Governments employ three strategies to contain the risks created by government safety
nets. These include each of the following, except:
A. government supervision.
B. an excise tax on bank profits.
C. government regulation.
D. formal bank examination.
Answer:
The components of the formula for the Taylor rule includes each of the following,
except:
A. the target federal funds rate.
B. the current inflation rate.
C. the 30-year U.S. Treasury bond rate.
D. the inflation gap.
Answer:
Mom’s Pizzeria goes out of business due to a dramatic decrease in sales from a local
newspaper article highlighting the fact that Mom’s Pizzeria has been purchasing expired
meat from a distributor at cut rate prices for years. The decrease in business also results
in Mom’s defaulting on the loan they have with the bank. This is an example of:
A. symmetric information in the financial markets.
B. perfect information in the financial markets.
C. asymmetric information in the financial markets.
D. perfect information in the pizza market.
Answer:
A bank’s assets tend to be long-term while its liabilities are short-term. Therefore, when
interest rates rise, the value of the bank’s assets:
A. increases by more than the value of its liabilities.
B. will decrease by more than the value of its liabilities.
C. increases and the value of its liabilities decreases.
D. decreases and the value of its liabilities increases.
Answer:
An increase in the price of oil should cause the short-run aggregate supply curve to:
A. shift to the right.
B. become vertical.
C. become horizontal.
D. shift to the left.
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:
An investor practicing hedging would be most likely to:
A. avoid the stock market and focus on bonds.
B. purchase shares in general motors and buy U.S. treasury bonds.
C. purchase shares in general motors and Amoco oil.
D. put his/her invested funds in CDs.
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:
Policymakers can neutralize:
A. supply shocks, but only in the short run.
B. supply shocks, but only in the long run.
C. supply shocks in both the short run and the long run.
D. only demand shocks.
Answer:
Unexpected inflation can benefit some people/firms and harm others. This is an
example of:
A. systematic risk.
B. unmeasured risk.
C. idiosyncratic risk.
D. zero risk since the effects balance.
Answer:
Discuss the effects on the current price of a stock from each of the following: a) An
increase in the growth rate of the dividend; b) A decrease in the risk-free interest rate; c)
An increase in the equity-risk premium; and finally d) A decrease in the annual
dividend.
Answer:
Increases in a borrower’s net worth:
A. reduces the problem of moral hazard.
B. lowers the information costs of lending.
C. reduces the problem of adverse selection.
D. all of the answers given are correct.
Answer:
The theory of purchasing power parity says:
A. the real exchange rate is always greater than one.
B. a dollar should buy the same goods no matter where in the world you go.
C. the dollar price of a basket of goods in the U.S. should equal the yen price of a
basket of goods in Japan.
D. the real exchange rate is always less than one.
Answer:
The market for bonds is initially described by the supply of bonds – S0, and the demand
for bonds – D0, with the equilibrium price and quantity being P0 and Q0. If the federal
government were to offer larger tax breaks on the purchase of new equipment for
businesses, all other factors constant, we would expect to see:
A. Bond supply curve to shift to S1
B. Bond demand curve to shift to D1
C. Bond supply curve to shift to S2
D. Bond demand curve to shift to D2
Answer:
If a one-year zero-coupon bond has a face value of $100, is purchased for $94, and is
held to maturity the:
A. holding period return will exceed the yield to maturity.
B. yield to maturity will exceed the holding period return.
C. yield to maturity will be 6.38%.
D. holding period return is 6.0%.
Answer:
In the early years of the Great Depression, 1929-1933:
A. over one half of all U.S. banks failed.
B. two-thirds of U.S. banks failed.
C. more than a third of all U.S. banks failed.
D. a little less than one-quarter of U.S. banks failed.
Answer:
Financial intermediaries, through their ability to lower transaction costs:
A. allow for people to be more self-sufficient.
B. increase the amount of trading that occurs in an economy.
C. take people away from their comparative advantage.
D. reduce the number of financial transactions that occur.
Answer:
Stocks appear to present risk, yet many people have substantial parts of their wealth
invested in them. This behavior could be explained by:
A. people are irrational in their investment behavior, only focusing on positive
outcomes.
B. people are not very risk-averse and do not require a risk premium for stocks.
C. investing in stocks over the long run is not as risky as short-term holdings of stocks.
D. people are not efficient users of information.
Answer:
Mutual funds are attractive because:
A. they provide high returns from purchasing the financial securities of a few select
companies.
B. they provide the investor with greater diversification at a lower cost than what most
investors could obtain individually.
C. they have inside information that is not available to other investors.
D. they usually have inside information because they run most of the companies they
invest in.
Answer:
The empirical evidence on purchasing power parity seems to point out that:
A. purchasing power parity can explain long run movements in exchange rates but does
not hold up to scrutiny for short-run changes.
B. purchasing power parity does a good job of explaining short-run movements in
exchange rates, but does not hold up to scrutiny over the long run.
C. purchasing power parity is a good theory for international trade, but is of little use in
explaining exchange rate movements.
D. inflation and a country’s rate of currency appreciation are positively correlated.
Answer:
A share of Ford Motor Company stock is an example of:
A. a non-standardized financial instrument.
B. a standardized financial instrument.
C. a non-standardized financial instrument since their prices can differ over time.
D. a financial instrument without risk.
Answer:
Which of the following cities has a Federal Reserve Bank located in it?
A. Denver
B. Philadelphia
C. Detroit
D. Miami
Answer:
What is the present value of $500 promised four years from now at 5% annual interest?
A. $411.35
B. $400.00
C. $607.75
D. $520.00
Answer:
The real power in the FOMC lies with:
A. the President of the New York Fed Bank.
B. the System Open Market Manager.
C. the Chairman of the Board of Governors.
D. no single individual; all participants have an equal share of the power.
Answer:
In April 1991, Argentina adopted a currency board primarily to address the problem of:
A. slow growth.
B. high interest rates.
C. large trade surpluses.
D. triple-digit inflation.
Answer:
To say that the relationship between the velocity of money and the opportunity cost of
holding money is not stable is the same as saying:
A. the supply of money is not stable.
B. the money market is always in disequilibrium.
C. money demand is stable.
D. money demand is not stable.
Answer:
A bank that specializes in granting loans to firms in a specific line of business:
A. may decrease its operating cost and decrease its credit risk.
B. may increase both its operating cost and its credit risk.
C. may increase its operating cost and decrease its credit risk.
D. may decrease its operating costs and increase its credit risk.
Answer:
Considering the balance sheet for all commercial banks in the U.S., the net worth of
banks is:
A. about 5 times the total assets.
B. about 1/11 of total assets.
C. just about the same as total assets.
D. about the same as total liabilities.
Answer:
Which of the following would not be an example of a secondary financial market
transaction?
A. You call a broker and purchase 100 shares of McDonalds Corp. stock.
B. You go to the bank and purchase a $5000 certificate of deposit.
C. You call a broker and purchase a U.S. Treasury bond.
D. You call a broker and purchase a bond issued by General Motors.
Answer:
In the event of bankruptcy, stockholders:
A. are paid before bondholders.
B. receive at least their initial investment due to limited liability.
C. could lose more than their initial investment.
D. are the last to be paid and could end up losing what they have invested.
Answer:
Compute the expected return, standard deviation, and value at risk for each of the
following investments:
Investment (A): Pays $800 three-fourths of the time and a $1200 loss otherwise.
Investment (B): Pays $1000 loss half of the time and a $1600 gain otherwise.
State which investment will be preferred by each of the following investors, and explain
why.
(i) a risk-neutral investor.
(ii) an investor who seeks to avoid the worst-case scenario.
(iii) a risk-averse investor.
Answer:
The dual banking system in the U.S. today refers to:
A. a bank’s ability to issue checking and saving accounts.
B. a bank’s ability to own another financial institution.
C. the ability of banks to be either federally or state chartered.
D. a deposit institution’s decision to be either a bank or a savings and loan.
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:
Short-run movements in inflation and output are ultimately attributed to changes in:
A. aggregate demand.
B. aggregate supply.
C. foreign policy.
D. aggregate demand and aggregate supply.
Answer:
If the central banks of most countries do not set the exchange rates, why do they hold
foreign exchange as one of their assets?
Answer:
Briefly describe the combination of strategies used by government officials to protect
investors and ensure the stability of the financial system.
Answer:
Why is it technically incorrect to say that the board of directors of the regional Fed
banks set the discount rate that each bank charges?
Answer:
Considering the concept of compounding, explain why in determining the future value
of a $100 investment at 5 percent annual interest, you can’t simply multiply $100 by
(1.10) and get the correct answer.
Answer:
Explain why an inverted yield curve is a valuable forecasting tool.
Answer:
If velocity of money is constant; real growth in the output of the economy is +2.5%;
and inflation is 2.0%; what is the growth rate of money?
Answer:
Discuss why the Fed can either select a quantity or a price (interest rate) target but not
both. If it helps, you can use the market for reserves for an example.
Answer:
Suppose a saver is looking for the opportunity to make a very large return in a very
short period of time. Would you recommend diversification for this individual?
Answer:
What would you expect to happen to the price level (inflation) from a prolonged
expansionary gap and why?
Answer:
The Standard & Poor’s 500 Index differs from the DJIA in at least two major respects.
What are the two major differences?
Answer:
If we think back to Chapter 11 when we discussed moral hazard, discuss how a
government ceding the right to control the amount of currency to a central bank is a
way to treat a potential moral hazard problem.
Answer:
Answer:
Consider the desirable features of monetary policy operating instruments and the use of
intermediate targets. What missing feature makes a target intermediate rather than
operating? Why did the Fed abandon the use of most intermediate targets?
Answer:
Explain why “free” checking accounts are not really free.
Answer:
Calculate the price of a $1,000 face value bond that offers a $45 annual coupon, and has
six years to maturity, when the interest rate is 6.0% (0.060).
Answer: