ECO 029 FINAL EXAM QUESTIONS
Under 100% reserve banking, the money multiplier will be:
1
What is the key assumption underlying the Fed's ability to control the real interest rate?
Because inflation is relatively sticky in the short run, when the Federal Reserve changes the federal funds rate, it implies similar changes in real interest rates.
What is the key assumption underlying the Fed's ability to control the real interest rate?
Because inflation is relatively sticky in the short run, when the Federal reserves changes the federal funds rate, it implies similar changes in real interest rates.
If you suspect that an airline will go bankrupt next week which would you rather hold: bonds or equities issued by the company?
Bonds
Why might a bank be willing to borrow funds from other banks at a higher rate rather than borrow from the Fed?
Borrowing from the Fed might invite greater supervisory scrutiny from the central bank
Which of the following is a correct statement about the effect of budget deficits when the central bank is pursuing an anti-inflation policy?
If the government decreases budget deficits while the central bank is pursuing an anti-inflation policy, the public is likely to find central bank policies more credible, and thus the loss of output required to reduce inflation may be less
Why can the Fed control the real interest rate in the short run but not in the long run?
It adjusts for inflation, and prices are sticky nit he short run. Hence, when a change in the Fed's monetary policy causes the nominal interest rate to change, the real interest rate also changes in the same direction. In the long run, actual and expected inflation change in response to changes in monetary policy, leaving the real interest rate unaffected.
What is the policy curve?
It indicates the relationship between the inflation rate and the real interest rate.
What is the aggregate demand curve?
It is the relationship between the inflation rate and aggregate output when the goods market is in equilibrium.
Why would a central bank be concerned about persistent, long-term budget deficits?
It may increase inflation expectations, making it harder to keep inflation anchored at a low, stable level
What is the significance of the Lucas critique of econometric policy evaluation?
It points out an econometric model based on past data may prove to be unreliable for evaluating policy options
Would an increase in net exports affect the monetary policy curve?
No, the monetary policy curve does not shift
Suppose that a new Fed chair is appointed, and his or her approach to monetary policy can be summarized by the following statement: "I care only about increasing employment, inflation has been at very low levels for quite some time; my priority is to east monetary policy to promote employment." What would be the effect on the aggregate demand curve?
The AD curve will shift to the right.
Which of the following entities in the Federal Reserve System controls the discount rate?
The Board of Governors
How does a credible nominal anchor help if a negative aggregate supply shock occurs?
The decrease in output and the increase in inflation are less than under the absence of a credible nominal anchor
"The depreciation of the dollar from December 2008 to December 2009 had a positive effect on aggregate demand in the U.S." Is this statement true, false, or uncertain? Explain.
True, since a cheaper dollar increases net exports, a component of aggregate demand.
If λ = 0, what does the imply about the relationship between the nominal interest rate and the inflation rate?
When λ= 0, this means that as inflation increases, the nominal interest rate will increase by exactly the same as the inflation rate, so that the real interest rate stays constant.
How does a credible nominal anchor help improve the economic outcomes that result from a positive aggregate demand shock?
With a credible nominal anchor, inflation is more stable following the demand shock.
John Maynard Keynes described waves of consumer and investor optimism and pessimism as:
animal spirits
The effect of a shock of downward revision of inflation expectations causes bond yields to
decrease
The inflation rate tends to increase, ceteris paribus, as expected inflation
increases
The inflation rate tends to increase, ceteris paribus, as the natural rate of unemployment
increases
Inflation targeting can be used to:
keep inflation under control and increase the credibility of monetary policymakers' commitment to price stability
You would be (blank) willing to buy gold if prices in the gold market become more volatile because
less because gold has become relatively more risky
The president of the United States can exert influence over the Federal Reserve in all of the following ways except:
reducing the Fed's net earnings
'The independence of the Fed leaves it completely unaccountable for its actions.' Why is this statement not true?
the legislation that structures the Fed is written by Congress and is subject to change, the president can appoint a new chairman of the Board of governors every four years, the Fed has to report to Congress on a semiannual basis to explain its actions
If the government deficit is not financed by increased bond holdings by the public:
the monetary base and the money supply increase
The ratio of the money supply to the monetary base is called:
the money multiplier
Using the numbers 1 2 3 4 rank the following four assets from most liquid (1) to least liquid (4): A 10,000-square-foot-office building $2,000 in cash A $10,000 Treasury bill 100 shares of Google stock
4 1 2 3
During and in the aftermath of the financial crisis of 2007-2009, planned investment fell substantially, despite significant decreases in the interest rate. Which of the following factors related to the planned spending function could explain this?
A decrease in firms' planned autonomous investment. An increase in financial frictions.
Why does the aggregate demand curve slope downward?
A rise in inflation works through the increase in real interest rates to reduce the equilibrium quantity of aggregate output.
What causes the IS curve to shift?
A shift in the IS curve occurs when equilibrium output changes at each given real interest rate. The factors of shifting are autonomous consumption, autonomous investment, autonomous net exports, taxes, and government purchases.
If huge budget deficits cause the public to think that there will be higher inflation in the future but have no effect on business or consumer optimism, what will happen to the position of the aggregate demand curve?
Aggregate demand will not change
If firms suddenly becomes more optimistic about the profitability of investment and planned investment spending rises by $100 billion, while consumers becomes more pessimistic and autonomous consumer spending falls by $100 billion, what happens to aggregate output?
Aggregate output remains unchanged.
Will aggregate output rise or fall if an increase in autonomous consumer expenditure is matched by an equal increase in taxes?
Aggregate output will rise.
Which of the following would cause the long-run aggregate supply curve to shift rightward?
An increase in available technology
What factors led to a decrease in both the unemployment rate and the inflation rate in the 1990s?
An increased proliferation of computer technology Improved demographic factors, such as an increase in the average age of the workforce
Which of the following is not a valid argument either for or against central bank independence?
An independent central bank may create frequent policy conflicts with the fiscal authority, thereby signaling mixed economic strategies to the public
Why is it necessary for the MP curve to have an upward slope?
An upward-sloping MP curve keeps inflation from spinning out of control
Which of the following is not an income-producing asset on a bank's balance sheet?
Bank reserves
When the Federal Reserve reduces its policy interest rate, how, if at all, is the IS curve affected?
Changes in interest rates represent a movement along the IS curve, and so the IS curve does not shift.
How is constrained discretion different from discretion in monetary policy?
Constrained discretion is a more transparent and disciplined type of discretion
What are the four components of planned expenditure?
Consumption expenditure, planned investment spending, government purchases, and net exports
Why does equilibrium output increase as the marginal propensity to consume increases?
Consumption increases, which leads to more production, higher income, and further increases in spending. A higher mpc leads to a larger multiplier effect for any given change in spending, thus increasing output.
The government budget constraint is
DEF = G - T = ΔMB + ΔB
From mid-2008 to early 2009, the Dow Jones Industrial Average declined by approximately 50% while real interest rates were low or were falling. What does this suggest about Tobin's q during the global financial crisis?
During the global financial crisis, Tobin's q decreased because: a decline in the stock market caused the market value of firms to fall
Which of the following is a correct transmission channel that shows how monetary policy can affect investment, without relating investment to interest rates?
Expansionary monetary policy can increase the value of stocks, raising Tobin's q, and thus increasing investment.
Retired persons often have much of their wealth placed in savings accounts and other interest-bearing investments and complain whenever interest rates are low. Which of the following if true would be a valid complaint?
Expected inflation is falling at a slower rate than nominal interest rates.
Consider the following statement: "The cost of financing investment is related only to interest rates; therefore, the only way that monetary policy can affect investment spending is through its effects on interest rates."
False
"When the stock market rises, investment is increasing." Is this statement true, false, or uncertain? Explain.
False. The buying and selling of stocks represents transfers of existing assets, and new production does not occur.
The wealth effect and household liquidity effect are similar because:
Increases in real interest rates lead to lower asset prices, which lead to lower spending on housing and consumption
Why did Keynesian analysis emphasize this concept?
Keynes viewed the total amount of output demanded in the economy as being the same as planned expenditure This is true when the planned expenditure on goods and services is equal to the actual amount of goods and services produced.
What would happen to the position of the long-run aggregate supply curve?
Long-run aggregate supply will shift rightward
If the public expects the Fed to pursue a policy that is likely to raise short-term interest rates permanently to 12%, but the Fed does not go through with this policy change, what will happen to long-term interest rates?
Long-term interest rates will fall
During and after the global financial crisis, the Fed reduced the fed funds rate to nearly zero. At the same time, the stock market fell dramatically and housing market values declined sharply. Comment on the effectiveness of monetary policy in this period through the wealth channel.
Monetary policy effects through the wealth channel were ineffective during the global financial crisis because: though real interest rates were low, stock and housing values declines sharply, which decreased aggregate demand
If net exports were not sensitive to changes in the real interest rate, would monetary policy be more or less effective in changing output?
Monetary policy would be less effective in changing output because net exports: represent an additional channel through which interest rate changes can affect output.
Why does the monetary policy curve slope upward?
Monetary policymakers will follow the Taylor principle and respond aggressively to an increase in the inflation rate by raising nominal interest rates by an even greater amount so that the real interest rate also rises. When inflation increases, the supply of real money balances declines. This increases the equilibrium nominal interest rate in the money market, which also increases the real interest rate in the short run.
The presidents of each of the Federal Reserve banks (including the New York Federal Reserve bank) are currently not required to undergo a formal political appointment and approval process. Do you think this is appropriate?
No. Because private banks can influence the appointment of their district Federal Reserve president, the benefits of eliminating this potential conflict of interest far outweigh the costs of the approval process.
If the bank you own has no excess reserves and a sound customer comes in asking for a loan, should you automatically turn the customer down, explaining that you don't have any excess reserves to lend out? Why or why not? What options are available for you to provide the funds your customer needs?
No. There are several ways that reserves can be acquired; for example, borrowing at discount window or in federal funds market
Based on these motives, what variables did he think determined the demand for money?
Nominal interest rate Income
If government spending increases while taxes are raised to balance the budget, which of the following is true?
One component of aggregate demand will increase and another will decrease.
What condition is required for equilibrium in the goods market?
Planned expenditure n goods and services must equal the actual amount of goods and services produced.
What three motives for holding money did Keynes consider in his liquidity preference theory of the demand for real money balances?
Precautionary motive Transactions motive Speculative motive
Which od the following is not a part of this monetary policy strategy to achieve these goals?
Public announcement of the procedural details of using all inflation-related policy variables.
According to the portfolio theories of money demand, what are the four factors that determine money demand?
Risk of other assets Expected Return Liquidity of Other Assets Wealth
If huge budge deficits cause the public to think that there will be higher inflation in the future, what will happen to the position of the short-run aggregate supply curve?
Short-run aggregate supply will shift leftward.
If a pill were invented that made workers twice as productive but their wages did not change, what would happen to the position of the short-run aggregate supply curve?
Short-run aggregate supply will shift rightward
Why does the credit view imply that monetary policy has a greater effect on small business rather than large firms?
Small businesses are more dependent on the availability of bank loans than large firms
If monetary policy becomes more transparent about the future course of interest rates how would that affect stock prices if at all?
Stock prices will increase, as the risk and required return on the investment will be reduced.
If autonomous consumption decreases, explain whether the IS curve shifts to the right or left, does not shift, or is indeterminate in the direction of the shift.
The IS curve shifts to the left.
Describe how (if at all) the IS curve, MP curve, and AD curve are affected in the following situation: There is a decrease in financial frictions.
The IS curve shifts to the right, the MP curve does not shift, and the AD curve shifts to the right.
Internet sites that allow people to post their resumes reduce the cost of a job search. How do you think the Internet has affected the natural rate of unemployment?
The Internet has decreased the natural rate of unemployment.
Suppose that a new Fed chair is appointed, and his or her approach to monetary policy can be summarized by the following statement: "I care only about increasing employment, inflation has been at very low levels for quite some time; my priority is to east monetary policy to promote employment." How would you expect the monetary policy curve to be affected, if at all?
The MP curve will shift downward because decreasing unemployment results in a loosening of monetary policy.
In what ways is the Volcker disinflation considered a success? What are the negative aspects of it?
The Volcker disinflation was successful in bringing inflation down with contractionary policies; however, these policies resulted in two recessions and a significant increase in unemployment.
How do changes in planned expenditures affect the aggregate demand curve?
The aggregate demand curve shifts to the right if autonomous consumption, autonomous investment, autonomous net exports, or government purchases increase, or if taxes decrease.
What would be the effect of an increase in U.S. net exports on the aggregate demand curve?
The aggregate demand curve shifts to the right.
Brokerage fees rise, making bond transactions more expensive
The demand for money increases
The stock market surges
The demand for money increases
The economy experiences a business cycle expansion
The demand for money increases during expansions
What changes in the four factors that determine money demand can increase the demand for money?
The demand for money increases when wealth or the risk associated with other assets increases, and it decreases when wealth or the risk associated with other assets increases or when the risk of inflation increases.
In Keynes's analysis of the precautionary demand for money, what will happen to money demand if people's incomes increase?
The demand for money will increase because Keynes believed that people would require more money for more transactions in the future
According to the expectations-augmented Phillips curve, which of the following factors determines the rate of inflation?
The difference between the unemployment rate and the natural rate of unemployment, expected inflation, and the degree of tightness in the labor market
What is the real interest rate?
The nominal interest rate minus expected inflation
Why has the development of overnight loan markets made it more likely that banks will hold fewer excess reserves?
The presence of overnight loan markets reduces the costs associated with deposit outflows.
Which of the following is not part of the checks and balances of the Federal Reserve System?
The requirement that all depository institutions keep deposits at the Fed
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.
Why might the bank lending channel be less effective than it once was?
There has been a worldwide decline in the traditional bank lending business
When interest rates decrease how might businesses and consumers change their economic behavior?
There will be more consumption spending on interest-sensitive items and more investment by businesses.
Why are financial markets important to the health of the economy?
They channel funds from savers to investors.
In the late 1990s, the stock market was rising rapidly, the economy was growing, and the Federal Reserve kept interest rates relatively low. Comment on how this policy stance would affect the economy as it relates to the Tobin q transmission mechanisms.
This situation is consistent with Tobin's q and the wealth effects of expansionary monetary policy. With lower interest rates, stock prices will rise. Tobin's q predicts that investment will increase, stimulating aggregate demand. In addition, this will increase wealth, which leads to higher consumption and increased aggregate demand.
Foreign exchange rates like stock prices should follow a random walk because changes in the exchange rate are unpredictable.
True
The more credible the policymakers who pursue a anti-inflation policy, the more successful that policy will be."
True
"No one who is risk-averse will ever buy a security that has a lower expected return, more risk, and less liquidity than another security." Is this statement true, false, or uncertain?
True because for a risk-averse person, those characteristics make a security less desirable.
"The more risk-averse people are the more likely they are to diversify." Is this statement true false or uncertain?
True because the benefits to diversification are greater for a person who cares more about reducing risk.
"The federal funds rate can sometimes be above the discount rate." Is this statement true, false, or uncertain?
True. Banks may prefer to pay a higher market rate than to borrow directly from the Fed and incur the perceived stigma.
"The federal funds rate can sometimes be below the interest rate on paid reserves." Is this statement true, false, or uncertain? Explain your answer.
True. This may happen because nonbank financial institutions, which cannot earn interest on reserves, participate in the federal funds market.
True or False: With a discount bond the return on a bond is equal to the rate of capital gain.
True: a discount bond has no coupon payments so the return on the bond is equal to the rate of capital gain
How are the outcomes likely to be different?
Under constrained discretion, policymakers are likely to have more credibility through commitment and transparency. Thus, inflation and inflation expectations are likely to be lower than under pure discretion, without giving up much flexibility to address changes in the real economy.
During a recession, how would you expect velocity to typically behave over the business cycle?
Velocity will decline, since nominal GDP will fall and expansionary monetary policy will be implemented
How and why do changes in the real interest rate affect planned investment spending?
When the real interest rate is very low, the cost of funds is very low and the return on many of the firm's planned investments will exceed it. As the real interest rate rises, the return on fewer and fewer planned investments will exceed the cost of funds. Thus, planned investment spending falls as the real interest rate rises.
How is an autonomous tightening or easing of monetary policy different than a change in the real interest rate due to a change in the current inflation rate?
With a tightening or easing of monetary policy, some projected changes in monetary policy independent of the current inflation rate may occur.
If borrowers with the most risky investment projects are more likely to seek bank loans as compared to those borrowers with the safest investment projects, banks are said to face the problem of:
adverse selection
A share of Microsoft common stock is
an asset for its owner and a liability for Microsoft
The credit market channel of monetary transmission acts primarily through the effect of:
asymmetric information on lending and balance sheets
Suppose the inflation rate remains relatively constant, and output decreases and the unemployment rate increases. This is possible if:
both the aggregate supply and demand curves shift horizontally to the left by the same amount
By definition, when the Fed conducts and open market purchase, it is:
buying bonds and increasing the quantity of reserves
The Federal Reserve System is the ____ for the United States, which is defined as the government agency responsible for ____ .
central bank; the conduct of monetary policy
The short-run aggregate supply curve slopes upward because an increase in output relative to potential output:
creates tight labor and product markets that cause inflation to rise
Disadvantages of using reserve requirements to control the money supply and interest rates include:
creating potential liquidity problems for banks with low excess reserves, limited effectiveness in practice, and an overly-strong potential impact on the money supply
In a financial panic, you would expect the money multiplier to ____ and the money supply to ____, which would cause the excess reserves ratio to ____. Thus depositors are likely to ____ their holdings of currency.
decrease decrease increase increase
The inflation rate tends to increase, ceteris paribus, as the actual unemployment rate
decreases
The inflation rate tends to increase, ceteris paribus, as the unemployment gap
decreases
Monetary policy has so many different channels through which it can operate. This is an advantage because:
if the policy is rendered ineffective through any one particular channel, there are other channels through which the same policy can still impact the economy
If the income tax exemption on municipal bonds were abolished the interest rates on these bonds would
increase
The IS curve shows combinations of:
interest rates and income that bring equilibrium in the market for goods and services
Critics of Fed independence argue that:
it is undemocratic to have monetary policy controlled by an elite group responsible to no one
Banks generate profits by earning higher returns on their _______ than they pay in interest on _______
loans; deposits;
Brooke accepts money in exchange for performing her daily tasks at her office, since she knows she can use that money to buy goods and services. In this case, money is being used as
medium of exchange
In order to reduce the ____ problem in loan markets, banks often insist on collateral from potential borrowers.
moral hazard
You would be (blank) willing to buy gold if gold again becomes acceptable as a medium of exchange because
more because gold has become relatively more liquid
You would be (blank) willing to buy gold if you expect interest rates to rise because
more because now gold has a better expected return than bonds
Okun's law descrives the:
negative relationship between the unemployment gap and the output gap
According the the quantity theory, changes in the:
quantity of money lead to proportional changes in the price level
Eliminating the Fed's independence might lead to a more pronounced political business cycle because a politically exposed Fed would be more concerned with:
short-run objectives and thus be more likely to engage in expansionary policies designed to lower unemployment and interest rates before an election
If bond investors decide that 30-year bonds are no longer as desirable an investment the yield curve would:
steepen at the end of the yield curve and flatten somewhere along the rest of the curve
Combining Okun's law with the Phillips curve helps derive the short-run aggregate supply curve in that:
the Phillips curve describes the short-run negative relationship between the unemployment rate and the inflation rate, while the short-run aggregate supply curve describes the positive relationship between output and inflation.
The aggregate demand curve slopes downward because a rise in inflation leads:
the monetary policy authorities to raise real interest rates
If the yield curve suddenly becomes steeper how would you revise your predictions of interest rates in the future?
you would raise your predictions of future interest rates
Asset A: Pays a return of $2000 20% of the time and $500 80% of the time. Asset B: Pays a return of $1000 50% of the time and $600 50% of the time. If both assets can be acquired for the same price; as a risk-averse investor you would prefer
Asset B
If float decreases below its normal level, why might the manager of domestic operations consider it more desirable to use repurchase agreements to affect the monetary base rather then an outright purchase of bonds?
Changes in float tend to be temporary.
If you decide to hold $100 less cash than usual and therefore deposit $100 more cash in the bank, what effect will this have on checkable deposits in the banking system if the rest of the public keeps its holdings of currency constant? Assume the required reserve ratio is 10% and banks do not hold any excess reserves.
Checkable deposits increase by $100
You deposit $400 into your checking account at the local bank.
Depositors: Assets are unaffected Banks: assets increase and liabilities increase Fed: Liabilities are unaffected
Identify the cash flow available to an investor in stock.
Dividends and capital gains.
"Bank managers should always seek the highest return possible on their assets." Is this statement true, false, or uncertain?
False. A bank must also consider an asset's risk and liquidity when deciding which assets to hold.
"The Fed can perfectly control the amount of monetary base, but has less control over the composition of the monetary base."Is this statement true, false, or uncertain? Explain your answer.
False. Since the Fed cannot control the amount of discount lending to financial institutions, it does not have perfect control over the amount of reserves in the banking system and hence the monetary base.
"According to the expectations theory of the term structure is it better to invest in one-year bonds reinvested over two years than to invest in a two-year bond if interest rates on one-year bonds are expected to be the same in both years." Is this statement true false or uncertain?
False: These investments are almost of the same profitability.
If a forecaster spends hours every day studying data to forecast interest rates but his expectations are not as accurate as predicting that tomorrow's interest rates will be identical to today's interest rate which of the following is true?
He could improve the accuracy of his forecasts.
What will happen to interest rates on a corporation's bonds if the federal government guarantees today that it will pay creditors if the corporation goes bankrupt in the future?
Interest rates on corporate bonds will decrease
What will happen to interest rates if the public suddenly expects a large increase in stock prices?
Interest rates will rise because the expected increase in stock prices raises the expected return on stocks relative to bonds and so the demand for bonds decreases.
What would happen to the risk premium on corporate bonds if brokerage commissions were lowered in the corporate bond market?
Lower brokerage commissions for corporate bonds would make them more liquid and thus increase demand, which would lower the risk premium.
All else equal, ____ is the monetary aggregate composed of the most liquid assets and ____ is the larger measure.
M1; M2;
As a bank you make a loan to an individual seeking funds to open a coffee shop. When the loan is made the borrower uses the funds to take a vacation to Greenland. This is an example of
Moral hazard.
Would you be more or less willing to buy long-term AT&T bonds under the following circumstances: Trading in these bonds increases, making them easier to sell. You expect a bear market in stocks (stock prices are expected to decline). Brokerage commissions on stocks fall. You expect interest rates to rise. Brokerage commissions on bonds fall.
More Willing More Willing Less Willing Less Willing More Willing
Would you be more or less willing to buy a house under the following circumstances: You just inherited $100,000 Real estate commissions fall from 6% of the sales price to 5% of the sales price You expect Microsoft stock to double in value next year Prices in the stock market become more volatile You expect housing prices to fall
More Willing More Willing Less Willing More Willing Less Willing
A financial adviser has just given you the following advice: "Long-term bonds are a great investment because their interest rate is over 20%." Is the financial adviser necessarily right?
No. If the interest rates rise sharply in the future, long-term bonds may suffer a sharp fall in price causing their return to be quite low.
Assuming the terms of issuance to be the same for different types of loans, a government would choose to issue a:
Perpetuity
What basic principle of finance can be applied to the valuation of any investment asset?
Present value
Which of the following functions is not performed by the twelve Federal Reserve Banks?
Setting the reserve requirement
If you are a banker and expect interest rates to rise in the future, would you want to make short-term or long-term loans?
Short-term so you can reinvest the funds at higher interest rates after their maturity.
Which of the following entities in the Federal Reserve System sets reserve requirements?
The Board of Governors
Which of the following entities in the Federal Reserve System directs open market operations?
The FOMC
If the Federal Reserve has a specific mandate from Congress to achieve "maximum employment and low, stable prices," then how does the Fed have goal independence?
The Fed is free to interpret exactly what these objectives mean
How does the Federal Reserve have a high degree of instrument independence?
The Federal Reserve can choose any method it wants in order to achieve a given set of policy objectives
Why is the Twelfth Federal Reserve district so geographically large, while the Second Federal Reserve district is so small by comparison?
The districts represent the population and economic interests in 1913 when the Federal Reserve Act was created
M1 money growth in the U.S. was about 16% in 2008; 7% in 2009; and 9% in 2010. Over the same 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.
During 2008 the difference in the yield between 3-month AA-rated financial commercial paper and 3-month AA-rated non-financial commercial paper steadily increased from its usual level of close to zero spiking to over a full percentage point at its peak in October 2008. Which of the following explains this sudden increase?
The increase in the yield spread was a result of the decrease in demand for financial commercial paper due to the uncertainty and soundness of financial companies and banks.
To pay for college you have just taken out a $1000 government loan that makes you pay $126 per year for 25 years. However you don't have to start making these payments until you graduate from college two years from now. Why is the yield to maturity necessarily less than 12% (this is the yield to maturity on a normal $1000 fixed-payment loan in which you pay $126 per year for 25 years)?
This is the case because the first payment due begins at a future date.
In Brazil, a country that underwent a rapid inflation before 1994, many transactions were conducted in dollars rather than in reals, the domestic currency. During this period, the US dollar serves what property or properties in Brazil?
Unit of account, medium of exchange, and store of value
What will happen to interest rates if prices in the bond market become more volatile?
When bond prices become more volatile, bonds become riskier and the demand for bonds will fall, which causes interest rates to rise.
Why is the New York Federal Reserve always a voting member on the FOMC?
because the New York district contains many of the largest commercial banks in the US, it is the only Federal Reserve Bank that is a member of the Bank for International Settlements (BIS), and the reserve is actively involved in the bond and foreign exchange markets
Which of the following is not an asset on a bank's balance sheet?
checkable deposits
Assets of value promised to the lender as compensation if the borrower defaults are called:
collateral
Assume that you are interested in earning some return on idle balances you usually keep in your checking account and decide to buy some money market mutual fund shares by writing a check. Everything else the same, M1 will _____ and M2 will _____
decrease; stay the same;
Is it better for bondholders when the yield to maturity increases or decreases? Bondholders are better off when the yield to maturity:
decreases, since this represents an increase in the price of the bond and a decrease in potential capital losses.
Reserves are:
deposits at the Fed plus vault cash, liabilities for the Fed, and assets for banks
The provision of several types of financial services by one firm may be beneficial because of
economies of scope and problematic because of conflicts of interest
The federal funds interest rate is determined by the:
equilibrium of supply and demand in the market for reserves
The ability of a central bank to set monetary policy instruments is ____ , while the ability of a central bank to set goals of monetary policy is ____.
instrument independence; goal independence;
You would be (blank) willing to buy a share of Microsoft stock if you expect gold to appreciate in value because
less because the return on gold relative to stocks has improved
You would be (blank) willing to buy a share of Microsoft stock if the bond market becomes more liquid because
less because you can now sell bonds easier than stocks
You would be (blank) willing to buy a share of Microsoft stock if your wealth falls because
less because you have less money to spend on all of your potential assets
It is not unusual to find a business that displays a sign saying "no personal checks, please." Based on this observation, a checking account must be _______ than currency.
less liquid
You would be (blank) willing to buy a share of Microsoft stock if prices in the bond market become more volatile because
more because stocks have become relatively safer than bonds
You would be (blank) willing to buy gold if you expect inflation to rise and gold prices tend to move with the aggregate price level because
more because the value of gold will offset the rising prices to keep your real value the same
You would be (blank) wiling to buy a share of Microsoft stock if you expect the stock to appreciate in value because
more because you believe the amount of return on your investment will be positive
The European Central Bank (ECB) has complete control over monetary policy in eleven euro countries and has a charter that cannot be changed by legislation. In comparison to the Federal Reserve System, the ECB is:
more independent
If you use an online payment system such as PayPal to purchase goods or services on the Internet, this will affect
neither M1 nor M2
Increasing the independence of a central bank would probably:
reduce pressures to pursue inflationary policies, allow the central bank to more easily pursue monetary policies that directly oppose the government's fiscal policies, hinder the coordination of monetary and fiscal policy
Why, considering most float changes are temporary, do repurchase agreements fit better than outright purchases?
repurchase agreements: can be easily counteracted if the float changes again, are temporary in their time frame, and are used more often for defensive operations
The portion of checkable deposits that banks are required to hold is called:
required reserves
Although neither ____ nor the ____ is officially set by FOMC, the decisions concerning these policy tools are effectively made by the committee
reserve requirements; discount rate;
Stock or flow variable?DebtMoneyIncomeSaving depositsWealth
stock stock flow stock stock
Maria is currently pregnant. She expects her expenditures to increase in the future and decides to increase the balance in her savings account. In this case, money is being used as a
store of value
What property would lead individuals to hold more money in the 1990s (lower inflation) than in the 1970s (higher inflation)? Everything else equal, this would demonstrate the property of money as a
store of value
The monetary base is affected by:
the Federal Reserve through open market operations, the Federal Reserve through its extension of discount loans, and float and Treasury deposits at the Federal Reserve
The public interest view of central bank behavior suggests that the objective of a bureaucracy is to maximize:
the public's welfare
In what ways can the regional Federal Reserve Banks influence the conduct of monetary policy?
through their administration of the discount facilities at each bank, by having members serve on the Federal Advisory Council, and by having five of their presidents sit on the FOMC
The primary reason for the creation of the Federal Reserve System was
to reduce or eliminate future bank panics
The theory of bureaucratic behavior suggests that the Federal Reserve will:
try to avoid a conflict with the president and Congress over increases in interest rates, try to gain regulatory power over more banks, devise clever strategies in an effort to avoid blame for poor economic performance
Tim wants to calculate the relative value of oranges and apples, and therefore checks the price per pound of each of these goods quoted in currency units. In this case, money is being used as a
unit of account