When output is below potential and the policy rate has hit the floor of zero, the resulting
fall in inflation leads to ________ real interest rates, which ________ output further,
which causes inflation to fall further.
A. lower; increase
B. higher; depress
C. higher; increase
D. lower; depress
Answer:
Money is
A. anything that is generally accepted in payment for goods and services or in the
repayment of debt.
B. a flow of earnings per unit of time.
C. the total collection of pieces of property that are a store of value.
D. always based on a precious metal like gold or silver.
Answer:
If you have a very low tolerance for risk, which of the following bonds would you be
least likely to hold in your portfolio?
A. a U.S. Treasury bond
B. a municipal bond
C. a corporate bond with a rating of Aaa
D. a corporate bond with a rating of Baa
Answer:
Which of the following is NOT included in the monetary aggregate M2?
A. currency
B. savings bonds
C. traveler’s checks
D. checking deposits
Answer:
Because it provides some indication of what is happening to U.S. claims on foreign
wealth and the demand for imports and exports, the ________ is closely followed by
economists wanting information on the future movement of exchange rates.
A) trade balance
B) capital account
C) current account balance
D) statistical discrepancy
Answer:
The Federal Reserve Bank of ________ houses the open market desk.
A. Boston
B. New York
C. Chicago
D. San Francisco
Answer:
An increase in ________ reduces the money supply since it causes the ________ to fall.
A. reserve requirements; monetary base
B. reserve requirements; money multiplier
C. margin requirements; monetary base
D. margin requirements; money multiplier
Answer:
When the Fed wants to raise interest rates after banks have accumulated large amounts
of excess reserves, it would
A. increase the interest rate paid on excess reserves.
B. increase discount rate.
C. increase the required reserve ratio.
D. conduct massive open market purchase.
Answer:
When the value of the dollar changes from £0.5 to £0.75, then the British pound has
________ and the U.S. dollar has ________.
A. appreciated; appreciated
B. depreciated; appreciated
C. appreciated; depreciated
D. depreciated; depreciated
Answer:
If you expect the inflation rate to be 4 percent next year and a one year bond has a yield
to maturity of 7 percent, then the real interest rate on this bond is
A. -3 percent.
B. -2 percent.
C. 3 percent.
D. 7 percent.
Answer:
First National Bank
If interest rates rise by 5 percentage points, say, from 10 to 15%, bank profits (measured
using gap analysis) will
A. decline by $0.5 million.
B. decline by $1.5 million.
C. decline by $2.5 million.
D. increase by $1.5 million.
Answer:
The rate of output at which the price level has no tendency to rise or fall is called the
A. natural rate of output.
B. potential level of income.
C. bliss point.
D. efficient level of output.
Answer:
In the simple deposit expansion model, if the Fed purchases $100 worth of bonds from
a bank that previously had no excess reserves, the bank can now increase its loans by
A. $10.
B. $100.
C. $100 times the reciprocal of the required reserve ratio.
D. $100 times the required reserve ratio.
Answer:
A central bank that does NOT follow the Taylor principle will fail to raise nominal
interest rates by more than the increase in expected inflation. Therefore, higher inflation
will lead to a ________ in real interest rates, resulting in ________-sloping monetary
policy curves.
A. decline; downward
B. rise; downward
C. rise; upward
D. decline; upward
Answer:
The primary purpose of deposit insurance is to
A. improve the flow of information to investors.
B. prevent banking panics.
C. protect bank shareholders against losses.
D. protect bank employees from unemployment.
Answer:
Everything else held constant, when financial frictions increase, the real cost of
borrowing ________ so that planned investment spending ________ at any given
inflation rate.
A. increases; falls
B. decreases; falls
C. decreases; rises
D. increases; rises
Answer:
Because borrowers, once they have a loan, are more likely to invest in high-risk
investment projects, banks face the
A. adverse selection problem.
B. lemon problem.
C. adverse credit risk problem.
D. moral hazard problem.
Answer:
During a recession, output declines result in
A. lower unemployment in the economy.
B. higher unemployment in the economy.
C. no impact on the unemployment in the economy.
D. higher wages for the workers.
Answer:
A rising stock market index due to higher share prices
A. increases people’s wealth, but is unlikely to increase their willingness to spend.
B. increases people’s wealth and as a result may increase their willingness to spend.
C. decreases the amount of funds that business firms can raise by selling newly-issued
stock.
D. decreases people’s wealth, but is unlikely to increase their willingness to spend.
Answer:
With ________ finance, borrowers obtain funds from lenders by selling them securities
in the financial markets.
A. active
B. determined
C. indirect
D. direct
Answer:
Assume you are holding Treasury securities and have sold futures to hedge against
interest-rate risk. If interest rates fall
A. the increase in the value of the securities equals the decrease in the value of the
futures contracts.
B. the decrease in the value of the securities equals the increase in the value of the
futures contracts.
C. both the securities and the futures contracts decrease in value.
D. both the securities and the futures contracts increase in value.
Answer:
A deductible reduces ________ in exactly the same way as ________.
A. moral hazard; coinsurance
B. adverse selection; restrictive provisions
C. moral hazard; cancellation of insurance
D. adverse selection; limits on the amount of insurance
Answer:
Assume that you borrow $2000 at 10% annual interest to finance a new business
project. For this loan to be profitable, the minimum amount this project must generate
in annual earnings is
A. $400.
B. $201.
C. $200.
D. $199.
Answer:
Everything else held constant, if the sum of the required reserve ratio and the excess
reserve ratio is greater than one, an increase in the currency-deposit ratio causes the M1
money multiplier to ________ and the money supply to ________.
a. decrease; increase
b. increase; increase
c. decrease; decrease
d. increase; decrease
Answer:
U.S. banks have most of their branches in
A) Latin America, the Far East, the Caribbean, and London.
B) Latin America, the Middle East, the Caribbean, and London.
C) Mexico, the Middle East, the Caribbean, and London.
D) South America, the Middle East, the Caribbean, and Canada.
Answer:
If the interest rate on a bond is above the equilibrium interest rate, there is an excess
________ for bonds and the bond price will ________.
A. demand; rise
B. demand; fall
C. supply; rise
D. supply; fall
Answer:
Suppose that there is a positive aggregate demand shock and the central bank commits
to an inflation rate target. But if the commitment is not credible, then
A. the public’s expected inflation will remain unchanged.
B. the short-run aggregate supply curve will rise.
C. over time inflation will fall back down to the inflation target.
D. all of the above.
E. both A and B.
Answer:
Net worth can perform a similar role to
A. diversification.
B. collateral.
C. intermediation.
D. economies of scale.
Answer:
Irving Fisher’s view that velocity is fairly constant in the short run transforms the
equation of exchange into the
A. Friedman’s theory of income determination.
B. quantity theory of money.
C. Keynesian theory of income determination.
D. monetary theory of income determination.
Answer:
The discount rate is kept ________ the federal funds rate because the Fed prefers that
________.
A. below; banks can monitor each other for credit risk
B. below; the Fed can monitor banks for credit risk
C. above; banks can monitor each other for credit risk
D. above; the Fed can monitor banks for credit risk
Answer:
The legislation that separated investment banking from commercial banking until its
repeal in 1999 is known as the
A. National Bank Act of 1863.
B. Federal Reserve Act of 1913.
C. Glass-Steagall Act.
D. McFadden Act.
Answer:
The primary difference between the “payoff” and the “purchase and assumption”
methods of handling failed banks is
A. that the FDIC guarantees all deposits when it uses the “payoff” method.
B. that the FDIC guarantees all deposits when it uses the “purchase and assumption”
method.
C. that the FDIC is more likely to use the “payoff” method when the bank is large and it
fears that depositor losses may spur business bankruptcies and other bank failures.
D. that the FDIC is more likely to use the purchase and assumption method for small
institutions because it will be easier to find a purchaser for them compared to large
institutions.
Answer:
A common element in all of the banking crisis episodes in different countries is
A. the existence of a government safety net.
B. deposit insurance.
C. increased regulation.
D. lack of competition.
Answer: