Taxes play an important role in bond returns because:
A. all interest from owning bonds is taxed.
B. all governments (federal, state, municipal) tax bonds similarly.
C. some bond interest is exempt from some government taxation, so after tax returns
across bonds can vary considerably.
D. only U.S. Treasury bonds are tax-exempt, so investors should always seek higher
returns from other bonds.
Answer:
The fact that many companies employ supervisors to oversee the actions of workers is a
way to treat:
A. moral hazard.
B. adverse selection.
C. the law of diminishing returns.
D. the free-rider problem.
Answer:
Mom’s Bakery goes out of business due to decreasing sales resulting from the dramatic
increase in people on low carbohydrate diets. The decrease in business also results in
Mom’s defaulting on the loan they have with the bank. This is an example of:
A. lack of perfect information in financial markets.
B. asymmetric information in financial markets.
C. moral hazard in financial markets.
D. symmetric information in financial markets.
Answer:
Commercial paper refers to:
A. the financial publications read by the CEO’s of public corporations.
B. any debt security with a maturity exceeding one year.
C. short-term collateralized securities issued only by corporations.
D. unsecured short-term debt issued by corporations and governments.
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 U.S. government’s borrowing needs increase, in the bond market this would be
seen as:
A. the bond demand curve shifting right.
B. a movement up the bond supply curve.
C. the bond demand curve shifting left.
D. the bond supply curve shifting right.
Answer:
The European Central Bank has ensured independence by appointing Executive Board
members for:
A. life.
B. eight-year non-renewable terms.
C. fourteen-year terms.
D. twenty-year terms.
Answer:
An individual who stores wealth in art rather than money will find that he/she:
A. suffers larger real losses during periods of high inflation.
B. has far more liquidity than most savers.
C. will incur higher transaction costs when he/she ultimately makes purchases.
D. will have to resort to barter exchanging the art for desired goods.
Answer:
If prices and wages are slow to adjust (‘sticky,” rather than flexible):
A. inflation would adjust rapidly.
B. output gaps would disappear quickly.
C. inflation would adjust to output gaps sluggishly.
D. the short-run aggregate supply curve would not shift.
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:
Each of the following is a transmission channel of monetary policy, except:
A. the balance-sheet channel.
B. the tax-impact channel.
C. the asset-price channel.
D. the exchange-rate channel.
Answer:
A bank faces foreign exchange risk when:
A. it has assets denominated in one currency and liabilities in another.
B. it lends to foreign borrowers because they are less likely to repay a U.S. bank.
C. foreign governments restrict dollar-denominated payments.
D. it has branches in other countries.
Answer:
If the Fed decides to control the euro/dollar exchange rate:
A. they will also have to control the domestic interest rate.
B. they will have to control the amount of banking system reserves.
C. the market will determine the interest rate.
D. they will have to control the domestic rate of inflation or it won’t work.
Answer:
Comparing checks and currency, we can say:
A. both are money but only currency is legal tender.
B. only checks are both money and legal tender.
C. a check isn’t money but currency is.
D. both are money and legal tender.
Answer:
If an American traveling abroad can obtain 115 euros for $100 U.S. the current euro per
$ exchange rate is:
A. 0.870 euros/$.
B. 1.15 euros/$.
C. 115 euros/$.
D. 1 euro/1.15$.
Answer:
Most economists view capital controls:
A. unfavorably.
B. unfavorably, emphasizing their harmful effects on developing countries.
C. favorably, since this is the main way for countries to exploit their comparative
advantage.
D. favorably, since having them makes capital markets more efficient.
Answer:
If interest rates are expected to rise, the bond prices will:
A. not change until interest rates actually change.
B. fall, due to the demand for bonds decreasing.
C. rise, as people seek capital gains.
D. move in the same direction as the expected change in interest rates.
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:
Increases in potential output shift:
A. the long-run aggregate supply curve.
B. the short-run aggregate supply curve.
C. both the long-run aggregate supply curve and the short-run aggregate supply curve.
D. the long-run aggregate supply curve, the short-run aggregate supply curve, and the
dynamic aggregate demand curve.
Answer:
Each of the following is a transmission channel of monetary policy, except:
A. the household net worth channel.
B. the Treasury Securities channel.
C. the asset-price channel.
D. the exchange-rate channel.
Answer:
Money aggregates can best be defined as a set of measures of the amount of:
A. money that exists at a particular point in time.
B. money the Federal Reserve has on deposit as reserves.
C. money available to the economy over a year.
D. U.S. currency the Bureau of Printing and Engraving has produced.
Answer:
High oil prices tend to harm the auto industry and benefit oil companies; therefore, high
oil prices are an example of:
A. systematic risk.
B. idiosyncratic risk.
C. neither systematic nor idiosyncratic risk.
D. both systematic and idiosyncratic risk.
Answer:
In September of 2000, the Federal Reserve Bank of New York sold dollars in exchange
for euro. To keep the federal funds rate on target, the Open Market desk:
A. sold U.S. Treasury bonds.
B. bought U.S. Treasury bonds.
C. bought dollars.
D. sold dollars.
Answer:
Suppose Tom receives a one-year loan from ABC Bank for $5,000.00. At the end of the
year, Tom repays $5,400.00 to ABC Bank. Assuming the simple calculation of interest,
the interest rate on Tom’s loan was:
A. $400
B. 8.00%
C. 7.41%
D. 20%
Answer:
The government’s too-big-to-fail policy applies to:
A. certain highly populated states where a bank run impacts a large percent of the total
population.
B. large banks whose failure would start a widespread panic in the financial system.
C. large corporate payroll accounts held by some banks where many people would lose
their income.
D. banks that have branches in more than two states.
Answer:
Any central bank policy that influences the domestic interest rate will:
A. have no effect on the exchange rate if exchange rates are flexible.
B. have an effect on the exchange rate.
C. not impact the supply of and demand for the domestic currency if exchange rates are
flexible.
D. be compatible with fixed exchange rates.
Answer:
For several years before the crisis of 2007-2009, people in U.S. business and
government called for China to move away from its fixed-exchange rate regime
because:
A. its pegged value was far below purchasing power parity estimates.
B. its pegged value was far above purchasing power parity estimates.
C. it was adding to China’s current account deficit.
D. it was exporting its inflation to the United States.
Answer:
The monetary policy transmission mechanism refers to the concept that monetary
policy:
A. always seems to work the way central bankers think it will.
B. works quickly.
C. only works through changes consumption and investment.
D. affects the economy in potentially many ways.
Answer:
Explain why a company offering homeowners insurance policies would want to insure
homes across a wide geographic area.
Answer:
You start with a portfolio valued at $500. Over the next twelve months it loses 40%; the
following year it has a gain of 30%. At the end of two years your portfolio is worth:
A. $390.
B. $450.
C. $300.
D. $410.
Answer:
A country that suffers from bouts of high inflation and wants to fix its exchange rate
should tie its currency to the currency of a:
A. country with a strong reputation for low inflation.
B. larger country.
C. country with similar inflation performance.
D. country that is still on the gold standard.
Answer:
Which of the following statements best describes the level of potential output in the
U.S.?
A. It never changes year to year
B. It is very erratic year to year
C. It usually increases year to year
D. It has been decreasing since 1999
Answer:
What is the relationship between a nation’s monetary and fiscal policy and its exchange
rate?
Answer:
Why might a life insurance company insist on an individual having a physical exam
before agreeing to provide life insurance to the individual?
Answer:
Why did the FOMC cut the target federal funds rate so aggressively between January
and November of 2001 when most measures of economic activity showed that the
economy was already rebounding from the recession earlier in the year?
Answer:
Explain why countries that have volatile inflation rates are likely to have high nominal
interest rates.
Answer:
A basket of goods cost $100 in the U.S. and £65 in the United Kingdom. If Purchasing
Power Parity holds, what is the dollar-pound exchange rate?
Answer:
Explain why credit cards are not considered money even though people seem to use
them like money.
Answer:
What are the determinants of the potential output for an economy?
Answer:
As the end of the year 1999 approached, many people worried that banks and more
specifically the banks’ computers would not be able to read the year 2000 correctly.
This was commonly known as the Y2K problem. Many people were concerned that
their bank would lose the record of their deposits etc., and made plans to take most of
their funds out of the bank. Address the potential Y2K problem from the standpoint of
bank risk. What two types of risk potentially could have been involved?
Answer:
Discuss why the discount rate may be considered a penalty rate of interest charged to
banks.
Answer:
Given the prevalence of electronic payment mechanisms like credit cards and debit
cards and the safety of checks, why is the amount of currency in the hands of the public
increasing?
Answer:
In the data, we observe that countries with high inflation rates tend to have high
nominal interest rates. What does this imply, if anything, about real interest rates in
countries with very high inflation rates?
Answer:
Calculate the expected value, the expected return, the variance and the standard
deviation of an asset that requires a $1000 investment, but will return $850 half of the
time and $1,250 the other half of the time.
Answer:
You make a $1,000 investment in the stock of ABC Inc. Over the next year the
investment decreases by 60%. What percentage increase do you need in the following
year on your holding to be back to $1,000?
Answer:
Economists are fond of calculating measures of elasticity. If we calculate the income
elasticity of money as the %ΔM/%ΔPY, where M is the quantity of money held and PY
is nominal income, would you suspect the coefficient to be positive, negative or zero?
Will the absolute value be greater or less than 1? Be sure to explain your choices.
Answer:
Chapter 15 laid out the criteria for an effective central bank. Two of these criteria
focused on accountability and transparency. How is accountability achieved for the
Federal Reserve and is it clear?
Answer:
What would be the standard deviation for a $1000 risk-free asset that returns $1,100?
Answer:
How did information asymmetries in the home mortgage market contribute to the
financial crisis of 2007-2009?
Answer:
The paper-bill spread refers to the interest rate spread between commercial paper and
Treasury bills with the same maturity. Is this a risk spread or a term spread? How do
you expect the paper-bill spread is related to GDP growth? What is the intuition for this
result? What does this imply about the yield curve?
Answer:
Explain why a forward contract may actually carry more risk than a futures contract.
Answer: