Select the answer which best completes the following statement: “at any point along the
long-run aggregate supply curve”
A. expected inflation equals current inflation and current output is below potential
output.
B. the economy is moving toward its potential output level.
C. current output equals potential output and expected inflation equals current
inflation.
D. expected inflation is moving toward current inflation.
Answer:
Negative supply shocks cause shifts in:
A. only the short-run aggregate supply curve.
B. the dynamic aggregate demand curve.
C. the monetary policy reaction curve but only if policymakers do not change their
inflation target.
D. the short-run aggregate supply curve and, possibly, the long-run aggregate supply
curve.
Answer:
One valuable lesson investors should learn from the stock market behavior during the
late 1990s and early 2000s is that the Fed:
A. can control the stock market.
B. can reduce the idiosyncratic risk of investing but not the systematic risk.
C. can eliminate the risk from investing.
D. cannot prevent a stock market decline.
Answer:
Accounts receivable loans provided by finance companies provide firms with:
A. start-up capital.
B. the ability to turn a liability into an asset.
C. the ability to turn a relatively illiquid asset into liquidity.
D. inventory loans.
Answer:
You have savings accounts at two separately FDIC insured banks. At one of the banks
your account has a balance of $200,000. At the other bank the account balance is
$60,000. You find out the banks are going to merge. If you are concerned about the
possibility of the new bank failing, you should:
A. do nothing; you are still insured up $250,000 per account.
B. consider moving $10,000 to another account at the same bank.
C. consider moving $10,000 to another account at a different bank.
D. do nothing; as an individual you are only insured up $250,000 no matter where the
accounts are.
Answer:
Holding liquidity and default risk constant, an investor earning 6% from a tax-exempt
bond who is in a 25% tax bracket would be indifferent between that bond and a taxable
bond with a(n):
A. 8% yield.
B. 4.5% yield.
C. 6.25% yield.
D. 7.5% yield.
Answer:
Regulators and supervisors of banks are challenged by all of the following, except:
A. globalization of financial services.
B. the use of new financial instruments that shift risk without shifting ownership.
C. technological innovation.
D. reinforcement by Congress of functional and geographic barriers in banking.
Answer:
Which formula below best expresses the real interest rate, (r)?
A. i = r – πe
B. r = i + πe
C. r = i – πe
D. πe = i + r
Answer:
An increase in potential output will result in:
A. a temporary expansionary gap.
B. a higher rate of inflation eventually.
C. a temporary recessionary gap.
D. an immediate shift upward in the short-run aggregate supply curve.
Answer:
The Fed could make the market federal funds rate equal the target rate by:
A. mandating that all loans be transacted at the target rate.
B. setting the discount rate below the federal funds rate.
C. entering the federal funds market as a borrower or a lender.
D. paying higher interest on reserves.
Answer:
If the probability of an outcome equals one, the outcome:
A. is more likely to occur than the others listed.
B. is certain to occur.
C. is certain not to occur.
D. has unquantifiable risk.
Answer:
Consider the price paid for debt issued by the State of California. Which of the
following would lead to a decrease in the value of State of California bonds?
A. The State of California bonds are in small dollar amounts.
B. The State of California bonds have a shorter maturity.
C. The State of California experiences a fiscal crisis that makes it less likely it will be
able to honor its interest payments.
D. The State of California pays back its previous bonds ahead of schedule.
Answer:
Which of the following statements is most correct?
A. Financial regulators do everything possible to encourage competition in banking.
B. Financial regulators work to prevent monopolies but also work to prevent strong
competition in banking.
C. Financial regulators discourage competition in banking.
D. Financial regulators prefer banks to have monopoly power in their geographic
markets.
Answer:
During most of the 1970s, officials at the Fed:
A. overestimated inflation and underestimated the growth rate of potential GDP.
B. overestimated the growth rate of potential GDP and underestimated inflation.
C. underestimated both the growth rate of output and inflation.
D. overestimated both the growth rate of potential GDP and inflation.
Answer:
The interest-rate channel of monetary policy transmission appears to be:
A. weak because the investment component of total spending isn’t very sensitive to
interest rates.
B. weak because the investment component of total spending is very sensitive to
interest rates.
C. strong because the investment component of total spending isn’t very sensitive to
interest rates.
D. strong because the investment component of total spending is very sensitive to
interest rates.
Answer:
Under the Liquidity Premium Theory, if investors expect short-term interest rates to
remain constant, the yield curve should:
A. have a positive slope.
B. have a negative slope.
C. be flat.
D. have an increasing slope.
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:
Firms have a harder time getting loans during periods of deflation because:
A. deflation aggravates information problems in ways dissimilar to inflation.
B. for a firm seeking a loan, deflation increases the real amount of their liabilities
without increasing the real value of their assets.
C. deflation decreases the net worth of firms.
D. all of the answers given are correct.
Answer:
Which of the following best expresses the formula for determining the price of a U.S.
Treasury bill that matures n periods from now per $100 of face value when the interest
rate is i?
A. $100/(1 + i)n
B. $100(1 + i)
C. $100/(1 + i)
D. 1 + $100/(1 + i)n
Answer:
When healthy banks fail due to widespread bank panics, those who are likely to be hurt
are:
A. government regulators.
B. households and small businesses.
C. the FDIC.
D. the Federal Reserve.
Answer:
Investing in financial instruments in today’s economy:
A. is an activity practiced only by the wealthy.
B. involves costly transactions.
C. requires a relatively large sum of money to invest (more than $100,000).
D. is made easier by the use of mutual funds.
Answer:
If money growth and real output growth are both zero, the change in the price level
will:
A. also be zero.
B. equal the percentage change in velocity.
C. be indeterminate.
D. be the inverse of the percentage change in velocity.
Answer:
If each company that made up the Dow Jones Industrial Average increased the number
of their shares outstanding by 10%, but the share prices did not change, the value of the
index would:
A. not change.
B. increase by 10%.
C. increase, but by less than 10%.
D. decrease since there are more shares outstanding.
Answer:
The purchasing power of money:
A. rises when inflation rises.
B. decreases as the price level decreases.
C. decreases with inflation.
D. is not impacted by inflation, only by monetary policy.
Answer:
Assume the Expectations Hypothesis regarding the term structure of interest rates is
correct. If the current one-year interest rate is 3% and the one-year-ahead expected
one-year interest rate is 5%, then the current two-year interest rate should be:
A. 3%.
B. 5%.
C. 4%.
D. 8%.
Answer:
The forward exchange rate:
A. is the rate at which foreign exchange dealers are willing to commit today to buying
or selling a currency in the future.
B. is a synonymous term for the nominal exchange rate.
C. is the same as the spot rate.
D. is always above the spot rate since it carries greater risk.
Answer:
An investment carrying a current cost of $120,000 is going to generate $50,000 of
revenue for each of the next three years. To calculate the internal rate of return we need
to:
A. calculate the present value of each of the $50,000 payments and multiply these and
set this equal to $120,000.
B. find the interest rate at which the present value of $150,000 for three years from
now equals $120,000.
C. find the interest rate at which the sum of the present values of $50,000 for each of
the next three years equals $120,000.
D. subtract $120,000 from $150,000 and set this difference equal to the interest rate.
Answer:
Tom deposits funds in his savings account at the bank which is paying 3.5% interest. If
he keeps his funds in the bank for one year he will have $155.25. What amount is Tom
depositing?
A. $151.75
B. $150.00
C. $148.75
D. $147.50
Answer:
If real GDP stays the same but the price level increases:
A. nominal money demand should remain the same.
B. nominal money demand should decrease.
C. nominal money demand should increase.
D. real money demand should decrease.
Answer:
Which of the following could cause a stock market bubble?
A. Changes in the real interest rate
B. Better enforcement of insider trading laws
C. Investor euphoria
D. Changes in dividends
Answer:
Which of the following is true of interest-rate risk?
A. It is the risk that the coupon rate for a bond will change, affecting current
bondholders’ coupon payments.
B. It refers to the probability that a borrower will default on debt obligations.
C. It is the risk that the face value of a bond will change before maturity.
D. Individuals owning long-term bonds are exposed to greater interest-rate risk.
Answer:
An increase in the real interest rate on U.S. bonds, everything else equal, will have the
following impact on the foreign exchange market:
A. the demand for dollars will decrease.
B. the supply of dollars will increase.
C. the dollar will depreciate relative to foreign currencies.
D. the demand for dollars will increase.
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:
The primary difference in certificates of deposit (CDs) that are equal to or less than
$100,000 and those over $100,000 (other than the amount) is:
A. a bank does not have to include CDs equal to or less than $100,000 in its liabilities.
B. CDs greater than $100,000 are negotiable and therefore can be bought and sold.
C. CDs equal to or less than $100,000 are issued for only six months or less.
D. CDs greater than $100,000 are issued for only six months or less.
Answer:
As a portion of total assets measured in billions of dollars, the least important asset on
the Fed’s balance sheet is:
A. gold.
B. securities.
C. foreign exchange reserves.
D. loans.
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Identify the six parts of the financial system.
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