1) If nominal GDP is $10 trillion, and velocity is 10, the money supply is
A) $1 trillion
B) $5 trillion
C) $10 trillion
D) $100 trillion
2) Assuming initially that rr = 10%, c = 40%, and e = 0, an decrease in c to 30% causes
the M1 money multiplier to ________, everything else held constant.
A) increase from 2.8 to 3.25
B) decrease from 3.25 to 2.8
C) increase from 2.8 to 3.5
D) decrease from 3.5 to 2.8
3) Which of the following statements about the characteristics of debt and equities is
true?
A) They can both be long-term financial instruments
B) Bond holders are residual claimants
C) The income from bonds is typically more variable than that from equities
D) Bonds pay dividends
4) In a business cycle expansion, the ________ of bonds increases and the ________
curve shifts to the ________ as business investments are expected to be more
profitable.
A) supply; supply; right
B) supply; supply; left
C) demand; demand; right
D) demand; demand; left
5) If the required reserve ratio is 10 percent, currency in circulation is $400 billion,
checkable deposits are $1000 billion, and excess reserves total $1 billion, then the
excess reserves-checkable deposit ratio is
A) 0.01
B) 0.10
C) 0.001
D) 0.05
6) Real interest rates are difficult to measure because
A) data on them are not available in a timely manner
B) real interest rates depend on the hard-to-determine expected inflation rate
C) they fluctuate too often to be accurate
D) they cannot be controlled by the Fed
7) Collateral is ________ the lender receives if the borrower does not pay back the
loan.
A) a liability
B) an asset
C) a present
D) an offering
8) The volume of loans that the Fed makes to banks is affected by the Fed’s setting of
the interest rate on these loans, called the
A) federal funds rate
B) prime rate
C) discount rate
D) interbank rate
9) For a commodity to function effectively as money it must be
A) easily standardized, making it easy to ascertain its value
B) difficult to make change
C) deteriorate quickly so that its supply does not become too large
D) hard to carry around
10) When Jane Brown writes a $100 check to her nephew and he cashes the check, Ms.
Brown’s bank ________ assets of $100 and ________ liabilities of $100.
A) gains; gains
B) gains; loses
C) loses; gains
D) loses; loses
11) The monetary policy strategy that does not allow the policy to focus on domestic
considerations is
A) exchange-rate targeting
B) monetary targeting
C) inflation targeting
D) the implicit nominal anchor
12) Under the current managed float exchange rate regime; countries with surpluses in
their balance of payments frequently do not want to see their currencies appreciate
because it makes their goods ________ expensive abroad and foreign goods ________
in their countries.
A) more; cheaper
B) more; costlier
C) less; cheaper
D) less; costlier
13) An increase in ________ leads to an equal ________ in the monetary base in the
short run.
A) float; decrease
B) float; increase
C) discount loans; decrease
D) Treasury deposits at the Fed; increase
14) Compared to checks, paper currency and coins have the major drawbacks that they
A) are easily stolen
B) are hard to counterfeit
C) are not the most liquid assets
D) must be backed by gold
15) The quantity theory of inflation indicates that if the aggregate output is growing at
3% per year and the growth rate of money is 5%, then inflation is
A) 2%
B) 8%
C) -2%
D) 1.6%
16) Banks and other financial institutions engage in financial intermediation, which
A) can hurt the performance of the economy
B) can benefit economic performance
C) has no effect on economic performance
D) involves borrowing from investors and lending to savers
17) Suppose that Wells Fargo Home Mortgage sells $10 million worth of mortgage
payments to GMAC in exchange for $10 million in auto loan payments. This type of
transaction is called a
A) credit option
B) credit swap
C) credit-linked note
D) credit default swap
18) In the simple deposit expansion model, a decline in checkable deposits of $1,000
when the required reserve ratio is equal to 20 percent implies that the Fed
A) sold $200 in government bonds
B) sold $500 in government bonds
C) purchased $200 in government bonds
D) purchased $500 in government bonds
19) In the early stages of the 1980s banking crisis, financial institutions were especially
harmed by
A) declining interest rates from late 1979 until 1981
B) the severe recession in 1981-82
C) the disinflation from mid 1980 to early 1983
D) the increase in energy prices in the early 80s
20) Financial intermediaries
A) provide a channel for linking those who want to save with those who want to invest
B) produce nothing of value and are therefore a drain on society’s resources
C) can hurt the performance of the economy
D) hold very little of the average American’s wealth
21) The Fed’s holdings of securities consist primarily of ________, but also in the past
have included ________.
A) Treasury securities; bankers’ acceptances
B) municipal securities; bankers’ acceptances
C) bankers’ acceptances; Treasury securities
D) Treasury securities; municipal securities
22) The subprime financial crisis caused a recession because of the ________ in
adverse selection and moral hazard problems and the ________ in housing prices.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
23) If the price of bonds is set ________ the equilibrium price, the quantity of bonds
demanded exceeds the quantity of bonds supplied, a condition called excess ________.
A) above; demand
B) above; supply
C) below; demand
D) below; supply
24) During times of financial crisis, mark-to-market accounting
A) requires that a financial firms’ assets be marked down in value which can worsen the
lending crisis
B) leads to an increase in the financial firms’ balance sheets since they can now get
assets at bargain prices
C) leads to an increase in financial firms’ lending
D) results in financial firms’ assets increasing in value
25) If float is predicted to decrease because of good weather, the manager of the trading
desk at the New York Fed bank will likely conduct ________ open market operations to
________ reserves.
A) defensive; inject
B) defensive; drain
C) dynamic; inject
D) dynamic; drain
26) Everything else held constant, if the expected return on U.S. Treasury bonds falls
from 10 to 5 percent and the expected return on GE stock rises from 7 to 8 percent, then
the expected return of holding GE stock ________ relative to U.S. Treasury bonds and
the demand for GE stock ________.
A) rises; rises
B) rises; falls
C) falls; rises
D) falls; falls
27) All of the following are necessary criteria for a commodity to function as money
except
A) it must deteriorate quickly
B) it must be divisible
C) it must be easy to carry
D) it must be widely accepted
28) When the domestic currency is initially undervalued in a fixed exchange rate
regime, the central bank must intervene in the foreign exchange market to ________ the
domestic currency, thereby allowing the money supply to ________.
A) purchase; decline
B) sell; decline
C) purchase; increase
D) sell; increase
29) Which of the following is not a secondary market?
A) foreign exchange market
B) futures market
C) options market
D) IPO market
30) A nominal variable, such as the inflation rate or the money supply, which ties down
the price level to achieve price stability is called ________ anchor.
A) a nominal
B) a real
C) an operating
D) an intermediate
31) Allowing bank branching across state lines gives banks greater ability to coordinate
bank operations. This makes it easier for them to receive the benefits of
A) the dual banking system
B) economies of scale
C) disintermediation
D) interest-rate irregularities
32) The riskiness of an asset is measured by
A) the magnitude of its return
B) the absolute value of any change in the asset’s price
C) the standard deviation of its return
D) risk is impossible to measure
33) Assuming the same coupon rate and maturity length, the difference between the
yield on a Treasury Inflation Protected Security and the yield on a nonindexed Treasury
security provides insight into
A) the nominal interest rate
B) the real interest rate
C) the nominal exchange rate
D) the expected inflation rate
34) When the economy suffers a permanent negative supply shock and the central bank
does not respond by changing the autonomous component of monetary policy, then
A) inflation will be lower
B) output will be at its potential
C) output will be lower
D) inflation will not change
E) both B and C
35) The evidence on the interest sensitivity of the demand for money suggests that the
demand for money is ________ to interest rates, and there is ________ evidence that a
liquidity trap exists.
A) sensitive; substantial
B) sensitive; little
C) insensitive; substantial
D) insensitive; little
36) Regulators attempt to reduce the riskiness of banks’ asset portfolios by
A) limiting the amount of loans in particular categories or to individual borrowers
B) encouraging banks to hold risky assets such as common stocks
C) establishing a minimum interest rate floor that banks can earn on certain assets
D) requiring collateral for all loans
37) 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