1) When the exchange rate for the British pound changes from $1.80 per pound to $1.60
per pound, then, holding everything else constant, the pound has ________ and
________ expensive.
A) appreciated; British cars sold in the United States become more
B) appreciated; British cars sold in the United States become less
C) depreciated; American wheat sold in Britain becomes more
D) depreciated; American wheat sold in Britain becomes less
2) Although the dominance of ________ over ________ is clear in all countries, the
relative importance of bond versus stock markets differs widely.
A) financial intermediaries; securities markets
B) financial intermediaries; government agencies
C) government agencies; financial intermediaries
D) government agencies; securities markets
3) The sum of the current yield and the rate of capital gain is called the
A) rate of return
B) discount yield
C) pertuity yield
D) par value
4) Since Social Security benefits are paid from current contributions, the system is a
A) privatized system
B) overfunded system
C) “pay-as-you-go” system
D) defined contribution system
5) Budgets deficits can be a concern because they might
A) ultimately lead to higher inflation
B) lead to lower interest rates
C) lead to a slower rate of money growth
D) lead to higher bond prices
6) ________ in the expected future domestic exchange rate causes the demand for
domestic assets to increase and the domestic currency to ________, everything else
held constant.
A) An increase; appreciate
B) An increase; depreciate
C) A decrease; appreciate
D) A decrease; depreciate
7) The most liquid securities traded in the capital market are
A) corporate bonds
B) municipal bonds
C) U.S. Treasury bonds
D) mortgage-backed securities
8) The “Greenspan doctrine” – central banks should not try to prick bubbles – was based
on which of the following arguments?
A) Asset-price bubbles are nearly impossible to identify
B) Monetary actions would be likely to affect asset prices in general, rather than the
specific assets that are experiencing a bubble
C) Raising interest rates has often been found to cause a bubble to burst more severely
D) Monetary policy actions to prick bubbles can have harmful effects on the aggregate
economy
E) all of the above
9) Suppose that from a new checkable deposit, First National Bank holds eight million
dollars on deposit with the Federal Reserve, nine million dollars in excess reserves, and
faces a required reserve ratio of ten percent. Given this information, we can say First
National Bank has ________ million dollars in vault cash.
A) one
B) two
C) nine
D) ten
10) If an individual uses money from a demand deposit account to purchase a U.S.
savings bond,
A) M1 decreases and M2 stays the same
B) M1 stays the same and M2 increases
C) M1 stays the same and M2 stays the same
D) M1 decreases and M2 decreases
11) A central bank’s attempt to prevent an appreciation of its currency can stimulate
domestic inflation if the ________ of foreign currencies leads to ________ international
reserves which ________ the monetary base.
A) purchase; higher; increases
B) purchase; lower; decreases
C) sale; lower; decreases
D) sale; higher; increases
12) Everything else held constant, an increase in the riskiness of bonds relative to
alternative assets causes the demand for bonds to ________ and the demand curve to
shift to the ________.
A) rise; right
B) rise; left
C) fall; right
D) fall; left
13) Because borrowers, once they have a loan, are more likely to invest in high-risk
investment projects, banks face the
A) adverse selection problem
B) lemon problem
C) adverse credit risk problem
D) moral hazard problem
14) Because Treasury bills pay a higher return than money and have no risk
A) the transactions demand for money may be zero
B) the precautionary demand for money may be zero
C) the speculative demand for money may be zero
D) all three of the above motives for holding money will be zero
15) In the market for reserves, a lower interest rate paid on excess reserves
A) decreases the supply of reserves
B) increases the supply of reserves
C) decreases the effective floor for the federal funds rate
D) increases the effective floor for the federal funds rate
16) A bank will want to hold more excess reserves (everything else equal) when
A) it expects to have deposit inflows in the near future
B) brokerage commissions on selling bonds increase
C) the cost of selling loans falls
D) the discount rate decreases
17) Financing government spending with taxes
A) causes both reserves and the monetary base to rise
B) causes both reserves and the monetary base to decline
C) causes reserves to rise, but the monetary base to decline
D) has no net effect on the monetary base
18) Suppose that from a new checkable deposit, First National Bank holds two million
dollars in vault cash, one million dollars in required reserves, and faces a required
reserve ratio of ten percent. Given this information, we can say First National Bank has
________ million dollars in excess reserves.
A) one
B) two
C) nine
D) ten
19) Assuming the same coupon rate and maturity length, when the interest rate on a
Treasury Inflation Protected Security is 3 percent, and the yield on a nonindexed
Treasury bond is 8 percent, the expected rate of inflation is
A) 3 percent
B) 5 percent
C) 8 percent
D) 11 percent
20) Reducing risk through the purchase of assets whose returns do not always move
together is
A) diversification
B) intermediation
C) intervention
D) discounting
21) ________ is a process of bundling together smaller loans (like mortgages) into
standard debt securities.
A) Securitization
B) Origination
C) Debt deflation
D) Distribution
22) Since 1980
A) bank profitability has declined
B) banks have offset the decline in profits from traditional activities with increased
income from off-balance-sheet activities
C) banks have offset the decline in profits from off-balance-sheet activities with
increased income from traditional activities
D) bank profits have grown rapidly due to deregulation
23) If you have a very low tolerance for risk, which of the following bonds would you
be least likely to hold in your portfolio?
A) a U.S. Treasury bond
B) a municipal bond
C) a corporate bond with a rating of Aaa
D) a corporate bond with a rating of Baa
24) If the maturity of a debt instrument is less than one year, the debt is called
A) short-term
B) intermediate-term
C) long-term
D) prima-term
25) The Bush tax cut reduced the top income tax bracket from 39% to 35% over a
ten-year period. Supply and demand analysis predicts the impact of this change was a
________ interest rate on municipal bonds and a ________ interest rate on Treasury
bonds.
A) higher; lower
B) lower; lower
C) higher; higher
D) lower; higher
26) In the simple deposit expansion model, a decline in checkable deposits of $1,000
when the required reserve ratio is equal to 10 percent implies that the Fed
A) sold $1,000 in government bonds
B) sold $100 in government bonds
C) purchased $1,000 in government bonds
D) purchased $100 in government bonds