One reason the target federal funds rate may not equal the actual federal funds rate is
because:
A. there is no way that the Fed could keep the actual rate at the target rate.
B. the target rate changes with the demand for reserves.
C. attaining the target rate involves forecasting reserve demand and forecasts are
subject to error.
D. none of the answers is correct; the target and the actual federal funds rates are
always equal.
Answer:
Everything else equal, if the ratio of bank assets to bank capital decreases, the bank’s
return on equity should:
A. decrease.
B. remain constant.
C. increase.
D. cannot be determined from the information provided.
Answer:
Which formula below best expresses the real interest rate, (r)?
A. i = r – πe
B. r = i + πe
C. r = i – πe
D. πe = i + r
Answer:
If their only concern were the cost of issuing municipal debt, how would you expect the
mayors of most U.S. cities to respond to a revenue-neutral change in the federal income
tax that sharply lowered the top marginal tax rate?
A. Favorably, since this will significantly increase the demand for municipal bonds.
B. Unfavorably, the demand for municipal bonds will fall and their yields will increase.
C. Favorably, the price of municipal bonds should increase and their yields fall.
D. No reaction, this should have no impact on municipal bonds at all.
Answer:
Between 1970 and 2000, the Fed:
A. published their targets for money growth and often hit these targets.
B. never published targets or actual amounts for money growth.
C. published targets for money growth and rarely hit them.
D. published actual money growth but not targets.
Answer:
Which of the following would not shift the aggregate expenditures curve?
A. A change in the real interest rate
B. Changes in consumer or business confidence
C. Fiscal policy changes
D. Changes in net exports that result from exchange rate changes
Answer:
A bank’s off-balance-sheet activities usually:
A. increase both its assets and liabilities while reducing net income.
B. increase its net income but do not change its assets or liabilities.
C. increases a bank’s liabilities but not its assets.
D. increases a bank’s assets but not its liabilities.
Answer:
You have savings accounts at two separately FDIC insured banks. At one of the banks
your account has a balance of $200,000. At the other bank the account balance is
$60,000. If both banks fail, you will receive:
A. $250,000.
B. $60,000.
C. $260,000.
D. $200,000.
Answer:
If a public corporation goes bankrupt and does not have enough assets to pay off all
creditors:
A. the stockholders are personally liable for the balance.
B. the fact that stockholders are residual claimants means they may have to pay in
additional capital to cover the obligations.
C. the stockholders receive any dividends due before the other creditors are paid.
Answer:
Requiring that borrowers put up collateral to obtain a loan is a tool designed to treat:
A. the Lemons Problem.
B. the problem of adverse selection.
C. the problem of moral hazard.
D. the free-rider problem.
Answer:
Money held for precautionary reasons is included in the demand for money:
A. as a third, separate category called the precautionary demand for money.
B. as part of transactions demand.
C. as part of portfolio demand.
D. partly as transactions demand and partly as portfolio demand.
Answer:
Which of the following is not true about the information and advice investment bankers
provide to clients?
A. It is public information that the bank compiles and makes available to anyone.
B. It is highly valued if the fees paid for it are any indication of its value.
C. It is often used to identify possible acquisition and merger candidates.
D. It helps improve the allocation of resources across the economy.
Answer:
Commissions paid to a stock broker are an example of:
A. risk transfer.
B. transaction costs.
C. information asymmetry.
D. liquidity.
Answer:
According to the NBER, a severe decline in economic activity that lasted less than two
quarters:
A. could not be considered a recession.
B. could still be considered a recession.
C. would not be called a recession until more than two years had passed.
D. would immediately be called a recession.
Answer:
One reason given for more central bankers releasing its decisions publicly is:
A. for monetary policy to work, people must be taken by surprise.
B. most people do not understand monetary policy so it really doesn’t do any harm to
release the decisions publicly.
C. so that central banks across the world can coordinate their policies.
D. monetary policy is more effective when households and businesses can understand
and anticipate it.
Answer:
Financial instruments used primarily to transfer risk would include all of the following,
except:
A. an insurance contract.
B. a futures contract.
C. options.
D. a bank loan.
Answer:
A portfolio of assets has lower risk than holding one asset, but the same expected return
and higher transaction costs. Which of the following statements is most correct?
A. The portfolio is attractive to people who are risk-averse and risk-neutral, but not to
risk seekers.
B. The portfolio is attractive to investors who are risk-neutral.
C. The portfolio is not attractive to investors who are risk-neutral.
D. The portfolio is attractive to investors who are risk seekers.
Answer:
The main problem from inflation as seen by most economists is:
A. inflation raises prices more than wages.
B. inflation harms lenders more than it benefits borrowers.
C. during periods of inflation some prices fall.
D. inflation creates risk.
Answer:
The daily reserve supply curve is:
A. upward sloping.
B. downward sloping.
C. vertical until the federal funds rate equals the discount rate; at that point it becomes
horizontal.
D. horizontal until the federal funds rate equals the discount rate; at that point it
becomes vertical.
Answer:
The price of a stock is currently $750 and the stock will pay a $43 dividend. The
interest rate is 7.5%. Based on equation 7 in the chapter, what is the expected price of
this stock for next year?
A. $651.17
B. $657.67
C. $691.17
D. $763.25
Answer:
Capital is the cushion banks have against:
A. sudden drops in the value of their assets.
B. an unexpected decrease in liabilities.
C. liquidity risk.
D. moral hazard.
Answer:
In calculating the current yield for a bond the:
A. coupon payment is ignored.
B. present value of the capital gain/loss is ignored.
C. present value of the final payment is the only important consideration.
D. present value of the coupon payments is the only important consideration.
Answer:
A typical automobile insurance policy is an example of:
A. liability insurance only.
B. property and casualty insurance.
C. property insurance only.
D. casualty insurance only.
Answer:
Considering interest-rate swaps, the swap rate is:
A. the benchmark rate plus a premium.
B. the rate being offered on U.S. Treasury securities of similar maturities.
C. another name for the swap spread.
D. a measure of overall risk in the economy.
Answer:
Which of the following is true?
A. Investments with higher risk generally have a higher expected return than risk-free
investments.
B. Investments that pay a return over a longer time horizon generally have less risk.
C. Investments with a greater variance in the size of the future payoff generally pay a
lower expected return.
D. Risk-free investments are the best benchmark for measuring the risk of all
investment strategies.
Answer:
If ABC Inc. and XYZ Inc. have returns that are perfectly positively correlated:
A. adding XYZ Inc. to a portfolio that consists of only ABC Inc. will reduce risk.
B. adding ABC Inc. to a portfolio that includes only XYZ Inc. will increase risk.
C. adding XYZ Inc. to a portfolio that consists of only ABC Inc. will neither increase
nor decrease the risk of the portfolio.
D. adding XYZ Inc. to a portfolio that consists of only ABC Inc. will neither increase
nor decrease idiosyncratic risk but will lower systematic risk.
Answer:
In the long run, current output will:
A. equal potential output.
B. be less than potential output.
C. be above potential output.
D. only equal potential output if unemployment is zero.
Answer:
Insurance companies can predict fairly accurately:
A. the percentage of policyholders who will have a claim and which policyholders will
have a claim.
B. which policyholders will suffer a loss but not the percentage of policyholders that
will do so.
C. the type of losses policyholders will incur but not the percentage of policyholders
that will file claims.
D. the percentage of policyholders that will file claims but not the policyholders that
will file them.
Answer:
If your stockbroker gives you bad advice and you lose your investment:
A. the government will reimburse you similar to reimbursing depositors if a bank fails.
B. the government will not reimburse you for the loss; you are not protected from bad
advice by your stockbroker.
C. these losses would be covered under FDIC insurance.
D. your investment would only be covered if the stockbroker was employed by a bank.
Answer:
One of the reasons primary credit exists is to:
A. bail out banks which are in financial trouble.
B. provide additional reserves when the open market staff’s forecasts are off.
C. provide banks with an available source for unsecured lending.
D. provide banks with a low interest source for long-term capital.
Answer:
The fact that common stockholders are residual claimants means the stockholders:
A. have a claim against the revenue that remains after everyone else is paid.
B. receive their dividends before any other residuals are paid.
C. are paid any past due dividends before other claims are paid.
Answer:
For a firm, a decrease in the interest rate resulting from monetary policy can:
A. decrease the value of its assets.
B. decrease the cost of its liabilities.
C. decrease its net worth.
D. all of the answers given are correct.
Answer:
A society without any money:
A. could never exchange goods and/or services.
B. would find people doing everything for themselves.
C. would have to rely on barter.
D. would be more efficient since people would be more self-sufficient.
Answer:
An investment grows from $100.00 to $150.00 or 50% over five years. What annual
increase gives a 50% increase over five years?
A. 12.00%
B. 10.00%
C. 9.25%
D. 8.45%
Answer: