Economics Quiz Questions

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If 1-year interest rates for the next three years are expected to be 1, 1, and 1 percent, and the 3-year term premium is 1 percent, than the 3-year bond rate will be

2 Percent

A budget ________ occurs when government expenditures exceed tax revenues for a particular time period.

Deficit

Holding everything else constant, if interest rates are expected to increase, the demand for bonds ________ and the demand curve shifts ________.

decreases;left

Bonds with no default risk are called

default-free bonds

The principal lender-savers are

households.

________ is a flow of earnings per unit of time.

income

Everything else held constant, abolishing the individual income tax will

increase the interest rate on municipal bonds.

Which of the following are TRUE for discount bonds?

The purchaser receives the face value of the bond at the maturity date.

When compared to exchange systems that rely on money, disadvantages of the barter system include

The requirement of a double coincidence of wants

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.

bond; stock

According to the liquidity premium theory of the term structure, a downward sloping yield curve indicates that short-term interest rates are expected to

decline sharply in future

An equal increase in all bond interest rates

decreases long-term bond returns more than short-term bond returns.

An increase in the interest rate

decreases the quantity of money demanded

The typical shape for a yield curve is

gently upward slope

Assume that you borrow $2000 at 10% annual interest to finance a new business project. For this loan to be profitable, the minimum amount this project must generate in annual earnings is

201

If the expected path of 1-year interest rates over the next five years is 1 percent, 2 percent, 3 percent, 4 percent, and 5 percent, the expectations theory predicts that the bond with the highest interest rate today is the one with a maturity of

5 years

I purchase a 10 percent coupon bond. Based on my purchase price, I calculate a yield to maturity of 8 percent. If I hold this bond to maturity, then my return on this asset is

8 percent

A lottery claims its grand prize is $10 million, payable over 5 years at $2,000,000 per year. If the first payment is made immediately, what is this grand prize really worth? Use an interest rate of 6%.

8,930,211

Which of the following can be described as involving direct finance?

A corporation issues new shares of stock.

If bad credit risks are the ones who most actively seek loans and, therefore, receive them from financial intermediaries, then financial intermediaries face the problem of

Adverse Selection

_______________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.

Commodity

_______ policy involves decisions about government spending and taxation.

Fiscal

Which of the following are TRUE of fixed payment loans?

Installment loans and mortgages are frequently of the fixed payment type.

How does the size of the U.S. budget deficit in 2010 compare to the time period since​ 1950?

It has expanded dramatically since 2007. In​ 2010, the​ deficit-to-GDP ratio was 10​ percent, well above the historical average of around 2 percent since 1950.

Prices and returns for ________ bonds are more volatile than those for ________ bonds, everything else held constant.

Long term;short term

If an individual moves money from a small-denomination time deposit to a demand deposit account

M1 increases and M2 stays the same.

There is a ________ association between inflation and the growth rate of money ________.

Monetary;Central

A financial market in which only short-term debt instruments are traded is called the ________ market.

Money

Which of the following is a depository institution?

Mutual Savings Bank

There is a ________ association between inflation and the growth rate of money ________.

Postive;supply

Suppose you have just inherited ​$ 10000 and are considering different options for investing the money to maximize your return. If you are​ risk-neutral (that​ is, neither seek out or shy away from​ risk), which of the following options should you choose to maximize your expected​ return?

Put the money in an​ interest-bearing checking​ account, which earns 2%. The FDIC insures the account against bank failure

A financial market in which previously issued securities can be resold is called a ________ market.

Secondary

What is the typical relationship among interest rates on three-month Treasury bills, long-term Treasury bonds, and Baa corporate bonds?

They tend to move together over time with the corporate bond having the highest rate of interest

True/False: With a discount bond, the return on the bond is equal to the rate of capital gain

True

In Brazil, a country that underwent a rapid inflation before 1994, many transactions were conducted in dollars rather than in reals, the domestic currency. What functions of money could be better served with U.S. dollar rather than their domestic currency?

Unit of account; Medium of exchange; Store of value

Suppose you have just inherited $10,000 and your only possibility is to loan the money to one of your friend's roommates, Mike, at an agreed-upon interest rate of 8%, even though you believe there is a 7% chance that Mike will leave town without repaying you.

YEs we are increasing rate of return

Which of the following $1,000 face-value securities has the highest yield to maturity?

a 5 percent coupon bond selling for $1,000

If fluctuations in interest rates become smaller, then, other things equal, the demand for stocks ________ and the demand for long-term bonds ________.

decreases;increases

Well-functioning financial markets

allow the economy to operate more efficiently.

In Keynes's liquidity preference framework, if there is excess demand for money, there is

an excess supply of demands

When stock prices fall

an individual's wealth may decrease and their willingness to spend may decrease

A key assumption in the segmented markets theory is that bonds of different maturities

are no substitutes at all

Securities are ________ for the person who buys them, but are ________ for the individual or firm that issues them.

assets; liabilities

According to the expectations theory of the term structure, the interest rate on a long-term bond will equal the ________ of the short-term interest rates that people expect to occur over the life of the long-term bond.

average

When the interest rate on a bond is above the equilibrium interest rate, in the bond market there is excess ________ and the interest rate will ________.

demand;fall

Financial institutions that accept deposits and make loans are called ________ institutions.

depository

High interest rates might ________ purchasing a house or car but at the same time high interest rates might ________ saving.

discourage; encourage

When the price of a bond decreases, all else equal, the bond demand curve

does not shift

If the price level doubles, the value of money

falls by 50 percent

If housing prices are expected to increase, then, other things equal, the demand for houses will ________ and that of Treasury bills will ________.

increase;decrease

Deflation causes the demand for bonds to ________, the supply of bonds to ________, and bond prices to ________, everything else held constant.

increase;decrease;increase

Higher government deficits ________ the supply of bonds and shift the supply curve to the ________, everything else held constant.

increase;right

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.

increases

When the Fed ________ the money stock, the money supply curve shifts to the ________ and the interest rate ________, everything else held constant.

increases;right;falls

All of the following are necessary criteria for a commodity to function as money EXCEPT

it must deteriorate quickly.

When the growth rate of the money supply is increased, interest rates will fall immediately if the liquidity effect is ________ than the other money supply effects and there is ________ adjustment of expected inflation.

larger;slow

A decrease in the liquidity of corporate bonds, other things being equal, shifts the demand curve for corporate bonds to the ________ and the demand curve for Treasury bonds shifts to the ________.

left, right

Of the four effects on interest rates from an increase in the money supply, the one that works in the opposite direction of the other three is the

liquidity effect

A bond with default risk will always have a ________ risk premium and an increase in its default risk will ________ the risk premium.

positive:raise

The ________ of the term structure states the following: the interest rate on a long-term bond will equal an average of short-term interest rates expected to occur over the life of the long-term bond plus a term premium that responds to supply and demand conditions for that bond.

liquidity premium theory

Federal funds are

loans made by banks to each other

Currency includes

paper money and coins

The sum of the current yield and the rate of capital gain is called the

rate of return

When the ________ interest rate is low, there are greater incentives to ________ and fewer incentives to ________.

real;borrow;lend

An increase in the riskiness of corporate bonds will ________ the price of corporate bonds and ________ the price of Treasury bonds, everything else held constant.

reduce;increase

Financial markets promote greater economic efficiency by channeling funds from ________ to ________.

savers; borrowers

If the maturity of a debt instrument is less than one year, the debt is called

short-term.

Prior to almost all recessions since 1950, there has been a drop in

the growth rate of the money stock.

The M1 measure of money includes

traveler's checks

A person's house is part of her

wealth


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