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:
An investment has grown from $100.00 to $130.00 or by 30% over four years. What
annual increase gives a 30% increase over four years?
A. 7.50%
B. 6.30%
C. 6.78%
D. 7.24%
Answer:
A bank’s reserves include:
A. U.S. Treasury bills.
B. currency in the bank but not currency in the ATM machines.
C. the bank’s deposits at the Federal Reserve.
D. U.S. Treasury bills and currency in the bank.
Answer:
One reason lenders usually require a lot of information from loan applicants is to
avoid:
A. the problems of moral hazard.
B. the problem of adverse selection.
C. being harmed by symmetric information.
D. charges of discrimination in lending.
Answer:
Which of the following statements is most correct?
A. Policymakers can eliminate the effects of negative supply shock.
B. Policymakers can neutralize movements in aggregate demand.
C. Policymakers can shift the short-run aggregate supply curve.
D. Shifts in the monetary policy reaction function used to stabilize the economy shift
the short-run aggregate supply curve.
Answer:
We would expect the risk spread between Baa bonds and U.S. Treasury securities of the
same maturities to:
A. widen during periods of economic recession.
B. remain relatively constant over the business cycle.
C. decrease during economic slowdowns.
D. increase during economic growth periods.
Answer:
The Fed is reluctant to change the required reserve rate because:
A. changes in the rate have a small impact on the actual quantity of money.
B. the money multiplier is not impacted by the required reserve rate.
C. the time lag between changing the required reserve rate and changes in the money
supply can be too long.
D. small changes in the required reserve rate can have too big of an impact on the
money multiplier and the level of deposits.
Answer:
A repurchase agreement is:
A. an asset that represents the value of all collateral repossessed by the bank and held
for sale.
B. a long-term collateralized loan.
C. an agreement where the parties agree to reverse the transaction on a specific day.
D. only made between two or more banks.
Answer:
Suppose that you purchase a Korean government bond and the number of won needed
to purchase one dollar increases. Your return on the bond:
A. decreases by the amount of the dollar’s appreciation.
B. decreases by more than the amount of the dollar’s appreciation.
C. decreases by less than the amount of the dollar’s appreciation.
D. increases by the amount of the dollar’s appreciation.
Answer:
Which of the following would be classified as precautionary demand for money?
A. You keep a $1000 in a money market account because the return is better than a
savings account at your bank
B. You apply for and receive a credit card with a $1000 limit
C. You put $1000 in a savings account at your bank for emergencies
D. You put $1000 in your checking account each month to cover your regular expenses
Answer:
If the demand for reserves remains constant and the market federal funds rate is below
the target rate, the Fed would:
A. increase the supply of reserves.
B. decrease the supply of reserves.
C. do nothing; the Fed will let the market work.
D. alter the demand for reserves.
Answer:
Possible explanations that have been offered for the Great Moderation experienced in
the United States include all of the following except:
A. good fortune.
B. economies that have become more flexible in absorbing shocks.
C. calm financial markets.
D. better understanding and use of monetary policy.
Answer:
The strike price of an option is:
A. the market price at the time the option is written.
B. the market price at the time the option is exercised.
C. the price at which the option holder has the right to buy or sell.
D. always above the market price.
Answer:
Reserves are:
A. assets of the central bank and liabilities of the commercial bank.
B. assets of the commercial banks and liabilities of the central bank.
C. liabilities of the commercial and central banks.
D. assets and liabilities for the central bank.
Answer:
The empirical data reveals the velocity of M2 to be:
A. relatively stable in the long run.
B. highly volatile in the long run.
C. stable only when measured annually.
D. higher than the velocity of M1.
Answer:
Money eliminates the need for:
A. a search for a double coincidence of wants.
B. government regulation.
C. specialization of labor.
D. financial Intermediaries.
Answer:
Members of the Board of Governors of the Fed:
A. can be reappointed after their term expires.
B. must leave office when there is a new administration elected.
C. serve one non-renewable fourteen-year term.
D. are appointed for life, though they can resign at any time.
Answer:
If government policymakers intervene in foreign exchange markets to cause the
domestic currency to appreciate:
A. this will benefit all residents of the country.
B. this will be beneficial to exporters.
C. this would be harmful to exporters.
D. this would be harmful to importers.
Answer:
Which of the following statements is most correct?
A. If the U.S. $ depreciates relative to the yen, then it is likely also depreciating
relative to the euro.
B. If the U.S. $ is appreciating relative to the euro, the euro is likely depreciating
relative to the yen.
C. If the U.S. $ is depreciating relative to the euro it is likely depreciating relative to all
currencies.
D. If the U.S. $ is appreciating relative to the yen, the yen is depreciating relative to the
U.S. $.
Answer:
The economy is in both a short- and long-run equilibrium if:
A. current inflation equals expected inflation and current output equals potential
output.
B. the aggregate demand curve intersects the short-run aggregate supply curve.
C. the long-run aggregate supply curve is at potential output.
D. the short-run aggregate supply curve intersects the long-run aggregate supply curve
at potential output.
Answer:
Whenever central bankers face more than one goal, the policy framework requires:
A. the central bank to always focus on inflation first.
B. central bankers to focus on all goals, no matter what.
C. economic growth to be the top priority.
D. central bankers to make their priorities clear.
Answer:
The default-risk premium:
A. is negative for a U.S. Treasury bond.
B. is also known as the risk spread.
C. must always be greater than 0 (zero).
D. is assigned by a bond-rating agency.
Answer:
Economic researchers have found:
A. no examples of countries with high rates of money growth and low inflation rates.
B. many examples of countries with low rates of money growth and high inflation
rates.
C. many examples of countries with high rates of money growth and low inflation
rates.
D. no relationship between rates of money growth and inflation rates.
Answer:
A $1,000 face value bond, with an annual coupon of $40, one year to maturity and a
purchase price of $980 has a:
A. current yield that equals 4.00%.
B. coupon rate that equals 4.08%.
C. current yield that equals 4.08% and a yield to maturity that equals 6.12%.
D. current yield that equals 4.08% and a yield to maturity that equals 4.0%.
Answer:
A review of economic data suggests that:
A. expansions are shorter than recessions.
B. business cycles are recurrent and periodic.
C. over the last fifty years, recessions are becoming more common.
D. recessions are shorter in duration than expansions.
Answer:
When the yield curve is downward sloping:
A. people are expecting an economic slowdown.
B. short-term yields are lower than long term yields.
C. people are expecting higher inflation in the future.
D. people could be expecting a tightening in monetary policy.
Answer:
Suppose Paul borrows $4,000 for one year from his grandfather who charges Paul 7%
interest. At the end of the year Paul will have to repay his grandfather:
A. $4,280
B. $4,290
C. $4,350
D. $4,820
Answer:
Professor Jeremy Siegel, of the University of Pennsylvania, did research showing that:
A. owning stocks over the long run produces returns below the risk-free return.
B. if an investor owns stocks for a very short time the risk is greater than if the stocks
are held for a long time.
C. the return on the S&P 500 for a 25-year period often produces returns below zero.
D. bonds really are less risky to hold over the long-term.
Answer:
Which of the following best expresses the payment a saver receives for investing their
money for two years?
A. PV + PV
B. PV + PV(1 + i)
C. PV(1 + i)2
D. 2PV(1 + i)
Answer:
Many states had their own insurance fund to protect depositors. The critical problem
with these state funds is:
A. they are monopolies in their own state and extract extremely high prices for the
insurance they provide.
B. they are highly inefficient they cannot achieve the economies of scale a federal fund
can achieve.
C. they do not have regulators as knowledgeable as the regulators at FDIC.
D. no state fund is large enough to withstand a run on all of the banks it insures.
Answer:
What tool is available to monetary policymakers to shift the short-run aggregate supply
curve to the left following a positive inflation shock?
A. A rightward shift of the monetary policy reaction curve
B. A leftward shift of the monetary policy reaction curve
C. Open market purchases of government securities
D. None of the answers given is correct; the actions of monetary policymakers affect
the dynamic aggregate demand curve
Answer:
Which of the following statements is true?
A. Leverage increases expected return and increases risk.
B. Leverage increases expected return and reduces risk.
C. Leverage decreases expected return but has no effect on risk.
D. Leverage decreases expected return and increases risk.
Answer:
A credit card that charges a monthly interest rate of 1.5% has an effective annual
interest rate of:
A. 18.0%
B. 19.6%
C. 15.0%
D. 17.50%
Answer:
Deposit insurance only seems to be viable at the federal level. This is likely due to the
fact that:
A. state funds are less informed about the solvency of national banks.
B. a run on the banks within a state will always spread countrywide.
C. the U.S. Treasury backs the FDIC and can therefore withstand virtually any crisis.
D. the cost of state insurance is prohibitively high.
Answer:
The fact that banks can be either nationally or state chartered creates:
A. situations where some banks go unregulated.
B. situations where banks operating in more than one state can escape regulation.
C. regulatory competition.
D. banks being simultaneously regulated by more than one agency.
Answer:
What is meant by the “paradox of leverage?”
Answer:
Briefly explain one function of financial instruments that can make them very different
from money.
Answer:
Consider the following: there are two countries, A and B. Each country has the same
resources, and produces the same goods. The residents of country A use money; the
residents of country B rely on bartering of goods. Will each country produce the same
quantity of output? Explain.
Answer:
How might the behavior of professional investment managers prior to the financial
crisis of 2007-2009 contributed to the depth of the plunge of corporate and mortgage
security prices during the crisis?
Answer:
In 2001 a combination of tax cuts and increased defense spending did not have the same
inflationary effect as the similar policy in the 1960s. Explain the difference.
Answer:
You are a top Treasury official for a developing country who has been asked for advice
on how to best open the nation’s stock market to foreign investment. Previously, the
government did not permit foreigners to purchase domestic stock. Now, the government
has a plan to create two markets: one for domestic residents and one for foreign
investment. What are the potential drawbacks of this system, compared to allowing both
domestic and foreign investors to trade in the same market? What are the larger
implications for economic efficiency? How might the government be able to address
these issues?
Answer:
Follow a $1 billion purchase of U.S. Treasury bonds by the Fed from commercial
banks. Discuss the changes that occur to the balance sheet of the banking system and
the balance sheet of the Fed.
Answer:
Explain why most financial instruments are fairly complex, while at the same time quite
standardized.
Answer:
Explain why a large equipment provider that sells to many of its commercial customers
on account may use a finance company.
Answer:
Considering the government-sponsored enterprises like Freddie Mac, Fannie Mae, and
others, do you see any indication that the managers of these agencies are creating a
moral hazard? Explain.
Answer:
Explain how the threat of a leveraged buyout or a takeover can actually address the
problem of moral hazard.
Answer:
Explain why real business cycle theory renders the short-run aggregate supply curve
irrelevant.
Answer:
In looking at the foreign exchange rates in the Wall Street Journal you notice the U.S.
dollar-euro spot rate is 1.085€/U.S.$ and the six-month forward rate is 1.098€/$. What
does this imply?
Answer:
Compare and contrast financial institutions that act as brokers to those that transform
assets. In what sense are both types of institutions financial intermediaries? Provide one
example of each type and describe how each functions as a financial intermediary.
Answer:
The name balance-sheet channel of monetary policy implies that monetary policy has to
impact categories on a firm’s balance sheet. Explain how the balance sheet of a firm
will be impacted by an increase in interest rates.
Answer:
Why did it take almost 150 years before the U.S. had a permanent central bank?
Answer:
An individual is currently 30 years old, wants to work until the age of 65 and plans on
dying at the age of 85. How much will the individual need to have saved by the time he
or she is 65 if he or she plans on spending $40,000 per year while retired? You can
assume the individual can earn an interest rate of 5.0% and the $40,000 is in addition to
any Social Security that may be received.
Answer: