The return on a 5 percent coupon bond that initially sells for $1,000 and sells for $950
next year is
A) -10 percent.
B) -5 percent.
C) 0 percent.
D) 5 percent.
Answer:
Using the Gordon growth model, a stock’s price will increase if
A) the dividend growth rate increases.
B) the growth rate of dividends falls.
C) the required rate of return on equity rises.
D) the expected sales price rises.
Answer:
Well-functioning financial markets
A) cause inflation.
B) eliminate the need for indirect finance.
C) cause financial crises.
D) produce an efficient allocation of capital.
Answer:
Unanticipated moral hazard contingencies can be reduced by
A) screening.
B) long-term customer relationships.
C) specialization in lending.
D) credit rationing.
Answer:
The most common type of discount lending that the Fed extends to banks is called
A) seasonal credit.
B) secondary credit.
C) primary credit.
D) installment credit.
Answer:
Financial markets promote economic efficiency by
A) channeling funds from investors to savers.
B) creating inflation.
C) channeling funds from savers to investors.
D) reducing investment.
Answer:
Economists’ attempts to explain the term structure of interest rates
A) illustrate how economists modify theories to improve them when they are
inconsistent with the empirical evidence.
B) illustrate how economists continue to accept theories that fail to explain observed
behavior of interest rate movements.
C) prove that the real world is a special case that tends to get short shrift in theoretical
models.
D) have proved entirely unsatisfactory to date.
Answer:
An increase in the money ________ shifts the LM curve to the ________, causing the
interest rate to fall and output to rise, everything else held constant.
A) demand; right
B) demand; left
C) supply; right
D) supply; left
Answer:
The factor accounting for the steepest rise in the currency ratio since 1892 is
A) taxes.
B) bank panics.
C) illegal activity.
D) an increase in wealth.
Answer:
One way the venture capital firm avoids the free-rider problem is by
A) prohibiting the sale of equity in the firm to anyone except the venture capital firm.
B) prohibiting members from serving on the board of directors.
C) prohibiting the borrowing firm from replacing management.
D) requiring collateral equal to the value of the borrowed funds.
Answer:
Assume a closed economy. Suppose that autonomous consumption equals $400,
planned investment equals $500, government expenditure equals $200, net taxes
equals $50, and the mpc equals 0.9.
Using the information in situation 20-2, if government spending increases by $100, then
the equilibrium aggregate output will change by
A) -$1,000.
B) -$100.
C) $100.
D) $1,000.
Answer:
Psychologists have found that people tend to be ________ in their own judgments.
A) underconfident
B) overconfident
C) indecisive
D) insecure
Answer:
New computer technology has
A) increased the cost of financial innovation.
B) increased the demand for financial innovation.
C) reduced the cost of financial innovation.
D) reduced the demand for financial innovation.
Answer:
Which of the following $1,000 face-value securities has the highest yield to maturity?
A) A 5 percent coupon bond selling for $1,000
B) A 10 percent coupon bond selling for $1,000
C) A 12 percent coupon bond selling for $1,000
D) A 12 percent coupon bond selling for $1,100
Answer:
If the required reserve ratio is one-third, currency in circulation is $300 billion, and
checkable deposits are $900 billion, then the money supply is ________ billion.
A) $2700
B) $3000
C) $1200
D) $1800
Answer:
According to Edward Kane, because the banking industry is one of the most ________
industries in America, it is an industry in which ________ is especially likely to occur.
A) competitive; loophole mining
B) competitive; innovation
C) regulated; loophole mining
D) regulated; innovation
Answer:
An important financial institution that assists in the initial sale of securities in the
primary market is the
A) investment bank.
B) commercial bank.
C) stock exchange.
D) brokerage house.
Answer:
A tax increase ________ disposable income, ________ consumption expenditure, and
shifts the IS curve to the ________, everything else held constant.
A) increases; increases; right
B) increases; decreases; left
C) decreases; increases; left
D) decreases; decreases; left
Answer:
A case for capital inflow controls can be made because capital inflows
A) can cause a lending boom and lead to excessive risk taking.
B) never finance productive investments.
C) always finance productive investments.
D) are less likely to cause financial crises than regulation of banking activities.
Answer:
If a bank has ________ rate-sensitive assets than liabilities, a ________ in interest rates
will reduce bank profits, while a ________ in interest rates will raise bank profits.
A) more; rise; decline
B) more; decline; rise
C) fewer; decline; decline
D) fewer; rise; rise
Answer:
Using the one-period valuation model, assuming a year-end dividend of $1.00, an
expected sales price of $100, and a required rate of return of 5%, the current price of the
stock would be
A) $110.00.
B) $101.00.
C) $100.00.
D) $96.19.
Answer:
The discount rate is kept ________ the federal funds rate because the Fed prefers that
A) below ; banks borrow reserves from each other.
B) below; banks borrow reserves from the Fed.
C) above; banks borrow reserves from each other.
D) above; banks borrow reserves from the Fed.
Answer:
Assume a closed economy with no government. Suppose that autonomous
consumption equals $400, planned investment equals $500, and the mpc equals 0.9.
Using the information contained in Situation 20-1, if planned investment decreases by
$100, the equilibrium aggregate output will change by
A) -$1,000.
B) $-100.
C) $100.
D) $1,000.
Answer:
Because ________ are less liquid for the depositor than ________, they earn higher
interest rates.
A) passbook savings; time deposits
B) money market deposit accounts; time deposits
C) money market deposit accounts; passbook savings
D) time deposits; passbook savings
Answer:
The stock market is important because it is
A) where interest rates are determined.
B) the most widely followed financial market in the United States.
C) where foreign exchange rates are determined.
D) the market where most borrowers get their funds.
Answer:
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.
Answer:
The aggregate supply curve is the total quantity of
A) raw materials offered for sale at different inflation rates.
B) final goods and services offered for sale at the current inflation rate.
C) final goods and services offered for sale at different inflation rates.
D) intermediate and final goods and service offered for sale at different inflation rates.
Answer:
Everything else held constant, in the market for reserves, when the demand for federal
funds intersects the reserve supply curve on the vertical section, increasing the discount
rate
A) increases the federal funds rate.
B) lowers the federal funds rate.
C) has no effect on the federal funds rate.
D) has an indeterminate effect on the federal funds rate.
Answer:
When the Federal Reserve calls in a discount loan from a bank, the monetary base
________ and reserves ________.
A) remains unchanged; decrease
B) remains unchanged; increase
C) decreases; decrease
D) decreases; remains unchanged
Answer:
When the European System of Central Banks uses main refinancing operations, it is
similar to the Federal Reserve using
A) dynamic open market operations.
B) defensive open market operations.
C) discount policy.
D) reserve requirements.
Answer:
To reduce moral hazard problems, banks include restrictive covenants in loan contracts.
In order for these restrictive covenants to be effective, banks must also
A) monitor and enforce them.
B) be willing to rewrite the contract if the borrower cannot comply with the restrictions.
C) trust the borrower to do the right thing.
D) be prepared to extend the deadline when the borrower needs more time to comply.
Answer: