Exam 2

Contractionary Fiscal Policies:

(1) Increase income taxes (2) Increase business taxes (3) Decrease government purchases

Contractionary Monetary Policies

(1) Sell treasury securities (2) Raise discount rate (3) Raise required reserve ratio

Which of the following is an example of a debt instrument?

A bond issued by Under Armour

The main way that most companies, including sports franchises, raise money for operations is through equity financing.

False

Which of the following is an advantage of equity financing?

It creates an exit strategy for owners.

Which of the following is a disadvantage of equity financing?

It provides a lack of operating confidentiality.

Do long-term bonds generally offer higher or lower interest rates than comparable short-term bonds? Why?

Long-term bonds generally offer higher interest rates because they are more risky and less liquid than comparable short-term bonds.

Some publicly traded companies may avoid paying dividends initially and reinvest all of the company's earnings back into the company to help it grow.

True

The loanable funds demand curve is downward sloping

because borrowers are willing and able to borrow less loanable funds when the interest rate is high than when it is low

The bond supply curve is upward sloping

because borrowers are willing and able to offer more bonds when the price of bonds is high than when it is low

The bond demand curve is downward sloping

because lenders are willing and able to purchase more bonds when the price of bonds is low than when it is high.

As wealth increases in the economy, we would expect to observe

bond prices and interest rates both fall.

Suppose there is a decrease in the expected returns on stocks. As a result, we would expect to observe

bond prices and interest rates both fall.

Suppose there is a rise in information costs for bonds, we would expect to observe

bond prices fall and interest rates rise.

Suppose there is an increase in the expected profitability of capital, we would expect to observe

bond prices fall and interest rates rise.

Suppose there is a decrease in government borrowing, we would expect to observe

bond prices rise and interest rates fall.

To combat a recession with monetary policy, the Federal Reserve will

buy treasury securities.

If Congress and the President pursue contractionary fiscal policy, then aggregate demand will ________ and the price level will ________.

decline; decline

If the Federal Reserve raises the required reserve ratio, then this will

decrease excess reserves and decrease the money supply.

To combat a recession with fiscal policy, Congress and the President will

decrease income taxes.

An increase in aggregate demand results in a(n) ________ in the ________.

expansion; short run

If the federal reserve pursues expansionary monetary policy, then aggregate demand will ________, the price level will ________, and interest rates will ________.

increase; increase; decline

The interest rate is determined in the

loanable funds market.

Suppose that NFL bonds become more risky relative to U.S. Treasury securities. The result will be that

the demand for NFL bonds will decline relative to the demand for Treasury securities, the price of NFL bonds will fall relative to the price of Treasury securities, and the default-risk premium for NFL bonds will widen.

Suppose that information costs for NFL bonds increase relative to U.S. Treasury securities. The result will be that

the demand for NFL bonds will decrease relative to the demand for Treasury securities, the price of NFL bonds will fall relative to the price of Treasury securities, and the information cost premium for NFL bonds will widen.

Suppose that NFL bonds become more liquid relative to U.S. Treasury securities. The result will be that

the demand for NFL bonds will increase relative to the demand for Treasury securities, the price of NFL bonds will rise relative to the price of Treasury securities, and the liquidity premium for NFL bonds will shrink.

The bond demand curve is equivalent to

the loanable funds supply curve.

Default risk is

the risk that a creditor cannot fulfill its promised principal and interest payments.

If people want to buy less bonds

then they are willing to supply less loanable fund

if people want to buy more bonds

then they are willing to supply more loanable funds

Why did congress establish a Federal Reserve?

to act as a lender of last resort