Money And Banking Final Study Guide

If the market interest rate is the same as the coupon rate on a newly issued bond, then the bond will sell...

at par

Joshua says that he would need 3% interest in order to lend you money which you will pay back in two years. This implies that for Joshua the present value of $100 to be received two years from today is what amount?

$94.26

It is found that when the disposable income of Elvania increases by $100 billion, household consumption spending increases by $70 billion. In Elvania, the marginal propensity to consume is...

0.7

Consider the following data about the economy: currency outstanding (C) = $1 trillion, total deposits (D) = $750 billion, total reserves (R) = $76 billion, and the required reserve ratio (RRR) = 10%. What is the currency ratio in this economy

1.33

The central bank of Elousia has an inflation target of 1.5%. In the current year, a shock has lowered the inflation rate to 1.0%. Following the shock, firms and households can expect an inflation rate of

1.5%

Suppose you buy a 30-day T-bill with a face value of $1000 at a price of $990. Your investment return yield (IRY) would be

12.17%

Sarah is considering the purchase of a 10-year, $10,000 bond being issued by Disreputable, Inc. The bond offers an interest rate of 5.5%. The rate on a similar US Treasury bond is 2.5%. All else equal, what will Sarah's default premium be if she purchases the Disreputable, Inc. bond?

3%

If GDP is $20 trillion and the money supply is $4 trillion, what is the velocity of money?

5

A loan with real estate used as collateral and where the terms of the contract allow the lender to change the interest rate is known as a(n)

ARM

How did a change in the business model for bond rating agencies contribute to a conflict of interest today?

Bond rating agencies are now paid by the bond issuers

Inflation is a benefit in the short run to...

Borrowers

Which of the following qualifies as a liability to a bank

Demand deposits

Keynes suggested that what kind of spending would be necessary to move the economy out of the Depression

Government spending of some kind

Which entities, by definition, issue the legal contracts known as bonds?

Governments, corporations, and government agencies

In the early twentieth century, the business scene in America was transformed by the formation of trusts. Business trusts are ___________ integrated ownership structures

Horizontally

When there is too much money chasing too few goods, the likely impact is...

Inflation

Bond prices and interest rates are...

Inversely Related

Which of the following is true about commercial paper?

It is essentially unsecured IOUs

When a bank repays a loan at the discount window to the Federal Reserve, which of the following will happen?

It will decrease bank reserves and decrease the monetary base

Money is most accurately defined as...

Money is anything generally accepted in exchange for goods and services

Financial assets include...

Money, bonds, and stocks

In Vance's homeowner's insurance policy, it states that he is required to pay out-of-pocket the first $5,000 for any homeowner's insurance claim that he submits before the insurance company will reimburse for any loss. This is an example of using

a deductible to try to mitigate the problem of moral hazard

Miserly Bank finds itself short of reserves at the end of the day. One solution to this dilemma would be for Miserly Bank to

borrow in the federal funds market

Monetary policy has the best chance of influencing the level of _______________ unemployment

cyclical

Which of these would cause the AD curve to shift to the right? a. A decrease in state government spending b. A decrease in federal government spending on highway infrastructure c. An increase in federal government spending on Social Security d. An increase in federal government spending on drones

d. An increase in federal government spending on drones

Banks that have some financial difficulty and borrow from the Federal Reserve in what is known as secondary credit will pay an interest rate equal to the

discount rate plus a penalty

A big advantage to the borrower of a 15-year mortgage loan compared to a 30-year mortgage loan is that

far less interest is paid over the life of the loan

When the economy is caught in a liquidity trap, expansionary monetary policy will...

have little impact on the economy

Stagflation is the term used for an economy experiencing a combination of...

high unemployment and rising rates of inflation

Often as part of a mortgage payment, banks will allow borrowers to "escrow" funds to pay for

homeowners' insurance and property taxes

In the early stages of the 2007 financial crisis, the Fed introduced term auction lending to...

increase the amount of liquidity in the financial system

During World War II, the US government financed the dramatic increase in wartime spending by...

increasing tax rates and selling war bonds

One thing on which both the political left in the United States agree regarding the Federal Reserve is that its

independence should be limited

One of the biggest challenges the Federal Reserve faces in conducting monetary policy is the existence of ___________ lags

information and impact

In addition to the need for a hefty down payment, buying a home prior to WWII was challenging because

instead of 15-30 years to repay the loan, borrowers had only five years

The disadvantage to the borrower of an adjustable-rate mortgage is that

interest rates and monthly payments can rise, sometimes by a great deal

When the Federal Reserve buys US Treasury securities on the open market, it is attempting to

lower interest rates

Exchange rates are simply another price of _______________, similar to __________________

money; interest rates

Commercial banks face competition from a variety of institutions, including

mutual funds, investment banks, and private equity partnerships

History tells us that stock prices tend to be

procyclical

The focus of the Securities and Exchange Commission (SEC) is on

reducing the asymmetric information problem that may exist in the US equity market

Assume that Merrill Lynch, a government securities dealer, sells T-bills to First Central Bank with a promise to buy the T-bills back the next day. This agreement is known as a

repurchase agreement

The local government of Clintonville wants to install a sewer system and use the revenue generated from providing the sewer services to residents. To raise the funds to install the sewer system, the local government might issue

revenue bonds

On payday you get paid in cash, so each week you put $10 into a shoebox in your closet so that you can buy a big-screen TV at the end of the year. In this situation, money is serving as a....

store of value

If the market price of a currency is above the equilibrium price, there is a __________ and ______________ pressure on the price

surplus; downward

A yield curve illustrates the relationship between the...

term to maturity of bonds and the interest rate they pay, at a particular point of time

The Federal Reserve is primarily responsible for...

the check-clearing system, supervising and examining banks in their districts, and keeping track of the economy in their districts

A US dollar-to-euro exchange rate was $1 = 0.921384 euro yesterday. Today, the US dollar-to-euro exchange rate is $1 = 0.891560. This means that between yesterday and today, the

the dollar has depreciated against the euro

The concept of purchasing power parity refers to

the exchange rate between currencies that equalizes the purchasing power of each currency by eliminating the differences in price levels in each economy

One of the main reasons why savers wish to purchase stocks is because

they want to share in a corporations future profits

When a coffee shop lists a tall coffee on its menu at $2.95, the coffee shop is using money as a...

unit of account

When the price level falls, indebted persons will be __________ off because the real value of their debt will have ____________.

worse, increased

What do we refer to when we talk about someone's time preference?

The rate at which someone prefers to consume today as opposed to consuming in the future

The loan application process that banks require potential borrowers to go through is an attempt to deal with

adverse selection

WordTechGuru Corporation issues bonds with a bond covenant that specifies a stated debt-to-equity ratio range that management must maintain and further requires management to provide financial information to bondholders, including the buying and selling of major assets. Which of these statements is most likely true of the bonds they are issuing?

The bonds will be considered less risky and thus have a lower interest rate

Which of the following is true of issuers with a lower bond rating?

The bonds will have a higher interest rate

The position of chair of the Federal Reserve is filled in what way?

The chair of the Fed is appointed by the president of the United States and confirmed by the US Senate

Which is currently true for the chair of the Federal Reserve?

The chair position has no formal qualifications; the four-year term is renewable

Which of these statements best describes the type of debt instruments and level of risk in the money market

The debt instruments are short-term and the risk is low

The sum of Federal Reserve notes in circulation, plus US coins, plus bank reserves is collectively referred to by which of these designations?

The monetary base

Christopher buys a US Treasury security from the Federal Reserve in the secondary market. He pays cash. What is the result of this transaction?

The monetary base will decrease, and bank reserves will stay the same.

The economy is experiencing a decrease in excess reserves relative to the level of bank deposits. What effect will this have on the money supply multiplier

The money supply multiplier will increase; it will be strengthened

You are interested in buying a share of stock in CAD Corporation. You expect a dividend payment of $0.50 next year and that the dividend will grow by 5% per year thereafter. You desire a 10% return on your purchase. According to the Gordon growth model, what is the maximum price you would pay for a share of this stock?

$10.00

What is true of the secondary market for stocks

Previously owned stocks are sold in the secondary market and make up the majority of stock market transactions.

Imagine that Roland goes to his bank and deposits $10,000 in cash into his savings account. The bank, wanting to use those funds to generate revenue for itself, will look to make a loan with this cash. An important determinant of how much of that $10,000 the bank can lend is the...

Required Reserve Ratio

Jenny has had a portion of stock in an e-commerce company for some time. She is ready to resell her stock. In what market would she do this?

Secondary Market

Initially, the US Federal Reserve was created by Congress for what primary function?

Serve as a lender of last resort

Between yesterday and today, the US dollar has appreciated against the yen. One of the impacts of this will be

US-made goods that sell in Japan will be more expensive

Which of these entities are part of the so-called shadow banking industry? a. Finance companies, mutual funds, and insurance companies b. Savings and loan associations, large corporations, and mutual funds c. Savings and loan associations, credit unions, and credit review companies d. Insurance companies, credit review companies, and investment banks

a. Finance companies, mutual funds, and insurance companies

Which of these describes an example of asymmetric information in the bond market a. Bond issuers are more conservative about the future than bond buyers. b. Bond issuers have better insight about their future profitability than bond buyers. c. Bond issuers have longer-term goals than bond buyers. d. Bond issuers and bond buyers have different experiences in the bond market.

b. Bond issuers have better insight about their future profitability than bond buyers

Which of these are among the primary responsibilities of the Federal Reserve? a. Repaying the federal government debt and enforcing financial market regulations b. Conducting monetary policy and acting as the fiscal agent of the US Treasury c. Repaying the federal government debt and setting market interest rates d. Conducting monetary policy and printing US currency

b. Conducting monetary policy and acting as the fiscal agent of the US treasury

Which of these groups of people is most hurt by inflation? a. Working class people b. Lenders and working class people c. The very wealthy d. Borrowers and the wealthy

b. Lenders and working class people

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. An expansionary monetary policy c. A decrease in government budget deficits d. An increase in business confidence

d. an increase in business confidence