Banks’ asset portfolios include state and local government securities because
A) they help to attract business from these government entities.
B) banks consider them helpful in attracting accounts of Federal employees.
C) the Federal Reserve requires member banks to buy securities from state and local
governments located within their respective Federal Reserve districts.
D) there is no default-risk with state and local government securities.
When real income ________, the demand curve for money shifts to the ________ and
the interest rate ________, everything else held constant.
A) falls; right; rises
B) rises; right; rises
C) falls; left; rises
D) rises; left; rises
Tools to help solve the adverse selection problem in financial markets include all of the
following EXCEPT
A) diversification.
B) government regulations to increase information.
C) the use of financial intermediaries.
D) the private production and sale of information.
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
A bank’s commitment to provide a firm with loans up to pre-specified limit at an
interest rate that is tied to a market interest rate is called
A) an adjustable gap loan.
B) an adjustable portfolio loan.
C) loan commitment.
D) pre-credit loan line.
The discount rate refers to the interest rate on
A) primary credit.
B) secondary credit.
C) seasonal credit.
D) federal funds.
If an individual uses money from a demand deposit account to purchase a U.S. savings
bond
A) M1 decreases and M2 stays the same.
B) M1 stays the same and M2 increases.
C) M1 stays the same and M2 stays the same.
D) M1 decreases and M2 decreases.
The Depository Institutions Deregulation and Monetary Control Act of 1980
A) separated investment banks and commercial banks.
B) restricted the use of ATS accounts.
C) imposed restrictive usury ceilings on large agricultural loans.
D) increased deposit insurance from $40,000 to $100,000.
If you expect the inflation rate to be 15 percent next year and a one-year bond has a
yield to maturity of 7 percent, then the real interest rate on this bond is
A) 7 percent.
B) 22 percent.
C) -15 percent.
D) -8 percent.
According to the liquidity premium theory of the term structure, a slightly upward
sloping 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.
Which of the following functions is NOT performed by any of the twelve regional
Federal Reserve Banks?
A) check clearing
B) conducting economic research
C) setting interest rates payable on time deposits
D) issuing new currency
In response to the early Keynesians, monetarists contended that
A) monetary policy during the Great Depression was not easy.
B) bank failures during the Great Depression were not the cause of the decline in the
money supply.
C) evidence from the Great Depression demonstrated the ineffectiveness of monetary
policy.
D) there is a weak link between interest rates and investment spending.
A problem for equity contracts is a particular type of ________ called the ________
problem.
A) adverse selection; principal-agent
B) moral hazard; principal-agent
C) adverse selection; free-rider
D) moral hazard; free-rider
Property and casualty insurance companies hold the largest share of their assets in
A) long-term government bonds.
B) short-term government securities and commercial paper.
C) tax-exempt municipal bonds and U.S. government securities.
D) medium-term corporate bonds.
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
The theory of portfolio choice suggests that the most important factor affecting the
demand for domestic and foreign assets is
A) the level of trade and capital flows.
B) the expected return on these assets relative to one another.
C) the liquidity of these assets relative to one another.
D) the riskiness of these assets relative to one another.
Which of the following can be described as involving indirect finance?
A) You make a loan to your neighbor.
B) A corporation buys a share of common stock issued by another corporation in the
primary market.
C) You buy a U.S. Treasury bill from the U.S. Treasury at TreasuryDirect.gov.
D) You make a deposit at a bank.
When a corporation announces a major decline in earnings, the stock price may initially
decline significantly and then rise back to normal levels over the next few weeks. This
impact is called
A) the January effect.
B) mean reversion.
C) market overreaction.
D) the small-firm effect.
Evidence suggests that a liquidity trap is possible when
A) real interest rates are at zero.
B) real interest rates are at or just above zero.
C) nominal interest rates are at zero.
D) nominal interest rates are at or just above zero.
The long-run neutrality of money refers to the fact that in the long run, monetary policy
A) changes only real output.
B) changes only the real interest rate.
C) changes both real output and the real interest rate.
D) has no effect on either real output or the real interest rate.
When you deposit $50 in your account at First National Bank and a $100 check you
have written on this account is cashed at Chemical Bank, then
A) the assets of First National rise by $50.
B) the assets of Chemical Bank rise by $50.
C) the reserves at First National fall by $50.
D) the liabilities at Chemical Bank rise by $50.
Planned investment spending is higher
A) when real interest rate is higher.
B) during financial frictions.
C) when businesses are optimistic.
D) all of the above.
E) A and C.
Economists believe that countries recently suffering hyperinflation have experienced
A) reduced growth.
B) increased growth.
C) reduced prices.
D) lower interest rates.
Keynes’s theory of the demand for money is consistent with ________ movements in
________.
A) countercyclical; velocity
B) procyclical; velocity
C) countercyclical; expectations
D) procyclical; expectations
A breakdown of financial markets can result in
A) financial stability.
B) rapid economic growth.
C) political instability.
D) stable prices.
If the economy is on the IS curve, but is to the left of the LM curve, then the ________
market is in equilibrium, but the interest rate is ________ the equilibrium level.
A) goods; below
B) goods; above
C) money; below
D) money; above
The interest rate charged on overnight loans of reserves between banks is the
A) prime rate.
B) discount rate.
C) federal funds rate.
D) Treasury bill rate.
When good weather speeds the check-clearing process, float tends to ________ causing
the Fed to initiate ________ open market ________.
A) decrease; defensive; sales
B) decrease; dynamic; sales
C) decrease; defensive; purchases
D) increase; dynamic; purchases
Keynes was especially concerned with explaining the
A) recession of 1920-21.
B) low levels of output and employment during the Great Depression.
C) strong economic growth of the 1920s.
D) high unemployment in Great Britain during the 1920s.
If Treasury deposits at the Fed are predicted to ________, the manager of the trading
desk at the New York Fed bank will likely conduct ________ open market operations to
________ reserves.
A) rise; defensive; drain
B) fall; defensive; drain
C) rise; dynamic; inject
D) fall; dynamic; drain
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.
The payments system is
A) the method of conducting transactions in the economy.
B) used by union officials to set salary caps.
C) an illegal method of rewarding contracts.
D) used by your employer to determine salary increases.