Mizzou Econ Midterm 2

Borrowers in the loanable funds market consist of

a. governments and firms.

b. banks, foreign governments, and bonds.

c. mutual fund firms, stock exchanges, and banks.

d. households and foreign entities.

e. arbitrage companies, banks, and firms.

A

Foreign entities

a. are generally borrowers of domestic (U.S.) loanable funds.

b. are generally lenders in the domestic (U.S.) loanable funds.

c. typically require a greater inflation premium than domestic borrowers.

d. typically require a smaller inflation premium than domestic borrowers.

e. are not concerned about the U.S. interest rate compared to their own, since it is illegal for them to lend in the United States.

B

The government engages in more deficit spending. Ceteris paribus (all else equal), this would cause

a. the demand for loanable funds to increase.

b. the supply of loanable funds to increase.

c. both the demand and supply of loanable funds to increase.

d. both the demand and supply of loanable funds to decrease.

e. economic institutions to collapse.

A

You borrow $10,000 today at a nominal rate of 5 percent; inflation for the past 10 years has been exactly 2 percent. Today, inflation instantly rises to 7 percent and stays that way for the duration of your loan. Based on the above information, ceteris paribus (all else equal), today

a. the real rate of interest on your loan is 14 percent.

b. the real rate of interest on your loan was previously 10 percent and is now 35 percent.

c. the real rate of interest on your loan is now -2 percent.

d. you will pay the lender back exactly $9,500.

e. you will pay the lender back exactly $10,700.

C

As income and wealth rise, we would expect

a. savings to increase as people save some of the extra wealth or income they have.

b. savings to fall, since people would spend the extra income or wealth.

c. interest rates to rise.

d. foreigners with more wealth to move their assets out of the United States to foreign markets.

e. people to have a negative rate of time preference.

A

Those with the least patience

a. have the greatest time preference.

b. have the least time preference.

c. will demand a higher nominal interest rate but not a higher real rate.

d. will save the most.

e. will engage in the most consumption smoothing.

A

Firms expect more sales and profits in the near future; this would cause

a. the demand for loanable funds to increase.

b. the supply of loanable funds to increase.

c. both the demand and supply of loanable funds to increase.

d. both the demand and supply of loanable funds to decrease.

e. lower interest rates in the near future.

A

Assume foreign incomes rise. Ceteris paribus (all things equal), this would cause

a. the demand for loanable funds to increase.

b. the supply of loanable funds to increase.

c. both the demand and supply of loanable funds to increase.

d. both the demand and supply of loanable funds to decrease.

e. the demand of loanable funds to decrease.

B

It is likely that as more baby boomers reach retirement,

a. more babies will be born to replace them.

b. the demand for loanable funds will shift right.

c. the demand for loanable funds will shift left.

d. the supply of loanable funds will shift right.

e. the supply of loanable funds will shift left.

E

If the interest rate of a one-year bond is 10 percent and its face value is $5,000, the dollar price of the bond is

a. $5,000.00.

d. $5,250.50.

b. $5,500.00.

e. $454.00.

c. $4,545.45.

C

Which of the following statements about bonds is true?

a. Bond interest rates fall with increased default risk.

b. Bond interest rates and default risk are not related.

c. Bond prices rise with increased default risk.

d. Bond prices rise with increased interest rates.

e. Bond interest rates rise with increased default risk.

E

A higher bond rating directly translates into ________ prices and ________ rates on the firm's bonds.

a. higher; higher interest

d. lower; higher interest

b. higher; lower interest

e. higher; higher default

c. lower; lower interest

B

The creation of a new security by combining otherwise separate loan agreements is called

a. bundling.

d. secondary markets.

b. securitization.

e. secondarization.

c. a Treasury security.

B

The main argument for the Troubled Asset Relief Program implemented by the U.S. government during the financial crisis of 2007-2008 was that

a. without large financial intermediaries, future GDP would collapse.

b. the government had an obligation to firms affected by the financial crisis.

c. the funds would go to those citizens who needed help the most.

d. government policies were responsible for the crisis in the first place.

e. the cost of the program was relatively small.

A

Which of the companies listed is a private bond-rating agency?

a. E*TRADE

d. Bear Stearns

b. Washington Post

e. University of Virginia

c. Fitch

C

Which of the following do stocks and bonds have in common?

a. Both are means for the issuing firm to raise money for operations.

b. Both come with part ownership in the issuing firm.

c. Both have a fixed rate of return.

d. Both impose a debt obligation on the issuing firm.

e. Both have a fixed maturity date.

A

What do the Dow Jones Industrial Average (the Dow) and the Standard & Poor's (S&P) 500 have in common?

a. They are both averages of several hundred individual stocks.

b. They both track overall stock prices.

c. They are both calculated as weighted averages.

d. They have both been in use for over a century.

e. They both constantly update the list of companies indexed.

B

Average world income began to increase rapidly during the

a. Enlightenment.

d. War of the Ring.

b. Dark Ages.

e. Industrial Revolution.

c. Second World War.

E

If you earn a subsistence-level income, much of your time is spent acquiring

a. luxury items, such as expensive cars and a nice house.

b. tax cuts, which will raise your take-home pay.

c. education and training, to better improve your earnings.

d. entertainment and consumer electronics.

e. basic necessities such as food, clothing, and shelter.

E

From 2013 to 2014, U.S. real gross domestic product (GDP) increased by 2.4 percent and the U.S. population grew by 0.7 percent. Therefore, per capita real GDP in the United States increased by

a. 2.8 percent.

d. 1.8 percent.

b. 1.7 percent.

e. 5.4 percent.

c. 3.8 percent.

B

From 2009 to 2010, nominal gross domestic product (GDP) in the United States grew by 3.8 percent. Given that prices increased by 1 percent and the population grew by 1 percent, we know that per capita real GDP grew by

a. 3.8 percent.

d. 4.8 percent.

b. 1.8 percent.

e. 5.8 percent.

c. 2.8 percent.

B

If your income increases at a rate of 2 percent per year, how long will it take to double your income?

a. 10 years

d. 50 years

b. 25 years

e. 75 years

c. 35 years

C

Resources are also known as

a. factors of productivity.

d. factors of output.

b. factors of production.

e. elements of growth.

c. elements of productivity.

B

Consider a country with a nominal gross domestic product (GDP) of $5 billion in 2010 and $15 billion in 2015. In the same period the population grew by 10 percent and price levels increased by 90 percent. What is the economic growth for this country?

a. 90 percent

d. 190 percent

b. 100 percent

e. 200 percent

c. 110 percent

B

A national news source reports the nominal gross domestic product (GDP) grew 6 percent in the last year. However, inflation was 4 percent. What was the real GDP growth?

a. 1 percent

d. 8 percent

b. 2 percent

e. 10 percent

c. 6 percent

B

The text defines "human capital" as

a. the machines created by humans in order to produce goods.

b. educational facilities that promote productivity.

c. services produced by humans that increase economic growth.

d. the quantity, knowledge, and skills of the workers in the economy.

e. the diversity and commitment of the workers in the economy.

D

What is NOT an example of an institution?

a. social mores and work habits

b. the relationship between the citizen and the government

c. significant monuments

d. laws and regulations

e. the type of government

C

When the price level rises, ________ declines from the wealth effect, ________ declines from the interest rate effect, and ________ decline(s) from the international trade effect.

a. consumption; investment; net exports

b. consumption; consumption; consumption

c. investment; investment; net exports

d. investment; consumption; net exports

e. investment; investment; investment

A

An increase in the value of the dollar (its exchange rate) will

a. have no effect on aggregate demand or supply.

b. decrease aggregate supply.

c. increase aggregate supply.

d. increase aggregate demand.

e. decrease aggregate demand.

E

The slope of the short-run aggregate supply curve can be explained by

a. the fact that all prices are sticky in the short run.

b. sticky input prices and flexible output prices.

c. flexible input prices and sticky output prices.

d. the fact that all prices are flexible in the short run.

e. the fact that all prices except wages are flexible in the short run.

B

Suppose new drilling techniques increase the world oil supply. In the long run, output will ________ and the price level will ________.

a. remain unchanged; decrease

d. increase; remain unchanged

b. remain unchanged; remain unchanged

e. increase; increase

c. increase; decrease

C

If the current short-run equilibrium level of output is less than full-employment output, we can then expect that in the long run

a. the price level will fall.

b. the price level will rise.

c. aggregate demand will decrease.

d. aggregate demand will increase.

e. long-run aggregate supply will decrease.

A

Suppose there is a surge in stock market values. In the short run, we would expect the price level to ________ and the unemployment rate to ________.

a. increase; decrease

d. decrease; decrease

b. increase; increase

e. remain unchanged; decrease

c. decrease; increase

A

Which of the following would cause an increase in the price level in the long run?

a. The number of workers in the labor force increases.

b. Net exports decrease.

c. Investment increases.

d. Natural resources increase.

e. There is a temporary increase in the price of oil.

C

An increase in ________ can be expected to shift the aggregate demand curve to the right.

a. taxes

b. the price of oil

c. expected future income

d. interest rates

e. the exchange rate value of the dollar

C

Suppose interest rates increase from 1 percent to 3 percent. In the short run, one can expect output in the United States to ________ and the price level to ________.

a. increase; increase

b. decrease; decrease

c. decrease; increase

d. increase; decrease

e. remain unchanged; remain unchanged

B

How is savings represented on the loanable funds graphic?

a. Borrowing is represented by the loanable funds graph but not savings.

b. Savings would be found on the vertical axis.

c. Savings is represented by the supply curve.

d. Savings appears on the horizontal axis.

e. Savings is represented by the demand curve.

C

According to the textbook, what entities are the main suppliers of funds to the loanable funds market?

a. loan shark companies, banks, and firms

b. insurance companies, stock exchanges, and banks

c. foreign governments, the U.S. government, and businesses

d. banks and governments

e. households and foreign entities

E

Foreign entities

a. typically require a smaller inflation premium than domestic borrowers.

b. are not concerned about the U.S. interest rate compared to their own, since it is illegal for them to lend in the United States.

c. are generally lenders in the domestic (U.S.) loanable funds.

d. are generally borrowers of domestic (U.S.) loanable funds.

e. typically require a greater inflation premium than domestic borrowers.

C

Depositors of money in a bank are

a. intermediaries of funds.

b. borrowers of funds.

c. suppliers of funds.

d. neither borrowers nor suppliers nor intermediaries (because only deposits were made).

e. customers of the firm borrowing the money.

C

Which of the following is true about the interest rate?

a. It is a cost to both savers and borrowers.

b. It is a return only to borrowers.

c. It is both a cost to savers and a return to borrowers.

d. It is both a return to savers and a cost to borrowers.

e. It is a return to both savers and borrowers

D

Assume you put money into an asset that pays you 10% interest and assume that inflation is 4%. Which statement is correct?

a. The nominal rate of interest is 40%.

b. The nominal rate of interest is 10% and the real rate is 4%.

c. The textbook states that all interest rates would be assumed to be real rates; thus, the nominal rate is 14%.

d. If the rate of inflation falls, your real rate of interest from this asset would also fall.

e. The real rate of interest is 6%.

E

You borrow $50,000 today at a rate of 5%. Today, inflation instantly rises to 7% and stays that way for the duration of your loan. Based on the above information today

a. the real rate of interest on your loan is 10%.

b. you will pay the lender back exactly $60,700.

c. the real rate of interest on your loan is 2%.

d. you will pay the lender back exactly $55,500.

e. the real rate of interest on your loan is -2%.

E

Which combination of events could have caused the equilibrium interest rate to rise and the equilibrium quantity of loanable funds (both borrowed and lent) to fall?

a. A baby boom begins, and investor confidence rises.

b. A baby boom begins, and investor confidence falls.

c. People have lower time preferences, and capital is more productive.

d. People have lower time preferences, and governments run larger deficits.

e. A baby boom begins, and people have higher time preferences.

E

If you have a savings account at a bank, you participate in the loanable funds market as a

a. borrower and a lender.

b. lender.

c. borrower.

d. buyer.

e. buyer and a seller.

B

Which of the following describes a Treasury security?

a. Treasury securities are backed by mortgages and student loans.

b. Treasury securities are only sold to individuals in primary markets.

c. Treasury securities are riskier assets than most other investment options.

d. Treasury securities are only available to foreign investors.

e. Treasury securities are bonds sold by the U.S. government to pay for the national debt.

E

Your friend Josephine is starting a new photography business that specializes in photographs of Central Park in New York City. Because her business is new and risky, she is unable to obtain a loan from the local bank. On June 21, 2019, you agree to pay a price of $9,000 for a bond from Josephine. You will receive $10,000 in return on June 21, 2020.

The par value of the bond mentioned in the scenario is equal to ________.

a. $9,000

b. None of these are correct

c. $10,000

d. $4,000

e. $1,000

C

Your friend Josephine is starting a new photography business that specializes in photographs of Central Park in New York City. Because her business is new and risky, she is unable to obtain a loan from the local bank. On June 21, 2019, you agree to pay a price of $9,000 for a bond from Josephine. You will receive $10,000 in return on June 21, 2020.

What is the interest rate paid on the bond described in the scenario?

a. 11.11%

b. 1.11%

c. 9.00%

d. 0.11%

e. 0.9%

A

Your friend Josephine is starting a new photography business that specializes in photographs of Central Park in New York City. Because her business is new and risky, she is unable to obtain a loan from the local bank. On June 21, 2019, you agree to pay a price of $9,000 for a bond from Josephine. You will receive $10,000 in return on June 21, 2020.

The dollar price of the bond mentioned in the scenario is equal to ________.

a. $9,000

b. $5,000

c. $10,000

d. $1,000

e. $4,000

A

If the interest rate on a 1-year bond is 15% and its face value is $10,000.00, the dollar price of the bond is _________.

a. $8,596.50

b. $8,695.65

c. $1,500.00

d. $11,500.00

e. $10,000.00

B

All else being equal, the smaller the default risk, the _________ of the bond.

a. higher the face value

b. lower the face value

c. lower the price

d. higher the interest rate

e. higher the price

E

A lower bond rating directly translates into _________ prices and _________ rates on the firm's bonds.

a. higher; higher interest

b. higher; higher default

c. lower; lower interest

d. lower; higher interest

e. higher; lower interest

D

Most people who purchase stocks and bonds use brokers who buy the stocks and bonds in _________ markets.

a. inferior

b. secondary

c. alternate

d. primary

e. minor

B

What is one difference between the Dow Jones Industrial Average (the Dow) and the Standard & Poor's (S&P) 500 index?

a. The Dow tracks the prices of the stocks, whereas the S&P 500 weighs the stock prices by the market value of the company.

b. The S&P 500 provides more historical data than the Dow.

c. The Dow weighs the stock prices by the market value of the company, whereas the S&P 500 tracks only the price of the stock.

d. The Dow provides a much broader representation of the stock market than the S&P 500 does.

e. The S&P 500 provides data on 500 companies, and the Dow provides data on only 300 companies.

A

From 2017 to 2018, a country's nominal gross domestic product (GDP) grew by 6.1%. Since prices increased by 2% and per capita real GDP grew by 2.7%, we know the population grew by _________.

a. 3.6%

b. 0.7%

c. 2.8%

e. 4.7%

e. 1.4%

E

Which of the following are the three major categories of resources?

a. labor, physical capital, technology

b. land, labor, technology

c. natural resources, physical capital, human capital

d. institutions, human capital, land

e. physical capital, technology, institutions

C

If your income increases at a rate of 5% per year, about how long will it take to double your income?

a. 25 years

b. 17.5 years

c. 35 years

d. 4.5 years

e. 14 years

E

Karenna has worked for the same company her entire life. Her current income is $70,000 per year. When she was hired, she made $35,000 per year. The company has given Karenna a 2% raise each year. How long has Karenna been with the company?

a. 35 years

b. 20 years

c. 70 years

d. 30 years

e. 10 years

A

China has large reserves of rare minerals needed in high-tech manufacturing. These mineral deposits are _________ for China.

a. a natural resource

b. physical capital

c. intellectual capital

d. a basis for sound institutions

e. technology

A

At a ranch, an example of physical capital is

a. a truck that was just repaired.

b. a newly hired worker.

c. a freshly tilled field.

d. a high school diploma.

e. an idea for a new crop.

A

Which of the following would be classified as an increase in human capital?

a. expanding the office library

b. buying a new color printer/copier

c. hiring a full-time art director

d. upgrading a hallway lighting system

e. restocking a lunchroom supply cabinet

C

Talia owns a motorcycle dealership. She wants to increase the number of motorbikes she sells each month, so she knows she needs to acquire more resources. Which of the following actions would represent an increase in the human capital resource at Talia's dealership?

a. installing a new, bigger sign out front

b. increasing the physical size of her dealership

c. increasing the number of salespeople

d. purchasing more motorcycles for her showroom

e. stocking more helmets, jackets, and saddlebags

C

Between 2006 and 2010, per capita real gross domestic product (GDP) in China grew at an average rate of 10.62% per year. In contrast, its economy only grew by an average rate of 0.25% from 1961 to 1965. Which of the following factors would have contributed most to this rapid escalation in growth?

a. restrictions on imports and exports

b. large increases in average prices

c. establishment of private property rights

d. dramatic reductions in tax rates

e. rapid population growth

C

The Bill of Rights guarantees certain basic rights for citizens. This is an example of

a. physical capital.

b. human capital.

c. a correction for population growth.

d. a factor of production.

e. an institution.

E

Factors of Production:

Land, Labor, Production

According to the interest rate effect, (all else equal). How does a lower price level impact savings, interest rates ad supply and/or demand?

more savings, low interest rates, higher AD

According to the sticky price argument, as price level increases...

Businesses produce more in the short-run, because they are temporarily profitable

Why is the LRAS curve vertical?

Prices have nothing to do with long-term output

If real estate prices in the U.S. increase...

A decline in the U.S. wealth and a decrease in in AD

If all else constant, what will cause AD curve to shift left?

An appreciation of the dollar

On AD-AS graph , what variable is on the vertical axis?

Price Level

Consider the AD curve. Suppose the Federal Reserve lowers interest rates. Will cause...

AD curve to shift right

If foreign residents are not allowed to buy U.S. government bonds...

Interest rates on bonds increase

Suppose confidence rises. What will happen to the AD-AS graph?

Shifts: AD (right)

Output: increase

Unemployment: decreases

Price level: increases

Suppose there is an oil pipeline leak. What will happen to the AD-AS graph?

Shifts: SRAS (left)

Output: decreases

Unemployment: increases

Price level: increases

Suppose there is a technology shock. What will happen to the AD-AS graph?

Shifts: LRAS & SRAS (right)

Output: increase

Unemployment: stays the same

Price level: increases

Factors shifting AS:

technological innovations and changes in the size and quality of labor

Factors shifting AD:

Consumption spending, investment spending, government spending, and net imports and exports

Three Essential Market Institutions for Economic Growth:

Competitive Markets

International Trade

Flow of Funds Across Boarders

Greatest incentive for voluntary production

Private Property Rights

Sources of Economic Growth

Resources

Technology

Institutions

How is economic growth measured?

the growth rate of real GDP per capita

What are the Effects on the Loanable Funds Market in a recession.

Leads to investment by firms

Temporary decrease in demand until recession is over

What are the Effects on the Loanable Funds Market if baby boomers enter retirement?

Baby Boomers are dissaving --->left shift in the supply curve

Result: possible less investment and reduced GDP

Chain of Borrowing:

savings --> borrowing --> investment --> (Output) GDP

Who are savers?

Households

Foreign Entities

Who are borrowers?

Firms

Government

What is at equilibrium of the Loanable Funds Market graph?

Savings=Investment

What are the 3 important pieces of a bond?

Name of the borrower

Repayment date (maturity date)

Amount due at repayment (face value or par value)

Financial Markets:

Financial Intermediaries

Direct & Indirect Finance

Financial Tools:

Stocks & Bonds

Treasury Securities

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