If a bank has 1,000 depositors, each of whom deposits $1,000 in the bank, and the bank
makes loans of $10,000 each, then each depositor has contributed:
A. $100 to each loan.
B. $1 to each loan.
C. $10 to each loan.
D. $1000 to each loan.
Answer:
If a U.S. dollar currently purchases 1.3 Canadian dollars and the inflation rate in
Canada over the next year is 5 percent while it is 2 percent in the U.S., we should
expect a U.S. dollar to purchase:
A. 1.365 Canadian dollars.
B. 1.262 Canadian dollars.
C. 1.300 Canadian dollars.
D. 1.339 Canadian dollars.
Answer:
The category of financial intermediaries called securities firms includes each of the
following, except:
A. mutual funds.
B. brokerages.
C. investment banks.
D. credit unions.
Answer:
As an option approaches its expiration date, the value of the option approaches:
A. the intrinsic value.
B. the price of the underlying asset.
C. zero.
D. infinity.
Answer:
Consider the following ratio: the average annual inflation rate/the average annual
money growth rate. If a country’s rate of money growth consistently exceeds the rate of
inflation the ratio would be:
A. less than one.
B. greater than one.
C. that is infinite.
D. exactly one.
Answer:
Interest on most bonds issued by states is usually exempt from:
A. state income tax but not federal.
B. from federal income tax but not state.
C. both state and federal income taxes.
D. from city income taxes.
Answer:
Savings banks and savings and loans are regulated by a combination of agencies which
includes all of the following except:
A. The Federal Reserve System.
B. The Comptroller of the Currency.
C. The Federal Deposit Insurance Corporation.
D. state authorities.
Answer:
The market for bonds is initially described by the supply of bonds – S0, and the demand
for bonds – D0, with the equilibrium price and quantity being P0 and Q0. If the U.S.
government’s borrowing needs decrease, all other factors constant:
A. Bond supply curve to shift to S1
B. Bond demand curve to shift to D1
C. Bond supply curve to shift to S2
D. Bond demand curve to shift to D2
Answer:
Almost all recessions identified by the NBER are characterized by:
A. declining real GDP.
B. higher interest rates.
C. durations exceeding two years.
D. higher rates of inflation.
Answer:
Most of the Fed’s income is:
A. paid to member banks in the form of a dividend.
B. sent to the FDIC to shore up the depositor insurance fund.
C. returned to the U.S. Treasury.
D. used to build the Fed’s portfolio of securities.
Answer:
Which of the following statements is true?
A. Leverage increases expected return while lowering risk.
B. Leverage increases risk.
C. Leverage lowers the expected return and lowers risk.
D. Leverage lowers the expected return and increases risk.
Answer:
Most home mortgages are good examples of:
A. consols.
B. zero-coupon bonds.
C. coupon bonds.
D. fixed-payment loans.
Answer:
A risk-averse investor will:
A. always accept a greater risk with a greater expected return.
B. only invest in assets providing certain returns.
C. never accept lower risk if it means accepting a lower expected return.
D. sometimes accept a lower expected return if it means less risk.
Answer:
Which of the following statements is most correct?
A. Reserves are assets of the central bank and liabilities of the U.S. Treasury.
B. Reserves are assets of the central bank and liabilities of the commercial banks.
C. Reserves are liabilities of the commercial banks and assets of the U.S. Treasury.
D. Reserves are assets of the commercial banks and liabilities of the central bank.
Answer:
Reinsurance is used by insurance companies faced with:
A. the prospects of a large but diversified risk.
B. inadequate capital to handle a potential loss.
C. insolvency.
D. the problem of moral hazard.
Answer:
The coupon rate for a coupon bond is equal to the:
A. annual coupon payment divided by the face value of the bond.
B. annual coupon payment divided by the purchase price of the bond.
C. purchase price of the bond divided by the coupon payment.
D. annual coupon payment divided by the selling price of the bond.
Answer:
One reason a bank’s officer may be reluctant to write off a past-due loan is that it will:
A. increase the bank’s liabilities.
B. decrease the bank’s assets and capital.
C. increase the bank’s liabilities and assets, requiring more capital to be held.
D. make the bank’s accounts less transparent.
Answer:
Which of the following statements would you say best reflects monetary policy?
A. It is a hard and fast science.
B. Its impact is impossible to predict.
C. It is a lot like gambling because the outcomes are most of the time uncertain.
D. There is certainly some science involved, a lot of understanding that is needed, but a
lot of uncertainty still remains.
Answer:
The Taylor rule assumes the real long-term interest rate would be:
A. approximately 2%.
B. zero.
C. five percent less the inflation rate.
D. one percent.
Answer:
If the Dow Jones Industrial Average is at 10,205 and it is up 4% from the previous day,
what was the index at the close of the market the previous day?
A. 10,201.0
B. 9,805.0
C. 9,812.5
D. 9800.0
Answer:
The concept of limited liability says a stockholder of a corporation:
A. is liable for the corporation’s liabilities, but nothing more.
B. cannot receive dividends that exceed his/her investment.
C. cannot lose more than his/her investment.
D. is only responsible for any taxes that the corporation may owe but not its other
debts.
Answer:
When the monetary policymakers raise the target inflation rate they:
A. raise the current real inflation rate at every level of current inflation.
B. lower the current real interest rate at every level of current inflation.
C. in effect shift the monetary policy reaction curve to the left.
D. in effect move up along the current monetary policy reaction curve.
Answer:
An open market sale of securities by the central bank to banks usually will:
A. diminish the inclination of banks to make loans.
B. induce the banks to make more loans since their revenue will decrease if they do
nothing.
C. increase the amount of deposits in the banking system.
D. increase the banks’ willingness and ability to make loans.
Answer:
Insurance company assets will include:
A. stocks and bonds.
B. only bonds.
C. only stocks.
D. only U.S. Treasury securities.
Answer:
An easing of monetary policy should:
A. increase spending by households and businesses and increase net exports.
B. raise net exports but lower spending by households and businesses.
C. decrease spending by households and businesses as well as net exports.
D. increase investment and household spending but lower net exports.
Answer:
Suppose a family wants to save $60,000 for a child’s tuition. The child will be attending
college in 18 years. For simplicity, assume the family is saving for a one-time college
tuition payment. If the interest rate is 6%, then about how much does this family need
to deposit in the bank today?
A. $10,000
B. $21,000
C. $42,000
D. $57,000
Answer:
A characteristic of long-run equilibrium is the economy is producing its potential
output. This is:
A. the maximum level of output the economy could produce at any time.
B. the level of output the economy produces when its resources are used at normal
rates.
C. defined as using 80 percent of the economy’s resources at any time.
D. the level of output consistent with an unemployment rate of 7.5%.
Answer:
The relationship between the velocity of money and interest rates is:
A. positive but not stable.
B. negative but not stable.
C. positive and stable.
D. negative and stable.
Answer:
As interest rates rise the supply of loans may decrease because:
A. borrowers net worth rises.
B. demand for loans falls.
C. lenders are increasingly on the lookout for adverse selection.
D. all of the answers given are correct.
Answer:
All of the following could represent the transmission of monetary policy, except:
A. households altering their spending on durable goods.
B. income tax rates changing.
C. firms altering their growth plans.
D. net exports changing.
Answer:
The Nasdaq Composite Index is:
A. made up of over 50,000 firms traded on the Over-the-Counter market.
B. a price-weighted index.
C. made up of mainly newer firms, and heavily influenced by technology and internet
companies.
D. the most broadly based index in use.
Answer:
The Federal Reserve was created in:
A. 1929.
B. 1913.
C. 1909.
D. 1945.
Answer:
Which of the following stock price indexes is a price-weighted index?
A. Dow Jones Industrial Average
B. Standard & Poor’s 500 Index
C. Nasdaq
D. Wilshire 5000
Answer:
Loans made between borrowers and lenders are:
A. usually not taxable at the federal level.
B. legal only in the state of origination.
C. assets of the lenders.
D. assets of the borrowers.
Answer:
Which of the following statements is false?
A. Pension plans and life insurance are often both offered by the same institution.
B. Life insurance companies hold more in stocks than pension funds do.
C. Life insurance pays off when you die while the pension plan pays off if you don’t.
D. They are both vehicles for saving.
Answer:
Why do most central banks publish their balance sheets so frequently?
Answer:
Considering the foreign exchange market, specifically the market for U.S. dollars and
British pounds, who is supplying dollars in this market?
Answer:
On what aspect of policymaking, according to Robert Lucas, have policymakers been
short sighted in the past?
Answer:
Explain the concept of notional principal used in swaps.
Answer:
Why must caution be employed in comparing stock indexes across countries?
Answer:
An annuity is a contract that makes monthly payments as long as someone lives.
Explain why an individual would want to purchase such a contract. What risk is being
transferred?
Answer:
Identify at least three effects that could result when the central bank changes its balance
sheet that can impact the economy.
Answer:
Discuss why the interest-rate transmission mechanism of monetary policy isn’t as strong
as most people may think it might be.
Answer:
Why are policymakers reluctant to make unconventional tools part of their regular
arsenal of policy tools?
Answer:
What are the three main functions a central bank performs in its role as a banker’s
bank?
Answer:
We have heard the predictions regarding the large number of people that will be retiring
over the next 25-50 years and the strain this is going to place on the federal budget.
Assuming that federal borrowing will have to increase, what is the likely impact going
to be on the risk and term structure (if any) of interest rates and why?
Answer:
Suppose a student writes a check in the amount of $300 to the college bookstore for
textbooks. Discuss briefly the impact on the student’s balance sheet, his/her bank’s
balance sheet and the balance sheet of the Fed.
Answer:
What is the link between purchasing power parity, inflation and the exchange rate?
Answer:
Explain why deflation can be so troubling to borrowers and lenders.
Answer:
A bank advertises a very competitive loan interest rate. Explain what measures the bank
can take to address adverse selection.
Answer:
Explain the impact on the Fed’s balance sheet from a $10 million open market purchase
of U.S. Treasury Securities. Be sure to identify which categories of assets and liabilities
change and by what amounts.
Answer: