Money and Banking Exam 1
Saladin is willing to lend her friend Astro $500 to buy a new smart phone. Saladin wants a 3% real rate of return on the loan when it is paid back at the end of the year. She believes that during the year the general level of prices will rise by 2%, so she should charge her friend Astro a nominal interest rate of
5%.
Buying stocks gives the buyer
?
Which of the following characteristics would make a commodity a good candidate to function as money?
easily divisible, physically durable and easy to carry around
Under the Burgess-Riefler doctrine, a low level of bank borrowing and low nominal interest rates were considered to be evidence of __________ monetary policy.
easy
One of the major reasons that the western European economies prospered following World War II was the
elimination of trade barriers between the western European nations.
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
The rise of Savings & Loans following World War II played a key role in the post-war __________ boom.
housing
In the long run, the Federal Reserve can affect only
inflation
One of the most important prices determined in financial markets is the __________ rate.
interest
The coupon rate of a bond refers to the
interest rate to be paid to the holder of the bond.
The demand for bonds is best described as a(n) __________ relationship between the price of bonds and the quantity of bonds demanded, all else equal.
inverse
A bond's maturity refers to the
is the period during which its owner will receive interest payments on the investment. When the bond reaches maturity, the owner is repaid its par, or face, value.
Regulation Q, passed following the Great Depression, set a
maximum on the interest rate that banks can pay on deposits.
Commercial banks face competition from a variety of institutions, including
mutual funds, investment banks, and insurance companies.
The face value of a bond is the
original amount of money borrowed by the bond issuer
Nominal interest rates are made up of
real interest rates plus inflation.
An increase in the supply of loanable funds could be caused by
savers want to save more at every interest rate. Expansionary monetary policy being followed by the Federal Reserve.
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
On payday you get paid in cash, so each week you put $10 into a shoebox in your closet so that you can buy a big-screen TV at the end of the year. In this situation, money is serving as a
store of value
On payday you get paid in cash, so each week you put $10 into a shoebox in your closet so that you can buy a big-screen TV at the end of the year. In this situation, money is serving as a
store of value.
A yield curve illustrates the relationship between the
term to maturity of bonds and the interest rate they pay, at a particular point of time.
Which of the following would be most suitable as money?
Cigarettes
Today, in the United States, several assets function as money. Which of the following would NOT be considered money?
Credit Cards
Interest rates
can represent the price of money.
Molly's time preference is the
rate at which Molly prefers to consume today as opposed to consuming in the future.
When a coffee shop lists a tall coffee on its menu at $2.95, the coffee shop is using money as a
unit of account
Money that has no intrinsic value is known as
fiat money.
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.
Diedre works for a pension fund and is thinking of buying some bonds that have a nominal interest rate of 6%. She believes that the inflation rate over the life of the bond will be 2%. The ex-post real interest rate on this bond is
unknown.
According to the pure expectations theory, a flat yield curve means the market
thinks that future interest rates will be exactly the same as current interest rates.
You own a 10-year, $10,000 US Treasury bond with a coupon rate of 3%. There are two years left to maturity, and you are planning to sell the bond in the secondary market. If the interest rate is 5%, how much can you expect to get for the bond?
$9,628
Sherry says that she requires a 3% rate of interest in order to lend you some money. This implies that for Sherry the present value of $100 to be received one year from today is
$97.09
Daniella is considering the purchase of a 10-year, $10,000 bond being issued by Disreputable, Inc. The bond offers an interest rate of 5.5%. The rate on a similar US Treasury bond is 2.5%. All else equal, Daniella will be getting a default premium of _____, if she purchases the Disreputable, Inc. bond.
3.0%
One of the innovations that the Federal Housing Administration developed that helped make mortgage loans more accessible was the __________ mortgage.
30-year, fixed-rate
In a barter economy with 100 goods, there would be _____ prices.
4,950
Julia is in the 10% marginal income tax bracket and earned a 4.5% return on the municipal bonds that just matured. The nominal interest rate paid on these bonds was
4.5%.
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%
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 below. Which of the following occurrences will shift the supply of bonds from Supply 0 to Supply 1?
A more optimistic outlook by business about the future
Consider the graph in Figure 3-1. An increase in the quantity supplied is best illustrated by a movement from
A to B.
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
2%.
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
At the conclusion of World War II, an explosion in the home mortgage market was led by depository institutions known as
Savings & Loans.
Consider the bond market illustrated in the graph in Figure 3-3. If the current market price is higher than P 1, which of the following statements is true?
There is a surplus of bonds in the market, and the market price will fall toward P 1.
Inflation is a benefit to
borrowers.
In the early twentieth century, the business scene in America was transformed by the formation of trusts. Business trusts are __________ integrated ownership structures.
horizontally
During World War II, US policymakers feared inflation would result from the dramatic increase in wartime spending. In order to prevent that inflation, US policymakers
implemented wage and price controls, issued war bonds, and rationed many commodities.
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 period following World War II, the US Treasury was in charge of monetary policy and instructed the Federal Reserve to
keep interest rates low in order to keep spending high.
Assets accepted for repayment of debt to the government as well as private transactions are known as
legal tender.
An inverted yield occurs when
long-term interest rates are lower than short-term interest rates.
The primary lesson learned from the Panic of 1907 was the
need in the United States for a central bank.
Some of the most important central banks in the world include
the Federal Reserve, the European Central Bank, and the Bank of England.
Financial deregulation in the 1980s ultimately led to
the Savings & Loan crisis and the end of the Savings & Loan industry.
Three things fully describe the aspects of a bond. They are
the face value, the coupon rate, and the term to maturity.
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 Figure 4-1, which shows the supply and demand for US Treasury Securities (S US and D US ) and for Charter Corp. bonds (S C and D C ), as well as the corresponding equilibrium price (P US and P C ). What is the most likely reason that the market price for US Treasury Securities is higher than the market price for Charter Corp. bonds?
There is a higher risk that Charter Corp. will default on its obligation.
Consider the bond market illustrated in the graph in Figure 3-3. If the current market price is lower than P 1, which of the following statements is true?
There is a shortage of bonds in the market, and the market price will fall toward P1 .
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.
Mandy goes to the grocery store to buy groceries, and at the checkout counter she pays cash. This is an example of money being used as
a medium of exchange
If you borrow $1,000 today to be paid back one year from today at 5% interest, the payment you will have to make in one year will be
$1,050.
If the interest rate is 5%, the value of $1,000 at the end of 10 years is
$1,628.89.
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
In the early twentieth century, which of the following US industries were dominated by trusts?
Steel, railroads, and banking
Consider the graph in Figure 3-2. Which of the following is considered a decrease in the quantity demanded?
The movement from A to C
Consider the graph in Figure 3-1. Which of the following best represents an increase in supply?
The movement from A to D
What concept does the following diagram illustrate?
The price level tends to move in the same direction as the money supply.
Shonda says that she would need to earn 3% interest in order to lend you money which you will pay back in two years. This implies that for Shonda the present value of $100 to be received two years from today is
$94.26
When the overall level of business activity declines persistently, there is said to be
a recession
A decrease in the demand for loanable funds would be caused by
Decrease in the amount of expected business opportunities
Which of the following is included in the M1 definition of the money supply?
Demand deposits and other checkable deposits
__________ is the removal of funds from a financial intermediary (e.g., bank) to invest them directly, as through a mutual fund.
Disintermediation
The Central Bank of the United States is the
Federal Reserve
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
Financial assets include which of the following?
Money, bonds, and stocks
In the early days of the Federal Reserve, the Federal Reserve Bank of __________ quickly established itself as the most important of the 12 Federal Reserve banks.
New York
If the market interest rate is lower than the coupon rate on a newly issued bond, then the bond will sell
above par
Money is generally thought of as
anything generally accepted in exchange for goods and 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.
If the market interest rate is higher than the coupon rate on a newly issued bond, then the bond will sell
below par
Financial markets bring together __________ and __________.
borrowers; lenders
