Money and Banking Final Exam

A tax increase initially

decrease consumption expenditure by an amount that is less than the value of the tax cut

The reduction of brokerage commissions for trading common stocks that occurred in 1975 caused the demand for bonds to ________ and the demand curve to shift to the __________.

fall, left

If people expect nominal interest rates to be higher in the future, the expected return to bonds ___________, and the demand for money_________.

falls; increases

Paper currency that has been declared legal tender but is not convertible into coins or precious metals is called ________ money.

fiat

Velocity is defined as:

how quickly money moves through an economy

In the Baumol-Tobin analysis of transactions demand for money, either an increase in _________ or a decrease in ________ increase money demand.

income; interest rate

Fisher's quantity theory of money suggests that the demand for money is not influenced by ________ and is purely a function of _________.

interest rates; income

Monetary aggregates are

measures of the money supply reported by the Federal Reserve.

For a marginal propensity to consume of 0.9, the value of the multiplier is

10

If the nominal rate of interest is 2 percent, and the expected inflation rate is -10 percent, the real rate of interest is

12%

If the required reserve ratio is 20 percent, the simple deposit multiplier is

5.0

If 1-year interest rates for the next three years are expected to be 8, 7, and 6 percent, then according to expectations theory the interest rate on a 3 year bond will be _________.

7%

An open-market operation is:

A purchase or sale of bonds by the central bank

If bad credit risks are the ones who most actively seek loans and, therefore, receive them from financial intermediaries, then financial intermediaries face the problem of

Adverse Selection

When the Fed conducts a contractionary open-market operations of $100, it:

All of the answers are correct

If the interest rate increase, the incentive to borrow ___________ and the incentive to lend _________.

Decreases; increases

If the interest rate increases, the incentive to borrow __________ and the incentive to lend__________.

Decreases; increases

Keynes hypothesized that the transactions component of money demand was primarily determined by the level of all of the following except:

Interest rates

Which of the following statements concerning Keynesian analysis is false?

Keynes's analysis explains how the price level will change when the total quantity of output supplied changes

The theory of how the nominal value of aggregate income is determined is called:

Keynesian Money Demand

All things equal, if the Federal Reserve decrease the money supply, the supply curve for money shifts ___________ and causes a(n) ______ in interest rates.

Left; increase

To convert a nominal GDP to a real GDP, you would use

The GDP deflator

Of the three motives for holding money suggested by Keynes, which did he believe to be the most sensitive to interest rates?

The speculative motive

Compared to an economy that uses a medium of exchange, in a barter economy

Transaction costs are higher

The marginal propensity to come (mpc) can be defined as the fraction of

a change in income that is spent

If the consumption function is expressed as C = a + mpc x YD, then "a" represents

autonomous consumer expenditure

The Keynesian framework indicates that government can play an important role in determining aggregate output by

both changing the level of government spending and by changing taxes

If the Fed wishes to conduct an expansionary open-market operation, it:

buys bonds from a dealer

In the Keynesian model of income determination, consumer expenditure includes spending by

consumers on personal computers

If you expect the inflation rate to be 12 percent next year and a one-year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is

-5%

What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $900 next year?

-5%

If you expect inflation rate to be 15 percent next year and a one-year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is

-8%

The equation of exchange states that the money supply multiplied by the velocity equals

Nominal gross domestic product

For every dollar increase in planned investment spending, aggregate output increases by __________.

more than one dollar

The price of a coupon bond and the yield to maturity are ________ related; that is, as the yield to maturity ________, the price of the bond ________.

negatively; rises; falls

The supply curve for bonds has the upward slope, indicating that as the price ________, ceteris paribus, the ___________ increases.

rises; quantity supplied

Patrick places his pocket change into his savings bank on his desk each evening. By his actions, Patrick indicates that he believes that money is a

Store of value

Dennis notices that jackets are on sale for $99. In this case money is functioning as a

Unit of account

Which of the following contributes to GDP?

Value of all final goods and services

The average number of times that a dollar is spent in buying an economy's GDP during a given time period is known as

Velocity of money

What is nominal GDP in 2010, if real GDP in 2009 was $12 billion, and the GDP deflator is 108?

$12.96 billion

If the consumption function is C = 20 + 0.75YD, then an increase in disposable income by $100 will result in an increase in consumer expenditure by

$75

What is the formula for the aggregate expenditure multiplier?

1/ (1-mpc)

As the price of a coupon bond increases the YTM (Yield To Maturity) ________.

Decrease

As the price of a coupon bond increases the YTM ______.

Decreases

The concept of ________ is based on the common-sense notion that a dollar paid to you in the future is less valuable to you than a dollar today.

Present

The concept of ________ is based on the common-sense notion that a dollar paid to you in the future is less valuable to you than a dollar today.

Present Value

All things equal, if the Federal Reserve increases the money supply, the supply curve for money shifts ________ and causes a(n) _________ in interest rates.

Right; decrease

The spread between the interest rates on bonds with default risk and default-free bonds is called the

Risk premium

Congress established the Federal Reserve system primarily to ________.

Serve as a lender of last resort

In the simple deposit expansion model, a decline in checkable deposit of $1,000 when the required reserve ratio is equal to 10 percent implies that the Fed

Sold $100 in government bonds

Keynes argued that the precautionary component of the demand for money was primarily determined by the level of people's ___________, which he believed were proportional to ________.

Transactions; income

Factors that decrease the demand for bonds include

a decrease in the riskiness of stocks

Factors that can cause the supply curve for bonds to shift to the right include

an expansion in overall economic activity

Members of the Board of Governors of the Federal Reserve are _________ and serve for __________ years

appointed by the President; 14

Keynes argued that when interest rates were high relative to some normal value, people would expect bond prices to _________ so the quantity of money demanded would ________.

increase; decrease

Friedman's argument that competition among banks will tend to keep the difference between the return on bonds and money relatively constant implies that changes in __________ will have ___________ on the demand for money

interest rates; little effect

The Baumol-Tobin analysis suggests that

the transactions component of the demand for money is negatively related to the level of interest rates.

A zero coupon bond pays annual interest and has a future value of $1,000, matures in 4 years, and has a yield to maturity of 6.5%. What is the present value of this bond?

$777.32

If the CPI in 2004 is 200, and in CPI is 180, the rate of inflation from 2004 to 2005 is

-10%

If the Keynesian consumption function is C = 10 + 0.65YD then, when disposable income is $1,000, what is the marginal propensity to consume?

0.65

Everything else held constant, if disposable income increases by 200 and consumption expenditure increases by 160, the mpc is

0.8

If the price level increase from 200 in year 1 to 220 in year 2, the rate of inflation from year 1 to year 2 is

10%

If nominal GDP in 2001 is $9 trillion, and 2001 real GDP in 1996 prices is $6 trillion, the GDP deflator price index is

150

You purchased one bond for $80. One year later you sold the bond for $83.25, and the coupon payment was $12. What is the RET, or the rate of return from holding the bond over the one-year period?

19.06%

If the money supply is $1500 and nominal income is $3,000, the velocity of money is

2

What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,200 next years?

25 %

What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,200 next year?

25%

If nominal GDP is $15 trillion, and the money supply is $5 trillion, velocity is

3

If the CPI is 120 in 1996 and 180 in 2002, then between 1996 and 2002, prices have increased by

50%

The problem created by asymmetric information before the transaction occurs is called __________, while the problem created after the transaction occurs is called _________.

Adverse selection; moral hazard

Keynes was especially interested in explaining movements of ________ because he wanted to explain why the Great Depression had occurred and how government policy could be used to increase ________ in a similar economic situation.

Aggregate output; employment

The monetary base minus reserves equals:

Currency in circulation

Suppose you take $50 from your wallet and you deposit it into your checking account. As a result:

Currency in circulation decreases.

When the Fed sells a government bond to a member bank, reserves ___________ and the monetary base _________.

Decrease, decreases

Holding the expected return on bonds constant, an increase in the expected return on common stocks would ________ the demand for bonds, shifting the demand curve to the ________.

Decrease; left

High interest rates might ________ purchasing a house or car but at the same time high interest rates might _________ saving.

Discourage; encourage

Keynes reasoned that consumer expenditure is most closely related to

Disposable income

When the holding period equals the maturity date, the YTM will be _________ the RET.

Equal to

Which of the following is true regarding GDP

GDP does not include intermediate goods, which are used to produce other final goods (Ex. the tires used to make a car).

If you withdraw $500 from an ATM and put it in your pocket, this _______ currency in circulation and __________ the monetary base.

Increases; has no effect on

Everything else held constant, when stock prices become less volatile, the demand curve for bonds shifts to the __________ and the interest rate ________.

Left; rises

In the bond market, the bond demanders are the ___________ and the bond suppliers are the _________.

Lenders; borrowers

If the interest rate on a bond rises, and you want to sell it before maturity, you will most likely experience a _____.

Loss

____________ is the narrowest monetary aggregate that the Fed reports.

M1

The Keynesian demand for real balances can be expressed as

Md/ P = f(i, Y)

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

Economists consider the __________ to be the most accurate measure of interest rates.

Yield to maturity