Loans made between borrowers and lenders are:
A. usually not taxable at the federal level.
B. legal only in the state of origination.
C. assets of the lenders.
D. assets of the borrowers.
Answer:
Suppose the tax rate is 25% and the taxable bond yield is 8%. What is the equivalent
tax-exempt bond yield?
A. 2%
B. 2.3%
C. 6%
D. 6.9%
Answer:
Considering a call option, if the price of the underlying asset decreases:
A. the intrinsic value of the option decreases if it is above zero.
B. the intrinsic value of the option increases if it is above zero.
C. the strike price decreases.
D. the value of the option increases.
Answer:
Investing in a mutual fund made up of hundreds of stocks of different companies is an
example of all of the following except:
A. spreading risk.
B. diversifying.
C. risk reduction.
D. increasing the variance of a portfolio.
Answer:
All but which of the following could be adjusted as a means of deflating asset price
bubbles:
A. Tariffs
B. Capital requirements
C. Capital surcharges
D. Fees for insuring the capital of banks
Answer:
Financial intermediaries handle a larger flow of funds than do primary markets
primarily because financial intermediaries:
A. have a government-provided monopoly.
B. have government-regulated prices, so there is little competition.
C. can lower transaction costs and increase liquidity for savers.
D. do not have to worry about information asymmetry.
Answer:
The store of value characteristic of money refers to the fact that:
A. people save most of their money.
B. money allows people to shift purchasing power into the future.
C. money is not valuable unless it is stored.
D. money is the only way people have to store value.
Answer:
Federal funds loans are:
A. secured loans between banks and the Fed.
B. unsecured loans.
C. collateralized loans between banks.
D. guaranteed by the FDIC.
Answer:
Brokerage commissions:
A. are set by government regulators so they cannot vary across firms for the same
services.
B. can vary but typically don’t because firms tend to set them at the same levels.
C. can differ reflecting the different services being offered.
D. are always a percentage of the amount of the trade.
Answer:
Which of the following expresses 4.85%?
A. 0.0485
B. 4.850
C. 0.00485
D. 0.485
Answer:
A repurchase agreement is:
A. an asset that represents the value of all collateral repossessed by the bank and held
for sale.
B. a long-term collateralized loan.
C. an agreement where the parties agree to reverse the transaction on a specific day.
D. only made between two or more banks.
Answer:
A $1,000 face value bond purchased for $965.00, with an annual coupon of $60, and 20
years to maturity has a:
A. current yield equal to 6.22%.
B. current yield equal to 6.00%.
C. coupon rate equal to 6.22%.
D. yield to maturity and current yield equal to 6.00%.
Answer:
The use of lagged reserve accounting makes the demand for reserves:
A. highly unpredictable.
B. constant.
C. more predictable.
D. subject to daily changes by the Fed.
Answer:
The Taylor rule is:
A. the monetary policy setting formula followed explicitly by the FOMC.
B. an approximation that seeks to explain how the FOMC sets their target.
C. an explicit tool used by the ECB but not the Fed.
D. a rule adopted by Congress to make the Fed’s monetary policy more accountable to
the public.
Answer:
Decreases in the real interest rate will result in a(n):
A. increase in net exports because it will lead to a depreciation of the dollar.
B. decrease in net exports because it will lead to a depreciation of the dollar.
C. increase in net exports because it will lead to an appreciation of the dollar.
D. decrease in net exports because it will lead to an appreciation of the dollar.
Answer:
The size of the bond dealer’s spread is mainly a function of the:
A. purchase price of the bond.
B. current yield.
C. liquidity of the bond market.
D. face value of the bond.
Answer:
A student receives a five-year loan to pay for a $2,000 used car. The lender and the
student agree to an 8% interest rate on a fixed-rate loan. Expected inflation was
estimated to equal 2.5%, but unexpectedly decreases to 2%. Which of the following is
true?
A. The real interest rate decreased.
B. The student is made worse off because her real cost of borrowing is higher.
C. The lender is made worst off because his real return on the car loan is lower.
D. Both the student and the lender benefit.
Answer:
If the Fed were to decrease the required reserve rate from ten percent to five percent,
the simple deposit expansion multiplier would:
A. double.
B. decrease by 5 percent.
C. increase by a factor of five.
D. be half as large as it was before the reduction.
Answer:
Tom decides to withdraw $300 out of his checking account. The impact of this
transaction on the Fed’s balance sheet will be:
A. no change in total assets or total liabilities, but an increase in the liability of
currency and a decrease in the liability of reserves by $300 respectively.
B. no change in total assets but the liability of currency increases by $300.
C. total assets decrease by $300 and the liability of currency increases by $300.
D. no change in either total assets or total liabilities.
Answer:
Adverse selection:
A. increases the efficiency of most markets.
B. usually causes prices to adjust faster than they otherwise would.
C. makes it easier for all customers to find what they want.
D. results in fewer market transactions.
Answer:
If the Federal Reserve is to be independent, then the quantity of securities it purchases
is determined by:
A. the Federal Reserve itself.
B. Congress.
C. the amount the public does not want to purchase at the going price.
D. the Treasury.
Answer:
Higher than expected inflation will increase the:
A. real interest rate borrowers pay on fixed rate mortgages.
B. nominal amounts people need to save for retirement.
C. real interest rate savers earn on fixed rate CDs.
D. real interest rates both paid on mortgages and earned on CDs.
Answer:
Which of the following statements is most correct?
A. When the real interest rate increases the reward for saving decreases.
B. When the real interest rate decreases current consumption becomes less expensive
and the reward for saving decreases.
C. When the real interest rate decreases the cost of current consumption increases.
D. When the real interest rate increases the level of saving always decreases.
Answer:
The intersection of the aggregate demand curve and the short-run aggregate supply
curve determines:
A. current inflation, but not current output.
B. potential output.
C. current output, but not current inflation.
D. current output and current inflation.
Answer:
Considering the euro/U.S. dollar exchange rate, as a U.S. dollar increases in value
versus the euro (holding other factors constant):
A. we would expect the supply curve of dollars to slope downward.
B. foreign goods become relatively less expensive than American goods.
C. foreign assets become relatively more expensive than American assets.
D. American goods become relatively less expensive than foreign goods.
Answer:
Hedge funds:
A. are strictly for millionaires.
B. are heavily regulated.
C. issue commercial paper and bonds.
D. always employ diversification techniques called “hedging.”
Answer:
Which of the following best defines dollarization?
A. A country uses the U.S. dollar as well as its currency for all transactions.
B. A country adopts a foreign currency for all transactions basically eliminating its own
monetary policy.
C. A country eliminates its own currency for international transactions and requires that
all international transactions be conducted in U.S. dollars.
D. The central bank of a country agrees to exchange its own currency for U.S. dollars
at a fixed exchange rate.
Answer:
If the price of an underlying asset has a standard deviation of zero:
A. options for this asset would likely not exist.
B. option for this asset would be highly valued.
C. the intrinsic value of options for this asset would equal the asset’s price.
D. options for this asset would have a time value of the option equal to the price of the
asset.
Answer:
According to the rule of 72:
A. any amount should double in value in 72 months if invested at 10%.
B. 72/interest rate is the number of years approximately it will take for an amount to
double.
C. 72 × interest rate is the number of years it will take for an amount to double.
D. the interest rate divided by the number of years invested will always equal 72%.
Answer:
Speculative attacks:
A. can only result from irresponsible fiscal policy.
B. can always be stopped by the country’s central bank if they act quickly.
C. can be triggered even when domestic policymakers are acting responsibly.
D. are illegal, and if caught, speculators are assessed large fines.
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Which core principle(s) could you use to explain why credit card issuers charge such
high rates of interest?
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