Finance 320 Exam 2

C + I + G + (X-M)

aggregate demand is equal to

have a bettr sense of future profitability

an example of asymmetric information in financial market is that, in equity markets, directors _________________ than shareholders

False

an increase in the price of bonds will cause a decrease in the demand for bonds

2%

Armand buys a 10-year, $10,000 bond that pays him $500 every year for 10 years and repays the face value in year 10. During the 10-year period, the rate of inflation holds steady at 3% per year. The real rate of return on Armand's investment is

the principal-agent problem

Cleo is hired as the CEO of Wolfstarter Company, a publicly owned corporation. After she is hired, she authorizes the purchase of a company limousine to chauffeur her around town, purchases a skybox at the stadium of the local NFL team, and provides herself with a company-paid membership at the local country club. This behavior could be an example of

True

Deductibles are one way insurance companies protect themselves from careless drivers True or False

compensating balance as a way to mitigate the problem of moral hazard

Holly goes to her bank to take out a loan, and the bank agrees to the loan on the condition that Holly maintain a balance of $1,000 in her savings account with the bank. This is an example of a bank using a

a deductible to try to mitigate the problem of moral hazard

In Vance's homeowner's insurance policy, it states that he is required to pay out-of-pocket the first $5,000 for any homeowner's insurance claim that he submits before the insurance company will reimburse for any loss. This is an example of using

government spending of some kind

Keynes suggested that what kind of spending would be necessary to move the economy out of the Depression?

horizontal; vertical

Originally, Keynes conceived of the aggregate supply curve as consisting of two distinct segments. In this conception, below the full-employment level of output the aggregate supply curve is _________, and once the economy reachees the full-employment level of output it becomes ___________

moral hazard

Petra has an automobile accident and finds that as a result her auto insurance premium will increase by 25%. This is an eexample of an adjustable premium that insurance companies often use as a mechanism to combat

inversely related

bond prices and interest rates are:

altering the real interest rate when inflation is changing quickly

changes in the federal funds rate influence the economy's growth rate through all of the following except by

borrowers

inflation is a benefit in the short run to:

a measure of the ease with which one asset can be converted into another asset, usually money

liquidity is the term that has which of these meanings?

is appointed by the US President, selected from the Board of Governors

the Chairman of the Board of Governors

three branches with overlapping responsibilities

the Fed is composed of:

the operations of the Fed, commerical bank regulation, and monetary policy

the board of governors of the Federal Reserve has three primary responsibilites, which are

adverse selection

the bond rating system, in which companies like Moody's and Standard & Poor's provide ratings for a company's default risk, is one way to deal with

a liquidity mismatch with savers desiring liquidity and borrowers desiring illiquid loans

the busniess of banking solves the problem of

banks charge each other for overnight loans on excess resrves held at the Fed

the federal funds rate is the interest rate

president of the United States

the governors of the federal reserve system are appointed by the

federal funds rate

the interest rate the FOMC currently choose to control is the

adverse selection

the loan application process that banks require potential borrowers to go through is an attempt to deal with

the chair of the Fed is appointed by the president of the United States and confirmed by the US Senate

the position of chair of the Federal Reserve is filled in what way?

decide on how to influence financial conditions

the primary purpose of meetings of the FOMC is to

inverse

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

adverse

the result of asymmetric information in a market is ___________ selection

US Treasury securities, federal agency debt, and privately issued mortgage-backed securities

the securities that the Federal Reserve hold on its balance sheet include

the Federal Deposit Insurance Corporation

the three bracnhes of the Federal Reserve System includes each of the following, expect which one?

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

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

the average price for used cars would go down and drive the better used cars out of the market

what would be expected in a market for used cars, assuming asymmetric information and buyers who have little way to determine good used cars from poor used cars?

to maintain the gold standard and be "lender of last resort" to commercial banks

when the Federal Reserve was created in 1913, what were its two primary purpose?

asymmetric

when the parties to a transaction have different levels of knowledge about each other and/or the nature and implications of the transaction, it is said that there exists _____________ information

the Secretary of the Treasury

which of the following is (are) not a permanent voting member on the FOMC?

demand deposits

which of the following qualifies as a liability to a bank

a consumer loan

which of the following would be considered an asset on a bank's balance sheet?

Securities

which of these catergories is the largest asset on the Federal Reserve's balance sheet - by far?

bond issuers have better insight about their future profitability than bond buyers

which of these describes an example of asymmetric information in the bond market

borrowers know more about their capacity to repay loans than lenders

which of these is an example of asymmetric information in banking?

the board of governors consists of six memebers plus the chair; the term length for members is fourteen years

which of these statements is appointed by the chair and serves a four-year term

banks plahy a key role in creating money, and they help with the problem of adverse selection

which of these statements is most true of the function of banks?

an increase in imports

which of these would cause a decrease in aggregate demand?

the chairman position has no formal qualifications; the four-year term is renewable

which of thesee is currently true for the chair of the Federal Reserve?

moral hazard

The principal of a school hires Daniel to teach eighth grade students. One goal the principal has is to prepare the students to do well on standardized tests, as he will be judged based on the results of those tests. Daniel prefers to teach in a more creative way, so the students learn a lot, but perform poorly on their standardized tests. This is an example of what problem?

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

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

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

The rational expectations approach postulates what two aggregate supply curves?

an increase in business confidence

Suppose the market for loanable funds is currently in equilibrium. Which of the following factors will cause an increase in the interest rate?

goes down, peples' savings are able to purchase more stuff so the total level of spending increase

The Pigou effect is one of the reasons that the aggregate demand curve slopes downward. According to this argument, when the price level :

the interviewer has asymmetric information as she knows less about Rachel than Rachel knows of herself

Rachel goes for a job interview and knows a lot about the job she is applying for. The woman who interviews her is filling in for another employee and knows very little about Rachel. We might say the woman conducting the interview is likely to have what kind of situation?

True

Several factors can cause the SRAS curve to shift; these factors include a change in the cost of inputs, a change in taxes, and even a change in seller expectations True or False

an increase; no increase

Using a two-part aggregate supply curve, an increase in aggregat demand when the economy is at less than full employment would be expected to lead to __________ in real GDP and __________ in the price level

Direct

What is the best description of the relationship between the price of bonds and the quantity of bonds supplied, all else equal?

True

When the actual level of output is less than the potential level of output, there is an output gap, sometimes called a reccesionary gap. True or False

Expansionary monetary policy being followed by the Federal Reserve

Which of the following could cause an increase in the supply of loanable funds?

A decrease in expectations about future inflation

Which of these could be a reason for a decrease in the demand for loanable funds?

lenders and working class people

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

it causes an increase in the interest rate, due to greater consumer demand for money to spend; business spending decrease

according to Keynes, when the price level rises, it causes the interest rate to do what? It causes the level of business spending to do what?