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1) A discount bond
A) pays the bondholder a fixed amount every period and the face value at maturity
B) pays the bondholder the face value at maturity
C) pays all interest and the face value at maturity
D) pays the face value at maturity plus any capital gain
2) The theory of portfolio choice indicates that factors affecting the demand for money
include
A) income
B) nominal interest rate
C) riskiness of money
D) all the above
3) With ________ finance, borrowers obtain funds from lenders by selling them
securities in the financial markets
A) active
B) determined
C) indirect
D) direct
4) A contractionary monetary policy shifts the LM curve to the ________, reducing
________, everything else held constant
A) left; output and increasing interest rates
B) left; both real output and interest rates
C) right; both interest rates and real output
D) right; interest rates and increasing real output
5) While legislation enacted in 1998 granted the Bank of Japan new powers and greater
autonomy, its critics contend that its independence is
A) limited by the Ministry of Finance's veto power over a portion of its budget
B) too great because it need not pursue a policy of price stability even if that is the
popular will of the people
C) too great since the Ministry of Finance no longer has veto power over the bank's
budget
D) limited since the Ministry of Finance can dismiss senior bank officials
6) The ________ states that the nominal interest rate equals the real interest rate plus
the expected rate of inflation
A) Fisher equation
B) Keynesian equation
C) Monetarist equation
D) Marshall equation
7) Having interest rate stability
A) allows for less uncertainty about future planning
B) leads to demands to curtail the Fed's power
C) guarantees full employment
D) leads to problems in financial markets
8) When workers voluntarily leave work while they look for better jobs, the resulting
unemployment is called
A) structural unemployment
B) frictional unemployment
C) cyclical unemployment
D) underemployment
9) An increase in the expected future domestic exchange rate causes the demand for
domestic assets to shift to the ________ and the domestic currency to ________,
everything else held constant
A) right; appreciate
B) right; depreciate
C) left; appreciate
D) left; depreciate
10) Prior to 1980, the Fed set an interest rate ________, a maximum limit, on the
interest rate that could be paid on time deposits
A) floor
B) ceiling
C) wall
D) window
11) The recognition lag is
A) the time it takes for policy makers to obtain data indicating what is happening in the
economy
B) the time it takes for policy makers to be sure of what the data are signaling about the
future course of the economy
C) the time it takes to pass legislation to implement a particular policy
D) the time it takes for policy makers to change policy instruments once they have
decided on the new policy
E) the time it takes for the policy actually to have an impact on the economy
12) Deposit insurance has not worked well in countries with
A) a weak institutional environment
B) strong supervision and regulation
C) a tradition of the rule of law
D) few opportunities for corruption
13) The British Banker's Association average of interbank rates for dollar deposits in
the London market is called the
A) Libor rate
B) federal funds rate
C) prime rate
D) Treasury Bill rate
14) Everything else held constant, when the current value of the domestic currency
increases, the ________ domestic assets ________
A) demand for; increases
B) quantity demanded of; increases
C) demand for; decreases
D) quantity demanded of; decreases
15) If the required reserve ratio is one-third, currency in circulation is $300 billion,
checkable deposits are $900 billion, and there is no excess reserve, then the monetary
base is
A) $300 billion
B) $600 billion
C) $333 billion
D) $667 billion
16) Everything else held constant, an increase in the currency-checkable deposit ratio
will mean
A) an increase in currency in circulation and an increase in the money supply
B) an increase in money supply but no change in reserves
C) a decrease in the money supply
D) an increase in currency in circulation but no change in the money supply
17) Which of the following are reported as liabilities on a bank's balance sheet?
A) Discount loans
B) Reserves
C) US Treasury securities
D) Loans
18) When housing prices began to decline after their peak in 2006, many subprime
borrowers found that their mortgages were "underwater" This meant that
A) the value of the house fell below the amount of the mortgage
B) the basement flooded since they could not afford to fix the leaky plumbing
C) the roof leaked during a rainstorm
D) the amount that they owed on their mortgage was less than the value of their house
19) Typically, the economy recovers fairly quickly from a recession Why did this not
happen in the United States during the Great Depression?
20) Explain dynamic and defensive open market operations What is the purpose of each
type? Describe two situations when defensive open market operations are used How are
defensive open market operations typically conducted?
21) Keynes believed that unstable investment caused the Great Depression Using the
simple Keynesian model, explain how a fall in investment affects equilibrium output
22) Everything else held constant, would an increase in volatility of stock prices have
any impact on the demand for rare coins? Why or why not?
23) Explain the complete formula for the M1 money supply, and explain how changes
in required reserves, excess reserves, the currency ratio, the nonborrowed base, and
borrowed reserves affect the money supply
