The risk spread:
A. is also known as the default-risk premium.
B. should have a direct relationship with the bond’s price.
C. should have an inverse relationship with the bond’s yield.
D. is always constant.
Answer:
Comparing the banking systems of Japan and the U.S. during the 1990s and early
2000s, one would be likely to say that:
A. the U.S. banking system was much shakier than the Japanese banking system.
B. Japanese banks are certainly more tightly regulated from an accounting perspective.
C. the U.S. banking system was much stronger than the Japanese banking system.
D. monetary policy worked far better in the Japanese banking system during this time
frame.
Answer:
In the period of 1979 to 1982, if the Fed had set an interest rate target that was equal to
the actual market interest rates that occurred, the:
A. economy would have been better off.
B. target would not have been politically acceptable.
C. target would have been a federal funds rate of zero percent.
D. inflation rate would have risen further.
Answer:
The market for bonds is initially described by the supply of bonds – S0, and the demand
for bonds – D0, with the equilibrium price and quantity being P0 and Q0. An increase in
the nation’s wealth, all else constant, would cause the
A. Bond supply curve to shift to S1.
B. Bond demand curve to shift to D1.
C. Bond supply curve to shift to S2.
D. Bond demand curve to shift to D2.
Answer:
Which of the following statements is most correct?
A. The velocity of M2 is relatively stable across all time periods.
B. The velocity of M2 is less stable than the velocity of M1.
C. The velocity of M2 is more volatile in the short run than the long run.
D. Fisher’s assumption about money velocity being stable in the long run was incorrect.
Answer:
The reason that a run on a single bank can turn into a bank panic that threatens the
entire financial system is:
A. information asymmetries.
B. moral hazard.
C. the lack of regulation.
D. the increased reliance on web-based funds transfers.
Answer:
Which of the following statements is most correct for U.S. commercial banks?
A. Net interest margin is much larger than return on equity.
B. Net interest margin is about equal to return on equity.
C. Net interest margin averages about two times the return on equity.
D. Net interest margin is closely related to the return on assets.
Answer:
Diversification is the principle of:
A. eliminating risk.
B. reducing the risk we carry to just two.
C. holding more than one asset to reduce risk.
D. eliminating investments from our portfolio that have idiosyncratic risk.
Answer:
The central bank for the euro area tries to achieve accountability and transparency
through a:
A. standard numerical objective for inflation over the medium term.
B. specific target for unemployment and economic growth.
C. following the monetary policy guidance of the European Parliament.
D. specific target for the dollar euro exchange rate.
Answer:
Assume that the Fed performs a foreign exchange intervention in which it does nothing
except buy German government bonds. One result of this will be that:
A. the dollar depreciates.
B. the euro depreciates.
C. both the dollar and the euro depreciate.
D. the dollar appreciates and the euro depreciates.
Answer:
A call option described as out of the money would find:
A. the market price of the stock is above the strike price.
B. the option has been exercised.
C. the option has expired.
D. the strike price is above the market price of the stock.
Answer:
Firm A has assets that are mainly in financial securities and whose liabilities carry
variable interest rates; Firm B has the same assets as Firm A and the same amount of
liabilities but its liabilities are all at fixed interest rates. If the central bank lowers
interest rates, everything else constant:
A. Firm B’s net worth will increase more than Firm A’s.
B. Firm A’s net worth will increase more than Firm B’s.
C. Neither firm’s net worth will change.
D. The net worth of both firms will increase and by the same amount.
Answer:
One thing that is common for all bank loans is that they are:
A. securitized.
B. liquid.
C. part of the banks’ assets.
D. unsecured.
Answer:
In countries with low inflation:
A. M2 growth is a very strong forecaster of inflation.
B. there tends to be a greater reliance on checks than electronic payments.
C. M2 growth is a poor forecaster of inflation.
D. money stocks are a larger percentage of GDP.
Answer:
In the U.S. today:
A. most banks are federally chartered.
B. most banks are state chartered.
C. there are approximately equal numbers of state and federally chartered banks.
D. all new banks are federally chartered.
Answer:
In its role as bank for the U.S. government, the Federal Reserve performs all of the
following services, except:
A. issuing new currency.
B. making discount loans.
C. maintaining the U.S. Treasury’s bank account.
D. managing U.S. Treasury borrowings.
Answer:
A fixed exchange rate policy:
A. decreases central bank policy accountability and transparency.
B. strengthens domestic interest rate policy.
C. will likely make domestic inflation more volatile.
D. imports monetary policy.
Answer:
Which of the following statements is most correct?
A. The market federal funds rate equals the target federal funds rate.
B. Since 2008, the market federal funds rate has remained solidly within the target
range announced by the Fed.
C. Since 2008, the market federal funds rate has varied wildly, sometimes moving
outside the target range announced by the Fed.
D. There doesn’t appear to be any relationship at all between the target and market
federal fund rates.
Answer:
One argument for an independent central bank is:
A. successful monetary policy requires a long time horizon usually well beyond the
next election of most public officials.
B. without independence competent people would not take a position in a central bank.
C. the central bank usually hires more competent individuals than the Treasury
department or other finance ministries.
D. central bankers have a short-run focus that usually corrects problems faster.
Answer:
If a bank has customer deposits of $150 million, $15 million in reserves and the amount
of excess reserves equals 0 (zero):
A. the required reserve rate is 15 percent.
B. the required reserve rate is 10 percent.
C. the required reserve rate is 1 percent.
D. the bank’s net interest margin is zero (0).
Answer:
The use of deposit sweeping allows banks to:
A. pay higher rates of interest than are allowed by law.
B. reduce the amount of required reserves they must hold.
C. pay less for FDIC insurance.
D. weed out less profitable deposits.
Answer:
The store of value characteristic of money refers to the fact that:
A. people save most of their money.
B. money allows people to shift purchasing power into the future.
C. money is not valuable unless it is stored.
D. money is the only way people have to store value.
Answer:
If the quantity of bonds supplied exceeds the quantity of bonds demanded, bond prices
would:
A. rise and yields would fall.
B. fall and yields would rise.
C. rise but yields will remain constant.
D. fall and yields would fall.
Answer:
Which of the following expresses the equation of exchange?
A. MY = PV
B. MV = Y
C. MV = PY
D. MP = VY
Answer:
A key use of interest-rate swaps is to:
A. eliminate risk for both parties involved in the transaction.
B. earn the fees for constructing the swaps.
C. provide a hedge against interest-rate risk.
D. manage government revenues.
Answer:
Which of the following is an example that can help explain increased profits for large
financial holding companies?
A. Financial holding companies offer a wide array of services under many brand
names.
B. Financial holding companies need only one CEO, one Board of Directors, and one
computer system regardless of size.
C. Financial holding companies are not well diversified and receive a higher return for
the higher risk.
D. Financial holding companies are exempt from having to pay for FDIC insurance.
Answer:
Bank failures tend to occur most often during periods of:
A. stock market run ups when, like many companies, banks tend to be overvalued.
B. high inflation when the fixed rate loans of many banks cause their real returns to
decrease.
C. recessions when many borrowers have a difficult time repaying loans and lending
activity slows.
D. wars and other civil unrest.
Answer:
Economies of scale associated with financial intermediaries means:
A. the total cost of handling transactions falls as more transactions of different kinds
are handled.
B. the cost per transaction falls as a larger volume of similar transactions are handled.
C. the cost per transaction increases as more transactions are handled.
D. the cost per transaction decreases regardless of the number of transactions.
Answer:
From October 1997 to January 1998, the economy of South Korea was in turmoil. One
of the problems was:
A. the currency of South Korea appreciated considerably making it very difficult for
Korean exporters to sell goods abroad.
B. the value of the U.S. $ compared to the Korean won fell by more than half.
C. U.S. goods became very cheap to Koreans making it difficult for Korean
manufacturers to compete with imports.
D. the value of the won fell by more than half compared to the U.S. dollar, making
U.S. goods very expensive to Koreans and Korean goods relatively inexpensive for
U.S. residents.
Answer:
Successful monetary policy relies most on:
A. having an ample supply of highly qualified people.
B. luck.
C. the institutional environment.
D. knowledgeable citizens who know how to react to the policy.
Answer:
The method used by the ECB to measure inflation for meeting its objectives:
A. gives equal weight to each member country.
B. gives greater relative weight to smaller countries.
C. can result in a contractionary monetary policy being used in a country where
inflation is already very low.
D. is based on wholesale rather than retail prices.
Answer:
This is a two-part question: We have a firm that needs $1000 to obtain a new machine
for its business. It can either issue stock or bonds, or some combination of both. If it
issues bonds it will have to pay $8.00 in interest for every $100 borrowed. Finally,
assume the company will earn $150 in good years and $75 in bad years, with equal
probability. The first part of the question is to (a) determine the payment to the equity
holders under the following three scenarios: (i) the first is the firm uses 0% debt
financing; (ii) the second is the firm uses 50% debt financing, and (iii) the third finds
the firm using 80% debt financing.
The second part of the question is to (b) determine the expected equity return (%) under
each scenario.
Answer:
The longest recession since the 1940’s began in:
A. 1952.
B. 1973.
C. 1981.
D. 2007.
Answer:
The default-risk premium:
A. should vary directly with the bond’s yield and inversely with its price.
B. is less than 0 (zero) for a U.S. Treasury bond.
C. should be lower for a highly speculative bond than for an investment-grade bond.
D. should vary directly with the bond’s yield and the bond’s price.
Answer:
Considering the market for U.S. dollars and Japanese yen, where the horizontal axis is
the quantity of dollars, explain what is likely to happen to the demand and supply of
dollars, as well as the exchange rate, if U.S. interest rates rise relative to Japanese rates.
Answer:
How do targeted asset purchases alter the outlook for the economy and inflation?
Answer:
Explain why the changes we observe in nominal exchange rates in the short run must be
due primarily to changes in the real exchange rate in countries with low inflation.
Answer:
Imagine a baker who has the opportunity to bid on a contract to supply a local military
base with bread for an entire year. The problem is the baker must commit to a price
today and hold to that price for the entire year. Identify the risk faced by the baker, and
explain how the use of a futures contract could transfer the risk.
Answer:
What is opportunistic disinflation and what provides the opportunity? Explain how the
process works.
Answer:
Why does the time value of the option tend to vary directly with the time to expiration?
Answer:
Suppose you negotiate a one-year loan with a principal of $1000 and the nominal
interest rate is currently 7%. You expect the inflation rate to be 3% over the next year.
When you repay the principal plus interest at the end of the year, the actual inflation
rate is 2.5%. Compute the ex ante and ex post real interest rate. Who benefits from this
unexpected decrease in inflation? Who loses?
Answer:
Why might the supply of loans increase as interest rates fall?
Answer:
Imagine a central banker who takes office believing that, ultimately, the best way to
stimulate an economy is to keep people guessing. This means the policymaker will
often, but not always, announce one change but then actually do something else. What
do you think of the central bank’s chances for achieving its objectives and why?
Answer:
Why is deflation, combined with a recessionary gap, and a zero nominal interest rate a
monetary policymaker’s nightmare?
Answer:
The number of banks in the U.S. has fallen almost by half in the past twenty years or so.
Was this the result of bank failures or were some due to another cause? Explain.
Answer:
Describe the supply curve in the market for bank reserves.
Answer:
If you focus on interest-rate risk, can you explain why banks offer higher interest rates
on longer-term CDs than they do on short-term CDs?
Answer:
Discuss the key criteria for success and the advantages of a central bank adopting the
framework of inflation targeting.
Answer:
How do financial markets pool and communicate the information regarding issuers of
financial instruments in a convenient way?
Answer:
Considering changes to the monetary base, are discount loans and federal funds
borrowing equivalent? Explain.
Answer:
A borrower seeking a mortgage today is often presented with the choice between a
mortgage whose interest rate and monthly payment stays fixed for the duration of the
loan, or a mortgage whose interest rate and monthly payment can change as other
interest rates change. Typically the interest rate on the fixed-rate mortgage is higher.
Having learned the five core principles, does this make sense?
Answer:
What will be the amount owed at the end of one year if a borrower charges $100 on
his/her credit card and doesn’t make any payments during the year (assume the interest
rate is 1.5% per month)?
Answer: