Money & Banking 1

Job gains averaged ________ per month from January through June.

172,000

The FOMC maintained the target range for the federal funds rate at _____ to _____ percent in the first half of this year.

2.25;2.5

GDP increase at an annual rate of _____ percent in the first quarter of 2019.

3.1

The unemployment rate moved down from _____ percent in December to ______ percent in June, close to its lowest level in 50 years.

3.9;3.7

A business cycle expansion increases income, causing money demand to _____ and interest rates to ______, everything else held constant. A. increase; increase B. increase; decrease C. decrease; decrease D. decrease; increase

A

A disadvantage of ______ made from precious metals is that it is very heavy and hard to transport from one place to another. A. commodity money B. fiat money C. electric money D. paper money

A

A feature of Bitcoin, a new type of electric money, that make it attractive as a medium of exchange is A. anonymous transactions. B. volatility of value. C. heavy regulations by the central bank. D. wide spread acceptance by businesses.

A

A supply curve plotted with price P on the vertical axis and quantity Q on the horizontal axis is said to SHIFT TO THE RIGHT if A) for every given price P, the amount Q of quantity supplied increases. B) the price P and the amount Q of quantity supplied both decrease. C) for every given price P, the amount Q of quantity supplied decreases. D) the price P and the amount Q of quantity supplied both increase.

A

An important function of secondary markets is to A) make it easier to sell financial instruments to raise funds. B) raise funds for corporations through the sale of securities. C) make it easier for governments to raise taxes. D) create a market for newly constructed houses.

A

Compared to interest rates on long term U.S. government bonds, interest rates on three-month Treasury bills fluctuate ________ and are _______ on average. A. more; lower B. less; lower C. more; higher D. less; higher

A

If Google sells a bond in London and it is denominated in dollars, the bond is a A. Eurobond. B. foreign bond. C. British bond. D. currency bond.

A

If a $1,000 face value coupon bond has a coupon rate of 3.75 percent, then the coupon payment every year is A) $37.50. B) $3.75. C) $375.00. D) $13.75

A

If an individual moves money from a demand deposit account to a money market deposit account A) M1 decreases and M2 stays the same. B) M1 stays the same and M2 increases. C) M1 stays the same and M2 stays the same. D) M1 increases and M2 decreases.

A

Reducing risk through the purchase of assets whose returns do not always move together is A) diversification. B) intermediation. C) intervention. D) discounting.

A

The concept of ________ is based on the common-sense notion that a dollar paid to you in the future is less valuable to you than a dollar today. A) present value B) future value C) interest D) deflation

A

The yield to maturity for a discount bond is ________ related to the current bond price. A) negatively B) positively C) not D) directly

A

When an investment bank ________ securities, it guarantees a price for a corporation's securities and then sells them to the public. A) underwrites B) undertakes C) overwrites D) overtakes

A

When we say that money is a stock variable, we mean that A) the quantity of money is measured at a given point in time. B) we must attach a time period to the measure. C) it is sold in the equity market. D) money never loses purchasing power

A

Which of the following is NOT a form of e-money? A. a credit card B. a stored-value card C. a smart card D. a debit card

A

_____ If the bond market has a surplus of bonds (with no government interference), what happens to the price of the bonds? A) Quantity supplied is greater than quantity demanded, causing bond prices to decrease. B) Quantity demanded is greater than quantity supplied, causing bond prices to increase. C) Nothing happens to the bond's price, the market is in equilibrium. D) The bond prices first rise and then falls as the market approaches equilibrium.

A

_____ What happens to the bond market, when wealth in an economy is increasing? A) The demand for bonds increases, causing the demand curve to shift right. B) The demand for bonds decreases, causing the demand curve to shift left. C) The supply for bonds increases, causing the supply curve to shift right. D) The supply for bonds decreases, causing the supply curve to shift left

A

_____ What is the demand curve for bonds? A) The demand curve shows the relationship between quantity demanded and market price of bonds. B) The demand curve shows the relationship between quantity supplied and market price of bonds. C) The demand curve shows the relationship between a bond's market price and the interest rate. D) The demand curve shows the relationship between the buyers and sellers of bonds.

A

A continuing increase in the growth of the money supply is likely followed by A. a depression. B. an increase in the price level. C. a recession. D. no change in the economy.

B

A credit market instrument that pays the owner a fixed coupon payment every year until the maturity date and then repays the face value is called a _____ A. Liquidity B. Coupon bond C. Simple loan D. Discount bond E. Yield to maturity F. Perpetuity G. Real interest rate H. M1 I. M2

B

For a 3-year simple loan of $10,000 at 10 percent, the amount to be repaid is A. $13,000. B. $13,310. C. $7,513. D. $10,300.

B

INTEREST RATE RISK is the risk faced by ____ in the form of ____. A) a potential lender; fluctuations in the purchase price of bonds. B) a bond owner; fluctuations in the yield to maturity, hence in the period-by-period return rate on the bond. C) a person who has re-sold a bond in a secondary market; fluctuations in the interest payments the seller will have to make to the buyer. D) a potential borrower; fluctuations in the interest payments the borrower will have to make to the lender.

B

If a security pays $55 in one year and $133 in three years, its present value is $150 if the interest rate is A) 5 percent. B) 10 percent. C) 12.5 percent. D) 15 percent

B

In his Liquidity Preference Framework, Keynes assumed that money has a zero rate of return; thus, A. when interest rates fall, the expected return on money falls relative to the expected return on bonds, causing the demand for money to fall. B. when interest rates rise, the expected return on money falls relative to the expected return on bonds, causing the demand for money to fall. C. when interest rates rise, the expected return on money falls relative to the expected return on bonds, causing the demand for money to rise. D. when interest rates fall, the expected return on money falls relative to the expected return on bonds, causing the demand for money to rise.

B

In which of the following situations would you prefer to be the LENDER? A. The interest rate is 9 percent and the expected inflation rate is 7 percent. B. The interest rate is 4 percent and the expected inflation rate is 1 percent. C. The interest rate is 13 percent and the expected inflation rate is 15 percent. D. The interest rate is 25 percent and the expected inflation rate is 50 percent.

B

Suppose 15-year bonds are newly issued today. Suppose something suddenly happens that leads lenders today to have LOWER expectations concerning the yield to maturity for these bonds ONE YEAR FROM NOW. Then one would expect to see their demand for bonds today _______ because of ______. A) decrease; a lower expected capital gain over the coming year. B) increase; a higher expected capital gain over the coming year. C) decrease; a higher expected capital gain over the coming year. D) increase; a lower expected capital gain over the coming year

B

Suppose a consol bond pays $1.00 at 11:59 P.M. on December 31 of each year in perpetuity. Suppose you purchase the consol bond for $100 at midnight on December 31, 2007, and you sell it for $109 at midnight on December 31, 2008. Suppose the inflation rate during 2007 is 4 percent. Then your NOMINAL return rate on the console bond for 2007 would be______ and your REAL return rate on the consol bond for 2007 would be A) 9 percent; 13 percent B) 10 percent; 6 percent C) 1 percent; 5 percent D) 9 percent; 5 percent

B

The on an asset over a holding period is defined as the payments to the owner over the holding period plus the change in the asset's value over the holding period expressed as a fraction of the asset's purchase price. A) yield to maturity B) return rate C) current yield D) capital gains (or losses)

B

There is ________ for any bond whose time to maturity matches the holding period. A. yield-to-maturity risk B. no interest-rate risk C. a large interest-rate risk D. rate-of-return risk

B

Which of the following are TRUE for discount bonds? A) A discount bond is bought at par. B) The purchaser receives the face value of the bond at the maturity date. C) U.S. Treasury bonds and notes are examples of discount bonds. D) The purchaser receives the par value at maturity plus any capital gains

B

Which of the following can be described as involving indirect finance? A) You make a loan to your neighbor. B) You buy shares in a mutual fund. C) You buy a U.S. Treasury bill from the U.S. Treasury at Treasury Direct.gov. D) You purchase shares in an initial public offering by a corporation in the primary market.

B

A credit market instrument that provides the borrower with an amount of funds that must be repaid at the maturity date along with an interest payment is knows as a ______ A. Liquidity B. Coupon bond C. Simple loan D. Discount bond E. Yield to maturity F. Perpetuity G. Real interest rate H. M1 I. M2

C

Economists consider the ________ to be the most accurate measure of interest rates. A) simple interest rate. B) current yield. C) yield to maturity. D) nominal interest rate

C

Equity holders are a corporation's ________. That means the corporation must pay all of its debt holders before it pays its equity holders. A. debtors B. brokers C. residual claimants D. underwriters

C

Equity instruments are traded in the ________ market. A) money B) bond C) capital D) commodities

C

If bad credit risks are the ones who most actively seek loans and, therefore, receive them from financial intermediaries, then financial intermediaries face the problem of A. free-riding. B. moral hazard. C. adverse selection. D. costly state verification.

C

If the amount payable in two years is $2,420 for a simple loan at 10 percent interest, the loan amount is A) $1,000. B) $1,210. C) $2,000. D) $2,200.

C

If you expect the inflation rate to be 4 percent next year and a one year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is A. -3 percent. B. -2 percent. C. 3 percent. D. 7 percent.

C

In a primary bond market, the _____ DEMAND CURVE for bonds slopes downward to the right because, at a LOWER bond price, ___________. A) borrowers'; borrowers are encouraged to buy more bonds. B) borrowers'; borrowers encouraged to sell more bonds C) lenders'; lenders are encouraged to buy more bonds. D) lenders'; lenders are encouraged to sell more bonds.

C

Letting " * " denote multiplication, if the annual interest rate is 3 percent, then the PRESENT VALUE of a payment stream ($0,$50,$0,$0,$0,$30) with $50 to be received at the end A) $50 ∗(1 + 0.03) + $30 ∗ (1+ 0.03) B) $50/(0.03)2 + $30/(0.03)6 C) $50/(1+ 0.03)2 + $30/(1+ 0.03)6 D) $50/(0.06) + $30/(0.18)

C

The components of the U.S. M1 money supply are demand deposits and other checkable deposits plus A) currency. B) currency plus savings deposits. C) currency plus traveler's checks. D) currency plus traveler's checks plus money market deposits.

C

The yield to maturity is ______ than the ______ rate when the bond price is ______ its face value. A. less; perpetuity; below B. greater; coupon; above C. greater; coupon; below D. greater; perpetuity; above

C

What is the return on a 5 percent (interest rate) coupon bond that initially sells for $1,000 and sells for $900 next year? A. 5 percent B. 10 percent C. -5 percent D. -10 percent

C

When tax revenues are greater than government expenditures, the government has a budget A. crisis. B. deficit. C. surplus. D. revision.

C

When the interest rate on a bond is above the equilibrium interest rate, in the bond market there is excess ____ and the interest rate will _____. A. supply; rise B. demand; rise C. demand; fall D. supply; fall

C

Which of the following statements uses the economists' definition of money? A) I plan to earn a lot of money over the summer. B) Betsy is rich—she has a lot of money. C) I hope that I have enough money to buy my lunch today. D) The job with New Company gave me the opportunity to earn more money

C

With an interest rate of 6 percent, the present value of $100 next year is approximately A. $106. B. $100. C. $94. D. $92

C

_____ What happens to the bond market, if the supply for bonds decreases? A) Both the bond price and interest rate will increase. B) Both the bond price and interest rate will decrease. C) The bond price will increase, while the interest rate will decrease. D) The bond price will decrease, while the interest rate will increase.

C

A ______ is bought at a price below its face value and the face value is repaid at the maturity date. A. Liquidity B. Coupon bond C. Simple Loan D. Discount Bond E. Yield to maturity F. Perpetuity G. Real interest rate H. M1 I. M2

D

A decrease in the bond price P will result in _____ the bond DEMAND curve, and an increase in the expected inflation rate will result in _____ the bond DEMAND curve. A) a downward movement along; a rightward shift of B) a leftward shift of; a downward movement along C) a rightward shift of; a downward movement along D) a downward movement along; a leftward shift of

D

An example of economies of scale in the provision of financial services is A) investing in a diversified collection of assets. B) providing depositors with a variety of savings certificates. C) hiring more support staff so that customers don't have to wait so long for assistance. D) spreading the cost of writing a standardized contract over many borrowers.

D

Evidence from business cycle fluctuations in the United States indicates that A) a negative relationship between money growth and general economic activity exists. B) recessions are usually preceded by declines in bond prices. C) recessions are usually preceded by dollar depreciation. D) recessions are usually preceded by a decline in the growth rate of money.

D

If an individual redeems a U.S. savings bond for currency A. M1 increases and M2 stays the same. B. M1 stays the same and M2 stays the same. C. M1 stays the same and M2 decrease. D. M1 increases and M2 increases.

D

If bonds are in EXCESS SUPPLY, then standard demand/supply theory predicts the current price of these bonds is ________ . A) below equilibrium and will be bid upwards until demand equals supply. B) above equilibrium and will be bid upwards until demand equals supply. C) below equilibrium and will be bid downwards until demand equals supply. D) above equilibrium and will be bid downwards until demand equals supply.

D

If the Fed wants to permanently lower interest rates, then it should raise the rate of money growth if A. there is fast adjustment of expected inflation. B. there is slow adjustment of expected inflation. C. the liquidity effect is smaller than the expected inflation effect. D. the liquidity effect is larger than the other effects.

D

Key factors that are likely to cause the SUPPLY curve for bonds to SHIFT TO THE LEFT include ______ A) a higher government budget deficit. B) a decrease in the expected profitability of capital investment. C) a decrease in the expected inflation rate. D) only B and C above.

D

Letting i denote the current nominal market interest rate (yield to maturity), in which of the following situations should a rational investor prefer to be a LENDER: A) i = 4 percent and the expected inflation rate = 3 percent B) i = 13 percent and the expected inflation rate = 11 percent C) i = 25 percent and the expected inflation rate = 20 percent D) i = 5 percent and the expected inflation rate = -1 percent

D

Of the following assets, the least liquid is A) stocks. B) traveler's checks. C) checking deposits. D) a house.

D

The higher a security's price in the secondary market the _______ funds a firm can raise by selling securities in the __________ market. A. less; primary B. less; secondary C. more; secondary D. more; primary

D

The price of a coupon bond and the yield to maturity are ________ related; that is, as the yield to maturity ________, the price of the bond ________. A) positively; rises; rises B) negatively; falls; falls C) positively; rises; falls D) negatively; rises; falls

D

The supply curve for bonds has the usual upward slope, indicating that as the price _____, ceteris paribus, the ______ increases. A. falls; supply B. falls; quantity supplied C. rises; supply D. rises; quantity supplied

D

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. A. premium B. collateral C. default D. discount

D

When the expected inflation rate increases, the demand for bonds ________, the supply of bonds ________, and the interest rate ________, everything else held constant. A. increases; increases; rises B. decreases; decreases; falls C. increases; decreases; falls D. decreases; increases; rises

D

Which of the following can be described as involving direct finance? A. A pension fund manager buys a short-term corporate security in the secondary market B. An insurance company buys shares of common stock in the over-the-counter markets. C. People buy shares in a mutual fund. D. A corporation issues new shares of stock.

D

You would be less willing to purchase U.S. Treasury bonds, other things equal, if A) you inherit $1 million from your Uncle Harry. B. stock prices are expected to fall. C. you expect interest rates to fall. D. gold becomes more liquid.

D

_______ is used to make purchases while ________ is the total collection of pieces of property that serve to store value. A. Money; income B. Wealth; income C. Income; money D. Money; wealth

D

The interest rate that equates the present value of payments received from a debt instrument with its value today ______. A. Liquidity B. Coupon bond C. Simple loan D. Discount bond E. Yield to maturity F. Perpetuity G. Real interest rate H. M1 I. M2

E

Another name for a consol is a ______ because it is a bond with no maturity date. The owner receives fixed coupon payments forever. A. Liquidity B. Coupon bond C. Simple Loan D. Discount Bond E. Yield to maturity F. Perpetuity G. Real interest rate H. M1 I. M2

F

The nominal interest rate minus the expected rate of inflation ______ A. Liquidity B. Coupon bond C. Simple Loan D. Discount Bond E. Yield to maturity F. Perpetuity G. Real interest rate H. M1 I. M2

G

The narrowest monetary aggregate that the Fed reports ______ A. Liquidity B. Coupon bond C. Simple loan D. Discount bond E. Yield to maturity F. Perpetuity G. Real interest rate H. M1 I. M2

H

________________________, measured by the 12-month change in the price index for personal consumption expenditures (PCE), declined earlier this year and stood at _____ percent in May.

Overall consumer price inflation; 1.5

List at least THREE issues that contribute to increased uncertainties about the economic outlook.

Trade tensions, sluggish global economic growth, labor market disparities, high and rising federal debt, Brexit, weak inflation