Both the CAPM and APT suggest that an asset should be priced so that it has a higher
expected return
A) when it has a greater systematic risk.
B) when it has a greater risk in isolation.
C) when it has a lower systematic risk.
D) when it has a lower systematic risk and a lower risk in isolation.
Answer:
The absence of money illusion means that
A) as real income doubles, the demand for money doubles.
B) as interest rates double, the demand for money doubles.
C) as the money supply doubles, the demand for money doubles.
D) as the price level doubles, the demand for money doubles.
Answer:
The ability to use one resource to provide different products and services is
A) economies of scale.
B) economies of scope.
C) diversification.
D) vertical integration.
Answer:
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
Answer:
The ability of a central bank to set monetary policy instruments is
A) political independence.
B) goal independence.
C) policy independence.
D) instrument independence.
Answer:
The Baumol-Tobin analysis suggests that a decrease in the brokerage fee for buying and
selling bonds will cause the demand for money to ________ and the demand for bonds
to ________.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
Answer:
Banks and other financial institutions engage in financial intermediation, which
A) can hurt the performance of the economy.
B) can benefit economic performance.
C) has no effect on economic performance.
D) involves borrowing from investors and lending to savers.
Answer:
The portfolio theories of money demand state that when income (and therefore, wealth)
is higher, the demand for the money asset will ________ and the demand for real
money balances will be ________.
A) rise; higher
B) rise; lower
C) fall; higher
D) fall; lower
Answer:
In the 1990s this agency has acted like an international lender of last resort to cope with
financial instability.
A) World Bank
B) European Central Bank
C) IMF
D) International Bank for Reconstruction and Development
Answer:
________ in the expected future domestic exchange rate causes the demand for
domestic assets to ________ and the domestic currency to appreciate, everything else
held constant.
A) An increase; increase
B) An increase; decrease
C) A decrease; increase
D) A decrease; decrease
Answer:
The most important source of the changes in supply conditions that stimulate financial
innovation has been the
A) deregulation of financial institutions.
B) dramatic increase in the volatility of interest rates.
C) improvement in computer and telecommunications technology.
D) dramatic increase in competition from foreign banks.
Answer:
If a contractionary monetary policy lowers the price level by more than expected, it
raises the real value of consumer debt. This reduces consumer expenditure through
A) the bank lending channel.
B) Tobin’s q.
C) the traditional interest-rate channel.
D) the household liquidity effect.
Answer:
A bank is insolvent when
A) its liabilities exceed its assets.
B) its assets exceed its liabilities.
C) its capital exceeds its liabilities.
D) its assets increase in value.
Answer:
The Bretton Woods system was one in which central banks
A) bought and sold their own currencies to keep their exchange rates fixed.
B) agreed not to intervene in the foreign exchange market to maintain a fixed exchange
rate regime that had existed prior to World War I.
C) agreed to limit domestic money growth to the average of the five largest industrial
nations.
D) agreed to limit domestic money growth to the average of the seven largest industrial
nations.
Answer:
Each Fed bank president attends FOMC meetings; although only ________ Fed bank
presidents vote on policy, all ________ provide input.
A) three; ten
B) five; ten
C) three; twelve
D) five; twelve
Answer:
Everything else held constant, if consumption expenditure increases by 65 for a 100
increase in disposable income, the mpc is
A) 0
B) 0.5
C) 0.65
D) 1
Answer:
When a bank sells a government bond to the Federal Reserve, 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:
Tobin’s q theory suggests that monetary policy may affect investment spending through
its impact on
A) stock prices.
B) interest rates.
C) bond prices.
D) cash flow.
Answer:
According to the liquidity premium theory of the term structure, a steeply upward
sloping yield curve indicates that short-term interest rates are expected to
A) rise in the future.
B) remain unchanged in the future.
C) decline moderately in the future.
D) decline sharply in the future.
Answer:
________ is a flow of earnings per unit of time.
A) Income
B) Money
C) Wealth
D) Currency
Answer:
The risk of a well-diversified portfolio depends only on the ________ risk of the assets
in the portfolio.
A) systematic
B) nonsystematic
C) portfolio
D) investment
Answer:
Which of the following are generally true of bonds?
A) The only bond whose return equals the initial yield to maturity is one whose time to
maturity is the same as the holding period.
B) A rise in interest rates is associated with a fall in bond prices, resulting in capital
gains on bonds whose terms to maturity are longer than the holding periods.
C) The longer a bond’s maturity, the smaller is the size of the price change associated
with an interest rate change.
D) Prices and returns for short-term bonds are more volatile than those for longer-term
bonds.
Answer:
When the interest rate is ________, ________ investments in physical capital will earn
more than the cost of borrowed funds, so planned investment spending is ________.
A) high; few; high
B) high; few; low
C) low; few; high
D) low; many; low
E) high; many; high
Answer:
In the long-run the ISLM model predicts that ________ can change real output.
A) only monetary policy
B) only fiscal policy
C) both monetary and fiscal policy
D) neither monetary nor fiscal policy
Answer:
During the bank panics of the Great Depression the currency ratio
A) increased sharply.
B) decreased sharply.
C) increased slightly.
D) decreased slightly.
Answer:
Of the following sources of external finance for American nonfinancial businesses, the
least important is
A) loans from banks.
B) stocks.
C) bonds and commercial paper.
D) loans from other financial intermediaries.
Answer:
Increasing the amount of information available to investors helps to reduce the
problems of ________ and ________ in the financial markets.
A) adverse selection; moral hazard
B) adverse selection; risk sharing
C) moral hazard; transactions costs
D) adverse selection; economies of scale
Answer:
Increased uncertainty resulting from the global financial crisis ________ the required
return on investment in equity.
A) raised
B) lowered
C) had no impact on
D) decreased
Answer:
When the economy slips into a recession, normally the demand for bonds ________,
the supply of bonds ________, and the interest rate ________, everything else held
constant.
A) increases; increases; rises
B) decreases; decreases; falls
C) increases; decreases; falls
D) decreases; increases; rises
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:
Starting in 1974, the conventional M1 money demand function began to severely
________ the demand for money. Stephen Goldfeld labeled this phenomenon “the case
of the missing ________.”
A) underpredict; velocity
B) overpredict; velocity
C) underpredict; money
D) overpredict; money
Answer:
In order to reduce the ________ problem in loan markets, bankers collect information
from prospective borrowers to screen out the bad credit risks from the good ones.
A) moral hazard
B) adverse selection
C) moral suasion
D) adverse lending
Answer:
The type of monetary policy regime that the Federal Reserve has been following in
recent years can best be described as
A) monetary targeting.
B) inflation targeting.
C) policy with an implicit nominal anchor.
D) exchange-rate targeting.
Answer:
The figure above illustrates the effect of an increased rate of money supply growth at
time period T0. From the figure, one can conclude that the
A) Fisher effect is dominated by the liquidity effect and interest rates adjust slowly to
changes in expected inflation.
B) liquidity effect is dominated by the Fisher effect and interest rates adjust slowly to
changes in expected inflation.
C) liquidity effect is dominated by the Fisher effect and interest rates adjust quickly to
changes in expected inflation.
D) Fisher effect is smaller than the expected inflation effect and interest rates adjust
quickly to changes in expected inflation.
Answer:
Critics of nationwide banking fear
A) an elimination of community banks.
B) increased lending to small businesses.
C) cutthroat competition.
D) banks with economies of scale problems.
Answer: