In the market for reserves, when the federal funds interest rate is below the discount
rate, the supply curve of reserves is
A. vertical.
B. horizontal.
C. positively sloped.
D. negatively sloped.
Answer:
Some automobile owners will drive faster knowing that they are covered by health and
automobile insurance. This behavior creates the problem of
A. fraudulent claims.
B. moral hazard.
C. adverse selection.
D. pecuniary purchases.
Answer:
If the required reserve ratio is 15 percent, currency in circulation is $400 billion,
checkable deposits are $1000 billion, and excess reserves total $1 billion, then the M1
money multiplier is
a. 2.54.
b. 2.67.
c. 2.35.
d. 0.551.
Answer:
Economists believe that countries recently suffering hyperinflation have experienced
A. reduced growth.
B. increased growth.
C. reduced prices.
D. lower interest rates.
Answer:
The theory of portfolio choice indicates that factors affecting the demand for money
include
A. income.
B. nominal interest rate.
C. liquidity of other assets.
D. all the above.
Answer:
Planned investment spending, a component of aggregate demand, is equal to
A. fixed investment plus actual inventory investment.
B. fixed investment plus unplanned inventory investment.
C. fixed investment.
D. fixed investment plus planned inventory investment.
Answer:
When the economy suffers a permanent negative supply shock and the central bank
does not respond by changing the autonomous component of monetary policy, then
A. inflation will be lower.
B. output will be at its potential.
C. output will be lower.
D. inflation will not change.
E. both A and B.
Answer:
Suppose that the latest Consumer Price Index (CPI) release shows a higher inflation rate
in the U.S. than was expected. Everything else held constant, the release of the CPI
report would immediately cause the demand for U.S. assets to ________ and the U.S.
dollar would ________.
A. increase; appreciate
B. increase; depreciate
C. decrease; appreciate
D. decrease; depreciate
Answer:
Because prices are sticky in the short-run, when the Federal Reserve raises the federal
funds rate
A. nominal interest rates fall.
B. real interest rates rise.
C. inflation falls.
D. real interest rates fall.
Answer:
One of the criticisms of Basel 2 is that it is procyclical. That means that
A. banks may be required to hold more capital during times when capital is short.
B. banks may become professional at a cyclical response to economic conditions.
C. banks may be required to hold less capital during times when capital is short.
D. banks will not be required to hold capital during an expansion.
Answer:
The simple deposit multiplier can be expressed as the ratio of the
A. change in reserves in the banking system divided by the change in deposits.
B. change in deposits divided by the change in reserves in the banking system.
C. required reserve ratio divided by the change in reserves in the banking system.
D. change in deposits divided by the required reserve ratio.
Answer:
There is ________ for any bond whose time to maturity matches the holding period.
A. no interest-rate risk
B. a large interest-rate risk
C. rate-of-return risk
D. yield-to-maturity risk
Answer:
The free-rider problem occurs because
A. people who pay for information use it freely.
B. people who do not pay for information use it.
C. information can never be sold at any price.
D. it is never profitable to produce information.
Answer:
The equation of exchange states that the quantity of money multiplied by the number of
times this money is spent in a given year must equal
A. nominal income.
B. real income.
C. real gross national product.
D. velocity.
Answer:
An autonomous tightening of monetary policy
A. causes an upward movement along the monetary policy curve.
B. causes a downward movement along the monetary policy curve.
C. shifts the monetary policy curve upward.
D. shifts the monetary policy curve downward.
Answer:
In order to ensure that borrowers have an ability to repay residential mortgages, the new
consumer protection legislation requires lenders to do all of the following EXCEPT
A. verify the income of the borrower.
B. verify the borrower’s job status.
C. check the credit history of the borrower.
D. verify that the borrower can read and understand a loan contract.
Answer:
A problem with the too-big-to-fail policy is that it ________ the incentives for
________ by big banks.
A. increases; moral hazard
B. decreases; moral hazard
C. decreases; adverse selection
D. increases; adverse selection
Answer:
A bank has excess reserves of $4,000 and demand deposit liabilities of $100,000 when
the required reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, the
bank’s excess reserves will be
A. -$5,000.
B. -$1,000.
C. $1,000.
D. $5,000.
Answer:
A shift in tastes toward American goods ________ net exports in the U.S. and causes
the quantity of aggregate output demanded to ________ in the U.S., everything else
held constant.
A. decreases; rise
B. decreases; fall
C. increases; rise
D. increases; fall
Answer:
Explain the Taylor rule, including the formula for setting the federal funds rate target,
and the components of the formula. If the Fed were to use this rule, how many goals
would it use to set monetary policy?
Answer:
Money market mutual fund shares function like
A. checking accounts that pay interest.
B. bonds.
C. stocks.
D. currency.
Answer:
A person who agrees to buy an asset at a future date is going
A. long.
B. short.
C. back.
D. ahead.
Answer:
An assumption in the model of the money supply process is that the desired levels of
currency and excess reserves
A. are given as constants.
B. grow proportionally with checkable deposits.
C. grow proportionally with high-powered money.
D. grow proportionally over time.
Answer:
When the Federal Reserve sells a government bond to a primary dealer, reserves in the
banking system ________ and the monetary base ________, everything else held
constant.
A. increase; increases
B. increase; decreases
C. decrease; increases
D. decrease; decreases
Answer:
Excessive volatility refers to the fact that
A. stock returns display mean reversion.
B. stock prices can be slow to react to new information.
C. stock price tend to rise in the month of January.
D. stock prices fluctuate more than is justified by dividend fluctuations.
Answer:
According to aggregate demand and supply analysis, America’s involvement in the
Vietnam War had the effect of
A. increasing aggregate output, lowering unemployment, and raising the inflation.
B. decreasing aggregate output, lowering unemployment, and lowering the inflation.
C. increasing aggregate output, raising unemployment, and raising the inflation.
D. decreasing aggregate output, raising unemployment, and lowering the inflation.
Answer:
The monetary base declines when
A. the Fed extends discount loans.
B. Treasury deposits at the Fed decrease.
C. float increases.
D. the Fed sells securities.
Answer:
All of the following are examples of coupon bonds EXCEPT
A. corporate bonds.
B. U.S. Treasury bills.
C. U.S. Treasury notes.
D. U.S. Treasury bonds.
Answer:
A decrease in interest rates
A. increases the value of the dollar, net exports, and equilibrium output.
B. increases the value of the dollar, reducing net exports and equilibrium output.
C. reduces the value of the dollar, net exports, and equilibrium output.
D. reduces the value of the dollar, increasing net exports and equilibrium output.
Answer:
Because of the presence of asymmetric information problems in credit markets, an
expansionary monetary policy causes a ________ in net worth, which ________ the
adverse selection problem, thereby ________ increased lending to finance investment
spending.
A. decline; increases; encouraging
B. rise; increases; discouraging
C. rise; reduces; encouraging
D. decline; reduces; discouraging
Answer:
With a 10 percent interest rate on dollar deposits, and an expected appreciation of 7
percent over the coming year, the expected return on dollar deposits in terms of the
foreign currency is
A. 3 percent.
B. 10 percent.
C. 13.5 percent.
D. 17 percent.
Answer:
Suppose that from a new checkable deposit, First National Bank holds two million
dollars in vault cash, eight million dollars on deposit with the Federal Reserve, and one
million dollars in required reserves. Given this information, we can say First National
Bank has ________ million dollars in excess reserves.
A. three
B. nine
C. ten
D. eleven
Answer:
When the inflation rate is expected to increase, the ________ for bonds falls, while the
________ curve shifts to the right, everything else held constant.
A. demand; demand
B. demand; supply
C. supply; demand
D. supply; supply
Answer:
If the First National Bank has a gap equal to a negative $30 million, then a 5 percentage
point increase in interest rates will cause profits to
A. increase by $15 million.
B. increase by $1.5 million.
C. decline by $15 million.
D. decline by $1.5 million.
Answer:
If a corporation begins to suffer large losses, then the default risk on the corporate bond
will
A. increase and the bond’s return will become more uncertain, meaning the expected
return on the corporate bond will fall.
B. increase and the bond’s return will become less uncertain, meaning the expected
return on the corporate bond will fall.
C. decrease and the bond’s return will become less uncertain, meaning the expected
return on the corporate bond will fall.
D. decrease and the bond’s return will become less uncertain, meaning the expected
return on the corporate bond will rise.
Answer: