1) In the equation of exchange, the concept that provides the link between M and PY is
called
A) the velocity of money
B) aggregate demand
C) aggregate supply
D) the money multiplier
2) Banks responded to disintermediation by
A) supporting the elimination of interest rate regulations, enabling them to better
compete for funds
B) opposing the elimination of interest rate regulations, as this would increase their cost
of funds
C) demanding that interest rate regulations be imposed on money market mutual funds
D) supporting the elimination of interest rate regulations, as this would reduce their cost
of funds
3) In the market for reserves, if the federal funds rate is above the interest rate paid on
excess reserves, an open market purchase ________ the ________ of reserves which
causes the federal funds rate to fall, everything else held constant.
A) increases; supply
B) increases; demand
C) decreases; supply
D) decreases; demand
4) Suppose that from a new checkable deposit, First National Bank holds two million
dollars in vault cash, eight million dollars on deposit with the Federal Reserve, and one
million dollars in required reserves. Given this information, we can say First National
Bank faces a required reserve ratio of ________ percent.
A) ten
B) twenty
C) eighty
D) ninety
5) During World War II, whenever interest rates would rise and the price of bonds
would begin to fall, the Fed would
A) lower reserve requirements
B) raise reserve requirements
C) make open market purchases of government securities
D) make open market sales of government securities
6) Conflicts of interest are a type of ________ problem that can happen when an
institution provides multiple services.
A) adverse selection
B) free-riding
C) discounting
D) moral hazard
7) The primary indicator of the Fed’s stance on monetary policy is
A) the discount rate
B) the federal funds rate
C) the growth rate of the monetary base
D) the growth rate of M2
8) According to rational expectations,
A) expectations of inflation are viewed as being an average of past inflation rates
B) expectations of inflation are viewed as being an average of expected future inflation
rates
C) expectations formation indicates that changes in expectations occur slowly over time
as past data change
D) expectations will not differ from optimal forecasts using all available information
9) Everything else held constant, if a central bank makes an unsterilized ________ of
foreign assets, then the domestic money supply will ________ and the domestic
currency will appreciate.
A) purchase; increase
B) purchase; decrease
C) sale; increase
D) sale; decrease
10) The guiding principle for the conduct of monetary policy that held that as long as
loans were being made for “productive” purposes, then providing reserves to the
banking system to make these loans would not be inflationary became known as the
A) free reserves doctrine
B) Benjamin Strong doctrine
C) efficient liquidity doctrine
D) real bills doctrine
11) The primary assets of money market mutual funds are
A) stocks
B) bonds
C) money market instruments
D) deposits
12) Every financial market has the following characteristic:
A) It determines the level of interest rates
B) It allows common stock to be traded
C) It allows loans to be made
D) It channels funds from lenders-savers to borrowers-spenders
13) A deductible reduces ________ in exactly the same way as ________.
A) moral hazard; coinsurance
B) adverse selection; restrictive provisions
C) moral hazard; cancellation of insurance
D) adverse selection; limits on the amount of insurance
14) When a financial institution hedges the interest-rate risk for a specific asset, the
hedge is called a
A) macro hedge
B) micro hedge
C) cross hedge
D) futures hedge
15) The collapse of the subprime mortgage market
A) did not affect the corporate bond market
B) increased the perceived riskiness of Treasury securities
C) reduced the Baa-Aaa spread
D) increased the Baa-Aaa spread
16) Which of the following statements are true?
A) Checkable deposits are payable on demand
B) Checkable deposits do not include NOW accounts
C) Checkable deposits are the primary source of bank funds
D) Demand deposits are checkable deposits that pay interest
17) Suppose that from a new checkable deposit, First National Bank holds eight million
dollars on deposit with the Federal Reserve, one million dollars in required reserves,
and faces a required reserve ratio of ten percent. Given this information, we can say
First National Bank has ________ million dollars in vault cash.
A) two
B) eight
C) nine
D) ten
18) During business cycle expansions when income and wealth are rising, the demand
for bonds ________ and the demand curve shifts to the ________, everything else held
constant.
A) falls; right
B) falls; left
C) rises; right
D) rises; left
19) In the Gordon Growth Model, the growth rate is assumed to be ________ the
required return on equity.
A) greater than
B) equal to
C) less than
D) proportional to
20) When a member of the nonbank public deposits currency into her bank account,
A) both the monetary base and bank reserves fall
B) both the monetary base and bank reserves rise
C) the monetary base falls, but bank reserves remain unchanged
D) bank reserves rise, but the monetary base remains unchanged
21) Which investment bank filed for bankruptcy on September 15, 2008 making it the
largest bankruptcy filing in U.S. history?
A) Lehman Brothers
B) Merrill Lynch
C) Bear Stearns
D) Goldman Sachs
22) ________ in the domestic interest rate causes the demand for domestic assets to
shift to the left and the domestic currency to ________, everything else held constant.
A) An increase; appreciate
B) An increase; depreciate
C) A decrease; appreciate
D) A decrease; depreciate
23) An increase in ________ reduces the money supply since it causes the ________ to
fall.
A) reserve requirements; monetary base
B) reserve requirements; money multiplier
C) margin requirements; monetary base
D) margin requirements; money multiplier
24) A contractionary monetary policy decreases net exports by ________ interest rates
and ________ the value of the dollar.
A) lowering real; decreasing
B) lowering real; increasing
C) raising nominal; increasing
D) raising real; increasing
25) When stock prices become more volatile, the ________ curve for gold shifts right
and gold prices ________, everything else held constant.
A) demand; increase
B) demand; decrease
C) supply; increase
D) supply; decrease
26) With the creation of the Federal Deposit Insurance Corporation, member banks of
the Federal Reserve System ________ to purchase FDIC insurance for their depositors,
while non-member commercial banks ________ to buy deposit insurance.
A) could choose; were required
B) could choose; were given the option
C) were required, could choose
D) were required; were required
27) Under a fixed exchange rate regime, if the domestic currency is initially
undervalued, that is, above par, the central bank must intervene to sell the ________
currency by purchasing ________ assets.
A) domestic; foreign
B) domestic; domestic
C) foreign; foreign
D) foreign; domestic
28) Everything else held constant, in the market for reserves, when the federal funds
rate equals the interest rate paid on excess reserves, raising the interest rate paid on
excess reserves
A) increases the federal funds rate
B) lowers the federal funds rate
C) has no effect on the federal funds rate
D) has an indeterminate effect of the federal funds rate
29) If merchants in the country Zed choose to close their doors, preferring to be stuck
with rotting merchandise rather than worthless currency, then one can conclude that Zed
is experiencing a
A) superdeflation
B) hyperdeflation
C) disinflation
D) hyperinflation
30) In its earliest years, the Federal Reserve’s guiding principle for the conduct of
monetary policy was known as the
A) real bills doctrine
B) liberal liquidity doctrine
C) free reserves doctrine
D) quantity theory of money
31) If a bank has ________ rate-sensitive assets than liabilities, then ________ in
interest rates will increase bank profits.
A) more; a decline
B) more; an increase
C) fewer; an increase
D) fewer; a surge
32) Each Federal Reserve bank has nine directors. Of these ________ are appointed by
the member banks and ________ are appointed by the Board of Governors.
A) three; six
B) four; five
C) five; four
D) six; three
33) Since the abandonment of the Bretton Woods system, balance of payments
considerations have become ________ important, and exchange rate considerations
________ important in the conduct of monetary policy.
A) more; less
B) more; more
C) less; less
D) less; more
34) The process of indirect finance using financial intermediaries is called
A) direct lending
B) financial intermediation
C) resource allocation
D) financial liquidation
35) Estimates suggest that, in the United States economy, it takes just over ________
for monetary policy to affect output and just over ________ for monetary policy to
affect the inflation rate.
A) 1 year; 2 years
B) 2 years; 1 year
C) 1 year; 6 months
D) 6 months; 1 year
36) An international lender of last resort creates a serious ________ problem because
depositors and other creditors of banking institutions expect that they will be protected
if a crisis occurs.
A) moral hazard
B) adverse selection
C) public choice
D) strategic choice
37) The process of asset transformation refers to the conversion of
A) safer assets into risky assets
B) safer assets into safer liabilities
C) risky assets into safer assets
D) risky assets into risky liabilities
38) Which of the following are not assets on the Fed’s balance sheet?
A) Discount loans
B) U.S. Treasury deposits
C) Cash items in the process of collection
D) U.S. Treasury bills