An increase in the Fed’s federal funds rate target affects aggregate spending by causing

A decrease in the present value of income from assets.

An appreciation of the dollar.

According the 1994 study by Gertler and Gilchrist, monetary policy has

a bigger impact on small firms than large firms.

According to the Taylor rule, the Fed should _____ interest rates when inflation rises above its long-run target and _____ interest rates when output falls below potential.

increase; lower

output equals its potential

the neutral real interest rate plus the expected rate of inflation.

Reasons why the Fed might deviate from the Taylor rule in setting interest rates include the following:

A financial crisis is underway.

& Nominal interest rates are at or near zero.

depends mainly on what people think other people will pay for it.

Which of the following statements about the Tulip Bulb Bubble is (are)

false?

Tulip bulbs had no intrinsic value to consumers. &

The government tried to convince people that tulip bulb prices were too high.

prices of shares in companies

Ability to buy stocks on margin.

& Investment pools.

Insufficient lending by the Fed through the discount window.

& Failure by the Fed to use open market operations to increase the monetary base.

Which of the following statements about the high-tech bubble of the late 1990s and early 2000s is

false?

The collapse of the bubble caused one of the worst recessions in U.S. history

Which of the following statements about the U.S. housing bubble of the early to mid-2000s is

true?

Adjusted for inflation, the rise in house prices was unprecedented

Protect uninsured depositors and creditors of large failing banks to prevent contagion to other banks.

banks were reluctant to lend to each other due to uncertainty about the quality of their assets.

the request would signal weakness.

Made risky loans. &

Injected equity in troubled banks

the bankruptcy of Lehman Brothers

the interest rate on Treasury securities declined.

Suppose the investor does not care about risk and believes the market interest rate is likely to

fall after she makes her investment. Which bond will she prefer, Coupon Bond or ZCB?

Suppose the investor does not care about risk and believes the market interest rate is likely to

rise after she makes her investment. Which bond will she prefer, Coupon Bond or ZCB?

not perfectly correlated

diversification reduces risk

Unsystematic risk

is represented by distance _____AB_______.

Systematic risk

is represented by distance ____BC________.

Suppose the average correlation among the securities in the pool changes, causing the curve to shift downward as in the diagram (Curve X to Curve Y). (Standard Deviation decreases in the shift downward) What can we infer happened to the average correlation among the securities?

It fell.

The correlation coefficient for the two securities is not equal to 1.

A rational investor would never choose which of the following portfolios?

A at .08 Standard Deviation

B at .15 Standard Deviation

C at .113 Standard Deviation

point A

Which of the following portfolios would a rational investor prefer?

A at .18 Standard Deviation

B at .15 Standard Deviation

C at .113 Standard Deviation

It is impossible to say without knowing the investor’s attitude toward risk.

The correlation coefficient between the securities declined

Undervalued.

It will remain unchanged because the increase in risk can be diversified away.

A security is a claim on ________ of income.

future flows of income

If the market price of a bond is less than the sum of the face value of a bond and all the coupon payments, the bond ________.

pays interest

A stock entitles the person who owns it to _____

a percentage of the firm’s future profits

Which of the following can be described as "direct finance"?

You buy $3,000 worth of AT&T bonds

strong financial systems; economic growth in the decades after the 1960s

They help channel funds from savers to entrepreneurs with good investment projects.

& They allow entrepreneurs to issue stocks and bonds and avoid taking a lot of risk by investing in their own projects.

& They allow entrepreneurs to issue stocks and bonds and avoid tying up their money by investing in their own illiquid projects.

the parties who are most eager to engage in a transaction are the ones who are least desirable to the parties on the other side.

moral hazard

these companies are well known to the public and can therefore sell securities on favorable terms.

which type of financial system a country has is less important than its overall financial development and the strength of its investor protections and legal institutions.

the government in a centrally planned economy can control the economy’s resources and require a high rate of saving and investment.

the opportunity cost of holding money.

negative; nominal interest rate

the total liabilities of the Fed to the private sector

decrease; decreases

increases; stays the same; stays the same

reduce the interest rate.

Raises consumption spending by increasing people’s wealth.

& Increases investment spending by decreasing the cost to firms of raising funds by issuing new equity.

Increased pessimism about borrowers’ chances of repaying their loans

& More stringent regulation and supervision of banks

increases; investment up; increases

Write a check.

& Pay with a debit card.

Reduce the supply of reserves to 250 through open-market sales

& Increase the interest rate on reserves to .075

sum of currency in circulation and bank reserves

 (B = C + R); the Federal REserve's liabilities to the private sector of the economy

Measure of the money supply (M1 or M2)

Value of a future dollar in terms of today's dollars;

$1 in n years = $1/(1+i)^n today