The better the information provided to financial markets the:
A. less the amount of funds transferred between savers and borrowers.
B. greater the amount of funds transferred between savers and borrowers though risk
increases.
C. higher the return required by lenders.
D. greater will be the flow of funds in these markets.
Answer:
If the price of an underlying asset has a standard deviation of zero:
A. options for this asset would likely not exist.
B. option for this asset would be highly valued.
C. the intrinsic value of options for this asset would equal the asset’s price.
D. options for this asset would have a time value of the option equal to the price of the
asset.
Answer:
The primary concern of current critics of fiat money is that:
A. fiat money is too costly to produce.
B. governments issue too much money threatening its value.
C. fiat money is too easy to counterfeit.
D. government will issue too little threatening economic growth.
Answer:
The U.S. Treasury yield curve:
A. shows the relationship among bonds with the same risk characteristics but different
maturities.
B. assumes maturities are constant, and reflects the difference in risk.
C. always has a positive slope.
D. always has a negative slope.
Answer:
The strong appreciation of the dollar for the last part of the 1990s:
A. was a benefit to all U.S. residents but costly to most foreign producers.
B. was a benefit to U.S. exporters, but put a severe strain on U.S. Importers.
C. was welcomed by all U.S. manufacturers.
D. played a key role in keeping inflation in check even though the economy was
growing rapidly.
Answer:
Which of the following statements regarding growth was brought out from the material
in Chapter 15?
A. Stability results in higher output growth rates.
B. Inflation volatility results in higher output growth rates.
C. There is no correlation between the volatility in growth rates and annual output
growth.
D. The more volatile the growth rate, the higher is the annual output growth.
Answer:
Which of the following would shift the short-run aggregate supply curve to the right?
A. An increase in oil prices
B. A reduction in the minimum wage
C. A change in the law requiring overtime pay for anyone working more than 30 hours
a week
D. An increase in payroll taxes
Answer:
If a point lies on the monetary policy reaction curve, and at this point the inflation rate
equals the target rate of inflation, we know that:
A. the real interest rate corresponding to this point is above the long-run real interest
rate.
B. the real interest rate corresponding to this point is equal to the long-run real interest
rate.
C. the real interest rate corresponding to this point is below the long-run real interest
rate.
D. current output is above potential output.
Answer:
The Dow Jones Industrial Average is a:
A. simple average.
B. price-weighted index.
C. value-weighted index.
D. total-value index.
Answer:
Under the Liquidity Premium Theory, if investors expect short-term interest rates to
remain constant, the yield curve should:
A. have a positive slope.
B. have a negative slope.
C. be flat.
D. have an increasing slope.
Answer:
Which of the following cities does not have a Federal Reserve Bank located in it?
A. Denver
B. Atlanta
C. San Francisco
D. Chicago
Answer:
Which of the following would lead to a decrease in bond demand?
A. An increase in expected inflation.
B. An increase in wealth.
C. A decrease in risk.
D. A decrease in liquidity.
Answer:
Which of the following is not a positive effect of the Basel Accord?
A. It forced regulators to change the way they thought about bank capital.
B. It promoted a more uniform international system.
C. It provided a framework that less developed countries could use to improve the
regulation of their banks.
D. It provided a system to differentiate between bonds based on their systemic risk.
Answer:
The correlation between high rates of inflation and economic growth is:
A. direct; one brings about the other.
B. inverse; high inflation usually means low economic growth.
C. there is no correlation between these measures.
D. is direct at low rates of economic growth and inverse at high rates.
Answer:
The theory of efficient markets:
A. rules out high returns due to chance.
B. says insider information makes markets less efficient.
C. allows for higher than average returns if the investor takes higher than average risk.
D. assumes people have equal luck.
Answer:
Empirical research seems to verify that:
A. countries that have less independent central banks experience lower rates of
inflation.
B. countries that have high rates of inflation seem to have central banks with low levels
of independence.
C. there is no relationship between the independence of central banks and rates of
inflation.
D. the rate of inflation seems to vary directly with the amount of central bank
independence.
Answer:
The decimal equivalent of a basis point is:
A. 0.0001
B. 1.00
C. 0.001
D. 0.01
Answer:
When a country operates with a currency board, the central bank’s sole objective is to:
A. focus on domestic monetary policy.
B. maintain the domestic interest rate.
C. maintain the exchange rate.
D. maintain the target inflation rate.
Answer:
The federal government is concerned about the health of the banking system for many
reasons, the most important of which may be:
A. banks are where government bonds are traded.
B. a significant number of people are employed in the banking industry.
C. many people earn the majority of their income from interest on bank deposits.
D. banks are of great importance in enabling the economy to operate efficiently.
Answer:
A proposed increase in the federal income tax rate should:
A. have no impact on the slope of the yield curve since the tax laws impact all
maturities the same.
B. cause the slope of the yield curve to become negative.
C. increase the slope of the yield curve since it increases the risk premium of longer
maturities.
D. flatten the yield curve.
Answer:
The European Central Bank’s Marginal Lending Facility is used to provide:
A. short-term loans to banks at rates below the target refinancing rate.
B. long-term loans to banks at rates above the target refinancing rate.
C. short-term loans at rates above the target refinancing rate.
D. long-term loans to banks at rates below the target refinancing rate.
Answer:
If the bonds of two different countries are identical, their expected returns will:
A. be equal if capital flows freely internationally.
B. always be equal.
C. be equal only if the exchange rate between the two countries is fixed.
D. be equal only if the inflation rate is the same in each country.
Answer:
An increase in wealth in the U.S. will lead to the following in the foreign exchange
market:
A. a decrease in the demand for dollars.
B. a decrease in the supply of dollars.
C. an increase in the supply of dollars.
D. an increase in the demand for dollars.
Answer:
Considering a bank’s balance sheet, which of the following statements is true?
A. Total Bank Assets = Total Bank Capital – Total Bank Liabilities
B. Total Bank Assets = Total Bank Liabilities + Total Bank Capital
C. Total Bank Assets + Total Bank Capital = Total Bank Liabilities
D. Total Bank Assets + Total Bank Liabilities = Total Bank Capital
Answer:
A bank’s net interest margin is calculated by taking net interest income and:
A. dividing it by the bank’s capital.
B. dividing it by the bank’s assets.
C. dividing it by the sum of the bank’s assets and capital.
D. subtracting taxes.
Answer:
A bank’s reserves include:
A. vault cash.
B. U.S. Treasury Securities.
C. the bank’s loan portfolio.
D. U.S. Treasury bills and vault cash.
Answer:
The Fed hopes to impact short-run inflation and output by altering:
A. the production function.
B. aggregate supply.
C. aggregate demand.
D. fiscal policy.
Answer:
The option holder is:
A. the seller of an option.
B. another name for the clearinghouse used in futures contracts.
C. the buyer of an option.
D. always a spectator.
Answer:
The quantity theory of money can explain which of the following?
A. If the %ΔY > 0 and the %ΔV = 0; the %ΔP < %ΔM
B. If the %ΔV = 0 and the %ΔM = 0; the %ΔP must be = 0
C. If %ΔY and the %ΔV = 0; the %ΔP > %ΔM
D. If the %ΔP > 0; the %ΔM must also be > 0
Answer:
Sometimes spreading has an advantage over hedging to lower risk because:
A. it can be difficult to find assets that move predictably in opposite directions.
B. it is cheaper to spread than hedge.
C. spreading increases expected returns, hedging does not.
D. spreading does not affect expected returns.
Answer:
Over the last twenty years in the U.S., the number of banks has:
A. steadily increased.
B. stayed about the same.
C. steadily decreased.
D. more than doubled.
Answer:
Sue uses a credit card to purchase a new pair of jeans. Sue is:
A. using money to buy her jeans since credit cards is money.
B. creating a liability that she will ultimately have to pay with money.
C. using an electronic payment form of money.
D. using a form of money included in M2.
Answer:
The high rates of inflation that were experienced in the 1970s could partly be blamed
on:
A. the assumption the economy would continue to grow at the rates that the economy
experienced in the 1960s.
B. the Vietnam war.
C. high oil prices.
D. all of the answers given are correct.
Answer:
The Federal Reserve’s Balance sheet would include an item labeled Currency. Is this an
asset or a liability of the Fed, and does it include all currency that is printed? Explain.
Answer:
Everything else equal, if the Fed decided to fix the euro/dollar exchange rate, what
would be the impact on the interest rate in the U.S. if the euro started to appreciate in
value and why?
Answer:
Explain how globalization impacts inflation in both the short run and the long run.
Answer:
Does the concept of limited liability make owning stocks more or less attractive?
Explain.
Answer:
Suppose you purchase a put option to sell General Motors common stock at $80 per
share in March. The current price of GM stock is $83 and the time value of the option is
$1. What is the intrinsic value of the option?
Answer:
You are given the following information: Reserves (R) in the banking system amount to
$48 billion, of which $45.8 billion are required. Currency in the hands of the public
amounts to $692.5 billion while checkable deposits amount to $650 billion. Calculate
the money multiplier.
Answer:
Calculate the monthly payment for a 30-year mortgage, where the amount borrowed is
$100,000 and the annual interest rate is 6.0%.
Answer:
Why might there be a trade-off between a bank’s profitability and its safety?
Answer:
Why do you think most health insurance policies require the first $100 or so of every
claim and a percentage of the bill after that to be paid by the insured?
Answer:
The United States, the United Kingdom, Germany and Japan are all developed
countries with highly developed and efficient financial markets. However, in all four
countries the main source of business finance is internal funding. Why is this so?
Answer:
Explain why the Fisher equation is not highly accurate at high rates of inflation. Use an
example.
Answer:
The price of a Big Mac in the U.S. is $2.00; the price in France is 3.35 euros. The
current exchange rate is 1.05€/$. What is the real exchange rate?
Answer:
Compute the change in the price of a five-year (until maturity) $1,000 face value
zero-coupon bond that currently yields 7% when expected inflation increases from 3%
to 4%.
Answer:
Which insurance companies, life or property and casualty, would you think would
invest more in long-term assets? Explain.
Answer:
If the current closing price of the stock of XYZ Inc., is $87.50 and the July expiration
call options with a strike price of $80 are selling for $9.45, what is the intrinsic value of
the option? What is the time value of the option?
Answer:
You are an American resident but have invested in a German bond (paying face value)
that matures in two years, pays a 5 percent interest rate and is denominated in euros.
What could cause your rate of return to fall below 5 percent even though the bond pays
off at maturity?
Answer:
If one of the specific goals that central bankers focus on is economic growth, should
they aim for the highest short-term growth rate the economy can achieve? Explain.
Answer: