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If the Fed injects reserves into the banking system and they are held as excess reserves, then the monetary base ________ and the money supply ________. A) remains unchanged; remains unchanged B) remains unchanged; increases C) increases; increases D) increases; […]

The steeply upward sloping yield curve in the figure above indicates that ________ interest rates are expected to ________ in the future. A) short-term; rise B) short-term; fall moderately C) short-term; remain unchanged D) long-term; fall moderately The term structure […]

Under an exchange-rate targeting rule for monetary policy, a crawling peg A) fixes the value of the domestic currency to a commodity such as gold. B) fixes the value of the domestic currency to that of a large, low-inflation country. […]

The main center of the Eurodollar market is A) London. B) Basel. C) Paris. D) New York. Suppose the economy is producing at the natural rate of output. An open market sale of bonds by the Fed will cause ________ […]

Everything else held constant, when a country’s currency appreciates, the country’s goods abroad become ________ expensive and foreign goods in that country become ________ expensive. A) more; less B) more; more C) less; less D) less; more Duration is A) […]

Referring to the Economic Stimulus Act of 2008, the expansionary effect of the government stimulus was overwhelmed by the continuing deterioration in credit market conditions. Everything else held constant and using the ISLM model, the net effect would cause the […]

Which of the following statements best explains how the use of money in an economy increases economic efficiency? A) Money increases economic efficiency because it is costless to produce. B) Money increases economic efficiency because it discourages specialization. C) Money […]

Situation 20-1 Assume a closed economy with no government. Suppose that autonomous consumption equals $400, planned investment equals $500, and the mpc equals 0.9. Using the information in Situation 20-1, if aggregate output is equal to $10,000, then unplanned inventory […]

Which of the followings is NOT true about the word “autonomous” that economists use? A) Changes in autonomous components are associated with shifts of a curve. B) The autonomous component of a variable is exogenous. C) The autonomous component of […]

State whether the following statement is true or false AND explain why: “A decrease in the discount rate will always cause a decrease in the federal reserve funds rate.” State whether the following statement is true or false AND explain […]

Financial intermediaries’ low transaction costs allow them to provide ________ services that make it easier for customers to conduct transactions. A) liquidity B) conduction C) transcendental D) equitable If nominal GDP in 2001 is $9 trillion, and 2001 real GDP […]

If the interest rate is 7 percent on euro-denominated assets and 5 percent on dollar-denominated assets, and if the dollar is expected to appreciate at a 4 percent rate, for Francois the Frenchman the expected rate of return on dollar-denominated […]

External financing by ________ should be more important in developing countries than in industrialized countries because information about private firms is more difficult to collect in developing countries. A) financial intermediaries B) bonds C) stock D) direct lending The total […]

Evidence from the United States and other foreign countries indicates that A) there is a strong positive association between inflation and growth rate of money over long periods of time. B) there is little support for the assertion that “inflation […]

Banks’ asset portfolios include state and local government securities because A) they help to attract business from these government entities. B) banks consider them helpful in attracting accounts of Federal employees. C) the Federal Reserve requires member banks to buy […]

Empirical evidence shows that the quantity theory of money is a good theory of inflation A) in the long run, but not in the short run. B) in the short run, but not in the longrun. C) in both the […]

A bank failure occurs whenever A) a bank cannot satisfy its obligations to pay its depositors and other creditors. B) a bank suffers a large deposit outflow. C) a bank has to call in a large volume of loans. D) […]

Tests used to rate the performance of rules developed in technical analysis conclude that technical analysis A) outperforms the overall market. B) far outperforms the overall market, suggesting that stockbrokers provide valuable services. C) does not outperform the overall market. […]

An autonomous easing of monetary policy A) causes an upward movement along the monetary policy curve. B) causes a downward movement along the monetary policy curve. C) shifts the monetary policy curve upward. D) shifts the monetary policy curve downward. […]

Everything else held constant, a decrease in autonomous consumer spending will cause the IS curve to shift to the ________ and aggregate demand will ________. A) right; increase B) right; decrease C) left; increase D) left; decrease The risk of […]

A central bank’s attempt to prevent an appreciation of its currency can stimulate domestic inflation if the ________ of its currency leads to ________ international reserves which ________ the monetary base. A) purchase; higher; increases B) purchase; lower; decreases C) […]

When the domestic currency is initially overvalued in a fixed exchange rate regime, the central bank must intervene in the foreign exchange market to ________ the domestic currency, thereby allowing the money supply to ________. A) purchase; decline B) sell; […]

When stock prices fall A) an individual’s wealth is not affected nor is their willingness to spend. B) a business firm will be more likely to sell stock to finance investment spending. C) an individual’s wealth may decrease but their […]

In order to reduce risk and increase the safety of financial institutions, commercial banks and other depository institutions are prohibited from A) owning municipal bonds. B) making real estate loans. C) making personal loans. D) owning common stock. The lon-run […]

When the interest rate rises A) planned investment falls. B) planned investment rises. C) planned investment will be unaffected. D) equilibrium income increases. In the liquidity trap, the money demand curve A) is horizontal. B) is vertical. C) is negatively […]

Who has regulatory responsibility when a bank operates branches in many countries? A) It is not always clear. B) the WTO C) the U.S. Federal Reserve System D) the first country to submit an application Approaches to establishing central bank […]

Everything else held constant, when output is ________ the natural rate level, wages will begin to ________, increasing short-run aggregate supply. A) above; fall B) above; rise C) below; fall D) below; rise To lower interest rates on residential mortgages […]

The amount paid for an option is the A) strike price. B) premium. C) discount. D) yield. The primary purpose of deposit insurance is to A) improve the flow of information to investors. B) prevent banking panics. C) protect bank […]

Hedging by buying an option A) limits gains. B) limits losses. C) limits gains and losses. D) has no limit on option premiums. Everything else held constant, in the market for reserves, when the supply for federal funds intersects the […]

U.S. Treasury bills pay no interest but are sold at a ________. That is, you will pay a lower purchase price than the amount you receive at maturity. A) premium B) collateral C) default D) discount If American college students […]

U.S. government bonds have no default risk because A) they are issued in strictly limited quantities. B) the federal government can increase taxes or print money to pay its obligations. C) they are backed with gold reserves. D) they can […]

In a ________ banking system, commercial banks provide a full range of banking, securities, and insurance services, all within a single legal entity. A) universal B) severable C) barrier-free D) dividerless As the costs associated with deposit outflows ________, the […]

Which of the following are transaction deposits? A) savings accounts B) small-denomination time deposits C) checkable deposits D) certificates of deposit If reserves in the banking system increase by $100, then checkable deposits will increase by $1000 in the simple […]

The theory of PPP suggests that if one country’s price level rises relative to another’s, its currency should A) depreciate in the long run. B) appreciate in the long run. C) depreciate in the short run. D) appreciate in the […]

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 source of business finance than is direct finance. B) despite their success […]

Using the Gordon growth formula, if D1 is $2.00, ke is 12% or 0.12, and g is 10% or 0.10, then the current stock price is A) $20. B) $50. C) $100. D) $150. ________ within the U.S. can make […]

An increase in interest rates might ________ saving because more can be earned in interest income. A) encourage B) discourage C) disallow D) invalidate In the simple deposit expansion model, if the Fed purchases $100 worth of bonds from a […]

All else equal, the ________ the coupon rate on a bond, the ________ the bond’s duration. A) higher; longer B) higher; shorter C) lower; shorter D) greater; longer In the long-run ISLM model and with everything else held constant, as […]

To say that stock prices follow a “random walk” is to argue that stock prices A) rise, then fall, then rise again. B) rise, then fall in a predictable fashion. C) tend to follow trends. D) cannot be predicted based […]

The ability of a central bank to set monetary policy goals is A) political independence. B) goal independence. C) policy independence. D) instrument independence. If the Fed injects reserves into the banking system and they are held as excess reserves, […]

The European Central Bank (ECB) pursues a hybrid monetary policy strategy that has elements in common with the -targeting strategy previously used by the Bundesbank but also includes some elements of targeting. A) monetary; inflation B) inflation; monetary C) monetary; […]

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

The discount rate is kept ________ the federal funds rate because the Fed prefers that ________. A) below; banks can monitor each other for credit risk B) below; the Fed can monitor banks for credit risk C) above; banks can […]

When a primary dealer buys a government bond from the Federal Reserve, reserves in the banking system ________ and the monetary base ________, everything else held constant. A) increase; increases B) increase; decreases C) decrease; increases D) decrease; decreases Which […]

What makes the Federal Reserve so unique compared to other central banks around the world is its A) centralized structure. B) decentralized structure. C) regulatory functions. D) monetary policy functions. Aggregate output and the interest rate are ________ related to […]

The Fed is considering eliminating A) primary credit lending. B) secondary credit lending. C) seasonal credit lending. D) its lender of last resort function. In the simple deposit expansion model, if the Fed extends a $100 discount loan to a […]

When yield curves are steeply upward sloping A) long-term interest rates are above short-term interest rates. B) short-term interest rates are above long-term interest rates. C) short-term interest rates are about the same as long-term interest rates. D) medium-term interest […]

One way of describing the solution that high net worth provides to the moral hazard problem is to say that it A) collateralizes the debt contract. B) makes the debt contract incentive compatible. C) state verifies the debt contract. D) […]

Bonds with relatively low risk of default are called ________ securities and have a rating of Baa (or BBB) and above; bonds with ratings below Baa (or BBB) have a higher default risk and are called ________. A) investment grade; […]

In emerging market countries, the deterioration in bank’s balance sheets has more ________ effects on lending and economic activity than in advanced countries. A) negative B) positive C) affirming D) advancing In Keynes’s liquidity preference framework, individuals are assumed to […]

Everything else held constant, if disposable income increases by 200 and consumption expenditure increases by 150, the mpc is A) 0. B) 0.15. C) 0.5. D) 0.75. In the Keynesian liquidity preference framework, a rise in the price level causes […]

Prices and returns for ________ bonds are more volatile than those for ________ bonds, everything else held constant. A) long-term; long-term B) long-term; short-term C) short-term; long-term D) short-term; short-term Monetarists contend that the channels of monetary influence in Keynesian […]

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

An increase in stock prices ________ the size of people’s wealth and may ________ their willingness to spend, everything else held constant. A) increases; increase B) increases; decrease C) decreases; increase D) decreases; decrease If aggregate demand is less than […]

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 The Fed operating procedures employed between 1979 […]

Because of the weak systems of property rights in many developing and transition economies, the financial system is unable to use collateral effectively worsening the ________ problem. A) adverse selection B) moral hazard C) principal/agent D) diversification If the money […]

One factor contributing to the decline in cost advantages that banks once had is the A) decline in the importance of checkable deposits from over 60 percent of banks’ liabilities to 2 percent today. B) decline in the importance of […]

A bank failure is less likely to occur when A) a bank holds less U.S. government securities. B) a bank suffers large deposit outflows. C) a bank holds fewer excess reserves. D) a bank has more bank capital. The Fed’s […]

The collapse of the subprime mortgage market A) did not affect the corporate bond market. B) increased the perceived riskiness of Treasury securities. C) reduced the Baa-Aaa spread. D) increased the Baa-Aaa spread. Everything else held constant, a decrease in […]

The revenue a government gains from issuing money is A) interest. B) rent. C) seignorage. D) the national dividend. E) the inflation tax. Bankers’ concerns regarding the optimal mix of excess reserves, secondary reserves, borrowings from the Fed, and borrowings […]

Which of the following can be described as involving indirect finance? A) You make a loan to your neighbor. B) You buy shares in a mutual fund. C) You buy a U.S. Treasury bill from the U.S. Treasury at Treasury […]

A credit market instrument that pays the owner a fixed coupon payment every year until the maturity date and then repays the face value is called a A) simple loan. B) fixed-payment loan. C) coupon bond. D) discount bond. Situation […]

Arguments for adopting a policy rule include A) the time-inconsistency problem can lead to poor economic outcomes. B) discretionary policies pursue overly expansionary monetary policies to boost employment in the short run but generate higher inflation in the long run. […]

The figure above illustrates the effect of an increased rate of money supply growth at time period T0. From the figure, one can conclude that the A) Fisher effect is dominated by the liquidity effect and interest rates adjust slowly […]

Small-denomination time deposits refer to certificates of deposit with a denomination of less than A) $1,000. B) $10,000. C) $100,000. D) $1,000,000. At the time of the South Korean financial crisis, the merchant banks were A) almost virtually unregulated. B) […]

Which of the following $1,000 face-value securities has the highest yield to maturity? A) a 5 percent coupon bond selling for $1,000 B) a 10 percent coupon bond selling for $1,000 C) a 12 percent coupon bond selling for $1,000 […]

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; […]

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. Solutions to the moral hazard in equity contracts include […]

If the government finances its spending by selling bonds to the central bank, the monetary base will ________ and the money supply will ________. A) increase; increase B) increase; decrease C) decrease; decrease D) not change; not change Increasing transactions […]

Everything else held constant, a monetary contraction is characterized by ________ output and ________ interest rates. A) rising; rising B) rising; falling C) falling; rising D) falling; falling ________ in the expected future domestic exchange rate causes the demand for […]

When the price level falls, the ________ curve for nominal money ________, and interest rates ________, everything else held constant. A) demand; decreases; fall B) demand; increases; rise C) supply; increases; rise D) supply; decreases; fall The S&L Crisis can […]

The credit derivative that, for a fee, gives the purchaser the right to receive profits that are tied either to the price of an underlying security or to an interest rate is called a A) credit option. B) credit swap. […]

Because many emerging market countries have not developed the political or monetary institutions that allow the successful use of discretionary monetary policy A) they have little to gain from pegging their exchange rate to an anchor country like the U.S. […]

When banks borrow money from the Federal Reserve, these funds are called A) federal funds. B) discount loans. C) federal loans. D) Treasury funds. If you expect the inflation rate to be 12 percent next year and a one-year bond […]

The concept of diversification is captured by the statement A) don’t look a gift horse in the mouth. B) don’t put all your eggs in one basket. C) it never rains, but it pours. D) make hay while the sun […]

According to the interest parity condition, if the domestic interest rate is 10 percent and the foreign interest rate is 12 percent, then the expected ________ of the foreign currency must be ________ percent. A) appreciation; 4 B) appreciation; 2 […]

Everything else held constant, in the market for reserves, when the federal funds rate is 3%, lowering the interest rate paid on excess reserves rate from 2% to 1% A) lowers the federal funds rate. B) raises the federal funds […]

If the consumption function is C = 20 + 0.8YD, then an increase in disposable income by $100 will result in an increase in consumer expenditure by A) $58. B) $64. C) $80. D) $100. The interest rate for primary […]

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 […]

The global financial crisis lead to a decline in stock prices because A) of a lowered expected dividend growth rate. B) of a lowered required return on investment in equity. C) higher expected future stock prices. D) higher current dividends. […]

The theory of PPP suggests that if one country’s price level rises relative to another’s, its currency should A) depreciate. B) appreciate. C) float. D) do none of the above. The originate-to-distribute business model has a serious ________ problem since […]

The figure above illustrates the effect of an increased rate of money supply growth at time period T0. From the figure, one can conclude that the A) Fisher effect is dominated by the liquidity effect and interest rates adjust slowly […]

In the ten year period 1981-1990, 1202 commercial banks were closed, with a peak of 206 failures in 1989. This rate of failures was approximately ________ times greater than that in the period from 1934 to 1980. A) two B) […]

In the figure above, illustrates the effect of an increased rate of money supply growth at time period 0. From the figure, one can conclude that the A) Fisher effect is dominated by the liquidity effect and interest rates adjust […]

The primary goal of the European Central Bank is A) price stability. B) exchange rate stability. C) interest rate stability. D) high employment. The declining cost of computer technology has made ________ a reality. A) brick and mortar banking B) […]

If a central bank does not want to see its currency fall in value, it may pursue ________ monetary policy to ________ the domestic interest rate, thereby strengthening its currency. A) expansionary; raise B) contractionary; raise C) expansionary; lower D) […]

If people expect real estate prices to increase significantly, the ________ curve for bonds will shift to the ________, everything else held constant. A) demand; right B) demand; left C) supply; left D) supply; right If a bank has excess […]

If the required reserve ratio is 25 percent, the simple deposit multiplier is A) 5.0. B) 2.5. C) 4.0. D) 10.0. The price of a barrel of oil doubled between 2007 and the middle of 2008. To make matters worse, […]

Allowing individuals to manage a portion of their Social Security funds is A) socialization. B) privatization. C) democratization. D) regeneration. Everything else held constant, an increase in net taxes ________ aggregate ________. A) increases; demand B) decreases; demand C) decreases; […]