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.
C) allows the domestic currency to depreciate at a steady rate so that inflation in the
pegging country can be higher than that of the anchor country.
D) allows the domestic currency to depreciate at a steady rate so that inflation in the
pegging country can be lower than that of the anchor country.
Milton Friedman called the response of lower interest rates resulting from an increase in
the money supply the ________ effect.
A) liquidity
B) price level
C) expected-inflation
D) income
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.
D) primary-issue funds.
The existence of lags prevents the instantaneous adjustment of the economy to policies
changing aggregate demand, thereby strengthening the case for
A) supply-side policy.
B) nonactivists.
C) activists.
D) demand-management policy.
Because Keynes assumed that the expected return on money was zero, he argued that
people would
A) never hold money.
B) never hold money as a store of wealth.
C) hold money as a store of wealth when the expected return on bonds was negative.
D) hold money as a store of wealth only when forced to by government policy.
Because checking accounts are ________ liquid for the depositor than savings
accounts, they earn ________ interest rates.
A) less; higher
B) less; lower
C) more; higher
D) more; lower
Everything else held constant, a decrease in the excess reserves ratio causes the M1
money multiplier to ________ and the money supply to ________.
A) decrease; increase
B) increase; increase
C) decrease; decrease
D) increase; decrease
Of the following financial intermediaries, which holds the least liquid assets?
A) property and casualty insurance companies
B) life insurance companies
C) money market mutual funds
D) commercial banks
A bank has no excess reserves and demand deposit liabilities of $100,000 when the
required reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, the bank’s
excess reserves will now be
A) -$5,000.
B) -$1,000.
C) $1,000.
D) $5,000.
Which of the following are NOT assets on the Fed’s balance sheet?
A) securities
B) discount loans
C) cash items in the process of collection
D) deferred availability cash items
A tax increase ________ disposable income, ________ consumption expenditure, and
shifts the IS curve to the ________, everything else held constant.
A) increases; increases; right
B) increases; decreases; left
C) decreases; increases; left
D) decreases; decreases; left
Which of the following was the fastest-growing financial intermediary of the 1970s?
A) commercial banks
B) credit unions
C) finance companies
D) money market mutual funds
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) liquidity effect is smaller than the expected inflation effect and interest rates adjust
quickly to changes in expected inflation.
B) liquidity effect is larger than the expected inflation effect and interest rates adjust
quickly to changes in expected inflation.
C) liquidity effect is larger than the expected inflation effect and interest rates adjust
slowly to changes in expected inflation.
D) liquidity effect is smaller than the expected inflation effect and interest rates adjust
slowly to changes in expected inflation.
In the basic closed-economy ISLM model, as the interest sensitivity of investment
spending increases, fiscal policy has ________ effect on output and monetary policy
has ________ effect on output.
A) less; less
B) more; more
C) more; less
D) less; more
A financial crisis occurs when an increase in asymmetric information from a disruption
in the financial system
A) causes severe adverse selection and moral hazard problems that make financial
markets incapable of channeling funds efficiently.
B) allows for a more efficient use of funds.
C) increases economic activity.
D) reduces uncertainty in the economy and increases market efficiency.
Everything else held constant, the vertical section of the supply curve of reserves is
lengthened when the
A) discount rate increases.
B) discount rate decreases.
C) federal funds rate rises.
D) federal funds rate falls.
The spread between interest rates on low quality corporate bonds and U.S. government
bonds
A) widened significantly during the Great Depression.
B) narrowed significantly during the Great Depression.
C) narrowed moderately during the Great Depression.
D) did not change during the Great Depression.
The Federal Reserve has had the authority to vary reserve requirements since the
A) 1920s.
B) 1930s.
C) 1940s.
D) 1950s.
The Federal Reserve Banks are ________ institutions since they are owned by the
________.
A) quasi-public; private commercial banks in the district where the Reserve Bank is
located
B) public; private commercial banks in the district where the Reserve Bank is located
C) quasi-public; Board of Governors
D) public; Board of Governors
According to rational expectations
A) expectations of inflation are viewed as being an average of past inflation rates.
B) expectations of inflation are viewed as being an average of expected future inflation
rates.
C) expectations formation indicates that changes in expectations occur slowly over time
as past data change.
D) expectations will not differ from optimal forecasts using all available information.
In the simple deposit expansion model, a decline in checkable deposits of $1,000 when
the required reserve ratio is equal to 20 percent implies that the Fed
A) sold $200 in government bonds.
B) sold $500 in government bonds.
C) purchased $200 in government bonds.
D) purchased $500 in government bonds.
When compared to exchange systems that rely on money, disadvantages of the barter
system include
A) the requirement of a double coincidence of wants.
B) lowering the cost of exchanging goods over time.
C) lowering the cost of exchange to those who would specialize.
D) encouraging specialization and the division of labor.
Real business cycle theorists are critical of monetarist reduced-form evidence because
they believe
A) money is the most important cause of changes in aggregate demand.
B) there is reverse causation from the business cycle to money.
C) there is reverse causation from money to the business cycle.
D) business cycles do not exist.
Assume a bank has $200 million of assets with a duration of 2.5, and $190 million of
liabilities with a duration of 1.05. If interest rates increase from 5 percent to 6 percent,
the net worth of the bank falls by
A) $1 million.
B) $2.4 million.
C) $3.6 million.
D) $4.8 million.
The efficient markets hypothesis predicts that stock prices follow a “random walk.” The
implication of this hypothesis for investing in stocks is
A) a “churning strategy” of buying and selling often to catch market swings.
B) turning over your stock portfolio each month, selecting stocks by throwing darts at
the stock page.
C) a “buy and hold strategy” of holding stocks to avoid brokerage commissions.
D) following the advice of technical analysts.
________ occurs when market participants observe returns on a security that are larger
than what is justified by the characteristics of that security and take action to quickly
eliminate the unexploited profit opportunity.
A) Arbitrage
B) Mediation
C) Asset capitalization
D) Market intercession
Because of asymmetric information, the failure of one bank can lead to runs on other
banks. This is the
A) too-big-to-fail effect.
B) moral hazard problem.
C) adverse selection problem.
D) contagion effect.
Under a fixed exchange rate regime, if the domestic currency is initially ________, that
is, ________ par, the central bank must intervene to sell the domestic currency by
purchasing foreign assets.
A) overvalued; below
B) overvalued; above
C) undervalued; below
D) undervalued; above
Vesting refers to
A) the length of time an insurance company has been in business.
B) the length of time that a person must be enrolled in a pension plan before being
entitled to receive benefits.
C) the length of time until a CD matures.
D) the premium required under term insurance.
A contract requiring payment of an annual premium in exchange for the payment of a
future stream of payments beginning at a specified age and continuing until death is
A) whole life insurance.
B) an annuity.
C) term life insurance.
D) variable life insurance.
E) universal life insurance.
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
Which of the following statements concerning external sources of financing for
nonfinancial businesses in the United States are TRUE?
A) Stocks are a far more important source of finance than are bonds.
B) Stocks and bonds, combined, supply less than one-half of the external funds.
C) Financial intermediaries are the least important source of external funds for
businesses.
D) Since 1970, more than half of the new issues of stock have been sold to American
households.
According to the efficient markets hypothesis, the current price of a financial security
A) is the discounted net present value of future interest payments.
B) is determined by the lowest successful bidder.
C) fully reflects all available relevant information.
D) is a result of none of the above.