Lcon 203S Money, 8ank|ng, and Macroeconom|c Act|v|ty, Ia|| 2012

Sect|on 4
Answers to M|dterm 1

Correct answers are |nd|cated by bo|d face.

1. Plgh lnLeresL raLes mlghL ________ purchaslng a house or car buL aL Lhe same Llme hlgh lnLeresL
raLes mlghL ________ savlng.
A) d|scourage, encourage
8) dlscourage, dlscourage
C) encourage, encourage
u) encourage, dlscourage

2. An lncrease ln Lhe lnLeresL raLe
A) lncreases Lhe demand for money.
8) lncreases Lhe quanLlLy of money demanded.
C) decreases Lhe demand for money.
D) decreases the quant|ty of money demanded.

3. As a sLore of value, money
A) does noL earn lnLeresL.
8) cannoL be a durable asseL.
C) musL be currency.
D) |s a way of sav|ng for future purchases.

4. ln Lhe llquldlLy preference framework,
A) Lhe demand for bonds musL equal Lhe supply of money.
8) Lhe demand for money musL equal Lhe supply of bonds.
C) an excess demand of bonds lmplles an excess demand for money.
D) an excess supp|y of bonds |mp||es an excess demand for money.

3. 1he currency componenL lncludes paper money and colns held ln
A) bank vaulLs.
8) A1Ms.
C) the hands of the nonbank pub||c.
u) Lhe cenLral bank.

6. ln whlch of Lhe followlng slLuaLlons would you prefer Lo be Lhe lender?
A) 1he lnLeresL raLe ls 9 percenL and Lhe expecLed lnflaLlon raLe ls 7 percenL.
8) 1he |nterest rate |s 4 percent and the expected |nf|at|on rate |s 1 percent.
C) 1he lnLeresL raLe ls 13 percenL and Lhe expecLed lnflaLlon raLe ls 13 percenL.
u) 1he lnLeresL raLe ls 23 percenL and Lhe expecLed lnflaLlon raLe ls 30 percenL.

7. lf Lhe nomlnal raLe of lnLeresL ls 2 percenL, and Lhe expecLed lnflaLlon raLe ls -10 percenL, Lhe real
raLe of lnLeresL ls
A) 2 percenL.
8) 8 percenL.
C) 10 percenL.
D) 12 percent.

8. 1he dlfference beLween money and lncome ls LhaL
A) money ls a flow and lncome ls a sLock.
8) money |s a stock and |ncome |s a f|ow.
C) Lhere ls no dlfference-money and lncome are boLh sLocks.
u) Lhere ls no dlfference-money and lncome are boLh flows.

9. A share of common sLock ls a clalm on a corporaLlon's
A) debL.
8) llablllLles.
C) expenses.
D) earn|ngs and assets.

10. AlLhough Lhe domlnance of ________ over ________ ls clear ln all counLrles, Lhe relaLlve
lmporLance of bond versus sLock markeLs dlffers wldely.
A) f|nanc|a| |ntermed|ar|es, secur|t|es markets
8) flnanclal lnLermedlarles, governmenL agencles
C) governmenL agencles, flnanclal lnLermedlarles
u) governmenL agencles, securlLles markeLs

11. A goal of Lhe SecurlLles and Lxchange Commlsslon ls Lo reduce problems arlslng from
A) compeLlLlon.
8) banklng panlcs.
C) rlsk.
D) asymmetr|c |nformat|on.

12. Whlch of Lhe followlng sLaLemenLs abouL Lhe characLerlsLlcs of debL and equlLy ls false?
A) 1hey can boLh be long-Lerm flnanclal lnsLrumenLs.
8) 1hey can both be short-term f|nanc|a| |nstruments.
C) 1hey boLh lnvolve a clalm on Lhe lssuer's lncome.
u) 1hey boLh enable a corporaLlon Lo ralse funds.

13. 1he hlgher a securlLy's prlce ln Lhe secondary markeL Lhe ________ funds a flrm can ralse by
selllng securlLles ln Lhe ________ markeL.
A) more, pr|mary
8) more, secondary
C) less, prlmary
u) less, secondary

14. Compared Lo an economy LhaL uses a medlum of exchange, ln a barLer economy
A) transact|on costs are h|gher.
8) LransacLlon cosLs are lower.
C) llquldlLy cosLs are hlgher.
u) llquldlLy cosLs are lower.

13. Whlch of Lhe followlng sLaLemenLs besL explalns how Lhe use of money ln an economy lncreases
economlc efflclency?
A) Money lncreases economlc efflclency because lL ls cosLless Lo produce.
8) Money lncreases economlc efflclency because lL dlscourages speclallzaLlon.
C) Money |ncreases econom|c eff|c|ency because |t decreases transact|ons costs.
u) Money cannoL have an effecL on economlc efflclency.

16. 8educlng rlsk Lhrough Lhe purchase of asseLs whose reLurns do noL always move LogeLher ls
A) d|vers|f|cat|on.
8) lnLermedlaLlon.
C) lnLervenLlon.
u) dlscounLlng.

17. A fall ln Lhe level of prlces
A) does noL affecL Lhe value of money.
8) has an uncerLaln effecL on Lhe value of money.
C) |ncreases the va|ue of money.
u) reduces Lhe value of money.

18. lor a commodlLy Lo funcLlon effecLlvely as money lL musL be
A) eas||y standard|zed, mak|ng |t easy to ascerta|n |ts va|ue.
8) dlfflculL Lo make change.
C) deLerloraLe qulckly so LhaL lLs supply does noL become Loo large.
u) hard Lo carry around.

19. Suppose LhaL Lhe lnLeresL raLe changes every year as follows: 8, 12, 10, and 13. ?ou would
llke Lo recelve $1,000 aL Lhe end of Lhe second year and $2,000 aL Lhe end of Lhe fourLh year.
Pow much do you need rlghL now?
A) $1,480
8) $1,940
C) 52,134
u) $2,329

20. lf Lhe amounL payable ln Lwo years ls $2420 for a slmple loan aL 10 percenL lnLeresL, Lhe loan
amounL ls
A) $1000.
8) $1210.
C) 52000.
u) $2200.

21. lf a bond pays $110 nexL year and $121 Lhe year afLer LhaL, whaL ls lLs yleld Lo maLurlLy for Lhls
bond?
A) 9 percenL
8) 10 percenL
C) 11 percenL
D) We cannot compute |t.

22. 1he ________ of a coupon bond and Lhe yleld Lo maLurlLy are lnversely relaLed.
A) pr|ce
8) par value
C) maLurlLy daLe
u) Lerm

23. 1he ________ ls below Lhe coupon raLe when Lhe bond prlce ls ________ lLs par value.
A) y|e|d to matur|ty, above
8) yleld Lo maLurlLy, below
C) dlscounL raLe, above
u) dlscounL raLe, below

24. Whlch of Lhe followlng bonds would you prefer Lo be buylng?
A) A 510,000 face-va|ue secur|ty w|th a 10 percent coupon se|||ng for 59,000
8) A $10,000 face-value securlLy wlLh a 7 percenL coupon selllng for $10,000
C) A $10,000 face-value securlLy wlLh a 9 percenL coupon selllng for $10,000
u) A $10,000 face-value securlLy wlLh a 10 percenL coupon selllng for $10,000

23. A dlscounL bond selllng for $13,000 wlLh a face value of $20,000 ln Lwo years has a yleld Lo
maLurlLy of abouL
A) 1S.S percent.
8) 20 percenL.
C) 23 percenL.
u) 33.3 percenL.

26. WhaL ls Lhe reLurn on a 3 percenL coupon bond LhaL lnlLlally sells for $1,000 and sells for $1,200
nexL year?
A) 3 percenL
8) 10 percenL
C) -3 percenL
D) 2S percent

27. When l purchase a 10 percenL coupon bond, l calculaLe a yleld Lo maLurlLy of 8 percenL. lf l hold
Lhls bond Lo maLurlLy, Lhen my reLurn on Lhls asseL ls
A) 8 percent.
8) 10 percenL.
C) 12 percenL.
u) Lhere ls noL enough lnformaLlon Lo deLermlne Lhe reLurn.

28. 1he bond markeLs are lmporLanL because Lhey are
A) easlly Lhe mosL wldely followed flnanclal markeLs ln Lhe unlLed SLaLes.
8) Lhe markeLs where forelgn exchange raLes are deLermlned.
C) the markets where |nterest rates are determ|ned.
u) Lhe markeLs where all borrowers geL Lhelr funds.

29. Whlch of Lhe followlng are generally Lrue of bonds?
A) 1he on|y bond whose return equa|s the |n|t|a| y|e|d to matur|ty |s one whose t|me to
matur|ty |s the same as the ho|d|ng per|od.
8) A rlse ln lnLeresL raLes ls assoclaLed wlLh a fall ln bond prlces, resulLlng ln caplLal galns on
bonds whose Lerms Lo maLurlLy are longer Lhan Lhe holdlng perlods.
C) 1he longer a bond's maLurlLy, Lhe smaller ls Lhe slze of Lhe prlce change assoclaLed wlLh
an lnLeresL raLe change.
u) rlces and reLurns for shorL-Lerm bonds are more volaLlle Lhan Lhose for longer-Lerm
bonds.

30. Whlch of Lhe followlng beneflL dlrecLly from any lncrease ln Lhe corporaLlon's proflLablllLy?
A) a bond holder
8) a commerclal paper holder
C) a shareho|der
u) a 1-blll holder

31. Assumlng Lhe same coupon raLe and maLurlLy lengLh, Lhe dlfference beLween Lhe yleld on a
1reasury lnflaLlon roLecLed SecurlLy and Lhe yleld on a nonlndexed 1reasury securlLy provldes
lnslghL lnLo
A) Lhe nomlnal lnLeresL raLe.
8) Lhe real lnLeresL raLe.
C) Lhe nomlnal exchange raLe.
D) the expected |nf|at|on rate.

32. 1yplcally, borrowers have superlor lnformaLlon relaLlve Lo lenders abouL Lhe poLenLlal reLurns
and rlsks assoclaLed wlLh an lnvesLmenL pro[ecL. 1he dlfference ln lnformaLlon ls called
A) moral selecLlon.
8) rlsk sharlng.
C) asymmetr|c |nformat|on.
u) adverse hazard

33. 8anklng asseLs from mosL llquld Lo leasL llquld, Lhe correcL order ls
A) savlngs bonds, house, currency.
8) currency, sav|ngs bonds, house.
C) currency, house, savlngs bonds.
u) house, savlngs bonds, currency.

34. Poldlng everyLhlng else consLanL,
A) lf asseL A's rlsk rlses relaLlve Lo LhaL of alLernaLlve asseLs, Lhe demand wlll lncrease for
asseL A.
8) lf wealLh lncreases, demand for asseL A lncreases and demand for alLernaLlve asseLs
decreases.
C) the more ||qu|d |s asset A, re|at|ve to a|ternat|ve assets, the greater w||| be the
demand for asset A.
u) Lhe lower Lhe expecLed reLurn Lo asseL A relaLlve Lo alLernaLlve asseLs, Lhe greaLer wlll
be Lhe demand for asseL A.

33. A movemenL along Lhe bond demand or supply curve occurs when ________ changes.
A) bond pr|ce
8) lncome
C) wealLh
u) expecLed reLurn

36. 1he reducLlon of brokerage commlsslons for Lradlng common sLocks LhaL occurred ln 1973
caused Lhe demand for bonds Lo ________ and Lhe demand curve Lo shlfL Lo Lhe ________.
A) fall, rlghL
8) fa||, |eft
C) rlse, rlghL
u) rlse, lefL

37. lf an lndlvldual moves money from a checklng deposlL accounL Lo a money markeL deposlL
accounL,
A) M1 decreases and M2 stays the same.
8) M1 sLays Lhe same and M2 lncreases.
C) M1 sLays Lhe same and M2 sLays Lhe same.
u) M1 lncreases and M2 decreases.

38. kevln purchaslng concerL LlckeLs wlLh hls credlL card ls an example of ________ .
A) Lhe medlum of exchange funcLlon of money
8) Lhe unlL of accounL funcLlon of money
C) Lhe sLore of value funcLlon of money
D) deferr|ng payment.

39. CounLrles LhaL experlence very hlgh raLes of lnflaLlon may also have
A) balanced budgeLs.
8) rap|d|y grow|ng money supp||es.
C) falllng money supplles.
u) consLanL money supplles.

40. Whlch of Lhe followlng can be descrlbed as lnvolvlng dlrecL flnance?
A) A corporat|on |ssues new shares of stock.
8) eople buy shares ln a muLual fund.
C) A penslon fund manager buys a shorL-Lerm corporaLe securlLy ln Lhe secondary markeL.
u) An lnsurance company buys shares of common sLock ln Lhe over-Lhe-counLer markeLs.

41. Whlch of Lhe followlng ls a long-Lerm flnanclal lnsLrumenL?
A) A negoLlable cerLlflcaLe of deposlL
8) A repurchase agreemenL
C) A U.S. 1reasury bond
u) A u.S. 1reasury blll

42. 8anks and oLher flnanclal lnsLlLuLlons engage ln flnanclal lnLermedlaLlon, whlch
A) can hurL Lhe performance of Lhe economy.
8) can benef|t econom|c performance.
C) has no effecL on economlc performance.
u) lnvolves borrowlng from lnvesLors and lendlng Lo savers.

43. A lower level of lncome causes Lhe demand for money Lo ________ and Lhe lnLeresL raLe Lo
________, everyLhlng else held consLanL.
A) decrease, decrease
8) decrease, lncrease
C) lncrease, decrease
u) lncrease, lncrease

44. lL ls Lrue LhaL lnflaLlon ls a
A) conLlnuous lncrease ln Lhe money supply.
8) conLlnuous fall ln prlces.
C) decllne ln lnLeresL raLes.
D) cont|nua||y r|s|ng pr|ce |eve|.

43. When Lhe expecLed lnflaLlon raLe decreases, Lhe real cosL of borrowlng ________ and bond
supply ________, everyLhlng else held consLanL.
A) lncreases, lncreases
8) |ncreases, decreases
C) decreases, lncreases
u) decreases, decreases

46. An llllquld asseL ls
A) an asseL LhaL can easlly and qulckly be sold Lo ralse cash.
8) a share of an ocean resorL.
C) d|ff|cu|t to rese||.
u) always sold ln an over-Lhe-counLer markeL.

47. A key facLor ln produclng hlgh economlc growLh ls
A) ellmlnaLlng forelgn Lrade.
8) we||-funct|on|ng f|nanc|a| markets.
C) hlgh lnLeresL raLes.
u) sLock markeL volaLlllLy.

48. 1he mosL llquld securlLles Lraded ln Lhe caplLal markeL are
A) corporaLe bonds.
8) munlclpal bonds.
C) U.S. 1reasury bonds.
u) morLgage-backed securlLles.

49. When Lhe money supply ls lncreased, lnLeresL raLes wlll fall lmmedlaLely lf Lhe llquldlLy effecL ls
________ Lhan Lhe oLher money supply effecLs and Lhere ls ________ ad[usLmenL of expecLed
lnflaLlon.
A) larger, fasL
8) |arger, s|ow
C) smaller, slow
u) smaller, fasL

30. An equal decrease ln all bond lnLeresL raLes
A) lncreases Lhe prlce of a flve-year bond more Lhan Lhe prlce of a Len-year bond.
8) |ncreases the pr|ce of a ten-year bond more than the pr|ce of a f|ve-year bond.
C) decreases Lhe prlce of a flve-year bond more Lhan Lhe prlce of a Len-year bond.
u) decreases Lhe prlce of a Len-year bond more Lhan Lhe prlce of a flve-year bond.