If a bank has $100 million in assets and a net worth of $10 million, its debt-to-equity
ratio is:
A. 10 to 1.
B. 5 to 1.
C. 9 to 1.
D. 0.1 to 1.
Answer:
Under the Expectations Hypothesis, a downward-sloping yield curve suggests:
A. investors expect future short-term interest rates to fall.
B. investors expect future short-term interest rates to rise.
C. this is a trick question, the yield curve always slopes upward.
D. investors expect future short-term interest rates to remain constant.
Answer:
The challenges facing policymakers today include each of the following, except:
A. the economy’s sustainable growth rate is highly stable.
B. nominal interest rates cannot fall below zero.
C. stock and property values are subject to booms and busts.
D. the structure of the economy and financial system continues to evolve.
Answer:
If the Fed desired to fix the euro/dollar exchange rate, they would have to:
A. get the European Central Bank to also agree to fixed exchange rates.
B. maintain ample reserves of dollars.
C. be willing to exchange dollars for euros whenever anyone asked.
D. impose capital controls.
Answer:
Stable velocity as a contributing factor to successfully using money growth as a
stabilizing monetary policy tool, is more important in an environment where:
A. inflation is extremely high (e.g., over 100 percent).
B. inflation is low (e.g., less than 10 percent).
C. inflation occurs, the problems caused by a variable velocity are just as severe at low
levels of inflation as at high levels of inflation.
D. there is deflation.
Answer:
The high volume of shares of stock that are traded on a normal day on stock markets
reflects the:
A. high transaction costs associated with these financial markets.
B. low transaction costs and high liquidity associated with these markets.
C. low transaction costs and low liquidity associated with these markets.
D. high transactions costs and low liquidity associated with these markets.
Answer:
Assume the Expectation Hypothesis regarding the term structure of interest rates is
correct. Then, if the current one-year interest rate is 4% and the two-year interest rate is
6%, then investors are expecting the future one-year rate to be:
A. 4%.
B. 8%.
C. 6%.
D. 5%.
Answer:
Financial markets do not function as well as they could due to:
A. the fact that banking is highly monopolized.
B. the cost of obtaining information can be high.
C. regulation by governments.
D. fluctuations in the inflation rate.
Answer:
Once you buy a coupon bond, which of the following can change?
A. Coupon rate
B. Coupon payment
C. Face value
D. Yield to maturity
Answer:
A decrease in taxes would cause:
A. the dynamic aggregate demand curve to shift to the left.
B. a movement down and along the existing dynamic aggregate demand curve.
C. a movement up and along the existing dynamic aggregate demand curve.
D. the dynamic aggregate demand curve to shift to the right.
Answer:
Which of the following would cause an increase in the potential output of a country?
A. An increase in the capital stock
B. A temporary decrease in exports
C. An increase in the money supply
D. A decrease in the labor force
Answer:
Mary decides to withdraw $500 out of her checking account. The impact of this
transaction on the Banking System’s balance sheet will be to:
A. only reduce checkable deposits by $500.
B. increase reserves and reduce checkable deposits by $500 respectively.
C. decrease reserves and checkable deposits by $500 respectively.
D. only reduce reserves by the required reserve rate times $500.
Answer:
The higher the nominal interest rate:
A. the less money individuals will hold for any given level of transactions and the
higher the velocity of money.
B. the more money individuals will hold for any given level of transactions and the
higher the velocity of money.
C. the more money individuals will hold for any given level of transactions and the
lower the velocity of money.
D. the less money individuals will hold for any given level of transactions and the
lower the velocity of money.
Answer:
A bank run involves:
A. illegal activities on the part of the bank’s officers.
B. a bank being forced into bankruptcy.
C. a large number of depositors withdrawing their funds during a short time span.
D. a bank’s return on assets being below the acceptable level.
Answer:
Current law regarding the Fed’s Board of Governors stipulates that:
A. no more than three governors can come from the same district.
B. no more than two governors can come from the same district.
C. every district must have at least one governor on the board.
D. no more than one governor can come from the same district.
Answer:
What is the present value of $100 promised one year from now at 10% annual interest?
A. $89.50
B. $90.00
C. $90.91
D. $91.25
Answer:
Comparing a lottery where a $1 ticket purchases a chance to win $1 million with
another lottery in which a $5,000 ticket purchases a chance to win $5 billion, we notice
many people would participate in the first but not the second, even though the odds of
winning both lotteries are the same. We can perhaps best explain this outcome by:
A. higher expected value for the lottery paying $1 million.
B. higher expected value for the lottery paying $5 billion.
C. lower value at risk for the lottery paying $1 million.
D. higher value at risk for the lottery paying $1 million.
Answer:
In Hong Kong, the monetary authority can only increase the monetary base if they
accumulate more U.S. dollars because:
A. the currency of Hong Kong is the U.S. dollar.
B. the monetary authority in Hong Kong operates a currency board where its sole
objective is to fix the exchange rate between its currency and the U.S. dollar.
C. the IMF required Hong Kong to peg its currency to the U.S. dollar in order to obtain
a loan.
D. Hong Kong has received substantial funding from the U.S. Treasury and the loans
were conditional on maintaining the value of the Hong Kong currency.
Answer:
A borrower who has to pay an interest rate of 8% rather than 6% due to risk spread will
pay:
A. $20 more in interest annually for every $100 borrowed.
B. 33.3% higher interest in dollar terms.
C. 2% in net interest.
D. less interest in total over the life of the loan.
Answer:
Of all of the components of aggregate demand, the most interest sensitive is:
A. investment.
B. government purchases.
C. consumption.
D. net exports.
Answer:
Bonds issued by the U.S. Treasury are referred to as benchmark bonds because:
A. they are always purchased for a premium.
B. they are highly liquid and virtually free of default risk.
C. all bonds from national governments are labeled as benchmark bonds.
D. all bonds from the U.S. government have the same rate of interest.
Answer:
A bank usually treats the moral hazard problem by using all of the following, except:
A. not making loans.
B. requiring collateral.
C. requiring down payments.
D. restrictive covenants.
Answer:
If we look at the equation for money demand from Irving Fisher, which of the following
statements is true?
A. Velocity does not play any role in the equation
B. Money demand is not a factor of nominal income
C. The price level does not impact money demand
D. There isn’t an explicit role for the interest rate in the equation
Answer:
Speculative attacks:
A. can only result from irresponsible fiscal policy.
B. can always be stopped by the country’s central bank if they act quickly.
C. can be triggered even when domestic policymakers are acting responsibly.
D. are illegal, and if caught, speculators are assessed large fines.
Answer:
Pension funds resemble insurance companies by:
A. pooling the savings of only large investors.
B. accepting deposits.
C. spreading risk.
D. becoming better investments the longer you live.
Answer:
Which of the following is not a nondepository institution?
A. A savings and loan
B. An insurance company
C. A mutual fund company
D. A pension fund
Answer:
Which of the following statements is most correct?
A. Financial regulators do everything possible to encourage competition in banking.
B. Financial regulators work to prevent monopolies but also work to prevent strong
competition in banking.
C. Financial regulators discourage competition in banking.
D. Financial regulators prefer banks to have monopoly power in their geographic
markets.
Answer:
Recent policy statements by the FOMC announce and explain its:
A. targets for money growth with no mention of interest-rate targets.
B. short-term interest-rate and balance-sheet adjustments with no mention of money
growth targets.
C. decisions for long-term interest rates.
D. decisions for money-growth targets but also mentioning short-term interest-rate
decisions.
Answer:
The theory of purchasing power parity assumes:
A. the real exchange and nominal exchange rates are fixed.
B. the nominal exchange rate is fixed but the real exchange rate is flexible.
C. the real exchange rate is fixed but the nominal exchange rate is flexible.
D. the real exchange rate varies with the inflation differential.
Answer:
If monetary policymakers do not change their inflation target and aggregate demand
shifts left:
A. there will be a temporary decrease in output.
B. potential output will decrease.
C. there will be an increase in inflation in the long run.
D. it will result in a permanent reduction in inflation.
Answer:
Which of the following is incorrect?
A. Money is wealth but not all wealth is money.
B. Money is a means of payment but is not part of wealth.
C. An asset doesn’t have to be a means of payment to be a part of a person’s wealth.
D. All items considered wealth can eventually be converted to a means of payment.
Answer:
Explain why returns on assets compensate for systematic risk but not for idiosyncratic
risk.
Answer:
Explain how the clearing corporation reduces the risk it faces in the futures market
through the use of margin accounts and marking-to-market.
Answer:
Please explain how Federal Deposit Insurance (FDIC) could potentially create a moral
hazard for the managers of deposit institutions.
Answer:
Why does the Dow Jones Industrial Average have a value over 10,000 when the 30
stocks that make up the index all have values less than $200 per share?
Answer:
In recent years the discussions of the causes of recessions have focused on monetary
policy and higher oil prices as the likely causes. Discuss how we can get insight into the
likely cause by focusing on macroeconomic variables.
Answer:
Are foreign exchange market interventions the only tool available to a central bank to
change the exchange rate? Explain.
Answer:
Explain why for speculation, the purchase of an option may be more attractive than a
futures contract or the outright purchase of the underlying asset.
Answer:
In what ways do the regional Federal Reserve Banks influence monetary policy?
Answer:
Considering the three branches that make up the Federal Reserve System, identify the
corresponding branches that make up the Euro system. Be sure to state which part of
the Euro system corresponds to which part of the Federal Reserve System.
Answer:
Why isn’t it correct to say that people who are risk averse avoid risk?
Answer:
What were the reasons for selecting the U.S. dollar as the currency to which the other
43 countries agreed to peg their currencies as part of the Bretton Woods System?
Answer:
What would the portfolio demand for money look like if it were graphed on a set of
axes? What would each axis represent?
Answer:
What is the primary distinction between debt/equity markets and derivative markets?
Answer:
Discuss what experience concerning required reserves occurred during the Great
Depression that contributes to the decision today not to use required reserves as an
active tool of monetary policy.
Answer:
There have been many changes made to the method for computing the required reserves
for banks over the years. Currently, lagged reserve accounting used enables a bank and
the Fed to know the level of reserves required over a period of time well before the
period of time begins. Why is this method for computing reserves advantageous to
banks as well as the Fed?
Answer:
Most credit cards charge a relatively high rate of interest, yet many people carry them,
including people who would be considered low-risk borrowers. Our discussion of
adverse selection said that low-risk borrowers should have been discouraged from
these. What gives?
Answer: