ECON 302 FINAL

If you expect the inflation rate to be 15 percent next year and a one-year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is... A. 7 Percent B. 22 Percent C. -15 Percent D. -8 Percent

D, -8 Percent

Which of the following is not a contractual savings institution? A. A pension fund B. A life insurance company C. A fire and casualty insurance company D. A savings and loan association

D, A savings and loan association

People, in general, do not lend money to one another to buy a house or car because... A. Informational problems B. They do not know about the effort the people will provide to repay their debts C. They do not know about the capacity of other people to repay their debts D. All of the above

D, All of the above

A _________ is bought at a price below its face value, and the _______ value is repaid at the maturity date. A. Discount bond; discount B. Coupon bond; discount C. Coupon bond; face D. Discount bond; face

D, Discount bond; face

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

D, Eurobonds

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

D, Liquidity

An example of the problem of ________ is when a corporation uses the funds raised from selling bonds to fund corporate expansion to pay for Caribbean cruises for all of its employees and their families. A. Credit risk B. Risk Sharing C. Adverse selection D. Moral hazard

D, Moral hazard

The yield to maturity for a discount bond is ________ related to the current bond price A. Not B. Positively C. Directly D. Negatively

D, Negatively

The Troubled Asset Relief program authorized the treasury to A. Take over commercial banks B. Merge troubled financial institutions C. Purchase subprime mortgage assets from troubled financial institutions D. Regulate financial institutions E. All of the above

D, Regulate financial institutions

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. Bonds B. Notes C. Bills D. Stock

D, Stock

Kevin hiding a $100 bill is an example of the ______ function of money. A. Medium of exchange B. Specialization C. Unit of account D. Store of value

D, Store of value

Buying a US Treasury bond from your friend is an example of... A. Primary market B. Indirect finance C. Financial intermediation D. Secondary market

D. Secondary market

In the bond market, what happens after bond issuers become more risky? 1. Borrowing? 2. Interest rates? 3. Lending?

Demand shifts left 1. Decreases 2. Increases 3. Decreases

In the bond market what happens after consumers have a decrease in the desire to consume? 1. Borrowing? 2. Interest rates? 3. Lending?

Demand shifts out 1. Increases 2. Decreases 3. Increases

What happens before and after an increaser in technology that makes it possible to buy and sell bonds with more ease? 1. Borrowing? 2. Interest rates? 3. Lending?

Demand shifts out 1. Increases 2. Decreases 3. Increases

In the bond market, risk affects demand or supply? Does it shift left or right?

Demand; left

In the bond market, an increase in liquidity affects demand or supply? Does it shift left or right?

Demand; right

In the bond market, an increase in wealth affects demand or supply? Does it shift left or right?

Demand; right

________ is where funds are exchanged

Financial market

________ makes claims on issuers future income or assets

Financial security

Government spending and taxes to affect the economy are also known as...

Fiscal policy

The most comprehensive measure of aggregate output is... A. GDP B. National income C. Net national product D. The stock value of the industrial 500.

GDP

What is the key disadvantage of commodity money (not a characteristic)?

Increase in supply

_________ buy capital

Investors

What is the key disadvantage of fiat money?

It can be overproduced where people cannot be paid

What happens to money demand if price levels fall?

It decreases

What happens to money demand if transaction costs fall?

It decreases

What happens to money demand if inflation falls?

It increases

What happens to money demand if real interest rates fall?

It increases

What is the key advantage of fiat money?

It is easy to control the money supply

What is a key advantage of commodity money (not a characteristic)?

It is universally accepted

In the money market, if the real GDP falls, the Fed will respond by shifting the money supply to the ______

Left

Currency+Bank reserves+Checking accounts equals...

M1

________ deal in short-term debt instruments

Money market

The federal reserve did not rescue the investment bank Lehman Brothers because of... A. Asymmetric information B. Systematic risk C. Moral hazard D. Presidential objection

Moral hazard

What is the solution to the key disadvantage of fiat money

More independent central banks

Growth in money for waiting is also known as....

Nominal interest rate

If one country's price level increases relative to another's by a certain percentage, then the other country's currency appreciates by the same percentage

Purchasing power parity

Cost in goods from borrowing is...

Real interest rate

_______ consume less than their income

Savers

Describe the process of securitization.

Securitization is the process of transforming illiquid financial assets into marketable capital marketing instruments thru this process 1. loan origination 2. servicing 3. bundling 4. distribution

In the bond market, an increase in expected profitability of investment opportunities affects demand or supply? Does it shift left or right?

Supply; right

In the bond market, an increase in government deficits affects demand or supply? Does it shift left or right?

Supply; right

In the money market, if the real GDP falls....

The demand curve shifts to the left

In the bond market, what happens before and after an increase in the expectations of the inflation rate. 1.Bond prices? 2. Nominal interest rates?

The expected return for long term bonds decreases and the demand curve shifts left 1. Decreases 2. Increases

The price of impatience is also known as _______

The interest rate

What happens to money demand if the real GDP falls?

There is no change

In the agreement to exchange dollars for euros in 3 months at a price of 90 cents per euro, the price is the...

forward exchange rate

Expectation theory of interest rates

sum of returns divided by the # of years

What is the global pool of money?

-From This American Life podcast -all of the money the world is saving right now -The global pool of money is watched very carefully -It got cold in 1908 (don't know what that means)

What three parties play a role in determining the money multiplier and thus money supply?

1. Bankers 2. Depositors 3. The Central Bank

What are the three major parts of the federal reserve system?

1. Board of governors 2. The FMOC 3. The Federal Reserve District Banks

Order the dynamics of a financial crisis from 1 to 4. Debt deflation, price deflation, banking crisis, credit and asset boom

1. Credit and asset boom 2. Banking Crisis 3. Debt Deflation 4. Price Deflation

How did competitive forces lead to the repeal of the Glass-Steagall Act's separation of the banking and securities industries? Check all that apply. 1. Financial innovation motivated banks and other financial institutions to bypass the intend of the Glass-Steagall Act 2. The Fed allowed bank holding companies to enter the underwriting business 3. Banks were allowed to hold substantial equity stakes in commercial firms in order to keep them competitive 4. The act's restrictions put American banks at a competitive disadvantage relative to foreign banks.

1. Financial innovation motivated banks and other financial institutions to bypass the intend of the Glass-Steagall Act 2. The Fed allowed bank holding companies to enter the underwriting business 4. The act's restrictions put American banks at a complete disadvantage relative to foreign banks

The interest rate falls when either the demand for bonds _______ or the supply of bonds ________ A. Increases; decreases B. Decreases; decreases C. Increases; increases D. Decreases; increases

A. Increases; decreases

Which of the following is an example of financial intermediation? A. IBM issues a bond that is sold to a retired person B. Saver makes a deposit in credit union; credit union makes a loan to a member for a new car C. IBM issues common stock that is sold to a college student D. US Treasury sells bonds to fund government spending

B. Saver makes a deposit to a credit union; credit union makes loan to a member for a new car

_______ is the development of new financial products and services

Financial innovation

_______ connect savers with borrowers

Financial intermediaries

What gives the Federal Reserve the ability to be so independent?

Instrumental Independence

Why is financial regulation probably necessary?

systematic risk and asymmetric info

Which of the following entities in the federal reserve system sets reserve requirements? A. Board of governors B. The federal advisory council C. Member commercial banks D. The FDIC

the Board of Governors

List the three functions money must fulfill.

1. Store of value 2. Medium of exchange 3. Unit of Account

Financial intermediaries lower transaction costs by providing what two things?

1. economies of scope 2. Liquidity services

If the British pound appreciates from $0.50 per pound to $0.75 per pound, the U.S. dollar depreciates from ________ per dollar to ________ per dollar

2 pounds, 1.3 pounds

The Federal Reserve was created before the crisis surrounding... A. Bank panics of the early 1900s B. The revolution C. The civil war D. WWI E. Great Depression

A, Bank panics of the early 1900s

The yield to maturity for a discount bond is ______ related to the current bond price A. Negatively B. Not C. Positively D. Directly

A, Negatively

There is ________ for any bond whose time to maturity matches the holding period. A. No interest-rate risk B. Yield-to-maturity risk C. A large interest-rate risk D. Rate-of-return risk

A, No interest-rate risk

The 1980's is not known for banking A. Regulation B. Innovation C. Consolidation D. All of the above E. None of the above

A, Regulation

Which of the following factors apart from securitization was not responsible for the Great Recession of 2007-2009? A. A sudden rise in equity prices B. An increase in funds lent to subprime borrowers C. A decrease in the federal funds rate

A. A sudden rise in equity prices

Which of the following is not true of securitization? Select all that apply. A. It is a process that converts high-risk financial instruments into default-free instruments B. It is a process that converts a series of financial instruments into marketable securities C. It is a process that drives the prices of financial instruments above their fundamental values

A. It is a process that converts high-risk financial instruments into default-free instruments C. It is a process that drives the prices of financial instruments above their fundamental values

Which of the following bonds would have the highest default risk? A. Junk bonds B. Investment-grade bonds C. US Treasury bonds D. Municipal bonds

A. Junk bonds

As a result of strict banking​ regulations, the United States​ has... A. Many more smaller banks when compared to other industrialized countries B. Banks that are quite large relative to those in other industrialized countries C. Too few banks when compared to other industrialized countries D. A few dominant banks that hold most of the assets in the banking industry

A. Many smaller banks when compared to other industrialized countries

In order to reduce risk and increase the safety of financial institutions, commercial banks and depository institutions are prohibited from... A. Owning common stock B. Owning municipal bonds C. Making real estate loans D. Making personal loans

A. Owning common stock

Buying shares of Uber when they went public is an example of the... A. Primary market B. Secondary market C. Financial intermediation D. Indirect finance

A. Primary market

Who was the first Treasury Secretary of the United States?

Alexander Hamilton

The US got its first National currency around... A. 1780s B. 1860s C. 1830s D. 1910s

B, 1860s

The least period of financial regulation in the US occurred in the... A. Mid 1900s B. Early 1800s C. Early 1900s D. Post 2007 Financial crisis

B, Early 1800s

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

B, Lenders; borrowers

Financial intermediaries provide customers with liquidity services. Liquidity services... A. Are another term for asset transformation B. Make it easier for customers to conduct transactions C. Allow customers to have a cup of coffee while waiting in the lobby D. Are a result of the asymmetric information problem

B, Make it easier for customers to conduct transactions

Kevin purchasing concert tickets with a $100 bill is an example of the ________ function of money. A. Specialization B. Medium of exchange C. Unit of account D. Store of value

B, Medium of exchange

The federal reserve rescued the investment bank Bear Sterns because of... A. Asymmetric information B. Systematic risk C. Moral hazard D. Legal regulatory obligation

B, Systematic risk

Which of the following entities in the federal reserve system directs open market operations? A. The board of governors B. The FMOC C. The federal advisory council d. Member commercial banks

B, The FMOC

What happened at the end of the 1800's, between 1870 and 1890 (Wizard of Oz story). Why was this bad? What did the yellow brick road, emerald city, and Dorothy's slippers represent in monetary terms?

Between 1870 and 1890, the populist movement occurred. 1.Yellow Brick Road-The gold standard 2. Emerald City- Washington, DC 3. Dorothy's Slippers-the free silver movement (silver money)

If the fed wants to decrease the federal funds rate, they need to...

Buy bonds

Open market operations refer to the Fed doing what?

Buying and selling bonds

Increasing the amount of information available to investors helps to reduce the problems of __________ and __________ in the financial markets. A. Adverse selection; risk sharing B. Moral hazard; transaction costs C. Adverse selection; moral hazard D. Adverse selection; economies of scale

C, Adverse selection; moral hazard

Why do bank runs occur? A. Capital requirements B. Moral hazard C. Asymmetric information D. Financial dis-mediation

C, Asymmetric information

A ______ is bought at a price below its face value, and the ______ value is repaid at the maturity date. A. Discount bond; discount B. Coupon bond; discount C. Discount bond; face D. Coupon bond; face

C, Discount bond; face

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

C, Lenders; borrowers

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

C, Liquidity

Currency includes... A. Paper money, coins, and checks B. Paper money and checks C. Paper money and coins D. Checking and savings deposits

C, Paper money and coins

The Fed usually conducts open market operations using... A. Mortgage backed securities B. Corporate bonds C. Short-term treasury debt D. Foreign bonds E. All of the above F. None of the above

C, Short-term treasury debt

A well-functioning financial system... A. Creates unpredictable market disruptions B. Acts as a barrier to efficient allocation of capital C. Solves asymmetric information problems D. Causes financial frictions to increase an economy

C, Solves asymmetric information problems

Which of the following entities in the federal reserve system controls the discount rate 1. The FDIC 2. The federal advisory council C. The board of governors D. Member commercial banks

C, The board of governors

Which of the following can be described as involving indirect finance? A. You buy a US Treasury bill from the US Treasury at TreasuryDirect.gov B. You make a loan to your neighbor C. You buy shares in a mutual fund D. You purchase shares in an initial public offering by a corporation in the primary market

C, you buy shares in a mutual fund

_________ controls the money supply

Central Bank

What makes QE QE2 AND QE3 different from normal federal reserve activity?

Central banks buys specific amounts of assets from banks raising their prices and lowering their yield while increasing the money supply and it differs from the usual policy of buying and selling short term government bonds to keep interest rates at a target level

_________ accept deposits

Commercial banks

________ has intrinsic value

Commodity money