A debt contract is incentive compatible
A) if the borrower has the incentive to behave in the way that the lender expects and
desires, since doing otherwise jeopardizes the borrower’s net worth in the business.
B) if the borrower’s net worth is sufficiently low so that the lender’s risk of moral
hazard is significantly reduced.
C) if the debt contract is treated like an equity.
D) if the lender has the incentive to behave in the way that the borrower expects and
desires.
Answer:
Which of the following is a TRUE statement?
A. Money and income are flow variables.
B. Money is a flow variable.
C. Income is a flow variable.
D. Money and income are stock variables.
Answer:
Everything else held constant, an increase in the cost of production ________ aggregate
________.
A. increases; demand
B. decreases; demand
C. increases; supply
D. decreases; supply
Answer:
If the expected path of one-year interest rates over the next five years is 4 percent, 5
percent, 7 percent, 8 percent, and 6 percent, then the expectations theory predicts that
today’s interest rate on the five-year bond is
A. 4 percent.
B. 5 percent.
C. 6 percent.
D. 7 percent.
Answer:
If 1-year interest rates for the next three years are expected to be 1, 1, and 1 percent,
and the 3-year term premium is 1 percent, than the 3-year bond rate will be
A. 1 percent.
B. 2 percent.
C. 3 percent.
D. 4 percent.
Answer:
________ in the foreign interest rate causes the demand for domestic assets to shift to
the right and the domestic currency to ________, everything else held constant.
A. An increase; appreciate
B. An increase; depreciate
C. A decrease; appreciate
D. A decrease; depreciate
Answer:
During the 1950s, Fed monetary policy targeted
A. the monetary base.
B. the exchange rate.
C. discount loans.
D. interest rates.
Answer:
When a bank suspects that a $1 million loan might prove to be bad debt that will have
to be written off in the future the bank
A. can set aside $1 million of its earnings in its loan loss reserves account.
B. reduces its reported earnings by $1, even though it has not yet actually lost the $1
million.
C. reduces its assets immediately by $1 million, even though it has not yet lost the $1
million.
D. reduces its reserves by $1 million, so that they can use those funds later.
Answer:
When the economy is hit by a negative demand 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:
Which of the following increases aggregate supply in the short-run, everything else held
constant?
A. an increase in the price of crude oil
B. a successful wage push by workers
C. expectations of a higher inflation
D. a technological improvement that increases worker productivity
Answer:
Stockholders are residual claimants, meaning that they
A. have the first priority claim on all of a company’s assets.
B. are liable for all of a company’s debts.
C. will never share in a company’s profits.
D. receive the remaining cash flow after all other claims are paid.
Answer:
As information technology improves, the lending role of financial institutions such as
banks should
A. increase somewhat.
B. decrease.
C. stay the same.
D. increase significantly.
Answer:
Everything else held constant, if the sum of the required reserve ratio and the excess
reserve ratio is less than one, 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.
Answer:
If the required reserve ratio is 5 percent, currency in circulation is $400 billion,
checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the M1
money multiplier is
a. 2.5.
b. 2.72.
c. 2.3.
d. 0.551.
Answer:
Which of the following is not a disadvantage of of the Fed’s “just do it” approach to
monetary policy?
A. There is low transparency of policy.
B. There is low accountability for central bankers.
C. This type of policy make the Fed more susceptible to the time-inconsistency
problem.
D. It relies on a stable money-inflation relationship.
Answer:
If one party pays a fixed fee on a regular basis in return for a contingent payment that is
triggered by a downgrading of a firm’s credit rating, that is called a
A. credit option.
B. credit swap.
C. credit-linked note.
D. credit default swap.
Answer:
In which of the following situations would you prefer to be the borrower?
A. The interest rate is 9 percent and the expected inflation rate is 7 percent.
B. The interest rate is 4 percent and the expected inflation rate is 1 percent.
C. The interest rate is 13 percent and the expected inflation rate is 15 percent.
D. The interest rate is 25 percent and the expected inflation rate is 50 percent.
Answer:
Everything else held constant, in the market for reserves, when the demand for federal
funds intersects the reserve supply curve along the horizontal section, increasing the
discount rate
A. increases the federal funds rate.
B. lowers the federal funds rate.
C. has no effect on the federal funds rate.
D. has an indeterminate effect on the federal funds rate.
Answer:
Which of the following policy measures authorized investors to bring lawsuits against
credit-rating agencies for a reckless failure to get the facts when providing a credit
rating?
A. the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
B. Sarbanes-Oxley Act of 2002
C. Global Legal Settlement of 2002
D. Gramm-Leach-Bliley Act of 1999
E. Riegle-Neal Act of 1994
Answer:
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.
Answer:
As a source of funds for nonfinancial businesses, stocks are relatively more important
in
A. the United States.
B. Germany.
C. Japan.
D. Canada.
Answer:
If, after a deposit outflow, a bank needs an additional $3 million to meet its reserve
requirements, the bank can
A. reduce deposits by $3 million.
B. increase loans by $3 million.
C. sell $3 million of securities.
D. repay its discount loans from the Fed.
Answer:
Assuming initially that the required reserve ratio = 15%, the currency-deposit ratio =
40%, and the excess reserve ratio = 5%, an increase in the excess reserve ratio to 10%
causes the M1 money multiplier to ________, everything else held constant.
a. increase from 2.15 to 2.33
b. decrease from 2.33 to 2.15
c. increase from 1.54 to 1.67
d. decrease from 1.67 to 1.54
Answer:
In an open economy, aggregate demand is the sum of
A. consumer expenditure, actual investment spending, and government spending.
B. consumer expenditure, planned investment spending, and government spending.
C. consumer expenditure, actual investment spending, government spending, and net
exports.
D. consumer expenditure, planned investment spending, government spending, and net
exports.
Answer:
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.
Answer:
One possible reason for slower growth in developing and transition countries is
A) capital may not be directed to its most productive use.
B) strict accounting standards are too stringent for the banks to meet.
C) the weak link between government and financial intermediaries.
D) the lack of adverse selection and moral hazard problems.
Answer:
The government agency that oversees the banking system and is responsible for the
conduct of monetary policy in the United States is
A. the Federal Reserve System.
B. the United States Treasury.
C. the U.S. Gold Commission.
D. the House of Representatives.
Answer:
Everything else held constant, an increase in autonomous consumer spending will cause
the IS curve to shift to the ________ and aggregate demand will ________.
A. right; increase
B. right; decrease
C. left; increase
D. left; decrease
Answer:
If aggregate output is below the natural rate level, activists of policies would
recommend that the government
A. do nothing.
B. try to eliminate the high unemployment by attempting to shift the aggregate supply
curve to the right.
C. try to eliminate the high unemployment by attempting to shift the aggregate demand
curve to the right.
D. try to eliminate the high unemployment by attempting to shift the aggregate demand
curve to the left.
Answer:
Advice on taxes, accounting or management information systems, and business
strategies are commonly referred to as ________ services.
A. accounting audit
B. management advisory
C. seller
D. managing underwriter
Answer:
Evidence suggests that a liquidity trap is possible when
A. real interest rates are at zero.
B. real interest rates are at or just above zero.
C. nominal interest rates are at zero.
D. nominal interest rates are at or just above zero.
Answer:
When interest rates fall, a bank that perfectly hedges its portfolio of Treasury securities
in the futures market
A. suffers a loss.
B. experiences a gain.
C. has no change in its income.
D. may either gain, lose or see no change in its income.
Answer:
________ markets transfer funds from people who have an excess of available funds to
people who have a shortage.
A. Commodity
B. Fund-available
C. Financial
D. Derivative exchange
Answer:
Suppose a report was released today that showed the Euro-Zone inflation rate is running
above the European Central Bank’s inflation rate target. This leads people to expect that
the European Central Bank will enact contractionary policy in the near future.
Everything else held constant, the release of this report would immediately cause the
demand for U.S. assets to ________ and the U.S. dollar will ________.
A. increase; appreciate
B. increase; depreciate
C. decrease; appreciate
D. decrease; depreciate
Answer: