In a financial market where information is symmetric:
A. there would be moral hazard.
B. one party to a transaction knows information the other party does not.
C. the ability to obtain information is available to only one party.
D. there would be no adverse selection.
Answer:
An individual who neither uses nor produces a commodity but sells a futures contract
for the asset is:
A. speculating that the price of the commodity is going to fall.
B. speculating that the price of the commodity is going to increase.
C. hedging trying to transfer risk.
D. using arbitrage to earn profits without taking a risk.
Answer:
If the U.S. government’s borrowing needs decrease, all other factors constant the:
A. supply of bonds will increase.
B. demand for bonds will decrease.
C. price of bonds will decrease.
D. price of bonds will increase.
Answer:
When a currency is described as undervalued, this typically implies:
A. it is undervalued relative to what the describer believes purchasing power parity to
be.
B. it is undervalued relative to the exchange rate set by the nation’s central bank.
C. the exchange rate is greater than one.
D. the exchange rate is lower than one year previous.
Answer:
During the period of October 1979 to October 1982; the FOMC’s primary operating
target resulted in:
A. the most stable period for the federal funds rate in history.
B. reserves being highly volatile.
C. the federal funds rate experiencing high volatility.
D. the federal funds rate dropping to 2 percent (an all-time low to that date) and not
rising above 3 percent.
Answer:
M1 is:
A. a more useful measure of the relationship between the money supply and inflation
because it includes the most liquid assets.
B. the money supply the Federal Reserve pays the most attention to in conducting
monetary policy.
C. less useful than M2 for understanding inflation.
D. the fastest growing of all of the money aggregates.
Answer:
An increase in aggregate demand with no adjustment in monetary policy will result in:
A. an increase in potential output and higher inflation.
B. a decrease in potential output and higher inflation.
C. no change in potential output but higher inflation.
D. no change in inflation.
Answer:
Insurance companies perform all of the following functions performed by financial
intermediaries except:
A. transferring risk.
B. pooling the resources of small savers.
C. making large investments.
D. supplying liquidity.
Answer:
A flight to quality refers to a move by investors:
A. away from bonds towards stocks.
B. towards securities of other countries and away from U.S. Treasuries.
C. towards precious metals and away from U.S. Treasury bonds.
D. away from low-quality bonds towards high-quality bonds.
Answer:
If the nominal interest rate increases:
A. the cost of holding money decreases.
B. the cost of holding money increases.
C. the velocity of money should decrease.
D. the cost of holding money increases and the velocity of money should decrease.
Answer:
The Federal Reserve Act explicitly requires that the Board of Governors represents each
of the following, except:
A. commercial interests.
B. foreign interests.
C. financial interests.
D. agricultural interests.
Answer:
Suppose that you purchase a Korean government bond and the number of won needed
to purchase one dollar increases. Your return on the bond:
A. decreases by the amount of the dollar’s appreciation.
B. decreases by more than the amount of the dollar’s appreciation.
C. decreases by less than the amount of the dollar’s appreciation.
D. increases by the amount of the dollar’s appreciation.
Answer:
Requiring that borrowers put up collateral to obtain a loan is a tool designed to treat:
A. the Lemons Problem.
B. the problem of adverse selection.
C. the problem of moral hazard.
D. the free-rider problem.
Answer:
Which of the following is an example of a financial market?
A. A local coffeehouse where people regularly buy and sell financial instruments.
B. A bank that only accepts deposits and issues loans.
C. An electronic network used for buying and selling textbooks.
D. A central bank used for raising taxes and borrowing on behalf of the government.
Answer:
Today, most central banks announce their policy actions:
A. one year after the policy is put in place.
B. almost immediately.
C. within a 3 to 5 year “window”.
D. usually six months after the policy is put in place.
Answer:
If a zero-coupon bond sells for par, the nominal interest rate on that bond is:
A. 100 percent.
B. negative.
C. zero.
D. infinity.
Answer:
Lloyd’s of London has a reputation for insuring:
A. only low risk stable enterprises.
B. unique and sometimes very odd situations.
C. only physical structures to minimize the risks to their underwriters.
D. only marine-related risks.
Answer:
The idea that central banks should be independent of political pressure is an idea that:
A. has been around since there were central banks.
B. is relatively new.
C. every central bank was founded upon.
D. became quite popular in the early 1900s.
Answer:
If the target federal funds rate reaches zero:
A. the FOMC would run out of policy options.
B. monetary policy would no longer be of use.
C. the FOMC would turn to unconventional measures, such as forward guidance.
D. the FOMC would simply reset the target.
Answer:
One reason lenders usually require a lot of information from loan applicants is to
avoid:
A. the problems of moral hazard.
B. the problem of adverse selection.
C. being harmed by symmetric information.
D. charges of discrimination in lending.
Answer:
If monetary policymakers fear a recession resulting from increased pessimism on the
part of business people, and they want to avoid the recession, they would:
A. shift the monetary policy reaction curve to the right.
B. shift the monetary policy reaction curve to the left.
C. likely lower their target rate for inflation.
D. encourage fiscal policymakers to act.
Answer:
Compound interest means that:
A. you get an interest deduction for paying your loan off early.
B. you get interest on interest.
C. you get an interest deduction if you take out a loan for longer than one year.
D. interest rates will rise on larger loans.
Answer:
Member countries of the Eurosystem agree to:
A. pursue independent domestic monetary policies based on what is best for their own
country, but not all member countries have adopted the euro as their currency.
B. share a common monetary policy and fiscal policy.
C. use the euro as their currency, but each country still pursues an independent
monetary policy.
D. share a common monetary policy and use the euro as their currency.
Answer:
Based on the membership of the Eurosystem in 2014, the median country is likely to
be:
A. very large.
B. fairly small.
C. Italy.
D. growing more rapidly than the others.
Answer:
A bank’s reserves include:
A. vault cash.
B. U.S. Treasury Securities.
C. the bank’s loan portfolio.
D. U.S. Treasury bills and vault cash.
Answer:
Forward contracts are:
A. an agreement between more than two parties.
B. contracts usually involving the exchange of a commodity or financial instrument.
C. always standardized.
D. easily resold.
Answer:
Since 1950, the U.S. economy has likely experienced:
A. more periods of deflation than disinflation.
B. more periods of disinflation than deflation.
C. an equal number of periods of deflation and disinflation since they are synonymous.
D. none of the answers provided is correct.
Answer:
Bank A has checkable deposits of $100 million, vault cash equaling $1 million and
deposits at the Fed equaling $14 million. If the required reserve rate is ten percent what
is the maximum amount Bank A could lend?
A. $85 million
B. $15 million
C. $14 million
D. $5 million
Answer:
As a company issues more debt:
A. its leverage decreases.
B. the share of financing from equity increases.
C. the expected return to equity holders falls.
D. risk increases.
Answer:
A long-standing goal of financial regulators has been to:
A. prevent banks from growing too big and powerful.
B. minimize the competition that banks face.
C. encourage banks to grow as large as possible.
D. discourage small rural banks.
Answer:
If monetary policymakers do not want an increase in government purchases, which
increases aggregate demand, to cause an increase in inflation, they would:
A. shift the monetary policy reaction curve to the right, raising inflation at every real
interest rate.
B. do nothing and let the economy’s self-correcting mechanism work.
C. shift the monetary policy reaction function left, increasing the real interest rate at
every rate of inflation.
D. increase the growth rate of money.
Answer:
A share of Microsoft stock would best be described as which of the following?
A. A derivative instrument
B. A means of payment
C. An underlying instrument
D. A debt instrument
Answer:
If Bank A sells a $100,000 U.S. Treasury bond to the Fed, Bank A’s excess reserves
will:
A. increase by less than $100,000.
B. not change.
C. decrease by less than $100,000.
D. increase by $100,000.
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