1. (3 points) A contract that makes the owner of a security a part owner of the company that issued the security is known as A. a debt security. B. an equity security (stock). C. an option. D. a bond.

2. (3 points) The period of time until the final payment is made on a debt security is called A. discount window. B. face value date. C. maturity. D. par date.

3. (3 points) When savers buy securities from borrowers without the assistance of any third party, this is A. indirect finance. B. a secondary market. C. direct finance. D. a financial intermediary.

4. (3 points) In the United States, A. money has always been fiat money. B. money is currently fiat money, but has been backed by gold in the past. C. money is backed by silver. D. the money supply is controlled by the U.S. Treasury. E. currency has always been uniform.

5. (3 points) Which of the following is money in the United States (M1 or M2)? CIRCLE ALL THAT APPLY A. $100 bill B. a share of Google Stock C. $10,000 worth of 10-year Treasury securities D. an once of gold bullion E. a $20,000 retail money market fund deposit. 2

6. (3 points) Risk averse individuals A. are irrational because they not value the potential for high returns. B. will never take on a risky investment. C. experience diminishing marginal utility. D. only care about the expected return of an investment. E. None of the above.

7. (3 points) When actual inflation is greater than expected, A. the realized real interest rate is less than expected. B. the realized real interest rate is greater than expected. C. the nominal interest rate is greater than expected. D. the realized real interest rate is negative. E. the realized real interest rate is zero.

8. (3 points) The bonds below have the same maturity. Which bond is the most risky? A. A discount bond B. A coupon bond with a semi-annual coupon and coupon rate of 5% C. A coupon bond with an annual coupon and coupon rate of 2% D. Cannot be determined

9. (3 points) Emily keeps at least $200 in her checking account for food and gasoline purchases. This is an example of money functioning as a A. standard of deferred payment B. unit of account C. store of value D. medium of exchange 3

10. (3 points) Suppose bank managers decide to use excess reserves and increase the quantity of loans made to households. As a result, checking deposits expand and A. the quantity of money does not change. B. the quantity of inside money increases. C. the quantity of inside money decreases. D. the quantity of outside money increases. E. the quantity of outside money decreases.

11. (3 points) If yields are expected to fall, investors would choose to hold A. short-term securities. B. long-term securities. C. cash D. a mix of short-term securities and long-term.

12. (3 points) If investors begin to expect a decline in economic activity, A. yield curves get steeper. B. short-term yields fall. C. the yield curve gets flatter or becomes inverted. D. all yields rise as higher inflation is expected.

13. (3 points) A primary assumption of the expectations theory of term structure (yield curves) is that A. bonds of different maturities are perfect substitutes. B. investors prefer short-term to long-term securities. C. markets for bonds of different maturities are completely separate. D. investors are risk averse. 4

14. (3 points) Suppose the expected inflation rate increases from 3% to 4%. According to the Fisher hypothesis, A. real interest rates will rise by one percentage point. B. nominal interest rates will rise by one percentage point. C. nominal interest rates will fall by one percentage point. D. real interest rates will fall by one percentage point. E. nominal interest rates will remain the same.

15. (3 points) Because investment returns are not not adjusted for inflation, A. costs of inflation are higher than would otherwise. B. costs of inflation are lower than otherwise. C. costs of inflation are the same since taxes are always inefficient.

16. (3 points) Loans that are more easily securitized likely have interest rates compared to loans that are not securitized, all else constant. A. the same B. lower C. higher

17. (6 points) Answer increases , decreases or stays the same .

a. (2 pts)Grannie deposits $10,000 in currency from under her bed into a checking account at First Federal M1____ , M2 _____

b. (2 pts)First Federal takes $9000 from excess reserves and makes a loan to Bonnies Bakery. The loan is deposited in the Bonnies Bakerys checking account. M1____ , M2 _____

c. (2 pts) Celeste buys a stock through a broker from Bo. Celeste pays for the stock with funds from her checking account and the proceeds from the sale are deposited into Bos retail money market account. M1____ , M2_____