Q&A Hero

Q: If in an efficient market all prices are correct and reflect market fundamentals, which of the following is a FALSE statement? A. A stock that has done poorly in the past is more likely to do well in the future. B. One investment is as good as any other because the securities' prices are correct. C. A security's price reflects all available information about the intrinsic value of the security. D. Security prices can be used by managers to assess their cost of capital accurately.

Q: Suppose the economy is thought to be 1 percent below its potential output (i.e., the output gap is −1 percent). The potential output is growing at 4% a year. Suppose the Fed is following the Taylor rule, with an inflation rate of 4 percent over the past year. The equilibrium real fed funds rate is 3 percent, the weight on the output gap is 0.75 and the weigh on the inflation gap is 0.25. The inflation target is 1 percent. What should the federal funds rate be?a. 7 percentb. 8 percentc. 9 percentd. 10 percent

Q: Your best friend calls and gives you the latest stock market "hot tip" that he heard at the health club. Should you act on this information? Why or why not?

Q: Suppose the Fed has set the federal funds rate at 4.5 percent using the Taylor rule. If the inflation rate increases by1 percentage point and the weight on inflation gap is 0.5, all other variables remain unchanged, the federal funds rate shoulda. decrease to 3.5 percent. b. decrease to 4 percent.c. increase to 5.5 percent. d. increase to 5 percent.

Q: If a corporation announces that it expects quarterly earnings to increase by 25% and it actually sees an increase of 22%, what should happen to the price of the corporation's stock if the efficient markets hypothesis holds, everything else held constant?

Q: Suppose the economy is thought to be 1 percent below potential (i.e., the output gap is −1 percent), when potential output grows 4 percent per year. Suppose the Fed is following the Taylor rule, with an inflation rate of 4 percent over the past year. The equilibrium real federal funds rate is 3 percent and the weights on the output gap and inflation gap are 0.5 each. The inflation target is 1 percent. What should the federal funds rate be?a. 4 percentb. 6 percentc. 8 percentd. 12 percent

Q: For small investors, the best way to pursue a "buy and hold" strategy is to A. buy and sell individual stocks frequently. B. buy no-load mutual funds with high management fees. C. buy no-load mutual funds with low management fees. D. buy load mutual funds.

Q: If the potential output of an economy is worth $440 billion and the actual output during a particular year was $435billion, the output gap isa. -­1.14 percentb. 2.2 percentc. -­5 percentd. 1.1 percent

Q: The advantage of a "buy-and-hold strategy" is that A. net profits will tend to be higher because there will be fewer brokerage commissions. B. losses will eventually be eliminated. C. the longer a stock is held, the higher will be its price. D. profits are guaranteed.

Q: If a country's potential output is $100 billion and the output gap is 5%, the country's actual output is a. $500 billion.b. $20 billion. c. $95 billion. d. $105 billion

Q: The efficient markets hypothesis suggests that investors A. should purchase no-load mutual funds which have low management fees. B. can use the advice of technical analysts to outperform the market. C. let too many unexploited profit opportunities go by if they adopt a "buy and hold" strategy. D. act on all "hot tips" they hear.

Q: If the yield curve is flat for short maturities and then slopes downward for longer maturities, the liquidity premium theory (assuming a mild preference for shorter-term bonds) indicates that the market is predicting A. a rise in short-term interest rates in the near future and a decline further out in the future. B. constant short-term interest rates in the near future and a decline further out in the future. C. a decline in short-term interest rates in the near future and a rise further out in the future. D. a decline in short-term interest rates in the near future and an even steeper decline further out in the future.

Q: Which equation best represents the Taylor rule?a. i=r*+πT+{w1× [(Y−Y*)/Y*] × 100} + [w2× (π −πT)]b. i=r*+π +{w1× [(Y−Y*)/Y*] × 100} + [w2× (π − πT)]c. i=r+πT+{w1× [(Y−Y*)/Y*] × 100} + [w2× (π −πT)]d. i=r+π +{w1× [(Y−Y*)/Y*] × 100} + (w2× π)

Q: According to the liquidity premium theory, a yield curve that is flat means that A. bond purchasers expect interest rates to rise in the future. B. bond purchasers expect interest rates to stay the same. C. bond purchasers expect interest rates to fall in the future. D. the yield curve has nothing to do with expectations of bond purchasers.

Q: Which terms in the equation for Taylor rule can be influenced by the government through monetary policy?a. Inflation gap and interest-rate spreadb. Unemployment gap and interest-rate spreadc. Interest-rate spread and unemployment gap d. Output gap and inflation gap

Q: According to the liquidity premium theory of the term structure, a downward sloping yield curve indicates that short-term interest rates are expected to A. rise in the future. B. remain unchanged in the future. C. decline moderately in the future. D. decline sharply in the future.

Q: Taylor originally picked as the weight on the output gap and as the weight on the inflation gap in his rule. a. 1; 1b. 1; 1/2c. 1/2; 1/2d. 1/2; 1

Q: Taylor originally picked____ as the equilibrium real federal funds rate, which was equal to its historical average.a. 1 percentb. 2 percentc. 3 percentd. 4 percent

Q: According to the liquidity premium theory of the term structure, a flat yield curve indicates that short-term interest rates are expected to A. rise in the future. B. remain unchanged in the future. C. decline moderately in the future. D. decline sharply in the future.

Q: The rule that is used to set a target for the federal funds rate in response to deviations of real output and inflation from their targets isa. the Taylor rule.b. a nonactivist rule.c. a money-growth rule. d. Mc Cullum's rule.

Q: According to the liquidity premium theory of the term structure, a slightly upward sloping yield curve indicates that short-term interest rates are expected to A. rise in the future. B. remain unchanged in the future. C. decline moderately in the future. D. decline sharply in the future.

Q: The Taylor rule is a. an activist rule.b. a nonactivist rule.c. used to set optimal tax rates.d. used to set the amount of government spending.

Q: According to the liquidity premium theory of the term structure, a steeply upward sloping yield curve indicates that short-term interest rates are expected to A. rise in the future. B. remain unchanged in the future. C. decline moderately in the future. D. decline sharply in the future.

Q: Why have economists abandoned the use of money-growth rules in the United States?a. Because the Fed can no longer control the money supply b. Because the velocity growth rate has been too stablec. Because of instability in money demandd. Because money-growth rules are overly activist

Q: If 1-year interest rates for the next five years are expected to be 4, 2, 5, 4, and 5 percent, and the 5-year term premium is 1 percent, than the 5-year bond rate will be A. 2 percent. B. 3 percent. C. 4 percent. D. 5 percent.

Q: If 1-year interest rates for the next three years are expected to be 1, 1, and 1 percent, and the 3-year term premium is 1 percent, than the 3-year bond rate will be A. 1 percent. B. 2 percent. C. 3 percent. D. 4 percent.

Q: Under an activist rule,a. the growth rate of money supply is greater than the inflation rate.b. monetary policy is allowed to change over the course of the business cycle. c. the growth rate of money supply is lower than the inflation rate.d. monetary policy is not changed over the course of the business cycle.

Q: A money-growth rule that responds to the state of the economy is rule. a. a laggingb. a leadingc. a nonactivist d. an activist

Q: The additional incentive that the purchaser of a Treasury security requires to buy a long-term security rather than a short-term security is called the A. risk premium. B. term premium. C. tax premium. D. market premium.

Q: According to the liquidity premium theory of the term structure A. bonds of different maturities are not substitutes. B. if yield curves are downward sloping, then short-term interest rates are expected to fall by so much that, even when the positive term premium is added, long-term rates fall below short-term rates. C. yield curves should never slope downward. D. interest rates on bonds of different maturities do not move together over time.

Q: A money-growth rule that does not respond to the state of the economy is a rule. a. laggingb. leadingc. nonactivist d. activist

Q: According to the liquidity premium theory of the term structure A. because buyers of bonds may prefer bonds of one maturity over another, interest rates on bonds of different maturities do not move together over time. B. the interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds plus a term premium. C. because of the positive term premium, the yield curve will not be observed to be downward sloping. D. the interest rate for each maturity bond is determined by supply and demand for that maturity bond.

Q: If the growth rate of the money supply is 4 percent, the growth rate of velocity of money is 1 percent, and real output growth is 2 percent, what is the inflation rate?a. −3 percent b. −1 percent c. +1 percent d. +3 percent

Q: If the growth rate of the money supply is 5 percent, the inflation rate is 2 percent, and real output growth is 2 percent, what is the growth rate of the velocity of money?a. −5 percent b. −1 percent c. +1 percent d. +5 percent

Q: If bonds with different maturities are perfect substitutes, then the ________ on these bonds must be equal. A. expected return B. surprise return C. surplus return D. excess return

Q: If the growth rate of velocity is -2 percent, the growth rate of money supply is 7 percent, and the inflation rate is 3 percent, what is the growth rate of real output?a. 1 percent b. 2 percent c. 3 percent d. 4 percent

Q: According to the expectations theory of the term structure, the interest rate on a long-term bond will equal the ________ of the short-term interest rates that people expect to occur over the life of the long-term bond. A. average B. sum C. difference D. multiple

Q: If velocity of money is 6, the price level is 1.2, and real output is worth $1,100 billion, what is the money supply?a. $65 billionb. $153 billionc. $220 billiond. $5,500 billion

Q: Economists' attempts to explain the term structure of interest rates A. illustrate how economists modify theories to improve them when they are inconsistent with the empirical evidence. B. illustrate how economists continue to accept theories that fail to explain observed behavior of interest rate movements. C. prove that the real world is a special case that tends to get short shrift in theoretical models. D. have proved entirely unsatisfactory to date.

Q: If the velocity of money is 8.2, the money supply is $223 billion, and real output is $958 billion, what is the price level?a. 0.5 b. 0.8 c. 1.7 d. 1.9

Q: An inverted yield curve A. slopes up. B. is flat. C. slopes down. D. has a U shape.

Q: If the velocity of money in an economy is 5, money supply is $350 billion, and the price level is 5, the real output is wortha. $1,750 billion b. $1,200 billion c. $2625 billion d. $5250 billion

Q: When yield curves are downward sloping A. long-term interest rates are above short-term interest rates. B. short-term interest rates are above long-term interest rates. C. short-term interest rates are about the same as long-term interest rates. D. medium-term interest rates are above both short-term and long-term interest rates.

Q: If the money supply is $300 billion, the price level is 1.3, and the real output is 1,300 billion, what is the velocity of money?a. 0.33 b. 3c. 5.63d. 300,000

Q: When yield curves are flat A. long-term interest rates are above short-term interest rates. B. short-term interest rates are above long-term interest rates. C. short-term interest rates are about the same as long-term interest rates. D. medium-term interest rates are above both short-term and long-term interest rates.

Q: When yield curves are steeply upward sloping A. long-term interest rates are above short-term interest rates. B. short-term interest rates are above long-term interest rates. C. short-term interest rates are about the same as long-term interest rates. D. medium-term interest rates are above both short-term and long-term interest rates.

Q: Total spending divided by the money supply equals a. the reserve requirement.b. the transactions demand for money. c. the money multiplier.d. the velocity of money.

Q: The typical shape for a yield curve is A. gently upward sloping. B. mound shaped. C. flat. D. bowl shaped.

Q: The equation that says money times velocity equals total spending is known as a. the national income identity.b. purchasing-power parity. c. a covenant.d. the equation of exchange.

Q: If a dollar of money is used 5 times in transactions in an economy over the course of a year and the supply of money is $120 billion, what is the volume of total spending in the economy?a. $5 billionb. $600 billion c. $240 billion d. $20 billion

Q: Differences in ________ explain why interest rates on Treasury securities are not all the same. A. risk B. liquidity C. time to maturity D. tax characteristics

Q: A plot of the interest rates on default-free government bonds with different terms to maturity is called A. a risk-structure curve. B. a default-free curve. C. a yield curve. D. an interest-rate curve.

Q: The average number of times a dollar of money is used for transactions over the course of a year is referred to as thea. money multiplier. b. velocity of money. c. money growth rate. d. extent of exchange.

Q: The term structure of interest rates is A. the relationship among interest rates of different bonds with the same maturity. B. the structure of how interest rates move over time. C. the relationship among the term to maturity of different bonds. D. the relationship among interest rates on bonds with different maturities.

Q: Monetarists think thata. money growth is closely related to inflation in the long run. b. money demand is unstable in the long run.c. the central should focus on short run economic fluctuations. d. the central bank should rely on discretionary policy making.

Q: Which of the following bonds would you prefer to be buying? A. a $10,000 face-value security with a 10 percent coupon selling for $9,000 B. a $10,000 face-value security with a 7 percent coupon selling for $10,000 C. a $10,000 face-value security with a 9 percent coupon selling for $10,000 D. a $10,000 face-value security with a 10 percent coupon selling for $10,000

Q: From 1991 to 2001, Argentina established commitment by a. following the Taylor rule.b. following a strict money growth rule. c. establishing a currency board.d. using a system of inflation targeting.

Q: Which of the following $1,000 face-value securities has the lowest yield to maturity? A. a 5 percent coupon bond selling for $1,000 B. a 10 percent coupon bond selling for $1,000 C. a 15 percent coupon bond selling for $1,000 D. a 15 percent coupon bond selling for $900

Q: Which of the following is an useful indicator of the stance of monetary policy?a. The income tax rateb. The federal funds ratec. The exchange rated. The rate of unemployment

Q: Which of the following $1,000 face-value securities has the highest yield to maturity? A. a 5 percent coupon bond with a price of $600 B. a 5 percent coupon bond with a price of $800 C. a 5 percent coupon bond with a price of $1,000 D. a 5 percent coupon bond with a price of $1,200

Q: People know that the Fed has the incentive to announce that the inflation rate will be 3 percent next year, so people will build 3 percent inflation into their wage negotiations. But then the Fed has the incentive to increase inflation above 3 percent to make the economy grow faster. This type of phenomenon is known asa. inflation targeting. b. time inconsistency. c. McCallum's rule.d. an expectations trap.

Q: Which of the following $5,000 face-value securities has the highest yield to maturity? A. a 6 percent coupon bond selling for $5,000 B. a 6 percent coupon bond selling for $5,500 C. a 10 percent coupon bond selling for $5,000 D. a 12 percent coupon bond selling for $4,500

Q: When the central bank chooses a policy at one date, which leads people to make decisions based on that policy, which then causes the central bank to choose a different policy at a later date, then there is said to bea. irrational expectations. b. time inconsistency.c. a liquidity trap.d. an expectations trap.

Q: Which of the following $1,000 face-value securities has the highest yield to maturity? A. a 5 percent coupon bond selling for $1,000 B. a 10 percent coupon bond selling for $1,000 C. a 12 percent coupon bond selling for $1,000 D. a 12 percent coupon bond selling for $1,100

Q: Which of the following is likely to happen if people expect the inflation rate to be high and the central bank follows atight monetary policy?a. The economy will enter into a recession.b. The level of economic activity will increase.c. The actual inflation rate will rise. d. The federal funds rate will fall.

Q: A $10,000 8 percent coupon bond that sells for $10,000 has a yield to maturity of A. 8 percent. B. 10 percent. C. 12 percent. D. 14 percent.

Q: ______ is said to occur when policymakers must increase inflation in response to an increase in the expected inflation rate.a. A liquidity trapb. An expectations trap.c. An adaptive expectations trapd. An inflation trap

Q: The ________ is below the coupon rate when the bond price is ________ its par value. A. yield to maturity; above B. yield to maturity; below C. discount rate; above D. discount rate; below

Q: The Fed is said to tighten policy when ita. decreases both the money growth and the federal funds rate.b. decreases the money growth and increases the federal funds rate. c. increases both the money growth and the federal funds rate.d. increases the money growth and decreases the federal funds rate.

Q: The yield to maturity is ________ than the ________ rate when the bond price is ________ its face value. A. greater; coupon; above B. greater; coupon; below C. greater; perpetuity; above D. less; perpetuity; below

Q: When a central bank decreases money growth, the bank is said to____ monetary policy.a. tightenb. loosenc. destabilized. ease

Q: The price of a coupon bond and the yield to maturity are ________ related; that is, as the yield to maturity ________, the price of the bond ________. A. positively; rises; rises B. negatively; falls; falls C. positively; rises; falls D. negatively; rises; falls

Q: Why does the Taylor rule have such wide appeal?

Q: The ________ of a coupon bond and the yield to maturity are inversely related. A. price B. par value C. maturity date D. term

Q: Suppose the federal funds rate is 4.4 percent and you know that the Fed is following the Taylor rule. You don't know the Fed's inflation target, but the equilibrium real interest rate is 4 percent, the inflation rate is 3 percent, the weight on the GDP gap is 0.4, the weight on the inflation gap is 0.6 and nominal GDP is 2 percent points below its target. Calculate the Fed's inflation target from this information.

Q: Which of the following are TRUE for a coupon bond? A. When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate. B. The price of a coupon bond and the yield to maturity are positively related. C. The yield to maturity is greater than the coupon rate when the bond price is above the par value. D. The yield is less than the coupon rate when the bond price is below the par value.

Q: Suppose (real) output is thought to be 2 percent above potential with an inflation rate of 3a. percent over the past year. The weights on the output gap and inflation gap are each 1/2. The inflation target is 1 percent. If you are sure that the equilibrium real federal funds rate is 3 percent, what is the Fed's setting for the federal funds rate, according to the Taylor rule?b. If you are sure that the equilibrium real federal funds rate is 2 percent, what is the Fed's setting for the federal funds rate, according to the Taylor rule?

Q: The present value of an expected future payment ________ as the interest rate increases. A. falls B. rises C. is constant D. is unaffected

Q: If actual output is denoted yand potential output is denoted y*, the output gap isa. [(y − y*)/ y*] × 100.b. [(y − y*)/ y] × 100. c. [(y* − y)/ y*] × 100. d. [(y* − y)/ y] × 100.

Q: The concept of ________ is based on the common-sense notion that a dollar paid to you in the future is less valuable to you than a dollar today. A. present value B. future value C. interest D. deflation