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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 […]

1) Financial institutions search for ________ has resulted in many financial innovations. A) higher profits B) regulations C) respect D) higher risk 2) If the required reserve ratio is 15 percent, the simple deposit multiplier is A) 15.0 B) 1.5 […]

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 […]

1) From 1950-2011 the price level in the United States increased more than A) twofold B) threefold C) sixfold D) ninefold 2) The Keynesian theory of money demand predicts that people will increase their money holdings if they believe that […]

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 […]

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 […]

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 […]

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 […]

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 […]

1) An inverted yield curve A) slopes up B) is flat C) slopes down D) has a U shape 2) The principal-agent problem would not occur if ________ of a firm had complete information about actions of the ________. A) […]

1) An expansionary monetary policy raises firms’ cash flows by ________ interest rates. A) lowering real B) lowering nominal C) raising real D) raising nominal 2) Which of the followings is a duty of the Board of Governors of the […]

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 […]

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 2) […]

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 2) The theory of portfolio choice indicates that factors affecting the demand for money include A) income […]

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) […]

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) […]

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 […]

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 […]

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 2) […]

1) The primary goal of the European Central Bank is A) price stability B) exchange rate stability C) interest rate stability D) high employment 2) Analysis of adverse selection indicates that financial intermediaries, especially banks, A) have advantages in overcoming […]

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 […]

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 […]

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 […]

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 […]

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) […]

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 2) The mound-shaped […]

1) The monetary base minus reserves equals A) currency in circulation B) the borrowed base C) the nonborrowed base D) discount loans 2) Keynes’s liquidity preference theory indicates that the demand for money is ________ related to ________. A) negatively; […]

1) A smart card is the equivalent of A) cash B) savings bonds C) savings deposits D) certificates of deposit 2) If reserves in the banking system increase by $100, then checkable deposits will increase by $400 in the simple […]

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 2) Suppose that the Federal Reserve conducts an open […]

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 2) Assuming initially that rr = 10%, c = 40%, and e = […]

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 2) Under exchange-rate targeting, the central bank in the targeting country ________ lose the ability to […]

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 […]

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 […]

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 […]

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 […]

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 2) High interest rates might cause a corporation to ________ building a new […]

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 […]

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.” 2) State whether the following statement […]

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; […]

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 […]

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; […]

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 […]

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 2) Net worth can perform a similar role to A) diversification […]

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 […]

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 […]

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 […]

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 […]

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 2) Banks responded to disintermediation by A) […]

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 2) The theory of purchasing power parity cannot […]

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 […]

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 2) In the late 1990s, […]

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) […]

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 2) Loss aversion can explain why very little ________ actually takes place in the securities […]

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, […]

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 2) In the model of the money supply process, the Federal Reserve’s […]

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 2) Everything else held constant, an increase in the […]

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 […]

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) […]

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 […]

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 […]

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 […]

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 […]

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 2) The theory of bureaucratic behavior suggests that the objective of a bureaucracy is to […]

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 2) When those most likely to produce the outcome insured against […]

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 2) If initially […]

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 2) A ________ is a subsidiary of a U.S. bank […]

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; […]

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 […]

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 […]

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) 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 […]

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 […]

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 2) If the amount payable in two years is […]

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 2) Members of Congress are […]

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 […]

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 […]

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 2) For simple loans, the simple interest rate […]

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 […]

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 […]