Econ 304 Final Exam
Assume that you borrow $2000 at 10% annual interest to finance a new business project. For this loan to be profitable, the minimum amount this project must generate in annual earnings is
$201
Find the future value (FV) of PV=$143.50 that are compounded at an annual rate of 10% for 30 years.
$2500
Notice: If the coupon rate is the dollar amount of the yearly coupon payment expressed as a percentage of the face value of the bond. Then what is the coupon rate of a $1000 face value coupon bond that has a coupon rate of 3.75%, then the coupon payment every year is
$37.50
Find the Present Value (PV) of a future value (FV) of $18,643 that was annually compounded at 8% for 20 years.
$4000
With a 10% reserve requirement ratio, a $100 deposit into New Bank means that the maximum amount New Bank could lend is
$90
According to the quantity theory of money in the long run, if there is an increase of 3% in the money supply (M) then real gross domestic product (Y) must be growing at:
0%
According to the quantity theory of money in the long run, if there is an increase of 5% in the money supply (M) then price levels (P) must be growing at:
0%
According to the quantity theory of money in the long run, if there is an increase of 5% in the money supply (M) then real gross domestic product (Y) must be growing at:
0%
Find the annual coupon interest rate (i) of a PV=$2,000; FV=$8,355; and N=15 years
10%
Refer to figure 1. Given a face value of $1,000, a price of $900, and quantity of Q1, the interest rate on the bond is
11.1%
Calculate the interest rate of a discount bond that has a face value of $1,000 and was bought at $880.
13.6%
According to the quantity theory of money equation if inflation is 8% and real gross domestic product (Y) has been growing at 6%, then the growth in the money supply (M) by central bank authorities must have equaled?
14%
Refer to figure 1. Following the increase in supply from S1 to S2, at a price of $850, what is the interest rate?
17.6%
According to the quantity theory of money equation if Money Supply (M) is growing at 8% and Real Gross Domestic Products (Y) grows at 5%, assuming that he velocity of money is constant, what will the inflation rate be (% change in P)?
3 percent
The nine directors of the Federal Reserve Banks are split into three categories: ____ are professional bankers, ___ are leaders form the industry, and ___ are to represent the public interest and are not allowed to be officers, employees, or stockholders of banks.
3;3;3
Calculate the interest rate of a discount bond that has a face value of $1,000 and was bought at $960.
4%
According to the quantity theory of money in the short run, if there is an increase of 5% in the money supply (M) then real gross domestic product (Y) must be growing at:
5%
According to the quantity theory of money in the short run, if there is an increase of 5% in the money supply (M) then the price levels (P) must be growing at:
5%
Find the number of years (N) of a PV=$1,000; FV=$1,677; i=9% if compounded annually
6 years
There are ___ members of the Board of Governors of the Federal Reserve System.
7
According to the quantity theory of money in the short run, if there is an increase of 8% in the money supply (M) then real gross domestic product (Y) must be growing at:
8%
During class we discussed that Financial Markets were associated with economic growth because they helped expand the production possibilities frontier (PPF) outwardly, since it helped increase which factor of production?
Capital (Physical Capital)
Which of the following are TRUE of fixed payment loans?
Car loans and mortgages are frequently of the fixed payment type.
________ money could be used for some other purpose than as a medium of exchange, for example, gold coins could be melted down and turned into gold jewelry.
Commodity
It is the money market interest rate that banks charge on overnight loans to other banks.
Federal Funds Rate
________ is the relative ease and speed with which an asset can be converted into a medium of exchange (cash).
Liquidity
The president from which Federal Reserve Bank always has a vote in the Federal Open Market Committee?
New York
Some of the Money Market interest rates of relevance are: prime rate, federal funds rate, and T-bill rate.
TRUE
Which of the following bonds are considered to be default-risk free?
U.S. Treasury Bonds
Which of the following can be described as direct finance?
You borrow $2500 from a friend.
A bank failure occurs whenever
a bank cannot satisfy its obligations to pay its depositors and other creditors.
Which of the following can be described as involving direct finance?
a corporation issues new shares of stock
Of the following assets, the least liquid is
a house
Critics of nationwide banking fear
an elimination of community banks
Refer to figure 1. A movement from S1 to S2, means there was
an increase in borrowing
A continuing increase in growth of the money supply is likely followed by
an increase in price level
Members of the Board of Governors are
appointed by the president of the United States and confirmed by the senate.
Securities are _______ for the person who buys them, but are ______ for the individual or firm that issues them.
assets; liabilities
The financial intermediaries that the average person interacts with most frequently are
banks
When I purchase a corporate __________, I am lending the corporation funds for a specific time. When I purchase a corporation's __________, I become an owner in the corporation.
bond; stock
Equity and debt instruments are maturities greater than one year are called ______ market instruments.
capital
The government institution that has responsibility for the amount of money and credit supplied in the economy as a whole is the
central bank
Which of the following are reported as liabilities on a bank's balance sheet?
checkable deposits
A credit market instrument that pays the owner a fixed coupon payment every year until the maturity date and then repays the face value is called a
coupon bond.
An increase in the riskiness of corporate bonds will ______ the price of corporate bonds and ______ the price of Treasury bonds, everything else held constant.
decrease; increase
U.S. Treasury bills are considered the safest of all money market instruments because there is a low probability of
default
The risk that interest payments will not be made, or that the face value of a bond is not repaid when a bond matures is
default risk
A _______ is bought at a price below its face value, and the _______ value is repaid at the maturity date.
discount bond; face
Which of the following are reported as liabilities on a bank's balance sheet?
discount loans (borrowing from the fed)
Nationwide banking might reduce bank failures due to
diversification of loan portfolios across state lines
For a commodity to function effectively as money it must be
easily standardized, making it easy to ascertain a value.
The Federal Open Market Committee meets _______ times a year.
eight
Everything else held constant, an increase in the riskiness of bonds relative to alternative assets cause the demand for bonds to _______ and the demand curve to shift to the _______.
fall; left
If the price level doubles, the value of money
falls by 50 percent
As the price of a bond _____, the interest rate _____.
falls, rises
Markets in which funds are transferred from those who have excess funds available to those who have a shortage of available funds are called
financial markets
A credit market instrument that requires the borrower to make the same payment every period until the maturity date is known as a
fixed-payment loan
The typical shape for a yield curve is
gently upward sloping
According to the quantity theory of money, increases in the money supply in the long-run will be associated with:
higher inflation rate
According to the quantity theory of money, increases in the money supply in the short-run will be associated with:
higher real gross domestic product
During a recession, output declines result in
higher unemployment in the economy
The principal lender-savers are
households
Everything else held constant, an increase rates on student loans, which are used to pay for tuition.
increases the cost of college tuition for the student who borrows the loan
Everything else held constant, an increase in federal marginal tax rates would likely have the effect of _______ the demand for municipal bonds, and _________ the demand for U.S. government bonds.
increasing; decreasing
The price paid for the rental of borrowed funds (usually expressed as a percentage of the rental of $100 per year) is commonly referred to as the
interest rate
Prior to almost all recessions since 1950, there has been a drop in
interest rates
A bank is insolvent when
its liabilities exceed its assets
Bonds with relatively high risk of default are called
junk bonds
When the Treasury bond market becomes more liquid, other things equal, the demand curve for corporate bonds shifts to the ________ and the demand curve for Treasury bonds shifts to the ________.
left; right
In the bond market, the bond demanders are the ______ and the bond suppliers are the _______.
lenders; borrowers
The risk premium on corporate bonds reflects the fact that corporate bonds have a higher default risk and are ________ U.S. Treasury bonds.
less liquid than
Banks may borrow from or lend to another bank in the Federal Funds market. A loan of excess reserves from one bank to another bank is recorded as a(n) _______ for the borrowing bank and a(n) _______ for the lending bank.
liability; asset
The ________ of the term structure states the following: 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 the liquidity premium that responds to supply and demand conditions for that bond.
liquidity premium theory
To an economist, _______ is anything that is generally accepted in payment for goods and services or in the repayment of debt, it has a unit of account, and it stores value.
money
Because checking accounts are _______ liquid for the depositor than savings accounts, they earn ________ interest rates.
more; lower
Thrift institutions include
mutual savings banks
Financial innovations occur because of financial institutions search for
profits
Countries that experience high rates of inflation may also have
rapidly growing money supplies
Bank capital has both benefits and costs for the bank owners. Higher bank capital ______ the likelihood of bankruptcy, but higher bank capital _________ the return of equity for a given return on assets.
reduces,; reduces
The amount of checkable deposits that banks are required by regulation to hold are the
required reserves
Other things being equal, a decrease in the default risk of corporate bonds shifts the demand curve for corporate bonds to the ______ and the demand curve for Treasury bonds to the ______.
right; left
During business cycle expansions when income and wealth are rising, the demand for bonds _______ and the demand curve shifts to the _______, everything else held constant.
rises; right
The spread between the interest rates on bonds with default risk and default-free bonds is called the
risk premium
Because _______ are less liquid for the depositor than _____, they earn higher interest rates.
savings accounts; checkable deposits
Which of the following is NOT included in the measure of M1?
savings deposit
The Federal Open Market Committee consists of the
seven members of Board of Governors and five presidents of the regional Fed banks.
In general, banks make profits by selling _______ liabilities and buying _____ assets.
short-term; longer-term
A credit market instrument that provides the borrower with an amount of funds that must be repaid at the maturity date along with an interest payment is known as a
simple loan
Each Federal Reserve bank has nine directors. Of these ____ are appointed by the member banks and ____ are appointed by the Board of Govenors.
six; three
When I purchase ______, I own a portion of a firm and have the right to vote on issues important to the firm and to elect its directors.
stock
U.S. government bonds have no default risk because
the federal government can increase taxes or print money to pay its obligations.
Everything else held constant, if the tax-exempt status of municipal bonds were eliminated, then
the interest rate on municipal bonds would exceed the rate on Treasury bonds.
As the banking system in the United States evolves, it is expected that
the number and importance of large banks will increase.
Prices of money market instruments undergo the lest price fluctuations compared to capital market instruments because of
the short terms to maturity for the securities
Suppose the government issues bonds to finance an increase in government spending (In other words the budged deficit has increased). In the bond market,
the supply curve shifts right, leading to a decrease in bond prices, and an increase in interest rates.
An essential characteristic of credit unions is that
they are organized for individuals with a common bond
Banks hold capital because
they are required to by regulatory authorities
IN the absence of regulation, banks would probably hold
too little captial
A person's house is part of her
wealth
A key factor in producing high economic growth is
well-functioning financial markets
