The Economics of Money, Banking and Financial Markets: The Business School Edition 3rd Edition

1) During hyperinflations, A) the value of money rises rapidly B) money no longer functions as a good store of value and people may resort to barter transactions on a much larger scale C) middle-class savers benefit as prices rise D) money's value remains fixed to the price level; that is, if prices double

1) Financial institutions search for ________ has resulted in many financial innovations. A) higher profits B) regulations C) respect D) higher risk Answer: A Answer: A Answer: A 2) If the required reserve ratio is 15 percent, the simple deposit multiplier is A) 15.0 B) 1.5 C) 6.67 D) 3.33 Answer: C Answer: C Answer: C 3) Banks are important to the study of money and

1) Federal funds are A) funds raised by the federal government in the bond market B) loans made by the Federal Reserve System to banks C) loans made by banks to the Federal Reserve System D) loans made by banks to each other Answer: D Answer: D Answer: D 2) In the simple deposit expansion model, if the

1) From 1950-2011 the price level in the United States increased more than A) twofold B) threefold C) sixfold D) ninefold Answer: C Answer: C Answer: C 2) The Keynesian theory of money demand predicts that people will increase their money holdings if they believe that A) interest rates are about to fall B) bond prices are about to rise C)

1) The spread between interest rates on low quality corporate bonds and U.S. government bonds A) widened significantly during the Great Depression B) narrowed significantly during the Great Depression C) narrowed moderately during the Great Depression D) did not change during the Great Depression Answer: A Answer: A Answer: A 2) Everything else held constant, when the federal

1) Suppose that from a new checkable deposit, First National Bank holds eight million dollars on deposit with the Federal Reserve, one million dollars in required reserves, and faces a required reserve ratio of ten percent. Given this information, we can say First National Bank has ________ million dollars in

1) In recent years the interest paid on checkable and time deposits has accounted for around ________ of total bank operating expenses, while the costs involved in servicing accounts have been approximately ________ of operating expenses. A) 45 percent; 55 percent B) 55 percent; 4 percent C) 25 percent; 50 percent D) 50 percent;

1) Holding all other factors constant, the quantity demanded of an asset is A) positively related to wealth B) negatively related to its expected return relative to alternative assets C) positively related to the risk of its returns relative to alternative assets D) negatively related to its liquidity relative to alternative assets Answer: A Answer: A Answer:

1) If the liquidity effect is smaller than the other effects, and the adjustment to expected inflation is immediate, then the A) interest rate will fall B) interest rate will rise C) interest rate will fall immediately below the initial level when the money supply grows D) interest rate will rise immediately above the

1) An inverted yield curve A) slopes up B) is flat C) slopes down D) has a U shape Answer: C Answer: C Answer: C 2) The principal-agent problem would not occur if ________ of a firm had complete information about actions of the ________. A) owners; customers B) owners; managers C) managers; customers D) managers; owners Answer: B Answer: B Answer: B 3) Parties who

1) An expansionary monetary policy raises firms' cash flows by ________ interest rates. A) lowering real B) lowering nominal C) raising real D) raising nominal Answer: B Answer: B Answer: B 2) Which of the followings is a duty of the Board of Governors of the Federal Reserve System? A) Setting margin requirements, the fraction of the purchase price

1) A monetary policy strategy that uses a fixed exchange rate regime that ties the value of a currency to the currency of a large, low inflation country is called ________ targeting. A) exchange-rate B) currency C) monetary D) inflation Answer: A Answer: A Answer: A 2) The presence of so many commercial banks in the United States

1) The payments system is A) the method of conducting transactions in the economy B) used by union officials to set salary caps C) an illegal method of rewarding contracts D) used by your employer to determine salary increases Answer: A Answer: A Answer: A 2) A venture capital firm protects its equity investment from moral hazard through

1) Examples of off-balance-sheet activities include A) loan sales B) extending loans to depositors C) borrowing from other banks D) selling negotiable CDs Answer: A Answer: A Answer: A 2) The theory of portfolio choice indicates that factors affecting the demand for money include A) income B) nominal interest rate C) riskiness of money D) all the above Answer: D Answer: D Answer:

1) Financial innovation has caused A) banks to suffer declines in their cost advantages in acquiring funds, although it has not caused a decline in income advantages B) banks to suffer a simultaneous decline of cost and income advantages C) banks to suffer declines in their income advantages in acquiring funds, although it

1) Assume you are holding Treasury securities and have sold futures to hedge against interest-rate risk. If interest rates rise A) the increase in the value of the securities equals the decrease in the value of the futures contracts B) the decrease in the value of the securities equals the increase in

1) If the price of a euro (the European currency) increases from $1.00 to $1.10, then, everything else held constant, A) a European vacation becomes less expensive B) a European vacation becomes more expensive C) the cost of a European vacation is not affected D) foreign travel becomes impossible Answer: B Answer: B Answer: B 2) Everything else

1) Methods of financing government spending are described by an expression called the government budget constraint, which states the following: A) the government budget deficit must equal the sum of the change in the monetary base and the change in government bonds held by the public B) the government budget deficit must equal

1) According to rational expectations theory, forecast errors of expectations A) are more likely to be negative than positive B) are more likely to be positive than negative C) tend to be persistently high or low D) are unpredictable Answer: D Answer: D Answer: D 2) If the interest rate on euro-denominated assets is 13 percent and it

1) The primary goal of the European Central Bank is A) price stability B) exchange rate stability C) interest rate stability D) high employment Answer: A Answer: A Answer: A 2) Analysis of adverse selection indicates that financial intermediaries, especially banks, A) have advantages in overcoming the free-rider problem, helping to explain why indirect finance is a more important

1) In the figure above, the price of bonds would fall from P1 to P2 when A) inflation is expected to increase in the future B) interest rates are expected to fall in the future C) the expected return on bonds relative to other assets is expected to increase in the future D) the

1) When financial institutions are able to reduce the costs of information for each service they offer by applying the same information source to each service, we say that the financial institution is realizing A) economies of scope B) economies of scale C) increasing returns D) diminishing marginal returns Answer: A Answer: A Answer: A 2) An increase

1) Equity contracts account for a small fraction of external funds raised by American businesses because A) costly state verification makes the equity contract less desirable than the debt contract B) of the reduced scope for moral hazard problems under equity contracts, as compared to debt contracts C) equity contracts do not permit

1) One of the criticisms of Basel 2 is that it is procyclical. That means that A) banks may be required to hold more capital during times when capital is short B) banks may become professional at a cyclical response to economic conditions C) banks may be required to hold less capital during

1) Federal deposit insurance covers deposits up to $250,000, but as part of a doctrine called "too-big-to-fail" the FDIC sometimes ends up covering all deposits to avoid disrupting the financial system. When the FDIC does this, it uses the A) "payoff" method B) "purchase and assumption" method C) "inequity" method D) "Basel" method Answer: B Answer:

1) The interest rate on seasonal credit equals A) the federal funds rate B) the primary credit rate C) the secondary credit rate D) an average of the federal funds rate and rates on certificates of deposits Answer: D Answer: D Answer: D 2) The mound-shaped yield curve in the figure above indicates that short-term interest rates are

1) The monetary base minus reserves equals A) currency in circulation B) the borrowed base C) the nonborrowed base D) discount loans Answer: A Answer: A Answer: A 2) Keynes's liquidity preference theory indicates that the demand for money is ________ related to ________. A) negatively; interest rates B) positively; interest rates C) negatively; income D) negatively; wealth Answer: A Answer: A Answer: A 3) The

1) A smart card is the equivalent of A) cash B) savings bonds C) savings deposits D) certificates of deposit Answer: A Answer: A Answer: A 2) If reserves in the banking system increase by $100, then checkable deposits will increase by $400 in the simple model of deposit creation when the required reserve ratio is A) 0.01 B) 0.10 C)

1) The theory of PPP suggests that if one country's price level falls relative to another's, its currency should A) depreciate B) appreciate C) float D) do none of the above Answer: B Answer: B Answer: B 2) Suppose that the Federal Reserve conducts an open market sale. Everything else held constant, this will cause the demand for U.S.

1) If nominal GDP is $10 trillion, and velocity is 10, the money supply is A) $1 trillion B) $5 trillion C) $10 trillion D) $100 trillion Answer: A Answer: A Answer: A 2) Assuming initially that rr = 10%, c = 40%, and e = 0, an decrease in c to 30% causes the M1 money multiplier

1) Which of the following are reported as assets on a bank's balance sheet? A) Borrowings B) Reserves C) Savings deposits D) Bank capital Answer: B Answer: B Answer: B 2) Under exchange-rate targeting, the central bank in the targeting country ________ lose the ability to pursue its own independent monetary policy and any shocks to the anchor

1) The First Bank of the United States A) was disbanded in 1811 when its charter was not renewed B) had its charter renewal vetoed in 1832 C) was fundamental in helping the Federal Government finance the War of 1812 D) None of the above Answer: A Answer: A Answer: A 2) Which of the following are bank

1) If a bank has $200,000 of checkable deposits, a required reserve ratio of 20 percent, and it holds $80,000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet is A) $50,000 B) $40,000 C) $30,000 D) $25,000 Answer: A Answer: A Answer: A 2) A decrease in the foreign interest rate

1) When the exchange rate for the British pound changes from $1.80 per pound to $1.60 per pound, then, holding everything else constant, the pound has ________ and ________ expensive. A) appreciated; British cars sold in the United States become more B) appreciated; British cars sold in the United States become less C) depreciated;

1) Other things being equal, an increase in the default risk of corporate bonds shifts the demand curve for corporate bonds to the ________ and the demand curve for Treasury bonds to the ________. A) right; right B) right; left C) left; right D) left; left Answer: C Answer: C Answer: C 2) The money supply is ________

1) A coupon bond that has no maturity date and no repayment of principal is called a A) consol B) cabinet C) Treasury bill D) Treasury note Answer: A Answer: A Answer: A 2) High interest rates might cause a corporation to ________ building a new plant that would provide more jobs. A) complete B) consider C) postpone D) contemplate Answer: C Answer: C Answer:

1) According to Edward Kane, because the banking industry is one of the most ________ industries in America, it is an industry in which ________ is especially likely to occur. A) competitive; loophole mining B) competitive; innovation C) regulated; loophole mining D) regulated; innovation Answer: C Answer: C Answer: C 2) In the late 1990s and early 2000s, the

1) State whether the following statement is true or false AND explain why: "An increase in the interest rate paid on excess reserves will always cause an increase in the federal reserve funds rate." Answer: False. If the interest rate paid on excess reserves is set below the federal funds rate,

1) Researchers at the Federal Reserve found that M2 money demand functions performed ________ in the 1980s, with M2 velocity moving ________ with the opportunity cost of holding M2. A) poorly; erratically B) poorly; closely C) well; erratically D) well; closely Answer: D Answer: D Answer: D 2) Who has regulatory responsibility when a bank operates branches in

1) According to the segmented markets theory of the term structure A) bonds of one maturity are close substitutes for bonds of other maturities, therefore, interest rates on bonds of different maturities move together over time B) the interest rate for each maturity bond is determined by supply and demand for that

1) Under a fixed exchange rate regime, if the domestic currency is initially overvalued, that is, below par, the central bank must intervene to purchase the ________ currency by selling ________ assets. A) domestic; foreign B) domestic; domestic C) foreign; foreign D) foreign; domestic Answer: A Answer: A Answer: A 2) When I purchase a 10 percent coupon

1) The increase in the currency ratio during World War II was due to A) bank panics B) a drop in the rate of interest paid on checking deposits C) the spread of ATMs D) high taxes and illegal activities Answer: D Answer: D Answer: D 2) Prices and returns for ________ bonds are more volatile than those

1) ________ is the process of researching and developing profitable new products and services by financial institutions. A) Financial engineering B) Financial manipulation C) Customer manipulation D) Customer engineering Answer: A Answer: A Answer: A 2) Net worth can perform a similar role to A) diversification B) collateral C) intermediation D) economies of scale Answer: B Answer: B Answer: B 3) Everything else held constant, when

1) Everything else held constant, in the market for reserves, decreases in the interest rate paid on excess reserves affect the federal funds rate A) when the funds rate is below the interest rate paid on excess reserves B) when the funds rate equals the interest rate paid on excess reserves C) when

1) In the Baumol-Tobin analysis of the demand for money, either an increase in ________ or an increase in ________ increases money demand. A) income; interest rates B) brokerage fees; interest rates C) interest rates; the price level D) brokerage fees; income Answer: D Answer: D Answer: D 2) The Second Bank of the United States was denied

1) Everything else held constant, when the government has higher budget deficits A) the demand curve for bonds shifts to the left and the interest rate rises B) the demand curve for bonds shifts to the left and the interest rate falls C) the supply curve for bonds shifts to the right and

1) Which of the following does not appear in the current account part of the balance of payments? A) A loan of $1 million from Bank of America to Brazil B) Foreign aid to El Salvador C) An Air France ticket bought by an American D) Income earned by General Motors from its plants

1) In the equation of exchange, the concept that provides the link between M and PY is called A) the velocity of money B) aggregate demand C) aggregate supply D) the money multiplier Answer: A Answer: A Answer: A 2) Banks responded to disintermediation by A) supporting the elimination of interest rate regulations, enabling them to better compete for

1) Futures differ from forwards because they are A) used to hedge portfolios B) used to hedge individual securities C) used in both financial and foreign exchange markets D) a standardized contract Answer: D Answer: D Answer: D 2) The theory of purchasing power parity cannot fully explain exchange rate movements because A) all goods are identical even if

1) A financial crisis occurs when an increase in asymmetric information from a disruption in the financial system A) causes severe adverse selection and moral hazard problems that make financial markets incapable of channeling funds efficiently B) allows for a more efficient use of funds C) increases economic activity D) reduces uncertainty in the

1) The money multiplier is A) negatively related to high-powered money B) positively related to the excess reserves ratio C) negatively related to the required reserve ratio D) positively related to holdings of excess reserves Answer: C Answer: C Answer: C 2) In the late 1990s, M2 velocity ________, suggesting a ________ normal relationship between M2 and macroeconomic variables. A)

1) If aggregate output is below the natural rate level, activists of policies would recommend that the government A) do nothing B) try to eliminate the high unemployment by attempting to shift the aggregate supply curve to the right C) try to eliminate the high unemployment by attempting to shift the aggregate demand

1) Which of the following is not a source of borrowings for a bank? A) Federal funds B) Eurodollars C) Transaction deposits D) Discount loans Answer: C Answer: C Answer: C 2) Loss aversion can explain why very little ________ actually takes place in the securities market. A) short selling B) bargaining C) bartering D) negotiating Answer: A Answer: A Answer: A 3) Mutual funds are

1) Hong Kong chooses to have ________ and ________ and therefore, cannot have an independent monetary policy at the same time. A) capital control, a fixed exchange rate B) free capital mobility, a fixed exchange rate C) free capital mobility, a flexible exchange rate D) capital control, a flexible exchange rate Answer: B Answer: B Answer: B 2)

1) Before 1970, mutual funds invested almost solely in A) corporate bonds B) corporate common stocks C) United States government bonds D) municipal bonds and money market securities Answer: B Answer: B Answer: B 2) In the model of the money supply process, the Federal Reserve's role in influencing the money supply is represented by A) both the required

1) The Fed does not tightly control the monetary base because it does not completely control A) open market purchases B) open market sales C) borrowed reserves D) the discount rate Answer: C Answer: C Answer: C 2) Everything else held constant, an increase in the excess reserve ratio will mean ________ in the M1 money multiplier and

1) The expected return on dollar deposits in terms of foreign currency can be written as the ________ of the interest rate on dollar deposits and the expected appreciation of the dollar. A) product B) ratio C) sum D) difference Answer: C Answer: C Answer: C 2) In the market for reserves, if the federal funds rate is

1) Everything else held constant, increased demand for a country's exports causes its currency to ________ in the long run, while increased demand for imports causes its currency to ________. A) appreciate; appreciate B) appreciate; depreciate C) depreciate; appreciate D) depreciate; depreciate Answer: B Answer: B Answer: B 2) Under the current managed float exchange rate regime, countries

1) The contagion effect refers to the fact that A) deposit insurance has eliminated the problem of bank failures B) bank runs involve only sound banks C) bank runs involve only insolvent banks D) the failure of one bank can hasten the failure of other banks Answer: D Answer: D Answer: D 2) A consol paying $20 annually

1) Because the quantity theory of money tells us how much money is held for a given amount of aggregate income, it is also a theory of A) interest-rate determination B) the demand for money C) exchange-rate determination D) the demand for assets Answer: B Answer: B Answer: B 2) Currency circulated by banks that could be redeemed

1) As the banking system in the United States evolves, it is expected that A) the number and importance of small banks will increase B) the number and importance of large banks will decrease C) small banks will grow at the expense of large banks D) the number and importance of large banks will

1) The nominal interest rate minus the expected rate of inflation A) defines the real interest rate B) is a less accurate measure of the incentives to borrow and lend than is the nominal interest rate C) is a less accurate indicator of the tightness of credit market conditions than is the nominal

1) With an interest rate of 6 percent, the present value of $100 next year is approximately A) $106 B) $100 C) $94 D) $92 Answer: C Answer: C Answer: C 2) The theory of bureaucratic behavior suggests that the objective of a bureaucracy is to maximize A) the public's welfare B) profits C) its own welfare D) conflict with the executive and

1) An instrument developed to help investors and institutions hedge interest-rate risk is A) a put option B) a call option C) a financial derivative D) a mortgage-backed security Answer: C Answer: C Answer: C 2) When those most likely to produce the outcome insured against are the ones who purchase insurance, insurance companies are said to face

1) The agreement to provide a standardized commodity to a buyer on a specific date at a specific future price is A) a put option B) a call option C) a futures contract D) a mortgage-backed security Answer: C Answer: C Answer: C 2) If initially the money supply is $1 trillion, velocity is 5, the price level is

1) Policy makers cannot achieve both price stability and economic activity stability when facing A) temporary supply shocks B) permanent supply shocks C) demand shocks D) all of the above Answer: A Answer: A Answer: A 2) A ________ is a subsidiary of a U.S. bank that is engaged primarily in international banking. A) Edge Act corporation B) Eurodollar agency C)

1) If Treasury deposits at the Fed are predicted to ________, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves. A) increase; defensive; inject B) decrease; defensive; inject C) increase; dynamic; inject D) decrease; dynamic; drain Answer: A Answer: A Answer: A 2) Everything else held

1) If the central bank targets a monetary aggregate, it is likely to lose control over the interest rate because A) of fluctuations in the demand for reserves B) of fluctuations in the consumption function C) bond values will tend to remain stable D) of fluctuations in the business cycle Answer: A Answer: A Answer: A 2) Using

1) The entry of AT&T and GM into the credit card business is an indication of A) government's efforts to deregulate the provision of financial services B) the rising profitability of credit card operations. C) the reduction in costs of credit card operations since 1990 D) the sale of unprofitable operations by Bank of

1) The formula for the M1 money multiplier is A) m = (1 + c)/(rr + e + c) B) M = 1/(rr + e + c) C) M = (1 + c)/(rr + e + c) D) m = [1/(rr + e + c)] MB Answer: A Answer: A Answer: A 2) An option that can only

1) The Bretton Woods agreement created the ________, which was given the task of promoting the growth of world trade by setting rules for the maintenance of fixed exchange rates and by making loans to countries that were experiencing balance of payments difficulties. A) IMF B) World Bank C) Central Settlements Bank D) Bank

1) Which of the following is not one of the eight basic puzzles about financial structure? A) Stocks are the most important source of finance for American businesses B) Issuing marketable securities is not the primary way businesses finance their operations C) Indirect finance, which involves the activities of financial intermediaries, is many

1) A $1000 face value coupon bond with a $60 coupon payment every year has a coupon rate of A) .6 percent B) 5 percent C) 6 percent D) 10 percent Answer: C Answer: C Answer: C 2) If the amount payable in two years is $2420 for a simple loan at 10 percent interest, the loan amount

1) The total amount of required reserves in the banking system is equal to the ________ the required reserve ratio and checkable deposits. A) sum of B) difference between C) product of D) ratio between Answer: C Answer: C Answer: C 2) Members of Congress are able to influence monetary policy, albeit indirectly, through their ability to A) withhold appropriations

1) Suppose the economy is producing at the natural rate of output. Assuming a fixed natural rate of output and everything else held constant, the development of a new, more productive technology will cause ________ in the unemployment rate in the long run and ________ in inflation in the short

1) According to the expectations theory of the term structure A) the interest rate on long-term bonds will exceed the average of short-term interest rates that people expect to occur over the life of the long-term bonds, because of their preference for short-term securities B) interest rates on bonds of different maturities

1) Interest-rate risk is the riskiness of an asset's returns due to A) interest-rate changes B) changes in the coupon rate C) default of the borrower D) changes in the asset's maturity Answer: A Answer: A Answer: A 2) For simple loans, the simple interest rate is ________ the yield to maturity. A) greater than B) less than C) equal to D)

1) If a person selling bonds to the Fed cashes the Fed's check, then reserves ________ and currency in circulation ________, everything else held constant. A) remain unchanged; declines B) remain unchanged; increases C) decline; remains unchanged D) increase; remains unchanged Answer: B Answer: B Answer: B 2) If you sell twenty-five $100,000 futures contracts to hedge holdings

1) In recent years, bank regulatory authorities have A) encouraged banks to enter the insurance field B) discouraged banks from entering the insurance field C) asked Congress to write new legislation that would make it illegal for banks to enter the insurance field D) asked Congress to write new legislation that would make it