Chapter 2 to 4 Review
Number of prices in barter economy with N goods
# = [N(N-1)]/2
In order to fund WW2, the U.S. followed the policy prescription of...
... John Maynard Keynes
Nominal interest rates are made up of...
....real interest rates plus inflation.
According to the pure expectations theory, a flat yield curve means the market...
....thinks that future interest rates will be exactly the same as current interest rates.
The stagflation that began in the 1960s in the US economy was worsened in the 1970s by...
...an oil embargo instituted by OPEC in 1973
Inflation is a benefit to...
...borrowers
The best way to measure the default risk premium that a borrower is paying is to...
...compare the interest rate the borrower pays with the risk-free premium, usually represented by the rate of US treasury securities
Bonds are issued by...
...corporations, governments, government agencies and many kinds of borrowers
In a barter economy, the number of prices necessary will....
...depend on the number of goods exchanged in the economy
When there is too much money chasing too few goods, the likely impact is...
...inflation
A 10-year, $10,000 bond with a coupon rate of 5% is a promsie by the issuer of the bond to...
...pay the bondholder $500 every year for 10 years and also a $10,000 payment in 10 years
When the economy experiences growing unemployment and rising rates of inflation, it is called...
...stagflation
A major advantage that municipal bonds have over corporate bonds for investors is that...
...the income earned on municipal bonds is not subject to federal income tax.
The three theories that economists have developed to explain the shape of the yield curve are...
...the pure expectations theory, the term premium theory, and the segmented market theory.
If the money supply increases too quickly...
...the rate of inflation increases.
If the ex-ante real interest rate is less than the ex-post real interest rate, which of the following happened?
Actual interest rate is less than the expected inflation rate
M2
All of M1 and savings deposits, small time deposits, shares in retail MMMFs and net of retirement accounts.
Currency
Any asset that is able to be standardized, divisible, durable and in demand as long as it is a medium of exchange, is a unit of value, and has store value. Can stop being money if people don't accept the currency in exchange for goods and services
Money
Anything that is generally acceptable in exchange for goods and services or repayment of debt
An economy is sliding into recession. What happens to the bond market and loanable funds market?
Bond prices will increase and interest rates will decrease
If the market price for bonds is higher than the equilibrium price, what is the result, and what will change to bring about equilibrium as price falls?
Surplus; quantity demanded will decrease and quantity supplied will increase
Firms in developing countries often have to pay a higher default risk premium that similar firms borrowing in the U.S.. Explain why.
The overall economy may enter into a recession, causing the borrower's economic condition to worsen and rendering them unable to repay.
Coupon rate
The rate of interest a bond pays
According to the pure expectations theory, what is happening when the yield becomes more steep from one time period to the next? What does it tell you?
Upward-sloping yield curve tells us the market thinks short-term rates are going to be higher in the future than what they currently are.
Premium
When the market price of a bond is above the face value
Discount
When the market price of bong is below the face value
The recent flight to quality is reversing. What will happen to the bond market?
Yields of US treasury bonds will increase relative to the yields of corporate bonds.
Interest(after taxes) =
i(after taxes) = i(beforetaxes) * (1-tax rate)
Monthly interest =
i(monthly) = [i(annual)]/12
Segmented market theory
short term, medium term, and long term bond markets are all different markets.
Assume the loanable funds market is in equilibrium. An increase in the demand for loanable funds will result in a ____________ equilibrium rate as the quantity of loanable funds demanded ___________ and the quantity of loanable funds supplied _____________ as the market moves to a new equilibrium.
Higher; increases; increases
Explain why a change in the demand for loanable funds may not change the supply of bonds
If consumers are more confident in the future they may go out and borrow and spend more. While increases consumer borrowing leads to an increase in the demand for loanable funds, it does not impact the supply of bonds because households cannot issue bonds
How does the experience of Europe in the 16th century raise doubts that a gold standard will keep inflation under control?
If people start to hoard gold, there may not be enough money and the economy will slide into recession. If gold or silver increases too rapidly the economy could suffer from inflation.
M1
Includes currency held by the public and the transaction accounts at depository institutions
Par
Market price of bond equals the face value of the bond
In the early days of the federal reserve, the federal reserve bank of _________ quickly established itself as the most important fo the 12 federal reserve banks.
New York
Are credit cards considered money?
No
If the market interest rate is the same as the coupon rate on a newly issues bond, then the bond will sell at...
Par
Under which theory might a steep yield curve suggest market participants are worried that inflation will increase in the future?
Pure expectations theory
On what market would stock be resold?
Secondary
Harper just got a big pay raise at work, pushing her from the 15% federal marginal tax bracket to the 25% marginal tax bracket. Why would she buy municipal bonds?
She will purchase municipal bonds instead of corporate bonds because she is wealthier and the increase in tax bracket will increase the difference between the nominal interest rate paid on the bonds and the after-tax interest rate she will receive relative to corporate bonds.
Which characteristic of money can lead to rapid, ongoing increase in the cost of living?
Store of value
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
Default
The supply of bonds is best described as a _________ relationship between the price of bonds and the quantity of bonds supplied, all else equal
Direct
Future value = ?
FV = PV * (1 + i)^n
Why would an inverted yield curve signal that an economic slowdown on the way?
It suggests that short-term interest rates will be lower in the future than they are today. Thus a contractionary monetary policy pushes up short-term interest rates, affecting credit card usage
Pure expectations theory
Long term interest rates are based on the expectations of what short term interest rates will be in the future.
Term premium theory
Longer term bonds have higher yields than shorter term bonds as a way of creating an incentive for bond buyers to purchase the less desirable longer term bonds.
How would proponents of the term premium theory explain why a yield curve becomes more steep from one time period to the next?
Longer-term bonds have a higher yield than short-term bonds. The yield curve slopes upward because of the term premium that has to be paid to entice bond buyers to buy longer-term bonds
What is the most broad or most inclusive measurement of the money supply?
M2
