ECO 3355 - Exam 1

If you borrow $1,000 today to be paid back one year from today at 5% interest, the payment you will have to make in one year will be

$1,050

If the interest rate is 5%, the value of $1,000 at the end of 10 years is

$1,628.89

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

Emily is in the 10% marginal income tax bracket and earned a 2.5% return on the corporate bonds that just matured. The nominal interest rate paid on these bonds was

2.78%

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?

3.0%

How many different prices would there be in a barter economy with 100 goods?

4,950

Edward would be equally happy with receiving $95 today or $100 one year from today. Edward's friend Bella would be just as happy receiving $90 today or $100 one year from today. Based on this information, which of the following best describes the difference between Edward and Bella?

Bella has a higher rate of time preference than Edward

Imagine you live in a country suffering from extreme inflation of 20% per month. The money you earn, every single molino, is worth a little less each week, so you and many others around you begin to use the currency of a more prosperous neighboring country, the dolingo. What is the term for this practice of adopting another country's currency?

Dollarization

Criteria for an asset to be commodity money

Easily divisible, easy to carry, easily standardized, durable, demanded broadly

A corporate bond offering an interest rate of 5% is as good a deal as a municipal bond offering the same interest rate.

False

For an asset to function as commodity money, it must be easily divisible, easily standardized, easy to carry around, physically attractive, and broadly demanded.

False

Lenders benefit from inflation in the short run.

False

With measurements of monetary aggregates such as M1 and M2, the money supply is relatively easy to measure.

False

Imagine you run a company that produces recycled paper products. The selling price for items you produce is going up, so you increase production. After a time, you see that you have increased production more than the market is actually demanding. Which of these is the most likely reason for less demand than you had estimated based on a higher price for your items?

Inflation

A flight to quality is most likely to have which of these effects?

It will increase the default risk premium that higher risk borrowers will pay and may cause some businesses to cut costs.

Which of these groups of people is most hurt by inflation?

Lenders and working class people

The term monetary aggregates refers to things like

M1 and M2

Money is most accurately defined by which of the following statements?

Money is anything generally accepted in exchange for goods and services

Financial assets include which of the following?

Money, bonds, and stocks

Which of these most accurately defines possible effects of fluctuating interest rates in the financial markets?

Prices and levels of employment

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

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

You read a news story about a country that is suffering from rapid, ongoing increases in the cost of living. Which characteristic of money is being directly negatively impacted in that economy?

Store of Value

You read a review written by a well-respected financial analyst who says that the steep yield curve we currently see suggests that borrowers require a relatively higher premium to hold longer-term bonds now, compared to short-term bonds. This analyst is most likely a proponent of which theory of interest rates?

Term Premium

Financial markets bring together __________ and __________.

borrowers; lenders

The three theories that economists have developed to explain the shape of the yield curve are Group of answer choices

the pure expectations theory, the term premium theory, and the segmented market theory.

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.

Suppose that the interest rate on a one-year bond is currently 3% and the market believes that the rate on a one-year bond one year from now will be 5%. If you follow the pure expectations theory of interest rates, then you would expect to see a(n) __________ yield curve.

upward-sloping

Some of the most important central banks in the world include

the Federal Reserve, the European Central Bank, and the Bank of England.

Financial assets include intangibles that can change in value, such as stocks and bonds

True

Your friend Jacob is looking at a steep yield curve and makes an attempt to understand the implications using segmented market theory. He says more information will be needed to make economic predictions, as this type of yield curve could be either good news or bad news. Are his comments about this yield curve, using segmented market theory, true or false?

True

Atwood and Spearman, Inc. bonds are selling for more than Boehm and Bull, Inc. bonds. The difference in yields between these two bond options is known as the

default risk premium spread

An inverted yield curve likely means the

economy is headed for recession

The advantage of municipal bonds over corporate bonds increases as the federal marginal tax rate

increases

An inverted yield occurs when

long-term interest rates are lower than short-term interest rates.

The advantage of municipal bonds over corporate bonds increases as the federal marginal tax rate

remains unchanged

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.