1) Bruce the Bank Manager can reduce interest rate risk by ________ the duration of
the bank’s assets to increase their rate sensitivity or, alternatively, ________ the
duration of the bank’s liabilities
A) shortening; lengthening
B) shortening; shortening
C) lengthening; lengthening
D) lengthening; shortening
2) In the long-run the ISLM model predicts that ________ can change real output
A) only monetary policy
B) only fiscal policy
C) both monetary and fiscal policy
D) neither monetary nor fiscal policy
3) In his Liquidity Preference Framework, Keynes assumed that money has a zero rate
of return; thus,
A) when interest rates rise, the expected return on money falls relative to the expected
return on bonds, causing the demand for money to fall
B) when interest rates rise, the expected return on money falls relative to the expected
return on bonds, causing the demand for money to rise
C) when interest rates fall, the expected return on money falls relative to the expected
return on bonds, causing the demand for money to fall
D) when interest rates fall, the expected return on money falls relative to the expected
return on bonds, causing the demand for money to rise
4) Which of the following is not included in the measure of M1?
A) NOW accounts
B) Demand deposits
C) Currency
D) Savings deposits
5) If the interest rates on all bonds rise from 5 to 6 percent over the course of the year,
which bond would you prefer to have been holding?
A) A bond with one year to maturity
B) A bond with five years to maturity
C) A bond with ten years to maturity
D) A bond with twenty years to maturity
6) Models describing the determination of the money supply and the Fed’s role in this
process normally focus on ________ rather than ________, since Fed actions have a
more predictable effect on the former
A) reserves; the monetary base
B) reserves; high-powered money
C) the monetary base; high-powered money
D) the monetary base; reserves
7) In the market for reserves, if the federal funds rate is between the discount rate and
the interest rate paid on excess reserves, an increase in the reserve requirement
________ the demand of reserves and causes the federal funds interest rate to
________, everything else held constant
A) decreases; fall
B) increases; fall
C) increases; rise
D) decreases; rise
8) A clause in a mortgage loan contract requiring the borrower to purchase homeowner’s
insurance is an example of a
A) proscriptive covenant
B) prescriptive covenant
C) restrictive covenant
D) constraint-imposed covenant
9) Which set of goals can, at times, conflict in the short run?
A) High employment and economic growth
B) Interest rate stability and financial market stability
C) High employment and price level stability
D) Exchange rate stability and financial market stability
10) Secondary reserves include
A) deposits at Federal Reserve Banks
B) deposits at other large banks
C) short-term Treasury securities
D) state and local government securities
11) Which of the following is not included in the M1 measure of money but is included
in the M2 measure of money?
A) Currency
B) Traveler’s checks
C) Demand deposits
D) Small-denomination time deposits
12) When the economy suffers a temporary negative supply shock and the monetary
policy makers try to stabilize economic activity in the short run, then
A) aggregate demand curve shifts rightward
B) output will be at its potential
C) inflation rate will be higher
D) all of the above
E) both A and B
13) One purpose of regulation of financial markets is to
A) limit the profits of financial institutions
B) increase competition among financial institutions
C) promote the provision of information to shareholders, depositors and the public
D) guarantee that the maximum rates of interest are paid on deposits
14) Everything else held constant, in the market for reserves, decreases in the interest
rate paid on excess reserves affect the federal funds rate
A) when the funds rate is below the interest rate paid on excess reserves
B) when the funds rate equals the interest rate paid on excess reserves
C) when the funds rate is below the discount rate
D) when the funds rate equals the discount rate
15) The reason that economists are so interested in the stability of velocity is because if
the demand for money is not stable, then steady growth of the money supply
A) is going to promote price stability at the expense of low unemployment
B) is going to promote low unemployment at the expense of price stability
C) is an ineffective way to conduct monetary policy
D) can still be used to conduct monetary policy if the goal is price stability