1) ________ is the process of researching and developing profitable new products and
services by financial institutions.
A) Financial engineering
B) Financial manipulation
C) Customer manipulation
D) Customer engineering
2) Net worth can perform a similar role to
A) diversification
B) collateral
C) intermediation
D) economies of scale
3) Everything else held constant, when the current value of the domestic exchange rate
increases, the ________ of domestic assets ________.
A) quantity supplied; does not change
B) supply; decreases
C) quantity supplied; increases
D) supply; increases
4) Everything else held constant, an increase in the interest rate paid on checkable
deposits will cause ________ in the amount of checkable deposits held relative to
currency holdings and ________ in the currency ratio.
A) an increase; an increase
B) an increase; a decrease
C) a decrease; an increase
D) a decrease; a decrease
5) ________ in the money supply creates excess ________ money, causing interest
rates to ________, everything else held constant.
A) A decrease; demand for; rise
B) An increase; demand for; fall
C) An increase; supply of; rise
D) A decrease; supply of; fall
6) In which of the following situations would you prefer to be the borrower?
A) The interest rate is 9 percent and the expected inflation rate is 7 percent
B) The interest rate is 4 percent and the expected inflation rate is 1 percent
C) The interest rate is 13 percent and the expected inflation rate is 15 percent
D) The interest rate is 25 percent and the expected inflation rate is 50 percent
7) One way to derive aggregate demand is by looking at its four component parts,
which are:
A) consumer expenditures, planned investment spending, government spending, and net
exports
B) consumer expenditures, actual investment spending, government spending, and net
exports
C) consumer expenditures, planned investment spending, government spending, and
gross exports
D) consumer expenditures, planned investment spending, government spending, and
taxes
8) You can borrow $5000 to finance a new business venture. This new venture will
generate annual earnings of $251. The maximum interest rate that you would pay on the
borrowed funds and still increase your income is
A) 25%
B) 12.5%
C) 10%
D) 5%
9) Evidence suggests that a liquidity trap is possible when
A) real interest rates are at zero
B) real interest rates are at or just above zero
C) nominal interest rates are at zero
D) nominal interest rates are at or just above zero
10) American farmers who sell beef to Europe benefit most from
A) a decrease in the dollar price of euros
B) an increase in the dollar price of euros
C) a constant dollar price for euros
D) a European ban on imports of American beef
11) Under the Exchange Rate Mechanism of the European Monetary System, when the
British pound depreciated below its lower limit against the German mark, the German
central bank was required to buy ________ and sell ________, thereby ________
international reserves.
A) pounds; marks; losing
B) pounds; marks; gaining
C) marks; pounds; gaining
D) marks; pounds; losing
12) Adverse selection occurs when those ________ likely to get ________ insurance
payoffs are the ones who want to purchase insurance the most.
A) least; large
B) least; small
C) most; large
D) most; small
13) Everything else held constant, if a central bank makes an unsterilized ________ of
foreign assets, then the domestic money supply will increase and the domestic currency
will ________.
A) purchase; appreciate
B) purchase; depreciate
C) sale; appreciate
D) sale; depreciate
14) ________ are the time and resources spent trying to exchange goods and services.
A) Bargaining costs
B) Transaction costs
C) Contracting costs
D) Barter costs
15) Taxpayers were served poorly by thrift regulators in the 1980s. This poor
performance cannot be explained by
A) regulators’ desire to escape blame for poor performance, leading to a perverse
strategy of “bureaucratic gambling”
B) regulators’ incentives to accede to pressures imposed by politicians, who sought to
keep regulators from imposing tough regulations on institutions that were major
campaign contributors
C) Congress’s dogged determination to protect taxpayers from the unsound banking
practices of managers at many of the nations savings and loans
D) politicians strong incentives to act in their own interests rather than the interests of
the taxpayers
16) Explain the Taylor rule, including the formula for setting the federal funds rate
target, and the components of the formula. If the Fed were to use this rule, how many
goals would it use to set monetary policy?
17) The economist who proposed that, “Inflation is always and everywhere a monetary
phenomenon” was
A) John Maynard Keynes
B) John R. Hicks
C) Milton Friedman
D) Franco Modigliani
18) According to aggregate demand and supply analysis, the negative supply shocks of
1973-1975 and 1978-1980 had the effect of
A) increasing aggregate output, lowering unemployment, and raising the inflation
B) decreasing aggregate output, raising unemployment, and raising the inflation
C) increasing aggregate output, raising unemployment, and raising the inflation
D) decreasing aggregate output, raising unemployment, and lowering the inflation
19) Which of the following policy measures forced credit-rating agencies to provide
reports to the SEC when their employees go to work for a company that has been rated
by them in the last twelve months.?
A) The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
B) Sarbanes-Oxley Act of 2002
C) Global Legal Settlement of 2002
D) Gramm-Leach-Bliley Act of 1999
E) Riegle-Neal Act of 1994
20) As default risk increases, the expected return on corporate bonds ________, and the
return becomes ________ uncertain, everything else held constant.
A) increases; less
B) increases; more
C) decreases; less
D) decreases; more
21) Holding everything else constant,
A) if asset A’s risk rises relative to that of alternative assets, the demand will increase
for asset A
B) the more liquid is asset A, relative to alternative assets, the greater will be the
demand for asset A
C) the lower the expected return to asset A relative to alternative assets, the greater will
be the demand for asset A
D) if wealth increases, demand for asset A increases and demand for alternative assets
decreases
22) If a market participant believes that a stock price is irrationally high, they may try to
borrow stock from brokers to sell in the market and then make a profit by buying the
stock back again after the stock falls in price. This practice is called
A) short selling
B) double dealing
C) undermining
D) long marketing
23) Elimination of minimum brokerage commission rates occurred because of
A) competition from banks
B) demands of institution investors
C) competition from foreign brokerage firms
D) an action of the Securities and Exchange Commission
24) An increase in the riskiness of corporate bonds will ________ the yield on
corporate bonds and ________ the yield on Treasury securities, everything else held
constant.
A) increase; increase
B) reduce; reduce
C) increase; reduce
D) reduce; increase
25) The interest rate falls when either the demand for bonds ________ or the supply of
bonds ________.
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases
26) Everything else held constant, a decrease in net exports ________ aggregate
________.
A) increases; demand
B) decreases; demand
C) decreases; supply
D) increases; supply
27) If ten years ago the prices of the items bought last month by the average consumer
would have been much higher, then one can likely conclude that
A) the aggregate price level has declined during this ten-year period
B) the average inflation rate for this ten-year period has been positive
C) the average rate of money growth for this ten-year period has been positive
D) the aggregate price level has risen during this ten-year period
28) A decrease in the expected future domestic exchange rate causes the demand for
domestic assets to ________ and the domestic currency to ________, everything else
held constant.
A) increase; appreciate
B) increase; depreciate
C) decrease; appreciate
D) decrease; depreciate
29) When short-term interest rates are expected to fall sharply in the future, the yield
curve will
A) slope up
B) be flat
C) be inverted
D) be an inverted U shape
30) Over the next three years, the expected path of 1-year interest rates is 4, 1, and 1
percent. The expectations theory of the term structure predicts that the current interest
rate on 3-year bond is
A) 1 percent
B) 2 percent
C) 3 percent
D) 4 percent
31) Severe fiscal imbalances can directly trigger a currency crisis since
A) investors fear that the government may not be able to pay back the debt and so begin
to sell domestic currency
B) the government may stop printing money
C) the government may have to cut back on spending
D) the currency must surely increase in value
32) During the bank panics of the Great Depression the currency ratio
A) increased sharply
B) decreased sharply
C) increased slightly
D) decreased slightly
33) Secondary reserves include
A) deposits at Federal Reserve Banks
B) deposits at other large banks
C) short-term Treasury securities
D) state and local government securities
34) Periodic payments of net earnings to shareholders are known as
A) capital gains
B) dividends
C) profits
D) interest
35) Which of the following is not one of the eight basic puzzles about financial
structure?
A) Debt contracts are typically extremely complicated legal documents that place
substantial restrictions on the behavior of the borrower
B) Indirect finance, which involves the activities of financial intermediaries, is many
times more important than direct finance, in which businesses raise funds directly from
lenders in financial markets
C) Collateral is a prevalent feature of debt contracts for both households and business
D) There is very little regulation of the financial system.
36) Everything else held constant, an increase in the cost of production ________
aggregate ________.
A) increases; demand
B) decreases; demand
C) increases; supply
D) decreases; supply
37) If you sold a short contract on financial futures you hope interest rates
A) rise
B) fall
C) are stable
D) fluctuate
38) A current account surplus indicates that America is ________ its claims on foreign
wealth, while a deficit indicates that this country is ________ its claims on foreign
wealth.
A) reducing; reducing
B) reducing; increasing
C) increasing; reducing
D) increasing; increasing
39) A financial innovation that developed as a result of banks avoidance of bank
branching restrictions was
A) money market mutual funds
B) commercial paper
C) junk bonds
D) bank holding companies