Ch 1 Questions

Question 1

What is the typical relationship between interest rates on​ 6-month Treasury​ bills, 10-year Treasury​ notes, and Baa corporate​ bonds?

Answer 1

A.
They tend to move together over time with the corporate bond having the highest rate of interest

All interest rates tend to move together over time with similar increases or decreases affected by the rate of​ inflation, economic​ growth, and events in financial markets. Corporate rates tend to be higher than Treasury rates due to considerations of risk.​ Longer-term rates tend to be higher than​ short-term rates due to the economic uncertainty that exists with longer time horizons.

Question 2

What effect might a fall in stock prices have on business​ investment?

Answer 2

A fall in stock prices might cause businesses to

decrease investment.

Question 3

What effect might a rise in stock prices have on​ consumers’ decisions to​ spend?

Answer 3

A rise in stock prices will generally lead to

more consumer spending.

Question 4

As the price of stocks held by consumers increases:
or
As the interest paid on bonds held by consumers ​increases:

Answer 4

Consumers wealth and spending both increase.

Question 5

When interest rates​ decrease, how might businesses and consumers change their economic​ behavior?

Answer 5

There will be more consumption spending on​ interest-sensitive items and more investment by businesses.

Consumption​ expenditure, or different forms of​ spending, will increase as interest rates decline. This is true for​ interest-sensitive purchases that might require increased borrowing at lower interest rates but also may lead to less saving activity.

Question 6

Who benefits and who is hurt when interest rates​ rise?

Corporations with immediate capital construction needs are

Answer 6

worse off

Question 7

Who benefits and who is hurt when interest rates​ rise?

Households with little​ debt, saving a significant fraction of annual income for​ retirement, are

Answer 7

better off

Question 8

Who benefits and who is hurt when interest rates​ rise?

The federal government running persistent budget deficits is

Answer 8

worse off

Question 9

Who benefits and who is hurt when interest rates​ rise?

Black-market entrepreneurs operating on a​ ‘cash-only’ basis are

Answer 9

worse off

Question 10

How does a fall in the value of the pound sterling affect British​ consumers?

Answer 10

Foreign goods are now relatively more​ expensive; British consumers are hurt

A weaker currency makes foreign goods​ (US) more expensive to domestic​ (British) consumers. With the price of domestic goods​ unchanged, these imports are now relatively more expensive and British exports are relatively cheaper to foreign consumers.

Question 11

A fall in the value of the pound will cause American businesses to be

Answer 11

WORSE OFF

Question 12

When the dollar is worth less in relation to currencies of other​ countries, are you more likely to buy​ American-made or​ foreign-made electronics?

Answer 12

You are more likely to purchase

American-made products

Question 13

Are US companies that manufacture​ semi-conductors happier when the dollar is strong or when it is​ weak?

Answer 13

Semi-conductor manufacturers are happier when the dollar is weaker

A stronger currency makes​ domestically-produced exports more expensive to foreign consumers. With the price of domestic goods​ unchanged, US imports are now relatively cheaper and American consumers will buy more imports and fewer goods produced in the United States.

Question 14

What about an American company that is in the business of importing electronic consumer goods into the United​ States?

Answer 14

Importers of electronic goods into the United States are happier when the dollar is
stronger

Question 15

Why are financial markets important to the health of the​ economy?

Answer 15

They channel funds from savers to investors

Question 16

What is the basic activity of​ banks?

Answer 16

To facilitate the transfer of money from savers to borrowers

Question 17

Which of the following is not an important financial intermediary in the​ economy?

Answer 17

The Fed. / the central bank

Financial intermediaries are institutions that borrow funds from people who have saved and in turn make loans to others.

Question 18

What was the main cause of the recession that began in​ 2007?

Answer 18

Defaults in subprime residential mortgages.

In late​ 2007, U.S. financial institutions suffered​ losses, producing not only numerous bank failures but also the demise of two of the largest investment banks in the United States.

Question 19

If history repeats itself and we see a decline in the rate of money growth as shown between 1980 and​ 1993, what might you expect to happen to

Answer 19

Real​ output:  
Uncertain
.
The inflation​ rate:  
Decline
.
interest rates: uncertain

Question 20

Why do managers of financial institutions care so much about the activities of the Federal Reserve​ System?

Answer 20

Because the Federal Reserve affects interest​ rates, inflation, and business​ cycles, all of which have an important impact on the profitability of financial institutions.

Question 21

When there is an increase in the value of the British pound sterling, all else equal:

Answer 21

When a foreign currency gains​ value, American goods are relatively cheaper than goods from that nation. Demand will increase for American goods as a result.

Question 22

How can changes in foreign exchange rates affect the profitability of financial​ institutions? ​(Check all that​ apply.)

Answer 22

Changes in foreign exchange rates change the value of assets held by financial institutions and thus lead to gains and losses on these assets.​ Also, changes in foreign exchange rates affect the profits made by traders in foreign exchange who work for financial institutions.

Question 23

Much of the U.S. government debt is held as Treasury bonds and bills by foreign investors. How do fluctuations in the dollar exchange rate affect the value of that debt held by​ foreigners?

Answer 23

Changes in dollar exchange rates do not cause changes in interest rates on​ T-bonds. But, as the dollar becomes stronger relative to a foreign​ currency, one dollar is equivalent to more foreign currency.​ Thus, for a given face value of bond​ holdings, a stronger dollar will yield more home currency to​ foreigners, so the asset will be worth more to foreign investors.​ Likewise, a weak dollar will lead to foreign bond holdings worth less to foreigners.

Question 24

is a security that is a claim on the earnings and assets of a company

Answer 24

Issuing stock and selling it to the public is a way for corporations to raise funds to finance their activities.

Question 25

Stock​ prices, as measured by the Dow Jones Industrial​ Average, have:

Answer 25

extremely volatile

Question 26

When a firm issues​ stock, it​ has:

Answer 26

taken on additional partners that own part of the assets of the firm and share in the​ firm’s earnings.

Question 27

When a​ company’s profits have been​ declining, the company is able to sell
less
stock at a higher price.

Answer 27

The value of stocks depends on the profits of the corporation that issued the original stocks.​ Therefore, when profits are​ declining, the value of the stock also decreases.

Question 28

Which of the following is an example of financial​ intermediation?

Answer 28

A saver makes a deposit in a credit​ union, and the credit union makes a loan to a member for a new car.

Question 29

The term bank generally includes all of the following institutions except​:

Answer 29

finance companies