Econ ch 1-6 HW

Question 1

Financial markets promote greater economic efficiency by channeling funds from ________ to ________.

Answer 1

savers to borrowers

Question 2

Prior to almost all recessions since 1950, there has been a drop in

Answer 2

the growth rate of money stock

Question 3

There is a ________ association between inflation and the growth rate of money ________.

Answer 3

positive; supply

Question 4

The management of money and interest rates is called ________ policy and is conducted by a nation’s ________ bank

Answer 4

monetary; central

Question 5

A budget ________ occurs when government expenditures exceed tax revenues for a particular time period.

Answer 5

deficit

Question 6

What is the typical relationship among interest rates on three-month Treasury bills, long-term Treasury bonds, and Baa corporate bonds?

Answer 6

They tend to move together over time with the corporate bond having the highest rate of interest

Question 7

How does the size of the U.S. budget deficit in 2010 compare to the time period since​1950?

Answer 7

expanded since 2007, in 2010 the deficit to GDP was 10%, average since 1950 was about 2%

Question 8

Well-functioning financial markets allow the economy to

Answer 8

operate more efficiently

Question 9

The principal lender-savers are

Answer 9

households

Question 10

Securities are ________ for the person who buys them, but are ________ for the individual or firm that issues them.

Answer 10

assets; liabilities

Question 11

If the maturity of a debt instrument is less than one year, the debt is called

Answer 11

short term

Question 12

A financial market in which previously issued securities can be resold is called a ________ market.

Answer 12

secondary

Question 13

A financial market in which only short-term debt instruments are traded is called the

Answer 13

money market

Question 14

Federal funds

Answer 14

loans made by banks to each other on an overnight basis

banks with excess reserves can lend to banks with demand for extra money and charge FFR

Question 15

If bad credit risks are the ones who most actively seek loans and, therefore, receive them from financial intermediaries, then financial intermediaries face the problem of

Answer 15

adverse selection

Question 16

Financial institutions that accept deposits and make loans are called

Answer 16

depository institutions

Question 17

Example of a depository institution

Answer 17

mutual savings bank

Question 18

A person’s house is part of her

Answer 18

wealth

Question 19

Currency includes

Answer 19

paper money and coins

Question 20

Income

Answer 20

flow of earnings per unit of time

Question 21

When compared to exchange systems that rely on money, disadvantages of the barter system include

Answer 21

the requirement of a double coincidence of wants

Question 22

requirements for medium of exchange

Answer 22

widely accepted, not deteriorate quickly, easy to carry, divisible, easily standardized

Question 23

___________ could be used for some other purpose other than as a medium of exchange, for example, gold coins could be melted down and turned into gold jewelry

Answer 23

commodity money

Question 24

Included in M1

Answer 24

Currency
Traveler’s checks
Demand Deposits
Other check deposits

Question 25

Included in M2

Answer 25

Small den. deposits Savings and Money Markets Money Mkt Mutual Fund shares

Question 26

If an individual moves money from a small-denomination time deposit to a demand deposit account

Answer 26

M1 increases and M2 stays the same.

Question 27

Most frequent forms of fixed payment loans

Answer 27

installment loans and mortgages

Question 28

rate of return

Answer 28

sum of current yield and rate of capital gain

Question 29

How does an equal increase in all bond interest rates change the prices of long term vs short term bonds

Answer 29

decreases long term bond returns more than short term

Question 30

Prices and returns for ________ bonds are more volatile than those for ________ bonds, everything else held constant.

Answer 30

long term; short term

Question 31

When the ________ interest rate is low, there are greater incentives to ________ and fewer incentives to ________.

Answer 31

real; borrow; lend

Question 32

An increase in an asset's expected return relative to that of an alternative asset, holding everything else constant, ________ the quantity demanded of the asset.

Answer 32

increases

Question 33

Holding everything else constant, if interest rates are expected to increase, the demand for bonds ________ and the demand curve shifts ________.

Answer 33

decreases; left

Question 34

If housing prices are expected to increase, then, other things equal, the demand for houses will ________ and that of Treasury bills will ________.

Answer 34

increase; decrease

Question 35

If fluctuations in interest rates become smaller, then, other things equal, the demand for stocks ________ and the demand for long-term bonds ________.

Answer 35

increases; increases or decreases; decreases

Question 36

When the interest rate on a bond is above the equilibrium interest rate, in the bond market there is excess ________ and the interest rate will ________

Answer 36

demand; fall

Question 37

When the price of a bond decreases, all else equal, the bond demand curve

Answer 37

does not shift

Question 38

Higher government deficits ________ the supply of bonds and shift the supply curve to the ________, everything else held constant.

Answer 38

increase; right

Question 39

Deflation causes the demand for bonds to ________, the supply of bonds to ________, and bond prices to ________, everything else held constant

Answer 39

increase; decrease; increase

Question 40

In Keynes's liquidity preference framework, if there is excess demand for money, there is

Answer 40

an excess supply for bonds

Question 41

How does an increase to the interest rates change the demand for money

Answer 41

decreases the quantity of money demanded

Question 42

When the Fed ________ the money stock, the money supply curve shifts to the ________ and the interest rate ________, everything else held constant.

Answer 42

increases; right; falls

Question 43

Factors that shift demand for money

Answer 43

Income effect, price level effect, expected inflation effect

Question 44

When the growth rate of the money supply is increased, interest rates will fall immediately if the liquidity effect is ________ than the other money supply effects and there is ________ adjustment of expected inflation.

Answer 44

larger, slow

Question 45

A bond with default risk will always have a ________ risk premium and an increase in its default risk will ________ the risk premium

Answer 45

positive, increase

Question 46

A decrease in the liquidity of corporate bonds, other things being equal, shifts the demand curve for corporate bonds to the ________ and the demand curve for Treasury bonds shifts to the ________.

Answer 46

left; right

Question 47

According to the expectations theory of the term structure, the interest rate on a long-term bond will equal the ________ of the short-term interest rates that people expect to occur over the life of the long-term bond.

Answer 47

average

Question 48

According to the liquidity premium theory of the term structure, a downward sloping yield curve indicates that short-term interest rates are expected to

Answer 48

decline sharply in futur

Question 49

An increase in the riskiness of corporate bonds will ________ the price of corporate bonds and ________ the price of Treasury bonds, everything else held constant.

Answer 49

reduce; increase

Question 50

Bonds with no default risk are called

Answer 50

default-free bonds

Question 51

how will the abolishment of income tax change the demand for municipal bonds?

Answer 51

decrease demand, higher interest rates

Question 52

The U-shaped yield curve in the figure above indicates that short-term interest rates are expected to

Answer 52

fall moderately in the near-term and rise later on

Question 53

The typical shape for a yield curve

Answer 53

gently upward sloping

Question 54

A key assumption in the segmented markets theory is that bonds of different maturities

Answer 54

are not substitutes at all