Exercise 2

Question 1

Economic policy affects:

Answer 1

the entire financial system

Question 2

More than half of all US dollars can be found

Answer 2

in foreign countries

Question 3

The expected rate of change in prices is known as the

Answer 3

expected inflation rate

Question 4

During the 2000s, banks became complacent about making mortgage loans because:

Answer 4

the banks counted on housing prices to keep appreciating

Question 5

In the long run, the only economic variable that the Fed can affect is:

Answer 5

inflation

Question 6

An equation that relates the interest rate to the output gap and the inflation rate is

Answer 6

the Taylor rule

Question 7

Another name for a debt security is a:

Answer 7

bond

Question 8

In the US, the biggest issuers of securities are:

Answer 8

business firms

Question 9

The owner of a financial security is known as

Answer 9

a lender

Question 10

Which of the following is true of debt securities?

Answer 10

A debt security specifies a particular maturity date

Question 11

A company that takes short term deposits and makes long term loans is a

Answer 11

financial intermediary

Question 12

Owning a variety of securities means engaging in

Answer 12

diversification

Question 13

The market in which a security is sold from one personal investor to another is know as

Answer 13

the secondary market

Question 14

US gov borrows by auctioning its bonds in the

Answer 14

primary market

Question 15

If the demand for a company’s bonds decreases, supply remaining unchanged,

Answer 15

its interest rate will rise while its equilibrium quantity will fall

Question 16

Risk that cannot be eliminated by diversification is referred to as

Answer 16

market risk

Question 17

The ease or difficulty with which you can buy or sell a security in the secondary market when you want to without incurring significant costs is known as:

Answer 17

liquidity

Question 18

A US gov savings bond is an example of a

Answer 18

nonmarketable security

Question 19

Because these securities are more liquid and generally have smaller price fluctuations, corporations and banks use the _____ securities to earn interest on temporary surplus funds

Answer 19

money market

Question 20

US Treasury bills pay no interest but are sold at a ____. That is, you will pay a lower price than the amount you receive at maturity.

Answer 20

Discount

Question 21

A short term debt instrument issued by well-known corporations is called

Answer 21

commercial paper

Question 22

The most liquid securities traded in the capital market are:

Answer 22

treasury bonds

Question 23

Prices of money market instruments undergo the least price fluctuations because of

Answer 23

the short terms to maturity for the securities

Question 24

Functions of money

Answer 24

Medium of exchange
unit of account
store of value

Question 25

Ultimately the value and functionality of money are determined by the

Answer 25

general acceptability to other people

Question 26

All the financial assets in M1 can be spent

Answer 26

True

Question 27

Hyperinflation:

Answer 27

tends to destroy ALL functions of money

Question 28

A $2 bill is an example of:

Answer 28

fiat money

Question 29

Which of the following does not belong in the M1 category?

Answer 29

savings deposits

Question 30

The conversion of a barter economy to one that uses money

Answer 30

increases efficiency by reducing transactions costs

Question 31

What is required of a good medium of exchange?

Answer 31

Low uncertainty over value in trade

Question 32

When money prices are used to help us maximize our utility choices, money is said to function as a

Answer 32

unit of account

Question 33

In explaining the evolution of money

Answer 33

new forms of money evolve to lower transactions costs

Question 34

People hold money even during inflationary episodes when other assets prove to be better stores of value. This can be explained by the fact that money is

Answer 34

extremely liquid

Question 35

Legal tender:

Answer 35

having legal tender is neither necessary nor sufficient to be money

Question 36

I an individual goes to a bank and deposits $15,000 cash they just received from an illegal drug deal into their savings account, then

Answer 36

M1 decreases and M2 stays the same