Econ 102 Section 1 Homework #5 Due July 7, Tuesday in class

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1 Econ 102 Section 1 Homework #5 Due July 7, Tuesday in class Multiple Choice Questions (1-10: 10x1=10 points; 11-55: 45 x 2=90 points) 1.The principal amount of a bond is the amount: A) originally lent. B) of interest agreed upon when the bond was originally issued. C) paid to the bondholders on a regular basis. D) of interest the bondholder is entitled to when the bond matures. E) the bondholder receives even if the borrower defaults on the loan. Answer: A Learning Objective: Principal amount Level of Learning: Knowledge Type: Word 2.The coupon rate is the: A) amount originally lent. B) regular payment of interest to a bondholder. C) interest rate promised when a bond is issued. D) maximum interest rate that can be paid on a bond. E) the growth rate of interest payments on a bond. Answer: C Learning Objective: Coupon rate Level of Learning: Knowledge Type: Word 3.If the principal amount of a bond is \$2,000,000, the coupon rate is 6%, and the inflation rate is 4%, then the annual coupon payment made to the holder of the bond is. A) \$12,000 B) \$40,000 C) \$80,000 D) \$120,000 E) \$200,000 Answer: D Learning Objective: Coupon payment Level of Learning: Application Type: Word 4..James pays \$10,000 for a newly issued two-year government bond with a \$10,000 face value and a 6 percent coupon rate. One year later, after receiving the first coupon payment, James sells the bond. If the current one-year interest rate on government bonds is 7 percent, then the price he receives is: A) \$10,000. B) \$700. C) greater than \$10,000. D) less than \$10,000. E) either greater or less than \$10,000, but not equal to \$10,000. Answer: D Learning Objective: Bond prices and interest rates Level of Learning: Comprehension Type: Word Problem Source: New 5.A three-year bond with a principal amount of \$5,000, a 4% coupon rate paid annually, one year from maturity will sell for what price (rounded to the nearest dollar) in the bond market if interest rates are 5%? A) \$4,762 B) \$4,952 C) \$5,000 D) \$5,200 E) \$5,460 Answer: B Learning Objective: Bonds Level of Learning: Application Type: Word Problem Source: Unique 6.One year before maturity the price of a bond with a principal amount of \$1,000 and a coupon rate of 5% paid annually rose to \$1,019. The one year interest rate: A) rose to 6.0%. B) remained at 5%. C) fell to 3%. D) fell to 2%. E) fell to 1%. Answer: C Learning Objective: Bonds Level of Learning: Application Type: Word Problem Source: Unique

3 Problem Source: New 13.Liabilities of the commercial banking system include: A) reserves and loans. B) deposits. C) reserves and deposits. D) loans and deposits. E) reserves. Answer: B Learning Objective: Money creation Level of Learning: Application Type: Word Problem Source: New 14.Bank reserves are: A) currency and customer checking deposits. B) currency, customer checking and savings deposits. C) any asset used to purchase goods and services. D) financial assets obtained from savers and lent to borrowers. E) cash and similar assets held to meet depositor withdrawals or payments. Answer: E Learning Objective: Bank reserves Level of Learning: Knowledge Type: Word % reserve banking refers to a situation in which banks' reserves equal 100% of their: A) loans. B) deposits. C) profits. D) income. E) money. Answer: B Learning Objective: 100% reserve banking Level of Learning: Knowledge Type: Word 16.Banks hold reserves: A) to earn interest. B) to increase profits. C) to escape the double coincidence of wants. D) to meet depositor withdrawals and payments. E) only because the government requires them to hold reserves. Answer: D Learning Objective: Bank reserves Level of Learning: Knowledge Type: Word 17.The reserve/deposit ratio equals: A) 10% of bank reserves. D) bank reserves divided by bank deposits. B) 10% of bank deposits. E) bank deposits divided by bank reserves. C) 100% of bank reserves. Answer: D Learning Objective: Reserve/deposit ratio Level of Learning: Knowledge Type: Word 18.Commercial banks create new money: A) by printing currency. B) by issuing checks. C) through multiple rounds of lending and borrowing. D) when they buy government bonds from the Federal Reserve. E) when they increase their desired reserve/deposit ratio. Answer: C Learning Objective: Money creation Level of Learning: Knowledge Type: Word 19..In Econland all \$5,000,000 in currency is held by banks as reserves. The public does not hold any currency. If the banks' desired reserve/deposit ratio is 10%, the money supply in Econland equals:

4 A) \$4,545,545 B) \$5,000,000 C) \$5,500,000 D) \$50,000,000 E) \$55,000,000 Answer: D Learning Objective: Creation of money Level of Learning: Application Type: Word Problem Source: Web 20.If the actual reserve/deposit ratio equals 15% and the desired reserve/deposit ratio for this bank is 10%, the bank should: A) do nothing because this is a profitable situation. B) stop making loans. C) send the extra reserves to the central bank. D) request that customers withdraw deposits from the bank. E) make more loans in order to earn interest. Answer: E Learning Objective: Money creation Level of Learning: Comprehension Type: Word Problem Source: Web 21. Typically the money supply increase by a multiple of the increase in bank reserves created by the central bank because of: A) the power of compound interest. D) 100-percent reserve banking. B) small differences make a large difference. E) the central bank requires multiple expansion. C) fractional reserve banking. Answer: C Learning Objective: Money creation Level of Learning: Comprehension Type: Word Problem Source: New 22.When an individual deposits currency into a checking account: A) bank reserves increase which allows banks to lend more and, ultimately, increases the money supply. B) bank reserves decrease which reduces the amount banks can lend thereby reducing the growth of the money supply. C) bank reserves are unchanged. D) bank reserves decrease which increases the amount banks can lend, thereby increasing the growth of the money supply. E) bank reserves increase which reduces the amount banks can lend, thereby reducing the growth of the money supply. Answer: A Learning Objective: Money supply with currency and deposits Level of Learning: Knowledge Type: Word Problem Source: Study Guide 23.After the Federal Reserve increases reserves in the banking system through open-market purchases, banks create new deposits through multiple rounds of lending and accepting deposits until the: A) Federal Reserve requires them to stop. B) deposit insurance limit is reached. C) actual reserve/deposit ratio is greater than the desired reserve/deposit ratio. D) actual reserve/deposit ratio is equal to the desired reserve/deposit ratio. E) actual reserve/deposit ratio is less than the desired reserve/deposit ratio. Answer: D Learning Objective: Money creation Level of Learning: Comprehension Type: Word 24..In Macroland there is \$10,000,000 in currency. The public holds half of the currency and banks hold the rest as reserves. If banks' desired reserve/deposit ratio is 10%, deposits in Macroland equal and the money supply equals. A) 50,000,000; 60,000,000 D) 100,000,000; 100,000,000 B) 55,000,000; 55,000,000 E) 100,000,000; 110,000,000 C) 50,000,000: 55,000,000 Answer: C Learning Objective: Money with currency and deposits Level of Learning:

6 A) 2,000; 1,800 B) 2,300; 2,100 C) 3,000; 1,000 D) 5,000; 3,000 E) 6,000; 2,000 Answer: D Learning Objective: Open-market sale Level of Learning: Application Type: Word 32.In Macroland, currency held by the public is 2000 econs, bank reserves are 600 econs, and the desired reserve/deposit ratio is 15%. If the Central Bank sells government bonds to the public in exchange for 300 econs that are then destroyed, the money supply in Macroland will decrease from econs to econs assuming that the public does not wish to change the amount of currency it holds. A) 2,000; 1,700 B) 2,600; 2,300 C) 2,990; 2,645 D) 6,000; 4,000 E) 7,000; 6,000 Answer: D Learning Objective: Open-market sale Level of Learning: Application Type: Word Problem Source: Web 33.The money supply in Macroland is currently 2,500, bank reserves are 200, currency held by public is 500, and banks' desired reserve/deposit ratio is Assuming the values of the currency held by the public and the desired reserve/deposit ratio do not change, if the Central Bank of Macroland wishes to increase the money supply to 3,000, then it should conduct an open-market government bonds to/from the public. A) purchase of 50 B) purchase of 250 C) purchase of 500 D) sale of 50 E) sale of 500 Answer: A Learning Objective: Open-market purchase Level of Learning: Application Type: Word 34.A banking panic is an episode in which: A) depositors, spurred by news or rumors of possible bankruptcy of one bank, rush to withdraw deposits from the banking system. B) commercial banks, fearing Federal Reserve sanctions, unwillingly participate in open-market operations. C) commercial banks, concerned about high interest rates, rush to borrow at the Federal Reserve discount rate. D) depositors, afraid of increasing interest rates, attempt to engage in discount-window borrowing at the Federal Reserve. E) the Federal Reserve, concerned about unusually rapid increases in the money supply, refuses to make loans to commercial banks through discount window lending. Answer: A Learning Objective: Banking panic Level of Learning: Knowledge Type: Word 35.During the Great Depression in the United States between 1929 and 1933, banks' reserve/deposit ratio and the amount of currency held by the public, while the money supply. A) increased; increased; increased D) decreased; decreased; increased B) decreased; decreased; decreased E) increased; decreased; decreased C) increased; increased; decreased Answer: C Learning Objective: Banking panics Level of Learning: Knowledge Type: Word Problem Source: Web 36.In the Keynesian model an expansionary gap will develop if there is: A) an increase in average labor productivity. D) too little spending. B) a decrease in average labor productivity. E) stabilization policy. C) too much spending. Answer: C Learning Objective: Keynesian model Level of Learning: Knowledge Type: Word Problem Source: New

8 43.In Econland autonomous consumption equals 200, the marginal propensity to consume equals 0.9, net taxes are fixed at 100, planned investment is fixed at 200, government purchases are fixed at 300, and net exports are fixed at 50. Induced expenditure equals: A).1Y B) Y C).9Y D) Y E) 6660 Answer: C Learning Objective: Induced expenditure Level of Learning: Application Type: Word 44.In Macroland autonomous consumption equals 100, the marginal propensity to consume equals.75, net taxes are fixed at 40, planned investment is fixed at 50, government purchases are fixed at 150, and net exports are fixed at 20. Short-run equilibrium output in this economy equals: A) 387 B) 1000 C) 1150 D) 1160 E) 1280 Answer: D Learning Objective: Short-run equilibrium output Level of Learning: Application Type: Word Problem Source: Web 45.An economic recession in Japan the demand for exports from East Asian countries resulting in a reduction in autonomous expenditures in these East Asian countries and a(n) output gap in the East Asian countries. A) reduces; expansionary D) increases; recessionary B) increases; expansionary E) reduces; autonomous C) reduces; recessionary Answer: C Learning Objective: Planned spending and the output gap Level of Learning: Comprehension Type: Word Use the following to answer questions 46-49: PAE Y * Expenditure Line PAE = 1, Y 45 o Y * Y 46. Based on the Keynesian cross diagram, short-run equilibrium output equals: A) 3000 B) 3250 C) 4000 D) 4750 E) 5000 Answer: C Learning Objective: Short-run equilibrium output Level of Learning: Comprehension Type: Word 47.Based on the Keynesian cross diagram, at short-run equilibrium output autonomous expenditure equals and induced expenditure equals.

9 A) 1000, 3000 B) 1000, 4000 C) 3000, 4000 D) 1000, 3250 E) 3000, 3250 Answer: A Learning Objective: Autonomous/induced expenditure Level of Learning: Comprehension Type: Word 48.Based on the Keynesian cross diagram, if output equals 5,000 planned aggregate expenditure is output and firms will production. A) greater than; increase D) less than; increase B) greater than; decrease E) less than; decrease C) equal to; not change Answer: E Learning Objective: Planned spending and the output gap Level of Learning: Comprehension Type: Word 49.Based on the Keynesian cross diagram, at short-run equilibrium output, A) there is a recessionary gap. B) there is an expansionary gap. C) output equals potential output. D) firms will be producing more than they can sell. E) firms will be producing less than they can sell. Answer: B Learning Objective: Planned spending and the output gap Level of Learning: Comprehension Type: Word 50.If planned aggregate expenditure (PAE) in an economy equals 1, Y and potential output (Y*) equals 9,000, then this economy has: A) an expansionary gap. D) no autonomous expenditure. B) a recessionary gap. E) no induced expenditure. C) no output gap. Answer: A Learning Objective: Planned spending and the output gap Level of Learning: Application Type: Word 51.In the short-run Keynesian model, to close a recessionary gap of \$5 billion dollars government purchases must be: A) increased by \$5 billion. D) increased by less than \$5 billion. B) decreased by \$5 billion. E) decreased by less than \$5 billion. C) increased by more than \$5 billion. Answer: D Learning Objective: Planned spending and government purchase Level of Learning: Comprehension Type: Word 52.If short-run equilibrium output equals 10,000, the income-expenditure multiplier equals 5, potential output (Y*) equals 11,000, then government purchases must to eliminate any output gap. A) increase by 20 D) decrease by 200 B) increase by 200 E) decrease by 250 C) increase by 250 Answer: B Learning Objective: Planned spending and government purchase Level of Learning: Application Type: Word 53.In the short-run Keynesian model where the marginal propensity to consume is 0.5, to offset an

10 expansionary gap resulting from a \$1 billion increase in autonomous consumption, taxes must be: A) increased by \$1 billion. D) decreased by \$2 billion. B) decreased by \$1 billion. E) increased by \$.5 billion. C) increased by \$2 billion. Answer: C Learning Objective: Taxes, transfers, and aggregate spending Level of Learning: Application Type: Word 54.If short-run equilibrium output equals 10,000, the income-expenditure multiplier equals 10, the MPC equals.9, and potential output (Y*) equals 9,000, then transfer payments must be decreased by (rounded to the nearest whole number) to eliminate any output gap. A) 10 B) 100 C) 1111 D) 11 E) 111 Answer: E Learning Objective: Taxes, transfers, and planned spending Level of Learning: Application Type: Word 55. If short-run equilibrium output equals 10,000, the income-expenditure multiplier equals 5, the MPC equals.8, and potential output (Y*) equals 9,000, then taxes must be increased by to eliminate any output gap. A) 20 B) 200 C) 225 D) 250 E) 1000 Answer: D Learning Objective: Taxes, transfers, and planned spending Level of Learning: Application Type: Word

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