The Reserve Banks of the Federal Reserve System are owned by:
A. the taxpayers in their districts.
B. the U.S. Treasury.
C. the Board of Governors.
D. the commercial banks in their districts.
Answer:
Suppose a family wants to save $60,000 for a child’s tuition. The child will be attending
college in 18 years. For simplicity, assume the family is saving for a one-time college
tuition payment. If the interest rate is 6%, then about how much does this family need
to deposit in the bank today?
A. $10,000
B. $21,000
C. $42,000
D. $57,000
Answer:
Mutual funds are attractive because:
A. they provide high returns from purchasing the financial securities of a few select
companies.
B. they provide the investor with greater diversification at a lower cost than what most
investors could obtain individually.
C. they have inside information that is not available to other investors.
D. they usually have inside information because they run most of the companies they
invest in.
Answer:
The experience of the Marcos Presidency in the Philippines in 1986 showed:
A. the importance of keeping the central bank independent from political pressure.
B. published central bank balance sheets do not always reflect reality.
C. transparency is critical if people are going to trust a central bank.
D. all of the answers given are correct.
Answer:
Financial intermediation exists, in part, because:
A. financial markets work so well.
B. direct finance through stocks and bonds is the dominant form of financing.
C. transaction costs of financial intermediation is always higher than direct finance.
D. the transaction costs associated with direct finance can at times be prohibitive.
Answer:
The monetary policy reaction curve:
A. is the guideline the Fed publishes in setting their interest rate target.
B. approximates the behavior of central bankers.
C. has remained fairly constant over the years.
D. is set by Congress and given to the Fed as a guideline to follow.
Answer:
Everything else equal, if the ratio of bank assets to bank capital decreases, the bank’s
return on equity should:
A. decrease.
B. remain constant.
C. increase.
D. cannot be determined from the information provided.
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:
The terrorist attack on the World Trade Center on September 11, 2001:
A. triggered a flight to quality in the bond market.
B. caused the demand for U.S. Treasury securities to fall and the demand for corporate
bonds to rise.
C. caused the price of U.S. Treasury securities to fall and the yields on corporate bonds
to fall.
D. did not have any significant impact since the risk on all bonds increased.
Answer:
Higher potential output levels:
A. put upward pressure on real interest rates.
B. put downward pressure on real interest rates and upward pressure on inflation rates.
C. put upward pressure on real interest rates and downward pressure on inflation rates.
D. none of the answers given is correct.
Answer:
How many members are on the Board of Governors of the Federal Reserve System?
A. Twelve, one for each district
B. Seven
C. Nine
D. Fourteen
Answer:
The strong appreciation of the dollar for the last part of the 1990s:
A. was a benefit to all U.S. residents but costly to most foreign producers.
B. was a benefit to U.S. exporters, but put a severe strain on U.S. Importers.
C. was welcomed by all U.S. manufacturers.
D. played a key role in keeping inflation in check even though the economy was
growing rapidly.
Answer:
When a country’s current account balance is added to its capital account balance, the
sum should be:
A. twice the current account.
B. zero.
C. positive.
D. negative.
Answer:
A primary goal of central banks is to:
A. reduce the idiosyncratic risk that impacts specific investments.
B. reduce systematic risk.
C. keep stock and bond prices high.
D. keep inflation rates high.
Answer:
In the first calendar quarter a company issues a surprising report saying that it expects
profits to rise in the fourth quarter. The theory of efficient markets says we should
expect the price of the company’s stock to:
A. rise in the fourth quarter when the higher profits are actually seen.
B. fall immediately as stockholders will be disappointed about having to wait until the
fourth quarter for higher profits.
C. rise immediately on the expectation of higher profits in the future.
D. rise around the third quarter since this information will take time to disseminate.
Answer:
The money aggregate M2 includes:
A. large denomination time deposits.
B. stock and bond mutual fund shares.
C. savings deposits but not money market deposit accounts.
D. M1.
Answer:
If a U.S. dollar currently purchases 1.3 Canadian dollars and the inflation rate in
Canada over the next year is 5 percent while it is 2 percent in the U.S., we should
expect a U.S. dollar to purchase:
A. 1.365 Canadian dollars.
B. 1.262 Canadian dollars.
C. 1.300 Canadian dollars.
D. 1.339 Canadian dollars.
Answer:
Which of the following statements is true?
A. Adverse selection is a problem that occurs after a transaction.
B. Moral hazard is a problem that occurs before a transaction.
C. Adverse selection is a problem stemming from asymmetric information.
D. Both adverse selection and moral hazard occur before a transaction.
Answer:
Milton Friedman’s assertion that “inflation is a monetary phenomenon” is based on:
A. the quantity theory of money.
B. the assumption of constant nominal GDP growth.
C. the assumption that the price level grows at the same rate as real GDP.
D. the assumption that the central bank increases the money supply by a constant rate
every year.
Answer:
The variance of a portfolio of assets:
A. decreases as the number of assets increases.
B. increases as the number of assets increase.
C. approaches 0 as the number of assets decreases.
D. approaches 1 as the number of assets increases.
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:
If the purchase price of a bond exceeds the face value, the yield to maturity:
A. is greater than the coupon rate because the capital gain is positive.
B. will equal the current yield.
C. will be less than the coupon rate because the capital gain will be negative.
D. will be greater than the current yield.
Answer:
Bonds cannot have yields less than zero because:
A. the U.S. treasury guarantees all bonds to have a positive yield.
B. the banking technology does not exist to deal with negative yields.
C. people can always hold cash.
D. all of the answers given are correct.
Answer:
When the home construction industry does poorly due to a recession, this is an example
of:
A. systematic risk.
B. idiosyncratic risk.
C. risk premium.
D. unique risk.
Answer:
The risk spread on bonds fluctuates mainly because:
A. taxes tend to increase over time.
B. bond rating agencies are often inconsistent.
C. new information about a borrower’s financial condition becomes available.
D. people do not change their attitudes towards risk quickly.
Answer:
Which of the following statements is most correct?
A. Usually higher expected returns are associated with higher risk premiums.
B. Usually higher risk premiums are associated with lower expected returns.
C. Usually lower expected returns are associated with higher risk premiums.
D. Usually expected returns are not associated with risk premiums.
Answer:
Whole life insurance has decreased in popularity due to:
A. many whole life insurance companies becoming bankrupt.
B. cheaper savings alternatives that have developed, making whole life policies
expensive savings vehicles.
C. mergers with property and casualty companies, raising the cost of all insurance.
D. lower interest rates on alternative savings vehicles.
Answer:
For most of the Fed’s history, the Fed:
A. lent reserves at an interest rate below the target federal funds rate.
B. found banks would borrow from the Fed far more often than they would borrow in
the federal funds market.
C. was very lenient in making discount loans.
D. tied the discount rate to the rate on Treasury securities.
Answer:
Investors usually obtain bond ratings from:
A. private bond-rating agencies.
B. the annual tax returns of the issuer.
C. the U.S. government from publicly available information.
D. public information made available by the bond issuers.
Answer:
Doubling the future value will cause:
A. the present value to fall by half.
B. the interest rate i, to double.
C. no change to present value, only the interest rate.
D. the present value to double.
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A borrower seeking a mortgage today is often presented with the choice between a
mortgage whose interest rate and monthly payment stays fixed for the duration of the
loan, or a mortgage whose interest rate and monthly payment can change as other
interest rates change. Typically the interest rate on the fixed-rate mortgage is higher.
Having learned the five core principles, does this make sense?
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