Deck 6: Financial Markets Ii: the Extended Is-Lm Model

Question 1

If the nominal interest rate is 20% per year,how much money can an individual borrow today if she wants to repay $100 in one year?

A)$80.00
B)$83.33
C)$120.00
D)$78.00
E) $121.00

Answer 1

$83.33

Question 2

With a nominal interest rate of 5% per year,the present discounted value of $100 to be received in 10 years is

A)$50.00.
B)$61.39.
C)$95.24.
D)$150.00.
E) $163.89.

Answer 2

$61.39.

Question 3

The nominal interest rate is

A)the interest rate measured in terms of goods.
B)always less than the real interest rate.
C)equal to the real interest rate minus the rate of inflation.
D)the type of interest rate typically reported in the financial pages of newspapers.
E) equal to the expected rate of inflation.

Answer 3

the type of interest rate typically reported in the financial pages of newspapers.

Question 4

If the nominal interest rate is less than the real interest rate,we know that

A)both the nominal or real interest rate must be negative.
B)the nominal interest rate must be equal to expected inflation.
C)expected deflation must be occurring.
D)expected inflation must be positive.
E) expected inflation must be zero.

Question 5

If the nominal interest rate 8% and expected inflation 3%,the expected real interest rate in year t is approximately

A)2%.
B)3%.
C)5%.
D)8%.
E) 11%.

Question 6

A consol bond promises to pay $1000 each year,forever,starting next year.If the nominal interest rate is 5%,the present discounted value of this consol is

A)$900.00.
B)$995.00.
C)$2,500.00.
D)$20,000.00.
E) $25,000.00.

Question 7

Whenever the expected inflation rate is positive

A)the real interest rate is greater than the nominal interest rate.
B)the real interest rate is negative.
C)the real interest rate is positive.
D)the nominal interest rate must be equal to the real interest rate.
E) none of the above

Question 8

If the expected inflation rate is negative,the expected real interest rate must be

A)negative.
B)less than the nominal interest rate.
C)equal to the nominal interest rate.
D)greater than the nominal interest rate.
E) none of the above

Question 9

Which of the following best defines the real interest rate (r)?

A)the amount of goods we must give up next year in order to consume more goods today
B)the amount of dollars we must give up next year in order to consume more goods today
C)the amount of dollars we must give up next year in order to have more dollars today
D)the amount of dollars we must give up today in order to have more dollars next year
E) the amount of dollars we must give up today in order to consume more goods today

Question 10

Data on real and nominal interest rates of one-year U.S.T-Bills show that,over the past twenty years,

A)the nominal rate has always been less than the real rate.
B)whenever the nominal rate rises, the real rate falls, and vice versa.
C)the nominal rate has varied, but the real rate has not.
D)the real rate has varied, but the nominal rate has not.
E) the real rate has always been less than the nominal rate.

Question 11

The present discounted value of a future payment becomes smaller when

A)the nominal interest rate decreases.
B)the payment is made sooner rather than later.
C)the payment itself decreases.
D)all of the above
E) none of the above

Question 12

For this question,assume that the interest rate is greater than 0.Given this information and the information about the payments provided below,rank the following three sequences of payments according to their present value

A)A > B > C
B)A > C > B
C)C > B > A
D)C > A > B
E) B > A > C

Question 13

With a constant nominal interest rate equal to i,the present discounted value of $1.00 to be received 4 years from today is equal to

A)1 + i.
B)i⁴.
C)(1 + i)⁴.
D)1 / (1 + i)⁴.
E) 4(1 + i).

Question 14

With a nominal interest rate of 10%,the present discounted value of $200 to be received in one year is

A)$90.91.
B)$165.29.
C)$181.82.
D)$190.00.
E) $220.00.

Question 15

Suppose the nominal interest rate is zero.In this situation,the present discounted value of a finite sequence of future payments is equal to which of the following?

A)zero
B)the sum of the all payments divided by the rate of inflation
C)the average value of each payment
D)the sum of all payments
E) the square of the sum of all payments

Question 16

Suppose that the nominal interest rate increases while the expected inflation rate rises.Given this information,we know with certainty that the real interest rate

A)will not change.
B)will fall.
C)will fall, but only if the increase in the nominal rate is smaller than the increase in expected inflation.
D)will fall, but only if the increase in the nominal rate is greater than the increase in expected inflation.
E) none of the above

Question 17

Under which of the following assumptions would the nominal interest rate be equal to the real interest rate?

A)Expected inflation is equal to the nominal interest rate.
B)Expected inflation is equal to the real interest rate.
C)Expected inflation is negative.
D)Expected inflation is equal to zero.
E) none of the above

Question 18

With a nominal interest rate of 10% per year,the present discounted value of $200 to be received in two years is

A)$82.64.
B)$90.91.
C)$165.29.
D)$181.82.
E) $220.00.

Question 19

For this question,assume that expected inflation is zero.In this situation,we know that

A)the nominal and real interest rates are equal.
B)the nominal interest rate will exceed the real interest rate.
C)the real interest rate will exceed the nominal interest rate.
D)the real interest will be zero.
E) the real interest rate is negative.

Question 20

An increase in the nominal interest rate,all else held constant,will always cause which of the following?

A)the real interest rate to decrease
B)the expected inflation rate to decrease
C)the demand for money to increase
D)all of the above
E) none of the above

Question 21

Let: (1)Pt be the price of one unit of a market basket of goods (i.e.,a composite commodity)in year t; (2)Pᵉt ₊ ₁ be the expected price of one unit of a market basket of goods in year t + 1; (3)πᵉt ₊ ₁ be the expected rate of inflation between period t and t + 1; and (4)it be the one-year nominal interest rate.Suppose an individual borrows the equivalent of one unit of a composite commodity today.Given this information,which of the following expressions represents (i.e.,is equal to)the real interest rate (rt)?

A)(1 + it)(Pᵉt₊₁)/ (Pt)
B)(1 + πᵉt₊₁)/ (1 + it)
C){(1 + πᵉt₊₁)/ (1 + it)} - 1
D){(1 + it)(Pt)/ (Pᵉt₊₁)} - 1
E) none of the above

Question 22

Junk bonds,bonds with a low bond rating,are also known as

A)high-yield bonds.
B)investment grade bonds.
C)high quality bonds.
D)zero-coupon bonds.

Question 23

With a nominal interest rate of 5%,the present discounted value of $100 to be received in two year is

A)$90.00.
B)$90.70.
C)$95.23.
D)$110.00.

Question 24

Let: (1)Pt be the price of one unit of a market basket of goods (i.e.,a composite commodity)in year t; (2)Pᵉt₊₁ be the expected price of one unit of a market basket of goods in year t + 1; (3)πᵉt₊₁ be the expected rate of inflation between period t and t + 1; and (4)it be the one-year nominal interest rate.Suppose an individual borrows the equivalent of one unit of a composite commodity today.Given this information,which of the following expressions represents (i.e.,is equal to)the amount of the composite commodity one must repay in one year?

A)(1 + it)(Pᵉt₊₁)/ (Pt)
B)(1 + πᵉt₊₁)/ (1 + it)
C){(1 + πᵉt₊₁)/ (1 + it)} - 1
D){(1 + it)(Pt)/ (Pᵉt₊₁)} - 1
E) none of the above

Question 25

If the expected real interest rate 5% and expected inflation 3%,the nominal interest rate in year t is approximately

A)2%.
B)3%.
C)5%.
D)8%.
E) 11%.

Question 26

Risk premiums on corporate bonds tend to ________ during business cycle expansions and ________ during recessions,everything else held constant.

A)increase; increase
B)increase; decrease
C)decrease; increase
D)decrease; decrease

Question 27

Suppose that the nominal interest rate and expected inflation both decrease by 2%.Given this information,we would expect which of the following to occur?

A)an increase in the real interest rate
B)a reduction in the real interest rate
C)a reduction in investment
D)an increase in money demand
E) both A and C

Question 28

Which of the following long-term bonds has the lowest interest rate?

A)corporate Baa bonds
B)U)S. Treasury bonds
C)corporate Aaa bonds
D)municipal bonds

Question 29

Because the nominal interest rate is always positive,the discount factor is always

A)negative.
B)greater than one.
C)zero.
D)less than one.

Question 30

The risk that interest payments will not be made,or that the face value of a bond is not repaid when a bond matures is

A)interest rate risk.
B)inflation risk.
C)liquidity risk.
D)default risk.

Question 31

With a nominal interest rate of 5%,the present discounted value of $100 to be received in one year is

A)$90.91.
B)$95.23.
C)$181.82.
D)$190.00.
E) $220.00.

Question 32

Which of the following bonds are considered to be default-risk free?

A)municipal bonds
B)investment-grade bonds
C)U)S. Treasury bonds
D)junk bonds

Question 33

For this question,assume that expected inflation is equal to the nominal interest rate.In this situation,which of the following is correct?

A)The real interest rate is negative.
B)The real interest rate is positive.
C)The real interest rate is higher than the nominal interest rate.
D)The real interest rate is zero.

Question 34

When individuals make decisions about how much money and bonds to hold,which of the following variables affects those decisions?

A)the real interest rate only
B)the nominal interest rate only
C)the expected inflation rate only
D)either the real interest rate or the expected inflation rate
E) both the nominal and real interest rates

Question 35

Bonds with relatively high risk of default are called

A)Brady bonds.
B)junk bonds.
C)zero coupon bonds.
D)investment grade bonds.

Question 36

Which of the following long-term bonds has the highest interest rate?

A)corporate Baa bonds
B)U)S. Treasury bonds
C)corporate Aaa bonds
D)municipal bonds

Question 37

Which of the following will not cause an increase in the present value of a sequence of payments?

A)a reduction in the current interest rate
B)a reduction in expected future interest rates
C)an increase in a future expected payment
D)none of the above

Question 38

The spread between the interest rates on bonds with default risk and default-free bonds is called the

A)risk premium.
B)junk margin.
C)bond margin.
D)default premium.

Question 39

For a given nominal interest rate,a reduction in expected inflation will cause

A)a reduction in the real interest rate.
B)an increase in the real interest rate.
C)an increase in investment.
D)an increase in money demand.

Question 40

Because expected inflation is typically positive,we know that

A)the nominal interest rate is generally less than the real interest rate.
B)the real interest rate is generally less than the nominal interest rate.
C)the nominal and real interest rates are generally equal.
D)the real interest rate is approximately equal to zero.

Question 41

When x increases

A)IS curve shifts to the left.
B)IS curve shifts to the right.
C)LM curve shifts upward.
D)LM curve shifts downward.

Question 42

The borrowing rate is

A)the rate at which consumers and firms can borrow.
B)a nominal interest rate.
C)determined by monetary policy.
D)a risk premium.

Question 43

Securitization is a process of asset transformation that involves a number of different financial institutions working together.These financial institutions are known collectively as the

A)transformers.
B)amalgamation.
C)movers and shakers.
D)shadow banking system.

Question 44

Channeling funds from individuals with surplus funds to those desiring funds when the saver does not purchase the borrower's security is known as

A)barter.
B)redistribution.
C)financial intermediation.
D)taxation.

Question 45

The policy rate is

A)determined by monetary policy.
B)a real interest rate.
C)a risk premium.
D)entering the IS equation.

Question 46

Depositors have a strong incentive to show up first to withdraw their funds during a bank crisis because banks operate on a

A)last-in, first-out constraint.
B)sequential service constraint.
C)double-coincidence of wants constraint.
D)everyone-shares-equally constraint.

Question 47

Which of the following statements is false?

A)A bank's assets are its uses of funds.
B)A bank issues liabilities to acquire funds.
C)The bank's assets provide the bank with income.
D)Bank capital is recorded as an asset on the bank balance sheet.

Question 48

Depositors lack of information about the quality of bank assets can lead to

A)bank panics.
B)bank booms.
C)sequencing.
D)asset transformation.

Question 49

Holding large amounts of bank capital helps prevent bank failures because

A)it means that the bank has a higher income.
B)it makes loans easier to sell.
C)it can be used to absorb the losses resulting from bad loans.
D)it makes it easier to call in loans.

Question 50

How many interest rates were there in the IS-LM model in Chapter 5?

A)one
B)two
C)three
D)zero

Question 51

Which of the following are reported as liabilities on a bank's balance sheet?

A)reserves
B)checkable deposits
C)consumer loans
D)deposits with other banks

Question 52

A bank is insolvent when

A)its liabilities exceed its assets.
B)its assets exceed its liabilities.
C)its capital exceeds its liabilities.
D)its assets increase in value.

Question 53

The collapse of the subprime mortgage market

A)did not affect the corporate bond market.
B)increased the perceived riskiness of Treasury securities.
C)reduced the Baa-Aaa spread.
D)increased the Baa-Aaa spread.

Question 54

The collapse of the subprime mortgage market increased the spread between Baa and default-free U.S.Treasury bonds.This is due to

A)a reduction in risk.
B)a reduction in maturity.
C)a flight to quality.
D)a flight to liquidity.

Question 55

The leverage ratio is the ratio of a bank's

A)assets divided by its liabilities.
B)income divided by its assets.
C)assets divided by capital.
D)capital divided by its total liabilities.

Question 56

Which of the following statements are true?

A)A bank's assets are its sources of funds.
B)A bank's liabilities are its uses of funds.
C)A bank's balance sheet shows that total assets equal total liabilities plus equity capital.
D)A bank's balance sheet indicates whether or not the bank is profitable.

Question 57

The process of indirect finance using financial intermediaries is called

A)direct lending.
B)financial intermediation.
C)resource allocation.
D)financial liquidation.

Question 58

The new term introduced in the extended IS-LM model is

A)risk premium.
B)nominal interest rate.
C)taxes.
D)G)

Question 59

When x decreases

A)IS curve shifts to the left.
B)IS curve shifts to the right.
C)LM curve shifts upward.
D)LM curve shifts downward.

Question 60

The capital ratio is the ratio of a bank's

A)assets divided by its liabilities.
B)income divided by its assets.
C)capital divided by its assets.
D)capital divided by its total liabilities.

Question 61

When x increases leading decrease in output,a better policy tool is

A)decrease in policy rate.
B)increase in policy rate.
C)increase in government spending.
D)decrease in government spending.

Question 62

Suppose bank A has assets of 100,liabilities of 60,and capital of 40.Its capital ratio is

A)40%.
B)66%.
C)25%.
D)60%.

Question 63

Suppose bank A has assets of 100,liabilities of 80,and capital of 20.Its capital ratio is

A)20%.
B)25%.
C)11%.
D)10%.

Question 64

Which of the followings is not a bank's assets?

A)reserves
B)loans
C)government bonds
D)checkable deposits

Question 65

Given the zero lower bound on the nominal rate,the lowest real interest rate the central bank can achieve is

A)-
B)
C)0)
D)i)

Question 66

Securitization can not help financial intermediaries

A)diversify their portfolios.
B)avoid bankruptcy.
C)attract more investors to buy and hold their securities.
D)decrease the cost of borrowing.

Question 67

Suppose bank A has assets of 100,liabilities of 80,and capital of 20.Its leverage ratio is

A)4)
B)5)
C)10.
D)9)

Question 68

The Case-Shiller index is normalized to equal 100 in January

A)1999.
B)1990.
C)2000.
D)2001.

Question 69

FDIC deposit insurance is ________ per account.

A)$100,000
B)$150,000
C)$200,000
D)$250,000

Question 70

The mortgage is said to be underwater when

A)the value of the house exceeds the value of the mortgage.
B)the house is flooded.
C)the value of the mortgage exceeds the value of the house.
D)none of the above

Question 71

By 2006,about ________ of all U.S mortgages were subprimes.

A)10%
B)20%
C)30%
D)25%

Question 72

To prevent bank runs and the consequent bank failures,the United States established the ________ in 1934 to provide deposit insurance.

A)FDIC
B)SEC
C)Federal Reserve
D)ATM

Question 73

Collateralized debt obligations (CDOs)were first issued in

A)1980s.
B)1990s.
C)2000.
D)2001.

Question 74

AIG provide CDS against

A)insolvency.
B)default risk.
C)illiquidity.
D)none of the above

Question 75

In mid-2008,estimated losses on mortgages were estimated to be about ________ of U.S.GDP.

A)2%
B)5%
C)7%
D)9%

Question 76

The first structured investment vehicle (SIV)was set up by ________ in 1988.

A)J)P. Morgan
B)Chase
C)Citigroup
D)Goldman Sachs

Question 77

Ted spread is

A)the difference between the riskless rate and the rate at which banks are willing to lend to each other.
B)the difference between the riskless rate and the yield on corporate bonds.
C)the difference between the riskless rate and return on stocks.
D)none of the above

Question 78

Suppose bank A has assets of 100,liabilities of 60,and capital of 40.Its leverage ratio is

A)1)5.
B)2)5.
C)0)6.
D)0)4.

Question 79

The Case-Shiller index reached its peak in

A)2006.
B)2007.
C)2005.
D)2008.

Question 80

Although the FDIC was created to prevent bank failures,its existence encourages banks to

A)take too much risk.
B)hold too much capital.
C)open too many branches.
D)buy too much stock.