A reduction in government spending causes the equilibrium level of aggregate output to
________ at any given interest rate and shifts the ________ curve to the ________,
everything else held constant.
A. rise; LM; right
B. fall; IS; left
C. fall; LM; left
D. rise; IS; right
Answer:
Everything else held constant, the vertical section of the supply curve of reserves is
shortened when the
A. discount rate increases.
B. discount rate decreases.
C. federal funds rate rises.
D. federal funds rate falls.
Answer:
Keynes argued that when interest rates were low relative to some normal value, people
would expect bond prices to ________ so the quantity of money demanded would
________.
A. increase; increase
B. increase; decrease
C. decrease; increase
D. decrease; decrease
Answer:
________ of a foreign bank operates in the U.S. but cannot accept deposits from
domestic residents.
A) An agency office
B) A universal corporation
C) A McFadden corporation
D) A Basel branch
Answer:
Banks engage in regulatory arbitrage by
A. keeping high-risk assets on their books while removing low-risk assets with the
same capital requirement.
B. keeping low-risk assets on their books while removing high-risk assets with the same
capital requirement.
C. hiding risky assets from regulators.
D. buying risky assets from arbitragers.
Answer:
________ in the expected future domestic exchange rate causes the demand for
domestic assets to shift to the ________ and the domestic currency to depreciate,
everything else held constant.
A. An increase; right
B. An increase; left
C. A decrease; right
D. A decrease; left
Answer:
As a store of value, money
A. does not earn interest.
B. cannot be a durable asset.
C. must be currency.
D. is a way of saving for future purchases.
Answer:
In the one-period valuation model, an increase in the required return on investments in
equity
A. increases the expected sales price of a stock.
B. increases the current price of a stock.
C. reduces the expected sales price of a stock.
D. reduces the current price of a stock.
Answer:
If net exports increase by 250 and the mpc is 0.75, equilibrium aggregate output
increases by
A. 250.
B. 500.
C. 750.
D. 1000.
Answer:
Models describing the determination of the money supply and the Fed’s role in this
process normally focus on ________ rather than ________, since Fed actions have a
more predictable effect on the former.
a. reserves; the monetary base
b. reserves; high-powered money
c. the monetary base; high-powered money
d. the monetary base; reserves
Answer:
Which of the following instruments is NOT traded in a money market?
A. residential mortgages
B. U.S. Treasury Bills
C. negotiable bank certificates of deposit
D. commercial paper
Answer:
According to the efficient markets hypothesis, the current price of a financial security
A. is the discounted net present value of future interest payments.
B. is determined by the lowest successful bidder.
C. fully reflects all available relevant information.
D. is a result of none of the above.
Answer:
Special Drawing Rights (SDRs) are issued to governments by the ________ to settle
international debts and have replaced ________ in international transactions.
a. Federal Reserve System; gold
b. Federal Reserve System; dollars
c. International Monetary Fund; gold
d. International Monetary Fund; dollars
Answer:
Suppose on any given day there is an excess supply of reserves in the federal funds
market. If the Federal Reserve wishes to keep the federal funds rate at its current level,
then the appropriate action for the Federal Reserve to take is a ________ open market
________, everything else held constant.
A. defensive; sale
B. defensive; purchase
C. dynamic; sale
D. dynamic; purchase
Answer:
A permanent negative supply shock leads to ________ inflation ________.
A. higher; in both the short and long runs
B. higher; in the short run but not in the long run
C. lower; in both the short and long runs
D. lower; in the short run but not in the long run
Answer:
Bonds with no default risk are called
A. flower bonds.
B. no-risk bonds.
C. default-free bonds.
D. zero-risk bonds.
Answer:
The expectations theory and the segmented markets theory do not explain the facts very
well, but they provide the groundwork for the most widely accepted theory of the term
structure of interest rates
A. the Keynesian theory.
B. the separable markets theory.
C. the liquidity premium theory.
D. the asset market approach.
Answer:
If the price of gold becomes less volatile, then, other things equal, the demand for
stocks will ________ and the demand for antiques will ________.
A. increase; increase
B. increase; decrease
C. decrease; decrease
D. decrease; increase
Answer:
Bruce the Bank Manager can reduce interest rate risk by ________ the duration of the
bank’s assets to increase their rate sensitivity or, alternatively, ________ the duration of
the bank’s liabilities.
A. shortening; lengthening
B. shortening; shortening
C. lengthening; lengthening
D. lengthening; shortening
Answer:
Although restrictive covenants can potentially reduce moral hazard, a problem with
restrictive covenants is that
A) borrowers may find loopholes that make the covenants ineffective.
B) they are inexpensive to monitor and enforce.
C) too many resources may be devoted to monitoring and enforcing them, as
debtholders duplicate others’ monitoring and enforcement efforts.
D) they reduce the value of the debt contract.
Answer:
The purpose of the commitment by the Fed to keep the federal funds rate at zero for a
long period of time is to
A. lower the long term interest rates.
B. lower the short term interest rates.
C. increase the long term interest rates.
D. increase the short term interest rates.
Answer:
Everything else held constant, an increase in the interest rate paid on checkable deposits
will cause ________ in the amount of checkable deposits held relative to currency
holdings and ________ in the currency ratio.
a. an increase; an increase
b. an increase; a decrease
c. a decrease; an increase
d. a decrease; a decrease
Answer:
In the money market, a condition of excess supply of money can be eliminated by a
________ in aggregate output or a ________ in the interest rate, everything else held
constant.
A. rise; rise
B. rise; fall
C. fall; rise
D. fall; fall
Answer:
The aggregate demand curve is downward sloping because a higher inflation rate leads
the central bank to ________ real interest rates, thereby ________ the level of
equilibrium aggregate output., everything else held constant.
A. raise; lowering
B. raise; raising
C. reduce; lowering
D. reduce; raising
Answer:
The segmented markets theory can explain
A. why yield curves usually tend to slope upward.
B. why interest rates on bonds of different maturities tend to move together.
C. why yield curves tend to slope upward when short-term interest rates are low and to
be inverted when short-term interest rates are high.
D. why yield curves have been used to forecast business cycles.
Answer:
Adverse selection occurs when those ________ likely to get ________ insurance
payoffs are the ones who want to purchase insurance the most.
A. least; large
B. least; small
C. most; large
D. most; small
Answer:
If $22,050 is the amount payable in two years for a $20,000 simple loan made today,
the interest rate is
A. 5 percent.
B. 10 percent.
C. 22 percent.
D. 25 percent.
Answer:
If reserves in the banking system increase by $100, then checkable deposits will
increase by $667 in the simple model of deposit creation when the required reserve
ratio is
A. 0.01.
B. 0.05.
C. 0.15.
D. 0.20.
Answer:
If fluctuations in interest rates become smaller, then, other things equal, the demand for
stocks ________ and the demand for long-term bonds ________.
A. increases; increases
B. increases; decreases
C. decreases; decreases
D. decreases; increases
Answer:
If the interest rate is 7 percent on euro-denominated assets and 5 percent on
dollar-denominated assets, and if the dollar is expected to appreciate at a 4 percent rate,
the expected return on ________-denominated assets in terms of ________ percent.
A. dollar; euros is 3
B. euro; dollars is 1
C. dollar; euros is 9
D. euro; dollars is 11
Answer:
Everything else held constant, Americans who love French wine benefit most from
A. a decrease in the dollar price of euros.
B. an increase in the dollar price of euros.
C. a constant dollar price for euros.
D. a ban on imports from Europe.
Answer: