Econ Practice Exam 4
Calculate the present value of an asset worth $2,000 four years from now if the interest rate is 6 percent.
$1,584.19 The present value of $2,000 to be received 4 years from now at 6 percent interest is $1,584.19 [= $2,000 ÷ (1.06)4].
A bond pays an interest rate of 5 percent each year for five years, with a future (face) value of $200. If the bond were sold today, what would be the present value of the bond?
$157
A bank account pays 4 percent interest per year. If you deposit $1,000 into this account at the start of each year for three years, how much will your account balance be at the end of three years?
$3,246
A bank makes an auto loan for $32,000 at an annual rate of 6 percent. Assuming no repayment is made during the period, after two years the borrower will owe
$35,955 At the end of two years, the borrower of the $32,000 auto loan will owe $35,955 [= $32,000 × (1.06)2].
Suppose that Betty takes out a loan for $300 at an annually compounded interest rate of 6 percent to be repaid after five years. How much will be required to pay off the loan at the end of the five years?
$401.47 To pay off the $300 loan at the end of 5 years will require $401.47 [= $300 × (1.06)5].
Which of the following statements about the Fed's dual mandate is incorrect? The dual mandate directive was given to the Fed in 1977 by Congress. The Fed uses the dual-mandate bullseye chart to make policy decisions. The dual mandate states that the Fed's top two goals should be full employment and stable prices. Since 2012, the Fed has used a specific target rate of inflation of 2 percent.
The Fed uses the dual-mandate bullseye chart to make policy decisions.
Which of the following is correct? The asset demand for money is downward sloping because the opportunity cost of holding money declines as the interest rate rises. The asset demand for money is downward sloping because the opportunity cost of holding money increases as the interest rate rises. The transactions demand for money is downward sloping because the opportunity cost of holding money varies inversely with the interest rate. The asset demand for money is downward sloping because bond prices and the interest rate are directly related.
The asset demand for money is downward sloping because the opportunity cost of holding money increases as the interest rate rises.
In which case would the quantity of money demanded by the public tend to increase by the greatest amount? The interest rate increases and nominal GDP increases. The interest rate increases and nominal GDP decreases. The interest rate decreases and nominal GDP decreases. The interest rate decreases and nominal GDP increases.
The interest rate decreases and nominal GDP increases.
Which of the following is not common to all investments? Investors are required to pay some price to acquire them. Owners are given the opportunity to receive future payments. Future payments are typically risky. The investment pays a positive rate of interest.
The investment pays a positive rate of interest.
Which of the following statements is incorrect about the money market? The money market is relatively insignificant since the federal funds rate is not a main tool of Fed policy. The money market accounts for about one-third of all lending and credit in the U.S. The money market is an umbrella term that refers to a wide variety of short-term lending markets. The Fed wishes to influence, rather than set, the interest rates in the money markets.
The money market is relatively insignificant since the federal funds rate is not a main tool of Fed policy.
Which of the following is not a tool of monetary policy?
changes in banking laws
Which of the following is correct? When the Federal Reserve transacts a reverse repo agreement with a nonbank firm, the money supply expands because the Fed gives the proceeds to the banks. does not change. expands because the Fed immediately puts the money back in circulation. contracts because that money will sit in the Fed's vaults.
contracts because that money will sit in the Fed's vaults.
Most of the thrift institutions in this country are
credit unions. The 7,000 or so thrift institutions—most of which are credit unions—are regulated by agencies separate and apart from the Board of Governors and the Federal Reserve Banks.
Other things equal, an increase in productivity will
increase both aggregate supply and real output.
Assume that the MPC is 0.75 and that the price level is "sticky." If the Federal Reserve increases the money supply and investment spending increases by $8 billion, then aggregate demand is likely to
increase by $32 billion.
The Federal Reserve could reduce the money supply by
increasing the interest rate on reserve balances.
Les buys a bond for $5,000. Every year that he holds the bond, he will receive interest payments of $250. The interest rate on the bond is 2 percent. is 5 percent. is 20 percent. cannot be determined.
is 5 percent.
The Federal Reserve System
is basically an independent agency.
Riskier investments tend to sell for
lower prices, so they provide a higher expected rate of return to compensate for risk.
(Last Word) With compound interest, a 1 percent difference in fees charged by funds
makes a huge difference in the amount of interest earned over many years.
(Last Word) In the future, private cryptocurrencies like Bitcoin and Ether
may be supplanted by central bank digital currencies.
Assume that the MPC is 0.80 and that prices are fully flexible. If the Federal Reserve increases the money supply and investment spending increases by $10 billion, then aggregate demand is likely to
ncrease by $50 billion.
For most financial assets, investors must be compensated for
nondiversifiable risk and time preference.
Currency held in the vault of First National Bank is
not counted as part of the money supply.
A checking account balance is money because it
performs the functions of money.
A bond that pays annual interest (or coupons) and a face value at maturity will fetch a price today that is equal to the
present value of its annual coupons and face value.
According to the Taylor rule, if the target rate of inflation for the Fed is 2 percent and inflation rises from 2 to 3 percent at full unemployment, then the Fed should
raise their targeted interest rate by one and one-half of a percentage point.
The Security Market line (SML) shows how the average expected rates of return on assets vary with
risk level.
Which of the following financial assets is considered to be essentially risk-free? gold stock in Fortune 500 companies real estate short-term U.S. government bonds
short-term U.S. government bonds
There is an asset demand for money primarily because of which function of money?
store of value
The U.S. federal government is unlikely to default on its bonds because
the federal government has the ability to collect taxes and to sell securities to the Fed.
If the quantity of money demanded exceeds the quantity supplied,
the interest rate will rise.
The expected rate of return from an investment is
the rate that compensates for time preference plus the rate that compensates for risk.
As a result of policy actions taken by the Fed since 2008, it (the Fed) can no longer expect to affect the federal funds rate through traditional open market operations by altering the amount of bank reserves in the system. This is because
there are already massive quantities of bank reserves in the system.
In defining money as M1, economists exclude time deposits because
they are not directly or immediately a medium of exchange.
The amount of money people want to hold for use as a medium of exchange is the
transactions demand for money.
If the Fed is trying to make interest rates go down, it may want
unemployment to decrease.
To say "money is what money does" means that
whatever performs the functions of money extremely well is considered to be money.
When the interest rate in the economy was 10 percent, the price of a bond with no expiration date that paid a fixed annual interest of $500 was $5,000. If the interest rate in the economy falls to 6 percent, the price of this bond will be about
$8,333. Find the amount of the interest payment by multiplying the interest rate times the face value of the bond: $500 ($5,000 × 0.10). When the interest rate in the economy falls to 6 percent, find the new price of the bond by dividing the annual interest payment by the new interest rate: $8,333 ($500 ÷ 0.06). Now the price of the bond is $8,333.
In 2008, at the depth of the Great Recession, the Fed moved toward a ZIRP when it aimed to keep the federal funds rate between
0 and 0.25 percent.
The Federal Reserve System was established by the Federal Reserve Act of
1913
If the effective federal funds rate is 3.89 percent, which of the following is most likely to be the Fed's target range for the federal funds rate? 1.00 to 6.00 2.89 to 4.89 3.75 to 4.00 3.89 to 4.39
3.75 to 4.00
Suppose stock X has a beta of 2.5 and stock Y has a beta of 0.5. From this we can conclude that X has
5 times the nondiversifiable risk of Y.
Ethan buys a bond for $10,000. Every six months he will receive an interest payment of $300. The annual interest rate on the bond is approximately
6 percent.
Which of the following best describes the cause-effect chain of expansionary monetary policy? A decrease in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and real GDP. A decrease in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and real GDP. An increase in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and real GDP. An increase in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and real GDP.
An increase in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and real GDP.
The Taylor rule
Fed target interest rate = 2 + current inflation rate + 0.5(inflation gap) -1(unemployment gap). The inflation gap = (current inflation rate - inflation rate target) and the unemployment gap is (current unemployment - unemployment rate target). 5.5 = 2 + 3 + 0.5(3 - 2) −1(3.5 - 3.5).
The discount rate is the rate of interest at which
Federal Reserve Banks lend to banks.
Which of the following does not explain what backs the money supply in the United States? It is backed by gold. It is widely accepted in transactions. It is designated "legal tender" by the federal government. It is relatively scarce.
It is backed by gold.
An asset's liquidity refers to its ability to be
a means of payment.
If you are estimating your total expenses for school next semester, you are using money primarily as
a unit of account.
"Do not put all your eggs in one basket" is advice that seeks to reduce
idiosyncratic risk.
(Last Word) Before being adjusted for costs,
actively managed funds and index funds perform about the same.
Economic studies suggest there is
an inverse relationship between the degree of independence of the central bank and the size of the average annual rate of inflation.
The buying and selling process that leads profit-seeking investors to equalize average expected rates of return from identical assets is known as
arbitrage.
Index funds are passively managed. are actively managed. may be either passively or actively managed. are neither passively nor actively managed.
are passively managed.
Arbitrage is the process by which investors simultaneously sell
assets with lower rates of return and buy otherwise identical assets with higher rates of return.
The major problem facing the economy is high unemployment and weak economic growth. The inflation rate is low and stable. Therefore, the Federal Reserve decides to pursue a policy to increase the rate of economic growth. Which policy changes by the Fed would reinforce each other to achieve that objective?
buying government bonds, lowering the IORB and ON RRP, and lowering the policy rate
Other things equal, an increase in taxes on businesses will
decrease aggregate supply, decrease aggregate demand, and cause real GDP to fall.
Other things equal, an appreciation of the U.S. dollar would
decrease net exports and decrease aggregate demand.
Assume the economy is operating at less than full employment. An expansionary monetary policy will cause interest rates to _________blank, which will _________blank investment spending. decrease; decrease decrease; increase increase; increase increase; decrease
decrease; increase
An increase in the money supply, ceteris paribus, usually
decreases the interest rate and increases aggregate demand.
Which one of the following is presently a major deterrent to bank panics in the United States?
deposit insurance
In general, risk levels and average expected rates of return are
directly related.
Which of the following is paid to the Fed as a source of low-cost liquidity? discount rate interest on reserve balances policy rate overnight reverse repo rate
discount rate
Projecting that it temporarily may not be able to fulfill every request from depositors wanting to withdraw funds in the coming days, the Bank of Beano decides to borrow money from the Federal Reserve Bank in its district. The interest rate on the loan is called the
discount rate.