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ANSWER: c POINTS: 1 DIFFICULTY: Basic TOPICS: Introduction to Money and Banking OTHER: Factual ANSWER: d POINTS: 1 DIFFICULTY: Basic TOPICS: Introduction to Money and Banking OTHER: Factual 1. Economic policy affects a. only the amount of money in the […]

41. In which of the following periods was total factor productivity growth the slowest in the U.S. economy? a. Long boom b. Economic liftoff period c. 1995−2005 d. Reorganization period 42. Business cycle refers to the a. rise and fall […]

1. In which period was the rate of output growth the fastest in the U.S. economy? a. 1929−1949 b. 1949−1970 c. 1970−1982 d. 1982−2010 2. The labor force consists of a. those employed plus those on temporary layoff. b. those […]

1. In the ATM model of money, the opportunity cost of holding money is determined by a. the rate of inflation. b. the cost of going to an ATM. c. the charges levied on every ATM transaction. d. the nominal […]

39. In the liquidity-preference model, a decrease in the money supply causes a. the nominal interest rate to increase and the equilibrium quantity of money to decrease. b. the nominal interest rate to increase and the equilibrium quantity of money […]

38. In the aggregate demand-aggregate supply model, a decrease in the expected price level, everything else remaining unchanged, causes to in the short run. a. output; increase b. output; decline c. output; remain unchanged d. inflation; increase 39. In the […]

1. Aggregate demand tells us a. the amount of goods and services being purchased in an economy. b. the amount of goods and services being produced in an economy. c. the total demand for labor in an economy. d. the […]

36. Researchers who support the RBC model found out that an RBC model could account for as much as fluctuations in output growth. a. 70 percent b. 60 percent c. 50 percent d. 75 percent 37. Critics of RBC models […]

1. A model in which actions that occur at one time affect what happens at other times is known as a. a dynamic model. b. a static model. c. a general-equilibrium model. d. a partial–equilibrium model. 2. A model that […]

1. An unexpected change in an exogenous variable is known as a. a shock. b. a fluctuation. c. an anachronism. d. a calibration. 2. Which of the following statements is true? a. A shock affects all countries to the same […]

41. In broad real terms, the dollar a. depreciated against other currencies in the second half of the 1990s and in the early 2000s. b. depreciated against other currencies in the second half of the 1990s and appreciated against those […]

ANSWER: b POINTS: 1 DIFFICULTY: Basic TOPICS: Federal Reserve Banks OTHER: Factual ANSWER: c POINTS: 1 DIFFICULTY: Basic TOPICS: Federal Reserve Banks OTHER: Factual 1. There are Federal Reserve Banks located around the United States. a. seven b. ten c. […]

ANSWER: b POINTS: 1 DIFFICULTY: Basic TOPICS: Money Creation and Destruction by the Fed and by Banks OTHER: Factual ANSWER: c POINTS: 1 DIFFICULTY: Basic TOPICS: Money Creation and Destruction by the Fed and by Banks OTHER: Factual ANSWER: c […]

1. An increase in the money supply is an example of a(n) policy. a. countercyclical b. procyclical c. contractionary d. expansionary 2. The Fed uses monetary policy to cause the economy to grow faster in the short run. A(n) in […]

38. Okun’s Law relates a. the unemployment gap and the inflation rate. b. the unemployment gap and the inflation gap. c. the inflation gap and the output gap. d. the unemployment gap and the output gap. 39. In an economy, […]

1. The systematic setting of policy according to a formula is known as a. credibility. b. an expectations trap. c. discretionary policy. d. a rule for monetary policy. 2. If monetary policy is not set by a rule, it is […]

39. Suppose the economy is thought to be 1 percent below its potential output (i.e., the output gap is −1 percent). The potential output is growing at 4% a year. Suppose the Fed is following the Taylor rule, with an […]

1. The financial system consists of a. 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 […]

94. The probabilities of different returns on a stock over the year are: Probability Return 10% −5% 15% 0% 20% 5% 30% 10% 25% 20% The standard deviation of the return on the stock is about percent. a. 5 b. […]

66. Suppose the quantity demanded for a security is BD = 150 − 0.1b, and the quantity supplied of the security is BS = 50 + 0.1b, where b is the price of the security in dollars. Suppose that the […]

ANSWER: b POINTS: 1 DIFFICULTY: Basic TOPICS: How We Use Money OTHER: Factual ANSWER: d POINTS: 1 DIFFICULTY: Basic TOPICS: How We Use Money OTHER: Factual 1. When people use money by trading it for goods and services, money is […]

1. 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. 2. The amount of money that you would need to invest […]

42. Consider a coupon bond that pays $100 every year and repays its principal amount of $1,000 at the end of four years. If the annual rate of discount is 8 percent, the present value of the bond is a. […]

1. 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. Debenture c. Government bond d. Certificates of deposit 2. […]

35. Which of the following bonds has the greatest interest-rate risk? a. A one–year bond b. A five-year bond c. A ten-year bond d. A thirty-year bond 36. Which of the following bonds is likely to have the highest term […]

1. 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. […]

35. 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. 36. Investors can lock in a real interest rate and thus avoid most of the […]

1. Shareholders are also called a. bondholders. b. brokers. c. stockholders. d. debt-holders. 2. Which of the following statements is true? a. Stockholders benefit when the price of the stocks they hold rises and lose when the price of the […]

50. In the CAPM, systematic risk a. is also known as idiosyncratic risk. b. can be diversified away. c. is also known as market risk. d. is the risk to a stock’s return that is not attributable to the fluctuations […]

36. The is a place where banks can request loans from the Federal Reserve. a. money market b. domestic trading desk c. Treasury d. discount window 37. The interest rate in the market for loans of reserves between banks is […]

1. A financial intermediary that accepts deposits from savers, and makes loans to borrowers is a a. stock exchange. b. bond market. c. bank. d. finance company. 2. When one party to a transaction knows more than another, the situation […]

1. Which of the following is NOT a reason for the government to regulate banks? a. To reduce the externalities caused by bank problems b. To stabilize the money supply c. To prevent bank runs d. To keep banks large […]

51. Which of the following is the purpose of the Bank Holding Company Act of 1956? a. To prevent bank holding companies from branching across state lines b. To allow bank holding companies to open branches across state lines c. […]

CHAPTER 1 Introduction to Money and Banking TEACHING OBJECTIVES Goals of Chapter 1 A. Provide an introduction to the textbook. B. Discuss two main themes in the book. C. Describe the value of money and banking for everyday life. D. […]

ADDITIONAL ISSUES FOR CLASSROOM DISCUSSION 1. Ask your students which of the ten facts they found most surprising. For those of us who teach money and banking or macroeconomics, none of the facts are surprising at all. But, students with […]

ADDITIONAL ISSUES FOR CLASSROOM DISCUSSION 1. Take a poll of your students’ expectations for major macroeconomic variables and the probability of a decline in real GDP for the next quarter. 2. Over the last 10 years, the labor force participation […]

Chapter 10: Economic Growth and Business Cycles 105 CHAPTER 10 Economic Growth and Business Cycles TEACHING OBJECTIVES Goals of Part 3: Macroeconomics A. Introduce the basic ideas behind economic growth and business cycles (Chapter 10), methods of modeling the use […]

ADDITIONAL ISSUES FOR CLASSROOM DISCUSSION 1. Ask your students how often they go to the ATM to get cash. Did the ATM model in the chapter change their views about how often to go? For many people, given how low […]

Chapter 11: Modeling Money 116 CHAPTER 11 Modeling Money TEACHING OBJECTIVES Goals of Chapter 11 A. Incorporate the functions of money into a series of models to show how those functions affect the demand for money. B. Show how the […]

Chapter 12: The Aggregate-Demand/Aggregate-Supply Model 126 CHAPTER 12 The Aggregate-Demand/Aggregate-Supply Model TEACHING OBJECTIVES Goals of Chapter 12 A. See how the AD-AS model is built up from dividing the economy’s spending into a number of different categories, depending on who […]

ADDITIONAL ISSUES FOR CLASSROOM DISCUSSION 1. Students may find the AD-AS model dicult at first. However, once 2. You can expand on the discussion of policy in this chapter. Monetary and fiscal policy work in similar ways, though (at least […]

ADDITIONAL ISSUES FOR CLASSROOM DISCUSSION 1. You may wish to revisit the academic debate of the late 1970s when the rational expectations revolution was in full swing and the importance of microeconomic foundations became clear. The two-period model presented here […]

Chapter 13: Modern Macroeconomic Models 136 CHAPTER 13 Modern Macroeconomic Models TEACHING OBJECTIVES Goals of Chapter 13 A. Examine two main approaches economists have developed to build macroeconomic models during the past 20 years. B. The first approach begins with […]

SOLUTIONS TO TEXTBOOK NUMERICAL EXERCISES AND ANALYTICAL PROBLEMS Numerical Exercises 11. a. The expected return to Uninvest is b. The standard deviation of the return to Uninvest is S = [p1(X1 − E)2 + p2(X2 − E)2]1/2 = {[0.10 × […]

CHAPTER 2 The Financial System and the Economy TEACHING OBJECTIVES Goals of Part 1: Money and the Financial System A. Introduce basic ideas behind bond, stock and other financial markets (Chapter 2), money and the payments system (Chapter 3), the […]

SOLUTIONS TO TEXTBOOK NUMERICAL EXERCISES AND ANALYTICAL PROBLEMS Numerical Exercises 11. Because a checking account is included in M1 (and thus also in M2) Analytical Problems 14. Societies have always used money to make it easier for people to trade […]

Chapter 3: Money and Payments 25 CHAPTER 3 Money and Payments TEACHING OBJECTIVES Goals of Chapter 3 A. Describe how money is used in its roles as a medium of exchange, store of value, unit of account, and standard of […]

CHAPTER 4 Present Value TEACHING OBJECTIVES Goals of Chapter 4 A. Develop the idea of present value and show how the concept can be used in a variety of applications. B. Look at how people use the present-value formula to […]

ADDITIONAL ISSUES FOR CLASSROOM DISCUSSION 1. Here’s a nice example that illustrates the power of compounding: penny doubling 2. Students really like the car-leasing example because many of them may have had the opportunity to buy or lease a car […]

SOLUTIONS TO TEXTBOOK NUMERICAL EXERCISES AND ANALYTICAL PROBLEMS Numerical Exercises 11. The bonds are comparable in all ways except taxability, so they must pay the same after-tax return in equilibrium. After taxes, the corporate bond pays a return of © […]

Chapter 5: The Structure of Interest Rates 44 CHAPTER 5 The Structure of Interest Rates TEACHING OBJECTIVES Goals of Chapter 5 A. Learn about the structure of interest rates— why the interest rates on various debt securities differ from each […]

ADDITIONAL ISSUES FOR CLASSROOM DISCUSSION 1. Students often find it difficult to work quickly through the logic of the following question: Would you rather be a borrower or lender if inflation turned out to be higher than expected? Rather than […]

Chapter 6: Real Interest Rates 52 CHAPTER 6 Real Interest Rates TEACHING OBJECTIVES Goals of Chapter 6 A. Define real interest rates, show how inflation affects them, and describe why inflation is a problem for investors. B. Develop a version […]

Why Do So Many People Invest in Mutual Funds? © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permi$ed in a license distributed with a certain […]

Chapter 7: Stocks and Other Assets 65 CHAPTER 7 Stocks and Other Assets TEACHING OBJECTIVES Goals of Chapter 7 A. Examine how the stock market works, the major influences on stock prices and returns, and data on stock prices and […]

ADDITIONAL ISSUES FOR CLASSROOM DISCUSSION 1. A great discussion usually ensues if you ask students what they would do if an aunt died and left them with $1 million. How would they invest it? 2. If you have already discussed […]

Chapter 8: How Banks Work 89 CHAPTER 8 How Banks Work TEACHING OBJECTIVES Goals of Part 2: Fundamentals of Banking A. Describe how banks work (Chapter 8) and discuss the government regulations of banks (Chapter 9). B. Goals of Chapter […]

ADDITIONAL ISSUES FOR CLASSROOM DISCUSSION 1. Ask students what they think about banks in general and the services that banks provide. How would they rank bankers compared with lawyers, professors, and doctors in terms of prestige? With the advent of […]

Chapter 9: Government’s Role in Banking 96 CHAPTER 9 Government’s Role in Banking TEACHING OBJECTIVES Goals of Chapter 9 A. Discuss how and why government authorities supervise and regulate bank activities. B. Describe the rules and regulations that govern bank […]

ADDITIONAL ISSUES FOR CLASSROOM DISCUSSION 1. U.S. banking regulations prevent banks from owning major corporations. In other countries, the banking industry is much more integrated with the corporate sector, with banks owning corporations or being owned by them, allowing easier […]

If sales of a firm exactly equals investor expectations, stock price of the firm a. is expected to increase. b. is expected to decrease. c. is expected to remain the same. d. can increase or decrease depending on the volume […]

If actual output is denoted yand potential output is denoted y*, the output gap is a. [(y − y*)/ y*] × 100. b. [(y − y*)/ y] × 100. c. [(y* − y)/ y*] × 100. d. [(y* − y)/ […]

In the liquidity-preference model, a decrease in the money supply causes a. the nominal interest rate to increase and the equilibrium quantity of money to decrease. b. the nominal interest rate to increase and the equilibrium quantity of money to […]

In an economy, the actual inflation rate is increasing while the ideal inflation rate is constant. In such a case, the inflation gap in the economy will a. increase over time. b. decrease over time. c. stay the same. d. […]

The reason why people are putting more funds in checking and savings account rather than in time deposits is that a. checking and savings account accept fiat money, while time deposits do not. b. long-term interest rates have declined in […]

Reserve requirements for banks are currently: Amount of Bank’s Requirement Transaction Deposits Reserve The first $6.6 million 0 percent Amounts from $6.6 to $45.4 million 3 percent Amounts over $45.4 million 10 percent Calculate the reserve requirements for three banks […]

If a country’s potential output is $100 billion and the output gap is 5%, the country’s actual output is a. $500 billion. b. $20 billion. c. $95 billion. d. $105 billion Answer: Which of the following is a factor considered […]

Investors who wish to reduce their risk should a. buy stocks of small companies. b. diversify. c. buy stocks of large companies. d. keep large amounts of cash. Answer: Which of the following statements is true? a. Different stock indexes […]

The lag that arises because the random nature of economic data may make it difficult for policy makers to fully understand the state of the economy is referred to as the___ lag. a. implementation b. recognition c. effectiveness d. decision […]

According to the Fisher hypothesis, if the real interest rate is 5 percent and the inflation rate rises from 2 percent to 4 percent, then the nominal interest rate will____percentage points and the real interest rate will change by_____percentage points. […]

In the CAPM, the risk to a stock’s return that is attributable to the fluctuations in the overall stock market is referred to as a. idiosyncratic risk. b. explicit risk. c. systematic risk. d. unsystematic risk. Answer: A rise in […]

Most often after a merger, bank profits a. rise. b. remain constant. c. drop slightly. d. fall to zero. Answer: If the exchange rate equals the ratio of price indexes in two countries, there is said to be a. one […]

In the liquidity-preference model, a decline in prices causes the a. money supply curve to shift to the right. b. money supply curve to shift to the left. c. money demand curve to shift to the left. d. money demand […]

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. Answer: Suppose a bank earned $173 million in interest on its assets of […]

Another name for the expected real interest rate is the a. securitized real interest rate. b. realized real interest rate. c. ex-post real interest rate. d. ex-ante real interest rate. Answer: Someone who has an average cash balance of $45 […]

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 […]

A rise in the annual interest rates will cause a. the principal amount of a bond to increase. b. the principal amount of a bond to decrease. c. the present value of a bond to decrease. d. the present value […]

According to monetarists, the main source of fluctuations in economic activity is a. changes in the amount of money in the economy. b. waves of optimism and pessimism that cause business investment in capital goods to fluctuate. c. changes in […]

The Friedman rule suggests that a. the optimal nominal interest rate in an economy should be negative. b. the optimal nominal interest rate in an economy should be positive. c. the optimal nominal inflation rate in an economy should be […]

Which of the following securities is likely to have the highest yield to maturity? a. A corporate bond with a Baa rating b. A corporate bond with AAA rating c. A government bond exempted from federal income tax d. A […]

Consider a coupon bond that pays $150 every year and repays its principal amount of $1,500 at the end of five years.If the annual rate of discount is 7 percent, the present value of the bond is approximately a. $214.29. […]

The financial system consists of a. 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 […]

According to the Dodd-Frank Act, a bank merger can be stopped if the new bank would hold more than ______percent of the nation’s deposits. a. 20 b. 15 c. 10 d. 5 Answer: If interest-rate parity holds and the interest […]

The Phillips curve, modified with the addition of expected inflation into the analysis, is known as a. the expectations-augmented Phillips curve. b. the long-run Phillips curve. c. the inflation-surprise theory. d. the Phillips-curve non-accelerating inflation theory of unemployment. Answer: A […]

Which of the following statements is true of the U.S. economy? a. In the second half of the 1960s, the output gap was mostly negative while in the first half of the 1990s, the output gap was mostly positive. b. […]

In 2006, Chairman Greenspan left the Fed because a. President Bush wanted him to resign. b. he reached mandatory retirement age. c. his term as Governor expired. d. his term as Chairman expired. Answer: Suppose the money demand function is […]

The cost of going to an ATM is $1 in an economy. If the nominal interest rate in the economy is 5 percent, what is the total cost associated with holding cash for an individual who spends $10 daily and […]

The amount of nonborrowed reserves equals a. the monetary base plus the amount of discount loans. b. the amount of reserves plus the amount of discount loans. c. the amount of reserves minus the sum of the amount of discount […]

In the event that a firm goes bankrupt and is liquidated, who is paid off first, second, and third between workers, debt holders, and stockholders? a. (1) debt holders; (2) workers; (3) stockholders b. (1) stockholders; (2) workers; (3) debt […]

Which of the following is the third step in the procedure of conducting a research by researchers using a DSGE model? a. To match up the model with economic data, using statistical techniques to calculate the size of shocks that […]