Which of the following is incorrect?
A. Money is wealth but not all wealth is money.
B. Money is a means of payment but is not part of wealth.
C. An asset doesn’t have to be a means of payment to be a part of a person’s wealth.
D. All items considered wealth can eventually be converted to a means of payment.
Answer:
The rule of 72 says that at 6% interest $100 should become $200 in about:
A. 72 months
B. 100 months
C. 12 years
D. 7.2 years
Answer:
An increase in the nation’s wealth, all other factors constant, would cause the:
A. bond supply curve to shift left.
B. bond demand curve to shift left.
C. bond supply curve to shift right.
D. bond demand curve to shift right.
Answer:
Mutual funds are characterized by the fact that they all:
A. have the same management fee set by regulation.
B. require the same minimum investment of $10,000.
C. provide some degree of diversification.
D. provide the same degree of liquidity.
Answer:
The U.S. Treasury estimates that the fraction of U.S. currency held outside the United
States is:
A. about one-fourth.
B. about half.
C. between two-thirds and three-quarters.
D. less than 10%.
Answer:
With respect to consumer behavior, the interest-rate channel of monetary policy
transmission appears to be:
A. weak because people’s decisions to purchase cars or houses depend more on
short-term rates rather than long-term rates.
B. weak because people’s decisions to purchase cars or houses depend more on
long-term rates rather than short-term rates.
C. strong because people’s decisions to purchase cars or houses depend on the
short-term rates that policymakers can change.
D. strong because it affects both spending and saving decisions.
Answer:
The Fed’s revenue comes:
A. from Congressional appropriation.
B. from the Department of Commerce.
C. from internally generated funds from interest on securities it holds and fees charged
to banks for payments system services.
D. solely from taxes placed on member banks.
Answer:
Given the following formula for the Taylor rule:
Target federal funds rate = 2 + current inflation + ½(inflation gap) + ½(output gap). If
the inflation rate in the economy were to fall by 2% below the target inflation rate, the
target federal funds rate would:
A. Decrease by 3.0%.
B. Remain at 2.5%.
C. Decrease by 1.0%.
D. Increase by 1.0%.
Answer:
People have a portfolio demand for money in part because:
A. money is part of a well-diversified financial portfolio.
B. the return on money is often higher than other financial assets.
C. money is needed to pay brokerage commissions.
D. there is no cost to holding money which gives it a relatively high return.
Answer:
The real power in the FOMC lies with:
A. the President of the New York Fed Bank.
B. the System Open Market Manager.
C. the Chairman of the Board of Governors.
D. no single individual; all participants have an equal share of the power.
Answer:
Considering the value of a financial instrument, the bigger the size of the promised
payment the:
A. less valuable the financial instrument because risk must be greater.
B. longer an investor has to wait for the payment.
C. more valuable the financial instrument.
D. greater the risk.
Answer:
One reason most central bankers do not set an inflation target of zero is:
A. it is almost impossible to achieve.
B. they believe it would cause price volatility.
C. the central bank could hit the zero nominal-interest-rate bound.
D. none of the answers given is correct.
Answer:
One trait a central bank has over other businesses including banks is that it:
A. receives all of its funding from the government.
B. can control the size of its balance sheet.
C. doesn’t have stockholders.
D. doesn’t have a board of directors.
Answer:
Which of the following statements is true?
A. Leverage increases expected return while lowering risk.
B. Leverage increases risk.
C. Leverage lowers the expected return and lowers risk.
D. Leverage lowers the expected return and increases risk.
Answer:
Which of the following would reflect the transactions demand for money?
A. Keeping funds in your checking account to pay your rent
B. Keeping funds in your savings account because the interest rate looks relatively
attractive
C. Selling common stocks you own and increasing the money in your savings account
because you think stock prices will fall soon
D. Buying a U.S. Treasury security using funds from your checking account
Answer:
The economy enters a period of robust economic growth that is expected to last for
several years. How would this be reflected in the risk structure of interest rates?
A. An inverted yield curve
B. A decrease in the term spread
C. A decrease in the interest rate spread
D. An increase in yields on tax-exempt bonds
Answer:
Capital controls:
A. can be controls on capital inflows.
B. can only be controls on capital outflows.
C. can be controls on capital inflows or outflows.
D. must be controls on both capital inflows and outflows in order to be effective.
Answer:
Credit:
A. probably came into being at the same time as coinage.
B. predates coinage by 2,000 years.
C. did not exist until the middle ages.
D. first became popular due to the writings of Aristotle.
Answer:
If the lender of last resort function of the government is to be effective in working to
minimize a crisis, it must be:
A. reserved only for those banks that are most deserving.
B. used on a limited basis.
C. credible, with banks knowing they can get loans quickly.
D. only available during economic downturns.
Answer:
The intrinsic value of a call option:
A. is the difference between the option price and the interest rate.
B. must be less than or equal to zero.
C. is the greater of zero or the difference between the price of the underlying asset and
the strike price.
D. will be negative if the time value of the option is negative.
Answer:
The movement away from bank lending towards asset-backed securities:
A. has increased the importance of the bank-lending channel of monetary policy.
B. has eliminated the bank-lending channel as a mechanism for monetary policy.
C. has not affected the importance of the bank-lending channel.
D. will require the FOMC to rethink the quantitative impact of changing the target
federal funds rate.
Answer:
During a bank crisis:
A. officials at the Federal Reserve find it easy to sort out solvent from insolvent banks.
B. it is important for regulators to be able to distinguish insolvent from illiquid banks.
C. it is easy to determine the market prices of bank’s assets.
D. a bank will go to the central bank for a loan before going to other banks.
Answer:
Of all of the components of aggregate demand, the most interest sensitive is:
A. investment.
B. government purchases.
C. consumption.
D. net exports.
Answer:
Which of the following statements pertaining to the yield curve is not true?
A. Yield curves usually slope upwards.
B. The yield curve shows the difference in default risk between securities.
C. The yield curve shows the relationship among bonds with the same risk
characteristics but different maturities.
D. The yield curve can be flat or downward sloping depending on market conditions.
Answer:
If the economy’s current level of output rises above its potential level of output, the
short-run aggregate supply curve will:
A. shift right.
B. shift left.
C. become horizontal.
D. become vertical.
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 higher than Tom expected. Tom will have:
A. gained money on his short position.
B. lost money on his long position.
C. gained money on his long position.
D. lost money on his short position.
Answer:
Comparing checks and currency, we can say:
A. both are money but only currency is legal tender.
B. only checks are both money and legal tender.
C. a check isn’t money but currency is.
D. both are money and legal tender.
Answer:
Considering a put option; if the price of the underlying asset increases:
A. the value of the put option also increases.
B. the intrinsic value of the option increases.
C. the value of the option decreases.
D. the time value of the option decreases.
Answer:
The statement “risk requires compensation” implies that people:
A. do not take risk.
B. only accept risk when they absolutely have to.
C. will only accept risk when they are rewarded for doing so.
D. avoid risk at all cost.
Answer:
Professional gamblers know that the odds are always in favor of the house (casinos).
The fact that they gamble says they are:
A. irrational.
B. risk-neutral.
C. risk-averse.
D. risk seekers.
Answer:
The aggregate demand curve shows the quantity of:
A. nominal output demanded at each level of inflation.
B. real output demanded at each level of inflation.
C. output made available at each level of inflation.
D. real output demanded at each level of real interest rate.
Answer:
The conditions for long-run equilibrium include each of the following, except:
A. imports equal exports.
B. current inflation is steady and equals target inflation.
C. current output equals potential output.
D. current inflation equals expected inflation.
Answer:
Which of the following would not be included in aggregate expenditures?
A. New military equipment purchased by the federal government
B. New computers purchased by a law firm
C. Social security payments made by the government to retirees
D. Tuition payments made by college students
Answer:
For a given call option price, which of the following statements is correct?
A. The closer the strike price is to the current price of the underlying asset, the smaller
the time value of the option.
B. The closer the strike price is to the current price of the underlying asset, the larger
the time value of the option.
C. As the strike price approaches the price of the underlying asset, the time value of the
option approaches zero.
D. As the strike price approaches the price of the underlying asset, the intrinsic value of
the option increases and the time value of the option decreases.
Answer:
The yield curve for U.S. Treasury securities allows us to draw the following
conclusions, except that:
A. long-term yields tend to higher than short term yields.
B. interest rates of different maturities tend to move.
C. long-term rates tend to equal short-term rates.
D. yields on short-term securities are more volatile than yields on long-term bonds.
Answer:
What does it mean to say that an asset is “liquid”?
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Many college campuses use student ID cards as a way for students to pay for
on-campus expenses, such as books, photocopies, and food. For convenience, some
students will maintain a balance on their ID cards. Are these balances a means of
payment? Are they a store of value? Explain why or why not.
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