1) An inverted yield curve
A) slopes up
B) is flat
C) slopes down
D) has a U shape
2) The principal-agent problem would not occur if ________ of a firm had complete
information about actions of the ________.
A) owners; customers
B) owners; managers
C) managers; customers
D) managers; owners
3) Parties who have bought a futures contract and thereby agreed to ________ (take
delivery of) the bonds are said to have taken a ________ position.
A) sell; short
B) buy; short
C) sell; long
D) buy; long
4) In general, banks would prefer to acquire funds quickly by ________ rather than
________.
A) reducing loans; selling securities
B) reducing loans; borrowing from the Fed
C) borrowing from the Fed; reducing loans
D) “calling in” loans; selling securities
5) All else the same, when the Fed calls in a $100 discount loan previously extended to
the 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
6) A short contract requires that the investor
A) sell securities in the future
B) buy securities in the future
C) hedge in the future
D) close out his position in the future
7) Because information is scarce
A) helps explain why equity contracts are used so much more frequently to raise capital
than are debt contracts
B) monitoring managers gives rise to costly state verification
C) government regulations, such as standard accounting principles, have no impact on
problems such as moral hazard
D) developing nations do not rely heavily on banks for business financing
8) The directive of prompt corrective action means that
A) the FDIC will intervene earlier and more vigorously when a bank gets into trouble
B) the banks must take actions quickly to resolve reserve disputes
C) bank failures cannot occur
D) there must be an immediate response to an increase in interest rates
9) Which of the following bonds would have the highest default risk?
A) Municipal bonds
B) Investment-grade bonds
C) U.S. Treasury bonds
D) Junk bonds
10) A clause in a debt contract requiring that the borrower purchase insurance against
loss of the asset financed with the loan is called a
A) collateral-insurance clause
B) prescription covenant
C) restrictive covenant
D) proscription covenant
11) The Federal Reserve will engage in a repurchase agreement when it wants to
________ reserves ________ in the banking system.
A) increase; permanently
B) increase; temporarily
C) decrease; temporarily
D) decrease; permanently
12) According to the liquidity premium theory of the term structure, a flat yield curve
indicates that short-term interest rates are expected to
A) rise in the future
B) remain unchanged in the future
C) decline moderately in the future
D) decline sharply in the future
13) The new Consumer Financial Protection Bureau is an independent agency but is
funded and housed within
A) the Treasury Department
B) the Federal Reserve
C) the SEC
D) the IRS
14) One possible reason for slower growth in developing and transition countries is
A) capital may not be directed to its most productive use
B) strict accounting standards are too stringent for the banks to meet
C) the weak link between government and financial intermediaries
D) the lack of adverse selection and moral hazard problems
15) Everything else held constant, when financial frictions increase, the real cost of
borrowing ________ so that planned investment spending ________ at any given
inflation rate.
A) increases; falls
B) decreases; falls
C) decreases; rises
D) increases; rises
16) The regulatory agency responsible for regulating the activities of life insurance
companies is
A) the FDIC
B) the Fed
C) the FHLBS
D) the appropriate state agency where the company is operating
17) A breakdown of financial markets can result in
A) financial stability
B) rapid economic growth
C) political instability
D) stable prices
18) If the Fed injects reserves into the banking system and they are held as excess
reserves, then the money supply
A) increases by only the initial increase in reserves
B) increases by only one-half the initial increase in reserves
C) increases by a multiple of the initial increase in reserves
D) does not change
19) Suppose that from a new checkable deposit, First National Bank holds two million
dollars in vault cash, nine million dollars in excess reserves, and faces a required
reserve ratio of ten percent. Given this information, we can say First National Bank has
________ million dollars in required reserves.
A) one
B) two
C) eight
D) ten
20) The speculative motive for holding money is closely tied to what function of
money?
A) Store of wealth
B) Unit of account
C) Medium of exchange
D) Standard of deferred payment
21) 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
currency ratio is
A) 0.25
B) 0.50
C) 0.40
D) 0.05
22) For small investors, the best way to pursue a “buy and hold” strategy is to
A) buy and sell individual stocks frequently
B) buy no-load mutual funds with high management fees
C) buy no-load mutual funds with low management fees
D) buy load mutual funds
23) An assumption in the model of the money supply process is that the desired levels
of currency and excess reserves
A) are given as constants
B) grow proportionally with checkable deposits
C) grow proportionally with high-powered money
D) grow proportionally over time
24) Regular bank examinations and restrictions on asset holdings help to indirectly
reduce the ________ problem because, given fewer opportunities to take on risk,
risk-prone entrepreneurs will be discouraged from entering the banking industry.
A) moral hazard
B) adverse selection
C) ex post shirking
D) post-contractual opportunism
25) 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
26) Both ________ and ________ were financial innovations that occurred because of
interest rate volatility.
A) adjustable-rate mortgages; commercial paper
B) adjustable-rate mortgages; financial derivatives
C) sweep accounts; financial derivatives
D) sweep accounts; commercial paper
27) When a bank suspects that a $1 million loan might prove to be bad debt that will
have to be written off in the future the bank
A) can set aside $1 million of its earnings in its loan loss reserves account
B) reduces its reported earnings by $1, even though it has not yet actually lost the $1
million
C) reduces its assets immediately by $1 million, even though it has not yet lost the $1
million
D) reduces its reserves by $1 million, so that they can use those funds later
28) The absence of money illusion means that
A) as real income doubles, the demand for money doubles
B) as interest rates double, the demand for money doubles
C) as the money supply doubles, the demand for money doubles
D) as the price level doubles, the demand for money doubles
29) If the government finances its spending by selling bonds to the central bank, the
monetary base will ________ and the money supply will ________.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) not change; not change
30) Suppose the economy is producing at the natural rate of output. An increase in
consumer and business confidence will cause ________ in real GDP in the short run
and ________ in inflation in the short 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
31) Lack of competition in the United States banking industry can be attributed to
A) the fact that competition does not benefit consumers
B) the fact that branching has eliminated competition
C) recent legislation restricting competition
D) nineteenth-century populist sentiment
32) If you bought a long contract on financial futures you hope that interest rates
A) rise
B) fall
C) are stable
D) fluctuate
33) The presence of ________ in financial markets leads to adverse selection and moral
hazard problems that interfere with the efficient functioning of financial markets.
A) noncollateralized risk
B) free-riding
C) asymmetric information
D) costly state verification
34) The regulatory agency that sets reserve requirements for all banks is
A) the Federal Reserve System
B) the Federal Deposit Insurance Corporation
C) the Office of Thrift Supervision
D) the Securities and Exchange Commission
35) Which of the following increases aggregate supply in the short-run, everything else
held constant?
A) An increase in the price of crude oil
B) A successful wage push by workers
C) Expectations of a higher inflation
D) A technological improvement that increases worker productivity
36) Bonds with no default risk are called
A) flower bonds
B) no-risk bonds
C) default-free bonds
D) zero-risk bonds