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ECON 029 Money and Banking Finals Spring 2013 A+ result

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Question;ECO 029 ?Money, Banking, and Financial Markets?Final ExamSpring 2013Chapter 21) An important financial institution that assists in the initial sale of securities in the primary market istheA) investment bank.B) commercial bank.C) stock exchange.D) brokerage house.2) If you expect the inflation rate to be 15 percent next year and a one-year bond has a yield to maturityof 7 percent, then the real interest rate on this bond isA) 7 percent.B) 22 percent.C) -15 percent.D) -8 percent.3) If the amount payable in two years is $2420 for a simple loan at 5 percent annual interest, the loanamount, rounded to the nearest dollar, isA) $1000.B) $1210.C) $2000.D) $2195.Chapter 44) To claim that a lottery winner who is to receive $1 million per year for twenty years has won $20million ignores the process ofA) face value.B) par value.C) deflation.D) discounting the future.5) With an interest rate of 6 percent, the present value of $100 next year is approximatelyA) $106.B) $100.C) $94.D) $92.6) To pay for college, you have just taken out a $1,000 government loan that makes you pay $126 peryear for 25 years. However, you don't have to start making these payments until you graduate fromcollege four years from now. Why is the yield to maturity necessarily less than 12% (this is the yield tomaturity on a normal $1,000 fixed-payment loan in which you pay $126 per year for 25 years)?A). This is the case because the first payment due begins at a future date.B). This is the case because market interest rates are less than 12%.C). This is the case because of the known effects of inflation.D). This is the case because the loan has a government guarantee.7) Which of the following $1,000 face-value securities has the lowest yield to maturity?A) A 5 percent coupon bond selling for $1,000B) A 10 percent coupon bond selling for $1,000C) A 15 percent coupon bond selling for $1,000D) A 1 percent coupon bond selling for $900Chapter 58) You would be more willing to buy Apple bonds (holding everything else constant) ifA) the brokerage commissions on bond sales become cheaper.B) interest rates are expected to rise in the future.C) your wealth has decreased.D) you expect diamonds to appreciate in value.9) If wealth increases, the demand for stocks ________ and that of long-term bonds ________,everything else held constant.A) increases, increasesB) increases, decreasesC) decreases, decreasesD) decreases, increases10) In the figure below, the factor responsible for the decline in the interest rate isA) a decline the price level.B) a decline in income.C) an increase in the money supply.D) a decline in the expected inflation rate.Chapter 611) In 2013, the government of Greece risked defaulting on its debt due to a severe budget crisis. Usingbond market graphs, determine how default would affect the risk premium between U.S. Treasury debtand Greek debt with comparable maturity.A). The risk premium would increase, which corresponds to segment C on the graphs above.B). The risk premium would not change and therefore would be equal to segment B on thegraphs above.C). The risk premium would not change and therefore would equal zero.D). The risk premium would increase, which corresponds to segment B on the graphs above.12) If the expected path of 1-year interest rates over the next five years is 2 percent, 4 percent, 1percent, 4 percent, and 3 percent, the expectations theory predicts that the bond with the lowestinterest rate today is the one with a maturity ofA) one year.B) two years.C) three years.D) four years.Chapter 713) After careful analysis, you have determined that a firm?s dividends should grow at 7% on average inthe foreseeable future. The firm?s most recent dividend D0 was $3. What is the current price of thisstock, assuming the required return is 18%?A) $16.67B) $27.27C) $29.18D) $42.8614) Consider tight monetary policy and its effects on stock prices via the simplified Gordon growthmodel equation. Which of the following accurately describes the effects of tight monetary policy onstock prices, according to this model?A). The return on bonds and the required return on an equity investment (ke) would rise, whilethe price of stock (Po) would fall.B). The return on bonds, the required return on an equity investment (ke), and the price of stock(Po) would all rise.C). The return on bonds and the required return on an equity investment (ke) would fall, whilethe price of stock (Po) would rise.D). The return on bonds, the required return on an equity investment (ke), and the price of stock(P0) would all fall.Chapter 815) Since they require moremonitoring of firms, ________ contracts are used lessfrequently than________ contracts to raise capital.A) equity, debtB) debt, loanC) equity, stockD) debt, equity16) The principal-agent problemA) occurs when managers have more incentive to maximize profits than the stockholdersownersdo.B) in financial markets helps to explain why equity is a relatively important source of finance forAmerican business.C) would not arise if the owners of the firm had complete information about the activities ofthe managers.D) explains why direct finance is more important than indirect finance as a source of businessfinance.17) One way the venture capital firm avoids the free-rider problem is byA) prohibiting the sale of equity in the firm to anyone except the venture capital firm.B) prohibiting members from serving on the board of directors.C) prohibiting the borrowing firm from replacing management.D) requiring collateral equal to the value of the borrowed funds.Chapter 318) If an individual moves money froma demand deposit account toa small-denomination time depositaccount,A) M1 stays the same and M2 increases.B) M1 stays the same and M2 stays the same.C) M1 decreases and M2 stays the same.D) M1 increases and M2 stays the same.19) If there are four goods in a bartereconomy, then one needs to know ________ prices in order toexchange goods.A) 4B) 6C) 8D) 220) Which of the following is a disadvantage of using fiat money?A). Fiat money is not portable or widely accepted.B). Fiat money is not easily divisible or suitable for small purchases.C). Public authorities may be tempted to produce too much of it.D). There are no disadvantages of using fiat money.Chapter 1321) The Federal Open Market Committee usually meets ________ times a year.A) fourB) sixC) eightD) twelve22) How does the Federal Reserve have a high degree of instrument independence?A). The Federal Reserve is not subject to the influence of Congress.B). The Federal Reserve can choose any method it wants in order to achieve a given set ofpolicy objectives.C). The Federal Reserve is able to set the goals of monetary policy.D). The Federal Reserve can contract with independent experts to choose the appropriate fiscalinstruments.Chapter 1023) Bank capital is NOT listed on the ________ side of the bank's balance sheet because it represents a________ of funds.A) liability, useB) liability, sourceC) asset, useD) asset, source24) When a new depositor opens a checking account at the First National Bank, the bank's assets________ and its liabilities ________.A) increase, increaseB) increase, decreaseC) decrease, increaseD) decrease, decreaseChapter 1425) Both ________ and ________ are monetary liabilities of the Fed.A) securities, loans to financial institutionsB) currency in circulation, reservesC) securities, reservesD) currency in circulation, loans to financial institutions26) The sum of the Fed's monetary liabilities and the U.S. Treasury's monetary liabilities is calledA) vault cash.B) currency in circulation.C) bank reserves.D) the monetary base.27) If reserves in the banking system increase by $100, then checkable deposits will increase by $1,000in the simple model of depositcreation when the required reserve ratio isA) 10.00B) 0.10C) 0.05D) 0.20Chapter 1528) When the Fed wants to raise the federal funds rate after banks have accumulated large amounts ofexcess reserves (which is the case right now in 2013), it wouldA) decrease the interest rate paid on excess reserves.B) increase discount rate.C) increase the required reserve ratio.D) increase the interest rate paid on excess reserves.29) Everything else held constant, in the market for reserves, when the federal funds rate is 3%, raisingthe discount rate from 4% to 5%A) raises the federal funds rate.B) has no effect on the federal funds rate.C) lowers the federal funds rate.D) has an indeterminate effect on the federal funds rate.30) The graph below illustrates how the Fed uses discounting to keep the federal funds rate from risingfar above the federal funds target. It shows a rightward shift of the demand curve for reserves from R1dto R2d. The initial equilibrium is at point 1, where the discount rate (id) is above the federal funds rate,which is equal to its target level, iffT. The shift moves the equilibrium to point 2, where the federal fundsrate equals the discount rate (iff2= id). According to this graph, at point 2, non-borrowed reserves are:A). equal to the distance between A and B.B). equal to the distance between B and C.C). equal to the distance between A and C.D). zero.Chapter 1931) The portfolio theories of money demand state that the demand for real money balances is________ related to income and ________ related to the nominal interest rate.A) negatively, negativelyB) negatively, positivelyC) positively, negativelyD) positively, positively32) If the money supply is $500 and nominal income is $3,000, the velocity of money isA) 1/60.B) 1/6.C) 6.D) 60.33) Velocity is defined asA) P + M + Y.B) (P ? M)/Y.C) (Y ? M)/P.D) (P ? Y)/M.34) The classical economists believed that if the quantity of money doubled,A) real output would double.B) prices would fall.C) prices would double.D) prices would remain constant.35) Methods of financing government spending are described by an expression called the governmentbudget constraint, which states the following:A) the government budget deficit must equal the sum of the change in the monetary base andthe change in government bonds held by the public.B) the government budget deficit must equal the difference between the change in themonetary base and the change in government bonds held by the public.C) the government budget deficit must equal the difference between the change in themonetary base and the change in government bonds held by the Fed.D) the government budget deficit must equal the difference between the change in themonetary base and the change in government bonds held by the Treasury.36) The Keynesian demand for real balances can be expressed asA) Md= f(i,Y).B) Md/P = f(i).C) Md/P = f(Y).D) Md/P = f(i,Y).Chapter 2037) Assume that autonomous consumption equals $100 and that the mpc equals 0.8. If disposableincome equals $1000, then total consumption equalsA) $900.B) $1000.C) $80.D) $800.38) A tax increase ________ disposable income, ________ consumption expenditure, and shifts the IScurve to the ________, everything else held constant.A) decreases, increases, leftB) decreases, decreases, leftC) increases, increases, rightD) increases, decreases, left39) Assume that disposable income equals $1000 and the mpc equals 0.6. If total consumption equal$800, then autonomous consumption is equal toA) $0.B) $200.C) $800.D) $1000.40) If aggregate demand falls short of current output, business firms will ________ production to________ inventories.A) cut, keep from accumulatingB) expand, keep from accumulatingC) cut, build upD) expand, build up41) Everything else held constant, aggregate output is increased by a decrease inA) autonomous consumption.B) government spending.C) planned investment.D) net taxes.42) An increase in interest ratesA) increases the value of the dollar, net exports, and equilibrium output.B) increases the value of the dollar, reducing net exports and equilibrium output.C) reduces the value of the dollar, net exports, and equilibrium output.D) reduces the value of the dollar, increasing net exports and equilibrium output.Chapter 2143) The Taylor Principle states that central banks raise nominal rates by ________ than any rise inexpected inflation so that real interest rates ________ when there is a rise in inflation.A) less, fallB) more, riseC) less, riseD) more, fall44) Everything else held constant, a decrease in autonomous consumer spending will cause the IS curveto shift to the ________ and aggregate demand will ________.A) left, decreaseB) right, increaseC) right, decreaseD) left, increase45) When the financial crisis started in August 2007, inflation was rising and the Fed began an aggressiveeasing lowering of the federal funds rate, which indicated thatA) there was an upward movement along the monetary policy curve.B) there was a downward movement along the monetary policy curve.C) the monetary policy curve shifted upward.D) the monetary policy curve shifted downward.46) The aggregate demand curve is downward sloping because a higher inflation rate leads the centralbank to ________ real interest rates, thereby ________ the level of equilibrium aggregate output,everything else held constant.A) raise, loweringB) raise, raisingC) reduce, loweringD) reduce, raising47) Everything else held constant, an increase in net taxes will cause the IS curve to shift to the________ and aggregate demand will ________.A) right, increaseB) right, decreaseC) left, increaseD) left, decreaseChapter 2248) Favorable weather produces a record crop of wheat and rye in the South. Determine theeffects on inflation and output in the short run and the long run using AD/AS graph analysis.A). Graph A.B). Graph B.C). Graph C.D). Graph D.49) Everything else held constant, an autonomous monetary policy easing ________ aggregate________.A) increases, demandB) decreases, demandC) decreases, supplyD) increases, supply50) The long-run rate of unemployment to which an economy always gravitates is theA) normal rate of unemployment.B) natural rate of unemployment.C) neutral rate of unemployment.D) inflationary rate of unemployment.51) Everything else held constant, a change in workers' expectations about inflation will cause ________to change.A) aggregate demandB) short-run aggregate supplyC) the production functionD) long-run aggregate supply52) The long-run aggregate supply curve shifts to the right when there isA) a decrease in the total amount of capital in the economy.B) a decrease in the total amount of labor supplied in the economy.C) a decrease in the available technology.D) a decline in the natural rate of unemployment.53) Suppose the U.S. economy is producing at the natural rate of output. A depreciation of the U.S.dollar will cause ________ in real GDP in the short run and ________ in inflation in the short run,everything else held constant. (Assume the depreciation causes noeffects in the supplyside of theeconomy.)A) an increase, an increaseB) a decrease, a decreaseC) no change, an increaseD) no change, a decrease54) According to aggregate demand and supply analysis, the negative supply shocks of 1973-1975 and1978-1980 had the effect ofA) increasing aggregate output, lowering unemployment, and raising the inflation.B) decreasing aggregate output, raising unemployment, and raising the inflation.C) increasing aggregate output, raising unemployment, and raising the inflation.D) decreasing aggregate output, raising unemployment, and lowering the inflation.Chapter 2455) A rise in short-term interest rates that is believed to be only temporaryA) is likely to have a significant effect on long-term interest rates.B) will have a bigger impact on long-term interest rates than if the rise in short-term rates hadbeen permanent.C) is likely to have only a small impact on long-term interest rates.D) cannot possibly affect long-term interest rates in any way.56) Suppose that there is a positive aggregate demand shock and the central bank commits to aninflation rate target. If the commitment is credible, thenA) over time inflation will fall back down to the inflation target.B) the public's expected inflation will remain unchanged.C) the short-run aggregate supply curve will not shift.D) all of the above.57) Suppose that there is a negative aggregate demand shock and the central bank commits to aninflation rate target. But if the commitment is notcredible, thenA) the public's expected inflation will remain unchanged.B) the short-run aggregate supply curve will shift upward.C) economic contraction will be worse.D) both B and C.58) Arguments for adopting a policy rule includeA) the time-inconsistency problem can lead to poor economic outcomes.B) discretionary policies pursue overly expansionary monetary policies to boost employment inthe short run but generate higher inflation in the long run.C) policy makers and politicians cannot be trusted.D) all of the above.59) Arguments for discretionary policies includeA) policy rules can be too rigid because they cannot foresee every contingency.B) the time-inconsistency problem can lead to poor economic outcomes.C) discretionary policies pursue overly expansionary monetary policies to boost employment inthe short run but generate higher inflation in the long run.D) all of the above.60) ________ imposes a conceptual structure and inherent discipline on policy makers, but withouteliminating all flexibility.A) Constrained discretionB) A policy ruleC) A discretionary policyD) The Taylor rule

 

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