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Unformatted text preview: ECON 116A Exam One Answer Key FALL 2008 October 16, 2008 Question 1 a. A bond is an IOU promising its owner a set payment at a speci ed future date. True: by de niton. b. The net addition of new residential housing is counted in the household consumption category of GDP. False: this is residential investment. c. The value of total inventories is counted as part of the investment component of GDP. False: it is change in inventories that goes into investment. d. Every risk averse agent would decline all gambles with expected payout $0. True: by de ntion, a risk averse agent declines a fair gamble. e. Gross Domestic Product (GDP) includes intermediate goods and services to account for value added. False: only nal goods and services go into GDP calculations. f. The Consumer Price Index measures the cost of all nal goods and services produced within a country. False: the CPI only considers a bundle of goods and services consumed by the representative consumer. g. A pension indexed for in ation usually increases by an amount equal to the percentage increase in the CPI . True: by de nition. h. Debt nancing refers to the corporate practice of selling shares of stock to raise money. False: this is equity nancing. i. In a closed economy, private saving plus public saving equals investment. 1 True: this is an equilibrium condition. j. Development of mortgaged backed securities increased risk spreading in nancial markets. True: tranching into MBS means mortgage risk distributed across possibly diverse holders. k. Opportunity cost refers to the resources that must be sacri ced to gain more of another good or service. True: by de nition. l. Crowding out refers to government budget de cits reducing the supply of loanable funds in credit markets. True: this is the only example of crowding out we encountered in lectures. Consequently increased interest rate chokes I . m. 1/5th labor hours catches 1lb sh or picks 2 lbs berries so opportunity cost of a lb of sh is 2/5th lbs of berries. False: the opportunity cost of a lb of sh is 2 lbs berries. n. If banks hold no excess reserves and the money supply is MS =R/r, the money supply multiplier equals r. False: the multiplier is 1/r. o. The discount rate is the rate of interest the Fed charges banks for loans. True: the discount rate is the interest rate the Fed charges depository institutions that borrow reserves from it. p. Central Bank open market operations target the federal funds rate True: this is a target of the Fed. q. As the price level rises, the value of money decreases . True: as the price level rises, the purchasing power of the same nominal amount is depreciated. r. The nominal interest rate during 1978 was 15% when the real interest rate is 0% and in ation rate is 7.5%....
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- Fall '07