Money and Banking HW 1

Suppose the quantity demanded for a security is BD = 150 - 0.1b, and the quantity supplied of the security is BS = 50 + 0.1b, where b is the price of the security in dollars. The equilibrium price of the security is $50. $125. $250. $500.

$500

In the event that a firm goes bankrupt and is liquidated, who is paid off first, second, and third between workers, debt holders, and stockholders? (1) debt holders; (2) workers; (3) stockholders (1) stockholders; (2) workers; (3) debt holders (1) workers; (2) debt holders; (3) stockholders (1) workers; (2) stockholders; (3) debt holders

(1) workers; (2) debt holders; (3) stockholders

If a stock's price is $20 at the beginning of a year and $17 at the end of the year, and it pays a dividend of $2 during the year, then the stock's return is ____ percent. -15 -5 5 10

-5 ending balance/beginning

Joe E. Conomist purchased 100 shares of stock in the IBM corporation in 2008 for $10,000. In 2011 Joe sells his IBM stock to Sally Forth for $15,000. How does this sale of stock in 2011 affect the IBM corporation? IBM makes $5000 in profit. IBM invests $5000 in capital equipment. IBM suffers a loss of $5000. IBM is unaffected.

IBM is unaffected

Suppose you are an investor with a choice between three securities that are identical in every way except in terms of their rates of return and risk. Which security has the least risk? Note: You can answer this question intuitively, without calculating the standard deviation Investment A: total return = 10 percent with probability 50 percent total return = 20 percent with probability 50 percent Investment B: total return = 12 percent with probability 50 percent total return = 18 percent with probability 50 percent Investment C: total return = 5 percent with probability 60 percent total return = 25 percent with probability 40 percent Investment A Investment B Investment C Investments A and B have the same risk, which is less than that of investment C.

Investment B

Suppose you are an investor with a choice between three investments that are identical in every way except in terms of their rates of return and taxability. Which investment provides the highest after-tax return? Investment A: interest rate 10 percent, tax rate 40 percent of interest income. Investment B: interest rate 8 percent, tax rate 25 percent of interest income. Investment C: interest rate 6.5 percent, tax rate 0 percent. Investment A. Investment B. Investment C Investments A and B have the same after-tax return, which is greater than that of investment C.

Investment C take (1-t)

Which of the following is NOT a benefit of financial intermediaries? Their ability to centralize information. Their ability to take in short-term deposits and make long-term loans. Their ability to reduce the transactions costs associated with borrowing. Their ability to take in large deposits and make small loans.

Their ability to take in large deposits and make small loans.

Consider the following four debt securities, which are identical in every characteristic except as noted: W: A corporate bond rated AAA X: A corporate bond rate BBB Y: A corporate bond rated AAA with a shorter time to maturity than bonds W and X Z: A corporate bond rated AAA with the same time to maturity as bond Y that trades in a more liquid market than bonds W, X, or Y Which of the following is the most likely order of the interest rates (yields to maturity) of the bonds from highest to lowest? W, X, Z, Y X, Y, Z, W X, Z, W, Y X, W, Y, Z

X, W, Y, Z

Gresham's Law states that bad money drives out good money. money supply creates its own demand. money is memory. the more you make, the more you spend.

bad money drives out good money.

In the United States, the biggest issuers of equity securities are households. business firms. governments. financial intermediaries.

business firms.

If money is gold or silver, it is called ____ money commodity glitter fiat inside

commodity

The periodic payments on equity securities are called interest payments. dividends. equity shares. stock repurchases.

dividends.

An increase in the supply of security A and an increase in the demand for security B causes the price of security A to ____ and the price of security B to ____. rise; fall rise; rise fall; rise fall; fall

fall; rise

Liquidity in a financial market refers to the amount of money that sellers have committed to buying securities. the difference in the times to maturity of two different debt securities multiplied by the difference in returns to the securities. the difference in the times to maturity of two different debt securities. how easy it is to buy or sell a security in the secondary market when you want to without incurring significant costs.

how easy it is to buy or sell a security in the secondary market when you want to without incurring significant costs.

Inflation affects money because it reduces money's role as a store of value. it reduces the supply of money. it reduces transactions and search costs. it increases money's efficiency as a medium of exchange.

it reduces money's role as a store of value.

Risk that cannot be eliminated by diversification is default risk. interest-rate risk. idiosyncratic risk market risk

market risk

When people use money by trading it for goods and services, money is serving the role of medium of exchange. unit of account. store of value. standard of deferred payment.

medium of exchange.

Fiat money is money that has value in large part by the government's proclamation. money in checking accounts. inside money. also known as full-bodied money.

money that has value in large part by the government's proclamation.

Dividing the amount of U.S. currency in circulation by the number of people in the United States shows that, on average, each person holds over $2,000 in cash. The most important explanation for this remarkably large sum is the underground economy is huge, with many dollar transactions. huge amounts of cash have been lost over time. most is circulating in foreign countries. banks keep huge amounts of cash in their ATMs and bank vaults.

most is circulating in foreign countries.

Aaron takes $100 out of his checking account and puts it in his savings account while Biff withdraws $200 from his money market mutual fund in the form of cash. The total effect is that M1 ____ and M2 ____. is unchanged; falls by $100 is unchanged; is unchanged rises by $100; falls by $100 rises by $100; is unchanged

rises by $100; is unchanged

Suppose the quantity demanded for a security is BD = 150 - 0.1b, and the quantity supplied of the security is BS = 50 + 0.1b, where b is the price of the security in dollars. Suppose that the supply curve shifts to BS = 75 + 0.1b. The equilibrium quantity of the security rises by 2.5. falls by 2.5. falls by 12.5. rises by 12.5.

rises by 12.5.

Maturity is the length of time until borrowed funds are repaid. what happens to a bond as time passes. a situation in which equity becomes worthless. infinite for debt securities.

the length of time until borrowed funds are repaid.

The secondary market is the market in which trades between primary government securities dealers takes place. the place where the New York Stock Exchange is located. the market in which a security is sold from one investor to another. the market for new securities.

the market in which a security is sold from one investor to another.

When money serves as the item in which prices are denoted, money is serving the role of unit of account. store of value. standard of deferred payment. medium of exchange.

unit of account.

One lesson learned from the financial crisis of 2008 was that government regulators need to respond slowly when financial practices threaten the economy. unregulated financial firms need to be prevented from growing so large that their failure would severely damage the economy. the ease of owning a home has no relationship to the efficiency of the financial system. unregulated financial firms need to be prevented from growing so small that their success would have no or little effect on the economy.

unregulated financial firms need to be prevented from growing so large that their failure would severely damage the economy.