Eco 372

Topics: Central bank, Federal Reserve System, Monetary policy Pages: 13 (2310 words) Published: July 22, 2014
Exercises – Topic 1 (Financial System and Role of Interest Rates)

1.What is produced and exchanged in the real sector?
A. Money.
B. Goods and services.
C. Financial assets.
D. All assets with a money price.

2.What is exchanged in the financial sector?
A. Money only.
B. Goods and services.
C. All financial assets.
D. All assets with a money price.

3.In a market economy, every real transaction has a corresponding: A. financial transaction.
B. financial liability.
C. real liability.
D. real asset

4.If the financial sector causes more to flow into spending than is saved, most likely: A. the supply of real assets will exceed the demand for real assets. B. there will be too many real assets produced.

C. the economy will experience inflation.
D. the economy will experience recession.

5.Flows that do not enter the spending stream enter the financial sector in the form of: A. saving.
B. investment.
C. real assets.
D. expenditures.

6.Every financial asset has a corresponding:
A. financial liability.
B. real liability.
C. real asset.
D. financial asset.

7.When you have $1,000 in a savings account at a bank:
A. the bank holds a financial asset of $1,000 and you hold a financial liability of $1,000. B. the bank holds a financial liability of $1,000 and you hold a financial asset of $1,000. C. both you and the bank now have a financial asset of $1,000. D. both you and the bank now have a financial liability of $1,000.

8.The interest rate is the price paid for the use of a:
A. real liability.
B. real asset.
C. financial liability.
D. financial asset.

9.When the interest rate rises, people are:
A. less likely to save, that is, sell a financial asset.
B. more likely to save, that is, sell a financial asset.
C. less likely to save, that is, purchase a financial asset. D. more likely to save, that is, purchase a financial asset.

10.Which of the following are examples of financial assets that pay a long-term interest rate? A. Saving deposits and checking accounts.
B. Mortgages and government bonds.
C. Cash and currency.
D. Money and CDs.

11.Which of the following are examples of financial assets that pay a short-term interest rate? A. Saving deposits and checking accounts.
B. Mortgages and government bonds.
C. Stocks and home loans.
D. Treasury bonds and foreign bonds.

12.The short-term interest rate is determined in the:
A. loanable funds market.
B. stock market.
C. exchange rate market.
D. money market.

13.The long-term interest rate is determined in the:
A. loanable funds market.
B. stock market.
C. exchange rate market.
D. money market.

14.Refer to the graph below –

I.Refer to the graph above. If the quantity of savings exceeds the quantity of investment, and all savings are not channeled back into investment, the long-term interest rate in this economy is: A. 5 percent.

B. 3 percent.
C. 1 percent.
D. 0 percent.

II.If the quantity of investment exceeds the quantity of loanable funds available in the market and some of the investment cannot channel the amount of savings, the long-term interest rate in this economy is: A. 5 percent.

B. 3 percent.
C. 1 percent.
D. 0 percent.

III.The distance representing the quantity of savings exceeding the quantity of investment in this market of loanable funds is: A. BA.
B. BC.
C. DA.
D. DE.

IV.The distance representing the quantity of investment exceeding the quantity of savings in this market of loanable funds is: A. BA.
B. BC.
C. DA.
D. DE.

15.Explain the effect of the following events on the interest rate in the loanable funds market. Demonstrate your answer graphically.

a.Tax revenue is lower than expected and people expect cities to default on municipal bonds. They sell their bonds and hold cash instead.

Decrease in supply


b.A significant number of people begin to use online banking services, allowing them to...
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