ECON 2035 EXAM 1

Suppose that you just bought a​ four-year ​$1,000 coupon bond with a coupon rate of 5.7​% when the market interest rate is 5.7​%. You sell the bond one year later after the market interest rate falls to 3.7​%. The rate of return earned on the bond during the year was enter your response here​ ________%. ​(Round your response to two decimal​ places.)

11.28

If you deposit ​$1,300 in a bank CD that pays interest of 12​% per​ year, how much will you have after two ​years? The amount of money after two years will be ​$__________ (Round your response to the nearest​ cent.)

1630.72 1300(1+0.12)^2

Use the data on Treasury securities in the following table to answer the​ question: Assuming that the liquidity premium theory is​ correct, on March​ 5, 2010, what did investors expect the interest rate to be on the​ one-year Treasury bill two years from that date if the term premium on a​ two-year Treasury note was 0.02​% and the term premium on a​ three-year Treasury note was 0.06​%? The expected interest rate is ______%. ​(Round your response to two decimal​ places.)

2.88 1.63-0.06=1.57 0.94-0.02=0.92 ((1+0.0157)^3)/(1+0.0092)^2))-1

Using data from the St. Louis Federal​ Reserve, compare movements in interest rates across countries GS20 is the Series ID for the interest rate on the​ 20-year U.S. Treasury note. INTGSBGBM193N is the Series ID for the interest rate for​ 20-year U.K. government securities. Click the following link to view​ 20-year U.S. Treasury note data from FREDopens in a new tab. LOADING... Using the Series IDs GS20 and​ INTGSBGBM193N, plot the interest rate on the​ 20-year U.S. Treasury note and the interest rate for​ 20-year U.K. government securities from January of 1957 to the most recent month. The interest rate on the​ 20-year U.S. Treasury note for January of 2023 ​(shown as 2023−01−01 in​ FRED) was _________%. ​(Round your response to two decimal​ places.) The interest rate for​ 20-year U.K. government securities for November of 1984 ​(shown as 1984−11−01 in​ FRED) was __________%. ​(Round your response to two decimal​ places.) During which periods has the interest rate on​ long-term U.K. government bonds been higher than the interest rate on​ long-term U.S. government​ bonds? ​(Check all that apply​) A. January of 1997​ (shown as​ 1997-01-01 in​ FRED) to January of 1999​ (shown as​ 1999-01-01 in​ FRED) B. January of 1957​ (shown as​ 1957-01-01 in​ FRED) to October of 1982​ (shown as​ 1982-10-01 in​ FRED) C. February of 2009​ (shown as​ 2009-02-01 in​ FRED) to January of 2013​ (shown as​ 2013-01-01 in​ FRED) D. November of 1985​ (shown as​ 1985-11-01 in​ FRED) to December of 1986​ (shown as​ 1986-12-01 in​ FRED) What has been the relationship between the two interest rates since​ 1995? A. U.K. interest rates have been trailing U.S. interest rates. B. U.K. interest rates have been higher. C. U.S. interest rates have been higher. D. They have been following each other very closely.

3.81% 10.73% B. January of 1957​ (shown as​ 1957-01-01 in​ FRED) to October of 1982​ (shown as​ 1982-10-01 in​ FRED) D. November of 1985​ (shown as​ 1985-11-01 in​ FRED) to December of 1986​ (shown as​ 1986-12-01 in​ FRED) D. They have been following each other very closely.

Suppose that the interest rate on a​ one-year Treasury bill is currently 4​% and that investors expect that the interest rates on​ one-year Treasury bills over the next three years will be 5​%, 6​%, and 4​%. Use the expectations theory to calculate the current interest rates on​ two-year, three-year, and​ four-year Treasury notes. The current interest rate on​ two-year Treasury notes is ​____%. ​(Round your response to two decimal​ places.) The current interest rate on​ three-year Treasury notes is ____%. ​(Round your response to two decimal​ places.) The current interest rate on​ four-year Treasury notes is ____​%. ​(Round your response to two decimal​ places.)

4.5 (4+5)/2 5 (4+5+6)/3 4.75

Consider the following information from the close of trading on November​ 24, 2020 for a coupon bond with a face value of ​$1,000 and a maturity date of October 15, 2023​: Coupon​ rate: 6.5​% ​Price: ​$1,144 Yield to​ maturity: 1.39​% The​ bond's current yield was enter your response here​ __________%. ​(Round your response to two decimal places.​ Why is the​ bond's yield to maturity less than its coupon​ rate? A. The​ bond's price is higher than its face​ value, which lowers the​ bond's current yield. B. The​ bond's price is higher than its face​ value, which lowers the​ bond's yield to maturity. C. The​ bond's price is higher than its face​ value, which actually increases the​ bond's yield to maturity. D. None of the above are correct.

5.68% (1000x6.5%)/1144 B. The​ bond's price is higher than its face​ value, which lowers the​ bond's yield to maturity.

Suppose​ that, holding yield​ constant, investors are indifferent as to whether they hold bonds issued by the federal government or bonds issued by state and local governments​ (that is, they consider the bonds the same with respect to default​ risk, information​ costs, and​ liquidity). Suppose that state governments have issued perpetuities​ (or consoles) with ​$74 coupons and that the federal government has also issued perpetuities with ​$74 coupons. If the state and federal perpetuities both have​ after-tax yields of 6​%, what are their​ pre-tax yields?​ (Assume that the relevant federal income tax rate is 34.58​%.) The​ pre-tax yield on the state perpetuity will be ________​%. ​(Round your response to two decimal​ places.) The​ pre-tax yield on the federal perpetuity will be ________%. ​(Round your response to two decimal​ places.)

6 9.17 0.06 = Y x (1-0.348)

What is commodity​ money? A. A good used as money that has value independent of its use as money. B. Money that has no value apart from its use as money. C. Money accepted as payment of taxes and must be accepted by individuals and firms in payment of debts. D. Any form of money used to purchase a commodity. How does commodity money differ from fiat​ money? A. Commodity money is designated by the government as legal​ tender, while fiat money is used in bartering. B. Commodity money has no intrinsic​ value, while fiat money has value beyond its use as currency. C. Commodity money has value beyond its use as​ currency, while fiat money has no intrinsic value. D. Consumers have more confidence that commodity money will retain its value and thus is the preferred medium of exchange.

A. A good used as money that has value independent of its use as money. C. Commodity money has value beyond its use as​ currency, while fiat money has no intrinsic value.

Suppose that you want to invest for three years to earn the highest possible return. You have three​ options: ​ (a) Roll over three​ one-year bonds, which pay interest rates of 9.8​% in the first​ year, 10.27​% in the second​ year, and 4.5​% in the third​ year; (b) buy a​ two-year bond with an interest rate of 8.52​% and then roll over the amount received when that bond matures into a​ one-year bond with an interest rate of 6.52​%; or​ (c) buy a​ three-year bond with an interest rate of 7.19​%. Assuming annual​ compounding, no coupon​ payments, and no cost of buying or selling​ bonds, which option should you​ choose? A. Option A B. Option B C. Option C D. Any of these options would provide a high return.

A. Option A

Since​ 1982, which measure of the money supply has grown more​ rapidly, M1 or​ M2? A. M1 and M2 have grown at the same rate. B. M1 has grown more rapidly. C. M2 has grown more rapidly. D. The size of M2 has remained constant. Has the growth rate of M1 been more or less stable than the growth rate of​ M2? A. The growth rate of M1 has been more stable than the growth rate of M2. B. M1 and M2 have grown at the same rate. C. The growth rate of M2 has been more stable than the growth rate of M1. D. More data is required before economists can determine this.

C. M2 has grown more rapidly. C. The growth rate of M2 has been more stable than the growth rate of M1.

Why did governments begin issuing paper​ currency? A. Because gold and silver coins were difficult to transport—so paper certificates were issued. B. Because those transporting gold and silver coins were often robbed—so paper certificates were issued. C. Because gold and silver coins no longer had any real value—so paper certificates were issued. D. A and B only. Why was paper currency​ needed? A. Paper currency lowered transportation costs. B. Paper currency lowered the costs of production. C. Paper currency lowered the cost of transactions. D. All of the above.

D. A and B only. C. Paper currency lowered the cost of transactions.

Why do consumers usually prefer​ fixed-payment loans to simple loans when buying cars and​ houses? A. There will be no large final payment for the consumer to worry about as with a simple loan. B. As long as the consumer makes all the required​ payments, the loan will be completely paid off. C. The payments are of equal amounts and include both principal and interest. D. All of the above are correct.

D. All of the above are correct.

By the​ 2000s, what significant changes had taken place in the mortgage​ market? A. Lenders loosened the standards for obtaining a mortgage loan—often lending to subprime borrowers and​ Alt-A borrowers. B. Investment banks began buying​ mortgages, bundling large numbers of them together as​ mortgage-backed securities, and reselling them to investors. C. Lenders created new types of​ non-traditional loans, allowing borrowers to pay a very low interest rate for the first few years of the mortgage and then pay a higher rate in later years. D. All of the above.

D. All of the above.

The figure to the right shows the​ Case-Shiller price index of houses. Economists Karl Case of Wellesley College and Robert Shiller of Yale University developed this index. Many economists consider changes in the average price of houses in the United States to be difficult to measure. What challenges might exist in accurately measuring housing​ prices? A. Whether there are other features of a home or neighborhood that are not easily identifiable from an index number. B. Whether the value accounts for quality improvements or declines if the index is based solely on selling prices. C. Whether to use the price sold as the value of the house or the appraised value. D. All of the above.

D. All of the above.

What actions did the Federal Reserve and Treasury take in dealing with the financial​ crisis? A. The Federal Reserve and the Treasury worked together to find a buyout partner for Bear Stearns. B. The Fed aggressively lowered interest rates and created several new credit windows for distressed banks. C. Congress passed the Troubled Asset Relief Program​ (TARP) and the Treasury actively worked with the Fed to ensure financial stability. D. All of the above.

D. All of the above.

Indicate whether the following statements are pros or cons of a central bank being independent of the rest of the government. Part 2 With an independent central​ bank, Congress has no direct control over monetary policy. An independent central bank can resist political pressures to increase the money supply. Members of the Board of Governors do not have to run for election. The greater the rate of central bank​ independence, the lower the rate of inflation. Central bank independence may allow the Fed to act in its own​ self-interest.

Pro Pro Con Pro Con

An article in the Wall Street Journal describes recent economic events as having​ "steepened the yield​ curve." What does it mean to say that the yield curve​ "steepens"? A yield curve shows the relationship on a particular day _______. If the yield curve​ "steepens" the gap between​ short-term interest rates and​ long-term interest rates ______ As an​ investor, if the yield curve steepens upward while you are invested in Treasury​ securities, you would have been better off if you had invested in ________

among the interest rates on bonds with different maturities;must have increased long-term securities

A bond rating reflects the rating​ agency's view on ______________. These bond ratings are produced by ______________ . The key factor that bond raters evaluate when making their ratings is a​ bond's __________

the likelihood that a bond issuer will make the required payments companies such as Moody's Investment Service, S&P, and Fitch Ratings

Use a demand and supply graph for bonds to illustrate the following situation. Households believe that future tax payments will be higher than current tax payments, so they increase their saving. Using the line drawing​ tool, draw the either a new bond supply curve or a new bond demand curve or both. Properly label any lines you draw. Carefully follow the instructions​ above, and only draw the required object. As a​ result, the new equilibrium interest rate on bonds _________​, and the equilibrium quantity of bonds will ________.

will decrease; increase

Graph the curve that shows the effects of the Federal​ Reserve's efforts to decrease the​ short-run nominal interest rate. Using the line drawing​ tool, draw the curve that shows the effects of the Federal​ Reserve's efforts. Properly label the line. Part 2 Carefully follow the instructions​ above, and only draw the required object.

.

What is the quantity theory of​ money? A. A theory about the relationship between money and prices that assumes the velocity of money is constant. B. A theory about the relationship between money and prices that assumes the velocity of money is changing. C. A theory about the relationship between money and inflation that assumes the velocity of money is constant. D. A theory about the relationship between money and inflation that assumes the velocity of money is changing. What does the quantity theory indicate is the cause of​ inflation? A. This theory is based on an identity known as the equation of​ exchange: MV=PY​, where increases in real GDP lead to an increase in inflation. B. This theory is based on an identity known as the equation of​ exchange: MV=PY​, where increases in the money supply lead to an increase in inflation. C. This theory is based on an identity known as the equation of​ exchange: M+V=P−Y​, where increases in the money supply lead to an increase in inflation. D. None of the above.

A. A theory about the relationship between money and prices that assumes the velocity of money is constant. B. This theory is based on an identity known as the equation of​ exchange: MV=PY​, where increases in the money supply lead to an increase in inflation.

Related to the Apply the​ Concept: "Interest Rates and Student ​Loans"​] A student looking at the timeline for a student loan shown in the text just before the Apply the Concept feature and makes the following​ observation: The text states that the interest rate on the loan is​ 4.6%, but this calculation is obviously wrong. Each monthly payment is $104​, so the student will be paying back $104×12=$1,248 per year.​ Therefore, because the principal of the loan is $10,000​, the interest rate must be $1,248/$10,000=0.1248, or 12.48%. Briefly explain whether you agree with the​ student's reasoning. A. Disagree. The payments include both principal and interest.​ Therefore, the​ $104 monthly payments include paying down the principal of the loan as well as paying interest on the principal. B. Agree. As the student​ states, there is a payment of $1,248 per​ year, so if the loan is for​ $10,000, that works out to be​ 12.48%. C. Agree. Even though the stated interest rate is​ 4.6%, payments are made​ monthly, which means it is compounded more​ times, so the effective rate works out to be​ 12.48%. D. Disagree. The stated rate on the loan is​ 4.6%, which means that even though the loan is made with monthly​ payments, the borrower is still effectively charged only​ 4.6% a year.

A. Disagree. The payments include both principal and interest.​ Therefore, the​ $104 monthly payments include paying down the principal of the loan as well as paying interest on the principal.

How do economists define expected return and​ risk? A. Expected return is the return expected on an asset during a future​ period, while risk is the degree of uncertainty in the return on an asset. B. Expected return is the price of an asset a year from​ now, while risk is the degree of uncertainty in the return a year from now. C. Risk is the price of an asset a year from​ now, while expected return is the degree of uncertainty in the return a year from now. D. Risk is the return expected on an asset during a future​ period, while expected return is the degree of uncertainty in the return on an asset.

A. Expected return is the return expected on an asset during a future​ period, while risk is the degree of uncertainty in the return on an asset.

Suppose that Apple sells new​ 30-year bonds with a coupon rate of​ 3% in 2022. Why might Apple have to offer a higher coupon rate on the new​ 30-year bonds the firm sells in​ 2024? A. If there is an increase in future inflation expectations between 2022 and 2024. B. If there is a decrease in future inflation expectations between 2022 and 2024. C. If​ Apple's profitability increases significantly between 2022 and 2024. D. If there is a decrease in the interest rate on U.S. Treasury bonds. Say that you bought one of​ Apple's 3% coupon bonds in 2022. The price of your bond in 2024 will ________________

A. If there is an increase in future inflation expectations between 2022 and 2024. decrease since it is less attractive than the newly issued bonds

According to an article in the Wall Street Journal in​ 2020, bonds issued by the satellite operator Intelsat that matured in 2023​ "fell to a record low of 43 cents on the​ dollar." Why would an investor sell one of these bonds for 43 cents on the dollar rather than hold the bond for three years and receive 100 cents on the dollar when the bond​ matured? A. Investors may believe the firm has a high risk of​ default, making a payment of 43 cents on the dollar attractive today. B. Investors may be worried that inflation will decrease in the near future resulting in a lower return from holding the bond. C. Investors may be worried that interest rates will decrease in the near future resulting in a lower return from holding the bond to maturity. D. All of the above are true. This bond is likely to have received a rating of ___________ since the ______________

A. Investors may believe the firm has a high risk of​ default, making a payment of 43 cents on the dollar attractive today. Caa;low rating would reflect its high default risk

In early​ 2020, an article on bloomberg.com discussed the effects of the​ Covid-19 pandemic on the world oil market.​ Covid-19 first appeared in the Chinese city of Wuhan in late 2019 and led to significant disruptions to the Chinese economy. The article quoted one financial analyst as saying that the oil industry was​ "contending with a potential black swan​ situation." What did the analyst mean by a​ "black swan​ situation"? A. It is a situation that only occurs rarely but that has a large impact on the economy. B. It is a situation that occurs at regular and predictable intervals which causes losses across the world economy. C. It is a situation that causes​ short-term losses but will create significant​ long-term profits. D. It is a situation that harms only one country while all other countries continue to prosper. Many things can affect demand and supply in the oil​ market; one example is the increasing popularity of electric cars. Why would the analyst distinguish the spread of the coronavirus as a​ "black swan​ situation" rather than just one of many factors affecting the demand for​ oil? A. Because factors like electric cars have the potential to increase profits for the oil industry while the coronavirus only has negative implications. B. Because electric cars impact the demand for oil while the coronavirus impacts both the supply and demand for oil. C. Because competition and innovation are known and expected factors while the coronavirus was an unlikely and unexpected situation. D. Because electric cars impact both the supply and demand for oil while the coronavirus impacts only the demand for oil.

A. It is a situation that only occurs rarely but that has a large impact on the economy. C. Because competition and innovation are known and expected factors while the coronavirus was an unlikely and unexpected situation.

Investors are typically _____________​, which leads to the observations that a​ trade-off exists between risk and _________.

risk averse;return

An article in the Wall Street Journal had the​ headline, "Investors Should Fear More Competition Among Ratings​ Companies." In most​ markets, economists believe that more competition increases economic efficiency and makes the customers of firms better off. Who are the bond rating​ agencies' customers? A. Rating agencies are hired by the companies that they are rating. B. Rating agencies work on behalf of the Securities and Exchange Commission. C. Rating agencies work for the U.S. Congress. D. Rating agencies do not have​ customers, they are​ non-profits that rate all bonds. What does the headline mean when it says​ "Investors Should Fear More Competition Among Ratings​ Companies"? A. That as the number or rating agencies increases the quality of ratings will deteriorate since talent will be spread across multiple agencies. B. That rating agencies may inflate their ratings in the presence of more competition to attract customers. C. That having multiple rating agencies will result in numerous ratings for each​ firm's bonds, causing confusion for investors. D. That rating agencies will lower their ratings on corporate bonds as they compete to be the official government rating agency.

A. Rating agencies are hired by the companies that they are rating. B. That rating agencies may inflate their ratings in the presence of more competition to attract customers.

A student​ remarks: When I pay my insurance​ premiums, I never get that money back. My insurance premiums represent payments for a service I receive from the insurance company. When I deposit money in the​ bank, I can always withdraw the money later if I want to.​ So, my bank deposit represents a financial investment for me.​ Therefore, a bank is a financial​ intermediary, but an insurance company is not. Explain whether the​ student's argument is correct or incorrect. A. The argument is incorrect because insurance companies specialize in contracts to protect their policyholders from the risk of financial loss. Insurance companies channel funds from savers to​ borrowers, which makes them a financial intermediary. B. The argument is correct because insurance companies specialize in contracts to protect their policyholders from the risk of financial loss. Since insurance companies provide only a​ service, they cannot be considered a financial intermediary. C. The argument is correct because banks borrow funds from savers and lend the funds to borrowers—a service that distinguishes them as a financial intermediary. D. The argument is incorrect because policyholders always have the option to cancel the insurance policy—essentially allowing them to withdraw​ funds, which would make an insurance company a financial intermediary.

A. The argument is incorrect because insurance companies specialize in contracts to protect their policyholders from the risk of financial loss. Insurance companies channel funds from savers to​ borrowers, which makes them a financial intermediary.

What is the Federal​ Reserve? A. The central bank of the United States. B. The agency that regulates federally chartered banks. C. The agency that insures deposits in banks. D. The agency that regulates financial markets.

A. The central bank of the United States.

What is the moral hazard​ problem? A. The problem that managers of a financial firm will take on riskier investments because they believe the federal government will save them from bankruptcy. B. The problem that managers may experience in distinguishing​ low-risk borrowers from​ high-risk borrowers before approving a mortgage. C. The problem that managers of a financial firm may have more information about risky investments than the federal government does.

A. The problem that managers of a financial firm will take on riskier investments because they believe the federal government will save them from bankruptcy.

Suppose that you are considering subscribing to Economist Analyst Today magazine. The magazine is advertising a​ one-year subscription for ​$120 or a​ two-year subscription for ​$238. You plan to keep getting the magazine for at least two years. The advertisement says that a​ two-year subscription saves you ​$2 compared to buying two successive​ one-year subscriptions. If the interest rate is 10​%, should you subscribe for one year or for two​ years? (Assume that one year from now a​ one-year subscription will still be ​$120​.) A. You should subscribe for one year. B. You should subscribe for two years.

A. You should subscribe for one year.

The relationship between the price of a financial asset and the payments an investor receives from owning the asset is given by the​ _______ formula. A. present value B. future value C. net present value D. yield to maturity

A. present value

If interest rates​ rise, bonds become more attractive to​ investors, so bond prices will rise.​ Therefore, when interest rates​ rise, bond prices will also rise. The above statement​ is: A. ​false, because higher interest rates make the interest payments on previously issued bonds less valuable. B. ​false, since an increase in interest rates causes bond supply to increase which lowers bond prices. C. ​true, since an increase in interest rates will increase bond demand and cause higher prices. D. ​true, because the time value of money shows an increase in interest rates will increase the present value of the bond.

A. ​false, because higher interest rates make the interest payments on previously issued bonds less valuable.

Suppose that you are considering investing ​$1,200 in one of the following bank CDs. • CD​ 1, which will pay an interest rate of 9​% per year for three years • CD​ 2, which will pay an interest rate of 13​% the first​ year, 6​% the second​ year, and 4​% the third year A. The future value of CD 1 is ​$___________​, and the future value of CD 2 is ​$__________.​ (Round your responses to the nearest​ cent.) B. Given the future values you​ calculated, which CD should be​ chosen? A. CD 1 should be chosen. B. CD 2 should be chosen. Part 2 Now suppose for CD 2 the interest rates stay the same but the order in which they are paid changes such that CD 2 pays an interest rate of 4​% the first​ year, 6​% the second​ year, and 13​% the third year. What is the future value of new CD​ 2? C. The future value of new CD 2 is ​$__________. ​(Round your responses to the nearest​ cent.) Part 3 We also have a third CD in which you might invest—one that pays an interest rate of 2​% the first two years and an interest rate of 9​% the third year. Part 4 D. How does the future value of this investment compare to the other​ two? The future value of CD 3 is ________ than the future value of CD 1 and ________ than the future value of CD 2. Part 5 E. Which is the best​ investment? The best investment is CD _____.

A. 1554.04;1494.85 1200(1+0.09)^3 1200(1+0.13)(1+0.06)(1+0.04) B. A. CD 1 should be chosen. C. 1494.85 1200(1+0.04)(1+0.06)(1+0.13) D. less;less E. 1

Some companies offer their employees defined benefit pension plans. Under these​ plans, employees are promised a fixed monthly payment after they retire. An article on a financial planning website discussed the plans of some​ companies, such as General Electric​ (GE), to offer some employees a​ lump-sum, one-time payment if the employee would agree to not receive monthly pension payments. The article​ explains, "The amount of the lump sum is calculated by determining the present value of the​ client's future​ payments, using interest rate and life expectancy​ assumptions." Part 2 Suppose that an employee expects to live to be 90 years old and is entitled under​ GE's retirement program to receive a pension of​ $1,000 per month beginning at age 65. A. The total value of the payments the employee would receive over the 25 years of payment would equal ​$____________ B. The lump sum amount GE will offer this employee would likely be _____________ the amount you found above since they will consider the ___________ Part 3 The article also​ notes, "A lump sum offered in the current environment of very low interest rates is likely to be at its​ peak." What is the reasoning behind this​ statement? C. Since the interest rate is in the __________ of the present value​ equation, low interest rates result in a _________ present value of future payments therefore a __________ lump sum offer today.

A. 300000 B. less than;discounted value of the future payments C. denominator;higher;larger

Baseball pitcher Chris Sale signed a contract in 2019 to play for the Boston Red Sox for 5 years at an annual salary of​ $29 million per year beginning in 2020. But he would not actually receive the full amount of his annual salary each year. The Red Sox would not begin to pay​ $50 million of his salary until the year​ 2035, when he would receive​ $10 million per year through 2039. Part 2 A. An article on espn.com discussing​ Sale's contract noted that​ "the five-year deal is worth​ $145 million." The author of the article arrived at this total​ "worth" of​ Sale's contract by _____________ Do you agree with the author that the contract was actually worth​ $145 million to​ Sale? B. The author is _________​, the total worth of​ Sale's contract will be __________ ​$145 million once you consider the present value of all future payments. Part 3 Assume for simplicity that Sale receives a salary of​ $20 million per year for the next 3​ years, with each payment coming at the end of each calendar year. This means he receives his first payment at the end of this​ year, his second payment at the end of next​ year, and his third payment at the end of the following year. At the beginning of this​ year, what is the present value of the salaries he will receive for these 3 years if the interest rate is 7​%? C. The present value of these payments would equal ​$__________ million. ​(Round your answer to 2 decimal​ places)

A. adding up his $29 million yearly salary over 5 years B. incorrect;less than C. 52.49

_____________ is a borrower who states his or her income but does not document or prove the amount of income.

Alt-A borrower

What are the four main functions of​ money? Describe each function. A. Money should serve as a medium of​ exchange, a unit of​ account, a standard of deferred​ payment, and wealth. B. Money should serve as a medium of​ exchange, a unit of​ account, a store of​ value, and a standard of deferred payment. C. Money should serve as commodity​ money, a medium of​ exchange, a unit of​ account, and a store of value. D. Money should serve as a unit of​ account, a store of​ value, a standard of deferred​ payment, and legal tender. A ______________ is something that is generally accepted as payment for goods and services. A ____________ is a way of measuring value in an economy in terms of money. A ______________ is the accumulation of wealth by holding dollars or other assets that can be used to buy goods and services in the future. A ______________ is a characteristic of money by which it facilitates exchange over time.

B. Money should serve as a medium of​ exchange, a unit of​ account, a store of​ value, and a standard of deferred payment. medium of exchange unit of account store of value standard of deferred payment

Why does the demand curve for bonds slope​ down? Why does the supply curve for bonds slope​ up? A. As wealth​ increases, all else​ constant, the demand for bonds will decrease as investors choose assets with higher​ returns, thus decreasing the quantity of bonds demanded.​ Likewise, as wealth​ increases, all else​ constant, holders of bonds will be seeking assets with higher​ returns, thus increasing the quantity of bonds supplied. B. As the price of bonds​ increases, the interest rates on the bonds will​ fall, thus reducing the quantity of bonds demanded. ​ Likewise, as the price of bonds​ increases, the interest rates on the bonds will​ fall, thus holders of bonds will be more willing to sell​ them, increasing the quantity supplied. C. As the price of bonds​ increases, the interest rates on the bonds​ increases, thus increasing the quantity of bonds demanded. ​ Likewise, as the price of bonds​ increases, the interest rates on the bonds will​ increase, thus holders of bonds will be less willing to sell​ them, decreasing the quantity supplied. D. None of the above as there are other factors that determine the slope of the demand and supply curves for bonds.

B. As the price of bonds​ increases, the interest rates on the bonds will​ fall, thus reducing the quantity of bonds demanded. ​ Likewise, as the price of bonds​ increases, the interest rates on the bonds will​ fall, thus holders of bonds will be more willing to sell​ them, increasing the quantity supplied.

Which of the following are examples of commodity​ money? ​(Check all that apply​) A. Dollar Bills B. Cigarettes C. Gold D. Checks E. Cars

B. Cigarettes C. Gold

Which involves financial​ intermediaries, and which involves financial​ markets? A. Indirect finance requires financial​ markets, while direct finance involves financial intermediaries. B. Direct finance requires financial​ markets, while indirect finance involves financial intermediaries. C. Both direct and indirect finance require financial intermediaries and financial markets. D. Neither direct or indirect finance requires the use of financial intermediaries and financial markets

B. Direct finance requires financial​ markets, while indirect finance involves financial intermediaries.

Briefly explain whether each of the following statements is true or​ false: The higher the price of​ bonds, the greater the quantity of bonds demanded. A. False—The price of bonds does not influence the quantity of bonds demanded. B. False—The higher the price of​ bonds, the lower the quantity of bonds demanded. C. True—The higher the price of​ bonds, the higher the interest paid on the bonds is and therefore the greater the quantity of bonds demanded. D. True—The higher the price of​ bonds, the higher their future value and therefore the greater the quantity of bonds demanded. The lower the price of​ bonds, the smaller the quantity of bonds supplied. A. False—The lower the​ price, the lower the​ yield, which increases the cost of borrowing. B. True—The lower the​ price, the higher the​ yield, which increases the cost of borrowing. C. False—The price of bonds does not influence the quantity of bonds supplied. D. True—The lower the​ price, the higher the​ yield, which decreases the cost of borrowing. As the wealth of investors​ increases, all else held​ constant, the interest rate on bonds should fall. A. True—A shift to the left in the demand curve will push prices down and yield up. B. True—A shift to the right in the demand curve will push prices up and yield down. C. False—A shift to the right in the demand curve will push both prices and yield down. D. False—A shift to the left in the demand curve will push prices down and yield up. If investors start to believe that the U.S. government might default on its​ bonds, the interest rate on those bonds will fall. A. True—This would cause a shift to the​ left, pushing both price and yield down. B. False—This would cause a shift to the​ left, pushing price down and yield up. C. False—This would cause a shift to the​ left, pushing both price and yield up. D. True—This would cause a shift to the​ right, pushing price down and yield up.

B. False—The higher the price of​ bonds, the lower the quantity of bonds demanded. B. True—The lower the​ price, the higher the​ yield, which increases the cost of borrowing. B. True—A shift to the right in the demand curve will push prices up and yield down. B. False—This would cause a shift to the​ left, pushing price down and yield up.

What is a capital gain on a financial​ security? If you own a bond and market interest rates​ increase, will you experience a capital gain or a capital​ loss? A. If the price of an asset​ increases, it is called a capital gain. When the market interest rate​ increases, the price of the bond increases and you make a capital gain. B. If the price of an asset​ increases, it is called a capital gain. When the market interest rate​ increases, the price of the bond falls and you incur a capital loss. C. If the coupon payment of an asset​ increases, it is called a capital gain. When the market interest rate​ increases, the coupon payment on the bond increase and you make a capital gain. D. If the coupon payment of an asset​ increases, it is called a capital gain. When the market interest rate​ increases, the coupon payment on the bond falls and you incur a capital loss.

B. If the price of an asset​ increases, it is called a capital gain. When the market interest rate​ increases, the price of the bond falls and you incur a capital loss.

What are the two types of income an investor can earn on a​ bond? A. ​Tax-free interest income from coupon payments and realized capital gains. B. Interest income from coupon payments and capital gains from price changes. C. Interest income from coupon payments and any increase in the principal of the bond. D. Realized capital gains and unrealized capital gains _______ is taxed at the same rate as wage and salary income while _________ is taxed at a lower rate.

B. Interest income from coupon payments and capital gains from price changes. interest income capital gain

An article on bloomberg.com​ noted, "Britain redeemed the last of the consols in​ 2015." The consols had annual coupons of​ £40. What is a​ consol? A. It is an example of a discount​ bond, which has a higher face value than initial sale price. B. It is an example of a​ perpetuity, which is like a coupon bond without a maturity date. C. It is an example of a simple​ loan, which requires the borrower to pay back the principal plus interest. D. It is a word that describes all bonds in general regardless of their structure or maturity dates. If the yield to maturity on other​ long-term British government bonds was​ 2.5%, what price was the British government likely to have offered​ investors? A. ​£100. B. ​£4,000. C. ​£1,600. D. ​£160.

B. It is an example of a​ perpetuity, which is like a coupon bond without a maturity date. C. ​£1,600.

What is meant by the term​ "risk averse"? A. It refers to investors who have an aversion to​ risk, meaning that when choosing between two​ assets, risk-averse investors would ignore risk and only consider expected return. B. It refers to investors who have an aversion to​ risk, meaning that when choosing between two assets with the same expected​ returns, risk-averse investors would choose the asset with the lower risk. C. It refers to investors who prefer risk to safe​ investments, meaning that​ risk-averse investors would choose gambling over any form of investment. D. It refers to investors who prefer risk to safe​ investments, meaning that when choosing between two​ assets, risk-averse investors would choose the asset with the possibility of maximizing return.

B. It refers to investors who have an aversion to​ risk, meaning that when choosing between two assets with the same expected​ returns, risk-averse investors would choose the asset with the lower risk.

In​ 2020, the U.S. Treasury was considering issuing bonds that​ wouldn't mature for 50 years. Some European governments have begun issuing bonds that​ don't mature for as long as 100 years. In​ 2020, the U.S. Treasury was considering issuing bonds that​ wouldn't mature for 50 years. A column in the Wall Street Journal noted that the prices of these bonds had been rising and that​ "buying bonds at such stupidly high prices​ isn't a way to keep your investment​ safe." What does the columnist mean by​ "stupidly high​ prices"? A. That the higher prices indicate a weakness in the entities issuing the bonds making these bonds risky investments for the future. B. That the higher prices make it more likely that the price will fall in the future rather than​ rise, making them a poor security to hold until maturity. C. That the higher prices are pushing the interest rates on these bonds very​ high, making them a poor security to buy and hold. D. That high price bonds will inevitably be regulated by the government resulting in lower​ long-term returns on the investment. What does the bonds selling for high prices have to do with the safety of the bonds as an​ investment? Rising bond prices are the result of __________ interest rates. If interest rates were to switch directions in the future investors holding these​ long-term bonds would ___________. This type of risk is called ____________. Why might investors have considered such very​ long-term government bonds to be safe​ investments? A. They believe interest rates around the world will remain extremely low for a long period of time. B. They believe these government bonds have very low default risk. C. They believe inflation rates around the world will remain extremely low for a long period of time. D. All of the above are true

B. That the higher prices make it more likely that the price will fall in the future rather than​ rise, making them a poor security to hold until maturity. falling;incur capital losses;interest rate risk D. All of the above are true

The federal government in the United States has been running very large budget deficits. Use the loanable funds approach to show the impact of the U.S. budget deficit on the world real interest​ rate, holding all else constant. A. The supply curve shifts to the​ left, raising interest rates. B. The demand curve shifts to the​ right, raising interest rates. C. The demand curve shifts to the​ left, decreasing interest rates. D. The supply curve shifts to the​ right, decreasing interest rates. Graph​ A, show your answer on the graph to the right. Using the line drawing​ tool, draw the new curve. Properly label your curve. Part 4 Carefully follow the instructions​ above, and only draw the required object Now suppose that households believe that deficits will be financed by higher taxes in the near​ future, and households increase their saving in anticipation of paying those higher taxes. Briefly explain how your earlier analysis will be affected. A. The supply curve would shift to the right. The interest rate would fall. B. The supply curve would shift to the left. The interest rate would rise. C. The demand curve would shift to the left. The interest rate would fall. D. The demand curve would shift to the right. The interest rate would rise. On graph​ B, show your answer on the graph to the right. Using the line drawing​ tool, draw the new curve. Properly label your curve. Part 7 Carefully follow the instructions​ above, and only draw the required object.

B. The demand curve shifts to the​ right, raising interest rates. A. The supply curve would shift to the right. The interest rate would fall.

In a large open​ economy, how would each of the following events affect the equilibrium interest​ rate? A natural disaster causes extensive damage to​ homes, bridges, and​ highways, leading to increased investment spending to repair the damaged infrastructure. A. The supply of loanable funds would​ increase, decreasing the interest rate. B. The demand for loanable funds would​ increase, increasing the interest rate. C. The supply of loanable funds would​ decrease, increasing the interest rate. D. The demand for loanable funds would​ decrease, decreasing the interest rate. Taxes on businesses are expected to be increased in the future. A. The demand for loanable funds would​ increase, increasing the interest rate. B. The supply of loanable funds would​ decrease, increasing the interest rate. C. The supply of loanable funds would​ increase, decreasing the interest rate. D. The demand for loanable funds would​ decrease, decreasing the interest rate. The World Cup soccer matches are being​ televised, and many people stay home to watch​ them, reducing consumption spending. A. The demand for loanable funds would​ increase, increasing the interest rate. B. The supply of loanable funds would​ increase, decreasing the interest rate. C. The demand for loanable funds would​ decrease, decreasing the interest rate. D. The supply of loanable funds would​ decrease, increasing the interest rate. The government proposes a new tax on​ saving, based on the value of​ people's investments as of December 31 each year. A. The supply of loanable funds would​ decrease, increasing the interest rate. B. The supply of loanable funds would​ increase, decreasing the interest rate. C. The demand for loanable funds would​ increase, increasing the interest rate. D. The demand for loanable funds would​ decrease, decreasing the interest rate.

B. The demand for loanable funds would​ increase, increasing the interest rate. D. The demand for loanable funds would​ decrease, decreasing the interest rate. B. The supply of loanable funds would​ increase, decreasing the interest rate. A. The supply of loanable funds would​ decrease, increasing the interest rate.

Suppose you are about to borrow ​$14,000 for four years to buy a new car. Which of these situations would be​ preferred? A. The interest rate on the loan is 15​%, and the annual inflation rate over the next four years is expected to average 5%. B. The interest rate on the loan is 5​%, and the annual inflation rate over the next four years is expected to average

B. The interest rate on the loan is 5​%, and the annual inflation rate over the next four years is expected to average

A student makes the following​ statement: "If the money supply in a country​ increases, then the level of total production in that country must also​ increase." Briefly explain whether you agree with this statement. A. This statement is true because if the money supply​ increases, then velocity also increases and total production rises. B. This statement is false because if velocity falls more than the money supply​ rises, total production may fall. C. This statement is false because if the money supply​ increases, then the price level also rises and total production falls. D. More information is required to determine if the student is correct.

B. This statement is false because if velocity falls more than the money supply​ rises, total production may fall.

At the end of World War​ I, the Allied powers—the United​ States, the United​ Kingdom, France, and Italy—insisted that the German government make​ payments, called​ reparations, to the Allied governments to pay for the damage Germany had caused during the war. In​ 1919, the British economist John Maynard Keynes wrote the influential book The Economic Consequences of the Peace​, in which he argued that the reparations for World War I that Germany was being forced to pay to the Allies would have devastating​ consequences, including political​ unrest, because the German government would struggle to find the funds to make the payments. As mentioned in the​ chapter, during the 1920s Germany experienced a hyperinflation. Was there likely a connection between the war reparations that Germany was forced to pay and the​ hyperinflation? A. ​Yes, Germany was forced to borrow large sums of money from its​ allies, causing the purchasing power of its currency to rise too quickly. B. ​Yes, Germany printed large amounts of money to pay the​ reparations, resulting in a collapse in the purchasing power of its currency. C. ​No, it helped stabilize the value of the German​ currency, which helped slow the growth of the hyperinflation that had begun during the war. D. ​No, despite​ Keynes's claims, no connection can be found between the war reparations and the German hyperinflation. Which of the following consequences of hyperinflation would be least likely to lead to political unrest in Germany in the​ 1920s? A. Workers may abandon their jobs because the wages they are paid have no purchasing power. B. Prices may rise so rapidly that money loses most of its value before it can be spent. C. An economy may resort to​ barter, in which​ case, specialization and productivity may be reduced. D. The purchasing power of money may rise so rapidly that it creates a shortage of goods.

B. ​Yes, Germany printed large amounts of money to pay the​ reparations, resulting in a collapse in the purchasing power of its currency.

Should the packs of Marlboro cigarettes used to pay taxi drivers in Russia in the late 1980s be considered​ money? A. ​No, the cigarettes as payment do not fulfill the key function of money as a store of value. B. ​Yes, the cigarettes as payment fulfill all the key functions of money. C. ​No, the cigarettes as payment do not fulfill the key function of money as a standard of deferred payment. D. ​Uncertain, as this may change as the value of the Russian ruble changes. If Marlboro cigarettes are​ money, are they commodity money or fiat​ money? A. Both commodity money and fiat money—As cigarettes fulfill all the key functions of money. B. Commodity money—As cigarettes have value independent of their use as money. C. Fiat money—As cigarettes have value independent of their use as money. D. Neither—Cigarettes are simply a good to be bought and sold.

B. ​Yes, the cigarettes as payment fulfill all the key functions of money. B. Commodity money—As cigarettes have value independent of their use as money.

According to an article on​ bloomberg.com, the McKinsey​ & Co. consulting firm estimates that banks could reduce their costs by as much as ​$14 billion per year by making greater use of blockchain technology. What is blockchain​ technology? A. A consolidated system that registers ownership of​ funds, securities, and other goods and allows transactions to settle overnight B. A consolidated system that registers ownership of​ funds, securities, and other goods and allows transactions to settle instantly C. A distributed system that registers ownership of​ funds, securities, and other goods and allows transactions to settle instantly D. A distributed system that registers ownership of​ funds, securities, and other goods and allows transactions to settle overnight How would blockchain technology reduce the costs of​ banking? A. It could eliminate the expense of printing paper money. B. ​Blockchain's use of complex technology could make it more attractive to more​ businesses, thereby increasing usage. C. Using blockchain technology could eliminate the need for banks and other intermediaries. D. Blockchain technology could shift the costs of banking from banks to consumers.

C. A distributed system that registers ownership of​ funds, securities, and other goods and allows transactions to settle instantly C. Using blockchain technology could eliminate the need for banks and other intermediaries.

Why​ aren't credit cards included in M1 or​ M2? A. Credit is not a form of​ money, since it is a debt that is owed to the owner of the card. B. Credit is not a form of​ money, since it is a liability that is owed to the owner of the card. C. Credit is not a form of​ money, since it is a debt that is owed to the issuer of the card. D. None of the above.

C. Credit is not a form of​ money, since it is a debt that is owed to the issuer of the card.

Assume that a bond had its rating lowered. What is the likely effect on this bond in the bond​ market? A. Demand for the bond will remain the same. B. Demand for the bond cannot be determined without the bond rating. C. Demand for the bond will decrease. D. Demand for the bond will increase. Using the graph to the​ right, show the effect on a bond that has its rating lowered. ​1) Using the line drawing​ tool, draw a new curve. Properly label your curve. ​2) Using the point drawing tool​, locate the new equilibrium price of the bond after the rating is lowered. Label your point ​'E Subscript 2​'. Part 3 Carefully follow the instructions​ above, and only draw the required objects.

C. Demand for the bond will decrease.

Typically, you will receive a very low interest rate on money you deposit in a bank. Interest rates on car loans and business loans are much higher. Which of the following is not a reason why most people prefer putting their money in a bank to lending it directly to individuals or​ businesses? A. There is less risk of default or losing money if an individual were to make a deposit in a bank. B. A saver would have difficulties or require substantial costs to acquire the necessary information to make a solid direct loan to other individuals or businesses. C. Direct lending would allow a saver the opportunity to participate in spreading out the risk of lending. D. Deposits in a bank offer individuals more liquidity than making a direct loan.

C. Direct lending would allow a saver the opportunity to participate in spreading out the risk of lending.

In​ Sweden, some banks have closed their​ ATMs, no longer allow depositors to make cash withdrawals in person at​ branches, and no longer accept cash deposits. Part 2 Which of the following is NOT a benefit to a bank that no longer makes cash available and does not accept cash​ deposits? A. Decreased likelihood of bank robbery. B. Reduction in staffing levels. C. Increased privacy for bank customers. D. Cost savings. Part 3 A bank might consider all of the following costs and benefits in making a decision as to whether to go​ cashless, except: A. Exposure to hackers and other electronic fraud schemes. B. The convenience of using cash. C. The availability of technology to support cashless transactions. D. The willingness of stores and merchants to accept electronic payments.

C. Increased privacy for bank customers. B. The convenience of using cash.

How does a high rate of inflation affect the value of​ money? A. Inflation increases the value of money. B. Inflation does not change the value of money. C. Inflation reduces the value of money. How does it affect the usefulness of money as a medium of​ exchange? A. More transactions using money may occur if inflation is​ high, thereby reducing the usefulness of money as a medium of exchange. B. Fewer transactions using money may occur if inflation is​ high, but the usefulness of money as a medium of exchange will remain constant. C. Fewer transactions using money may occur if inflation is​ high, thereby reducing the usefulness of money as a medium of exchange. D. Money is not affected as a medium of exchange. Part 3 If inflation is​ high, _________ transactions may​ occur, thereby___________ the usefulness of money as a medium of exchange.

C. Inflation reduces the value of money. C. Fewer transactions using money may occur if inflation is​ high, thereby reducing the usefulness of money as a medium of exchange. fewer;reducing

What is the difference between an investor and a​ trader? A. There is no difference. Both investors and traders hold stocks and bonds for a long period of time and collect either the dividend from a corporation or the coupon payment from the bond. B. Investors buy and sell securities and bonds hoping to take advantage of price arbitrage in a short time horizon. A trader holds stocks and bonds for a long period of time and collects either the dividend from a corporation or the coupon payment from the bond. C. Investors hold stocks and bonds for a long period of time and collect either the dividend from a corporation or the coupon payment from the bond. A trader buys and sells securities and bonds hoping to take advantage of price arbitrage in a short time horizon. D. None of the above. What is financial​ arbitrage? A. The process of selling securities only. B. The process of buying and reselling securities to profit from price changes over a long period of time. C. The process of buying and reselling securities to profit from price changes over a brief period of time. D. None of the above.

C. Investors hold stocks and bonds for a long period of time and collect either the dividend from a corporation or the coupon payment from the bond. A trader buys and sells securities and bonds hoping to take advantage of price arbitrage in a short time horizon. C. The process of buying and reselling securities to profit from price changes over a brief period of time.

Write an expression showing the relationship among the price of a coupon​ bond, the coupon​ payments, the face​ value, and the yield to maturity. A. FV=PV×(1+i)n. B. P=C/(1+i)+C/(1+i)2+C/(1+i)3+...+C/(1+i)n. C. P=C/(1+i)+C/(1+i)2+C/(1+i)3+...+C/(1+i)n+FV/(1+i)n. D. P=C/i. Write an expression showing the relationship among the amount borrowed on a simple​ loan, the required loan​ payment, and the yield to maturity. A. Loan value=Required Loan Payment/ (1+YTM)n. B. Principal=Required Loan Payment/YTM. C. YTM=(Required Loan Payment−Principal)/Principal. D. Loan value=FP/(1+i)+FP/(1+i)2+FP/(1+i)3+...+FP/(1+i)n. Part 3 Write an expression showing the relationship among the price of a discount​ bond, the​ bond's face​ value, and the yield to maturity. A. Price=Face Value/YTM+Face Value/YTM2+...+Face Value/YTMn. B. Price=Face Value×(1+YTM). C. YTM=Face Value/Price. D. YTM=Face Value−Price/Price. Part 4 Write an expression showing the relationship among the amount borrowed on a​ fixed-payment loan, the payments on the​ loan, and the yield to maturity. A. Loan value=FP/(1+i)+FP/(1+i)2+...+FP/(1+i)n. B. Loan value=FP/(1+i)n. C. Loan value=FP×(1+i)n. D. Loan value=C/i.

C. P=C/(1+i)+C/(1+i)2+C/(1+i)3+...+C/(1+i)n+FV/(1+i)n. C. YTM=(Required Loan Payment−Principal)/Principal. D. YTM=Face Value−Price/Price. A. Loan value=FP/(1+i)+FP/(1+i)2+...+FP/(1+i)n.

Suppose that the inflation rate increases and the Federal Reserve responds by taking actions to raise the​ short-term nominal interest rate. Which of the following best describes the impact of the​ Fed's actions on the money market​ graph? A. Supply shifts rightwards. B. Demand shifts leftwards. C. Supply shifts leftwards. D. Demand shifts rightwards.

C. Supply shifts leftwards.

Consider the following​ analysis: The rise and fall of a​ bond's price has a direct inverse relationship to its yield to​ maturity, or interest rate. As prices go​ up, the yield declines and vice versa. For​ example, a ​$1,000 bond might carry a stated annual ​yield, known as the coupon of 9​%, meaning that it pays ​$90 a year to the bondholder. If that bond was bought for ​$920​, the actual yield to maturity would be 9.78​% ​($90 annual interest on ​$920 of​ principal). Part 2 Do you agree with this​ analysis? Briefly explain. A. The analysis is partially correct. There is an inverse relationship between bond prices and bond​ yields, and the rate of return on the coupon payment is higher if the purchase price is lower. The analysis does not take into account the present value equation of calculating a bond yield. The yield to maturity must be calculated without using present value analysis. B. The analysis is partially correct. There is a direct relationship between bond prices and bond​ yields, and the rate of return on the coupon payment is higher if the purchase price is higher.​ However, the analysis does not take into account the present value equation of calculating a bond yield. The yield to maturity must be calculated using present value analysis. C. The analysis is partially correct. There is an inverse relationship between bond prices and bond​ yields, and the rate of return on the coupon payment is higher if the purchase price is lower.​ However, the analysis does not take into account the present value equation of calculating a bond yield. The yield to maturity must be calculated using present value analysis. D. None of the above.

C. The analysis is partially correct. There is an inverse relationship between bond prices and bond​ yields, and the rate of return on the coupon payment is higher if the purchase price is lower.​ However, the analysis does not take into account the present value equation of calculating a bond yield. The yield to maturity must be calculated using present value analysis.

What is the difference between the actual real interest rate and the expected real interest​ rate? A. The actual real interest rate does not adjust for​ prices; the expected real interest rate adjusts for prices. B. The actual real interest rate adjusts for​ prices; the expected real interest rate does not adjust for prices. C. The expected real interest rate equals the nominal interest rate minus expected​ inflation; the actual real interest rate equals the nominal interest rate minus actual inflation. D. There is no correct answer.

C. The expected real interest rate equals the nominal interest rate minus expected​ inflation; the actual real interest rate equals the nominal interest rate minus actual inflation.

We have seen that Federal Reserve Chairman Ben Bernanke has argued that low interest rates in the United States during the​ mid-2000s were due to a global savings glut rather than to Federal Reserve policy. In an interview with Albert Hunt of Bloomberg​ Television, Alan​ Greenspan, who was Federal Reserve Chairman from August 1987 through January 2006 made a similar argument. Greenspan​ argued, "Behind the low level of​ long-term rates: a global savings glut as​ China, Russia and other emerging market economies earned more money on exports than they could easily​ invest." Use the loanable funds graphs to illustrate​ Barnanke's argument that a global savings glut caused low interest rates in the United States. One graph should illustrate the situation in the United​ States, and the other graph should illustrate the situation in the rest of the world. ​1) Using the line drawing​ tool, show the effect of the savings glut in the rest of the world. Properly label your line. ​2) Using the double arrow​ tool, indicate the amount of loanable funds the U.S. either borrows or lends at the new world real interest rate. Properly label your double arrow line. Part 4 Carefully follow the instructions​ above, and only draw the required objects. Which of the following best describes the effect of a global savings​ glut? A. The increased savings in the rest of the world increases international​ lending, lowering the world interest​ rate; thus converting the United States from a borrower to a lender. B. The increased savings in the rest of the world decreases international​ lending, raising the world interest​ rate, and decreasing international borrowing in the United States. C. The increased savings in the rest of the world increases international​ lending, lowering the world interest​ rate, and increasing international borrowing in the United States. D. The increased savings in the rest of the world decreases international​ lending, raising the world interest​ rate; thus converting the United States from a lender to a borrower. Why should a debate over the cause of low interest rates matter to Alan​ Greenspan? A. There is a debate over whether the Federal Reserve was responsible for low interest rates or whether the global savings glut was responsible. If the global savings glut was​ responsible, we could definitely agree that the Federal Reserve should take less blame for the artificially low interest rates that helped facilitate the housing bubble. B. There is a debate over whether the Federal Reserve was responsible for low interest rates or whether the global savings glut was responsible. If the global savings glut was​ responsible, we could argue that the Federal Reserve should take more blame for the artificially low interest rates that helped reduce the housing bubble. C. There is a debate over whether the Federal Reserve was responsible for low interest rates or whether the global savings glut was responsible. If the global savings glut was​ responsible, we could argue that the Federal Reserve should take less blame for the artificially low interest rates that helped facilitate the housing bubble. D. None of the above.

C. The increased savings in the rest of the world increases international​ lending, lowering the world interest​ rate, and increasing international borrowing in the United States. C. There is a debate over whether the Federal Reserve was responsible for low interest rates or whether the global savings glut was responsible. If the global savings glut was​ responsible, we could argue that the Federal Reserve should take less blame for the artificially low interest rates that helped facilitate the housing bubble.

Who appoints the members of the Federal​ Reserve's Board of​ Governors? A. They are appointed by the president and confirmed by the chairman of the Fed. B. They are appointed by the vice president and confirmed by the Senate. C. They are appointed by the president and confirmed by the Senate. D. They are appointed by the president and confirmed by the House of Representatives.

C. They are appointed by the president and confirmed by the Senate.

Discuss whether your​ money, wealth, or income increases in each of the following​ situations: Part 2 The value of your house increases. A. Income increases. B. Money increases. C. Wealth increases. D. All of the above. Your boss gives you a​ 10% raise. A. Income increases. B. Money increases. C. Wealth increases. D. All of the above. Part 4 You take cash out of the bank and use it to buy an Apple iPad. A. Income increases. B. Money increases. C. Wealth increases. D. All of the above.

C. Wealth increases. A. Income increases. B. Money increases.

What is​ interest-rate risk? Why does a bond with a longer maturity have greater​ interest-rate risk than a bond with a shorter​ maturity? A. ​Interest-rate risk is the risk of rate of return changes affecting the value of a bond. The longer the​ maturity, the more risk of large changes in the rate of return. B. ​Interest-rate risk is the risk of yield to maturity changes affecting the value of a bond. The longer the​ maturity, the more risk of large changes in the yield to maturity. C. ​Interest-rate risk is the risk of interest rate changes affecting the value of a bond. The longer the​ maturity, the more risk of large changes in interest rates. D. None of the above.

C. ​Interest-rate risk is the risk of interest rate changes affecting the value of a bond. The longer the​ maturity, the more risk of large changes in interest rates.

An article on bloomberg.com discussing the office space sharing firm WeWork noted that​ "the yield on WeWork bonds soared above​ 10%." Can we tell from this statement whether the demand for WeWork bonds had increased or​ decreased? A. ​Yes, demand must have increased if the yields were driven up to such high levels. B. ​No, the only way yields can increase significantly is if bond supply decreased. C. ​Yes, demand must have decreased if a higher yield is required to attract buyers. D. ​No, the higher yield could be the result of either a decrease or an increase in bond demand. Can we tell from this statement whether the prices of WeWork bonds were increasing or​ decreasing? A. ​No, there is no relationship between the price of a bond and its yield. B. ​Yes, a​ bond's price and its yield are negatively related so an increase in yield is an indication of a lower price on the bond. C. ​Yes, a​ bond's price and its yield are positively related so an increase in yield is an indication of a higher price on the bond. The article observes that WeWork was losing millions of dollars per day. What does this observation have to do with the statement that​ "the yield on WeWork bonds soared above​ 10%." A. These losses indicate that WeWork has strong long term profit potential. This will cause demand for the bonds to rise resulting in a higher price and a higher yield. B. These losses show WeWork bonds are subject to substantial interest rate risk. This will cause demand for the bonds to drop resulting in a lower price and a higher yield. C. These losses show WeWork is a risky company with a high default risk on their bonds. This will cause demand for the bonds to drop resulting in a lower price and a higher yield. D. The observation about WeWork losses does not have an impact on the demand for WeWork​ bonds, therefore does not impact their price or yield.

C. ​Yes, demand must have decreased if a higher yield is required to attract buyers. B. ​Yes, a​ bond's price and its yield are negatively related so an increase in yield is an indication of a lower price on the bond. C. These losses show WeWork is a risky company with a high default risk on their bonds. This will cause demand for the bonds to drop resulting in a lower price and a higher yield.

Could the actions of the Federal Reserve and Treasury be viewed as a moral hazard​ problem? A. ​Yes, financial firms such as Bear Stearns will always have more information than the federal government does and thus will use that information to offer risky—but profitable—investments. B. ​Uncertain, if the actions of the Fed and Treasury prove to be​ successful, then there are no moral hazard problems. C. ​Yes, financial firms such as Bear Stearns may continue taking on riskier investments because they believe a federal bailout is likely. D. ​No, the Federal Reserve and Treasury would never act in a way that may lead to moral hazard problems.

C. ​Yes, financial firms such as Bear Stearns may continue taking on riskier investments because they believe a federal bailout is likely.

Briefly discuss the different challenges the federal government faced in dealing with the 2020​ Covid-19 pandemic compared with dealing with the 2007-2009 financial crisis. To answer this​ question, choose whether each of the following events occurred during the 2020​ Covid-19 pandemic, the 2007-2009 financial​ crisis, or whether it was true for both crises. Congress developed the Paycheck Protection Plan for small businesses. Congress passed the TARP program to help stabilize the banking sector. The Federal Reserve launched the Main Street Lending Program to support​ medium-sized businesses. The U.S. government assumed partial ownership of some financial firms. The Federal Reserve and the Treasury worked together during the crisis.

Covid-19 pandemic 2007-2009 financial crisis Covid-19 pandemic 2007-2009 financial crisis True for both

An article on the American Express website observes that​ "often, an interest carry trade involves maturity​ mismatch, since​ longer-term lending typically carries higher interest rates than​ short-term." How might you be able to make a profit from the fact that​ long-term interest rates are typically higher than​ short-term interest​ rates? A. By purchasing more​ short-term securities than​ long-term securities. B. By borrowing long term and investing the funds short term. C. By purchasing more​ long-term securities than​ short-term securities. D. By borrowing short term and investing the funds long term. ​Why, in​ practice, is it difficult for the average investor to make a profit from an interest carry​ trade? A. Borrowing rates for the average investor are much higher than​ short-term Treasury rates. B. The average investor often overestimates inflation rates resulting in negative real returns on​ long-term investments. C. It is very difficult for the average investor to determine​ short-term and​ long-term interest rates. D. The average investor does not have access to​ long-term investments, and can only access them through expensive brokerage arrangements.

D. By borrowing short term and investing the funds long term. A. Borrowing rates for the average investor are much higher than​ short-term Treasury rates.

Suppose that an economy in​ 10,000 B.C.E. used a rare stone as its money. Suppose also that the number of stones declined over time as stones were accidentally destroyed or used as weapons. What would have happened to the value of the stones over​ time? A. If the number of stones​ declined, the remaining stones would have no value. B. If the number of stones​ declined, the value of the remaining stones would have decreased​ (inflation). C. If the number of stones​ declined, the value of the remaining stones would have remained the same. D. If the number of stones​ declined, the value of the remaining stones would have increased​ (deflation). Part 2 What would the consequences likely have been if someone had discovered a large quantity of new​ stones? A. If a large quantity of new stones were​ found, the value of the stones would increase​ (deflation). B. If a large quantity of new stones were​ found, the value of the stones would remain the same. C. If a large quantity of new stones were​ found, the value of the stones may or may not change. D. If a large quantity of new stones were​ found, the value of the stones would fall​ (inflation).

D. If the number of stones​ declined, the value of the remaining stones would have increased​ (deflation). D. If a large quantity of new stones were​ found, the value of the stones would fall​ (inflation).

How do the​ Fed's current responsibilities compare with its responsibilities when it was first created by​ Congress? A. The role of the modern Fed has not changed from the role of the original Fed. B. In addition to its original role of taking in deposits and making​ loans, the modern Fed is now responsible for solving the financial crisis. C. In addition to its original role as regulator of the banking​ system, the modern Fed is now the lender of last resort. D. In addition to its original role as a lender of last​ resort, the modern Fed is now responsible for monetary policy.

D. In addition to its original role as a lender of last​ resort, the modern Fed is now responsible for monetary policy.

For several decades in the late nineteenth​ century, the price level in the United States declined. Was this likely to have helped or hurt U.S. farmers who borrowed money to buy​ land? A. It hurt farmers because the value of their debt stayed the same while the prices of their products rose. B. It helped farmers because the value of their debt stayed the same while the prices of their products rose. C. It helped farmers because the value of their debt stayed the same while the prices of their products fell. D. It hurt farmers because the value of their debt stayed the same while the prices of their products fell. Does your answer depend on whether the decline in the price level was expected or​ unexpected? A. The answer does not depend on whether deflation was expected. If deflation was​ expected, the interest rate may have stayed sufficiently low to compensate. B. The answer depends on whether deflation was expected. If deflation was​ expected, the interest rate may have stayed sufficiently high to compensate. C. The answer depends on whether deflation was expected. If deflation was​ expected, the interest rate may have stayed sufficiently low to compensate. D. More information is required to determine whether this outcome was dependent on​ farmers' expectations about the price level.

D. It hurt farmers because the value of their debt stayed the same while the prices of their products fell. C. The answer depends on whether deflation was expected. If deflation was​ expected, the interest rate may have stayed sufficiently low to compensate.

Friedrich Schneider of Johannes Kepler University in Austria asks the question​ "Is cash a major source of . . . crime and of​ terrorism?" Most of the options below describe ways cash might facilitate crime or terrorism. Which of the following is not a way that cash may facilitate illicit​ activities? Part 2 A. Cash is a widely accepted form of payment. B. Cash is difficult for the government to monitor and therefore it is difficult to tax transactions done in cash. C. Cash is difficult for law enforcement to track. D. It is easier to make large purchases with cash than with checks or credit cards. Suppose you were trying to test whether in the United States and other countries cash is important in facilitating crime and terrorism. What evidence would you try to​ collect? Part 4 A. Monitor cash withdrawals by suspected criminals. B. Attempt to track the movement of large denomination bills. C. Keep track of cash found subsequent to an arrest for crime or terrorism. D. All of the above.

D. It is easier to make large purchases with cash than with checks or credit cards. D. All of the above.

Until​ 1933, the United States was on the gold standard and people could receive gold in exchange for their paper currency. Although no one today can exchange paper currency for​ gold, the Federal Reserve still stores more than 500,000 gold bars in the basement of the New York Federal Reserve building in Manhattan. Which measure of the money supply would include these gold​ bars? A. M2. B. M1. C. M1 and M2. D. Neither M1 nor M2.

D. Neither M1 nor M2.

In the loanable funds​ model, why is the demand curve downward​ sloping? Why is the supply curve upward​ sloping? A. The demand curve is downward sloping because the higher the interest​ rate, the less the demand for borrowing. The supply curve is upward sloping because the higher the interest​ rate, the less willing suppliers of loanable funds will be to lend money. B. The demand curve is downward sloping because the higher the bond​ price, the less the demand for borrowing. The supply curve is upward sloping because the higher the loan​ price, the more willing suppliers of loanable funds will be to lend money. C. The demand curve is downward sloping because the lower the interest​ rate, the less the demand for borrowing. The supply curve is upward sloping because the higher the interest​ rate, the more willing suppliers of loanable funds will be to lend money. D. The demand curve is downward sloping because the higher the interest​ rate, the less the demand for borrowing. The supply curve is upward sloping because the higher the interest​ rate, the more willing suppliers of loanable funds will be to lend money.

D. The demand curve is downward sloping because the higher the interest​ rate, the less the demand for borrowing. The supply curve is upward sloping because the higher the interest​ rate, the more willing suppliers of loanable funds will be to lend money.

How will the bond market adjust to an increase in the expected inflation​ rate? A. The nominal interest will remain unchanged because nominal interest rate rises or falls​ point-for-point with changes in the real interest rate. B. The nominal interest rate will rise​ half-point for each point change in the expected inflation rate. C. The nominal interest rate will fall​ point-for-point with changes in the expected inflation rate. D. The nominal interest rate will rise​ point-for-point with increase in the expected inflation rate. Use a demand and supply graph for bonds to illustrate your answer. Using the line drawing​ tool, draw the new demand curve and supply curve. Properly label your curves. Carefully follow the instructions​ above, and only draw the required objects.

D. The nominal interest rate will rise​ point-for-point with increase in the expected inflation rate.

An article in the Wall Street Journal in 2020​ noted, "U.S. government bond prices rose Tuesday after data showed the pace of inflation​ slowed." Briefly explain why the prices on bonds rise if investors expect inflation to be lower. A. The yields on bonds will fall because investors demand fewer bonds at the current interest rates. B. The yields on bonds will rise because investors demand fewer bonds at the current interest rates. C. The yields on bonds will rise because investors require a higher rate of return on the bonds they are purchasing. D. The yields on bonds will fall because investors are willing to accept a lower nominal interest rate on the bonds they are purchasing.

D. The yields on bonds will fall because investors are willing to accept a lower nominal interest rate on the bonds they are purchasing.

If you ask someone who​ hasn't taken a course in economics to define the money​ supply, he or she is likely to say something​ like, "The money supply equals the total amount of paper currency and coins in circulation." Why does the Fed include more than just currency in​ M1, its narrow definition of the money​ supply? A. To quantify all the assets that could be converted into currency. B. To broaden the definition of the money supply to include accounts that many households treat as​ short-term investments. C. To eliminate the distinction between cash and time deposits. D. To more accurately measure the amount of money available as a medium of exchange.

D. To more accurately measure the amount of money available as a medium of exchange.

An article in the Economist magazine discusses​ Affirm, a fintech firm based in San Francisco that makes loans to individuals for specific​ purchases, such as buying a laptop or an engagement ring. Affirm usually charges no interest on its loans and earns revenue from payments made by sellers of the goods being purchased. According to the​ article, Affirm's​ "sophisticated credit evaluation uses big data and proprietary models to evaluate how much debt an applicant can​ bear" and is​ "a particular hit with younger​ customers." Banks lend Affirm most of the funds it loans out. Based on this​ information, Affirm​ ________ considered a financial intermediary because it is​ ________. A. should not​ be; not a commercial bank B. should not​ be; not taking in deposits itself to fund its lending program C. should​ be; charging an interest rate lower than the interest rate charged on credit cards D. should​ be; connecting borrowers with available external funds Why would banks lend money to Affirm and other similar fintech firms rather than directly to​ borrowers? A. They are able to charge fintech companies a much higher interest rate than they could charge an individual borrower. B. Loans to fintech companies are insured by the government since they provide an essential service to the economy. C. Banks never make loans to individuals directly and rely on fintech companies to fill this role. D. The risk of not receiving repayment is lower with a fintech company than with individual borrowers who may not meet the​ bank's lending requirements.

D. should​ be; connecting borrowers with available external funds D. The risk of not receiving repayment is lower with a fintech company than with individual borrowers who may not meet the​ bank's lending requirements.

___________ finance is a transaction between two parties where one party lends directly to the other​ party

Direct

__________ finance involves three​ parties: the​ borrower, the​ lender, and a third party—such as a bank.

Indirect

During the 2007−2009 ​recession, many people who had taken out mortgages to buy homes found that they were having trouble making the payments on their mortgage. Because housing prices were​ falling, many found that the amount they owed on their mortgage was greater than the price of their home. Significant numbers of people defaulted on their mortgages. The following appeared in an article discussing this issue in the Economist​ magazine: Since foreclosures are costly for lenders as well as painful for​ borrowers, both sides could be better off by renegotiating a mortgage. The​ sticking-point, according to conventional​ wisdom, is securitization. When mortgages are sliced into numerous pieces it is far harder to get lenders to agree on changing their terms. Part 2 When a mortgage is​ renegotiated, lenders ______ and borrowers ______. Part 3 How does securitization result in mortgages being​ "sliced into numerous​ pieces"? A. Because the loans have been bundled and then sold to the federal government. B. Because the loans have been bundled with other loans and resold to other investors. C. Because the loans have been separated into smaller loans to offer the home buyer smaller monthly payments. D. Because the loans have been separated into several smaller loans with lower and higher interest rates. Part 4 Why would securitization make renegotiating a loan more​ difficult? A. The cost of information gathering for each investor holding the security may be prohibitively costly. B. The closing costs for several smaller loans may be prohibitively costly to the home buyer. C. Each investor holding the security may not agree to the terms of the renegotiation. D. The cost of negotiation with every investor holding the security may be prohibitively costly.

Part 2 win;win B. Because the loans have been bundled with other loans and resold to other investors. D. The cost of negotiation with every investor holding the security may be prohibitively costly.

In the market for loanable funds depicted by the figure to the​ right, the supply of loanable funds is determined by gross saving in the economy. Gross saving in the economy is composed of gross private saving and gross government saving. This latter magnitude reflects the condition of the​ government's __________ Click the following link to view Saving and Investment data from FREDopens in a new tab​.* Then use that data to answer the following questions. LOADING... Part 4 For this exercise you will need to enter data from FRED for gross government saving ​(Series ​ID: GGSAVE​). Part 5 Using data from​ FRED, enter the values for gross government saving for first quarter of 2022 and 2023 ​(shown as 2022−01−01 and 2023−01−01 in​ FRED). ​(Enter your responses exactly as they appear in FRED.​) ​Quarter/Year Gross Government Saving​ (bils.) First​/2022 ___________ First​/2023 _______________ Based on the data recorded​ above, it can be seen that the government budget in the first quarter of 2023 was ____________. ​Furthermore, compared to the first quarter of 2022​, the saving effort by government has _____________. Using the figure to the​ right, this latter observation​ indicates, on the assumption of constant gross private​ saving, that the level of investment in the economy will be __________

budget -170.457 -1079.973 in deficit decreased decreased

During​ 1992, the inflation rate in the United States was​ 3.0%, and the money supply as measured by M1 increased by​ 12.4%. Can you say with certainty whether these data are consistent with the quantity theory of​ money? Part 2 You ______ say for sure since you _______________

cannot do not know the percentage change in real GDP or velocity

A ____________ is a debt instrument in which the borrower repays the amount of the loan in a single payment at maturity but receives less than the face value of the bond initially. A ____________ is a debt instrument that requires the borrower to make regular periodic payments of principal and interest to the lender. A _________ is a debt instrument in which the borrower receives from the lender an amount called the principal and agrees to repay the lender the principal plus interest on a specific date when the loan matures. A ___________ is a debt instrument that requires multiple payments of interest on a regular​ basis, such as semiannually or​ annually, and a payment of the face value at maturity. A ___________ pays interest before the instrument matures. A _____________ pays back principal before the instrument matures.

discount bond fixed-payment loan simple loan coupon bond coupon bond fixed-payment loan

Briefly define the three theories of the term structure. The _________ states that interest rates on​ long-term bonds are an average of the interest rates investors expect on​ short-term bonds over the lifetime of the​ long-term bond. The __________ holds that the interest rate on a bond of a particular maturity is determined only by the demand and supply of bonds of that maturity. The _________ holds that interest rates on​ long-term bonds are averages of the expected interest rates on​ short-term bonds plus a term premium.

expectations theory segmented markets theory liquidity premium theory

___________ is a borrower with a flawed credit history

subprime borrower

In February​ 2020, President Trump sent to Congress a budget proposal for federal spending and taxes. The budget proposal assumed that the growth of the U.S. economy would be faster than many economists were forecasting.​ (In fact, the economy was about to enter a recession caused by the​ Covid-19 pandemic.) If the Trump​ administration's forecasts of​ faster-than-expected economic growth had turned out to be​ correct, illustrate the effect on the market for corporate bonds in the United States. Part 2 ​1.) Using the line drawing​ tool, depict the impact on the supply of corporate bonds if the forecast of​ faster-than-expected economic growth turned out to be correct. Label this line as ​'S2​'. ​2.) Using the line drawing​ tool, depict the impact on the demand for corporate bonds if the forecast of​ faster-than-expected economic growth turned out to be correct. Label this line as ​'D2​'. ​3.) Using the point drawing​ tool, identify the new equilibrium in the bond market. Label this point as ​'E2​'. Part 3 Carefully follow the instructions above and only draw the required objects. Briefly explain why you shifted the curves the way that you did. The supply curve for bonds shifted as a result of an______________ The demand curve for bonds shifted as a result of an _____________

increase in expected profitability for businesses increase in household wealth.

During 2018​, the money supply as measured by M1 increased by 4.5​%, the value of velocity increased by 1.1​%, and the inflation rate was 2.4​%. What must have happened to the value of real GDP during 2018​? The value of real GDP during 2018 __________ by _________​%. ​(provide your answer to 1 decimal​ place)

increased;3.2 4.5% + 1.1% - 2.4%

Between 2012 and​ 2020, the annual inflation rate in the United States was less than​ 3% every year. Some economists and policymakers were afraid that during a future​ recession, the United States might experience​ deflation, or a decline in the price level. Suppose that after a recession​ begins, the federal​ government's budget deficit increases at the same time that the U.S. economy experiences deflation. Use a graph of the market for U.S. Treasury bonds to show the effect of these developments on the equilibrium price of Treasury bonds. Part 2 ​1.) Using the line drawing​ tool, depict the impact on the supply of U.S. Treasury bonds. Label this line as ​'S2​'. ​2.) Using the line drawing​ tool, depict the impact on the demand for U.S. Treasury bonds. Label this line as ​'D2​'. ​3.) Using the point drawing​ tool, identify the new equilibrium in the bond market. Label this point as ​'E2​'. Part 3 Carefully follow the instructions above and only draw the required objects. The graph indicates that the net effect is that the quantity of Treasury bonds transacted ___________ while the price___________

increases may increase or decrease depending on the relative size of the shifts.

The term structure of interest rates is the relationship among the __________ on bonds that are otherwise similar but differ in ________. The most common way to analyze the term structure is by using a _______ known as the _________

interest rates;maturity graph; treasury yield curve

________ is the risk that is common to all assets of a certain​ type, while __________ is the risk that pertains to a particular asset rather than to the market as a whole. How does diversification reduce the risk of a financial​ portfolio? A. By allocating savings among many different​ assets, if one asset class performs​ poorly, the rest of the portfolio may perform well. B. By allocating savings to only one asset​ class, if the asset performs​ well, the benefit from the investment will be huge. C. By accurately calculating the expected return of an​ asset, investors will be guaranteed a strong return. D. By determining if an asset produces market risk or idiosyncratic​ risk, an investor can then determine how well the asset will perform.

market risk;idiosyncratic risk A. By allocating savings among many different​ assets, if one asset class performs​ poorly, the rest of the portfolio may perform well.

Peter Sanders of the Kennedy School at Harvard University has argued that​ "the invention of physical money . . . was a huge​ breakthrough, a massive step forward in facilitating . . . economic​ activity." Do you​ agree? Part 2 Using physical money instead of bartering results in _____________ standardization of prices and a _____________ in transaction costs. Taken together the use of money leads to __________ economic activity.

more a decrease an advancement in

According to an article in the Wall Street​ Journal, "Investors are skeptical of some of the​ [bond] ratings. More than​ $100 billion worth of bonds trade with yields like junk despite their​ triple-B-minus ratings." What is a junk​ bond? The term​ "junk bond" refers to a bond ______________. From an​ investor's point of​ view, the difference between buying a bond with a​ BBB- rating and a junk bond is that junk bonds have greater____________ and therefore __________ yields. The graph shows the supply and demand for junk​ bonds, assuming that investors believe the rating​ agencies' rating, resulting in an equilibrium at point E1. How would the market for junk bonds change if investors became skeptical of the ratings and believed the bonds were rated too​ highly? ​1.) Using the line drawing​ tool, depict the impact on the supply or demand for junk bonds if investors believe they are rated too highly. Label your new line appropriately. ​2.) Using the point drawing​ tool, identify the new equilibrium in this bond market. Label this point as ​'E2​'. Carefully follow the instructions above and only draw the required objects. According to the​ graph, when investors become skeptical of bond ratings and believe they are rated too highly it causes their ___________. Is the situation described in this article due just to a difference of opinion between rating agencies and investors about the creditworthiness of the firms issuing these​ bonds? Might there be another reason the rating agencies have come to different conclusions about these​ bonds? A. Credit rating agencies are paid by the firms whose bonds they are rating. This can lead to inflated ratings to attract customers. B. Credit rating agencies are part of the federal government and investors believe the government overestimates creditworthiness. C. Credit rating agencies are not paid for their ratings so investors do not trust their ratings on smaller firms to be accurate. D. Credit rating agencies base their rating on a​ bond's interest rate risk while investors focus on default risk

with a non-investment grade rating default risk;higher price to drop and their yield to rise A. Credit rating agencies are paid by the firms whose bonds they are rating. This can lead to inflated ratings to attract customers.