Risk sharing is profitable for financial institutions due to
A) low transactions costs.
B) asymmetric information.
C) adverse selection.
D) moral hazard.
Answer:
Everything else held constant, if the expected return on RST stock declines from 12 to 9
percent and the expected return on XYZ stock declines from 8 to 7 percent, then the
expected return of holding RST stock ________ relative to XYZ stock and demand for
XYZ stock ________.
A) rises; rises
B) rises; falls
C) falls; rises
D) falls; falls
Answer:
An expansionary monetary policy shifts the LM curve to the ________, reducing
________, everything else held constant.
A) left; output and increasing interest rates
B) left; both real output and interest rates
C) right; both interest rates and real output
D) right; interest rates and increasing real output
Answer:
If bonds with different maturities are perfect substitutes, then the ________ on these
bonds must be equal.
A) expected return
B) surprise return
C) surplus return
D) excess return
Answer:
Suppose you are holding a 5 percent coupon bond maturing in one year with a yield to
maturity of 15 percent. If the interest rate on one-year bonds rises from 15 percent to 20
percent over the course of the year, what is the yearly return on the bond you are
holding?
A) 5 percent
B) 10 percent
C) 15 percent
D) 20 percent
Answer:
U.S. Treasury bills are considered the safest of all money market instruments because
there is almost no risk of
A) defeat.
B) default.
C) desertion.
D) demarcation.
Answer:
Prices of money market instruments undergo the least price fluctuations because of
A) the short terms to maturity for the securities.
B) the heavy regulations in the industry.
C) the price ceiling imposed by government regulators.
D) the lack of competition in the market.
Answer:
If the Brazilian demand for American exports rises at the same time that U.S.
productivity rises relative to Brazilian productivity, then, in the long run, ________,
everything else held constant.
A) the Brazilian real will appreciate relative to the U.S. dollar
B) the Brazilian real will depreciate relative to the U.S. dollar
C) the Brazilian real will either appreciate, depreciate, or remain constant relative to the
U.S. dollar
D) there is no effect on the Brazilian real relative to the U.S. dollar
Answer:
A shift in tastes toward foreign goods ________ net exports in the U.S. and causes the
quantity of aggregate output demanded to ________ in the U.S., everything else held
constant.
A) decreases; rise
B) decreases; fall
C) increases; rise
D) increases; fall
Answer:
When the Federal Reserve sells a government bond to a bank, 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:
In the figure above, a factor that could cause the supply of bonds to shift to the right is:
A) a decrease in government budget deficits.
B) a decrease in expected inflation.
C) a recession.
D) a business cycle expansion.
Answer:
Assume a bank has $200 million of assets with a duration of 2.5, and $190 million of
liabilities with a duration of 1.05. If interest rates increase from 5 percent to 6 percent,
the net worth of the bank falls by
A) $1 million.
B) $2.4 million.
C) $3.6 million.
D) $4.8 million.
Answer:
Of the three players in the money supply process, most observers agree that the most
important player is
A) the United States Treasury.
B) the Federal Reserve System.
C) the FDIC.
D) the Office of Thrift Supervision.
Answer:
A share of common stock is a claim on a corporation’s
A) debt.
B) liabilities.
C) expenses.
D) earnings and assets.
Answer:
If float is predicted to decrease because of unseasonably good weather, the manager of
the trading desk at the Federal Reserve Bank of New York will likely conduct a
________ open market ________ of securities.
A) defensive; sale
B) defensive; purchase
C) dynamic; sale
D) dynamic; purchase
Answer:
Equity instruments are traded in the ________ market.
A) money
B) bond
C) capital
D) commodities
Answer:
The risk premium on corporate bonds reflects the fact that corporate bonds have a
higher default risk and are ________ U.S. Treasury bonds.
A) less liquid than
B) less speculative than
C) tax-exempt unlike
D) lower-yielding than
Answer:
________ in the foreign interest rate causes the demand for domestic assets to
________ and the domestic currency to depreciate, everything else held constant.
A) An increase; increase
B) An increase; decrease
C) A decrease; increase
D) A decrease; decrease
Answer:
Which of the following statements about the characteristics of debt and equity is false?
A) They can both be long-term financial instruments.
B) They can both be short-term financial instruments.
C) They both involve a claim on the issuer’s income.
D) They both enable a corporation to raise funds.
Answer:
In the Keynesian cross diagram, a decrease in investment spending because companies
become more pessimistic about investment profitability causes the aggregate demand
function to shift ________, the equilibrium level of aggregate output to fall, and the IS
curve to shift to the ________, everything else held constant.
A) up; left
B) up; right
C) down; left
D) down; right
Answer:
In the loanable funds framework, the ________ curve of bonds is equivalent to the
________ curve of loanable funds.
A) demand; demand
B) demand; supply
C) supply; supply
D) supply; equilibrium
Answer:
Which of the following is not one of the eight basic puzzles about financial structure?
A) Debt contracts are typically extremely complicated legal documents that place
substantial restrictions on the behavior of the borrower.
B) Indirect finance, which involves the activities of financial intermediaries, is many
times more important than direct finance, in which businesses raise funds directly from
lenders in financial markets.
C) Collateral is a prevalent feature of debt contracts for both households and business.
D) There is very little regulation of the financial system.
Answer:
To convert a nominal GDP to a real GDP, you would use
A) the PCE deflator.
B) the CPI measure.
C) the GDP deflator.
D) the PPI measure.
Answer:
When prices are measured in terms of fixed (base-year) prices they are called ________
prices.
A) nominal
B) real
C) inflated
D) aggregate
Answer:
The monetary policy strategy that directly ties down the price of internationally traded
goods is
A) exchange-rate targeting.
B) monetary targeting.
C) inflation targeting.
D) the implicit nominal anchor.
Answer:
If the required reserve ratio is 10 percent, currency in circulation is $400 billion,
checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the
currency ratio is
A) 0.25
B) 0.5
C) 0.4
D) 0.05
Answer:
Economic theory suggests that ________ interest rates are ________ important than
________ interest rates in explaining investment behavior.
A) nominal; more; real
B) real; less; nominal
C) real; more; nominal
D) market; more; real
Answer:
A $1000 face value coupon bond with a $60 coupon payment every year has a coupon
rate of
A) .6 percent.
B) 5 percent.
C) 6 percent.
D) 10 percent.
Answer:
If the Fed pursues a strategy of targeting an interest rate when fluctuations in money
demand are prevalent,
A) fluctuations of nonborrowed reserves will be small.
B) fluctuations of nonborrowed reserves will be large.
C) the Fed will probably quickly abandon this policy, as it did in the 1960s.
D) the Fed will probably quickly abandon this policy, as it did in the 1950s.
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, raising the federal funds interest rate, everything else held
constant.
A) rise; decreases
B) rise; increases
C) decline; increases
D) decline; decreases
Answer:
If people expect real estate prices to increase significantly, the ________ curve for
bonds will shift to the ________, everything else held constant.
A) demand; right
B) demand; left
C) supply; left
D) supply; right
Answer:
If the ________ curve is relatively more unstable than the ________ curve, an interest
rate target is preferred.
A) IS; IS
B) IS; LM
C) LM; IS
D) LM; LM
Answer:
Because of their ________ liquidity, ________ U.S. government securities are called
secondary reserves.
A) low; short-term
B) low; long-term
C) high; short-term
D) high; long-term
Answer:
Which of the following benefit directly from any increase in the corporation’s
profitability?
A) a bond holder
B) a commercial paper holder
C) a shareholder
D) a T-bill holder
Answer:
In the market for reserves, if the federal funds rate is between the discount rate and the
interest rate paid on excess reserves, an increase in the reserve requirement ________
the demand of reserves and causes the federal funds interest rate to ________,
everything else held constant.
A) decreases; fall
B) increases; fall
C) increases; rise
D) decreases; rise
Answer: