macroecon midterm 2

which of the following would be a violation of the rational expectations assumption?

"Over the past twenty years, people have consistently under-predicted the inflation rate for the following year."

With a nominal interest rate of 10% per year, the presented discounted value of $200 to be received in two years is

$165.29

with a nominal interest rate of 10%, the present discounted value of $200 to be received in one year is

$200/(1 + 0.10) = $181.82

a share of stock will pay a dividend of $25 in on year and will be sold for an expected price of $500 at a time. if the current one-year interest rate is 5%, the current price of the stock will be approximately equal to

$500

With a nominal interest rate of 5% per year, the present discounted value of $100 to be received in 10 years is

$61.39

assume the interest rate in a foreign country is 7% and that the foreign currency is expected to depreciate by 3% during the year. for each dollar that a U.S. resident invests in foreign bonds, he/she can expect to get back an approximate total of

(0.07-0.03) + 1 = $1.04

suppose the current one year interest rate is 4% and financial markets expect the one-year interest rate next year to be 8%. given this information, the yield to maturity on a two year bond will be approximately

(8 + 4)/2 = 6

which a constant nominal interest rate equal to i, the present discounted value of $1 to be received four years from today is

1/(1+i)^4

in which of the following periods was the relationship between the U.S. unemployment rate and the U.S. inflation rate unstable?

1931-1939

suppose the current 1 year interest rate is 3%. also suppose the financial markets expect the one year interest rate to be 2% and expect the rate to be 1% the year after that. given this information, the yield to maturity on a three year bond will be approximately

2%

If the nominal interest rate is 8% and the expected inflation is 3%, the expected real interest rate in year t is approximately

8 - 3 = 5%

a bond has a face value of $1000 a price of $1200 and coupon payments of $100 for two years. the current yield of this bond is

8.33%

Suppose there is a reduction in expected future output. This will cause which of the following to occur?

IS curve shift left in the current period

Suppose individuals now believe that there will be a future tax cut. This reduction in expected future taxes will cause which of the following to occur in the current period?

IS curve shifts right

When x (risk premium) decreases

IS curve shifts to the right

When the IS curve is drawn with the nominal interest rate on the vertical axis , a reduction on the vertical axis, a reduction in the expected inflation rate will cause

IS curve to shift left

An increase in the rate of depreciation will cause the discounted present value of expected profits to

decrease

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

Suppose output is growing at 4% and the nominal money stock is growing at 0%. Also assume that the economy has reached its medium and runs equilibrium. Given this information, we know with certainty that

deflation occurs

which of the following is true when a country is experiencing a trade surplus (NX>0)

demand for domestic goods is greater than the domestic demand for goods

if the exchange rate between the dollar and the pound (pount price of the dollar) is currently 1.50 and is expected to be 1.35 in one year, then the expected rate of

depreciation of the dollar is 10%

The policy rate is

determined by monetary policy

assume individuals consider only the medium run effects of changes in future macro variables when forming expectations of future output and future interest rates. suppose current taxes are cut AND that individuals expect all future taxes to decrease permanently. given this info, we know with certainty that

expected future interest rate will increase

Which of the following assumptions best characterized the assumption about how individuals formed expectations of inflation by the early 1970s?

expected inflation for the current year was approximately equal to the previous year's inflation rate

Under which of the following assumptions would the nominal interest rate be equal to the real interest rate?

expected inflation is equal to zero

when inflation is NOT persistent, as was the case in the US before the mid 60s, we can expect that

expected price level for a given year will equal the previous years actual price level, current inflation rate wont depend heavily on past years inflation rates, lower unemployment rates

suppose there is an increase in profitability. this suggests that

firms have increased their expectations of future profits

human wealth is a function of which of the following variables

future expected income, future expected taxes, current interest rates

If the expected inflation rate is negative, the expected real interest rate must be

greater than the nominal interest rate

if the expected inflation rate is negative, the expected real interest rate must be

greater than the nominal interest rate

Suppose the central bank engages in CONTRACTIONARY monetary policy that results in lower money growth. This lower money growth will cause which of the following in the short run?

higher real interest rates and higher nominal interest rates

The "depreciation rate" tells us

how much usefulness a machine loses from year to year

changes in future expected interest rates can affect current consumption. suppose individuals expect future interest rates to decrease. consumption will change as a result of this lower expected future interest rate because of its effect on what

human wealth, value of stocks, value of bonds

during the Great Depression, the Fed

implemented contractionary monetary policy

suppose an individual experiences a $20,000 increase in real income and the individual believes this increase in income is permanent. Economic theory suggests that this individual's current consumption will

increase at most by $20,000

the quantity of imports will increase when there is an

increase in domestic output

Suppose the central bank reduces the money supply. This monetary contraction will always cause a greater reduction in output when it is accompanied by

increase in expected future interest rates, increase in expected future taxes, reduction in expected future output

Which of the following will cause aggregate private spending to decrease?

increase in expected future taxes

suppose that the nominal interest rate and expected inflation both decrease by 2%. Given this information, we should expect which of the following to occur

increase in money demand

Suppose there is an INCREASE in GOVERNMENT SPENDING. Such a fiscal policy action will cause

increase in nominal interest rate in the short run

in the IS-LM model, an increase in expected inflation will cause which of the following?

increase in output, increase in nominal interest rate, and a reduction in the real interest rate ALL OF THE ABOVE

The Fisher effect summarizes the effects of

inflation on the nominal interest rate in the medium run

Suppose individuals now believe that there will be an increase in the future expected interest rate. This increase in the expected future interest rate will cause which of the following to occur in the current period?

leftward shift of the IS curve

Suppose the federal reserve pursues CONTRACTIONARY monetary policy resulting in a reduction in money growth. This reduction in money growth will result in which of the following?

lower nominal interest rates in the medium run, and no change in real interest rates in the medium run

Suppose the central bank engages in EXPANSIONARY monetary policy that results in higher money growth will cause which of the following in the short run?

lower real interest rates and lower nominal interest rates

Suppose households INCREASE consumption. This increase in consumption will cause which of the following to occur?

natural real interest rates to increase

suppose that facebook reports increases in quarterly revenue and profits by 10% compared to last year's same quarter. this increase is in line with the forecasts of market participants. which of the following is more likely to happen to the FB stock market valuation.

no change (since they anticipated it)

Suppose the central bank pursues expansionary monetary policy. Such an action will cause

no effect on the natural interest rate

Suppose the central bank pursues contractionary monetary policy. Such an action will cause

no effect on the natural real interest rate

suppose the Fed increases the money supply in the current period with no other policy change implemented or anticipated. This policy action will cause which of the following shifts in the IS and/or LM curves in the current period?

no shift in IS; LM shifts down

For this question, assume that expected inflation is zero. In this situation, we know that

nominal and real interest rates are equal

What is the type of interest rate typically reported in the financial pages of newspapers?

nominal interest rate

real interest rate equation

nominal interest rate - inflation rate

Whenever the expected inflation rate is positive

none of the above

an increase in the nominal interest rate, all else held constant, will always cause which of the following

none of the above

if current sales increase by $100 million and firms are forward looking, we know for sure that current investment must

none of the above

which of the following statements about consumption and investment are true

none of the above

Consumption is most likely to respond one-for-one with changes in current income when

none of the above (will respond when consumer believes change in current income is permanent)

human wealth is

present discounted value of expected future after-tax labor income

Which of the following situations generally exists when deflation occurs?

price level is decreasing

which of the following best defines the real exchange rate

price of domestic goods in terms of foreign goods

Since the end of 2008, the Federal Reserve has adopted an unconventional monetary tool called

quantitative easing

For this questions, assume that expected inflation is equal to the nominal interest rate. In this situation, which of the following is correct?

real interest rate is zero

which of the following will cause an increase in the present value of a sequence of payments

reduction in current interest rate, reduction in expected future interest rates, increase in future expected payment

Suppose that the nominal interest rate and expected inflation both increase by 2%. Given this information, we would expect which of the following to occur?

reduction in money demand

which of the following, all else fixed, will cause the real exchange rate to increase

reduction in the foreign price level

which of the following does not represent a labor market rigidity to which critics refer when talking about unemployment in europe

restrictive monetary and fiscal policies

an upward-sloping yield curve suggests that financial market participants expect short-term interest rates will

rise in the future

suppose individuals expect that interest rates will increase in the future. Also assume that the Fed wants to prevent any change in current output. Given this goal of the Fed, the Fed should implement a policy in the current period that

shifts the LM curve downward

suppose the central bank implements a monetary contraction that is fully expected by financial market participants. Given this information, we would expect

stock prices to remain unchanged

The data shows that total profit in the U.S. economy

tends to decrease in recessions, increase in expansions

suppose individuals now believe that there will be a future tax cut. this reduction in expected future taxes will cause which of the following to occur in the current period?

the IS curve to shift rightward (reduction in taxes)

which of the following best describes real interest rate?

the amount of goods we must give up in order to consume more goods today

suppose there is a decrease in the current short-term interest rate. which of the following is more likely to happen?

the long term interest rate will decrease but by less than the short term rate

When individuals make decisions about how much money and bonds to hold, which of the following variables affects those decisions?

the nominal interest rate only

Suppose the economy is initially operating at the natural level of output. Now, suppose the central bank reduces the rate of nominal money growth by 2%. Given this information , we would expect that

the nominal interest rate will fall by exactly 2% in the medium run

suppose the economy is initially operating at the natural level of output. now suppose the central bank permanently increases the rate of nominal money growth by 2%. given this info, we would expect that

the nominal interest rate will increase by exactly 2% in the medium run

The present discounted value of a future payment becomes smaller when

the payment itself decreases

the fundamental value of share of a stock is equal to which of the following

the present value of expected dividends

For this question, assume that the expected rate of inflation is a function of past year's inflation. Also assume that the unemployment rate has greater than the natural rate of unemployment for a number of years. Given this information, we know that

the rate of inflation should steadily decrease.

suppose that over the past decade, US inflation is less than that of Mexico. Further assume that during this same period, the dollar depreciates relative to the Mexican peso. Given this information

the real exchange rate must decrease

Which of the following will cause the rental cost/user cost of capital to decrease?

the real interest rate increases

Suppose the nominal interest rate is zero, In this situation, the present discounted value of finite sequence of future payments is equal to which of the following?

the sum of all payments

suppose policy makers implement a fiscal expansion that is NOT anticipated by financial market participants. we know that this will

will cause stock prices to rise if the LM curve is flat

Suppose that the nominal interest rate increases while the expected inflation rate rises. Given this information, we know with certainty that the real interest rate will

will fall if the increase in the nominal interest rate is less than the increase in the expected inflation rate

from the perspective of the US, an increase in the nominal exchange rate will cause which of the following?

American goods are more expensive to foreigners

In the IS-LM model, an increase in expected inflation will cause which of the following?

Increase in output, nominal interest rate, and a reduction in the real interest rate

Which of the following bonds are considered to be default-risk free?

US treasury bonds

which of the following conditions must be satisfied for the demand for domestic goods to be equal to the domestic demand for goods?

X = IM/e (net exports have to equal 0)

suppose financial market participants expect short term rates in the future to be less than current short term interest rates. given this information, we would expect that

a downward sloping yield curve

which of the following people-none of whom has any financial or housing wealth-is most likely to be spending all of their current income?

a low income person expecting a dramatic rise in income in the future

lower money growth tends to cause

a reduction in i in the medium run and no change in r in the medium run

an unexpected reduction in the money supply will tend to cause

a reduction in stock prices

suppose individuals expect the central bank to pursue monetary expansion in the future. given this info we know that

current output will not change

for this question, ignore tax considerations of each of the following. Assume that consumption decisions are made according to the permanent income theory. Which of the following would lead to the smallest increase in current consumption?

all of the above because they are all one time things

suppose policy makers over estimate the natural rate of unemployment. then they will likely implement policies that result in

an ever decreasing inflation rate

which of the following will NOT cause aggregate private spending to increase?

an increase in expected future real interest rates (shifts the IS curve left)

the IS curve becomes steeper when

changes in the current real interest rate cause small changes in current demand

the "life cycle" and "permanent income theories" theories of consumption share which of the following features?

consumers look ahead to the future in making current spending decisions

Which of the following long-term bonds has the highest interest rate?

corporate Baa bonds