ECON 2 Lecture 10: Stocks

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ECON 2 Lecture 9: Federal Reserve and Financial Crises

ECON 2 Lecture 10: Stocks

ECON 2 Lecture Notes - Lecture 11: Bitcoin, Barter, Comparative Advantage

Document Summary

The federal reserve influences the supply of money by influencing the federal funds rate. The cost of holding money is nominal interest rate because you would have made that much if you invested it. The higher the interest rate, the higher the cost is of holding your money, so people are more likely to invest. The demand for money also depends on income and price level. Higher income means higher demand at any interest rate. Higher price level means more money is needed to purchase goods. If your income rises or the price level increases, the demand curve shifts out. Securitization: when a bunch of loans are pooled together and then sold piece-by-piece to third parties as a more secure investment than a single loan. If a firm needs money to expand, they can do several things: Use retained earnings, profits that the company saved.

Related Questions

Choose the correct answer from the brackets:

A)The demand for money is mainly influenced by three variables: r (the short-term interest rate), Y (real GDP), and P (the aggregate Price level). Suppose r rises, but Y and P are unchanged. What happens to the quantity of money demanded?

r is both the opportunity cost of holding money and the reward for holding bonds. Thus, an increase in r causes people to want to hold (more/less ) of their wealth in the form of money and ( more/less) in the form of bonds to take advantage of the higher interest rate.

Suppose real income (Y) rises while the quantity of money in the economy stays the same. What happens to money demand?

The supply of money does not automatically rise when the production of real goods and services (Y) rises. However, the collective demand for money by firms and households does rise. To get this money firms and households attempt to (buy more/ sell some of their /more /less bonds).

Thus, an increase in Y causes people to want to hold (buy more /sell some of their / more /less) of their wealth in the form of money and (buy more / sell some of their / more / less ) in the form of bonds.

C)Suppose the price level (P) rises, but Y and r are unchanged. What happens to money demand?

If Y is unchanged, people will want to buy the same amount of goods and services as before. However, since P is higher, they will need (more / less) money to do so.

Hence, an increase in P causes people to want to hold (more / less) of their wealth in the form of money and (more / less) in the form of bonds.

purplesardine140

1) If the economy was experiencing a severe recession, which of the following combinations of monetary and fiscal policy actions would be most appropriate?

a. a decrease in the reserve requirement coupled with an increase in taxes

b. the sale of government securities by the Fed coupled with an increase in the level of government spending.

c. the purchase of government securities by the Fed coupled with a decrease in the level of government spending.

d. the purchase of government securities by the Fed coupled with a tax reduction

e. an increase in the reserve requirement coupled with a tax reduction

f. the purchase of government securities by the Fed coupled with a tax increase

2) Many years ago, the traditional mortgage loan structure specified
A. a down payment of 20%.
B. an initial loan-to-value ratio of 100%.
C. a variable interest rate.
D. all of the above.

3) Unlike the traditional mortgage amortization schedule, "negative-amortization" mortgages permit the
A. mortgage payments to exceed the accrued interest during the early years of the mortgage.
B. principal payments to grow at a constant rate during the early years of the mortgage.
C. value of the house to depreciate during the early years of the mortgage.
D. outstanding balance to increase over a part of the life of the mortgage.

4) The traditional mortgage amortization schedule specifies a monthly payment that is
A. increasing over the life of the mortgage.
B. decreasing over the life of the mortgage.
C. constant over the life of the mortgage.
D. first increasing, then decreasing, over the life of the mortgage.

5) The "interest-only" mortgage typically converts later to a
A. traditional mortgage with a higher payment.
B. traditional mortgage with a lower payment.
C. "negative-amortization" mortgage with a lower payment.
D. "exotic" mortgage with a lower payment.

6) "Exotic" mortgages became popular in part because they allow someone of
A. means to get into a home they would easily have been able to afford.
B. modest means to get into a home they might otherwise not have been able to afford.
C. modest means to build more equity in their home than a traditional mortgage would allow.
D. modest means to build their credit score by proving they could make challenging payments.

7) Other things equal, increasing home prices tend to
A. force homeowners to spend less than they earn.
B. allow homeowners to spend more than they earn.
C. leave homeowners' ability to spend unaffected.
D. increase the likelihood that homeowners will default on their mortgages.

8) If homeowners purchased a $250,000 home with a zero-down, interest-only mortgage, and the value of the home subsequently fell to $200,000, in order to sell the house and move to another city, the homeowners would be required at closing to pay (in addition to the proceeds from the home sale)
A. nothing.
B. $50,000.
C. any transaction costs and real estate fees.
D. $50,000 plus any transaction costs and real estate fees.

9) Home price escalation in the U.S. during 2005 fueled booms in
A. Iraq and Afghanistan
B. stocks of dot com startups in Silicon Valley and U.S. government bonds
C. home building and home equity lines of credit
D. mortgage foreclosures and home demolition

10) The stimulus package proposed by the Bush Administration in early 2008 relied upon

A. a permanent increase in personal income tax rates
B. a temporary surtax added to existing personal income tax rates
C. making permanent the 2003 income tax rate cuts, as well as tax rebates to taxpayers
D. a requirement that any children claimed as dependents have social security numbers

11) The stimulus plan adopted in 2009 by newly-elected President Obama consisted of
A. only tax cuts
B. only spending increases on newly-created federal programs
C. only attempts to shore up Medicaid, welfare and unemployment programs
D. roughly equal tax cuts and spending increases, with additional spending to shore up existing federal programs

12) The main effect on the economy of the financial sector crisis in late 2008 was
A. reduced aggregate demand
B. increased aggregate demand
C. reduced aggregate supply
D. increased aggregate supply

13) If not corrected, the financial sector crisis of late 2008 would have tended to
A. increase both Real GDP and the general price level
B. increase Real GDP and lower the general price level
C. lower Real GDP and increase the general price level
D. lower both Real GDP and the general price level

14) Monetary policy designed to counteract a reduction in aggregate demand might include
A. a reduction in the money stock
B. a reduction in short-term interest rates
C. increased government infrastructure spending
D. an increase in individual income tax rates

Question 3

According to Joseph Schumpeter, the theory of creative destruction describes a process by which

	A	some new products unleash a gale of destruction that drive other new products out of the market.
B		new products unleash a gale of destruction that drives old products out of the market.
C		new products are created by the destruction of capital.
D		the creation of new products never involves the destruction of old products.

Question 4

Which of the following countries had the highest GDP per capita in 2012?

		A Qatar
B		United States
C		Japan
D		Norway

Question 5

________ save a ________ of their income. This ________ capital in their economy and raises economic growth.

	A	Developing countries; large proportion; decreases
B		Developing countries; small proportion; increases
C		High-income countries; large proportion; increases
D		High-income countries; small proportion; increases

Question 6

The demand for loanable funds is determined by the willingness of ________ to borrow money to engage in new investment projects.

A		government
B		households
C		banks
D		firms

Question 7

The U.S. economy has been more stable since 1950.

True

False

Question 8

When the economy reaches a trough in a business cycle, which of the following will occur?

A		Income, production, and employment will continue to fall.
B		Income, production, and employment will begin to rise.
C		Income and production will rise, but employment will continue to fall.
D		Employment rises, but income and production will continue to fall.

Question 9

In a closed economy, what is the relationship between saving and investment?

A		Saving is greater than investment.
B		Investment is greater than saving.
C		Investment is equal to saving.
D		Investment may be greater or smaller than saving.

Question 10

The per-worker production function shows the relationship between ________ per hour worked and ________ per hour worked, holding ________ constant.

A		labor; real GDP; technology
B		capital; real GDP; technology
C		labor; capital; real GDP
D		capital; labor; real GDP

Question 11

New growth theory states that increases in ________ capital will result in ________ at the ________ level.

	A	knowledge; increasing returns to scale; firm
	B	physical; decreasing returns to scale; firm
	C	knowledge; decreasing returns to scale; economy
D		knowledge; increasing returns to scale; economy

Question 12

Which of the following is not a reason why the Industrial Revolution occurred when and where it did?

A		The British government was committed to upholding private property rights.
B		The British government was able to eliminate arbitrary increases in taxes.
C		The British government was able to more easily seize wealth.
D		Institutional changes by the British government helped protect wealth.

Question 13

Growth in real GDP per capita for the world economy was greatest during

A		the seventeenth century.
B		the eighteenth century.
C		the nineteenth century.
D		the twentieth century.

Question 14

Which of the following is a normative statement about economic growth?

A		Economic growth is associated with higher labor productivity growth.
B		Economic growth increases GDP per capita.
C		Economic growth hurts developing countries.
D		Foreign direct investment stimulates economic growth.

Question 15

The effect of a recession on a company like Whirlpool Corporation is such that

A		sales decline more sharply for Whirlpool as compared to firms that do not produce durable goods.
B		profits fall less sharply as compared to firms that do not produce durable goods.
C		the decline in sales is more short-lived as compared to firms that do not produce durable goods.
D		there is no difference in the impact of the recession on its profits as compared to firms that do not produce durable goods.

Question 16

For the recessions in the United States since the 1950s,

A		cyclical unemployment has been non-existent.
B		unemployment rises on average by about 1.2 percentage points 12 months after a recession begins.
C		unemployment falls on average by 2 percentage points 12 months after a recession begins.
D		unemployment rises on average about 5 percentage points 12 months after a recession begins.

Question 17

You are an economic advisor to the president. You are asked to recommend a policy to promote long-term economic growth in the economy. Which of the following policies would you choose?

A		a reduction in sales taxes
B		an investment tax credit
C		a reduction in taxes on luxury yachts
D		All of these

Question 18

In comparison to a government that runs a balanced budget, when the government runs a budget deficit,

	A	the equilibrium interest rate will fall.
	B	business investment will fall.
	C	household savings will fall.
	D	None of these

Question 19

If labor productivity growth slows down in a country, this means that the growth rate in ________ has declined.

A		labor force participation
B		the quantity of goods or services that can be produced by one hour of work
C		the working-age population
D		nominal GDP

Question 20

Policies to promote growth by increasing saving and investment work through

A		decreasing the supply of loanable funds, lowering the interest rate, raising the level of investment in physical capital.
B		increasing the supply of loanable funds, increasing the interest rate, raising the level of investment in physical capital.
C		increasing the supply of loanable funds, lowering the interest rate, lowering the level of investment in physical capital.
D		increasing the supply of loanable funds, lowering the interest rate, raising the level of investment in physical capital.

ECON 2 Lecture 10: Stocks

ECON 2 Lecture 9: Federal Reserve and Financial Crises

ECON 2 Lecture 10: Stocks

ECON 2 Lecture Notes - Lecture 11: Bitcoin, Barter, Comparative Advantage

Document Summary

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