Assignment

1. What is the best definition of net worth?
a special type of assets
a special type of liability
assets - liabilities

2. All semester we've talked about money. In this part of the course, we simplify things a bit by assuming that there is no cash or currency (in the next course you look at adding that in). We are also using balance sheets extensively. Thus, on a bank balance sheet, money is and on a household balance sheet it is
an asset, an asset an asset, a liability
an asset, a form of net worth a liability, an asset
a liability, a liability
a liability, a form of net worth a form of net worth, an asset a form of net worth, a liability
a form of net worth, a form of net worth

3. Suppose a bank has $5 M in reserves, $200 M in loans made to its customers, and its customers have $200 M on deposit with this bank. In addition, the required reserve ratio (RR) is 5%. This bank bankrupt and it have sufficient reserves to meet its reserve requirement.
is, does
is, does not is not, does
is not, does not

4. Understanding balance sheets of households and banks is critical for this part of the course (and understanding household balance sheets is critical for your financial health). Below are several items that appear on balance sheets. Which of the following is an asset for a bank and a liability for a household? There might be more than one answer.
bank net worth bank reserves consumer loans consumer deposits

5. This question reviews inflation and a price index. For the sake of this question, let's say that inflation, as measured by the CPI, declined. Then the CPI would be sure to fall.
true
false

6. Earlier in the course we looked at what are sometimes called "index numbers." They are a pure number (not measured in dollars, for example) and have a base year or period. One or more of the following are an index number -- which ones?
real GDP CPI
nominal GDP
the unemployment rate GDP deflator
federal funds rate consumption (C)

7. A key part of this part of the course is how banks create money (note that this is different than a bank making a profit
-- a profit is their revenues - their costs). Money is a term we defined earlier in the course. The question here: if a bank makes a loan to a customer, that bank's net worth will not change when the loan is made. Note that this is before the loan money is spent by the customer taking out the loan.
true
false

8. Which more realistically shows what is happening in the economy?
static aggregate supply and demand
dynamic aggregate supply and demand

9. Recall how a bond offers an investor fixed nominal payments in the future. The amount at maturity is the "face value" and some bonds offer periodic payments as well ("coupons," which are often paid every 6 months). Large corporations and governments issue bonds to borrow money (the amount of Treasury bonds outstanding is the federal debt and the amount of bonds sold in a given year is the deficit).

Specifically, the U.S. Treasury sells Treasury Bills, Treasury Notes, and Treasury Bonds (often known as T-Bills, T-Notes, and T-Bonds). T-Bills have maturities up to 1 year and their owner only gets one payment, the face value, as a benefit of owning the bond. T-Notes (2-10 year maturities) and T-Bonds (20 and 30 years) also have face values at maturities as well as twice yearly coupon payments. In class I showed an example of an 8 year T-Note with some attached coupons. Note that these bonds are securities as they are a financial asset that can be bought and sold by the public (much like how corporate stock is bought and sold).

Here, let's focus on a T-Bill with a one year maturity and a face value of $10,000. If you wished to earn the most you could on this investment, what is the price you'd be willing to pay for this this security?

the lowest price possible a price just above $10,000 a price just below $10,000 a price as high as possible

10. T-Bills come with a variety of face values; these are set when the U.S. Treasury auctions them off and potential buyers know them as well. For this question, let's use one with a face value of $1,000,000 with a maturity of one year. Let's also say that its current market price is $960,000. What would be its interest rate?
more than 3.5%
between 2.5% and 3.5%
less than 2.5%

11. In Section 4 we studied both static and dynamic aggregate supply and demand. One key issue is which to use where. Thus, with this in mind, for which of the following would you use static aggregate supply and demand analysis? The alternative would be dynamic aggregate supply and demand analysis. There might be more than one answer.

As we didn't spend much time on this in class, this question is worth 0 points. Thus, it is practice with no penalty for errors. We'll only do the most basic questions on dynamic aggregate supply and demand for credit.

If government purchases increases, does real GDP grow or shrink.

The economy is currently growing at 2%. Would the growth rate be more if the Fed lowered the federal funds rate? Does the price level rise or fall if taxes fell?

The current inflation rate is about 1%. If taxes fell, would the inflation rate rise?

12. Say that the U.S. is in a typical expansion with a bit of inflation. Then, monetary policy changes and the Fed increases the federal funds rate by a small amount, say 0.5%. Which of the following is most likely?

We didn't spend much time on this in class, so it is worth 0 points. Thus, you can try this out without worry. We'll only do the most basic questions on dynamic aggregate supply and demand for credit.

less inflation less growth recession deflation
a larger increase in prices
a larger increase in real GDP