Money and Banking Test 1

What is the return on a 5 percent coupon bond that initially sells for​ $1,000 and sells for​ $900 next​ year? A. minus−5 percent B. minus−10 percent C. 10 percent D. 5 percent

-5%

If the nominal rate of interest is 2​ percent, and the expected inflation rate is minus−10 ​percent, the real rate of interest is A. 2 percent. B. 8 percent. C. 10 percent. D. 12 percent.

12%

Fear of a major recession causes stock prices to​ fall, everything else held​ constant, which in turn causes consumer spending to A. decrease. B. remain unchanged. C. increase. D. cannot be determined.

Decrease

An increase in the time to the promised future payment​ ________ the present value of the payment. A. decreases B. has no effect on C. increases D. is irrelevant to

Decreases

U.S. Treasury bills are considered the safest of all money market instruments because there is low probability of​ ________. A. default B. demarcation C. defeat D. desertion

Default

With​ ________ finance, borrowers obtain funds from lenders by selling them securities in the financial markets. A. indirect B. determined C. active D. direct

Direct

U.S. Treasury bills pay no interest but are sold at a​ ________. That​ is, you will pay a lower purchase price than the amount you receive at maturity. A. collateral B. premium C. discount D. default

Discount

​________ is used to make purchases while​ ________ is the total collection of pieces of property that serve to store value. A. ​Wealth; income B. ​Income; money C. ​Money; income D. ​Money; wealth

Money; wealth

When the price level​ falls, the​ ________ curve for nominal money​ ________, and interest rates​ ________, everything else held constant. A. ​supply; decreases; fall B. ​demand; increases; rise C. ​supply; increases; rise D. ​demand; decreases; fall

demand; decreases; fall

American companies can borrow funds A. in both U.S. and foreign financial markets. B. only in U.S. financial markets. C. only from the U.S. government. D. only in foreign financial markets.

in both U.S. and foreign financial markets.

Longminus−term debt has a maturity that is​ ________. A. less than a year. B. between one and ten years. C. ten years or longer. D. between five and ten years.

Ten years or longer

If the prices would have been much higher ten years ago for the items the average consumer purchased last​ month, then one can likely conclude that A. the average inflation rate for this tenminus−year period has been positive. B. the aggregate price level has declined during this ten-−year period. C. the average rate of money growth for this tenminus−year period has been positive. D. the aggregate price level has risen during this tenminus−year period.

The aggregate price level has declined during the ten- year period

Which of the following is a true​ statement? A. Money or the money supply is defined as Federal Reserve notes. B. The inflation rate is measured as the rate of change in the federal government budget deficit. C. The aggregate price level is measured as the rate of change in the inflation rate. D. The average price of goods and services in an economy is called the aggregate price level.

The average price of goods and services in an economy is called the aggregate price level.

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

The interest rate is 4 percent and the expected inflation rate is 1 percent.

The bond markets are important because they are A. the markets where all borrowers get their funds. B. easily the most widely followed financial markets in the United States. C. the markets where foreign exchange rates are determined. D. the markets where interest rates are determined.

The markets where interest rates are determined

Which of the following statements about financial markets and securities is​ true? A. A debt instrument is intermediate term if its maturity is less than one year. B. A debt instrument is intermediate term if its maturity is ten years or longer. C. A bond is a longminus−term security that promises to make periodic payments called dividends to the​ firm's residual claimants. D. The maturity of a debt instrument is the number of years​ (term) to that​ instrument's expiration date.

The maturity of a debt instrument is the number of years (term) to that instrument's expiration date

When we say that money is a stock​ variable, we mean that A. money never loses purchasing power. B. we must attach a time period to the measure. C. it is sold in the equity market. D. the quantity of money is measured at a given point in time.

The quantity of money is measured at a given point in time

Compared to an electronic payments​ system, a payments system based on checks has the major drawback that A. legal liability is more clearly defined. B. fraud may be more difficult to commit when paper receipts are eliminated. C. checks are less costly to process. D. checks take longer to​ process, meaning that it may take several days before the depositor can get her cash.

checks take longer to​ process, meaning that it may take several days before the depositor can get her cash.

A credit market instrument that pays the owner a fixed coupon payment every year until the maturity date and then repays the face value is called a A. simple loan. B. coupon bond. C. discount bond. D. fixedminus−payment loan.

coupon bond

Everything else held​ constant, when households save​ less, wealth and the demand for bonds​ ________ and the bond demand curve shifts​ ________. A. ​increase; left B. ​decrease; left C. ​decrease; right D. ​increase; right

decrease; left

If your nominal income in 2014 was​ $50,000, and prices doubled between 2014 and​ 2017, to have the same real​ income, your nominal income in 2017 must be A. ​$50,000. B. ​$75,000. C. ​$90,000. D. ​$100,000.

$100,000

What is the present value of​ $500.00 to be paid in two years if the interest rate is 5​ percent? A. ​$550.00 B. ​$476.25 C. ​$500.00 D. ​$453.51

$453.51

With an interest rate of 6​ percent, the present value of​ $100 next year is approximately A. ​$106. B. ​$100. C. ​$94. D. ​$92.

$94

If a security pays​ $55 in one year and​ $133 in three​ years, its present value is​ $150 if the interest rate is A. 5 percent. B. 10 percent. C. 12.5 percent. D. 15 percent.

10%

What is the return on a 5 percent coupon bond that initially sells for​ $1,000 and sells for​ $1,200 next​ year? A. 10 percent B. minus−5 percent C. 5 percent D. 25 percent

25%

If there are five goods in a barter​ economy, one needs to know ten prices in order to exchange one good for another.​ If, however, there are ten goods in a barter​ economy, then one needs to know​ ________ prices in order to exchange one good for another. A. 20 B. 25 C. 30 D. 45

45

If the price of a euro​ (the European​ currency) increases from​ $1.00 to​ $1.10, then, everything else held​ constant, A. a European vacation becomes less expensive. B. a European vacation becomes more expensive. C. foreign travel becomes impossible. D. the cost of a European vacation is not affected.

A European vacation becomes more expensive

Which of the following can be described as involving direct​ finance? A. A pension fund manager buys a shortminus−term corporate security in the secondary market. B. People buy shares in a mutual fund. C. An insurance company buys shares of common stock in the overminus−theminus−counter markets. D. A corporation issues new shares of stock.

A corporation issues new shares of stock

A hyperinflation is A. an increase in output caused by higher prices. B. impossible today because of tighter regulations. C. a period of extreme inflation generally greater than​ 50% per month. D. a period of anxiety caused by rising prices.

A period of extreme inflation generally greater than 50% per month

When paper currency is decreed by governments as legal​ tender, legally it must be​ ________. A. convertible into an electronic payment B. paper currency backed by gold C. a precious metal such as gold or silver D. accepted as payment for debts

Accepted as payment for debts

When stock prices fall A. an​ individual's wealth may decrease and their willingness to spend may decrease. B. an​ individual's wealth may decrease but their willingness to spend is not affected. C. an​ individual's wealth is not affected nor is their willingness to spend. D. a business firm will be more likely to sell stock to finance investment spending.

An individuals wealth may decrease and their willingness to spend may decrease

Financial institutions that accept deposits and make loans are called​ ________. A. exchanges B. finance companies C. banks D. overminus−theminus−counter markets

Banks

On​ ________, October​ 19, 1987, the stock market experienced its worst oneminus−day drop in its entire history with the DJIA falling by​ 22%. A. "Freaky Friday" B. "Woeful Wednesday" C. "Terrible Tuesday" D. "Black Monday"

Black Monday

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. A. bond; debt security B. stock; debt security C. bond; stock D. stock; bond

Bond; stock

Financial markets promote economic efficiency by A. channeling funds from investors to savers. B. reducing investment. C. channeling funds from savers to investors. D. creating inflation.

Channeling funds from savers to investors

A short−term debt instrument issued by wellminus−known corporations is called A. municipal bonds. B. corporate bonds. C. commercial paper. D. commercial mortgages

Commercial Paper

​________ 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. A. Electronic B. Paper C. Fiat D. Commodity

Commodity

The dollar amount of the yearly coupon payment expressed as a percentage of the face value of the bond is called the​ bond's A. payment rate. B. face value rate. C. coupon rate. D. maturity rate.

Coupon Rate

The bond demand curve is​ ________ sloping, indicating​ a(n) ________ relationship between the price and quantity demanded of​ bonds, everything else equal. A. ​upward; inverse B. ​downward; inverse C. ​downward; direct D. ​upward; direct

Downward; inverse

Equity instruments are traded in the​ ________ market. A. commodities B. bond C. money D. capital

Equity

Bonds that are sold in a foreign country and are denominated in a currency other than that of the country in which it is sold are known as A. country bonds. B. foreign bonds. C. Eurobonds. D. equity bonds.

Eurobonds

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

Fiat

Markets in which funds are transferred from those who have excess funds available to those who have a shortage of available funds are called A. commodity markets. B. derivative exchange markets. C. financial markets. D. fundminus−available markets.

Financial markets

The​ ________ states that the nominal interest rate equals the real interest rate plus the expected rate of inflation. A. Monetarist equation B. Marshall equation C. Keynesian equation D. Fisher equation

Fisher Equation

A credit market instrument that requires the borrower to make the same payment every period until the maturity date is known as a A. fixedminus−payment loan. B. simple loan. C. coupon bond. D. discount bond

Fixed-payment loan

Bonds that are sold in a foreign country and are denominated in the​ country's currency in which they are sold are known as A. foreign bonds. B. country bonds. C. Eurobonds. D. equity bonds.

Foreign bonds

The most comprehensive measure of aggregate output is A. the stock value of the industrial 500. B. gross domestic product. C. net national product. D. national income.

Gross Domestic Product

Everything else held​ constant, an increase in interest rates on student loans A. has no effect on educational costs. B. increases costs for students with no loans. C. increases the cost of a college education. D. reduces the cost of a college education.

Increases the cost of a college education

Every financial market has the following​ characteristic: A. It allows common stock to be traded. B. It channels funds from lendersminus−savers to borrowersminus−spenders. C. It allows loans to be made. D. It determines the level of interest rates.

It channels funds from lenders- savers to borrowers-spenders

​________ is the relative ease and speed with which an asset can be converted into a medium of exchange. A. Liquidity B. Specialization C. Deflation D. Efficiency

Liquidity

Federal funds are A. funds raised by the federal government in the bond market. B. loans made by banks to the Federal Reserve System. C. loans made by banks to each other. D. loans made by the Federal Reserve System to banks.

Loans made to banks to each other

Kevin purchasing concert tickets with his debit card is an example of the​ ________ function of money. A. specialization B. store of value C. unit of account D. medium of exchange

Medium of exchange

A financial market in which only shortminus−term debt instruments are traded is called the​ ________ market. A. stock B. money C. bond D. capital

Money

Since it does not have to be converted into anything else to make​ purchases, ________ is the most liquid asset. A. artwork B. stock C. money D. gold

Money

To an​ economist, ________ is anything that is generally accepted in payment for goods and services or in the repayment of debt. A. wealth B. money C. income D. credit

Money

Because these securities are more liquid and generally have smaller price​ fluctuations, corporations and banks use the​ ________ securities to earn interest on temporary surplus funds. A. money market B. bond market C. capital market D. stock market

Money Market

When in 1985 a British pound cost approximately​ $1.30, a Shetland sweater that cost 100 British pounds would have cost​ $130. With a weaker​ dollar, the same Shetland sweater would have cost A. more than​ $130. B. less than​ $130. C. ​$130, since the exchange rate does not affect the prices that American consumers pay for foreign goods. D. ​$130, since the demand for Shetland sweaters will decrease to prevent an increase in price due to the stronger dollar.

More than $130

Bonds issued by state and local governments are called​ ________ bonds. A. corporate B. municipal C. commercial D. Treasury

Municipal

Currency includes A. paper money and checks. B. paper​ money, coins,​ checks, and savings deposits. C. paper​ money, coins, and checks. D. paper money and coins.

Paper, money and coins

Banks A. provide a channel for linking those who want to save with those who want to invest. B. hold very little of the average​ American's wealth. C. produce nothing of value and are therefore a drain on​ society's resources. D. are the only financial institutions allowed to give loans.

Provide a channel for linking those who want to save with those who want to invest

GDP measured with constant prices is referred to as A. industrial production. B. real GDP. C. nominal GDP. D. the GDP deflator.

Real GDP

Everything else held​ constant, a decline in interest rates will cause spending on housing to A. fall. B. either​ rise, fall, or remain the same. C. rise. D. remain unchanged.

Rise

A financial market in which previously issued securities can be resold is called a​ ________ market. A. primary B. tertiary C. used securities D. secondary

Secondary

A credit market instrument that provides the borrower with an amount of funds that must be repaid at the maturity date along with an interest payment is known as a A. discount bond. B. simple loan. C. fixedminus−payment loan. D. coupon bond

Simple loan

When I purchase​ ________, I own a portion of a firm and have the right to vote on issues important to the firm and to elect its directors. A. stock B. bonds C. bills D. notes

Stock

​________ are the time and resources spent trying to exchange goods and services. A. Bargaining costs. B. Transaction costs. C. Barter costs. D. Contracting costs.

Transaction costs

All of the following are examples of coupon bonds except A. U.S. Treasury bills B. U.S. Treasury bonds C. U.S. Treasury notes D. Corporate bonds

U.S. Treasury bills

Dennis notices that jackets are on sale for​ $99. In this case money is functioning as a​ ________. A. medium of exchange B. store of value C. unit of account D. paymentsminus−system ruler

Unit of account

When money prices are used to facilitate comparisons of​ value, money is said to function as a A. store of value. B. unit of account. C. medium of exchange. D. paymentsminus−system ruler.

Unit of account

Economists consider the​ ________ to be the most accurate measure of interest rates. A. simple interest rate. B. current yield. C. yield to maturity. D. real interest rate

Yield to maturity

Which of the following can be described as involving indirect​ finance? A. A corporation buys a share of common stock issued by another corporation in the primary market. B. You buy a U.S. Treasury bill from the U.S. Treasury at TreasuryDirect.gov. C. You make a loan to your neighbor. D. You make a deposit at a bank.

You make a deposit at a bank

In the figure​ above, the decrease in the interest rate from i1 to i2 can be explained by A. a decrease in money growth. B. a decline in the expected price level. C. an increase in income. D. an increase in the expected price level.

a decline in the expected price level

A liquid asset is A. always sold in an overminus−theminus−counter market. B. difficult to resell. C. an asset that can easily and quickly be sold to raise cash. D. a share of an ocean resort.

an asset that can easily and quickly be sold to raise cash

In the figure​ above, one factor not responsible for the decline in the demand for money is A. a decline the price level. B. an increase in income. C. a decline in the expected inflation rate. D. a decline in income.

an increase in income

In the figure​ above, the factor responsible for the decline in the interest rate is A. a decline in the expected inflation rate. B. a decline in income. C. a decline the price level. D. an increase in the money supply

an increase in the money supply

When the inflation rate is expected to​ increase, the​ ________ for bonds​ falls, while the​ ________ curve shifts to the​ right, everything else held constant. A. ​demand; demand B. ​supply; supply C. ​supply; demand D. ​demand; supply

demand; supply

For a commodity to function effectively as money it must be A. difficult to make change. B. deteriorate quickly so that its supply does not become too large. C. easily​ standardized, making it easy to ascertain its value. D. hard to carry around.

easily​ standardized, making it easy to ascertain its value.

The interest rate that describes how well a lender has done in real terms after the fact is called the A. ex post real interest rate. B. ex ante real interest rate. C. ex ante nominal interest rate. D. ex post nominal interest rate.

ex post real interest rate.

The​ ________ is the final amount that will be paid to the holder of a coupon bond. A. face value B. present value C. coupon value D. discount value

face value

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. A. decreases B. increases C. has no effect on D. erases

increases

The conversion of a barter economy to one that uses money A. increases efficiency by reducing transactions costs. B. does not increase economic efficiency. C. increases efficiency by reducing the need to specialize. D. increases efficiency by reducing the need to exchange goods and services.

increases efficiency by reducing transactions costs.

All of the following are necessary criteria for a commodity to function as money except A. it must deteriorate quickly. B. it must be easy to carry. C. it must be divisible. D. it must be widely accepted.

it must deteriorate quickly.

Everything else held​ constant, when stock prices become less​ volatile, the demand curve for bonds shifts to the​ ________ and the interest rate​ ________. A. ​right; rises B. ​right; falls C. ​left; falls D. ​left; rises

left; rises

Of the four effects on interest rates from an increase in the money​ supply, the initial effect​ is, generally, the A. income effect. B. price level effect. C. expected inflation effect. D. liquidity effect.

liquidity effect

There is​ ________ for any bond whose time to maturity matches the holding period. A. rateminus−ofminus−return risk B. yieldminus−tominus−maturity risk C. a large interestminus−rate risk D. no interestminus−rate risk

no interest−rate risk

A corporation acquires new funds only when its securities are sold in the A. secondary market by a securities dealer. B. secondary market by a commercial bank. C. primary market by an investment bank. D. primary market by a stock exchange broker.

primary market by an investment bank.

The sum of the current yield and the rate of capital gain is called the A. par value. B. rate of return. C. pertuity yield. D. discount yield.

rate of return

An increase in the expected rate of inflation will​ ________ the expected return on bonds relative to the that on​ ________ assets, everything else held constant. A. ​raise; real B. ​reduce; real C. ​reduce; financial D. ​raise; financial

reduce real

Everything else held​ constant, an increase in the liquidity of bonds results in a​ ________ in demand for bonds and the demand curve shifts to the​ ________. A. ​rise; right B. ​rise; left C. ​fall; right D. ​fall; left

rise; right

During business cycle expansions when income and wealth are​ rising, the demand for bonds​ ________ and the demand curve shifts to the​ ________, everything else held constant. A. ​rises; left B. ​falls; right C. ​falls; left D. ​rises; right

rises; right

When the price of a bond is above the equilibrium​ price, there is an excess​ ________ bonds and price will​ ________. A. supply​ of; rise B. supply​ of; fall C. demand​ for; fall D. demand​ for; rise

supply of; fall

In a business cycle​ expansion, the​ ________ of bonds increases and the​ ________ curve shifts to the​ ________ as business investments are expected to be more profitable. A. ​supply; supply; right B. ​supply; supply; left C. ​demand; demand; right D. ​demand; demand; left

supply; supply; right

Holding everything else​ constant, A. if asset​ A's risk rises relative to that of alternative​ assets, the demand will increase for asset A. B. the lower the expected return to asset A relative to alternative​ assets, the greater will be the demand for asset A. C. if wealth​ increases, demand for asset A increases and demand for alternative assets decreases. D. the more liquid is asset​ A, relative to alternative​ assets, the greater will be the demand for asset A.

the more liquid is asset​ A, relative to alternative​ assets, the greater will be the demand for asset A.

When compared to exchange systems that rely on​ money, disadvantages of the barter system​ include: A. lowering the cost of exchanging goods over time. B. the requirement of a double coincidence of wants. C. encouraging specialization and the division of labor. D. lowering the cost of exchange to those who would specialize.

the requirement of a double coincidence of wants.

When the expected inflation rate​ increases, the real cost of borrowing​ ________ and bond supply​ ________, everything else held constant. A. ​increases; decreases B. ​increases; increases C. ​decreases; decreases D. ​decreases; increases

​decreases; increases

During a​ recession, the supply of bonds​ ________ and the supply curve shifts to the​ ________, everything else held constant. A. ​increases; right B. ​decreases; right C. ​decreases; left D. ​increases; left

​decreases; left

In the bond​ market, the bond demanders are the​ ________ and the bond suppliers are the​ ________. A. ​borrowers; lenders B. ​lenders; advancers C. ​borrowers; advancers D. ​lenders; borrowers

​lenders; borrowers

The management of money and interest rates is called​ ________ policy and is conducted by a​ nation's ________ bank. A. ​fiscal; central B. ​monetary; superior C. ​monetary; central D. ​fiscal; superior

​monetary; central

The price of a coupon bond and the yield to maturity are​ ________ related; that​ is, as the yield to maturity​ ________, the price of the bond​ ________. A. ​positively; rises; rises B. ​positively; rises; falls C. ​negatively; falls; falls D. ​negatively; rises; falls

​negatively; rises; falls

The economist Irving​ Fisher, after whom the Fisher effect is​ named, explained why interest rates​ ________ as the expected rate of inflation​ ________, everything else held constant. A. ​rise; increases B. ​rise; stabilizes C. ​fall; increases D. ​fall; stabilizes

​rise; increases