macroecon midterm 2
which of the following would be a violation of the rational expectations assumption?
"Over the past twenty years, people have consistently under-predicted the inflation rate for the following year."
With a nominal interest rate of 10% per year, the presented discounted value of $200 to be received in two years is
$165.29
with a nominal interest rate of 10%, the present discounted value of $200 to be received in one year is
$200/(1 + 0.10) = $181.82
a share of stock will pay a dividend of $25 in on year and will be sold for an expected price of $500 at a time. if the current one-year interest rate is 5%, the current price of the stock will be approximately equal to
$500
With a nominal interest rate of 5% per year, the present discounted value of $100 to be received in 10 years is
$61.39
assume the interest rate in a foreign country is 7% and that the foreign currency is expected to depreciate by 3% during the year. for each dollar that a U.S. resident invests in foreign bonds, he/she can expect to get back an approximate total of
(0.07-0.03) + 1 = $1.04
suppose the current one year interest rate is 4% and financial markets expect the one-year interest rate next year to be 8%. given this information, the yield to maturity on a two year bond will be approximately
(8 + 4)/2 = 6
which a constant nominal interest rate equal to i, the present discounted value of $1 to be received four years from today is
1/(1+i)^4
in which of the following periods was the relationship between the U.S. unemployment rate and the U.S. inflation rate unstable?
1931-1939
suppose the current 1 year interest rate is 3%. also suppose the financial markets expect the one year interest rate to be 2% and expect the rate to be 1% the year after that. given this information, the yield to maturity on a three year bond will be approximately
2%
If the nominal interest rate is 8% and the expected inflation is 3%, the expected real interest rate in year t is approximately
8 - 3 = 5%
a bond has a face value of $1000 a price of $1200 and coupon payments of $100 for two years. the current yield of this bond is
8.33%
Suppose there is a reduction in expected future output. This will cause which of the following to occur?
IS curve shift left in the current period
Suppose individuals now believe that there will be a future tax cut. This reduction in expected future taxes will cause which of the following to occur in the current period?
IS curve shifts right
When x (risk premium) decreases
IS curve shifts to the right
When the IS curve is drawn with the nominal interest rate on the vertical axis , a reduction on the vertical axis, a reduction in the expected inflation rate will cause
IS curve to shift left
An increase in the rate of depreciation will cause the discounted present value of expected profits to
decrease
The risk that interest payments will not be made, or that the face value of a bond is not repaid when a bond matures is
default risk
Suppose output is growing at 4% and the nominal money stock is growing at 0%. Also assume that the economy has reached its medium and runs equilibrium. Given this information, we know with certainty that
deflation occurs
which of the following is true when a country is experiencing a trade surplus (NX>0)
demand for domestic goods is greater than the domestic demand for goods
if the exchange rate between the dollar and the pound (pount price of the dollar) is currently 1.50 and is expected to be 1.35 in one year, then the expected rate of
depreciation of the dollar is 10%
The policy rate is
determined by monetary policy
assume individuals consider only the medium run effects of changes in future macro variables when forming expectations of future output and future interest rates. suppose current taxes are cut AND that individuals expect all future taxes to decrease permanently. given this info, we know with certainty that
expected future interest rate will increase
Which of the following assumptions best characterized the assumption about how individuals formed expectations of inflation by the early 1970s?
expected inflation for the current year was approximately equal to the previous year's inflation rate
Under which of the following assumptions would the nominal interest rate be equal to the real interest rate?
expected inflation is equal to zero
when inflation is NOT persistent, as was the case in the US before the mid 60s, we can expect that
expected price level for a given year will equal the previous years actual price level, current inflation rate wont depend heavily on past years inflation rates, lower unemployment rates
suppose there is an increase in profitability. this suggests that
firms have increased their expectations of future profits
human wealth is a function of which of the following variables
future expected income, future expected taxes, current interest rates
If the expected inflation rate is negative, the expected real interest rate must be
greater than the nominal interest rate
if the expected inflation rate is negative, the expected real interest rate must be
greater than the nominal interest rate
Suppose the central bank engages in CONTRACTIONARY monetary policy that results in lower money growth. This lower money growth will cause which of the following in the short run?
higher real interest rates and higher nominal interest rates
The "depreciation rate" tells us
how much usefulness a machine loses from year to year
changes in future expected interest rates can affect current consumption. suppose individuals expect future interest rates to decrease. consumption will change as a result of this lower expected future interest rate because of its effect on what
human wealth, value of stocks, value of bonds
during the Great Depression, the Fed
implemented contractionary monetary policy
suppose an individual experiences a $20,000 increase in real income and the individual believes this increase in income is permanent. Economic theory suggests that this individual's current consumption will
increase at most by $20,000
the quantity of imports will increase when there is an
increase in domestic output
Suppose the central bank reduces the money supply. This monetary contraction will always cause a greater reduction in output when it is accompanied by
increase in expected future interest rates, increase in expected future taxes, reduction in expected future output
Which of the following will cause aggregate private spending to decrease?
increase in expected future taxes
suppose that the nominal interest rate and expected inflation both decrease by 2%. Given this information, we should expect which of the following to occur
increase in money demand
Suppose there is an INCREASE in GOVERNMENT SPENDING. Such a fiscal policy action will cause
increase in nominal interest rate in the short run
in the IS-LM model, an increase in expected inflation will cause which of the following?
increase in output, increase in nominal interest rate, and a reduction in the real interest rate ALL OF THE ABOVE
The Fisher effect summarizes the effects of
inflation on the nominal interest rate in the medium run
Suppose individuals now believe that there will be an increase in the future expected interest rate. This increase in the expected future interest rate will cause which of the following to occur in the current period?
leftward shift of the IS curve
Suppose the federal reserve pursues CONTRACTIONARY monetary policy resulting in a reduction in money growth. This reduction in money growth will result in which of the following?
lower nominal interest rates in the medium run, and no change in real interest rates in the medium run
Suppose the central bank engages in EXPANSIONARY monetary policy that results in higher money growth will cause which of the following in the short run?
lower real interest rates and lower nominal interest rates
Suppose households INCREASE consumption. This increase in consumption will cause which of the following to occur?
natural real interest rates to increase
suppose that facebook reports increases in quarterly revenue and profits by 10% compared to last year's same quarter. this increase is in line with the forecasts of market participants. which of the following is more likely to happen to the FB stock market valuation.
no change (since they anticipated it)
Suppose the central bank pursues expansionary monetary policy. Such an action will cause
no effect on the natural interest rate
Suppose the central bank pursues contractionary monetary policy. Such an action will cause
no effect on the natural real interest rate
suppose the Fed increases the money supply in the current period with no other policy change implemented or anticipated. This policy action will cause which of the following shifts in the IS and/or LM curves in the current period?
no shift in IS; LM shifts down
For this question, assume that expected inflation is zero. In this situation, we know that
nominal and real interest rates are equal
What is the type of interest rate typically reported in the financial pages of newspapers?
nominal interest rate
real interest rate equation
nominal interest rate - inflation rate
Whenever the expected inflation rate is positive
none of the above
an increase in the nominal interest rate, all else held constant, will always cause which of the following
none of the above
if current sales increase by $100 million and firms are forward looking, we know for sure that current investment must
none of the above
which of the following statements about consumption and investment are true
none of the above
Consumption is most likely to respond one-for-one with changes in current income when
none of the above (will respond when consumer believes change in current income is permanent)
human wealth is
present discounted value of expected future after-tax labor income
Which of the following situations generally exists when deflation occurs?
price level is decreasing
which of the following best defines the real exchange rate
price of domestic goods in terms of foreign goods
Since the end of 2008, the Federal Reserve has adopted an unconventional monetary tool called
quantitative easing
For this questions, assume that expected inflation is equal to the nominal interest rate. In this situation, which of the following is correct?
real interest rate is zero
which of the following will cause an increase in the present value of a sequence of payments
reduction in current interest rate, reduction in expected future interest rates, increase in future expected payment
Suppose that the nominal interest rate and expected inflation both increase by 2%. Given this information, we would expect which of the following to occur?
reduction in money demand
which of the following, all else fixed, will cause the real exchange rate to increase
reduction in the foreign price level
which of the following does not represent a labor market rigidity to which critics refer when talking about unemployment in europe
restrictive monetary and fiscal policies
an upward-sloping yield curve suggests that financial market participants expect short-term interest rates will
rise in the future
suppose individuals expect that interest rates will increase in the future. Also assume that the Fed wants to prevent any change in current output. Given this goal of the Fed, the Fed should implement a policy in the current period that
shifts the LM curve downward
suppose the central bank implements a monetary contraction that is fully expected by financial market participants. Given this information, we would expect
stock prices to remain unchanged
The data shows that total profit in the U.S. economy
tends to decrease in recessions, increase in expansions
suppose individuals now believe that there will be a future tax cut. this reduction in expected future taxes will cause which of the following to occur in the current period?
the IS curve to shift rightward (reduction in taxes)
which of the following best describes real interest rate?
the amount of goods we must give up in order to consume more goods today
suppose there is a decrease in the current short-term interest rate. which of the following is more likely to happen?
the long term interest rate will decrease but by less than the short term rate
When individuals make decisions about how much money and bonds to hold, which of the following variables affects those decisions?
the nominal interest rate only
Suppose the economy is initially operating at the natural level of output. Now, suppose the central bank reduces the rate of nominal money growth by 2%. Given this information , we would expect that
the nominal interest rate will fall by exactly 2% in the medium run
suppose the economy is initially operating at the natural level of output. now suppose the central bank permanently increases the rate of nominal money growth by 2%. given this info, we would expect that
the nominal interest rate will increase by exactly 2% in the medium run
The present discounted value of a future payment becomes smaller when
the payment itself decreases
the fundamental value of share of a stock is equal to which of the following
the present value of expected dividends
For this question, assume that the expected rate of inflation is a function of past year's inflation. Also assume that the unemployment rate has greater than the natural rate of unemployment for a number of years. Given this information, we know that
the rate of inflation should steadily decrease.
suppose that over the past decade, US inflation is less than that of Mexico. Further assume that during this same period, the dollar depreciates relative to the Mexican peso. Given this information
the real exchange rate must decrease
Which of the following will cause the rental cost/user cost of capital to decrease?
the real interest rate increases
Suppose the nominal interest rate is zero, In this situation, the present discounted value of finite sequence of future payments is equal to which of the following?
the sum of all payments
suppose policy makers implement a fiscal expansion that is NOT anticipated by financial market participants. we know that this will
will cause stock prices to rise if the LM curve is flat
Suppose that the nominal interest rate increases while the expected inflation rate rises. Given this information, we know with certainty that the real interest rate will
will fall if the increase in the nominal interest rate is less than the increase in the expected inflation rate
from the perspective of the US, an increase in the nominal exchange rate will cause which of the following?
American goods are more expensive to foreigners
In the IS-LM model, an increase in expected inflation will cause which of the following?
Increase in output, nominal interest rate, and a reduction in the real interest rate
Which of the following bonds are considered to be default-risk free?
US treasury bonds
which of the following conditions must be satisfied for the demand for domestic goods to be equal to the domestic demand for goods?
X = IM/e (net exports have to equal 0)
suppose financial market participants expect short term rates in the future to be less than current short term interest rates. given this information, we would expect that
a downward sloping yield curve
which of the following people-none of whom has any financial or housing wealth-is most likely to be spending all of their current income?
a low income person expecting a dramatic rise in income in the future
lower money growth tends to cause
a reduction in i in the medium run and no change in r in the medium run
an unexpected reduction in the money supply will tend to cause
a reduction in stock prices
suppose individuals expect the central bank to pursue monetary expansion in the future. given this info we know that
current output will not change
for this question, ignore tax considerations of each of the following. Assume that consumption decisions are made according to the permanent income theory. Which of the following would lead to the smallest increase in current consumption?
all of the above because they are all one time things
suppose policy makers over estimate the natural rate of unemployment. then they will likely implement policies that result in
an ever decreasing inflation rate
which of the following will NOT cause aggregate private spending to increase?
an increase in expected future real interest rates (shifts the IS curve left)
the IS curve becomes steeper when
changes in the current real interest rate cause small changes in current demand
the "life cycle" and "permanent income theories" theories of consumption share which of the following features?
consumers look ahead to the future in making current spending decisions
Which of the following long-term bonds has the highest interest rate?
corporate Baa bonds
