MEL 3 and 4 Test 2

A financial​ intermediary: A. borrows funds from savers and lends them to borrowers. B. buys and sells houses and real estate assets. C. stores​ gold, silver, and other hard assets. D. purchases physical capital to receive a stream of returns.

A

Adverse selection occurs​ when: A. one party to a transaction takes advantage of knowing more than the other party. B. actions people take after they have entered into a transaction make the other party worse off. C. optimal behavior occurs in financial markets. D. the government makes choices that lead to resource misallocation.

A

All else equal, a decrease in government's budget deficit will cause A. Supply to shift outward B. A decrease in loanable funds C. Supply to shift inward D. An increase in interest rate

A

An increase in the real wage would result in a A. movement along the labor demand​ curve, causing a decrease in the number of workers hired by the firm. B. movement along the labor demand​ curve, causing an increase in the number of workers hired by the firm. C. shift of the labor demand​ curve, causing an increase in the number of workers hired by the firm. D. shift of the labor demand​ curve, causing a decrease in the number of workers hired by the firm.

A

Explain under what circumstances lenders gain and borrowers lose if the actual inflation rate differs from the expected inflation rate. A. Lenders gain and borrowers lose when expected inflation exceeds actual inflation. B. Lenders and borrowers both lose when expected inflation exceeds actual inflation. C. Lenders lose and borrowers gain when expected inflation exceeds actual inflation. D. Lenders and borrowers both gain when expected inflation exceeds actual inflation.

A

Holding other factors​ constant, the implementation of a federal job retraining program would likely A. reduce structural unemployment and the natural rate of unemployment. B. reduce cyclical unemployment and the natural rate of unemployment. C. reduce frictional unemployment and the natural rate of unemployment. D. increase the natural rate of unemployment.

A

Other than pooling deposits and making​ loans, which of the following are the three key services that financial intermediaries perform for savers and​ borrowers? A. Risk​ sharing, liquidity, and information. B. Asymmetric​ information, liquidity, and securitization. C. Adverse​ selection, liquidity, and risk sharing. D. Risk​ sharing, securitization, and market pricing.

A

Seasonal unemployment results from A. weather conditions associated with the changing seasons. B. the desire of workers to have time off during the spring and summer seasons. C. the fact that​ labor's productivity varies as the seasons change. D. All of the above are sources of seasonal unemployment. E. A and B only.

A

Suppose a Treasury bond will mature in 4 years. If the bond pays a coupon of​ $200 per year and will make a final par value payment of​ $5,000 at​ maturity, what is its price if the relevant market interest rate is​ 3%? A. ​$5,185.85 B. ​$5,304.26 C. ​$5,743.42 D. ​$6,011.82

A

The money demand curve will shift to the left if real GDP​ ________ or if the price level​ ________. A. ​decreases; decreases B. ​decreases; increases C. ​increases; decreases D. ​increases; increases

A

Which of the following statements is​ TRUE, according to the Brookings​ Paper, "Low Inflation or No​ Inflation" (Lecture 14​ outline)? A. Firms prefer some​ inflation, because real wages can be decreased by increasing the nominal wage by less than the inflation rate. B. Firms prefer​ deflation, because then they will be paying lower real wages. C. Reducing inflation to​ 0% will grow the economy between 1 to​ 3%. D. Firms prefer zero​ inflation, because nominal wages are easily adjusted downwards.

A

Would your answer change if the interest rate was 14​%? A. Yes comma the preferred choice is now $ 125 to be received in one year. B. ​Yes, the preferred choice is now ​$140 to be received in two years. C. No comma the best choice is still $ 150 to be received in three years.

A

Unit of Account

A way of measuring value in an economy in terms of money

Store of Value

Accumulation of wealth by holding dollars or other assets that can be used to buy goods and services in the future

Standard of deferred payment

An asset that facilitates transactions over time.

A government may risk experiencing hyperinflation by printing money rather than issuing bonds to finance a large budget deficit because A. printing money is a costless action for government. B. investors refuse to buy the​ government's bonds on the belief that they will never be paid back. C. the chance that hyperinflation actually occurs is nil. D. selling bonds will absorb funds that would otherwise go to private borrowers.

B

According to the Fisher​ effect, the nominal interest rate will decrease by 3​% if the A. expected real interest rate decreases by 3​%. B. expected inflation rate decreases by 3​%. C. expected inflation rate exceeds the actual inflation rate by 3​%. D. expected inflation rate increases by 3​%.

B

Both moral hazard and adverse selection problems occur​ when: A. inflation is very high. B. there is asymmetric information. C. interest rates are high. D. there are asset bubbles.

B

If a government chooses to finance a budget deficit by borrowing and the expected inflation rate does not​ change, this will cause the real interest rate to​ ________ and the nominal interest rate to​ ________. A. ​increase; decrease B. ​increase; increase Your answer is correct.C. ​decrease; increase D. ​decrease; decrease

B

Isabel purchases a​ $1,000 face value oneminusyear Treasury bill for​ $934.58, and the next day investors decide they will only buy oneminusyear Treasury bills if they receive an interest rate of​ 9%. If Isabel decides to sell her Treasury bill to another investor the day after she purchased​ it, she will A. suffer a capital loss of​ $18.69. B. suffer a capital loss of​ $17.15. C. receive a capital gain of​ $7.76. D. receive a capital gain of​ $28.04.

B

Moral hazard occurs​ when: A. the government makes choices that lead to resource misallocation. B. actions people take after they have entered into a transaction make the other party worse off. C. one party to a transaction takes advantage of knowing more than the other party. D. optimal behavior occurs in financial markets.

B

Seigniorage is A. the cost of inflation to households and firms due to holding less money and making more frequent trips to the bank. B. the​ government's profit from issuing fiat money. C. the costs involved in changing prices due to inflation. D. a rate of inflation in excess of​ 100% per year.

B

Suppose the​ long-run growth rate of real GDP for a country is about​ 3%, the growth rate of velocity is​ 0%, and the growth rate of the money supply is​ 6%. If the real interest rate has averaged​ 2.8%, then in the long​ run, the nominal interest rate​ is: A. ​8.8% B. ​5.8% C. ​3.2% D. ​4.8%

B

The demand for money is downward sloping because at lower interest​ rates, A. the government can increase its budget deficit. B. the opportunity cost of holding money is lower. C. people wish to make more purchases. D. money is more valuable.

B

The primary function of the financial system is​ to: A. control the money supply. B. facilitate the flow of funds from lenders to borrowers. C. regulate the stock market. D. ensure economic growth.

B

What do economists mean by the​ "time value of​ money"? A. The fact that it takes time to make money. B. The way that the value of a payment changes depending on when the payment is received. C. The fact that money has value only if you have the time to enjoy it. D. All of the above.

B

What is the difference between the quantity equation and the quantity theory of​ money? A. The quantity equation could be either true or​ false, but the quantity theory of money is always true. B. The quantity theory of money assumes that velocity is​ constant, whereas the quantity equation does not require the same assumption. C. Irving Fisher turned the quantity theory of money into the quantity equation by assuming that velocity is constant. D. None of the abovelong dashthe quantity equation is the same as the quantity theory of money.

B

An increase in interest rates A. reduces the prices of existing financial assets and of newlyminusissued financial assets. B. increases the prices of existing financial assets and of newlyminusissued financial assets. C. reduces the prices of existing financial D. increases the prices of existing financial assets.

C

Assume that the interest rate is 7​%. Would you prefer to​ receive: ​$125 one year from​ now, ​$140 two years from​ now, or ​$150 three years from​ now? A. ​$125 one year from now. B. ​$140 two years from now. C. ​$150 three years from now. D. These choices are equally preferable.

C

Assume the interest rate on a current oneminusyear bond is​ 3%, and the expected interest rate on the oneminusyear bond one year from now is​ 6%. If the term premium on a twominusyear bond is​ 0.5%, then the interest rate on the twominusyear bond will be A. ​4%. B. ​4.5%. C. ​5%. D. ​6.5%.

C

If Jennifer withdraws​ $750 from her checking account and holds it as​ currency, then M1 will​ ________ and M2 will​ ________. A. not​ change; increase B. ​decrease; decrease C. not​ change; not change D. ​decrease; not change

C

If the money supply grows at​ 6% and the inflation rate is​ 2%, the quantity theory predicts that the change in real GDP will be A. ​0.33% B. ​3%. C. ​4%. D. ​8%.

C

If the rate of job finding equals​ 7%, and the rate of job separation equals​ 1%, then the natural rate of unemployment is A. ​7%. B. ​8.75%. C. ​12.5%. This is the correct answer.D. ​14.3%.

C

Seigniorage is also known as the inflation tax because it A. causes people to hold more of their wealth as money. B. acts like a transfer of wealth from the government to holders of money. C. reduces the purchasing power of money. D. directly decreases aggregate​ well-being.

C

Suppose the currency to deposit ratio is​ 0.10, the required reserve ratio is​ 0.10, and the excess reserve to deposit ratio is 0.25. The the value of the money multiplier​ is: A. 2.8 B. Less than 1. C. 2.4 D. 0.2

C

Suppose you purchase a bottle of vitamin water with a price of​ $3. The price of​ $3 best reflects the function of money as a​ ________, and when you take​ $3 out of your wallet to purchase the​ bottle, money is functioning as a​ ________. A. store of​ value; unit of account B. medium of​ exchange; store of value C. unit of​ account; medium of exchange D. medium of​ exchange; standard of deferred payment

C

The price of a financial asset should equal the A. future value of the payments to be received from owning the asset B. coupon value of the asset divided by the effective interest rate at the time the asset was purchased. C. present value of the payments to be received from owning the asset. D. face value of the asset less the future payments to be received from owning the asset.

C

Unemployment is at the natural rate and the labor market is in equilibrium when which two flows are​ equal? A. The number of workers looking for work and the number of firms looking to hire. B. The number of retirees and the number of new entrants. C. The number of workers separating from their jobs and the number of workers finding jobs. D. The number of employed workers and the number of unemployed workers.

C

What benefits does securitization of mortgage loans provide for​ banks? What benefits does securitization provide for people who want to buy a​ home? A. Banks can expand the number of loans they​ make, which benefits individuals who want to buy a​ home; however, there are no real benefits for banks. B. Banks benefit from being able to transfer all the risk to the​ investors; however, there are no benefits for individuals looking to buy a home. C. Banks can expand the number of loans they make and to earn larger​ profits; therefore it makes more funds available for individuals who want to buy a home. D. Banks can reduce the number of loans they make and still earn higher​ profits, making less funds available for individuals who want to buy a home.

C

Which of the following statements is FALSE regarding information from Planet​ Money's Podcast,​ "How Four Drinking Buddies Saved​ Brazil?" A. The four buddies broke inflation expectations by creating a virtual​ currency, the Unit of Real Value​ (URV), and listing prices in terms of URVs. These prices did not​ change, but the exchange rate between URVs and Brazilian cruzeiros changed daily. B. Consumers responded to quickly changing prices by running ahead of the price changers at stores to buy the items before the price was increased. C. High inflation started in the 1950s in Brazil when the government financed building its new​ capital, Brasilia, by printing money. D. President Sarney froze bank​ accounts, and President Collor froze​ prices, and both policies helped reduce the inflation rate in Brazil.

D

A Wall Street Journal article on the​ Fed's options for reducing inflationary pressure​ stated: ​"In the old​ days, when the Fed wanted to tighten...the task was easy. It pulled a few billion dollars out of ​short-term lending markets by selling Treasury​ bonds." Source​: Jon​ Hilsenrath, "As the Fed Uses Fewer​ Tools, Exit Plan​ Emerges," Wall Street Journal​, December​ 15, 2009. Why does the​ Fed's selling Treasury bonds​ "pull" money out of the​ system? A. Because reserves will​ increase, thereby decreasing the money supply. B. Because the required reserve ratio will​ increase, thereby decreasing the money multiplier and the money supply. C. Because the discount rate will​ decrease, thereby decreasing reserves the money supply. D. Because reserves​ and, thus, the money supply will decrease.

D

According to the Planet Money​ Podcast, "The Week​ America's Economy Almost​ Died," (Lecture​ 12outline), how did the economy​ "freeze?" A. The stock market was shut down for a day to prevent a​ free-fall in stock prices. B. The U.S. Federal Government did not raise the debt​ ceiling, and therefore defaulted on its loans. C. The mortgage market​ froze, so that potential home buyers could not buy homes. D. The commercial paper market​ froze, so that even​ low-risk businesses could not borrow.

D

An example of a financial intermediary​ is: A. insurance companies. B. commercial banks. C. mutual funds. D. all of the above.

D

Are only commercial banks subject to​ runs? A. ​Yes, by​ law, only commercial bank depositors can withdraw funds without prior notice. B. ​Yes, only commercial banks are subject to runs since only they use​ depositors' funds to acquire​ long-term assets. C. ​No, any entity that handles money can experience a run. D. ​No, any financial institution that accepts​ short-term deposits and uses the funds to make​ long-term loans is subject to runs.

D

If you pay​ $17,500 for a​ $20,000 face value oneminusyear Treasury​ bill, what is the rate of interest you will​ receive? A. ​8.75% B. ​11.43% C. ​12.5% D. ​14.29%

D

In dealing with​ runs, a central​ bank's role as a lender of last​ resort: A. enables it to restore the confidence of depositors. B. makes it an ultimate source of credit to which banks can turn for loans. C. places taxpayers at the mercy of inept bankers. D. A and B only. E. all of the above.

D

Which of the following statements is FALSE regarding information from Planet​ Money's Podcast:​ "Anatomy of a Bank​ Takeover" A. When the FDIC declares the bank has​ failed, the agents enter the bank to secure the cash and vaults. B. The FDIC goes through the Bank of Clark​ County's paperwork and hard drives to reconstruct the​ bank's balance sheets. C. The FDIC contacts another local bank and tells them they will be taking over the Bank of Clark County. D. The FDIC makes a public announcement that it will be taking over the Bank of Clark County.

D

Which of the following actions is not performed by a central​ bank? A. Acting as a lender of last resort. B. Collecting and disbursing government funds. C. Regulating the money supply. D. Taking deposits from the public. E. All of the above are functions of a central bank.

D

In the loanable funds​ model, the supply curve is upward sloping because A. a higher real interest rate increases the foreign exchange value of the​ dollar, which reduces net exports​ and, as a​ consequence, increases the quantity of foreign saving available to the domestic loanable funds market. B. the higher the real interest​ rate, the greater the reward to saving and hence the larger the quantity of funds households will save. C. an increase in the real interest rate increases government saving by inducing governments to curtail​ spending, thereby reducing budget deficits or increasing surpluses. D. All of the above. E. A and B but not C.

E

Why is ​$100 you will receive in one year worth more to you than ​$100 you will receive in five ​years? A. The likelihood that a payment is not received increases the farther into the future the payment date lies. B. The purchasing power of money usually erodes with the passage of time. C. The opportunity cost in waiting to receive a payment is greater the farther into the future the payment date lies. D. A and B only. E. All of the above.

E

Yield curves generally slope upward. A​ downward-sloping, or​ "inverted," yield curve is often thought to signal a future recession. Why might this be​ true? If there is a​ recession, income will ________ and thus ________ will __________ ​, which will cause interest rates to ______ . ​Thus, an inverted yield curve may indicate that market participants expect a recession.

Fall Money Supply Fall Fall

Medium Of Exchange

Something that is generally accepted as payment for goods and services.

Given evidence from the short run that the substitution effect is stronger than the income​ effect, it can be deduced that the labor supply curve is__________.

Upward sloping

Of the three actions that can decrease the money​ multiplier, the one most responsible for the drop in value of the money multiplier during the financial crisis of 2007dash2009 was the increase in A. household and firm holdings of currency relative to their holdings of checking account deposits. B. the required reserve ratio. C. ​banks' ratio of excess​ reserves-to-deposits.

c

Doug is currently not employed. He places a value of​ $16 an hour on his time in nonmarket activities. If Doug is offered a job paying​ $12 an​ hour, A. he should supply a positive number of hours in the labor market and allocate no time to nonmarket activities. B. he should supply a positive number of hours in the labor market and to nonmarket activities. C. he is indifferent between supplying hours to the labor market and using his time in nonmarket activities. D. he should supply 0 hours in the labor market.

d

Following an increase in the real​ wage, the substitution effect leads an individual to supply ______ hours of​ labor, while the income effect leads one to supply ________ hours of labor.

more fewer

What three actions by households and​ firms, banks, or the Federal Reserve will cause the value of the money multiplier to decrease​? A. An increase by households and firms in their holdings of​ currency; an increase in​ banks' holding of​ deposits; and a decrease in the monetary base by the Fed. B. An increase by households and firms in their holdings of checking account deposits relative to their holdings of​ currency; an increase in​ banks' ratio of​ deposits-to-excess reserves; and an increase in the​ Fed-mandated required reserve ratio. C. An increase by households and firms in their holdings of currency relative to their holdings of checking account​ deposits; an increase in​ banks' ratio of excess​ reserves-to-deposits; and an increase in the​ Fed-mandated required reserve ratio. D. Upper A decrease by households and firms in their holdings of currency relative to their holdings of checking account​ deposits; a decrease in​ banks' ratio of excess​ reserves-to-deposits; and a decrease in the​ Fed-mandated required reserve ratio.

C

Why does the Fed have greater control over the monetary base than over the money​ supply? A. Because the money supply is influenced by bank​ reserves, which​ are, in​ part, affected by the nonbank public. B. Because the Fed can control the monetary base through open market​ operations, but the Fed has absolutely no influence on the money multiplier. C. Because the money supply is influenced by the money​ multiplier, which​ is, in​ part, affected by the nonbank public. D. Because the Fed can control the monetary base through the required reserve​ ratio, but the Fed has absolutely no influence on the money multiplier.

C

n the loanable funds​ model, an explanation as to why the demand curve is downward sloping is that A. substitution and income effects work upon the quantity​ demanded, just as they do in the case of an ordinary consumer good. B. the quantity of loanable funds demanded rises as the real interest rate​ falls, and vice versa. C. the lower the real interest​ rate, the more investment projects firms can profitably​ undertake, and the greater the quantity of loanable funds they will demand. D. the law of demand makes it impossible for the curve to be upward sloping.

C

In​ 2011, Deutsche Bank​ AG, headquartered in​ Germany, became the largest bank in Europe by increasing its asset holdings at a time when other European banks were reducing their assets. As a​ result, Deutsche​ Bank's leverage increased. A Bloomberg article quoted a German banker as​ saying: "It's​ understandable: The higher your​ leverage, the higher the returns when times are​ good." But the article also noted​ that: "The higher leverage also makes Deutsche​ Bank's earnings more volatile and dependent on market​ swings." ​Source: Aaron​ Kirchfeld, Elena​ Logutenkova, and Nicholas​ Comfort, "Deutsche Bank No. 1 in Europe as Leverage Hits​ Valuation," Bloomberg​, March​ 27, 2012. Explain why higher leverage results in higher returns​ "when times are​ good" and why it also makes​ "earnings more volatile and dependent on market​ swings." A. The higher a​ bank's leverage, the lower is the ratio of its liabilities to its assets. This means that a​ bank's return on equity​ (the ratio of its​ after-tax profit to the value of its​ capital) will show a high degree of​ volatility, rising or falling sharply with any given fluctuation in the​ bank's profits. B. The higher a​ bank's leverage, the more of its own capital it has exposed. This means that a​ bank's return on equity​ (the ratio of its​ after-tax profit to the value of its​ capital) will show a high degree of​ volatility, rising or falling sharply with any given fluctuation in the​ bank's profits. C. The higher a​ bank's leverage, the lower is the ratio of its assets to its capital. This means that a​ bank's return on assets​ (the ratio of its​ after-tax profit to the value of its​ assets) will show a high degree of​ volatility, rising or falling sharply with any given fluctuation in the​ bank's profits. D. The higher a​ bank's leverage, the less of its own capital it has exposed. This means that a​ bank's return on equity​ (the ratio of its​ after-tax profit to the value of its​ capital) will show a high degree of​ volatility, rising or falling sharply with any given fluctuation in the​ bank's profits.

D

Securitization occurs​ when: A. the Treasury auctions new issues of bills and bonds. B. securities are bought and sold on the secondary market. C. companies employ investment banks to underwrite new stock issues. D. loans are bundled together into securities that are resold to investors. Your answer is correct.

D

Suppose you borrow​ $5,000 at an interest rate of​ 8%. If the expected real interest rate is​ 3%, then the rate of inflation over the upcoming year that would be most beneficial to you would be A. greater than​ 0% but less than​ 5%. B. ​0%. C. equal to​ 5%. D. greater than​ 5%.

D

The Federal Reserve publishes data on the M2 money supply even though​ currency, checking account​ deposits, and​ traveler's checks, which are the most liquid of​ assets, are already measured in M1. The Fed does this because A. the Fed emphasizes the role of M2 in monetary policymaking. B. M2 has a more stable relationship with economic variables such as​ inflation, interest​ rates, and real GDP. C. M2 is much easier to calculate than M1. D. M2 is a broader measure of the money supply and therefore may convey additional information about economic activity that is not embodied in M1.

D

The demand for loanable funds is determined​ by: A. the government budget deficit. B. the value of the stock market. C. the amount of reserves made available by the Fed. D. the willingness of firms to borrow money to engage in new investment projects.

D

The idea of​ shoe-leather costs is that people wear out their shoes going back and forth to the bank. While people are unlikely to actually wear out their shoes in this​ way, which of the following is an example of costs that you might incur by trying to reduce the costs to you of​ inflation? A. Any fees involved in moving funds. B. Opportunity cost of time involved in moving funds between accounts. C. Additional costs of stocking up on​ inflation-sensitive items. D. All of the above.

D

The often made statement that inflation​ "greases the wheels of the labor​ market" means simply that A. high and unanticipated inflation allows for real wage adjustments when nominal wages are​ sticky, thereby permitting labor market adjustments that improve the​ market's efficiency. B. the efficiency with which the labor market operates is greater the higher is the rate of inflation. C. low inflation allows for nominal wage adjustments when real wages are​ sticky, thereby permitting labor market adjustments that improve the​ market's efficiency. D. low inflation allows for real wage adjustments when nominal wages are​ sticky, thereby permitting labor market adjustments that improve the​ market's efficiency.

D

The supply of loanable funds is determined by​ the: A. extent of foreign saving that is invested in U.S. financial markets. B. willingness of households to save. C. extent of government saving. D. all of the above.

D

The term structure of interest rates refers to the​ relationship: A. among interest rates on bonds that never mature versus those with certain maturity dates. B. among interest rates on bonds that have different characteristics but the same maturities. C. between interest rates and the term of the loan. D. among interest rates on bonds that are otherwise similar but have different maturities.

D

What is a bank​ run? A. A 5K or longer footrace sponsored by a bank. B. The simultaneous decision of many borrowers to spend the funds they have acquired. C. The decision of a bank to call in all loans made to a particular class of borrowers. D. The simultaneous decision of many depositors to withdraw their money from a bank.

D

What will happen to the demand curve for tea workers if the price of tea​ increases, assuming all else​ equal? A. There will be a leftward shift in the demand curve for tea workers. B. There will be an upward movement along the demand curve for tea workers. C. There will be a downward movement along the demand curve for tea workers. D. There will be a rightward shift in the demand curve for tea workers.

D