The fact that over the long run the return on common stocks has been higher than that
on long-term U.S. Treasury bonds is partially explained by the fact that:
A. A lot more money is invested in common stocks than U.S. Treasury bonds.
B. There are regulations on the interest rates U.S. Treasury bonds can offer.
C. The risk premium is higher on common stocks.
D. Risk-averse investors buy more common stock.
Answer:
The Social Security System in the U.S. is best described as a:
A. defined benefits plan.
B. defined contribution plan.
C. employer funded plan.
D. pay-as-you-go system.
Answer:
For many of the countries that made up the Soviet Union, the period immediately
following the collapse of the Soviet Union in 1990 found these countries experiencing:
A. rapid economic growth.
B. severe deflation.
C. rapid development of financial intermediaries.
D. extremely high rates of inflation.
Answer:
Assume the Expectation Hypothesis regarding the term structure of interest rates is
correct. Then, if the current one-year interest rate is 4% and the two-year interest rate is
6%, then investors are expecting the future one-year rate to be:
A. 4%.
B. 8%.
C. 6%.
D. 5%.
Answer:
Consider a $2 billion open market purchase of U.S. Treasury securities by the Federal
Reserve. The Banking System’s balance sheet will specifically show:
A. only an increase in liabilities of $2 billion.
B. only a decrease in assets of $2 billion.
C. no net change in assets or liabilities, only a change in the composition of assets with
securities decreasing and reserves increasing by $2 billion respectively.
D. no net change in assets or liabilities, only a change in the composition of assets with
securities increasing and reserves decreasing by $2 billion respectively.
Answer:
Large, advanced economies like the United States, Japan, and the euro area generally:
A. use fixed exchange rates to promote stability.
B. allow their respective Treasuries to determine the exchange rates.
C. allow supply and demand to determine exchange rates.
D. give exclusive control of exchange rates to their respective central banks.
Answer:
Management fees for mutual funds are:
A. fixed by regulation.
B. fixed by regulation and can vary by the size of the fund.
C. usually a percentage of the gains the fund achieves.
D. usually a percentage of the funds under management.
Answer:
The Federal Reserve banks play a role in formulating monetary policy by each of the
following, except:
A. conducting open market operations from their banks.
B. participating in FOMC meetings.
C. participation in setting the discount rate.
D. making discount loans.
Answer:
Monetary policymakers face a tradeoff between:
A. the level of output and the rate of inflation.
B. the volatility in output and the volatility in inflation.
C. low unemployment and high inflation.
D. high unemployment and low inflation.
Answer:
Monetary policy has the following advantage(s) over fiscal policy:
A. it is less influenced by politics.
B. it can be implemented faster.
C. it can usually be fine-tuned.
D. all of the answers given are correct.
Answer:
Which of the following is likely to be a primary financial market transaction?
A. You cash the check your grandmother sent you for your birthday.
B. You call a broker and purchase bonds for your retirement fund.
C. A city issues bonds to finance new road construction.
D. A supermarket needs to borrow the funds for a second location and takes out a loan
from a commercial bank to pay for it.
Answer:
One reason lenders may require a large net worth before making a loan is because:
A. then the borrower does not need the funds.
B. it tells the lender the firm has good employees.
C. it is one way to treat the problem of moral hazard.
D. banking laws require firms have significant net worth before a bank can make a
loan.
Answer:
A U.S. resident purchases a bond issued by the Canadian government. If the Canadian
dollar appreciates relative to the U.S. dollar over the term of the bond, the U.S. investor
will:
A. see a higher return on her investment as a result.
B. see a lower return on her investment as a result.
C. not see her return affected since exchange rates are flexible.
D. none of the answers provided is correct.
Answer:
Which best describes money as a means of payment?
A. Money provides an immediate double coincidence of wants.
B. Money makes sure a double coincidence of wants never occurs.
C. Money requires at least two transactions to obtain the double coincidence of wants.
D. To obtain a double coincidence of wants without money is impossible.
Answer:
How do financial institutions evaluate the creditworthiness of potential borrowers?
A. They offer high interest rates because only the best borrowers will be able to afford
them.
B. They gather information regarding the borrowers’ finances.
C. They do not evaluate creditworthiness because everyone is treated the same.
D. They do not evaluate the creditworthiness because they know the borrower will
honor his/her obligation to repay the loan.
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:
According to Robert Shiller, a dark-horse candidate for the next speculative bubble is:
A. stock market.
B. farmland.
C. housing market.
D. student loans.
Answer:
When the Fed forecasts a sustained increase in the demand for the monetary base, the
staff of the Fed is likely to meet this demand through:
A. discount loans.
B. repurchase agreements.
C. an outright purchase of U.S. Treasury Securities.
D. an outright sale of U.S. Treasury Securities.
Answer:
Carlos pays his cable bill using his bank’s internet banking web site to withdraw funds
from his checking account. This transaction is a(n):
A. automated clearinghouse transaction (ACH).
B. digitized-check transaction.
C. e-money transaction.
D. fedwire transaction.
Answer:
In the short run, the point on the aggregate demand curve where an economy will end
up depends on:
A. the money supply.
B. the long-run rate of inflation.
C. potential output.
D. the short-run aggregate supply curve.
Answer:
We would expect the risk spread between Baa bonds and U.S. Treasury securities of the
same maturities to:
A. widen during periods of economic recession.
B. remain relatively constant over the business cycle.
C. decrease during economic slowdowns.
D. increase during economic growth periods.
Answer:
Which of the following lists correctly orders assets from most liquid to least liquid?
A. Stocks, house, paper currency, savings deposits
B. Stocks, paper currency, house, savings deposits
C. Savings deposits, paper currency, house, stocks
D. Paper currency, savings deposits, stocks, house
Answer:
Deflation can cause widespread bank crises for all of the following reasons except:
A. a decline in the value of borrowers’ net worth but not their liabilities.
B. borrowers’ default rates increase.
C. bank balance sheets deteriorate as the level of economic activity decreases.
D. information asymmetry problems decrease during deflationary periods.
Answer:
Liabilities of commercial banks show up on the Fed’s balance sheet as part of its:
A. liabilities.
B. securities.
C. foreign exchange reserves.
D. loans.
Answer:
With the economy at its potential level of output, the federal government undertakes a
large military buildup; all other things equal, the impact on the long-run real interest
rate will be to:
A. increase.
B. decrease.
C. remain constant since output is at its potential level.
D. change at the same rate as inflation.
Answer:
An insurance company provides liability insurance to a restaurant protecting the owner
against claims from customers. One area of coverage is protections against food
poisoning claims. The insurance company may periodically send an employee into the
restaurant to observe food preparation and food storage processes. The insurance
company is trying to avoid:
A. free riding.
B. moral hazard.
C. adverse selection.
D. transaction costs.
Answer:
Possible explanations that have been offered for the Great Moderation experienced in
the United States include all of the following except:
A. good fortune.
B. economies that have become more flexible in absorbing shocks.
C. calm financial markets.
D. better understanding and use of monetary policy.
Answer:
The lines drawn to establish Federal Reserve Districts were based on:
A. solely population distribution in 1914.
B. solely economic forces that existed in 1914.
C. economic and political forces that existed in 1914.
D. economic and political forces as well as population distribution in 1914.
Answer:
Considering the balance sheet for all commercial banks in the U.S., the largest category
of liabilities is:
A. borrowing from other banks in the U.S.
B. saving’s deposits and time deposits.
C. checkable deposits.
D. borrowings from non-banks in the U.S.
Answer:
If a bank’s return on equity remains constant, but the ratio of bank assets to bank capital
increases:
A. the bank’s return on assets must have increased.
B. the bank’s return on assets must have decreased.
C. the bank’s assets and capital must have increased by the same percentage.
D. the bank must be unprofitable.
Answer:
When faced with negative supply shocks, policymakers:
A. will stabilize both inflation and output.
B. will always focus on stabilizing output.
C. cannot stabilize output so they tend to focus on inflation.
D. face a trade-off because they cannot simultaneously stabilize both output and
inflation.
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