1) 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
2) Everything else held constant, when the federal funds rate is ________ the interest
rate paid on reserves, the quantity of reserves demanded rises when the federal funds
rate ________.
A) above, rises
B) above, falls
C) below, rises
D) below, falls
3) Microprudential supervision focuses on the safety and soundness of
A) individual financial institutions
B) the financial system as a whole
C) the shadow banking system
D) government credit agencies
4) Today 1 euro can be purchased for $1.10. This is the
A) spot exchange rate
B) forward exchange rate
C) fixed exchange rate
D) financial exchange rate
5) The theory of PPP suggests that if one country’s price level falls relative to another’s,
its currency should
A) depreciate in the long run
B) appreciate in the long run
C) appreciate in the short run
D) depreciate in the short run
6) Fraudulent practices and other abuses of private pension funds led Congress to enact
the
A) FDIC Act
B) Federal Reserve Act
C) FHLBS
D) Employee Retirement Income Security Act
7) The amount of checkable deposits that banks are required by regulation to hold are
the
A) excess reserves
B) required reserves
C) vault cash
D) total reserves
8) The Federal Reserve will engage in a matched sale-purchase transaction when it
wants to ________ reserves ________ in the banking system.
A) increase; permanently
B) increase; temporarily
C) decrease; temporarily
D) decrease; permanently
9) During the Great Depression years 1930-1933 there was a very high rate of business
failures and defaults, we would expect the risk premium for ________ bonds to be very
high.
A) U.S. Treasury
B) corporate Aaa
C) municipal
D) corporate Baa
10) The theory of portfolio choice suggests that the most important factor affecting the
demand for domestic and foreign assets is the ________ on these assets relative to one
another.
A) interest rate
B) risk
C) expected return
D) liquidity
11) In this type of arrangement, any balances above a certain amount in a corporation’s
checking account at the end of the business day are “removed” and invested in
overnight securities that pay the corporation interest. This innovation is referred to as a
A) sweep account
B) share draft account
C) removed-repo account
D) stockman account
12) During World War II, whenever interest rates would ________ and the price of
bonds would begin to ________, the Fed would make open market purchases.
A) rise; rise
B) rise; fall
C) fall; rise
D) fall; fall
13) An increase in productivity in a country will cause its currency to ________
because it can produce goods at a ________ price, everything else held constant.
A) depreciate; lower
B) appreciate; lower
C) depreciate; higher
D) appreciate; higher
14) According to the expectations theory of the term structure
A) when the yield curve is steeply upward sloping, short-term interest rates are
expected to remain relatively stable in the future
B) when the yield curve is downward sloping, short-term interest rates are expected to
remain relatively stable in the future
C) investors have strong preferences for short-term relative to long-term bonds,
explaining why yield curves typically slope upward
D) yield curves should be equally likely to slope downward as slope upward
15) The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 did not
prohibit companies issuing securities from paying the credit-rating agencies to rate
them. This is an example of which remedy of conflicts of interest?
A) Regulate for transparency
B) Supervisory oversight
C) Leave it to the market
D) Socialization of information production
16) Of the three players in the money supply process, most observers agree that the
most important player is
A) the United States Treasury
B) the Federal Reserve System
C) the FDIC
D) the Office of Thrift Supervision
17) Because of their ________ liquidity, ________ U.S. government securities are
called secondary reserves.
A) low; short-term
B) low; long-term
C) high; short-term
D) high; long-term
18) In the simple deposit expansion model, if the banking system has excess reserves of
$75, and the required reserve ratio is 20%, the potential expansion of checkable
deposits is
A) $75
B) $750
C) $37.50
D) $375
19) Well-functioning financial markets
A) cause inflation
B) eliminate the need for indirect finance
C) cause financial crises
D) produce an efficient allocation of capital
20) If the Fed decides to reduce bank reserves, it can
A) purchase government bonds
B) extend discount loans to banks
C) sell government bonds
D) print more currency
21) When gold prices become more volatile, the ________ curve for gold shifts to the
________; ________ the price of gold.
A) supply; right; increasing
B) supply; left; increasing
C) demand; right; decreasing
D) demand; left; decreasing
22) 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
23) In a ________ banking system, commercial banks engage in securities
underwriting, but legal subsidiaries conduct the different activities. Also, banking and
insurance are not typically undertaken together in this system.
A) universal
B) British-style universal
C) short-fence
D) compartmentalized
24) Banks earn profits from off-balance sheet loan sales
A) by foreclosing on delinquent accounts
B) by selling the loans at discounted prices
C) by selling existing loans for more than the original loan amount
D) by calling-in loans before the maturity date
25) The account that shows international transactions involving currently produced
goods and services is called the
A) trade balance
B) current account
C) balance of payments
D) capital account
26) If the required reserve ratio is 10 percent, currency in circulation is $400 billion,
checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the
excess reserves-checkable deposit ratio is
A) 0.001
B) 0.10
C) 0.01
D) 0.05
27) Which of the following statements is correct?
A) If most shocks to the economy are aggregate demand shocks or permanent aggregate
supply shocks, then policy that stabilizes inflation will also stabilize economic activity,
even in the short run
B) If temporary supply shocks are more common, then a central bank must choose
between stabilizing inflation and stabilizing output in the short run
C) In the long run, there is no conflict between stabilizing inflation and economic
activity in response to shocks
D) all of the above
28) Adverse selection is a problem associated with equity and debt contracts arising
from
A) the lender’s relative lack of information about the borrower’s potential returns and
risks of his investment activities
B) the lender’s inability to legally require sufficient collateral to cover a 100% loss if
the borrower defaults
C) the borrower’s lack of incentive to seek a loan for highly risky investments
D) the lender’s inability to restrict the borrower from changing his behavior once given
a loan
29) Everything else held constant, an increase in the required reserve ratio will result in
________ in M1 and ________ in M2..
A) an increase; an increase
B) an increase; a decrease
C) a decrease; an increase
D) a decrease; a decrease
30) If housing prices are expected to increase, then, other things equal, the demand for
houses will ________ and that of Treasury bills will ________.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
31) The decade during which the growth rates of monetary aggregates diverged the
most is
A) the 1960s
B) the 1970s
C) the 1980s
D) the 1990s
32) The Keynesian demand for real balances can be expressed as
A) Md = f(i,Y)
B) Md/P = f(i)
C) Md/P = f(Y)
D) Md/P = f(i,Y)
33) An increase in default risk on corporate bonds ________ the demand for these
bonds, but ________ the demand for default-free bonds, everything else held constant.
A) increases; lowers
B) lowers; increases
C) does not change; greatly increases
D) moderately lowers; does not change
34) Economists closely follow the current account balance because they believe it can
provide information on the future movement of
A) interest rates
B) gold flows
C) exchange rates
D) special drawing rights