If the required reserve rate is ten percent and banks do not hold any excess reserves and
there are no changes in currency holdings, a $1 million open market purchase by the
Fed will result in deposit creation of:
A. $9 million.
B. $90 million.
C. $10 million.
D. $900,000.
Answer:
There is a strong consensus among economists that monetary policy is more effective
when it is formed:
A. by an individual rather than a committee.
B. in secrecy without the reasoning behind it being revealed for many years.
C. to keep financial markets guessing.
D. independently of political pressure.
Answer:
The period 1974-1975 is somewhat unique in U.S. economic history due to the fact
that:
A. the output was growing rapidly and the inflation rate was falling.
B. both the output and the inflation rate were falling.
C. output was falling yet the inflation rate rose dramatically.
D. output and the inflation rate were both rising.
Answer:
A 10-year Treasury note as a face value of $1,000, price of $1,200, and a 7.5% coupon
rate. Based on this information, we know the:
A. present value is greater than its price.
B. current yield is equal to 33%.
C. coupon payment on this bond is equal to $75.
D. coupon payment on this bond is equal to $90.
Answer:
Higher savings usually requires higher interest rates because:
A. everyone prefers to save more instead of consuming.
B. saving requires sacrifice and people must be compensated for this sacrifice.
C. higher savings means we expect interest rates to decrease.
D. of the rule of 72.
Answer:
An individual who neither uses nor produces a commodity but sells a futures contract
for the asset is:
A. speculating that the price of the commodity is going to fall.
B. speculating that the price of the commodity is going to increase.
C. hedging trying to transfer risk.
D. using arbitrage to earn profits without taking a risk.
Answer:
The high rates of inflation that were experienced in the 1970s could partly be blamed on
all of the following except:
A. the assumption the economy would continue to grow at the rates that the economy
experienced in the 1960s.
B. the Vietnam war.
C. high oil prices.
D. rapid growth rates of potential GDP during the 1970s.
Answer:
A wheat farmer who must purchase his inputs now but will sell his wheat at a market
price at a future date:
A. faces a market risk that cannot be offset.
B. is a good example of what the chapter refers to as a speculator.
C. would hedge by taking the short position in a wheat futures contract.
D. would hedge by taking the long position in a wheat futures contract.
Answer:
The impact of monetary policy on the exchange rate and net exports is best described
as:
A. the strongest of all the parts of the transmission mechanism.
B. powerful, but lagging.
C. difficult to forecast.
D. nonexistent.
Answer:
The inter-bank loans that appear on banks’ balance sheets represent what proportion of
bank capital?
A. Nearly ten percent
B. Almost three-fourths
C. About one-third
D. Less than one percent
Answer:
As general business conditions improve, all other factors constant the:
A. price of bonds will increase.
B. yield on bonds will increase.
C. bond demand curve shifts right.
D. bond supply curve shifts left.
Answer:
Which of the following best expresses the payment a lender receives for lending money
for three years?
A. 3PV
B. PV(1 + i)3
C. PV/(1 + i)3
D. FV/(1 + i)3
Answer:
If we have a stock selling for $95.00 and a call option for this stock has a strike price of
$82.00 and an option price of $13.60:
A. the intrinsic value of the option is $0.60 and the time value of the option is $13.00.
B. the intrinsic value is $82.00 and the time value of the option is $13.60.
C. the intrinsic value of the option is $13.00 and the time value of the option is $0.60.
D. the intrinsic value is $0 since the option is out of the money.
Answer:
A category of assets for banks is cash items in the process of collection. This is:
A. uncollected funds the bank is due to receive from the clearing of checks.
B. currency the bank is due from the Treasury.
C. late fees the bank is owed from loan payments that were not made on time.
D. payments from the FDIC insurance fund due the bank.
Answer:
During the Great Depression, the monetary base in the U.S.:
A. decreased significantly.
B. increased.
C. remained constant.
D. was highly erratic.
Answer:
The operational components required for truly independent central banks include:
A. a budget controlled by Congress.
B. the ability to have policies reversed.
C. monetary policies that cannot be reversed by anyone outside of the central bank.
D. the chairperson of the bank being answerable only to the President.
Answer:
The two best known bond rating services are:
A. the Federal Reserve and Moody’s Investment Services.
B. the Federal Reserve and the U.S. Treasury.
C. Standard & Poor’s and the Wall Street Journal.
D. Standard & Poor’s and Moody’s Investment Services.
Answer:
Municipal bonds are usually purchased by:
A. retired investors who have no other taxable income.
B. investors looking for securities to buy for their IRA accounts.
C. investors who live in cities with high municipal tax rates.
D. investors who are in high marginal tax brackets.
Answer:
We have a stock selling for $90.00. There is a put option for this stock with a strike
price of $85 and an option price of $1.20:
A. the intrinsic value of this option is $0.00 and the time value of the option is $1.20.
B. the intrinsic value of this option is $90.00 and the time value of the option is $1.20.
C. the intrinsic value of this option is -$5.00 and the time value of the option is $1.20.
D. you cannot determine the intrinsic value or time value of the option since the strike
price is less than the underlying asset price.
Answer:
All of the following are associated with a fixed exchange rate policy except:
A. sacrificing control of the domestic inflation rate.
B. higher import prices.
C. the need to maintain ample international reserves.
D. it means importing monetary policy.
Answer:
Bond prices and yields:
A. move together in the same direction.
B. do not change if the coupon is fixed.
C. move together inversely.
D. are independent of each other.
Answer:
The Governors of the Federal Reserve System serve terms of:
A. four years that can be renewed.
B. fourteen years.
C. four years, the same as the U.S. President, and the terms are not renewable.
D. seven years.
Answer:
Most finance companies specialize in one of three loan types. Which of the following is
not one of those three types?
A. Consumer loans for purchases such as appliances
B. Margin loans for buying stock
C. Sales loans for purchases such as cars
D. Business loans for firms to use to buy new equipment
Answer:
The empirical evidence on purchasing power parity over the long run seems to point out
that:
A. the higher a country’s inflation rate, the greater is the appreciation in the country’s
currency.
B. the theory of purchasing power parity cannot explain long-run changes in exchange
rates.
C. the higher a country’s inflation rate the greater is the depreciation in the country’s
currency.
D. there isn’t any clear link between inflation rates and exchange rates.
Answer:
The dynamic aggregate demand curve has a negative slope for all of the following
reasons except:
A. the reduction in real wealth caused by inflation.
B. the fact that high rates of inflation are good for the stock market.
C. the redistribution that occurs as inflation has a greater impact on the poor than it
does on the wealthy.
D. higher current inflation leads policymakers to increase the real interest rate, which
depresses various components of aggregate expenditures.
Answer:
The weighted average difference between the interest received on assets and the interest
rate paid for liabilities for a bank is the bank’s:
A. interest rate spread.
B. net interest margin.
C. net interest income.
D. return on equity.
Answer:
The impact of a decrease in expected inflation in the bond market will have a relatively
large effect on the prices of bonds prices because the bond demand curve:
A. will shift right as will the bond supply curve.
B. will shift right but the bond supply curve shifts left.
C. and supply curves will shift left.
D. will shift left as the bond supply curve shifts right.
Answer:
Financial instruments used primarily to transfer risk would not include:
A. a bank loan.
B. options.
C. an insurance policy.
D. home mortgages.
Answer:
You have two savings accounts at an FDIC insured bank. You have $225,000 in one
account and $40,000 in the other. If the bank fails, you will receive:
A. $225,000.
B. $40,000.
C. $115,000.
D. $250,000.
Answer:
The Fed will make a discount loan to a bank during a crisis:
A. no matter what condition the bank is in.
B. only if the bank is sound financially and can provide collateral for the loan.
C. but if the bank doesn’t have collateral the interest rate is higher.
D. only if the bank would fail without the loan.
Answer:
Which of the following best completes the sentence; “Under a gold standard a central
bank “?
A. can have too much gold.
B. can have too little gold but never have too much.
C. wants to keep their gold reserves fixed.
D. will have gold reserves depleted when exports exceed imports.
Answer:
The monetary base is also known as:
A. M1.
B. M2.
C. high-powered money.
D. free reserves.
Answer:
If M = the money supply; Y = real output, P = the price level, and V = velocity, which
of the following equals the velocity of money?
A. (Y × M)/P
B. (P × M)/Y
C. (P × Y)/M
D. (P × Y) + M
Answer:
Savings and loans primarily provide:
A. large commercial loans.
B. unsecured credit card loans.
C. student loans.
D. home mortgages.
Answer:
Suppose that general business conditions improve, and at the same time, wealth
increases. Based on this information, we know that:
A. bond prices increase.
B. yield to maturity decreases.
C. the real interest rate increases.
D. the quantity of bonds increases.
Answer: