Midterm 2 MC Macroecon

Which of the following would be a violation of the rational expectations assumption?

"Over the past twenty years, people have consistently under-predicted the inflation rate for the following year."

The interest rate in a foreign country is 7% and the foreign currency is expected to depreciate by 3% during the year. For each dollar that a US resident invests in foreign bonds, he/she can expect to get back an approximate total of

$1.04

A share of stock will pay a dividend of $25 in one year, and will be sold for an expected price of $500 at that time. If the current one-year interest rate is 5%, the current price of the stock will be approximately equal to

$500. dividend/(1+i)^n + price/(1+i)^n

Suppose the central bank implements a monetary contraction that is fully expected by financial market participants. Given this information, we would expect

Stock prices to remain unchanged

Suppose individuals now believe that there will be a future tax cut. This reduction in expected future taxes will cause which of the following to occur in the current period?

The IS curve to shift rightward

Which of the following best defines the real interest rate (r)?

The amount of goods we must give up next year in order to consume more goods today

With a nominal interest rate of 5% per year, the present discounted value of $100 to be received in 10 years is

61.39 (present value / (1+i)^n

Assume that the current one-year rate is 3% and the two-year rate is 5%. Given this information, the one-year rate expected one year from now is

7%

A bond has a face value of $1,000, a price of $1,200, and coupon payments of $100 for two years. The "current yield" of this bond is

8.33%

Which of the following is evidence that consumption depends on total wealth, and not just on current income?

A drop in consumer confidence, with unchanged current income, often causes total consumption spending to fall

Which of the following people - none of whom has any financial or housing wealth - is most likely to be spending all of their current income?

A low-income person expecting a dramatic rise in income in the future

Suppose an individual experiences a $20,000 increase in real income and the individual believes this increase in income is permanent. Economic theory suggests that this individual's current consumption will

Increase by at most $20,000

A consol bond promises to pay $1000 each year, forever, starting next year. If the nominal interest rate is 5%, the present discounted value of this consol is

d) $20,000 (1000/.05)

Changes in future expected interest rates can affect current consumption. Suppose individuals expect future interest rates to decrease. Consumption will change as a result of this lower expected future interest rate because of its effects on which of the following? a) human wealth b) the value of stocks c) the value of bonds d) all of the above e) none of the above

d) all of the above

Human wealth is a function (i.e., affected by changes in) of which of the following variables? a) future expected income b) future expected taxes c) current interest rates d) all of the above e) none of the above

d) all of the above

In the IS-LM model in the short-run, an increase in expected inflation will cause which of the following? a) an increase in output b) an increase in the nominal interest rate c) a reduction in the real interest rate d) all of the above e) none of the above

d) all of the above

Suppose there is a reduction in foreign output (Y*). This reduction in Y* will cause which of the following in the domestic country? a) A reduction in output b) A reduction in consumption c) A reduction in net exports d) All of the above e) None of the above

d) all of the above

Suppose that nominal interest rate and expected inflation both decrease by 2%. Given this information, we would expect which fo the following to occur? a) an increase in the real interest rate b) a reduction in the real interest rate c) a reduction in investment d) an increase in money demand e) both A & C

d) an increase in money demand

Suppose the U.S. one-year interest rate is 3% per year, while a foreign country has a one-year interest rate of 5% per year. Ignoring risk and transaction costs, a U.S. investor should invest in foreign bonds as long as the expected yearly rate of depreciation of the foreign currency is a. less than 5%. b. greater than 5%. c. greater than 2%. d. less than 2%. e. less than 1%.

d) less than 2%

Suppose that Facebook (FB) reports increases in quarterly revenue and profits by 10% compared to last year's same quarter. This increase is in line with the forecasts of market participants. Which of the following is more likely to happen to the FB stock market valuation? a) price will increase b) price will decrease c) it will go up in the short-run but down in the medium run. d) no change

d) no change

Which of the following statements about consumption and investment is correct? a) consumption is more volatile than investment. b) investment and consumption exhibit approximately the same degree of volatility. c) a permanent change in income will have a relatively larger effect on consumption than on investment. d) none of the above

d) none of the above

Which of the following will NOT cause an increase in the present value of a sequence of payments? a) A reduction in the current interest rate b) A reduction in the expected future interest rates c) An increase in a future expected payment d) None of the above

d) none of the above

Which of the following will NOT cause an increase in the present value of a sequence of payments? a) a reduction in the current interest rate b) a reduction in expected future interest rates c) an increase in a future expected payment d) none of the above

d) none of the above

Suppose a bond promises to make a single payment at maturity. These types of bonds are called

discount bonds

For this question, ignore tax considerations of each of the following. Assume that consumption decisions are made according to the permanent income theory. Which of the following would lead to the smallest increase in current consumption? a) Winning $10,000 in the lottery b) Inheriting $10,000 from a relative c) Obtaining $10,000 by winning a lawsuit d) Getting a one-time $10,000 bonus from your employer e) All of the above

e) all of the above

Adaptive expectations assumes that individuals a) Can accurately predict the future b) Base predictions on random events (i.e. animal spirits) c) Form their predictions of macroeconomic variables randomly d) Use all available information in predicting the future e) None of the above

e) none of the above

An increase in the nominal interest rate, all else held constant, will always cause which of the following? a) the real interest rate to decrease b) the expected inflation rate to decrease c) the demand for money to increase d) all of the above e) none of the above

e) none of the above

Assume a country is open. Given this information, which of the following must occur? a) demand for domestic goods will be equal to domestic demand for goods b) demand for domestic goods will be greater than the domestic demand for goods c) demand for domestic goods will be less than the domestic demand for goods d) S + T = I + G e) none of the above

e) none of the above

Rational expectations assumes that individuals a) Can accurately predict the future b) Make predictions based on the past behavior of the economy c) Form their predictions of macroeconomic variables randomly d) Have perfect foresight e) None of the above

e) none of the above

Whenever the expected inflation rate is positive a) The real interest rate is greater than the nominal interest rate b) The real interest rate is negative c) The real interest rate is positive d) The nominal interest rate must be equal to the real interest rate e) None of the above

e) none of the above

Whenever the expected inflation rate is positive a) The real interest rate is greater than the nominal interest rate b) The real interest rate is negative c) The real interest rate is positive d) The nominal interest rate must be equal to the real interest rate e) None of the above

e. none of the above

Under which of the following assumptions would the nominal interest rate be equal to the real interest rate?

expected inflation is equal to zero

Suppose there is an increase in profitability. This suggests that

firms have increased their expectations of future profits.

The "depreciation rate" tells us

how much usefulness a machine loses from year to year

Suppose an individual experiences a $20,000 increase in real income and the individual believes this increase in income is permanent. The permanent income hypothesis suggests that this individual's current consumption will

increase by at most $20,000.

An expected reduction in the money supply will tend to cause

no change in stock prices

An expected tax cut will tend to cause

no change in stock prices.

Suppose the Fed increases the money supply in the current period with no other policy change implemented or anticipated. This policy action will cause which of the following shifts in the IS and/or LM curves in the current period?

no shift in IS, LM down

Suppose individuals expect that interest rates will decrease in the future. Also assume that the Fed wants to prevent any change in current output. Given this goal of the Fed, the Fed should implement a policy in the current period that

shifts the LM curve upward

Suppose the central bank implements a monetary expansion that is NOT fully anticipated by financial markets. Given this information, we would expect

stock prices to rise

Suppose policy makers implement a fiscal expansion that is NOT anticipated by financial market participants. We know that this will

tend to cause stock prices to rise if the LM curve is flat.

Suppose there is a reduction in expected future taxes. This will cause which of the following to occur?

the IS curve to shift right in the current period

Suppose there is an increase in expected future output. This will cause which of the following to occur?

the IS curve to shift right in the current period

Assume individuals consider only the medium run effects of changes in future macro variables when forming expectations of future output and future interest rates. Suppose current taxes are cut AND that individuals expect all future taxes to decrease permanently. Given this information, we know with certainty that

the expected future interest rate will increase.

A nominal depreciation of the Mexican peso (against all currencies) indicates that

the peso price of, for example, the UK pound has increased

The fundamental value of a share of stock is equal to which of the following?

the present value of expected dividends

A reduction in which of the following variables will cause a reduction in the user cost of capital? a) δ b) Πt c) Πet d) all of the above e) none of the above

δ (depreciation)

Suppose financial market participants expect short-term rates in the future to be less than current short-term interest rates. Given this information, we would expect

a downward sloping yield curve.

Suppose individuals now believe that there will be an increase in the future expected interest rate. This increase in the expected future interest rate will cause which of the following to occur in the current period?

a leftward shift of the IS curve

An unexpected reduction in the money supply will tend to cause

a reduction in stock prices.

Which of the following events would likely cause the largest increase in current consumption? a) a permanent increase in annual salary of $2000 b) a one-time tax cut of $4000 c) a one-time increase in income (e.g. a bonus) of $4000 d) both B and C

a) a permanent increase in annual salary of $2000

Which of the following would cause a reduction in human wealth? a) a permanent reduction in salary b) a reduction in the value of one's house c) a reduction in the value of one's stock portfolio d) all of the above e) none of the above

a) a permanent reduction in salary

Which of the following will NOT cause aggregate private spending to increase? a) In increase in expected future real interest rates b) An increase in government spending c) A reduction in future taxes d) All of the above e) None of the above

a) an increase in expected future real interest rates

An increase in government spending will have a greater impact on net exports when a) the MPS is smaller b) the economy is closed c) the sensitivity of investment to income is smaller d) all of the above e) none of the above

a) the MPS is smaller

The quantity of imports will increase when there is

an increase in domestic output

The IS curve shifts to the left where there is

an increase in expected future taxes

Suppose the current one-year interest rate is 4%, and financial markets expect the one-year interest rate next year to be 8%. Given this information, the yield to maturity on a two-year bond will be approximately

b) 6%

Which of the following will occur as a result of a tax increase?

c) the trade balance improves

With a nominal interest rate of 10%, the present discounted value of $200 to be received in one year is

c. $181.82

The "life cycle" and "permanent income" theories of consumption share which of the following features?

consumers look ahead to the future in making current spending decisions.

Assume individuals consider only the medium run effects of changes in future macro variables when forming expectations of future output and future interest rates. Suppose individuals expect the central bank to pursue a monetary expansion in the future. Given this information, we know with certainty that

current output will not change.

Suppose there is a reduction in cash flow. This suggests that

current profits have decreased

Suppose the current one-year interest rate is 3%. Also assume that financial markets expect the one-year interest rate next year to be 2%, and expect the one-year rate to be 1% the year after that. Given this information, the yield to maturity on a three-year bond will be approximately

2%

With a constant nominal interest rate equal to i, the present discounted value of $1.00 to be received 4 years from today is equal to

1/(1 + i )^4

An upward-sloping yield curve suggests that financial market participants expect short-term interest rates will

Rise in the future

Suppose individuals expect that interest rates will increase in the future. Also assume that the Fed wants to prevent any change in current output. Given this goal of the Fed, the Fed should implement a policy in the current period that

Shifts the LM curve downward