Econ 3001 Class

Federal funds

These instruments are typically overnight loans between banks of their deposits at the Federal Reserve.

Describe two ways in which financial intermediaries help lower transaction costs LOADING... in the economy.

They pool many small deposits together and specialize in loan risk assessment and other forms of expertise.

The Federal Reserve System include the following except the following except the

U.S. Treasury.

In the theory of portfolio​ choice, which of the following will increase the quantity demanded of an​ asset?

an increase in the liquidity of the asset relative to alternative assets.

An open market purchase of ​$200 of government security from the nonbank public results to ________________ in checkable deposits in the Nonbank​ Public's T-account. An open market sale of government securities to the nonbank public ___________ the monetary base.

an increase, lowers

The Federal​ Reserve's act of controlling the monetary base through its purchases or sales of securities is known as

an open market operation

Which of the following is not a goal of monetary​ policy?

an unemployment rate as close to zero as possible

Stock market bubbles

does not prove that the efficient market hypothesis is incorrect

Graphically, this chain reaction from wages to costs to prices produces shifts in the​ short-run aggregate supply curve (AS2) that are ___________

down and to the right

​Graphically, this chain reaction produces shifts in the​ short-run aggregate supply curve that are ________________

down and to the right

The current central bank of the United States is

the Federal Reserve

if the market price of a ​1,000-face-value discount bond changes from ​$950 to ​$975​, the yield to maturity decreases by _____________

2.7% Rbounds = f - p / p

Moral hazard

A situation where the borrower might engage in activities that are undesirable from the​ lender's point of​ view, because they make it less likely that the loan will be paid back.

Total Aggregate Demand equals Yad equals

C + I + G + NX

C = ​$3.15 trillion I = $1.2 trillion G = $3.5 trillion T = $3 trillion NX = $−1 trillion f ​= 1 mpc​ = 0.7 d​ = 0.2 x​ = 0.1 The simplified expression for the consumption function​ is:

C =1.05+0.7Y.

Advocates of Fed independence fear that subjecting the Fed to direct presidential or congressional control​ would:

Only A and B are correct. impart an inflationary bias to monetary policy. force monetary authorities to sacrifice the​ long-run objective of price stability.

is the purchase and sale of government securities by the Federal Reserve that affect both interest rates and the amount of reserves in the banking system.

Open-market operations

SEC

Organized exchanges and financial markets

What three motives for holding money did Keynes consider in his liquidity preference theory of the demand for real money​ balances? ​(Check all that​ apply.)

Precautionary motive. Transactions motive. Speculative motive.

Which of the following is not a purpose or function of​ money?

Protection against inflation

Now identify the policy tools that have the least​:

Flexibility: Changes in reserve requirements Reversibility: Changes in reserve requirements Effectiveness: Changes in reserve requirements Speed of Implementation: Loans to financial institutions

Which of the following is not true regarding the pricing of​ assets?

Those with the most wealth pay the highest price for assets.

Which of the following is unlikely to cause a reduction in​ lending?

a decrease in interest rates

is the difference between what the firm owns and what it owes.

Net Worth

If the dividend and required return remain the​ same, and the stock price is expected to increase by ​$1 six years from​ now, does the current stock price also increase by ​$1​?

No, the current stock price will not increase by ​$1 because the future stock price is discounted by the required return.

Based on these​ motives, what variables did he think determined the demand for​ money? ​(Check all that​ apply.)

Nominal interest rate. Income.

Adverse selection

Occurs when the potential borrowers who are the most likely to produce an undesirable​ (adverse) outcomelong dash the bad credit riskslong dash are the ones who most actively seek out a loan and are thus most likely to be selected.

If government spending increases while taxes are raised to balance the​ budget, which of the following is​ true?

One component of aggregate demand will increase and another will decrease.

With higher losses on​ loans, financial institutions undergo, ____________ ​, the process of cutting back their lending to​ borrower-spenders.

deleveraging

Rising defaults from subprime mortgages led to a weakening of balance sheets of banks and other financial institutions. With less capital​ available, these financial institutions sold off assets and limited the availability of credit to households and businesses. This process is referred to​ as:

deleveraging.

If the price of bonds is belowbelow the equilibrium​ price, there occurs an excess

demand for bonds, the price of bonds will rise, and the interest rate will fall.

If Mexicans go on a spending spree and buy twice as much French​ perfume, Japanese​ TVs, English​ sweaters, Swiss​ watches, and Italian​ wine, what will happen to the value of the Mexican​ peso? The value of the Mexican peso will

depreciate

If the European central bank decides to pursue a contractionary monetary policy to fight​ inflation, what will happen to the value of the U.S.​ dollar? The U.S. dollar will

depreciate

Using the line drawing tool​, show the effect of an increase in the foreign interest rate i Superscript Upper iF. Properly label your new line. Carefully follow the instructions​ above, and only draw the required object.

depreciate. Draw line to the left for depre. and label d2

Large well-known companies are more likely than relatively smaller to acquire funds through

direct finance

Bank loans from the Federal Reserve are called​ ________ and represent a source of new funds for financial intermediaries.

discount loans

Banks also obtain funds by borrowing from the Federal Reserve System. These borrowings are known as

discount loans

The interest rate charged for borrowedinterest rate charged for borrowed reserves is known as the

discount rate

The government can solve the​ free-rider problem through the following except

discouraging firms to reveal honest information

If investors expect an increase in the​ growth, g​, of earnings and dividends over the next 5​ years, the price of a share of DuWop will

increase

If the income tax exemption on municipal bonds were​ abolished, the interest rates on these bonds would

increase

Assuming the ratios you calculated in the previous steps are the​ same, the money supply should

increase $4,786 To determine the effect of open market operations on the money​ supply, find the new value of the monetary base and then multiply by the money multiplier calculated in the previous part.

In the long​ run, the equilibrium price level will ______________ and the equilibrium level of aggregate output will ______________.

increase remain unchanged

In the long​ run, if the​ output, price-level, and expected inflation effects outweigh the liquidity​ effect, to raiseraise interest rates the Federal Reserve should

increase the growth of the money supply.

During financial​ crises, financial frictions​ __________, leading to a​ __________ shift of the IS curve.

increase, leftward

If interest rates​ rise, this opportunity cost will __________​, and individuals will hold __________ cash balances

increase, smaller

Banks reduce the​ free-rider problem in information production by

making private, nontraded loans so other lenders cannot benefit from the information they have collected about the borrower.

Financial markets perform the basic function​ of:

matching savers with funds to lend to people who want to borrow funds

The simplified expression for the investment function​ is:

I = 1 = 0.2r

Following the financial crisis in​ 2008, the Federal Reserve began injecting the banking system with massive amounts of​ liquidity, and at the same​ time, very little lending occurred. As a​ result, the M1 money multiplier was below 1 for most of the time from October 2008 through 2011. How does this relate to your answer to the previous​ step?

If large amounts of reserves enter the banking system but are held as excess​ reserves, it is possible for the money multiplier to fall below one.

When might conventional monetary policy not​ work?

open market operations

Other things being the​ same, a bank with a greater amount of capital

has a lower risk of failure.

The monetary base is known as

high-powered money

A shift from currency to deposits will ______ the reserves in the banking system.

increase

If DuWop announces an increase in the annual​ dividend, ​Div, the price of a share of DuWop will

increase

is the relative ease and speed with which an asset can be converted into cash.

Liquidity

If interest rates​ decline, which would you rather be​ holding, long-term bonds or​ short-term bonds?

Long-term bonds because their price would increase more than the price of​ short-term bonds

Refer to the figure on your right. Suppose that the top marginal tax bracket increases. ​1.) Use the line drawing tool to plot the shifts in the supply and the demand curve for municipal bonds. Properly label this line. ​2.) Use the point drawing tool to show the change in the price of municipal bonds. Label this point ​'P2​'

Look in document pictures ch. 6 question 3

Which of the following is not a feature of the​ Dodd-Frank Act?

Lowering margin requirements on derivatives trades

Which of the following is a strategy banks could use to eliminate a capital​ shortfall?

Make fewer loans

Historically in the United​ States, branching laws have been most restrictive in the

Midwest

is comprised of currency in circulation plus total reserves.

Monetary base

is the most liquid store of value in the economy.

Money

The simplified expression for the net export function​ is:

NX = -1-0.1r

An open market sale of a​ $100 to a bank results to the​ T-account entries for the Banking System of

+$100 in securities and -$100 in reserves

Which of the following is an example of fiat​ money?

A five dollar bill

Finance Companies

Investment Intermediary

Which of the following statements is​ true?

Only a coupon bond can have a negative nominal interest rate.

An expression for the IS curve​ is:

Y - 15.17-1r

Eurocurrencies

are foreign currencies deposited in banks outside the home country.

A increase in the tax rate causes a decrease in the interest rate on tax exempt​ bonds, such as municipal bonds.

decrease

A​ bank's balance sheet includes several components such as the following except

employed workers.

Net exports​ (NX) equal ____________ minus ______

exports, imports

The​ principal-agent problem causes

moral hazard

When the wealth of individuals decreases,

the price of bonds decreases while the interest rates increase.

The money multiplier is

2.19 The money multiplier can be found by using the following​ formula: m = 1 + c / rr+e + c where c = currency deposit ratio rr ​= required reserve ratio e = excess reserves ratio

The First National Bank receives an extra​ $100 of reserves but decides not to lend any of these reserves. How much deposit creation takes place for the entire banking​ system?

$0

How much will taxes need to decrease to increase output by ​$1,000 ​billion? deltaT = $

$1,000 Use the following formula to find the amount that taxes will need to​ change: DeltaGDP = DeltaT * -mpc / 1 - mpc

Suppose the central bank conducts an unusually large open market purchase of bonds held by banks of ​$1,380 billion due to a sharp contraction in the economy. Assuming that currency and deposits remain the​ same, the new amount of excess reserves is

$1,392

The money supply is

$1,520 The money supply is the sum of currency in circulation and the amount of checkable deposits.

Assume that autonomous consumption is 1,7191 billion and disposable income is ​$12,100 billion. Using the consumption​ function, calculate consumption expenditure if an increase of​ $1,000 in disposable income leads to an increase of ​$690 in consumption expenditure. Consumption expenditure is ​$

$10,068 Use the equation: C = Cbar + mpc x Yd

f the real interest rate is r= 5, equilibrium output Ye = $

$10.2 Use the derived equation for the IS curve to find equilibrium output.

A bank has ​$25,000 of checkable deposits and a required reserve ratio of 25%. The bank currently holds ​$18,750 in reserves. How much of these reserves are excess​ reserves?

$12,500

If government purchases increase to ​$4.2 trillion and the real interest rate r =5​, equilibrium output Ye =

$12.5 An increase in government spending of ​$0.70.7 trillion will lead to an increase in equilibrium output at any given interest​ rate: DeltaG/(1-mpc) = 0.7/(1-0.7)=$2.33 trillion

If the real interest rate is r=2​, equilibrium output Ye equals = $

$13.2 Use the derived equation for the IS curve to find equilibrium output.

For this​ problem, use the fact that the expected value of an event is a probability weighted​ average, the sum of each probable outcome multiplied by the probability of the event occurring. You are in the market for a used car. At a used car​ lot, you know that the blue book value for the cars you are looking at is between ​$15,000 and ​$20 ,000. If you believe the dealer knows more about the cars than​ you, how much are you willing to​ pay? Assume that you care only about the expected value of the car you buy and that the car values are symmetrically distributed. You are willing to pay ​$

$15,000

If government purchases increase to ​$4.2 trillion and the real interest rate r =2​, equilibrium output Ye =

$15.5 An increase in government spending of ​$0.7 trillion will lead to an increase in equilibrium output at any given interest​ rate: DeltaG/(1-mpc) = 0.7/(1-0.7)=$2.33 trillion

Suppose that the required reserve ratio is 9​%, currency in circulation is ​$600 ​billion, the amount of checkable deposits is ​$920 ​billion, and excess reserves are ​$12 billion. The money supply is

$1520 The money supply is the sum of currency in circulation and the amount of checkable deposits.

Let's assume that a carpenter borrowed ​$2,000 to be paid off in a year to finance a machine that would make him work faster. As a​ result, he is able to take on more projects and collect ​$400 more earnings in the first​ year, after paying off the principal of ​$2 comma 000. ​However, there is a 14% rental fee​ (interest) on his loan that he also has to pay off. The carpenter earned an extra ​$120 in the first year. ​(Round your response to the nearest​ dollar) Compute using equation: 400-loan*(interest rate)

$180 Compute using the​ equation: 400 - loan * (interest rate)

Let's assume that a carpenter borrowed ​$2,000 to be paid off in a year to finance a machine that would make him work faster. As a​ result, he is able to take on more projects and collect ​$400 more earnings in the first​ year, after paying off the principal of ​$2,000. However, there is a 11% rental fee​ (interest) on his loan that he also has to pay off. The carpenter earned an extra ​$120 in the first year. ​(Round your response to the nearest​ dollar)

$180 Compute using the​ equation: 400 - loan * (interest rate)

Suppose ​$25 ,000 is deposited at a bank. The required reserve ratio is 25%, and the bank chooses not to hold any excess reserves but makes loans instead. What are the​ bank's total​ loans?

$18750

What is the opportunity cost of holding ​$750 in cash if the relevant interest rate is 3%? The opportunity cost is ​$23. ​(Round your response to the nearest​ dollar.)

$23 The opportunity cost is the foregone interest earnings by holding wealth in the form of cash

Suppose that you​ buy, and one year later​ sell, a foreign​ (British) bond under the following​ circumstances: When you buy the bond the exchange rate is ​$2.00 ​= 1 pound You pay pound 45 ​($90.00) for the British bond. You sell the bond for pound 50. No interest payment was expected or received. When you sell the​ bond, the exchange rate is​ $2.30 ​= 1 pound

$25 (First convert the proceeds from the bond sale into dollars by multiplying the selling price in pounds by the new exchange rate. Then to compute the gain or​ loss, subtract the purchase price in dollars from the selling price in dollars.)

If the consumption function is C​ = 100​ + 0.80Y and planned investment spending is 500​, what will be the equilibrium level of​ output? Ye = $

$3,000 Equilibrium output can be calculated by taking the product of autonomous expenditure and the spending​ multiplier: Y = (a+I) * 1 / 1- mpc

Suppose that Dell Computer Company starts the year with​ $20 million in inventory and ends the year with​ $14 million in inventory. Inventory investment for the year for Dell will be

$300, decrease

How much would you pay for a share of stock paying a dividend ​(cash payout ​C) of ​$4 to be paid in one​ year, a known selling price in one year ​(​P) of ​$40​, and expected return ​(R) of similar assets of 2​%?

$43.14 R= Pt+1 - Pt+c / Pt

If the marginal propensity to consume is 0.50​, how much would government spending have to rise to increase output by ​ 1,000 ​billion? deltaG = $

$500 Make sure you are correctly calculating the expenditure multiplier. Recall that aggregate output is positively related to government spending and that a change in government spending leads to a multiplied change in aggregate​ output, equal to the expenditure multiplier.

If planned investment falls by​ 100, how much does the equilibrium level of output​ fall? deltaYe = $

$500 The change in output is calculated by taking the product of the change in autonomous expenditure and the multiplier.

A share of stock in DuWop Corporation pays an annual dividend of ​$4. From the list of individuals​ below, calculate the value each person is likely to place on a share of this stock. ​(Round your responses to the nearest​ penny.)

$52 $82.40 $106.00 Po = PV share = Div1 / ke-g

If autonomous consumption expenditure is ​$200 ​billion, the marginal propensity to consume is 0.90​, aggregate income is ​$1,000 ​billion, and taxes are ​$200 billion, consumption expenditures will equal ​$

$920 C = Cbar + mpc * (Y - T)

Calculate the expected returns for the following two​ assets: Asset A pays a return of ​$2,000 30​% of the time and ​$500 70​% of the time. Asset B pays a return of ​$1,600, 60​% of the time and ​$400 40​% of the time.

$950 $1120 Simply multiply and add using: R^e = p1R1+p2+R2 Where p1 and p2 represent proabbilities and R1 and R2 represent the annual returns

If the required reserve ratio is​ 0.03, currency in circulation is ​$600 ​billion, deposits are ​$1000 ​billion, and excess reserves is​ $1 billion, then the money multiplier is equal to

(1+(600/1000))/(0.03+(1+/1000)+(600/1000))

An open market salesale of a​ $100 government security toto a bank results to the​ T-account entries for the Federal Reserve of

-$100 in securities and -$100 in reserves

What happens to reserves at the First National Bank if one person withdraws ​$1,200 of cash and another person deposits ​$800 of​ cash? Use a​ T-account to explain your answer.

-400 for both

Suppose that the average growth rate of the economy has been 3​%. Given a forecast of 44% growth this​ year, if rational expectations​ hold, then the expected forecast error is

0%

The excess reserves ratio is

0.013 To calculate the excess reserves​ ratio, divide the amount of excess reserves by the amount of checkable deposits.

Suppose that the Federal Reserve System set the required reserve ratio equal to 0.2 and that the banking system holds ​$50 billion in excess reserves. If the amount of deposits is ​$3000 billion and the amount of currency holdings is ​$50 ​billion, then the currency ratio is

0.02 The equation for the currency ratio is given by c = C/D where c​ = currency ratio C​ = amount of currency holdings D​ = checkable deposits

Referring to part​ a, the excess reserve ratio is

0.02 The equation for the excess reserves ratio is given by e = ER / D where e​ = excess reserves ratio ER​ = amount of excess reserves D​ = checkable deposits

The currency deposit ratio is

0.652 The currency deposit ratio can be found by dividing the amount of currency by the amount of checkable deposits.

The money multiplier is

0.73 The money multiplier can be found by using the following​ formula: m = 1 + c / rr+e + c where c = currency deposit ratio rr ​= required reserve ratio e = excess reserves ratio

The new excess reserves ratio is

1.51 To calculate the value of the excess reserves​ ratio, divide the new amount of excess reserves by the amount of checkable deposits.

If the mpc is 0.8​, then the expenditure multiplier is

1/(1-mpc) is known as the expenditure multiplier

If the required reserve ratio on checkable deposits increases to​ 20%, how much multiple deposit creation will take place when reserves are increased by​ $100? Assume that banks do not hold any excess reserves and the​ public's holdings of currency do not change.

100/.2 = $500

Suppose that an Exxon Mobil bond has a return of 22​% half the time and 55​% the other half. The expected return on this bond is When Google stock has a lower expected​ return, relative to alternative​ assets, due to poor business​ choices, the demand for the alternative assets​ (substitutes) rises

13.5% The equation for the expected returns is given by E = (P1*a) + (P2 * b) where E​ = Expected Returns a​ = first possible return b​ = second possible return P1​ = probability of having a P2​ = probability of having b

Given that the price a stock is bought for is ​$105. Based on the​ one-period valuation model of stock​ prices, if the stock is sold a year later at the price ​$130 after receiving a dividend of ​$2​, then the required rate of return on equity investments is

25.7% ke= ((P1+D) / P0-1) * 100 where P0 = current price of the stock D = dividend paid P1 = price of stock at the end of the first period ke = required return on investments in equity

Suppose ​$150,000 is deposited at a bank. The required reserve ratio is 20 ​percent, and the bank chooses not to hold any excess reserves but makes loans instead. What are the​ bank's total​ reserves?

30,000

A goods market equilibrium occurs when

5.00

ewBank started its first day of operations with ​$122million in capital. A total of ​$294million in checkable deposits is received. The bank makes a ​$23 million commercial loan and another ​$29 million in mortgage loans. Required reserves are 5.9%. NewBank decides to invest ​$267 million in​ 30-day T-bills. The​ T-bills are currently trading at ​$4985​(including commissions) for a ​$4,980 face value instrument. How many​ T-bills do they​ purchase? ​(​Note: Information is based on​ NewBank's first month of​ operations.)

53,561 To determine how many​ T-bills NewBank will​ purchase, divide the amount to invest by the price per​ T-bill.

Reserves​ are:

6

If a​ one-year discount bond that pays ​$1,000 at​ maturity, is held for the entire​ year, and the purchase price is ​$940​, then the interest rate is A​ one-year discount bond for which the owner pays ​$937​, holds it for the entire one​ year, and receives ​1,000 at​ maturity, generates an interest rate of

6.38% 6.7% The equation that can be used to calculate the interest rate is given by i = (F-P)/P where i = interest rate F= face value of the bond P = price paid for the bond

If transportation costs and trade barriers are low and the exchange rate is 0.6 euros per​ dollar, then according to the law of one​ price, a computer that costs​ $1,000 in the United States will cost _____________ euros in Europe.

600

Suppose that Dell Corporation has 17,000 computers in its warehouses on December​ 31, 2012, ready to be shipped to merchants​ (each computer is valued at ​450​). By December​ 31, 2013, Dell Corporation has 30,000 computers ready to be​ shipped, each valued at ​$400. Calculate​ Dell's inventory on December​ 31, 2012. Dell's inventory on December​ 31, 2012 is ​$ Calculate​ Dell's inventory investment in 2013. ​Dell's inventory investment in 2013 is ​$

7,650,000 Multiply the cost of one computer by the number of computers. 4,350,000 Multiply the cost of one computer by the number of computers. Then find the inventory spending.

A German sports car is selling for 60,000 euros. What is the dollar price in the United States for the German car if the exchange rate is 0.80 euro per​ dollar?

75,000 To find the U.S. dollar price of the German sports​ car, divide the euro price for the car by the exchange rate.

Why is a financial crisis likely to lead to a contraction in economic​ activity?

A disruption in the financial system diminishes the flow of funds from savers to borrowers.

Primary market

A financial market in which new issues of a​ security, such as a bond or a​ stock, are sold to initial buyers by the corporation or government agency borrowing the funds.

Money market

A financial market in which only​ short-term debt instruments​ (generally those with original maturity of less than one​ year) are traded.

Secondary market

A financial market in which securities that have been previously issued can be resold.

Capital market

A market in which​ longer-term debt​ (generally those with original maturity of one year or​ greater) and equity instruments are traded.

Debt market

A market where bonds or​ mortgages, which are contractual agreements by the borrower to pay the holder of the instrument fixed dollar amounts at regular intervals until a specified date when a final payment is​ made, are traded.

What causes the IS curve to​ shift?

A shift in the IS curve occurs when equilibrium output changes at each given real interest rate. The factors of shifting are autonomous​ consumption, autonomous​ investment, autonomous net​ exports, taxes, and government purchases.

Asymmetric information

A situation where one party often does not know enough about the other party to make accurate decisions.

Why is the New York Federal Reserve always a voting member on the​ FOMC?

A. The New York Federal Reserve district contains many of the largest commercial banks in the United States. B. The New York Federal Reserve is actively involved in the bond and foreign exchange markets. C. It is the only Federal Reserve bank that is a member of the Bank for International Settlements​ (BIS). D. Only A and C are correct. E. All of the above are correct. (CORRECT ANSWER)

According to the liquidity premium theory of the term structure of interest​ rates, if the​ one-year bond rate is expected to be 4​%, 5%, and 9​% over each of the next three​ years, and if the liquidity premium on a​ three-year bond is 22%, then the interest rate on a​ three-year bond is ________. ​(Round your response to the nearest whole​ number). According to the liquidity premium and preferred habitat theories of the term structure of interest​ rates, a flat yield curve indicates that

According to the liquidity premium​ theory, the equation for the interest rate on a​ three-year bond is given by r = ((i(1) + i(2) + i(3)) + / 3 + p where r = interest rate on the 3 year bond i(t) = expected interest rate on the one-year bond p = liquidity premium on a 3 year bond. The answer = 8%

Disadvantages of using reserve requirements to control the money supply and interest rates​ include:

All of the above are correct.

Which of the following is associated with asymmetric information in a financial​ crisis?

All of the above are correct.

Why is being nosy a desirable trait for a​ banker?

All of the above is correct

Which of the following would cause the​ long-run aggregate supply curve to shift​ rightward?

An increase in available technology.

Which of the following would NOT be considered part of planned investment​ spending?

An increase in inventories from unanticipated weakness in demand for goods.

Which of the following shifts the aggregate demand​ curve?

An increase in the autonomous real interest rate

Which of the following policy changes would be considered a conventional monetary policy​ change?

An open market sale of securities to increase the fed funds rate.

Which of the following policy changes would be considered an unconventional monetary policy​ change?

Announcing a firm policy to conduct large scale open market purchases in the future.

If​ John, Jennifer,​ Arthur, and Lisa are the only prospective buyers of a​ stock, and they have the discount rates 10%, 15%, 6% and 13​%, ​respectively, then the buyer who will be able to obtain the stock is

Arthur

Complete the balance sheet below to show​ NewBank's purchase. ​(Round your responses to the nearest whole​ number.)

Assets Required reserves $17million Checkable deposits $294 million (Liabilities) Excess reserves ​$80 million Bank capital (liabilities) ​$122 million ​ T-bills ​$267 million Loans ​$52 million

Using the numbers ​1, 2,​ 3, and ​4, rank the following four assets from most liquid ​(1​) to least liquid ​(4​).

A​ 10,000-square-foot office building = 4 ​ $2,000 in cash = 1 A​ $10,000 Treasury bill = 2 100 shares of Google stock = 3

The maturity of a debt instrument is the number of years​ (term) until that​ instrument's expiration date. Identify the term to maturity LOADING... of the following financial​ instruments:

A​ 30-year corporate bond. = Long term A​ money-market instrument with a maturity of 6 months. = Short term A Treasury note with a maturity of 5 or 10 years. = Intermediate-term A​ 90-day Treasury bill. = Short term

Commercial paper

A​ short-term debt instrument issued by large banks and​ well-known corporations.

By​ definition, when the Fed conducts an open market​ purchase, it​ is:

B. buying bonds. C. increasing the quantity of reserves. Both B and C are correct.

When an economy is at its natural rate of unemployment

B. the economy is at a​ full-employment level. C. the demand for labor is equal to the supply of labor. Both B and C are correct.

Which of the following is not a reason for the dramatic increase in the number of bank holding companies?

Bank holding companies can monopolise the market for banking services in a given region

The ______________​, established in​ 1791, is the first central bank in the United States.

Bank of the United States

Which of the following players can affect the money supply by its holdings of excess reserves question mark

Banks

It is not unusual to find a business that displays a sign saying​ "no personal​ checks, please."

Based on this​ observation, a checking account must be less liquid than currency.

John values ABC stock at​ $10 per share. Susan values it at​ $15 per​ share, and Bill values it at​ $20 per share. In a​ free-market auction, the individual who ends up buying the item

Bill

Which of the following statements concerning external sources of financing for nonfinancial businesses in the United States is​ true?

Bonds are a far more important source of financing than are stocks

If the Federal Reserve increases the money supply at the same time that Congress implements an income tax​ cut, then which of the following is​ true? The graph to the right depicts aggregate supply and demand in​ long-run equilibrium. ​1) Using the line drawing tool​, show the​ short-run effect of an increase in the money supply combined with a tax cut. Properly label your line. ​ 2) Using the point drawing tool​, indicate the​ short-run equilibrium. Label the point ​'E2​'.

Both of these actions will increase aggregate demand. to the right draw the point to the right on the new line 32

When the euro​ appreciates, are you more likely to drink California or French​ wine?

California wine

Refer to the figure on your right. Suppose savings increase. ​1.) Use the line drawing tool to show the shift in the supply​ and/or demand for bonds. Properly label the curves. Carefully follow the instructions​ above, and only draw the required objects. When the savings rate of individuals decreases​, then the supply of bonds remains the same for every bond price.

Ch. 5 q. 10

You are given the following series of​ one-year interest​ rates: 6​%, 4​%, 5%, 7​%. Assuming that the expectations theory is the correct theory of the term​ structure, calculate the interest rates in the term structure for maturities of one to four​ years, and plot the resulting yield curve. 1. Using the point drawing​ tool, plot the interest rate​ (calculated using the data​ above) for each of the four terms to maturity. Properly label each point according to its corresponding term. 2. Using the​ 4-point curved line drawing tool​, connect these points. Label your curve​ 'yield curve'.

Ch. 6 picture document question 7

You are given the following series of​ one-year interest​ rates: 4%, 6​%, 11%, 15​% Assuming that the expectations theory is the correct theory of the term​ structure, calculate the interest rates in the term structure for maturities of one to four​ years, and plot the resulting yield curve. 1. Using the point drawing​ tool, plot the interest rate​ (calculated using the data​ above) for each of the four terms to maturity. Properly label each point according to its corresponding term. 2. Using the​ 4-point curved line drawing tool​, connect these points. Label your curve​ 'yield curve'.

Ch. 6. question 9 picture document

In the second column of the following​ table, indicate whether the exchange rate will rise ​(up arrow↑​) or fall ​(down arrow↓​) as a result of the change in the factor.​ (Recall that a rise in the exchange rate is viewed as an appreciation of the domestic​ currency).

Change in Factor: Domestic interest rate↓: ↓ fall Foreign interest rate↓: rise Domestic price level↓: rise Tariffs and quotas↓: ↓ fall Import demand↓: rise Export demand↓: ↓ fall Domestic productivity↓: ↓ fall

When the Federal Reserve reduces its policy interest​ rate, how, if at​ all, is the IS curve​ affected?

Changes in interest rates represent a movement along the IS​ curve, and so the IS curve does not shift.

Refer to the figure on your right. Suppose the expected rate of inflation decreases. ​1.) Use the line drawing tool to show the shifts in the supply​ and/or the demand curve of bonds.

Chapter 5 question 3

You are given the following series of​ one-year interest​ rates: 5​%, 7​%, 12​%, 12​%. Assuming that the expectations theory LOADING... is the correct theory of the term​ structure, calculate the interest rates in the term structure for maturities of one to four​ years, and plot the resulting yield curve. 1. Using the point drawing​ tool, plot the interest rate​ (calculated using the data​ above) for each of the four terms to maturity. Properly label each point according to its corresponding term. 2. Using the​ 4-point curved line drawing tool​, connect these points. Label your curve​ 'yield curve'

Chapter 6 question 5 picture document

Assume that the required reserve ratio on checkable deposits is​ 10%, banks do not hold any excess​ reserves, and the​ public's holdings of currency do not change. If the Fed reduces reserves by selling​ $5 million worth of bonds to the​ banks, what will the​ T-account of the banking system look like when the banking system is in​ equilibrium? What will have happened to the level of checkable​ deposits?

Checkable deposits fall by​ $50 million and the​ T-account is: Banking System Assets: Reserves −​$5 million Securities plus +​$5 million Loans−​$50 million Liabilities Checkable deposits -$50 million

If you decide to hold​ $100 less cash than usual and therefore deposit​ $100 more cash in the​ bank, what effect will this have on checkable deposits in the banking system if the rest of the public keeps its holdings of currency​ constant? Assume the required reserve ratio is​ 10% and banks do not hold any excess reserves.

Checkable deposits increase by​ $1,000.

If the Fed buys​ $1 million of bonds from the First National​ Bank, but an additional​ 10% of any deposit is held as excess​ reserves, what is the total increase in checkable​ deposits? Assume that the required reserve ratio on checkable deposits is​ 10% and the​ public's holdings of currency do not change.

Checkable deposits increase by​ $5 million

is property that is pledged to a lender to guarantee payment in the event that the borrower is unable to make debt payments

Collateral

Rank the following bank assets from most liquid LOADING... ​(1) to least liquid​ (4). ​(Enter a numerical value between 1 and​ 4.)

Commercial loans: 3 Securities: 2 Reserves: 1 Physical capital: 4

How do conflicts of interest make the asymmetric information problem​ worse?

Competing interests may lead a financial institution to conceal information or disseminate misleading​ information, which prevents financial markets from channeling funds into the most productive investment opportunities.

What are the four components of planned​ expenditure?

Consumption​ expenditure, planned investment​ spending, government​ purchases, and net exports.

Life Insurance Companies

Contractual Savings Institution

Pension Funds

Contractual Savings Institution

Unlike commercial​ banks, savings and​ loans, and mutual savings​ banks, credit unions did not have restrictions on locating branches in other states.​ Why, then, are credit unions typically smaller than the other depository​ institutions?

Credit unions are small because members usually share a common employer or have ties to a particular organization.

If casualty insurance companies provided fire insurance without any​ restrictions, what kind of moral hazard problem might​ result?

Customers would take less preventive care in avoiding fire risk with this type of insurance

Properly categorize each of the following​ concepts:

Debt = Stock variable Money = Stock variable Income = Flow variable Savings deposits =Stock variable Wealth = Stock variable

Why are deposit insurance and other types of government safety nets important to the health of the​ economy?

Deposit insurance and other government safety nets help to eliminate a contagion effect.

Classify the following transaction as affecting either​ assets, a​ liabilities, or neither for each of the​ "players" in the money supply processlong dash—the Federal​ Reserve, banks, and depositors. You use your debit card to purchase a meal at a restaurant for $100

Depositors: Assets rise and offset by a fall in assets due to lower checking account balances. Banks: Reserve assets decrease and checkable deposit liabilities decrease.

Commercial Banks

Depository Institution

Credit Unions

Depository Institution

Investment Banks

Depository Institution

Savings and Loan Associations

Depository Institution

If the British central bank lowers interest rates to reduce​ unemployment, what will happen to the value of the pound in the short run and the long​ run? The pound will

Depreciate

Which of the following statements regarding direct finance is true?

Direct finance occurs when borrowers sell securities directly to lenders

Which of the following statements regarding direct finance is not true?

Direct finance requires the use of financial intermediaries.

Which of the following is a benefit to an individual purchasing a mutual​ fund?

Diversification

Identify the cash flows available to an investor in stock.

Dividends and capital gains.

Which of the following will cause the aggregate demand curve to​ shift?

Each of these factors can cause aggregate demand curve to shift.

When the euro appreciates ​(holding everything else​ constant), then

European chocolate sold in the United States becomes more expensive.

Assume that you are interested in earning some return on idle balances you usually keep in your checking account and decide to buy some money market mutual fund shares by writing a check.

Everything else the​ same, M1 will decrease and M2 will stay the same.

Match each of the following theories with its description to the right. ​(Enter a​ value: 1-4.)

Expectations theory = The interest rate on a​ long-term bond will equal an average of the​ short-term interest rates that people expect to occur over the life of the​ long-term bond. Preferred habitat = The interest rate on a​ long-term bond will equal an average of​ short-term interest rates expected to occur over the life of the​ long-term bond plus a liquidity premium​ (also referred to as a term​ premium) that responds to supply and demand conditions for that bond. Segmented markets = The interest rate for each bond with a different maturity is determined by the supply of and demand for that​ bond, with no effects from expected returns on other bonds with other maturities.

​"If most participants in the stock market do not follow what is happening to monetary​ aggregates, prices of common stocks will not fully reflect information about​ them." Is this statement true or​ false?

False, as full information can be gained with only some participants eliminating unexploited profit opportunities.

"Bank managers should always seek the highest return possible on their​ assets." Is this statement​ true, false, or​ uncertain?

False. A bank must also consider an​ asset's risk and liquidity when deciding which assets to hold.

"A country is always worse off when its currency is weak​ (falls in​ value)." Is this statement​ true, false, or​ uncertain? Why?

False. A weaker currency makes domestically produced goods cheaper to foreign​ consumers, helping export industries. A weaker currency makes foreign produced goods more expensive to domestic consumers.

​"When the stock market​ rises, investment is​ increasing." Is this statement​ true, false, or​ uncertain? Explain your answer.

False. The buying and selling of stocks represents transfers of existing​ assets, and new production does not occur.

​"Firms will increase production when planned investment is less than​ (actual) total​ investment." Is this statement​ true, false, or​ uncertain?

False. Unplanned inventory investment is​ positive, and firms will cut production in order to reduce inventory levels.

The agency that was created to protect depositors in reaction to the many banking failures of​ 1930-1933 is​ the:

Federal Deposit Insurance Corporation

clear checks determines margin requirements meets eight times a year

Federal Reserve banks Board of Governors Federal Open Market Committee

Comptroller of the Currency

Federally chartered commercial banks

Which of the following statements about fiat money is​ false?

Fiat money is redeemable into a particular precious metal such as gold.

are the most important source of external funds to finance businesses.

Financial intermediaries

Which of the following statements is​ true?

Firms raise more funds with bonds than with stocks.

Compare the use of open market​ operations, loans to financial​ institutions, and changes in reserve requirements to control the money supply on the basis of the following​ criteria: flexibility,​ reversibility, effectiveness, and speed of implementation. Identify the policy tools that have the greatest​:

Flexibility: Open market operations Reversibility: Open market operations Speed of Implementation: Open market operations

Which of the following would cause the risk premium on corporate bonds to fall​?

Forecasters predict that the economy will grow more quickly for the next few years.

If a lender makes a simple loan of ​$300 for 4 years and charges 3%, then the amount that the lender receive at maturity is ​________. ​(Round your response to the nearest two decimal​ place) If a lender makes a simple loan of ​$1500 for one year and charges ​$150 interest, then the simple interest rate on that loan is _____. If a borrower must repay​ $106.50 one year from today in order to receive a simple loan of​ $100 today, the simple interest on this loan is

Formula #4 $337.65 10% 6.5%

You have just won ​$20,000 in the state​ lottery, which promises to pay you ​$1,000​ (tax free) every year for the next twenty years. The interest rate is​ 5%. In​ reality, you receive the first payment of ​$1,000​ today, which is worth ​_________ today The value of the second​ $1,000 payment is worth ​_______ today. ​ Your total lottery winnings are actually worth _____________ $20,000 to you today.

Formula Sheet #3 $1000 $952.38 Less than

Consider a coupon bond that has a par value of ​$1 comma 100 and a coupon rate of 5%. The bond is currently selling for ​$1 comma 050.62 and has 2 years to maturity. What is the​ bond's yield to maturity​ (YTM)?

Formula Sheet Number 2 8% Google ytm calculator

Calculate the present value of a $1,500 discount bond with 7 years to maturity if the yield to maturity is 8​%.

Formula sheet #7 $875.24

If the interest rate is 6%, the present value of ​$800 to be received 3 years from today is ​$. (Round your response to the nearest two decimal​ place) You are in a car​ accident, and you receive an insurance settlement of ​$5500 per year for the next three years. The first payment is to be received today. The second payment is to be received one year from​ today, and the third payment two years from today. If the interest rate is 2%, the present value of the insurance settlement is ​$. (Round your response to the nearest two decimal​ place)

Formulas Number 1 Sheet 1025.64 18252.12 Yield to maturity

is an issue that occurs when people who do not pay for information take advantage of the information that other people have paid for.

Free Rider problem

Commodities Futures Trading Commission

Futures market exchanges

A coupon bond with a face value of ​$800 that pays an annual coupon of ​$100 has a coupon rate equal to __________% What is the approximate​ (closest whole​ number) yield to maturity on a coupon bond that matures one year from​ today, has a par value of ​$990, pays an annual coupon of ​$75, and whose price today is ​$1004.50?

Google calculator 13% 6% Below

Given the following descriptions of risk LOADING... ​, enter the corresponding Standard and​ Poor's rating​ (i.e., AAA,​ AA, A,​ BBB, ...​ D).

High grade high quality = AA Highly speculative = B Upper medium grade = A Prime maximum safety = AAA Speculative = BB

If households and firms believe the economy will be in a recession in the​ future, will this necessarily cause a​ recession, or have any impact on output at​ all?

If these beliefs are strong​ enough, it could reduce autonomous investment to a point where equilibrium output decreases​ significantly, leading to a recession.

What happens to aggregate output if unplanned inventory investment is either positive or​ negative?

If unplanned inventory investment is​ positive, there is an excess supply of​ goods, and aggregate output will decline. If unplanned inventory investment is​ negative, there is an excess demand for​ goods, and aggregate output will rise.

Which of the following is measured as a flow per unit of​ time?

Income

Calculate the value of the consumption function at each level of income in the table below if autonomous consumption =300​, taxes =210​, and mpc = 0.7. ​(Round your responses to the nearest whole​ number.)

Income y 0 Disposable Income Yd = -210 Consumption C= 153 Disposable income​ (denoted by YD​) is the total income available for​ spending, equal to aggregate output ​(Y​) minus taxes ​(T​). The consumption function can be derived as​ follows: C = cbar + mpc * YD where C = autonomous consumption expenditure mpc ​= marginal propensity to consume YD ​= disposable income 140 Disposable Income Yd = -70 Consumption C= 251 240 Disposable Income Yd = 30 Consumption C= 321 340 Disposable Income Yd = 130 Consumption C= 391 440 Disposable Income Yd = 230 Consumption C= 461 540 Disposable Income Yd = 330 Consumption C= 531 640 Disposable Income Yd = 430 Consumption C= 601

Why does the existence of deposit insurance increase the likelihood that depositors will need deposit​ protection?

Insured banks tend to pursue greater risks than they otherwise would

What happens to inventory spending during the early stages of an economic​ recession?

Inventory spending will be positive for some​ time, but firms will quickly cut production and try to sell their already manufactured goods before increasing production again.

Mutual Funds

Investment Intermediary

Why can the Fed control the real interest rate in the short run but not in the long​ run?

It adjusts for​ inflation, and prices are sticky in the short run.​ Hence, when a change in the​ Fed's monetary policy causes the nominal interest rate to​ change, the real interest rate also changes in the same direction. In the long​ run, actual and expected inflation change in response to changes in monetary​ policy, leaving the real interest rate unaffected.

What relationship does the aggregate supply curve​ describe?

It describes the relationship between the total quantity of output supplied and the inflation rate.

Do you think that eliminating or limiting the amount of deposit insurance would be a good​ idea? Explain your answer.

It is not a good idea. Eliminating or limiting the amount of deposit insurance would help reduce the moral hazard of excessive risk taking on the part of banks. It​ would, however, make bank failures and panics more likely.

Which of the following is not an important reason for the regional Federal Reserve bank presidents to attend the FOMC​ meetings, even if they are nonvoting​ members?

It provides a greater opportunity for nonvoting members to become voting members in the future.

Why is a public announcement of numerical inflation rate objectives important to the success of an​ inflation-targeting central​ bank?

It reduces uncertainty in inflation expectations of market participants.

Why did Keynesian analysis emphasize this​ concept?

Keynes viewed the total amount of output demanded in the economy as being the same as planned expenditure. This is true when the planned expenditure on goods and services is equal to the actual amount of goods and services produced.

In​ Keynes's analysis of the speculative demand for​ money, what will happen to money demand if people suddenly decide that the normal level of the interest rate has​ declined? Why?

Money demand will decrease because as interest rates​ fall, the price of bonds rises. The relative increase in the expected return on bonds makes money less attractive.

Why would a life insurance company be concerned about the financial stability of major corporations or the health of the housing​ market?

Most life insurance companies hold large amounts of corporate bonds and mortgage assets.

An​ economy's aggregate demand is shown graphically as a​ downward-sloping curve. The position of this curve relative to the vertical axis is impacted by six basic factors. The top portion of the following table lists these six factors along with several that do not affect the position of the aggregate demand curve. A response box is attached to each factor. The​ table's bottom portion contains a labeling key. Label any factor that does not impact AD with an X. For a factor that shifts aggregate demand to the​ right, use the label​ R; similarly, for a factor that shifts aggregate demand to the​ left, use the label L. Keep in mind that each factor is to be assessed on the assumption that all else is constant. ​(Note​: Each letter is used three​ times.)

L- The Federal Reserve autonomously tightens monetary policy. X- The government adopts ​ill-advised regulations that diminish the​ economy's overall efficiency. L- The government allows previously enacted tax cuts to​ expire, resulting in much higher taxes for households. X- The prospect of worsening inflation induces the Federal Reserve to tighten monetary policy. R- Consumer optimism spreads as the media reports encouraging news about the economy. X- Actual output rises above potential​ output, creating ​"tightness" in resource markets. R- Foreign economies rebound​, producing a substantial rise in net exports. R- Optimism within the business community induces a surge in planned business expenditures. L- Peace breaks​ out, enabling the government to substantially curtail defense expenditures.

Give one example each of moral hazard and adverse selection in private insurance arrangements.

Leaving your car unlocked with the keys in it is an example of moral​ hazard, while a person with poor health seeking health insurance is an example of adverse selection

Which of the following statements about rational expectations is true​?

Rational expectations are identical to optimal forecasts.

NewBank started its first day of operations with ​$132 million in capital. A total of ​$95 million in checkable deposits is received. The bank makes a ​$27 million commercial loan and another ​$25 million in mortgage loans. The required reserve ratio is 5.1%. ​(​Note: Information is based on​ NewBank's first month of​ operations

Required reserves ​$5million Checkable deposits ​$95 million Excess reserves $170million Bank capital ​$132million Loans ​$52million

Which of the following repealed the prohibition on interstate​ banking?

Riegle-Neal Act.

The​ Dodd-Frank Act created a Financial Stability Oversight Council that designates which financial firms are systematically important and so received the official designation of

SIFIs

Office of Thrift Supervision

Savings and loan associations

Which of the following is true regarding primary and secondary​ markets?

Secondary markets sell old issues of securities.

Which firms are most likely to use bank financing rather than to issue bonds or stocks to finance their​ activities?

Sole​ proprietorship, partnerships, and small corporations.

Suppose the economy is described by the following​ equations: C=100+0.8Y I=50−0.5r G=100 T=0 NX=−50−1.5r Solve for aggregate​ output: Solve for aggregate​ output: Use the table below to fill in equilibrium values of aggregate​ output, consumption, planned​ investment, and net exports for different values of r.

Solve for aggregate​ output: ​Y= 1000 - 10r Y = C + I + G + NX and Solve for Y R = 0 Aggregate​ Output, Y = 1000 Before Solving for C, Solve for Y = [100+50+100-50] (1/(1-0.8)) - ((0.5+1.5)/ (1-0.8))r Consumption​ Expenditure, C = 900 Planned​ Investment, I = 50 Government​ Spending, G = 100 Net​ Exports, NX = -50 R = 2 Aggregate​ Output, Y = 980 Consumption​ Expenditure, C = 884 Planned​ Investment, I =49 Government​ Spending, G = 100 Net​ Exports, NX = -53 R= 4 Aggregate​ Output, Y = 960 Consumption​ Expenditure, C = 868 Planned​ Investment, I = 48 Government​ Spending, G = 100 Net​ Exports, NX = -56 R= 6 Aggregate​ Output, Y = 940 Consumption​ Expenditure, C = 852 Planned​ Investment, I = 47 Government​ Spending, G = 100 Net​ Exports, NX = -59 R = 8 Aggregate​ Output, Y = 920 Consumption​ Expenditure, C = 836 Planned​ Investment, I = 46 Government​ Spending, G = 100 Net​ Exports, NX = -62 R= 10 Aggregate​ Output, Y = 900 Consumption​ Expenditure, C = 820 Planned​ Investment, I = 45 Government​ Spending, G = 100 Net​ Exports, NX = -65

How would your yield curve change if people preferred​ shorter-term bonds over​ longer-term bonds? The yield curve would become

Steeper

The diagram to the right shows the rate of inflation in the United States over the past 35 years. As it is well​ known, the United States experienced​ double-digit inflation in the late 1970s. What property would lead individuals to hold more money in the 1990s than in the​ 1970s? Everything else​ equal, this would demonstrate the property of money as a

Store of value

is a loan to someone with​ less-than-excellent credit.

Subprime mortgage

When the inflation rate​ increases, what happens to the fed funds​ rate? Operationally, how does the Fed adjust the fed funds​ rate?

The Fed adjusts the fed funds rate up through open market sales of bonds.

The​ Fed's game plan is best described as​ follows:

The Fed uses policy instruments to impact its intermediate targets in a way that allows the Fed to achieve its goals.

If the marginal propensity to consume declines, the marginal propensity to consume declines​, explain whether the IS curve shifts to the right or​ left, does not​ shift, or is indeterminate in the direction of the shift

The IS curve shifts to the left.

In its February 18, 2010, edition, the Wall Street Journal printed, "The dollar strengthened [...] and stocks [...] followed suit. The Dow industrials rose 40.43 points, or 0.4%." What effect does the strengthened dollar have on the IS​ curve?

The IS curve shifts to the left.

What effect does the increase in stock prices have on the IS​ curve?

The IS curve shifts to the right.

As the labor force becomes more productive over​ time, how does that affect the​ long-run aggregate supply​ curve?

The LRAS curve shifts to the right because the existing labor​ force, along with a given amount of capital and other​ resources, can produce more output.

What are the costs and benefits of a​ too-big-to-fail policy?

The benefit is that it makes bank panics less​ likely; however, the cost is that it increases the incentive for moral hazard by big banks

Which of the following players can affect the money supply through open market operations through open market operations​?

The central bank

Which of the following is an example of a​ "good" supply​ shock?

The computer revolution in the late 1990s.

Why might you be willing to make a loan to your neighbor by putting funds in a savings account earning a​ 5% interest rate at the bank and having the bank lend her the funds at a​ 10% interest rate rather than lend her the funds​ yourself?

The costs of writing up the loan contract might exceed the​ 5% difference between your deposit rate and the bank lending rate.

What changes in these can increase the demand for​ money?

The demand for money increases when wealth or the risk associated with other assets​ increases, and it decreases when expected return or liquidity of other assets increases or when the risk of inflation increases.

Why is the Twelfth Federal Reserve district so geographically​ large, while the Second Federal Reserve district is so small by​ comparison?

The districts represent the population and economic interests in 1913 when the Federal Reserve Act was created.

Match the following definitions to the appropriate​ term:

The idea that the prices of identical goods should be identical throughout the​ world: Law of one price The price of domestic goods relative to the price of foreign goods denominated in the domestic​ currency: Real exchange rate Taxes on imported​ goods: Tariffs Restrictions on the quantity of foreign goods that can be​ imported: Quotas The theory that exchange rates between any two countries will adjust to reflect changes in the price levels of the two​ countries: Theory of purchasing power parity

Why was the Term Auction Facility​ (TAF) more widely used by financial institutions than the discount window during the global financial​ crisis?

The interest rate on TAF loans was less than the discount rate

Using the line drawing tool​, show the effect of increased government spending on the aggregate demand curve. Label your new line ​'AD2​'. Carefully follow the instructions​ above, and only draw the required object. If the Fed lowers the money supply at the same time that government spending​ increases, how would this change your answer​ above?

The lower money supply would cause the aggregate demand curve to shift​ leftward, removing some or all of the effect of the increase in government spending.

Predict what will happen to the money supply if there is a sharp rise in the currency ratio.

The money supply falls

The Fed buys​ $100 million of bonds from the public and also lowers the reserve requirement r. What will happen to the money​ supply?

The money supply will increase.

Which of the following is not true of a banking system with deposit​ insurance?

The moral hazard problem in banking is reduced.

Which of the following is not a motivation for the original​ Glass-Steagall Act in​ 1933?

The need to further consolidate the banking industry and securities industry.

What is the real interest​ rate?

The nominal interest rate minus expected inflation.

Why has the development of overnight loan markets made it more likely that banks will hold fewer excess​ reserves?

The presence of overnight loan markets reduces the costs associated with deposit outflows.

Why does a financial crisis ultimately cause a substantial reduction in economic​ activity?

The resulting credit crash severely reduces investment for productive activities.

What is the primary tool that Congress uses to exercise some control over the​ Fed?

The threat that Congress will acquire greater control over the​ Fed's finances and budget.

Why was the Federal Reserve System set up with twelve regional Federal Reserve banks rather than one central​ bank, as in other​ countries?

The writers of the Federal Reserve Act wanted to ensure the​ Fed's power was not centralized in a single location.

What is the main disadvantage of moving to e-money or moving to a cashless​ society?

There are problems with security and privacy

Savings and Loan

These depository institutions obtain funds primarily through savings deposits​ (often called​ shares) and time and checkable deposits. In the​ past, these institutions were constrained in their activities and mostly made mortgage loans for residential housing.

What is the combined effect of these two events on the IS​ curve?

These events may have opposite effects on the IS​ curve, thus the combined effect on the IS curve is indeterminate.

Credit Union

These financial institutions are very small cooperative lending institutions organized around a particular​ group: union​ members, employees of a​ firm, and so forth. They acquire funds from deposits called shares and primarily make consumer loans.

Mutual Fund

These financial intermediaries acquire funds by selling shares to many individuals and use the proceeds to purchase diversified portfolios of stocks and bonds.

Commercial Bank

These financial intermediaries raise funds primarily by issuing checkable​ deposits, savings​ deposits, and time deposits. They then use these funds to make​ commercial, consumer, and mortgage loans and to buy U.S. government securities and municipal bonds.

Repurchase agreements

These instruments are effectively​ short-term loans​ (usually with a maturity of less than two​ weeks) for which Treasury bills serve as​ collateral, which the lender receives if the borrower does not pay back the loan.

​Banker's acceptances

These money market instruments are created in the course of carrying out international trade. This is a bank draft​ (a promise of payment similar to a​ check) issued by a​ firm, payable at some future​ date, and guaranteed for a fee by a bank.

Treasury bills

These​ short-term debt instruments of the US government are issued in​ three-, six-, and​ 12-month maturities to finance the federal government.

If inflation is currently low but policymakers believe inflation will rise over the next two years with an unchanged stance of monetary​ policy, what should they do to prevent the inflationary​ surge?

They should tighten monetary policy before inflation surges.

Refer to the figure on your right. ​ 1.) Using the line drawing tool show what happens under the given scenario. A financial crisis leading to an increase in financial frictions. Carefully follow the instructions​ above, and only draw the required object. An increase in taxes. Carefully follow the instructions​ above, and only draw the required object. An increase in autonomous investment. Carefully follow the instructions above, and only draw the required object.

To the left To the left To the right

Why do U.S. Treasury bills have lower interest rates than​ large-denomination negotiable bank​ CDs?

Treasuries are considered to be​ risk-free debt instruments.

​"The more​ risk-averse people​ are, the more likely they are to​ diversify." Is this statement​ true, false, or​ uncertain?

True because the benefits to diversification are greater for a person who cares more about reducing risk.

High employment is a worthy goal.

True, unemployment results in​ under-utilized resources and lower output

​"The federal funds rate can sometimes be above the discount​ rate." Is this statement​ true, false, or​ uncertain?

True. Banks may prefer to pay a higher market rate than to borrow directly from the Fed and incur the perceived stigma.

Money may serve as an instrument that allows for comparison of the relative worth of various goods and services. What function of money does this​ describe?

Unit of account

Why was the Term Auction Facility​ (TAF) more widely used by financial institutions than the discount window during the global financial​ crisis?

Using the TAF funds provided some anonymity, which helped to avoid the stigma associated with discount window lending.

is the total collection of pieces of property that serves to store value.

Wealth

According to the portfolio theories of money​ demand, what are the four factors that determine money​ demand?​ (Check all that​ apply.)

Wealth. Risk of other assets. Liquidity of other assets. Expected return.

Which of the following forms is a conventional monetary policy​ tool:

When there is a​ zero-lower-bound problem.

The total aggregate demand Yad ​is:

Y = Yd

Do disclosure requirements help limit excessive risk taking by​ banks?

Yes. Disclosure requirements better enable depositors to evaluate and monitor financial institutions and thus act as a deterrent to excessive risk taking.

Suppose that a plot of the values of M2 and nominal GDP for a given country over 40 years shows that these two variables are very closely related. In​ particular, a plot of their ratio​ (nominal GDP/M2) yields very stable and​ easy-to-predict values. Based on this​ evidence, would you recommend the monetary authorities of this country to conduct monetary policy by focusing mostly on the money supply rather than on setting interest​ rates?

You should recommend the monetary authorities to focus mostly on the money supply​ (as measured by​ M2), as its growth rate would be a good indicator of the stance of monetary policy.

Rank the following assets from most liquid ​(1​) to least liquid ​(6​):

a. Checking account deposits = 2 b. Houses = 6 c. Currency = 1 d. Automobile = 5 e. Savings deposits = 3 f. Common stock = 4

For each of the following​ assets, indicate​ which, if​ any, of the monetary aggregates includes​ them:

a. Currency = M1 and M2 b. Money market mutual funds​ (noninstitutional) = M2 only c. U.S.​ T-bills (with maturities of less than 90​ days) = Neither M1 nor M2 d. ​ Small-denomination time deposit = M2 only e. ​ Large-cap mutual funds= Neither M1 nor M2 f. Checkable deposits = M1 and M2

Before a loan is​ made, banks screen their loan applicants to avoid the problem of

adverse selection

The​ "lemons problem" is a term used to describe the

adverse selection problem in financial markets

The​ principal-agent problem arises because of many reasons except the statement that indicates that

agents' incentives are always compatible with those of the principals.

Financial intermediaries

allow for risk sharing for the lending-savers.

The following statements are not true except the one that indicates that

although banks are the most important source of external funds to businesses worldwide, their role is shrinking slightly over time.

A share of Microsoft common stock​ is:

an asset for its​ owner, which Microsoft shows as shareholder equity on its balance sheet.

Regardless of the original source of the financial​ crisis, all credit booms end in a credit crash because of

an increase in adverse selection and moral hazard in the loan market.

Using the liquidity preference​ framework, an increase in the riskiness of bonds will​ cause:

an increase in the demand for​ money, no change in the quantity of​ money, and a higher interest rate.

If American auto companies make a breakthrough in automobile technology and are able to produce a car that gets 200 miles to the​ gallon, what will happen to the U.S. exchange​ rate? The U.S. exchange rate will

apperciate

If a strike takes place in​ France, making it harder to buy French​ goods, what will happen to the value of the U.S.​ dollar? The dollar will

appreciate

In​ 1999, the euro was trading at ​$0.90 per euro. If the euro is now trading at ​$1.19 per​ euro, the euro has___________ by __ %

appreciated by 32.22% %change = e1-e0 / e0 * 100% E0 = dollar to euro exchange rate in base period E1 = dollar to euro exchange rate in current period

Match the following definitions to the appropriate​ term: An increase in the value of a currency​: A fall in the value of a currency​: The price of one currency in terms of another​: The immediate exchange of bank deposits in the foreign The exchange rate for forward transactions​:

appreciation, depreciation, exchange rate, spot exchange rate, forward exchange rate

The large number of banks in the United States

are greater than the number of banks in most developed countries.

Eurodollars

are​ dollar-denominated deposits in foreign banks that are outside the United States or in foreign branches of U.S. banks.

When lenders have inferior knowledge relative to borrowers about the potential returns and risks associated with an investment​ project, it gives rise to the problem known as

asymmetric information

The presence of deposit insurance increases the adverse selection problem in banking by

attracting​ risk-loving people into bank ownership.

In order to limit the moral hazard incentives for banks to engage in the excessively risky behavior encouraged by deposit​ insurance,

a​ strong, institutional environment must be in place.

Because of the adverse selection problem​:

bad credit risks with a willingness to pay higher interest rates will be the majority seeking loans

The operation of the Fed and its monetary policy involve actions that affects its record of holdings known as the​ Fed's

balance sheet

Relatively smaller companies are more likely than large comma well dash known large, well-known to acquire funds through

banks

The Federal Reserve System was established in 1913

because the public became convinced a central bank was needed to avoid bank panics.

Among the research​ documents, the only book that is given to the public is the

beige book

The government employs the following types of regulations in an attempt to ensure the soundness of our financial intermediaries except

bolstering competition

The policy tools of the Fed are the following except

bond creation.

A/an increaseincrease in expected inflation causes

bond demand to shift left, bond supply to shift right, and interest rates to rise.

A business cycle expansion causes

both bond demand and bond supply to shift right.

An asset with great liquidity is one that

can be converted into a medium of exchange with relative ease and speed.

The natural rate of​ unemployment:

can be influenced by government policy

Future regulation related to the​ Dodd-Frank Act of 2010 needs to​ include:

capital​ requirements, compensation,​ GSEs, credit-rating​ agencies, and the dangers of overregulation.

Reserves, cash items in process of​ collection, and deposits at other banks are collectively called

cash items

The government agency that oversees the banking system and is responsible for the supply of money and credit in the economy is the

central bank

The Federal Reserve System is the​ ___________ for the United​ States, which is defined as the government agency responsible for​ __________.

central​ bank; the conduct of monetary policy

The figure to the right depicts the bond market. Explain the effect that a large federal deficit will have on interest rates. ​1.) Using the line drawing tool​, show the effect of this shock on the bond market. Properly label your line. ​ 2.) Using the point drawing tool​, indicate the new equilibrium bond price and quantity. Label the point​ '2'. Carefully follow the instructions​ above, and only draw the required objects The effect of this shock will likely cause interest rates to

ch. 5 q. 18 , increase

Use the graph and the supply and demand for bonds to show what will happen to interest rates if there is a rise in the riskiness of bonds. ​(Remember that bond prices are inversely related to interest​ rates.) 1. Using the line drawing tool​, show the effect of this shock on money demand​ and/or money supply. Properly label your line or lines. 2. Using the point drawing tool​, indicate the new equilibrium in the market for money. Label this point​ '2'.

ch. 5 question 5

Refer to the figure on your right. Imagine that investors observe a decline in the volatility of stock returns. ​1.) Use the line drawing tool to show the shift in the demand​ and/or the supply curve of bonds.

ch. 5. q 12

Refer to the figure on your right. Suppose that the health of the economy deteriorates so that the probability of corporations defaulting on their bonds increases. ​1.) Use the line drawing tool to show the shifts in the supply and demand of corporate bonds. Properly label this line. ​2.) Use the point drawing tool to to show the change in the price of corporate bonds. Label this point ​'P2​' Carefully follow the instructions​ above, and only draw the required objects.

ch. 6. question 8 pic document

Refer to the figure on your right. Assume that a business cycle contraction occurs. show how the demand​ and/or supply curve of bonds shifts as a result. ​1.) Use the line drawing tool to show how the demand​ and/or supply curve of bonds shifts as a result.

ch5. q 19

A​ short-term debt security issued by large banks and corporations is called a

commercial paper

The government employs the following types of regulations in an attempt to ensure the soundness of our financial intermediaries except

confidentiality

The four components of aggregate demand are

consumption, planned​ investment, government​ spending, and net exports.

The four components of aggregate demand are

consumption​ expenditure, planned investment​ spending, government​ spending, and net exports.

The money market instruments include:

corporate stocks and bonds

Which of the following are found on the liability side of the​ Fed's balance​ sheet?

currency in circulation

A discount bond will have a negative nominal interest rate when​ the:

current bond price is greater than its face value.

If the demand for bonds shifts to the​ left, the price of bonds

decreases, and interest rates rise.

If investors develop a greater aversion to risk or view DuWop stock as having greater​ risk, ​k, the share price will

decrease

Suppose that the White House decides to sharply decrease military spending without increasing government spending in other areas. This measure​ would, all else​ constant, cause aggregate demand to

decrease graph to the left

A negative demand shock will _____________ inflation and will __________ aggregate output in the short run.

decrease, decrease

What effect might a financial panic have on the money multiplier and the money​ supply? Why? In a financial​ panic, you would expect the money multiplier to ___________ and the money supply to ___________​, which would cause the excess reserves ratio to __________. Thus depositors are likely to ___________ their holdings of currency.

decrease, decrease, increase, increase

A rise in the real interest rate will cause exports to ___________ and imports to ______

decrease, increase

A negative demand will ______ inflation and will __________ aggregate output in the long run.

decrease, not change

​A/an __________________ in the volatility of the bond market causes the demand for bonds to rise and the demand curve to shift to the right

decrease, the demand curve shift to the right

Internet sites that allow people to post their resumes reduce the cost of a job search. How do you think the Internet has affected the natural rate of​ unemployment? The Internet has ____________ the natural rate of unemployment.

decreased

​Now, suppose that the price of the stock above was bought instead for​ $115. Then, required rate of return on equity investments then

decreased

Suppose the economy is starting from a situation of​ long-run equilibrium. In this​ case, we know that its equilibrium output ​(Upper Y starY*​) is ____________ its potential output

equal to

Reserves that the banks choose to hold in addition to the amount requiredbanks choose to hold in addition to the amount required is known as

excess reserves

Changes in the following variables will cause a shift of the short-run aggregate supply​ curve: 1.) Use the line drawing tool to show how an increase in the available technology will affect the​ long-run aggregate supply curve. Draw and label the new graph properly. Carefully follow the instructions​ above, and only draw the required object.

expected inflation, output gap, and price (supply) shocks. to the right

Suppose there is an increase in the growth rate of the money supply. If the liquidity effect is smaller than the​ income, price-level, and expected inflation​ effects, and if inflationary expectations adjust​ slowly, then in the short​ run, interest rates

fall

If a depositor withdraws ​$200 from his deposit at a​ bank, then the​ bank's reserves

fall by $200

Suppose there is​ a/an decreasedecrease in the growth rate of the money supply. If the liquidity effect is smaller than the​ output, price-level, and expected inflation​ effects, then in the long​ run, interest rates

fall compared to their initial value

When the Federal Reserve decreases the growth rate of the money​ supply, the income effect causes the interest rate to ______ while the liquidity effect drives the interest rate ___________.

fall, up

The dramatic slowdown in the growth of credit in the wake of the financial crisis starting in 2007 triggered a​ 'credit crunch' in which credit was hard to get. As a​ result, the performance of the economy in 2008 and 2009 was very poor. What caused the credit​ crunch? Our analysis of how a bank manages its capital indicates that the 2008dash-9 credit crunch was​ caused, at least in​ part, by the capital​ crunch, in which shortfalls of bank capital led to slower credit growth. As we discussed in the previous​ chapter, there was a major boom and bust in the housing market that led to huge losses for banks from their holdings of securities backed by residential mortgages. In​ addition, banks had to take back onto their balance sheets many of the structured investment vehicles​ (SIVs) they had sponsored. The losses that reduced bank​ capital, along with the need for more capital to support the assets coming back onto their balance​ sheets, led to capital​ shortfalls: Banks had to either raise new capital or restrict asset growth by cutting back on lending. Banks did raise some capital but with the growing weakness of the​ economy, raising new capital was extremely​ difficult, so banks also chose to tighten their lending standards and reduce lending. Both of these helped produce a weak economy in 2008 and 2009. When faced with a capital​ shortfall, banks can raise new capital or restrict lending. In​ 2008, faced with these choices we saw that banks tended to raise more capital in order to keep lending constant.

false

The seeds of a financial crisis are often sown when an economy introduces new types of financial products​, an event known as

financial innovation

If expectations of future​ short-term interest rates suddenly​ fall, what would happen to the slope of the yield​ curve? The yield curve would become

flatter

According to the liquidity premium and preferred habitat theories of the term structure of interest​ rates, a flat yield curve indicates that

future​ short-term interest rates are expected to fall.

Which of the following are found on the asset side of the​ Fed's balance​ sheet?

government securities

If the supply of bonds shifts to the left​, the price of bonds __________ and the interest rate decreases

increases

Along the supply curve for​ bonds, a decrease in the price of bonds

increases the interest rate and decreases the quantity of bonds supplied

Continuing on the same train of​ thought, when the Fed __________ the growth rate of the money​ supply, the price level effect drives the interest rate _____________ while the expected inflation rate pushes the interest rate to ____________

increases, rise, rise

A major advantage of​ ________ targeting over​ ________ targeting is that it is readily understood by the public.

inflation; monetary

Financial intermediaries have a role to play in matching savers and borrowers for all of the following reasons except​

information symmetries

Municipal bonds tend to pay lower interest rates than U.S. Treasury bonds because

interest payments received from holding municipal bonds are exempt from federal income tax.

The IS curve shows combinations​ of:

interest rates and income that bring equilibrium in the market for goods and services.

An increase in the interest rate will cause

investment spending to fall and net exports to fall.

The Federal Deposit Insurance Corporation​ (FDIC)

is characterized by all statements

An individual may find making a loan to another individual unprofitable due to the fact that

it is concentrating the loan risks.

Some firms had fallen on bad times and their previously issued​ long-term securities have ratings below Baa. These bonds are dubbed as

junk bonds

A rise in the expected domestic price level shifts the demand for domestic assets to the​ ________ and causes the domestic currency​ to_________.

left, depreciate

The​ "lemons problem" applies to financial markets for many reasons including the fact that

lenders cannot distinguish goods firms from bad.

A bank with excess reserves can economize on these reserves​ by:

lending reserves in the federal funds market.

With deposit​ insurance, ______________ information regarding banks will be collected by the depositors.

less

It is not unusual to find a business that displays a sign saying​ "no personal​ checks, please." Based on this​ observation, a checking account must be ___________ than currency.

less liquid

Explain why you would be more or less willing to buy a share of Microsoft stock in the following​ situations: You would be ______________ willing to buy a share of Microsoft stock if your wealth falls _______________________________ . You would be ____________ willing to buy a share of Microsoft stock if you expect the stock to appreciate in value _______________ You would be __________________willing to buy a share of Microsoft stock if the bond market becomes more liquid because _____________________. You would be ___________________________ willing to buy a share of Microsoft stock if you expect gold to appreciate in value because . You would be _____________________willing to buy a share of Microsoft stock if prices in the bond market become more volatile __________________ .

less, you have less money to spend on all of your potential assets more, you believe the amount of the return on your investment will be positive less, you can now sell bonds easier than stocks less, the return on gold relative to stocks has improved more, because stocks have become relatively safer than bonds

Government regulation __________ the adverse selection problem.

lessens

A​ bank's balance sheet is a list of its ___________, its sources of bank funds.

liabilities

Banks generate profits by earning higher returns on their​ ____________ than they pay in interest on​ _____________.

loans; deposits

Debt contracts are

long legal documents with substantial provisions.

How and why do changes in the real interest rate affect planned investment​ spending? When the real interest rate is very _______________, the cost of funds is very low and the return on many of the​ firm's planned investments _______________exceed it. As the real interest rate​ rises, the return on __________ planned investments will exceed the cost of funds.​ Thus, planned investment spending ___________ as the real interest rate rises.

low, will, fewer and fewer, falls

The Federal Reserve pursued inherently recessionary policies in the early 1980s​ to:

lower the inflation​ rate, which had spun out of control.

Compared to its original​ state, the economy in the​ short-run equilibrium at point 2 has output that is ___________ and inflation is ____________

lower, higher

If taxes decrease and government purchases decrease ​, the IS curve Refer to the figure on your right. If taxes decreases and government purchases increases​, what would happen to the IS​ curve? ​1.) Use the line drawing tool to show the shift in the IS curve. Carefully follow the instructions​ above, and only draw the required object.

may shift right, left, or not shift at all To the right

Open market purchases raise the​ ________, thereby increasing the​ _________.

monetary base and​ reserves; money supply

We know that money is the most liquid store of value due to many reasons except that

money is exposed to the risks associated with hyperinflation.

Which of the following is not included in the M1 monetary​ aggregate?

money market deposit accounts

The tool to solve adverse selection problems are the following except

monitoring of activities of the risky party after the transaction

is an asymmetric information problem that occurs after the transaction.

moral hazad

After a loan is​ made, banks monitor their loan customers to avoid the problem of

moral hazard

In order to reduce the​ ________ problem in loan​ markets, banks often insist on collateral from potential borrowers.

moral hazard

Your parents loan you money to pay your​ tuition, and you use the money to play online poker instead. This is an example of

moral hazard

When a borrower engages in activity different from that agreed to by the​ lender, it is known as​ the:

moral hazard problem

Problems created by asymmetric information LOADING... after the transaction occurs is called​ ________, while the problem created before a transaction occurs is called​ ________.

moral​ hazard; adverse selection

A decrease in how responsive investment is to the real cost of borrowing or how net exports respond to the real interest rate makes the IS curve ______ steep.

more

A payments system based on money is

more efficient than a barter economy because fewer prices are needed to establish relative values between all commodities.

These shifts in the​ short-run aggregate supply curve result in output gaps that are ________________ and the economy is evolving toward an eventual new​ long-run equilibrium with an inflation rate that is ______________

narrowing and lower

These shifts in the​ short-run aggregate supply curve result in output gaps that are ____________ and the economy is evolving toward an eventual new​ long-run equilibrium at which inflation and output​ are, compared to their original​ values, ___________________.

narrowing, unchanged

The​ ______ is where the economy gravitates to in the long run.

natural rate of unemployment

An open market purchase has _________ when the proceeds from the sale are kept in currency.

no effect

Which of the following is the greatest source of funds to commercial banks today​?

nontransaction deposits

A shift from currency to deposits will ______ the monetary base in the banking system.

not effect

Defaults:

occur when a borrower cannot make his loan payments.

The principal-agent problem

occurs because owners have incomplete information about the motives and behavior of managers.

Each Federal Reserve district has _________________ main Federal Reserve​ bank/banks.

one

The​ Fed's most commonly used means of changing the money supply​ is:

open market operations

The following statements are true except the one that indicates that

over 90% of Americans households own securities

Currency​ includes:

paper money and coins.

A marginal propensity to consume of 0.50 means that

people spend half of each additional dollar of disposable income.

The most important advantage of discount policy is that the Fed can use it​ to:

perform its role as lender of last resort.

Keynes viewed aggregate​ demand, the total amount demanded in the​ economy, as being the same as

planned expenditure.

The aggregate demand function​ includes:

planned expenditures.

The​ "lemons problem" occurs in the​ used-car market due to many reasons including the fact that

potential sellers are the only ones who truly know the real value of the cars.

The efficient markets theory does not hold if crashes are

predictable

Match the following definitions to the appropriate​ term: A condition of low and stable inflation​: Nominal variable such as the inflation​ rate, exchange​ rate, or money supply that policymakers use to tie down the price level​: Results when discretionary monetary policies are pursued that are expansionary or beneficial in the short run but that have poor outcomes in the long run​: The most extreme example of unstable prices​:

price stability nominal anchor time-inconsistency problem hyperinflation

The efficient market hypothesis implies​ that:

prices in markets like the stock market are unpredictable

The​ principal-agent problem arises because of many reasons except the statement that indicates that

principals have no incentives to free ride off the monitoring expenditures of other principals.

The efficient market hypothesis is an application of the theory of

rational expectations.

The following are the three reseach documents that play an important role in the monetary policy process and at Federal Open Market Committee except the

red book

The Federal Deposit Insurance Corporation​ (FDIC)

regulates agencies such as mutual savings banks and savings and loan associations

The faction of deposits required as reserves is known as the

required reserve ratio

The Federal Deposit Insurance Corporation Improvement Act of​ 1991:

required the FDIC to establish​ risk-based deposit insurance premiums.

Which of the following reduces both adverse selection and moral hazard in a loan​ arrangement?

requiring that the borrower have high net worth

The aggregate demand curve would shift to the ________________ if household wealth increases or business become more optimistic. Refer to the figure on your right. How does a tax affect decrease the relationship between inflation and aggregate​ output? ​1.) Using the line drawing tool​, show the effect of a tax decrease on the following aggregate demand curve. Properly label your curve. Carefully follow the instructions​ above, and only draw the required object.

right and to the right AD2

A rise in the expected future exchange rate shifts the demand for domestic assets to the​ ________ and causes the domestic currency​ to_________

right, appreciate

If the current market price is ​$25 and these three individuals are representative of the market as a​ whole, this share price is likely to

rise

Inflation ___________ when the unemployment rate is less than the natural rate of unemployment.

rises

When the Fed provides more reserves to the banking​ system, the money banks have to lend to each other ___________ , and the federal fund rate ____________.

rises, falls

Short-term U.S. government securities are called _____________ because of their high liquidity.

secondary reserves

Collateral reduces the consequences of adverse selection because it

secures the loan.

Suppose the interest rates on​ one-, five-, and​ ten-year U.S. Treasury bonds are currently​ 3%, 6%, and​ 6%, respectively. Investor A chooses to hold only​ one-year bonds, and Investor B is indifferent with regard to holding​ five- and​ ten-year bonds. Which theories best explain the behavior of Investors A and​ B? Investor​ A's preferences are best explained by the ___________ ​theory, while Investor​ B's are best explained by the ______________ theory.

segmented markets, expectations

When the Fed wants to reduce reserves in the banking​ system, it will

sell government bonds

Banks reduce the​ free-rider problem in information production by

serving as an intermediary that holds most nontraded loans.

Other things being the​ same, the financial instrument that is the least risky to own is the

short-term bond

In the​ short-run equilibrium at point​ 2, labor markets would likely see increasing ______________ and corresponding weaker pressure on wages and costs that enables firms to raise their ___________ at a less rapid rate.

slack, prices

In this​ short-run equilibrium at point​ 2, labor markets would likely see increasing __________ and corresponding weaker pressure on wages and costs that enable firms to raise their ________ at a less rapid rate.

slack, prices

Suppose the economy is starting from a situation of​ long-run equilibrium. In this​ case, we know that its equilibrium output (Y*) is ___________ its potential output (YP). Starting from its​ long-run equilibrium at point 1 in the figure to the​ right, suppose the economy experiences a temporary negative supply shock. ​1) Using the line drawing tool​, shift a single curve to show the initial​ short-run effect. Be sure to properly label your curve. ​2) Using the point drawing tool​, identify the new​ short-run equilibrium. Label this point​ '2'. Carefully follow the instructions​ above, and only draw the required objects.

slanted up to the left above the red line then dot where they cross on the blue

How would your yield curve change if people preferred​ shorter-term bonds over​ longer-term bonds? The yield curve would become

steepers

The asset market approach emphasizes ______________ of assets to determine asset prices. The table below gives information about a bond with a​ $10,000 face value. ​1.) Use the line drawing tool to indicate the equilibrium condition.

stocks ch. 5 q133

If, in retaliation for​ "unfair" trade​ practices, Congress imposes a tariff on Chinese​ imports, but at the same time Chinese demand for American goods​ increases, then in the long run

the Chinese yuan will depreciate relative to the dollar.

The first central bank in the United States was

the First Bank of the United States

If Steffi withdraws​ $400 in cash from her checking​ account, then

the amount of reserves decline.

A bank has a required reserve ratio of​ 10%. If the bank has deposits of​ $100,000 and is holding​ $12,000 in​ reserves:

the bank is holding​ $2,000 in excess reserves.

With lack of solid information about financial​ conditions, the failure of one bank can lead to runs on other banks. This is known​ as:

the contagion effect

If the Mexican peso depreciates against the​ dollar, then

the dollar has appreciated against the peso.

If U.S. products become popular in Europe and exports of U.S. products to Europe​ increase, then in the long​ run,

the euro per dollar exchange rate will rise.

The IS curve shows the combinations of interest rates and aggregate output for which

the goods market is in equilibrium.

The aggregate demand curve describes the relationship between

the inflation rate and the quantity of aggregate output demanded.

In the short​ run, a leftward shift in the aggregate demand curve will cause

the inflation rate to rise and output fall.

In the long​ run, a rightward shift in aggregate demand will cause

the inflation rate to rise and output to remain unchanged

The​ "lemons problem" applies to financial markets for many reasons except that

the market is large and efficient

If the risk premium on corporate bonds​ increases, then

the spread between the interest rate on corporate bonds and the interest rate on​ default-free bonds has become greater.

Referring to the figure about the Federal Reserve System​ above, we find that

there are 12 federal reserve bank cities.

At points to the left of the IS​ curve,

there is an excess demand for goods, which leads to an unplanned decrease in inventories Dot to the top left

Many things can be said about mortgages except that

they are not associated with any form of collateral.

You go into an electronics store to buy a​ big-screen television. A salesperson rudely tells you that​ he's too busy to help you now. He says​ you'll just have to wait. Then you watch him get a cup of coffee and take his break.​ You've just seen a demonstration of

the​ principal-agent problem.

The Federal Reserve affects the​ short-term nominal interest rate

through adjusting reserves in the banking system.

Starting from its​ long-run equilibrium at point 1 in the figure to the​ right, suppose the economy experiences a negative demand shock. ​1) Using the line drawing tool​, shift a single curve to show the initial​ short-run effect. Properly label your curve. ​2) Using the point drawing tool​, identify the new​ short-run equilibrium. Label this point​ '2'.

to the left 2

If the demand for a​ country's exports falls at the same time that tariffs on imports are​ raised, will the​ country's currency tend to appreciate or depreciate in the long​ run?

uncertain

The currency that is physically held by banks is known as

vault cash

The​ long-run aggregate supply curve​ is:

vertical because changes in​ labor, capital, and technology​ (not the inflation​ rate) change the output an economy can produce over the long run.

The twelve Federal Reserve banks are involved in monetary policy in several ways including:

voting on the purchase and sale of government securities that affect both interest rates and the amount of reserves in the banking system.

A successful​ cost-push shock by workers means Refer to the figure on your right. ​1.) Use the line drawing tool to show the effect of​ a(n) favorable price shock. Label the new line properly. Carefully follow the instructions​ above, and only draw the required object.

wage increases are higher than productivity​ growth, and the aggregate supply curve will shift up. To the right AS2

If taxes increase and autonomous consumption expenditure decrease​, the IS curve

will shift left

he current price of a stock is ​$75.41. If dividends are expected to be ​$1.00per share for the next six ​years, and the required return is 66%, then what should the price of the stock be in 6 years when you plan to sell​ it? The price 6 years from now will be

​ Go back and look at equation Chapter 7 q. 8 100$

Suppose the required reserve ratio is​ 0.12, the currency ratio is​ 0.6, and the excess reserves ratio is 0.03. If the Fed decreases the monetary base by​ $5 billion, the money supply will fall by

​$10.67 billion.

Which of the following repealed the​ Glass-Steagall Act?

​Gramm-Leach-Bliley Act.

How could higher deposit insurance premiums for banks with riskier assets benefit the​ economy?

​Risk-based premiums would help mitigate the moral hazard​ problem; however, it is difficult to monitor the degree of risk in bank assets because often only the bank making the loans knows how risky they are

The U.S. government finances its deficit spending through the use of securities known as Treasuries. Each type of security has a unique name based on its maturity. Given the following terms to​ maturity, identify the appropriate Treasury​ instrument:

​Short-term (1,​ 3, or 6​ months) = Treasury Bills ​Intermediate-term (2,​ 5, or 10​ years) = Treasury Notes Long-term (10+​ years) = Treasury Bonds

Using the​ T-accounts of the First National Bank and the Second National​ Bank, describe what happens when Jane Brown writes a check for ​$50 on her account at the First National Bank to pay her friend Joe​ Green, who in turn deposits the check in his account at the Second National Bank.

​T-account for the First National​ Bank: both - 50 T-account for the Second National​ Bank: both 50

Can this problem be resolved in a competitive​ market?

​Yes, you can obtain more information about the car that you would like to buy.

Uncertainty about future​ interest-rate volatility and returns is known​ as:

​interest-rate risk

Which of the following is not included in​ M2?

​large-denomination time deposits

Asymmetric information in equity contracts is known as the​ ______________ problem because the manager of the firm has fewer incentives to maximize profits than the stockholders might ideally prefer.

​principal-agent

Suppose that Dell Computer Company starts the year with ​$8 million in inventory and ends the year with ​$14 million in inventory. Inventory investment for the year for Dell will be

−​$6 million. 6