Deck 7: The Asset Market, money, and Prices

Question 1

For something to satisfy the medium-of-exchange function of money,it must be

A)backed by gold.
B)readily exchangeable for other goods.
C)issued by a central bank.
D)an inherently valuable commodity.

Answer 1

readily exchangeable for other goods.

Question 2

M1 does not include

A)MMMFs.
B)travelers' checks.
C)currency.
D)transaction accounts.

Answer 2

MMMFs.

Question 3

The number of units of one good that trade for one unit of alternative goods can be determined most easily when

A)there is one unit of account.
B)the goods all weigh about the same.
C)the goods are all new.
D)the goods are actively traded through barter.

Answer 3

there is one unit of account.

Question 4

Which of the following statements about M1 and M2 is not true?

A)Transaction accounts are part of M1.
B)M2 is more liquid than M1.
C)M2 is larger than M1.
D)Transaction accounts are part of M2.

Question 5

moneys primary role in the economy comes from the benefits of lowering transactions costs and allowing specialization.This function of money is called

A)store of value.
B)medium of exchange.
C)standard of deferred payment.
D)unit of account.

Question 6

The following are all functions of money except

A)medium of exchange.
B)store of value.
C)unit of account.
D)source of anxiety.

Question 7

In economics,money refers to

A)income.
B)wealth.
C)assets used and accepted as payment.
D)currency.

Question 8

Which of the following best illustrates the medium of exchange function of money?

A)The price of a new car is $25,000.
B)A penny saved is a penny earned.
C)A person owes $10,000 on his or her credit card.
D)You pay $3 to purchase a bag of apples.

Question 9

A good that is used as a medium of exchange as well as being a consumption good is called

A)a barter money.
B)a commodity money.
C)a legal tender.
D)a debased money.

Question 10

Which of the following statements about M1 and M2 is true?

A)Demand deposits are not part of M1.
B)M2 is more liquid than M1.
C)M1 is larger than M2.
D)Savings deposits are part of M2.

Question 11

In some countries,prices in stores are listed in terms of U.S.dollars,rather than in units of the local currency.That's most likely because

A)the country's political system is unstable.
B)interest rates are higher using U.S. dollars than using the local currency.
C)there is no other store of value.
D)the country has experienced high rates of inflation.

Question 12

Which of the following measures is the best measure of money as a medium of exchange?

A)M1
B)M2
C)M3
D)None of the above

Question 13

M2 does not include

A)Treasury bonds.
B)passbook savings accounts.
C)small-denomination time deposits.
D)M1.

Question 14

Which of the following is not part of M1?

A)Transaction accounts
B)Checking accounts
C)Time deposits
D)Traveler's checks

Question 15

M2 includes

A)large-denomination time deposits.
B)institutional MMMFs.
C)commercial paper.
D)M1.

Question 16

One of moneys primary roles in the economy comes from the use of money to transfer purchasing power to the future.This role of money is called

A)store of value.
B)unit of account.
C)medium of exchange.
D)standard of deferred payment.

Question 17

The use of money is more efficient than barter because the introduction of money

A)reduces the need for economic specialization.
B)reduces the need to exchange goods.
C)reduces the need for other stores of value.
D)reduces transaction costs.

Question 18

Suppose your bank raises its minimum-balance requirement for free checking on checking accounts by $500.You take $500 out of your passbook savings account and put it in your checking account.What is the overall effect on M1 and M2?

A)M1 rises by $500, M2 falls by $500.
B)M1 is unchanged, M2 is unchanged.
C)M1 rises by $500, M2 is unchanged.
D)M1 is unchanged, M2 falls by $500.

Question 19

Why do people keep currency in their pockets when bank deposits pay interest?

A)Because banks might steal your money.
B)Because currency is more liquid.
C)Because bank deposits lose value due to inflation.
D)Because bank deposits lose value due to changes in interest rates.

Question 20

A disadvantage of the barter system is that

A)no trade occurs.
B)people must produce all their own food, clothing, and shelter.
C)the opportunity to specialize is greatly reduced.
D)gold is the only unit of account.

Question 21

Why is per-capita U.S.currency demand so large? Who is holding large amounts of U.S.currency and why are they doing so? Should U.S.policymakers be concerned about this? Why?

Question 22

What happens to M1 and M2 due to each of the following changes?
(a)You take $500 out of your checking account and put it into a passbook savings account.
(b)You take $1000 out of your checking account and buy traveler's checks.
(c)You take $1500 out of your money-market mutual fund and deposit into your checking account.
(d)You cash in $2000 in savings bonds and invest the money in a certificate of deposit.

Question 23

The uncertainty about the return an asset will earn is

A)liquidity.
B)risk.
C)time to maturity.
D)stochastic dominance.

Question 24

The set of assets that a holder of wealth chooses to own is called

A)an asset assortment.
B)a wealth strategy.
C)a portfolio.
D)an investment envelope.

Question 25

A developing country does not have enough taxes to cover its expenditures and is unable to borrow.This government would be most likely to cover its deficit by

A)purchasing government bonds from the public.
B)selling government bonds to the public.
C)selling newly issued government bonds directly to the central bank.
D)buying newly issued government bonds directly from the central bank.

Question 26

Suppose you read in the paper that the Federal Reserve plans to expand the money supply.The Fed is most likely to do this by

A)printing more currency and distributing it.
B)purchasing government bonds from the public.
C)selling government bonds to the public.
D)buying newly issued government bonds directly from the government itself.

Question 27

People's best guesses about returns on assets are called

A)expected returns.
B)liquidity.
C)risk.
D)the term structure of returns.

Question 28

The amount by which the expected return on a risky asset exceeds the return on an otherwise comparable safe asset is known as the

A)CDS spread.
B)risk premium.
C)VIX.
D)term spread.

Question 29

What function is money playing in each of these situations:
a.You walk into a store in Germany and see that all the prices are in euros.
b.You buy a candy bar for $1.25.
c.Your Aunt Jane keeps $100 bills tucked into many books in her house.

Question 30

The existence of a ________ means that the interest rate on a two-year bond will exceed the average interest rate on two successive one-year bonds.

A)risky asset.
B)securitization premium.
C)term structure.
D)risk premium.

Question 31

Which of the following is not included in M2?

A)Money market mutual funds held by individuals
B)Money market deposit accounts
C)Money market mutual funds held by institutions
D)Small-denomination time deposits

Question 32

What are the major components of M1? What are the major components of M2? Describe each component.

Question 33

Time to maturity refers to the amount of time until

A)an asset repays the principal to an investor.
B)an asset pays interest for the first time.
C)a bond can be sold on the secondary market.
D)the yield curve shows an upward slope.

Question 34

The risk premium is

A)the amount by which the expected return on a risky asset exceeds the return on an otherwise comparable safe asset.
B)a measure of the riskiness of the overall economy in a domestic country compared with a foreign country.
C)the amount an investor must pay to insure his or her stock portfolio to protect against a fall in value.
D)the amount an investment bank charges to guarantee an annuity that pays a fixed rate of return in the future.

Question 35

What's the most common way for a central bank to reduce the money supply?

A)Collect higher taxes
B)Sell bonds to the public
C)Buy bonds from the government
D)Buy bonds from the public

Question 36

We shouldn't be concerned about U.S.currency held abroad because

A)the currency will never return to the United States.
B)foreigners use it to buy U.S. bonds.
C)it represents an interest-free loan to the United States.
D)foreigners can't spend it in their own countries.

Question 37

You are putting together a portfolio of assets.The four most important characteristics of the assets you will choose are expected return,time to maturity,

A)risk, and liquidity.
B)risk, and collateral
C)risk, and reward.
D)liquidity, and standard issue size.

Question 38

People in other countries want to hold U.S.dollars as a

A)medium of exchange.
B)store of value.
C)unit of account.
D)standard of deferred payment.

Question 39

Over half of U.S.currency is

A)held abroad.
B)used in the underground economy.
C)held by banks as reserves.
D)held by businesses, especially retailers, for making transactions.

Question 40

The ease and quickness with which an asset can be exchanged for goods,services,or other assets is its

A)risk.
B)time to maturity.
C)velocity.
D)liquidity.

Question 41

In the early 2000s,lenders began issuing mortgage loans to people who would normally not be qualified to take out loans because they did not meet lending standards.Those borrowers are known as

A)alternative borrowers.
B)weak borrowers.
C)subprime borrowers.
D)credit risks.

Question 42

By spreading her investments out over many different assets,an investor achieves

A)a higher expected return.
B)increased risk.
C)diversification.
D)greater liquidity.

Question 43

An increase in the real interest rate would cause an increase in the real demand for money

A)no matter what the change in expected inflation.
B)if expected inflation fell by less than the rise in the real interest rate.
C)if expected inflation fell by the same amount as the rise in the real interest rate.
D)if expected inflation fell by more than the rise in the real interest rate.

Question 44

AAA Company stock has a higher expected rate of return than ZZZ Company stock.All else being equal,you would expect that relative to ZZZ,AAA company stock provides

A)less risk and less liquidity.
B)less risk and more liquidity.
C)more risk and less liquidity.
D)more risk and more liquidity.

Question 45

Suppose that: 1)The interest on a one-year bond today is 3%;
2)The interest on a one-year bond starting one year from now is expected to be 4% per year;
3)The interest on a one-year bond starting two years from now is expected to be 5% per year;
4)The risk premium on a two-year bond is 0.5%; and
5)The risk premium on a three-year bond is 1.0%.
Use that information to answer the following questions.

A)According to the expectations theory,what is the interest rate today on a two-year bond? Show your work.
B)According to the expectations theory,what is the interest rate today on a three-year bond? Show your work.
C)Plot the yield curve

Question 46

Mr.Pierpont has wealth of $200,000.He wants to keep at least $80,000 in bonds at all times,and will shift $10,000 into bonds from his checking account for each percentage point that the interest rate on bonds exceeds the interest rate on his checking account.If the interest rate on checking accounts is 4% and the interest rate on bonds is 9%,how much does Mr.Pierpont keep in his checking account?

A)$50,000
B)$70,000
C)$130,000
D)$150,000

Question 47

Compared with money,bonds have

A)less risk and less liquidity.
B)less risk and more liquidity.
C)more risk and less liquidity.
D)more risk and more liquidity.

Question 48

A 10% decrease in real income usually leads to ________ in money demand.

A)an increase
B)no change
C)a decrease of less than 10%
D)a decrease of 10%

Question 49

The financial crisis occurred in 2008 in large part because of losses on securities consisting of bundles of mortgage loans known as

A)home loan loss reserves.
B)credit default swaps.
C)mortgage-backed securities.
D)naked put options.

Question 50

A one-year bond has an interest rate of 5% today.Investors expect that in one year,a one year bond will have an interest rate equal to 7%.According to the expectations theory of the term structure of interest rates,in equilibrium,a two-year bond today will have an interest rate equal to

A)3)0%.
B)5)0%.
C)5)5%.
D)6)0%.

Question 51

Which of the following is most likely to lead to an increase of 1% in the nominal demand for money?

A)An increase in real income of 0.5%
B)A decrease in real income of 0.5%
C)A decline of 1% in the price level
D)An increase of 1% in the price level

Question 52

Suppose that you could buy a one-year bond today,which has an interest rate of 3%.If you wait a year and buy a one-year bond then,the interest rate will be 4%.Two years from now,a one-year bond is expected to offer an interest rate of 5%.According to the expectations theory of the term structure of interest rates,what is the interest rate on a two-year bond today? What is the interest rate on a three-year bond today?

Question 53

The least liquid asset on this list is

A)money.
B)bonds.
C)houses.
D)stocks.

Question 54

Mr.Pierpont has wealth of $200,000.He wants to keep at least $80,000 in bonds at all times,and will shift $10,000 into bonds from his checking account for each percentage point that the interest rate on bonds exceeds the interest rate on his checking account.Currently,he keeps $100,000 in bonds,which pay him 7%.What is the current interest rate on checking accounts?

A)5%
B)7%
C)9%
D)10%

Question 55

Which of the following is most likely to lead to a decrease of 10% in the nominal demand for money?

A)An increase in real income of 5%
B)A decrease in real income of 5%
C)A decline of 10% in the price level
D)An increase of 10% in the price level

Question 56

The interest rate on long-term bonds is somewhat higher than suggested by the expectations theory because

A)the expectations theory doesn't account for taxes.
B)a risk premium exists.
C)an inflation premium must be added to long-term bonds.
D)the Fed can only control short-term interest rates.

Question 57

An increase in expected inflation is likely to cause

A)a decline in the demand for real balances.
B)an increase in the demand for real balances.
C)no change in the demand for real balances.
D)no change in the demand for real balances only if the income elasticity of real money demand is zero.

Question 58

A 5% increase in real income usually leads to ________ in money demand.

A)a decrease
B)no change
C)an increase of less than 5%
D)a decrease of 5%

Question 59

The idea that investors today compare the returns on bonds with differing times to maturity to see which is expected to give them the highest return is the underlying principle behind the ________ of the term structure of interest rates.

A)expectations theory
B)investors' viewpoint analysis
C)segmented-markets theory
D)yield comparison theory

Question 60

The opportunity cost of holding currency decreases when

A)income decreases.
B)the interest rate on bonds decreases.
C)the interest rate on money decreases.
D)wealth decreases.

Question 61

If the interest elasticity of money demand is -0.1,by what percent does money demand change if the nominal interest rate rises from 2% to 3%?

A)-0.1%
B)5%
C)0%
D)-5%

Question 62

What happens to real money demand (rise,fall,no change)due to a change in each of the following factors?
(a)A tax on stock market transactions is introduced.
(b)Computerized bond trading reduces transactions costs.
(c)People's average level of wealth rises.
(d)The threat of a recession increases the riskiness of stocks and bonds.
(e)The interest rate paid on checking account balances declines.
(f)The price level falls in a one-time jump.

Question 63

Suppose a new law imposes a tax on all trades of bonds and stock.What is the likely effect on money demand?

A)Money demand declines first, then rises when inflation increases.
B)Money demand rises.
C)The overall effect is ambiguous.
D)Money demand declines.

Question 64

Suppose velocity is constant at 4,real output is 10,and the price level is 2.From this initial situation,the government increases the nominal money supply to 6.If velocity and output remain unchanged,by how much will the price level increase?

A)2)4%
B)20%
C)24%
D)50%

Question 65

Money demand is given by M^d/P = 1000 + .2Y - 1000i.
Given that P = 200,Y = 2000,and i = .10,real money demand is equal to

A)1300.
B)1500.
C)260,000.
D)300,000.

Question 66

If real income rises 5%,prices rise 3%,and nominal money demand rises 7%,what is the income elasticity of real money demand?

A)3/4
B)4/5
C)5/6
D)6/7

Question 67

If there is a financial panic and increased uncertainty about the returns in the stock market and bond market,what is the likely effect on money demand?

A)Money demand declines first, then rises when inflation increases.
B)Money demand rises.
C)The overall effect is ambiguous.
D)Money demand declines.

Question 68

Suppose velocity is 3,real output is 9000,and the price level is 1.5.What is the level of real money demand in this economy?

A)2000
B)3000
C)6000
D)30,000

Question 69

Suppose real money demand is 1000,real output is 6000,and the price level is 200.What is the level of velocity in this economy?

A)2
B)3
C)6
D)12

Question 70

When the quantity of money supplied equals the quantity of money demanded,then

A)the goods market is in equilibrium.
B)the asset market is in equilibrium.
C)the money market is in equilibrium.
D)the money market is not in equilibrium.

Question 71

If real income rises 4%,prices rise 1%,and nominal money demand rises 4%,what is the income elasticity of real money demand?

A)3/4
B)4/5
C)5/6
D)1

Question 72

When the real quantity of money supplied equals the real quantity of money demanded,there is said to be

A)goods market equilibrium.
B)asset market equilibrium.
C)monetary neutrality.
D)money illusion.

Question 73

If the income elasticity of money demand is 3/4 and the interest elasticity of money demand is -1/4,by what percent does money demand rise if income rises 10% and the nominal interest rate rises from 4% to 5%?

A)7)50%
B)6)25%
C)5)00%
D)1)25%

Question 74

Suppose the money demand function is
M^d/P = 1000 + 0.2Y - 1000 (r + π^e).
(a)Calculate velocity if Y = 2000,r = .06,and π^e = .04.
(b)If the money supply (M^s)is 2600,what is the price level?
(c)Now suppose the real interest rate rises to 0.11,but Y and M^s are unchanged.What happens to velocity and the price level? So if the nominal interest rate were to rise from 0.10 to 0.15 over the course of a year,with Y remaining at 2000,what would the inflation rate be?

Question 75

If real GDP is $4 billion,the price level is 1.25,and the nominal money stock is $500 million,then velocity is

A)0)1.
B)1)
C)10.
D)100.

Question 76

Over time,the wealth of society increases and payments technologies get more efficient.What is the effect on money demand of these two changes?

A)Money demand rises proportionately to the rise in wealth.
B)Money demand rises, but less than proportionately to the rise in wealth.
C)The overall effect is ambiguous.
D)Money demand declines.

Question 77

Velocity is defined as

A)nominal money stock/nominal GDP.
B)nominal GDP/nominal money stock.
C)real money stock/real GDP.
D)mc².

Question 78

Money demand is given by M^d/P = 1000 + .2Y - 1000i.
Given that P = 200,Y = 2000,and i = .10,velocity is equal to

A)0)65.
B)0)75.
C)1)33.
D)1)54.

Question 79

Give five examples of factors that could reduce the demand for money.

Question 80

Under a situation of asset market equilibrium,

A)the quantity of money supplied equals the quantity of money demanded.
B)the quantity of money supplied equals the quantity of nonmonetary assets demanded.
C)the quantity of nonmonetary assets supplied equals the quantity of monetary assets demanded.
D)the quantity of money supplied equals the quantity of nonmonetary assets supplied.