1) Futures differ from forwards because they are
A) used to hedge portfolios
B) used to hedge individual securities
C) used in both financial and foreign exchange markets
D) a standardized contract
2) The theory of purchasing power parity cannot fully explain exchange rate
movements because
A) all goods are identical even if produced in different countries
B) monetary policy differs across countries
C) some goods are not traded between countries
D) fiscal policy differs across countries
3) In the Baumol-Tobin analysis of transactions demand for money, either an increase in
________ or a decrease in ________ increases money demand.
A) income; interest rate
B) interest rates; brokerage fees
C) brokerage fees; income
D) interest rate; income
4) Suppose the economy is producing at the natural rate of output. A decrease in
consumer and business confidence will cause ________ in real GDP in the long run and
________ in inflation in the long run, everything else held constant.
A) an increase; an increase
B) a decrease; a decrease
C) no change; an increase
D) no change; a decrease
5) Everything else held constant, a decrease in the currency ratio causes the M1 money
multiplier to ________ and the money supply to ________.
A) decrease; increase
B) increase; increase
C) decrease; decrease
D) increase; decrease
6) The public’s fear of centralized power and distrust of moneyed interests led to the
demise of the first two experiments in central banking, otherwise known as:
A) the First Bank of the United States and the Second Bank of the United States
B) the First Bank of the United States and the Central Bank of the United States
C) the First Central Bank of the United States and the Second Central Bank of the
United States
D) the First Bank of North America and the Second Bank of North America
7) The oldest central bank, having been founded in 1694, is the
A) Bank of England
B) Deutsche Bundesbank
C) Bank of Japan
D) Federal Reserve System
8) Which of the following did not contribute to the failing of Freddie Mac and Freddie
Mae?
A) Problems with adverse selection
B) Problems with moral hazard
C) Weak regulatory oversight
D) Unethical accounting practices
9) Members of the Board of Governors are
A) chosen by the Federal Reserve Bank presidents
B) appointed by the newly elected president of the United States, as are cabinet
positions
C) appointed by the president of the United States and confirmed by the Senate
D) never allowed to serve more than 7-year terms
10) By taking the short position on a futures contract of $100,000 at a price of 96 you
are agreeing to ________ a ________ face value security for ________.
A) sell; $100,000; $96,000
B) sell; $96,000; $100,000
C) buy; $100,000; $96,000
D) buy; $96,000; $100,000
11) When a corporation wishes to sell new securities, it usually employs
A) a takeover specialist
B) a finance company
C) an investment bank
D) a commercial bank
12) Reasons for holding Eurodollars include
A) the fact that Eurodollar deposits are insured by the FDIC
B) the fact that dollars are widely used to conduct international transactions
C) the fact that minimum transaction sizes are very low, making Eurodollars an
attractive savings instrument for consumers
D) the fact that Eurodollar deposits are heavily regulated
13) Risk that is related to the uncertainty about interest rate movements is called
A) default risk
B) interest-rate risk
C) the problem of moral hazard
D) security risk
14) The excess reserves ratio is ________ related to expected deposit outflows, and is
________ related to the market interest rate.
A) negatively; negatively
B) negatively; positively
C) positively; negatively
D) positively; positively
15) A decline in the expected inflation rate causes the demand for money to ________
and the demand curve to shift to the ________, everything else held constant.
A) decrease; right
B) decrease; left
C) increase; right
D) increase; left
16) Prior to 2008, the bank’s cost of holding reserves equaled
A) the interest paid on deposits times the amount of reserves
B) the interest paid on deposits times the amount of deposits
C) the interest earned on loans times the amount of loans
D) the interest earned on loans times the amount on reserves
17) The bailout of the savings and loan industry was much delayed and, therefore, much
more costly to taxpayers because
A) of regulators’ initial attempts to downplay the seriousness of problems within the
thrift industry
B) politicians listened to the taxpayers rather than the S&L lobbyists
C) Congress did not wait long enough for many of the problems in the thrift industry to
correct themselves
D) regulators could not be fired, therefore, they didn’t care if they did a good job or not
18) When the Federal Reserve extends a discount loan to a bank, the monetary base
________ and reserves ________.
A) remains unchanged; decrease
B) remains unchanged; increase
C) increases; increase
D) increases; remain unchanged
19) When bad drivers line up to purchase collision insurance, automobile insurers are
subject to the
A) moral hazard problem
B) adverse selection problem
C) assigned risk problem
D) ill queue problem
20) ________ in the domestic interest rate causes the demand for domestic assets to
shift to the right 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
21) One reason financial systems in developing and transition countries are
underdeveloped is
A) they have weak links to their governments
B) they make loans only to nonprofit entities
C) the legal system may be poor making it difficult to enforce restrictive covenants
D) the accounting standards are too stringent for the banks to meet
22) As the relative expected return on dollar assets increases, foreigners will want to
hold more ________ assets and less ________ assets, everything else held constant.
A) foreign; foreign
B) foreign; dollar
C) dollar; foreign
D) dollar; dollar
23) For banks,
A) return on assets exceeds return on equity
B) return on assets equals return on equity
C) return on equity exceeds return on assets
D) return on equity is another name for net interest margin
24) An increase in the foreign interest rate causes the demand for domestic assets to
________ and the domestic currency to ________, everything else held constant.
A) increase; appreciate
B) increase; depreciate
C) decrease; appreciate
D) decrease; depreciate
25) The fluctuations in both money supply growth and the federal funds rate during
1979-1982 suggest that the Fed
A) had shifted to borrowed reserves as an operating target
B) had shifted to total reserves as an operating target
C) had shifted to the monetary base as an operating target
D) never intended to target monetary aggregates
26) Studies of mutual fund performance indicate that mutual funds that outperformed
the market in one time period usually
A) beat the market in the next time period
B) beat the market in the next two subsequent time periods
C) beat the market in the next three subsequent time periods
D) do not beat the market in the next time period
27) Banks, savings and loan associations, mutual savings banks, and credit unions
A) are no longer important players in financial intermediation
B) since deregulation now provide services only to small depositors
C) have been adept at innovating in response to changes in the regulatory environment
D) produce nothing of value and are therefore a drain on society’s resources