Chapter Quizzes Answer Econ 2411
What are some possible factors for the decline in the demand of money?
-A decline in income -A decline in the expected inflation -A decline in the price level
What are possible factors that could lead to the decline in the demand for money:
-A decline in the price level -A decline in the expected inflation rate -A decline in income
Which of the following options is the reason why the Fed's expansionary policy beginning in 2008 increased the money supply as much as what might have been expected?
-Banks began to hold fewer reserves -Banks increased the volume of loans to the public -Banks increased the volume of loans to the public and held fewer reserves than they did before the crisis
For each of the following assets, indicates which, if any, of the monetary aggregates includes then:
-Currency: M1 and M2 -Money market mutual funds: M2 only -US T-Bills: Neither M1 or M2 -Small denominations time deposits: M2 only -Large-cap mutual funds: Neither M1 or M2 -Checkable deposits: M1 and M2
Which of the following are methods by which banks reduce their credit risk?
-Engage in credit rationing -Enforce restrictive covenants in the loan contract -Collect information on prospective borrowers to screen out high-risk borrowers -Develop long-term relationships with borrowers
Which of the following statements about reserves is true?
-Having extra reserves is extra insurance for a bank -The supply of reserves help determine the federal funds rate -The Fed is able to control the amount of reserves in the system
Which of the following statements about the monetary aggregates is true?
-M1 is less than M2 -When you transfer funds from your savings account to your checking account, M1 increases and M2 stays the same -The growth rate of M1 and M2 almost never track each other closely
Which of the following statements about reserves is correct?
-The fed is able to control the amount of reserves in the system -Having extra reserves is extra insurance for a bank -The supply of reserves help determine the federal funds rate
If the expected path of 1 year interest rates over the next four years is 5 percent, 4 percent, 2 percent and 1 percent, then the expected theory predicts that today's interest rate on the four year bond is:
3 percent
During a banking crisis we would expect to see which of the following to occur?
A decrease in both return on assets and return on equity
Which of the following sets of conditions would mostly likely lead to an overall decrease in interest rates?
A decrease in expected profitability of investments and a reduction in the government deficit
Which of the following sets of conditions would most likely lead to an overall decrease in interest rates?
A decrease in expected profitability of investments and a reduction in the government's deficit
The existence of mortgage backed securities by 2007 initially led to which of the following?
A greater incentive for banks to write more mortgages
Gustavo is a young doctor who lives in a country with a relatively inefficient legal and financial system. When Gustavo applied for a mortgage, he found that banks usually required collateral for up to 300% of the amount of the loan.
An inefficient legal system implies weak property rights, and collateral helps bank recoup some of their loan if the borrower defaults
Because of the adverse selection problem:
Bad credit risks with a willingness to pay higher interest rates will be the majority seeking loans
Which of the following options is the reason why the Fed's expansionary policy beginning in 2008 did not increase the money supply as much as what might been expected?
Banks began to hold excess reserves'
According to the liquidity premium theory, a yield curve that is flat means that:
Bond purchasers expect interest rates to fall in the future
According to the Efficient Market Hypothesis, the expected return is determined by several components, including the:
Cash payment the following period
Which of the following correctly lists a procedure used to reduce asymmetric information problems as well as the type of asymmetric information problem it reduces?
Covenants are used to reduce moral hazard
For each of the following assets, indicate which, if any, of the monetary aggregates include them:
Currency- M1 and M2 Money market mutual funds- M2 Only US T-Bills- Neither M1 or M2 Small-denomination time deposits- M2 Only Large-cap mutual funds- Neither M1 or M2 Checkable deposits- M1 and M2
If investors develop a greater aversion to risk or view DuWop stock as having greater risk, K, the share price will:
Decrease
When the Fed wants to reduce the expected inflation, it should ___ the growth rate of the money supply
Decrease
In the long run, if the output, price-level, and expected inflation effects outweigh the liquidity effect, to reduce interest rates the Federal Reserve should:
Decrease the growth rate of the money supply
If the demand for bonds shift to the left, the price of bonds:
Decreases, and interest rate rises
If the demand for bonds shifts to the left, the price of bonds:
Decreases, and interest rates rise
If the supply of bonds shifts to the right, the price of bonds___ and the interest rate___.
Decreases; Increases
Assuming the liquidity premium theory of term structure, you conclude that the liquidity premium is___.
Decreasing
When a depositor deposits $1,000 cash into their checking account at Bank of America which of the following is the closest to what happened in the T-Account?
Demand deposits increase and required reserves increase
Which of the following is a benefit to an individual purchasing a mutual fund?
Diversification
Which of the following is not true regarding efficient markets?
Everyone in the market must be well informed
Suppose there is a/an decrease in the growth rate of the money supply. If the liquidity effect is smaller than the output, price-level, and expected inflation effects, then in the long run, interest rates:
Fall compared to their initial value
How can economies of scale help explain the existence of financial intermediaries?
Financial intermediaries are able to operate with lower transaction costs relative to individual lenders or borrowers
Assume the price of XYZ stock yesterday was $340 per share and today it is trading for $300 a share. According to the Gordobn Model, which of the following likely happened?
G decreased and KE increased
The sensitivity of bank profits to changes in interest rates can be measured more directly using___, in which the amount of rate-sensitive liabilities is subtracted from the amount of rate-sensitive assets
Gap analysis
Which of the following statements about interest-rate risk is true?
If a bank has more rate-sensitive liabilities than assets, an increase in interest rates reduced bank profits
If there is a decrease in the growth rate of the money supply, the resulting liquidity effect is larger than the combined income, price-level, and expected inflation effects, and inflationary expectations adjust quickly, then the interest rate will
Immediately rise and then fall over time, but will remain higher than its original level.
If DuWop announces an increase in the annual dividend, Div, the price of a share of DuWop will:
Increase
If investors expect an increase in the growth, G, of earnings and dividends over the next 5 years, the price of a share of DuWop will:
Increase
When the Fed want to raise the expected inflation, it should ___ the growth rate of the money supply
Increase
In the long run, if the output, price-level, and expected inflation effects outweigh the liquidity effect, to raise interest rates the Federal Reserve should:
Increase the growth rate of the money supply.
If the supply of bonds shifts to the left, the price of bonds___, and the interest rate___
Increases; Decrease
Which of the following would cause M2 to grow faster than M1?
Interest rates are increasing and opportunity cost of holding currency is increasing
Which of the following would cause M2 to grow faster than M1
Interest rates are increasing and the opportunity cost of holding currency is increasing
Pricing behavior in an efficient market indicates that current prices will be set so that the optimal forecast of a security's return using all available information___, the security's equilibrium return
Is equal to
Which of the following statements best describes the players in the Repo market?
It consists of investors who have cash, looking for short term returns and banks who have treasuries, looking for cash
Which of the following is true about a credit default swap?
It is insurance on an investment
According to the Gordon Model, which of the following is correct in regards to why the stock market increased in value on Tuesday 2/6/18?
KE decreased and G increased
As a result of a inefficient legal and financial system, when compared to other countries, we would expect Gustavo's nation to have:
Less investment and slower economic growth
If an individual moves money from a money market deposit account to currency,
M1 increases and M2 stays the same
If an individual moves money from a money market deposits account to currency,
M1 increases, and M2 stays the same
In order to reduce the___ problem in loan markets, banks often insist on collateral from potential borrowers.
Moral Hazards
Problems created by asymmetric information after the transaction occurs is called___, while the problem created before a transaction occurs is called___
Moral Hazards; Adverse Selection
The principle-agent problem:
Occurs because owners have incomplete information about the motives and behavior of mangers
"An efficient market is one in which no one ever profits from having better information that the rest." Why is this statement true?
People with better information make the market more efficient by exploiting profit-making opportunities
What basic principle of finance can be applied to the valuation of any investment asset?
Present Value
Which of the following methods of paying for a government deficit would likely lead to inflation?
Printing Money
Which of the following is a disadvantage of using a fiat money?
Public authorities may be tempted to produce too much of it
Which of the following is a disadvantage of using fiat money?
Public authorities may be tempted to produce too much of it
If the FDIC considers an insolvent bank to be "too big to fail", it will resolve the insolvency through the
Purchase and assumption method, which guarantees all deposits
If the Fed is only concerned about the short-run economy the liquidity effect is smaller than the other effects and expected inflation adjusts slowly, then to lower the short-run interest rates, the Fed should always ___ the growth rates of the money supply.
Raise
If the Fed is only concerned about the short-run economy the liquidity effect is smaller than the other effects and expected inflation adjusts slowly, then to lower the short-run interest rates, the Fed should always___ the growth rates of the money supply.
Raise
Even though the yield curve has accurately predicted the last seven recessions, why is it that today many economists are not so concerned about its recent inversion?
Recently, many foreign investors have purchased intermediate to long term treasury bonds which force rates on these instruments down
Even though the yield curve has accurately predicted the last seven recessions, why is it that today many economists are not so concerned about its recent inversion?
Recently, the Treasury has sold a large amount of short term bonds
During business cycle expansions when income and wealth are rising, the demand for bonds___ and the demand curve shifts to the___, everything else held constant
Rises; Right
During business cycle expansions when income and wealth are rising, the demand for bonds___ and the demand curve shifts to the___, everything else held constant.
Rises; Right
Everything else held constant, if interest rates are expected to fall in the future, the demand for long-term bonds today___ and the demand curve shifts to the___
Rises; Right
Everything else held constant, if interest rates are expected to fall in the future, the demand for long-term bonds today___ and the demand curve shifts to the ___
Rises; right
When real income___, the demand curve for money shifts to the___ and the interest rate___, everything else held constant
Rises; right; rises
Which of the following is true about techniques used to reduce asymmetric information problems?
Screening is used before the transaction; monitoring is used after the transaction
In regards to the Efficient Market Hypothesis which one of the forms of information could possibly include insider trading issues?
The Strong
After careful analysis, you have determined that a firm's dividends should grow at 15%, on average, in the foreseeable future. The firm's last dividend was $5.00. Compute the current price of this stock, assuming the required return is 20%.
The current price is $115.00
Which of the following events would we likely see during or around a recession?
The growth of M1 will be greater than the growth of M2
M1 money growth in the U.S. was about 16% in 2008, 7% in 2009, and 9% in 2010. Over the same time period, the yield on 3-month Treasury bills fell from almost 3% to close to 0%. Given these high rates of money growth, why did interest rates fall, rather than increase?
The income, price-level, and expected-inflation effects were small relative to the liquidity effect
M1 money growth in the U.S. was about 16% in 2008, 7% in 2009, and 9% in 2010. Over the same time period, the yield on 3-month Treasury bills fell from almost 3% to close to 0%. Given these high rates of money growth, why did interest rates fall, rather than increase?
The income, price-level, and expected-inflation effects were small relative to the liquidity effect.
Segmented Markets
The interest rate for each bond with a different maturity is determined by the supply of and demand for that bond, with no effects from expected returns on other bonds with other maturities.
Expectation Theory
The interest rate on a long-term bond will equal an average of the short-term interest rates that people expect to occur over the life of the long-term bond
Preferred Habitat
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 liquidity premium (also referred to as a term premium) that responds to supply and demand conditions for that bond.
Everything else held constant, if the tax-exempt of municipal bonds were eliminated, then
The interest rate on municipal bonds would exceed the rate on Treasury bonds.
Everything else held constant, if the tax-exempt status of municipal bonds were eliminated, then
The interest rate on municipal bonds would exceed the rate on treasury bonds.
When the wealth of individuals increases,
The price of bonds increase while the interest rate decrease
Which of the following best describes how the Repo Rate is arrived at?
The repo rate represents the agreed upon difference between the sale price and the repurchase price of treasuries
Even though the yield curve has accurately predicted the last seven recessions, why is it that today many economists are not so concerned about its recent inversion?
The term premium sometimes called the liquidity premium has recently decreased to a value of close to zero.
In regards to the Efficient Market Hypothesis which one of the forms of information is primarily based on past performance and or prices?
The weak
If expectations of future short-term interest rates suddenly fall, what would happen to the slope of the yield curve?
The yield curve would become flatter
If expectations of future short-term interest rates suddenly fall, what would happen to the slope of the yield curve?
The yield curve would become flatter.
Following a policy meeting on March 19, 2009, the Federal Reserve made an announcement that it would purchase up to $300 billion of longer-term Treasury securities over the following six months. What effect might this policy have on the yield curve?
The yield curve would shift down, but mostly on medium and long term maturities
Which of the following best describes what happened to the Repo market fall?
There was a cash shortage on Wall St. and the repo rate was becoming much higher than the intended federal funds rate.
Which of the following statements about the monetary aggregates is true?
When you transfer funds from your savings account to your checking account, M1 increases and M2 stays the same
Which of the following statements about the monetary aggregates is true?
When you transfer funds from your savings account, M1 Increase and M2 stays the same
Assuming initially that the required return on investment is 20%, expected dividend is $.10 and a forecasted price a year from now is $50. Everything else the same, how would a decrease in the required on investments to 10% affect the present stock price?
Will increase the present price
Would you be more willing to lend to a friend if she put all of her life savings into her business than you would if she had not done so?
You would be more willing because putting her life savings into her business provides you protection against the problem of moral hazard
According to the liquidity premium theory, a yield curve that is flat means that
bond purchases expect interest rate to fall in the future
As a result of the liquidity premium is decreasing, the yield curve becomes___
flatter
If a bank has___ rate-sensitive assets than liabilities, a___ in interest rates will reduce bank profits, while a___ in interest rates will raise bank profits
more; decline; rise
Suppose there is a/an increase in the growth rate of the money supply. If the liquidity effect is smaller than the output, price level, and expected inflation effects, then in the long run, interest rates will
rise when compared to their initial value
When real income___, the demand curve for money shifts to the___ and the interest rate___, everything else held constant
rises; right; rises
When the wealth of individuals increases,
the price of bonds increases while the interest rates decrease
