Two reasons for an industrialized country to adopt an exchange-rate targeting regime
are if the country ________ conduct successful monetary policy on its own, and if the
country wants to ________ integration of the domestic economy with its neighbors.
A) cannot; encourage
B) cannot; discourage
C) can; encourage
D) can; discourage
Answer:
Everything else held constant, a monetary contraction is characterized by ________
output and ________ interest rates.
A) rising; rising
B) rising; falling
C) falling; rising
D) falling; falling
Answer:
An equal decrease in all bond interest rates
A) increases the price of a five-year bond more than the price of a ten-year bond.
B) increases the price of a ten-year bond more than the price of a five-year bond.
C) decreases the price of a five-year bond more than the price of a ten-year bond.
D) decreases the price of a ten-year bond more than the price of a five-year bond.
Answer:
There are two ways in which the Fed can provide additional reserves to the banking
system: it can ________ government bonds or it can ________ discount loans to
commercial banks.
A) sell; extend
B) sell; call in
C) purchase; extend
D) purchase; call in
Answer:
There are ________ members of the Board of Governors of the Federal Reserve
System.
A) 5
B) 7
C) 12
D) 19
Answer:
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.
Answer:
The riskiness of an asset’s returns due to changes in interest rates is
A) exchange-rate risk.
B) price risk.
C) asset risk.
D) interest-rate risk.
Answer:
Since Regulation Q has been abolished, there have been doubts raised about the size of
the effect of the ________ channel.
A) balance sheet
B) bank lending
C) cash flow
D) unanticipated price level
Answer:
Everything else held constant, a shift in tastes in the U.S. toward Mexican goods will
________ net exports in the U.S. and cause the quantity of aggregate output demanded
to ________ in Mexico.
A) decrease; rise
B) decrease; fall
C) increase; rise
D) increase; fall
Answer:
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
Answer:
A venture capital firm protects its equity investment from moral hazard through which
of the following means?
A) It places people on the board of directors to better monitor the borrowing firm’s
activities.
B) It writes contracts that prohibit the sale of an equity investment to the venture capital
firm.
C) It prohibits the borrowing firm from replacing its management.
D) It requires a 50% stake in the company.
Answer:
Which of the following is not a disadvantage of controls on capital outflows?
A) The controls may lead to excessive risk taking by the domestic banks.
B) They are seldom effective during a crisis.
C) Capital flight may increase after they are put in place.
D) Controls often lead to an increase in government corruption.
Answer:
If a bank has $200,000 of checkable deposits, a required reserve ratio of 20 percent, and
it holds $80,000 in reserves, then the maximum deposit outflow it can sustain without
altering its balance sheet is
A) $50,000.
B) $40,000.
C) $30,000.
D) $25,000.
Answer:
As a result of the global financial crisis several of the large, free-standing investment
banking firms chose to become bank holding companies. This means that they will now
be regulated by
A) the Federal Reserve.
B) the FDIC.
C) the state banking authorities.
D) the Treasury.
Answer:
Under the current managed float exchange rate regime, countries with ________ in
their balance of payments frequently do not want to see their currencies ________
because it makes their goods more expensive abroad and foreign goods cheaper in their
countries.
A) surpluses; depreciate
B) deficits; depreciate
C) surpluses; appreciate
D) deficits; appreciate
Answer:
Because of the “lemons problem” the price a buyer of a used car pays is
A) equal to the price of a lemon.
B) less than the price of a lemon.
C) equal to the price of a peach.
D) between the price of a lemon and a peach.
Answer:
In the market for reserves, if the federal funds rate is above the interest rate paid on
excess reserves, an open market sale ________ the ________ of reserves, causing the
federal funds rate to increase, everything else held constant.
A) increases; supply
B) increases; demand
C) decreases; supply
D) decreases; demand
Answer:
When a domestic currency is completely backed by a foreign currency and the
note-issuing authority establishes a fixed exchange rate to this foreign currency, then
the country is said to have
A) created a currency board.
B) undergone dollarization.
C) adopted a managed exchange system.
D) adopted an exchange rate monetary system.
Answer:
A bank that wants to monitor the check payment practices of its commercial borrowers,
so that moral hazard can be prevented, will require borrowers to
A) place a bank officer on their board of directors.
B) place a corporate officer on the bank’s board of directors.
C) keep compensating balances in a checking account at the bank.
D) purchase the bank’s CDs.
Answer:
In May 1991, the FDIC announced that it would sell the government’s final 26% stake
in Continental Illinois, ending government ownership of the bank that it had rescued in
1984. The FDIC took control of the bank, rather than liquidate it, because it believed
that Continental Illinois
A) was a good investment opportunity for the government.
B) could be the Chicago branch of a new governmentally-owned interstate banking
system.
C) was too big to fail.
D) would become the center of the new midwest region central bank system.
Answer:
The Fed’s holdings of securities consist primarily of ________, but also in the past have
included ________.
A) Treasury securities; bankers’ acceptances
B) municipal securities; bankers’ acceptances
C) bankers’ acceptances; Treasury securities
D) Treasury securities; municipal securities
Answer:
In the ISLM framework, an expansionary monetary policy causes aggregate output to
________ and the interest rate to ________, everything else held constant.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
Answer:
Suppose on any given day the prevailing equilibrium federal funds rate is below the
Federal Reserve’s federal funds target rate. If the Federal Reserve wishes for the federal
funds rate to be at their target level, then the appropriate action for the Federal Reserve
to take is a ________ open market ________, everything else held constant.
A) defensive; sale
B) defensive; purchase
C) dynamic; sale
D) dynamic; purchase
Answer:
If initially the money supply is $1 trillion, velocity is 5, the price level is 1, and real
GDP is $5 trillion, an increase in the money supply to $2 trillion
A) increases real GDP to $10 trillion.
B) causes velocity to fall to 2.5.
C) increases the price level to 2.
D) increases the price level to 2 and velocity to 10.
Answer:
Which of the following statements are true?
A) Checkable deposits are payable on demand.
B) Checkable deposits do not include NOW accounts.
C) Checkable deposits are the primary source of bank funds.
D) Demand deposits are checkable deposits that pay interest.
Answer:
All but the most primitive societies use money as a medium of exchange, implying that
A) the use of money is economically efficient.
B) barter exchange is economically efficient.
C) barter exchange cannot work outside the family.
D) inflation is not a concern.
Answer:
If the Japanese yen appreciates from $0.01 per yen to $0.02 per yen, the U.S. dollar
depreciates from ________ per dollar to ________ per dollar.
A) 100¥; 50¥
B) 10¥; 5¥
C) 5¥; 10¥
D) 50¥; 100¥
Answer:
Net worth can perform a similar role to
A) diversification.
B) collateral.
C) intermediation.
D) economies of scale.
Answer:
Which of the following statements are true?
A) An increase in tax rates will increase the demand for Treasury bonds, lowering their
interest rates.
B) Because the tax-exempt status of municipal bonds was of little benefit to bond
holders when tax rates were low, they had higher interest rates than U.S. government
bonds before World War II.
C) Interest rates on municipal bonds will be higher than comparable bonds without the
tax exemption.
D) Because coupon payments on municipal bonds are exempt from federal income tax,
the expected after-tax return on them will be higher for individuals in lower income tax
brackets.
Answer:
Keynes assumed that money has ________ rate of return.
A) a positive
B) a negative
C) a zero
D) an increasing
Answer:
Everything else held constant, if a central bank makes an unsterilized ________ of
foreign assets, then the domestic money supply will ________ and the domestic
currency will appreciate.
A) purchase; increase
B) purchase; decrease
C) sale; increase
D) sale; decrease
Answer:
Which of the following would not be a way to increase the return on equity?
A) Buy back bank stock
B) Pay higher dividends
C) Acquire new funds by selling negotiable CDs and increase assets with them
D) Sell more bank stock
Answer: