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Unformatted text preview: Chapter 11: Money, Banking, and the Financial Sector 1. True or False: When the interest rate rises, the price of existing bonds also rises. FALSE ; When interest rates rise, people can earn more on new bonds that pay the new, higher interest rate. People will only buy older bonds with lower interest rates if their prices fall. As interest rates rise, bond prices fall. 2. Suppose you take out a loan from the bank in order to purchase a washer and dryer. The nominal interest rate is 8%. If inflation falls just after you take out the loan, you will end up paying a HIGHER real interest rate. The real interest rate is the nominal rate adjusted for the inflation rate: Real Interest Rate = Nominal Interest Rate - Inflation Rate As interest rates fall, bond prices: RISE . 3.1 Darlene wants to purchase a new computer and go to the Caribbean for spring break. The computer costs $899 and the vacation costs $650. She only has $1,100 in her checking account, so she cannot afford to purchase both. After much thought, Darlene buys the computer and writes a check for $899 Which choice is an example of money as a medium of exchange? Darlene writes a check for $899. (Sam paid $139.99 for the DVD player.) 3.2 Which choice is an example of money as a store of wealth? Darlene has $1,100 in her checking account. (Sam saved $30 per week.) 3.3 Which choice is an example of money as a unit of account? The price of the computer is more than the price of the vacation. (The Panasonic model cost less than the Sony model.) 4.1 Bill has the following assets: $600 in a money-market mutual fund $75 in his wallet A $3,000 small time deposit that matures in four years $500 in a savings account 50 shares of McDonald's stock, which currently sells for $20 per share $175 in a checking account What is the dollar value of Bill's assets that are considered part of M1? $250 ; M1 consists of coins and currency in circulation, traveler's checks, and demand deposits (funds in checking accounts). Bill has $75 in currency and $175 in his checking account, totaling $250. $645 (Jackie) 4.2 What is the dollar value of Bill's assets that are considered part of M2? $4350 ; M2 consists of everything in M1, plus savings deposits, small time deposits (under $100,000), and money-market mutual funds. The only item on the list that is not part of M2 is the value of McDonald's stock. The total of the other components ($600 + $75 + $3,000 + $500 + $175) equals $4,350....
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