Examples of economies of scale are:
A. the additional fees financial intermediaries charge on small accounts.
B. the decrease in overall transaction costs that occur as volume increases.
C. the reduction in the cost per transaction that occurs as the number of transactions
increase.
D. the decrease in overall information costs that occurs as more transactions are
handled.
Answer:
The holding period return on a bond:
A. can never be more than the yield to maturity.
B. will equal the yield to maturity if the bond is purchased for face value and sold at a
lower price.
C. will be less than the yield to maturity if the bond is sold for more than face value.
D. will be less than the yield to maturity if the bond is sold for less than face value.
Answer:
Which of the following is not an important addition made to the Basel Accords by Basel
III in 2010?
A. It supplements capital requirements based on risk-weighted assets with restrictions
on leverage.
B. It introduces three buffers over and above capital requirements itself.
C. It adds a liquidity requirement that compels banks to hold a quantity of high-quality
liquid assets.
D. It ends the too-big-to-fail problem.
Answer:
The U.S. has many banks because:
A. small banks are more profitable than large banks.
B. many states outlawed bank branching.
C. the Great Depression caused the failure of the large banks, leaving many small
banks.
D. the Glass-Steagall Act forced the splitting up of large banks.
Answer:
An index number is valuable because:
A. the level of every index number itself provides critical information.
B. it is more stable than the data it reflects.
C. it provides a meaningful measurement scale to calculate percentage changes.
D. it does not require any calculations to compute percentage changes.
Answer:
As bond prices increase:
A. the quantity of bonds supplied increases.
B. the quantity of bonds supplied decreases.
C. the quantity of bonds demanded increases.
D. yields increases.
Answer:
The total assets of commercial banks in 2013 amounted to:
A. three times nominal GDP in the U.S.
B. about one-half of nominal GDP in the U.S.
C. about four-fifths of nominal GDP in the U.S.
D. about one-tenth of nominal GDP in the U.S.
Answer:
Under the Bretton Woods System each participating country had to:
A. be willing to exchange their own currency for gold.
B. hold ample reserves of currency of each of the participating countries.
C. stand ready to exchange its own currency for U.S. dollars at a fixed exchange rate.
D. adopt capital controls.
Answer:
History shows that:
A. countries with low rates of money growth have high rates of inflation.
B. money growth and inflation are not related.
C. countries with high rates of money growth have high rates of inflation.
D. money growth rates equal inflation rates.
Answer:
Deflation compounds information problems because it:
A. increases a company’s net worth.
B. tends to understate a company’s assets and overstate their liabilities.
C. reduces the dollar value of assets while the dollar value of liabilities stays constant.
D. always harms lenders.
Answer:
As a result of technology, many small businesses today:
A. are located closer to their bank.
B. are located further from their bank.
C. have more face-to-face interactions with their banker.
D. no longer need banks.
Answer:
The variance of a portfolio containing n assets with independent returns:
A. increases as n increases.
B. decreases as n increases.
C. is constant for any n greater than two.
D. does not change in a predictable way when n increases.
Answer:
The right to buy a given quantity of an underlying asset at a predetermined price on or
before a specific date is called a(n):
A. put option.
B. option writer.
C. call option.
D. arbitrage contract.
Answer:
As a portion of total assets measured in billions of dollars, the most important asset on
the Fed’s balance sheet is:
A. gold.
B. securities.
C. foreign exchange reserves.
D. loans.
Answer:
If the risk on foreign government bonds increases relative to U.S. government bonds,
the price of U.S. government bonds should:
A. not change since U.S. government bonds are free of default risk.
B. decrease since people will bail out of all government bonds.
C. increase as the demand for these bonds increases.
D. not be affected because the two types of bonds are traded in different markets.
Answer:
Monetary union, in comparison to dollarization, means that:
A. countries forgo revenues from seignorage.
B. countries share in monetary policy decisions.
C. the central bank no longer has the ability to be the lender of last resort.
D. all of the answers given are correct.
Answer:
Which of the following statements best completes the following sentence; “Prior to
World War I, when the U.S. was on the gold standard, inflation in the U.S.”?
A. averaged 3.5 percent per year but was highly variable.
B. averaged less than one percent per year and was highly variable.
C. averaged less than one percent per year and was stable.
D. averaged 3.5 percent per year and was stable.
Answer:
Investment A pays $1,200 half of the time and $800 half of the time. Investment B pays
$1,400 half of the time and $600 half of the time. Which of the following statements is
correct?
A. Investment A and B have the same expected value, but A has greater risk.
B. Investment B has a higher expected value than A, but also greater risk.
C. Investment A and B have the same expected value, but A has lower risk than B.
D. Investment A has a greater expected value than B, but B has less risk.
Answer:
If a futures contract for U.S. Treasury bonds decreases by “17” in the financial page
listings, the price of the contract decreased by:
A. $531.25.
B. $170.00.
C. $340.00.
D. $1700.00.
Answer:
Negative supply shocks cause shifts in:
A. only the short-run aggregate supply curve.
B. the dynamic aggregate demand curve.
C. the monetary policy reaction curve but only if policymakers do not change their
inflation target.
D. the short-run aggregate supply curve and, possibly, the long-run aggregate supply
curve.
Answer:
Considering a bank’s balance sheet, which of the following statements is false?
A. Total Bank Assets + Total Bank Liabilities = Total Bank Capital
B. Total Bank Assets = Total Bank Liabilities + Total Bank Capital
C. Total Bank Liabilities = Total Bank Assets – Total Bank Capital
D. Total Bank Capital = Total Bank Assets – Total Bank Liabilities
Answer:
Decreases in the real interest rate will result in a(n):
A. increase in net exports because it will lead to a depreciation of the dollar.
B. decrease in net exports because it will lead to a depreciation of the dollar.
C. increase in net exports because it will lead to an appreciation of the dollar.
D. decrease in net exports because it will lead to an appreciation of the dollar.
Answer:
Lloyd’s of London is perhaps most known for:
A. being the largest insurance company in the world.
B. going out of business when it insured too many odd risks.
C. offering insurance against unusual risks.
D. being the oldest insurance company in the world.
Answer:
Most of the buying and selling in primary markets:
A. is in the public view.
B. is highly transparent and closely monitored by the SEC.
C. involve an investment bank.
D. is done by the Federal Reserve.
Answer:
The acronym CAMELS, which is the criteria used by supervisors to evaluate the health
of banks, includes the following, except:
A. asset quality.
B. losses.
C. management.
D. earnings.
Answer:
Each president of a Reserve Bank serves for a:
A. fourteen-year term.
B. five-year term.
C. seven-year term.
D. two-year renewable term.
Answer:
Which of the following is not a reason to create large financial holding companies?
A. Financial holding companies offer a wide array of services under one brand name.
B. Financial holding companies need only one CEO, one Board of Directors, and one
accounting system regardless of size.
C. Financial holding companies are well diversified so risk is reduced.
D. Financial holding companies are exempt from having to pay for FDIC insurance on
deposits.
Answer:
From 1979 to 1982, the Fed targeted bank reserves as the monetary policy tool. One
side effect of this strategy was:
A. the inflation rate increased to over 18 percent in 1983.
B. many banks failed that otherwise may not have.
C. interest rates rose very high.
D. inflation remained high for most of the 1980’s.
Answer:
If domestic residents are restricted in their ability to purchase foreign assets then their
government is imposing:
A. controls on capital inflows.
B. controls on capital outflows.
C. controls on both capital inflows and outflows.
D. fixed exchange rates.
Answer:
The Reserve Banks of the Federal Reserve System are owned by:
A. the taxpayers in their districts.
B. the U.S. Treasury.
C. the Board of Governors.
D. the commercial banks in their districts.
Answer:
In the United States, one problem with central bank independence is:
A. it is almost impossible to obtain because Congress controls the budget of the
Federal Reserve.
B. in a representative democracy, monetary policymakers must be held accountable to
the public.
C. central bank independence has not produced favorable results.
D. the central bank can control policy, but the U.S. Treasury issues currency.
Answer:
The largest Federal Reserve District geographically is serviced by:
A. the Reserve Bank in San Francisco.
B. the Reserve Bank in Chicago.
C. the Reserve Bank in New York.
D. the districts are divided fairly equally.
Answer:
According to the theory of efficient markets:
A. investors use rules of thumb to make choices about which stocks to buy and sell.
B. investors are able to use forecasts based on the dividend-discount model to generate
above-average returns.
C. a portfolio manager who charges no commission should not, on average, outperform
an individual investor with access to the same funds.
D. the stock price should remain constant.
Answer:
An inflation rate above the target rate will result in:
A. a movement up along the monetary policy reaction curve and a movement up the
dynamic aggregate demand curve.
B. a movement down along the monetary policy reaction curve and a movement down
the dynamic aggregate demand curve.
C. a movement up along the monetary policy reaction curve and a leftward shift of the
dynamic aggregate demand curve.
D. a movement up along the monetary policy reaction curve and a rightward shift of
the dynamic aggregate demand curve.
Answer:
A borrower who obtains funds from a lender to purchase additional inventory but uses
the funds to finance a trip to Las Vegas for a weekend of gambling at the opening of a
new casino is an example of:
A. the problem of adverse selection.
B. the free-rider.
C. the moral hazard problem.
D. lax government regulation.
Answer:
Use the long-run model from Chapter 22 to describe the adjustment process the
economy would go through from an increase in potential output.
Answer:
What evidence is there that the transaction costs involved with the buying and selling of
stocks is low?
Answer:
Why do you think Congress and the President are reluctant to fix the problems
(identified in the text) with the Social Security System?
Answer:
From information presented in Chapter 8, you should be able to identify at least two
reasons an investor may want to consider an index fund over a managed (mutual) fund.
What are these reasons?
Answer:
The usually upward sloping yield curve indicates that long-term bonds have higher
yields than short-term bonds. Why is this?
Answer:
What is the difference between standard deviation and value at risk? Consider the
difference between purchasing a one-year bank CD compared with purchasing a
homeowner’s insurance policy. Which scenario do you believe is more likely to
consider value at risk over standard deviation? Explain.
Answer:
What are the main costs to a country that adopts dollarization?
Answer:
Why is it that financial intermediaries are so important in most economies?
Answer:
What are some of the advantages of trading in decentralized electronic exchanges?
Answer:
How do banks potentially make economic downturns more severe and how do
economic downturns contribute to the increased failure of banks?
Answer:
Explain why an appreciating U.S. dollar does not benefit everyone in the U.S.
Answer:
Use the equation of exchange to show that in the long run, inflation must equal money
growth less the growth of potential output.
Answer:
You receive a $1,000 gift from your grandmother when you graduate from college.
Your grandmother withdrew the $1,000 from her checking account and gave you ten
$100 bills. You deposit the ten bills into your checking account. Discuss the impact of
these transactions on your grandmother’s balance sheet, your balance sheet, and the
Fed’s balance sheet.
Answer:
As we saw in the chapter, some financial instruments are used primarily to transfer risk.
Explain how a bread maker can use a financial instrument to transfer the following risk:
the bread maker has the opportunity to provide bread to a local army base. The base
figures they will need 10,000 loaves of bread each week, or roughly 500,000 for a year.
The problem is the baker must quote a price for the entire year. The baker would really
like to have this contract but he realizes that fluctuating input prices (specifically wheat)
could result in significant losses.
Answer:
Any theory of the yield curve must be able to explain what three general conditions?
Answer:
What is the source of regulatory competition in banking? Discuss how the focus of this
competition has changed over time.
Answer: