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ECON 029 Money and Banking Finals Spring 2013

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Question;ECO 029 ?Money, Banking, and Financial Markets?;Final Exam;Spring 2013;Chapter 2;1) An important financial institution that assists in the initial sale of securities in the primary market is;the;A) 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 maturity;of 7 percent, then the real interest rate on this bond is;A) 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 loan;amount, rounded to the nearest dollar, is;A) $1000.;B) $1210.;C) $2000.;D) $2195.;Chapter 4;4) To claim that a lottery winner who is to receive $1 million per year for twenty years has won $20;million ignores the process of;A) 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 approximately;A) $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 per;year for 25 years. However, you don't have to start making these payments until you graduate from;college four years from now. Why is the yield to maturity necessarily less than 12% (this is the yield to;maturity 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 $1,000;B) A 10 percent coupon bond selling for $1,000;C) A 15 percent coupon bond selling for $1,000;D) A 1 percent coupon bond selling for $900;Chapter 5;8) You would be more willing to buy Apple bonds (holding everything else constant) if;A) 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, increases;B) increases, decreases;C) decreases, decreases;D) decreases, increases;10) In the figure below, the factor responsible for the decline in the interest rate is;A) 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 6;11) In 2013, the government of Greece risked defaulting on its debt due to a severe budget crisis. Using;bond market graphs, determine how default would affect the risk premium between U.S. Treasury debt;and 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 the;graphs 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, 1;percent, 4 percent, and 3 percent, the expectations theory predicts that the bond with the lowest;interest rate today is the one with a maturity of;A) one year.;B) two years.;C) three years.;D) four years.;Chapter 7;13) After careful analysis, you have determined that a firm?s dividends should grow at 7% on average in;the foreseeable future. The firm?s most recent dividend D0 was $3. What is the current price of this;stock, assuming the required return is 18%?;A) $16.67;B) $27.27;C) $29.18;D) $42.86;14) Consider tight monetary policy and its effects on stock prices via the simplified Gordon growth;model equation. Which of the following accurately describes the effects of tight monetary policy on;stock prices, according to this model?;A). The return on bonds and the required return on an equity investment (ke) would rise, while;the 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, while;the 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 8;15) Since they require moremonitoring of firms, ________ contracts are used lessfrequently than;contracts to raise capital.;A) equity, debt;B) debt, loan;C) equity, stock;D) debt, equity;16) The principal-agent problem;A) occurs when managers have more incentive to maximize profits than the stockholdersowners;do.;B) in financial markets helps to explain why equity is a relatively important source of finance for;American business.;C) would not arise if the owners of the firm had complete information about the activities of;the managers.;D) explains why direct finance is more important than indirect finance as a source of business;finance.;17) One way the venture capital firm avoids the free-rider problem is by;A) 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 3;18) If an individual moves money froma demand deposit account toa small-denomination time deposit;account;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 to;exchange goods.;A) 4;B) 6;C) 8;D) 2;20) 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 13;21) The Federal Open Market Committee usually meets ________ times a year.;A) four;B) six;C) eight;D) twelve;22) 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 of;policy 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 fiscal;instruments.;Chapter 10;23) Bank capital is NOT listed on the ________ side of the bank's balance sheet because it represents a;of funds.;A) liability, use;B) liability, source;C) asset, use;D) asset, source;24) When a new depositor opens a checking account at the First National Bank, the bank's assets;and its liabilities ________.;A) increase, increase;B) increase, decrease;C) decrease, increase;D) decrease, decrease;Chapter 14;25) Both ________ and ________ are monetary liabilities of the Fed.;A) securities, loans to financial institutions;B) currency in circulation, reserves;C) securities, reserves;D) currency in circulation, loans to financial institutions;26) The sum of the Fed's monetary liabilities and the U.S. Treasury's monetary liabilities is called;A) 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 $1,000;in the simple model of depositcreation when the required reserve ratio is;A) 10.00;B) 0.10;C) 0.05;D) 0.20;Chapter 15;28) When the Fed wants to raise the federal funds rate after banks have accumulated large amounts of;excess reserves (which is the case right now in 2013), it would;A) 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%, raising;the 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 rising;far above the federal funds target. It shows a rightward shift of the demand curve for reserves from R1;d;to R2;d. 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, iff;T. The shift moves the equilibrium to point 2, where the federal funds;rate equals the discount rate (iff;2= 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 19;31) 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, negatively;B) negatively, positively;C) positively, negatively;D) positively, positively;32) If the money supply is $500 and nominal income is $3,000, the velocity of money is;A) 1/60.;B) 1/6.;C) 6.;D) 60.;33) Velocity is defined as;A) 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 government;budget constraint, which states the following;A) the government budget deficit must equal the sum of the change in the monetary base and;the change in government bonds held by the public.;B) the government budget deficit must equal the difference between the change in the;monetary base and the change in government bonds held by the public.;C) the government budget deficit must equal the difference between the change in the;monetary base and the change in government bonds held by the Fed.;D) the government budget deficit must equal the difference between the change in the;monetary base and the change in government bonds held by the Treasury.;36) The Keynesian demand for real balances can be expressed as;A) M;d;= f(i,Y).;B) M;d;/P = f(i).;C) M;d;/P = f(Y).;D) M;d;/P = f(i,Y).;Chapter 20;37) Assume that autonomous consumption equals $100 and that the mpc equals 0.8. If disposable;income equals $1000, then total consumption equals;A) $900.;B) $1000.;C) $80.;D) $800.;38) A tax increase ________ disposable income, ________ consumption expenditure, and shifts the IS;curve to the ________, everything else held constant.;A) decreases, increases, left;B) decreases, decreases, left;C) increases, increases, right;D) increases, decreases, left;39) Assume that disposable income equals $1000 and the mpc equals 0.6. If total consumption equal;$800, then autonomous consumption is equal to;A) $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 accumulating;B) expand, keep from accumulating;C) cut, build up;D) expand, build up;41) Everything else held constant, aggregate output is increased by a decrease in;A) autonomous consumption.;B) government spending.;C) planned investment.;D) net taxes.;42) An increase in interest rates;A) 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 21;43) The Taylor Principle states that central banks raise nominal rates by ________ than any rise in;expected inflation so that real interest rates ________ when there is a rise in inflation.;A) less, fall;B) more, rise;C) less, rise;D) more, fall;44) Everything else held constant, a decrease in autonomous consumer spending will cause the IS curve;to shift to the ________ and aggregate demand will ________.;A) left, decrease;B) right, increase;C) right, decrease;D) left, increase;45) When the financial crisis started in August 2007, inflation was rising and the Fed began an aggressive;easing lowering of the federal funds rate, which indicated that;A) 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 central;bank to ________ real interest rates, thereby ________ the level of equilibrium aggregate output;everything else held constant.;A) raise, lowering;B) raise, raising;C) reduce, lowering;D) reduce, raising;47) Everything else held constant, an increase in net taxes will cause the IS curve to shift to the;and aggregate demand will ________.;A) right, increase;B) right, decrease;C) left, increase;D) left, decrease;Chapter 22;48) Favorable weather produces a record crop of wheat and rye in the South. Determine the;effects 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, demand;B) decreases, demand;C) decreases, supply;D) increases, supply;50) The long-run rate of unemployment to which an economy always gravitates is the;A) 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 demand;B) short-run aggregate supply;C) the production function;D) long-run aggregate supply;52) The long-run aggregate supply curve shifts to the right when there is;A) 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 the;economy.);A) an increase, an increase;B) a decrease, a decrease;C) no change, an increase;D) no change, a decrease;54) According to aggregate demand and supply analysis, the negative supply shocks of 1973-1975 and;1978-1980 had the effect of;A) 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 24;55) A rise in short-term interest rates that is believed to be only temporary;A) 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 had;been 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 an;inflation rate target. If the commitment is credible, then;A) 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 an;inflation rate target. But if the commitment is notcredible, then;A) 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 include;A) the time-inconsistency problem can lead to poor economic outcomes.;B) discretionary policies pursue overly expansionary monetary policies to boost employment in;the 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 include;A) 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 in;the 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 without;eliminating all flexibility.;A) Constrained discretion;B) A policy rule;C) A discretionary policy;D) The Taylor rule

 

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