Commercial banks differ from credit unions in the following way:
A. credit unions focus on consumer loans while commercial banks primarily make
loans to businesses.
B. credit unions make loans and accept deposits while commercial banks just make
loans.
C. commercial banks cannot make auto loans to individuals, just to businesses while
credit unions can do both.
D. credit unions do not have to hold reserves while commercial banks do.
Answer:
A counterparty to a financial instrument is always the:
A. issuer of the financial instrument.
B. government agency guaranteeing the value of the instrument.
C. person or institution that purchases the financial instrument.
D. person or institution that is on the other side of the financial contract.
Answer:
Between January and November of 2001, the FOMC reduced the target federal funds
rate from 6½ to 1¾. A reason for this was that the FOMC:
A. was acting preemptively.
B. feared over stimulating the economy.
C. was taking a wait and see approach to previous cuts.
D. was feeling political pressure to act.
Answer:
Which of the following is a bank liability?
A. Mortgage loans
B. Demand deposits
C. Reserves
D. U.S. Treasury securities
Answer:
Considering the roughly $1.2 trillion in U.S. currency held by the public:
A. over 90% of the amount is held in the form of $1 bills.
B. more than three-fourths is held in the form of $100 bills.
C. over half of the currency held in the form of $20 bills.
D. the Federal Reserve distributes the amount equally across all denominations of bills.
Answer:
Financial institutions, acting as financial intermediaries, perform all of the following,
except:
A. provide ways to diversify risk.
B. pooling resources of small savers.
C. increase transactions costs.
D. provide safekeeping and accounting services.
Answer:
Only two exchange rate regimes can be considered hard pegs. These are:
A. currency boards and dollarization.
B. dollarization and managed floating.
C. flexible exchange rates and currency boards.
D. the gold standard and inflation targeting.
Answer:
A typical FOMC meeting would best be described as:
A. an informal meeting with significant give and take among participants.
B. an informal meeting with the Chairman as a passive observer.
C. a fairly formal session with not much give and take.
D. a press conference, where the financial press can ask questions regarding the Fed’s
view of the economy.
Answer:
Large, advanced economies like the United States, Japan, and the euro area generally:
A. use fixed exchange rates to promote stability.
B. allow their respective Treasuries to determine the exchange rates.
C. allow supply and demand to determine exchange rates.
D. give exclusive control of exchange rates to their respective central banks.
Answer:
Holding liquidity and default risk constant, an investor earning 6% from a tax-exempt
bond who is in a 25% tax bracket would be indifferent between that bond and a taxable
bond with a(n):
A. 8% yield.
B. 4.5% yield.
C. 6.25% yield.
D. 7.5% yield.
Answer:
Assume an investor has a choice of 3 consecutive one-year bonds or one 3-year bond.
Assuming the Expectations Hypothesis of the term structure of interest rates is correct
the:
A. average interest rate of the three consecutive one-year bonds should be less than the
3-year bond to reflect the risk premium.
B. interest rate of the 3-year bond should equal the average interest rate of the 3
one-year bonds.
C. three consecutive one-year bonds must have the same interest rate.
D. current one-year interest rate must equal the current 3-year interest rate.
Answer:
A firm that has a well-earned reputation for providing high quality:
A. has found a way to address the free-rider problem.
B. has found a way to address the moral hazard problem.
C. has found a way to address the problem of adverse selection.
D. will not survive in a market if low quality is provided at a lower price.
Answer:
When expected inflation decreases for any given nominal interest rate, all of the
following occur except the:
A. real interest rate decreases.
B. bond supply curve shifts to the left.
C. cost of borrowing increases and the desire to borrow decreases.
D. price of bonds increases.
Answer:
If an investor thinks interest rates are likely to rise, she would:
A. sell her bonds and hold more money.
B. buy more bonds now and hold less money.
C. not alter her bond portfolio until interest rates actually rise.
D. not change her money holdings at all.
Answer:
Which of the following lists correctly orders assets from most liquid to least liquid?
A. Stocks, house, paper currency, savings deposits
B. Stocks, paper currency, house, savings deposits
C. Savings deposits, paper currency, house, stocks
D. Paper currency, savings deposits, stocks, house
Answer:
The lower the interest rate, i, the:
A. lower is the present value.
B. greater must be n.
C. higher is the present value.
D. higher is the future value.
Answer:
The first test of the Federal Reserve as lender of last resort occurred with the:
A. attack on Pearl Harbor by the Japanese.
B. widespread failures of Savings and Loans in the 1980’s.
C. introduction of flexible exchange rates in the U.S. in 1971.
D. stock market crash in 1929.
Answer:
A stock has a current annual dividend of $6.00 per year and it is expected to grow by
3% (0.03) a year. It is expected that two years from now the stock will sell for $90.00 a
share. If the interest rate is 5% (0.05), then equation 7 in the chapter predicts the stock’s
current price should be:
A. $94.90
B. $93.12
C. $101.30
D. $94.30
Answer:
Monetary policymakers face a tradeoff between:
A. the level of output and the rate of inflation.
B. the volatility in output and the volatility in inflation.
C. low unemployment and high inflation.
D. high unemployment and low inflation.
Answer:
An increase in the rate of inflation:
A. can only result from increases in aggregate demand.
B. can only result from upward shifts in the short-run aggregate supply curve.
C. will result only if the long-run aggregate supply curve is vertical.
D. can result from shifts in either the dynamic aggregate demand curve or the short-run
aggregate supply curve.
Answer:
Assume we have a stock currently worth $100. We also assume the interest rate is zero,
and we can buy options for this stock with a strike price of $100. If the stock can rise or
fall by $20 with equal probability over the option period, and the option cannot be
exercised until the expiration date, what is the time value of the option?
A. $20
B. $0
C. $10
D. $100
Answer:
Most economists attribute the Great Moderation experienced in the United States during
the 1990s mainly to:
A. good fortune.
B. slowing productivity growth.
C. aggressive fiscal policy.
D. better understanding and use of monetary policy.
Answer:
The unit of account characteristic of money:
A. makes it difficult to compare the relative prices of goods and services.
B. refers to how we use money to transfer purchasing power over time.
C. means prices are expressed in terms of money.
D. means that money finalizes payments.
Answer:
Fannie Mae, Ginnie Mae, and Freddie Mac are examples of:
A. private regulatory bodies that supervise home mortgage lenders.
B. government-sponsored enterprises chartered to encourage home lending.
C. government-sponsored enterprises that were chartered to encourage small business
loans.
D. government-sponsored enterprises that provide homeowners insurance to people
that cannot obtain it from private insurers.
Answer:
If a bond has a face value of $1000 and a coupon rate of 4.25%, the bond owner will
receive annual coupon payments of:
A. $425.00
B. $4.25
C. $42.50
D. a value that cannot be determined from the information provided.
Answer:
Tom buys a futures contract for U.S. Treasury bonds and on the settlement date the
interest rate on U.S. Treasury bonds is lower than Tom expected. Tom will have:
A. lost money on his long position.
B. gained money on his long position.
C. lost money on his short position.
D. gained money on his short position.
Answer:
Consider the following ratio: the average annual inflation rate/the average annual
money growth rate. A country with a ratio less than one would have:
A. an average inflation rate greater than the average rate of money growth.
B. an average inflation rate less than the average rate of money growth.
C. to have a high unemployment rate.
D. an economy suffering from a recession.
Answer:
The additional capital requirements put in place following the banking crisis of the
1980s led to a:
A. quick rebound in the willingness and ability of banks to make loans.
B. further slowdown in bank lending.
C. period of rapid economic growth in the early 1990s.
D. prolonged economic slowdown lasting much of the 1990s.
Answer:
Monetary policy in the United States is under the control of:
A. the U.S. Treasury.
B. the President.
C. the Federal Reserve.
D. the U.S. Senate.
Answer:
Rumors of a bank failing, even if not true, can become a self-fulfilling prophecy
because:
A. customers will not want to obtain loans from this bank.
B. equity investors will not be able to sell the bank’s stock.
C. regulators will scrutinize the bank heavily looking for something wrong.
D. depositors will rush to the bank to withdraw their deposits and the bank under
normal situations would not have sufficient liquid assets on hand.
Answer:
The gap between LIBOR and the expected Federal Reserve policy interest rate provides
a key measure of which of the following:
A. the direction of movement of the Euro relative to the U.S. dollar on the foreign
exchange market.
B. the persistence and intensity of the liquidity crisis.
C. the expected length of a coming global recession.
D. the movement of the U.S. stock market.
Answer:
Is the European Monetary Union a form of dollarization? Explain.
Answer:
Discuss whether a large private organization could function in the role of a lender of
last resort, and if it could, what potential problem(s) might arise.
Answer:
How does money velocity contribute to the observation that in countries with high rates
of inflation the inflation rate exceeds the rate of money growth?
Answer:
It has been argued that monetary policy reached its limits in Japan during the late 1990s
and early 2000s. What fact created this belief?
Answer:
What price would an individual would be willing to pay for a stock that currently pays a
$5.00 annual dividend if the individual expects the dividend to grow by 4% (0.04) per
year and the individual has a discount rate of 6.0% (0.06)?
Answer:
A sterilized intervention is actually a combination of two transactions. What are they
and what is the effect on the monetary base?
Answer:
Why did a decline in mortgage rates in the 1990s cause the velocity of M2 to fluctuate?
Answer:
Consider the current peso/dollar exchange rate is 100 pesos per dollar and the current
inflation rate in Mexico and the U.S. is 3 percent in each country. Assuming purchasing
power parity, what will the exchange rate be if the inflation rate increases to 5 percent
in Mexico and falls to 2 percent in the U.S.?
Answer:
XYZ Inc. announces plans to finance the expansion of the firm by issuing hundreds of
millions of dollars of bonds. Discuss how the current stockholders of XYZ Inc. will feel
about this plan.
Answer:
Explain why an investor cannot simply compare the size of promised payments from
different investments, even if the interest rates and other risk factors are the same.
Answer:
Is the Efficient Markets Hypothesis (EMH) responsible for the financial crisis of
2007-2009?
Answer:
What are the operational components of central bank independence?
Answer:
Is discount lending used to keep banks from failing? Explain.
Answer:
What were the contributing factors that led to Argentina’s initial adoption of a currency
board and then its subsequent failure?
Answer:
We saw in Chapter 18 that many central banks have turned to a policy framework of
inflation targeting. Discuss if this would be effective in a country experiencing
deflation.
Answer: