Money and banking

Ignoring the effect on the supply curve, when wealth increases, interest rate ____; when riskincreases, interest rate ____; when liquidity decreases, interest rate ____; when expected inflationincreases, interest rate ____; when expected interest rate decreases, interest rate ____.A. Decreases, increases, increases, increases, decreases.B. Decreases, decreases, increases, decreases, decreases.C. Increases, decreases, decreases, increases, decreases.D. Increases, decreases, increases, increases, decreases. E. Decreases, increases, increases, decreases, decreases.

A. Decreases, increases, increases, increases, decreases

The ___ of the bond is the ___, and the ___ of the bond is the ___.A. buyer, lender, seller, borrower.B. buyer, borrower, seller, lender.

A. buyer, lender, seller, borrower

An increase in the time to the promised future payment ________ the present value of the payment.A) decreasesB) increasesC) has no effect onD) is irrelevant to

A. decreases

The present value of an expected future payment ________ as the interest rate increases.A) fallsB) risesC) is constantD) is unaffected

A. falls

Ignoring the effect on the demand curve, rise in investment profitability ____ interest rates; a declinein expected inflation ____ interest rates; a decline in government deficit ____ interest rates.A. Increases, decreases, decreases.B. Decreases, increases, increases.C. Increases, increases, decreases.D. Decreases, increases, decreases.

A. increases, decreases, decreases

Suppose a loan amount of $200 is repaid in three equal installments of $72. Which of the followingis (closest to) the interest rate? (Do not use excel/google sheets. Use a simple calculator.)A. 1%B. 4%C. 7%D. 10%E. 12%

B. 4%

Financial intermediaries can lower their transaction costs by making several loans. This reduction incost is calledA Economies of scopeB Economies of scaleC Marginal costD Marginal product

B. Economies of Scale

M1 includes everything included in M2 plus additional measures.A. TrueB. False

B. False

True or false? If the nominal interest rate is fixed, the lender loses from deflation.A. TrueB. FalseC. Cannot be determined.

B. False

When expected inflation increases, the supply of bonds ____, the demand for bonds ____, and theinterest rate ____.A. Increases; increases; cannot be determined.B. Increases; decreases; increases.C. Decreases; increases; decreases.D. Decreases; increases; increases.

B. Increases; decreases; increases

Pick the incorrect statement.A) M1 and M2 are both measures of stock of money.B) M1 includes everything included in M2 plus additional measures.C) M1 and M2 are positively correlated.D) M1 consists of forms of money that are more liquid than those included in M2.

B. M1 includes everything included in M2 plus additional measures

Select the incorrect statement about coupon bonds.A. The bondholder receives a coupon payment (C) every period until maturity and a face value (F)at maturity.B. The coupon rate is also the interest rate.C. When interest rate increases, the price of the bond decreases.D. Perpetuity is a special type of coupon bond that doesn't mature.E. The coupon rate is the ratio of coupon payment over the face value.

B. The coupon rate is also the interest rate

The credit market can be filled with bad borrowers in the presence of asymmetric information. Whattype of problem is this?A moral hazardB adverse selectionC free-ridingD moral dilemma

B. adverse selection

When there is an excess demand, interest rate ___ and when there is excess supply, interest rate ___.A. rises; dropsB. drops; risesC. rises; risesD. drops; drops

B. drops; rises

A credit market instrument that requires the borrower to make the same payment every period untilthe maturity date is known as aA) simple loan.B) fixed-payment loan.C) coupon bond.D) discount bond.

B. fixed-payment loan

An example of the problem of ____ is when a corporation uses the funds raised from selling bondsto fund corporate expansion to pay for Caribbean cruises for all of its employees and their families.A adverse selectionB moral hazardC risk sharingD credit risk

B. moral hazard

Securities sold in the _ market generates funds for corporations. Long-term debt instruments aresold in the __ market.A primary; moneyB primary; capitalC secondary; moneyD secondary; capital

B. primary; capital

Typically, borrowers have superior information relative to lenders about the potential returns andrisks associated with an investment project. The difference in information is calledA moral selectionB risk sharingC asymmetric informationD adverse hazard

C. Asymmetric information

Which of the following statements is false?A. The assumption of ceteris paribus is maintained when analyzing the supply and demandmodel.B. When the interest rate of a bond increases, the price of the bond decreases.C. The demand for a bond comes from the borrowers.D. The standard deviation of return is one measure of riskiness of an asset.

C. The demand for a bond comes from the borrowers

The demand curve for bonds is downward sloping becauseA a higher interest rate means a higher cost of borrowing.B a higher price means a higher rate of return.C a higher price means a lower rate of return.D a higher price means a higher cost of borrowing.

C. a higher price means a lower rate of return

A ________ pays the owner a fixed coupon payment every year until the maturity date, when the________ value is repaid.A) coupon bond; discountB) discount bond; discount C) coupon bond; faceD) discount bond; face

C. coupon bond; face

The ________ is calculated by multiplying the coupon rate times the face value of the bond.A) present valueB) par valueC) coupon paymentD) maturity payment

C. coupon payment

According to the theory of portfolio choice, the quantity demanded of an asset (e.g., bond) increaseswhen wealth __, when the expected return of the asset (relative to other assets) __, the riskiness ofthe asset (relative to other assets) __, and the liquidity of the asset (relative to other assets) __.A increases; decreases; decreases; increasesB increases; increases; decreases; decreasesC increases; increases; decreases; increasesD decreases; increases; decreases; increases

C. increases; increases; decreases; increases

The supply curve is upward sloping becauseA a higher price means a higher interest rate and therefore a higher rate of return.B a higher price means a lower interest rate and therefore a lower rate of return.C a higher price means a higher interest rate and therefore a lower cost of borrowingD a higher price means a lower interest rate and a lower cost of borrowing.

D. a higher price means a lower interest rate and a lower cost of borrowing