Deck 25: Financial Markets and the Economy

Question 1

All else constant, an increase in the supply of

A)increases the equilibrium quantity and the equilibrium price of bonds.
B)increases the equilibrium quantity and decreases the equilibrium price of bonds.
C)decreases the equilibrium quantity and increases the equilibrium price of bonds.
D)decreases the equilibrium quantity and the equilibrium price of bonds.

Answer 1

B

Question 2

A buyer of a newly-issued bond

A)is a borrower of funds.
B)is a lender of funds.
C)is purchasing ownership in the institution that issues the bonds.
D)must be a producer and not a consumer.

Answer 2

B

Question 3

Since the late 1970s, the United States

A)has experienced only moderate inflation, usually between 2 to 3 percent.
B)has seen a steadily increasing rate of inflation.
C)has experienced low inflation, except for a seven-year period between 1979 and 1986.
D)has experienced high inflation followed by a long period of deflation.

Answer 3

C

Question 4

Suppose you sell a $1,000 bond that matures in 1 year for $950.Calculate the interest rate you will have to pay on this bond.

A)0.95%
B)5.0%
C)5.3%
D)95%

Question 5

Which of the following statements is true about bonds?

A)Sellers of newly issued bonds are borrowers.
B)When the government and large corporations want to borrow money they buy bonds.
C)A bond owner must hold a bond until it matures.
D)The interest rate on a bond is directly related to its price.

Question 6

The price of a bond is determined by

A)the seller.
B)the buyer.
C)the demand for and supply of bonds.
D)the investment bank that auctions off the bonds.

Question 7

The interest rate on a bond is

A)inversely related to its price.
B)directly related to its price.
C)determined by its face value.
D)determined by the time to maturity.

Question 8

The face value of a bond is

A)the price an individual pays to purchase the bond.
B)the amount that the issuer will have to pay upon maturity.
C)the market value of the bond.
D)the rate of return on the bond.

Question 9

Suppose you buy a bond with a face value of $1,000 for $800.What is the interest rate you receive on the bond?

A)0.8%
B)1.25%
C)20%
D)25%

Question 10

Financial markets are

A)markets where money is traded between the Fed and economic agents.
B)markets where funds accumulated by one group are made available to another group.
C)banks interact to lend and borrow reserves.
D)the market where capital goods are traded.

Question 11

All else constant, an increase in the demand for bonds

A)increases the equilibrium quantity and the equilibrium price of bonds.
B)increases the equilibrium quantity and decreases the equilibrium price of bonds.
C)decreases the equilibrium quantity and increases the equilibrium price of bonds.
D)decreases the equilibrium quantity and the equilibrium price of bonds.

Question 12

A bond is

A)a debt instrument, that is, the issuer has taken out a loan.
B)an equity instrument, that is, the buyer has purchased ownership in the issuer's firm.
C)the same thing as a stock.
D)a short-term loan from the government.

Question 13

The supply of bonds curve slopes upwards because

A)at higher prices, bonds pay higher interest which makes them more attractive to suppliers.
B)lower prices raises the cost of borrowing which makes them less attractive to suppliers.
C)at lower prices, bonds pay higher interest which makes them more attractive to suppliers.
D)higher prices raise the cost of borrowing which makes them less attractive to suppliers.

Question 14

A $100 bond, which matures in one year, has a price of $75.The interest rate on this bond is

A)20%.
B)25%.
C)33 1/3%.
D)50%.

Question 15

The demand for bonds curve slopes downwards because

A)at higher prices, bonds pay higher interest which makes them more attractive to buyers.
B)lower prices reduce the cost of borrowing which makes them less attractive to buyers.
C)at lower prices, bonds pay higher interest which makes them more attractive to buyers.
D)higher prices raise the cost of borrowing which makes them less attractive to buyers.

Question 16

A $1,000 bond, which matures in one year, has a price of $925.The interest rate on this bond is

A)7.5%.
B)8.11%.
C)9.25%.
D)9.20%.

Question 17

Which of the following statements is true?

A)The lower the price of a bond, relative to its face value, the lower the interest rate.
B)The lower the price of a bond, relative to its maturity, the lower the interest rate.
C)The higher the price of a bond, relative to its face value, the higher the interest rate.
D)The lower the price of a bond, relative to its face value, the higher the interest rate.

Question 18

As the price of a bond _____, the interest rate___.

A)falls, rises
B)rises, rises
C)rises, remains unchanged
D)falls, falls

Question 19

Which of the following statements is true about bonds?

A)Buyers of newly issued bonds are borrowers.
B)When the government and large corporations want to borrow money they buy bonds.
C)A bond owners must hold a bond until it matures.
D)The interest rate on a bond is inversely related to its price.

Question 20

The interest rate on a bond is

A)the difference between the face value and the bond price, expressed as a percentage of the face value.
B)the difference between the face value and the bond price, expressed as a percentage of the bond price.
C)the ratio of the face value and the bond price, expressed as a percentage.
D)the difference between the face value and the yield, expressed as a percentage of the bond price.

Question 21

Suppose the U.S.dollar price of the Euro falls.This means that

A)the U.S.exchange rate has risen and the U.S.dollar buys more euros.
B)the U.S.exchange rate has risen and the U.S.dollar buys less euros
C)the U.S.exchange rate has fallen and the U.S.dollar buys more euros.
D)the U.S.exchange rate has fallen and the U.S.dollar buys less euros.

Question 22

An increase in the supply of bonds

A)raises the interest rate and increases equilibrium quantity of bonds.
B)raises the interest rate and decreases equilibrium quantity of bonds.
C)lowers the interest rate and decreases equilibrium quantity of bonds.
D)lowers the interest rate and increases equilibrium quantity of bonds.

Question 23

A higher U.S.exchange rate means that

A)foreign products are now more expensive to U.S.citizens.
B)foreign products are now cheaper to U.S.citizens.
C)U.S.products are now more expensive to U.S.citizens.
D)U.S.products are now cheaper to foreign countries.

Question 24

Suppose the United States experiences a rise in the U.S.dollar price of foreign exchange.

A)This means that the U.S.exchange rate has risen and the U.S.dollar buys more foreign currency.
B)This means that the U.S.exchange rate has risen and the U.S.dollar buys less foreign currency.
C)This means that the U.S.exchange rate has fallen and the U.S.dollar buys more foreign currency.
D)This means that the U.S.exchange rate has fallen and the U.S.dollar buys less foreign currency.

Question 25

A country's exchange rate is the

A)price of its currency in terms of another currency.
B)ratio of imports to exports.
C)ratio of exports to imports.
D)ratio of net exports to real GDP.

Question 26

An increase in the supply of bonds leads to

A)an increase in the price of bonds, a decrease in the interest rate, and an increase in aggregate demand.
B)an increase in the price of bonds, an increase in the interest rate, and an increase in aggregate demand.
C)a decrease in the price of bonds, an increase in the interest rate, and an increase in aggregate demand.
D)a decrease in the price of bonds, an increase in the interest rate, and a decrease in aggregate demand.

Question 27

If a British student pays her way to attend Harvard University, her action will:

A)cause the exchange rate of the British pound to rise.
B)cause the exchange rate of the U.S.dollar to fall.
C)create a supply of dollars and a demand for pounds in the foreign currency market.
D)create a supply of pounds and a demand for dollars in the foreign currency market.

Question 28

Which of the following events is likely to generate a supply of U.S.dollars in the foreign exchange market?

A)A Saudi Arabian citizen buys a condominium in New York.
B)An American student will pay her way to attend her first year of college at Oxford, England.
C)Alabama Mills exports 5,000 bales of cotton to Pakistan.
D)Hans Meyer, a German citizen, plans to spend a month in California, sampling wines.

Question 29

Currency rates of exchange are determined by

A)agreements among governments.
B)the nations with the strongest armies.
C)the demand and supply of the currency.
D)multilateral business agreements.

Question 30

If the U.S.exchange rate falls,

A)foreign products are now more expensive to U.S.citizens.
B)foreign products are now cheaper to U.S.citizens.
C)U.S.products are now more expensive to U.S.citizens.
D)U.S.products are now cheaper to foreign countries.

Question 31

Which of the following statements is true? All other things unchanged,

A)when bond prices rise, real GDP and the price level rise.
B)when bond prices fall, real GDP rises and the price level falls.
C)when bond prices rise, the interest rate rises, and aggregate demand and the price level fall.
D)when bond prices fall, the interest rate and aggregate demand fall.

Question 32

Which of the following is an index of exchange rates?

A)import-export ratio
B)trade-weighted exchange rate
C)trade balance index
D)foreign price-domestic price ratio

Question 33

Figure 10-2

Refer to Figure 10-2.Who generates a demand for dollars in the foreign exchange market?

A)U.S.residents who demand foreign goods, services, and assets.
B)U.S.residents who demand domestically produced goods, services, and assets.
C)Foreign residents abroad who demand U.S.goods, services, and assets.
D)Foreign banks and citizens who wish to reduce their holdings of foreign currencies.

Question 34

If bond prices fall,

A)interest rates rise, which in turn, discourage investment.
B)interest rates fall, which in turn, discourage investment.
C)interest rates rise, which in turn, stimulate investment.
D)interest rates fall, which in turn, stimulate investment.

Question 35

Suppose the government issues bonds to finance an increase in government spending.In the bond market,

A)the demand curve shifts right, leading to an increase in bond prices, and a decrease in interest rates.
B)the supply curve shifts right, leading to a decrease in bond prices, and an increase in interest rates.
C)the demand curve shifts left, leading to a decrease in bond prices, and an increase in interest rates.
D)the supply curve shifts left, leading to an increase in bond prices, and an increase in interest rates.

Question 36

Which of the following events is likely to generate a demand for U.S.dollars in the foreign exchange market?

A)A Saudi Arabian citizen buys a condominium in New York.
B)An American student will begin her first year of college at Oxford, England.
C)Wal-Mart imports 5,000 bicycles from China to sell in its stores.
D)The Illinois Chamber of Commerce will finance and lead a trade mission to India.

Question 37

The foreign exchange market

A)is a government-run market where foreign currencies are traded.
B)is a bank-owned market through which people buy and sell currencies.
C)refers to the entire array of institutions through which people buy and sell currencies.
D)an open market run by the Federal Reserve through which banks buy and sell currencies.

Question 38

An increase in the demand for bonds leads to

A)a decrease in the price of bonds, a decrease in the interest rate, and a decrease in aggregate demand.
B)an increase in the price of bonds, an increase in the interest rate, and an increase in aggregate demand.
C)an increase in the price of bonds, a decrease in the interest rate, and an increase in aggregate demand.
D)a decrease in the price of bonds, an increase in the interest rate, and an increase in aggregate demand.

Question 39

If bond prices rise,

A)interest rates rise, which in turn, discourage investment.
B)interest rates fall, which in turn, discourage investment.
C)interest rates rise, which in turn, stimulate investment.
D)interest rates fall, which in turn, stimulate investment.

Question 40

An increase in the demand for bonds

A)raises the interest rate and increases equilibrium quantity of bonds.
B)raises the interest rate and decreases equilibrium quantity of bonds.
C)lowers the interest rate and decreases equilibrium quantity of bonds.
D)lowers the interest rate and increases equilibrium quantity of bonds.

Question 41

What are the three motives for holding money?

A)the medium of exchange motive, the store of value motive, and the unit of account motive
B)the transaction motive, the speculative motive, and the liquidity motive
C)the transaction motive, the investment motive, and the liquidity motive
D)the transaction motive, the speculative motive, and the precautionary motive

Question 42

Figure 10-2

Refer to Figure 10-2.The demand for dollars curve slopes downwards because

A)a higher exchange rate tends to decrease U.S.exports, thereby generating a lower quantity of dollars in the foreign exchange market.
B)a higher exchange rate tends to increase U.S.imports, thereby generating a lower quantity of dollars in the foreign exchange market.
C)a lower exchange rate tends to decrease U.S.exports, which raises the price of foreign currency in the foreign exchange market.
D)a lower exchange rate tends to increase U.S.imports, thereby raising the price of foreign currency in the foreign exchange market.

Question 43

Figure 10-2

Refer to Figure 10-2.The supply of dollars curve slopes upwards because

A)a higher exchange rate tends to decrease U.S.exports, thereby raising the price of foreign currency in the foreign exchange market.
B)a higher exchange rate tends to increase U.S.imports, thereby generating a higher quantity of dollars in the foreign exchange market.
C)a lower exchange rate tends to decrease U.S.exports, thereby generating a lower quantity of dollars in the foreign exchange market.
D)a lower exchange rate tends to increase U.S.imports, thereby raising the price of foreign currency in the foreign exchange market.

Question 44

In deciding how much money to hold, individuals

A)must understand the velocity of the money and its role in the economy.
B)compare the inflation rate with the market interest rate.
C)base their decisions on the amount of spending they plan to undertake.
D)evaluate the relative costs and benefits of holding money versus other assets.

Question 45

An increase in the supply of bonds generates

A)an increase in both the interest rate and the exchange rate.
B)a decrease in both the interest rate and the exchange rate.
C)an increase in the interest rate and a decrease in the exchange rate.
D)a decrease in the interest rate and an increase in the exchange rate.

Question 46

A fall in the price of bonds may lead to a(n):

A)decrease in aggregate demand and the price level due to a decrease in net exports.
B)decrease in aggregate demand and an increase in the price level due to a decrease in investment.
C)increase in aggregate demand due to an increase in net exports.
D)increase in aggregate demand due to an increase in investment.

Question 47

If the supply of bonds in the United States decreases, bond prices will rise.When bond prices rise interest rates will ___, which will make U.S.financial assets ____attractive to foreigners.

A)fall, more
B)rise, more
C)fall, less
D)rise, less

Question 48

Which of the following would cause the price of the dollar to rise?

A)a fall in bond prices
B)an increase in bond prices
C)a decrease in interest rates
D)a fall in the exchange rate

Question 49

If the demand for U.S.dollars goes up, the exchange rate will _______ and, as a result, net exports in the United States will ______.

A)increase, decrease
B)decrease, increase
C)increase, increase
D)decrease, decrease

Question 50

If the demand for U.S.dollars goes down, the exchange rate will _______ and, as a result, net exports in the United States will _______ .

A)increase, decrease
B)decrease, increase
C)increase, increase
D)decrease, decrease

Question 51

In the textbook model, wealth is held in two forms: money and in bond funds.Which of the following statements is true?
I.Money and bond funds earn the same interest rates in a well functioning money market.
II.Money is a more liquid asset compared to bond funds.
III.Bond funds are interest earning assets while money generally is not.
IV.The value of money is affected by inflation but the value of bond funds is not.

A)I, II, and IV
B)I and IV
C)II, III, and IV
D)III and IV

Question 52

An increase in the demand for bonds

A)an increase in both the interest rate and the exchange rate.
B)a decrease in both the interest rate and the exchange rate.
C)an increase in the interest rate and a decrease in the exchange rate.
D)a decrease in the interest rate and an increase in the exchange rate.

Question 53

Figure 10-2

Refer to Figure 10-2.Who generates a supply of dollars in the foreign exchange market?

A)U.S.residents who demand foreign goods, services, and assets.
B)U.S.residents and firms who wish to sell domestic assets to foreigners.
C)Foreign residents abroad who demand U.S.goods, services, and assets.
D)Foreign banks and citizens who wish to increase their holdings of a reserve currency.

Question 54

Holding everything else unchanged, higher interest rates in foreign countries relative to U.S.interest rates

A)increase the demand and reduce the supply of dollars leading to an increase in the exchange rate.
B)decrease the demand and the supply of dollars leading to an decrease in the exchange rate.
C)increase the demand and the supply of dollars leading to an increase in the exchange rate.
D)decrease the demand and increase the supply of dollars leading to a decrease in the exchange rate.

Question 55

What is an "inverse bond" fund?

A)It is a fund that performs poorly when bond prices fall.
B)It is a fund that performs well when bond prices fall.
C)It is a bond fund that moves in opposite direction to movements in the stock index.
D)It is a bond fund that moves in opposite direction to movements in mutual funds.

Question 56

Holding everything else unchanged, higher interest rates in the U.S.

A)increase the demand and reduce the supply of dollars leading to an increase in the exchange rate.
B)decrease the demand and the supply of dollars leading to an decrease in the exchange rate.
C)increase the demand and the supply of dollars leading to an increase in the exchange rate.
D)decrease the demand and increase the supply of dollars leading to a decrease in the exchange rate.

Question 57

When people hold money to make anticipated purchases of goods and services, they are exercising the _______ demand for money.

A)speculative
B)exchange
C)transactions
D)precautionary

Question 58

Higher interest rates in the United States will attract foreigners to U.S interest-earning assets.This

A)decreases U.S.net exports.
B)increases U.S.net exports.
C)decreases U.S.imports.
D)will have no effect on net exports.

Question 59

Money held for contingencies reflects the _______ demand for money.

A)speculative
B)exchange
C)transactions
D)precautionary

Question 60

An increase in the U.S.exchange rate will make U.S.exports _______ attractive to foreigners and imports from other countries _______ attractive to the United States.

A)less, less
B)less, more
C)more, more
D)more, less

Question 61

The demand curve for money curve shows, all other things unchanged, the

A)quantity of money demanded at each price.
B)quantity of money demanded at each bond rate.
C)quantity of money demanded at each interest rate.
D)amount of money people demand at a specific interest rate.

Question 62

Holding $10 in your pocket to purchase a piping hot pizza illustrates the

A)speculative demand for money.
B)transfer demand for money.
C)precautionary demand for money.
D)transactions demand for money.

Question 63

The opportunity cost of holding money is

A)the liquidity foregone.
B)the higher interest rates that can be earned by holding a bond fund.
C)the decrease in risk from holding money rather than a bond fund.
D)the liquidity gained by holding ready cash.

Question 64

When the money demand curve is drawn with interest rate on the vertical axis and the quantity of money on the horizontal axis, the slope of the demand curve for money is

A)vertical.
B)horizontal.
C)positive.
D)negative.

Question 65

Scenario 1
Consider two money management strategies.The first strategy is called the cash strategy in which an individual deposits her monthly earnings in a checking account and draws down equal amounts each day to finance her daily expenditures.Assume that she earns no interest on her checking accounts and funds are exhausted at the end of the month.The second strategy is called the bond fund strategy.Here the individual deposits one-quarter of her earnings in a checking account and the remaining three-quarters in a bond fund.The bond fund pays 1% interest per month.At the end of the week when the money in the checking account is exhausted, the individual replenishes it by withdrawing another one-quarter of her earnings from the bond fund for the next week.This process is repeated at the end of the second week and third week until the bond fund is exhausted.
Refer to Scenario 1.At low interest rates, an individual

A)is more likely to adopt the bond fund strategy because liquidity is not an issue.
B)might favor the simple cash strategy because the opportunity cost has increased.
C)might favor the simple cash strategy because the interest foregone is minimal.
D)might be indifferent between the two strategies because the cost of transferring funds between interest earning assets and checkable deposits falls.

Question 66

Keeping an extra $200 in your checking account to pay for possible car repairs illustrates the

A)speculative demand for money.
B)transfer demand for money.
C)precautionary demand for money.
D)transactions demand for money.

Question 67

Scenario 1
Consider two money management strategies.The first strategy is called the cash strategy in which an individual deposits her monthly earnings in a checking account and draws down equal amounts each day to finance her daily expenditures.Assume that she earns no interest on her checking accounts and funds are exhausted at the end of the month.The second strategy is called the bond fund strategy.Here the individual deposits one-quarter of her earnings in a checking account and the remaining three-quarters in a bond fund.The bond fund pays 1% interest per month.At the end of the week when the money in the checking account is exhausted, the individual replenishes it by withdrawing another one-quarter of her earnings from the bond fund for the next week.This process is repeated at the end of the second week and third week until the bond fund is exhausted.
Refer to Scenario 1.In which strategy will the quantity of money demanded be greater?

A)the cash strategy
B)the bond fund strategy
C)It will be the same in either strategy.
D)There is insufficient information to answer the question.

Question 68

Scenario 1
Consider two money management strategies.The first strategy is called the cash strategy in which an individual deposits her monthly earnings in a checking account and draws down equal amounts each day to finance her daily expenditures.Assume that she earns no interest on her checking accounts and funds are exhausted at the end of the month.The second strategy is called the bond fund strategy.Here the individual deposits one-quarter of her earnings in a checking account and the remaining three-quarters in a bond fund.The bond fund pays 1% interest per month.At the end of the week when the money in the checking account is exhausted, the individual replenishes it by withdrawing another one-quarter of her earnings from the bond fund for the next week.This process is repeated at the end of the second week and third week until the bond fund is exhausted.
Refer to Scenario 1.An individual is more likely to adopt the bond fund strategy when

A)the inflation rate rises.
B)the interest rate is higher.
C)the cost of transferring funds between interest earning assets and checkable deposits is high.
D)bond funds become more liquid.

Question 69

The quantity of money demanded is negatively related to ____ and positively related to _____.

A)the interest rate, real GDP
B)the interest rate, unemployment
C)real GDP, the interest rate
D)real GDP, the money supply

Question 70

Suppose you earn $4,800 a month and spend exactly $160 in each of the 30 days.If you deposit $1,000 into your checking account on the first day, eleventh day, and twenty-first day of the month, then your average quantity of money demanded is

A)$160.
B)$1,200.
C)$2,400.
D)$4,800.

Question 71

Alexa keeps $500 readily accessible in her checking account so that she can take advantage of changes in the prices of other financial assets.This illustrates the

A)speculative demand for money.
B)transfer demand for money.
C)precautionary demand for money.
D)transactions demand for money.

Question 72

Which of the following decreases the demand for money?

A)an increase in income
B)a decrease in real GDP
C)an increase in the price level
D)expectations of higher bond prices

Question 73

Which of the following increases the demand for money?

A)an increase in the costs of transferring between money and non-money accounts
B)a decrease in real GDP
C)a decrease in the price level
D)declining preferences by consumers for holding money

Question 74

Suppose you earn $4,800 a month and spend exactly $160 in each of the 30 days.If your entire earnings are deposited in your checking account at the beginning of the month, then your average quantity of money demanded is

A)$160.
B)$1,200.
C)$2,400.
D)$4,800.

Question 75

Which of the following increases the demand for money?

A)More and more companies eliminate fees for consumers to set up automatic bill paying systems.
B)A recession in Japan reduces Japanese imports from the United States.
C)The economy experiences deflation.
D)The government raises the tax on interest in income from bonds.

Question 76

The _______ demand for money is holding money in expectation that bond prices and the prices of other assets might change.

A)speculative
B)exchange
C)transactions
D)precautionary

Question 77

The demand for money curve shows

A)the quantity of money demanded at each interest rate, holding all other determinants unchanged.
B)the quantity of money made available by the Federal Reserves, holding all other determinants unchanged.
C)the quantity of money demanded at each bond price, holding all other determinants unchanged.
D)the quantity of money demanded at price level, holding all other determinants unchanged.

Question 78

Which of the following does not cause the money demand curve to shift?

A)a change in the interest rate
B)a change in the price level
C)a change in transfer costs
D)a change in real GDP

Question 79

An increase in financial innovations such as increased network of ATM machines and the widespread acceptance of debit cards

A)will shift the demand for money to the right.
B)will shift the demand for money to the left.
C)increases the quantity of money people want to hold.
D)decreases the quantity of money people want to hold.

Question 80

Which of the following decreases the demand for money?

A)an increase in income
B)an increase in real GDP
C)a decrease in the price level
D)expectations of higher bond prices