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money and banking > Test Two > Flashcards

Test Two Flashcards

1
Q

A theory assuming that people’s expectations are the best possible forecast based on all public information, NOT ALWAYS 100% ACCURATE.

A

Rational expectations

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2
Q

if a bond is held to maturity

A

The rate of return is the yield to maturity

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3
Q

if a bond is sold before maturity

A

It’s rate of return is the current yield plus the percentage capital gain or loss

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4
Q

what happens to a bond’s price if the yield to maturity rises sharply?

A

The price falls

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5
Q

Are short-term or long-term bonds more volatile

A

Long-term

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6
Q

what risk is avoided if a bond’s time to maturity matches its holding period?

A

Interest-Rate Risk

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7
Q

The rate savers can receive with certainty

A

risk-free rate

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8
Q

what reduces the present value of future income?

A

Risk

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9
Q

payment on an asset that compensates the owner for taking risk

A

risk premium

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10
Q

risk premium _______ with the riskiness of the asset

A

increases

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11
Q

Asset prices change when?

A

When expected income or interest rates change

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12
Q

Stock prices change when?

A

expected income changes

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13
Q

changes in company earnings have what kind of effect on bond prices

A

little to no effect

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14
Q

Ex ante

A

Before (expected inflation)

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15
Q

Ex post

A

After (actual inflation)

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16
Q

what interest rate is adjusted for changes in price level and is a more accurate reflection of the cost of borrowing

A

Real interest rate

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17
Q

if inflation is higher than expected how are the ex post and ex ante real interest rates affected?

A

the ex post real interest rate is lower than the ex ante rate

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18
Q

pricing inflation cased negative ex post returns on mortgages issued by savings and loan associations resulted in what

A

the savings and loan crisis

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19
Q

what makes borrowing and lending risky

A

uncertainty about inflation

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20
Q

what type of bonds promise a fixed real interest rate: the nominal rate is adjusted for inflation over the life of the bond

A

inflation-indexed bonds

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21
Q

how are inflation-indexed bonds effected by inflation increases

A

The nominal interest rate on the bond is increased by and equal percentage

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22
Q

what are the fundamental forces determining interest rates

A
  • Time preference
  • marginal product of capital
  • income
  • inflation expectations
  • monetary policy
  • federal budget deficits (surpluses)
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23
Q

What 2 motives determine the shape of indifference curves

A

Current consumption & deferred current consumption

24
Q

higher income shifts the budget constraint out leading to

A

higher savings

25
Q

what is the reward to saving?

A

Interest rates. Productivity of capital is the source of that reward

26
Q

how does a fall in marginal product of capital affect the demand curve for loanable funds

A

The demand curve shifts to the left

27
Q

income fall can have a ____________ effect on interest rates

A

positive the supply curve of loanable funds shifts to the left

28
Q

during a recession which curve has the greater shift

A

demand curve

29
Q

a rapid increase in asset prices not justified by a change in interest rate or expected asset income

A

asset-price bubble

30
Q

are bonds or stock prices more volatile

A

Stocks, they provide income farther into the future than bonds.

31
Q

the price of a stock divided by earnings over the recent past

A

price-earnings ratio

32
Q

what increases p/e ratio?

A

low interest rates and high expected earnings in the future

33
Q

what happens to interest rates during periods which people expect inflation to increase

A

interest rates rise

34
Q

what happens to interest rates when people expect inflation to decline

A

interest rates typically fall

35
Q

_____ require that the exchange shuts down temporarily if prices drop by a certain percentage

A

Circuit breakers (established following 1987 crash)

36
Q

circuit breakers stop what type of selling

A

panic selling

37
Q

to stimulate the economy the fed implements measures that:

A
  • encourage banks to expand loans
  • thereby boosting the money supply moving the supply curve of loanable funds rightward
  • thereby reducing interest rates
38
Q

to restrain economic activities the fed implements actions that:

A
  • force banks to reduce their lending
  • thereby curtailing the money supply, moving the supply curve of loanable funds leftward
  • thus increasing interest rates
39
Q

does the fed res. have a considerably more direct influence on short-term interest rate or long-term rates

A

Short-term

40
Q

What effect does a federal budget deficit have on the demand curve

A

A right ward shift therefore a increase in interest rates

41
Q

What proposition suggests that people will offset fiscal deficits with greater savings to pay future taxes, especially if the increase in gov spending is expected to be permanent

A

The Ricardian Equivalance

42
Q

The total resouces owned by individuals including all assets

A

Wealth

43
Q

the degree of uncertainty associated with the return on one asset relative to alternative assets

A

Risk

44
Q

the ease and speed with which an asset can be turned into cash relative to alternative assets

A

Liquidity

45
Q

wealth and quantity demanded have what kind of relationships

A

Positive

46
Q

expected return and quantity demanded have what kind of relationship

A

positive

47
Q

quantity demanded and risk are _____ related

A

negatively related

48
Q

quantity demanded and liquidity

A

positively related

49
Q

sources of supply:

A
  • personal saving
  • business saving
  • government budge surplus
  • foreign lending in the US
50
Q

Sources of Demand

A
  • household credit purchases
  • Business investment spending
  • government budget deficit
  • foreign borrowing in the us
51
Q

what occurs when the amount demanded equals the amount supplied at a given price

A

market equilibrium

52
Q

supply curve shifters

A
  • expected profitability of investment opportunities
  • expected inflation
  • government budget
53
Q

a higher level of income causes the demand for money at each interest rate to increase and the demand curve to shift to the right

A

Income Effect

54
Q

a rise in the price level causes the demand for money at each interest rate to increase and the demand curve to shift to the right

A

Price-Level Effect

55
Q

an increase in the money supply will lower interest rates refers to what effect?

A

Liquidity

56
Q

what are the goals of monetary policy

A
  • keep stable prices (low/in volatile inflation)

- maximize employment (increase output

money and banking (1 decks)

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