Keynes’s liquidity preference theory indicates that the demand for money
A) is purely a function of income, and interest rates have no effect on the demand for
money.
B) is purely a function of interest rates, and income has no effect on the demand for
money.
C) is a function of both income and interest rates.
D) is a function of both government spending and income.
Answer:
Nonactivists of the policies believe that
A) wages and prices are very flexible.
B) the self-correcting mechanism is very rapid.
C) government action is unnecessary.
D) all of the above.
Answer:
A credit-driven bubble arises when ________ in lending causes ________ in asset
prices which can cause ________ in lending.
A) a decrease; a decrease; an increase
B) a decrease; an increase; an increase
C) an increase; an increase; a further increase
D) a decrease; a decrease; a further decrease
Answer:
If the required reserve ratio is 10 percent, currency in circulation is $400 billion,
checkable deposits are $1000 billion, and excess reserves total $1 billion, then the
money supply is ________ billion.
A) $10,000
B) $4000
C) $1400
D) $10,400
Answer:
Which of the following is true?
A) Special drawing rights are loans to countries made by the IMF.
B) Changes in the quantity of special drawing rights are tied to changes in the quantity
of gold.
C) Special drawing rights are a paper substitute for gold.
D) Special drawing rights are not held as international reserves.
Answer:
When the Fed sells $100 worth of bonds to First National Bank, reserves in the banking
system
A) increase by $100.
B) increase by more than $100.
C) decrease by $100.
D) decrease by more than $100.
Answer:
When banks calculate the losses the institution would incur if an unusual combination
of bad events happened, the bank is using the ________ approach.
A) stress-test
B) value-at-risk
C) trading-loss
D) maximum value
Answer:
A decrease in the liquidity of corporate bonds, other things being equal, shifts the
demand curve for corporate bonds to the ________ and the demand curve for Treasury
bonds shifts to the ________.
A) right; right
B) right; left
C) left; left
D) left; right
Answer:
Because of the adverse selection problem,
A) good credit risks are more likely to seek loans causing lenders to make a
disproportionate amount of loans to good credit risks.
B) lenders may refuse loans to individuals with high net worth, because of their greater
proclivity to ‘skip town.”
C) lenders are reluctant to make loans that are not secured by collateral.
D) lenders will write debt contracts that restrict certain activities of borrowers.
Answer:
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
Answer:
The economist Irving Fisher, after whom the Fisher effect is named, explained why
interest rates ________ as the expected rate of inflation ________, everything else held
constant.
A) rise; increases
B) rise; stabilizes
C) fall; stabilizes
D) fall; increases
Answer:
When the total value of final goods and services is calculated using current prices, the
resulting measure is referred to as
A) real GDP.
B) the GDP deflator.
C) nominal GDP.
D) the index of leading indicators.
Answer:
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.
Answer:
According to the Lucas critique, if past increases in the short-term interest rate have
always been temporary, then
A) the term-structure relationship using past data will then show only a weak effect of
changes in the short-term interest rate on the long-term rate.
B) the term-structure relationship using past data will show no effect of changes in the
short-term interest rate on the long-term rate.
C) one cannot predict the term-structure relationship as it depends on expectations.
D) the term-structure relationship using past data will nevertheless show a strong effect
of changes in the short-term interest rate on the long-term rate because of a change in
the way expectations are formed.
Answer:
In Keynes’s liquidity preference framework, individuals are assumed to hold their
wealth in two forms:
A) real assets and financial assets.
B) stocks and bonds.
C) money and bonds.
D) money and gold.
Answer:
Assume a bank has $200 million of assets with a duration of 2.5, and $190 million of
liabilities with a duration of 1.05. The duration gap for this bank is
A) 5 year.
B) 1 year.
C) 5 years.
D) 2 years.
Answer:
The S&L Crisis can be analyzed as a principal-agent problem. The agents in this case,
the ________, did not have the same incentive to minimize cost to the economy as the
principals, the ________.
A) politicians/regulators; taxpayers
B) taxpayers; politician/regulators
C) taxpayers; bank managers
D) bank managers; politicians/regulators
Answer:
The Second Bank of the United States
A) was disbanded in 1811 when its charter was not renewed.
B) had its charter renewal vetoed in 1832.
C) is considered to be the primary cause of the bank panic of 1907.
D) None of the above.
Answer:
Which of the following bonds would you prefer to be buying?
A) A $10,000 face-value security with a 10 percent coupon selling for $9,000
B) A $10,000 face-value security with a 7 percent coupon selling for $10,000
C) A $10,000 face-value security with a 9 percent coupon selling for $10,000
D) A $10,000 face-value security with a 10 percent coupon selling for $10,000
Answer:
An autonomous easing of monetary policy
A) causes an upward movement along the monetary policy curve.
B) causes a downward movement along the monetary policy curve.
C) shifts the monetary policy curve upward.
D) shifts the monetary policy curve downward.
Answer:
In the long-run ISLM model and with everything else held constant, the long-run effect
of a tax cut is to ________ real output and ________ the interest rate.
A) increase; increase
B) increase; not change
C) not change; increase
D) not change; decrease
Answer:
Of all commercial banks, about ________ percent belong to the Federal Reserve
System.
A) 17
B) 22
C) 38
D) 52
Answer:
The fixed exchange rate regime established at a meeting in New Hampshire in 1944 has
been known as the
A) General Agreement on Tariffs and Trade.
B) Bretton Woods system.
C) International Settlement Fund.
D) Balance of Payments Compliance Accord.
Answer:
A decrease in the domestic interest rate causes the demand for domestic assets to
________ and the domestic currency to ________, everything else held constant.
A) increase; appreciate
B) increase; depreciate
C) decrease; appreciate
D) decrease; depreciate
Answer:
If the Fed wants to permanently lower interest rates, then it should raise the rate of
money growth if
A) there is fast adjustment of expected inflation.
B) there is slow adjustment of expected inflation.
C) the liquidity effect is smaller than the expected inflation effect.
D) the liquidity effect is larger than the other effects.
Answer:
The mismanagement of financial liberalization in emerging market countries can be
understood as a severe
A) principal/agent problem.
B) asymmetric information problem.
C) lemons problem.
D) free-rider problem.
Answer:
A decrease in the brokerage commissions in the housing market from 6% to 5% of the
sales price will shift the ________ curve for bonds to the ________, everything else
held constant.
A) demand; right
B) demand; left
C) supply; right
D) supply; left
Answer:
Approaches to establishing central bank credibility include
A) continued success at keeping inflation under control.
B) inflation targeting.
C) exchange rate targeting.
D) all of the above.
Answer:
Suppose the economy is producing at the natural rate of output. An open market sale of
bonds by the Fed will cause ________ in real GDP in the long run and ________ in
inflation in the long run, everything else held constant.
A) an increase; an increase
B) a decrease; a decrease
C) no change; an increase
D) no change; a decrease
Answer:
Subject to the approval of the Board of Governors, the decision of choosing the
president of a district Federal Reserve Bank is made by
A) all nine district bank directors.
B) the six district bank directors elected by the member banks.
C) three district bank directors who are professional bankers.
D) district bank directors who are not professional bankers.
E) class A and class B directors.
Answer:
If a bank has excess reserves of $7,000 and demand deposit liabilities of $100,000, and
if the reserve requirement is 10 percent, then the bank has actual reserves of
A) $14,000.
B) $17,000.
C) $22,000.
D) $27,000.
Answer:
Because many emerging market countries have not developed the political or monetary
institutions that allow the successful use of discretionary monetary policy,
A) they have little to gain from pegging their exchange rate to an anchor country like
the U.S. or Germany.
B) they have little to gain from using a nominal anchor, because it would mean a
monetary policy that is overly expansionary.
C) they have very little to gain from an independent monetary policy, but a lot to lose.
D) they would be better off giving their central bankers the independence to use
discretion, rather than take their discretion away through any nominal anchor.
Answer:
Which of the following is not a reason financial regulation and supervision is difficult
in real life?
A) Financial institutions have strong incentives to avoid existing regulations.
B) Unintended consequences may happen if details in the regulations are not precise.
C) Regulated firms lobby politicians to lean on regulators to ease the rules.
D) Financial institutions are not required to follow the rules.
Answer: