The Fed’s use of the federal funds rate as an operating target in the 1970s resulted in
A. countercyclical monetary policy.
B. too slow growth in M1 throughout the decade.
C. procyclical monetary policy.
D. too rapid growth in M1 throughout the decade.
Answer:
In Keynes’s liquidity preference framework, as the expected return on bonds increases
(holding everything else unchanged), the expected return on money ________, causing
the demand for ________ to fall.
A. falls; bonds
B. falls; money
C. rises; bonds
D. rises; money
Answer:
A system of deposit insurance
A. attracts risk-taking entrepreneurs into the banking industry.
B. encourages bank managers to decrease risk.
C. increases the incentives of depositors to monitor the riskiness of their bank’s asset
portfolio.
D. increases the likelihood of bank runs.
Answer:
Off-balance-sheet activities
A. generate fee income with no increase in risk.
B. increase bank risk but do not increase income.
C. generate fee income but increase a bank’s risk.
D. generate fee income and reduce risk.
Answer:
Using the information in Situation 20-1, if aggregate output equals $8,000, the
unplanned inventory investment equals
A. -$100
B. $0
C. $100
D. $500
Answer:
Keynes hypothesized that the speculative component of money demand was primarily
determined by the level of
A. interest rates.
B. velocity.
C. income.
D. stock market prices.
Answer:
Which of the following is NOT a government-sponsored enterprise?
A. Fannie Mae.
B. Freddie Mac.
C. Federal Home Loan Banks.
D. Ginnie Mae.
Answer:
In the bond market, the bond demanders are the ________ and the bond suppliers are
the ________.
A. lenders; borrowers
B. lenders; advancers
C. borrowers; lenders
D. borrowers; advancers
Answer:
Taxpayers were served poorly by thrift regulators in the 1980s. This poor performance
cannot be explained by
A. regulators’ desire to escape blame for poor performance, leading to a perverse
strategy of “bureaucratic gambling.”
B. regulators’ incentives to accede to pressures imposed by politicians, who sought to
keep regulators from imposing tough regulations on institutions that were major
campaign contributors.
C. Congress’s dogged determination to protect taxpayers from the unsound banking
practices of managers at many of the nation’s savings and loans.
D. politicians strong incentives to act in their own interests rather than the interests of
the taxpayers.
Answer:
________ in the expected future domestic exchange rate causes the demand for
domestic assets to ________ and the domestic currency to depreciate, everything else
held constant.
A. An increase; increase
B. An increase; decrease
C. A decrease; increase
D. A decrease; decrease
Answer:
By bundling share purchases of many investors together mutual funds can take
advantage of economies of scale and thereby lower
A. adverse selection.
B. moral hazard.
C. transactions costs.
D. diversification.
Answer:
Both ________ and ________ were financial innovations that occurred because of
interest rate volatility.
A. adjustable-rate mortgages; commercial paper
B. adjustable-rate mortgages; financial derivatives
C. sweep accounts; financial derivatives
D. sweep accounts; commercial paper
Answer:
According to the liquidity premium theory of the term structure, a flat yield curve
indicates that short-term interest rates are expected to
A. rise in the future.
B. remain unchanged in the future.
C. decline moderately in the future.
D. decline sharply in the future.
Answer:
In the model of the money supply process, the bank’s role in influencing the money
supply process is represented by
a. the excess reserve.
b. both the excess reserve and the market interest rate.
c. the currency ratio.
d. only borrowed reserves.
Answer:
________ in the expected future domestic exchange rate causes the demand for
domestic assets to shift to the ________ and the domestic currency to appreciate,
everything else held constant.
A. An increase; right
B. An increase; left
C. A decrease; right
D. A decrease; left
Answer:
Insurance companies reduce risk exposure in exchange for a portion of their insurance
premiums by obtaining
A. government loan guarantees.
B. federal insurance.
C. reinsurance.
D. bankers acceptances.
Answer:
The demand for gold increases, other things equal, when
A. the market for silver becomes more liquid.
B. interest rates are expected to rise.
C. interest rates are expected to fall.
D. real estate prices are expected to increase.
Answer:
Critics of the current system of Fed independence contend that
A. the current system is undemocratic.
B. voters have too much say about monetary policy.
C. the president has too much control over monetary policy on a day-to-day basis.
D. the Board of Governors is held responsible for policy missteps.
Answer:
The Fed’s lender-of-last-resort function
A. has proven to be ineffective.
B. cannot prevent runs by large depositors.
C. is no longer necessary due to FDIC insurance.
D. creates a moral hazard problem.
Answer:
The current international financial system is a managed float exchange rate system
because
A) exchange rates fluctuate in response to, but are not determined solely by, market
forces.
B) some countries keep their currencies pegged to the dollar, which is not allowed to
fluctuate.
C) all countries allow their exchange rates to fluctuate in response to market forces.
D) all countries peg their currencies to the dollar which is allowed to fluctuate in
response to market forces.
Answer:
Under the current managed float exchange rate regime, countries with balance of
payments ________ frequently do not want to see their currencies ________ because it
makes foreign goods more expensive for domestic consumers and can stimulate
inflation.
A) surpluses; depreciate
B) deficits; depreciate
C) surpluses; appreciate
D) deficits; appreciate
Answer:
Because checking accounts are ________ liquid for the depositor than savings
accounts, they earn ________ interest rates.
A. less; higher
B. less; lower
C. more; higher
D. more; lower
Answer:
The monetary policy strategy that relies on a stable money-income relationship is
A. exchange-rate targeting.
B. monetary targeting.
C. inflation targeting.
D. the implicit nominal anchor.
Answer:
Evidence in support of the efficient markets hypothesis includes
A. the failure of technical analysis to outperform the market.
B. the small-firm effect.
C. the January effect.
D. excessive volatility.
Answer:
If a bank has more rate-sensitive assets than rate-sensitive liabilities
A. it reduces interest rate risk by swapping rate-sensitive income for fixed rate income.
B. it reduces interest rate risk by swapping fixed rate income for rate-sensitive income.
C. it increases interest rate risk by swapping rate-sensitive income for fixed rate
income.
D. it neutralizes interest rate risk by receiving and paying fixed-rate streams.
Answer:
According to the expectations theory of the term structure
A. the interest rate on long-term bonds will exceed the average of short-term interest
rates that people expect to occur over the life of the long-term bonds, because of their
preference for short-term securities.
B. interest rates on bonds of different maturities move together over time.
C. buyers of bonds prefer short-term to long-term bonds.
D. buyers require an additional incentive to hold long-term bonds.
Answer:
If a perpetuity has a price of $500 and an annual interest payment of $25, the interest
rate is
A. 2.5 percent.
B. 5 percent.
C. 7.5 percent.
D. 10 percent.
Answer:
A well-capitalized financial institution has ________ to lose if it fails and thus is
________ likely to pursue risky activities.
A. more; more
B. more; less
C. less; more
D. less; less
Answer:
Although the National Bank Act of 1863 was designed to eliminate state-chartered
banks by imposing a prohibitive tax on banknotes, state banks were able to stay in
business by
A. issuing credit cards.
B. ignoring the regulations.
C. acquiring funds through deposits.
D. branching into other states.
Answer:
Between 1950 and 1980 in the U.S., interest rates trended upward. During this same
time period
A. the rate of money growth declined.
B. the rate of money growth increased.
C. the government budget deficit (expressed as a percentage of GNP) trended
downward.
D. the aggregate price level declined quite dramatically.
Answer: