1) Suppose that from a new checkable deposit, First National Bank holds eight million
dollars on deposit with the Federal Reserve, one million dollars in required reserves,
and faces a required reserve ratio of ten percent. Given this information, we can say
First National Bank has ________ million dollars in excess reserves.
A) two
B) eight
C) nine
D) ten
2) The higher the insurance coverage, the ________ the policyholder can gain from
risky activities that make an insurance payoff ________ likely.
A) more; less
B) more; more
C) less; less
D) less; more
3) From before the financial crisis began in September of 2007 to when the crisis was
over at the end of 2009, the huge expansion in the Fed’s balance sheet and the monetary
base did not result in a large increase in monetary supply because
A) most of it just flowed into holdings of excess reserve
B) the Fed also increased the required reserve ratio
C) the Fed also conducted open market sales
D) the discount loan decreased
4) Although it has a population about half that of the United States, Japan has
A) many more banks
B) about 25 percent of the number of banks
C) more than 5000 commercial banks
D) fewer than 100 commercial banks
5) Activists of the policies believe that
A) the self-correcting mechanism through wage and price adjustment is very slow
B) wages and prices are sticky
C) the government needs to pursue active policy to eliminate high unemployment when
it develops
D) all of the above
6) The return on a 5 percent coupon bond that initially sells for $1,000 and sells for
$950 next year is
A) -10 percent
B) -5 percent
C) 0 percent
D) 5 percent
7) When the economy is hit by a negative demand shock and the central bank pursues
policies to increase aggregate demand to its initial level, then
A) inflation will be lower
B) output will be at its potential
C) output will be lower
D) inflation will be unchanged
E) both B and D
8) Under a gold standard in which one dollar could be turned in to the U.S. Treasury
and exchanged for 1/20th of an ounce of gold and one German mark could be
exchanged for 1/100th of an ounce of gold, an exchange rate of ________ marks to the
dollar would stimulate a flow of gold from the United States to Germany.
A) 7
B) 6
C) 5
D) 4
9) When the interest rate changes,
A) the demand curve for bonds shifts to the right
B) the demand curve for bonds shifts to the left
C) the supply curve for bonds shifts to the right
D) it is because either the demand or the supply curve has shifted
10) The interest rate on a consol equals the
A) price times the coupon payment
B) price divided by the coupon payment
C) coupon payment plus the price
D) coupon payment divided by the price
11) Before 1863,
A) federally-chartered banks had regulatory advantages not granted to state-chartered
banks
B) the number of federally-chartered banks grew at a much faster rate than at any other
time since the end of the Civil War
C) banks acquired funds by issuing bank notes
D) banks were required to maintain 100% of their deposits as reserves
12) High inflation can spiral out of control when
A) expected inflation increases nominal interest rates, causing the Fed to buy bonds,
increasing the money supply and further increasing inflation
B) expected inflation decreases nominal interest rates, causing the Fed to buy bonds,
increasing the money supply and further increasing inflation
C) expected inflation increases nominal interest rates, causing the Fed to sell bonds,
increasing the money supply and further increasing inflation
D) expected inflation decreases nominal interest rates, causing the Fed to sell bonds,
increasing the money supply and further increasing inflation
13) An equal increase in all bond interest rates
A) increases the return to all bond maturities by an equal amount
B) decreases the return to all bond maturities by an equal amount
C) has no effect on the returns to bonds
D) decreases long-term bond returns more than short-term bond returns
14) In Japan in 1998 and in the U.S. in 2008, interest rates were negative for a short
period of time because investors found it convenient to hold six-month bills as a store
of value because
A) of the high inflation rate
B) these bills sold at a discount from face value
C) the bills were denominated in small amounts and could be stored electronically
D) the bills were denominated in large amounts and could be stored electronically
15) From 1980 to early 1985 the dollar ________ in value, thereby benefiting American
________.
A) appreciated; consumers
B) appreciated, businesses
C) depreciated; consumers
D) depreciated, businesses
16) The gross domestic product is the
A) the value of all wealth in an economy
B) the value of all goods and services sold to other nations in a year
C) the market value of all final goods and services produced in an economy in a year
D) the market value of all intermediate goods and services produced in an economy in a
year
17) Which of the following statements about financial markets and securities is true?
A) A bond is a long-term security that promises to make periodic payments called
dividends to the firm’s residual claimants
B) A debt instrument is intermediate term if its maturity is less than one year
C) A debt instrument is intermediate term if its maturity is ten years or longer
D) The maturity of a debt instrument is the number of years (term) to that instrument’s
expiration date
18) Information plays an important role in asset pricing because it allows the buyer to
more accurately judge
A) liquidity
B) risk
C) capital
D) policy
19) 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
20) When the value of loans begins to drop, the net worth of financial institutions falls
causing them to cut back on lending in a process called
A) deleveraging
B) releveraging
C) capitulation
D) deflation
21) The monetary policy strategy that provides an automatic rule for the conduct of
monetary policy is
A) exchange-rate targeting
B) monetary targeting
C) inflation targeting
D) the implicit nominal anchor
22) The interest rate that equates the present value of payments received from a debt
instrument with its value today is the
A) simple interest rate
B) current yield
C) yield to maturity
D) real interest rate
23) The price of a barrel of oil doubled between 2007 and the middle of 2008 . To make
matters worse, a financial crisis hit the U.S. economy starting in August of 2007 .
Which of the following is true of the Chinese experience?
A) The worldwide decline in demand led to a collapse of Chinese exports
B) Instead of relying solely on the economy’s self-correcting mechanism, much more
aggressive fiscal expansions than those of the U.S. (in addition to a substantial
monetary easing) served to shift the AD curve back to general equilibrium relatively
quickly
C) The Chinese economy was better able than the U.S. economy to weather the
financial crisis with output growth starting to grow earlier and more quickly than that of
the U.S
D) All of the above
E) None of the above
24) Everything else held constant, in the market for reserves, when the federal funds
rate is 3%, raising the discount rate from 5% to 6%
A) lowers the federal funds rate
B) raises the federal funds rate
C) has no effect on the federal funds rate
D) has an indeterminate effect on the federal funds rate
25) If the Fed injects reserves into the banking system and they are held as excess
reserves, then the monetary base ________ and the money supply ________.
A) remains unchanged; remains unchanged
B) remains unchanged; increases
C) increases; increases
D) increases; remains unchanged
26) ________ in the domestic interest rate causes the demand for domestic assets to
decrease and the domestic currency to ________, everything else held constant.
A) An increase; appreciate
B) An increase; depreciate
C) A decrease; appreciate
D) A decrease; depreciate
27) An investment intermediary that lends funds to consumers is
A) a finance company
B) an investment bank
C) a finance fund
D) a consumer company
28) 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
29) The upward and downward movement of aggregate output produced in the
economy is referred to as the
A) roller coaster
B) see saw
C) business cycle
D) shock wave
30) One way of describing the solution that high net worth provides to the moral hazard
problem is to say that it
A) collateralizes the debt contract
B) makes the debt contract incentive compatible
C) state verifies the debt contract
D) removes all of the risk in the debt contract
31) Evidence suggests that credit-rating agencies ________ exploited conflicts of
interest because ________.
A) have not; it would cause their ratings to lose credibility and thus have a lower value
in the marketplace
B) have not; they would have an increase in profits in the long-run
C) have; it would cause their ratings to lose credibility and thus have a lower value in
the marketplace
D) have; they would have an increase in profits in the long-run
32) If in an efficient market all prices are correct and reflect market fundamentals,
which of the following is a false statement?
A) A stock that has done poorly in the past is more likely to do well in the future
B) One investment is as good as any other because the securities’ prices are correct
C) A security’s price reflects all available information about the intrinsic value of the
security
D) Security prices can be used by managers to assess their cost of capital accurately
33) A central bank ________ of domestic currency and corresponding ________ of
foreign assets in the foreign exchange market leads to an equal increase in its
international reserves and the monetary base, everything else held constant.
A) sale; purchase
B) sale; sale
C) purchase; sale
D) purchase; purchase
34) If a bank needs to acquire funds quickly to meet an unexpected deposit outflow, the
bank could
A) borrow from another bank in the federal funds market
B) buy U.S. Treasury bills
C) increase loans
D) buy corporate bonds
35) Which of the following is NOT an argument for the Federal Reserve paying interest
on excess reserve holdings?
A) Paying interest reduces the effective tax on deposits
B) Paying interest will help in the implementation of monetary policy
C) Paying interest will help the Federal Reserve have more control of the amount of
discount loans
D) Paying interest increases the capacity of the Fed’s balance sheet which will make it
easier to address financial crises