macro exam 2
A consol bond promises to pay $1000 each year, forever. If the nominal interest rate is 5%, the present discounted value of this consol is
$20,000
20) Which of the following would be a violation of the rational expectations assumption? A) "Over the past twenty years, people have consistently under-predicted the inflation rate for the following year." B) "Over the past twenty years, people have never once accurately predicted the inflation rate for the following year." C) "The Fed's announcement that it might ease interest rates caused an immediate drop in short-term rates, even before the Fed took any action." D) all of the above E) none of the above
A) "Over the past twenty years, people have consistently under-predicted the inflation rate for the following year."
9) A bond has a face value of $1,000, a price of $1,200, and coupon payments of $100 for two years. The "current yield" of this bond is A) 8.33%. B) 10%. C) 12%. D) 83%. E) none of the above
A) 8.33%.
15) Which of the following would cause a reduction in human wealth? A) a permanent reduction in salary B) a reduction in the value of one's house C) a reduction in the value of one's stock portfolio D) all of the above E) none of the above
A) a permanent reduction in salary
4) Suppose there is an increase in profitability. This suggests that A) firms have increased their expectations of future profits. B) the real interest rate has increased. C) the rate of depreciation has increased. D) all of the above
A) firms have increased their expectations of future profits.
A reduction in which of the following variables will cause a reduction in the user cost of capital? A) δ B) Πt C) Πet D) all of the above E) none of the above
A) δ
Suppose the central bank implements a monetary expansion that is NOT fully anticipated. We would expect A. Stock prices rise B. Stock prices fall C. Stock prices remain unchanged D. ambiguous effect on stock prices E. none of the above
A. Stock prices rise
Which of the following events would likely cause the largest increase in current consumption? A. a permanent increase in annual salary of $2000 B. a one time tax cut of $4000 C. a one time bonus of $4000 D. both b and c
A. a permanent increase in annual salary of $2000
which of the following will not cause aggregate private spending to increase A. an increase in expected future real interest rates B. an increase in government spending C. a reduction in future taxes D. all of the above E. none of the above
A. an increase in expected future real interest rates
Exports will decrease when there is A. an increase in the real exchange rate B. an increase in domestic output C. an increase in foreign output D. all of the above E. none of the above
A. an increase in the real exchange rate
An increase in which of the following variables will cause an increase in the user cost of capital? A. depreciation rate B. current profit C. expected profit D. all of the above E. none of the above
A. depreciation rate
An upward sloping yield curve suggests that financial market participants expect short-term interest rates will A. rise in the future B. fall in the future C. be unstable in the future D. not change in the future E. be equal to zero in the future
A. rise in the future
Which of the following best defines the real interest rate (r) A. the amount of goods we must give up next year in order to consume more goods today B. the amount of dollars we must give up next year in order to consume more goods today C. the amount of dollars we must give up next year in order to have more dollars today D. the amount of dollars we must give up today in order to have more dollars next year E. the amount of dollars we must give up today in order to consume more goods today
A. the amount of goods we must give up next year in order to consume more goods today
An increase in government spending will have a greater impact on net exports when A. the marginal propensity to save is smaller B. the economy is closed C. the sensitivity of investment to income is smaller D. all of the above E. none of the above
A. the marginal propensity to save is smaller
Human wealth is A. the present discounted value of expected future after tax income B. the sum of financial and housing wealth C. the dsicounted present value of all financial assets D. financial wealth minus housing wealth E. total wealth minus housing wealth
A. the present discounted value of expected future after tax income
Suppose the current one-year interest rate is 4% and financial markets expect the one-year interest rate next year to be 8%. Given this information, the yield to maturity on a two year bond will be approximately A 4% B 6% C 8% D 12%
B 6%
suppose there is an increase in expected future output. This will cause which of the following to occur? A IS shift left in current period B IS shift right in current period C LM shift right in current period D LM urve shift up in the current period E LM shift down in current period
B IS shift right in current period
iii. With a nominal interest rate of 5% per year, the present discounted value of $100 to be received in 10 years is A) $50.00. B) $61.39. C) $95.24. D) $150.00. E) $163.89.
B) $61.39.
Suppose individuals now believe that there will be an increase in the future expected interest rate. This increase in the expected future interest rate will cause which of the following to occur in the current period? A) an upward shift of the LM curve B) a leftward shift of the IS curve C) the IS curve to become flatter D) the LM curve to become steeper E) none of the above
B) a leftward shift of the IS curve
iv. The quantity of imports will increase when there is A) a reduction in the real exchange rate. B) an increase in domestic output. C) an increase in foreign output. D) all of the above E) none of the above
B) an increase in domestic output.
The IS curve shifts to the left where there is A) a reduction in current taxes. B) an increase in expected future taxes. C) an increase in expected future output. D) all of the above E) none of the above
B) an increase in expected future taxes.
Suppose there is a reduction in expected future taxes. This will cause which of the following to occur? A) the IS curve to shift left in the current period B) the IS curve to shift right in the current period C) the LM curve to shift up in the current period D) the LM curve to shift down in the current period
B) the IS curve to shift right in the current period
With a nominal interest rate of 10%, the present discounted value of $200 to be received in one year is A. $90.91 B. $165.29 C. $181.82 D. $190.00 E. $220.00
B. $165.29
11) Suppose the current one-year interest rate is 3%. Also assume that financial markets expect the one-year interest rate next year to be 2%, and expect the one-year rate to be 1% the year after that. Given this information, the yield to maturity on a three-year bond will be approximately A. 1%. B. 2%. C. 3%. D. 6%.
B. 2%.
Suppose current one year interest rate is 4% and the financial markets expect the one year interest rate next year to be 8%. Given this information, the YTM on a 2 year bond will be approx A. 4% B. 6% C.8% D. 12% E. none above
B. 6%
Which of the following, all else fixed, will cause the real exchange rate to increase? A. a nominal depreciation B. A reduction in the foreign price level C. a reduction in the domestic price level D. all of the above E. none of the above
B. A reduction in the foreign price level
Suppose financial market participants expect short-term rates in the future to be less than current short-term interest rates. Given this information, we would expect A. an upward sloping yield curve B. a downward sloping yield curve C. an upward shifting yield curve D. a downward shifting yield curve E. a horizontal yield curve
B. a downward sloping yield curve
for a given nominal interest rate, a reduction in expected inflation will cause A. a reduction in the real interest rate B. an increase in the real interest rate C. an increase in investment D. an increase in money demand
B. an increase in the real interest rate
Which of the following is true when a country is experiencing a trade surplus? A. demand for domestic goods is equal to the domestic demand for goods B. demand for domestic goods is greater than the domestic demand for goods C. demand for domestic goods is less than the domestic demand for goods D. a budget surplus exists
B. demand for domestic goods is greater than the domestic demand for goods
Assume that the nominal exchange rate decreases by 4%. If prices--both domestic and foreign do not change), we know that A. foreign goods are now relatively cheaper B. foreign goods are now relatively more expensive C. domestic goods are now relatively more expensive D. both a and c
B. foreign goods are now relatively more expensive
The fundamental value of a share of stock is equal to which of the following? A. the sum of expected dividends B. the present value of expected dividends C. the sum of coupon payments D. the present value of coupon payments E. the present value of expected yield
B. the present value of expected dividends
Assume that the current one year rate is 3% and the 2 year rate is 5%. Given this info the one year rate expected on year from now is A 5% B 6% C 7% D 9%
C 7%
13) The "life cycle" and "permanent income" theories of consumption share which of the following features? A) consumption spending depends on income, rather than wealth. B) consumption spending should fluctuate widely from year to year. C) consumers look ahead to the future in making current spending decisions. D) all of the above E) none of the above
C) consumers look ahead to the future in making current spending decisions.
The Fisher effect summarizes the effects of A) inflation on the nominal interest rate in the short run. B) inflation on the real interest rate in the short run. C) inflation on the nominal interest rate in the medium run. D) inflation on the natural real interest rate in the short run.
C) inflation on the nominal interest rate in the medium run.
An expected reduction in the money supply will tend to cause A) an increase in stock prices. B) a reduction in stock prices. C) no change in stock prices. D) an ambiguous effect on stock prices.
C) no change in stock prices.
An expected tax cut will tend to cause A) an increase in stock prices. B) a reduction in stock prices. C) no change in stock prices. D) an ambiguous effect on stock prices.
C) no change in stock prices.
suppose an individual experiences a $20,000 increase in real income and the individual believes this increase in income is permanent. Economic theory suggests that this individual's current consumption will A) remain unchanged B)increase by more than $20,000 C)increase by at most $20,000 D)decrease or remain unchanged, depending on the value of the real IR D)decrease, remain unchanged, or increase depending on the value of the real IR
C)increase by at most $20,000
With a nominal interest rate of 10%, the present discounted value of $200 to be received in one year is A. $90.91 B. $165.29 C. $181.82 D. $190.00 E. $220.00
C. $181.82
A share of stock will pay a dividend of $25 in one year and will be sold for an expected price of $500 at that time. If the current one year interest rate is 5% then the current price of the stock will be approximately equal to A. $100 B. $475 C. $500 D. $525
C. $500
Assume the interest rate in a foreign country is 7% & that the foreign currency is expected to depreciate by 3% during the year. For each dollar that a U.S. resident invests in foreign bonds, he/she can expect to get back an approximate total of A. .93 B. .96 C. 1.04 D. 1.07 E. 1.10
C. 1.04
If the nominal interest rate is 8% and expected inflation is 3%, the expected real interest rate is A. 2% B. 3% C. 5% D. 8% E. 11%
C. 5%
which of the following will occur as a result of a tax increase? A. private savings increases B. Investment increases C. The trade balance improves D. The trade balance worsens E. The budget deficit increases
C. The trade balance improves
Suppose the fed increases the money supply in the current period with no other policy change implemented or anticipated. This policy action will cause which of the following shifts in the IS and or LM curves in the current period? A. IS left LM Up B. IS right LM up C. no shift in IS, LM down D. IS left, LM down E. IS right, LM down
C. no shift in IS, LM down
suppose the central bank implements a monetary contraction that is fully expected by financial market participants. Given this information, we would expect A. stock prices rise B. stock prices fall C. stock prices remain unchanged D. an ambiguous effect on stock prices E. stock prices to fall and the interest rates to rise
C. stock prices remain unchanged
The present discounted value of a future payment becomes smaller when A. the nominal interest rate decreases B. the payment is made sooner rather than later C. the payment itself decreases D. all of the above E. none of the above
C. the payment itself decreases
Which of the following best defines the real exchange rate? A. the price of foreign bonds in terms of domestic bonds B. the price of foreign currency in terms of domestic currency C. the price of domestic goods in terms of foreign goods D. the price of domestic currency in terms of foreign currency
C. the price of domestic goods in terms of foreign goods
which of the following best defines the real exchange rate? A. the price of foreign bonds in terms B. the price of foreign currency in terms of domestic currency C. the price of domestic goods in terms of foreign goods D. the price of domestic currency in terms of foreign currency E. none of the above
C. the price of domestic goods in terms of foreign goods
Suppose policy makers implement a fiscal expansion that is NOT anticipated by financial market participants. We know that this wil A.always cause stock prices to fall. B.always cause stock prices to rise. C.tend to cause stock prices to riseif the LM curve is flat. D.tend to cause stock prices to rise if the LM curve is vertical.
C.tend to cause stock prices to rise if the LM curve is flat.
10. Suppose the economy is initially operating at the natural level of output. Now, suppose the central bank permanently increases the rate of nominal money growth by 2%. Given this information, we would expect that A.the nominal interest rate will increase in the short run. B.the real interest rate will increase by exactly 2% in the short run. C.the nominal interest rate will increase by exactly 2% in the medium run. D.the nominal interest rate will not change in the medium runE.none of the above
C.the nominal interest rate will increase by exactly 2% in the medium run.
Human wealth is a function of which of the following variables? A future expected income B future expected taxes C current interest rates D all above E none above
D all above
8) In the IS-LM model, an increase in expected inflation will cause which of the following? A) an increase in output B) an increase in the nominal interest rate C) a reduction in the real interest rate D) all of the above E) none of the above
D) all of the above
Human wealth is a function (i.e., affected by changes in) of which of the following variables? A) future expected income B) future expected taxes C) current interest rates D) all of the above E) none of the above
D) all of the above
Suppose there is a reduction in foreign output (Y*). This reduction in Y* will cause which of the following in the domestic country? A) a reduction in output B) a reduction in consumption C) a reduction in net exports D) all of the above E) none of the above
D) all of the above
Suppose there is a reduction in cash flow. This suggests that A) firms have decreased their expectations of future profits. B) the real interest rate has increased. C) the rate of depreciation has increased. D) current profits have decreased. E) all of the above
D) current profits have decreased.
ii. Under which of the following assumptions would the nominal interest rate be equal to the real interest rate? A) expected inflation is equal to the nominal interest rate. B) expected inflation is equal to the real interest rate. C) expected inflation is negative. D) expected inflation is equal to zero. E) none of the above
D) expected inflation is equal to zero.
if expected inflation rate is negative, the expected real interest rate must be A) negative. B) less than the nominal interest rate. C) equal to the nominal interest rate. D) greater than the nominal interest rate. E) none of the above
D) greater than the nominal interest rate.
5) Which of the following statements about consumption and investment is correct? A) consumption is more volatile than investment. B) investment and consumption exhibit approximately the same degree of volatility. C) a permanent change in income will have a relatively larger effect on consumption than on investment. D) none of the above
D) none of the above
Suppose individuals expect that interest rates will decrease in the future. Also assume that the Fed wants to prevent any change in current output. Given this goal of the Fed, the Fed should implement a policy in the current period that A) shifts the IS curve rightward. B) shifts the IS curve leftward. C) shifts the IS curve leftward and the LM curve upward. D) shifts the LM curve upward. E) shifts the LM curve downward.
D) shifts the LM curve upward.
With a constant nominal interest rate equal to i, the present discounted value of $1 to be received in 4 years from today is equal to A. 1+i B. i^4 C.(1+i)^4 D. 1/(1+i)^4 E. 4(1+i)
D. 1/(1+i)^4
Suppose the US one-year interest rate is 3% per year, while a foeign country has a one-year interest rate of 5% per year. Ignoring risk and transaction costs, a US investor should invest in foreign bonds as long as the expected yearly rate of depreciation of foreign currency is A. >5% B. >5% C. >2% D. <2% E. <1%
D. <2%
Changes in future expected interest rates can affect current consumption. Suppose individuals expect future IRs to decrease. Consumption will change as a result of this lower expected future interest rate bc of its effects on whch of the following A. human wealth B. the value of the stocks C. the value of the bonds D. all of the above E. none of the above
D. all of the above
suppose there is a reduction in foreign output (Y*). This reduction in Y* will cause which of the following in the domestic country? A. a reduction in output B. a reduction in consumption C. a reduction in net exports D. all of the above E. none of the above
D. all of the above
suppose a bond promises to make a single payment at maturity. This type of bond is called A. junk bond B. indexed bond C. Corporate bond D. discount bond E. constant maturity bond
D. discount bond
which of the following will not cause an increase in the present value of a sequence of payments? A. a reduction in the current interest rate B. a reduction in expected future interest rates C. an increase in future expected payment D. none of the above
D. none of the above
which of the following will not cause an increase in the present value of a sequence of payments? A. a reduction in the current interest rate B. a reduction in the expected future interest rates C. an increase in the future expected payment D. none of the above
D. none of the above
Suppose that the nominal interest rate and expected inflation both decrease by 2%. Given this information, we would expect which of the following to occur? A.an increase in the real interest rate B.a reduction in the real interest rate C.a reduction in investment D.an increase in money demand E.both A and C
D.an increase in money demand
The IS curve becomes steeper when A.government spending is relatively small B. the income tax rate in the current period is relatively small C.current changes in the real interest rate cause large changes in current real output D.changes in the current real interest rate cause small changes in current demand
D.changes in the current real interest rate cause small changes in current demand
If the expected inflation rate is negative, the expected real interest rate must be A.negative. B.less than the nominal interest rate. C.equal to the nominal interest rate. D.greater than the nominal interest rate. E.none of the above
D.greater than the nominal interest rate.
Suppose that Facebook (FB) reports increases in quarterly revenue and profits by 10% compared to last year's same quarter. This increase is in line with the forecasts of market participants. Which of the following is more likely to happen to the FB stock market valuation? A.price will increase B.price will decrease C.it will go up in the short-run but down in the medium run. D.no change
D.no change
17. Assume individuals consider only the medium run effects of changes in future macro variables when forming expectations of future output and future interest rates. Suppose current taxes are cut AND that individuals expect all future taxes to decrease permanently. Given this information, we know with certainty that A.current output and the current interest rate will both increase. B.current output will increase. C.the current interest rate will increase. D.the expected future interest rate will increase.
D.the expected future interest rate will increase.
the depreciation rate tells us A the interest rate that should be used in present discounted value calculations B the rate at which consumers deplete their total wealth in retirement C the difference between current and expected income D the difference between current and expected profits E how much usefulness a machine loses from year to year
E how much usefulness a machine loses from year to year
An increase in the nominal interest rate, all else held constant, will always cause which of the following?A) the real interest rate to decrease B) the expected inflation rate to decrease C) the demand for money to increase D) all of the above E) none of the above
E) none of the above
ii. Adaptive expectations assumes that individuals A) can accurately predict the future. B) base predictions on random events (i.e., animal spirits). C) form their predictions of macroeconomic variables randomly. D) use all available information in predicting the future. E) none of the above
E) none of the above
ii. Rational expectations assumes that individuals A) can accurately predict the future. B) make predictions based on the past behavior of the economy. C) form their predictions of macroeconomic variables randomly. D) have perfect foresight. E) none of the above
E) none of the above
suppose individuals expect that interest rates will increase in the future. Also assume that the FED wants to prevent any change in current output. Given this goal of the Fed, the Fed should implement a policy in the current period that A)shifts the IS curve rightward B)shifts the IS curve leftward C)shifts the IS curve leftward and the LM curve upward D)shifts the LM curve upward E)shifts the LM curve downward
E)shifts the LM curve downward
Whenever the expected inflation rate is positive A. the real interest rate is greater than the nominal interest rate B. the real interest rate is negative C. the real interest rate is positive D. the nominal interest rate must be equal to the real interest rate E. none of the above
E. none of the above
Assume individuals consider only the medium run effects of changes in future macro variables when forming expectations of future output and future interest rates. Suppose individuals expect the central bank to pursue a monetary expansion in the future. Given this information, we know with certainty that A.current output and the current interest rate will both increase. B.current output will decrease. C.the current interest rate will decrease. D.the current output effects are ambiguous. E.current output will not change.
E.current output will not change.
If current sales increase by $100 million and firms are forward looking, we know for sure that current investment must A.decrease exactly by $100 million. B.increase by exactly $100 million. C.increase by less than $100 million. D.decrease, but by less than $100 million. E.none of the above
E.none of the above
Suppose there is a decrease in the current short-term interest rate. Which of the following is more likely happen? A.the long-term interest rate will increase. B.the long-term interest rate will remain the same. C.the long-term interest rate will decrease by more than the short-term rate. D.the long-term interest rate will decrease by the same amount as the short-term rate. E.the long-term interest rate will decrease, but by less than the short-term rate.
E.the long-term interest rate will decrease, but by less than the short-term rate.
What is the Mundell-Fleming Model?
If everyone suddenly increased their demand for bonds, the dollar will appreciate. This will increase interest rates, increase the exchange rae, and increase the trade deficit.
What happens to IS/output when the government attempts to reduce the deficit by lowering government spending?
The IS curve shifts left People expect the Fed to lower interest rates so investment increases output is unchanged when investment increases, the stock of capital increases result is ambiguous
what are the factors that will decrease imports?
a decrease in domestic income, a decrease in the real exchange rate, a depreciation
a nominal depreciation of the mexican peso indicates that a the peso price of foreign currency has fallen b the mexican real exchange rate will not change if the price level in mexico falls c the peso price of the UK pound has increased d the number of units of foreign currency that one can obtain with one peso has decreased
a the peso price of foreign currency has fallen
Which of the following will NOT cause aggregate private spending to increase? a) an increase in expected future real IRs b)an increase in government spending c)a reduction in future taxes d)all of the above e)none of the above
a) an increase in expected future real IRs
what are the factors that lower exports?
appreciation, decrease in foreign income, an increase in the real exchange rate, a decrease in foreign output
which of the following people-none of whom has any financial or housing wealth-is most likely to be spending all of their current income? a) low income person expecting continued low income throughout life b) low income person expecting a dramatic rise in income in the future c)high income person expecting continued high income throughout life d)high income person expecting to retire soon, and live for a long time after
b) low income person expecting a dramatic rise in income in the future
which of the following, all else fixed, will cause the real exchange rate to increase? a. a nominal depreciation b. a reduction in the foreign price level c. a reduction in the domestic price level d. all of the above e. none of the above
b. a reduction in the foreign price level
which of the following is evidence that consumption depends on total wealth, and not just on current income? a) people save very little for retirement b)the pre-announced phased-in tax cuts of 1981-83 caused little change in consumption in 1981 c) a drop in consumer confidence, with unchanged current income, often causes total consumption spending to fall d)all of the above e)none of the above
c) a drop in consumer confidence, with unchanged current income, often causes total consumption spending to fall
suppose individuals now believe that there will be a future tax cut. This reduction in expected future taxes will cause which of the following to occur in the current period? a)LM curve to shift down b)LM curve to shift up c)IS curve to shift right d)IS curve to shift left e)none of the above
c)IS curve to shift right
Suppose there is a fiscal expansion in the current period. This fiscal expansion will tend to cause a smaller increase in current output when: a. an increase in current output causes an increase in expected future output b. an increase in the current interest rate causes expectations of expansionary monetary policy in the future c. an increase in the current interest rate causes an increase in the expected future interest rates d. a and b e. all of the above
c. an increase in the current interest rate causes an increase in the expected future interest rates
what happens to consumption/IS curve when there is an increase in future expected interest rates?
decrease in present value of future disposable income and therefore a decrease in human wealth causes decrease in current consumption IS curve shifts left
what are the factors that will increase exports/ cause a surplus?
depreciation, increase in foreign income, increase in foreign output, decrease in the real exchange rate
assume a country is open. Given this info, which of the following must occur? a demand for domestic goods will b e equal to the domestic demand for goods b demand for domestic goods will be greater than the domestic demand for goods c demand for domestic goods will be less than the demand for goods d s+t-i=g e none of the above
e none of the above
for this question, ignore tax considerations of each of the following. Assume that consumption decisions are made according to the permanent income theory. Which of the following would lead to the smallest increase in current consumption? a)winning $10,000 in lottery b)inheriting $10,000 from a relative c)obtaining $10,000 from winning a lawsuit d)getting a one time $10,000 bonus from your employer e)all of the above
e)all of the above
What is quantitative easing?
fed buys government bonds with longer maturity dates to bring down expected real interest rates and to increase the value of disposable income
what are the factors that will shift the current IS right?
increase G, increase Y' decrease r', decrease T'
what are the factors that increase imports and cause a trade deficit?
increase in government spending, and increase in domestic income (y), increase in the real exchange rate, an appreciation domestically
What happens to consumption/IS when there is an increase in future expected output?
increase in human wealth increase in current consumption IS curve shifts right This also causes firms to increase profits
what are the factors that shift the current IS left
increasing T or T', increase R' , decrease in Y'
What is the long term effect of a decrease in government spending?
it causes the central bank to decrease interest rates in the future, which increases investment and consumption, positively affecting output.
an upward sloping yield curve indicates
long term interest rates are higher than short term interest rates, meaning financial markets expect short term rates to be higher in the future
when output or expected output increase, what happens to stock prices?
stock prices increase
If domestic RIRs decrease, what will happen to imports/exports?
the domestic economy is becoming more competitive compared to foreign economies, and the domestic country will import less and export more.