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
C) 6.67
D) 3.33
3) Banks are important to the study of money and the economy because they
A) channel funds from investors to savers
B) have been a source of rapid financial innovation
C) are the only important financial institution in the U.S. economy
D) create inflation
4) In practice, the Fed’s policy of targeting ________ in the 1960s proved to be
________, destabilizing the economy
A) money market conditions; countercyclical
B) money market conditions; procyclical
C) monetary aggregates; countercyclical
D) monetary aggregates; procyclical
5) Under the current managed float exchange rate regime, countries with balance of
payments deficits frequently do not want to see their currencies depreciate because it
makes ________ goods more expensive for ________ consumers and can stimulate
inflation.
A) foreign; foreign
B) foreign; domestic
C) domestic; foreign
D) domestic; domestic
6) The main advantage of using options on futures contracts rather than the futures
contracts themselves is that interest-rate risk is
A) controlled while preserving the possibility of gains
B) controlled, while removing the possibility of losses
C) not controlled, but the possibility of gains is preserved
D) not controlled, but the possibility of gains is lost
7) New information that might lead to a decrease in a stock’s price might be
A) an expected decrease in the level of future dividends
B) a decrease in the required rate of return
C) an expected increase in the dividend growth rate
D) an expected increase in the future sales price
8) In the liquidity trap, monetary policy
A) has a large impact on interest rates
B) has a small impact on interest rates
C) has no impact on interest rates
D) has a proportionate impact on interest rates
9) If a foreign bank operates a subsidiary bank in the U.S., the subsidiary bank is
A) subject to the same regulations as a U.S. owned bank
B) only subject to the regulations of the country in which the foreign bank is chartered
C) restricted to making loans to only foreign citizens in the U.S
D) restricted to accepting deposits from foreign citizens living in the U.S
10) According to the segmented markets theory of the term structure
A) the interest rate on long-term bonds will equal an average of short-term interest rates
that people expect to occur over the life of the long-term bonds
B) buyers of bonds do not prefer bonds of one maturity over another
C) interest rates on bonds of different maturities do not move together over time
D) buyers require an additional incentive to hold long-term bonds
11) ________ in the foreign 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
12) The concept of adverse selection helps to explain all of the following except
A) why firms are more likely to obtain funds from banks and other financial
intermediaries, rather than from the securities markets
B) why indirect finance is more important than direct finance as a source of business
finance
C) why direct finance is more important than indirect finance as a source of business
finance
D) why the financial system is so heavily regulated
13) Suppose on any given day there is an excess supply of reserves in the federal funds
market. If the Federal Reserve wishes to keep the federal funds rate at its current level,
then the appropriate action for the Federal Reserve to take is a ________ open market
________, everything else held constant.
A) defensive; sale
B) defensive; purchase
C) dynamic; sale
D) dynamic; purchase
14) Money market mutual fund shares function like
A) checking accounts that pay interest
B) bonds
C) stocks
D) currency
15) A major controversy involving the banking industry in its early years was
A) whether banks should both accept deposits and make loans or whether these
functions should be separated into different institutions
B) whether the federal government or the states should charter banks
C) what percent of deposits banks should hold as fractional reserves
D) whether banks should be allowed to issue their own bank notes
16) 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,
the expected return on ________-denominated assets in ________ percent.
A) dollar; euros is 3
B) euro; dollars is 1
C) dollar; euros is 1
D) euro; dollars is 3
17) Net profit after taxes per dollar of assets is a basic measure of bank profitability
called
A) return on assets
B) return on capital
C) return on equity
D) return on investment
18) Conflicts of interest arising from management advisory services brought down
________ in 2002 .
A) Enron
B) WorldComm
C) Arthur Andersen
D) Global Crossing
19) If there is an excess supply of money
A) individuals sell bonds, causing the interest rate to rise
B) individuals sell bonds, causing the interest rate to fall
C) individuals buy bonds, causing interest rates to fall
D) individuals buy bonds, causing interest rates to rise
20) Because the United States was the reserve-currency country under the Bretton
Woods system, it could run large balance of payments ________ without ________
significant amounts of international reserves.
A) deficits; losing
B) deficits; gaining
C) surpluses; losing
D) surpluses; gaining
21) If the possibility of a default increases because corporations begin to suffer losses,
then the default risk on corporate bonds will ________, and the bonds’ returns will
become ________ uncertain, meaning that the expected return on these bonds will
decrease, everything else held constant.
A) increase; less
B) increase; more
C) decrease; less
D) decrease; more
22) Which of the following is not an advantage to exchange-rate targeting?
A) It provides a strong nominal anchor to keep inflation under control
B) It provides an automatic rule for policy to help avoid the time-inconsistency problem
C) It is simple and clear so that the public can easily understand it
D) It increases the accountability of policymakers
23) In asset markets, an asset’s price is
A) set equal to the highest price a seller will accept
B) set equal to the highest price a buyer is willing to pay
C) set equal to the lowest price a seller is willing to accept
D) set by the buyer willing to pay the highest price
24) The nonactivists who opposed the recent fiscal stimulus package argue that
A) fiscal stimulus would take too long to work because of long implementation lags
B) fiscal stimulus might kick in after the economy had already recovered
C) fiscal stimulus could lead to increased volatility in inflation and economic activity
D) all of the above
E) none of the above
25) Which of the following is not an example of a backup line of credit?
A) loan commitments
B) overdraft privileges
C) standby letters of credit
D) mortgages
26) Which of the following policy measures required the SEC to prevent issuers of
asset-backed securities from choosing the credit-rating agencies that will give them the
highest rating and supported earlier initiatives by the SEC?
A) The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
B) Sarbanes-Oxley Act of 2002
C) Global Legal Settlement of 2002
D) Gramm-Leach-Bliley Act of 1999
E) Riegle-Neal Act of 1994
27) If the expected path of 1-year interest rates over the next five years is 1 percent, 2
percent, 3 percent, 4 percent, and 5 percent, the expectations theory predicts that the
bond with the highest interest rate today is the one with a maturity of
A) two years
B) three years
C) four years
D) five years
28) 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 10%, the adaptive
expectation forecast of the inflation rate is
A) 5%
B) between 5 and 10%
C) 10%
D) more than 10%
29) One of the concerns of increased bank consolidation is the reduction in community
banks which could result in
A) less lending to small businesses
B) loss of cultural identity
C) higher interest rates
D) more bank regulation