ECON 2035 : Review Questions Exam 2 Spr 2012

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15 Mar 2019

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However, we know there are different types of bonds short-term bonds and long-term bonds and government bonds and corporate bonds. Explain your answer: we said that the equity premium was lower from the mid-1980s to mid-2007 during the great moderation than in the 1960s-mid-1980s. Appreciated: suppose that the currency of the isle of lucy (a country) depreciates relative to other currencies, other things equal. Explain briefly: after the introduction of the euro, transactions costs for buying and selling european securities have fallen. Other things equal, what effect would this have on the value of the. Explain briefly: what happens to the value of us exports and imports as a result, suppose the european central bank undertook an unexpectedly expansionary monetary policy (i. e. , engaged in open market purchases). Explain briefly: suppose that consumers and firms in the us revise upward their expectation of the inflation rate over the next year but leave unchanged their expectations of the inflation rate in europe.

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6. If there is a shortage of loanable funds, then

a.	the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is above equilibrium.
b.	the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is below equilibrium.
c.	the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is above equilibrium.
d.	the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is below equilibrium.

7. We associate the term debt finance with

a.	the bond market and we associate the term equity finance with the stock market.
b.	the stock market and we associate the term equity finance with the bond market.
c.	financial intermediaries and we associate the term equity finance with financial markets.
d.	financial markets and we associate the term equity finance with financial intermediaries.

8. If the demand for loanable funds shifts to the right, then the equilibrium interest rate

a.	and the quantity of loanable funds rises.
b.	and the quantity of loanable funds falls.
c.	rises and the quantity of loanable funds falls.
d.	falls and the quantity of loanable funds rises.

9. Long-term bonds are

a.	riskier than short-term bonds, and so interest rates on long-term bonds are usually lower than interest rates on short-term bonds.
b.	riskier than short-term bonds, and so interest rates on long-term bonds are usually higher than interest rates on short-term bonds.
c.	less risky than short-term bonds, and so interest rates on long-term bonds are usually lower than interest rates on short-term bonds.
d.	less risky than short-term bonds, and so interest rates on long-term bonds are usually higher than interest rates on short-term bonds.

10. Compared to bondholders, stockholders

a.	face higher risk and have the potential for higher returns.
b.	face higher risk but receive a fixed payment.
c.	face lower risk and have the potential for higher returns.
d.	face lower risk but receive a fixed payment.

11. The old adage, 'don't put all your eggs in one basket', is very similar to a modern bit of advice concerning financial matters:

a.	Buy low-risk bonds.
b.	Use a medium of exchange.
c.	Diversify.
d.	Intermediate.

12. A budget surplus is created if

a.	the government sells more bonds than it buys back.
b.	the government spends more than it receives in tax revenue.
c.	private saving is greater than zero.
d.	None of the above is correct.

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5. Plots of the yield curve can be useful for: a. Predicting the future course of inflation b. Predicting the future trends in international trade c. Predicting the future course of interest rates d. Prediction the future policy actions of the Federal Reserve System

6. An upward sloping yield curve means that, a. Short-term interest rates are expected to fall, so that long-term interest rates will be higher than short-term interest b. Short-term interest rates are expected to rise, so that short-term interest rates will be higher than long-term interest c. Short-term interest rates are expected to rise, so that long-term interest rates will be higher than short-term interest d. Short-term interest rates are expected to fall, so that short-term interest rates will be lower than long-term interest

7. Which of the following is NOT a stylized fact about the yield curve. a. The yield curve is generally upward sloping b. The yield curve is generally downward sloping c. The yield curve tends to shift over time d. The yield curve tends tend to predict future economic activity

8. If the Expectations Hypothesis holds true about long-term and short-term bonds being substitutes, then if the U.S. government decides to issue a large stock of long-term bonds, we could expect, a. The yield curve to become steeper b. The yield curve to become flatter c. The yield curve to shift down d. The yield curve to shift up

9. Suppose that businesses believe that the economy is about to expand, then we could expect, a. The yield curve to become steeper b. The yield curve to become flatter c. The yield curve to shift down d. The yield curve to shift up

10. Empirical evidence in US shows that when the spread between long term bonds and short-term bonds is negative (that is: the yield curve slopes downward or is inverted) then __________ is highly possible. a. Higher inflation b. Lower inflation c. A recession d. An economic expansion

11. According to the pure expectations theory of term structure, a flat yield curve is interpreted to mean that, a. Interest rates are expected to rise b. Interest rates are expected to fall c. Interest rates are expected to remain constant d. Interest rates are expected to rise and then to fall e. None of the above

12. Yield curves can be classified as: a. Upward sloping b. Downward sloping c. Flat d. All of the above e. Only (a) and (b)

13. Yield curves can be: a. Steeply upward sloping b. Moderately upward sloping c. Downward sloping d. All of the above e. Only (a) and (b)

14. Typically, yield curves are: a. Gently upward sloping b. Gently downward sloping c. Flat d. Bowl shaped e. Mound shaped

15. When yield curves are steeply upward sloping, a. Long-term interest rates are above short-term interest rates b. Short-term interest rates are above long-term interest rates c. Short-term interest rates are about the same as long-term interest rates d. Medium-term interest rates are above both short-term and long-term interest rates e. Medium-term interest rates are below both short-term and long-term interest rates

16. An inverted yield curve: a. Slopes up b. Is flat c. Slopes down d. Has a U shape e. Has an inverted U shape

17. According to the expectations theory of the term structure, a. The interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds b. Buyers of bonds do not prefer bonds of one maturity over another c. Interest rates on bonds of different maturities move together over time d. All of the above e. Only (a) and (b)

18. According to the expectations theory of the term structure, a. The interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds b. Interest rates on bonds of different maturities move together over time c. Buyers of bonds prefer short-term to long-term bonds d. All of the above e. Only (a) and (b)

19. According to the expectations theory of the term structure, a. When the yield curve is steeply upward sloping, short-term interest rates are expected to rise in the future b. When the yield curve is downward sloping, short-term interest rates are expected to decline in the future c. Buyers of bonds do not prefer bonds of one maturity over another d. All of the above e. Only (a) and (b)

20. According to the expectations theory of the term structure, a. When the yield curve is steeply upward sloping, short-term interest rates are expected to rise in the future b. When the yield curve is downward sloping, short-term interest rates are expected to decline in the future c. Investors have strong preferences for short-term relative to long-term bonds, explaining why yield curves typically slope upward d. All of the above e. Only (a) and (b)

21. According to the expectations theory of the term structure, a. When the yield curve is steeply upward sloping, short-term interest rates are expected to rise in the future b. When the yield curve is downward sloping, short-term interest rates are expected to decline in the future c. Yield curves should be as equally likely to slope downward as slope upward d. All of the above e. Only (a) and (b)

22. According to the expectations theory of the term structure, a. The interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds b. Buyers of bonds do not prefer bonds of one maturity over another c. Yield curves should be as equally likely to slope downward as slope upward d. All of the above e. Only (a) and (b)

23. According to the expectations theory of the term structure, a. The interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds b. Buyers of bonds do prefer short-term to long-term bonds c. Interest rates on bonds of different maturities do not move together over time d. All of the above

24. Assume that over the next two years, the expected path of 1-year interest rates is 4 percent and 1 percent. The expectations theory of the term structure predicts that the current interest rate on 2-year bond is: a. 1% b. 1.5% c. 2% d. 2.5% e. 4%

25. Assume that over the next two years, the expected path of 1-year interest rates is 1 percent and 4 percent. The expectations theory of the term structure predicts that the current interest rate on 2-year bond is: a. 1% b. 1.5% c. 2% d. 2.5% e. 4%

26. Assume that the current 1-year interest rate is 3 percent and the current 2-year interest rate is 2 percent. The expectations theory of the term structure predicts that the interest rate expected on 1-year bonds next year is: a. 1% b. 1.5% c. 2% d. 2.5% e. 4%

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Each Federal Reserve Bank is

Answer

		a corporation.
		a government owned enterprise.
		a government subsidized entity.
		a government-sponsored enterprise.

A transaction in which the Fed agrees to buy a security one day and sell it back the next day is

Answer

		an overnight securitization operation.
		a repurchase agreement.
		a legal tender.
		a rebate sale.

The Federal Reserve document that states the goals of the FOMC and the target for the federal funds rate is known as the

Answer

		Directive.
		Beige book.
		Bluebook.
		Green book.

How long is the normal term in office for a Governor of the Federal Reserve Board?

Answer

		Five years
		Seven years
		Fourteen years
		Life

The federal funds rate is the interest rate on

Answer

		loans to banks from the Fed.
		loans by banks to the Fed.
		short-term loans between banks.
		Treasury bills.

Expenditures of each Federal Reserve Bank are approved by

Answer

		the U.S. Senate.
		the President of the United States.
		the U.S. Treasury Department.
		the Federal Reserve Board of Governors.

Federal Reserve Banks pay for their central banking operations through

Answer

		government tax revenue.
		interest on the securities they own.
		fees charged to banks that use their services.
		dividends paid by local banks.

When the Fed engages in open-market operations, the transactions are conducted by

Answer

		the Open Market Desk at the Federal Reserve Bank of New York.
		the Open Market Desk at the Federal Reserve Board in Washington, D.C.
		the National Bureau of Economic Research.
		the Federal Open Market Committee.

In 2006, Chairman Greenspan left the Fed because

Answer

		President Bush wanted him to resign.
		he reached mandatory retirement age.
		his term as Governor expired.
		his term as Chairman expired.

The Federal Reserve publication that discusses forecasts for the economy is known as the

Answer

		Redbook.
		Beigebook.
		Bluebook.
		Greenbook.

The FOMC directive

Answer

		describes forecasts for the economy.
		states the target for the federal funds rate.
		discusses the regional economies around the country.
		shows the Fed's balance sheet.

The chairman of the Federal Reserve Board who reduced the inflation rate from over 10 percent to about 3 percent in the early 1980s was

Answer

		Arthur Burns.
		G. William Miller.
		Paul Volcker.
		Alan Greenspan.

Which Fed chairman ensured the independence of the Federal Reserve in the 1950s?

Answer

		William McChesney Martin
		Arthur Burns
		Paul Volcker
		G. William Miller

There are ____ Federal Reserve Banks.

Answer

		seven
		ten
		twelve
		fifteen

Purchases and sales of government securities in the secondary market are known as

Answer

		discount borrowing and lending.
		federal funds purchases and sales.
		discounting.
		open-market operations.

The monetary base can be divided into

Answer

		currency plus transactions deposits.
		vault cash plus reserves held at the Fed.
		required clearing balances plus currency.
		reserves plus currency.

The Fed does not generally change reserve requirements to affect the money supply because

Answer

		the impact is too large.
		the Fed needs the approval of Congress to do so.
		it's not legal for the Fed to do so.
		the Fed needs the approval of the President of the United States to do so.

The Fed has decided to tighten monetary policy, so it decreases the money supply through

Answer

		defensive open-market operations.
		dynamic open-market operations.
		reduced discount loans for profit.
		reduced discount loans for business needs.

A haircut is

Answer

		the extra collateral the Fed requires above the value of a discount loan.
		the extra principal a commercial bank requires the Fed to pay when making a discount loan.
		the difference between what an investor pays for a bond and what the investor sells the bond for.
		expected personal grooming for a member of the Board of Governors.

Currency held by the nonbank public plus banks' vault cash plus banks' deposits at the Fed equals

Answer

		the Fed's capital stock.
		discount loans.
		the monetary base.
		required clearing balances.

The extra collateral the Fed requires above the value of a discount loan is known as

Answer

		the term premium.
		a haircut.
		a covenant.
		secondary credit.

Currency held by the nonbank public plus banks' reserves equals

Answer

		the Fed's capital stock.
		discount loans.
		the monetary base.
		required clearing balances.

The money supply divided by the monetary base equals

Answer

		the reserve ratio.
		velocity.
		high-powered money.
		the money multiplier.

The main liability on the Federal Reserve's balance sheet is

Answer

		discount loans.
		securities.
		monetary base.
		capital.

A bank in good condition may take out a loan without the Fed questioning the purpose or nature of the loan. Such a loan is known as

Answer

		a no documentation discount loan.
		a haircut.
		a covenant.
		a primary credit discount loan.

If the Open-Market Desk at the Fed buys securities when the federal funds rate is below the primary credit discount rate, the most likely effect is that the

Answer

		federal funds rate decreases.
		primary credit discount rate decreases.
		primary credit discount rate increases.
		federal funds rate increases.

In November and December, people use more currency than usual, so the Fed increases the money supply through

Answer

		defensive open-market operations.
		dynamic open-market operations.
		discount loans for profit.
		discount loans for business needs.

Reserves held by banks at the Fed that earn implicit interest payments in the form of earnings credits for Fed services are known as

Answer

		required clearing balances.
		reserve requirements.
		excess reserves.
		non-transaction deposits.

Required clearing balances

Answer

		pay interest in the form of earnings credits.
		count as reserves and can be used to meet reserve requirements.
		pay interest equal to the federal funds rate minus one percent.
		are required to be held against transactions deposits.

ECON 2035 : Review Questions Exam 2 Spr 2012

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