MACRO chapter 9

Fred purchases a bond, newly issued by the Big Time Corporation, for $10,000. The bond pays $400 to its holder at the end of the first, second, and third years and pays $10,400 upon its maturity at the end of four years. The principal amount of this bond is ___, the coupon rate is ____, and the term of this bond is _____.

$10,000; 4%; four years

If the desired reserve/deposit ratio equals 0.10, then every dollar of currency in bank vaults supports ______ of the money supply, while every dollar of currency held by the public contributes ______ to the money supply.

$10; $1

In Macroland there is $10,000,000 in currency. The public holds half of the currency and banks hold the rest as reserves. If banks' desired reserve/deposit ratio is 10%, deposits in Macroland equal ______ and the money supply equals _______.

$50,000,000; $55,000,000

If the principal amount of a bond is $10,000,000, the coupon rate is 7%, and the inflation rate is 4%, then the annual coupon payment made to the holder of the bond is

$700,000

If the Central Bank of Macroland puts an additional 1,000 units of currency into the economy, the public deposits all currency into the banking system, and banks have a desired reserve/deposit ratio of 0.10, then the banks will eventually make new loans totaling ______ and the money supply will increase by _______.

$9,000, $10,000

If the money supply equals 2,000, velocity equals 3, and real GDP equals 4,000, then the price level equals:

1.5

If real GDP equals 5,000, nominal GDP equals 10,000, and the price level equals 2, then what is velocity if the money stock equals 2,000?

5

One year before maturity the price of a bond with a principal amount of $1,000 and a coupon rate of 5% paid annually fell to $981. The one year interest rate must be:

7%

If bank reserves are 200, the public holds 400 in currency, and the desired reserve/deposit ratio is 0.25, the deposits are ______ and the money supply is _____.

800; 1.200

The M2 measure of money consists of the sum of:

M1, saving deposits, small time deposits, and money market mutual funds

M1 differs from M2 in that

M2 includes savings deposits, small-denomination time deposits, and money market mutual funds that are not included in M1.

In the US, saving is allocated to its most productive use by

a decentralized, market-oriented financial system

When your grandfather keeps a bundle of $100 dollar bills behind a brick in the basement, this is an example of dollars serving as:

a store of value

If you post your car on eBay with a Buy-It-Now price of $1,800, you are using money as:

a unit of account

When an individual deposits currency into a checking account:

bank reserves increase, which allows banks to lend more and increases the money supple

In an open-market purchase the Federal Reserve ______ government bonds and the supply of bank reserves ______.

buys; increases

Stockholders receive returns on their financial investment in the form of ___ and ___

capital gains; dividends

Bank reserves are

cash and similar assets held to meet depositor withdrawals or payments

The M1 measure of money consists of the sum of:

currency, checking deposits, and traveler's checks

If banks' desired reserve ratio increases from 0.10 to 0.15, the public still desires to hold the same amount of currency, and the Fed takes no actions, the money supply will:

decrease

When the coupon rate on newly-issued bonds increases from 5% to 6%, the prices of existing bonds:

decrease

100 percent reserve banking refers to a situation in which banks' reserves equal 100 percent of their:

deposits

The practice of spreading one's wealth over a variety of different financial investments in order to reduce overall risk is called:

diversification

A regular payment received by stockholders for each share they own is called a

dividend

Two reasons savers keep deposits at banks are to

earn a return on their savings and to facilitate making payments

Savings deposits are ______ the M1 measure of money and ______ the M2 measure of money.

excluded from; included

Pat pays $10,000 for a newly issued two-year government bond with a $10,000 face value and a 6 percent coupon rate. One year later, after receiving the first coupon payment, Pat sells the bond. If the current one-year interest rate on government bonds is 5 percent, then the price Pat receives is:

greater than $10,000

In the long run, countries with higher rates of money growth usually have:

higher rates of inflation

If the public switches from using cash for most transactions to using checks instead, then all else equal, the money supply will:

increase

When the coupon rate on newly-issued bonds decreases from 6% to 5%, the prices of existing bonds:

increase

You own shares in a well-managed and diversified company. If a booming economy decreases investors' concerns about market risk, then the price of your shares will _____, holding other factors constant.

increase

Stock prices increase when expected future dividends ____, interest rates _____, and/or the risk premium ______.

increase; decrease; decrease

An increase in interest rates results in a(n) ______ in the required rate of return to hold stocks and ______ current stock prices.

increase; reduces

The introduction of credit cards and debit cards has ______ velocity.

increased

When the central bank buys $1,000,000 worth of government bonds from the public, the money supply:

increases by more than $1,000,000

An increase in the perceived riskiness of the stock of Company A ______ the risk premium investors require to purchase Company A stock and ______ the price of Company A stock.

increases; decreases

The current price of a stock increases when

interest rates decrease

The financial system consists of financial ____, such as commercial banks, and financial _____, such as the stock market.

intermediaries; markets

Extremely rapid rates of money growth are usually the result of:

large government budget defects

Chris pays $10,000 for a newly issued two-year government bond with a $10,000 face value and a 6 percent coupon rate. One year later, after receiving the first coupon payment, Chris sells the bond. If the current one-year interest rate on government bonds is 7 percent, then the price Chris receives is:

less than $10,000

In a fractional-reserve banking system the reserve/deposit ratio equals:

less than 100%

The coupon rate on newly issued bonds is usually ______ for bonds with favorable tax treatment, such as municipal bonds, and ______ for bonds that are very risky, such as junk bonds.

lower; higher

When the actual reserve/deposit ratio exceeds the desired reserve/deposit ratio banks:

make more loans

Double coincidence of wants is avoided if money is used as a:

medium of exchange

When a bank makes a loan by crediting the borrower's checking account balance with an amount equal to the loan:

money is created

The ongoing search by savers for high returns leads the bond and stock markets to direct funds to the uses that appear:

most likely to be productive

A financial intermediary that sells shares in itself to the public, and then uses the funds to buy a wide variety of financial assets is called a:

mutual fund

The main disadvantage of using money as a store of value is that:

other assets pay relatively higher rates of interest than money

The market value of a particular bond at any given point in time is called the bond's

price

The specialized information gathering activities that banks use to evaluate borrowers are an example of the

principle of comparative advantage

In the past, some governments' budget deficits became so large that they could not raise sufficient taxes to finance the spending, so they ______, which led to ______.

printed large quantities of paper money; hyperinflation

Decentralized market based financial systems improve the allocation of saving by

providing information and risk sharing services

Savers may prefer to use financial intermediaries rather than lending directly to borrowers because financial intermediaries

reduce the cost of gathering information about borrowers

Assets of the commercial banning system include

reserves and loans liabilities: deposites

The rate of return that financial investors require to hold a risky asset minus the rate of return on a safe asset is called the

risk premium

The amount of money in the United States is determined by:

the combines behavior of commercial banks and the public, as well as actions of the Fed

The link between the money supply and prices is strongest in:

the long run

Two countries, Alpha and Beta, have the same levels of nominal and real GDP. Each dollar in Alpha is used more frequently than each dollar in Beta. Therefore, it must be the case that ______ in Alpha than in Beta.

the money stock is smaller

According to the quantity equation, if velocity and output are constant, then an increase in the money supply leads to ______ in inflation.

the same percentage increase

The money supply will increase by a multiple of the increase in bank reserves created by the central bank unless:

there is 100% reserve banking

Credit card balances are not considered to be money primarily because they:

they are not part of people's wealth

Commercial banks create new money

through multiple rounds of lending

Nominal GDP divided by the money stock equals

velocity

The speed at which money circulates is called

velocity