Money & Banking End of Chapter Questions (Exam 1) – Flashcards
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3.1) Why is simply counting currency an inadequate measure of money?
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There are other liquid assets similar to currency that can be used as money to purchase goods and services.
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3.5) Money performs its three functions at all? times, but sometimes we can stress one in particular. For each of the following? situations, identify which function of money is emphasized.
a) Brooke accepts money in exchange for performing her daily tasks at her? office, since she knows she can use that money to buy goods and services.
b) Tim wants to calculate the relative value of oranges and? apples, and therefore checks the price per pound of each of these goods quoted in currency units.
c) Maria is currently pregnant. She expects her expenditures to increase in the future and decides to increase the balance in her savings account.
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a) medium of exchange
b) unit of account
c) store of value
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3.6) In? Brazil, a country that underwent a rapid inflation before? 1994, many transactions were conducted in dollars rather than in? reals, the domestic currency. During this? period, the US dollar served what property or properties in? Brazil?
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Unit of account
Medium of exchange
Store of value
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3.12) Rank the following assets from most liquid to least liquid: Checking account deposits, Houses, Currency, Automobile, Savings deposits, Common stock
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1. Currency (most liquid)
2. Checking account deposits
3. Savings account deposits
4. Common Stock
5. Automobile
6. House (least liquid)
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3.13) Which of the Federal? Reserves measures of the monetary aggregates—M1 or M2—is composed of the most liquid? assets? Which is the larger? measure?
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Most liquid: M1
Larger: M2
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3.15) M1, M2, or neither?
a) currency
b) Money market mutual funds -- non institutional
c) US Tbills -- less than 90 day maturity
d) small-denomination time deposits
e) large cap mutual funds
f) checkable deposits
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a) M1 & M2
b) M2
c) Neither
d) M2
e) Neither
f) M1 & M2
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3.16) Assume that you are interested in earning some return on idle balances you usually keep in your checking account and decide to buy some money market mutual fund shares by writing a check. Everything else the same, what is the effect on M1 and M2?
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M1: decrease
M2: no change
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4.1) Would a dollar tomorrow be worth more to you today when the interest rate is 20% or when it is 10%?
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10% ($ tomorrow is worth less to you with a higher interest rate)
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4.2) Formula used to calculate yield to maturity on a 20-yr 10% coupon bond with $1000 face value that sells for $2000
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p = C/(1+i) + C/(1+i)^2 + C/(1+i)^3 +...+ C/(1+i)^n + f/(1+i)^n
2000 = 100/(1.1) + 100/(1.1)^2 + ...+ 100/(1.1)^20 + 1000/(1.1)^20
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4.11) If i rates decline, would you rather be holding LT or ST bonds? Why? Which type of bond has greater i rate risk?
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long-term bonds because their price would increase more than the price of the? short-term bonds, giving them a higher return.
long-term bonds have greater i rate risk/sensitivity
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4.17) What is the YTM on a $1000 face-value discount bond maturing in one year that sells for $800?
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25%
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4.4) Do bondholders fare better when YTM increases or when it decreases? Why?
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Decreases - increase in the price of the bond and a decrease in potential capital losses
