Macroeconomics Midterm 2
.Consider an economy where money supply grows by 2% annually, money velocity is stable, and output growsby 3% per year. What rate of inflation would you expect to see?(a)-1%(b) 1%(c) 2%(d) 5%
-1%
f the growth in the money supply is 3%, the growth rate of velocity is 2% and the growth rate of real GDPis 7%, then the inflation rate will be:(a) 1%(b) 2%(c)-2%(d) 6%
-2%
If money supply growth is 4 percent, spending growth is 5 percent and output growth is 5 percent, what isthe inflation rate and the velocity growth respectively?(a) 1 and 0 percent(b) -1 and 0 percent(c)0 and 1 percent(d) Not enough information
0 and 1 percent
Suppose a firm owns assets worth $20,000 and its equity is $4,000. How much debt does this firm have?(a) 24,000 dollars(b)16,000 dollars(c) -16,000 dollars(d) 20/4
16,000 dollars
What is the "no free lunch" principle?(a)Higher returns come at the price of higher risk(b) The riskier the asset is the lower return it has(c) Bonds is a safer type of investment than stocks(d) None of the above
Higher returns come at the price of higher risk
What is the no free lunch principle?(a) Everything is rivalrous(b) Higher returns come at the price of lower risk(c) Always invest in an index fund(d)Higher returns come at the price of higher risk
Higher returns come at the price of higher risk
Traditionally financial assets with higher returns are associated with?(a) Lower risk(b)Higher risk(c) Zero risk(d) There is no relationship between asset return and asset risk.
Higher risk
Which of the following does not affect the Solow growth curve (also know as the Long Run Aggregate SupplyCurve):(a) Aggregate stock of capital(b)Inflation(c) Level of technology(d) Level of human capital
Inflation
n a country where inflation is small and stable over time, which of the following is/are true?(a) Short-term borrowing become riskier(b)Long-term loans become safer because the nominal interest rates can be reasonably predicted(c) Businesses substitute long-term investment projects with short-term projects to get quick return(d) None of the above
Long-term loans become safer because the nominal interest rates can be reasonably predicted
Which of the following best describes the Fisher effect?(a) Nominal interest rates and realized inflation(b) Real interest rates and GDP growth(c) Real interest rates and realized inflation(d)Nominal interest rates and expected inflation
Nominal interest rates and expected inflation
n relation to stock and bonds which of the following statements which is correct: (a)Government bonds are always a perfectly safe investment. (b)on average, corporate bonds pay less than government bonds. (c)Stocks have typically higher earnings than government bonds and lower risk. (d)Stocks have typically higher earnings than government bonds but higher risk.
Stocks have typically higher earnings than government bonds but higher risk.
According to the quantity theory of money, what is the effect of doubling the money supply in the long run?(a) More goods can be produced using the extra money in the economy(b) The prices will decrease by half(c)The prices will double and nothing else will change(d) None of the above
The prices will double and nothing else will change
When the actual inflation rate is greater than the anticipated inflation rate, which of the following is mostlikely to suffer?(a)Those who lend at a fixed interest rate(b) Those who borrow at a fixed interest rate(c) Those who lend with flexible interest rates(d) Employers who hire workers with long-term labor contracts
Those who lend at a fixed interest rate
In the AD-AS model discussed in class, the aggregate supply curve is:(a) vertical in both the short run and in the long run(b) upward sloping in the long run, but vertical in the short run(c) upward sloping in both the short run and in the long run(d)upward sloping in the short run, but vertical in the long run
upward sloping in the short run, but vertical in the long run
f you get a 30 year mortgage today at a 5% annual interest rate, and inflation turns out to be 2% annuallyfor the whole period, what is the annual real interest rate on your loan?(a) 7%(b) 5%(c)3%(d) -3%
3%
Suppose you earn $10000 a month. You spend $7000 a month on food, clothes and housing. You keep therest in a savings account, in order to use it for retirement. What is your savings rate?(a) $3000(b) 70%(c) $7000(d)30%
30%
Calculate the leverage ratio given that assets are worth $500 million, and D is $400 million.(a) 5(b)4(c) 1(d) Not enough information
4
How can an efficient financial intermediation contribute to higher output level?(a) Supply funds to more profitable investments, thus increasing aggregate productivity(b) Allow implementation of profitable investments that require large amounts of capital(c) Increase the saving rate by sharing risk of individual projects between many savers(d)All of the above
All of the above
Which of the following statements is not true about the velocity of money?(a)Changes in the growth of the velocity of money tend to be permanent(b) The velocity of money measures how many times a dollar is spent in the economy(c) The velocity of money tends to increase when the economy is experiencing a boom(d) A large increase in government spending would affect the growth of the velocity of money
Changes in the growth of the velocity of money tend to be permanent
Suppose the inflation rate between 2015 and 2016 was 10% and the price of lattes at Starbucks increased from $3.00 to $3.50 over the same period. Are lattes(a)Cheaper in 2015(b) Cheaper in 2016(c) They cost the same in real terms(d) Not enough information
Cheaper in 2015
Consider a bond which pays $50 on January 1 each year until 2025 and $1000 on January 1, 2025. The$1000 amount is called:(a)Face value(b) Coupon payment(c) Maturity date(d) Interest rate
Face value
Suppose the demand for Treasury bonds decreases, perhaps due to the growth slow down in the U.S. next year. Also assume that the government does not issue any additional bonds. What happens to the interest rate?(a)Increase(b) Decrease(c) Remain the same(d) The effect is unclear
Increase
Which of the following is not a real shock in the context of the AD-AS model:(a)Increase in the money supply(b) Lower price of oil(c) A negative technology shock(d) Good weather
Increase in the money supply
The aggregate demand curve in the AD-AS model is a graphic representation of:(a)Quantity theory of money(b) Solow model(c) Central bank policy(d) Inflation expectations
Quantity theory of money
The average number of times that a dollar is spent in buying the total amount of final goods and services produced during a given time period is known as(a) Gross national product(b) Spending multiplier(c) Money multiplier(d)Velocity
Velocity
Which shocks tend to shift the AD curve temporarily?(a) Money supply shocks(b)Velocity shocks(c) Real shocks(d) All of the above
Velocity shocks
The long run neutrality of money is evident in which of the following components of the AS-AD model?(a)Vertical Solow growth curve(b) Downward sloping AD curve(c) Upward sloping SRAS(d) Stickiness of prices
Vertical Solow growth curve
Assuming the velocity of money and long run real GDP growth are relatively constant, what would we expect to happen when the money supply doubles?(a) We would expect a decrease in the CPI(b)We would expect the price level to double(c) We would expect 50% inflation(d) We would expect the price level to increase by 50%
We would expect the price level to double
Why would investment banks want a high leverage ratio?(a) To make them more illiquid(b) Protects them against financial shocks(c)With more access to funds the bigger profit they can make(d) None of the above
With more access to funds the bigger profit they can make
Insecure property rights typically lead to:(a) an increase in the supply of savings.(b)a decrease in the supply of savings.(c) an increase in the demand to borrow.(d) a decrease in the demand to borrow
a decrease in the supply of savings.
Which of the following will occur as a result of an improvement in technology?(a) aggregate demand curve will shift to the right(b) aggregate demand curve will shift to the left(c)aggregate supply curve will shift to the right(d) aggregate supply curve will shift to the left
aggregate supply curve will shift to the right
Suppose the equilibrium interest rate in Sweden is 2%. In 2014, inflation equaled 3%. If the realized real interest rate turned out to be 1%, what were the inflation expectations at the beginning of 2014?(a) 1%(b)2%(c) 3%(d) 6%
%
Suppose companies and investors become very optimistic about the future of the economy. What would bethe effect of this situation in the loanable funds market?(a) The demand curve will shift up (or to the right)(b) The quantity of funds in equilibrium will increase(c) The interest rate in equilibrium will increase(d)All of the above
All of the above
What can lead to the failure of financial intermediaries?(a) Bank runs and panics(b) Insecure property rights(c) Politicized lending(d)All of the above
All of the above
What is true about the Efficient Market Hypothesis?(a) It says that prices of traded goods reflect all publicly available information(b) Under the hypothesis, if you have information that no one else has, you have to act very quickly(c) Under the hypothesis, throwing darts at the stock pages will work as well as trying to figure out whichstocks will beat the market(d)All of the above
All of the above
What is/are the role(s) of stock markets?(a) Equity issuance is an important mean of raising capital for new investment(b) Stock market gives investors a better idea of how well publicly traded firms are run(c) Stock markets are a way to mobilize funds from savers to productive investment(d)All of the above
All of the above
Which of the following contributed to the Great Depression(a) A decrease in money supply(b) A decrease in spending and consumption growth(c) Trade wars(d)All of the above
All of the above
Which of the following may cause financial intermediation to fail?(a) Insecure property rights(b) Interest rate controls(c) Bank failures and panics(d)All of the above
All of the above
Which of the following would cause the long-run aggregate supply curve to shift?(a) A decrease in the expected inflation rate(b) An increase in the expected inflation rate(c)An increase in productivity(d) An autonomous increase in consumption spending
An increase in productivity
Suppose the reserve requirement is 10% and the Fed prints $100 to inject into the banking system. What is the change in money supply?(a) The effect is unclear(b) An increase of $1,000(c) A decrease of $100(d)An increase of $1,000
An increase of $1,000
Money is best defined as:(a) Anything that has a high nominal value(b)Anything that is a widely accepted means of payment(c) Only the amount we spend in a given period(d) The total amount of fixed assets we own
Anything that is a widely accepted means of payment
Which of the following is not a reason why the demand of loanable funds downward sloping?(a) At high interest rates, there are few investment opportunities that would guarantee a sufficient return to repay interest on capital(b) At lower interest rates agents want to borrow more(c)At lower interest rates agents are likely to save more(d) At high interest rates, the price of savings is high
At lower interest rates agents are likely to save more
If the price of a bond goes up, what happens to its associated interest rate?(a) Increases(b)Decreases(c) Nothing(d) Not enough information
Decreases
Which of the following assets would you classify as being most liquid?(a)Demand deposits(b) Small-time deposits(c) A home(d) Gold bullion
Demand deposits
Which of the following is a real shock?(a)Discovery and exploration of new oil deposits(b) Unexpected change in the growth rate of money supply(c) Change in inflation expectations(d) All of the above
Discovery and exploration of new oil deposits
How would a stock market crash be reflected in the AS-AD model?(a)Downward shift in the AD curve(b) Shift in the LRAS curve to the right(c) Shift in the LRAS curve to the left(d) Shift in the SRAS curve to the left
Downward shift in the AD curve
Which of the following is not a real shock:(a)Increase in the money supply(b) Lower price of oil(c) A sharp increase in taxes(d) Good weather
Increase in the money supply
In the long run an increase in money supply, everything else being constant, will:(a)Increase the average price level and output will not increase.(b) Increase output and reduce the average price level.(c) Reduce the average price level and output will not increase.(d) Increase the average price level and output will increase.
Increase the average price level and output will not increase.
In the context of the AS-AD model, if the Fed increases the money growth rate, what happens to the US inflation rate in the short- and in the long-run?(a)4Increases in the short run. Increases even more in the long run(b) Decreases in the short run. Decreases even more in the long run(c) Increases in the short run. The increase is reduced in the long run(d) Decreases in the short run. The decrease is reduced in the long run
Increases in the short run. Increases even more in the long run
Which of the following statements is not consistent with the life cycle theory of saving:(a) Individuals should borrow when young, save during their working years and dissave when old(b)Individuals should save all their income until retirement, then dissave(c) Individuals should borrow to finance their education if that will result in an overall higher lifetime income,net of educational expenses(d) Individuals should save and borrow to smooth consumption over their lifetime
Individuals should save all their income until retirement, then dissave
What are the long-run effects on inflation and real GDP growth from an increase in money supply growth rate .(a) Both Inflation and GDP growth rate increase(b)Inflation increases but GDP growth rate does not change(c) GDP growth rate increases but inflation does not change(d) Neither GDP growth rate nor inflation changes
Inflation increases but GDP growth rate does not change
If the US government decides to sell bonds, then which of the following describes the change in interest rateand in the quantity of loanable funds in the private sector of the economy?(a) Interest rate goes up, quantity of loanable funds goes up(b)Interest rate goes up, quantity of loanable funds goes down(c) Interest rate goes down, quantity of loanable funds goes down(d) Interest rate goes down, quantity of loanable funds goes up
Interest rate goes up, quantity of loanable funds goes down
How can a speculative bubble hurt the economy?(a)Misallocation of capital to non-valuable area of the economy(b) Bubble collapse causes labor moving from one sector to another, hence improving labor productivity(c) Bubble crash sows the seed to the next bubble in another asset(d) All of the above
Misallocation of capital to non-valuable area of the economy
.Money illusion is:(a) The average number of times a dollar is spent on final goods and Services in a year(b)Mistaking changes in nominal prices for changes in real prices(c) A decrease in the average level of prices(d) An increase in the average level of prices
Mistaking changes in nominal prices for changes in real prices
The Fed has direct control over which component of Money Supply?(a)Monetary Base(b) M1(c) M2(d) None of the above, in the long-run money is neutral so the Fed has no control whatsoever
Monetary Base
Mistaking changes in nominal prices for changes in real prices is called:(a)Money illusion(b) Inflation tax(c) Cost of inflation(d) Nominal rate of return
Money illusion
According to the quantity theory of money, when does a deflation occur?(a)The money supply and the velocity of money grow more slowly than the real GDP(b) The real GDP increases(c) The money supply grows faster than the velocity of money and the real GDP(d) Both A and B
The money supply and the velocity of money grow more slowly than the real GDP
There is a positive rate of inflation if: (a) The prince index became smaller this year relative to last year. (b) The there are more prices increasing than decreasing. (c)The prices on average increase. (d) The prices for all goods decrease.
The prices on average increase.
Suppose you agree to a bank loan at a nominal rate of 5% to finance your new business venture. You expectan inflation rate of 2% over the course of the loan. If inflation unexpectedly is 3%...(a) The bank's realized rate of return on the loan will be higher than you expected(b) The real interest rate you will pay on your loan will be higher than you expected(c) You will have to compensate the bank for the unexpected increase in inflation(d)The real interest rate you will pay on your loan will be lower than you expected
The real interest rate you will pay on your loan will be lower than you expected
Suppose we have two bonds with the same maturity date, same face value and same coupon payments. Theprice of these two bonds should be:(a) The same always(b)The same only if the issuers are equally risky(c) The same only if the issuer is the same(d) Always different
The same only if the issuers are equally risky
Suppose the consumer price index in 2015 is 100 and a shirt costs $50. In 2017, the consumer price index is110. Which of the following is true?(a) The shirt is cheaper in real terms in 2015 if it costs $45(b)The shirt is more expensive in real terms in 2017 if it costs $60(c) The shirt is cheaper in real terms in 2017 if it costed $55(d) The shirt is the same price in real terms in 2017 if it costs $50
The shirt is more expensive in real terms in 2017 if it costs $60
The Fisher effect is:(a) The tendency of GDP to rise with expected inflation(b) The tendency of real interest rates to rise with expected inflation(c)The tendency of nominal interest rates to rise with expected inflation(d) None of the above
The tendency of nominal interest rates to rise with expected inflation
Which of the following is included in the monetary base?(a) Checking deposits(b)Total reserves(c) Savings deposits(d) All of the above
Total reserves
according to lifecycle theory of saving, at what point in individual's life should her personal stock of savings be the largest?(a) At the beginning of the professional career(b)Towards the end of the working life(c) Towards the end of life(d) Lifecycle theory of savings leaves this indeterminate
Towards the end of the working life
Fill in the blanks "An increase in money supply can ....... output in the ........"(a) decrease, short run.(b) increase, long run.(c)increase, short run.(d) decrease, long run.
increase, short run.
Suppose the reserve requirement is 25 % and $5,000 gets put into the banking system. What is the maximum increase in the M1 money supply?(a) 1,250 dollars(b)20,000 dollars(c) 5,000 dollars(d) zero dollars
20,000 dollars
Suppose the reserve ratio is 50%. An increase in the amount of deposits of 100 million dollars will increasethe money supply by:(a) 100 million(b) 50 million(c) 2 million(d)200 million
200 million
Suppose the CPI index was 50 in 2010 and David earned 100 dollars a day. Also, suppose that in 2011 David's boss gives him a raise so that he made 150 dollars a day at the same job, when the CPI index reached 100.In which year was David better off? Does David's boss deserve to be seen as a kind hearted person?(a)2010; no(b) 2010; yes(c) 2011; no(d) 2011; yes
2010; no
What is your leverage ratio if you own a $8000 car that you financed with a $6000 car loan and by paying$2000 upfront?(a) 1(b) 2(c)3(d) 4
3
Suppose that after the Fed increased the monetary base by $20 billion, money supply increase by $400 billion.What is the implied reserve ratio in the economy?(a)5%(b) 10%(c) 20%(d) 400%
5%
Suppose the CPI were at 100 in 2015 and at 110 in 2017. Real GDP decreased by 5% over the same period.If the velocity of money were constant, how much is the implied growth in the money supply?(a) -5%(b) 0%(c)5%(d) 10%
5%
If the money supply is 600 and real GDP is 3,600, prices will grow by 2% tomorrow from an initial price levelof 1. Calculate the velocity of money:(a) 1/60(b) 1/6(c)6(d) 60
6
What are the short-run effects of reducing inflation, through cutting the money supply growth rate?(a)A decrease in GDP growth rate, perhaps a recession.(b) An increase in GDP growth rate, perhaps an economic boom(c) A shift of the Solow growth curve(d) None of the above
A decrease in GDP growth rate, perhaps a recession.
Which of the following will shift the Aggregate Demand curve to the left(a) A decrease in oil prices(b) An increase in oil prices(c) An increase in money supply growth(d)A decrease in consumer confidence
A decrease in consumer confidence
Crowding out is best described by which of the following:(a)A decrease in private borrowing that occurs when government borrows more(b) The process in which bank loans are bundled together and sold on the market as financial assets(c) The buying and selling of equally risky assets(d) None of the above
A decrease in private borrowing that occurs when government borrows more
What is deflation?(a) An increase in the GDP deflator.(b)A decrease in the average price level.(c) A reduction in the rate of inflation.(d) The meaning varies depending on the context.
A decrease in the average price level.
Increasing savings during times of high income and decreasing them during times of low income is called:(a) Demand of loanable funds(b)Consumption smoothing(c) Interest rate(d) Time preference
Consumption smoothing
Under fractional reserve banking:(a) The Fed has to give a fraction of its money to the banks(b) Open market operations sell liquid assets(c)Banks hold only a fraction of deposits in reserve, while lending the rest(d) None of the above
Banks hold only a fraction of deposits in reserve, while lending the rest
What is fractional reserve banking?(a) The reserve is a fraction of bank's equity capital(b) The Fed sets a maximum reserve requirement(c)Banks hold only a fraction of deposits on reserve(d) None of the above
Banks hold only a fraction of deposits on reserve
If the Fed wants to increase the money supply using an open market operation, it should:(a) Reduce the minimum reserve requirement(b) Sell bonds(c)Buy bonds(d) Use the discount window
Buy bonds
How could the Fed increase the money supply?(a) Set the government's budget(b) Increase inflation(c)Buy bonds through open markets operations(d) Increasing interest rates
Buy bonds through open markets operations
What does not determine the supply of loanable funds?(a) Consumption smoothing(b)Necessity to finance large investments(c) Market and psychological factors(d) Impatience
Necessity to finance large investments
The Federal Funds rate is the:(a) Interest rate banks pay when they borrow directly from the Fed(b)Overnight lending rate on loans from one major bank to another(c) Interest rate on short-term Treasury securities(d) Ratio of reserves to deposits
Overnight lending rate on loans from one major bank to another
if American Steel hires you to advice them about the future developments in the price level, and how it can affect their company, what price index should you look at more closely? Hint you can assume steel is never sold as a final good.(a) CPI(b)PPI(c) GDP Deflator(d) None of the above
PPI
What is the best strategy for picking additional stocks for your portfolio?(a) Pick stocks that are not correlated with your current portfolio(b) Pick stocks that are positively correlated with your current portfolio(c)Pick stocks that are negatively correlated with your current portfolio(d) Pick stocks that are less risky than what you currently hold
Pick stocks that are negatively correlated with your current portfolio
Consider the quantity theory of money. Suppose the quantity of money in an economy increased 21% from one year to the next while the quantity of goods produced (output) increased 10%. Assuming that money velocity was constant over the two periods that implies that:(a)Prices increased by 11%.(b)Prices increased by 10%.(c)Prices decreased by 10%.(d)None of the above.
Prices increased by 11%.
The efficient market hypothesis says that:(a)Prices of traded assets reflect all publicly available information.(b) Prices of traded assets reflect all publicly and privately available information.(c) Prices of traded assets are always right.(d) Financial markets are always efficient, and bubbles are not possible.
Prices of traded assets reflect all publicly available information.
What is the main implication of the Efficient Markets Hypothesis?(a)Prices of traded goods reflect all publicly available information(b) Picking stocks at random is a recipe for disaster(c) When relevant information appears on the Financial Times, one has to act very quickly(d) Arbitrage makes markets efficient
Prices of traded goods reflect all publicly available information
Financial intermediaries:(a) Have liabilities that exceed their assets(b)Reduce the costs of moving savings from savers to borrowers and investors(c) Are inefficient middlemen, raising the cost of economic activity(d) profit by keeping resources in their least valuable uses
Reduce the costs of moving savings from savers to borrowers and investors
Which of the following is a part of M2, but not of M1?(a)Savings deposits(b) Checking deposits(c) Retirement accounts(d) Currency outstanding
Savings deposits
The asset-backed securities are created by a process called(a) Arbitrage(b) Deleveraging(c) Debt accumulation(d)Securitization
Securitization
Suppose the Rate of Return on bonds is 6 percent in London and 5 percent in New York. If the risk is the same and supposing your entire portfolio is in invested in New York bonds, then which of the following is the best strategy?(a) Sell in London and buy in NY(b)Sell in NY and buy in London(c) Buy in London(d) Buy in NY
Sell in NY and buy in London
What is not a duty of the US Federal Reserve Bank?(a)Set the government's budget(b) Regulates other banks(c) Manage money supply(d) Protects financial consumers with disclosure regulations
Set the government's budget
How would a trade war (a uniform increase in tariffs by multiple countries) that affects productivity but doesn't change the growth in net export spending be represented in the AS-AD model?(a) Downward shift in the AD curve(b) Shift in the LRAS curve to the right(c)Shift in the LRAS curve to the left(d) Shift in the SRAS curve to the left
Shift in the LRAS curve to the left
An increase in the expectations of inflation will:(a)Shift the SRAS curve upward(b) Shift the AD curve upward(c) Shift the Solow growth curve upward(d) All of the above
Shift the SRAS curve upward
An increase in the expectations of inflation will:(a)Shift the SRAS curve upward (to the left)(b) Shift the AD curve upward (to the right)(c) Shift the Solow growth to the right(d) All of the above
Shift the SRAS curve upward (to the left)
Which bond do you expect to be associated to the lowest interest rate?(a)T-notes (2 years maturity)(b) Greek bonds in 2015 during the Greek debt crisis(c) Manchester united bond with 2 year maturity(d) All of them should have the same interest rate
T-notes (2 years maturity)
Which of the following is true about the consumer price index (CPI)?(a)The CPI measures the average price of goods bought by a typical American consumer(b) In calculating the CPI, higher priced items get the same weight as other items(c) The CPI is the not a good measure of increases in the cost of living(d) All of the above
The CPI measures the average price of goods bought by a typical American consumer
What is the crowding-out effect of government borrowing?(a) The decrease in private savings when the government borrows less(b)The decrease in private borrowing when the government borrows more(c) The budget deficit caused by increased government borrowing(d) The increase in private borrowing when the government issues bonds
The decrease in private borrowing when the government borrows more
How would the equilibrium interest rate be affected if people suddenly became more patient?(a)The equilibrium interest rate would decrease(b) The equilibrium interest rate would increase(c) The equilibrium interest rate would not change(d) Not enough information
The equilibrium interest rate would decrease
