1) A financial crisis occurs when an increase in asymmetric information from a
disruption in the financial system
A) causes severe adverse selection and moral hazard problems that make financial
markets incapable of channeling funds efficiently
B) allows for a more efficient use of funds
C) increases economic activity
D) reduces uncertainty in the economy and increases market efficiency
2) If a central bank does not want to allow the domestic currency to depreciate, it will
________ international reserves by purchasing its currency, thereby ________ the
monetary base and increasing the risk of higher unemployment.
A) lose; decreasing
B) lose; increasing
C) acquire; decreasing
D) acquire; increasing
3) All else the same, if a bank’s liabilities are more sensitive to interest rate fluctuations
than are its assets, then ________ in interest rates will ________ bank profits.
A) an increase; increase
B) an increase; reduce
C) a decline; reduce
D) a decline; not affect
4) The Federal Reserve Act required all ________ banks to become members of the
Federal Reserve System, while ________ banks could choose to become members of
the system.
A) state; national
B) state; municipal
C) national; state
D) national; municipal
5) Which of the following would a bank not hold as insurance against the highest cost
of deposit outflow-bank failure?
A) Excess reserves
B) Secondary reserves
C) Bank capital
D) Mortgages
6) Before the South Korean financial crisis, sales by the top five chaebols
(family-owned conglomerates) were
A) nearly 50% of GDP
B) about 10% of GDP
C) almost 90% of GDP
D) nearly 25% of GDP
7) A ________pays out cash flows from subprime mortgage-backed securities in
different tranches, with the highest-rated tranch paying out first, while lower ones paid
out less if there were losses on the mortgage-backed securities.
A) Collateralized debt obligation (CDO)
B) Adjustable-rate mortgage
C) Negotiable CD
D) Discount bond
8) Which of the following is a true statement?
A) Money and income are flow variables
B) Money is a flow variable
C) Income is a flow variable
D) Money and income are stock variables
9) Which of the following statements is true?
A) A liquid asset is one that can be quickly and cheaply converted into cash
B) The demand for a bond declines when it becomes less liquid, decreasing the interest
rate spread between it and relatively more liquid bonds
C) The differences in bond interest rates reflect differences in default risk only
D) The corporate bond market is the most liquid bond market
10) The price of a consol equals the coupon payment
A) times the interest rate
B) plus the interest rate
C) minus the interest rate
D) divided by the interest rate
11) Through correspondent banking, large banks provide services to small banks,
including
A) loan guarantees
B) foreign exchange transactions
C) issuing stock
D) debt reduction
12) All other things held constant, premiums on options will increase when the
A) exercise price increases
B) volatility of the underlying asset increases
C) term to maturity decreases
D) futures price increases
13) Both France and the United Kingdom successfully used exchange-rate targeting to
lower inflation in the late 1980s and early 1990s by tying the value of their currencies
to the
A) U.S. dollar
B) German mark
C) Swiss franc
D) Euro
14) When the value of the British pound changes from $1.25 to $1.50, the pound has
________ and the U.S. dollar has ________.
A) appreciated; appreciated
B) depreciated; appreciated
C) appreciated; depreciated
D) depreciated; depreciated
15) Only when budget deficits are financed by money creation does the increased
government spending lead to ________ in the ________.
A) a decrease; monetary base
B) an increase; monetary base
C) a decrease; money multiplier
D) an increase; money multiplier
16) The primary purpose of deposit insurance is to
A) improve the flow of information to investors
B) prevent banking panics
C) protect bank shareholders against losses
D) protect bank employees from unemployment
17) With regard to external sources of financing for nonfinancial businesses in the
United States, which of the following are accurate statements?
A) Marketable securities account for a larger share of external business financing in the
United States than in Germany and Japan
B) Since 1970, most of the newly issued corporate bonds and commercial paper have
been sold directly to American households
C) Direct finance accounts for more than 50 percent of the external financing of
American businesses
D) Smaller businesses almost always raise funds by issuing marketable securities
18) A type of ________ problem that occurs when a person or institution has multiple
objectives that conflict with each other is called ________.
A) moral hazard; conflicts of interest
B) adverse selection; conflicts of interest
C) moral hazard; spinning
D) adverse selection; spinning
19) Under a fixed exchange rate regime, if a country has an ________ exchange rate,
then its central bank’s attempt to keep its currency from appreciating will result in a
________ of international reserves.
A) undervalued; gain
B) undervalued; loss
C) overvalued; gain
D) overvalued; loss
20) In the model of the money supply process for M2, the relationship between
checkable deposits and the M2 money supply is represented by
A) D = M2
B) D = (1 + c + t + mm) M2
C) M2 = D
D) M2 =
21) Everything else held constant, aggregate demand increases when
A) taxes are cut
B) government spending is reduced
C) animal spirits decrease
D) the money supply is reduced
22) An advantage to American banks from operating foreign branches is that Eurodollar
deposits in offshore branches are
A) not subject to reserve requirements
B) insured by the FDIC
C) subject to extensive regulatory supervision
D) all demand deposits that pay no interest
23) When the value of the dollar changes from £0.75 to £0.5, then the British pound has
________ and the U.S. dollar has ________.
A) appreciated; appreciated
B) depreciated; appreciated
C) appreciated; depreciated
D) depreciated; depreciated
24) A possible sequence for the three stages of a financial crisis in an advanced
economy might be ________ leads to ________ leads to ________.
A) asset price declines; banking crises; unanticipated decline in price level
B) unanticipated decline in price level; banking crises; increase in interest rates
C) banking crises; increase in interest rates; unanticipated decline in price level
D) banking crises; increase in uncertainty; increase in interest rates
25) Which of the following criteria need not be satisfied for choosing a policy
instrument?
A) The variable must be measurable
B) The variable must be controllable
C) The variable must be predictable
D) The variable must be transportable
26) ________ is used to make purchases while ________ is the total collection of
pieces of property that serve to store value.
A) Money; income
B) Wealth; income
C) Income; money
D) Money; wealth
27) Everything else held constant, an increase in net taxes ________ aggregate
________.
A) increases; demand
B) decreases; demand
C) decreases; supply
D) increases; supply
28) The additional incentive that the purchaser of a Treasury security requires to buy a
long-term security rather than a short-term security is called the
A) risk premium
B) term premium
C) tax premium
D) market premium
29) If your nominal income in 1998 is $50,000, and prices increase by 50% between
1998 and 2011, then to have the same real income, your nominal income in 2011 must
be
A) $50,000
B) $75,000
C) $100,000
D) $150,000
30) Which of the following functions is not performed by any of the twelve regional
Federal Reserve Banks?
A) Check clearing
B) Conducting economic research
C) Setting interest rates payable on time deposits
D) Issuing new currency
31) In both New Zealand and Canada, what has happened to the unemployment rate
since the countries adopted inflation targeting?
A) The unemployment rate increased sharply
B) The unemployment rate remained constant
C) The unemployment rate has declined substantially after a sharp increase
D) The unemployment rate declined sharply immediately after the inflation targets were
adopted
32) Higher capital requirements will reduce the problems incurred when troubled
________ which had been off-balance sheet activities come back on the balance sheet.
A) structured investment vehicles (SIVs)
B) negotiable CDs
C) Eurodollars
D) Federal funds
33) ________ money could be used for some other purpose other than as a medium of
exchange, for example, gold coins could be melted down and turned into gold jewelry.
A) Commodity
B) Fiat
C) Paper
D) Electronic