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Using the federal funds rate as an operating target (a) will reduce its stability. (b) may lead to a procyclical policy. (c) will tend to reduce the inflation rate, but at the cost of higher unemployment. (d) will increase the […]

When an insurance company makes a direct loan to a firm, the loan is known as (a) a private placement. (b) a commercial paper. (c) an account receivable. (d) an account payable. Answer: When market participants have rational expectations (a) […]

Acme Widget has been sued. It had been expected to lose suit and to be liable for massive payments that would have imperiled the future of the company. If Acme unexpectedly wins the suit, (a) the price of its bonds […]

The Ricardian equivalence proposition will not hold if (a) the government finances its expenditures by borrowing rather than by taxing. (b) the government finances its expenditures by taxing rather than by borrowing. (c) consumers face restrictions on the amount they […]

Which of the following is NOT a way in which prices communicate information in the markets for bonds, stocks, foreign exchange, and financial instruments? (a) Prices of financial assets represent expectations of future value. (b) Prices of financial assets reflects […]

The Federal Reserve District banks (a) do not engage in monetary policy. (b) engage in monetary policy directly through discount lending. (c) engage in monetary policy directly through open market operations. (d) engage in monetary policy directly through their membership […]

Many economists believe that changes in the money supply (a) affect the real economy in the short run, but not in the long run. (b) affect the real economy in the long run, but not in the short run. (c) […]

The greatest appeal of U.S. Treasury securities is that (a) they have high yields. (b) they have no default risk. (c) the U.S. Treasury will repurchase them at any time. (d) their market prices fluctuate very little. Answer: Excessive volatility […]

A decline in real output causes the demand for real balances (a) to rise and the interest rate to fall. (b) to fall and the interest rate to rise. (c) and the interest rate to fall. (d) and the interest […]

Which of the following is a correct statement about interpreting an increase in bond prices? (a) An increase in bond prices results an increase in the expected inflation rate. (b) An increase in bond prices results from an increase in […]

If the Treasury purchases a new computer system and pays the computer vendor with a check for $100,000 drawn on the Treasury’s account with the Fed, (a) the reserves of the banking system will fall by $100,000. (b) the Fed’s […]

The only case for which the bond price does not react to a change in the yield to maturity is when (a) the bond is a U.S. Treasury security. (b) the bond’s coupon rate equals its current yield. (c) the […]

Which of the following is a contractual saving institution? (a) The New York Stock Exchange (b) Greater Illinois Savings and Loan (c) Prudential Insurance Company (d) Fidelity Magellan Mutual Fund Answer: The effects of interest rates on the transactions demand […]

Since 1987, the Fed (a) has placed greater emphasis on hitting its target for M1 growth. (b) has pegged the federal funds rate. (c) no longer announces targets for M1 growth. (d) has concentrated on the T-bill rate as its […]

Significant skepticism has been expressed about which of the following being an efficient market? (a) The market for U.S. Treasury securities (b) The stock market (c) The market for financial futures (d) The commercial paper market Answer: In 1995, then […]

A small open economy (a) is unable to affect the world real interest rate by its borrowing and lending decisions. (b) will always be a net borrower from abroad. (c) will always be a net lender abroad. (d) is almost […]

A one-year discount bond with a face value of $10,000 that is currently selling for $9000 has an interest rate of (a) 9%. (b) 10%. (c) 11.11%. (d) 90%. Answer: Cold turkey disinflation (a) is very costly in terms of […]

Bank holding companies are supervised by (a) state banking authorities in the state in which the holding company is chartered. (b) the Office of the Comptroller of the Currency. (c) the Federal Reserve System. (d) the Office of Thrift Supervision. […]

During the 1980s and 1990s, the number of domestically chartered commercial banks in the United States (a) declined by more than one-third. (b) more than doubled. (c) more than tripled. (d) declined by about 90%. Answer: Which of the following […]

In the balance sheet channel, an expansionary monetary policy will in the short run (a) increase the real interest rate. (b) decrease the real interest rate. (c) leave the real interest rate unaffected. (d) have an ambiguous effect on the […]

The Competitive Equality Banking Act of 1987 (a) made branching across state lines legal. (b) forbade the opening of additional nonbank banks. (c) mandated that banks charge the same interest rate to all customers receiving a particular type of loan. […]

If the Fed sterilizes the purchase of foreign assets, (a) its assets and liabilities rise by the same amount. (b) its assets and liabilities fall by the same amount. (c) the composition of its assets changes, but its liabilities are […]

Forward contracts (a) are highly liquid. (b) entail small information costs. (c) provide little risk sharing. (d) are subject to default risk. Answer: To deal with difficulties in administering pension funds, Congress in 1974 passed the (a) Corrupt Pension Fund […]

In early 2003, President Bush was considering whether to nominate Alan Greenspan for (a) a fourth term as Chairman of the Board of Governors of the Federal Reserve System. (b) a fifth term as Chairman of the Board of Governors […]

Why did the risks associated with underwriting bond issues rise during the 1980s? (a) Because rising federal taxes forced a number of issuing firms close to bankruptcy (b) Because of the higher volatility of interest rates (c) Because accelerating inflation […]

The Federal Reserve System (a) is in charge of managing the New York Stock Exchange. (b) is headed by the Secretary of the Treasury. (c) is the central bank of the United States. (d) was dissolved in the late 1980s. […]

Demand-pull inflation results from (a) workers’ pressure for higher wages. (b) policymakers’ attempts to increase aggregate demand for current output above the full-employment level. (c) attempts by financial markets to deal with bracket creep. (d) attempts by the public to […]

For the post-World War II period, (a) increases in short-term interest rates tend to continue for many periods. (b) increases in short-term interest rates tend to be quickly followed by decreases. (c) short-term interest rates have typically been greater than […]

Circuit breakers are (a) interventions designed to restore orderly markets. (b) fines levied on noise traders. (c) fines levied on inside traders. (d) minimum inventory requirements imposed on specialists on the floor of the New York Stock Exchange. Answer: Between […]

The Humphrey-Hawkins Act of 1978 resulted from political discontent over (a) the high unemployment rates of the late 1970s. (b) the low interest rates of the late 1970s, which were discouraging saving. (c) the procyclical monetary policy being conducted by […]

A put option is said to be in the money if (a) it is written on a Treasury bill or other money-market asset. (b) it has increased in price since it was first written. (c) the price of the underlying […]

Economists believe that the most serious costs of inflation arise from (a) bracket creep. (b) menu costs. (c) redistributions of wealth owing to unexpected inflation. (d) uncertainty about the rate of inflation. Answer: Loanable funds refers to (a) only those […]

The narrowest money measure is (a) currency plus checking accounts at commercial banks. (b) currency plus all checking accounts. (c) currency plus all deposits at financial institutions. (d) definitive money. Answer: An expected change in the money supply will result […]

Money market mutual funds (a) hold portfolios of stocks. (b) hold portfolios of short-term assets. (c) are always load funds. (d) hold only U.S. Treasury securities. Answer: The new classical approach to the aggregate supply curve assumes that businesses are […]

Research has shown that the countries that suffered a banking crisis during the early 1930s (a) had smaller declines in the money supply than did countries that did not suffer a banking crisis. (b) had larger declines in output and […]

The members of Federal Reserve district bank boards of directors appointed by the Board of Governors are known as Class (a) A directors. (b) B directors. (c) C directors. (d) D directors. Answer: Which of the following statements is accurate? […]

The Bank Holding Company Act of 1956 defined a bank as a financial institution that (a) makes commercial loans. (b) accepts demand deposits. (c) makes commercial loans and accepts demand deposits. (d) makes commercial loans, accepts demand deposit, and holds […]

Under narrow banking (a) banks would make loans only from bank equity. (b) banks would not be allowed more than one branch. (c) federal deposit insurance would be eliminated. (d) banks would not be allowed to make any risky loans. […]

In a closed economy the goods market is in equilibrium when (a) Y = S + I + G. (b) C + S = I + G. (c) C + I = S + G. (d) Y = C + […]

In derivative markets trade takes place in (a) assets such as bonds or common stock that derive their value from the value of the companies that issue them. (b) assets whose rates of returns must be derived from information published […]

If new information becomes available indicating that a company’s profits will be much less than previously believed, the flow of funds into the market for its securities will decline (a) unless the expected real interest rate on its securities rises. […]

Which of the following is NOT true of exchanges? (a) Securities are bought and sold in one physical location. (b) Securities are sold in an auction market. (c) The NYSE is an exchange. (d) The NASDAQ is an exchange. Answer: […]

For simple loans, the yield to maturity (a) is always less than the specified simple interest rate. (b) is always greater than the specified simple interest rate. (c) is always equal to the specified simple interest rate. (d) may be […]

The most important economic benefit from specialization is that it (a) makes it possible for an economy to begin using money. (b) leads to an increase in the standard of living in an economy. (c) makes barter possible. (d) eliminates […]

Which of the following is a fixed payment loan? (a) A home mortgage (b) A U.S. Treasury bill (c) A U.S. Treasury note (d) A zero-coupon bond Answer: A central bank may be reluctant to see its currency appreciate because […]

In the United States, monetary policy is carried out by (a) the Federal Reserve System. (b) Congress. (c) the President. (d) Congress and the President acting together. Answer: At the time monetary union in Europe began in 1999, which of […]

In 1998, in order to avoid contagion, the Fed (a) expanded the deposit insurance system. (b) made substantial loans to three of the top 10 U.S. banks. (c) brought together the creditors of Long-Term Capital Management. (d) raised interest rates. […]

The theory of purchasing power parity (a) extends the law of one price to a group of goods. (b) assumes that most changes in nominal exchange rates are the result of changes in real exchange rates. (c) assumes that inflation […]

The use of bankers’ acceptances is most useful in reducing (a) interest rate risk. (b) credit risk. (c) exchange rate risk. (d) the gap between current exchange rates and future exchange rates. Answer: To conduct open market operations the FOMC […]

The fluctuations in the growth rate of M1 during 19791982 (a) were substantial, as a result of the stabilizing of the federal funds rate. (b) were substantial, but below those experienced under Burns and Miller. (c) were substantial and were […]

Interest rate fluctuations (a) are usually not considered to be of much importance and are largely ignored by the Fed. (b) have the paradoxical effect of increasing the rate of economic growth. (c) make it difficult for households and firms […]

If the U.S. rate of productivity growth is less than the rate of Canadian productivity growth, then we would expect (a) the Canadian dollar to appreciate against the U.S. dollar. (b) the Canadian dollar to depreciate against the U.S. dollar. […]

Where would shares of stock in the Federal Reserve System purchased by the Fed’s member banks be included on the Fed’s balance sheet? (a) It would be included on the balance sheets of the member banks, but it would not […]

In the bond market, the buyer is considered to be (a) the lender. (b) the borrower. (c) the lender or the borrower depending upon the use to which the funds are put. (d) the lender or the borrower depending upon […]

When an insurance company makes a direct loan to a firm, the loan is known as (a) a private placement. (b) a commercial paper. (c) an account receivable. (d) an account payable. Answer: In a matched sale-purchase transaction, the Fed […]

If the equilibrium interest rate in the loanable funds market on a one-year discount bond is 12%, then the equilibrium price in the bond market must be (a) $8800. (b) $8928.57. (c) $9214.36. (d) $10,000. Answer: Which of the following […]

Milton Friedman and Anna Schwartz believe that their evidence indicates that money growth causes output fluctuations because they discovered that (a) nominal interest rates move inversely with changes in the money supply. (b) the Fed always responds passively to changes […]

The “Member Bank Reserve Changes” data published weekly in The Wall Street Journal is most useful for (a) information on sources of change in the monetary base. (b) gauging whether a particular bank is likely to fail. (c) gauging the […]

If the federal funds rate was above the discount rate (a) banks would choose not to borrow from the Fed. (b) banks would want to borrow as much as they could from the Fed. (c) reserves would decline causing the […]

Using an interest rate for an intermediate target (a) will cause the quantity of money to fluctuate. (b) will often lead to a recession. (c) requires the use of a monetary aggregate as an operating target. (d) is required by […]

Which of the following is true of the Fed’s balance sheet? (a) The sum of Federal Reserve Notes and Reserve deposits by depository institutions equals the total of Fed assets. (b) The sum of Federal Reserve Notes and Reserve deposits […]

As a result of an open market purchase, bank reserves (a) rise and interest rates fall. (b) fall and interest rates rise. (c) and interest rates both rise. (d) and interest rates both fall. Answer: Why did Monetarist critics of […]

If the Fed wants to reduce the value of the dollar it will (a) sell foreign assets and buy dollars. (b) sell dollars and buy foreign assets. (c) buy foreign assets and also buy dollars. (d) sell foreign assets and […]

On a bank’s balance sheet, assets are (a) the uses of acquired funds. (b) the sources of acquired funds. (c) those items owed by the bank to depositors and others. (d) by definition equal to the bank’s liabilities. Answer: Investors […]

If the price of a futures contract increases, then (a) the exchange will collect the amount of the increase from the seller of the contract and transfer it to the account of the buyer of the contract. (b) the exchange […]