Q&A Hero

Q: During the financial crisis of 2007-2009 which of the following countries experienced a decline in real GDP roughly twice that of the United States? A. CanadaB. United KingdomC. JapanD. Turkey

Q: Suppose, the money-demand equation is given by MD = P × [(0.25 × Y) − (15 × i)], where P is the price level, Y is the level of output in billions, and i is the interest rate in percentage points. Initially, P = 2, Y = $500, and i = 3. If Y rises to $600 and the price level does not change, by how much should the Fed change the money supply if it wants to keep the nominal interest rate unchanged? Should the money supply rise or fall, and by how much? Use the liquidity-preference framework and show a diagram of this situation.

Q: During the financial crisis, which type of risk was the biggest problem faced by investment banks? A) interest-rate risk B) currency risk C) hedging risk D) credit risk

Q: Blood tests administered to applicants for medical insurance are an example of an attempt by insurance companies to deal with the problem of A) moral hazard. B) the drug abuse problems currently plaguing the country. C) adverse selection. D) failure of policyholders to keep paying their premiums.

Q: The Japanese experience of the 1990s shows: A. monetary policy is always more effective than fiscal policy.B. monetary policy always works.C. sometimes monetary policy does not work.D. central bankers should not try to counter the business cycle.

Q: Describe in words the relationships established in the two equations used by the Federal Reserve to forecast the demand for M2.

Q: When investment banks buy or sell securities on their own account, it's called A) financial engineering. B) proprietary trading. C) underwriting. D) factoring.

Q: Discuss the impact of the evolving financial system on the bank-lending channel of monetary policy transmission? Evaluate what that is likely to mean for future changes in the target federal funds rate.

Q: Describe the standard equation used to describe the demand for money. In that equation, what would happen to the demand for money if prices were to double?

Q: The law of large numbers allows insurance companies to A) hold capital market instruments as assets without fearing overly large numbers of defaults. B) hold money market instruments as assets without fearing overly large numbers of defaults. C) predict the average number of occurrences of insurable events in a large population of policyholders. D) charge higher premiums than necessary, knowing that large numbers of individuals will pay them.

Q: The development of new financial securities or investment strategies using sophisticated models is known as A) underwriting. B) factoring. C) financial engineering. D) hedging.

Q: What are the arguments for and against monetary policymakers intervening to address equity and property price bubbles?

Q: Consider the standard dynamic model of money in which the economy is in a steady state with constant levels of output, inflation, and the nominal interest rate. Suppose initially that the steady-state nominal interest rate is 4 percent, the steady-state inflation rate is 2% percent, and the growth rate of the money supply is 2 percent. How will an unanticipated permanent decline in the growth rate of the money supply to 0 percent affect the level of output, the inflation rate, and the nominal interest rate?

Q: Describe three different changes in the ATM model that would increase the time between ATM visits and increase the quantity of money demanded.

Q: When an insurance company makes a direct loan to a firm, the loan is known as A) a private placement. B) a commercial paper. C) an account receivable. D) an account payable.

Q: Which of the following activities is NOT a primary concern of investment banks? A) taking in deposits and making loans B) providing advice and financing for mergers and acquisitions C) underwriting new security issues D) providing advice on new security issues

Q: If greater stock prices can lead to greater investment spending, should central bankers ever worry about stock prices becoming too high?

Q: In a dynamic model, what three key assumptions are needed to make the prices of goods and services endogenous?

Q: Possible explanations that have been offered for the Great Moderation experienced in the United States include all of the following except: A. good fortune.B. economies that have become more flexible in absorbing shocks.C. calm financial markets.D. better understanding and use of monetary policy.

Q: Which of the following is when an investment bank purchases securities outright in case it misjudged the state of the market and it may have to sell the securities at a lower price than what was guaranteed? A) credit risk B) liquidity risk C) principal risk D) default risk

Q: Suppose you have a 20 percent probability of having your cash lost or stolen, and you spend $25 each day. Your total cost of holding cash is (182.50/T) + (3.75 × T).a. What is your cost of going to the ATM?b. What is the nominal interest rate?c. How often will you go to the ATM to minimize your costs?

Q: Why is it more correct to say that there may be correlation between high interest rates and the growth rate of output but there is no clear causation?

Q: Suppose the money demand function is MD = P × [(0.25 × Y) − (100 × i)], where Y is expressed in billions of dollars and i is expressed in percentage points. a. Suppose that initially P = 2, Y = 5,000, and i = 5. If income rises to 6,000, what is the new equilibrium nominal interest rate? b. Suppose that initially P = 3, Y = 4,000, and i = 7. If the price level falls to 2, what is the new equilibrium nominal interest rate?

Q: Most economists attribute the Great Moderation experienced in the United States during the 1990s mainly to: A. good fortune.B. slowing productivity growth.C. aggressive fiscal policy.D. better understanding and use of monetary policy.

Q: Assume that the nominal interest rate in an economy is 3 percent and the cost of going to the ATM is $1.50. You spend $5 each day, and there is also a 12 percent probability of having your cash lost or stolen.a. What is your total cost of holding cash as a function of the number of days between trips to the ATM?b. How often will you go to the ATM to minimize your costs?

Q: An most important service provided by underwriters is A) lowering of information costs. B) dealing with problems of moral hazard. C) insuring firms against loss from fire. D) insuring firms against loss from employee theft.

Q: The chapter seems to imply that the direct influence of short-term interest rate changes by central bankers is not that powerful in terms of their direct impact on spending. Why then do so many people pay attention to the monetary policy?

Q: What will happen to the nominal interest rate and the equilibrium quantity of money because of the following changes?a. A decline in people's incomesb. An increase in the level of pricesc. A decline in the supply of money

Q: During the Great Moderation experienced in the United States during the 1990s the volatility of inflation and growth: A. moved in opposite directions.B. both dropped significantly.C. both increased but only slightly.D. disappeared.

Q: What does it mean for an investment bank conducts a "road show"? A) It involves an investment bank marketing its services to firms considering new issues. B) It is when an investment bank goes to the SEC to seek approval for a new issue. C) It is when firms seeking an underwriter consider alternative investment banks. D) It involves visits to institutional investors who might want to buy the security issue.

Q: The Friedman rule suggests thata. the optimal nominal interest rate in an economy should be negative. b. the optimal nominal interest rate in an economy should be positive. c. the optimal nominal inflation rate in an economy should be positive.d. the optimal nominal inflation rate in an economy should be negative.

Q: Why are policymakers reluctant to make unconventional tools part of their regular arsenal of policy tools?

Q: If a positive inflation shock occurs and monetary policymakers do not change the inflation target: A. output will eventually return to potential output and inflation will equal the inflation target.B. output will eventually rise above potential output while inflation will equal the inflation target.C. output will eventually fall below potential output while inflation will equal the inflation target.D. output will eventually return to potential output but inflation will exceed the inflation target.

Q: Research by Laurence Ball showed thata. the coefficients of money demand were smaller by half than what previous researchers had found. b. nominal interest rates fell with an increase in money demand.c. earlier researchers had estimated the money-demand function very precisely and their results held up when additional data was available.d. increase in money supply can accelerate inflation.

Q: The due diligence process is A) the process by which a firm chooses an investment bank. B) when an investment bank researches a firm's value. C) how an investment bank underwrites large issues. D) the review of a prospectus by the SEC.

Q: Currently, the FDIC insures deposits up to a limit of A) $1000. B) $100,000. C) $250,000. D) $1,000,000.

Q: Monetary policymakers can respond to the impact that positive inflation shocks have on output by shifting the: A. monetary policy reaction curve left.B. monetary policy reaction curve right.C. short-run aggregate supply curve to the left.D. short-run aggregate supply curve to the right.

Q: A syndicate is A) a group of brokers illegally making use of insider information. B) a group of commercial banks that agrees to accept the checks of each other's depositors. C) a group of investment banks underwriting a large security issue. D) a group of dealers that markets a government bond issue.

Q: Regression analysis is a key method used in econometrics in which the coefficients of an equation are calculated by finding values for them that make the as small as possible.a. correlationb. standard errorc. sum of the squared error terms d. confidence interval

Q: In the current U.S. economy, who plays the role of lender of last resort? A) The Securities and Exchange Commission B) The Federal Deposit Insurance Corporation C) The Federal Reserve System D) The Social Security Administration

Q: Monetary policy has the following advantage(s) over fiscal policy: A. it is less influenced by politics.B. it can be implemented faster.C. it can usually be fine-tuned.D. all of the answers given are correct.

Q: In investment banking the "spread" is the difference between A) the value of a firm's assets and the value of its liabilities. B) the bid and asked prices on a bond. C) the price of new capital guaranteed to the issuing firm and the price that can be obtained in the market. D) the price of a new stock issue and the price of an equivalent new bond issue.

Q: Econometrics isa. a system of measuring economic variables. b. the study of public finance.c. the use of statistical techniques on economic data.d. the use of mathematical techniques on economic data.

Q: During a banking panic, a lender of last resort will A) purchase banks which are having difficulty but appear sound. B) make loans to solvent but temporality illiquid banks. C) make loans to insolvent but liquid banks. D) make loans to any banks which request them.

Q: Fiscal policy suffers from the problem of: A. being formulated and implemented by politicians subject to short-run incentives.B. being slow to implement.C. being influenced by special interest groups.D. all of the answers given are correct.

Q: The income effect refers to the situation when a higher nominal interest rate results from a(n)a. decrease in income that increases the demand for money. b. increase in income that increases the demand for money.c. increase in the price level that increases the demand for money. d. decrease in the price level that increases the demand for money.

Q: Underwriting involves A) insuring the life or health of individuals. B) guaranteeing a price for new capital to the issuing firm. C) selling stock more cheaply than conventional stockbrokers. D) issuing stock and using the proceeds to buy bonds.

Q: In the country of Aargh, in the equation for TFP,Y= A× Ka× L1−a,the coefficient is a= 2. The capital stock is growing 6 percent per year, employment is growing 1 percent per year, and output is growing 4 percent per year. In the country of Blargh, the coefficient is a= 25, the capital stock is growing 10 percent per year, employment is growing 2 percent per year, and output is growing 5 percent per year. In which country is TFPgrowing the fastest? In which country is output per worker growing the fastest? Explain your answer and show all your calculations.

Q: The McFadden Act of 1927 A) separated commercial banking from investment banking. B) put a tax on the issuance of bank notes by state banks. C) prohibited national banks from operating branches outside their home states. D) established the Federal Reserve System.

Q: Comparing monetary and fiscal policy: A. fiscal policy has an advantage because it is faster to implement than monetary policy.B. fiscal policy is easier to implement.C. monetary policy is easier to implement.D. history has shown fiscal policy to be more effective at stabilization.

Q: Which of the following is not correct with regard to the definition of a recession as used by the NBER? A. A recession occurs whenever there is a dip in the growth rate.B. The exact length of time needed for a downturn to be declared a recession is not specified.C. Many key economic indicators are used, some of which may move in opposite directions.D. A recession is characterized by lower levels of economic activity.

Q: In the dynamic model of money, an increase in the price level causes an increase in money demand, thus leading to a higher nominal interest rate. This effect is referred to as thea. price-level effect. b. income effect.c. liquidity effect.d. inflationary effect.

Q: In the United States the number of people not in the labor force, employed, and unemployed is shown in the table below for years 1973, 1974, and 1975 All numbers are in millions. 197319741975Not in labor force 57.758.259.4Employed 85.186.885.8Unemployed 4.45.27.9a. For each year, calculate the number of people who are in the labor force.b. For each year, calculate the number of people who are in the working-age population. c. Calculate the labor-force participation rate.d. Calculate the unemployment rate.e. By how much did the labor-force participation rate change from 1973 to 1974 and from 1974 to 1975?f. By how much did the unemployment rate change from 1973 to 1974 and from 1974 to 1975?

Q: The FDIC was created inA) 1863B) 1913C) 1934D) 1991

Q: Tax cuts would have the same directional effect on the dynamic aggregate demand curve as: A. decreases in government purchases.B. the Federal Reserve selling U.S. treasury securities.C. the Federal Reserve buying U.S. treasury securities.D. temporary tax increases.

Q: Almost all recessions identified by the NBER are characterized by: A. declining real GDP.B. higher interest rates.C. durations exceeding two years.D. higher rates of inflation.

Q: Which of the following statements is true?a. In a static model, an economy is assumed to start at a point where all variables are constant.b. In the dynamic model of money, the longer prices take to adjust to shocks, the more long­lived is the liquidity effect.c. In the dynamic model of money, all variables are initially growing at an increasing rate but they eventually reach a steady state.d. Money supply is the only endogenous variable in the dynamic model of money.

Q: Suppose a country has a population of 76 million, of which 53 million are in the working-age population. Of those, 3 million are unemployed and 46 million are employed.a. Calculate the number of people who are in the labor force.b. Calculate the number of people who are not in the labor force. c. Calculate the labor-force participation rate.d. Calculate the unemployment rate.

Q: The Federal Reserve System was created inA) 1836B) 1863C) 1913D) 1945

Q: The dynamic aggregate demand curve shifts as a result of: A. discretionary fiscal policy.B. automatic fiscal policy.C. either discretionary or automatic fiscal policy.D. fiscal policy but only when it's used in conjunction with monetary policy.

Q: "Official" recessions in the United States are declared by: A. the Federal Reserve.B. the U.S. department of the Treasury.C. the National Bureau of Economic Research.D. Congress.

Q: In a dynamic model of money, if money supply and trend output is constant over timea. nominal supply of money will increase, while nominal demand for money will be constant. b. nominal supply of money will decrease, while nominal demand for money will be constant. c. nominal supply of money will be constant, while nominal demand for money will decrease. d. both the nominal supply of money and nominal demand for money will be constant.

Q: Suppose a country has a population of 122 million, of which 71 million are in the working-age population. Of those, 16 million are not in the labor force and 50 million are employed.a. Calculate the number of people who are in the labor force. b. Calculate the number of people who are unemployed.c. Calculate the labor-force participation rate. d. Calculate the unemployment rate.

Q: The Federal Reserve System was created in response to A) the stock market crash of 1929. B) the ending of the Civil War. C) the banking panic of 1907. D) difficulties of the free-banking era.

Q: Unemployment insurance and the proportional nature of the tax system are examples of: A. discretionary fiscal policy.B. automatic fiscal policy.C. both discretionary and automatic fiscal policy.D. expansionary fiscal policy.

Q: Which of the following statements is most correct? A. A recession is officially defined as two consecutive quarters where the real growth rate is negative.B. A recession officially begins when unemployment exceeds 5.0 percent.C. There is no hard and fast definition of a recession.D. The official date of a recession is determined by the Federal Reserve Board, but usually with at least a three-month delay.

Q: The difference between labor productivity growth and growth in compensation per hour has been the greatest in the a. long boom period.b. economic liftoff period.c. Great Depression period. d. reorganization period.

Q: A bank run involves A) a failure by a bank to get the maximum return on its investments. B) large numbers of depositors withdrawing their deposits within a short period of time. C) a bank being forced out of business. D) fraud on the part of a bank's managers.

Q: Securitization refers to A) changing the mix in a financial portfolio away from stocks and toward bonds. B) selling directly to investors loans or securities that were formerly held by financial intermediaries. C) banks insisting that collateral be supplied on previously unsecured loans. D) reducing the exposure of a bank's portfolio to interest rate risk.

Q: An inflation shock that shifts the short-run aggregate supply curve leftward and leaves the long-run supply curve unchanged means the economy's potential level of output will: A. increase.B. not change.C. decrease.D. decrease only if monetary policymakers do not respond.

Q: The growth rate of compensation per hour was slowest during the a. long boom period.b. economic liftoff period. c. Great Depression.d. reorganization period.

Q: Congress introduced deposit insurance in response to A) the savings-and-loan crisis of the 1980s. B) the banking crisis of the 1930s. C) the demise of the Second Bank of the United States in 1836. D) the demise of the First Bank of the United States in 1811.

Q: Standby letters of credit A) are a form of swaps. B) are a promise by a bank to lend the borrower funds to pay off its maturing commercial paper. C) are a promise by a large depositor to provide additional funds to a bank should the bank face an unexpectedly large deposit outflow. D) represent the unused balance on a bank credit card.

Q: An increase in the rate of inflation: A. can only result from increases in aggregate demand.B. can only result from upward shifts in the short-run aggregate supply curve.C. will result only if the long-run aggregate supply curve is vertical.D. can result from shifts in either the dynamic aggregate demand curve or the short-run aggregate supply curve.

Q: Compensation of workers per hour in the U.S. grew the fastest in the a. long boom.b. economic liftoff period. c. Great Depression.d. reorganization period.

Q: National banks are chartered by the A) Office of the Comptroller of the Currency. B) Office of Bank Supervision. C) Securities and Exchange Commission. D) Office of Management and the Budget.

Q: The United States has a dual banking system in the sense that A) the public may deposit money in either commercial banks or savings-and-loan associations. B) banks offer both demand deposits and time deposits to savers. C) banks are chartered by the federal government and by state governments. D) banks both take in deposits and make loans.

Q: Stagflation occurs when: A. the inflation rate decreases and current output decreases.B. the inflation rate increases and current output decreases.C. the inflation rate decreases and current output increases.D. the inflation rate increases and current output increases.

Q: Compensation of workers is defined asa. wages and salaries plus benefits earned by the workers. b. wages and salaries earned by the worker.c. non-monetary benefits earned by the workers.d. the tax rates which are applicable on the wages earned by the workers.

Q: If output grew 3.9 percent last year and hours worked grew 1.3 percent,then by how much did labor productivity grow over the year?a. 0.3 percent b. 2.6 percent c. 3.0 percent d. 5.2 percent