Economics Quiz Questions
If 1-year interest rates for the next three years are expected to be 1, 1, and 1 percent, and the 3-year term premium is 1 percent, than the 3-year bond rate will be
2 Percent
A budget ________ occurs when government expenditures exceed tax revenues for a particular time period.
Deficit
Holding everything else constant, if interest rates are expected to increase, the demand for bonds ________ and the demand curve shifts ________.
decreases;left
Bonds with no default risk are called
default-free bonds
The principal lender-savers are
households.
________ is a flow of earnings per unit of time.
income
Everything else held constant, abolishing the individual income tax will
increase the interest rate on municipal bonds.
Which of the following are TRUE for discount bonds?
The purchaser receives the face value of the bond at the maturity date.
When compared to exchange systems that rely on money, disadvantages of the barter system include
The requirement of a double coincidence of wants
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
According to the liquidity premium theory of the term structure, a downward sloping yield curve indicates that short-term interest rates are expected to
decline sharply in future
An equal increase in all bond interest rates
decreases long-term bond returns more than short-term bond returns.
An increase in the interest rate
decreases the quantity of money demanded
The typical shape for a yield curve is
gently upward slope
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
If the expected path of 1-year interest rates over the next five years is 1 percent, 2 percent, 3 percent, 4 percent, and 5 percent, the expectations theory predicts that the bond with the highest interest rate today is the one with a maturity of
5 years
I purchase a 10 percent coupon bond. Based on my purchase price, I calculate a yield to maturity of 8 percent. If I hold this bond to maturity, then my return on this asset is
8 percent
A lottery claims its grand prize is $10 million, payable over 5 years at $2,000,000 per year. If the first payment is made immediately, what is this grand prize really worth? Use an interest rate of 6%.
8,930,211
Which of the following can be described as involving direct finance?
A corporation issues new shares of stock.
If bad credit risks are the ones who most actively seek loans and, therefore, receive them from financial intermediaries, then financial intermediaries face the problem of
Adverse Selection
_______________money could be used for some other purpose other than as a medium of exchange, for example, gold coins could be melted down and turned into gold jewelry.
Commodity
_______ policy involves decisions about government spending and taxation.
Fiscal
Which of the following are TRUE of fixed payment loans?
Installment loans and mortgages are frequently of the fixed payment type.
How does the size of the U.S. budget deficit in 2010 compare to the time period since 1950?
It has expanded dramatically since 2007. In 2010, the deficit-to-GDP ratio was 10 percent, well above the historical average of around 2 percent since 1950.
Prices and returns for ________ bonds are more volatile than those for ________ bonds, everything else held constant.
Long term;short term
If an individual moves money from a small-denomination time deposit to a demand deposit account
M1 increases and M2 stays the same.
There is a ________ association between inflation and the growth rate of money ________.
Monetary;Central
A financial market in which only short-term debt instruments are traded is called the ________ market.
Money
Which of the following is a depository institution?
Mutual Savings Bank
There is a ________ association between inflation and the growth rate of money ________.
Postive;supply
Suppose you have just inherited $ 10000 and are considering different options for investing the money to maximize your return. If you are risk-neutral (that is, neither seek out or shy away from risk), which of the following options should you choose to maximize your expected return?
Put the money in an interest-bearing checking account, which earns 2%. The FDIC insures the account against bank failure
A financial market in which previously issued securities can be resold is called a ________ market.
Secondary
What is the typical relationship among interest rates on three-month Treasury bills, long-term Treasury bonds, and Baa corporate bonds?
They tend to move together over time with the corporate bond having the highest rate of interest
True/False: With a discount bond, the return on the bond is equal to the rate of capital gain
True
In Brazil, a country that underwent a rapid inflation before 1994, many transactions were conducted in dollars rather than in reals, the domestic currency. What functions of money could be better served with U.S. dollar rather than their domestic currency?
Unit of account; Medium of exchange; Store of value
Suppose you have just inherited $10,000 and your only possibility is to loan the money to one of your friend's roommates, Mike, at an agreed-upon interest rate of 8%, even though you believe there is a 7% chance that Mike will leave town without repaying you.
YEs we are increasing rate of return
Which of the following $1,000 face-value securities has the highest yield to maturity?
a 5 percent coupon bond selling for $1,000
If fluctuations in interest rates become smaller, then, other things equal, the demand for stocks ________ and the demand for long-term bonds ________.
decreases;increases
Well-functioning financial markets
allow the economy to operate more efficiently.
In Keynes's liquidity preference framework, if there is excess demand for money, there is
an excess supply of demands
When stock prices fall
an individual's wealth may decrease and their willingness to spend may decrease
A key assumption in the segmented markets theory is that bonds of different maturities
are no substitutes at all
Securities are ________ for the person who buys them, but are ________ for the individual or firm that issues them.
assets; liabilities
According to the expectations theory of the term structure, the interest rate on a long-term bond will equal the ________ of the short-term interest rates that people expect to occur over the life of the long-term bond.
average
When the interest rate on a bond is above the equilibrium interest rate, in the bond market there is excess ________ and the interest rate will ________.
demand;fall
Financial institutions that accept deposits and make loans are called ________ institutions.
depository
High interest rates might ________ purchasing a house or car but at the same time high interest rates might ________ saving.
discourage; encourage
When the price of a bond decreases, all else equal, the bond demand curve
does not shift
If the price level doubles, the value of money
falls by 50 percent
If housing prices are expected to increase, then, other things equal, the demand for houses will ________ and that of Treasury bills will ________.
increase;decrease
Deflation causes the demand for bonds to ________, the supply of bonds to ________, and bond prices to ________, everything else held constant.
increase;decrease;increase
Higher government deficits ________ the supply of bonds and shift the supply curve to the ________, everything else held constant.
increase;right
An increase in an asset's expected return relative to that of an alternative asset, holding everything else constant, ________ the quantity demanded of the asset.
increases
When the Fed ________ the money stock, the money supply curve shifts to the ________ and the interest rate ________, everything else held constant.
increases;right;falls
All of the following are necessary criteria for a commodity to function as money EXCEPT
it must deteriorate quickly.
When the growth rate of the money supply is increased, interest rates will fall immediately if the liquidity effect is ________ than the other money supply effects and there is ________ adjustment of expected inflation.
larger;slow
A decrease in the liquidity of corporate bonds, other things being equal, shifts the demand curve for corporate bonds to the ________ and the demand curve for Treasury bonds shifts to the ________.
left, right
Of the four effects on interest rates from an increase in the money supply, the one that works in the opposite direction of the other three is the
liquidity effect
A bond with default risk will always have a ________ risk premium and an increase in its default risk will ________ the risk premium.
positive:raise
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 a term premium that responds to supply and demand conditions for that bond.
liquidity premium theory
Federal funds are
loans made by banks to each other
Currency includes
paper money and coins
The sum of the current yield and the rate of capital gain is called the
rate of return
When the ________ interest rate is low, there are greater incentives to ________ and fewer incentives to ________.
real;borrow;lend
An increase in the riskiness of corporate bonds will ________ the price of corporate bonds and ________ the price of Treasury bonds, everything else held constant.
reduce;increase
Financial markets promote greater economic efficiency by channeling funds from ________ to ________.
savers; borrowers
If the maturity of a debt instrument is less than one year, the debt is called
short-term.
Prior to almost all recessions since 1950, there has been a drop in
the growth rate of the money stock.
The M1 measure of money includes
traveler's checks
A person's house is part of her
wealth
