Monetary Econ Final Exam

In the country of Trivia, it is widely believed that the marginal propensity to consume is 0.75. This means that a onetime increase in spending of $50 billion will result in an increase in GDP equal to a. $50 billion b. $66.67 billion c. $100 billion d. $200 billion

D. $200 billion

Suppose the market for loanable funds is currently in equilibrium. Which of the following factors will cause an increase in the interest rate? a. an increase in the household saving rate b. a decrease in government budget deficits c. an increase in business confidence d. an expansionary monetary policy

c. an increase in business confidence

When there is too much money chasing too few goods, the likely impact is a. unemployment b. stagflation c. inflation d. deflation

c. inflation

Carlos is considering buying either a corporate bond or a municipal bond that are exactly the same except for their yield. Carlos is in the 33% marginal tax bracket, and the municipal bond he is considering pays a 4% interest rate. To make Carlos indifferent between the two bonds, the corporate bond must offer an interest rate of how much? a. 5.97% b. 6.52% c. 4.97% d. 5.52%

a. 5.97%

A flight to quality is most likely to have which of these effects? a. it will be more difficult for individual borrowers to borrow, but ease borrowing for businesses b. it will be easier to both individuals and businesses that want to sell high-risk bonds c. it will decrease the default risk premium that higher risk borrower s have to pay and may bring about economic growth d. it will increase the default risk premium that higher risk borrowers will pay and may cause some businesses to cut costs

d. it will increase the default risk premium that higher risk borrowers will pay and may cause some businesses to cut costs

Which is not an example of adverse selection from the financial crisis? a. banks made mortgage loans with no intention of holding on to those loans b. borrowers signed mortgage agreements they didn't understand c. banks and other financial institutions repackaging mortgages into securities d. regulators turning a blind eye to bank exposure to toxic assets

d. regulators turning a blind eye to bank exposure to toxic assets

According to the pure expectations theory, a flat yield curve means the market a. thinks that future interest rates will be higher than current interest rates b. thinks that future interest rates will be lower than current interest rates c. does not know what will happen to future interest rates d. thinks that future interest rates will be exactly the same as current interest rates

d. thinks that future interest rates will be exactly the same as current interest rates

Which is true about fed actions? a. dynamic transactions would involve open market operations that are meant to change the overall level of reserves in the system b. defensive transactions are open market operations are meant to change the overall level of reserves in the system c. the term auction facility is an example of dynamic transactions by the fed d. the fed can do very little with either dynamic or defensive transactions

a. dynamic transactions would involve open market operations that are meant to change the overall level of reserves in the system

According to Keynes, when the price level rises, it causes the interest rate to do what? It cause the level of business spending to do what? a. it causes an increase in the interest rate, due to a greater consumer demand for money to spend; business spending decreases b. it causes an increase in the interest rate, due to greater consumer demand for money to spend; business spending goes up as well c. it cause a decrease in the interest rate, as people adjust to higher prices and purchase less; business spending decreases as well d. it causes a decrease in the interest rate, as people adjust to higher prices and purchase less; business spending goes up

a. it causes an increase in the interest rate, due to a greater consumer demand for money to spend; business spending decreases

Initially, the US federal reserve was created by Congress for what primary function? a. serve as a lender of last resort b. print all currency for the US economy c. be a repository of all gold deposits in the US financial system d. serve as the chief monitor of economic activity in the US economy

a. serve as a lender of last resort

Which is not true about the federal reserve system in the United States? a. the fed answers directly to the Treasury department b. the federal open market committee conducts day to day monetary policy by buying and selling bonds c. the fed has the ability to create or destroy money based on its relationship with member banks d. there are 12 regional banks

a. the fed answers directly to the Treasury department

Which is not a liability on the Fed's balance sheet? a. currency held by public and banks b. treasury deposits c. repurchase agreements d. commercial bank deposits at regional fed banks

c. repurchase agreements

You read a review written by a well-respected financial analyst who says that the steep yield curve we currently see suggests that borrowers require a relatively higher premium to hold longer-term bonds now, compared to short-term bonds. This analyst is most likely a proponent of which theory of interest rates? a. segmented market b. pure expectations c. term premium d. default risk

c. term premium

Which is not true of moral hazard in financial markets? a. the principal agent problem which states that there is no way to insure that the principal doesn't act in the best interest of the agent b. if you are insured, you may act recklessly c. the FDIC being funded by member banks d. a borrower considering a loan to be "somebody else's money"

c. the FDIC being funded by member banks

Financial deregulation in the 1980s ultimately led to a. dramatic growth of Savings & Loan institutions b. big profits for Savings & Loan institutions c. the Savings & Loan crisis and the end of the Savings & Loan industry d. a housing boom

c. the Savings & Loan crisis and the end of the Savings & Loan industry

What was the primary lesson learned from the Panic of 1907? a. the importance of wealthy families in the banking industry b. the need to eliminate federal oversight of banks and return oversight to the level of states c. the need for a central bank and laws and regulations for banking d. the need for deregulation of financial markets and tighter control of monopolies

c. the need for a central bank and laws and regulations for banking

Which is not true about the monetary base? a. it includes currency in circulation and commercial banks deposits at the fed b. the buying of bonds by the fed increases the monetary base c. the selling of bonds by the fed increases the monetary base d. raising the reserve requirement increases the monetary base

c. the selling of bonds by the fed increases the monetary base

If the market interest rate is higher than the coupon rate on a newly issued bond, then the bond will sell a. at par b. below par c. above par d. at a premium

b. below par

Which is not true about expansionary open market operations> a. it involves selling bonds on the secondary market b. it involves increasing the amount of reserves available on the fed funds market c. it is meant to encourage borrowing for consumption and investment d. it can be inflationary

a. it involves selling bonds on the secondary market

Bond prices and interest rates are a. directly related b. inversely related c. unrelated d. exponentially related

b. inversely related

Economic theorists expanded on the Keynesian aggregate supply model in the late 1940s, broadening it into a three-part aggregate supply curve. Which of the following best describes that three-part supply curve? a. A flat initial segment, followed by a modestly upward-sloping middle segment until full employment GDP is reached, and finally a more steeply upward-sloping segment beyond full-employment GDP b. A flat initial segment, followed by an upward-sloping middle segment until full-employment GDP is reached, and finally a vertical segment at full-employment GDP c. A flat initial segment until full-employment is reached, followed by a vertical segment at full-employment GDP, and finally followed by another flat segment once the full-employment price level is reached d. An upward-sloping initial segment, followed by an upward-sloping segment until full-employment GDP is reached, and finally followed by another flat segment beyond full-employment GDP

b. A flat initial segment, followed by an upward-sloping middle segment until full-employment GDP is reached, and finally a vertical segment at full-employment GDP

Harper just go a big raise at work, which pushed her from the 15% federal marginal tax bracket to the 25% marginal tax bracket. Which of the following best describes how this might affect her decision to buy municipal bonds? a. this will make her more likely to buy municipal bonds rather than corporate bonds because she is wealthier b. This will maker her more likely to buy municipal bonds because it will increase the difference between the nominal interest rate paid on the bonds and the after-tax interest rate she will receive relative to corporate bonds c. this will maker her less likely to buy municipal bonds rather than buy corporate bonds because the increase in taxes will reduce her wealth d. this will make her neither more nor less likely to buy municipal bonds rather than corporate bonds

b. This will maker her more likely to buy municipal bonds because it will increase the difference between the nominal interest rate paid on the bonds and the after-tax interest rate she will receive relative to corporate bonds

Which of these would cause a decrease in aggregate demand? a. a decrease in imports b. an increase in imports c. an increase in net exports d. an increase in exports

b. an increase in imports

What is the best description of the relationship between the price of bonds and the quantity of bonds supplied, all else equal? a. inverse b. direct c. negative d. exponential

b. direct

Armand buys a 10-year, $10,000 bond that pays him $500 every year for 10 years and repays the face value in year 10. During the 10-year period, the rate of inflation holds steady at 3% per year. The real rate of return on Armand's investment is a. 5% b. 3% c. 2% d. 0%

c. 2%

Emily is in the 10% marginal income tax bracket and earned a 2.5% return on the corporate bonds that just matured. The nominal interest rate paid on these bonds was a. 2.96% b. 3.28% c. 2.78& d. 3.96%

c. 2.78%

Using a two-part aggregate supply curve, an increase in aggregate demand when the economy is at less than full employment would be expected to lead to ____________ in real GDP and ______________ in the price level. a. an increase; an increase b. an increase; a decrease c. an increase; no increase d. no change; an increase

c. an increase; no increase

The best way to measure the default risk premium that a borrower is paying is to a. look at the borrower's bond rating as reported by Moody's Investors Services b. look at the borrower's bond rating as reported by Standard and Poor's Bond Rating Services c. compare the interest rate the borrower pays with the risk-free premium, usually represented by the rate on US Treasury Securities d. look at the profitability of the lender relative to its industry

c. compare the interest rate the borrower pays with the risk-free premium, usually represented by the rate on US Treasury Securities

Which of the following could cause an increase in the supply of loanable funds? a. an increase in government deficits b. a more optimistic outlook on the future by business c. expansionary monetary policy being followed by the federal reserve d. expectations of future inflation

c. expansionary monetary policy being followed by the federal reserve

Which is not true about contractionary monetary policy? a. it involves selling bonds on the secondary market b. it decreases the amount of loanable funds in the money market c. it involves buying bonds on the secondary market d. it is meant to discourage borrowing for consumption and investment

c. it involves buying bonds on the secondary market

Which of these groups of people is hurt most by inflation? a. borrowers and the wealthy b. the very wealthy c. lenders and working class people d. working class people

c. lenders and working class people

You are having a conversation with your friend about the upward-sloping yield curve that currently exists in the bond market. She explains this to you by saying that the upward slope to the yield curve is because the market expects future short-term interest rates to be higher than current interest rates. Her observation means that she is a proponent of the ____________ theory of interest rates. a. term premium b. default premium c. pure expectations d. segmented market

c. pure expectations

Which of these could be a reason for a decrease in the demand for loanable funds? a. lower expected household income b. a deterioration in business confidence c. an increase in expectations about future inflation d. a decrease in expectations about future inflation

d. a decrease in expectations about future inflation

What would be a difficulty in carrying out monetary policy? a. targeting a monetary aggregate such as M1 is difficult because of financial innovation b. data doesn't tell us where we are until after the fact c. it can take time for monetary policy to be effective d. all of the above

d. all of the above

When a newly issued bond sells above its face value, it is said to sell a. below par value b. at par value c. at a discount d. at a premium

d. at a premium

In a 2003 analysis of the Federal Reserve's role in the stock market collapse in 1929, Allan Meltzer concluded that the a. federal government's action to intervene in the financial system in October of 1929 delayed the onset of the Great Depression b. federal reserves acted appropriately and quickly in reaction to the events in October of 1929 c. federal government and the federal reserve effectively coordinated their response to the events in October of 1929 d. federal reserve followed the wrong policy doctrine and thus contributed to the onset of the Great Depression

d. federal reserve followed the wrong policy doctrine and thus contributed to the onset of the Great Depression

The advantage of municipal bonds over corporate bonds increases as the federal marginal tax rate a. is eliminated b. remains unchanged c. decreases d. increases

d. increases

The coupon rate of a bond refers to the a. original amount of money borrowed by the bond issuer b. number of years until repayment of the bond principal c. discount offered to the bond purchaser d. interest rate to be paid to the holder of the bond

d. interest rate to be paid to the holder of the bond

The relationship between the economy-wide price level and the level of real GDP illustrated by the aggregate demand curve is a. neutral b. positive c. direct d. inverse

d. inverse

The quantity of loanable funds supplied is directly related to interest rates because as interest rates increase a. the opportunity cost of household consumption increases, causing households to bring more of their after-tax income to the pool of loanable funds b. the opportunity cost to firms of funding projects with cash increases, causing firms to bring less of their cash to the pool of loanable funds c. the opportunity cost of government borrowing increases, causing government to run budget surpluses instead of deficits and therefore bring more cash to the pool of loanable funds d. in the United States, savers in the rest of the world will be more inclined to save in their domestic market, thereby bringing less of their savings to the US pool of loanable funds

a. the opportunity cost of household consumption increases, causing households to bring more of their after-tax income to the pool of loanable funds

An inverted yield curve likely means the a. economy is expanding quickly b. economy is headed for recession c. economy is experiencing increasing inflationary pressure d. federal reserve is conducting expansionary policy

b. economy is headed for recession

The Pigou Effect is one of the reasons that the aggregate demand curve slopes downward. According to this argument, when the price level a. goes down, interest rates will fall resulting in an increase in the total level of spending b. goes down, peoples' savings are able to purchase more stuff so the total level of spending increases c. goes down, peoples' savings are able to purchase more stuff, but spending tends to stay steady, while savings increase d. in the United States goes down, US goods and services become relatively cheaper compared to things produced overseas, so the total level of spending on US goods and services increases

b. goes down, peoples' savings are able to purchase more stuff so the total level of spending increases

Which is true about the Taylor Rule? a. the inflation rate used in the formula is the latest (most recent quarter) rate we have b. if actual inflation is greater than target inflation the target fed funds rate will go up c. if actual inflation is less than target inflation the target fed funds rate will go up d. the output gap is weighted higher than the inflation gap

b. if actual inflation is greater than target inflation the target fed funds rate will go up

Imagine you run a company that produces recycled paper products. The selling price for items you produce is going up, so you increase production. After a time, you see that you have increased production more than the market is actually demanding. Which of these is the most likely reason for less demand than you had estimated based on a higher price for your items? a. changing interest rates b. inflation c. default risk d. scarcity of alternatives

b. inflation

Which is not true about quantitative easing? a. it lowered long term interest rates b. it sought to re-establish the upward sloping yield curve c. it took toxic assets off the balance sheets of financial institutions d. it arguably introduced moral hazard into the system

b. it sought to re-establish the upward sloping yield curve

Which is not a type of asymmetric information that banks help solve? a. adverse selection b. liquidity trap c. moral hazard

b. liquidity trap

Regulation Q, passed following the Great Depression, set a a. maximum on the interest rates banks can charge b. maximum on the interest rate that banks can pay on deposits c. maximum on the quantity of money that the US Treasury can print d. floor on the interest rate that banks can pay on deposits

b. maximum on the interest rate that bank can pay on deposits

Which is not a goal of monetary policy? a. avoiding inflation and deflation b. reducing structural unemployment c. stabilizing interest rates d. facilitating stable exchange rates

b. reducing structural unemployment

Which is not an asset on the Fed's balance sheet? a. securities and treasury bonds b. reverse repurchase agreements c. repurchase agreements d. discount window loans

b. reverse repurchase agreements

What is the face value of a bond, also known as the bond principal? a. the rate of interest to be paid to the holder of the bond b. the original amount of money borrowed by the bond issuer c. the final amount of money collected by the bondholder d. the original amount of money borrowed by the bondholder plus the first year's interest

b. the original amount of money borrowed by the bond issuer