1) The ________ states that exchange rates between any two currencies will adjust to
reflect changes in the price levels of the two countries
A) theory of purchasing power parity
B) law of one price
C) theory of money neutrality
D) quantity theory of money
2) According to the quantity theory of money demand,
A) an increase in interest rates will cause the demand for money to fall
B) a decrease in interest rates will cause the demand for money to increase
C) interest rates have no effect on the demand for money
D) an increase in money will cause the demand for money to fall
3) Theoretically, one can distinguish a demand-pull inflation from a cost-push inflation
by comparing
A) how fast prices rise relative to wages
B) the unemployment rate with its natural rate level
C) when prices rise relative to wages
D) government debt to real GDP
4) The M2 money supply is represented by
A) M2 = MB
B) M2 =
C) MB = M2
D) MB =
5) When $1 million is deposited at a bank, the required reserve ratio is 20 percent, and
the bank chooses not to hold any excess reserves but makes loans instead, then, in the
bank’s final balance sheet,
A) the assets at the bank increase by $800,000
B) the liabilities of the bank increase by $1,000,000
C) the liabilities of the bank increase by $800,000
D) reserves increase by $160,000
6) During the 2007-2009 financial crisis the currency ratio
A) increased sharply
B) decreased sharply
C) increased slightly
D) decreased slightly
7) A budget ________ occurs when government expenditures exceed tax revenues for a
particular time period
A) deficit
B) surplus
C) surge
D) surfeit
8) Keynes’s liquidity preference theory indicates that the demand for money is
A) constant
B) positively related to interest rates
C) negatively related to interest rates
D) negatively related to bond values
9) A venture capital firm protects its equity investment from moral hazard through
which of the following means?
A) It places people on the board of directors to better monitor the borrowing firm’s
activities
B) It writes contracts that prohibit the sale of an equity investment to the venture capital
firm
C) It prohibits the borrowing firm from replacing its management
D) It requires a 50% stake in the company
10) The ________ describes points for which the goods market is in equilibrium
A) LM curve
B) IS curve
C) consumption function
D) investment schedule
11) What is the return on a 5 percent coupon bond that initially sells for $1,000 and
sells for $1,200 next year?
A) 5 percent
B) 10 percent
C) -5 percent
D) 25 percent
12) It is possible that when the money supply rises, interest rates may ________ if the
________ effect is more than offset by changes in income, the price level, and expected
inflation
A) fall; liquidity
B) fall; risk
C) rise; liquidity
D) rise; risk
13) The most significant change in the economic environment that changed the demand
for financial products in recent years has been
A) the aging of the baby-boomer generation
B) the dramatic increase in the volatility of interest rates
C) the dramatic increase in competition from foreign banks
D) the deregulation of financial institutions
14) If the 2005 inflation rate in Canada is 4 percent, and the inflation rate in Mexico is 2
percent, then the theory of purchasing power parity predicts that, during 2005, the value
of the Canadian dollar in terms of Mexican pesos will
A) rise by 6 percent
B) rise by 2 percent
C) fall by 6 percent
D) fall by 2 percent
15) When the central bank allows the purchase or sale of domestic currency to have an
effect on the monetary base, it is called
A) an unsterilized foreign exchange intervention
B) a sterilized foreign exchange intervention
C) an exchange rate feedback rule
D) a money neutral foreign exchange intervention
16) The collapse of the Bank of Credit and Commerce International, BCCI, showed the
difficulty of international banking regulation BCCI operated in more than ________
countries and was supervised by the small country of ________
A) 70, Luxembourg
B) 100, Monaco
C) 70, Monaco
D) 100, Luxembourg
17) US dollar deposits in foreign banks outside the US or in foreign branches of US
banks are called
A) Atlantic dollars
B) Eurodollars
C) foreign dollars
D) outside dollars
18) Because interest rates have substantial fluctuations, the ________ theory of the
demand for money indicates that velocity has substantial fluctuations as well
A) classical
B) Cambridge
C) liquidity preference
D) Pigouvian
19) An increase in the foreign interest rate causes the demand for domestic assets to
shift to the ________ and the domestic currency to ________, everything else held
constant
A) right; appreciate
B) right; depreciate
C) left; appreciate
D) left; depreciate