Stock prices may rise from a reduction in interest rates because:
A. consumer and business confidence about future growth improves.
B. stockholders will expect lower future earnings.
C. financial market participants are less optimistic about future earnings.
D. the present value of future earnings will decrease.
Answer:
If an investment has a 20%(0.20) probability of returning $1,000; a 30%(0.30)
probability of returning $1,500; and a 50%(0.50) probability of returning $1,800; the
expected value of the investment is:
A. $1,433.33
B. $1,550.00
C. $2,800.00
D. $1,600.00
Answer:
The long position in a futures contract is the party that will:
A. benefit from decreases in the price of the underlying asset.
B. agree to make delivery of a commodity or financial instrument at a future date.
C. benefit from increases in the price of the underlying asset.
D. accept the greater share of the risk.
Answer:
The Fed purchases German bonds from commercial banks. Which of the following best
describes the impact on the Fed’s and the Banking System’s balance sheets resulting
from this transaction?
A. The Fed’s assets and liabilities increase, the banking systems assets and liabilities
decrease.
B. The Fed’s assets increase and its liabilities increase, for the banking system, the
value of assets and liabilities do not change, only the composition of assets changes.
C. The Fed’s assets and liabilities do not change, only the compositions of the assets
change. For the banking system, assets and liabilities increase.
D. The Fed’s assets increase and its liabilities decrease, for the banking system, the
value of assets and liabilities do not change, only the composition of assets changes.
Answer:
The interest rate that the FOMC currently chooses to control is:
A. the federal funds rate.
B. the 30-year Treasury bond rate.
C. the discount rate.
D. the prime rate.
Answer:
A decrease in taxes would cause:
A. the dynamic aggregate demand curve to shift to the left.
B. a movement down and along the existing dynamic aggregate demand curve.
C. a movement up and along the existing dynamic aggregate demand curve.
D. the dynamic aggregate demand curve to shift to the right.
Answer:
If bank with leverage of 8 to 1 increases its assets by adding $1 to capital for every $1
added to assets:
A. leverage increases.
B. leverage decreases.
C. leverage stays constant.
D. the answer cannot be determined from the information in the question.
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:
The best way for a government to stop the failure of one bank from turning into a bank
panic is to:
A. make sure solvent institutions can meet the withdrawal demands of depositors.
B. declare a bank holiday until solvent banks can acquire adequate liquidity.
C. limit the withdrawals of depositors.
D. provide zero-interest rate loans to all banks regardless of net worth.
Answer:
The Expectations Hypothesis suggests the:
A. yield curve should usually be downward sloping.
B. yield curve should usually be upward sloping.
C. slope of the yield curve reflects the risk premium associated with longer-term bonds.
D. slope of the yield curve depends on the expectations for future short-term rates.
Answer:
Considering a put option, an increase in the strike price:
A. causes the intrinsic value of the option to decrease if it is above zero.
B. causes the intrinsic value of the option to increase if it is above zero.
C. causes the value of the option to decrease.
D. makes the option worthless.
Answer:
In a derivative transaction:
A. the dollar amount of the transaction increases as the contract date approaches.
B. the risk is less than if actually purchasing the underlying asset.
C. what one person gains is what the other person loses.
D. there is always a futures contract.
Answer:
Estimates of gross domestic product (GDP) are revised:
A. quickly and often.
B. for many years after the fact.
C. only in the following quarter.
D. each month.
Answer:
A price of a futures contract for U.S. Treasury bonds listed as “111-15” is measured in:
A. 32nds.
B. 12ths.
C. 4ths.
D. dollars; it stands for $111.15 but a dash is used instead of a period.
Answer:
As the volatility of the stock price increases, the time value of the option:
A. decreases.
B. is zero.
C. increases.
D. doesn’t change.
Answer:
Assume there are two companies. Both issue stock, but one is high quality and the other
low quality. If potential investors cannot distinguish the quality of the company:
A. the shares of the low quality firm will disappear from the market.
B. the shares of both companies will trade on the market.
C. the shares of the high quality firm will disappear from the market.
D. this is an example of moral hazard and the shares of both companies will cease to
trade.
Answer:
If information in a financial market is symmetric, this means:
A. borrowers and lenders have perfect information.
B. borrowers would have more information than lenders.
C. borrowers and lenders have the same information.
D. lenders have more information than borrowers.
Answer:
Mary decides to withdraw $500 out of her checking account. The impact of this
transaction on the Banking System’s balance sheet will be to:
A. only reduce checkable deposits by $500.
B. increase reserves and reduce checkable deposits by $500 respectively.
C. decrease reserves and checkable deposits by $500 respectively.
D. only reduce reserves by the required reserve rate times $500.
Answer:
When a loan is amortized, it means the:
A. borrower is in default.
B. principal and interest are paid off by the borrower over the life of the loan.
C. interest is due entirely at the maturity date.
D. principal in never repaid, only interest.
Answer:
A lender usually knows less about the creditworthiness of a borrower than the borrower
does. This is an example of:
A. opportunistic behavior.
B. economies of scale.
C. diminishing marginal returns.
D. information asymmetry.
Answer:
A put option described as out of the money would find:
A. the strike price is below the market price of the stock.
B. the market price of the stock and the strike price are equal.
C. the market price of the stock is below the strike price.
D. the option has expired.
Answer:
If the Fed decides to control the euro/dollar exchange rate:
A. they will also have to control the domestic interest rate.
B. they will have to control the amount of banking system reserves.
C. the market will determine the interest rate.
D. they will have to control the domestic rate of inflation or it won’t work.
Answer:
Two problems that arise from asymmetric information are:
A. adverse selection and diseconomies of scale.
B. moral hazard and the free-rider problem.
C. moral hazard and adverse selection.
D. the free-rider problem and adverse selection.
Answer:
Which of the following would be classified as a negative supply shock?
A. An increase in the price of oil
B. An increase in government purchases
C. An increase in export demand
D. A decline of investor optimism
Answer:
Which of the following would lead to an increase in bond supply?
A. A decrease in government spending relative to revenue.
B. An increase in corporate taxes.
C. A decrease in expected inflation.
D. An improvement in general business conditions.
Answer:
A lender who wants to avoid the problem of adverse selection could:
A. charge a very high interest rate and assume all loan applicants are high risk.
B. charge the same average interest rate to all borrowers.
C. charge a low interest rate and make the applicant prove they warrant the low rate by
providing information.
D. only lend by issuing credit cards.
Answer:
If Bank A sells a $100,000 U.S. Treasury bond to the Fed, Bank A’s reserves will:
A. increase by $100,000.
B. increase by less than $100,000.
C. not change.
D. decrease.
Answer:
An open market sale of U.S. Treasury securities by the Fed will cause the Fed’s balance
sheet to show:
A. a decrease in the asset of securities and a decrease in the liability of reserves.
B. an increase in the liability of reserves.
C. no change in the size of the balance sheet, just the composition of assets will change
from securities to cash.
D. an increase in the asset category of securities and the liability category of reserves.
Answer:
The Chairman of the Board of Governors:
A. serves a four-year term that cannot be renewed.
B. is selected from the Board of Governors, appointed by the U.S. President.
C. serves the same four-year term as the U.S. President.
D. serves an eight-year term.
Answer:
The basic dividend-discount model is a bit of an oversimplification for valuing stocks
because it:
A. ignores expected dividend growth.
B. ignores the value of future dividends.
C. ignores the risk involved in holding stocks.
D. cannot handle stocks that do not pay dividends.
Answer:
A rightward shift in the dynamic aggregate demand curve could result from:
A. a decrease in government purchases.
B. an increase in investment resulting from a lower inflation rate.
C. a rightward shift of the monetary policy reaction curve.
D. a leftward shift of the monetary policy reaction curve.
Answer:
The central banks of Australia, Canada and New Zealand have eliminated reserve
requirements and conduct monetary policy through a “channel” or “corridor” system.
The “channel” or “corridor” refers to the spread between the central bank’s:
A. target interest rate and its deposit rate.
B. target interest rate and its lending rate.
C. lending rate and its deposit rate.
D. target interest rate and the current interest rate.
Answer: