Mishkin Chapter 1 &2

If nominal GDP in 2001 is $9 trillion, and 2001 real GDP in 1996 prices is $6 trillion, the GDP deflator price index is

150

A budget ________ occurs when government expenditures exceed tax revenues for a particular time period

deficit

Financial markets have the basic function of

getting people with funds to lend together with people who want to borrow funds

Banks are important to the study of money and the economy because they

have been a source of rapid financial innovation in the past.

During a recession, output declines resulting in

higher unemployment in the economy.

The interest rate on Baa (medium quality) corporate bonds is ________, on average, than other interest rates, and the spread between it and other rates became ________ in the 1970s.

higher; larger

American companies can borrow funds

in both U.S. and foreign financial markets

Which of the following is a true statement?

The average price of goods and services in an economy is called the aggregate price level

Which of the following statements about financial markets and securities is true?

The maturity of a debt instrument is the number of years (term) to that instrument's expiration date.

Which of the following statements about the characteristics of debt and equity is false?

They can both be short-term financial instruments.

Financial institutions that accept deposits and make loans are called

banks

The financial intermediaries that the average person interacts with most frequently are

banks

When I purchase a corporate ________, I am lending the corporation funds for a specific time. When I purchase a corporation's ________, I become an owner in the corporation.

bond; stock

The upward and downward movement of aggregate output produced in the economy is referred to as the

business cycle

To calculate the growth rate of a variable, you will

calculate the percentage change from one time period to the next.

Banks and other financial institutions engage in financial intermediation, which

can benefit economic performance.

Equity instruments are traded in the ________ market.

capital

Financial markets promote economic efficiency by

channeling funds from lenders to borrowers

It is true that inflation is a

continually rising price level

Nominal GDP is output measured in ________ prices while real GDP is output measured in ________ prices.

current;fixed

Everything else held constant, a weaker dollar will likely hurt

furniture importers in California.

If the price level increases from 200 in year 1 to 220 in year 2, the rate of inflation from year 1 to year 2 is

10%

On ________, October 19, 1987, the market experienced its worst one-day drop in its entire history with the DJIA falling by 22%.

"Black Monday"

If your nominal income in 2002 was $50,000, and prices doubled between 2002 and 2011, to have the same real income, your nominal income in 2011 must be

$100,000.

If an economy has aggregate output of $20 trillion, then aggregate income is

$20 trillion.

Assume that you borrow $2000 at 10% annual interest to finance a new business project. For this loan to be profitable, the minimum amount this project must generate in annual earnings is

$201

If your nominal income in 1998 is $50,000, and prices increase by 50% between 1998 and 2011, then to have the same real income, your nominal income in 2011 must be

$75,000

If the CPI in 2004 is 200, and in 2005 the CPI is 180, the rate of inflation from 2004 to 2005 is

-10%.

If real GDP in 2002 is $10 trillion, and in 2003 real GDP is $9.5 trillion, then real GDP growth from 2002 to 2003 is

-5%

You can borrow $5000 to finance a new business venture. This new venture will generate annual earnings of $251. The maximum interest rate that you would pay on the borrowed funds and still increase your income is

5%

If the CPI is 120 in 1996 and 180 in 2002, then between 1996 and 2002, prices have increased by

50%

Which of the following can be described as involving direct finance?

A corporation issues new shares of stock.

The organization responsible for the conduct of monetary policy in the United States is the

Federal Reserve System

________ policy involves decisions about government spending and taxation

Fiscal

The most comprehensive measure of aggregate output is

GDP

Which of the following items are not counted in U.S. GDP?

GM's purchase of tires for new cars

The measure of the aggregate price level that is frequently the focus of Federal Reserve officials is the

PCE deflator

Which of the following is most likely to result from a stronger dollar?

U.S. goods exported abroad will cost more in foreign countries, and so foreigners will buy fewer of them.

Which of the following can be described as direct finance?

You borrow $2500 from a friend

Which of the following can be described as involving indirect finance?

You buy shares in a mutual fund.

Which of the following can be described as involving indirect finance?

You make a deposit at a bank.

Which of the following is not a financial institution?

a business college

A financial crisis is

a major disruption in the financial markets.

Which of the following benefit directly from any increase in the corporation's profitability?

a shareholder

Changes in stock prices

affect firms' decisions to sell stock to finance investment spending.

A liquid asset is

an asset that can easily and quickly be sold to raise cash.

American farmers who sell beef to Europe benefit most from

an increase in the dollar price of euros

When stock prices fall

an individual's wealth may decrease and their willingness to spend may decrease.

Money is defined as

anything that is generally accepted in payment for goods and services or in the repayment of debt.

Securities are ________ for the person who buys them but are ________ for the individual or firm that issues them.

assets; liabilities

U.S. Treasury bills pay no interest but are sold at a ________. That is, you will pay a lower purchase price than the amount you receive at maturity.

discount

High interest rates might ________ purchasing a house or car but at the same time high interest rates might ________ saving.

discourage; encourage

A share of common stock is a claim on a corporation's

earnings and assets

An increase in interest rates might ________ saving because more can be earned in interest income.

encourage

When secondary market buyers and sellers of securities meet in one central location to conduct trades the market is called a(n)

exchange

The price of one country's currency in terms of another country's currency is called the

exchange rate

Stock prices are

extremely volatile.

From 1980 to 1985 the dollar appreciated relative to the British pound. Holding everything else constant, one would expect that, when compared to 1980,

fewer Britons traveled to the United States in 1985.

Channeling funds from individuals with surplus funds to those desiring funds when the saver does not purchase the borrower's security is known as

financial intermediation

Markets in which funds are transferred from those who have excess funds available to those who have a shortage of available funds are called

financial markets

The market where one currency is converted into another currency is called the ________ market.

foreign exchange

Everything else held constant, a decrease in the value of the dollar relative to all foreign currencies means that the price of foreign goods purchased by Americans

increases

A rising stock market index due to higher share prices

increases people's wealth and as a result may increase their willingness to spend.

Everything else held constant, an increase in interest rates on student loans

increases the cost of a college education.

An increase in stock prices ________ the size of people's wealth and may ________ their willingness to spend, everything else held constant.

increases; increase

The price paid for the rental of borrowed funds (usually expressed as a percentage of the rental of $100 per year) is commonly referred to as the

interest rate

An important financial institution that assists in the initial sale of securities in the primary market is the

investment bank

Every financial market has the following characteristic:

it channels funds from lenders-savers to borrowers-spenders.

Secondary markets make financial instruments more

liquid

The gross domestic product is the

market value of all final goods and services produced in an economy in a year.

The management of money and interest rates is called ________ policy and is conducted by a nation's ________ bank.

monetary; central

A financial market in which only short-term debt instruments are traded is called the ________ market.

money

Compared to interest rates on long-term U.S. government bonds, interest rates on three-month Treasury bills fluctuate ________ and are ________ on average

more; lower

The higher a security's price in the secondary market the ________ funds a firm can raise by selling securities in the ________ market.

more; primary

When the total value of final goods and services is calculated using current prices, the resulting measure is referred to as

nominal GDP

In a(n) ________ market, dealers in different locations buy and sell securities to anyone who comes to them and is willing to accept their prices.

over-the-counter

A breakdown of financial markets can result in

political instability.

High interest rates might cause a corporation to ________ building a new plant that would provide more jobs.

postpone

A corporation acquires new funds only when its securities are sold in the

primary market by an investment bank.

Financial intermediaries

provide a channel for linking those who want to save with those who want to invest.

When prices are measured in terms of fixed (base-year) prices they are called ________ prices.

real

GDP measured with constant prices is referred to as

real GDP

Sustained downward movements in the business cycle are referred to as

recessions

Equity holders are a corporation's ________. That means the corporation must pay all of its debt holders before it pays its equity holders.

residual claimants

Everything else held constant, a decline in interest rates will cause spending on housing to

rise

Financial markets promote greater economic efficiency by channeling funds from ________ to ________.

savers; borrowers

A financial market in which previously issued securities can be resold is called a ________ market.

secondary

If the maturity of a debt instrument is less than one year, the debt is called

short-term

When I purchase ________, I own a portion of a firm and have the right to vote on issues important to the firm and to elect its directors

stock

When tax revenues are greater than government expenditures, the government has a budget

surplus

Long-term debt has a maturity that is

ten years or longer

To convert a nominal GDP to a real GDP, you would use

the GDP deflator

If ten years ago the prices of the items bought last month by the average consumer would have been much higher, then one can likely conclude that

the aggregate price level has declined during this ten-year period

The bond markets are important because they are

the markets where interest rates are determined.

Between 1950 and 1980 in the U.S., interest rates trended upward. During this same time period,

the rate of money growth increased.

Prices of money market instruments undergo the least price fluctuations because of

the short term to maturity for the securities.

When an investment bank ________ securities, it guarantees a price for a corporation's securities and then sells them to the public

underwrites

Everything else constant, a stronger dollar will mean that

vacationing in England becomes less expensive.

If the aggregate price level at time t is denoted by Pt, the inflation rate from time t - 1 to t is defined as

πt = (Pt - Pt - 1)/ Pt - 1.