Econ exam #3

Suppose Chandler changes his $1,000 demand deposit from Bank A to Bank B. If the reserve ratio is 10 percent, what is the potential change in demand deposits as a result of Chandler's action?

$0

Suppose the Fed purchases a $1,000 government bond from you. If you deposit the entire $1,000 in your bank, what is the total potential change in the money supply as a result of the Fed's action if reserve ratio is 10 percent?

$10,000

If a depositor puts $100 in a bank account that earns 5 percent interest compounded annually, how much will be in the account after five years?

$127.63

Microsoft has the opportunity to purchase a new factory today that will provide them with a $50 million return four years from now. If prevailing interest rates are 6 percent, what is the maximum that the project can cost for Microsoft to be willing to undertake the project?

$39,604,682

If the real interest rate is 2 percent, the inflation rate is 8 percent, and the tax rate is 20 percent, what is the after-tax real interest rate?

0%

Using the rule of 70, if your income grows at 7 percent per year, your income will double in approximately _______.

10 years

Suppose the nominal interest rate is 6 percent while the money supply is growing at a rate of 3 percent per year. Assuming real output remains fixed, if the government increases the growth rate of the money supply from 3 percent to 7 percent, the Fisher effect suggests that, in the long run, the nominal interest rate should become _______.

10%

If the nominal interest rate is 8 percent and the inflation rate is 4 percent, the real interest rate is _______.

4%

If the reserve ratio is 20 percent, the value of the money multiplier is _______.

5

Which of the following financial market securities would likely pay the highest interest rate?

A bond issued by a start-up company

If the supply of loanable funds is very inelastic (steep), which policy would likely increase saving and investment the most?

A reduction in the budget deficit

Which of the following is an example of moral hazard?

After Kody buys fire insurance, he begins to smoke cigarettes in bed.

Which of the following costs of inflation does not occur when inflation is constant and predictable?

Arbitrary redistributions of wealth

Which of the following statements about a bank's balance sheet is true?

Assets minus liabilities equals owner's equity or capital.

Which of the following policy combinations would consistently work to increase the money supply?

Buy government bonds, decrease interest paid on reserves, decrease the discount rate

Which of the following policy actions by the Fed is likely to increase the money supply?

Decreasing interest on reserves

Which of the following statements about monetary policy is true?

In recent times, the Fed has targeted interest rates as opposed to the money supply.

Which of the following reduces risk in a portfolio the greatest?

Increasing the number of stocks in the portfolio from one to 10

Which of the following does not help reduce the risk that people face?

Increasing the rate of return within their portfolio

Which of the following statements about inflation is not true?

Inflation reduces people's real purchasing power because it raises the cost of the things people buy.

Which of the following sets of government policies is the most growth oriented?

Reduce taxes on the returns to saving, provide investment tax credits, and reduce the deficit

If government spending exceeds tax collections, _______.

There is a budget deficit

Which of the following statements is true?

When the Fed buys government bonds, the money supply increases.

An example of fiat money is _______.

a U.S. twenty-dollar bill

If money is neutral, _______.

a change in the money supply only affects nominal variables such as prices and dollar wages

An increase in the budget deficit is _______.

a decrease in public saving

An inflation tax is _______.

a tax on everyone who holds money

Speculative bubbles may occur in the stock market _______.

because rational people may buy an overvalued stock if they think they can sell it to someone for even more at a later date

A financial intermediary is a middleperson between ______ & ________

borrowers and lenders

An increase in the prevailing interest rate _______.

decreases the present value of future returns from investment and decreases investment

The reserve ratio is the ratio of a bank's reserves to its _______.

deposits

The study of a company's accounting statements and future prospects to determine its value is known as _______.

fundamental analysis

Countries that employ an inflation tax do so because

government expenditures are high and the government has inadequate tax collections and difficulty borrowing

Substantial or persistent inflation is caused by _______.

governments that print too much money

Commodity money _______.

has intrinsic value

When prices rise at an extraordinarily high rate, it is called _______.

hyperinflation

If the money supply grows 7 percent and real output grows 3 percent, prices should rise by _______.

less than 7 percent

Compared to a portfolio composed entirely of stock, a portfolio that is 40 percent government bonds and 60 percent stock will have a _______.

lower return and a lower level of risk

Stock prices will follow a random walk if _______.

markets reflect all available information in a rational way

Suppose that, because of inflation, a business in Venezuela must calculate, print, and mail a new price list to its customers each week. This is an example of _______.

menu costs

The quantity equation states that _______.

money × velocity = price level × real output

The Fed's tools of monetary control are _______.

open-market operations, lending to banks, reserve requirements, and paying interest on reserves

The amount of money today needed to produce a particular sum in the future, given prevailing interest rates, is known as _______.

present value

National saving (or just saving) is equal to _______.

private saving + public saving

Credit risk refers to a bond's _____

probability of default

The quantity theory of money concludes that an increase in the money supply causes a _______.

proportional increase in prices

Which of the following is not a function of money?

protection against inflation

An increase in the budget deficit will _______.

raise the real interest rate and decrease the quantity of loanable funds demanded for investment

If Americans become less concerned with the future and save less at each real interest rate, _______.

real interest rates rise and investment falls

Diversification of a portfolio can _______.

reduce firm-specific risk

If the public consumes $200 billion less and the government purchases $200 billion more (other things unchanging), which of the following statements is true?

saving is unchanged

An increase in the budget deficit that causes the government to increase its borrowing _______.

shifts the supply of loanable funds to the left

An increase in the budget surplus _______.

shifts the supply of loanable funds to the right and reduces the real interest rate

Suppose that, because of inflation, people in Lebanon economize on currency and go to the bank each day to withdraw their daily currency needs. This is an example of _______.

shoeleather costs

Which of the following is an example of equity finance?

stock

To insulate the Federal Reserve from political pressure,

the Board of Governors is appointed to 14-year terms

If the government increases investment tax credits and reduces taxes on the return to saving at the same time, _______.

the impact on the real interest rate is indeterminate

The discount rate is _______.

the interest rate the Fed charges on loans to banks

In the long run, the demand for money is most dependent upon _______.

the level of prices

If banks increase their holdings of excess reserves, _______.

the money multiplier and the money supply decrease

Suppose all banks maintain a 100 percent reserve ratio. If an individual deposits $1,000 of currency in a bank, _______.

the money supply is unaffected

Investment is _______.

the purchase of capital equipment and structures

An example of a real variable is _______.

the ratio of the price of eggs to the price of milk

Velocity is _______.

the speed at which the typical dollar circulates

If two countries start with the same real GDP per person, and one country grows at 2 percent while the other grows at 4 percent, _______.

the standard of living in the country growing at 4 percent will start to accelerate away from the slower growing country due to compound growth

If the efficient markets hypothesis is true, then _______.

the stock market is informationally efficient, so stock prices should follow a random walk

If Americans become more cautious with their spending, we would expect _______.

the supply of loanable funds to shift to the right and the real interest rate to fall

If the price level doubles, _______.

the value of money has been reduced by half

Firm-specific risk is the _______.

uncertainty associated with specific companies

The Board of Governors of the Federal Reserve System consists of _______.

up to seven members appointed by the president

If the Fed engages in an open-market purchase, and at the same time, it raises reserve requirements, _______.

we cannot be certain what will happen to the money supply

If actual inflation turns out to be greater than people had expected, then _______.

wealth was redistributed to borrowers from lenders

If an increase in the budget deficit reduces national saving and investment, we have witnessed a demonstration of _______.

crowding out

The M1 money supply is composed of _______.

currency, demand deposits, and other liquid balances at banks such as savings accounts

Which of the following statements is true? a. Municipal bonds pay less interest than comparable corporate bonds. b. Longer-term bonds tend to pay less interest than shorter-term bonds. c. A stock index is a directory used to locate information about selected stocks. d. Mutual funds are riskier than single stock purchases because the performance of so many different firms can affect the return of a mutual fund.

a. Municipal bonds pay less interest than comparable corporate bonds.

If people are risk averse, then _______.

a. they dislike bad things more than they like comparable good things b. their utility functions exhibit the property of diminishing marginal utility of wealth c. the utility they would lose from losing a $100 bet would exceed the utility they would gain from winning a $100 bet

It is difficult for an actively managed mutual fund to outperform an index fund because _______.

actively managed funds trade more often and charge fees for their expertise