Which of the following statements best explains how the use of money in an economy
increases economic efficiency?
A) Money increases economic efficiency because it is costless to produce.
B) Money increases economic efficiency because it discourages specialization.
C) Money increases economic efficiency because it decreases transactions costs.
D) Money cannot have an effect on economic efficiency.
Of the following sources of external finance for American nonfinancial businesses, the
least important is
A) loans from banks.
B) stocks.
C) bonds and commercial paper.
D) loans from other financial intermediaries.
Everything else held constant, a decrease in marginal tax rates would likely have the
effect of ________ the demand for municipal bonds, and ________ the demand for
U.S. government bonds.
A) increasing; increasing
B) increasing; decreasing
C) decreasing; increasing
D) decreasing; decreasing
If firms have an incentive to hide information from mandatory disclosure because the
information is proprietary, then which of the following remedies is the least intrusive
way to overcome this incentive?
A) leave it to the market
B) separation of functions
C) supervisory oversight
D) socialization of information production
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
If the Taylor Principle is not followed and nominal interest rates are increased by less
than the increase in the inflation rate, then real interest rates will ________ and
monetary policy will be too ________.
A) rise; tight
B) rise; loose
C) fall; tight
D) fall; loose
Suppose that from a new checkable deposit, First National Bank holds two million
dollars in vault cash, nine million dollars in excess reserves, and faces a required
reserve ratio of ten percent. Given this information, we can say First National Bank has
________ million dollars in required reserves.
A) one
B) two
C) eight
D) ten
The contagion effect refers to the fact that
A) deposit insurance has eliminated the problem of bank failures.
B) bank runs involve only sound banks.
C) bank runs involve only insolvent banks.
D) the failure of one bank can hasten the failure of other banks.
Tobin’s model of the speculative demand for money shows that people hold money as a
________ as a way of reducing ________.
A) medium of exchange; transaction costs
B) medium of exchange; risk
C) store of wealth; transaction costs
D) store of wealth; risk
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.
________ quantity theory of money suggests that the demand for money is purely a
function of income, and interest rates have no effect on the demand for money.
A) Keynes’s
B) Fisher’s
C) Friedman’s
D) Tobin’s
In the market for reserves, if the federal funds rate is between the discount rate and the
interest rate paid on excess reserves, a ________ in the reserve requirement increases
the demand for reserves, ________ the federal funds interest rate, everything else held
constant.
A) rise; lowering
B) decline; raising
C) decline; lowering
D) rise; raising
In the long-run ISLM model and with everything else held constant, the long-run effect
of an expansionary fiscal policy is to ________ real output and ________ the interest
rate.
A) increase; increase
B) not change; not change
C) increase; not change
D) not change; increase
Municipal bonds have default risk, yet their interest rates are lower than the rates on
default-free Treasury bonds. This suggests that
A) the benefit from the tax-exempt status of municipal bonds is less than their default
risk.
B) the benefit from the tax-exempt status of municipal bonds equals their default risk.
C) the benefit from the tax-exempt status of municipal bonds exceeds their default risk.
D) Treasury bonds are not default-free.
When the interest rate is ________, ________ investments in physical capital will earn
more than the cost of borrowed funds, so planned investment spending is ________.
A) high; few; high
B) high; few; low
C) low; few; high
D) low; many; low
E) high; many; high
The monetary policy strategy that results in the loss of an independent monetary policy
is
A) exchange-rate targeting.
B) monetary targeting.
C) inflation targeting.
D) the implicit nominal anchor.
In the figure above, illustrates the effect of an increased rate of money supply growth at
time period 0. 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.
Cutting the money supply by one-third is predicted by the quantity theory of money to
cause
A) a sharp decline in real output of one-third in the short run, and a fall in the price
level by one-third in the long run.
B) a decline in real output by one-third.
C) a decline in output by one-sixth, and a decline in the price level of one-sixth.
D) a decline in the price level by one-third.
Corporate bonds are not as liquid as government bonds because
A) fewer corporate bonds for any one corporation are traded, making them more costly
to sell.
B) the corporate bond rating must be calculated each time they are traded.
C) corporate bonds are not callable.
D) corporate bonds cannot be resold.
When good weather speeds the check-clearing process, float tends to ________ causing
the Fed to initiate defensive open market ________.
A) decrease; sales
B) decrease; purchases
C) increase; sales
D) increase; purchases
Everything else held constant, when output is ________ the natural rate level, wages
will begin to ________, decreasing short-run aggregate supply.
A) above; fall
B) above; rise
C) below; fall
D) below; rise
If a central bank does not want to see its currency rise in value, it may pursue ________
monetary policy to ________ the domestic interest rate, thereby weakening its currency.
A) expansionary; raise
B) contractionary; raise
C) expansionary; lower
D) contractionary; lower
Since it does not have to be converted into anything else to make purchases, ________
is the most liquid asset.
A) money
B) stock
C) artwork
D) gold
The typical shape for a yield curve is
A) gently upward sloping.
B) mound shaped.
C) flat.
D) bowl shaped.
Everything else held constant, an increase in net exports ________ aggregate
________.
A) increases; demand
B) decreases; demand
C) decreases; supply
D) increases; supply
In the market for reserves, if the federal funds rate is above the interest rate paid on
excess reserves, an open market sale ________ the ________ of reserves, causing the
federal funds rate to increase, everything else held constant.
A) increases; supply
B) increases; demand
C) decreases; supply
D) decreases; demand
A contractionary monetary policy shifts the LM curve to the ________, reducing
________, everything else held constant.
A) left; output and increasing interest rates
B) left; both real output and interest rates
C) right; both interest rates and real output
D) right; interest rates and increasing real output
Tobin’s model of the speculative demand for money shows that people can reduce their
________ by ________ their asset holdings.
A) wealth; diversifying
B) risk; specializing
C) return; diversifying
D) risk; diversifying
________ in the money supply creates excess ________ money, causing interest rates
to ________, everything else held constant.
A) A decrease; demand for; rise
B) An increase; demand for; fall
C) An increase; supply of; rise
D) A decrease; supply of; fall
Equity holders are a corporation’s ________. That means the corporation must pay all
of its debt holders before it pays its equity holders.
A) debtors
B) brokers
C) residual claimants
D) underwriters
If the CPI is 120 in 1996 and 180 in 2002, then between 1996 and 2002, prices have
increased by
A) 180%.
B) 80%.
C) 60%.
D) 50%.
