In rational expectations theory, the term “optimal forecast” is essentially synonymous
with
A) correct forecast.
B) the correct guess.
C) the actual outcome.
D) the best guess.
Answer:
A central bank’s attempt to prevent an appreciation of its currency can stimulate
domestic inflation if the ________ of foreign currencies leads to ________ international
reserves which ________ the monetary base.
A) purchase; higher; increases
B) purchase; lower; decreases
C) sale; lower; decreases
D) sale; higher; increases
Answer:
A system of deposit insurance
A) attracts risk-taking entrepreneurs into the banking industry.
B) encourages bank managers to decrease risk.
C) increases the incentives of depositors to monitor the riskiness of their bank’s asset
portfolio.
D) increases the likelihood of bank runs.
Answer:
If unplanned investment is negative, firms will ________ production and output will
________.
A) cut; rise
B) cut; fall
C) increase; rise
D) increase; fall
Answer:
The long-run aggregate supply curve is a vertical line passing through
A) the natural rate of output.
B) the natural-rate price level.
C) the actual rate of unemployment.
D) the expected rate of inflation.
Answer:
The economic hardship resulting from a financial crises is severe, however, there are
also social consequences such as
A) increased crime.
B) difficulty getting a loan.
C) currency devaluations.
D) loss of output.
Answer:
The principal-agent problem
A) occurs when managers have more incentive to maximize profits than the
stockholders-owners do.
B) in financial markets helps to explain why equity is a relatively important source of
finance for American business.
C) would not arise if the owners of the firm had complete information about the
activities of the managers.
D) explains why direct finance is more important than indirect finance as a source of
business finance.
Answer:
Loophole mining refers to financial innovation designed to
A) hide transactions from the IRS.
B) conceal transactions from the SEC.
C) get around regulations.
D) conceal transactions from the Treasury Department.
Answer:
There are two types of investment: ________ investmentthe spending by business firms
on equipment and structures, and planned spending on residential housesand ________
investmentspending by business firms on additional holdings of raw materials, parts,
and finished goods.
A) planned; gross
B) planned; inventory
C) fixed; gross
D) fixed; inventory
Answer:
Rational expectations forecast errors will on average be ________ and therefore
________ be predicted ahead of time.
A) positive; can
B) positive; cannot
C) negative; can
D) zero; cannot
Answer:
If Treasury deposits at the Fed are predicted to ________, the manager of the trading
desk at the New York Fed bank will likely conduct ________ open market operations to
________ reserves.
A) rise; defensive; drain
B) fall; defensive; drain
C) rise; dynamic; inject
D) fall; dynamic; drain
Answer:
Members of Congress are able to influence monetary policy, albeit indirectly, through
their ability to
A) withhold appropriations from the Board of Governors.
B) withhold appropriations from the Federal Open Market Committee.
C) propose legislation that would force the Fed to submit budget requests to Congress,
as must other government agencies.
D) instruct the General Accounting Office to audit the foreign exchange market
functions of the Federal Reserve.
Answer:
Long-term debt has a maturity that is
A) between one and ten years.
B) less than a year.
C) between five and ten years.
D) ten years or longer.
Answer:
A person’s house is part of her
A) money.
B) income.
C) liabilities.
D) wealth.
Answer:
All ________ are required to be members of the Fed.
A) state chartered banks
B) nationally chartered banks
C) banks with assets less than $100 million
D) banks with assets less than $500 million
Answer:
The World Bank is an international organization that:
A) promotes the growth of trade by setting rules for how tariffs and quotas are set by
countries.
B) makes loans to countries to finance projects such as dams and roads.
C) makes loans to countries with balance of payment difficulties.
D) helps developing countries that have been having difficulties in repaying their loans
to come to terms with lenders in the West.
Answer:
The rate of inflation increases when
A) the unemployment rate equals the NAIRU.
B) the unemployment rate exceeds the NAIRU.
C) the unemployment rate is less than the NAIRU.
D) the unemployment rate increases faster than the NAIRU increases.
Answer:
Government regulations to reduce the possibility of financial panic include all of the
following except
A) transactions costs.
B) restrictions on assets and activities.
C) disclosure.
D) deposit insurance.
Answer:
When compared to the Fed’s ________ anchor approach, ________ targeting can make
the institutional framework for the conduct of monetary policy more consistent with
democratic principles.
A) nominal; inflation
B) implicit; monetary
C) nominal; monetary
D) implicit; inflation
Answer:
Everything else held constant, an increase in net exports ________ aggregate
________.
A) increases; demand
B) decreases; demand
C) decreases; supply
D) increases; supply
Answer:
For small investors, the best way to pursue a “buy and hold” strategy is to
A) buy and sell individual stocks frequently.
B) buy no-load mutual funds with high management fees.
C) buy no-load mutual funds with low management fees.
D) buy load mutual funds.
Answer:
Suppose the economy is producing at the natural rate of output. An open market
purchase of bonds by the Fed will cause ________ in real GDP in the long run and
________ in inflation in the long run, everything else held constant.
A) an increase; an increase
B) a decrease; a decrease
C) no change; an increase
D) no change; a decrease
Answer:
In the market for reserves, if the federal funds rate is between the discount rate and the
interest rate paid on excess reserves, a ________ in the reserve requirement ________
the demand for reserves, lowering the federal funds interest rate, everything else held
constant.
A) rise; decreases
B) rise; increases
C) decline; increases
D) decline; decreases
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:
Taxpayers were served poorly by thrift regulators in the 1980s. This poor performance
cannot be explained by
A) regulators’ desire to escape blame for poor performance, leading to a perverse
strategy of “bureaucratic gambling.”
B) regulators’ incentives to accede to pressures imposed by politicians, who sought to
keep regulators from imposing tough regulations on institutions that were major
campaign contributors.
C) Congress’s dogged determination to protect taxpayers from the unsound banking
practices of managers at many of the nation’s savings and loans.
D) politicians strong incentives to act in their own interests rather than the interests of
the taxpayers.
Answer:
Bankers’ concerns regarding the optimal mix of excess reserves, secondary reserves,
borrowings from the Fed, and borrowings from other banks to deal with deposit
outflows is an example of
A) liability management.
B) liquidity management.
C) managing interest rate risk.
D) managing credit risk.
Answer:
Government regulations require publicly traded firms to provide information, reducing
A) transactions costs.
B) the need for diversification.
C) the adverse selection problem.
D) economies of scale.
Answer:
Activists of the policies believe that
A) the self-correcting mechanism through wage and price adjustment is very slow.
B) wages and prices are sticky.
C) the government needs to pursue active policy to eliminate high unemployment when
it develops.
D) all of the above.
Answer:
Everything else held constant, when stock prices become less volatile, the demand
curve for bonds shifts to the ________ and the interest rate ________.
A) right; rises
B) right; falls
C) left; falls
D) left; rises
Answer:
A central bank ________ of domestic currency and corresponding ________ of foreign
assets in the foreign exchange market leads to an equal decline in its international
reserves and the monetary base, everything else held constant.
A) sale; purchase
B) sale; sale
C) purchase; sale
D) purchase; purchase
Answer:
From 1980 to 1985 the dollar appreciated relative to the British pound. Holding
everything else constant, one would expect that, when compared to 1980,
A) fewer Britons traveled to the United States in 1985.
B) Britons imported more wine from California in 1985.
C) Americans exported more wheat to England in 1985.
D) more Britons traveled to the United States in 1985.
Answer:
If the consumption function is C = 20 + 0.5YD, then an increase in disposable income
by $100 will result in an increase in consumer expenditure by
A) $25.
B) $70.
C) $50.
D) $100.
Answer:
The Fed’s use of the federal funds rate as an operating target in the 1970s resulted in
A) countercyclical monetary policy.
B) too slow growth in M1 throughout the decade.
C) procyclical monetary policy.
D) too rapid growth in M1 throughout the decade.
Answer: