The existence of a lender of last resort creates moral hazard for bank managers
because:
A. they have an incentive to take too much risk in their operations.
B. officials are likely to undervalue the bank’s portfolio of assets.
C. they are less likely to apply for a direct loan from the central bank.
D. banks seek loans from the central bank only after exploring other options.
Answer:
If market participants believe next year’s corn crop is likely to be unusually large:
A. the current spot market price of corn is likely to be below the futures price of corn.
B. the current spot market price of corn is likely to be above the futures price of corn.
C. it would be impossible to find someone to take the short position in a futures
contract.
D. it will be impossible to find someone to take the long position in a futures contract.
Answer:
The pool of information collected by financial markets is usually:
A. only available to lenders.
B. summarized in the form of a price.
C. valuable and not made available until the parties pay for it.
D. more than a borrower needs to make a loan.
Answer:
The Consumer Price Index (CPI):
A. tends to understate the impact of price changes.
B. tends to overstate the impact of price changes due to substitution bias.
C. is more accurate than the GDP deflator.
D. assumes that consumers substitute away from cheaper goods.
Answer:
An investment pays $1000 three quarters of the time, and $0 the remaining time. Its
expected value and variance respectively are:
A. $1,000: 62,500 dollars2
B. $750; 46,875 dollars
C. $750; 62,500 dollars
D. $750; 187,500 dollars2
Answer:
The ability to create money means the central bank can control:
A. the availability of money and credit in a country’s economy.
B. tax revenue.
C. the unemployment rate.
D. government expenditures.
Answer:
The interest rate changes that result from the FOMC meetings:
A. can be altered only by Congress.
B. can be altered by the Secretary of the Treasury during an economic crisis.
C. cannot be changed by anyone other than the FOMC.
D. can only be altered during a time of crisis by the U.S. President.
Answer:
Consider a $1,000.00 face value bond with a $55 annual coupon and 10 years until
maturity. Calculate the current yield; the coupon rate and the yield to maturity under
each of the following:
a) The bond is purchased for $940.00
b) The bond is purchased for $1,130.00
c) The bond is purchased for $1,000.00
Answer:
If the Fed decides to maintain a fixed euro/dollar exchange rate when they sell euros:
A. there will be pressure on domestic interest rates to increase.
B. the domestic money supply will increase.
C. this will increase banking system reserves.
D. they will have to impose capital controls.
Answer:
A sterilized foreign exchange intervention would:
A. alter the asset side of a central bank’s balance sheet but leave the domestic monetary
base unchanged.
B. alter the liability side of the central bank’s balance sheet but leave the asset side
unchanged.
C. leave the central bank’s balance sheet unchanged.
D. not alter the central bank’s holdings of international reserves.
Answer:
Which of the following statements is incorrect?
A. A country cannot be open to international capital flows, control its domestic interest
rate and fix its exchange rate.
B. A country can be open to international capital flows and control its own domestic
interest rate but it can’t fix its exchange rate.
C. A country can be open to international capital flows, control its domestic interest
rate, and fix its exchange rate.
D. A country can be open to international capital flows and fix its exchange rate but
could not also control its own domestic interest rate.
Answer:
The price for private information is likely higher than it should be due to the problem
of:
A. adverse selection.
B. free-riders.
C. the government regulations regarding information.
D. moral hazard.
Answer:
The difference between standard deviation and value at risk is:
A. nothing, they are two names for the same thing.
B. value at risk is a more common measure in financial circles than is standard
deviation.
C. standard deviation reflects the spread of possible outcomes where value at risk
focuses on the value of the worst outcome.
D. value at risk is expected value times the standard deviation.
Answer:
Which of the following would be classified as intermediate targets for U.S. monetary
policy?
A. M2 but not M1
B. The federal funds rate
C. M1 and M2
D. M1 but not M2
Answer:
All other factors equal, if the costs of converting bonds and other financial securities to
a means of payment decrease:
A. the transactions demand for money should increase.
B. the transactions demand for money should decrease.
C. it shouldn’t impact the transactions demand for money.
D. nominal interest rates should decrease.
Answer:
Which of the following would not be included in aggregate expenditures?
A. Your purchase of a new car
B. The value of 100 shares of Microsoft stock you purchased
C. The purchase of new textbooks by your local school district
D. The value of blue jeans produced in the U.S. and exported to Japan
Answer:
Which of the following traditional channels of monetary policy transmission can be
described as powerful?
A. The interest-rate channel
B. The exchange-rate channel
C. Both the interest-rate channel and the exchange-rate channel can be described as
very powerful
D. Neither the interest-rate channel nor the exchange-rate channel can be described as
very powerful
Answer:
Discount lending by the Fed:
A. is the key component of monetary policy.
B. is more important today than in years past.
C. is not as important today as it was in the past.
D. amounts to five billion dollars in volume during an average week.
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:
Estimates of gross domestic product (GDP) are revised:
A. quickly and often.
B. for many years after the fact.
C. only in the following quarter.
D. each month.
Answer:
When studying world stock indexes, we observe that:
A. the S&P 500 is largest in terms of index value.
B. most of the world’s indexes are price-weighted.
C. the indexes are very comparable.
D. the indexes are comparable but only in percentage terms.
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:
One reason customers do not care about the quality of their bank’s assets is:
A. most people cannot distinguish an asset from a liability.
B. the quality of a bank’s assets changes almost daily.
C. they assume the bank only has high quality assets.
D. with deposit insurance, there isn’t any real reason to care; their deposits are
protected even if the bank fails.
Answer:
Statistical analysis reveals that the long-run money velocity (for euro-area M3, which is
equivalent to U.S. M2):
A. is unstable in the euro similar to the instability that exists in the U.S.
B. is much more stable in the U.S. than in the euro area.
C. has increased in the euro area since 1980.
D. is more stable in the euro area than in the U.S.
Answer:
A cause of the decline in the velocity of money during the 2007-2009 financial crisis
was a result of:
A. the fiscal stimulus provided by the U.S. government.
B. the lowering of the discount rate by the Fed.
C. the use of unconventional policy tools by the Fed.
D. an increase in uncertainty.
Answer:
Comparing the European and the U.S. central bank systems, the National Central Banks
that make up part of the European System of Central Banks resembles:
A. the U.S. Treasury.
B. the Board of Governors.
C. the FOMC.
D. the regional Federal Reserve Banks.
Answer:
Keeping interest rates stable is:
A. the most important goal for a central bank.
B. a key goal, because stable interest rates will result in all other goals being achieved.
C. a secondary goal for central banks.
D. not a goal of the central bank.
Answer:
Which of the following statements is true?
A. Adverse selection is a problem that occurs after a transaction.
B. Moral hazard is a problem that occurs before a transaction.
C. Adverse selection is a problem stemming from asymmetric information.
D. Both adverse selection and moral hazard occur before a transaction.
Answer:
A central bank’s sale of securities from its portfolio will:
A. decrease the size of its balance sheet.
B. have no impact at all on the balance sheet.
C. only change the composition of its liabilities.
D. only change the composition of its assets.
Answer:
Changing short-term interest rates have a(n):
A. strong and immediate impact on household purchase decisions.
B. no impact on household purchasing decisions.
C. somewhat modest impact on household purchasing decisions.
D. none of the answers provided is correct.
Answer:
Discuss the impact of the evolving financial system on the bank-lending channel of
monetary policy transmission? Evaluate what that is likely to mean for future changes
in the target federal funds rate.
Answer:
Assuming the law of one price, explain what the exchange rate between U.S. dollars
and yen has to be if the price of steel in Japan is 15,000 yen per ton and the price in the
U.S. is $125 per ton (assume no transaction costs).
Answer:
Assuming a constant nominal GDP, would the velocity of M1 equal the velocity of M2?
Explain.
Answer:
What was the double liquidity shock that occurred in the U.S. financial system in the
summer of 2007?
Answer:
Discuss how changes in economic conditions are likely to affect the equity-risk
premium and stock prices. Considering the risks associated with investing in stocks
(over short periods of time), what types of investments would you expect investors to
buy during an economic recession?
Answer:
Explain the three desirable features of a good monetary policy instrument.
Answer:
What is the basic difference(s) between term and whole life insurance?
Answer:
What is the primary function of U.S. regulatory agencies in the U.S. financial system?
Answer:
Describe the condition that would have a call option in the money. Now describe the
condition that has a put option out of the money.
Answer:
Trading in electronic exchanges has grown tremendously in recent years, what are some
of the disadvantages of trading in decentralized electronic exchanges?
Answer:
The authors open Chapter 17 with a contrast between the Fed’s actions in response to
the terrorist attacks of September, 2001 and its response to the financial crisis of the
Great Depression. Why was the Fed successful at dealing with the crisis in 2001, and
not as successful with the crisis of the early 1930s?
Answer:
What are the five functions performed by financial intermediaries?
Answer:
When a negative supply shock occurs it is extremely important for monetary
policymakers to discern whether or not potential output has decreased. Why does that
matter?
Answer:
Explain why it is correct to say the Federal Reserve functions as the government’s bank
but it is incorrect to say it controls the government’s budget.
Answer:
In terms of foreign exchange reserve holdings, how does the Fed’s balance sheet
compare to that of the European Central Bank (ECB)?
Answer:
Imagine the exchange rate between the British pound (£) and the U.S. dollar ($) is fixed
at $1.40/£ and capital flows freely between Great Britain and the U.S. Explain what the
price of shares of stock in XYZ Inc. would be selling for in London if they are $80 per
share in the U.S. and why.
Answer:
In the face of constant velocity, explain what happens to aggregate demand if the
growth rate of money is less than the rate of inflation.
Answer:
Prosper.com is a San Francisco-based web site that facilitates peer-to-peer micro
lending. If you were going to consider making a loan through Prosper, would you be
more concerned about adverse selection or moral hazard, and why?
Answer:
A bank has the following assets: Reserves of $15 million; Loans of $150 million; and
Securities of $50 million. Their liabilities include Deposits of $150 million; Borrowed
funds of $35 million and Bank Capital of $30 million. If the required reserve rate is 10
percent, answer the following: What is the amount of excess reserves the bank is
currently holding? What are the options available to the bank if customers decide to
withdraw $10 million in deposits?
Answer: