ECON 2035 Final Exam

________ of interest rates refers to the relationship among the interest rates on bonds with _______ maturities and ________ characteristics.

Term structure; different; similar

If investors believe that the U.S. government might default on its bonds, everything else held constant, the interest rate on bonds will fall.

False

Moral hazard problems associated with debt financing, such as issuing bonds, can be fully eliminated.

False

7-60 practice exam

Which of the following is the most common goal for central banks of industrialized countries? Select one: low inflation high employment low interest rates high economic growth Feedback The correct answer is: low inflation Question 8 Not answered Points out of 1.00 Flag question Question text Which of the following would cause the realistic money multiplier to increase? Select one: An increase in the required reserve ratio. A decrease in excess reserves relative to deposits. A decrease in the discount rate. An increase in the currency-to-deposit ratio. Feedback The correct answer is: A decrease in excess reserves relative to deposits. Question 9 Not answered Points out of 1.00 Flag question Question text All of the following are associated with rising inflation EXCEPT Select one: families having trouble deciding how much to save for retirement. a steady decrease in interest rates. income redistribution. firms hesitating to enter into long-term contracts with suppliers. Feedback The correct answer is: a steady decrease in interest rates. Question 10 Not answered Points out of 1.00 Flag question Question text The assumption that reserves are scarce Select one: was accurate prior to the financial crisis of 2007-2009 but not following the crisis. was not accurate prior to or following the financial crisis of 2007-2009. was accurate prior to and following the financial crisis of 2007-2009. was accurate following the financial crisis of 2007-2009 but not prior to the crisis. Feedback The correct answer is: was accurate prior to the financial crisis of 2007-2009 but not following the crisis. Question 11 Not answered Points out of 1.00 Flag question Question text All of the following help make the Fed independent of the political pressure EXCEPT Select one: board members' terms expire at different times, reducing the possible number of appointees by any one president board members receive a long, nonrenewable appointment the chair of the Fed receives a lifetime appointment financial independence Feedback The correct answer is: the chair of the Fed receives a lifetime appointment Question 12 Not answered Points out of 1.00 Flag question Question text If the MPC is 0.75, the government purchases multiplier will equal Select one: 0.25. 0.75. 1.33. 4. Feedback The correct answer is: 4. Question 13 Not answered Points out of 1.00 Flag question Question text Economists who have studied the Phillips curve have concluded that it can shift due to all of the following EXCEPT Select one: changes in firms' expectations of inflation. demand shocks. supply shocks. changes in households' expectations of inflation. Feedback The correct answer is: demand shocks. Question 14 Not answered Points out of 1.00 Flag question Question text If the Fed is able to permanently reduce the inflation rate, households will eventually lower their expectation of the inflation rate. Once that happens, the Phillips curve will shift ________, and the Fed can return output to potential GDP by ________ the real interest rate. Select one: down; lowering up; lowering down; raising up; raising Feedback The correct answer is: down; lowering Question 15 Not answered Points out of 1.00 Flag question Question text Which of the following is LEAST likely to occur if the Fed responds to a negative demand shock by reducing the real interest rate? Select one: The output gap returns to zero. The IS curve shifts to the right. The MP curve shifts down. The inflation rate returns to its previous rate. Feedback The correct answer is: The IS curve shifts to the right. Question 16 Not answered Points out of 1.00 Flag question Question text If you transfer money from your savings account to your checking account, the value of M1 _______ and the value of M2 _______. Select one: does not change; does not change. increases; decreases. increases; does not change. does not change; decreases. Feedback The correct answer is: does not change; does not change. Question 17 Not answered Points out of 1.00 Flag question Question text According to the quantity theory of money, if the long-run economic growth rate is 2.5%, by how much should the Fed increase the money supply if it wants inflation to be 2%? Select one: 0.5% 1.25% 4.5% 5% Feedback The correct answer is: 4.5% Question 18 Not answered Points out of 1.00 Flag question Question text When the price of a coupon bond decreases Select one: the coupon rate decreases. the coupon rate increases. the current yield decreases. the current yield increases. Feedback The correct answer is: the current yield increases. Question 19 Not answered Points out of 1.00 Flag question Question text Suppose you have a fixed-rate mortgage. You expect annual inflation rate over the life of the mortgage to be 4%, and your expected real interest rate is 8%. What is the nominal interest rate? Select one: 8% 12% 4% 16% Feedback The correct answer is: 12% Question 20 Not answered Points out of 1.00 Flag question Question text Suppose there is a 25% chance of a stock rising by 20% and a 75% chance of it rising by 10%. A risk nuetral investor would be indifferent between this stock and an investment with a guaranteed return of _____. Select one: 12.5% 15% 7.5% 5% Feedback The correct answer is: 12.5% Question 21 Not answered Points out of 1.00 Flag question Question text A one-year bond currently pays 5% interest. It's expected that it will pay 4% next year and 3% the following year. The two-year term premium is 0.25% while the three-year term premium is 0.50%. What is the interest rate on a three-year bond according to the liquidity premium theory? Select one: 5.00% 4.25% 3.00% 4.50% Feedback The correct answer is: 4.50% Question 22 Not answered Points out of 1.00 Flag question Question text According to the expectations theory of the yield curve, when the yield curve is downward-sloping Select one: investors expect short term rates to fall. buyers of short term bonds have different preferences and goals than buyers of long term bonds. short-term yields are lower than long-term yields. the bond market is anticipating an econmic expansion. Feedback The correct answer is: investors expect short term rates to fall. Question 23 Not answered Points out of 1.00 Flag question Question text A Big Mac costs $4 in the United States and 3 euros in Portugal. The purchasing power parity theory would predict that the exchange rate in the long run is Select one: $1 = 0.75 euros. $1 = 1.33 euros. 1 euro = $0.75. $1 = 12 euros. Feedback The correct answer is: $1 = 0.75 euros. Question 24 Not answered Points out of 1.00 Flag question Question text Which of the following is an example of moral hazard? Select one: A family with a home ten feet from a large river buys flood insurance. A company uses the proceeds of a new stock sale to build an unnecessarily luxurious new headquarters. A company in serious financial trouble offers to pay you 30% on a loan. A terminal cancer patient buys life insurance. Feedback The correct answer is: A company uses the proceeds of a new stock sale to build an unnecessarily luxurious new headquarters. Question 25 Not answered Points out of 1.00 Flag question Question text Which of the following is TRUE under the liquidity premium theory of the term structure of interest rates? Select one: Bonds of different maturities are perfect substitutes. Investors always choose bonds with highest expected return, regardless of their maturities. Markets for bonds of different maturities are completely separable. Investors prefer bonds with shorter maturities over bonds with longer maturities, so they require a premium to invest in bonds with longer maturities. Feedback The correct answer is: Investors prefer bonds with shorter maturities over bonds with longer maturities, so they require a premium to invest in bonds with longer maturities. Question 26 Not answered Points out of 1.00 Flag question Question text Term structure of interest rates is the relationship among the interest rates on bonds that have ______ maturities and ______ characteristics. Select one: different; different same; different same; same different; same Feedback The correct answer is: different; same Question 27 Not answered Points out of 1.00 Flag question Question text Suppose a pair of AirPods sells for $150 in New York while the same pair of AirPods costs 300 Japanese Yen in Tokyo. If the real exchange rate is 1 pair of AirPods in the U.S for 2 pairs of AirPods in Japan, how many Japanese Yen would you receive in exchange for $1? Select one: 0.5 0.25 2 4 Feedback The correct answer is: 4 Question 28 Not answered Points out of 1.00 Flag question Question text Suppose your fashion company, based in New York, has clothes manufactured in Vietnam. The company's main source of revenues is generated by sales in Italy. Everything else held constant, which of the following scenarios leads to an increase in your profit in the short-run. Select one: An increase in interest rates in Vietnam relative to interest rates in the U.S. An increase in demand for Italian cars in the U.S. An increase in demand for Vietnamese rice in the U.S . An increase in demand for Apple MacBooks in Italy. Feedback The correct answer is: An increase in demand for Italian cars in the U.S. Question 29 Not answered Points out of 1.00 Flag question Question text The Paycheck Protection Program is part of the vast economic rescue package intended to help small businesses that are affected by the COVID-19 to raise funds to keep their workers on the payroll. The program requires that the federal money is used to cover payroll costs, mortgage interest, rent, or utilities. This is a real world example of using _____ to reduce _____ . Select one: credit rationing - moral hazard credit rationing - adverse selection. restrictive covenant - adverse selection restrictive covenant - moral hazard Feedback The correct answer is: restrictive covenant - moral hazard Question 30 Not answered Points out of 1.00 Flag question Question text Assuming scarcity of reserve and a negative output gap, which of the following monetary policy should the Fed conduct under the Taylor rule? Select one: Increase the discount rate Increasing the IOER An open market purchase Decrease the ON RRP rate Feedback The correct answer is: An open market purchase Question 31 Not answered Points out of 1.00 Flag question Question text Which of the following is TRUE about the Federal Reserve System? Select one: Conducting open market operations is part of the duties of the 12 Federal Reserve District Banks. President of the Federal Reserve Bank of New York always votes on the target for the federal funds rate. The majority of the voting members of the FOMC is selected from the presidents of the Federal Reserve District Banks. It is impossible for an individual to serve more than 14 years on the Board of Governors. Feedback The correct answer is: President of the Federal Reserve Bank of New York always votes on the target for the federal funds rate. Question 32 Not answered Points out of 1.00 Flag question Question text Which of the following statements is TRUE? Select one: The discount rate is deterred by the market forces. When banks hold excess reserves, the size of money multiplier is less than the simple deposit multiplier would suggest. The Federal Reserve has no control over the realistic money multiplier. A reduction in the tendency of nonbank public to hold currency relative to checkable deposits would reduce the money supply in the economy. Feedback The correct answer is: When banks hold excess reserves, the size of money multiplier is less than the simple deposit multiplier would suggest. Question 33 Not answered Points out of 1.00 Flag question Question text Which of the following would help the Federal Reserve to reduce the equilibrium quantity of reserves without affecting the equilibrium federal funds rate? Select one: an open market purchase together with a reduction in required reserves ratio an open market sale together with an increase in required reserve ratio an open market purchase together with an increase in required reserve ratio an open market sale together with a reduction in required reserve ratio Feedback The correct answer is: an open market sale together with a reduction in required reserve ratio Question 34 Not answered Points out of 1.00 Flag question Question text The process of falling asset prices as a result of failing bank selling their assets, and falling price of goods and services, which further increases bankruptcies is called ____ . Select one: discounting process debt-deflation process money supply process compounding process Feedback The correct answer is: debt-deflation process Question 35 Not answered Points out of 1.00 Flag question Question text The facilities which allow the Fed to provide funds directly to non-financial firms and state and local governments are known as Select one: liquidity facilities credit facilities crisis facilities disintermediation facilities Feedback The correct answer is: credit facilities Question 36 Not answered Points out of 1.00 Flag question Question text By providing and communicating information, the financial system Select one: eliminates the risk in investing in the stock market. relieves individual savers from the necessity of searching out individual borrowers. reduces the difference between the return on three-month U.S. Treasury bills and the return on thirty-year U.S. Treasury bonds guarantees investors a reasonable return on their money Feedback The correct answer is: relieves individual savers from the necessity of searching out individual borrowers. Question 37 Not answered Points out of 1.00 Flag question Question text If you purchase a Treasury bond, the Treasury bond is Select one: an asset to you as well as an asset to the U.S government a liability to you, but an asset to the U.S government a liability to you as well as a liability to the U.S government an asset to you, but a liability to the U.S government Feedback The correct answer is: an asset to you, but a liability to the U.S government Question 38 Not answered Points out of 1.00 Flag question Question text By designating Federal Reserve currency as legal tender, the federal government Select one: has guaranteed that Federal Reserve currency may be exchanged for an equivalent amount of gold has mandated that Federal Reserve currency be accepted for payments of debts. has ensured that Federal Reserve currency will serve as money has mandated that Federal Reserve currency be accepted by citizens of foreign countries Feedback The correct answer is: has mandated that Federal Reserve currency be accepted for payments of debts. Question 39 Not answered Points out of 1.00 Flag question Question text According to the equation of exchange, if the quantity of money decreases and the velocity of money remains constant, then Select one: the level of real GDP must decrease the level of inflation must decrease the level of nominal GDP must decrease the price level must decrease Feedback The correct answer is: the level of nominal GDP must decrease Question 40 Not answered Points out of 1.00 Flag question Question text If the current price of a bond is greater than its face value Select one: the coupon rate must be less than the current yield. the coupon rate must be equal to the current yield. an investor will receive a capital gain by holding the bond until its maturity. the yield to maturity must be less than the coupon rate. Feedback The correct answer is: the yield to maturity must be less than the coupon rate. Question 41 Not answered Points out of 1.00 Flag question Question text If, while you are holding a bond, its market price falls, you can be certain that Select one: the interest rate on other similar bonds must have fallen the coupon payment you are receiving must have decreased the par value of the bond must have declined the interest rate on other similar bonds must have risen Feedback The correct answer is: the interest rate on other similar bonds must have risen Question 42 Not answered Points out of 1.00 Flag question Question text If the Fed decreases money supply and as a result, households and firms buy fewer short-term financial assets, the price of short-term financial assets will _______and the interest rates on those assets will________. Select one: rise, fall fall, rise rise, rise fall, fall Feedback The correct answer is: fall, rise Question 43 Not answered Points out of 1.00 Flag question Question text If a one-year bond currently yields 5% and is expected to yield 7% next year, the liquidity premium theory predicts that the yield today on a two-year bond should be Select one: more than 6%. less than 6%, but higher than 5%. 6 % 5% Feedback The correct answer is: more than 6%. Question 44 Not answered Points out of 1.00 Flag question Question text Suppose Exxon-Mobil announces that its profits in the third quarter of 2016 were $40 billion. This will cause the price of Exxon-Mobil stocks to Select one: A.remain unchanged B.rise C.rise, fall, or remain unchanged depending on the expectation of market participants prior to the announcement. D.fall Feedback The correct answer is: rise, fall, or remain unchanged depending on the expectation of market participants prior to the announcement. Question 45 Not answered Points out of 1.00 Flag question Question text If market participants have rational expectations, then the best forcast of the price of a stock in the next period is Select one: equal to an average of the past prices of the stock Dependent upon all infromation available currently, including, but not limited to the current price of the stock dependent on all the past information equal to the current price of the stock Feedback The correct answer is: equal to the current price of the stock Question 46 Not answered Points out of 1.00 Flag question Question text Suppose that the Federal Reserve announces contractionary monetary policy while, at the same time, the Bank of England announces a more expansionary monetary policy. Everything else held constant, this would cause the UK pound to________ against the U.S. dollar Select one: be ambiguous remain constant appreciate depreciate Feedback The correct answer is: depreciate Question 47 Not answered Points out of 1.00 Flag question Question text The problem of moral hazard Select one: is considerably more serious when an investor buys a firm's stock than when the investor buys a firm's bonds. is nonexistent for investors who buy corporate bonds or stock. is considerably more serious when an investor buys a firm's bonds than when the investor buys a firm's stock is equally serious whether an investor buys a firm's bonds or a firm's stock. Feedback The correct answer is: is considerably more serious when an investor buys a firm's stock than when the investor buys a firm's bonds. Question 48 Not answered Points out of 1.00 Flag question Question text Bank profit will increase following an increase in interest rates if the value of its Select one: fixed-rate assets is greater than the value of its variable-rate assets. fixed-rate assets is less than the value of its fixed-rate liabilities. fixed-rate assets is greater than the value of its fixed-rate liabilities. fixed-rate liabilities is greater than the value of its variable-rate liabilities. Feedback The correct answer is: fixed-rate assets is less than the value of its fixed-rate liabilities. Question 49 Not answered Points out of 1.00 Flag question Question text The FDIC ________ short-term borrowing by shadow banks, and shadow banks are normally ________ to receive loans from the Fed when they suffer liquidity problems. Select one: does not insure; eligible does not insure; not eligible insures; not eligible insures; eligible Feedback The correct answer is: does not insure; not eligible Question 50 Not answered Points out of 1.00 Flag question Question text Which of the following statements is correct? Select one: The Fed is fully insulated from external pressures because it does not need to go through the normal congressional appropriations process. The Fed is fully insulated from external pressures due to the long terms that members of the Board of Governors serve. The Fed is fully insulated from external pressures because it has a constitutional mandate. The Fed is only partially insulated from external pressures. Feedback The correct answer is: The Fed is only partially insulated from external pressures. Question 51 Not answered Points out of 1.00 Flag question Question text Suppose the Board of Governors decides to purchase a painting of Elvis (medium: oil on velvet) to grace the walls of the conference room at the Federal Reserve Branch Bank in Memphis and pays for the painting with a check. Everything else held constant, this purchase will cause _____ in the Fed's liabilities and _____ in checkable deposit account balances. Select one: a decrease; no change a decrease; an increase no change; an increase an increase; an increase Feedback The correct answer is: an increase; an increase Question 52 Not answered Points out of 1.00 Flag question Question text Suppose a branch of Bank of America in Texas deposits $1 million of currency into its account at the Federal Reserve Bank of Dallas. The branch's action, everything else held constant, will cause vault cash to ________ and Federal Reserve liabilities to________. Select one: increase; remain unchanged decrease; remain unchanged remain unchanged; decrease remain unchanged; increase Feedback The correct answer is: decrease; remain unchanged Question 53 Not answered Points out of 1.00 Flag question Question text While the Federal Reserve Act of 1913 required all _____ banks to become members of the Federal Reserve System, _____ banks were given the choice of becoming members of the system. Select one: A.municipal; state B.state ; national C.national; state D.state; municipal Feedback The correct answer is: national; state Question 54 Not answered Points out of 1.00 Flag question Question text Assuming equal year to maturity, which of the following coupon bonds has the highest yield to maturity? Select one: Price = $780; Coupon Rate = 5%; Face Value = $750 Price = $680; Coupon Rate = 6%; Face Value = $700 Price = $880; Coupon Rate = 6%; Face Value = $850 Price = $800; Coupon Rate = 5%; Face Value = $800 Feedback The correct answer is: Price = $680; Coupon Rate = 6%; Face Value = $700 Question 55 Not answered Points out of 1.00 Flag question Question text Suppose the Fed's trading desk expects that there are factors that will temporarily decrease the supply of reserves. Everything else held constant, the trading desk should undertake a _____ to counteract the effects of the decrease in the supply of reserves. If the Fed does nothing, however, the federal funds rate will _____. Select one: reverse repo; decrease repo; decrease reverse repo; increase repo; increase Feedback The correct answer is: repo; increase Question 56 Not answered Points out of 1.00 Flag question Question text Suppose firms become pessimistic about the future profitability of spending on new information technology. Holding everything else constant, this causes the output gap to become______ and inflation rate to_______. In order for the output gap to return to zero and inflation rate to return to its original rate, the Fed should ______ real interest rate. Select one: positive; decrease; increase negative; increase; decrease positive; increase; increase negative; decrease; decrease Feedback The correct answer is: negative; decrease; decrease Question 57 Not answered Points out of 1.00 Flag question Question text An expansionary monetary policy causes a _____ in net worth, which ______ the information problem, thereby ________ lending to finance investment spending. Select one: A.rise; decreases; encouraging B.decline; decreases; encouraging C.rise; increases; discouraging D.decline; increases; discouraging Feedback The correct answer is: rise; decreases; encouraging Question 58 Not answered Points out of 1.00 Flag question Question text Suppose there is a decrease in labor productivity. Holding everything else constant, this will shift the Phillips curve______ resulting in a______ inflation gap. If the Fed wants to reduce the inflation gap, it should_______ its target for the federal funds rate, which results in a______ output gap. Select one: up; positive; increase; negative down; negative; increase; positive up; negative; decrease; negative down; positive; increase; positive Feedback The correct answer is: up; positive; increase; negative Question 59 Not answered Points out of 1.00 Flag question Question text All of the following were actions taken by the government or the Fed in response to the financial crisis of 2007-2009 EXCEPT Select one: effective nationalization of Fannie Mae and Freddie Mac reducing the federal funds rate to near zero insuring deposits in money market mutual funds purchasing of most toxic assets such as mortgage-backed securities Feedback The correct answer is: purchasing of most toxic assets such as mortgage-backed securities Question 60 Not answered Points out of 1.00 Flag question Question text Everything else held constant, which of the following changes would shift the demand curve for bonds to the right? Select one: a decrease in expected inflation a decrease in wealth an increase in expected return of stocks a reduction in corporate profit tax Feedback The correct answer is: a decrease in expected inflation

According to the liquidity premium theory of the term structure, a flat yield curve indicates that

short-term interest rates are expected to decline moderately in the future.

Compounding is the process of

earning interests as saving accumulates over time

If market participants have rational expectations, then the best forecast of the price of a stock in the next period is

equal to the price of the stock in the current period.

Which of the following statements is CORRECT? Select one: A. Commercial banks are not allowed to use the funds in checkable deposits to invest in corporate bonds. B. A duration gap is the difference between the value of a bank's variable-rate assets and the value of its variable-rate liabilities. C. On a commercial bank's balance sheet, assets are the sources of acquired funds. D. A decrease in the market interest rate will decrease the present value of a bank's assets and liabilities.

Commercial banks are not allowed to use the funds in checkable deposits to invest in corporate bonds.

Suppose you pay $1,000 to purchase a 10-year bond issued by Apple that has a face value of $1,000 and a coupon rate of 4%. One year later, Apple issues another 10-year bond that is similar to yours but pays a coupon rate of 3%. If you sell your bond one year later, you can be sure that the market price of your bond will _____.

increase

Suppose the stock market has become less liquid. Everything else held constant, this change will cause the demand for bonds to _______ and their yields to ______.

increase; decrease

A flight to quality refers to a shift by savers from

low-quality bonds and into high-quality bonds.

The liquidity premium theory holds that investors

require a term premium to compensate them for investing in a less preferred maturity.

Which of the following is a liability of the Fed? Select one: A.reserves B.discount loans to banks C.U.S. government securities D.checkable deposits in commercial banks

reserves

Suppose you are trying to obtain a loan from Bank of America to open a small clothing boutique. When you sign a loan contract with Bank of America, you notice that the contract includes a clause saying that you are not allowed to take out a loan from another creditor during the duration of your loan. This clause is called a _________ and is used by Bank of America to mitigate _______.

restrictive covenant; moral hazard

The political business cycle theory predicts that

the Fed acts to stimulate economic activity before an election.

If the U.S. enters a period of deflation, while Mexico experiences inflation, we would expect ______ in the long run.

the U.S. dollar to appreciate against the Mexican peso.

The rate of return of a stock held for one year equals

the dividend yield plus the rate of capital gain.

In the context of the evaluation of the efficient markets hypothesis, pricing anomalies refer to

the existence of trading strategies that appear to have offered above-normal returns.

Suppose the required reserve ratio is 10% and the Fed purchases $100 million worth of Treasury bills from Wells Fargo. What is the maximum amount that Wells Fargo can lend out?

$100 million.

If the German interest rate is 4% and the U.S. interest rate is 5%, what is the expected change in the value of the dollar in terms of the euro according to the interest-rate parity condition?

-1%

How many Federal Reserve districts are there?

12

According to the Principal-Agent view, we should expect a political business cycle since the Fed would want to avoid conflicts with groups that could limit its power, influence, and prestige.

True

If the euro depreciates sharply against the U.S. dollar, it becomes less expensive for U.S. citizens to travel to Disneyland Paris.

True

Which of the following will cause the money demand curve to shift to the left? Select one: a decrease in the nominal interest rate a decrease in real GDP an increase in the price level an increase in the supply of money

a decrease in real GDP

If the Fed purchases securities worth $10 million from a commercial bank, the banking system's balance sheet will show

a decrease in securities held of $10 million and an increase in bank reserves of $10 million.

The problem created by asymmetric information before the transaction occurs is called _______, while the problem created after the transaction occurs is called _______.

adverse selection; moral hazard

Which of the following increases the M2 multiplier? Select one: A.a decrease in the nonbank public's preference for nontransaction accounts relative to checkable deposits B.an increase in the currency-to-deposit ratio C.an increase in the required reserve ratio D.an increase in the nonbank public's preference for nontransaction accounts relative to checkable deposits

an increase in the nonbank public's preference for nontransaction accounts relative to checkable deposits

The FDIC ________ short-term borrowing by shadow banks, and shadow banks are normally ________ to receive loans from the Fed when they suffer liquidity problems.

does not insure; not eligible

Risk premiums on corporate bonds tend to _______ during business cycle expansions and ______ during recessions, everything else held constant.

decrease; increase

Above-normal returns on stock investments can be expected by investors who

possess inside information.

On a bank's balance sheet, liabilities are

the sources of acquired funds

If market participants rely only on past stock prices to forecast future stock prices

they have adaptive expectations.

Everything else held constant, an increase in the required reserve ratio causes the M1 money multiplier to________ and the money supply to__________.

decrease; decrease

Suppose the Federal Reserve releases a policy statement today which leads people to believe that the Fed will be enacting expansionary monetary policy soon. Everything else held constant, the release of this statement would immediately cause the demand for U.S. financial assets to ______ and the U.S. dollar to _______.

decrease; depreciate

Suppose the federal government imposes a tax of $20 per bond on bond sales and bond purchases. Everything else held constant, the demand for bonds ________ as the return to investing in bonds _______.

decreases; decreases

Since all assets typically do NOT move together, how can investors typically reduce risk?

diversify one's portfolio across different asset classes

According to the ______, if the velocity of money is 3 and the money supply is $3 trillion during a time period, then the nominal GDP must have been ______ during that time period.

equation of exchange; $9 trillion

The segmented markets theory

explains upward-sloping yield curves as resulting from the demand for long-term bonds being low relative to the demand for short-term bonds.

A corporation issues a two-year bond with a coupon of $50 and a face value of $1,000. A year later, market interest rates have declined to 3%. What is the price of the bond a year after it was issued?

$1019.42

Suppose you purchase a 5-year bond with a coupon payment of $50 for $1,200. One year later, you sell it for $1,000. The rate of return on your bond for a holding period of one year is _____.

-12.5% ###############

At the beginning of the year, you buy a share of Apple stock for $130. If during the year you receive a dividend of $4, and Apple stock is selling for $100 at the end of year, what was your rate of return from investing in the stock?

-20%

_____________ cannot explain why the interest rates on bonds of different maturities tend to move together.

Only the segmented markets theory

3 key components of the financial system

1. financial assets 2. financial institutions 3. the Federal Reserve and other financial regulators

5 functions of money

1. means of payment -> medium of exchange & means of unilateral payment 2. unit of account 3. store of value 4. standard of value 5. standard of deferred payment

Suppose the value of a bank's assets is $80 billion and the value of its liabilities is $70 billion. If the bank has a 2% ROA, then what is its ROE?

16%

According to the quantity theory of money, if the money supply grows at a rate of 1%, while the real GDP grows at a rate of 3 %, there will be a________ in the price level in the long run.

2% decrease

Suppose a tube of Colgate costs 250 Yen in Tokyo and $5 in San Francisco. If the real exchange rate is one-fourth of a tube of Colgate in the U.S. for one tube of Colgate in Tokyo, how many yen should you receive in exchange for $1?

200

A one-year bond currently pays 5% interest. It's expected that it will pay 6% next year and 7% the following year. The two-year term premium is 0.2% while the three-year term premium is 0.35%. What is the interest rate on a two-year bond ?

5.70%

Which of the following $1,000 face-value securities has the LOWEST yield to maturity? Select one: A 5 percent coupon bond selling for $1,000. A 5 percent coupon bond selling for $1,200. A 10 percent coupon bond selling for $1,000. A 6 percent coupon bond selling for $1,000.

A 5 percent coupon bond selling for $1,200.

What is the maximum length a member of the Board of Governors can serve?

Between 14 and just under 28 years

The financial system provides risk sharing by incorporating all available information into the prices of financial assets.

False

When banks hold excess reserves, the size of money multiplier is greater than the simple deposit multiplier would suggest.

False

Which of the following is a strategy that banks usually use to manage liquidity risk? Select one: A.Insert restrictive covenants in their loan contracts. B.Increase the share of floating-rate loans in their portfolio. C.Increase the share of reverse repurchase agreements in their portfolio. D.Diversify their portfolio of assets.

Increase the share of reverse repurchase agreements in their portfolio.

Which of the following is NOT true of moral hazard? Select one: A.It describes a lender's problem in verifying borrowers are using their funds as intended. B.It would not exist in a world of perfect information. C.It arises because borrowers typically know more than lenders. D.It describes a lender's problem of distinguishing the low-risk applicants from the high-risk applicants.

It describes a lender's problem of distinguishing the low-risk applicants from the high-risk applicants.

Which of the following statements about the supply of dollars in the foreign exchange market is TRUE? Select one: A.It is equal to the money supply. B.It is determined by the willingness of households and firms that own dollars to exchange them for foreign currency to buy foreign goods and financial assets. C.It represents the supply of U.S. goods and financial assets by firms and households within the United States. D.It represents the demand for U.S. goods and financial assets by firms and households outside the United States.

It is determined by the willingness of households and firms that own dollars to exchange them for foreign currency to buy foreign goods and financial assets.

Which of the following statements is TRUE? Select one: Nominal interest rates can be lower than real interest rates. Stocks are debt instruments. The lower the interest rate used to discount the future payments is, the lower the present value of future payments is. Unanticipated deflation would make the lender worse off than expected.

Nominal interest rates can be lower than real interest rates.

Consider the following three investment options and choose the correct statement. 1) A bond with an equal probability of the rate of return of 5% and 15%. 2) A bond with an equal probability of the rate of return of 8% and 12%. 3) A bond with an equal probability of the rate of return of 9% and 18%.

Regardless of risk preferences, all investors would choose option 3.

Why didn't the increase in the monetary base following the 2007-2009 financial crisis lead to a similar increase in the M1 money supply?

The M1 money multiplier declined as a result of a significant increase in the excess reserve-to-deposit ratio.

Which of the following statements is CORRECT? Select one: The secondary bond market consists of newly issued bonds to the public. The purpose of diversification is to increase the liquidity of a financial portfolio. The financial system performs the role of communicating information by incorporating all available information into the prices of financial assets. If you purchase a corporate bond, the bond is an asset to the corporation and a liability to you.

The financial system performs the role of communicating information by incorporating all available information into the prices of financial assets.

Which of the following statements is INCORRECT? Select one: A. The Fed does not receive funds from the Treasury to operate. B. The member commercial banks are considered to wield the most power in the Federal Reserve System. C. All nationally chartered banks are required to be members of the Fed. D. President of Federal Reserve Bank of New York always has a vote in the FOMC.

The member commercial banks are considered to wield the most power in the Federal Reserve System.

The interest-rate parity condition holds that if the interest rate on a one-year German bond is 3% and the interest rate on a one-year U.S. bond is 1%, the dollar is expected to appreciate by 2% against the euro.

True

Which of the followings is NOT included in M2? Select one: Small-denomination time deposits U.S. Treasury bonds Retail money market mutual fund shares Checking account balances

U.S. Treasury bonds

1-6 practice exam

Which of the following assets is the least liquid? Select one: a U.S. Treasury bond a share of publically traded stock a house a savings account Feedback The correct answer is: a house f a bank has $1 million in deposits and $400,000 in total reserves, with $200,000 in excess reserves, the required reserve ratio must be Select one: 10%. 20%. 30%. 5%. Feedback The correct answer is: 20%. Which of the following is NOT a form of a short-term loan in the shadow banking system? Select one: money market mutual fund shares commercial paper repurchase agreements bank deposits Feedback The correct answer is: bank deposits The original intention of the Fed's role as lender of last resort was to make loans to banks that were Select one: insolvent, but not illiquid. illiquid, but not insolvent. both illiquid and insolvent. not illiquid nor insolvent. Feedback The correct answer is: illiquid, but not insolvent. The era of bank panics in the United States was effectively ended by Select one: introducing deposit insurance. establishing the Fed as lender of last resort. implementing the gold standard. abandoning the gold standard. Feedback The correct answer is: introducing deposit insurance. The Federal Reserve district banks Select one: do not engage in monetary policy engage in monetary policy directly through their membership on the Federal Reserve committees engage in monetary policy directly through discount lending engage in monetary policy directly through open market operations Feedback The correct answer is: engage in monetary policy directly through discount lending

According to the money market model, a decrease in real GDP will have the same effect on short-term nominal interest rates as ________ in price level or ________ in the money supply.

a decrease; an increase

Suppose Judy withdraws $1,000 from her savings account to purchase shares in a money market mutual fund. Judy's action will cause _______ in the M1 money supply and _______ in the M2 money supply, everything else held constant.

a decrease; no change

A 10-year Treasury note is _______. Select one: a financial asset and a financial security neither a financial asset nor a financial security a financial asset, but not a financial security a financial security, but not a financial asset

a financial asset and a financial security

Which of the following is a fixed payment loan?

a home mortgage

If an investor is certain that market interest rates will increase in the future, which of the following will she be most likely to purchase? Select one: a fifty-year government bond a two-year government note a six-month government bill a ten-year government note

a six-month government bill

Suppose the Board of Governors decides to purchase a painting to grace the walls of its conference room at the Federal Reserve Branch Bank in New York and pays for the painting with currency. Everything else held constant, this purchase will cause_________ in the Fed's liabilities and _______ in checkable deposit account balances.

an increase; no change

Money

anything that is generally used and accepted as payment for goods and services or in the settlement of debts.

When the exchange rate for the euro changes from $1.14 per euro to $1.23 per euro, everything else held constant, the euro has ______ and _______ expensive.

appreciated; European cars sold in the U.S. become more

When the price of a bond is ________the equilibrium price, there is an excess demand for bonds and price will______.

below; increase

Which of the following is the most important source of external financing for corporations? Select one: A.mortgages B.stock market C.retained earnings D.bond market

bond market

The implication of the expectations theory that expected returns for a holding period must be the same for bonds of different maturities depends on the assumption that

bonds with different maturities are perfect substitutes.

If the real exchange rate between the U.S. and Japan is _______, it is cheaper to buy goods in Japan than in the U.S.

greater than 1

Suppose the Federal Reserve conducts an open market purchase while, at the same time, the non-bank public increases their currency-to-deposit ratio. Everything else held constant, these changes would ______ the M1 money supply.

have an ambiguous effect on

Which of the following assets is the least liquid? Select one: Money market mutual fund shares Stock U.S. Treasury bond House

house

Suppose the corporate bond market becomes more liquid relative to the Treasury bond market. Everything else held constant, this change will cause the demand for corporate bonds to _______ and the yield to maturity on Treasury bonds to_______.

increase; increase

According to the Gordon growth model, which of the following can cause the value of a stock to decline? Select one: A.higher expected growth rate of dividends B.decreased required return on equity C.increased idiosyncratic risk D.lower short-term interest rate

increased idiosyncratic risk

Rising stock prices ________ the funds that firms can raise, which ________ their spending on physical capital.

increases; increases

Higher expected inflation ________ the supply of bonds and ________ the demand for bonds, everything else held constant.

increases; reduces

One of the implications of the efficient market hypothesis is that

investors will not be able to consistently earn above-average returns by trading stocks.

The efficiency of a payments system is important because

it allows the system to function using fewer resources, which benefits the economy.

Suppose Apple announces that its earnings for the fourth quarter of 2016 rose to $3 billion. As a result of this announcement, the price of Apple's stock declines. The best explanation of this is

market participants were expecting Apple's earnings to be greater than $3 billion.

In the late 1980s, taxi drivers in Moscow quoted a bewildering array of fares in terms of foreign currencies to tourists. However, tourists could use Marlboro cigarettes to pay the fares. Used in this way, Marlboro cigarettes were serving which of the following functions of money?

medium of exchange

The theory of purchasing power parity assumes that

movements in nominal exchange rates are the result of movements in relative price levels.

Suppose a bank's assets have an average duration of 3 years, and its liabilities have an average duration of 5 years. Since this bank has a ________ duration gap, a fall in market interest rates will _______ bank capital.

negative; decrease

Suppose the value of a bank's variable-rate assets is $150 million, and the value of its variable-rate liabilities is $200 million dollar. Since this bank has a ______ gap, an increase in market interest rates will ____ bank profits.

negative; decrease

Which of the followings is NOT a financial intermediary? Select one: New York Stock Exchange. Geico insurance company. Vangard's S&P 500 ETF. Wells Fargo.

new york stock exchange

The shadow banking system refers to

nonbank financial institutions such as investment banks and hedge funds.

Initial Public Offering (IPO) refers to a company's selling of stock for the first time in the _____ stock market. Purchasing the stock of a company's IPO is an example of _____ finance.

primary; direct

The McFadden Act of 1927

prohibited national banks from operating branches outside their home states.

If the Fed purchases $10,000 worth of securities and the required reserve ratio is 8%, by how much will deposits change (assuming no change in excess reserves or the nonbank public's currency holdings)?

rise by $125,000

Federal Reserve district banks perform all of the following roles EXCEPT Select one: A.managing check clearing in the payments system. B.managing currency in circulation by issuing new Federal Reserve notes. C.setting the federal funds rate. D.performing regulatory functions.

setting the federal funds rate.

When a government declares a money to be "legal tender for all debts, private", it is guaranteeing that the money will function as a

standard of deferred payment