The relationship between the long-run real interest rate and potential output:
A. is direct.
B. is inverse.
C. is constant since the long-run real interest rate is primarily determined by risk.
D. depends on the actions of central bankers.
Answer:
Keeping interest rates stable is:
A. the most important goal for a central bank.
B. a key goal, because stable interest rates will result in all other goals being achieved.
C. a secondary goal for central banks.
D. not a goal of the central bank.
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:
If the Fed decides to maintain a fixed euro/dollar exchange rate when they sell euros:
A. there will be pressure on domestic interest rates to increase.
B. the domestic money supply will increase.
C. this will increase banking system reserves.
D. they will have to impose capital controls.
Answer:
Consider the following: an investor in the U.S. is pondering a one-year investment. She
can purchase a domestic bond for $1,000 that has an interest rate of i or she can
purchase a bond in England for 1,500 British pounds (£) that pays an interest rate of if.
The current exchange rate is $1.50/£. She considers the bonds to be of equal risk. If i =
if, the expected returns are not equal. What do you know?
A. The exchange rate is fixed between the U.S. and Britain
B. The bonds initially sold for different prices
C. Arbitrage doesn’t work
D. The exchange rate must be flexible
Answer:
Which of the following statements is most correct?
A. Managers, directors, and stockholders almost always share the same interest.
B. Managers’ and directors’ interests often conflict with stockholders’ interest.
C. Managers and stockholders have the same interests, but this usually conflicts with
the interests of directors.
D. Directors and stockholders have the same interests, but this usually conflicts with
the interests of managers.
Answer:
The bond demand curve slopes downward because:
A. at lower prices the reward for holding the bond increases.
B. as bond prices fall so do yields.
C. as bond prices fall bonds are less attractive.
D. as bond prices rise yields increase.
Answer:
A change in the interest rate:
A. has a smaller impact on the present value of a payment to be made far into the
future than on one to be made sooner.
B. will not make a difference in the present values of two equal payments to be made at
different times.
C. has a larger impact on the present value of a payment to be made far into the future
than on one to be made sooner.
D. has a larger impact on the present value of a bigger payment to be made far into the
future than on one of lesser value.
Answer:
Executive board members of the European System of Central Banks are appointed by:
A. a committee made up of bank presidents in the member countries.
B. a committee made up of heads of state of member countries.
C. the finance ministers of member countries.
D. the directors of the National Central Banks.
Answer:
What is the present value of $500 promised four years from now at 5% annual interest?
A. $411.35
B. $400.00
C. $607.75
D. $520.00
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:
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:
The European Central Bank’s equivalent of the Fed’s open market operations (OMO)
is:
A. very similar to the Fed’s OMO in that they are highly centralized.
B. dissimilar to the Fed’s OMO in that the operations are conducted at all 18 of the
National Central Banks simultaneously.
C. similar to the Fed’s OMO in that they accept only U.S. Treasury securities in their
refinancing operations.
D. dissimilar to the Fed’s OMO because fewer banks participate in the auctions of the
securities.
Answer:
The reduction in transaction costs provided by financial intermediaries benefit:
A. small borrowers and small savers.
B. large borrowers but not small savers.
C. society in the net, but small savers bear much of the cost.
D. small borrowers but not small savers.
Answer:
Financial markets do not function as well as they could due to:
A. the fact that banking is highly monopolized.
B. the cost of obtaining information can be high.
C. regulation by governments.
D. fluctuations in the inflation rate.
Answer:
A $1,000 face value bond purchased for $965.00, with an annual coupon of $60, and 20
years to maturity has a:
A. current yield and coupon rate equal to 6.22% and a coupon rate above this.
B. current yield equal to 6.22% and a coupon rate below this.
C. coupon rate equal to 6.00% and a current yield below this.
D. yield to maturity and current yield equal to 6.00%.
Answer:
Considering the S&P 500 Index, if each company’s stock price increased by 10%:
A. the weights in the index would remain the same.
B. the companies with the most shares outstanding would have even greater weight
after the increase.
C. the companies with fewer shares would gain more weight at the expense of the
companies with greater shares.
D. the weights in the index would change to reflect the percentage changes in the
prices of the various stocks.
Answer:
According to the theory of efficient markets, mutual fund managers may be expected to
earn above-average returns if they:
A. take on less risk.
B. have access to illegal, private information.
C. participate in efficient markets.
D. have learned from investing in the same stocks repeatedly.
Answer:
The slope of the yield curve seems to predict the performance of the economy usually:
A. with a 3-month lag.
B. with a one-year lag.
C. within a few weeks.
D. with a two-year lag.
Answer:
Suppose the economy has an inverted yield curve. According to the Liquidity Premium
Theory, which of the following interpretations could be used to explain this?
A. Interest rates are expected to rise in the future.
B. Investors expect an economic slowdown.
C. Investors are indifferent between bonds with different time horizons.
D. The term spread has increased.
Answer:
The stock market bubble of the late 1990s and early 2000s:
A. saw internet and computer technology companies over-invest.
B. saw an efficient allocation of resources toward the high-growth computer/internet
sector.
C. was a good example of the theory of efficient markets.
D. was an example that not all bubbles burst.
Answer:
Assume the Expectations Hypothesis regarding the term structure of interest rates is
correct. Then, if the current two-year interest rate is 5% and the current one-year rate is
6%, then investors expect the future one-year rate to be:
A. 4%.
B. 5%.
C. 6%.
D. 1%.
Answer:
Which of the following is a bank asset?
A. Demand deposits
B. Borrowings from other banks
C. Mortgage loans
D. CDs
Answer:
If policymakers are aggressive in keeping current inflation near the target inflation rate
then the monetary policy reaction curve will:
A. be steep.
B. be flat.
C. have an undefined slope.
D. be vertical.
Answer:
Which of the following statements is most accurate?
A. As the inflation rate increases, inflation becomes less stable.
B. As the inflation rate decreases inflation becomes less stable.
C. As the inflation rate decreases inflation becomes more volatile.
D. As the inflation rate increases, inflation becomes more stable.
Answer:
When arbitrage occurs across countries with flexible exchange rates and when the
bonds in each country are identical and there are no barriers to capital flows:
A. the interest rates on the bonds will be identical.
B. the prices of the bonds will be identical.
C. the inflation rates in each country will be identical.
D. none of the answers provided is correct.
Answer:
Which of the following is true?
A. A flat dynamic aggregate demand curve corresponds to a steep monetary policy
reaction curve and means that supply shocks will create large changes in current output.
B. A flat dynamic aggregate demand curve corresponds to a flat monetary policy
reaction curve and means that supply shocks will create large changes in current output.
C. A flat dynamic aggregate demand curve corresponds to a steep monetary policy
reaction curve and means that supply shocks will create small changes in current
output.
D. A flat dynamic aggregate demand curve corresponds to a flat monetary policy
reaction curve and means that supply shocks will create small changes in current
output.
Answer:
Which of the following is not correct with regard to the definition of a recession as used
by the NBER?
A. A recession occurs whenever there is a dip in the growth rate.
B. The exact length of time needed for a downturn to be declared a recession is not
specified.
C. Many key economic indicators are used, some of which may move in opposite
directions.
D. A recession is characterized by lower levels of economic activity.
Answer:
The Fed hopes to impact short-run inflation and output by altering:
A. the production function.
B. aggregate supply.
C. aggregate demand.
D. fiscal policy.
Answer:
A key use of interest-rate swaps is to:
A. eliminate risk for both parties involved in the transaction.
B. earn the fees for constructing the swaps.
C. provide a hedge against interest-rate risk.
D. manage government revenues.
Answer:
Bonds issued by a foreign government in its own currency would:
A. not be held by the Fed.
B. be held by the Fed as part of its securities.
C. be held by the Fed as part of its foreign exchange reserves.
D. be held by the Fed as part of its loans.
Answer:
A primary financial market is:
A. located only in New York, London, and Tokyo but can handle transactions anywhere
in the world.
B. one where the borrower obtains funds directly from the lender for newly issued
securities.
C. a market where U.S. Treasury bonds are traded.
D. one that can only deal in the highest investment grade securities.
Answer:
The Federal Reserve surveys lending officers regularly to:
A. determine the interest rates they charge.
B. get a feel for the supply and demand for loans.
C. get a feel for the quantity and quality of loans.
D. all of the answers given are correct.
Answer:
The make-up of the Governing Council of the European Central Bank and the methods
used to calculate price stability for the monetary system can potentially result in:
A. small countries having undue influence on the decisions of the Council.
B. monetary policy that is well suited for some countries but ill-suited for others.
C. a policy for the median country rather than a policy well suited for any country.
D. all of the results listed are possible.
Answer:
The value of $100 left in a certificate of deposit for four years that earns 4.5% annually
will be:
A. $120.00
B. $119.25
C. $117.00
D. $145.00
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