Money and Banking Test 1

money

anything that is generally acceptable in exchange for goods and services and/or repayment of debt

legal tender

assets accepted for repayment of debt to the government as well as private transactions

Dollarization occurs when A. a country officially adopts another country's currency as their legal tender. B. a country officially adopts the US dollar as their legal tender. C. the US Treasury prints more currency. D. the Federal Reserve prints more currency.

A

Stagflation is an economic condition where an economy is experiencing A. a high and rising price level and little economic growth with high unemployment. B. a low and falling price level and little economic growth with high unemployment. C. a high and rising price level with high economic growth and low unemployment. D. a low and falling price level and high economic growth with high unemployment.

A

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 US, savers in the rest of the world will be more inclined to save in their domestic market, thereby bringing less of their saving to the US pool of loanable funds.

A

When people use all available information to develop expectations about the future and use their expectations about the future to make current decisions, this is called __________ expectations. A. rational B. adaptive C. realistic D. Deterministic

A

Default Risk

risk that a borrower will not pay interest or principle or both as promised

Financial markets bring together __________ and __________. A. households; banks B. firms; households C. borrowers; lenders D. lenders; savers

c

Commodity Money

-Money that has some other use than being a medium of exchange, unit of account, and having store of value -Easily standardized -Easily divisible -easy to carry around -physically durable -broad demand -->cigarettes in prison

You are having a conversation with your friend Belinda 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 longer-term bonds are less desirable than shorter-term bonds so that the issuers of longer term bonds must offer a higher interest rate as an incentive to attract buyers. 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

A

You hear a report on the news by a well-respected financial analyst who says that the currently inverted yield curve is irrelevant to borrowing and lending decisions because yield curves are not an accurate reflection of the situation in bond markets. This analyst most likely is a proponent of the __________ theory of interest rates. A. segmented market B. pure expectations C. term premium D. default risk

A

__________ is the removal of funds from a financial intermediary (e.g., bank) to invest them directly, as through a mutual fund. A. Disintermediation B. Dollarization C. Standardization D. Allocation

A

Sherry says that she requires a 3% rate of interest in order to lend you some money. This implies that for Sherry the present value of $100 to be received one year from today is A. $97.09. B. $97. C. $100.03. D. $103.

A PV=FV/(1+i)^n PV=100/(1+.03)^1 PV=97.09

Aggregate demand is equal to A. C + I + G + (X + M). B. C + G + (X - M). C. C + I + G + (X - M). D. S + I + G + (X - M).

C

segmented market theory

Also called the segmented markets theory or the market segmentation theory, a framework where the short-term, medium-term, and long-term bond markets are all different or segmented markets

A decrease in aggregate demand would be caused by a(n) __________ in __________. A. increase; exports B. increase; imports C. decrease; imports D. increase; net exports

B

A major advantage that municipal bonds have over corporate bonds for investors is that A. municipal bonds have a lower default risk. B. the income earned on municipal bonds is not subject to federal income tax. C. corporate bonds are not as readily available as municipal bonds. D. municipal bonds have a shorter term to maturity.

B

Bond prices and interest rates are A. directly related. B. inversely related. C. unrelated. D. exponentially related.

B

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

Money that has no intrinsic value is known as A. commodity money. B. fiat money. C. asset money. D. interest.

B

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

If the interest rate is 5%, the value of $1,000 at the end of 10 years is A. $1,505. B. $1,628.89. C. $10,000. D. $57,665.04.

B PV=FV/(1+i)^n PV=1000/(1+.05)^10 PV=1628.89

Bonds are issued by A. corporations only. B. governments only. C. many kinds of borrowers. D. government agencies only.

C

Following World War II, inflation became so bad that Germans stopped using Reichsmarks for transactions, and instead used cigarettes for small transactions and cognac (a type of brandy) for large transactions. Which of the following best describes this situation? A. Cigarettes and cognac were popular commodities because Germans were heavy drinkers and smokers. B. Germans wanted to disassociate themselves from the Third Reich. C. Cigarettes and cognac functioned as money in Germany in this period following World War II. D. Cigarettes and cognac were more plentiful than Reichmarks, so Germans found them more convenient to use for transactions than Reichmarks.

C

If the market for loanable funds is currently in equilibrium, a(n) __________ will cause an increase in the interest rate. A. increase in the household saving rate B. decrease in government budget deficits C. increase in business confidence D. expansionary monetary policy

C

Institutions that compete with commercial banks because they perform some but not all of the functions of commercial banks are said to be part of the __________ banking industry. A. ghost B. pseudo C. shadow D. Competitive

C

Mandy goes to the grocery store to buy groceries, and at the checkout counter she pays cash. This is an example of money being used as A. a store of value. B. barter. C. a medium of exchange. D. a unit of account.

C

Molly's time preference is the A. amount of time that Molly spends on financial transactions. B. value of her time. C. rate at which Molly prefers to consume today as opposed to consuming in the future. D. rate of interest she is willing to pay for a loan.

C

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 A. unit of account. B. medium of exchange. C. store of value. D. rainy day fund.

C

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

Which of the following is included in the M1 definition of the money supply? A. Savings deposits B. Small time deposits C. Demand deposits and other checkable deposits D. Money market deposit accounts

C

In a barter economy with 100 goods, there would be _____ prices. A. 10,000 B. 9,900 C. 4,950 D. 100

C (N(N-1))/2 (100(100-1))/2=4,950

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 500/10000=5% interest-inflation=real rate 5%-3%=2%

If the before-tax rate of return on a corporate bond is 7%, an individual in the 25% marginal tax bracket would earn a _____ rate of return on the bond. A. 7% B. 5.95% C. 5.25% D. 4.55%

C Interest rate(before tax) * (1-tax rate) = interest rate(after tax) 7% * (1-25%) =5.25%

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 A. 0.3. B. 0.5. C. 0.7. D. 1.0.

C MPC = change in consumption / change in disposable income MPC= $70 billion / $100 billion = .7

Shonda says that she would need to earn 3% interest in order to lend you money which you will pay back in two years. This implies that for Shonda the present value of $100 to be received two years from today is A. $97.09. B. $100.06. C. $94.26. D. $59.17.

C PV(1+i)^n=FV 100/(1+.03)^2=94.26

You own a 10-year, $10,000 US Treasury bond with a coupon rate of 3%. There are two years left to maturity, and you are planning to sell the bond in the secondary market. If the interest rate is 5%, how much can you expect to get for the bond? [FOR SIMPLICITY, ASSUME AN ANNUAL COUPON PAYMENT.] A. $10,600 B. $10,000 C. $9,628 D. $9,500

C PV=CouponFV/(1+i)^yearly...+(CouponFV+FaceValue)/(1+i)^finalyear PV=300/(1+.05)^1+(300+10,000)/(1+.05)^2

A 10-year, $10,000 bond with a coupon rate of 5% is a promise by the issuer of the bond to A. make a single payment to the bondholder of $10,500 in 10 years. B. pay the bondholder $5,000 every year for 10 years and also a $10,000 payment in 10 years. C. make a single payment to the bondholder of $15,000 in 10 years. D. pay the bondholder $500 every year for 10 years and also a $10,000 payment in 10 years.

D

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

As the federal marginal tax rate rises, the advantage of municipal bonds over corporate bonds A. is eliminated. B. remains unchanged. C. decreases. D. increases.

D

Shareen buys a 30-year, $10,000 US Treasury bond with a coupon rate of 5%. After two years she needs some cash so she decides to sell her bond. Shareen will sell her bond in the __________ market. A. primary bond B. Treasury bond C. T-bond D. secondary bond

D

The risk that a bond issuer will not be able to live up to the promise they make when they issue a bond is known as __________ risk. A. inflation B. yield C. interest rate D. Default

D

Today, in the United States, several assets function as money. Which of the following would NOT be considered money? A. Currency B. Demand deposits C. Checkable deposits D. Credit cards

D

Emmel is the CFO for ABC Corporation. Ten years ago, under Emmel's instructions, the company invested in 10-year US Treasury bonds that paid 3% interest. At the time, Emmel's projection was that inflation over the 10-year period would be 0.5% per year. As it turns out, the annual rate of inflation over the 10-year period was 1.5%. As a result, the ex-post rate of return on ABC Corporation's investment was _____, instead of the _____ return that Emmel expected ex-ante. A. 3%; 2.5% B. 2.5%; 1.5% C. 3%; 0.5% D. 1.5%; 2.5%

D ex-post = real ex-ante = anticipated

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 a(n) __________ in GDP equal to __________. A. decrease; $66.67 billion B. increase; $50 billion C. increase; $66.67 billion D. increase; $200 billion

D Change in GDP = change in initial spending x (1/(1-MPC)) $50,000,000 x (1/(1-.75)) = $200,000,000

What would prompt an increase in aggregate demand?

Fiscal Policy 1. Gov spending 2. taxes Monetary Policy 1. Increase money supply 2. lower interest rates 3. higher investment spending

MPC

Marginal propensity to consume -a change in the desired level of consumption brought about by a change in the level of disposable income (1)/(1-MPC)

Functions of money

Medium of Exchange: good accepted by both sides in a transaction Unit of account: agreed upon method of placing relative value on assets Store of value: money must retain some of its purchasing power over time

The market for bonds is a subset of the market for loanable funds. • True • False

T

M1

What we often think of as money Includes currency held by the public and transaction accounts at depository institution

Jenny has had a portion of stock in an e-commerce company for some time. She is ready to resell her stock. On what market would she do this? A. After market B. Resale market C. Secondary market D. Liquidity market

c

Pure expectation theory

framework where long-term interest rates are based on the expectations of what short-term interest rates will be in the future

Bond

written legal contract that is a promise to repay with interest, issued by a corporation, gov, or gov agency