Finance companies perform all of the following functions, except:
A. issue commercial paper and securities.
B. take deposits.
C. make loans.
D. lease equipment to firms.
Answer:
Often Eurodollar deposits earn higher returns than U.S. bank deposits for all of the
following reasons except:
A. Eurodollar deposits are not subject to U.S. reserve requirements.
B. the bank does not have to pay deposit insurance premiums on these deposits.
C. regulatory compliance may be more costly for a foreign bank than a U.S. bank.
D. taxes on the profits on banks outside the U.S. may be lower on banks inside the U.S.
Answer:
Which of the books used at the FOMC meetings can be characterized as less
quantitative than the other two?
A. The teal book
B. The beige book
C. The green book
D. The white paper released to the press
Answer:
The effect on the monetary policy reaction curve resulting from policymakers
decreasing their inflation target would be:
A. the monetary policy reaction curve shifting to the left.
B. a movement up the existing monetary policy reaction curve.
C. a movement down the existing monetary policy reaction curve.
D. the monetary policy reaction curve shifting to the right.
Answer:
Which of the following best expresses the future value of $100 left in a savings account
earning 3.5% for three and a half years?
A. $100(1.035)3.5
B. $100(0.35)3.5
C. $100 × 3.5 × (1.035)
D. $100(1.035)3/2
Answer:
Sharon deposits $150.00 in her savings account at the bank. At the end of one year she
has $156.38. What was the interest rate that Sharon earned?
A. 4.25%
B. 6.38%
C. 4.52%
D. 5.63%
Answer:
If we let Md reflect money demand, then we can write the equation for money demand
as:
A. Md = VY.
B. Md = PY.
C. Md = (1/V) PY.
D. Md = V(Y/P).
Answer:
Pension funds resemble life insurance companies in the sense that:
A. the payoff occurs only occurs when a person dies.
B. they accept deposits.
C. they offer the ability to make premium payments today in return for a promised
payment under specified future circumstances.
D. they both are better investments the longer you live.
Answer:
An economic rationale for government protection of small investors is that:
A. large investors can better afford losses.
B. many small investors cannot adequately judge the soundness of their bank.
C. there is inadequate competition to ensure a bank is operating efficiently.
D. banks are often run by unethical managers who will often exploit small investors.
Answer:
To say monetary policy is transparent implies:
A. that anyone could figure out what the correct policy should be.
B. monetary policy should not be so difficult that most people couldn’t understand it.
C. policymakers offer plausible explanations for their decisions along with supporting
data.
D. that when faced with the same problem, policymakers will always react the same
way.
Answer:
Interest-rate swaps are:
A. exchanges of equity securities for debt securities.
B. agreements between two parties to exchange periodic interest-rate payments over
some future period.
C. agreements involving swapping of option contracts.
D. agreements that allow both parties to convert floating interest rates to fixed interest
rates.
Answer:
Monetary policymakers can respond to the impact that positive inflation shocks have on
output by shifting the:
A. monetary policy reaction curve left.
B. monetary policy reaction curve right.
C. short-run aggregate supply curve to the left.
D. short-run aggregate supply curve to the right.
Answer:
Briefly discuss the relationship between present value and each of the following:
a) future value
b) time
c) interest rate
Answer:
Fly-By-Night Inc. issues $100 face value, zero-coupon, one-year bonds. The current
return on one-year, zero-coupon U.S. government bonds is 3.5%. If the Fly-By-Night
bonds are selling for $92.00, what is the risk premium for these bonds?
A. 8.7%
B. 1.5%
C. 5.2%
D. 8.0%
Answer:
Considering the balance sheet for all commercial banks in the U.S., the largest category
of liabilities is:
A. borrowing from other banks in the U.S.
B. saving’s deposits and time deposits.
C. checkable deposits.
D. borrowings from non-banks in the U.S.
Answer:
Comparing the European and the U.S. central bank systems, the Executive Board of the
European system resembles:
A. the FOMC.
B. the Board of Governors.
C. the Presidents of the regional Federal Reserve Banks.
D. the Chairman of the Board of Governors of the Fed.
Answer:
The dynamic aggregate demand curve illustrates that the relationship between inflation
and real output is:
A. direct.
B. inverse.
C. independent.
D. undefined.
Answer:
Assume we have a stock currently worth $100. We also assume the interest rate is zero,
and we can buy options for this stock with a strike price of $100. If the stock can rise or
fall by $5 with equal probability over the option period, and the option cannot be
exercised until the expiration date, what is the time value of the option?
A. $10
B. $5
C. $0
D. None of the answers is correct.
Answer:
More detailed financial instruments tend to be:
A. less costly because all possible contingencies are covered.
B. more costly because it will cost more to create.
C. more desirable than less detailed ones, no matter what the price.
D. less costly because they can be standardized more easily.
Answer:
In the U.S. the authority to issue currency is held by:
A. the Federal Reserve.
B. the U.S. Treasury.
C. the Office of the Comptroller of the Currency.
D. the U.S. Mint.
Answer:
Considering state chartered banks:
A. most elect to join the Federal Reserve System.
B. those with assets exceeding $100 million must join the Federal Reserve System.
C. most elect not to join the system.
D. only those that join the system must abide by reserve requirements.
Answer:
The reserve requirement does not meet all of the criteria of a good monetary policy
tool, because it:
A. is not controllable.
B. is not observable.
C. cannot be quickly changed.
D. it has a predictable impact on the economy.
Answer:
Financial intermediaries include each of the following, except:
A. the New York Stock Exchange.
B. credit unions.
C. savings banks.
D. commercial banks.
Answer:
A good definition for intermediate targets of monetary policy would be:
A. instruments under the direct control of central bankers but one step removed from
operational targets.
B. instruments that are not under the direct control of the central banks but lie between
operational instruments and objectives.
C. the quantity or non-price targets of monetary policy.
D. the real goals of monetary policy.
Answer:
The primary function of central banks is to:
A. increase risk and volatility to increase compensation.
B. control inflation, as well as help reduce the size and frequency of business cycle
fluctuations.
C. increase the uncertainty that firms face in making investment decisions.
D. eliminate the need for banks to collect financial information.
Answer:
A U.S. resident who wants to purchase an automobile that comes from Japan:
A. will be supplying yen on the foreign exchange market.
B. will make up part of the demand for dollars on the foreign exchange market.
C. will make up part of the supply of dollars on the foreign exchange market.
D. will not be a participant in the foreign exchange market.
Answer:
From the Fisher equation we see that the nominal interest rate and expected inflation
have:
A. an inverse relationship.
B. a relationship which is direct but less than one-to-one.
C. a relationship which is direct and one-to-one.
D. no relationship.
Answer:
A country with a current account surplus:
A. has imported more than it has exported.
B. as borrowed heavily from the rest of the world.
C. has exported more than it has imported.
D. also has a capital account surplus.
Answer:
If the Dow Jones Industrial Average is currently at 10,000 and the price of one stock
included in the index increases by $10, the Dow Jones Industrial Average will:
A. not change; it is a value-weighted index.
B. increase by 10.0%.
C. increase by 1.0%.
D. increase by 0.1%.
Answer:
Used car dealers that provide warranties on the cars they sell are addressing the:
A. lemons problem.
B. monopoly problem.
C. problem of people preferring foreign cars.
D. free rider problem of buyers preferring new versus used cars.
Answer:
Inflation refers to growth in the economy’s:
A. Gross Domestic Product (GDP).
B. interest rates.
C. money.
D. prices.
Answer:
All of the following are true about central bank independence except that it:
A. is usually given at the pleasure of governments.
B. can be eliminated by governments in a time of crisis.
C. is usually guaranteed by a country’s constitution.
D. can be subverted by the actions of fiscal policymakers.
Answer:
The scandals involving Enron, World Com, Global Crossing and other large firms:
A. are examples of asymmetric information and have led, at least temporarily, to a less
well functioning stock market.
B. is what should have been expected on the part of investors, that is why there is a risk
premium.
C. have resulted in a cry for less government regulation of public corporations.
D. demonstrate that the government should be responsible for collecting and
distributing financial information on firms.
Answer:
Why does it take so long for the declaration of the beginning and end of recessions in
the U.S. and why is there a lack of clarity as to what is and is not a recession?
Answer:
We saw in Chapter 12 that initially savings and loans were created to make home
mortgages, and their main source of funds was deposits from savers. In the late 1970’s
and into the 1980’s, the U.S. experienced rising interest rates that had depositors
looking for higher returns. Congress quickly removed the interest rate ceilings that
savings and loans could offer. Explain the initial impact this had on the interest rate
spread and the net interest margin for the savings and loans.
Answer:
Considering that, on average, the return on assets is the same for small and large banks,
and the return on equity is higher for large banks than small banks, what can be one of
the explanations for the trend toward bank mergers?
Answer:
During the U.S. Civil War the Confederate government had to resort to printing
currency to obtain the goods they needed. Comment on what you think happened to
both prices and the value of this currency at the end of the war.
Answer:
There are two current trends in the financial industry which run in opposite directions.
What are they?
Answer:
What are the four fundamental characteristics that determine the value of a financial
instrument?
Answer:
Consider the objective of flying a jet form New York to Paris. After takeoff, a pilot
would certainly check a few times to see if he or she is on course. Using this example,
discuss why, at least in theory, intermediate monetary policy targets may be useful.
Answer:
What explanations have been offered to account for the Great Moderation?
Answer:
Answer:
Could a country be open to international capital flows, control its domestic interest rate
and fix its exchange rate? Explain.
Answer:
Respond to the following: “If it takes a significant period of time to uncover accounting
manipulations by individuals in a major corporation, honesty may be the best policy but
dishonesty can be a lot more profitable!”
Answer:
Explain why a domestic bank in the U.S. might create a subsidiary bank in a foreign
location like the Cayman Islands.
Answer:
Given the following Taylor rule:
Target federal funds rate = 2 + current inflation + ½(inflation gap) + ½(output gap);
Since the coefficients on the inflation and output gaps are equal, does this mean the
central bank will respond to a one percent increase in inflation with the same change in
the target rate as they would initiate from a one percent increase in the output gap?
Explain.
Answer:
Explain why a bank with a high debt-to-equity ratio may be more profitable than a bank
with a lower ratio but would also have a higher level of risk.
Answer:
If the current closing price in the stock of XYZ Inc., is $87.50 and the July expiration
put options with a strike price of $80 are selling for $1.05, what is the intrinsic value of
the option? What is the option premium?
Answer:
Is the actual amount of output that corresponds to the long-run aggregate supply curve
fixed? Explain.
Answer:
Explain the impact on the monetary policy reaction curve and the nominal interest rate
if the level of government purchases were to decrease and the central bank does not
change its inflation target?
Answer: