Chapter 1

Who benefits and who is hurt when interest rates​ rise? 1. Corporations with immediate capital construction needs are ____________. 2. Households with little​ debt, saving a significant fraction of annual income for​ retirement, are __________. 3. The federal government running persistent budget deficits is __________. ​4. Black-market entrepreneurs operating on a​ 'cash-only' basis are __________.

Any institution that needs to borrow to finance expensive capital acquisition programs will be hurt by rising interest rates as the cost of borrowing increases. 1. worse off 2. better off 3. worse off 4. worse off

When there is an increase in the value of the European Union's euroEuropean Union's euro​, all else​ equal: A. American businesses will see a decrease in demand for their goods in the United States only. B. American businesses will see an increase in demand for their goods in the United States and in foreign countries. C. American businesses will see a decrease in the supply of their goods in the United States and in foreign countries. D. American businesses will see a decrease in demand for their goods in the United States and in foreign countries.

B. American businesses will see an increase in demand for their goods in the United States and in foreign countries.

Much of the U.S. government debt is held as Treasury bonds and bills by foreign investors. How do fluctuations in the dollar exchange rate affect the value of that debt held by​ foreigners? A. If the dollar becomes weaker relative to a foreign​ currency, U.S. exports​ rise, causing an increase in GDP and in the economy as a whole. As a​ result, the maturity date on​ T-bonds may be lowered and the profitability of debt held by foreigners rises. B. As the dollar becomes stronger relative to a foreign​ currency, for a given face value of bond​ holdings, it will yield more home currency to​ foreigners, so the asset will be worth more to foreign investors. C. Fluctuations in the dollar exchange rate affect the value of Treasury bonds and bills only if they are followed by changes in​ long-term interest rates. D. If the dollar is worth less relative to a foreign​ currency, the U.S. economy becomes weaker and the government decreases the interest rate on​ T-bonds, so for a given face value of bond​ holdings, the asset will be worth less to foreign investors.

B. As the dollar becomes stronger relative to a foreign​ currency, for a given face value of bond​ holdings, it will yield more home currency to​ foreigners, so the asset will be worth more to foreign investors.

Why do managers of financial institutions care so much about the activities of the Federal Reserve​ System? A. Because the Federal Reserve conducts fiscal​ policy, which can have important impacts on the profitability of financial institutions. B. Because the Federal Reserve affects interest​ rates, inflation, and business​ cycles, all of which have an important impact on the profitability of financial institutions. C. Because financial institutions count on the Federal Reserve as being the lender of last resort​ and, as​ such, follow the​ Fed's activities closely to monitor whether there are enough reserves in the system to receive a​ bailout, if necessary. D. None of the abovelong dash—financial institutions are only directly influenced by the activities of Congress and the Securities and Exchange Commission.

B. Because the Federal Reserve affects interest​ rates, inflation, and business​ cycles, all of which have an important impact on the profitability of financial institutions.

Which of the following is likely to occur if the stock market has been rising slowly​? A. Firms accumulate more investment funding from their stock sales. B. Firms will sell less newly issued stock.Firms will sell less newly issued stock. C. Consumers are willing to spend more on goods and services.Consumers are willing to spend more on goods and services. D. Firms will increase their investment spending on new equipment.

B. Firms will sell less newly issued stock.Firms will sell less newly issued stock. A rising stock market is preferable for firms and stockholders​ alike, since firms are better able to acquire more capital from more willing investors. Investors also benefit from the rising values of the stock holdings since the rise is viewed as an increase in their total wealth.

How does the size of the U.S. budget deficit in 2010 compare to the time period since​ 1950? A. It has not changed significantly since 1950. B. It has expanded dramatically since 2007. In​ 2010, the​ deficit-to-GDP ratio was 10​ percent, well above the historical average of around 2 percent since 1950. C. It increased slightly from 1950 to​ 1983, and then recently decreased. In​ 2010, the​ deficit-to-GDP ratio was 10​ percent, well under the 1983 peak of around 16 percent. D. It has constantly expanded since 1950. In​ 2010, the​ deficit-to-GDP ratio was 10​ percent, well above the historical average of around 2 percent since 1950.

B. It has expanded dramatically since 2007. In​ 2010, the​ deficit-to-GDP ratio was 10​ percent, well above the historical average of around 2 percent since 1950.

When there is an increase in the value of the Japanese yen relative to the American dollar an increase in the value of the Japanese yen relative to the American dollar​, all else​ equal: A. American goods will become more expensive relative to Japanese goods. B. Japanese goods will become more expensive relative to American goods. C. Americans will import more Japanese goods than they did before. D. Japan will export more goods to the United States than it did before.

B. Japanese goods will become more expensive relative to American goods.

Economists group commercial​ banks, savings and loan​ associations, credit​ unions, mutual​ funds, mutual savings​ banks, insurance​ companies, pension​ funds, and finance companies together under the heading financial intermediaries. What function do financial intermediaries​ perform? A. They produce nothing of value and are therefore a drain on​ society's resources. B. They provide a channel for linking those who want to save with those who want to invest. C. They are a source of slow and resistant financial innovation. D. These institutions can hurt the performance of the economy.

B. They provide a channel for linking those who want to save with those who want to invest.

How can changes in foreign exchange rates affect the profitability of financial​ institutions? ​(Check all that​ apply.) Changes in foreign exchange​ rates: A. lead to central bank intervention in financial​ institutions' activities. B. affect the profits made by traders in foreign exchange who work for financial institutions. C. change the value of assets held by financial institutions. D. do not affect the profitability of financial institutions if there is no central bank intervention. E. cause changes in mortgage interest rates and other interest rates set by financial institutions.

B. affect the profits made by traders in foreign exchange who work for financial institutions. C. change the value of assets held by financial institutions.

A decrease in the value of the dollar relative to foreign currency implies that A. foreign goods have become less expensive to U.S. residents B. more foreigners will want to purchase U.S. goods C. more U.S. residents would want to purchase foreign goods D. U.S. goods have become more expensive to foreigners

B. more foreigners will want to purchase U.S. goods

If there is a​ recession, graduates will find it more difficult to find a job because A. more firms are willing to hire. B. more workers are unemployed. C. of low competition in the labor market. D. less workers are willing to hold onto their jobs.

B. more workers are unemployed. When output​ falls, unemployment usually rises. With higher​ unemployment, graduates have a harder time searching for a job.

The chief financial officer​ (CFO) of a large corporation that wishes to borrow​ $100 million to construct a factory in the United States should use the__________ market.

Bond Market

A ▼ budget surplus trade surplus trade deficit budget deficit is an excess of government expenditures over tax​ revenues, while a ▼ trade surplus budget surplus trade deficit budget deficit occurs when tax revenues exceed government expenditures.

Budget Deficit Budget Surplus The government must finance any deficit by​ borrowing, while a budget surplus leads to a lower government debt burden.

The _____________________ ▼ business cycle financial intermediation financial crisis is the upward and downward movements of aggregate output in the economy.

Business Cycle Money plays an important role in the business cycle since financial crises could trigger recessions.

Which of the following is an example of financial​ intermediation? A. U.S. Treasury sells bonds to fund government spending. B. IBM issues a bond that is sold to a retired person. C. A saver makes a deposit in a credit​ union, and the credit union makes a loan to a member for a new car. D. IBM issues common stock that is sold to a college student.

C. A saver makes a deposit in a credit​ union, and the credit union makes a loan to a member for a new car. Financial intermediaries are crucial to​ well-functioning financial markets. They make productive use of​ savers' unused assets by extending credit to trusted borrowers.

When there is an increase in the value of the European Union's euroEuropean Union's euro​, all else​ equal: A. American businesses will see a decrease in demand for their goods in the United States only. B. American businesses will see a decrease in demand for their goods in the United States and in foreign countries. C. American businesses will see an increase in demand for their goods in the United States and in foreign countries. D. American businesses will see a decrease in the supply of their goods in the United States and in foreign countries.

C. American businesses will see an increase in demand for their goods in the United States and in foreign countries.

A strong dollar implies that A. U.S. goods exported abroad will cost less in foreign​ countries, and hence foreigners will buy more of them. B. imported foreign goods will cost more in the​ U.S., and as a​ result, U.S. residents would want to purchase less of them. C. American consumers can afford more foreign goods. D. American businesses become more competitive than their foreign counterparts.

C. American consumers can afford more foreign goods. In terms of​ exporting, businesses of a country are more competitive when the​ country's currency is weaker relative to others.

Much of the U.S. government debt is held as Treasury bonds and bills by foreign investors. How do fluctuations in the dollar exchange rate affect the value of that debt held by​ foreigners? A. If the dollar becomes weaker relative to a foreign​ currency, U.S. exports​ rise, causing an increase in GDP and in the economy as a whole. As a​ result, the maturity date on​ T-bonds may be lowered and the profitability of debt held by foreigners rises. B. If the dollar is worth less relative to a foreign​ currency, the U.S. economy becomes weaker and the government decreases the interest rate on​ T-bonds, so for a given face value of bond​ holdings, the asset will be worth less to foreign investors. C. As the dollar becomes stronger relative to a foreign​ currency, for a given face value of bond​ holdings, it will yield more home currency to​ foreigners, so the asset will be worth more to foreign investors. D. Fluctuations in the dollar exchange rate affect the value of Treasury bonds and bills only if they are followed by changes in​ long-term interest rates.

C. As the dollar becomes stronger relative to a foreign​ currency, for a given face value of bond​ holdings, it will yield more home currency to​ foreigners, so the asset will be worth more to foreign investors.

Real GDP is computed by adjusting nominal GDP​ for: A. depreciation B. capital consumption allowances C. changes in the price level Your answer is correct. D. exchange rate changes

C. Changes in the price level The measurement of GDP after adjustments have been made for changes in the price level between years is known as real GDP.

What was the main cause of the recession that began in​ 2007? A. Rapid increases in the money supply. B. Collapse of the​ high-tech bubble. C. Defaults in subprime residential mortgages. D. Large fluctuations in interest rates.

C. Defaults in subprime residential mortgages.

Which of the following is not an important financial intermediary in the​ economy? A. Insurance companiesInsurance companies. B. Commercial banks. C. The central bank D. Pension fundsPension funds.

C. The central bank

Why are financial markets important to the health of the​ economy? A. They eliminate the need for financial intermediaries B. They identify and shut down inefficient firms C. They channel funds from savers to investors D. They allow consumers to time their purchases better

C. They channel funds from savers to investors

What is the basic activity of​ banks? A. To ensure that everyone who wants a loan gets one B. To sell shares of corporations to the general public C. To facilitate the transfer of money from savers to borrowers D. To equate future consumption with current consumption E. To represent the interest of insurance companies

C. To facilitate the transfer of money from savers to borrowers

The term bank generally includes all of the following institutions except​: A. credit unions. B. savings and loan associations. C. finance companies. D. commercial banks.

C. finance companies. Included under the term banks are firms such as commercial​ banks, savings and loan​ associations, mutual savings​ banks, and credit unions. They are prominent examples of financial intermediaries.

Fiscal policy involves decisions​ about: A. central banking and the Federal Reserve System. B. the money supply and interest rates. C. government spending and taxation. D. unemployment and inflation.

C. government spending and taxation. Fiscal policy deals with the way the government collects its revenues. It also determines how much the government expenditure is.

​Banks, savings and loan​ associations, mutual savings​ banks, and credit​ unions: A. have been deregulated and now provide services only to small depositors. B. produce nothing of value and are therefore a drain on​ society's resources. C. have been adept at innovating in response to changes in the regulatory environment. D. are no longer important players in financial intermediation.

C. have been adept at innovating in response to changes in the regulatory environment.

Monetary policy is the management​ of: A. unemployment and aggregate output. B. government spending and taxation. C. the money supply and interest rates. D. budget surpluses and budget deficits.

C. the money supply and interest rates. Monetary policy manages the levels of money supply and interest rates.

The foreign exchange rate​ is: A. where imports and exports are traded for one another B. the amount of loans made from one​ country's bank to another​ country's bank C. the price of one​ country's currency in terms of another​ country's currency Your answer is correct. D. where the currency of one country is converted into the currency of another country

C. the price of one​ country's currency in terms of another​ country's currency

Evidence from the United States and other foreign countries indicates​ that: A. money growth is clearly unrelated to inflation. B. there is little support for the assertion that​ "inflation is always and everywhere a monetary​ phenomenon." C. there is a strong positive association between inflation and the growth rate of money over long periods of time. D. countries with low monetary growth rates tend to experience higher rates of​ inflation, all else being constant.

C. there is a strong positive association between inflation and the growth rate of money over long periods of time.

The foreign exchange market​ is: A. the amount of loans made from one​ country's bank to another​ country's bank B. the price of one​ country's currency in terms of another​ country's currency C. where the currency of one country is converted into the currency of another country D. where imports and exports are traded for one another

C. where the currency of one country is converted into the currency of another country

What was the main cause of the recession that began in​ 2007? A. Rapid increases in the money supply. B. Collapse of the​ high-tech bubble. C. Large fluctuations in interest rates. D. Defaults in subprime residential mortgages.

D. Defaults in subprime residential mortgages.

When interest rates​ decrease, how might businesses and consumers change their economic​ behavior? A. Consumers and businesses will spend less and save more. B. Consumers and businesses will invest in bonds or similar debt instruments. C. Consumers and businesses will hold smaller​ (average) cash balances. D. There will be more consumption spending on​ interest-sensitive items and more investment by businesses.

D. There will be more consumption spending on​ interest-sensitive items and more investment by businesses. individuals often save less and spend more since the opportunity cost of consumption expenditure has declined.

What is the basic activity of​ banks? A. To sell shares of corporations to the general public B. To ensure that everyone who wants a loan gets one C. To equate future consumption with current consumption D. To facilitate the transfer of money from savers to borrowers E. To represent the interest of insurance companies

D. To facilitate the transfer of money from savers to borrowers

As the price of stocks held by consumers ​increases: A. consumer wealth decreases and consumer spending increases. B. consumer wealth increases and consumer spending decreases. C. consumer wealth and spending both decrease. D. consumer wealth and spending both increase.

D. consumer wealth and spending both increase.

Evidence from business cycle fluctuations in the United States indicates​ that: A. recessions have been preceded by declines in share prices on the stock exchange. B. recessions have been preceded by dollar depreciation. C. a negative relationship between money growth and general economic activity exists. D. recessions have been preceded by a decline in the growth rate of money.

D. recessions have been preceded by a decline in the growth rate of money.

When a firm issues​ stock, it​ has: A. purchased foreign currency. B. borrowed from the public. C. agreed to make periodic payments for a specific period of time to the owner of the security. D. taken on additional partners that own part of the assets of the firm and share in the​ firm's earnings.

D. taken on additional partners that own part of the assets of the firm and share in the​ firm's earnings. A common stock is a security that is a claim on the earnings and assets of the corporation. Issuing stock and selling it to the public is a way for corporations to raise funds to finance their activities.

The national debt of the United States is best defined​ as: A. the quantity of outstanding currency. B. the claims that foreigners have against the United States. C. the amount that the federal government borrows in any one year. D. the accumulated federal budget deficits and surpluses since the​ nation's beginning.

D. the accumulated federal budget deficits and surpluses since the​ nation's beginning. The U.S. national debt reflects all the accumulated federal budget deficits and surpluses from George Washington to the present.

The ▼ Federal Reserve Federal Deposit Insurance Corporation U.S. Treasury is the central bank responsible for monetary policy in the United States.

Federal Reserve The Federal Reserve can affect the quantity of money as well as the interest rates in the U.S. economy.

________________ are major disruptions in financial markets characterized by sharp declines in asset prices or failure of many financial firms.

Financial Crisis Governments try to prevent financial crises since financial systems seize up when they occur.

_________________ is the development of new financial products and services.

Financial Innovation Financial innovation can be good when it makes the financial system more efficient.​ However, if not monitored and utilized​ properly, it can lead to devastating financial crises.

_________________ are institutions that borrow from people who have saved and then lend to others.

Financial Intermediaries Individuals are made better off with access to financial​ intermediaries, such as banks. They utilize these institutions to loan indirectly to companies.

The __________ is the cost of borrowing or the price paid for the rental of funds expressed as a percentage per year.

Interest Rate

When a​ company's profits have been​ declining, the company is able to sell __________ stock at a higher price.

Less The value of stocks depends on the profits of the corporation that issued the original stocks.​ Therefore, when profits are​ declining, the value of the stock also decreases.

Why do managers of financial institutions care so much about the activities of the Federal Reserve​ System? A. Because the Federal Reserve affects interest​ rates, inflation, and business​ cycles, all of which have an important impact on the profitability of financial institutions. B. Because the Federal Reserve conducts fiscal​ policy, which can have important impacts on the profitability of financial institutions. C. Because financial institutions count on the Federal Reserve as being the lender of last resort​ and, as​ such, follow the​ Fed's activities closely to monitor whether there are enough reserves in the system to receive a​ bailout, if necessary. D. None of the above long dash—financial institutions are only directly influenced by the activities of Congress and the Securities and Exchange Commission.

Managers care about the activities of the Federal Reserve because it affects interest​ rates, inflation, and business​ cycles, all of which have an important impact on the profitability of financial institutions.

Monetary policy is the management of ▼ money stocks bonds and ▼ business cycles interest rates foreign exchange rates .

Money & Interest Rates Monetary policy can influence the fluctuations of aggregate output.

Why are financial markets important to the health of the​ economy?

They channel funds from savers to investors

What is the typical relationship between interest rates on​ 6-month Treasury​ bills, 10-year Treasury​ notes, and Baa corporate​ bonds?

They tend to move together over time with the corporate bond having the highest rate of interest.

The currency of the United States is said to be ▼ weaker neutral stronger when the exchange rate for the U.S. dollar falls and it costs more dollars to purchase another​ country's currency.

Weaker

If stock market prices are rising, then more people feel_________

Wealthier Stocks are part of the cumulative wealth of individuals.​ Therefore, when stock values increase​, individuals feel wealthier.

When there is a decrease in the value of the American dollar relative to the Japanese yen a decrease in the value of the American dollar relative to the Japanese yen​, all else​ equal: A. American goods will become more expensive relative to Japanese goods. B. Japan will export more goods to the United States than it did before. C. Japanese goods will become more expensive relative to American goods. D. Americans will import more Japanese goods than they did before.

When the foreign currency gains value relative to the dollar​ (equivalently, when the dollar loses value relative to the foreign​ currency), foreign-made goods become more expensive to Americans. Americans will import fewer​ goods; in other​ words, exports to the United States will drop. C. Japanese goods will become more expensive relative to American goods.

A fall in the value of the pound will cause American businesses to be _____________.

worse off

What effect might a fall in stock prices have on business​ investment?

A fall in stock prices might cause businesses to decrease investment. A higher price for a​ firm's shares means that it can raise a larger amount of​ funds, which can be used to buy production facilities and equipment.

What effect might a rise in stock prices have on​ consumers' decisions to​ spend?

A rise in stock prices will generally lead to more consumer spending. As a consumer feels more wealthy, the more they would be willing to spend.

How does a fall in the value of the pound sterling affect British​ consumers? A. Foreign goods are now relatively more​ expensive; British consumers are hurt B. Foreign goods are now relatively​ cheaper; British consumers will benefit C. Domestic goods are now relatively more​ expensive; British consumers are hurt D. Domestic interest rates​ increase; British consumers find it more expensive to borrow

A weaker currency makes foreign goods​ (US) more expensive to domestic​ (British) consumers. With the price of domestic goods​ unchanged, these imports are now relatively more expensive and British exports are relatively cheaper to foreign consumers. A. Foreign goods are now relatively more​ expensive; British consumers are hurt

Which of the following are the largest financial intermediaries in the U.S.​ economy? A. Banks B. Mutual funds C. Insurance companies D. Finance companies

A. Banks Most Americans keep a large proportion of their financial wealth in banks in the form of checking​ accounts, savings​ accounts, or other types of bank deposits.

Which of the following is not an important financial intermediary in the​ economy? A. The central bankThe central bank. B. Commercial banks. C. Finance companiesFinance companies. D. Insurance companiesInsurance companies.

A. The central bank.

Why are financial markets important to the health of the​ economy? A. They channel funds from savers to investors Your answer is correct. B. They eliminate the need for financial intermediaries C. They identify and shut down inefficient firms D. They allow consumers to time their purchases better

A. They channel funds from savers to investors Your answer is correct.

How can changes in foreign exchange rates affect the profitability of financial​ institutions? ​(Check all that​ apply.) Changes in foreign exchange​ rates: A. change the value of assets held by financial institutions. B. lead to central bank intervention in financial​ institutions' activities. C. do not affect the profitability of financial institutions if there is no central bank intervention. D. affect the profits made by traders in foreign exchange who work for financial institutions. E. cause changes in mortgage interest rates and other interest rates set by financial institutions.

A. change the value of assets held by financial institutions. D. affect the profits made by traders in foreign exchange who work for financial institutions.

A strong U.S. dollar means that U.S. goods exported abroad will​ cost: A. more in foreign countries and foreign goods imported will cost less in the United States. B. more in foreign countries and foreign goods imported will cost more in the United States. C. less in foreign countries and foreign goods imported will cost more in the United States. D. less in foreign countries and foreign goods imported will cost less in the United States.

A. more in foreign countries and foreign goods imported will cost less in the United States.

All of these statements are true about money and money supply except A. that a recession always follows a reduction in the growth rate of the money supply. B. that money is important to the health of the economy. C. that money is linked to changes in economic variables that affect all of us. D. that money can be anything that is generally accepted in repayment of debts.

A. that a recession always follows a reduction in the growth rate of the money supply. It is true that almost all recessions since the beginning of the twentieth century have been preceded by a reduction in the growth rate of money.​ However, sometimes a reduction in the growth rate of money is not followed by a​ recession, making recessions hard to predict.