If U.S. assets are seen as having greater risk relative to foreign assets in the market for
foreign exchange, this should cause the:
A. demand for dollars to increase.
B. supply of dollars to decrease.
C. supply of dollars to increase.
D. dollar to appreciate.
Answer:
Financial instruments used primarily as stores of value would not include:
A. a car insurance policy.
B. a U.S. Treasury bond.
C. shares of General Motors stock.
D. a home mortgage.
Answer:
A foreign exchange intervention is:
A. synonymous with a fixed exchange rate.
B. the use of public statements by government officials to influence inflation
expectations.
C. only used in crisis situations.
D. the buying/selling of currencies to affect supply or demand which impacts the
exchange rate.
Answer:
Which of the following statements is not true?
A. For most of history gold has been the most common commodity money.
B. The most common form of money in the U.S. is not a commodity money.
C. Gold is an example of a fiat money.
D. U.S. currency is legal tender.
Answer:
“Official” recessions in the United States are declared by:
A. the Federal Reserve.
B. the U.S. department of the Treasury.
C. the National Bureau of Economic Research.
D. Congress.
Answer:
The moral hazard problem caused by government safety nets:
A. is greater for larger banks.
B. is greater for smaller banks.
C. is pretty constant across banks of all sizes.
D. only exists for banks with high leverage ratios.
Answer:
One reason that financial intermediaries exist is that they:
A. are required by government regulation.
B. have developed low-cost methods to obtain information.
C. are the only way to obtain information.
D. earn high returns from lending their own funds.
Answer:
If prices are not stable:
A. money becomes less useful as a store of value.
B. money performs better as a unit of account.
C. it may be an inconvenience, but resources are still allocated efficiently.
D. prices become highly useful for conveying information.
Answer:
The idea that central banks should be independent of political pressure is an idea that:
A. has been around since there were central banks.
B. is relatively new.
C. every central bank was founded upon.
D. became quite popular in the early 1900s.
Answer:
Suppose there is a decrease in the price at which a bondholder sells her bond. In this
case, the holding period return will:
A. increase, since yields and prices are inversely related.
B. decrease, since this lowers the capital gain.
C. be negative.
D. equal the coupon rate.
Answer:
The opportunity cost of holding money is:
A. the nominal interest rate.
B. the real interest rate.
C. the nominal interest rate less the cost of converting a bond to cash.
D. the rate of inflation.
Answer:
The United States would be characterized as having:
A. a controlled domestic interest rate, a closed capital market and a flexible exchange
rate.
B. a controlled domestic interest rate, an open capital market and a flexible exchange
rate.
C. no control over the domestic interest rate, an open capital market and a flexible
exchange rate.
D. a controlled domestic interest rate, an open capital market and a fixed exchange
rate.
Answer:
With the U.S. Social Security System, the burden of funding the system rests on:
A. the current workers.
B. the retirees.
C. the federal government.
D. the Social Security Administration.
Answer:
Comparing the European and the U.S. central bank systems, the Governing Council of
the European system resembles:
A. the Board of Governors.
B. the Presidents of the Regional Federal Reserve Banks.
C. the FOMC.
D. the Chairman of the Board of Governors of the Fed.
Answer:
In most companies, an employee must work for a number of years before qualifying for
pension benefits. This process is referred to as:
A. a defined-benefit period.
B. vesting.
C. regulated contribution period.
D. mandatory benefit pending.
Answer:
Each of the Reserve Banks has a president who is:
A. appointed by the bank’s board of directors but approved by the board of governors.
B. appointed by the board of governors but approved by the bank’s board of directors.
C. elected by the commercial banks in their district.
D. selected from the Board of Directors.
Answer:
If the nominal interest rate decreases:
A. the cost of holding money decreases.
B. the cost of holding money increases.
C. the velocity of money should increase.
D. the cost of holding money increases and the velocity of money should decrease.
Answer:
Regulators require a bank to hold some of its assets as reserves mainly to address:
A. liquidity risk.
B. trading risk.
C. credit risk.
D. operational risk.
Answer:
When comparing stock indexes around the world we:
A. find that a given percentage change across all indexes has the same value.
B. observe that they always move together.
C. can see that the numeric change in indices allows investors to make easy
comparisons of value.
D. can examine their respective movements if we look at them as percentage changes.
Answer:
Credit may dry up at the start of an economic downturn because of all of the following
except:
A. lenders require information and accurate information is more difficult to obtain.
B. it becomes more difficult for lenders to determine the creditworthiness of borrowers.
C. lenders see greater risk in making loans to borrowers.
D. the free-rider problem worsens during a downturn.
Answer:
Imagine a scandal that finds the officers of bond rating agencies have been taking bribes
to inflate the rating of specific bonds. This should:
A. have no impact on the bond market since bond markets are highly efficient.
B. decrease the demand for all bonds.
C. increase the demand for U.S. Treasury securities and decrease the demand for
corporate bonds.
D. decrease the risk spread.
Answer:
The use of lagged reserve accounting makes the demand for reserves:
A. highly unpredictable.
B. constant.
C. more predictable.
D. subject to daily changes by the Fed.
Answer:
The future value of $100 that earns 10% annually for n years is best expressed by which
of the following?
A. $100(0.1)n
B. $100 × n × (1.1)
C. $100(1.1)n
D. $100/(1.1)n
Answer:
The risk premium for an investment:
A. is negative for U.S. treasury securities.
B. is a fixed amount added to the risk-free return, regardless of the level of risk.
C. increases with risk.
D. is zero (0) for risk-averse investors.
Answer:
Interest-rate risk would not matter to which of the following bondholders?
A. A holder of a U.S. government bond.
B. A holder of a U.S. government bond indexed for inflation.
C. A holder of a U.S. government bond who plans on selling it in one year.
D. A holder of a U.S. government bond that plans on holding it until it matures.
Answer:
In the United States, the Federal Reserve is asked to:
A. deliver on a specific inflation target set by Congress.
B. meet an explicit target for economic growth.
C. meet a specific target for unemployment each year.
D. deliver price stability as one of a number of objectives.
Answer:
The fact that over the long run the return on common stocks has been higher than that
on long-term U.S. Treasury bonds is partially explained by the fact that:
A. A lot more money is invested in common stocks than U.S. Treasury bonds.
B. There are regulations on the interest rates U.S. Treasury bonds can offer.
C. The risk premium is higher on common stocks.
D. Risk-averse investors buy more common stock.
Answer:
If Bank A sells a $100,000 U.S. Treasury bond to the Fed, Bank A’s reserves will:
A. increase by $100,000.
B. increase by less than $100,000.
C. not change.
D. decrease.
Answer:
The most a bank could lend at any time without altering its assets is an amount equal to
its:
A. checkable deposits.
B. reserves.
C. excess reserves.
D. net worth.
Answer:
Potential output depends on all of the following except:
A. technology.
B. the number of firms in the economy.
C. the size of the capital stock.
D. the number of people who can work.
Answer:
Under the purchase-and-assumption method of dealing with a failed bank, the FDIC:
A. finds another bank to take over the insolvent bank.
B. takes over the day to day management of the bank.
C. sells the failed bank to the Federal Reserve.
D. sells off the profitable loans of the failed bank in an open auction.
Answer:
One key difference between the Fed and the European Central Bank (ECB) in their
reserve requirements is that the:
A. reserve requirements of the ECB are at a much higher rate than the Fed’s.
B. ECB’s reserve requirements are more difficult for banks to predict.
C. reserve requirement of the ECB are determined annually.
D. ECB reserve requirement is based on all of a bank’s liabilities.
Answer:
A monthly growth rate of 0.5% is an annual growth rate of:
A. 6.00%
B. 5.00%
C. 6.17%
D. 6.50%
Answer:
Explain why the decoding of the human genome has interesting implications for the life
insurance industry.
Answer:
Identify at least three possible sources for a risk an individual may face in planning for
retirement.
Answer:
Explain why a lowering of interest rates should raise stock prices.
Answer:
Respond to the following statement with a brief explanation: “The Federal Reserve can
improve the performance of the stock market but it cannot prevent a stock market
crash.”
Answer:
A lender obtains funds from depositors by offering short-term interest rates on savings
accounts. The lender uses these funds to make longer-term installment loans. Explain
how the lender might make use of the futures market to hedge the risk taken.
Answer:
What is the equation that reflects a bank’s balance sheet?
Answer:
The text points out that there is an inverse relationship between the fiscal cost of a bank
crisis and real GDP growth. What are some of the reasons that can explain this inverse
relationship?
Answer:
Explain the difference between American and European options.
Answer:
Answer:
What is meant by the problem of time consistency in the conduct of financial system
policy?
Answer:
What is the equivalent tax-exempt bond yield for a taxable bond with an 8% yield and a
bondholder in a 35% marginal tax rate? Explain.
Answer:
Discuss whether the economy would be more or less efficient if public corporations
issued fewer shares of stock.
Answer:
Considering leverage, can you explain why a mortgage lender would want borrowers to
have larger down payments, and when the borrower doesn’t the mortgage lender may
require mortgage insurance?
Answer:
Answer:
What questions should an employee ask before accepting options as part of or instead
of a salary?
Answer:
While it is true that central banks of many countries intervene in the foreign exchange
market, why wouldn’t it be correct to say that central banks of these countries fix the
exchange rates?
Answer:
Compute the interest rate for a $1,000 face value a bond that sells for $280 and matures
in 20 years. The bond has no coupon payments, only the face value payment.
Answer:
If governments operated like businesses, meaning their goal was to maximize profits,
why would they likely never give up the power to print money to any other institution?
Answer:
Compute the future value of $1,000 at a 6 percent interest rate after three different
lengths of time. Use 6, 10 and 20 years into the future.
Answer: