The total amount of required reserves in the banking system is equal to the ________
the required reserve ratio and checkable deposits.
A) sum of
B) difference between
C) product of
D) ratio between
Answer:
If reserves in the banking system increase by $200, then checkable deposits will
increase by $500 in the simple model of deposit creation when the required reserve
ratio is
A) 0.04
B) 0.25
C) 0.4
D) 0.5
Answer:
________ in the foreign interest rate causes the demand for domestic assets to
________ and the domestic currency to appreciate, everything else held constant.
A) An increase; increase
B) An increase; decrease
C) A decrease; increase
D) A decrease; decrease
Answer:
A rise in the price level 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
Answer:
Since the early 1990s, the Fed has conducted monetary policy by setting a target for the
A) level of borrowed reserves.
B) monetary base.
C) federal funds rate.
D) inflation rate.
Answer:
The rate of inflation tends to remain constant when
A) the unemployment rate is above the NAIRU.
B) the unemployment rate equals the NAIRU.
C) the unemployment rate is below the NAIRU.
D) the unemployment rate increases faster than the NAIRU increases.
Answer:
Money ________ transaction costs, allowing people to specialize in what they do best.
A) reduces
B) increases
C) enhances
D) eliminates
Answer:
If the required reserve ratio is equal to 10 percent, a single bank can increase its loans
up to a maximum amount equal to
A) its excess reserves.
B) 10 times its excess reserves.
C) 10 percent of its excess reserves.
D) its total reserves.
Answer:
In the one-period valuation model, an increase in the required return on investments in
equity
A) increases the expected sales price of a stock.
B) increases the current price of a stock.
C) reduces the expected sales price of a stock.
D) reduces the current price of a stock.
Answer:
In the Keynesian cross diagram, an increase in autonomous consumer expenditure
causes the aggregate demand function to shift up, the equilibrium level of aggregate
output to ________, and the IS curve to shift to the ________, everything else held
constant.
A) rise; left
B) rise; right
C) fall; left
D) fall; right
Answer:
In the Keynesian cross diagram, an increase in autonomous consumer expenditure
causes the aggregate demand function to shift ________ and the equilibrium level of
aggregate output to ________, everything else held constant.
A) up; rise
B) up; fall
C) down; rise
D) down; fall
Answer:
The United States chooses to have ________ and ________ and therefore, cannot have
a fixed exchange rate at the same time.
A) capital control, an independent monetary policy
B) free capital mobility, an independent monetary policy
C) free capital mobility, no control of monetary policy
D) capital control, no control of monetary policy
Answer:
Everything else held constant, a decrease in the currency-checkable deposit ratio will
mean
A) an increase in currency in circulation and an increase in the money supply.
B) an increase in money supply.
C) a decrease in the money supply.
D) an increase in currency in circulation but no change in the money supply.
Answer:
Mean reversion refers to the fact that
A) small firms have higher than average returns.
B) stocks that have had low returns in the past are more likely to do well in the future.
C) stock returns are high during the month of January.
D) stock prices fluctuate more than is justified by fundamentals.
Answer:
If the Fed expects currency holdings to fall, it conducts open market ________ to offset
the expected ________ in reserves.
A) purchases; increase
B) purchases; decrease
C) sales; increase
D) sales; decrease
Answer:
Either a dual or hierarchial mandate is acceptable as long as ________ is the primary
goal in the ________.
A) price stability; short run
B) price stability; long run
C) reducing business-cycle fluctuations; short run
D) reducing business-cycle fluctuations; long run
Answer:
A shift in tastes toward foreign goods ________ net exports in the U.S. and causes the
IS curve to shift to the ________ in the U.S., everything else held constant.
A) decreases; right
B) decreases; left
C) increases; right
D) increases; left
Answer:
In the market for reserves, if the federal funds rate is above the interest rate paid on
excess reserves, an open market purchase ________ the supply of reserves and causes
the federal funds interest rate to ________, everything else held constant.
A) decreases; fall
B) increases; fall
C) increases; rise
D) decreases; rise
Answer:
Suppose on any given day there is an excess demand of reserves in the federal funds
market. If the Federal Reserve wishes to keep the federal funds rate at its current level,
then the appropriate action for the Federal Reserve to take is a ________ open market
________, everything else held constant.
A) defensive; sale
B) defensive; purchase
C) dynamic; sale
D) dynamic; purchase
Answer:
The government safety net creates ________ problem because risk-loving entrepreneurs
might find banking an attractive industry.
A) an adverse selection
B) a moral hazard
C) a lemons
D) a revenue
Answer:
Assuming initially that rr = 10%, c = 40%, and e = 0, an decrease in c to 30% causes
the M1 money multiplier to ________, everything else held constant.
A) increase from 2.8 to 3.25
B) decrease from 3.25 to 2.8
C) increase from 2.8 to 3.5
D) decrease from 3.5 to 2.8
Answer:
Bank loans from the Federal Reserve are called ________ and represent a ________ of
funds.
A) discount loans; use
B) discount loans; source
C) fed funds; use
D) fed funds; source
Answer:
In one of the earliest studies on the link between interest rates and money demand using
United States data, James Tobin concluded that the demand for money is
A) sensitive to interest rates.
B) not sensitive to interest rates.
C) not sensitive to changes in income.
D) not sensitive to changes in bond values.
Answer:
If an individual redeems a U.S. savings bond for currency
A) M1 stays the same and M2 decreases.
B) M1 increases and M2 increases.
C) M1 increases and M2 stays the same.
D) M1 stays the same and M2 stays the same.
Answer:
If aggregate output is below the natural rate level, activists of policies would
recommend that the government
A) do nothing.
B) try to eliminate the high unemployment by attempting to shift the aggregate supply
curve to the right.
C) try to eliminate the high unemployment by attempting to shift the aggregate demand
curve to the right.
D) try to eliminate the high unemployment by attempting to shift the aggregate demand
curve to the left.
Answer:
The growth of the subprime mortgage market led to
A) increased demand for houses and helped fuel the boom in housing prices.
B) a decline in the housing industry because of higher default risk.
C) a decrease in home ownership as investors chose other assets over housing.
D) decreased demand for houses as the less credit-worthy borrowers could not obtain
residential mortgages.
Answer:
The yield to maturity for a one-year discount bond equals the increase in price over the
year, divided by the
A) initial price.
B) face value.
C) interest rate.
D) coupon rate.
Answer:
A borrower who takes out a loan usually has better information about the potential
returns and risk of the investment projects he plans to undertake than does the lender.
This inequality of information is called
A) moral hazard.
B) asymmetric information.
C) noncollateralized risk.
D) adverse selection.
Answer:
When bad storms slow the check-clearing process, float tends to ________ causing the
Fed to initiate defensive open market ________.
A) decrease; sales
B) decrease; purchases
C) increase; sales
D) increase; purchases
Answer:
A theory of aggregate economic fluctuations called real business cycle theory holds that
A) changes in the real money supply are the only demand shocks that affect the natural
rate of output.
B) aggregate demand shocks do affect the natural rate of output.
C) aggregate supply shocks do affect the natural rate of output.
D) changes in net exports are the only demand shocks that affect the natural rate of
output.
Answer:
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
Answer:
All of the following are common to banking crises in different countries except
A) financial liberalization or innovation.
B) weak bank regulatory systems.
C) a government safety net.
D) a dual banking system.
Answer:
The most important advantage of discount policy is that the Fed can use it to
A) precisely control the monetary base.
B) perform its role as lender of last resort.
C) control the money supply.
D) punish banks that have deficient reserves.
Answer:
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
Answer:
Net profit after taxes per dollar of assets is a basic measure of bank profitability called
A) return on assets.
B) return on capital.
C) return on equity.
D) return on investment.
Answer: