ECON 330 - CH.1/CH,2
How does the creation of a secondary market in mortgages help to promote home ownership? A. By allowing banks to transfer the risk of holding a loan to firms that have economies of scale in risk assessment. B. By allowing banks to offer a lower interest rate than if they held the loan themselves. C. By allowing banks to offer non-securitized loans to high-risk borrowers. D. A and B only. E. All of the above.
D. A and B only.
Describe key services that the financial system provides to savers. A. Liquidity B. Economies of scale of information C. Risk sharing D. All of the above
D. All of the above
If during 2011 the money supply increases by 6%, the inflation rate is 5%, and the growth of real GDP is 4%, what must have happened to the value of velocity during 2011? During 2011, the value of velocity increases by __%.
3%
_____ is a borrower with a flawed credit history and _____ is a borrower who states his or her income but does not document or prove the amount of income.
A subprime borrower; an Alt-A Borrower
What does it mean for payments to be made "in kind"? How might moving from a system of payments being made in gold and silver coins to a system of payments being made in kind affect the economy of the empire? A. "In kind" means to repay a service or good with another service or good, which would likely make trade and compensation more difficult for the empire. B. "In kind" means to repay a service or good with another service or good, which would likely have no effect on the economy of the empire. C. "In kind" means to repay a service or good with another service or good, which would likely make trade and compensation easier for the empire. D. "In kind" means to repay a service or good with another service or good. It would depend on the type of good or service being repaid to determine the effect on the economy of the empire.
A. "In kind" means to repay a service or good with another service or good, which would likely make trade and compensation more difficult for the empire.
What is a hyperinflation? A. Hyperinflation is inflation that exceeds 100% per year. B. Hyperinflation is inflation that is less than 100% per year. C. Hyperinflation is inflation that is equal to 100% per year. D. All of the above.
A. Hyperinflation is inflation that exceeds 100% per year.
How do the Fed's current responsibilities compare with its responsibilities when it was first created by Congress? A. In addition to its original role as a lender of last resort, the modern Fed is now responsible for monetary policy. B.In addition to its original role as regulator of the banking system, the modern Fed is now the lender of last resort. C. In addition to its original role of taking in deposits and making loans, the modern Fed is now responsible for solving the financial crisis. D. The role of the modern Fed has not changed from the role of the original Fed.
A. In addition to its original role as a lender of last resort, the modern Fed is now responsible for monetary policy.
What is the Federal Reserve? A. The central bank of the United States. B. The agency that insures deposits in banks. C. The agency that regulates federally chartered banks. D. The agency that regulates financial markets.
A. The central bank of the United States.
Has the growth rate of M1 been more or less stable than the growth rate of M2? A. The growth rate of M2 has been more stable than the growth rate of M1. B. The growth rate of M1 and M2 have grown at the same rate. C. The growth rate of M1 has been more stable than the growth rate of M2. D. More data is required before economists can determine this.
A. The growth rate of M2 has been more stable than the growth rate of M1.
What are the costs and sources of inefficiency in a barter system? (Check all that apply.) A. Transactions costs are almost always high. B. There is a lack of standardization. C. There is increased time and effort spent looking for trading partners. D. There is difficulty in accumulating wealth. E. Each good has only one price. F. Productivity is increased by specialization.
A. Transactions costs are almost always high. B. There is a lack of standardization. C. There is increased time and effort spent looking for trading partners. D. There is difficulty in accumulating wealth.
Why in this statement, did the president single out banks? Aren't supermarkets, airlines, software companies, and many other businesses also important to the economy? A. Without a healthy banking system, supermarkets, airlines, and other businesses would not be able to conduct business. B. Because more banks and small businesses failed during the recent financial crisis than any other business. C. Because banks channel funds from savers to borrowers, which makes them more important than other businesses. D. Because banks were more responsible for the financial crisis than any other business.
A. Without a healthy banking system, supermarkets, airlines, and other businesses would not be able to conduct business.
Should the packs of Marlboro cigarettes used to pay taxi drivers in Russia in the late 1980s be considered money? A. Yes, the cigarettes as payment fulfill all the key functions of money. B. No, the cigarettes as payment do not fulfill the key function of money as a store of value. C. No, the cigarettes as payment do not fulfill the key function of money as a standard of deferred payment. D. Uncertain, as this may change as the value of the Russian ruble changes.
A. Yes, the cigarettes as payment fulfill all the key functions of money.
An article in the Economist magazine notes that all of the following are benefits of using peer-to-peer lending, except: A. the funds for the loans come directly from the bank. B. interest rates are lower than those on credit cards. C. it may be easier to qualify for a loan. D. borrowers can apply for a loan online.
A. the funds for the loans come directly from the bank.
What is the cause of hyperinflation? A. An undervalued currency. B. A very high rate of growth in the money supply. C. A very large tax increase. D. All of the above.
B. A very high rate of growth in the money supply.
Your boss gives you a 10% raise. A. Money increases. B. Income increases. C. Wealth increases. D. All of the above.
B. Income increases.
What does it mean to say that the coinage had become debased? A. The coins were replaced with paper currency. B. Less valuable metals were added to the coins, causing the coins to lose value. C. More gold and silver were added to the coins, depleting the supply of such metals in the empire. D. Many people were robbed while transporting gold and silver coins, which lowered the value of the coins.
B. Less valuable metals were added to the coins, causing the coins to lose value.
You take cash out of the bank and use it to buy an Apple iPad. A. Wealth increases. B. Money increases. C. Income increases. D. All of the above.
B. Money increases.
What are the four main functions of money? Describe each function. A. Money should serve as a medium of exchange, a unit of account, a standard of deferred payment, and wealth. B. Money should serve as a medium of exchange, a unit of account, a store of value, and a standard of deferred payment. C. Money should serve as commodity money, a medium of exchange, a unit of account, and a store of value. D. Money should serve as a unit of account, a store of value, a standard of deferred payment, and legal tender.
B. Money should serve as a medium of exchange, a unit of account, a store of value, and a standard of deferred payment.
Why does the Federal Reserve care about the payments system? A. It is under the control of the Federal Reserve. B. The modern U.S. payments system is a fiat money system. C. The payments system saves the Fed money. D. An effective payments system eliminates the problem of trust between a buyer and a seller.
B. The modern U.S. payments system is a fiat money system.
What is the moral hazard problem? A. The problem that managers of a financial firm may have more information about risky investments than the federal government does. B. The problem that managers of a financial firm will take on riskier investments because they believe the federal government will save them from bankruptcy. C. The problem that managers may experience in distinguishing low-risk borrowers from high-risk borrowers before approving a mortgage.
B. The problem that managers of a financial firm will take on riskier investments because they believe the federal government will save them from bankruptcy.
Who appoints the members of the Federal Reserve's Board of Governors? A. They are appointed by the president and confirmed by the chairman of the Fed. B. They are appointed by the president and confirmed by the Senate. C. They are appointed by the president and confirmed by the House of Representatives. D. They are appointed by the vice president and confirmed by the Senate.
B. They are appointed by the president and confirmed by the Senate.
Why might the federal government decide to intervene in the housing market to promote home ownership? A. To increase profits for investment banks by creating mortgage-backed securities. B. To make it easier for families to borrow money to purchase a home. C. To promote economic stimulus through the construction of new homes. D. All of the above.
B. To make it easier for families to borrow money to purchase a home.
The value of your house increases. A. Money increases. B. Wealth increases. C. Income increases. D. All of the above.
B. Wealth increases.
Explain whether each of the following is included in only M1, only M2, or both M1 and M2. Traveler's checks are included in _____. Savings deposits are included in _____. Certificates of deposit are included in _____. Checking account deposits are included in _____.
Both M1 and M2; Only M2; Only M2; Both M1 and M2
Why is a bubble more likely to occur in the housing market rather than in the market for automobiles or the market for refrigerators? A. Because automobiles and refrigerators are purchased with non-securitized loans and a house is purchased with a securitized loan. B. Because homes are always bundled into mortgage-backed securities while automobiles and refrigerators are not. C. Because a house is likely to increase in price while automobiles and refrigerators are less likely to gain in value. D. Because home prices are more likely to rise at a rapid rate during a financial crisis.
C. Because a house is likely to increase in price while automobiles and refrigerators are less likely to gain in value.
How does securitization result in mortgages being "sliced into numerous pieces"? A. Because the loans have been separated into several smaller loans with lower and higher interest rates. B. Because the loans have been separated into smaller loans to offer the home buyer smaller monthly payments. C. Because the loans have been bundled with other loans and resold to other investors. D. Because the loans have been bundled and then sold to the federal government.
C. Because the loans have been bundled with other loans and resold to other investors.
What makes a personal check money? A. Checks serve as commodity money. B. Checks serve as wealth. C. Checks are accepted as a medium of exchange. D. All of the above.
C. Checks are accepted as a medium of exchange.
If Marlboro cigarettes are money, are they commodity money or fiat money? A. Fiat money —As cigarettes have value independent of their use as money. B. Neither —Cigarettes are simply a good to be bought and sold. C. Commodity money —As cigarettes have value independent of their use as money. D. Both commodity money and fiat money —As cigarettes fulfill all the key functions of money.
C. Commodity money —As cigarettes have value independent of their use as money.
Suppose financial intermediaries did not exist and only direct finance was possible. How would this affect the process of an individual buying a car or a house? A. Direct financing would increase the price the lender charges while the number of loans would remain unchanged. B. Direct financing would decrease the price the lender charges and increase the number of loans. C. Direct financing would increase the price the lender charges and reduce the number of loans. D. Direct financing would not affect the loan process when buying a house or car.
C. Direct financing would increase the price the lender charges and reduce the number of loans.
What factors, if changed, would affect your willingness to accept a dollar bill or a check as money? A. If others were unwilling to accept a dollar bill or a check as commodity money. B. If the dollar bill or check was no longer a sign of wealth. C. If others were unwilling to accept a dollar bill or a check as a means of payment. D. The dollar bill or check will always be accepted as money.
C. If others were unwilling to accept a dollar bill or a check as a means of payment.
Why would the president worry about the possibility that the appearance of Fed independence might be undermined? A. It could instill confidence in the Fed and worsen market conditions. B. It could instill confidence in the Fed and improve market conditions. C. It could undermine confidence in the Fed and impact market conditions. D. It could undermine confidence in the Fed but would not have an impact on the markets.
C. It could undermine confidence in the Fed and impact market conditions.
Which best describes why the president and Ms. Yellen did not discuss interest rates? A. They did not have enough time. B. The president does not set interest rates. C. It is important for the Fed to maintain its independence. D. The Federal Reserve is not a government organization.
C. It is important for the Fed to maintain its independence.
Is the equation of exchange a theory? A. No, it is not a theory because velocity is assumed to be constant. B. Yes, the equation of exchange is a statement about the world that might possibly be false. C. No, a theory is a statement about the world that might possibly be false. D. None of the above.
C. No, a theory is a statement about the world that might possibly be false.
Since the 1975, which measure of the money supply has grown more rapidly, M1 or M2? A. Since the 1960s, M1 has grown more rapidly. B. Since the 1960s, M1 and M2 have grown at the same rate. C. Since the 1960s, M2 has grown more rapidly. D. Since the 1960s, the size of M2 has remained constant.
C. Since the 1960s, M2 has grown more rapidly.
Why would securitization make renegotiating a loan more difficult? A. The closing costs for several smaller loans may be prohibitively costly to the home buyer. B. Each investor holding the security may not agree to the terms of the renegotiation. C. The cost of negotiation with every investor holding the security may be prohibitively costly. D. The cost of information gathering for each investor holding the security may be prohibitively costly.
C. The cost of negotiation with every investor holding the security may be prohibitively costly.
Which involves financial intermediaries, and which involves financial markets? A: Both direct and indirect finance require financial intermediaries and financial markets. B.Indirect finance requires financial markets, while direct finance involves financial intermediaries. C.Direct finance requires financial markets, while indirect finance involves financial intermediaries. D.Neither direct or indirect finance requires the use of financial intermediaries and financial markets.
C.Direct finance requires financial markets, while indirect finance involves financial intermediaries.
By the 2000s, what significant changes had taken place in the mortgage market? A. Lenders created new types of non-traditional loans, allowing borrowers to pay a very low interest rate for the first few years of the mortgage and then pay a higher rate in later years. B. Investment banks began buying mortgages, bundling large numbers of them together as mortgage-backed securities, and reselling them to investors. C. Lenders loosened the standards for obtaining a mortgage loanlong dash—often lending to subprime borrowers and Alt-A borrowers. D. All of the above.
D. All of the above.
The figure to the right shows the Case-Shiller price index of houses. Economists Karl Case of Wellesley College and Robert Shiller of Yale University developed this index. Many economists consider changes in the average price of houses in the United States to be difficult to measure. What challenges might exist in accurately measuring housing prices? A. Whether there are other features of a home or neighborhood that are not easily identifiable from an index number. B. Whether to use the price sold as the value of the house or the appraised value. C. Whether the value accounts for quality improvements or declines if the index is based solely on selling prices. D. All of the above.
D. All of the above.
What actions did the Federal Reserve and Treasury take in dealing with the financial crisis? A. The Fed aggressively lowered interest rates and created several new credit windows for distressed banks. B. Congress passed the Troubled Asset Relief Program (TARP) and the Treasury actively worked with the Fed to ensure financial stability. C. The Federal Reserve and the Treasury worked together to find a buyout partner for Bear Stearns. D. All of the above.
D. All of the above.
What makes a dollar bill money? A. A dollar bill is durable yet easily transportable. B. A dollar bill is easily divisible. C. A dollar bill is accepted as a means of payment and standardized in terms of quality. D. All of the above.
D. All of the above.
What problems did the decline in housing prices that began in 2006 cause for the financial system? A. Banks began to restrict credit to all but the safest borrowers long dash—limiting the flow of funds from savers to borrowers. B. The value of mortgage-backed securities declined sharply long dash—causing heavy losses for the investment institutions owning these securities. C. Many subprime and Alt-A borrowers, borrowers with adjustable rate mortgages, and borrowers who had made only small down payments defaulted on their mortgages. D. All of the above.
D. All of the above.
Why do many economists believe that there was a housing bubble in the United States between 2000 and 2005? A. Because housing prices could not be accurately determined during these years. B. Because expectations of home sales were too overly optimistic during these years. C. Because housing prices were falling at a very rapid rate during these years. D. Because housing prices were rising at a very rapid rate during these years.
D. Because housing prices were rising at a very rapid rate during these years.
The Fed considers all the following as desirable outcomes for a payments system, except: A. Efficiency. B. Security. C. Speed. D. Closed to international transactions.
D. Closed to international transactions.
What is the equation of exchange? A. M+V=P−Y B. V=PM/Y C. M−V=P−Y D. MV=PY
D. MV=PY
Which of the following best explains the growth rates of M1 and M2 during the early 1990s? A. Laid off workers were depleting their checking accounts. B. Money market checking accounts were introduced. C. Investors were moving money into stocks. D. The economy was in a recession.
D. The economy was in a recession.
Could the actions of the Federal Reserve and Treasury be viewed as a moral hazard problem? A. Uncertain, if the actions of the Fed and Treasury prove to be successful, then there are no moral hazard problems. B. Yes, financial firms such as Bear Stearns will always have more information than the federal government does and thus will use that information to offer risky long dash—but profitable long dash—investments. C. No, the Federal Reserve and Treasury would never act in a way that may lead to moral hazard problems. D. Yes, financial firms such as Bear Stearns may continue taking on riskier investments because they believe a federal bailout is likely.
D. Yes, financial firms such as Bear Stearns may continue taking on riskier investments because they believe a federal bailout is likely.
______ finance is a transaction between two parties where one party lends directly to the otherparty, whereas ______ finance involves threeparties: theborrower, thelender, and a third partylong dash—such as a bank.
Direct; Indirect
A _____ is something that is generally accepted as payment for goods and services. A _____ is a way of measuring value in an economy in terms of money. A _____ is the accumulation of wealth by holding dollars or other assets that can be used to buy goods and services in the future. A _____ is a characteristic of money by which it facilitates exchange over time.
Medium of Exchange; Unit of Account: Store of Value; Standard of Deferred Payment
_____ is anything that people are willing to accept in payment for goods and services or to pay off debts. _____ is a financial security that represents partial ownership of a firm. _____ is a financial security issued by a corporation or government to borrow money in exchange for the rights to an interest payment. _____ is a unit of foreign currency. _____ is a collection of loans packaged together that pays an interest payment to the owner of the loan.
Money, A stock, A Bond, Foreign Exchange, A Securitized Loan
What a saver would consider a financial asset a borrower would consider a financial liability. Is this statement true or false?
True
Why would government officials need to restore confidence in the coins before people would use them as money? People would have to believe the coins _____ before they would use them.
had legitimate value
Periods of hyperinflation often _____ bank profits, especially if inflation is _____ than the bank expected it to be when making loans.
hurt; higher
Economists classify a "bubble" as an unsustainable _____ in the price of a class of assets, such as the purchase of a home.
increase
The flow of money from a loan is considered _____ finance because the bank _____ lending its own funds to you.
indirect; is not
When a mortgage is renegotiated, lenders _____ and borrowers ______.
win; win