Situation 20-1
Assume a closed economy with no government. Suppose that autonomous
consumption equals $400, planned investment equals $500, and the mpc equals 0.9.
Using the information in Situation 20-1, if aggregate output is equal to $10,000, then
unplanned inventory investment equals
A) -$1000
B) -$100
C) $0
D) $100
The money supply is ________ related to expected deposit outflows, and is ________
related to the market interest rate.
A) negatively; negatively
B) negatively; positively
C) positively; negatively
D) positively; positively
This theory views shocks to tastes (workers’ willingness to work, for example) and
technology (productivity) as the major driving forces behind short-run fluctuations in
the business cycle because these shocks lead to substantial short-run fluctuations in the
natural rate of output.
A) the natural rate hypothesis
B) hysteresis
C) real business cycle theory
D) the Phillips curve model
The type of monetary policy regime that the Federal Reserve has followed From the
1980s up until the time Ben Bernanke became chair of the Federal Reserve in 2006 can
best be described as
A) monetary targeting.
B) inflation targeting.
C) policy with an implicit nominal anchor.
D) exchange-rate targeting.
Inflation results in
A) ease of planning for the future.
B) ease of comparing prices over time.
C) lower nominal interest rates.
D) difficulty interpreting relative price movements.
An increase in the money supply shifts the LM curve to the right, causing the interest
rate to ________ and output to ________, everything else held constant.
A) rise; rise
B) rise; fall
C) fall; rise
D) fall; fall
Which of the following is an example of a bank realizing economies of scope?
A) The bank develops a standard mortgage loan application to make the process of
loaning out mortgages easier.
B) The bank reduces costs of credit checking for the loan process by outsourcing the
process to a specialist.
C) By using the information collected from a corporation, the bank can decide how easy
it would be to sell bonds issued by the corporation to the public.
D) A bank in a rural area specializes in providing agricultural loans.
________ institutions are financial intermediaries that acquire funds at periodic
intervals on a contractual basis.
A) Investment
B) Contractual savings
C) Thrift
D) Depository
During times of financial crisis, mark-to-market accounting
A) requires that a financial firms’ assets be marked down in value which can worsen the
lending crisis.
B) leads to an increase in the financial firms’ balance sheets since they can now get
assets at bargain prices.
C) leads to an increase in financial firms’ lending.
D) results in financial firms’ assets increasing in value.
Which of the following is most likely to lead to inflationary monetary policy?
A) declining oil prices
B) resolution of conflict in the Middle East
C) the enactment of a free-trade agreement with Mexico
D) rising government budget deficits
Since the abandonment of the Bretton Woods system, balance of payments
considerations have become ________ important, and exchange rate considerations
________ important in the conduct of monetary policy.
A) more; less
B) more; more
C) less; less
D) less; more
Everything else held constant, in the market for reserves, when the supply for federal
funds intersects the reserve demand curve along the horizontal section of the demand
curve, lowering the interest rate paid on excess reserves
A) increases the federal funds rate.
B) lowers the federal funds rate.
C) has no effect on the federal funds rate.
D) has an indeterminate effect of the federal funds rate.
From 1990s until 2012, the Japanese economy has experienced
A) easy monetary policy as indicated by falling nominal interest rates.
B) easy monetary policy as indicated by short-term interest rates near zero.
C) tight monetary policy as indicated by falling asset prices.
D) tight monetary policy as indicated by short-term interest rates near zero.
Securities are ________ for the person who buys them, but are ________ for the
individual or firm that issues them.
A) assets; liabilities
B) liabilities; assets
C) negotiable; nonnegotiable
D) nonnegotiable; negotiable
A decrease in the riskiness of corporate bonds will ________ the price of corporate
bonds and ________ the price of Treasury bonds, everything else held constant.
A) increase; increase
B) reduce; reduce
C) reduce; increase
D) increase; reduce
The time it takes for policy makers to obtain data indicating what is happening in the
economy is called
A) the data lag.
B) the recognition lag.
C) the legislative lag.
D) the implementation lag.
E) the effectiveness lag.
To lower long-term interest rates, in 2010 the Fed started its new open market operation
program to purchase
A) mortgage-backed securities.
B) commercial papers.
C) long-term Treasuries.
D) Treasury bills and Treasury notes.
The current international financial system is a managed float exchange rate system
because
A) exchange rates fluctuate in response to, but are not determined solely by, market
forces.
B) some countries keep their currencies pegged to the dollar, which is not allowed to
fluctuate.
C) all countries allow their exchange rates to fluctuate in response to market forces.
D) all countries peg their currencies to the dollar which is allowed to fluctuate in
response to market forces.
In a(n) ________ market, dealers in different locations buy and sell securities to anyone
who comes to them and is willing to accept their prices.
A) exchange
B) over-the-counter
C) common
D) barter
In the generalized dividend model, a future sales price far in the future does not affect
the current stock price because
A) the present value cannot be computed.
B) the present value is almost zero.
C) the sales price does not affect the current price.
D) the stock may never be sold.
An increase in the quantity of money supplied shifts the money supply curve to the
________ and the LM curve to the ________, everything else held constant.
A) right; left
B) right; right
C) left; left
D) left; right
The advantage of forward contracts over future contracts is that they
A) are standardized.
B) have lower default risk.
C) are more liquid.
D) are more flexible
A substantial decrease in the aggregate price level that reduces firms’ net worth may
stall a recovery from a recession. This process is called
A) debt deflation.
B) moral hazard.
C) insolvency.
D) illiquidity.
Charging risk-based insurance premiums is a time-honored principle of insurance
management to reduce
A) moral hazard.
B) adverse selection.
C) free riding.
D) principal-agent problems.
In the basic closed-economy ISLM model, the goods market equilibrium condition is
A) output = consumption + investment + government spending.
B) output = consumption + investment + government spending – tax.
C) output = consumption + investment + government spending + net export.
D) output = potential output.
________ in the money supply creates excess demand for ________, causing interest
rates to ________, everything else held constant.
A) An increase; money; rise
B) An increase; bonds; fall
C) A decrease; bonds; rise
D) A decrease; money; fall
If the Federal Reserve conducts open market purchases, the money supply ________,
shifting the LM curve to the ________, everything else held constant.
A) decreases; right
B) decreases; left
C) increases; right
D) increases; left
The U.S. banking system is considered to be a dual system because
A) banks offer both checking and savings accounts.
B) it actually includes both banks and thrift institutions.
C) it is regulated by both state and federal governments.
D) it was established before the Civil War, requiring separate regulatory bodies for the
North and South.
Which of the following statements are TRUE?
A) An increase in tax rates will increase the demand for Treasury bonds, lowering their
interest rates.
B) Because the tax-exempt status of municipal bonds was of little benefit to bond
holders when tax rates were low, they had higher interest rates than U.S. government
bonds before World War II.
C) Interest rates on municipal bonds will be higher than comparable bonds without the
tax exemption.
D) Because coupon payments on municipal bonds are exempt from federal income tax,
the expected after-tax return on them will be higher for individuals in lower income tax
brackets.
The FDIC must take steps to close down banks whose equity capital is less than
________ of assets.
A) 4%
B) 3%
C) 2%
D) 1%
A budget ________ occurs when government expenditures exceed tax revenues for a
particular time period.
A) deficit
B) surplus
C) surge
D) surfeit
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