1) Under a fixed exchange rate regime, if the domestic currency is initially overvalued,
that is, below par, the central bank must intervene to purchase the ________ currency
by selling ________ assets.
A) domestic; foreign
B) domestic; domestic
C) foreign; foreign
D) foreign; domestic
2) When I purchase a 10 percent coupon bond, I calculate a yield to maturity of 8
percent. If I hold this bond to maturity, then my return on this asset is
A) 10 percent
B) 8 percent
C) 12 percent
D) there is not enough information to determine the return
3) Open market sales ________ reserves and the monetary base thereby ________ the
money supply.
A) raise; lowering
B) raise; raising
C) lower; lowering
D) lower; raising
4) Which of the following financial intermediaries is not a depository institution?
A) A savings and loan association
B) A commercial bank
C) A credit union
D) A finance company
5) Exchange-rate targeting allows a central bank to ________, thus this will ________
the probability of policy developing a time-inconsistency problem.
A) be governed by a policy rule; decrease
B) follow discretionary policy; decrease
C) be governed by a policy rule; increase
D) follow discretionary policy; increase
6) If you buy a put option on treasury futures at 110, and at expiration the market price
is 115, the ________ will ________ exercised.
A) call; be
B) put; be
C) call; not be
D) put; not be
7) All of the following are examples of off-balance sheet activities that generate fee
income for banks except
A) foreign exchange trades
B) guaranteeing debt securities
C) back-up lines of credit
D) selling negotiable CDs
8) Open market purchases ________ reserves and the monetary base thereby ________
the money supply.
A) raise; lowering
B) raise; raising
C) lower; lowering
D) lower; raising
9) Which of the following is an entity of the Federal Reserve System?
A) The U.S. Treasury Secretary
B) The FOMC
C) The Comptroller of the Currency
D) The FDIC
10) An advantage of an international lender of last resort is its ability to prevent
________, in which a successful speculative attack on one currency leads to attacks on
others; its disadvantage is the problem of ________ if creditors expect to be protected if
a crisis occurs.
A) contagion; moral hazard
B) contagion; adverse selection
C) currency virus; moral hazard
D) currency virus; adverse selection
11) Typically, yield curves are
A) gently upward sloping
B) mound shaped
C) flat
D) bowl shaped
12) In order to reduce the ________ problem in loan markets, bankers collect
information from prospective borrowers to screen out the bad credit risks from the good
ones.
A) moral hazard
B) adverse selection
C) moral suasion
D) adverse lending
13) As interest rates rise, the expected absolute return of money ________, money’s
expected return relative to bonds ________.
A) does not change; decrease
B) rises; decrease
C) does not change; increase
D) falls; decrease
14) Which of the following long-term bonds has the highest interest rate?
A) Corporate Baa bonds
B) U.S. Treasury bonds
C) Corporate Aaa bonds
D) Municipal bonds
15) The practice of factoring involves
A) the syndication of underwriting large security issues
B) the selling of accounts receivable at a discount in return for cash
C) breaking up large mutual funds into smaller funds
D) spreading the risk of insurance through reinsurance
16) During the Great Depression, Tobin’s q
A) rose dramatically, as did real interest rates
B) fell to unprecedentedly low levels
C) stayed fairly constant, in contrast to most other economic measures
D) rose only slightly, in spite of Hoover’s attempts to prop it up
17) When you deposit $50 in your account at First National Bank and a $100 check you
have written on this account is cashed at Chemical Bank, then
A) the assets of First National rise by $50
B) the assets of Chemical Bank rise by $50
C) the reserves at First National fall by $50
D) the liabilities at Chemical Bank rise by $50
18) When interest rates fall, a bank that perfectly hedges its portfolio of Treasury
securities in the futures market
A) suffers a loss
B) experiences a gain
C) has no change in its income
D) may either gain, lose or see no change in its income
19) Under the Global Legal Settlement of 2002, the provision that requires investment
banking firms to make their analysts’ recommendations public is an example of
A) regulate for transparency
B) supervisory oversight
C) separation of functions
D) socialization of information production
20) When the value of the dollar changes from £0.5 to £0.75, then the British pound has
________ and the U.S. dollar has ________.
A) appreciated; appreciated
B) depreciated; appreciated
C) appreciated; depreciated
D) depreciated; depreciated
21) Reinsurance allows ________ to reduce the risks of exposure by allocating a
portion of the risk to ________ in exchange for a portion of the premium.
A) insurance companies; another insurance company
B) insurance companies; the insured
C) the insured; the insurance company
D) the insured; a bank
22) The Basel Accord requires banks to hold as capital an amount that is at least
________ of their risk-weighted assets.
A) 10%
B) 8%
C) 5%
D) 3%
23) Which of the following is a potential operating instrument for the central bank?
A) The monetary base
B) The M1 money supply
C) Nominal GDP
D) The discount rate
24) Tobin’s model of the speculative demand for money shows that people hold money
as a store of wealth as a way of
A) reducing risk
B) reducing income
C) avoiding taxes
D) reducing transactions cost
25) Since depositors, like any lender, only receive fixed payments while the bank keeps
any surplus profits, they face the ________ problem that banks may take on too
________ risk.
A) adverse selection; little
B) adverse selection; much
C) moral hazard; little
D) moral hazard; much
26) Everything else held constant, in the market for reserves, increases in the discount
rate affect the federal funds rate
A) when the funds rate is below the discount rate
B) when the funds rate equals the discount rate
C) when the demand for federal funds intersects the vertical section of the reserve
supply curve
D) when the demand for federal funds equals zero
27) State banking authorities have sole jurisdiction over state banks
A) without FDIC insurance
B) that are not members of the Federal Reserve System
C) operating as bank holding companies
D) chartered in the 21st century
28) The effect of an open market purchase on reserves differs depending on how the
seller of the bonds keeps the proceeds. If the proceeds are kept in ________, the open
market purchase has no effect on reserves; if the proceeds are kept as ________,
reserves increase by the amount of the open market purchase
A) deposits; deposits
B) deposits; currency
C) currency; deposits
D) currency; currency
29) Money market mutual funds
A) function as interest-earning checking accounts
B) are legally deposits
C) are subject to reserve requirements
D) have an interest-rate ceiling
30) The present value of an expected future payment ________ as the interest rate
increases.
A) falls
B) rises
C) is constant
D) is unaffected
31) When we say that money is a stock variable, we mean that
A) the quantity of money is measured at a given point in time
B) we must attach a time period to the measure
C) it is sold in the equity market
D) money never loses purchasing power
32) Modern liability management has resulted in
A) increased sales of certificates of deposits to raise funds
B) increase importance of deposits as a source of funds
C) reduced borrowing by banks in the overnight loan market
D) failure by banks to coordinate management of assets and liabilities
33) If the money supply is $600 and nominal income is $3,600, the velocity of money is
A) 1/60
B) 1/6
C) 6
D) 60
34) Government regulations require publicly traded firms to provide information,
reducing
A) transactions costs
B) the need for diversification
C) the adverse selection problem
D) economies of scale
35) As of 2009, China’s economy had recovered from the global recession that began in
2008 . Use aggregate demand and aggregate supply analysis to explain why, and to
explain the likely consequences for China of an increase in the growth rate of the global
economy.
36) Explain the Keynesian theory of money demand. What motives did Keynes think
determined money demand? What are the two reasons why Keynes thought velocity
could not be treated as a constant?
37) Describe what the liquidity trap is.Explain how it can be problematic for monetary
policymakers.
38) Why does the Federal Reserve Bank of New York play a special role within the
Federal Reserve System?
39) Explain why the Social Security system faces problems. Discuss the possible
solutions to these problems.
40) Why does the free-rider problem occur in the debt market?
41) What is a stock? How do stocks affect the economy?
42) Using T-accounts show what happens to reserves at Security National Bank if one
individual deposits $1000 in cash into her checking account and another individual
withdraws $750 in cash from her checking account.