his bank puts in the vault. The reserve requirement is 25%. the change in his bank's excess reserves? A) $1500 B) $1125 C) $0 D) $375

not d

The Fed buys a bond from Sumit and deposits $1,500 cash into his checking account. The reserve requirement is 25%. How many dollars' worth of loans can the banking system create? a. $0 b. $1500 c. $4.500 d. $6,000

not d

In the market for loanable funds, which of these would cause the equilibrium interest rate to rise, but would have an impact on the equilibrium quantity? • Job security for employees falls, and the government increases regulation of business production methods. • There is a surge in the stock market and an increase in average household income. There is an increase in tax breaks for saving toward retirement, and there are reduced expectations for business • Job security for employees increases, and there is an advancement in technology that would reduce costs if adopted.

• Job security for employees increases, and there is an advancement in technology that would reduce costs if adopted.

Assume that the reserve requirement is 20%. A bank has $20 billion in demand deposits. How much money does the bank have to keep in reserves? • S10 billion • $2 billion • $20 billion • S4 billion

• S4 billion

the economy has high levels of unemployment, the Federal Reserve will • a. reduce interest rates. • b. increase government spending. • c. raise interest rates. • d. lower taxes.

• a. reduce interest rates.

Which action is the Federal Reserve MOST likely to take to curb inflation? • lower reserve requirements • lower the discount rate • sell securities in the open market • raise taxes

• sell securities in the open market