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Question
What is arbitrage? Explain why arbitrage drives the contract price of futures to the price of the underlying asset on the expiration date, for prices above and below the asset price.Answer
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Related questions
Q:
The organization responsible for the conduct of monetary policy in the United States is the
A. Comptroller of the Currency.
B. U.S. Treasury.
C. Federal Reserve System.
D. Bureau of Monetary Affairs.
Q:
Countries that experience very high rates of inflation may also have
A. balanced budgets.
B. rapidly growing money supplies.
C. falling money supplies.
D. constant money supplies.
Q:
Financial institutions that accept deposits and make loans are called
A. exchanges.
B. banks.
C. over-the-counter markets.
D. finance companies.
Q:
Banks, savings and loan associations, mutual savings banks, and credit unions
A. are no longer important players in financial intermediation.
B. since deregulation now provide services only to small depositors.
C. have been adept at innovating in response to changes in the regulatory environment.
D. produce nothing of value and are therefore a drain on society's resources.
Q:
Which of the followings does NOT describe the goods market in the ISLM model?
A. consumption function
B. investment function
C. government spending and tax
D. money demand function
Q:
As bonds become a riskier asset, the demand for money ________ and, all else constant, the equilibrium interest rate ________.
A. rises; rises
B. rises; falls
C. falls; rises
D. falls; falls
Q:
An autonomous increase in money demand, other things equal, shifts the ________ curve to the ________.
A. IS; right
B. IS; left
C. LM; left
D. LM; right
Q:
In the long-run ISLM model and with everything else held constant, as long as the level of output ________ the natural rate level, the price level will continue to ________, shifting the LM curve to the ________, until finally output is back at the natural rate level.
A. exceeds; rise; right
B. exceeds; fall; left
C. remains below; fall; right
D. remains below; rise; left
Q:
An increase in the money ________ shifts the LM curve to the ________, causing the interest rate to fall and output to rise, everything else held constant.
A. demand; right
B. demand; left
C. supply; right
D. supply; left
Q:
A policy in which the money supply is kept growing at a constant rate regardless of the state of the economy is
A. a Taylor rule.
B. a discretionary policy.
C. a policy rule advocated by monetarists.
D. advocated by activists.
Q:
The argument that econometric policy evaluation is likely to be misleading if policymakers assume stable economic relationships is known as
A. the monetarist revolution.
B. the Lucas critique.
C. public choice theory.
D. new Keynesian theory.
Q:
The Lucas critique indicates that
A. advocates of discretionary policies' criticisms of rational expectations models are well-founded.
B. advocates of discretionary policies' criticisms of rational expectations models are not well-founded.
C. expectations are important in determining the outcome of a discretionary policy.
D. expectations are not important in determining the outcome of a discretionary policy.
Q:
In the Baumol-Tobin model, given that total costs for an individual equals + , where T0 = monthly income, b = brokerage costs, and C = amount raised from each bond transaction, derive the so-called square root rule.
Q:
In the liquidity trap, the money demand curve
A. is horizontal.
B. is vertical.
C. is negatively sloped.
D. is positively sloped.
Q:
Keynes argued that when interest rates were high relative to some normal value, people would expect bond prices to ________, so the quantity of money demanded would ________.
A. increase; increase
B. increase; decrease
C. decrease; decrease
D. decrease; increase
Q:
If people expect nominal interest rates to be lower in the future, the expected return to bonds ________, and the demand for money ________.
A. increases; increases
B. increases; decreases
C. decreases; increases
D. decreases; decreases
Q:
The demand for money as a cushion against unexpected contingencies is called the
A. transactions motive.
B. precautionary motive.
C. insurance motive.
D. speculative motive.
Q:
When a domestic currency is completely backed by a foreign currency and the note-issuing authority establishes a fixed exchange rate to this foreign currency, then the country is said to have
A) created a currency board.
B) undergone dollarization.
C) adopted a managed exchange system.
D) adopted an exchange rate monetary system.
Q:
The Bretton Woods agreement created the ________, which was given the task of promoting the growth of world trade by setting rules for the maintenance of fixed exchange rates and by making loans to countries that were experiencing balance of payments difficulties.
A) IMF
B) World Bank
C) Central Settlements Bank
D) Bank of International Settlements
Q:
The economist who proposed that, "Inflation is always and everywhere a monetary phenomenon" was
A. John Maynard Keynes.
B. John R. Hicks.
C. Milton Friedman.
D. Franco Modigliani.
Q:
When the economy suffers a temporary negative supply shock and the central bank responds by changing the autonomous component of monetary policy to keep inflation at the target inflation rate, then
A. aggregate output drops in the short run.
B. output will return to potential output over time.
C. aggregate output is stabilized.
D. all of the above.
E. both A and B.
Q:
When the economy suffers a permanent negative supply shock and the central bank does not respond by changing the autonomous component of monetary policy, then
A. inflation will be lower.
B. output will be at its potential.
C. output will be lower.
D. inflation will not change.
E. both B and C.
Q:
If the economy suffers a permanent negative supply shock because there is an increase in regulations that permanently reduce the level of potential output, then
A. potential output falls.
B. the long-run aggregate supply curve shifts leftward.
C. the short-run aggregate supply curve shifts upward.
D. all of the above.
Q:
As of 2009, China's economy had recovered from the global recession that began in 2008. Use aggregate demand and aggregate supply analysis to explain why, and to explain the likely consequences for China of an increase in the growth rate of the global economy.
Q:
With the policy rate set at zero, the rise in expected inflation will lead to a ________ in the real interest
rate, which will cause investment spending and aggregate output to ________.
A. fall; rise
B. fall; fall
C. rise; rise
D. rise; fall
Q:
The price of a barrel of oil doubled between 2007 and the middle of To make matters worse, a financial crisis hit the U.S. economy starting in August of 2007. Which of the following is TRUE of the Chinese experience?
A. The worldwide decline in demand led to a collapse of Chinese exports.
B. Instead of relying solely on the economy's self-correcting mechanism, much more aggressive fiscal expansions than those of the U.S. (in addition to a substantial monetary easing) served to shift the AD curve back to general equilibrium relatively quickly.
C. The Chinese economy was better able than the U.S. economy to weather the financial crisis with output growth starting to grow earlier and more quickly than that of the U.S.
D. All of the above.
E. None of the above.
Q:
Explain and demonstrate graphically the effects of a negative supply shock in both the short-run and long-run.
Q:
The Baumol-Tobin analysis suggests that an increase in the brokerage fee for buying and selling bonds will cause the demand for money to ________ and the demand for bonds to ________.
A. increase; increase
B. increase; decrease
C. decrease; increase
D. decrease; decrease
Q:
________ in the foreign interest rate causes the demand for domestic assets to shift to the right and the domestic currency to ________, everything else held constant.
A. An increase; appreciate
B. An increase; depreciate
C. A decrease; appreciate
D. A decrease; depreciate
Q:
A decrease in the foreign interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to ________, everything else held constant.
A. right; appreciate
B. right; depreciate
C. left; appreciate
D. left; depreciate