Maynard Exam #1 Reading Quiz Questions

Every time a commercial bank makes a loan:

the money supply increases

Net capital inflows are:

(funds provided to a country's investors by foreigners) - (funds provided to foreign investors by a country's savers)

According to the text, the slope of the Phillips curve in the United States is about ___________. Thus, if the gap is 6 percent, the change in inflation would be ________ percent.

1/4; 1.5

The bank of England has an explicit inflation target of:

2 percent

According the the liquidity preference theory, you hold money:

to buy goods and services

Consider a bank with the following income statement: It has $100 in loans with an interest of 5%; $50 in security holdings, paying 10%; reserves of $10; $100 in savings accounts that earn an interest rate of 2.5%; checking deposits equal to $30, a net worth of $30, and no other expenses. This bank gets a return on its assets of about:

4.8%

Suppose both the inflation and output gap are zero. According to this information, the ex ante real interest rate suggested by the Taylor rule equals:

5 percent

Which of the following assets is the least liquid?

A car

Members of the Board of Governors of the Federal Reserve are ______________ and serve for _________ years

appointed by the President; 14

Using the Standard & Poor's (S&P) bond rating, the least risky bonds are rated:

AAA

_____________ and ______________ are assets in the Federal Reserves Balance Sheet

Discount Loans; Government Bonds

to create a stable American currency, Alexander Hamilton introduced:

Dollar coins

If ROA is return on assets. and ROE is return on equity, we can write the equation ratio, ER, as:

ER= ROA/ROE

Which of the following is not an off-balance bank activity?

Federal Funds Loans

Holding profits and assets constant, an increase in a bank's capital____ the bank's equity ratio and ____ the bank's return

Increases; reduces

One reason a dollar is worth _____________ today compared to the future is that a dollar can be used to ____________.

More; earn interest over time

_______________ is(are) the monetary tool used most by the Fed.

Open-market operations

The most liquid form of asset on a bank's balance sheet are:

Reserves

What is your response to the Phillips curve being relatively flat?

We would need to increase interest rates only a little, as the change in inflation is very responsive to changes in output

On a bank's balance sheet, which of the following is an asset? (d)

a) checking deposits b) small-time deposits c) savings accounts d) None of the answers are correct

To account for risk in expectations theory of the term structure we:

add a risk premium to the average of the current one-period rate and expected rates over the next n-1 periods.

In classical theory of asset prices. If the asset is below present value its expected income. According to this theory, individuals will ___________ the asset, thereby ______________ its price.

buy; increasing

To increase the supply of money, the central bank ____________; to decrease the supply of money, the central bank ______________>

buys bonds; sells bonds

If the inflation rate is zero, the Fed:

cannot push the real interest rate below 0 percent

If the Fed wishes to keep the money supply constant when the money multiplier increases, it will ____________. This is called a ___________.

conduct open-market sales; defensive open-market operation

During a recession, the inflation rate generally

decreases

When the Fed sells US Treasury bonds, the monetary base ________; this is called a(n) __________ open-market operation.

decreases; contractionary

In the loanable funds theory, investment is the:

demand for loans

According to the classic theory of asset prices a P/E ratio might be the result of

either optimistic expectations about company profits or low interest rates

In the loanable funds model, if the current real interest rate is less than equilibrium real interest rate then there will be an ____________ and the real interest rate will ____________.

excess demand for loans; rise

Loans from one bank to another are called____; loans from a corporation to a bank are called:

federal funds; repurchase agreements

Which of the following might explain why firms will raise prices when the economy is booming?

firms seek to take advantage of high advantage to make more profits firms pay for workers putting in extra hours at higher wages firms need to cover higher cost of production

Which of the following include central banks efforts to cope with uncertainty when conduction monetary policy?

have smaller responses to output gaps

The future value of a dollar is

how many dollars it can produce over the summer

The reason the Fed may adjust the Federal funds rate during a financial crisis is because the crisis:

impacts consumer confidence

If the Fed targets money supply, an increase in money demand will:

increase the interest rate because the money supply is fixed

What is the yield to maturity?

interest rate that makes the present value of payment from a bond equal to its price

The present value of a $100 bill will be less if

the interest rate is positive

When inflation is lower than expected _____________

lenders are better off than borrowers

A margin requirement;

limits the amount a buyer can borrow to buy stocks

In the liquidity preference theory, money is used as a ______________ and bonds _______________.

medium of exchange; pay interest

For many years Chairman of the Fed Ben Bernanke has argued that:

monetary policy should not respond to asset bubbles

In the liquidity preference model, the nominal interest rate is the:

opportunity cost of holding money

In 1979, the inflation rate reached about 14 percent. The Federal Reserve ________________ interest rates, sending the economy into a(n) ________________. (Paul Volcker)

raised, recession

The loanable funds theory states that ___________ is (are) determined by the ____________ for loans.

real interest rates; supply and demand

A higher interest rate: ____________________

reduces the value of present money

In the classical theory, the ___________ the asset, the ______________ the interest rate.

riskier; higher

Consider the liquidity preference theory. A decrease in the price level (i.e. deflation):

shifts the demand curve to the left

According to the phillips curve, short-term changes in inflation are due to

short-term output fluctuations

If the 'n' 1-year interest rates are expected to remain constant and the term premium rises with maturity, the yield curve would:

slope upward

Historically, most inverted yield curves have been caused by the Fed in an effort to:

slow inflation

Which of the following are forms of money?

stored-value cards

When baby boomers retire and drown down their retirement funds, we expect to see a shift in the loanable funds ______________ to the _____________ and real interest rate will __________________.

supply; left; rise