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business
money banking financial markets

Questions and Answers of Money Banking Financial Markets

What is the relationship between the principle–agent problem in corporate governance and the moral hazard problem?
Which government regulatory agency was created, in great part, to help overcome the adverse selection problem in equity markets?a. The Federal Reserveb. The United States Treasuryc. The Department of
It is often stated that “we live in an information age,” yet the adverse selection problem still exists. Why?
How does the existence of “free riders” help to perpetuate the adverse selection problem?
Akerlof changed the conditions of perfect competition by adding in what factor that often occurs in real life?a. Price differencesb. Time dimensionc. Uncertaintyd. Different sellers
CarMax offers a solution to the lemons problem in the used car market. What other ways might the lemons problem be resolved?
While Akerlof described adverse selection in the used car market, can you think of how adverse selection might arise in the labor market? Or even in dating?
If the economy is currently “overheating,” this means:a. actual GDP is higher than potential GDP.b. there is “too much” spending in the economy.c. inflation rates will probably increase in
Johnny believes input markets, such as financial markets, are inefficient. Use the aggregate supply and aggregate demand to explain why this leads Johnny to argue that government policy is needed to
Bobby believes input markets, such as financial markets, are efficient. Use aggregate supply and aggregate demand to explain why this leads Bobby to believe economic slowdowns will “end
If the cost of doing business for producers increases, which of the following occurs?a. The short-run aggregate supply curve becomes flat.b. The short-run aggregate supply curve shifts outward.c. The
Why is the long-run aggregate supply curve vertical? Why might the long-run aggregate supply curve move?
Explain the difference between movement along the short-run aggregate supply curve and shifts of the short-run aggregate supply curve.
Deep economic contractions, such as the Great Depression of the 1930s, are depicted in the Keynesian framework as which part of the aggregate supply curve?a. Verticalb. Horizontalc. Upward slopingd.
Why was an upward-sloping part of the aggregate supply curve added to Keynes’s original aggregate supply curve?
Explain to someone with no training in economics why the aggregate supply curve might be vertical at the full employment level of output.
If savings is greater than investment, what is the implication for aggregate demand?a. Actual spending is less than potential spending as a result of leakages.b. Actual spending is greater than
If the MPC is 0.7 and business investment spending decreases by $10, determine what will happen to total spending according to the spending multiplier.
If the MPC is 0.9 and consumption increases by $50 million, determine what will happen to total spending according to the spending multiplier.
What did Karl Marx consider to be the main economic problem that would ultimately cause the collapse of capitalism?a. High inflationb. Growing unemploymentc. Excessive government debtd. High interest
What is the Pigou effect and how does it result in a downward-sloping aggregate demand curve?
A movement along the curve is caused by a change in PRICE, when the demand curve shifts, a factor is causing the entire curve to shift outward (increasing) or to the left (decreasing)
Which of the following explain why Ronald Reagan and Paul Volcker agreed on economic policy?a. They were both from the same political party.b. They both wanted to focus on long-term outcomes, not
In the twenty-first century Paul Volcker is greatly respected, yet during the early 1980s he was one of the most disliked people in America. Why was Paul Volcker so disliked in the early 1980s? Why
Explain why economists in the 1960s were so perplexed about why stagflation had occurred.
Savings & Loan Associations were established to lend money to households so that the households could:a. purchase houses.b. fund their children’s education.c. afford to retire comfortably.d.
Bobby believes input markets, such as financial markets, are efficient. Use aggregate supply and aggregate demand to explain why this leads Bobby to believe economic slowdowns will “end
What roles did the US federal government and the Federal Reserve play in helping to expand the home mortgage market after World War II?
Rationing was used in the United States during World War II in part to:a. keep interest rates low.b. keep unemployment rate low.c. keep inflation rate low.d. keep the government budget deficit low.
During World War II there was relatively little inflation in the United States. Why was this the case?
There are three ways to finance a war. What are they? How were they used in the past?
When an economy is suffering from deflation, the nominal or market interest rates tend to:a. Increaseb. Decreasec. Become negatived. Equal zero
In 1907 J. Pierpont Morgan was able to help end a financial crisis in great part by restoring confidence. Why weren’t a different set of banker’s actions enough to stop the financial crisis in
Low interest rates may, or may not, signal that a central bank is pursuing an “expansionary” policy. Explain.
The Panic of 1907 was primarily ended thanks to the actions of:a. the Federal Reserve.b. President Teddy Roosevelt.c. J. Pierpont Morgan.d. Salmon P. Chase.
Augustus Heinze tried to corner the market for shares of United Copper. What does this mean? How did it help to trigger the Panic of 1907?
What role did Taylorism, or “scientific management,” play in the expansion of financial markets in the United States?
Under which theory might a steep yield curve suggest market participants are worried that inflation will increase in the future?a. Pure expectations theoryb. Term premium theoryc. Segmented market
Offer an explanation of how Operation Twist may have resulted in a flat yield curve.
Offer two different explanations for why an inverted yield curve might signal an economic slowdown is on the way.
Proponents of segmented market theory disagree with which of the following?a. Bonds are promises to repay with interest.b. Bonds with higher default risk pay higher yields.c. Bonds with lower prices
How would proponents of the term premium theory explain why a yield curve becomes more steep from one time period to the next?
According to the pure expectations theory, what is happening when the yield becomes more steep from one time period to the next? What does that tell you?
If Kari is the 35% income tax bracket and is thinking about buying a corporate bond that yields 2.5%, what yield must a muni bond pay to make her indifferent between the two bonds, ceteris paribus?a.
If Tommy is in the 15% income tax bracket and is considering buying a muni bond that yields 3%, what yield would a corporate bond have to pay to make him indifferent between the two bonds, ceteris
Do you think the preferential tax treatment of muni bonds should be eliminated? Or, should the tax benefit of muni bonds be reduced? Why or why not?
If the ex- ante real interest rate is less than the ex post real interest rate, which of the following happened?a. Actual inflation rate is less than the expected inflation rateb. Actual inflation
Explain why rapid changes in the rate of inflation, as well as inflationary expectations, make business investment decisions difficult.
Explain why business people should use the real interest rate instead of the nominal interest rate when making economic decisions.
you read in the financial press that the recent flight to quality is reversing. What will happen in the bond market?a. Yields of US Treasury bonds will decrease relative to the yields of corporate
Offer an explanation to someone with no training in economics for why the yield on US government bonds is used as a substitute for the risk-free rate.
Firms borrowing in developing countries such as Brazil often have to pay a higher default risk premium, ceteris paribus, than similar firms borrowing in the United States. Explain why this is the
You read in the financial press that the economy of Finland is sliding into a recession. What will happen in the bond market and the loanable funds market in Finland, ceteris paribus?a. Bond prices
Explain why a change in the demand for loanable funds may not change the supply of bonds.
Explain why changes in the demand for bonds change the supply of loanable funds.
Assume the loanable funds market is in equilibrium. An increase in the demand for loanable funds will result in a __________ equilibrium interest rate as the quantity of loanable funds demanded
During the Reagan Administration in the 1980s, while the US government was running large government budget deficits, the rest of the world was also bringing large amounts of their savings to the
During the Reagan Administration in the 1980s, the US government ran large government budget deficits, which many argued would slow down the US economy. Using the loanable funds framework, explain in
If the market price for bonds is higher than the equilibrium price, what is the result, and what will change to bring about equilibrium as price falls, ceteris paribus?a. Shortage; quantity
Stories appear in the financial press reporting two economic developments: Wealth levels in the United States are increasing, while at the same time the relative riskiness of bonds issued by American
You read in the financial press that market participants expect stock prices to increase dramatically in the near future, while at the same time business confidence is increasing. Explain in words
If a three-year bond with a $1,000 face value has a coupon rate of 3.5%, and the current market interest rate is 2%, what is the market price of the bond?a. $956.75b. $1,035.00c. $1,043.07 *d.
If you have a bond with a face value of $1,000 and a coupon rate of 2.5%, but the market interest rate for such bonds is 2.25%, will your bond sell at par, at a premium, or at a discount? Explain
If you have a bond with a face value of $1,000 and a coupon rate of 2.25%, but the market interest rate for such bonds is 2.5%, will your bond sell at par, at a premium, or at a discount? Explain
The rate of interest a bond pays is called the bond’s:a. Face value.b. Coupon rate.c. Bond rating.d. Rating rate.
The fact that the face value of a bond does not change over the life of the bond is generally considered a benefit to the borrower. Can you explain why?
Today, shoppers “clip coupons” before they go shopping. Explain how these modern coupons are similar and dissimilar to the “coupons” referred to in the bond market.
If the annual interest rate is 2%, what is the quarterly interest rate?a. 0.0204b. 0.0166c. 0.005d. 0.001
What is the future value of $500 in two years if the interest rate is 4%? How would you explain this to someone who has no training in economics?
Each person might have a different time preference. Explain why an older person might have a higher or lower time preference than a young person.
Which of the following is the most broad or most inclusive measurement of the money supply?a. M1b. M2c. M3d. M0
A critic of money economics once stated, “if you cannot measure the money supply accurately, it is not worth discussing at all.” How would you refute this statement?
Ricardo and Friedman agree that if the money supply increases “too quickly” the following happens:a. The rate of inflation decreases.b. The rate of real economic growth increases.c. The rate of
Proponents of the Gold Standard, or using gold as money, often argue that it will keep inflation under control. How does the experience of Europe in the sixteenth century raise doubts about that
Bobby is confused. He states: “Since prisoners are not allowed to smoke in prisons any longer, Radford’s examples of cigarettes in POW camps no longer applies.” How would you explain to Bobby
You read a news story about a country that is suffering from rapid, ongoing increases in the cost of living. Which characteristic of money is being directly negatively impacted in that economy?1.
How many prices must a barter economy have if the economy has four goods? What if it has 400 goods? Explain why having a money in the second case is beneficial.
What is the difference between money and currency? When are they the same? Why might they be different?
In a speech in 2016, Fed Chair Janet Yellen noted that there is some uncertainty in measuring the natural rate of unemployment:“it cannot be estimated precisely, and so it could be appreciably
An article in the Wall Street Journal in late 2015 noted: “One economic trend that hasn’t done its bit for this 6½-year recovery: capital spending.” Given that interest rates were at
If consumption spending becomes more sensitive to changes in the real interest rate, how will the slope of the IS curve be affected?
In testifying before Congress in mid-2012, then Fed Chairman Ben Bernanke noted that the economic recovery “could be endangered by the confluence of tax increases and [government] spending
A columnist in the Economist asserts: “I would argue that the Fed has been targeting very low inflation, and falling inflation expectations imply much lower interest rates in future.”a. Will
How would the size of the multiplier affect the slope of the IS curve?
Suppose the Fed is concerned that deflation will harm the economy over the long run. Use the IS–MP model (including the Phillips curve) to analyze how the Federal Reserve would fight deflation.a.
A Federal Reserve publication remarks: “For Okun’s law to be useful as a rule of thumb, the relationship between real GDP growth and the unemployment rate needs to be stable across time.”a.
In each of the following situations, briefly explain whether the IS curve will shift and, if it does shift, in which direction it will shift:a. Consumers become more optimistic about their future
In his memoirs, published in 2014, former Treasury Secretary Timothy Geithner observed:“Eventually, Congress will have to make some tough choices about the mortgage market—not just how to reduce
In each of the following situations, briefly explain whether the short-run Phillips curve with the unemployment rate on the horizontal axis will shift, and if it does shift, in which direction it
John Maynard Keynes wrote that one requirement for a stable economy was that “the multiplier … is greater than unity but not very large.” Why might a large value for the multiplier make an
An article on the U.S housing market in the Economist notes: “The status quo also means that, in the event of another crash, taxpayers would be landed with a big bill.” Explain what aspect of the
In a lecture, Fed Chair Janet Yellen remarked:“The Phillips-curve approach to forecasting inflation has a long history in economics, and it has usefully informed monetary policy decision making
Economists debate whether the Federal Reserve, Congress, and the president should adopt an activist stabilization policy that attempts to “finetune” the economy—that is, smooth almost every
An article in the Economist in 2016 argued: “If the Fed wants higher nominal rates in a world of low real rates, it must cultivate higher inflation.” Briefly explain the author’s reasoning.
Briefly explain whether you agree with the following argument:Potential GDP is the level of real GDP attained when all firms are producing at capacity. Firms have the capacity to operate 24 hours per
Use the following data to calculate the values of equilibrium output and the investment spending multiplier:C = MPC × Y = 0.75 × YI̅ = $2.3 trillionG̅ = $1.7 trillionN̅X̅ = - $0.5 trillio
For a brief period in 2008 and 2009, the U.S. Treasury guaranteed investors against losses on their holdings of money market mutual fund shares. If the program had become permanent, how would it have
John Hicks, in his original macroeconomic model, the IS–LM model, developed the LM curve to show the combinations of the real interest rate and output that result in equilibrium in the money
An article in the Wall Street Journal in 2016 noted:“The 2016 rally in government bond prices has taken U.S. real yields … on the 10-year Treasury … below zero for the first time since 2012.”
Give an example of a shock that could shift the IS curve to the left. Give an example of a shock that could shift the IS curve to the right.

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