Question

1)You decide to buy a debt instrument that matures in 6 months. Upon maturity you will receive $1052. You would purchase this debt instrument in the:

a. money market

b. foreign exchange market,

c. intermediate term bond market

d. equity market

2) Assume you found $10,000 in $100 bills in your attic. The government said you could keep the money so you deposit it into your savings account. After depositing the money in your savings account, which of the following is true?

a. all of the answers are correct

b. M1 has decreased by $10,000 (I chose this answer and it was incorrect)

c. M2 remains unchanged

3. Households receive income for supplying land, labor, capital, and entreprenuership. The income is distributed among them by which actions:

a. all goes to consumption, taxes, and savings

b. all goes to consumption and taxes (I chose this answer and it was incorrect)

c. All goes to savings and consumption

d. all is consumed

4. Which of the following can be described as involving indirect finance?

a. you make a loan to your neighbor

b. you buy a U.S. treasury bill from the U.S. treasury

c. you make a deposit at a bank

Answer 1

(1) (a)

Short term bonds (less than 1 year) are traded in the money market.

(2) (a)

M1 = Currency + Checking account

M2 = M1 + Savings account = Currency + Checking account + Saving account

So, depositing currency will decrease currency by $10K and decrease My1 by $10K. At the same time, savings account will increase by $10K. For M2 value, currency will decrease and saving account will increase each by $10K, so M2 is unchanged.

(3) (c)

Income = Consumption + Savings

(4) (c)

In indirect finance, lending and borrowing is done via a financial intermediary such as a bank.