ECON 102 12/13
A lottery game offers a prize of $100,000 at the end of thirty years. If the interest rate is 7%, the present value of this amount is ___
$13,141 (future)/(1-interest rate)^years
Every time a deposit is made in a bank, the bank creates a loan by the amount
(1-reserve ratio)*initial deposit
As of July 28, 2018, American Express Bank offered a 1.75% nominal annual interest rate (deposit rate) on its savings account. The annual inflation rate at this time was 2.5%. The implied real rate of return on the American Express savings account is
-.75%
The present value of a given payment in the future ________ when the interest rates fall.
increases
When interest rates rise, secondary bond market prices
fall - Direct lending becomes more attractive than old bonds, so demand for old bonds falls and their prices fall
Fears that trade wars might put downward pressure on economic growth. Lower economic growth should, according to the theory from class, cause stock prices to ____________ and bond yields to ___________
fall; fall
A CDS (Credit Default Swap) is more expensive for a AA bond than for a BB bond
false, BB bonds are riskier than AA bonds therefore there is a greater chance the bondholder will need rescue from the CDS, which increases demand for the CDS and raises its price
The current United States currency system is
fiat system
Keynesians think that firm investment decisions are driven by irrational expectations and classical economists think
firm expectations are always right
One problem with commodity money systems is that
fluctuations in the price of the commodity can affect the use of the commodity as a medium of exchange
Globalization of financial markets appeared to reduce financial risk because
globalization made it easier to diversify lending across regions that seemed economically isolated
Using Tobin's Q-theory of investment,
high stock prices lead to high investment levels.
The Fed injected large amounts of reserves into banks during the 2008 financial crisis. The Fed needs to make sure that, in the long run, banks do not loan out too many of these reserves or the result will be
higher inflation.
US GDP is estimated to have grown 4.1 percent in the second quarter of 2018--a very rapid growth rate by historical standards. If firms receive an economic forecast predicting future increases in the growth of real GDP, they are likely to respond by
increasing their level of investment spending to increase future production capacity.
The money multiplier tends to be greater when
individuals hold less cash
The purpose of having the members of the Board of Governors of the Federal Reserve serve fourteen-year terms is to
insulate the governors' policy decisions from the influence of presidential elections and politics.
Suppose that a firm can invest $100 today in a project and receive $105 a year from today. There is no inflation, and the annual interest rate in the economy is 4%. The firm should
invest in the project because the opportunity cost is less than the return on the investment.
Financial intermediaries reduce risk by
investing in a large number of projects with independent returns.
A diamond ring is not in our measure of "money" because
it is not a unit of account
Which of the following is NOT a function of the Federal Reserve?
lending money to individuals who can not receive loans from anyone else
Deposits are examples of a bank's
liabilities
As Bear Stearns began to collapse in 2008, the Federal Reserve helped stabilize the financial markets by
loaning $30 billion to JPMorgan Chase to purchase Bear Stearns.
US interest rates are currently increasing (in two chapters we'll talk about why that is!). All other things being equal, higher interest rates lead t
lower secondary bond market prices
The present value of some future payment indicates the
minimum amount a person is willing to accept today instead of the future payment.
The accelerator theory theory says current investment spending depends
positively on expected growth of real GDP.
Coastal Federal Bank owns numerous mortgages. It packages the mortgages into a portfolio which it sells to investors. They have engaged in
securitization
investment rises
sharply during booms and falls sharply during recessions.
Investment is a ___ portion of GDP than consumption, but is substantially ___ volatile
smaller; more
John Maynard Keynes' theory regarding investment differs from the accelerator theory in that Keynes argued that
swings in optimism and pessimism are often irrational.
Economists and the general public moved to M2 in the 1980's because financial deregulation induced innovations
that made it easy to move wealth from savings and time deposits into M1 for immediate spending
The supply of money in the U.S. economy is determined primarily by
the actions of the Federal Reserve and the banking system
Ceteris paribus, the real interest rate is defined as
the nominal interest rate minus inflation
Assume you know you will get an inheritance in 5 years. As interest rates go up,
the present value to you of that inheritance goes down
If the nominal interest rate is 4.2% and the inflation rate is 3.1%, the real interest rate is ___
1.1%
Suppose a bank has $600,000 in deposits, a reserve ratio of 20 percent, and bank reserves of $240,000. This bank can make new loans in the amount of
120K
Members of the Federal Reserve Board of Governors are appointed by the President and confirmed by the Senate for terms of
14 years
We have a "fractional reserve" banking system because
Banks can't afford to keep everything in reserve--they have to make loans and earn the lending rate in order to cover their costs
Decisions on changes to the money supply are made by the
Federal Open Market Committee
if consumers were to shift funds from savings accounts to checking accounts, which of the following is true?
M1 increases and M2 does not change.
The 2008-2014 recession and recovery were made worse by over-leveraged investment banks with too few reserves
True. Investment banks borrowed to buy MBS's and went into bankruptcy because they had no reserves to back up lost deposits
Keynes referred to the sharp, often irrational, changes in the outlook of investors as the ________ of investors
animal spirits
One reason stocks are riskier than bonds is that
a firm's bondholders have to get paid off before any revenue can be disbursed through dividends or retained earnings
A bank's reserves
all of the above; can be held as cash in its vault AND can be held as deposits with the Federal Reserve AND are the sum of its excess and required reserves
"If the real interest rate was zero, it would be a financially sound decision to level the Rocky Mountains so that automobiles and cars would save on gas mileage." Putting aside ecological concerns, this statement is true because:
all of the above; investment is a function of the real interest rate. AND the benefits of gas savings would offset the cost of leveling the mountains. AND you could borrow the funds with no opportunity costs.
Why might entrepreneurs and firms use banks for loans instead of going directly to savers?
all of the above; Individual investors may ask for a high rate of interest to compensate for their risk. AND It is time consuming to pitch an investment idea to many investors instead of one bank. AND Individual investors may not be savvy enough to evaluate the risks of making a loan.
If a firm wants to finance a new project, it can obtain financing by
all of the above; selling corporate bonds to the public. AND using its retained earnings AND issuing or selling new shares of stock
When real interest rates are high, so is the opportunity cost of funds." This statement is true because:
all of the above; the higher interest rates make it more costly to use or borrow funds. AND the opportunity cost of funds is the interest rate. AND the real interest rate is important when considering the cost of funds
A MBS (Mortgage Backed Security) is a "security" because
all of the above; It is a package of home loans; should borrowers default the owners of the MBS gets the houses, which have value (are collateral) AND A MBS is diversified across many borrowers in many regions, which makes it less risky and therefore more "secure" AND It has a AAA rating (is "secure")
Investment banks differ from retail (also known as commercial) banks in that
all of the above; Retail (commercial) banks offer checking , consumer credit services and liquidity (cash machine etc) services AND Investment banks manage the financial decisions of large firms rather than liquidity and small investment needs of small firms/households
Low interest rates contributed to the housing boom of 2001-2006 because
all of the above; low interest rates made it cheap to borrow to buy a house AND low interest rates meant low returns for savers, so they looked for a new financial asset to put their money in (housing)
The Federal Reserve responded to the financial crisis caused by the 9/11 terrorist attack by
allowing banks to borrow more direct loans from the Federal Reserve.
Ceteris paribus, an increase in M2 is an increase in AD because
an increase in M2 means an increase in lending for C and I
According to the accelerator theory, a firm anticipating high GDP growth would expect new investment in plant and equipment to
be profitable, so they increase investment spending.
Checking account balances are included in
both M1 and M2
The Federal Reserve arranged for JPMorgan Chase & Co. to ___ Bear Stearns during the financial crisis in 2008.
buy
According to the U.S. Secret Service, approximately $2.6 billion of U.S. paper currency in circulation is counterfeit. As long as counterfeit U.S. currency remains undetected and in circulation, an increase in the U.S. inflation rate would essentially
decrease the real value of the counterfeit currency.
During the 1980s, U.S. banks made loans to South American countries. Many of these loans turned out to be worthless (they were not repaid). Because of these loans, banks saw their assets ___ liabilities ____ and owners' equity ___
decrease; remain the same; decrease
As shown in the figure below, excess reserves have started to increase again in starting at the beginning of 2017. This has the effect of _______ the money (or deposit) multiplier and ______ the money supply
decreasing; decreasing
After the Great Depression, depositors panicked and removed their money. _______ was a government program created to prevent bank runs from occuring in the future.
deposit insurance
A highly liquid investment is
easily convertible into money on short notice
When a firm has earnings it has not yet paid out to the owners, those earnings are called
retained earnings
As stock prices rise, investment spending
rises along with stock prices
What is not included in M1
savings deposits
If the secondary bond market price of a bond falls
the value of the debt owed to the bondholders also falls
"Stress tests" examine the potential impact on depositors if there are macroeconomic shocks affecting bank assets
true
Commercial banks own shares in the regional Feds and get an above-market rate of return on those shares
true
Federal Reserve Banks reflect the interests of commercial banks at the same time that they oversee/regulate them
true
Financial intermediaries maintain the monetary payments system, increase lending efficiency and upward-mobility/growth
true
M2 is composed of retail money funds, small time deposits and savings deposits. Institutional money funds are not a component of M2.
true
The "new economy" period of 1994-2000 had strong economic growth, tax rate increases, high employment and high wages
true
The 2002-2008 expansion saw a housing bubble, labor-replacing technologies, tax cuts and spending increases
true
US excess reserves held by depository institutions rose dramatically from 2008-2014 but have been falling since 2014
true
Ceteris paribus, if interest rates go up, stock prices will increase
true, Stocks will be relatively less attractive and demand for them will fall, driving stock prices down
Expectations shift Investment demand in both the Keynesian and Neo-Classical models of Investment spending
true, The difference between the two schools of thought has to do with how expectations are formed
If there are arbitrage opportunities, it must mean that someone could borrow in one financial market, take that money and lend it in another financial market,
true, These opportunities don't exist in equilibrium, and markets will rise and fall until they are in equilibrium
mpk = r in equilibrium
true, Under perfect competition and in equilibrium the rate of return from making an investment is equal to the (real) cost of that investment. Of course firms make profits up until that point but make no marginal profits in equilibrium
In terms of determining the money supply, the primary difference between debit cards and credit cards is that
using a debit card is like writing a check, while using a credit card is like taking out loan.
