unit 4 financial sector

Question 1

which of the following is true for bonds but not for stocks?

Answer 1

bonds are interest bearing assets

Question 2

which of the following is considered most liquid asset?

Answer 2

currency

Question 3

if the interest rate on loans before adjusting for inflation is 9%, and the expected inflation rate if 4%, then which of the following must be true?

Answer 3

Lenders are expected to recieve an additional 4% on their loaned funds.

Question 4

Sam pays monthly installments on a five year fixed interest rate auto loan. If the expected inflation rate increases, which of the following will happen?

Answer 4

Sam will pay a lower real interest rate.

Question 5

On the island of Mabera, the local money is called “favoli.” The price of every good in Mabera is expressed as the number of favolis needed to buy the good. The use of favolis to express the price of goods describes which function of money?

Answer 5

unit of account

Question 6

The table below gives the value of various monetary measures, in millions of dollars.
Cash in Circulation $100
Cash in Bank Vaults $2
Bank Reserves $10
Demand Deposits $1,000
Traveler’s Checks $20

what is M1?

Answer 6

1,120 million

Question 7

what available money can banks loan out?

Answer 7

excess reserves (they do it to make it profit when the loans gets paid)

Question 8

ABC Bank is a commercial bank in Country X. Assume the required reserve ratio is 25% and banks in Country X keep no excess reserves. If ABC Bank sells $20 million worth of government bonds to Country X’s central bank, what will happen to the money supply after all adjustments are made in the banking system?

Answer 8

the money supply will increase by a maximum of $80 million.

Question 9

Which of the following changes will necessarily occur as a result of an increase in the nominal interest rate?

Answer 9

the quantity of money demanded will decrease.

Question 10

An increase in the equilibrium nominal interest rate could be caused by which of the following changes?

Answer 10

an increase in real income

Question 11

Which of the following will happen if the central bank of a nation purchases government bonds on the open market?

Answer 11

the monetary base will increase and the money supply will increase

Question 12

Which shifts the aggregate demand curve to the right?

Answer 12

a decrease in overnight interbank lending rate.

Question 13

Which of the following is a monetary policy action a central bank would implement to control inflation?

Answer 13

sell government bonds to the public

Question 14

Which of the following changes in the loanable funds market will decrease the equilibrium real interest rate?

Answer 14

an increase in foreign capital inflows.

Question 15

If the loanable funds market is in equilibrium, then which of the following must be true?

Answer 15

borrowing equals lending

Question 16

on a loanable funds market graph,high interest rates mean demand of loans will be (high or low)

Answer 16

low since people dont want to borrow at such high interest rates

Question 17

supply of loanable funds - when real interest rates are low …

Answer 17

theres not going to be as much savings, quantity of loanable funds go down

Question 18

if people keep money in jar at home… supply of curve will shift

Answer 18

to the left, which real interest rates would go up and thered be a decrease in investment and growth.

Question 19

what happens on a loanable funds market when the government increases deficit spending.

Answer 19

when gov. does more borrowing, it shifts both! two answers, increase in demand OR decrease in supply. but better answer is decrease in supply, when gov. borrows, public saving decrease.

Question 20

define crowding out

Answer 20

that gov. deficit spending designed to help economy actually hurts the economy because it increases real interest rate and decreases investment and growth.