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The agency that was created to protect depositors after the banking failures of 1930-1933 is the A. Federal Reserve System. B. Federal Deposit Insurance Corporation. C. Treasury Department. D. Office of the Comptroller of the Currency. Answer: China is trying […]

Everything else held constant, if a central bank makes an unsterilized purchase of foreign assets, then the domestic money supply will ________ and the domestic currency will ________. A) increase; appreciate B) increase; depreciate C) decrease; appreciate D) decrease; depreciate […]

In a liquidity trap, monetary policy has ________ effect on aggregate spending because a change in the money supply has ________ effect on interest rates. A. no; no B. no; a large C. no; a small D. a large; a […]

You have observed that the forecasts of an investment advisor consistently outperform the other reported forecasts. The efficient markets hypothesis says that future forecasts by this advisor A. may or may not be better than the other forecasts. Past performance […]

When output is below potential and the policy rate has hit the floor of zero, the resulting fall in inflation leads to ________ real interest rates, which ________ output further, which causes inflation to fall further. A. lower; increase B. […]

Moral hazard and adverse selection problems increased in prominence in the 1980s A. as deregulation required savings and loans and mutual savings banks to be more cautious. B. following a burst of financial innovation in the 1970s and early 1980s […]

For a 3-year simple loan of $10,000 at 10 percent, the amount to be repaid is A. $10,030. B. $10,300. C. $13,000. D. $13,310. Answer: On the evening news you hear of a scientific study that directly links premature births […]

The process of indirect finance using financial intermediaries is called A. direct lending. B. financial intermediation. C. resource allocation. D. financial liquidation. Answer: Life insurance companies are regulated by state governments because A. they have never experienced bankruptcy. B. they […]

If during the past decade the average rate of monetary growth has been 5% and the average inflation rate has been 5%, everything else held constant, when the Federal Reserve announces that the new rate of monetary growth will be […]

If market participants notice that a variable behaves differently now than in the past, then, according to rational expectations theory, we can expect market participants to A. change the way they form expectations about future values of the variable. B. […]

Which of the following is NOT included in the measure of M1? A. NOW accounts B. demand deposits C. currency D. savings deposits Answer: An appreciation of the U.S. dollar makes foreign goods cheaper relative to American goods, resulting in […]

If interest rates increase from 9 percent to 10 percent, a bank with a duration gap of 2 years would experience a decrease in its net worth of A. 0.9 percent of its assets. B. 0.9 percent of its liabilities. […]

Parties who have sold a futures contract and thereby agreed to ________ (deliver) the bonds are said to have taken a ________ position. A. sell; short B. buy; short C. sell; long D. buy; long Answer: Loss aversion can explain […]

In the market for reserves, when the federal funds interest rate is below the discount rate, the supply curve of reserves is A. vertical. B. horizontal. C. positively sloped. D. negatively sloped. Answer: Some automobile owners will drive faster knowing […]

Using Taylor’s rule, when the equilibrium real federal funds rate is 2 percent, there is no output gap, the actual inflation rate is zero, and the target inflation rate is 2 percent, the nominal federal funds rate should be A. […]

The Second 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) is considered to be the primary cause of the bank panic of 1907. […]

An increase in the expected inflation rate will ________ the ________ for gold, ________ its price, everything else held constant. A. increase; demand; increasing B. decrease; demand; decreasing C. increase; supply; increasing D. decrease; supply; increasing Answer: By the standard […]

The higher the insurance coverage, the ________ the policyholder can gain from risky activities that make an insurance payoff ________ likely. A. more; less B. more; more C. less; less D. less; more Answer: Which of the following is an […]

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: […]

In the basic closed-economy ISLM model, the LM curve can be described by an equation where A. output is a function of consumption. B. money is a function of interest rates. C. output is a function of money. D. interest […]

A debt contract is incentive compatible A) if the borrower has the incentive to behave in the way that the lender expects and desires, since doing otherwise jeopardizes the borrower’s net worth in the business. B) if the borrower’s net […]

The Fed accidentally discovered open market operations when A. it came to the rescue of failing banks in the early 1930s, and found that its purchases of bank loans injected reserves into the banking system. B. it purchased securities for […]

The mound-shaped yield curve in the figure above indicates that the inflation rate is expected to A. remain constant in the near-term and fall later on. B. fall moderately in the near-term and rise later on. C. rise moderately in […]

The relationship between borrowed reserves (BR), the nonborrowed monetary base (MBn), and the monetary base (MB) is A. MB = MBn – BR. B. BR = MBn – MB. C. BR = MB – MBn. D. MB = BR – […]

An increase in the monetary base that goes into currency is ________, while an increase that goes into deposits is ________. a. multiplied; multiplied b. not multiplied; multiplied c. multiplied; not multiplied d. not multiplied; not multiplied Answer: A debit […]

Which of the following statements concerning Keynesian ISLM analysis is TRUE? A. For a given change in taxes, the IS curve will shift less than for an equal change in government spending. B. Changes in net exports arising from a […]

Everything else held constant, an increase in the excess reserve ratio will mean ________ in the M2 money multiplier and ________ in the M2 money supply. a. an increase; an increase b. an increase; a decrease c. a decrease; an […]

Everything else held constant, a monetary expansion is characterized by ________ output and ________ interest rates. A. rising; rising B. rising; falling C. falling; rising D. falling; falling Answer: If the required reserve ratio is 10 percent, currency in circulation […]

The M1 measure of money includes A. small denomination time deposits. B. traveler’s checks. C. money market deposit accounts. D. money market mutual fund shares. Answer: In the figure above, the factor responsible for the decline in the interest rate […]

Funds held in ________ are subject to reserve requirements. A. all checkable deposits B. all checkable and time deposits C. all checkable, time, and money market fund deposits D. all time deposits Answer: Experts predict that the future structure of […]

When the financial crisis started in August 2007, inflation was rising and the Fed began an aggressive easing lowering of the federal funds rate, which indicated that A. there was an upward movement along the monetary policy curve. B. there […]

A central bank that does NOT follow the Taylor principle will fail to raise nominal interest rates by more than the increase in expected inflation. As a result, the monetary policy curve is ________ sloping and the aggregate demand curve […]

An autonomous monetary policy easing reduces real interest rates and raises aggregate output ________ and the inflation rate rises ________. A. temporarily; permanently B. permanently; temporarily C. permanently; permanently D. temporarily; temporarily Answer: If the required reserve ratio is 10 […]

For the classical economists, the quantity theory of money provided an explanation of movements in the price level. Changes in the price level result A. from proportional changes in the quantity of money. B. primarily from changes in the quantity […]

If a central bank does not want to allow the domestic currency to appreciate, it will ________ international reserves by selling its currency, thereby ________ the monetary base and increasing the risk of higher inflation. A) lose; decreasing B) lose; […]

In the Gordon growth model, a decrease in the required rate of return on equity A. increases the current stock price. B. increases the future stock price. C. reduces the future stock price. D. reduces the current stock price. Answer: […]

The Fed operating procedures employed between 1979 and 1982 resulted in ________ swings in the federal funds rate and ________ swings in the M1 growth rate. A. increased; increased B. increased; decreased C. decreased; decreased D. decreased; increased Answer: Banks […]

An autonomous depreciation of the U.S. dollar makes American goods ________ relative to foreign goods and results in a ________ in U.S. net exports, everything else held constant. A. cheaper; decline B. cheaper; rise C. more expensive; decline D. more […]

Factors that influenced planned investment spending include A. real interest rates. B. financial frictions. C. emotional waves of optimism and pessimism. D. all of the above. E. A and C. Answer: The M2 monetary aggregate contains everything that is in […]

If float is predicted to increase because of bad weather, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves. A) defensive; inject B) defensive; drain C) dynamic; […]

The decision by inflation targeters to choose inflation targets ________ zero reflects the concern of monetary policymakers that particularly ________ inflation can have substantial negative effects on real economic activity. A. below; high B. below; low C. above; high D. […]

First National Bank If interest rates rise by 5 percentage points, say from 10 to 15%, bank profits (measured using gap analysis) will A. decline by $0.5 million. B. decline by $1.5 million. C. decline by $2.5 million. D. increase […]

According to the liquidity premium theory of the term structure, a steeply upward sloping yield curve indicates that short-term interest rates are expected to A. rise in the future. B. remain unchanged in the future. C. decline moderately in the […]

All else the same, if a bank’s liabilities are more sensitive to interest rate fluctuations than are its assets, then ________ in interest rates will ________ bank profits. A. an increase; increase B. an increase; reduce C. a decline; reduce […]

The portfolio theories of money demand state that the demand for real money balances is ________ related to income and ________ related to the nominal interest rate. A. positively; negatively B. positively; positively C. negatively; negatively D. negatively; positively Answer: […]

A reduction in government spending causes the equilibrium level of aggregate output to ________ at any given interest rate and shifts the ________ curve to the ________, everything else held constant. A. rise; LM; right B. fall; IS; left C. […]

A temporary supply shock that raises prices will cause the real interest rate to A. rise in both the short and long runs. B. rise in the short run but not in the long run. C. fall in both the […]

Secondary reserves include A. deposits at Federal Reserve Banks. B. deposits at other large banks. C. short-term U.S. government securities. D. state and local government securities. Answer: Using the Gordon growth model, a stock’s current price will increase if A. […]

Which of the following is NOT an entity of the Federal Reserve System? A. Federal Reserve Banks B. the Comptroller of the Currency C. the Board of Governors D. the Federal Open Market Committee Answer: When the central bank ________ […]

In general, banks would prefer to acquire funds quickly by ________ rather than ________. A. reducing loans; selling securities B. reducing loans; borrowing from the Fed C. borrowing from the Fed; reducing loans D. “calling in” loans; selling securities Answer: […]

A problem for equity contracts is a particular type of ________ called the ________ problem. A) adverse selection; principal-agent B) moral hazard; principal-agent C) adverse selection; free-rider D) moral hazard; free-rider Answer: If the interest rate is 7 percent on […]

Everything else held constant, a decrease in the required reserve ratio on checkable deposits will mean a. a decrease in the money supply. b. an increase in the money supply. c. a decrease in checkable deposits. d. an increase in […]

The speculative demand for money may not exist because A. banks now pay interest on some types of checkable deposits. B. there are alternative riskless assets paying higher returns than the return on money. C. the transactions demand can be […]

Mutual funds in which a fixed number of nonredeemable shares are sold at an initial offering and are then traded in the over-the-counter market, like shares of common stock, are called A. open-end funds. B. close-end funds. C. OTC funds. […]

The Fed’s use of the federal funds rate as an operating target in the 1970s resulted in A. countercyclical monetary policy. B. too slow growth in M1 throughout the decade. C. procyclical monetary policy. D. too rapid growth in M1 […]

Using the one-period valuation model, assuming a year-end dividend of $0.11, an expected sales price of $110, and a required rate of return of 10%, the current price of the stock would be A. $110.11. B. $121.12. C. $100.10. D. […]

Since the Federal Reserve sets the required reserve ratio to less than one, one dollar of reserves can support ________ of checkable deposits. a. exactly one dollar b. less than one dollar c. more than one dollar d. exactly twice […]

His analysis started with the recognition that the total quantity demanded of an economy’s output was the sum of four types of spending: consumer expenditure, planned investment spending, government spending, and net exports. A. John Maynard Keynes B. Sir John […]

Reasons for holding Eurodollars include A) the fact that Eurodollar deposits are insured by the FDIC. B) the fact that dollars are widely used to conduct international transactions. C) the fact that minimum transaction sizes are very low, making Eurodollars […]

Because of the “lemons problem” the price a buyer of a used car pays is A. equal to the price of a lemon. B. less than the price of a lemon. C. equal to the price of a peach. D. […]

________ in the domestic interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to depreciate, everything else held constant. A. An increase; right B. An increase; left C. A decrease; right D. […]

The long-run neutrality of money refers to the fact that in the long run, monetary policy A. changes only real output. B. changes only the real interest rate. C. changes both real output and the real interest rate. D. has […]

Which of the following is most likely to result from a stronger dollar? A. U.S. goods exported aboard will cost less in foreign countries, and so foreigners will buy more of them. B. U.S. goods exported aboard will cost more […]

Although the Fed professed employment of ________ targeting during the 1970s, its behavior suggests that it emphasized ________ targeting. A. free-reserve; interest-rate B. interest-rate; monetary aggregate C. monetary aggregate; interest-rate D. free reserve; monetary aggregate Answer: A disadvantage of ________made […]

The Baumol-Tobin analysis suggests that A. velocity is relatively constant. B. the transactions component of the demand for money is negatively related to the level of interest rates. C. the speculative motive is nonexistent. D. velocity is unrelated to the […]

Which of the following is NOT a secondary market? A. foreign exchange market B. futures market C. options market D. IPO market Answer: The credit derivative that, for a fee, gives the purchaser the right to receive profits that are […]

If net exports decrease by 250 and the mpc is 0.75, equilibrium aggregate output A. increases by 1000. B. increases by 750. C. decreases by 750. D. decreases by 1000. Answer: The nominal interest rate minus the expected rate of […]

The chartering process is especially designed to deal with the ________ problem, and regular bank examinations help to reduce the ________ problem. A. adverse selection; adverse selection B. adverse selection; moral hazard C. moral hazard; adverse selection D. moral hazard; […]

If you sell a $100,000 interest-rate futures contract for 110, and the price of the Treasury securities on the expiration date is 106, your ________ is ________. A. profit; $4000 B. loss; $4000 C. profit; $6000 D. loss; $6000 Answer: […]

On January 25, 2009, one U.S. dollar traded on the foreign exchange market for about 3.33 Romanian new lei. Therefore, one Romanian new lei would have purchased about ________ U.S. dollars. A. 0.30 B. 1.86 C. 2.86 D. 3.33 Answer: […]

Under the current managed float exchange rate regime; countries with surpluses in their balance of payments frequently do not want to see their currencies appreciate because it makes their goods ________ expensive abroad and foreign goods ________ in their countries. […]

With the policy rate set at zero, the rise in expected inflation will lead to a ________ in the real interest rate, which will cause investment spending and aggregate output to ________. A. fall; rise B. fall; fall C. rise; […]

What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,200 next year? A. 5 percent B. 10 percent C. -5 percent D. 25 percent Answer: The Federal Reserve System was created […]

The economist who proposed that, “Inflation is always and everywhere a monetary phenomenon” was A. John Maynard Keynes. B. John R. Hicks. C. Milton Friedman. D. Franco Modigliani. Answer: In May 1991, the FDIC announced that it would sell the […]

If actual output is greater than equilibrium output, firms will ________ output to keep from ________ inventories. A. increase; accumulating B. increase; depleting C. decrease; depleting D. decrease; accumulating Answer: The time-inconsistency problem in monetary policy can occur when the […]

In the simple deposit expansion model, a decline in checkable deposits of $500 when the required reserve ratio is equal to 10 percent implies that the Fed A. sold $500 in government bonds. B. sold $50 in government bonds. C. […]

Automated teller machines A. are more costly to use than human tellers, so banks discourage their use by charging more for use of ATMs. B. cost about the same to use as human tellers in banks, so banks discourage their […]

In the long-run ISLM model and with everything else held constant, as long as the level of output ________ the natural rate level, the price level will continue to ________, shifting the LM curve to the ________, until finally output […]

If a bank has excess reserves of $7,000 and demand deposit liabilities of $100,000, and if the reserve requirement is 10 percent, then the bank has actual reserves of A. $14,000. B. $17,000. C. $22,000. D. $27,000. Answer: Assuming initially […]

In a study published in 1963, Milton Friedman and Anna Schwartz found that in every business cycle they studied over nearly a hundred-year period, the growth rate of the ________ decreased before ________ decreased. A. money supply; interest rates B. […]

Increasing transactions costs of selling an asset make the asset A. more valuable. B. more liquid. C. less liquid. D. more moneylike. Answer: Everything else held constant, if aggregate output is to the right of the LM curve, then there […]

Analysis of the transmission mechanisms of monetary policy provides four basic lessons for a central bank’s conduct of monetary policy. These lessons include the following. A. Rising interest rates indicate a tightening of monetary policy, whereas falling interest rates indicate […]

________ imposes a conceptual structure and inherent discipline on policy makers, but without eliminating all flexibility. A. Constrained discretion B. A policy rule C. A discretionary policy D. The Taylor rule Answer: The problem created by asymmetric information before the […]

The factor accounting for the steepest rise in the currency ratio since 1892 is a. taxes. b. bank panics. c. illegal activity. d. an increase in wealth. Answer: If the required reserve ratio is 10 percent, currency in circulation is […]

Of all commercial banks, about ________ belong to the Federal Reserve System. A. 10% B. one half C. one third D. 90% Answer: When the policy rate hits its lower bound and inflation keeps falling, this portion of the Monetary […]

The monetary base minus currency in circulation equals A. reserves. B. the borrowed base. C. the nonborrowed base. D. discount loans. Answer: If a bank has excess reserves of $15,000 and demand deposit liabilities of $80,000, and if the reserve […]

Everything else held constant, in the market for reserves, when the supply for federal funds intersects the reserve demand curve on the downward sloping section, decreasing the interest rate paid on excess reserves A. increases the federal funds rate. B. […]

In the simple deposit expansion model, if the required reserve ratio is 10 percent and the Fed increases reserves by $100, checkable deposits can potentially expand by A. $100. B. $250. C. $500. D. $1,000. Answer: Suppose the economy is […]

When the prices of rare coins become volatile, the ________ curve for bonds shifts to the ________, everything else held constant. A. demand; right B. demand; left C. supply; right D. supply; left Answer: Everything else held constant, if a […]