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1) If expectations are formed rationally, then individuals
A) will have a forecast that is 100% accurate all of the time
B) change their forecast when faced with new information
C) use only the information from past data on a single variable to form their forecast
D) have forecast errors that are persistently low
2) The analysis of how asymmetric information problems affect economic behavior is
called ________ theory
A) uneven
B) parallel
C) principal
D) agency
3) High-powered money minus reserves equals
A) reserves
B) currency in circulation
C) the monetary base
D) the nonborrowed base
4) The Federal Reserve will engage in a repurchase agreement when it wants to
________ reserves ________ in the banking system
A) increase; permanently
B) increase; temporarily
C) decrease; temporarily
D) decrease; permanently
5) Although debt contracts require less monitoring than equity contracts, debt contracts
are still subject to ________ since borrowers have an incentive to take on more risk
than the lender would like
A) moral hazard
B) agency theory
C) diversification
D) the "lemons" problem
6) Exchange-rate targeting allows a central bank to ________, thus this will ________
the probability of policy developing a time-inconsistency problem
A) be governed by a policy rule; decrease
B) follow discretionary policy; decrease
C) be governed by a policy rule; increase
D) follow discretionary policy; increase
7) A decline in the money ________ shifts the LM curve to the ________, causing the
interest rate to rise and output to fall, everything else held constant
A) demand; right
B) demand; left
C) supply; right
D) supply; left
8) Since 1980, ________ are subject to reserve requirements
A) only commercial banks
B) only the member institutions of the Federal Reserve
C) only nationally chartered depository institutions
D) all depository institutions
9) In the market for reserves, if the federal funds rate is between the discount rate and
the interest rate paid on excess reserves, a decline in the reserve requirement ________
the demand of reserves, ________ the federal funds rate, everything else held constant
A) decreases; lowering
B) increases; lowering
C) increases; raising
D) decreases; raising
10) In the figure above, a factor that could cause the demand for bonds to shift to the
right is:
A) an increase in the riskiness of bonds relative to other assets
B) an increase in the expected rate of inflation
C) expectations of lower interest rates in the future
D) a decrease in wealth
11) Arguments for discretionary policies include
A) policy rules can be too rigid because they cannot foresee every contingency
B) the time-inconsistency problem can lead to poor economic outcomes
C) discretionary policies pursue overly expansionary monetary policies to boost
employment in the short run but generate higher inflation in the long run
D) all of the above
12) All else equal, when interest rates ________, the duration of a coupon bond
________
A) rise; falls
B) rise; increases
C) falls; falls
D) falls; does not change
13) In the Keynesian cross diagram, an increase in autonomous consumer expenditure
causes the aggregate demand function to shift up, the equilibrium level of aggregate
output to ________, and the IS curve to shift to the ________, everything else held
constant
A) rise; left
B) rise; right
C) fall; left
D) fall; right
14) The ability of a central bank to set monetary policy instruments is
A) political independence
B) goal independence
C) policy independence
D) instrument independence
15) Banks responded to disintermediation by
A) supporting the elimination of interest rate regulations, enabling them to better
compete for funds
B) opposing the elimination of interest rate regulations, as this would increase their cost
of funds
C) demanding that interest rate regulations be imposed on money market mutual funds
D) supporting the elimination of interest rate regulations, as this would reduce their cost
of funds
16) Under a fixed exchange rate regime, if a central bank must intervene to purchase
the ________ currency by selling ________ assets, then, like an open market sale, this
action reduces the monetary base and the money supply, causing the interest rate on
domestic assets to rise
A) domestic; foreign
B) domestic; domestic
C) foreign; foreign
D) foreign; domestic
17) In recent years the interest paid on checkable and time deposits has accounted for
around ________ of total bank operating expenses, while the costs involved in
servicing accounts have been approximately ________ of operating expenses
A) 45 percent; 55 percent
B) 55 percent; 4 percent
C) 25 percent; 50 percent
D) 50 percent; 30 percent
18) The bond supply and demand framework is easier to use when analyzing the effects
of changes in ________, while the liquidity preference framework provides a simpler
analysis of the effects from changes in income, the price level, and the supply of
________
A) expected inflation; bonds
B) expected inflation; money
C) government budget deficits; bonds
D) government budget deficits; money
19) Money market mutual funds
A) function as interest-earning checking accounts
B) are legally deposits
C) are subject to reserve requirements
D) have an interest-rate ceiling
