econ 2035 full final review

A Big Mac costs $4 in the U.S and 3 euros in Portugal. The purchasing power parity theory would predict that the exchange rate in the long run is

$1 = .75 euros

Which of the following are form of short-term loans in the shadow banking system

- money market mutual fund shares - repurchase agreements - commercial paper

Suppose you have a fixed-rate mortgage. You expect annual inflation over the life of the mortgage to be 4%, and your expected real interest rate is 8%. what is the nominal interest rate?

12%

Suppose there is a 25% chance of a stock rising by 20% and a 75% chance of it rising by 10%. A risk-neutral investor would be indifferent between this stock and an investment with a guaranteed return of ________

12.5%

If 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

20%

Suppose a pair of Airpods sells for $150 in New York while the same pair of Airpods cost 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

4

if the MPC is .75, the government purchases multiplier will equal

4

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%

4.5%

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 premium is 0.50%. What is the interest rate on a three-year bond according to the liquidity premium theory?

4.50%

Which of the following is TRUE about the Federal Reserve System

President of the Federal Reserve Bank of New York always votes on the target for the federal funds rate

Which of the following statements is TRUE

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

Which of the following is an example of moral hazard?

a company uses the proceeds of a new stock sale to build an unnecessarily luxurious new headquarters

Which of the following would cause the realistic money multiplier to increase

a decrease in excess reserves relative to deposits

Everything else held constant, which of the following changes would shift the demand curve for bonds to the right

a decrease in expected inflation

Which of the following assets is the least liquid?

a house

All of the following are associated with rising inflation EXCEPT

a steady decrease in interest rates

If you purchase a Treasury bond, the Treasury bond is

an asset to you, but a liability to the U.S. government

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

an increase in demand for Italian cars in the U.S

Suppose the Board of Governors decides to purchase a painting of Elvis 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

an increase; an increase

Assuming scarcity of reserves and a negative output gap, which of the following monetary policy should the Fed conduct under the Taylor rule?

an open market purchase

Which of the following would help the Federal Reserve to reduce the equilibrium quantity of reserves without affecting the equilibrium federal funds rate?

an open market sale together with a reduction in required reserve ratio

Which of the following is NOT a form of a short-term loan in the shadow banking system

bank deposits

The problem of moral hazard is

considerably more serious when an investor buys a firm's stock than when the investor buys a firm's bonds

The facilities which allow the Fed to provide funds directly to non-financial firms and state and local governments are known as

credit facilities

The process of falling asset prices as a result of failing banks selling their assets, and falling price of goods and services, which further increases bankruptcies is called ________-

debt-deflation process

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 __________

decrease; remain unchanged

Economist who have studied the Phillips curve have concluded that it can shift due to all of the following EXCEPT

demand shocks

Suppose 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

depreciate

Term structure of interest rates is the relationship among the interest rates on bonds that have _____ maturities and _____ characteristics

different; same

If you transfer money from your savings account to your checking account, the value of M1 __________ and the value of M2 _______

does not change; does not change

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

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.

down; lowering

The Federal Reserve district banks

engage in monetary policy directly though discount lending

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

equal to the current price of the stock

If the Fed decreases the 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 ________

fall; rise

Bank profit will increase following an increase in interest rates if the value of its

fixed-rate assets is less than the value of its fixed rate liabilities

By designating Federal Reserve currency as legal tender, the federal government

has mandated that Federal Reserve currency be accepted for payments of debts

The original intention of the Fed's role as lender of last resort was to make loans to banks that were

illiquid, but not insolvent (unable to pay debts)

The era of bank panics in the U.S was effectively ended by

introducing deposit insurance

According to the expectations theory of the yield curve, when the yield curve is downward-sloping

investors expect short term rates to fall

Which of the following is TRUE under the liquidity premium theory of the term structure of interest rates

investors prefer bonds with shorter maturities over bonds with longer maturities, so they require a premium to invest in bonds with longer maturities

Which of the following is the most common goal for central banks of industrialized countries

low inflation

If a one-year bond currently yields 5% an is expected to yield 7% next year, the liquidity premium theory predicts that the yield today on a two-year bond should be

more than 6%

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

national; state

Suppose firms become pessimistic about 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

negative; decrease; decrease

Assuming equal year to maturity, which of the following coupon bonds has the highest yield to maturity?

price = $680, Coupon rate = 6%, face value = $700

All of the following were actions taken by the government or the Fed in response to the financial crisis of 2007-3009 EXCEPT

purchasing of most toxic assets such as mortgage-backed securities

By providing and communicating information, the financial system

relieves individual savers from the necessity of searching out individual borrowers

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 ______

repo; increase

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 ________

restrictive covenant; moral hazard

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

rise, fall, or remain unchanged depending on the expectation of market participants prior to the announcement

An expansionary monetary policy causes a ______ in net worth, which _______ the information problem, thereby __________ lending to finance investment spending

rise; decrease; encouraging

Which of the following statements is correct?

the Fed is only partially insulated (protected) from external pressures

Which of the following is LEAST likely to occur if the Fed responds to a negative demand shock by reducing the real interest rate?

the IS curve shifts to the right

All of the following help make the Fed independent of the political pressure EXCEPT

the chair of the Fed receives a lifetime appointment

When the price of a coupon bond decreases

the current yield increases

If, while you are holding a bond, its market price falls, you can be certain that

the interest rate on other similar bonds must have risen

According to the equation of exchange, if the quantity of money decreases and the velocity of money remains constant, then

the level of nominal GDP must decrease

If the current price of a bond is greater than its face value

the yield to maturity must be less than the coupon rate

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

up; positive; increase; negative

The assumption that reserves are scarce

was accurate prior to the financial crisis of 2007-2009 but not following the crisis