ECON Review 1

A discount bond selling for $15,000 with a face value of $20,000 in one year has a yield to maturity of: 3 percent. 20 percent. 25 percent. 33.3 percent

33.3 percent.

The narrowest official definition of the money supply is M1. M2. M3. None of the above.

M1

A one-year bond currently pays 5% interest. It's expected that it will pay 4.5% next year and 4% the following year. The two-year term premium is 0.2% while the three-year term premium is 0.35%. What is the interest rate on a three-year bond according to the liquidity premium theory? 4.75% 4.5% 4.95% None of the above.

None of the above.

Almost every time that there has been an inverted yield curve, what took place within one year? higher bond yields a sharp change in expected inflation. rising inflation recession

recession

Bonds with relatively high risk of default are called trash bonds. junk bonds. Aaa bonds. investment grade bonds.

junk bonds.

If the federal government decreases its spending and doesn't decrease taxes, the bond supply shifts to the: right and the equilibrium interest rate rises. left and the equilibrium interest rate falls. left and the equilibrium interest rate rises. right and the equilibrium interest rate falls.

left and the equilibrium interest rate falls.

Other things being equal, an increase 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 right; right left; left left; right

left; right

Evidence indicates that there's a strong relationship between money and inflation in: both the short and long run. short run, but not the long run. neither the short nor the long run. long run, but not the short run.

long run, but not the short run.

If a small open economy reduces its budget deficit, the result will be: a lower world real interest rate, but no change in the domestic real interest rate. a lower domestic real interest rate, but no change in the world real interest rate. lower domestic and world real interest rates. no change in either the domestic or world real interest rate.

no change in either the domestic or world real interest rate.

If households in the economy decide to take money out of checking account deposits and hold it as currency, this will initially: not change M1 and increase M2. decrease M1 and not change M2. not change M1 and not change M2. decrease M1 and decrease M2.

not change M1 and not change M2.

Money eliminates the need for: people to have a double coincidence of wants. any government role in the economy. the market system. specialization.

people to have a double coincidence of wants.

The key to present value calculations is that they: provide accurate answers only in a low-inflation environment. provide a common unit for measuring funds at different times. are appropriate only for funds in the same time period. provide accurate answers only in a high-inflation environment.

provide a common unit for measuring funds at different times.

The purchasing power of money: is constant. rises when prices rise. is set by the Fed in January of each year. rises when prices fall.

rises when prices fall.

In contrast to the bond market model, the money market model is best suited to analyze interest rates when the focus is: how to get rich. short-term nominal interest rates. long-term nominal interest rates. money market mutual funds.

short-term nominal interest rates.

Under the liquidity premium theory, a flat yield curve implies: that investors expect almost no change in future short-term rates. that investors expect lower future short-term rates. that investors expect higher future short-term rates.. The liquidity premium must be known to answer this question.

that investors expect lower future short-term rates

Many savers are willing to accept a lower interest rate on municipal bonds than on comparable instruments because: municipal bonds are more liquid than most other instruments. the after-tax yield on municipal bonds is greater. municipal bonds invariably have lower default risk. the yield on municipal bonds is considered inflation proof.

the after-tax yield on municipal bonds is greater.

What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $900 next year? -10 percent 10 percent 5 percent -5 percent

-5 percent

According to the quantity theory of money, if the long-run economic growth rate is 4%, by how much should the Fed increase the money supply if it wants the overall price level to remain constant? -4% +4% 0% There is not enough information to answer this question

+4%

If you deposit $500 in a savings account at an annual interest rate of 5%, how much will you have in the account at the end of five years? $392 $638 $550 $625

638

Which of the following $1,000 face-value securities has the lowest yield to maturity? A 15 percent coupon bond selling for $900 A 15 percent coupon bond selling for $1,000 A 10 percent coupon bond selling for $1,000 A 5 percent coupon bond selling for $1,000

A 5 percent coupon bond selling for $1,000

Which of the following is a key financial service provided by the financial system? risk sharing information liquidity All of the above are key financial services provided by the financial system.

All of the above are key financial services provided by the financial system.

In what sense do self-fulfilling expectations determine the acceptability of a medium of exchange? People value something as money only if they believe others will accept it from them as payment. People expect that eventually every country will use the same medium of exchange. People expect that money will never lose its value. People like to do what the government expects them to do.

People value something as money only if they believe others will accept it from them as payment.

In which of the following situations would you prefer to be the borrower? The interest rate is 25 percent and the expected inflation rate is 50 percent. The interest rate is 9 percent and the expected inflation rate is 7 percent. The interest rate is 4 percent and the expected inflation rate is 1 percent. The interest rate is 13 percent and the expected inflation rate is 15 percent.

The interest rate is 25 percent and the expected inflation rate is 50 percent.

Which of the following statements accurately describes the two measures of the money supply? The two measures' movements closely parallel each other, even on a month-to-month basis. M2 is the narrowest measure the Fed reports. Short-run movements in the money supply are extremely reliable. The two measures do not always move together, so they cannot be used interchangeably by policymakers

The two measures do not always move together, so they cannot be used interchangeably by policymakers.

Which of the following is NOT true of the yield curve for U.S. Treasury securities? Typically, it slopes upward. Typically, it shifts up or down rather than twists. Typically, it slopes downward. It depicts the relationship among yields on securities of different maturities.

Typically, it slopes downward.

Which of the following would NOT cause the demand curve for bonds to shift? a change in wealth a change in expected inflation a change in the price of bonds a change in the liquidity of bonds

a change in wealth

In the figure above, one factor NOT responsible for the decline in the interest rate is: an decrease in real GDP. a decrease in money supply. a decline the price level. None of the above.

a decrease in money supply.

Which is the best example of idiosyncratic risk? a financial crisis a recession a lawsuit because the corporation produced a faulty product rising interest rate

a lawsuit because the corporation produced a faulty product

Treasury bonds: have constant coupon rates and are therefore not risky investments. carry no risk of default and are therefore not risky investments. have constant yields to maturity and are therefore not risky investments. are subject to fluctuations in their market prices and are therefore still risky investments.

are subject to fluctuations in their market prices and are therefore still risky investments.

In the bond market, the bond demanders are the ________ and the bond suppliers are the ________. borrowers; lenders lenders; advancers borrowers; advancers lenders; borrowers

borrowers; lenders

Financial markets: channel funds indirectly between borrowers and lenders. generally provide lenders with lower returns than do financial intermediaries. channel funds directly from lenders to borrowers. act as go-betweens by holding a portfolio of assets and issuing claims based on that portfolio to savers.

channel funds directly from lenders to borrowers.

Securitization is the process of issuing stocks to finance capital spending. issuing bonds to finance purchases of equipment and structures. converting loans into securities. reducing risk by decreasing corporate debt loads.

converting loans into securities.

Which of the following is fixed on a coupon bond? coupon rate current yield market price yield to maturity

coupon rate

The risk premium of corporate bonds typically increases: when the interest rates on corporate bonds decreases. during a recession. when the risk premium on treasury bonds increases. when the average price of corporate bonds increases.

during a recession.

Bitcoin is a form of e-money. commodity money. legal tender. all of the above.

e-money

Under a barter system: each good has many prices. no prices for goods exist. each good has a single price. prices for goods are very stable.

each good has many prices.

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

fiat

Segmented markets theory: has difficulty explaining why yield curves usually slope upward. accounts well for the fact that yield curves usually slope downward. has difficulty explaining why yields on bonds of different maturities move together. None of the above.

has difficulty explaining why yields on bonds of different maturities move together

The 2007-2009 financial crisis was precipitated by the collapse in: corporate debt. stock prices. investor confidence. housing prices.

housing prices.

A "primary market" is a market: in which newly issued claims are sold by savers to borrowers. for government securities. for debt by large or "primary" corporations. in which newly issued claims are sold to buyers by borrowers.

in which newly issued claims are sold to buyers by borrowers.

The implication of the expectations theory that expected returns for a holding period must be the same for bonds of different maturities depends on the assumption that: yield curves usually slope upward. instruments with different maturities are unrelated. instruments with different maturities are perfect substitutes. investors are usually risk averse.

instruments with different maturities are perfect substitutes.

An investor who buys a 30-year bond: is subject to substantial reinvestment risk. is probably planning for long-term expenses. is probably expecting market interest rates to decrease in the future. is probably expecting market interest rates to increase in the future.

is probably expecting market interest rates to decrease in the future.

During an economic recession: the bond demand and supply curves both shift to the left and the equilibrium interest rate usually falls. the bond demand curve shifts to the right, the bond supply curve shifts to the left, and the equilibrium interest rate usually falls. the bond demand curve shifts to the left, the bond supply curve shifts to the right, and the equilibrium interest rate usually rises. the bond demand and supply curves both shift to the right and the equilibrium interest rate usually rises.

the bond demand and supply curves both shift to the left and the equilibrium interest rate usually falls.

A discount bond resembles a simple loan in that: both represent assets to the borrowers who issue them. both have par values greater than their face values. the borrower repays in a single payment. the interest on neither is taxable.

the borrower repays in a single payment

Consider the loanable funds model used to study international capital market. If an open economy has a surplus of loanable funds, then: interest rates will decrease if it is a small open economy. the country is a net lender and foreign capital will flow out of the country. interest rates will increase if it is a small open economy. the country is a net borrower and foreign capital will flow into the country.

the country is a net lender and foreign capital will flow out of the country.

An important reason why economies at an early stage of development tend to operate inefficiently is: they tend to be plagued by superstitious beliefs that stifle innovation. they tend to have authoritarian governments that stifle innovation. the high transactions costs associated with barter. they tend to be dominated by the agricultural sector, where productivity is usually low.

the high transactions costs associated with barter.

The yield to maturity is equal to: interest rate on the asset minus any taxes owed on the interest received. any payments received from an asset at the date the asset matures. the interest rate at which the present value of an asset's returns is equal to its price today. the face value or par value of a coupon bond.

the interest rate at which the present value of an asset's returns is equal to its price today.

The concet of compounding is central to understanding the time value of money. Compounding refers to: the process of earning interest on both the interest and the principal of an investment. the increased value of an investment that arises from the payment of periodic interest. the interest payments plus the principal received by an investor. the high rate of wealth accumulation experienced by successful investors.

the process of earning interest on both the interest and the principal of an investment

Given that most investors tend to be risk averse: no one buys risky assets. it must be a superior strategy compared to one that is risk loving. low risk assets provide the best return. there's a trade-off between risk and return.

there's a trade-off between risk and return.

The statement "This Dell laptop costs $1,200" illustrates which function of money? unit of account standard of deferred payment medium of exchange store of value

unit of account

A decrease in expected inflation: will shift the bond demand curve to the left. usually leads to falling nominal interest rates. will shift the supply curve for loanable funds to the left. results in increased nominal capital gains on physical assets.

usually leads to falling nominal interest rates.