Chapter 1 : 1. Interest rates are important because: Your Answer: high interest rates encourage individuals to save more. Correct Answer: All the above are correct 2. Looking at interest rates over time, generally, Your Answer: short term interest rates usually rise when long term interest rates rise. 3. Over time, generally, the value of stocks has: Your Answer: Increased smoothly. Correct Answer: Fluctuated substantially 4. Before periods of recession, Your money supply growth rates sometimes rise and sometimes fall.
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Chapter 1 :
1.
Interest rates are important because:
Your Answer:high interest rates encourage individuals to save more.
Correct Answer:
All the above are correct
2.
Looking at interest rates over time, generally,
Your Answer:
short term interest rates usually rise when long term interest rates rise.
3.
Over time, generally, the value of stocks has:
Your Answer:Increased smoothly.
Correct Answer:
Fluctuated substantially
4.
Before periods of recession,
Your Answer:money supply growth rates sometimes rise and sometimes fall.
Correct Answer:
money supply growth rates always fall.
5.
Which of the following captures the historic relationship between money and the overall price level?
Your Answer:Prices increase but the money supply has remained constant over time.
Correct Answer:
Both tend to increase together over time.
6.
Countries with low inflation tend to have:
Your Answer:high money growth
Correct Answer:
low money growth
7.
Well performing financial markets
Your Answer:
Promote economic efficiency
8.
The relationship between real and nominal GDP is that:
Your Answer:Real GDP is evaluated with current prices and nominal GDP uses base year prices.
Correct Answer:
Real GDP is evaluated with base year prices and nominal GDP use current year prices.
9.
The GDP deflator is calculated as:
Your Answer:Real GDP – Nominal GDP
Correct Answer:
Nominal GDP/Real GDP
10.
The Foreign Exchange Market
Your Answer:Is where U.S. goods are exchanged for foreign currency.
Correct Answer:
Allows one currency to be converted into another.
11.
The stock market is:
Your Answer:the market where the cost of borrowing is determined.
Correct Answer:
the most widely followed financial market in the United States.
12.
As financial intermediaries, banks:
Your Answer:have few interactions with the average person.
Correct Answer:
make loans and accept deposits.
13.
Which of the following is true of a nation's central bank?
Your Answer:It has many interactions with the nation's citizens and businesses.
Correct Answer:
It is responsible for conducting the nation's monetary policy.
14.
Exchange rates are important to American consumers because
Your Answer:Americans import more goods when foreign currencies rise in relation to the dollar.
Correct Answer:
Americans can afford to buy more foreign goods if the dollar is stronger.
15.
U. S. Government Budget deficits
Your Answer:May result in lower interest rates
Correct Answer:
Occur when government spending exceeds tax revenues.
Chapter 2 :
1.
The essential role of financial markets is:
Your Answer:Provide a method of borrowing.
Correct Answer:
Provide a method of channeling funds between borrowers and savers.
2.
With direct finance,
Your Answer:individuals deposit savings directly in banks.
Correct Answer:
individuals (or firms) borrow directly from the savers.
3.
Concerning time to maturity,
Your Answer:"short term" is 30 days or less.
Correct Answer:
"long term" is over 10 years.
4.
Moral hazard refers to
Your Answer:Occurs after the transaction
Correct Answer:
Is all of the above
5.
Eurodollars are:
Your Answer:
Bank deposits held outside the U.S. but denominated in dollars.
6.
The difference between equities and debt securities is
Your Answer:Equities are short term and debt securities are long term.
Correct Answer:
Equities represent ownership in a corporation and debt represents a contractual liability of the corporation.
7.
Transaction costs:
Your Answer:Are increased with financial intermediaries.
Correct Answer:
Are the time and money spent carrying out financial transactions.
8.
Which of the following is not a depository financial institution?
Your Answer:Savings and Loan
Correct Answer:
Life Insurance Company
9.
Which of the following is NOT a function of the Securities and Exchange Commission?
Your Answer:
Distributing seats on the New York Stock Exchange.
10.
How does the government insure the soundness of financial institutions?
Your Answer:By forcing banks to have at least one CEO of a Fortune 500 company on their Boards of Directors.
Correct By subjecting institutions to stringent financial reporting requirements.
Answer:
11.
A corporation working with an investment bank to issue new shares of stock is engaged in a ________ market, ________ market transaction.
Your Answer:secondary, money
Correct Answer:
primary, capital
12.
Financial intermediaries (banks, for instance) provide small lender-savers all of the following advantages except:
Your Answer:lower transaction costs.
Correct Answer:
a higher return.
13.
The financial intermediary that obtains funds largely through premium payments and uses those funds to purchase corporate bonds and mortgages is:
Your Answer:mutual funds.
Correct Answer:
life insurance companies.
14.
Asymmetric information refers to the fact:
Your Answer:That buyers typically have more information than sellers.
Correct Answer:
There is not enough information to make accurate decisions
15.
Repurchase agreements are
Your Answer:Loans of deposits at the Federal Reserve
Correct Answer:
Short term loans with Treasury bills as collateral.
Chapter 3 :
1.
Fiat money is:
Your Answer:coins
Correct Answer:
not convertible into precious metals.
2.
Which of these is not a function of money in an economy?
Your Answer:Store of value
Correct Answer:
Source of income
3.
Which of the following is not part of M1?
Your Answer:checking accounts
Correct Answer:
savings accounts
4.
If Mary deposits $100 of her currency in her checking account, then:
Your Answer:M2 will increase by $100.
Correct Answer:
M1 and M2 will not change.
5.
If Mary moves $100 from her savings account to her checking account, then:
Your Answer:
M2 will not change.
6.
Which of the following is not part of M2?
Your Answer:
Institutional money market mutual funds
7.
Inefficiencies that are created when using checks as money include:
Your Answer:
Checks can transfer funds slowly and require paper shuffling.
8.
The liquidity of an asset is:
Your Answer:the amount of an asset sold at discount or premium.
Correct Answer:
the relative ease with which an asset can be converted into a medium of exchange.
9.
For a commodity to function effectively as money, it must
Your Answer:Be indestructible.
Correct Answer:
Be widely accepted.
10.
Money supply data is generated by:
Your Answer:The Department of Commerce
Correct Answer:
The Federal Reserve System (the Fed)
11.
Which of the following correctly shows the evolution of the payments system?
Your Answer:Commodity money, checks, fiat money, electronic money.
Correct Answer:
Commodity money, fiat money, checks, electronic money.
12.
Which of the following is true regarding money's store of value function?
Your Answer:money is the only store of value available.
Correct Answer:
money is the most liquid store of value available.
13.
Which of the following is not a disadvantage of electronic money?
Your Answer:People are concerned about the privacy and security of e-money transactions.
Correct Answer:
E-money transactions cost more than paper check transactions.
14.
Wealth is
Your Answer:A flow of earnings per unit of time
Correct Answer:
The total collection of pieces of property that serve to store value
15.
The Fed's measurements of monetary aggregates
Your Answer:Does not depend on the definition of money.
Correct Answer:
Are more reliable in the long run than the short run.
Chapter 4 :
1.
You receive a check for $100 two years from today. The discounted present value of this $100 is:
Your Answer:$100*(1+i)
Correct Answer:
$100/(1+i)2
2.
Why do current prices on previously issued bonds offered for resale change when the market interest rate changes?
Your Answer:Because the marketplace does not provide enough information to price bonds accurately.
Correct Answer:
Because no buyer of bonds today will accept a lower yield to maturity than the market rate, and no buyer will be able to get a higher yield.
3.
If a bond sells at a premium, where price exceeds face value, then we would expect to see:
Your Answer:
market interest rates below the coupon rate.
4.
As bond prices increase:
Your Answer:yields to maturity do not change.
Correct Answer:
yields to maturity decrease.
5.
For a $1000 one year discount bond with a price of $975, the yield to maturity is
Your Answer:($1000 – $975)/($1000)
Correct Answer:
($1000 – $975)/$975
6.
For a coupon bond, the current yield is calculated as:
Your Answer:
Coupon Payment/Price
7.
If the interest rate rises one basis point, then it has gone from 4% to
Your Answer:5%.
Correct Answer:
4.01%.
8.
The return on a bond is
Your Answer:coupon rate – rate of capital gain.
Correct Answer:
current yield + rate of capital gain.
9.
Interest rate risk is:
Your Answer:the risk the government or firm will not make interest payments.
Correct Answer:
the risk associated with change in return with changes in interest rates.
10.
The real interest rate is:
Your Answer:the nominal interest rate/the CPI.
Correct Answer:
the nominal rate minus the expected inflation rate.
11.
For a coupon bond, the yield to maturity is the:
Your Answer:difference between the bond's price and its face value.
Correct Answer:
interest rate that equates the bond's present value with its price.
12.
When interest rates fluctuate, which bonds will experience the least price volatility?
Your Answer:20-year bonds
Correct Answer:
1-year bonds
13.
Which of the following provides the greatest incentive to borrow?
Your Answer:A high nominal interest rate
Correct Answer:
A low real interest rate
14.
Why is the Rate of Return often the most relevant measure of a bond's benefit to the buyer?
Your Answer:Because the Rate of Return uses the difference between the face value and the purchase price to compute a capital gain on the bond.
Correct Answer:
Because the Rate of Return recognizes that many bond buyers do not plan to hold to maturity, but will sell the bond before maturity.
15.
The price structure for discount bonds
Your Answer:Means that for discount bonds with the same face value, the one with the longer term will sell for a higher price.
Correct Answer:
Means that for discount bonds with the same face value, the one with the shorter term will sell for a higher price.
Chapter 5 :
1.
Other things remaining equal, which of the following will increase the demand (shift the demand curve to the right) for bond J?
Your Answer:An increase in the interest rate on bond K.
Correct Answer:
An increase in the level of wealth in the economy.
2.
The theory of asset demand tells us that
Your Answer:Risky assets have higher liquidity.
Correct Answer:
The demand for an asset will increase if the expected return on an asset rises.
3.
At a bond price above the equilibrium,
Your Answer:there is an excess demand and the price will tend to fall.
Correct Answer:
there is an excess supply and the price will tend to fall.
4.
Which of the following will cause a movement along the demand curve for bond J?
Your Answer:An increase in the price of bond K.
Correct Answer:
An increase in the price of bond J.
5.
Suppose the price of bond J rises. This will:
Your Answer:increase the demand for bond K and increase the interest rate on bond K.
Correct Answer:
increase the demand for bond K and decrease the interest rate on bond K.
6.
Which of the following will increase the supply of bonds (shift the supply curve to the right)?
Your Answer:A decrease in the expected inflation rate.
Correct Answer:
A business cycle expansion.
7.
An increase in the expected inflation rate will:
Your Answer:increase the demand for bonds, decrease the supply of bonds and increase the interest rate.
Correct Answer:
decrease the demand for bonds, increase the supply of bonds and increase the interest rate.
8.
Because Keynes assumed that money and bonds are the only two assets available, it must be true that
Your Answer:Md + Ms = Bd - Bs
Correct Answer:
Md + Bd = Ms + Bs
9.
At interest rates below the equilibrium rate of interest
Your Answer:
there is an excess demand for money and the interest rate will rise.
10.
Using money demand and money supply:
Your Answer:
an increase in income will increase money demand and increase the interest rate.
11.
In the Liquidity Preference framework, the price-level effect differs from the expected inflation effect in that:
Your Answer:
The price level effect remains and the expected inflation effect reverses
12.
In Liquidity Preference, why does the demand curve for money slope downward?
Your Answer:
Because people are more willing to hold money when interest rates are low.
13.
According to the ________ effect, an increase in the money supply lowers the interest rate.
Your Answer:price-level
Correct Answer:
liquidity
14.
Why does the supply curve for bonds slope upward?
Your Answer:Because as the price falls, firms are more willing to supply bonds.
Correct Answer:
Because as the interest rate falls, firms are more willing to borrow money.
15.
Increasing government deficits causes
Your Answer:The supply curve for bonds to shift left because corporations will borrow less due to decreased profitability when the government is in debt
Correct Answer:
The supply curve for bonds to shift right because the U.S. Treasury will issue bonds to pay for the deficit
Chapter 6 :
1.
Generally, which bond has the highest interest rate?
Your Answer:Municipal Bonds
Correct Answer:
Corporate Baa Bonds
2.
Default risk is:
Your Answer:the chance the issuing firm will be sold to another firm.
Correct Answer:
the chance the issuer will be unable to make interest payments or repay principal.
3.
Suppose that there are two bonds, A and B. Suppose also the default risk on bond A increases. As a result of this we would expect to see:
Your Answer:
the demand for A to decrease and the demand for B to increase.
4.
The risk premium on a bond is:
Your Answer:
the difference in interest rate between that bond and a US Treasury bond.
5.
An increase in the level of risk for bond A will:
Your Answer:increase the risk premium on bond A and increase the risk premium on bond B.
Correct Answer:
increase the risk premium on bond A and reduce the risk premium on bond B.
6.
Municipal bonds generally have lower interest rates than U.S. Government bonds because:
Your Answer:they have less risk.
Correct Answer:
they are exempt from Federal taxes.
7.
Yield curves show:
Your Answer:the relationship between risk and bond interest rates (yields).
Correct the relationship between time to maturity and bond interest rates (yields).
Answer:
8.
The liquidity premium theory explains an inverted yield curve by
Your Answer:Assuming that the liquidity premium is always positive
Correct Answer:
Assuming that short-term rates are expected to fall to a great degree in the future
9.
The liquidity premium theory suggests that yield curves should usually be:
Your Answer:
up-sloping.
10.
The liquidity premium theory is based upon the idea that, other things remaining equal,
Your Answer:investors are indifferent between short-term and long-term bonds.
Correct Answer:
investors prefer short-term bonds.
11.
The shape of the yield curve is usually:
Your Answer:downward sloping.
Correct Answer:
upward sloping.
12.
The expectations theory of the term structure assumes:
Your Answer:markets for different maturity bonds are completely separate.
Correct Answer:
buyers of bonds consider bonds of different maturities to be perfect substitutes.
13.
What will the yield curve look like if future short-term interest rates are expected to rise sharply?
Your Answer:It will be horizontal.
Correct Answer:
It will steeply slope upward.
14.
Reduced liquidity of a bond causes the interest rate on that bond
Your Answer:To be lower because it is more widely traded
Correct Answer:
To be higher because it is less widely traded.
15.
The Segmented Markets theory of term structure suggests that
Your Answer:Investors have no preference for short-term bonds over long-term bonds, or vice versa.
Correct Answer:
Investors have strong preferences for bonds of a particular maturity.
---------- Forwarded message ----------From: <[email protected]>Date: Sun, Mar 15, 2009 at 10:44 AMSubject: Answers to "The Economics of Money, Banking and Financial Markets, Eighth Edition, 8/e" for "Student Resources, Chapter 14: Determinants of the Money Supply, Multiple Choice Quiz"To: [email protected]
Site Title: The Economics of Money, Banking and Financial Markets, Eighth EditionBook's Title: The Economics of Money, Banking and Financial Markets, Eighth EditionBook's Author: MishkinLocation on Site: Student Resources > Chapter 14: Determinants of the Money Supply > Multiple Choice Quiz
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Correct: To allow the Fed to act as the lender of last resort to troubled banks. Location on Site: Student Resources > Chapter 15: Tools of Monetary Policy > Multiple Choice Quiz
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The Phillips curve theory predicts an increase in inflation if output is ________ potential and the rate of unemployment is ________ the natural rate of unemployment.