Reasons for the rapid structural change in financial markets in recent years include all
of the following except:
A. globalization.
B. technological advances in computing.
C. technological advances in communication.
D. high real interest rates.
Answer:
Net interest income for a bank is:
A. the difference between gross income and net income after taxes.
B. the interest banks earn from uses of funds.
C. the difference between interest income and interest expense.
D. the difference between interest income and total expenses.
Answer:
The relationship between interest rates and stock prices is referred to as:
A. the interest-rate mechanism of monetary policy.
B. the investment-spending mechanism of monetary policy.
C. the wealth-creating mechanism of monetary policy.
D. the asset-price channel of monetary policy.
Answer:
In a defined-contribution plan:
A. only the employee makes contributions into the fund.
B. the retirement benefits will vary with both the amount contributed and the
performance of the fund.
C. the benefits are determined mainly by years of service.
D. no vesting is required; employees are eligible for benefits from the time they make
their first contribution.
Answer:
If a lender wants to earn a real interest rate of 3% and expects inflation to be 3%, he/she
should charge a nominal interest rate that:
A. is at least 7%.
B. is anything above 0%.
C. equals the real rate desired plus expected inflation.
D. equals the real rate desired less expected inflation.
Answer:
When an individual obtains a car loan and makes all of the regular monthly payments,
the sum of the payments made will exceed the purchase price of the car. This is due
primarily to the core principle:
A. risk requires compensation.
B. information is the basis for decisions.
C. markets determine prices and allocate resources.
D. time has value.
Answer:
A company currently pays an annual dividend of $6.50 per share. It expects the growth
rate of the dividend will be 2.5% (0.025) annually. If the interest (discount) rate is 5%
(0.05) what does the dividend-discount model predict the current price of the stock
should be?
A. It doesn’t, you need an expected future price to use the model
B. $257.50
C. $130.00
D. $266.50
Answer:
Over the last few decades, central bankers have:
A. mostly abandoned intermediate targets.
B. greatly increased their focus on intermediate targets.
C. found that the links between the operating instruments and intermediate targets have
become more stable.
D. developed more intermediate targets.
Answer:
Loans made between lenders and borrowers are:
A. assets to the borrowers.
B. liabilities of the lenders.
C. not taxable in the state of origination.
D. liabilities of the borrowers.
Answer:
An open-market purchase of foreign bonds to increase a central bank’s international
reserves:
A. increases the central bank’s liabilities and assets.
B. decreases the central bank’s assets and liabilities.
C. increases the central bank’s assets but decreases its liabilities.
D. increases the central bank’s liabilities and decreases its assets.
Answer:
A speculative attack on a country with a fixed exchange rate occurs when:
A. financial market participants believe the government will have to devalue its
currency.
B. financial market participants believe the government has a large excess of
international reserves.
C. financial market participants believe the currency is undervalued.
D. the country converts its gold reserves into foreign exchange.
Answer:
A financial intermediary:
A. is an agency that guarantees a loan.
B. is a third-party that facilitates a transaction between a borrower and a lender.
C. would be used in direct finance.
D. must be a depository institution.
Answer:
Moody’s, Value Line, and Dun and Bradstreet are examples of companies that:
A. provide information free to investors but charge the companies for the ratings
provided on the company.
B. provide information free to investors but recoup expenses through advertising done
by the companies being rated.
C. charge investors who subscribe to the services for the information.
D. duplicate information that is available to investors at no cost.
Answer:
Suppose a particular bank is very large in terms of assets, and makes consumer and
residential loans as well as commercial and industrial loan. The bank is probably a:
A. regional or super-regional bank.
B. money center bank.
C. community bank.
D. savings bank.
Answer:
If the current rate of inflation is 4% and the target rate of inflation is 2%, and output is
3% above its potential, the target federal funds rate would be:
A. 7%.
B. 8.5%.
C. 5%.
D. 4.5%.
Answer:
The real exchange rate is defined as:
A. the nominal exchange rate plus the rate of inflation.
B. the spot exchange rate.
C. the cost of a basket of goods and services in one country compared to the cost of the
same basket in another country.
D. the exchange rate that would exist if nominal rates were not fixed by governments.
Answer:
If a negative supply shock is associated with a decline in potential output, keeping
inflation at its target requires:
A. a leftward shift in the monetary policy reaction curve because there is an
expansionary gap.
B. a rightward shift in the monetary policy reaction curve because there is an
expansionary gap.
C. a leftward shift in the monetary policy reaction curve because there is a recessionary
gap.
D. a rightward shift in the monetary policy reaction curve because there is a
recessionary gap.
Answer:
Using the equation of exchange, if inflation is 1.5%, real output grows by 3.0%, and the
growth rate of money is 5.0%, the change in the velocity of money is:
A. Zero; velocity is constant.
B. -0.5%.
C. +4.5%.
D. +0.5%.
Answer:
The attendees at the FOMC meetings receive information prior to the meetings that is
contained in books with colorful names. The information that is released to the public
prior to the meetings is from the:
A. blue book only.
B. beige book only.
C. blue and green books, but not the teal book.
D. beige and blue books but not the green book.
Answer:
The Chairman of the FOMC is:
A. the Secretary of the Treasury.
B. the Vice-Chairman of the Board of Governors.
C. the Chairman of the Board of Governors.
D. the President of the New York Fed.
Answer:
Suppose that in a barter economy Tom bakes bread and Hans produces chocolates. Tom
wants chocolates but Hans doesn’t like bread, so Hans is unwilling to trade with Tom.
Tom’s problem is an example of which problem associated with a barter system?
A. Too much specialization
B. Not enough prices
C. The law of diminishing returns
D. The double coincidence of wants problem
Answer:
Financial institutions:
A. raise the level of transaction costs relating to borrowing/lending.
B. can lower the information asymmetry involved with borrowing/lending.
C. decrease the liquidity to savers.
D. are required for all financial transactions.
Answer:
Evidence points out that since the mid-1950’s just about every recession was preceded
by rising interest rates. This suggests that the recessions were:
A. caused in part by the actions of the Federal Reserve.
B. the result of changes in consumer confidence.
C. due to increases in oil prices and other production costs.
D. caused by simultaneous shifts in aggregate demand and aggregate supply.
Answer:
The payoff method used by the FDIC to address the insolvency of a bank is when the
FDIC:
A. pays the owners of the bank for the losses they would otherwise face.
B. pays off all depositors the balances in their accounts so no depositor suffers a loss,
though the owners of the bank may suffer losses.
C. pays off the depositors up to the current $250,000 limit, so it is possible that some
depositors will suffer losses.
D. takes all of the assets of the bank, sells them, pays off the liabilities of the bank, in
full and then replenishes their fund with any remaining balance.
Answer:
A $1,000 face value bond purchased for $965.00, with an annual coupon of $60, and 20
years to maturity has a:
A. current yield equal to 6.22%.
B. current yield equal to 6.00%.
C. coupon rate equal to 6.22%.
D. yield to maturity and current yield equal to 6.00%.
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:
Private mortgage insurance is usually required in situations where:
A. the lender feels the buyers have overpaid for the house.
B. the buyers have no down payment.
C. the buyers have a down payment less than 20 percent of the purchase price.
D. in the lenders’ view the buyers do not have adequate monthly income to handle the
mortgage payment.
Answer:
Which of the following statements is not true?
A. Home mortgage loans are secured loans.
B. Credit card loans are secured.
C. Most automobile loans are secured loans.
D. Secured loans usually carry less risk than unsecured loans.
Answer:
When the Fed makes a discount loan, the impact on the Banking System’s balance sheet
will reflect:
A. an increase in liabilities with no change in assets.
B. an increase in assets and a decrease in liabilities.
C. a decrease in assets and an increase in liabilities.
D. an increase in assets and liabilities.
Answer:
A non-transaction deposit would include each of the following, except:
A. a savings account.
B. a checking account.
C. a passbook savings account.
D. a certificate of deposit.
Answer:
The Nasdaq Composite Index is:
A. a value-weighted index.
B. a price-weighted index.
C. made up of over 5000 companies traded on the NYSE.
D. made of mainly older firms and is heavily weighted by manufacturing.
Answer:
Which of the following expresses 5.5%?
A. 0.0055
B. 5.50
C. 0.550
D. 0.0550
Answer:
Loans made between borrowers and lenders are:
A. liabilities to the lenders and assets to the borrowers since the borrower obtains the
funds.
B. assets to the lenders and liabilities of the borrowers since the promises are made to
the lenders.
C. not part of either parties’ assets or liabilities until the loans are repaid.
D. liabilities to both the lenders and the borrowers.
Answer:
The tendency for large banks to have a higher return on equity than small banks
suggests:
A. small banks have better management than large banks.
B. large banks can charge higher interest rates than small banks.
C. there could be significant economies of scale in banking.
D. larger banks are better able to escape the cost of regulation.
Answer:
If the economy is producing a level of output that is consistent with the potential output
level, and government purchases increase, describe what happens in terms of the
long-run real interest rate, and why, to keep the economy at its potential output level.
Answer:
You hear someone claim that stocks are less risky than bonds. What possible evidence
could this person offer for such a claim?
Answer:
Why do yield curves usually slope upward?
Answer:
You study horse racing avidly and discover for this year’s Kentucky Derby you think
you have the field pretty well figured out. In fact, you calculate the expected return and
it is the same as the expected return you are getting from the stock market. Is this
investment in the race valuable to you?
Answer:
Could the holding period return ever be less than the yield to maturity? Explain.
Answer:
Considering the foreign exchange market, identify four causes for an increase in the
supply of dollars.
Answer:
Define the components of the CAMELS criteria and explain how a CAMELS rating is
calculated.
Answer:
Since 2002, the Fed has set the primary discount rate at 100 basis points above the
target federal funds rate. Why is this likely to prevent the spikes in the market federal
funds similar to the ones that occurred in previous years?
Answer:
Identify four factors that will cause the value of call options to increase.
Answer:
What role, if any, did the accounting scandals involving some U.S. companies in 2001
and 2002 play in the supply of loans?
Answer:
In what way(s) can a pension plan be seen as the opposite of life insurance?
Answer:
What should be the impact on a bank’s return on assets and return on equity from
increased use of off-balance-sheet activities?
Answer:
The chapter seems to imply that the direct influence of short-term interest rate changes
by central bankers is not that powerful in terms of their direct impact on spending. Why
then do so many people pay attention to the monetary policy?
Answer:
If monetary policymakers do not want the current inflation rate to increase, yet they
observe increasing aggregate demand from higher government purchases, will they
have to accept a higher inflation target? Explain.
Answer:
Discuss the inefficiencies that can be caused by stock market bubbles, especially
focusing on firms and consumers.
Answer:
Identify the five core principles of Money and Banking.
Answer:
Explain the changes that would cause the dynamic aggregate demand curve to shift.
Answer: