Stock market bubbles typically lead to all of the following except:
A. an efficient allocation of resources.
B. stock market crashes.
C. patterns of volatile returns from the stock market.
D. gaps between actual stock prices and those warranted by the fundamentals.
Answer:
The market for bonds is initially described by the supply of bonds – S0, and the demand
for bonds – D0, with the equilibrium price and quantity being P0 and Q0. If the federal
government were to offer larger tax breaks on the purchase of new equipment for
businesses, all other factors constant, we would expect to see:
A. Bond supply curve to shift to S1
B. Bond demand curve to shift to D1
C. Bond supply curve to shift to S2
D. Bond demand curve to shift to D2
Answer:
A liability of the central bank in functioning as the bankers’ bank is:
A. accounts of commercial banks.
B. securities.
C. loans.
D. currency.
Answer:
The creation of the Federal Reserve in 1913:
A. provided the opportunity for lender of last resort but not the guarantee that it would
be used.
B. guaranteed the Federal Reserve would always act as lender of last resort.
C. eliminated bank panics in the U.S.
D. was in response to the Great Depression in the U.S.
Answer:
Considering the law of one price, evidence in the foreign exchange markets over brief
intervals shows:
A. the law works most of the time.
B. this is the closest thing to a perfect law in economics.
C. that the law fails most of the time.
D. the law only works in the very short run.
Answer:
Considering the euro/U.S. dollar exchange rate, as a U.S. dollar decreases in value
versus the euro (holding other factors constant):
A. this is represented by a downward movement along the supply of dollars curve.
B. this would be represented by an upward sloping demand for dollars curve.
C. this would be represented by a leftward shift of the supply of dollars curve.
D. this is represented by an upward movement along the demand for dollars curve.
Answer:
In the ten years after the FDIC limit was increased to $100,000:
A. more than four times the number of banks and savings and loans failed than did
during the first 46 years of FDIC’s existence.
B. less than one-fourth the number of banks and savings and loans failed than during
the first 46 years of FDIC’s existence.
C. the cost to taxpayers of failed institutions in that period was negligible because
FDIC was in place.
D. increasing the deposit insurance limit to $250,000 provided complete coverage for
all deposits except those of large corporations.
Answer:
As inflation increases, for any fixed nominal interest rate, the real interest rate:
A. also increases.
B. remains the same, that’s why it is real.
C. decreases.
D. decreases by less than the increase in inflation.
Answer:
During the financial crisis of 2007-2009 it became difficult for the Fed to hit their target
federal funds rate because:
A. of the number of bank failures.
B. of the Federal government stimulus package.
C. of the loss of liquidity in the interbank lending market.
D. of the instability in the stock market.
Answer:
The empirical evidence on purchasing power parity over the long run seems to point out
that:
A. the higher a country’s inflation rate, the greater is the appreciation in the country’s
currency.
B. the theory of purchasing power parity cannot explain long-run changes in exchange
rates.
C. the higher a country’s inflation rate the greater is the depreciation in the country’s
currency.
D. there isn’t any clear link between inflation rates and exchange rates.
Answer:
Investment A pays $1,200 half of the time and $800 half of the time. Investment B pays
$1,400 half of the time and $600 half of the time. Which of the following statements is
correct?
A. Investment A and B have the same expected value, but A has greater risk.
B. Investment B has a higher expected value than A, but also greater risk.
C. Investment A and B have the same expected value, but A has lower risk than B.
D. Investment A has a greater expected value than B, but B has less risk.
Answer:
A person who discovers that he/she has advanced stages of cancer and calls his/her life
insurance agent to double his/her insurance policy is an example of:
A. a moral hazard risk.
B. the risk of adverse selection.
C. the problem of information symmetry.
D. risk spreading.
Answer:
From 1979 to 1982, the Fed targeted bank reserves as the monetary policy tool. One
side effect of this strategy was:
A. the inflation rate increased to over 18 percent in 1983.
B. many banks failed that otherwise may not have.
C. interest rates rose very high.
D. inflation remained high for most of the 1980’s.
Answer:
Sue buys a futures contract for U.S. Treasury bonds and on the settlement date the
interest rate on U.S. Treasury bonds is higher than Sue expected. Sue will have:
A. gained money on her short position.
B. gained money on her long position.
C. lost money on her long position.
D. lost money on her short position.
Answer:
If a bank has $150 million in assets and a net worth of $20 million, its asset-to-equity
ratio is:
A. 6.5 to 1.
B. 7.5 to 1.
C. 0.13 to 1.
D. 0.15 to 1.
Answer:
Inflation presents risk because:
A. inflation is always present.
B. inflation cannot be measured.
C. there are different ways to measure it.
D. there is no certainty regarding what inflation will be in the future.
Answer:
The Expectations Hypothesis assumes each of the following, except:
A. long-term bond rates are equal to the average of current and expected future
short-term interest rates.
B. bonds of different maturities are not perfect substitutes.
C. bonds of different maturities have the same risk characteristics.
D. bonds of different maturities are perfect substitutes.
Answer:
If we let P = the domestic price of a basket of goods and Pf the foreign price of the same
basket of goods, and = the nominal exchange rate of U.S. $/foreign currency the real
exchange rate is best expressed as:
A.
B.
C.
D.
Answer:
The expected value of an investment:
A. is what the owner will receive when the investment is sold.
B. is the sum of the payoffs.
C. is the probability-weighted sum of the possible outcomes.
D. cannot be determined in advance.
Answer:
A characteristic of long-run equilibrium is the economy is producing its potential
output. This is:
A. the maximum level of output the economy could produce at any time.
B. the level of output the economy produces when its resources are used at normal
rates.
C. defined as using 80 percent of the economy’s resources at any time.
D. the level of output consistent with an unemployment rate of 7.5%.
Answer:
Nondepository institutions:
A. do not serve as intermediaries.
B. only serve as brokers.
C. only transform assets.
D. do not accept deposits.
Answer:
In the United States, one problem with central bank independence is:
A. it is almost impossible to obtain because Congress controls the budget of the
Federal Reserve.
B. in a representative democracy, monetary policymakers must be held accountable to
the public.
C. central bank independence has not produced favorable results.
D. the central bank can control policy, but the U.S. Treasury issues currency.
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:
Harry gets $1000 in currency from his grandfather when he graduates from college. He
deposits these funds into his checking account. Considering Harry’s personal balance
sheet, his assets:
A. increased by $1000 when he deposited the $1000 into his checking account.
B. Increased when he received the $1000 in currency from his grandfather.
C. And liabilities increased by $1000 when he deposited the funds into his checking
account.
D. Increased by $1000 and his liabilities decreased by $1000 when he deposited the
funds into his checking account.
Answer:
Policymakers can neutralize:
A. supply shocks, but only in the short run.
B. supply shocks, but only in the long run.
C. supply shocks in both the short run and the long run.
D. only demand shocks.
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 theory of efficient markets means
A. professional fund managers should be able to consistently beat the market average.
B. a professional fund manager should really not expect to beat the market average
consistently.
C. a professional fund manager who beats the market average one year should be
expected to beat the market average the next year.
D. a professional fund manager who beats the market average one year should be
expected to not beat the market average the next year.
Answer:
If a bond’s rating improves it should cause the bond’s price:
A. and yield to increase, all other factors constant.
B. and yield to decrease, all other factors constant.
C. to increase and its yield to decrease, all other factors constant.
D. to decrease and its yield to increase, all other factors constant.
Answer:
Assume that the Fed performs a foreign exchange intervention in which it does nothing
except buy German government bonds. One result of this will be that:
A. the dollar depreciates.
B. the euro depreciates.
C. both the dollar and the euro depreciate.
D. the dollar appreciates and the euro depreciates.
Answer:
A bank that meets deposit withdrawal by borrowing additional funds will alter:
A. the asset side of their balance sheet.
B. the liabilities side of the balance sheet.
C. the amount of bank capital.
D. the asset and liabilities side of the balance sheet.
Answer:
If the nominal interest rate decreases:
A. the cost of holding money decreases.
B. the cost of holding money increases.
C. the velocity of money should increase.
D. the cost of holding money increases and the velocity of money should decrease.
Answer: