When conducting open market operations, at what price is it willing to buy or sell
securities?
A) at the price agreed upon by the Federal Open Market Committee
B) at the price agreed upon by the Board of Governors
C) at the price set by the Fed chair
D) at whatever price is necessary to carry out its open market operations
Answer:
Which type of borrowers were least likely to default in their mortgage at the beginning
of the financial crisis?
A) those with fixed-rate mortgages who made large down payments
B) those with alt-A loans
C) subprime borrowers
D) those with adjustable-rate mortgages
Answer:
In the federal funds market diagram, a decrease in the required reserve ratio
A) shifts the demand curve for reserves to the left.
B) increases the federal funds rate.
C) results in a multiple expansion of deposits, which increases the equilibrium level of
reserves held by banks.
D) shifts the supply curve for reserves to the right.
Answer:
In the balance-of-payments accounts, the statistical discrepancy
A) equals the capital account balance minus the current account balance.
B) equals the current account balance minus the capital account balance.
C) probably reflects hidden capital flows.
D) must equal zero.
Answer:
Under the liquidity premium theory, the expectation that future short-term rates will be
constant results in a yield curve that
A) is flat.
B) slopes upward.
C) slopes downward.
D) is flat, slopes upward, or slopes downward, depending on the size of the term
premium at each maturity.
Answer:
Speculators in derivatives markets
A) reduce the efficiency of these markets.
B) are acting contrary to U.S. securities laws.
C) accept risk transferred to them by hedgers.
D) reduce the liquidity of these markets.
Answer:
An speculator who buys a fifty-year corporate bond
A) must be expecting to still be alive in fifty years.
B) is subject to substantial reinvestment risk.
C) is probably expecting market interest rates to increase in the future.
D) is probably expecting market interest rates to decrease in the future.
Answer:
The existence of rating agencies has
A) lowered returns on corporate bonds.
B) raised returns on corporate bonds.
C) left returns on corporate bonds largely unaffected.
D) raised returns on both corporate bonds and Treasury securities.
Answer:
Which of the following statements about the presence of speculators in futures markets
is correct?
A) Their main objective is to reduce their exposure to risk.
B) They aid hedgers by increasing the liquidity in futures markets.
C) They make it difficult for hedgers to find someone to take the opposite side of their
positions.
D) Once a futures market participant is known to be a speculator he or she is no longer
allowed to participate in the market.
Answer:
The supply curve of loanable funds slopes up because
A) at higher bond prices more loanable funds will be supplied.
B) higher interest rates reduce the inflation rate.
C) an increase in the interest rate makes lenders more willing and able to supply more
funds.
D) a decrease in the interest rate makes lenders more willing and able to supply more
funds.
Answer:
A decline in bank lending has the most significant effect on
A) small businesses.
B) large businesses.
C) state governments.
D) federal government.
Answer:
Currently, the price of gold is
A) fixed by the United States.
B) adjusted periodically by the IMF.
C) adjusted periodically by the World Bank.
D) determined in the market by demand and supply.
Answer:
What unusual measures did the Fed take in trying to reduce long-term interest rates
during the Financial Crisis of 2007-2009?
A) buying mortgage-backed securities issued by Fannie Mae and Freddie Mac
B) reducing the federal funds rate multiple times
C) issuing its own securities
D) eliminating the discount rate on loans to member banks
Answer:
If households increase their saving at the same time that the government increases its
deficit,
A) the demand and supply curves for bonds will be unaffected.
B) the demand curve for bonds will shift to the left.
C) the supply curve for bonds will shift to the right.
D) the equilibrium interest rate will definitely rise.
Answer:
A bank panic occurs when
A) a bank is worried that its loans will not be repaid.
B) an individual bank cannot meet its reserve requirements.
C) a bank lacks sufficient funds with which to make loans.
D) the situation in which many banks experience a bank run simultaneously.
Answer:
During the years from 1964 to 1969, inflation increased in the United States
A) when the AD curve shifted up and to the right, even though the SRAS curve
remained stable.
B) when the SRAS curve shifted up and to the left, even though the AD curve remained
stable.
C) when the AD curve shifted up and to the right and the SRAS curve shifted up and to
the left.
D) despite the AD and SRAS curves remaining stable.
Answer:
Many savers are willing to accept a lower interest rate on municipal bonds than on
comparable instruments because
A) the after-tax yield on municipal bonds is greater.
B) municipal bonds invariably have lower default risk.
C) municipal bonds are more liquid than most other instruments.
D) the yield on municipal bonds is considered inflation proof.
Answer:
One method that lenders use to mitigate the adverse selection problem is to
A) charge higher interest rates to less creditworthy borrowers.
B) monitor closely the behavior of borrowers after a loan is made.
C) ration credit.
D) provide default insurance.
Answer:
What is meant by senior debt?
A) debt that has been around for the longest period of time
B) debt that must be paid before junior debt is paid
C) debt owed to the federal government
D) debt issued by the federal government as opposed to states or corporations
Answer:
A call option is said to be “in the money” if
A) it is written on a Treasury bill or other money-market asset.
B) it has increased in price since it was first written.
C) the price of the underlying asset is currently greater than the strike price.
D) the price of the underlying asset is currently greater than the strike price plus the
option premium.
Answer:
The output gap can best be described as:
A) the percentage difference between GDP and its potential
B) the difference between GDP in the current year compared to the previous year
C) the difference between a nation’s GDP and that of the nation with the highest GDP
D) the difference between GDP and its forecasted level
Answer:
If the economy is initially at equilibrium and an unexpected decline in aggregate
demand takes place, in the short run aggregate output will
A) fall in the new classical view, but not in the new Keynesian view.
B) fall in the new Keynesian view, but not in the new classical view.
C) fall in both the new Keynesian and new classical views.
D) remain at full employment in both the new classical and new Keynesian views.
Answer:
Investors value liquidity in an asset because
A) liquid assets tend to have high rates of return.
B) liquid assets incur lower selling costs.
C) liquid assets incur lower tax liabilities.
D) whereas liquid assets have high information costs, their low risk offsets this.
Answer:
All of the following were actions taken by the government or the Fed in response to the
Financial Crisis of 2007-2009 EXCEPT
A) purchasing of most toxic assets such as mortgage-backed securities.
B) reducing the federal funds rate to near zero.
C) insuring deposits in money market mutual funds.
D) effective nationalization of Fannie Mae and Freddie Mac.
Answer:
Which type of bond would you purchase if you expected higher rates of inflation during
the life of the bond?
A) Treasury bond
B) TIPS
C) corporate bond
D) municipal bond
Answer:
Which of the following is true of the segmented markets theory?
A) It assumes that borrowers have particular periods for which they want to borrow.
B) It assumes that lenders always lend for short periods.
C) It provides a good explanation for why yield curves usually slope upward.
D) It assumes that instruments with different maturities are perfect substitutes.
Answer:
The use of deductibles and coinsurance are examples of attempts by insurance
companies to deal with the problem of
A) moral hazard.
B) adverse selection.
C) failure of policyholders to keep paying their premiums.
D) excessive government regulation.
Answer:
Why do individuals hold money when it does not provide the services that, say, a house
does?
A) Money is the most liquid asset.
B) Money is the only form in which wealth may be held.
C) Money increases in value faster than other assets.
D) Money is useful in avoiding taxes on certain transactions.
Answer:
Acme Widget tells investors it wants to build a new widget factory and sell investors
$10,000,000 in bonds to finance it. Once they have raised the $10,000,000 the owners
of Acme Widget use the funds to finance a trip to Atlantic City to try out a new scheme
they have devised to win at blackjack. This is an example of
A) the adverse selection problem in financial markets.
B) the moral hazard problem in financial markets.
C) the difficulty lenders have in distinguishing good from lemon firms.
D) the problems with using rational expectations in financial markets.
Answer:
Bank capital can best be described as:
A) funds contributed by shareholder purchasers of a bank’s stock plus the accumulated
retaining earnings
B) the accumulated amount of reserves held by a bank
C) the location of most of the major banks of a country
D) another name for bank assets
Answer:
The interest rate on unsecured loans between banks is called the
A) discount rate.
B) repurchase rate.
C) T-bill rate.
D) federal funds rate.
Answer: