If a bank’s return on equity remains constant, but the ratio of bank assets to bank capital
decreases:
A. the bank’s return on assets must have increased.
B. the bank’s return on assets must have decreased.
C. the bank’s assets and capital must have increased by the same percent.
D. the bank must be unprofitable.
Answer:
The terrorist attack on the World Trade Center on September 11, 2001:
A. triggered a flight to quality in the bond market.
B. caused the demand for U.S. Treasury securities to fall and the demand for corporate
bonds to rise.
C. caused the price of U.S. Treasury securities to fall and the yields on corporate bonds
to fall.
D. did not have any significant impact since the risk on all bonds increased.
Answer:
The Fed sells German bonds to commercial banks. Which of the following best
describes the impact on the Fed’s and the Banking System’s balance sheets resulting
from this transaction?
A. The Fed’s assets and liabilities increase, the banking systems assets and liabilities
decrease.
B. The Fed’s assets increase and its liabilities both increase. For the banking system,
the value of assets and liabilities do not change, only the composition of assets changes.
C. The Fed’s assets and liabilities do not change, only the compositions of the assets
change. For the banking system, assets and liabilities increase.
D. The Fed’s assets and liabilities both decrease. For the banking system, the value of
assets and liabilities do not change, only the composition of assets changes.
Answer:
Which of the following is likely to be a primary financial market transaction?
A. You cash the check your grandmother sent you for your birthday.
B. You call a broker and purchase bonds for your retirement fund.
C. A city issues bonds to finance new road construction.
D. A supermarket needs to borrow the funds for a second location and takes out a loan
from a commercial bank to pay for it.
Answer:
One advantage of using checks over a debit card is:
A. checks can be replaced if lost or stolen, a debit card cannot.
B. the bank is responsible if someone steals your checks and uses them; this isn’t the
case with debit cards.
C. a cancelled paper check is the only generally accepted proof of payment.
D. the person has “float,” meaning time between writing the check and depositing
funds to cover it.
Answer:
Tax cuts would have the same directional effect on the dynamic aggregate demand
curve as:
A. decreases in government purchases.
B. the Federal Reserve selling U.S. treasury securities.
C. the Federal Reserve buying U.S. treasury securities.
D. temporary tax increases.
Answer:
A decrease in the nation’s wealth, all other factors constant, would cause:
A. the bond demand curve to shift left.
B. bond prices to rise.
C. interest rates to decrease.
D. the bond supply curve to shift left.
Answer:
The monetary policy reaction curve:
A. is the guideline the Fed publishes in setting their interest rate target.
B. approximates the behavior of central bankers.
C. has remained fairly constant over the years.
D. is set by Congress and given to the Fed as a guideline to follow.
Answer:
The publication, Consumer’s Reports, is one tool designed to address:
A. adverse selection.
B. moral hazard.
C. the free-rider problem.
D. symmetric information.
Answer:
If the current rate of inflation is 5% and the target rate of inflation is 2%, and output is
3% above its potential, the target federal funds rate would be:
A. 6.5%.
B. 2.5%.
C. 3.5%.
D. 10%.
Answer:
One monopoly that modern central banks have is in:
A. regulating other banks.
B. making loans to banks.
C. issuing U.S. Treasury securities.
D. issuing currency.
Answer:
If the returns of two assets are perfectly positively correlated, an investor who puts half
of his/her savings into each will:
A. reduce risk.
B. have a higher expected return.
C. not gain from diversification.
D. reduce risk but lower the expected return.
Answer:
Compound interest means that:
A. you get an interest deduction for paying your loan off early.
B. you get interest on interest.
C. you get an interest deduction if you take out a loan for longer than one year.
D. interest rates will rise on larger loans.
Answer:
Over very long periods, U.S. real economic growth averaged around:
A. 3 percent per year.
B. 1 percent per year.
C. 5 percent per year.
D. 7 percent per year.
Answer:
Central banks are in a position to control risk in the economy because they:
A. control the unemployment rate.
B. control the economy’s real growth rate.
C. control short-term interest rates.
D. can change taxes.
Answer:
The Japanese experience of the 1990s shows:
A. monetary policy is always more effective than fiscal policy.
B. monetary policy always works.
C. sometimes monetary policy does not work.
D. central bankers should not try to counter the business cycle.
Answer:
During the 1990s, the money multipliers for M1 and M2:
A. decreased.
B. remained fairly constant even though the economy grew.
C. the M1 multiplier decreased while the M2 multiplier increased dramatically.
D. increased dramatically as the economy grew.
Answer:
If an investment offered an expected payoff of $100 with $0 variance, you would know
that:
A. half of the time the payoff is $100 and the other half it is $0.
B. the payoff is always $100.
C. half of the time the payoff is $200 and the other half it is $0.
D. half of the time the payoff is $200 and the other half it is $50.
Answer:
When the Federal Reserve was unable to stem the bank panics of the 1930s, Congress
responded by:
A. taking over the lender of last resort function and assigning this function to the U.S.
Treasury.
B. ordering the printing of tens of billions of dollars of additional currency.
C. creating the FDIC and offering deposit insurance.
D. declaring a bank holiday and closing banks for 30 days.
Answer:
Municipal bonds are issued by:
A. cities only.
B. the U.S. Treasury, but the proceeds can only be used by cities.
C. states and cities, but their interest is taxable only at the federal level.
D. states and cities and their interest is exempt from U.S. government taxation.
Answer:
Considering the value of a financial instrument, the bigger the size of the promised
payment the:
A. less valuable the financial instrument because risk must be greater.
B. longer an investor has to wait for the payment.
C. more valuable the financial instrument.
D. greater the risk.
Answer:
Mary purchases a U.S. Treasury bond; the bond is a(n):
A. asset of the U.S. government as well as an asset for Mary.
B. liability of the U.S. government and an asset for Mary.
C. asset for Mary but not a liability of the U.S. Government.
D. asset for the government but a liability for Mary.
Answer:
In high inflation countries, inflation rates can exceed the rate of growth of money
because:
A. high inflation increases the velocity of money.
B. high rates of inflation increase the opportunity cost of holding money.
C. money loses value quickly with inflation.
D. all of the answers given are correct.
Answer:
If a futures contract for U.S. Treasury bonds increases by “12” in the financial page
listings, the value of the contract increased by:
A. $120.00.
B. $1200.00.
C. $375.00.
D. $240.00.
Answer:
If a saver has a positive rate of time preference then the present value of $100 to be
received 1 year from today is:
A. more than $100.
B. not calculable.
C. less than 100.
D. unknown to the saver.
Answer:
The seller of a put option is transferring the risk:
A. of a price decrease of the stock to the buyer of the option.
B. of a price increase of the stock to the buyer of the option.
C. this statement is incorrect since options do not transfer risk.
D. this statement is incorrect since only sellers of call options are transferring risk.
Answer:
One reason a country would be better off fixing its exchange rate is if:
A. it has a strong reputation for controlling inflation on its own.
B. it lacks ample foreign exchange reserves.
C. it is well-integrated with the economy of the country to whose currency its currency
is fixed.
D. its own macroeconomic characteristics are inversely correlated with the
macroeconomic characteristics of the country to whose currency its currency is fixed.
Answer:
Consumption can be sensitive to changes in the real interest rate because:
A. higher interest rates can increase the cost of durable goods like automobiles.
B. higher interest rates will result in less saving.
C. lower real interest rates will decrease spending on durable goods and increase
spending on non-durable goods.
D. lower interest rates increase savings.
Answer:
Which of the following statements best completes this sentence: “On a bank’s balance
sheet”?
A. assets show the sources of funds and the net worth shows the uses of funds.
B. net worth shows the sources of funds and liabilities show the uses of funds.
C. assets show the uses of funds and liabilities show the sources of funds.
D. net worth represents both a source and a use of funds.
Answer:
Considering the theory of purchasing power parity, if inflation in Mexico is 5% while
prices in the U.S. are stable; we should expect over the period of a year:
A. the dollar to appreciate 5% relative to the peso.
B. the peso to appreciate 5% relative to the dollar.
C. the nominal exchange rate to stay fixed.
D. the real exchange rate of U.S. goods/Mexican goods to appreciate 5%.
Answer: