The negative relation between investment spending and the interest rate is what gives
the ________ curve its ________ slope.
A) IS; upward
B) IS; downward
C) LM; downward
D) LM; upward
Answer:
The major provisions of the Competitive Equality Banking Act of 1987 include
A) expanding the responsibilities of the FDIC, which is now the sole administrator of
the federal deposit insurance system.
B) the establishment of the Resolution Trust Corporation to manage and resolve
insolvent thrifts placed in conservatorship or receivership.
C) directing the Federal Home Loan Bank Board to continue to pursue regulatory
forbearance.
D) prompt corrective action when a bank gets in trouble.
Answer:
Acquiring information on a bank’s activities in order to determine a bank’s risk is
difficult for depositors and is another argument for government
A) regulation.
B) ownership.
C) recall.
D) forbearance.
Answer:
The ________ is calculated by multiplying the coupon rate times the par value of the
bond.
A) present value
B) par value
C) coupon payment
D) maturity payment
Answer:
Looking at the Net Interest Margin indicates that the poor bank performance in the late
1980s
A) was not the result of interest-rate movements.
B) was not the result of risky loans made in the early 1980s.
C) resulted from a narrowing of the gap between interest earned on assets and inters
paid on liabilities.
D) resulted from a huge decrease in provisions for loan losses.
Answer:
Financial institutions search for ________ has resulted in many financial innovations.
A) higher profits
B) regulations
C) respect
D) higher risk
Answer:
The immediate (two-day) exchange of one currency for another is a
A) forward transaction.
B) spot transaction.
C) money transaction.
D) exchange transaction.
Answer:
________ in the expected future domestic exchange rate causes the demand for
domestic assets to shift to the ________ and the domestic currency to appreciate,
everything else held constant.
A) An increase; right
B) An increase; left
C) A decrease; right
D) A decrease; left
Answer:
At the time of the South Korean financial crisis, the merchant banks were
A) almost virtually unregulated.
B) subject to heavy government regulation.
C) engaged in long-term lending to the corporate sector.
D) restricted to long-term foreign borrowing.
Answer:
A discount bond
A) pays the bondholder a fixed amount every period and the face value at maturity.
B) pays the bondholder the face value at maturity.
C) pays all interest and the face value at maturity.
D) pays the face value at maturity plus any capital gain.
Answer:
When $1 million is deposited at a bank, the required reserve ratio is 20 percent, and the
bank chooses not to make any loans but to hold excess reserves instead, then, in the
bank’s final balance sheet,
A) the assets at the bank increase by $1 million.
B) the liabilities of the bank decrease by $1 million.
C) reserves increase by $200,000.
D) liabilities increase by $200,000.
Answer:
This method of financing government spending is frequently called printing money
because high-powered money (the monetary base) is created in the process.
A) Financing government spending with taxes.
B) Financing government spending through a Treasury sale of bonds that are then
purchased by the Fed.
C) Financing government spending by selling bonds to the public, which pays for the
bonds with currency.
D) Financing government spending by selling bonds to the public, which pays for the
bonds with checks.
Answer:
When the Fed wants to raise interest rates after banks have accumulated large amounts
of excess reserves, it would
A) increase the interest rate paid on excess reserves.
B) increase discount rate.
C) conduct massive open market purchase.
D) conduct massive open market purchase.
Answer:
The effect of an open market purchase on reserves differs depending on how the seller
of the bonds keeps the proceeds. If the proceeds are kept in currency, the open market
purchase ________ reserves; if the proceeds are kept as deposits, the open market
purchase ________ reserves.
A) has no effect on; has no effect on
B) has no effect on; increases
C) increases; has no effect on
D) decreases; increases
Answer:
When paper currency is decreed by governments as legal tender, legally it must be
A) paper currency backed by gold.
B) a precious metal such as gold or silver.
C) accepted as payment for debts.
D) convertible into an electronic payment.
Answer:
Professional athletes often have contract clauses prohibiting risky activities such as
skiing and motorcycle riding. These clauses are
A) limited-liability clauses.
B) risk insurance.
C) restrictive covenants.
D) illegal.
Answer:
According to the expectations theory of the term structure, the interest rate on a
long-term bond will equal the ________ of the short-term interest rates that people
expect to occur over the life of the long-term bond.
A) average
B) sum
C) difference
D) multiple
Answer:
A movement along the bond demand or supply curve occurs when ________ changes.
A) bond price
B) income
C) wealth
D) expected return
Answer:
The process where financial intermediaries create and sell low-risk assets and use the
proceeds to purchase riskier assets is known as
A) risk sharing.
B) risk aversion.
C) risk neutrality.
D) risk selling.
Answer:
As a source of funds for nonfinancial businesses, stocks are relatively more important
in
A) the United States.
B) Germany.
C) Japan.
D) Canada.
Answer:
Modern liability management has resulted in
A) increased sales of certificates of deposits to raise funds.
B) increase importance of deposits as a source of funds.
C) reduced borrowing by banks in the overnight loan market.
D) failure by banks to coordinate management of assets and liabilities.
Answer:
Sometimes one observes that the price of a company’s stock falls after the
announcement of favorable earnings. This phenomenon is
A) clearly inconsistent with the efficient markets hypothesis.
B) consistent with the efficient markets hypothesis if the earnings were not as high as
anticipated.
C) consistent with the efficient markets hypothesis if the earnings were not as low as
anticipated.
D) consistent with the efficient markets hypothesis if the favorable earnings were
expected.
Answer:
If the economy is characterized by a stable IS curve and an unstable LM curve, then
________ target produces ________ fluctuations in aggregate output.
A) an interest rate; larger
B) a money supply; smaller
C) a money supply; larger
D) an exchange rate; smaller
Answer:
The theory of rational expectations, when applied to financial markets, is known as
A) monetarism.
B) the efficient markets hypothesis.
C) the theory of strict liability.
D) the theory of impossibility.
Answer:
An appreciation of the U.S. dollar makes foreign goods cheaper relative to American
goods, resulting in a ________ in net exports in the U.S. and a ________ shift of the IS
curve in the U.S., everything else held constant.
A) fall; leftward
B) rise; leftward
C) fall; rightward
D) rise; rightward
Answer:
During World War II, whenever interest rates would ________ and the price of bonds
would begin to ________, the Fed would make open market purchases.
A) rise; rise
B) rise; fall
C) fall; rise
D) fall; fall
Answer:
Because of the presence of asymmetric information problems in credit markets, an
expansionary monetary policy causes a ________ in net worth, which ________ the
adverse selection problem, thereby ________ increased lending to finance investment
spending.
A) decline; increases; encouraging
B) rise; increases; discouraging
C) rise; reduces; encouraging
D) decline; reduces; discouraging
Answer:
The legislative lag represents
A) the time it takes for policy makers to obtain data indicating what is happening in the
economy.
B) the time it takes for policy makers to be sure of what the data are signaling about the
future course of the economy.
C) the time it takes to pass legislation to implement a particular policy.
D) the time it takes for policy makers to change policy instruments once they have
decided on the new policy.
E) the time it takes for the policy actually to have an impact on the economy.
Answer:
Of the four effects on interest rates from an increase in the money supply, the initial
effect is, generally, the
A) income effect.
B) liquidity effect.
C) price level effect.
D) expected inflation effect.
Answer:
Suppose the economy is producing at the natural rate of output. A decrease 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
Answer:
If the economy is on the LM curve, but is to the right of the IS curve, then the
________ market is in equilibrium, but aggregate ________ exceeds aggregate
________.
A) goods; output; demand
B) goods; demand; output
C) money; output; demand
D) money; demand; output
Answer:
The government agency that oversees the banking system and is responsible for the
conduct of monetary policy in the United States is
A) the Federal Reserve System.
B) the United States Treasury.
C) the U.S. Gold Commission.
D) the House of Representatives.
Answer:
When asset prices increase above their fundamental values it is called an
A) asset-price bubble.
B) irrational bubble.
C) asset-price spike.
D) irrational spike.
Answer:
An increase in the domestic 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
Answer:
A foreign exchange intervention with an offsetting open market operation that leaves
the monetary base unchanged 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.
Answer: