Q&A Hero

Q: Economists who try to predict recessions find that recessions are a. easy to predict.b. difficult to predict.c. non-existent before the year 2000. d. non-existent since the year 2000.

Q: The Fed could use reserve requirements as a monetary policy instrument. In terms of desirable features for policy instruments, assess the viability of using reserve requirements.

Q: Americans should not worry about all the dollars held by foreigners because a. most of the currency is reinvested into America.b. taxes are lower as a result.c. interest rates are lower as a result. d. stock prices are higher as a result.

Q: The required return on equity for an individual stock includes which of the following? A) systemic risk B) idiosyncratic risk C) risk-free interest rate D) all of the above

Q: Consider the objective of flying a jet form New York to Paris. After takeoff, a pilot would certainly check a few times to see if he or she is on course. Using this example, discuss why, at least in theory, intermediate monetary policy targets may be useful.

Q: When the overall level of business activity declines persistently, there is said to be a. a revolution.b. a hyperinflation. c. a recession.d. an expansion.

Q: In terms of desirable features of a monetary policy instrument, explain why the size of the staff at the Fed is not a good policy instrument. Be sure to address which feature(s) it fits and which one(s) it doesn't.

Q: More than half of all U.S. dollars can be found a. in foreign countries.b. in the United States.c. in the underground economy. d. in bank vaults.

Q: How can stock prices affect spending by businesses and households?

Q: Consider the desirable features of monetary policy operating instruments and the use of intermediate targets. What missing feature makes a target intermediate rather than operating? Why did the Fed abandon the use of most intermediate targets?

Q: Explain the three desirable features of a good monetary policy instrument.

Q: Earning interest on past interest is referred to as a. present value.b. super interest. c. compounding. d. discounting.

Q: What are the economic implications of an inverted yield curve?

Q: What are the differences between common stock and preferred stock?

Q: What is the consensus among economists and other monetary policy experts regarding the usefulness of the monetary policy instruments available to central banks in normal times?

Q: Consider the following production functionY= A×Ka×L1−a.If a = 0.3, and over the past year total factor productivity grew 2.3 percent, capital grew 2 percent, and labor grew 3 percent, what was the growth rate of output?a. 0 percent b. 5 percent c. 2 percent d. 7 percent

Q: In what way do owners of stocks have limited liability?

Q: How does the liquidity premium theory explain an upward sloping yield curve during normal economic times?

Q: There have been many changes made to the method for computing the required reserves for banks over the years. Currently, lagged reserve accounting used enables a bank and the Fed to know the level of reserves required over a period of time well before the period of time begins. Why is this method for computing reserves advantageous to banks as well as the Fed?

Q: Consider the following production functionY= A×Ka×L1−a.If a = 0.4, and over the past year total factor productivity (TFP) grew 2.6 percent, capital grew 2 percent, and labor grew 1 percent, what was the growth rate of output over the year?a. 2 percent b. 3 percent c. 4 percent d. 5 percent

Q: A one-year bond has an interest rate of 0.2% and is expected to rise to 0.5% next year and 1.1% in two years. The term premium for a two-year bond is 0.1% and for a three-year bond is 0.25%. What are the interest rates on a two-year bond and three-year bond according to the liquidity premium theory?

Q: What was the decline in the value of mutual funds held by households during the depths of the financial crisis, between the third quarter of 2008 and the first quarter of 2009 A) $2 million B) $2 billion C) $200 billion D) $2 trillion

Q: What is the difference between primary and secondary credit offered by the Fed and who would use secondary credit?

Q: Suppose you buy an inflation-indexed bond that will adjust with inflation and thus pay you $1,500 in real (inflation- adjusted) terms in one year. The nominal interest rate is 4 percent and the expected inflation rate is 2 percent. What is the present value of the bond? (Round off your answer to the nearest dollar and pick the answer closest to the one you calculate.)a. $1,415 b. $1,442 c. $1,471 d. $1,530

Q: Using estimates of past returns, which monthly investment is most likely to result in the largest amount of money at retirement for a person in the early 20s? A) CDs B) Treasury bills C) stocks D) all of the above will result in a similar amount of money

Q: The real interest rate is the nominal interest rate adjusted for expected or actual a. unemployment.b. production.c. income growth. d. inflation.

Q: A one-year bond has an interest rate of 3% and is expected to fall to 5% next year and 2% in two years. The term premium for a two-year bond is 0.3% and for a three-year bond is 0.5%. What are the interest rates on a two-year bond and three-year bond according to the liquidity premium theory?

Q: Since 2002, the Fed has set the primary discount rate at 100 basis points above the target federal funds rate. Why is this likely to prevent the spikes in the market federal funds similar to the ones that occurred in previous years?

Q: Which of the following statements is true?a. The prices of debt securities fall during recessions.b. Interest rates on neither the short-term securities nor the long-term securities fall in recession.c. Interest rates on long-term securities fall more than the interest rates on short-term securities in recession. d. Interest rates on short-term securities fall more than the interest rates on long-term securities in recession.

Q: Describe the supply curve in the market for bank reserves.

Q: The amount of interest paid on a debt security in dollar terms as a percent of the principal is referred to as the a. expected real interest rate.b. realized real interest rate. c. after-tax real interest rate. d. nominal interest rate.

Q: Why does the segmented markets theory suggest think that bonds of different maturities are not perfect substitutes for each other?

Q: Discuss the evolution of discount lending from a tool of monetary policy to its current role.

Q: Which of the following statements is true?a. A short-term bond and a long-term bond provides the same premium.b. Investors in short-term bonds earn higher premiums than investors in long-term bonds.c. A change in the interest rates of bonds affect the prices of long-term bonds more than the prices of short- term bonds.d. A change in the interest rates of bonds affect the prices of short-term bonds more than the prices of long- term bonds.

Q: Why does the Federal Funds rate face a zero bound?

Q: A debt security sold by large corporations to raise short­term funds is known as a(n)a. commercial paper.b. treasury bill.c. debenture.d. bond.

Q: According to the expectations theory, what will be the interest rate on a three-year bond if a one-year bond has an interest rate of 2% and is expected to have an interest rate of 3% next year and 5% in two year? Report your answer using a percentage with two decimal places.

Q: Discuss why the discount rate may be considered a penalty rate of interest charged to banks.

Q: Purchases of new houses are part of a. net exports.b. government spending. c. investment.d. consumption.

Q: Could the Fed impact the amount of borrowing in the federal funds market without changing their target for the federal funds rate? Explain.

Q: Describe the facts found in the bond market about the relationship between interest rates on bonds of different maturities.

Q: The process of turning assets such as mortgages into bonds sold to investors is a. default.b. standard deviation. c. standardization.d. securitization.

Q: Is discount lending used to keep banks from failing? Explain.

Q: Why is it necessary to distinguish between the target federal funds rate and the market federal funds rate?

Q: If the expectations theory of the term structure is correct, would a reduction in the supply of thirty-year Treasury bonds affect their yields?

Q: Which of the following is a security in which a saver buys the security for a given time to maturity, earning interest at the specified rate?a. Commercial paper b. Debenturec. Government bondd. Certificates of deposit

Q: If the federal government replaced the current income tax with a value-added tax A) the prices of Treasury and municipal bonds would rise. B) the prices of Treasury and municipal bonds would fall. C) the prices of Treasury bonds would rise, while the prices of municipal bonds would fall. D) the prices of Treasury bonds would fall, while the prices of municipal bonds would rise.

Q: State and briefly define the tools of monetary policy available to the Federal Reserve.

Q: If the principal invested in a bank at an annual interest rate of 6% is $3,000, the interest that will accumulate on the principal after a year will equala. $180. b. $300. c. $500. d. $700.

Q: Almost every time that there has been an inverted yield curve, what took place within one year? A) recession B) rising inflation C) financial crisis D) higher bond yields

Q: Interest and capital gains are taxed differently in the United States in that A) interest is exempt from state and local taxes. B) interest is taxed as ordinary income, but capital gains are taxed only when realized. C) interest is taxed as ordinary income, but capital gains are taxed as accrued. D) capital gains when realized are exempt from state and local taxes.

Q: In 2001, the FOMC lowered the target federal funds rate eleven times, cutting the rate from 6½ percent to 1¾ percent. Why didn't the Fed just cut the rate by larger amounts early on?

Q: The amount of money that you would need to invest today to yield a given future amount is called the a. future value.b. present value.c. rate of discount. d. discount factor.

Q: Which theory explains all three facts about the term structure? A) expectations B) segmented markets C) preferential treatment D) liquidity premium

Q: Suppose that your marginal federal income tax rate is 30%, the sum of your marginal state and local tax rates is 5%, and the yield on a thirty-year corporate bond is 10%. You would be indifferent between buying this corporate bond and buying a thirty-year municipal bond issued within your state (ignoring differences in liquidity, risk, and costs of information) if the municipal bond has a yield ofA) 6.5%.B) 7.0%.C) 9.5%.D) 10.0%.

Q: The key to the success of forward guidance as a monetary policy tool is: A. timing.B. a favorable exchange rate.C. transparency.D. credibility.

Q: The amount of money invested in a financial security or deposited into a financial intermediary is referred to as the a. principal.b. interest. c. yield.d. capital-gain.

Q: The additional interest that investors require to buy a long-term bond instead of a sequence of short-term bonds is known as the: A) risk premium B) default premium C) term premium D) segmented premium

Q: In the financial system, savers transfer funds to borrowers in exchange for a. cash.b. gold.c. financial securities. d. derivative securities.

Q: Suppose that your marginal federal income tax rate is 30%, the sum of your marginal state and local tax rates is 5%, and the yield on thirty-year U.S. Treasury bonds is 10%. You would be indifferent between buying a thirty-year Treasury bond and buying a thirty-year municipal bond issued within your state (ignoring differences in liquidity, risk, and costs of information) if the municipal bond has a yield ofA) 6.5%.B) 7.0%.C) 9.5%.D) 10.0%.

Q: Unconventional monetary policy tools include all but: A. quantitative easing.B. forward guidance.C. targeted asset purchases.D. reserve requirement.

Q: Costs of trading are referred to as_______costs. a. tradingb. menuc. shoe-leather d. transactions

Q: Which of the following will be included in the financial system of a country?a. Labor Unions b. Banksc. Factor marketsd. Markets for raw materials

Q: Every one percent decrease in the rate of inflation will: A. raise the target federal funds rate by 1.5%.B. lower the target federal funds rate by 0.5%.C. lower the target federal funds rate by 1.5%.D. raise the target federal funds rate by 0.5%.

Q: Many savers are willing to accept a lower interest rate on municipal bonds than on comparable instruments because A) the after-tax yield on municipal bonds is greater. B) municipal bonds invariably have lower default risk. C) municipal bonds are more liquid than most other instruments. D) the yield on municipal bonds is considered inflation proof.

Q: Of the following, which would not be considered an unconventional monetary policy approach? A. Discount rateB. Policy duration commitmentC. Quantitative easingD. Credit easing

Q: As a medium of exchange, money makes exchanges easier by reducing a. inflation.b. transactions costs.c. production costs of goods.d. legal costs in negotiating loan contracts.

Q: If the inflation rate in the economy were to fall by 2% below the target inflation rate, the target federal funds rate would: A. Decrease by 3.0%.B. Remain at 2.5%.C. Decrease by 1.0%.D. Increase by 1.0%.

Q: The financial system consists ofa. all the securities, intermediaries, and markets that exist to match savers and borrowers. b. all transactions occurring in the goods market during a financial year.c. all markets that exist to match the buyers and suppliers of various factors of production. d. all transactions involving the government.

Q: For state residents, interest on most bonds issued by their state government is A) exempt from state and federal income taxes. B) exempt from state, but not from federal, income taxes. C) exempt from federal, but not from state, income taxes. D) subject to both state and federal income taxes.

Q: The measure for the actual rate of inflation used in the Taylor rule is the: A. Personal Consumption Expenditure Index.B. GDP deflator.C. Consumer Price Index.D. Producer Price Index.

Q: When people use money by trading it for goods and services, money is serving the role of a a. medium of exchange.b. unit of account. c. store of value.d. standard of deferred payment.

Q: If output in the economy were to fall by an additional one percent below potential, the target federal funds rate would: A. Increase by 1.5%.B. Decrease by 1.5%.C. Remain at 2.5%.D. Decrease by 0.5%.

Q: Municipal bonds are issued A) only by local governments. B) only by state governments. C) by both state and local governments. D) by the federal government, and by state and local governments.

Q: Which policymaking institution determines the money supply, sets the rules for how checks are cleared and how banks obtain new currency, and determines what activities banks may or may not engage in?a. Treasury Department.b. Commerce Department.c. Securities and Exchange Commission. d. Federal Reserve System.

Q: Every one percent increase in the rate of inflation will: A. increase the real federal funds rate by 1.5%.B. increase the target federal funds rate by 1.5%.C. increase the real federal funds rate by 0.5%.D. increase the target federal funds rate by 1.5% and increase the real federal funds rate by 0.5%.

Q: If the current rate of inflation is 4% and the target rate of inflation is 2%, and output is 3% above its potential, the target federal funds rate would be: A. 7%.B. 8.5%.C. 5%.D. 4.5%.

Q: Differences in the taxation of returns A) only affect the yields of illiquid credit market instruments. B) have a negligible effect on the yields of credit market instruments. C) only affect the yields of high-information cost credit market instruments. D) create differences in yields among credit market instruments.

Q: Which of the following is NOT a financial policymaker?a. Securities and Exchange Commission (SEC)b. Federal Deposit Insurance Corporation (FDIC) c. Consumer Financial Protection Bureau (CFPB) d. Federal Reserve System (the Fed)

Q: Financial instruments with high information costs A) will usually be more liquid than similar instruments with low information costs. B) will have lower yields than U.S. Treasury securities. C) may not be offered for sale in some states. D) will have lower prices than similar instruments with low information costs.