Money and Banking
Fall 2000
Practice Questions #1
Goal:
- Review
introductory material
- Provide
numerical examples of material presented in class
- Provide
a list of relevant terms
- Below
is a list of terms discussed in class.
Provide a definition for each and where appropriate use the terms
in an example. In addition, write
a brief statement of the term’s significance.
Aggregate Output GDP Deflator
Aggregate Income Consumer Price Index (CPI)
Securities Financial
Markets
Budget Deficits Asset
Business Cycles Liability
Inflation Indirect
Finance
Money Direct Finance
Interest Rates Debt
Monetary Policy Equity
Financial Intermediation Maturity
GDP Primary
Market
Doublecounting problem Secondary
Market
Factors of Production Liquidity
Factor Market Money
Market
Real Values Capital
Market
Nominal Values Output Market
Sectors of the Economy
- Suppose
you purchase a one-year discount bond with a face value of $10,000 for
$8000. What is the interest rate
you will earn at the maturity date?
- Suppose
interest rates increase to 28%. If you decide to sell the bond you
purchased in problem 2 before its maturity date, what will be the maximum
price people will pay for it?
- Suppose
interest rates fall to 20%. Someone offers to buy the bond you purchased
in problem 2 for $8200. Should you
sell it to them?
- Suppose
the tax rate for the marginal investor is 10%. If the interest rate paid
on certificates of deposit is 5.25%, what must the interest rate on
municipal bonds be in order for the marginal investor to be indifferent
between purchasing municipal bonds or CDs?
- a. Suppose the tax rate for the marginal
investor decreases to 5%. If the
interest rate on certificates of deposit remains at 5.25%, what must the
rate on municipal bonds be in order for the marginal investor to be
indifferent between purchasing municipal bonds or CDs?
b.
Suppose an investor has a tax rate of 3%. Given your answer in (a),
which investment will this investor prefer?
- If a
dollar is worth one dollar when the price index is 100,
- what
is the value of the dollar if the price index increases to 200?
- What
is the value of the dollar if the price index increases to 300?
- What
is the value of the dollar if the price index increases to 400?
- What
is the value of the dollar if the price index increases to 170?
- What
is a generalized formula for the problems a) through d)?