practice exam ch 1-5!!!

Question 1

without the use of money, workers in an economy…?

Answer 1

would probably specialize less

Question 2

equation to know how many prices someone in a barter economy needs to know?

Answer 2

n(n-1)/2

Question 3

high transaction costs associated with a barter system refers to..?

Answer 3

high cost associated with finding someone with whom to exchange

Question 4

an advantage that money has over other assets is that it…?

Answer 4

has lower transaction costs to use as means of payment than other assets

Question 5

true or false? money is wealth, but not all wealth is money.

Answer 5

true

Question 6

when comparing money to a US treasury bond held by an individual, we can say…

Answer 6

both are stores of value

Question 7

comparing checks and currency we can say..?

Answer 7

a check isn’t money but currency is

Question 8

to say an asset is liquid implies that…?

Answer 8

we are considering assets that may be readily converted into means of payment

Question 9

M1 does not include…

Answer 9

currency IN THE VAULTS of commercial banks

Question 10

what is most liquid? - art, demand deposits, houses, stocks?

Answer 10

demand deposits

Question 11

is M1 or M2 a more useful measure of the relationship between the money supply and inflation? why?

Answer 11

M1… because it includes the most liquid assets

Question 12

when did m2 stop being a good measure of relationship between money supply and inflation?

Answer 12

1980. has had no correlation since then

Question 13

cross-country analysis of money-growth shows what about the correlation between inflation and the money growth rate?

Answer 13

it is positive & relatively strong

Question 14

the consumer price index…

Answer 14

tends to overstate the impact of price changes due to substitution bias

Question 15

financial instruments channel funds from…

Answer 15

savers to borrowers in financial markets with the use of financial institutions

Question 16

new york stock exchange is…

Answer 16

a capital, financial market

Question 17

insurance contract is a…

Answer 17

financial instrument

Question 18

during the financial crisis of 2007-2009 some important financial firms were leveraged by more than…

Answer 18

30 times their net worth

Question 19

how do financial markets enable the transfer of risk?

Answer 19

allow individuals and firms less willing to bear risk to transfer risk to other individuals and firms more willing to bear risk

Question 20

the high volume of shares of stock that are traded on a normal day on stock markets reflect… (2)

Answer 20

the low transaction costs and high liquidity

Question 21

what does the buying and selling in primary markets involve?

Answer 21

an investment bank

Question 22

well-run financial markets…

Answer 22

ensure resources are allocated efficiently

Question 23

countries that lack well-defined property laws and legal structures…

Answer 23

will not develop as fast economically as countries with clear property rights and formal legal system

Question 24

rule of 72?

Answer 24

divide 72 by the interest rate…. don’t put the interest rate percentage!!!! example: 8%…. 72/8

Question 25

doubling the future value will cause the present value to….

Answer 25

double

Question 26

present value and interest rate have what type of relationship…?

Answer 26

inverse relationship

Question 27

an increase in time until a payment is made on an investment does what to the present value..?

Answer 27

decreases PV

Question 28

the coupon rate is…?

Answer 28

the annual amount of interest payments made on a bond as a percentage of the amount borrowed

Question 29

should a firm make the investment if the internal rate of return is greater than the opportunity cost?

Answer 29

yes

Question 30

how is the price of a coupon bond determined?

Answer 30

take the present value of all of the bond’s payments

Question 31

an investment with more risk should sell for…?

Answer 31

a lower price and offer higher return