Practice Quiz 12

A bank makes an auto loan for $10,000 at an annual rate of 6 percent. Assuming no repayment is made at all during the period, after two years the borrower will owe:

$11,236

If the Fed buys bonds from the public through its open market operations:

the price of bonds will increase and the interest rate received by bond holders will decrease

An interesting development that happened in late 2008, relating to the Fed and bank reserves, is that the Fed:

Started paying interest on the banks' reserves

A decrease in the money supply will:

raise interest rates, reducing planned investment and GDP

Which one of the following is an example of an economic investment?

Building a new bank office

The Security Market line (SML) shows how the average expected rates of return on assets vary with:

Risk level

The Taylor Rule suggests that:

for each 1 percent increase of real GDP above potential GDP, the Fed should raise the real Federal funds rate by ½ percentage point

Refer to the following: Suppose the interest rate is currently 6% and the Fed determines that investment of $40 is required to reach full employment GDP. To target this outcome, the Fed might:

lower the discount rate

If the intent of the Fed is to increase GDP, it should:

purchase government securities in the open market

Answer the question based on the information given in the table below that shows the items and figures taken from a consolidated balance sheet of the twelve Federal Reserve Banks. All figures are in billions of dollars. In the balance sheet above for the Federal Reserve, there would be assets of:

$320 billion

A bond with no expiration date has a face value of $10,000 and pays a fixed 10 percent interest. If the market price of the bond rises to $11,000, the annual yield approximately equals:

9 percent

The Fed can regularly influence and change the risk-free rate of financial investments through its:

Bank supervision

In the cause-effect chain linking changes in the banks' excess reserves and the resulting changes in output and employment in the economy:

An increase in the money supply will decrease the rate of interest

An investor owns bond #1 that has a rate of return of 10 percent, but a similar bond #2 has an 11 percent return and equal risk. By selling bond #1 and buying bond #2 to earn a higher return, the investor is engaging in:

Arbitrage

Which of the following will cause the aggregate demand curve to shift to the left?

Fed sales of bonds to the public

An investor wants to invest in the oil industry, but does not know which major companies will produce the greatest return. As a result, the investor buys shares in several oil companies. By buying several companies to reduce risk, the investor is seeking to reduce:

Idiosyncratic risk

Which of the following statements best describes the relationship between risk and the average expected return of investments?

More risky assets will have higher average expected rates of return than less risky assets

Before taking management and trading costs into account, arbitrage activities in the market ensure that the returns of actively managed funds are:

More volatile than those of index funds with similar risk

If nominal GDP is $4,000 billion and the amount of money demanded for transactions purposes is $800 billion, it can generally be concluded that:

On average, each dollar will be spent five times a year

In which case would the quantity of money demanded by the public tend to increase by the greatest amount?

The interest rate decreases and nominal GDP increases

Suppose banks are just meeting their reserve requirement of 25% and the Fed sells $30 billion in government securities to commercial banks. The effect of this sale is to:

reduce the potential money supply by $120 billion

Two primary assets of the Federal Reserve Banks are:

securities and loans to commercial banks

Suppose the demand for money falls. In order to maintain interest rates at their previous level, the Fed might:

sell government securities

If the current interest rate is below the equilibrium rate:

the interest rate will rise and the quantity of money demanded will decrease