If a government were to find that it cannot raise taxes any further, and that it cannot
borrow any further from financial markets, the government:
A. cannot increase its spending any further.
B. can increase spending by having the central banks purchase its bonds.
C. is in default.
D. can decrease the amount of money in circulation.
Answer:
A reduction in the central bank’s inflation target will result in:
A. an increase in potential output.
B. no change in potential output.
C. a decrease in potential output.
D. the long-run aggregate supply curve having an upward slope.
Answer:
If the U.S. government’s borrowing needs increase, in the bond market this would be
seen as the:
A. bond demand curve shifting right.
B. bond supply curve shifting right.
C. bond demand curve shifting left.
D. bond supply curve shifting left.
Answer:
Which of the following statements is most correct?
A. We can always compute the ex post real interest rate but not the ex ante real rate.
B. We cannot compute either the ex post or ex ante real interest rates accurately.
C. We can accurately compute the ex ante real interest rate but not the ex post real rate.
D. None of the statements are correct.
Answer:
Under the Liquidity Premium Theory a flat yield curve implies:
A. there is no risk premium for longer-term maturities.
B. short-term interest rates are expected to remain constant.
C. short-term interest rates are expected to decrease.
D. long-term interest rates are higher than short-term interest rates.
Answer:
A country’s current account represents:
A. the amount one country owes to another country.
B. the net flow of all transactions between one country and another country.
C. the amount a country imports from the rest of the world.
D. the net flow of goods and services between that country and the rest of the world.
Answer:
Of the more than 6,100 banks in the United States at the end of 2013, by far the greatest
numbers of them were:
A. regional banks.
B. money center banks.
C. community banks.
D. savings banks.
Answer:
If the U.S. government’s borrowing needs increase, all other factors constant the:
A. demand for bonds will decrease.
B. price of bonds will increase.
C. supply of bonds will increase.
D. yields on bonds will decrease.
Answer:
If M2 is four times larger than M1, the velocity of M1 should be:
A. one-fourth of the velocity of M2.
B. equal to the velocity of M2.
C. equal to four.
D. four times larger than the velocity of M2.
Answer:
The internal rate of return of an investment is:
A. the same as return on investment.
B. zero when the present value of an investment equals its cost.
C. the interest rate that equates the present value of an investment with its cost.
D. equal to the market rate of interest when an investment is made.
Answer:
Higher stock prices can lead to greater investment spending by firms because:
A. the cost of external financing is lower.
B. the market value of a firm is now less than the replacement cost of the firm.
C. the firm gets 100 percent of the increase in the stock value.
D. the cost of internal financing is lower and the firm also gets 100 percent of the
increase in the stock value.
Answer:
As inflation increases, for any fixed nominal interest rate, the real interest rate:
A. also increases.
B. remains the same, that’s why it is real.
C. decreases.
D. decreases by less than the increase in inflation.
Answer:
A country’s capital account:
A. is synonymous with the current account.
B. will be in a deficit position when the current account is in a deficit.
C. will be in a surplus position if the current account is in a deficit position.
D. reflects the sum of exports minus imports.
Answer:
The relationship between the long-run real interest rate and potential output:
A. is direct.
B. is inverse.
C. is constant since the long-run real interest rate is primarily determined by risk.
D. depends on the actions of central bankers.
Answer:
What would be the impact on the monetary policy reaction curve if the Fed were to
raise the target inflation rate?
A. The monetary policy reaction curve shifts to the left
B. A movement up the existing monetary policy reaction curve
C. A movement down the existing monetary policy reaction curve
D. The monetary policy reaction curve shifts to the right
Answer:
A person who discovers that he/she has advanced stages of cancer and calls his/her life
insurance agent to double his/her insurance policy is an example of:
A. a moral hazard risk.
B. the risk of adverse selection.
C. the problem of information symmetry.
D. risk spreading.
Answer:
When compared to Canada or Japan, the U.S. is unusual in that it has:
A. far fewer banks than either of those countries.
B. fewer banks than Japan but more than Canada.
C. more banks than Japan but fewer than Canada.
D. more banks than either Japan or Canada.
Answer:
Gold is:
A. the most important asset on the Fed’s balance sheet.
B. extremely important as an asset for the Fed.
C. a small portion of the Fed’s assets.
D. very important for monetary policy in the U.S.
Answer:
Users of commodities are:
A. usually not participants in futures contracts.
B. speculators preferring to get the large returns which result from large risk.
C. likely to take the short position in a futures contract.
D. buyers of futures.
Answer:
When the home construction industry does poorly due to a recession, this is an example
of:
A. systematic risk.
B. idiosyncratic risk.
C. risk premium.
D. unique risk.
Answer:
Which of the following is not a bank asset?
A. Securities
B. Mortgage loans
C. Reserves
D. Non-transaction deposits
Answer:
The user of a commodity who is trying to insure against the price of the commodity
rising would:
A. take the short position in a futures contract.
B. take the long position in a futures contract.
C. be better off speculating on price movements and earning higher profits.
D. want to hedge by selling a futures contract.
Answer:
All other factors held constant, an investment:
A. with more risk should offer a lower return and sell for a higher price.
B. with less risk should sell for a lower price and offer a higher expected return.
C. with more risk should sell for a lower price and offer a higher expected return.
D. with less risk should sell for a lower price and offer a lower return.
Answer:
Capital controls:
A. can be controls on capital inflows.
B. can only be controls on capital outflows.
C. can be controls on capital inflows or outflows.
D. must be controls on both capital inflows and outflows in order to be effective.
Answer:
If Bank A sells a $100,000 U.S. Treasury bond to the Fed, Bank A’s required reserves
will:
A. not change.
B. increase by $100,000.
C. decrease.
D. increase but by less than $100,000.
Answer:
Checkable deposits have decreased since the 1970’s mainly because:
A. regulators allowed higher rates to be paid on these accounts and banks found them
to be highly unprofitable.
B. people prefer to use credit cards rather than writing checks.
C. these deposit accounts offer little or no interest so depositors find them to be
expensive.
D. as banks added fees to these accounts people increased their holdings of currency.
Answer:
Bonds issued by a foreign government in its own currency would:
A. not be held by the Fed.
B. be held by the Fed as part of its securities.
C. be held by the Fed as part of its foreign exchange reserves.
D. be held by the Fed as part of its loans.
Answer:
In 2010, regulators of many nations agreed on a major update of internationally active
banks known as:
A. Basel III.
B. the Fred-Bob Act.
C. the Gramm-Leach-Bliley Act.
D. the Dodd-Frank Act.
Answer:
In the late 1970s into the early 1980s, interest rates were high and very volatile. During
this period:
A. the velocity of money should have been stable.
B. money demand as well as velocity should have also been shifting and volatile.
C. it should have been easy for the Fed to predict the velocity of money.
D. the Fed was actually targeting the short-term interest rate.
Answer:
The sharp reduction in the number of banks that has occurred since the mid-1990s has
been due primarily to:
A. bank failures from increased competition.
B. bank mergers.
C. the closing of banks by federal regulators.
D. the revoking of state bank charters.
Answer:
Which of the following is not correct with regard to the definition of a recession as used
by the NBER?
A. A recession occurs whenever there is a dip in the growth rate.
B. The exact length of time needed for a downturn to be declared a recession is not
specified.
C. Many key economic indicators are used, some of which may move in opposite
directions.
D. A recession is characterized by lower levels of economic activity.
Answer:
A decrease in Americans’ preference for foreign goods will lead to the following in the
foreign exchange market:
A. an increase in the demand for dollars.
B. a decrease in the supply of dollars.
C. a depreciation of the dollar relative to foreign currencies.
D. a movement down the demand curve for dollars.
Answer:
A borrower has information that is not available to a prospective lender; this is an
example of:
A. a wise borrower and an unwise lender.
B. a transfer of risk.
C. information asymmetry.
D. liquidity risk.
Answer:
Answer:
Briefly explain the different focus of valuing stocks taken by behaviorists, chartists, and
fundamentalists.
Answer:
How would the impact on the exchange rate differ if the Fed were to sell U.S. Treasury
securities instead of selling an equal amount (in $ terms) of euros?
Answer:
What is your response to the following: “The Taylor rule shows a strong correlation
between the target rate actually set by the FOMC and the one predicted by the rule.
Since the Taylor rule would provide accountability, credibility, and transparency, the
FOMC committee should be dissolved and replaced by a form of the Taylor rule.”
Answer:
The same laptop computer cost $2,000 in the United States, 220,000 Japanese yen,
£1,300 British pounds, and €1900 in Germany. If the law of one price holds, what are
the yen/$; £/$ and €/$ exchange rates?
Answer:
Why did it take almost 100 years before the United States had its own national
currency?
Answer:
How did poor economic forecasting contribute to the high inflation experienced in the
U.S. economy in the 1970s?
Answer:
An investor sees the current twelve-month rate at 4% and expects the following future
twelve-month rate for each of the subsequent years; 4.5%, 5.5% and 6.0%. If this
investor views a four-year maturity at 5.65% as equal to four consecutive one-year
securities, what is his/her risk premium?
Answer:
The practice of “redlining” in bank lending is clearly an example of discrimination in
lending. Agree or disagree? Why?
Answer:
The text points out that the apparent result of central bank independence has been better
performing economies. Why do you think it took so long for many countries to create
independent central banks?
Answer:
It has been argued that regulations can often be the source of innovation. Provide an
example of this in the banking industry.
Answer:
During the early 1980s, the U.S. economy experienced an increase in interest rates
quoted on U.S. Treasury debt, business loans, and mortgages. At the same time the
inflation rate gradually declined more than expected. What happened to ex ante versus
ex post real interest rates during this period? Use the Fisher equation to support your
answer.
Answer:
Why do insurance companies often find it necessary to purchase re-insurance?
Answer:
Assuming the free flow of capital, explain why the central bank of a country that has
fixed its exchange rate would not find discussions of inflation on the agenda of its
policy meetings.
Answer:
Answer:
The empirical evidence on the velocity of money, specifically M2, shows it to be
relatively stable over the long run. Does this imply that monetary policymakers really
should focus on the growth rate of money for economic stability?
Answer: