ECO 340 QUIZZES - FALL 2005 - COMPLETE,

WITH SOLUTIONS AT END OF EACH QUIZ

Quiz 1 / Eco 340 / Sept. 8, 2005

1. Name one of the three basic functions of money.

2. Commercial paper and Treasury bills are examples of _______-market instruments.

3. Financial intermediation is the process by which banks and other financial institutions connect savers with _______________.

4. Today's currency is fiat money, which, unlike commodity money, has no _______________ value.

5. The smallest of the main measures of the money supply, containing mostly currency and checking deposits, is ______.

Extra credit (E.C.). According to the Federal Reserve's latest report on U.S. business conditions, how was the economy doing prior to Hurricane Katrina?

1. A bond that pays its face value upon maturity and makes regular interest payments each year is called a _______________ bond.

2. A bond that pays its face value upon maturity but makes no payments before maturity is called a _______________ bond.

3. When market interest rates go up, the resale prices of old bonds go _________.

4. A _______________ asset can be readily converted into cash.

5. If you borrow $100 today and must repay that amount a year from now plus $5 interest, then the interest rate on your loan is ______.

E.C. The Federal Reserve is widely expected to ________________ its short-term interest rate targets next week. [increase / decrease / not change]

Solutions to Quiz 2
1. coupon
2. discount
3. down
4. liquid
5. 5%
E.C. increase

1. Because of the compounding of interest, a bank account paying 1% annual interest will double in value not in 100 years, but in about _____ years.

2. The real interest rate is (approximately) the nominal interest rate minus the ____________ rate.

3. The present discounted value (PDV) of $100 today is $_____.

4. The PDV of $100 to be paid a year from now, if the interest rate is 5%, is about $____.

5. The PDV of a future payment is _____________ if the interest rate is higher.
[ lower / higher ]

E.C. What did the Federal Open Market Committee decide to do this week?

Solutions to Quiz 3
1. 70 (or 72)
2. inflation
3. $100
4. $95
5. lower
E.C. Raise the federal-funds-rate target by 0.25 percentage point (25 basis points).

Theory of Asset Demand: The demand for an asset depends positively on wealth, and (relative to other assets) the asset's

1. ________________________________,

2. ________________________________, and

3. ________________________________.

4. If the marginal tax rate is 50%, then a corporate bond paying 8% interest has an after-tax interest rate of only _________%.

5. If the demand for bonds increases, then the equilibrium price of bonds will rise and the interest rate will ___________________.

E.C. How badly did Hurricane Katrina hurt the overall U.S. labor market in September? (Include a number or two with your answer.)

Solutions to Quiz 4
1. expected return
2. safety
3. liquidity
4. 4%
5. fall
E.C. Not much overall: the unemployment rate rose slightly, from 4.9% to 5.1%, and payroll employment fell by 35,000. (The job losses from Katrina itself were estimated at 230,000, but were mostly offset by gains in non-disaster areas.)

***

Quiz 5 / Eco 340 / Oct. 20, 2005

1. Interest rates typically ________ in recessions and __________ in recoveries.

2. An increase in the expected inflation rate causes the nominal interest rate to ____________.

3. That relationship between expected inflation and interest rates is called the ___________ effect.

4. A bond with a rating of Aaa has a very _________ degree of risk. [high / low]

5. Long-term bonds typically pay ___________ rates of interest than short-term bonds.
[higher / lower]

E.C. Two Fed officials said yesterday that interest rates need to keep on ___________.

Quiz 6 / Eco 340 / Oct. 27, 2005

1. A yield curve shows the interest rates on current bonds of different ___________________.

2. The basic valuation method of stocks [i.e., fundamental analysis] is that a stock's price should be the _________ of its future dividends or earnings. [three-letter abbreviation]

3. A person with ______________ expectations uses all available, relevant information to make the best possible forecast of the future.

4. The ___________-market theory of the stock market says that stock prices reflect all available, relevant information.

5. An _________ fund is a mutual fund that holds the same stocks as a market average like the S&P 500.

E.C. This week the president nominated _________________________ to be the next chairman of the Federal Reserve.

1. American firms raise more than half their external funds through _____________.

2. Firms that issue stocks, bonds, or other marketable securities tend to be large and ____________________________________________.

3. ________________________________ is a market failure that arises after a contract is signed, if asymmetric information between the two parties to a contract makes it possible for one party to hurt the other party's financial interests (e.g., if a driver buys insurance and then starts driving recklessly).

4. ___________________________ management is the area of bank management that deals with getting a good risk-adjusted return on the banks loans, securities, etc.

5. ___________________________ management is the area of bank management that deals with acquiring a large amount of funds at low cost.

E.C. Percentage of American private-sector workers who have a pension fund: ______.

Solutions to Quiz 8
1. loans
2. well established
3. Moral hazard
4. Asset
5. Liability
E.C. 20%

***

Quiz 9 / Eco 340 / Tues., Nov., 22, 2005

1. Which country has more banks - the United States or Japan? _________________

2. Interstate ____________________ restrictions have historically shielded many small banks from competition.

3. The main reason why the number of banks has fallen by about half since 1985 is _____________________________.

4. The 1933 Glass-Steagall Act separated the commercial banking and _____________________________ industries.

5. Banks are still profitable, but _________________________ banking has been on the decline, in the sense that accepting deposits and making loans is an ever-shrinking share of what banks do, and vice versa.

Solutions to Quiz 9
1. United States
2. branching
3. bank consolidation
4. securities
5. traditional

***

Quiz 10 / Eco 340 / Th., Dec. 1, 2005

1. Depository institutions' share of financial intermediary assets has fallen in recent decades, mainly because the share of assets held by ________________________ has fallen off dramatically.

2. _______________ funds and ________________ funds are the two types of financial intermediaries whose share of assets has grown the most.

3. The central bank of the United States is called the __________________________.

4. The Fed's main liabilities are not deposits but _____________________________.

5. The Fed's main assets are not loans but ___________________________________.

E.C. The U.S. economy grew 4.3% in the last quarter. Is that considered good? ______

Solutions to Quiz 10
1. thrifts (S&L's in particular)
2. Mutual; pension
3. Federal Reserve System
4. currency (Federal Reserve Notes)
5. government bonds
E.C. Yes.

***

1. OMO stands for _______________________________________.

2. If the Fed is conducting expansionary OMO, then it is ________________ T-bills from banks and ____________________ the banks' reserve accounts at the Fed.

3. High inflation in the 1970s, combined with regulations that did not allow checking accounts to pay interest, helped give rise to _____________________, which could pay high rates of interest and offered check-writing privileges.

4. The Fed's OMO are handled by the regional Fed bank in ______________.

5. An independent central bank is one that is relatively free of _____________ influence.

E.C. Business ___________________ grew at an annualized rate of 4.7% last quarter, raising hopes that the economy can grow rapidly without higher inflation.

E.C. #2. Average annualized real GDP growth rate, 1995-2005 = ________.

Solutions to Quiz 11
1. open market operations
2. buying; crediting
3. MMFs (money-market funds)
4. New York
5. political
E.C. productivity
E.C. #2.  3.4%