If M = the quantity of money, m the money multiplier, MB the Monetary Base, C =
Currency, D = Deposits, R = Reserves, RR = required reserves, and ER = Excess
reserves, then RR would equal:
A. MB.
B. D – C.
C. M/MB.
D. R – ER.
Answer:
One reason the long-run aggregate supply curve has the slope it does is due to the fact
that:
A. if current output equals potential output, the short-run aggregate supply curve is
stable.
B. that inflation is zero in the long run.
C. over long periods of time the economy moves to its potential level of output with
higher inflation.
D. over long periods of time the economy moves to its potential level of output with
lower inflation.
Answer:
If Europeans increase their demand for American cars, everything else constant, we
should observe the following change in the U.S. dollar-euro market:
A. the supply curve of dollars shifts left.
B. the demand curve for dollars shifts left.
C. the demand curve for dollars shifts right.
D. the supply curve of dollars shifts right.
Answer:
The main asset held by a central bank in its role as the Banker’s Bank is:
A. foreign exchange reserves.
B. currency.
C. loans.
D. securities.
Answer:
Consider the following: an investor in the U.S. is pondering a one-year investment. She
can purchase a domestic bond for $1,000 that has an interest rate of i or she can
purchase a bond in England for 1,500 British pounds (£) that pays an interest rate of if.
The current exchange rate is $1.50/£. She considers the bonds to be of equal risk. If i =
if, the expected returns are not equal. What do you know?
A. The exchange rate is fixed between the U.S. and Britain
B. The bonds initially sold for different prices
C. Arbitrage doesn’t work
D. The exchange rate must be flexible
Answer:
The autonomy of modern central banks means that governments cannot increase their
spending by:
A. raising taxes.
B. issuing bonds.
C. printing money.
D. either issuing bonds or printing money; both represent debt.
Answer:
The problem for a central bank setting a zero inflation policy would be:
A. the risk of high employment.
B. it is impossible to have zero inflation.
C. firms would have to cut the nominal wage to reduce the real wage.
D. economic growth would also have to be zero.
Answer:
Suppose that the overnight interest rate falls to zero and output is below potential
output. A central bank could:
A. seek to reduce expectations of future policy rates.
B. use its balance sheet to expand the monetary base.
C. purchase securities of different maturities to affect their market prices and rates.
D. all of the answers given are correct.
Answer:
If the economy’s current level of output is below its potential level of output, the
short-run aggregate supply curve:
A. will shift right.
B. will shift left.
C. will be vertical.
D. does not matter; only the long-run aggregate supply curve matters in this situation.
Answer:
The Dodd-Frank does all of the following except:
A. sets out new rules for financial institutions and markets.
B. repeals the Glass-Steagall Act of 1933.
C. requires closer government oversight over key establishments called systemically
important financial institutions.
D. sharply alters the authorities of the government agencies that govern the financial
sector.
Answer:
A primary goal of central banks is to:
A. reduce the idiosyncratic risk that impacts specific investments.
B. reduce systematic risk.
C. keep stock and bond prices high.
D. keep inflation rates high.
Answer:
Which of the following statements is most correct?
A. Managers, directors, and stockholders almost always share the same interest.
B. Managers’ and directors’ interests often conflict with stockholders’ interest.
C. Managers and stockholders have the same interests, but this usually conflicts with
the interests of directors.
D. Directors and stockholders have the same interests, but this usually conflicts with
the interests of managers.
Answer:
A risk-averse investor versus a risk-neutral investor:
A. will never take a risk, while the risk neutral investor will.
B. needs greater compensation for the same risk versus the risk neutral investor.
C. will take the same risks as the risk neutral investor if the expected returns are equal.
D. needs less compensation for the same risk versus the risk neutral investor.
Answer:
Financial instruments used primarily as stores of value do not include:
A. asset backed securities.
B. U.S. Treasury bonds.
C. a car insurance policy.
D. a bank loan.
Answer:
The moral hazard that can result from debt financing is mainly due to the:
A. borrower not working as hard once he or she obtains the loan.
B. borrower wanting to refinance the loan.
C. borrower taking greater risk in hopes of obtaining a larger return.
D. economy turning sour and the borrower defaulting.
Answer:
What is the future value of $1,000 after six months earning 12% annually?
A. $1,050.00
B. $1,060.00
C. $1,120.00
D. $1,058.30
Answer:
An investment will pay $2000 a quarter of the time; $1,600 half of the time and $1,400
a quarter of the time. The standard deviation of this asset is:
A. $600
B. $1,650
C. $47,500
D. $217.94
Answer:
Options are popular because of all of the following EXCEPT:
A. stock prices are volatile.
B. they offer a tool to transfer risk.
C. they present a tool to limit losses but also limit gains.
D. they offer opportunities for high leverage.
Answer:
If on average, a dollar is spent 4 times each year to purchase real output, the velocity of
money is:
A. one-fourth.
B. four.
C. the money supply divided by 4.
D. nominal GDP divided by four.
Answer:
Which of the following is not true of over-the-counter markets?
A. Traders are linked by computer.
B. Dealers buy and sell only for their customers.
C. Trading does not take place in one physical location.
D. Traders are willing to buy and sell stocks and bonds at posted prices.
Answer:
Which of the following statements is most correct?
A. Stockholders have limited liability and have no control over corporate leadership.
B. Stockholders can dislodge the managers of the corporation but not the board of
directors.
C. Stockholders have unlimited liability and can dislodge members of the board of
directors.
D. Stockholders can dislodge members of the board and have limited liability.
Answer:
Considering the euro/U.S. dollar exchange rate, as a U.S. dollar increases in value
versus the euro (holding other factors constant):
A. we would expect the supply curve of dollars to slope downward.
B. foreign goods become relatively less expensive than American goods.
C. foreign assets become relatively more expensive than American assets.
D. American goods become relatively less expensive than foreign goods.
Answer:
Which of the following is an accurate statement about universal banks?
A. In Germany universal banks do everything under one roof, including direct
investment in the shares of nonfinancial firms.
B. In Germany the provision of insurance, banking, and securities must be done by
separate corporations.
C. As in Germany, universal banks in the United States do everything under one roof,
including direct investment in the shares of nonfinancial firms.
D. Universal banks in the United States account for the largest share of financial
intermediary assets.
Answer:
Once the FOMC announces the result of its meeting the attendees:
A. it must brief the financial news immediately after and answer questions posed to
them.
B. observe a twenty-four hour blackout period following the meeting during which
they do not speak publicly about the economic outlook or current monetary policy.
C. observe a blackout period that lasts for a week following the meeting during which
they do not speak publicly about the economic outlook or current monetary policy.
D. never discuss the policy issues addressed in the meetings.
Answer:
Suppose the tax rate is 25% and the taxable bond yield is 8%. What is the equivalent
tax-exempt bond yield?
A. 2%
B. 2.3%
C. 6%
D. 6.9%
Answer:
The presence of a term spread that is usually positive indicates that:
A. the yield curve always slopes upward.
B. bonds of similar risk but with different maturities are not perfect substitutes.
C. we should expect the yield curve to usually be flat.
D. we should expect the yield curve to usually slope downward.
Answer:
Investors usually obtain bond ratings from:
A. private bond-rating agencies.
B. the annual tax returns of the issuer.
C. the U.S. government from publicly available information.
D. public information made available by the bond issuers.
Answer:
A country that has a capital account deficit:
A. is a net seller of assets.
B. imports more goods and services than it exports.
C. has a current account surplus.
D. has a current account deficit.
Answer:
The purpose of derivatives is to:
A. increase the risk so the return is larger.
B. eliminate risk for both parties in the transaction.
C. postpone the risk for both parties in the transaction.
D. transfer the risk from one person to another.
Answer:
A put option that is described as in the money would find:
A. the market price of the stock above the strike price.
B. the strike price is above the market price of the stock.
C. the market and strike prices are the same.
D. the option has been exercised.
Answer:
The main difference between European and American options is:
A. holders of European options have more options than holders of American options.
B. American option holders have more options than European option holders.
C. European option holders can exercise the option prior to expiration.
D. European options cannot be resold.
Answer:
Consider the bonds below. Which is subject to the greatest interest-rate risk?
A. A 30-year fixed-rate mortgage (fixed payment loan)
B. A consol
C. A Treasury bill
D. A 20-year corporate bond
Answer:
The information contained in the Fed’s teal book is released to the public:
A. immediately after the FOMC meeting in which they are used.
B. within two weeks after the FOMC meeting in which they are used.
C. the material in the green book is never released to the public.
D. five years after the FOMC meeting in which they are used.
Answer:
A bank can usually offer a saver a higher return for the same risk for all of the following
reasons except:
A. the bank can usually purchase assets at a lower cost than any one saver.
B. the bank can pool the resources of small savers and purchase higher valued assets.
C. economies of scale can also be applied by the bank in its purchase of assets.
D. savers do not have good enough information to know if the return is sufficient.
Answer:
Explain why a real exchange rate that does not equal one implies purchasing power
parity does not hold.
Answer:
What are the three criteria that are used to judge a central bank’s independence and how
does the Fed stack up to each of these criteria?
Answer:
If we lived in an economy where interest rates were highly volatile, would you expect
the maximum asset to capital ratio that a regulator would allow to increase or decrease
and why?
Answer:
Using the U.S. as an example, explain why rising budget deficits on the part of a federal
government creates a potential point of conflict between fiscal and monetary
policymakers.
Answer:
What distinguishes the short-run real interest rate from the long-run real interest rate?
Answer:
Figure 4 presented data on 62 countries’ inflation rates relative to the U.S. rate of
inflation and the percent change in the exchange rate for the years 1980-2010. What
was the relationship between these two variables?
Answer:
Can central bankers set short-term interest rate targets and still control inflation in the
long run or are these goals mutually impossible? Explain.
Answer:
Consider a typical individual who owns the following financial instruments: A life
insurance policy for $250,000; a certificate of deposit for $10,000; homeowner’s and
auto insurance policies; $50,000 in a mutual fund, and $150,000 in her pension fund at
work. Which of these are instruments used primarily as stores of value and which are
being used to transfer risk?
Answer:
Assuming the Expectations Hypothesis is correct, and given the following information:
The current four-year interest rate is 5.0%
The current one-year interest rate is 4.0%
The expected one-year rate for one year from now is 5.0%
The expected one-year rate for two years from now is 5.5%
What is the expected one-year rate for three years from now? Explain.
Answer:
Output and inflation movements can arise from either demand or supply shifts. How
can we tell them apart?
Answer:
In the spring of 2002, the Japanese Ministry of Finance intervened in the foreign
exchange market by selling yen and purchasing dollars. Why? And why did the
intervention fail?
Answer:
Is variability in velocity more of a problem in high or low inflation countries? Explain.
Answer:
What are the general conditions under which a fixed exchange rate makes sense for a
country?
Answer:
You buy an asset for $2500. The asset will return $3300 half of the time and $2700, the
other half. The expected return is 20%(a gain of $500) and the standard deviation is
12%($300). How would using $1,250 of borrowed funds change the expected return
and standard deviation specifically?
Answer:
What are the advantages from the 2002 change in the Fed’s lending policy?
Answer:
Irving Fisher derived the quantity theory of money from the equation of exchange.
What two assumptions did he make to derive the theory and what is the basic assertion
of the theory?
Answer:
Why is it necessary to distinguish between the target federal funds rate and the market
federal funds rate?
Answer: