ECON 485 Midterm

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One of the things that made the Savings & Loans eager to lend money for home mortgages was the existence of the

Federal Housing Administration

In a 2003 analysis of the Federal Reserve's role in the stock market collapse in October of 1929, Allan Meltzer concluded that the

Federal Reserve followed the wrong policy doctrine and thus contributed to the onset of the Great Depression

__________, __________, and __________ are part of the "shadow banking industry."

Finance companies; mutual funds; private equity partnerships

The term monetary aggregates refers to things like

M1 and M2

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

Maud has a higher rate of time preference than Harold

Throughout time, many commodities have performed the function of money. Which of the following would NOT be a likely commodity to serve as money?

Milk

The graph in Figure 4-1 shows the supply and demand for bonds for Charter Corp. (Sc and Dc) and US Treasury Securities (Sus and Dus).​ The default risk premium paid by Charter Corp. in this market is represented by

PusPc

At the conclusion of World War II, an explosion in the home mortgage market was led by depository institutions known as

Savings & Loans

Harper just got a big raise at work, which pushed her from the 15% federal marginal tax bracket to the 25% marginal tax bracket. Which of the following best describes how this might affect her decision to buy municipal bonds?

This will make her more likely to buy municipal bonds because it will increase the difference between the nominal interest rate paid on the bonds and the after-tax interest rate she will receive relative to corporate bonds.

Assets are things that are useful or things that have value.​ T/F

True

The expansion of the "junk bond"​ market in the 1980s was one factor that allowed for the rapid increase in the number of leveraged buyouts. T/F

True

When resource markets are efficient, recessionary gaps close by themselves without any government intervention.​ T/F

True

​One of the tools the US government ​used to control inflation during World War II was wage and price controls. T/F

True

Following World War II, inflation became so bad that Germans stopped using Reichsmarks for transactions, and instead used cigarettes for small transactions and cognac (a type of brandy) for large transactions. Which of the following best describes this situation?

cigarettes and cognac functioned as money in Germany in this period following World War II

Today, in the United States, several assets function as money. Which of the following would NOT be considered money?

credit cards

When stagflation began to appear in the US economy in the late 1960s, economists and policymakers were perplexed because they had never seen __________ and __________ at the same time.

high inflation rates; high unemployment rates

​A person who believes the pure expectations theory of interest rates would explain a steeply upward-sloping yield curve is suggesting that

higher inflation is in the future, or more rapid economic growth is on the horizon

​If the market for loanable funds is currently in equilibrium, a(n) __________ will cause an increase in the interest rate.

increase in business confidence

In the country of Trivia, it is widely believed that the marginal propensity to consume is 0.75. This means that a onetime increase in spending of $50 billion will result in a(n) __________ in GDP equal to __________.

increase; $200 billion

A decrease in aggregate demand would be caused by a(n) __________ in __________.

increase; imports

As the federal marginal tax rate rises, the advantage of municipal bonds over corporate bonds

increases

The relationship between the economy-wide price level and the level of real GDP illustrated by the aggregate demand curve is

indirect

A major concern of US policymakers as a result of the dramatic increase in ​wartime spending was

inflation

When there is too much money chasing too few goods, the likely impact is

inflation

One of the most important prices determined in financial markets is the __________ rate.

interest

​Financial assets include which of the following?

money, bonds, and stocks

Commercial banks face competition from a variety of institutions, including

mutual funds, investment banks, and insurance companies

A 10-year, $10,000 bond with a coupon rate of 5% is a promise by the issuer of the bond to

pay the bondholder $500 every year for 10 years and also a $10,000 payment in 10 years

A bond's maturity refers to the

period of time when the issuer of the bond makes repayment of the bond's principal

Nominal interest rates are made up of

real interest rates plus inflation

Shareen buys a 30-year, $10,000 US Treasury bond with a coupon rate of 5%. After two years she needs some cash so she decides to sell her bond. ​Shareen will sell her bond in the __________ market.

secondary bond

Jenny has had a portion of stock in an e-commerce company for some time. She is ready to resell her stock. On what market would she do this?

secondary market

Institutions that compete with commercial banks because they perform some but not all of the functions of commercial banks are said to be part of the __________ banking industry.

shadow

Some of the most important central banks in the world include

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

The three reasons that the economy-wide price level and the level of real GDP move in opposite directions are

the Pigou effect, Keynes's interest rate effect, and the foreign trade effect

Financial deregulation in the 1980s ultimately led to

the Savings & Loan crisis and the end of the Savings & Loan industry

A major advantage that municipal bonds have over corporate bonds for investors is that

the income earned on municipal bonds is not subject to federal income tax

Consider the graph in Figure 3-2. Which of the following is considered a decrease in the quantity demanded?​

the movement of A to C

​The quantity of loanable funds supplied is directly related to interest rates because as interest rates increase

the opportunity cost of household consumption increases, causing households to bring more of their after-tax income to the pool of loanable funds

​The aggregate demand, three-part aggregate supply model has performed relatively well in all but which of the following situations?

understanding the stagflation of the late 1960s and early 1970s

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

upward-sloping

The rational expectations approach postulates two aggregate supply curves:

​an upward-sloping short-run aggregate supply curve and a vertical long-run supply curve at the full-employment level of GDP

Inflation is a benefit to

borrowers

Financial markets bring together __________ and __________.

borrowers; lenders

Money that has no intrinsic value is known as

fiat money

It is found that when the disposable income of Elvania increases by $100 billion, ​household consumption spending increases by $70 billion. In Elvania, the marginal propensity to consume is

0.7

Emily is in the 10% marginal income tax bracket and earned a 4.5% return on the corporate bonds that just matured. The nominal interest rate paid on these bonds was

5%

Consider the graph in Figure 3-1. An increase in the quantity supplied ​is best illustrated by a movement from

A to B

Which of the following is included in the M1 definition of the money supply?​

Demand deposits and other checkable deposits

In the early 1980s, Paul Volcker used an easy monetary ​policy to bring inflation under control. T/F

False

Rational expectations refers to the idea that people are adaptive in nature, and once something happens they will adapt to it.​ T/F

False

The Panic of 1907 was essentially ended by one person, John D. Rockefeller.​ T/F

False

The higher a person's rate of time preference, the lower the interest rate needed to get them to defer their consumption to the future.​ T/F

False

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

False

Dollarization occurs when

a country officially adopts another country's currency as their legal tender

​A decrease in the demand for loanable funds would be caused by

a decrease in expectations about future inflation

One of the most important functions of the US Federal Reserve is to serve as

a lender of last resort

Consider Figure 6-1. Which of the following will cause a shift in aggregate demand from AD2 to AD1?

an increase in interest rates

Money is generally thought of as ​

anything generally accepted in exchange for goods or services

When a newly issued bond sells above its face value, it is said to sell

at a premium

If the market interest rate is the same as the coupon rate on a newly issued bond, then the bond will sell

at par

​The risk that a bond issuer will not be able to live up to the promise they make when they issue a bond is known as __________ risk.

default

An inverted yield curve likely means the

economy is headed for recession


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