Secondary credit provided by the Fed is designed for:
A. banks who qualify for a lower interest than what is available under primary credit.
B. banks that are in trouble and cannot obtain a loan from anyone else.
C. banks that want to borrow without putting up collateral.
D. foreign banks.
Answer:
Which of the following is not a feature of common stock?
A. Stockholders receive regular fixed payments on their shares.
B. Stockholders have limited liability.
C. Stock holders are residual claimants.
D. Stockholders have voting rights.
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:
Opportunistic disinflation occurs when policymakers:
A. change the target inflation rate.
B. take advantage of positive supply shocks.
C. are able to permanently lower inflation.
D. all of the answers given are correct.
Answer:
The holding period return has relevance because:
A. most bonds are held by the original purchaser until maturity.
B. most bonds are held by the original purchaser until they mature.
C. bonds are frequently traded.
D. current yields are not that important to bondholders.
Answer:
Financial intermediaries handle a larger flow of funds than do primary markets
primarily because financial intermediaries:
A. have a government-provided monopoly.
B. have government-regulated prices, so there is little competition.
C. can lower transaction costs and increase liquidity for savers.
D. do not have to worry about information asymmetry.
Answer:
The yield on a tax-exempt bond:
A. equals the taxable bond yield times one minus the tax rate.
B. is equal to the yield on a U.S. 30-year bond.
C. is called the risk-free yield.
D. only applies to foreign bonds because they are exempt from U.S. income taxes.
Answer:
A flight to quality refers to a move by investors:
A. away from bonds towards stocks.
B. towards securities of other countries and away from U.S. Treasuries.
C. towards precious metals and away from U.S. Treasury bonds.
D. away from low-quality bonds towards high-quality bonds.
Answer:
Juan purchases automobile insurance; the insurance contract is a:
A. financial instrument.
B. form of money.
C. transfer of risk from the insurance company to Juan.
D. financial intermediary.
Answer:
An investor in a 30% marginal tax bracket, earning $10 in interest annually for a $100
U.S. Treasury bond:
A. earns a 10% after-tax return because interest on U.S. Treasury bonds is tax exempt
at the federal level.
B. earns a 3% return after-tax.
C. would be indifferent between this bond and a municipal bond offering $7 annually
per $100 of face value, assuming the same default risk and liquidity characteristics.
D. earns a 1% return after-tax.
Answer:
A policy is time consistent when:
A. policymakers have incentives to adhere to a policy decision made today, in the
future.
B. policymakers have incentives to make policy decisions in a time-sensitive fashion.
C. policymakers consider the future when making current policies.
D. the timing of a policy is irrelevant.
Answer:
If the U.S. government’s borrowing needs increase, all other factors constant the:
A. price of bonds will increase.
B. supply of bonds will increase.
C. demand for bonds will decrease.
D. supply of bonds and the demand for bonds will both increase.
Answer:
The federal funds rate is the interest rate: A. the Fed charges banks who borrow from
it.
B. banks charge each other for overnight loans on excess reserves held at the Fed.
C. the U.S. Treasury charges banks that need emergency funds.
D. the FDIC charges banks that need to borrow from it to meet depositor demands.
Answer:
Which of the following provides a strong incentive to supply dollars on the foreign
exchange market?
A. To purchase goods and services produced abroad
B. To get a lower return paid on foreign currencies that is not subject to the risk
associated with exchange-rate fluctuations
C. To invest in U.S. assets
D. To take advantage of higher inflation rates in other countries
Answer:
Considering interest-rate swaps, the swap spread is:
A. another name for the swap rate.
B. the difference between the benchmark rate and the swap rate.
C. the benchmark rate plus the swap rate.
D. a measure of the time value of the swap.
Answer:
The money aggregate M1 includes each of the following, except:
A. currency in the hands of the public.
B. travelers checks that have been issued.
C. currency in the vaults of commercial banks.
D. demand deposits at commercial banks.
Answer:
Which of the following is a problem of adverse selection?
A. The lender has a problem of distinguishing good risk from bad risk borrowers.
B. The lender has a problem determining that the proceeds from a loan are being used
as the borrower stated.
C. A person takes up the hobby of bungee jumping after purchasing health insurance.
D. Individuals use more medical services as a result of their purchase of a health
insurance plan.
Answer:
The fact that financial intermediaries employ experts to carry out particular activities
and so lower transactions costs is usually associated with the following economic
concept:
A. the law of demand.
B. economies of scale.
C. comparative advantage.
D. information costs.
Answer:
Higher potential output levels:
A. put upward pressure on real interest rates.
B. put downward pressure on real interest rates and upward pressure on inflation rates.
C. put upward pressure on real interest rates and downward pressure on inflation rates.
D. none of the answers given is correct.
Answer:
An increase in aggregate demand will have the following effect on potential output:
A. potential output will increase.
B. potential output will decrease.
C. potential output will increase at first and then decrease.
D. there won’t be a change in potential output from an increase in aggregate demand.
Answer:
Which of the following expresses 5.65%?
A. 0.565
B. 0.00565
C. 5.65
D. 0.0565
Answer:
The Federal Reserve Bank of New York is unique from other Reserve banks because it:
A. is the only regional Bank that serves just one state.
B. is the only regional Bank located in a financial center.
C. is where the Federal Reserve System’s portfolio is managed.
D. is the oldest and therefore the largest.
Answer:
The ability to control inflation expectations is most closely related to a central bank’s:
A. transparency.
B. credibility.
C. accountability.
D. willingness to communicate.
Answer:
If the economy was initially at a long-run equilibrium, the short-run effects from a
decrease in aggregate demand will include:
A. a recessionary gap.
B. a decrease in potential output.
C. an increase in the current inflation rate.
D. a decrease in the target rate of inflation.
Answer:
The larger the bond dealer’s spread the:
A. less liquid is the market for that bond.
B. greater is the coupon rate for that bond.
C. more liquid is the market for that bond.
D. less risk there is for the dealer to hold that bond.
Answer:
Given the equation of exchange, MV = PY, when central bankers control short-term
nominal interest rates by adjusting the level of reserves in the banking system, their
actions are expected to primarily affect:
A. the rate of growth of V.
B. the value of V.
C. potential Y as opposed to current Y.
D. the rate of growth of M.
Answer:
When a bank takes savings from many small savers and lends it to many borrowers, the
bank:
A. decreases the risk to savers through diversification.
B. increases the risk to borrowers through high transaction costs.
C. decreases the risk to savers through economies of scale.
D. decreases the return to savers and increases the cost to borrowers.
Answer:
The money aggregate M2 includes:
A. large denomination time deposits.
B. stock and bond mutual fund shares.
C. savings deposits but not money market deposit accounts.
D. M1.
Answer:
Which of the following statements is true?
A. Adverse selection is a problem of monopoly and moral hazard is a problem of
information asymmetry.
B. Adverse selection and moral hazard are problems stemming from asymmetric
information.
C. Adverse selection is a problem that occurs after a transaction.
D. Moral hazard is a problem that occurs before a transaction.
Answer:
If the Fed decides to maintain a fixed euro/dollar exchange rate when they purchase
euros:
A. they increase the number of dollars.
B. downward pressure is put on domestic interest rates.
C. the domestic money supply increases.
D. all of the answers given are correct.
Answer:
The theory of purchasing power parity implies the real exchange rate between two
countries is:
A. flexible.
B. less than one.
C. greater than one.
D. equal to one.
Answer:
Many insurance companies sell group policies that cover all of the employees at a
particular firm, or all of the members of a particular organization. How could this policy
help to overcome the problem of adverse selection?
Answer:
Imagine the inflation rate begins to rise rapidly, the FOMC meets and it is believed that
the target interest rate needed to stem the inflation could easily exceed 20 percent.
Many members of the committee believe the Fed cannot announce this high of a target
for political reasons. Discuss what the FOMC could do in terms of targets and what
change occurred in 2002 that is going to make their job a bit more difficult.
Answer:
How do the specific goals of interest rate and exchange rate stability differ in
importance from the other specific goals mentioned for central bankers?
Answer:
A bond offers a $40 coupon, has a face value of $1000, and 10 years to maturity. If the
interest rate is 5.0%, what is the value of this bond?
Answer:
Explain how a regulation requiring banks to keep a given percentage of deposits in an
account paying below market interest rates at the Fed is really a tax on banks.
Answer:
What are the pros and cons of a currency board?
Answer:
What was the primary motivation behind the creation of the 1988 Basel Accord?
Answer:
Identify four factors that will cause the value of put options to decrease.
Answer:
The equation of exchange which is MV = PY is an identity, which means it is true by
definition. If you think carefully, what variable in the equation by the way it is defined
really makes the equation of exchange an identity?
Answer:
Answer:
What is the consensus among economists and other monetary policy experts regarding
the usefulness of the monetary policy instruments available to central banks in normal
times?
Answer:
Calculate the internal rate of return for a machine that costs $500,000 and provides
annual revenue of $115,000 per year for 5 years. You can assume all revenue is received
once a year at the end of the year.
Answer:
How would the discovery of a previously unknown large reserve of oil affect the
short-run aggregate supply curve and why? What other change could have the same
effect?
Answer:
A futures contract is a forward contract with some important differences. Explain.
A futures contract is a forward contract that has been standardized and which is sold
through an organized exchange. Forward contracts generally are private agreements
between two parties and as a result are customized and therefore difficult to sell.
Answer:
The Federal Reserve is the U.S. government’s bank. Identify the functions the Fed
performs in this role.
Answer:
What distinguishes commodity money from fiat money?
Answer:
What is meant by saying that automatic fiscal policy is countercyclical?
Answer: