Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Macroeconomics > Exam 3 > Flashcards

Exam 3 Flashcards

1
Q

A __________ is a legal promise to repay a debt

A

bond

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

The amount initially lent when a bond is issued is called the _______?

A

Principal amount

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

The rate of interest promised when a bond is issued is called the

A

coupon rate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

If the principal amount on a 15 year bond is $5,000, and the annual coupon payment is $300, then the coupon rate is:

A

300/5000 = 0.06 (6%)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Coupon payments are ________?

A

regular interest payments made to bondholders

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Suppose James buys a newly issued bond for $10,000. The bond pays $800 at the end of each year for the first 4 years, and then pays $10,800 upon its maturity at the end of the 5th year. In this example, the dollar value of the coupon payment is? and the principal is?

A

Coupon is 800
Principal is 10,000

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Corporations and governments frequently raise funds by issuing _____ and selling them to investors.

A

bonds

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Suppose James buys a newly issued bond for $5,000. The bond pays $250 at the end of each year for the first 4 years, and then pays $5,250 upon its maturity at the end of the 5th year. The term of this bond is:

A

5 years

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

A regular payment received by stockholders for each share that they own is a

A

dividend

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Municipal bonds that are exempt from federal taxes have higher coupon rates than otherwise similar bonds. t/F

A

False

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

________ are ownership shares in a corporation.

A

stock

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

The returns that stockholders receive on their stock holdings include _____.

A

dividends and/or capital gains

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

________ is the time at which the bonds are supposed to be repaid by the issuer.

A

maturity

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Suppose you expect Global Inc. to pay a dividend of $2 and to sell for $100 per share in one year. If the interest rate on government bonds is 5% and you require a risk premium of 3% to hold a share of Global Inc., then what is the most you’d be willing to pay for the stock now (rounded to the nearest dollar)?

A

102$/1.08 = 94 (approximant)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

An increase in interest rates tends to _____ stock prices

A

Lower (remember that interest rate has a negative relationship with stocks and bonds)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

The difference between the required rate of return to hold risky assets and the rate of return on safe assets is called the _____.

A

Risk premium

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

If a company’s earnings are expected to increase in the future, then current stock prices:

A

Also tend to rise/increase

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Stock markets and bond markets help direct investment towards its most productive uses because investors:

A

can safely make risky but worthwhile investments by diversifying.

have a strong incentive to gather information about firms’ profitability

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

___________is the difference between the required rate of return to hold risky assets and the rate of return on safe assets.

A

Risk premium

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

____________is the practice of spreading one’s wealth over a variety of different financial investments to reduce overall risk.

A

Diversification

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

A financial intermediary that sells shares in itself to the public, and then uses the funds raised to buy a wide variety of financial assets is called

A

Mutual fund

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Bond markets and stock markets do not help direct investment towards its most productive uses. t/f

A

False: By providing investors with a strong incentive to gather information about firms and by allowing investors to diversify, bond markets and stock markets help ensure that investment is directed towards its most productive uses.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

A mutual fund is ______.

A

a financial intermediary that sells shares in itself to the public and then uses the funds raised to buy a wide variety of financial assets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Sydney purchases a newly issued, two-year government bond with a principal amount of $10,000 and a coupon rate of 7 percent paid annually. One year before the bonds matures (and after receiving the coupon payment for the first year), Sydney sells the bond in the bond market. What price (rounded to the nearest dollar) will Sydney receive for his bond if newly issued one-year government bonds are paying a 6 percent coupon rate?

A

10,000+0.07*10,000
Then divide by 1.06
10,094 (approximately)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Decentralized market-based financial systems improve the allocation of saving by

A

providing information and risk-sharing services.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Who determines the beginning and the end of economic recessions/depressions?

A

NBER (National bureau of economic research. They aren’t government they are a non-profit.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

Business cycles are:

A

Short term fluctuations in GDP

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

Recessions tend to be followed by a _____ in the rate of inflation.

A

decline

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

Potential output is also sometimes called:

A

Full-employment output
Potential GDP

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

Sharp increases in the unemployment rate are typically associated with:

A

Recessions

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

Potential output is:

A

the maximum sustainable level of real GDP

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

Recessions tend to be followed by a(n) _____ in the rate of inflation and are often preceded by a(n) _____ in the rate of inflation

A

Decrease, increase

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

The difference between actual output and potential output as a fraction of potential output is known as the _____.

A

Output gap

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
32
Q

A recessionary gap occurs when:

A

Potential output exceeds actual output

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
33
Q

Formula for output gap?

A

Real (or actual) GDP - Potential GDP / Potential GDP

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
34
Q

The long-term and chronic unemployment that exists even when the economy is producing at a normal rate is called:

A

Structural unemployment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
35
Q

Cyclical unemployment is:

A

the extra unemployment that occurs during periods of recession

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
36
Q

____ gaps imply that capital and labor resources are not being fully used, while _____ gaps typically lead to inflation. Thus, both are considered to be problems for policymakers.

A

Recessionary; expansionary

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
37
Q

The part of unemployment due to structural and frictional unemployment is called the _____.

A

Natural rate of unemployment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
38
Q

Cyclical unemployment is zero when the economy has:

A

neither expansion or recession

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
39
Q

If u denotes the total unemployment rate and un denotes the natural rate of unemployment, then u - un equals:

A

Cyclical unemployment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
40
Q

If the total unemployment rate is 3 percent, and the natural rate of unemployment is 4 percent, then cyclical unemployment is:

A

-1 (difference between total and natural

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
41
Q

The natural rate of unemployment is the unemployment rate that prevails when cyclical unemployment is _____.

A

Zero

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
42
Q

When the economy is experiencing a recessionary gap:

A

the total unemployment rate is greater than the natural rate of unemployment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
43
Q

In the short run, if firms meet the demand for their output at preset prices, then the primary cause of expansions are:

A

increases in economy wide spending

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
44
Q

In the long run, firms will respond to expansionary gaps by:

A

Raising prices

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
45
Q

Suppose Al sells ice cream. In the short run, the price of his ice cream is determined largely by ______.

A

Demand for the ice cream

Using the best info about demand and cost

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
46
Q

Consider a market for Al’s ice cream. In the short run, ______.

A

producers tend to meet demand at preset prices

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
47
Q

Cyclical unemployment is equal to zero when

A

Actual GDP and potential GDP are equal

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
48
Q

In the short run, ______ determines output, and in the long run ______ determines output.

A

Total spending, potential output

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
49
Q

The natural rate of unemployment is equal to the unemployment rate when there is only

A

structural and frictional unemployment.

50
Q

What is the fundamental assumption of the basic Keynesian model?

A

In the short run, firms meet the demand for their product at preset prices.

51
Q

The costs of changing prices are called _______ costs

A

Menu Costs

52
Q

Menu costs will prevent firms from changing prices in the _____.

A

Short run (It’s because it’s preventing the cost change girl)

53
Q

Total planned spending on final goods and services is called ______.

A

Planned aggregate expenditure

54
Q

________ costs are the costs of changing prices

A

Menu

55
Q

The sum of planned spending by households, firms, and government equals

A

Planned aggregate expenditure

56
Q

Consumption spending is positively related to disposable

A

income

57
Q

The ________ function relates consumption spending to disposable income and all other factors that might affect household spending.

A

consumption function

58
Q

Consumption spending and disposable income are _____.

A

positively related

59
Q

An increase in stock prices that makes households wealthier and thus more willing to spend would be captured by a change in _____.

A

Autonomous consumption

60
Q

The tendency for changes in asset prices to affect households’ consumption through changes in autonomous consumption is known as the _________ effct

A

Wealth

61
Q

If disposable income rises by $20 billion and households consume $15 billion of the increase and save $5 billion of the increase, then the marginal propensity to consume is _____.

A

0.75 (Change in consumption/change in disposable income)

62
Q

Which of the following could affect autonomous consumption?

A

Interest rate
wealth
asset prices

63
Q

Consumption spending that is not related to the level of disposable income is known as __________ function

A

Autonomous consumption

64
Q

The reason why the marginal propensity to consume is less than 1 is because when people receive an extra dollar of disposable income, they

A

spend part of the dollar and save the rest.

65
Q

The amount by which consumption rises when disposable income rises by $1 is called the

A

Marginal propensity to consume (MPC)

66
Q

If PAE=900+0.5Y, then autonomous expenditure is equal to _____.

A
  1. correct
    Reason: Autonomous expenditure is the portion of planned aggregate expenditure (PAE) that is independent of output (Y).
67
Q

Changes in output _____ planned aggregate expenditure. (Affect or not affect?

A

Affect.

68
Q

If PAE=900+0.5Y, then the marginal propensity to consume is equal to _____.

A

0.5

69
Q

If Y>PAE, then firms’ inventories will _____.

A

Rise

70
Q

if Y=4,200 and PAE is 4,140 then _____.

A

firms are producing more than they can sell

71
Q

What two lines are included in a Keynesian-cross diagram?

A

the expenditure line
a 45 degree line where Y=PAE

72
Q

If initially PAE=900+.5Y, but a fall in planned investment leads autonomous expenditure to fall by 100, then short-run equilibrium output will fall to

A

1600

PAE = 800 + 0.5y
0.5y= 800/0.5
y = 1600

73
Q

A recessionary gap could be caused by:

A

a fall in consumer spending

a decline in government purchases

A decrease in net exports

a decrease in planned investment

74
Q

If potential output equals actual output, then a fall in consumer spending will lead to an expansionary gap or a recessionary gap?

A

Recessionary!

75
Q

If disruptions to financial markets make it more difficult for firms and consumers to borrow, then this will _____.

A

Lead to a recessionary gap

76
Q

A fall in autonomous consumption will lead the income of workers who produce consumption goods to _____, leading to further _____ in consumption and output.

A

Fall ; Decreases

77
Q

The higher is the marginal propensity to consume, the ____ will be the income-expenditure multiplier.

A

Higher

78
Q

If an increase in consumers’ uncertainty about the future leads to a decrease in autonomous consumption, then _____.

A

there will be a recessionary gap

short-run equilibrium output will fall

planned aggregate expenditure will fall

79
Q

The nominal interest rate can be thought of as the price of:

A

holding money

80
Q

An individual’s demand for money is the amount of _____.

A

wealth an individual chooses to hold in the form of money

81
Q

The Fed’s choice of the money supply _____ the nominal interest rate.

A

determines

82
Q

The opportunity cost of holding money is the:

A

Nominal interest rate

83
Q

The decision about the forms in which to hold one’s wealth is called the

A

portfolio allocation decision

84
Q

Part of the cost of holding money is that it typically yields a _____ rate of return than stocks and bonds.

A

lower

85
Q

The amount of wealth an individual chooses to hold in the form of money is:

A

The individual’s demand for money

86
Q

Since 1960, the amount of money people hold in the form of cash and checking account balances (M1) has _____.

A

decreased

87
Q

As the nominal interest rate rises, the quantity of money demanded _____.

A

falls

88
Q

If real GDP increases, we would expect the demand for money to _____.

A

increase

89
Q

Increases in the price level _____ the demand for money.

A

increases

90
Q

The money demand curve shows the relationship between the _____ and the aggregate quantity of money demanded.

A

nominal interest rate

91
Q

The money demand curve slopes _____ because as the nominal interest rate increases, the opportunity cost of holding money _____.

A

downward, increases

92
Q

When the nominal interest rate falls, the quantity of money demanded will _____.

A

increase

93
Q

The money demand curve will shift to the left if the real price level _____.

A

falls

94
Q

As the nominal interest rate decreases, the opportunity cost of holding money _____, leading the money demand curve to slope _____.

A

decreases, downward

95
Q

As the nominal interest rate rises, the quantity of money demanded _____.

A

falls.
Reason: As the nominal interest rate rises, the opportunity cost of holding money rises, so that the quantity of money demanded falls.

96
Q

When the nominal interest rate falls, the quantity of money demanded will _____.

A

Increase
Reason: As the nominal interest rate falls, so does the opportunity cost of holding money, so the quantity of money demanded will increase.

97
Q

The money demand curve will SHIFT to the left if:

A

Real GDP decreases

98
Q

If the nominal interest rate increases, will it SHIFT the demand curve?

A

No.
Reason: If the nominal interest rate increases, the quantity of money demanded will fall, but this is represented by a movement along (rather than a shift in) the money demand curve.

99
Q

Factors that increase the benefit to holding money will _____ the demand for money and shift the money demand curve to the _____.

A

increase and to the right

100
Q

As the nominal interest rate decreases, the opportunity cost of holding money _____, leading the money demand curve to slope _____.

A

decreases, downward

101
Q

Which of the following will shift the money demand curve to the right?

A

An increase in the price level

An increase in real income

102
Q

Equilibrium in the market for money occurs at the _____ that equates the quantity of money supplied with the quantity of money demanded.

A

nominal interest rate

103
Q

The nominal interest rate will fall if the quantity of money demanded is _____ the quantity of money supplied.

A

less than

104
Q

In order to reduce the prevailing interest rate, the Fed ______.

A

buys government bonds

increases the money supply

105
Q

The quantity of money supplied is:

A

fixed and determined by the central bank

106
Q

If the quantity of money demanded is greater than the quantity of money supplied, then the nominal interest rate will _____.

A

rise

107
Q

Which of the following will SHIFT the money demand curve to the right?

A

An increase in real income

An increase in the price level

108
Q

The federal funds rate is the rate of interest that:

A

Banks charge each other for very short term loans

109
Q

The federal funds rate is closely watched by the public, politicians, the media and the financial markets because it is a strong indicator of the Fed’s plans for _____.

A

monetary policy

110
Q

By changing the federal funds rate, the Fed is able to influence interest rates throughout the economy because there is a tendency for

A

all interest rates to move in the same direction

111
Q

If i denotes the nominal interest rate and p denotes the rate of inflation, then the real interest rate is given by:

A

i - p

112
Q

The Fed can influence the real interest rate by changing the nominal interest rate because inflation changes _____ in response to changes in policy or economic conditions.

A

slowly

113
Q

To ______ the federal funds rate, the Fed conducts open-market purchases.

A

increase

114
Q

If the Fed wants to lower the federal funds rate, it conducts open-market _____

A

purchases

115
Q

A higher real interest rate discourages firms from making

A

capital

116
Q

At any given level of output, consumption spending __________ and planned investment spending ________ when the real interest rate decreases.

A

increases, increases

117
Q

Because _____ responds slowly to changes in policy or economic conditions, the Fed can influence the real interest rate by changing the nominal interest rate.

A

inflation

118
Q

When the economy faces a condition where it is overheating, the Fed will _________ real interest rates

A

Raises

119
Q

Inflation tends to lower stock prices because financial investors know that the Fed is likely to ______ interest rates in a attempt to _____ planned aggregate expenditure.

A

increase, lower

120
Q

In graph form, with real interest on the vertical axis and the inflation rate on the horizontal axis, what does the Fed’s policy reaction function look like?

A

upward sloping

121
Q

If the Fed’s policy reaction function equals r = 0.03 + π, where r is the real interest rate and π is the inflation rate, if the real rate of interest is set at 4 percent, then the rate of inflation must be

A

1 percent

122
Q

In the short-run, if the Federal Reserve increases interest rates, then consumption and investment ______, planned aggregate expenditure ______, and short-run equilibrium output _______.

A

decreases, decreases, decreases

In the short run, increased interest rates drive down consumption, investment, and planned aggregate expenditures. This, in turn, reduces short-run equilibrium output.

123
Q
A

Macroeconomics (6 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions