1) Which of the following does not appear in the current account part of the balance of
payments?
A) A loan of $1 million from Bank of America to Brazil
B) Foreign aid to El Salvador
C) An Air France ticket bought by an American
D) Income earned by General Motors from its plants abroad
2) The simple deposit multiplier can be expressed as the ratio of the
A) change in reserves in the banking system divided by the change in deposits
B) change in deposits divided by the change in reserves in the banking system
C) required reserve ratio divided by the change in reserves in the banking system
D) change in deposits divided by the required reserve ratio
3) Franco Modigliani has found that an expansionary monetary policy can cause stock
market prices to ________ and consumption to ________.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
4) Suppose Ford Motor Company issues a 5% bond with a stipulation that if a national
index of SUV sales drops by 10%, then Ford can decrease the coupon rate to 3%. This
security is called a
A) credit option
B) credit swap
C) credit-linked note
D) credit default swap
5) A swap that involves the exchange of one set of interest payments for another set of
interest payments is called
A) an interest rate swap
B) a currency swap
C) a swaptions
D) an international swap
6) Which of the following is not an advantage of inflation targeting?
A) There is simplicity and clarity of the target
B) Inflation targeting does not rely on a stable money-inflation relationship
C) There is an immediate signal on the achievement of the target
D) Inflation targeting reduces the effects of inflation shocks
7) The demand for houses decreases, all else equal, when
A) wealth increases
B) real estate prices are expected to increase
C) stock prices become more volatile
D) gold prices are expected to increase
8) When the growth rate of the money supply increases, interest rates end up being
permanently lower if
A) the liquidity effect is larger than the other effects
B) there is fast adjustment of expected inflation
C) there is slow adjustment of expected inflation
D) the expected inflation effect is larger than the liquidity effect
9) According to the liquidity premium theory of the term structure, a steeply upward
sloping yield curve indicates that short-term interest rates are expected to
A) rise in the future
B) remain unchanged in the future
C) decline moderately in the future
D) decline sharply in the future
10) In response to the overvalued dollar in the early 1970s, the German Bundesbank
bought ________ and sold ________ to keep the exchange rate fixed, gaining
international reserves.
A) marks; dollars
B) marks; pounds
C) dollars; marks
D) dollars; pounds
11) Critics of nationwide banking fear
A) an elimination of community banks
B) increased lending to small businesses
C) cutthroat competition
D) banks with economies of scale problems
12) Analysis of the transmission mechanisms of monetary policy provides four basic
lessons for a central bank’s conduct of monetary policy. Which of the following is not
one of these lessons?
A) Rising interest rates indicate a tightening of monetary policy, whereas falling interest
rates indicate an easing of monetary policy
B) Monetary policy can be highly effective in reviving a weak economy even if
short-term interest rates are already near zero
C) Avoiding unanticipated fluctuations in the price level is an important objective of
monetary policy, thus providing a rationale for price stability as the primary long-run
goal for monetary policy
D) Other asset prices beside those on short-term debt instruments do not contain
important information about the stance of monetary policy because they are important
elements in various monetary policy transmission mechanisms
13) If the aggregate price level at time t is denoted by Pt, the inflation rate from time t –
1 to t is defined as
A) = (Pt Pt – 1)/ Pt – 1
B) = (Pt + 1 – Pt – 1) /Pt – 1
C) = (Pt + 1 – Pt) /Pt
D) = (Pt – Pt – 1) /Pt
14) The organization responsible for the conduct of monetary policy in the United
States is the
A) Comptroller of the Currency
B) U.S. Treasury
C) Federal Reserve System
D) Bureau of Monetary Affairs
15) If initially the money supply is $2 trillion, velocity is 5, the price level is 2, and real
GDP is $5 trillion, a fall in the money supply to $1 trillion
A) reduces real GDP to $2.5 trillion
B) causes velocity to rise to 10
C) decreases the price level to 1
D) decreases the price level to 1 and decreases velocity to 2.5
16) The goals of bank asset management include
A) maximizing risk
B) minimizing liquidity
C) lending at high interest rates regardless of risk
D) purchasing securities with high returns and low risk
17) If a bank manager wants to protect the bank against losses that would be incurred
on its portfolio of treasury securities should interest rates rise, he could ________
options on financial futures.
A) buy put
B) buy call
C) sell put
D) sell call
18) When the price level falls, the ________ curve for nominal money ________, and
interest rates ________, everything else held constant.
A) demand; decreases; fall
B) demand; increases; rise
C) supply; increases; rise
D) supply; decreases; fall
19) When investment banks allocate shares of a popular but underpriced IPO to
executives of other firms in order to attract their business, it is called
A) spinning
B) a bribe
C) reputational activities
D) a kickback
20) A lesson of the Enron collapse is that government regulation
A) always fails
B) can reduce but not eliminate asymmetric information
C) increases the problem of asymmetric information
D) should be reduced
21) A lower level of income causes the demand for money to ________ and the interest
rate to ________, everything else held constant.
A) decrease; decrease
B) decrease; increase
C) increase; decrease
D) increase; increase
22) The problem with spinning is that it may ________ the cost of capital to a firm and
thus ________ the efficiency of the capital market.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
23) All other things held constant, premiums on call options will increase when the
A) exercise price falls
B) volatility of the underlying asset falls
C) term to maturity decreases
D) futures price increases
24) Everything else held constant, if income tax rates were lowered, then
A) the interest rate on municipal bonds would fall
B) the interest rate on Treasury bonds would rise
C) the interest rate on municipal bonds would rise
D) the price of Treasury bonds would fall
25) The FDIC must take steps to close down banks whose equity capital is less than
________ of assets.
A) 4%
B) 3%
C) 2%
D) 1%
26) Discount policy affects the money supply by affecting the volume of ________ and
the ________.
A) excess reserves; monetary base
B) borrowed reserves; monetary base
C) excess reserves; money multiplier
D) borrowed reserves; money multiplier
27) Fed policy since the early 1990s indicates that it is pursuing a policy of targeting the
A) monetary base
B) money supply
C) federal funds interest rate
D) exchange rate
28) When one party to a transaction has incentives to engage in activities detrimental to
the other party, there exists a problem of
A) moral hazard
B) split incentives
C) ex ante shirking
D) pre-contractual opportunism
29) The recent Enron and Tyco scandals are an example of
A) the free-rider problem
B) the adverse selection problem
C) the principal-agent problem
D) the “lemons problem”