1) The increase in the currency ratio during World War II was due to
A) bank panics
B) a drop in the rate of interest paid on checking deposits
C) the spread of ATMs
D) high taxes and illegal activities
2) Prices and returns for ________ bonds are more volatile than those for ________
bonds, everything else held constant.
A) long-term; long-term
B) long-term; short-term
C) short-term; long-term
D) short-term; short-term
3) Psychologists have found that people tend to be ________ in their own judgments.
A) underconfident
B) overconfident
C) indecisive
D) insecure
4) If a security pays $110 next year and $121 the year after that, what is its yield to
maturity if it sells for $200?
A) 9 percent
B) 10 percent
C) 11 percent
D) 12 percent
5) A bank has excess reserves of $4,000 and demand deposit liabilities of $100,000
when the required reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent,
the bank’s excess reserves will be
A) -$5,000
B) -$1,000
C) $1,000
D) $5,000
6) Savings and loan regulators allowed S&Ls to include in their capital calculations a
high value for intangible capital called
A) goodwill
B) salvation
C) kindness
D) retribution
7) Which of the following is a contractual savings institution?
A) A life insurance company
B) A credit union
C) A savings and loan association
D) A mutual fund
8) Commercial and farm mortgages, in which property is pledged as collateral, account
for
A) one-quarter of borrowing by nonfinancial businesses
B) one-half of borrowing by nonfinancial businesses
C) one-twentieth of borrowing by nonfinancial businesses
D) two-thirds of borrowing by nonfinancial businesses
9) Examples of discount bonds include
A) U.S. Treasury bills
B) corporate bonds
C) U.S. Treasury notes
D) municipal bonds
10) In the market for reserves, when the federal funds rate is above the interest rate paid
on excess reserves, the demand curve for reserves is
A) vertical
B) horizontal
C) positively sloped
D) negatively sloped
11) Of the four effects on interest rates from an increase in the money supply, the one
that works in the opposite direction of the other three is the
A) liquidity effect
B) income effect
C) price level effect
D) expected inflation effect
12) If a firm is due to be paid in euros in two months, to hedge against exchange-rate
risk the firm should ________ foreign exchange futures ________.
A) sell; short
B) buy; long
C) sell; long
D) buy; short
13) The finance of government spending through a Treasury sale of bonds which are
then purchased by the Fed
A) causes both reserves and the monetary base to rise
B) causes both reserves and the monetary base to decline
C) causes reserves to rise, but the monetary base to decline
D) has no net effect on the monetary base
14) Although ________ currency is lighter than coins made of metals, a disadvantage
arising from modern technology is the ease of ________.
A) paper; transport
B) commodity; counterfeiting
C) fiat; transport
D) paper; counterfeiting
15) Experts predict that the future structure of the U.S. banking industry will have
A) an increased number of banks
B) as few as ten banks
C) several thousand banks
D) a few hundred banks
16) Everything else held constant, in the market for reserves, when the federal funds
rate is 3%, increasing the interest rate paid on excess reserves from 1% to 2%
A) lowers the federal funds rate
B) raises the federal funds rate
C) has no effect on the federal funds rate
D) has an indeterminate effect on the federal funds rate
17) Traders working for banks are subject to the
A) principal-agent problem
B) free-rider problem
C) double-jeopardy problem
D) exchange-risk problem
18) Using the Gordon growth formula, if D1 is $1.00, ke is 10% or 0.10, and g is 5% or
0.05, then the current stock price is
A) $10
B) $20
C) $30
D) $40
19) When bad storms slow the check-clearing process, float tends to ________ causing
the Fed to initiate ________ open market ________.
A) decrease; defensive; sales
B) decrease; dynamic; purchases
C) increase; defensive; sales
D) increase; dynamic; purchases
20) Two reasons for an industrialized country to adopt an exchange-rate targeting
regime are if the country ________ conduct successful monetary policy on its own, and
if the country wants to ________ integration of the domestic economy with its
neighbors.
A) cannot; encourage
B) cannot; discourage
C) can; encourage
D) can; discourage
21) ________ is a flow of earnings per unit of time.
A) Income
B) Money
C) Wealth
D) Currency
22) If the yield curve slope is flat for short maturities and then slopes steeply upward
for longer maturities, the liquidity premium theory (assuming a mild preference for
shorter-term bonds) indicates that the market is predicting
A) a rise in short-term interest rates in the near future and a decline further out in the
future
B) constant short-term interest rates in the near future and further out in the future
C) a decline in short-term interest rates in the near future and a rise further out in the
future
D) constant short-term interest rates in the near future and a decline further out in the
future
23) The Fed accidentally discovered open market operations in the early
A) 1920s
B) 1910s
C) 1900s
D) 1890s
24) If workers believe that government policymakers will increase aggregate demand to
avoid a politically unpopular increase in unemployment when workers demand higher
wages, then workers will not fear higher unemployment and their wage demands will
result in
A) demand-pull inflation
B) hyperinflation
C) deflation
D) cost-push inflation
25) In the case of an insurance policy, ________ occurs when the existence of insurance
encourages the insured party to take risks that increase the likelihood of an insurance
payoff; ________ occurs when those most likely to get large insurance payoffs are the
ones who want to purchase insurance the most.
A) moral hazard; insurance market discrimination
B) moral hazard; insurance segregation
C) moral hazard; adverse selection
D) adverse selection; moral hazard
26) Of the four effects on interest rates from an increase in the money supply, the initial
effect is, generally, the
A) income effect
B) liquidity effect
C) price level effect
D) expected inflation effect
27) Models describing the determination of the money supply and the Fed’s role in this
process normally focus on ________ rather than ________, since Fed actions have a
more predictable effect on the former.
A) reserves; the monetary base
B) reserves; high-powered money
C) the monetary base; high-powered money
D) the monetary base; reserves
28) Financial intermediaries provide customers with liquidity services. Liquidity
services
A) make it easier for customers to conduct transactions
B) allow customers to have a cup of coffee while waiting in the lobby
C) are a result of the asymmetric information problem
D) are another term for asset transformation
29) The primary liabilities of depository institutions are
A) premiums from policies
B) shares
C) deposits
D) bonds
30) Everything else held constant, when prices in the art market become more
uncertain,
A) the demand curve for bonds shifts to the left and the interest rate rises
B) the demand curve for bonds shifts to the left and the interest rate falls
C) the demand curve for bonds shifts to the right and the interest rate falls
D) the supply curve for bonds shifts to the right and the interest rate falls
31) Prior to 1980, the Fed set an interest rate ________, a maximum limit, on the
interest rate that could be paid on time deposits.
A) floor
B) ceiling
C) wall
D) window
32) The most common type of discount lending, ________ credit loans, are intended to
help healthy banks with short-term liquidity problems that often result from temporary
deposit outflows.
A) secondary
B) primary
C) temporary
D) seasonal
33) An $8,000 coupon bond with a $400 coupon payment every year has a coupon rate
of
A) 5 percent
B) 8 percent
C) 10 percent
D) 40 percent
34) In Keynes’s liquidity preference framework, if there is excess demand for money,
there is
A) an excess demand for bonds
B) equilibrium in the bond market
C) an excess supply of bonds
D) too much money
35) If a bank has excess reserves of $7,000 and demand deposit liabilities of $100,000,
and if the reserve requirement is 15 percent, then the bank has actual reserves of
A) $17,000
B) $22,000
C) $27,000
D) $29,000
36) Everything else held constant, if the expected return on U.S. Treasury bonds falls
from 8 to 7 percent and the expected return on corporate bonds falls from 10 to 8
percent, then the expected return of corporate bonds ________ relative to U.S. Treasury
bonds and the demand for corporate bonds ________.
A) rises; rises
B) rises; falls
C) falls; rises
D) falls; falls
37) The price of gold should be ________ to the expected inflation rate.
A) positively related
B) negatively related
C) inversely related
D) unrelated
38) Stockholders are residual claimants, meaning that they
A) have the first priority claim on all of a company’s assets
B) are liable for all of a company’s debts
C) will never share in a company’s profits
D) receive the remaining cash flow after all other claims are paid
39) When a domestic currency is completely backed by a foreign currency and the
note-issuing authority establishes a fixed exchange rate to this foreign currency, then
the country is said to have
A) created a currency board
B) undergone dollarization
C) adopted a managed exchange system
D) adopted an exchange rate monetary system
40) Having interest rate stability
A) allows for less uncertainty about future planning
B) leads to demands to curtail the Fed’s power
C) guarantees full employment
D) leads to problems in financial markets