Econ 135

If a bank will pay 7% interest compounded annually on $2,500 deposited today, the depositor will receive how much at the end of 8 years?

$4,295.47

If the nominal interest rate is 9% and the expected inflation is 11%, then the real interest rate is

-2%

A liquidity premium is used to...

...lure lenders to lend long term.

If a bond is sold at a discount from par, this...

...raises the yield on the bond.

Suppose that a particular stock closes at $30 and is paying a dividend of 30 cents a share. How much is its current yield?

1.0%

The Fed conducts an open market purchase of Treasury bills of $10 million. If the required reserve ratio is .10, what change in the money supply can be expected using the oversimplified money multiplier?

100 Million

Assume you bought a one-year Treasury bill in June, 2003 for $9,789 that can be redeemed for $10,000 in June, 2004. What is the yield on this purchase?

2.16%

The actual control of the Federal Reserve System resides in the

Board of Governors.

__________ markets are markets where the terms of a transaction, including price, are agreed upon today for a transaction that will take place on a specified date in the future.

Financial Futures

If the price level rises, what will happen to the demand for reserves?

It will shift outward

The official definition of the money supply that includes coins, paper money, travelers' checks, conventional checking accounts, and other checkable deposits at banks and savings institutions is called

M1

Which of the following is an example of money serving as a medium of exchange?

Marian buys a carbo-loaded drink before a marathon

__________ represents the value today of funds to be received or lent on a future date.

Present Value

As market interest rates fall, what happens to the prices of existing bonds?

Prices of existing bonds increase.

What is the difference between a broker and a dealer?

The dealer sometimes takes a position (becomes a principal) in a transaction, in addition to arranging trades; the broker only arranges trades for a fee.

Given an interest rate of 5%, which has a higher present value: A payment of $80 at the present time, or $100 in 2 years?

The future amount ($100 in 2 years ) has a higher present value, give an interest rate of 5%.

____ are short-term debt instruments of the U.S. Government with typical maturities of three to twelve months

Treasury Bills ( T-Bills)

__________ are long-term debt instruments of the U.S. government with original maturities from two to thirty years.

U.S. Government Securities

Which of the following equations represents the method used to determine the future value in n years of a sum that you have today?

V1 = V0 x (1 + i) ^n

If the slope of the yield curve is positive, this means which of the following?

Yields rise as the term to maturity increases

The coupon (interest) rate of a bond is equal to the

a coupon payment on a bond multiplied by the face value of the bond.

A bond sells at __________ because interest rates have fallen since the bond was originally issued.

a premium above par

The Federal Deposit Insurance Corporation insures

bank deposits against the failure of an individual bank.

The moral hazard problem refers to

banks taking on more risk in their lending because they know their depositors are insured.

Fiat money is money

because a government says it is.

The price at which a market maker is willing to buy securities is called the

bid price

When the Fed wants to expand the money supply through open market operation, it

buys government securities from member banks buys government securities from the Treasury

The __________ is the market for financial assets with an original maturity of greater than one year.

capital market

The oversimplified money multiplier formula, when the required reserve ratio is m, is

change in money supply = (1/m) x initial deposit

Short-term debt instruments issued by corporations are called

commercial paper

The government regulates the banking industry by

conducting frequent audits and examinations limiting the kinds of assets that a bank may own. limiting the quantity of some kinds of assets that a bank may own.

Liquidity refers to the

ease with which an asset can be converted into cash.

The primary benefit of a monetary system of exchange compared to a barter system is the increased

efficiency in arranging transactions.

U.S government securities

finance the deficit of the federal government

Preferred Stock pays a _________ dividend

fixed

According to the expectations theory, when the yield curve is rising, market participants expect

future short-term interest rates to rise above current short-term rates.

The president has influence on Federal Reserve policy because

he appoints the board members and the chair.

If the anticipated productivity of capital investment increases, the demand for loanable funds

increases

Proponents of Fed independence maintain that

independence permits objective decisions not based on politics. only the Federal Reserve knows how to act wisely.

What happens when the quantity of funds demanded exceeds the quantity supplied?

interest rates rise and bond prices fall

Open market operations have their initial effect on bank

interest rates.

The Federal Reserve Board of Governors

is structurally independent of the executive and legislative branches of the federal government

The separation of the money market from the capital market is based on the ______ of the instruments traded there.

length of term

The distinction between M1 and M2 is based on

liquidity-the ease with which an asset can be converted into cash

Banks that are managed in a very safe and conservative manner can be expected to earn

low and consistent profits.

The demand for reserves increases as the price level rises because

people need more money to finance transactions.

If Michelle wanted to purchase newly issued stock from a new computer company, she would purchase this in a

primary market

The government banking regulation that places an upper limit on the money supply is

reserve requirements on bank deposits

Ceteris paribus, a rise in expectations of inflation will lead to a ________ in nominal interest rates.

rise

As a knowledgeable investor, you should realize that as interest rates fall, bond prices would

rise. become more volatile, like stock prices. fall but not by as much as stock prices.

The money supply contracts and interest rates rise when the Fed

sells government securities

The current long-term interest rate is a function of which of the following?

the current short-term rate. the short-term rates expected in the future. the liquidity premium.

Which of the following is generally true when the Gross Domestic Product (GDP) rises?

the demand for loanable funds increases people are more willing and able to borrow

For investors a positive aspect of municipal bonds is that

the interest they earn is exempt from federal and state income taxes

Under fractional banking, when a bank lends to a customer

the money supply increases.

The number of reserves demanded decreases as the federal funds rate rises because

the opportunity cost of holding excess reserves increases as the federal funds rate rises.

What happens to the shape of the yield curve if, ceteris paribus, expectations about future interest rates change such that future short term interest rates are expected to be higher than previously expected?

the yield curve becomes steeper