ECON 201 EXAM #4
What is the present value of $5,000 to be received 10 years from now if the interest rate is 10 percent?
$1,927.72
The Federal Reserve System's three administered rates are the
IORB rate, ON RRP rate, and discount rate.
"NAFTA" stands for
North American Free Trade Agreement.
Differences in production efficiencies among nations in producing a particular good result from
all of these.
The increased domestic employment argument for tariff protection holds that
an increase in tariffs will increase net exports and stimulate domestic employment.
Quantitative easing (QE) and traditional open-market purchases differ in that
an open-market purchase was intended to reduce the federal funds rate, while QE is not intended to do so.
The term trade deficit refers to a situation where
exports are less than imports.
Assume that by devoting all of its resources to the production of X, nation Alpha can produce 40 units of X. By devoting all of its resources to Y, Alpha can produce 60Y. Comparable figures for nation Beta are 60X and 40Y. The data indicate that
in Beta, the opportunity-cost ratio is 1Y ≡ 1.5X.
Benefits from international trade are based on differences in the following areas, except
income levels.
Dumping of goods abroad
is simply comparative advantage at work.
Government trade barriers
lessen or eliminate gains from specialization.
Tariffs
may be imposed either to raise revenue (revenue tariffs) or to shield domestic producers from foreign competition (protective tariffs).
Local and state governments
may default, but the U.S. federal government is very unlikely to default.
The law of increasing opportunity costs
may limit the extent to which a nation specializes in producing a particular product.
The primary gain from international trade is
more goods than would be attainable through domestic production alone.
If a nation has a comparative advantage in the production of X, this means the nation
must give up less of other goods than other nations in producing a unit of X.
In the real world, specialization is rarely complete because
nations normally experience increasing opportunity costs in producing more of the product in which they are specializing.
The three main tools of monetary policy are
open-market operations, forward guidance, and changing the administered interest rates.
Prior to the 2007-2009 financial crisis, the most frequently employed monetary policy tool was
open-market operations.
"Offshoring" refers to
shifting work previously done by domestic workers to workers located abroad.
Diversifiable risk refers to risk
specific to a particular investment.
The so-called eurozone refers to
the EU nations that have adopted a common currency.
U.S. monetary policy is conducted by
the central bank.
Investors diversify portfolios
to reduce the risk of losing their investment.
The voluntary exchange of goods, services, or assets between two or more parties is known as
trade.
Arbitrage occurs when investors try to profit from situations where
two identical assets have different rates of return.
Another name for diversifiable risk is
idiosyncratic risk.
The U.S. federal government is unlikely to default on its bond payments because
if necessary, it can sell U.S. securities to the Fed as a way to obtain money.
Country A limits other nation's exports to Country A to 1,000 tons of coal annually. This is an example of a(n)
import quota.
In a reverse repo transaction,
the Fed is the borrower and the nonbank firm is the lender.
Which of the following is not a tool of monetary policy?
the Taylor rule
What are the two most important factors influencing investor preferences?
the desire for high rates of return and the dislike of risk and uncertainty
A neutral monetary policy is a Fed policy in which
the money supply and interest rates are left as they are.
If the Federal Reserve System sells government securities,
the money supply will decrease.
Trade is
the voluntary exchange of goods, services, or assets between two or more parties.
Lottery winners who take the lump-sum payouts instead of payments spread out over many years
prefer immediate to delayed returns.
U.S. exports of goods and services are about
10 percent of U.S. GDP.
According to the Taylor rule, if inflation is 4 percent and there is an unemployment gap of −3 percent, the Fed's targeted interest rate should be
10 percent.
Augi buys a bond for $10,000 and receives interest payments of $600 every six months. The interest rate on the bond is approximately
12 percent.
If inflation is 7.8 percent and there is an unemployment rate of 3.7, then according to the Taylor rule, the Fed's targeted interest rate should be
12.5 percent.
The purpose of an expansionary monetary policy is to shift the
aggregate demand curve rightward.
An interest rate set by a central bank to help it manage market-determined interest rates defines
an administered rate.
An opportunity-cost ratio is
an equivalency showing the number of units of two products that can be produced with the same resources.
Arbitrage is the process by which investors simultaneously sell
assets with lower rates of return and buy otherwise identical assets with higher rates of return.
A key reason that actively managed funds have lower returns than index funds with a similar level of risk is that
management and trading costs reduce the returns of actively managed funds.
The problem of cyclical asymmetry refers to the idea that
restrictive monetary policy can cause the money supply to contract, but expansionary monetary policy may not achieve an increase in the money supply.
Financial assets such as stocks and bonds that are tradable in organized markets such as the New York Stock Exchange are
securities.
An export supply curve
shows the amount of a product that domestic firms will export at each world price that is above the domestic price.
Ownership shares in a single corporation is represented by what investment?
stock
Index funds are a portfolio of
stocks or bonds that exactly match a particular index.
The sale of government bonds in the open market by the Fed will
decrease aggregate demand.
Indy owns 200 shares of stock in Pet Mart Corporation that he purchased for $20 per share. Every year he has received, from company profits, $2.50 for each share he owns. If Indy holds his shares for ten years, he
will have received $5,000 in dividends.
Interest paid on reserve balances held at the Fed
will incentivize banks to hold more reserves and reduce riskier lending.
You invest $200 at an annual interest rate of 4 percent. What will your investment be worth at the end of one year?
$208
$300 invested at an annual interest rate of 6 percent will be worth how much at the end of one year?
$318
You invest $500 at an annual interest rate of 7 percent. What will your investment be worth at the end of one year?
$535
Which of the following equations shows how much X dollars will be worth if invested at an annual interest rate i for t years, if interest is compounded annually?
(1 + i)tX
The beta for the market portfolio's level of nondiversifiable risk is
1.0.
The United States' most important trading partner as measured by the dollar value of trade is
Canada.
The risk-free interest rate is determined primarily by the
Federal Reserve.
What is the difference between economic and financial investments?
Financial investments include all purchases undertaken with the expectation of financial gain; economic investments include only purchases of new capital goods.
Which of the following is not a tool of monetary policy?
Ig
The interest rate that the Fed pays nonbank financial firms for overnight loans is called the
ON RRP rate.
The production possibilities curves suggest that
West Mudville should specialize in, and export, baseball bats.
A high tariff on imported good X might reduce domestic employment in industry Y if
X is an input used domestically in producing Y.
If the inflation rate is 7 percent and the unemployment rate is 3 percent, the Fed would likely choose
a restrictive monetary policy.
Which of the following is an example of a land-intensive good?
beef
"Default" occurs when
bond issuers fail to make promised payments.
Bond payments are generally more predictable than stocks because
bond owners know the size and timing of payments they will receive.
If a corporation goes bankrupt,
bondholders get paid from the sale of company assets before stockholders do.
In a reverse repo transaction, the Fed _________blank money.
borrows
After the mortgage default crisis and by the close of 2015, monetary policy consisted of
both A and B.
The extremely large increase in the inflation rate in 2021 was in large part due to
both A and B.
If the demand for money increases and the Fed wants interest rates to remain unchanged, which of the following would be appropriate policy?
buy bonds in the open market
Open-market operations do not include
buying and selling blue-chip corporate stock.
The tools that the Fed can use to alter the money supply are open market operations and all of the following, except
changing the amount of government spending.
Recalling the dual mandate bullseye chart, if an economy is in the southeast quadrant, the Fed should definitely
choose expansionary monetary policy.
Recalling the dual mandate bullseye chart, if an economy is in the northwest quadrant, the Fed should definitely
choose restrictive policy such as increasing the administered rates.
Countries engaged in international trade specialize in production based on
comparative advantage.
As a percentage of GDP, U.S. exports are
considerably lower than in several other industrially advanced nations.
If the Fed wants to encourage nonbank lending, it will
decrease the ON RRP.
Situations in which borrowers stop making loan payments or do not pay back loans that they took out and are now due is known as
default.
Compound interest
describes how quickly an interest-bearing asset increases in value.
Payments to shareholders from corporate profits are known as
dividends.
In order for mutually beneficial trade to occur between two otherwise isolated nations,
each nation must have a comparative advantage in at least one product.
Limited liability rules
encourage stock investing by limiting shareholder risk of loss.
Suppose the domestic price (no-international-trade price) of copper is $3.40 per pound in the United States while the world price is $3.75 per pound. Assuming no transportation costs, the United States will
export copper.
The purpose of a restrictive monetary policy is to
increase interest rates to rein in spending.
A protective tariff will
increase the price and sales of domestic producers.
Which of the following actions by the Fed will most likely decrease bank lending?
increasing the interest paid on reserve balances held at the Fed
The equilibrium world price is the
international market price of a good or service, determined by world demand and supply.
Les buys a bond for $6,000. Every year that he holds the bond, he will receive interest payments of $240. The interest rate on the bond
is 4 percent.
The Federal Reserve System changes the money supply by
issuing a statement about any monetary actions the Fed intends to take.
In the theory of comparative advantage, a good should be produced in that nation where
its cost is least in terms of alternative goods that might otherwise be produced.
Trade adjustment assistance
provides cash assistance for workers displaced by imports or plant relocations abroad.
The discount rate is the interest
rate at which the Federal Reserve Banks lend to banks.
The risk premium of a financial asset is the
rate that compensates for risk.
The Fed's monetary policy response at the onset of the COVID recession included
reinitiating QE by buying $3 trillion in longer-term bonds.
Present value is best defined as the
value today of some amount of money that is to be received at a future date.
The World Trade Organization
was established to oversee trade agreements between its member nations.
