Q&A Hero

Q: A cause of the decline in the velocity of money during the 2007-2009 financial crisis was a result of: A. the fiscal stimulus provided by the U.S. government.B. the lowering of the discount rate by the Fed.C. the use of unconventional policy tools by the Fed.D. an increase in uncertainty.

Q: Accounting rules require that a bank's equals its________.a. equity capital; assets plus liabilities.b. assets; liabilities minus equity capital.c. liabilities; assets plus equity capital.d. liabilities; assets minus equity capital.

Q: Empirical research has shown that: A. in the 1990s and 2000s, velocity was more sensitive to an increase in the opportunity cost of holding money than in the 1980s.B. in the 1990s and 2000s, velocity was less sensitive to an increase in the opportunity cost of holding money than in the 1980s.C. during the 1980s and 1990s, the velocity of money was not sensitive to changes in the opportunity cost of holding money.D. during the 1980s and 1990s, the velocity of money actually decreased as the opportunity cost of holding money increased.

Q: Banks earn profit bya. borrowing from depositors at a lower interest rate, and lending those funds at a higher interest rate. b. reducing the service charges for safety vaults and ATM facilities.c. lending more loans to non-risky business firms. d. reducing the amount of transaction deposits.

Q: To use money growth as a short-term monetary policy instrument, a central bank must: A. believe there is a stable link between the monetary base and the rate of inflation.B. believe that only money matters.C. believe that there is an unpredictable relationship between money aggregates and inflation.D. believe the deposit expansion multiplier is volatile and unpredictable.

Q: Which of the following is the main reason behind the financial crisis of 2008?a. There was a sharp decline in the growth rate of money supply.b. There was a sharp increase in the quantity of exports from the U.S. to Asian countries. c. Banks in the U.S. made subprime mortgage loans.d. Banks had much higher requirements for borrowers to qualify for loans than normal.

Q: For the Fed to use money growth as a direct monetary policy target, which of the following needs to exist? A. A highly variable deposit expansion multiplierB. A stable link between the monetary base and the quantity of moneyC. A predictable link between the quantity of money and the deposit expansion multiplierD. A stable link between the monetary base and the quantity of money and a predictable relationship between the quantity of money and the rate of inflation

Q: An investor buys a stock for $10,000 and earns dividends of $250 during the course of the year. At the end of the year, the stock is worth $9,300. The total return for the year isa. 2.5 percent. b. −2.5 percent. c. −4.5 percent. d. −7.0 percent.

Q: Stable velocity as a contributing factor to successfully using money growth as a stabilizing monetary policy tool, is more important in an environment where: A. inflation is extremely high (e.g., over 100 percent).B. inflation is low (e.g., less than 10 percent).C. inflation occurs, the problems caused by a variable velocity are just as severe at low levels of inflation as at high levels of inflation.D. there is deflation.

Q: An investor buys a stock for $10,000 and earns dividends of $250 during the course of the year. At the end of the year, the stock is worth $9,300. The capital-gains yield for the year isa. 2.5 percent. b. −2.5 percent. c. −4.5 percent. d. −7.0 percent.

Q: The only solution available to a country experiencing extremely high rates of inflation is to: A. raise interest rates.B. peg your currency to another country's currency.C. reduce money growth.D. revert to a gold standard.

Q: An investor buys a stock for $10,000 and earns dividends of $250 during the course of the year. At the end of the year, the stock is worth $9,300. The dividend yield for the year isa. −2.5 percent. b. 5 percent. c. 5 percent. d. −7.0 percent.

Q: You graduate from law school and can now begin charging clients fees for your time. What impact will this have on your demand for money? A. Your increased income will likely cause your demand for money to decreaseB. Your opportunity cost of making trips to the bank will decreaseC. Your increased income will likely cause your demand for money to increaseD. Your demand for money will not be affected

Q: A stock which was bought for $1,000 pays annual dividends of $250. The first quarter dividend yield of the stock can be calculated ata. 1.75 percent. b. 3 percent.c. 5.25 percent. d. 6.25 percent.

Q: The demand for money varies: A. directly with the liquidity of other financial assets.B. inversely with the liquidity of other financial assets.C. not all with the liquidity of other assets since money is liquid.D. inversely with wealth.

Q: Which of the following statements is true?a. Dividend payments of firms are independent of how much profit the firm is making.b. Stock prices of firms are independent of how much profit the firm is making.c. A share of stock gives an investor complete ownership of the corporation that issued the stock.d. A share of stock gives an investor partial ownership of the corporation that issued the stock.

Q: Crises that occasionally hit financial markets will increase the demand for money since: A. the return on money increases.B. the return on financial assets increases.C. there is no risk with holding money.D. the risk of holding money relative to other financial assets decreases.

Q: An index fund isa. a mutual fund that mimics a stock index.b. an investment company that pools the funds of many investors and buys government bonds. c. a mutual fund that buys mortgage-backed securities (MBSs).d. a company that rates companies in terms of their financial strength.

Q: If an investor thinks interest rates are likely to rise, she would: A. sell her bonds and hold more money.B. buy more bonds now and hold less money.C. not alter her bond portfolio until interest rates actually rise.D. not change her money holdings at all.

Q: A mutual fund isa. a hedge fund that only wealthy people may invest in.b. a company that buys a share of each stock in the entire stock market.c. an investment company that buys stocks in companies that are not growing strongly.d. an investment company that pools the funds of many investors and buys a large number of different stocks.

Q: A decline in the yields earned by bonds should: A. not impact the demand for money since money doesn't earn any interest.B. also decrease the demand for money.C. increase the demand for money.D. increase the velocity of money.

Q: Which of the following statements is true?a. Different stock indexes normally show the same total returns. b. Stock indexes do not provide information on dividends.c. Mutual funds encourage investors to invest in the same security instead of diversifying. d. The S&P 500 is an example of a mutual fund.

Q: As a person's wealth increases we would expect the demand for money to: A. decrease.B. increase dollar for dollar with wealth.C. increase but at a rate less than dollar for dollar.D. not change; money demand does not vary with wealth, only with income.

Q: The Wilshire 5000 stock index isa. an index of the 2000 largest industrial companies whose shares trade in U.S. markets. b. an index of all the companies with U.S. headquarters whose shares trade in the U.S. c. an index of 5000 major companies whose shares trade in U.S. markets.d. an index of the average stock prices of many small firms operating in the U.S.

Q: People have a portfolio demand for money in part because: A. money is part of a well-diversified financial portfolio.B. the return on money is often higher than other financial assets.C. money is needed to pay brokerage commissions.D. there is no cost to holding money which gives it a relatively high return.

Q: An index of thirty major U.S. industrial companies is the a. NASDAQ index.b. NYSE index.c. Dow Jones Industrial Average. d. S&P

Q: If your bank offers you free checking if your average balance is at least $1000 and you would normally carry an average balance of $500, what is the annual cost to you of free checking if bonds are paying a 5.0% return? A. $50.00B. $0.00C. $20.00D. $25.00

Q: An index that measures the average stock prices of small firms in the United States is the a. Russell 2000 index.b. NYSE index.c. Dow Jones Industrial Average. d. S&P

Q: The portfolio demand for money reflects: A. the money we hold for our everyday transactions.B. the portion of wealth people desire to hold in the form of money.C. the money we hold to purchase stocks and bonds and other financial securities.D. the money we hold for our everyday transactions and the money we hold to purchase stocks and bonds and other financial securities.

Q: If your after-tax realized real interest rate was 1 percent over the past year and you owned a one-year bond that paid 6 percent interest, what was the inflation rate if your tax rate was 15 percent?a. 3.95 percent b. 4.1 percent c. 4.25 percent d. 5.0 percent

Q: Money held for precautionary reasons is included in the demand for money: A. as a third, separate category called the precautionary demand for money.B. as part of transactions demand.C. as part of portfolio demand.D. partly as transactions demand and partly as portfolio demand.

Q: If the actual inflation was 4 percent over the past year and you owned a one-year bond that paid 4 percent interest, what was your after-tax realized real interest rate if your tax rate was 15 percent?a. −0.6 percent b. 0.0 percent c. 1.1 percent d. 2.0 percent

Q: Which of the following would be classified as precautionary demand for money? A. You keep a $1000 in a money market account because the return is better than a savings account at your bankB. You apply for and receive a credit card with a $1000 limitC. You put $1000 in a savings account at your bank for emergenciesD. You put $1000 in your checking account each month to cover your regular expenses

Q: If actual inflation was 4 percent over the past year and you owned a one-year bond that paid 6 percent interest, what was your after-tax realized real interest rate if your tax rate was 15 percent?a. −0.6 percent b. 0.0 percent c. 1.1 percent d. 2.0 percent

Q: In high inflation countries, inflation rates can exceed the rate of growth of money because: A. high inflation increases the velocity of money.B. high rates of inflation increase the opportunity cost of holding money.C. money loses value quickly with inflation.D. all of the answers given are correct.

Q: If you expect inflation to be 2 percent next year and you buy a one-year bond paying 5 percent interest, what is your after-tax expected real interest income if the price of the bond is $200 and your tax rate is 40 percent?a. $0.20 b. $20c. $10 d. $2

Q: Which of the following statements best completes the sentence, "All other factors constant, as the nominal interest rate increases, the opportunity cost of money..."? A. decreases, the velocity of money decreases, and the quantity of money people want to hold decreases.B. increases, the velocity of money decreases, and the quantity of money people want to hold decreases.C. decreases, the velocity of money increases, and the quantity of money people want to hold decreases.D. increases, the velocity of money increases, and the quantity of money people want to hold decreases.

Q: If you expect inflation to be 3 percent next year and you buy a one-year bond paying 4 percent interest, what is your after-tax expected real interest rate if you face a tax rate of 30 percent?a. −0.2 percent b. 0.0 percent c. 0.3 percent d. 1.0 percent

Q: If you were going to write a function for money demand, you would say that the demand for money holdings: A. varies directly with both the nominal interest rate and nominal income.B. varies inversely with both the nominal interest rate and nominal income.C. varies inversely with nominal income and directly with the nominal interest rate.D. varies inversely with the nominal interest rate and directly with nominal income.

Q: Investors can lock in a real interest rate and thus avoid most of the risk of unexpected inflation by buying a. corporate bonds.b. inflation-indexed securities. c. stock.d. mortgage-backed securities.

Q: All other factors equal, as nominal interest rates decrease, checking account balances should: A. increase.B. decrease.C. remain constant.D. be converted to cash.

Q: One way that homeowners and banks can share the risk of inflation is through a. fixed-rate mortgages.b. refinancing. c. default.d. adjustable-rate mortgages.

Q: All other factors equal, if the costs of converting bonds and other financial securities to a means of payment increase: A. the transactions demand for money should increase.B. the transactions demand for money should decrease.C. it shouldn't impact the transactions demand for money.D. nominal interest rates should decrease.

Q: Which of the following will NOT play a role in eliminating the shortcoming of the taxation system, particularly the fact that the tax system taxes nominal return rather than real return?a. Eliminating taxation of interestb. Introducing inflation-indexed bondsc. Taxing only real interest income, not nominal interest income d. Reducing inflation to zero

Q: The fact that people can write drafts (checks) from many stock and money market accounts has: A. increased the transactions demand for money.B. decreased the transactions demand for money.C. not affected the transactions demand for money.D. increased the cost of converting non-money assets to a means of payment.

Q: In recessions, the long-term expected real interest rate usually a. rises.b. declines.c. stays unchanged.d. rises early in the recession; declines later in the recession.

Q: The opportunity cost of holding money is: A. the nominal interest rate.B. the real interest rate.C. the nominal interest rate less the cost of converting a bond to cash.D. the rate of inflation.

Q: In recessions, the short-term expected real interest rate usuallya. rises by about 4 percentage points.b. rises by about 2 percentage points.c. declines by about 2 percentage points.d. declines by about 4 percentage points.

Q: The higher the nominal interest rate: A. the less money individuals will hold for any given level of transactions and the higher the velocity of money.B. the more money individuals will hold for any given level of transactions and the higher the velocity of money.C. the more money individuals will hold for any given level of transactions and the lower the velocity of money.D. the less money individuals will hold for any given level of transactions and the lower the velocity of money.

Q: According to the Fisher hypothesis, an increase in the expected inflation rate should lead to____in the nominal____interest rate and in the expected real interest rate.a. an increase; a decrease b. an increase; no change c. an increase; an increase d. a decrease; a decrease

Q: If real GDP stays the same but the price level increases: A. nominal money demand should remain the same.B. nominal money demand should decrease.C. nominal money demand should increase.D. real money demand should decrease.

Q: For every dollar's worth of goods and services bought at an earlier date, the amount of money it would take now tobuy the same amount of goods and services after N years of inflation at rate p is called the ______ inflation discount factor.a. futureb. realized c. expected d. past

Q: Which of the following would reflect the transactions demand for money? A. Keeping funds in your checking account to pay your rentB. Keeping funds in your savings account because the interest rate looks relatively attractiveC. Selling common stocks you own and increasing the money in your savings account because you think stock prices will fall soonD. Buying a U.S. Treasury security using funds from your checking account

Q: John bought an inflation-indexed security for $10,000 in January The security promises an annual interest rate of 5 percent and makes payments twice a year. If the value of the inflation index in January 2014 was 106 and its value in July 2014 was 105, John will receive an interest income of ____.a. $504.76b. $226.40c. $182.72d. $368.56

Q: In May of 2003, the European Central Bank (ECB) decided to: A. focus almost exclusively on money growth as their target.B. downgrade the role of money growth in their policymaking strategy.C. limit the role of interest rate targeting to be second in importance to money growth targeting.D. switch from an inflation target to a money growth target.

Q: Suppose you bought an inflation-indexed security for $12,000 in January 2013 which pays an annual interest of 4 percent. If the value of the inflation index in January 2013 was 106 and its value in January 2014 was 105, what is the value of the inflation-adjusted principal?a. $12,114.29 b. $11,342.58 c. $8,000.60 d. $13,126.41

Q: If the nominal interest rate increases: A. the cost of holding money decreases.B. the cost of holding money increases.C. the velocity of money should decrease.D. the cost of holding money increases and the velocity of money should decrease.

Q: If the expected inflation rate is 4 percent, the nominal interest rate is 6 percent, and the actual inflation rate turns out to be 2 percent, then the realized real interest rate is____than the expected real interest rate and borrowers_____relative to lenders.a. less; gainb. less; losec. greater; gaind. greater; lose

Q: In the late 1970s and early 1980s, the velocity of money increased significantly. The main reason(s) for the increase was: A. as presidential election years near the velocity of money increases.B. the introduction of stock and bond mutual funds with draft writing privileges and low nominal interest rates.C. high nominal interest rates.D. the introduction of stock and bond mutual funds with draft writing privileges along with high nominal interest rates.

Q: If the expected inflation rate was 4 percent and the actual inflation rate was 6 percent, then a. borrowers gained in real terms at the expense of lenders.b. lenders gained in real terms at the expense of borrowers. c. borrowers and lenders were not affected.d. the government lost because it collected less in taxes.

Q: When nominal interest rates are high, the velocity of money should: A. be low.B. also be high.C. not change; the velocity of money does not vary with the interest rate.D. decrease by the same percent that the nominal interest rate has increased.

Q: If the expected inflation rate is 3 percent, the nominal interest rate is 5 percent, and the actual inflation rate turns out to be 4 percent, then the realized real interest rate is_____than the expected real interest rate and borrowers____relative to lenders.a. less; gainb. less; losec. greater; gaind. greater; lose

Q: During economic slowdowns (recessions) the velocity of money tends to: A. remain relatively stable.B. increase slightly.C. increase dramatically.D. decrease.

Q: If the expected inflation rate was 7 percent and the actual inflation rate was 3 percent, then a. borrowers gained in real terms at the expense of lenders.b. lenders gained in real terms at the expense of borrowers. c. borrowers and lenders were not affected.d. the government gained because it collected more in taxes.

Q: If money growth and real output growth are both zero, the change in the price level will: A. also be zero.B. equal the percentage change in velocity.C. be indeterminate.D. be the inverse of the percentage change in velocity.

Q: From 1972 to 1974, the expected real interest rate on short-term bonds averaged about +2 percent, but the realized real interest rate averaged about −2 percent. The main reason for the difference was thata. actual inflation was about 4 percentage points lower than expected inflation.b. actual inflation was about 4 percentage points higher than expected inflation.c. a monopoly cornered the market on short-term bonds.d. nominal rate of interest was zero.

Q: Which of the following statements is most correct? A. The velocity of M2 is relatively stable across all time periods.B. The velocity of M2 is less stable than the velocity of M1.C. The velocity of M2 is more volatile in the short run than the long run.D. Fisher's assumption about money velocity being stable in the long run was incorrect.

Q: If the ex-post real interest rate is 5 percent and actual inflation rate is 2 percent, the nominal interest rate is____a. 7 percent.b. 3 percent.c. 2.5 percent.d. 2 percent.

Q: The empirical data reveals the velocity of M2 to be: A. relatively stable in the long run.B. highly volatile in the long run.C. stable only when measured annually.D. higher than the velocity of M1.

Q: Another name for the realized real interest rate is thea. securitized real interest rate.b. expected real interest rate.c. ex-post real interest rate.d. ex-ante real interest rate.

Q: Control of money growth to stabilize inflation only works if velocity were constant. In practice, changes in velocity: A. can safely be ignored in countries with relatively low inflation rates.B. are important when inflation is low.C. must be taken into account no matter what the inflation rate.D. can always safely be ignored.

Q: Another name for the expected real interest rate is thea. securitized real interest rate.b. realized real interest rate.c. ex-post real interest rate.d. ex-ante real interest rate.

Q: Nobel-laureate economist Milton Friedman suggested that policymakers strive to ensure that the monetary aggregates: A. grow at a rate equal to the rate of inflation.B. grow at a rate equal to the rate of real growth plus the desired level of inflation.C. grow at a rate equal to the rate of real growth less the desired level of inflation.D. remain constant in terms of dollar amounts.

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: A rate of inflation that exceeds the growth rate of money for a country could be explained by: A. a growing real economy.B. a constant velocity of money.C. an increasing velocity of money.D. a decreasing velocity of money.

Q: Explain how an economist could use the slope of the yield curve to analyze the probability that a recession will occur.Explain why the spread may matter.

Q: The quantity theory of money along with the assumption of a constant velocity can explain which of the following? A. At a given level of money growth, the higher the level of real growth the higher the level of inflation will be.B. At a given level of money growth, the higher the level of real growth the lower the level of inflation will be.C. If real growth is higher than money growth, the price level must be rising.D. If real growth equals money growth, the price level is falling.

Q: What do steep upward-sloping yield curves indicate about the business cycle?

Q: The quantity theory of money can explain which of the following? A. If the %ΔY > 0 and the %ΔV = 0; the %ΔP < %ΔMB. If the %ΔV = 0 and the %ΔM = 0; the %ΔP must be = 0C. If %ΔY and the %ΔV = 0; the %ΔP > %ΔMD. If the %ΔP > 0; the %ΔM must also be > 0

Q: Consider the bond market to be in equilibrium according to our complete theory of the term structure of interest rates. The current interest rate on one-year bonds is 2 percent, and you believe, as does everyone in the market, that in one year the interest rate on one-year bonds will be 3 percent, and in two years, the interest rate on one-year bonds will be 4 percent. That is, using our standard notation,=2%,=3%,and=4%.Assume that there is no term premium on a one-year bond.a. According to the expectations theory of the term structure of interest rates, what will the interest rate be today on a two-year bond and a three-year bond?Suppose the term premium equals 75 percent × the number of years to maturity, for the 2-year bond and the 3- year bond.b. Calculate the interest rate today on the two-year bond and the three-year bond, incorporating the term premium.c.Draw the yield curve for today, using the values you calculated in part b. Your drawing should show three points and should be drawn reasonably to scale, showing the values on each axis of each point plotted. Explain briefly (in one or two sentences) why the yield curve has the shape it does.