If someone wants to start a bank today they would have to:
A. obtain a charter from the federal government.
B. simply have $5 million is startup capital, a charter is no longer needed.
C. obtain a charter either from the federal or state government.
D. obtain a state charter, the federal government stopped issuing charters in 1970.
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:
Which of the following is an example of the economies of scope argument for increased
profits for large financial holding companies?
A. Financial holding companies offer a wide array of services under one name.
B. Financial holding companies need only one CEO, one Board of Directors, and one
accounting system regardless of size.
C. Financial holding companies face declining average costs per dollar of deposits.
D. The profitability of financial holding companies relies on one particular line of
business.
Answer:
The nominal exchange rate:
A. is the price of a good in one country expressed in units of the same good in another
country.
B. is fixed by the central banks of countries.
C. is the price of one country’s currency stated in units of another country’s currency.
D. is adjusted once a year and is the price at which goods are traded.
Answer:
The Fed holds its euro reserves primarily in the form of:
A. euro currency.
B. a weighted portfolio of European government bonds.
C. German government bonds.
D. international mutual funds.
Answer:
During the early years of the Great Depression, a study of the money aggregates reveals
that the money multiplier:
A. was at an all-time high.
B. increased from 1929 right through 1936.
C. decreased.
D. was constant from 1929 through 1936.
Answer:
An increase in expected inflation for any given nominal interest rate will cause the:
A. bond supply curve to shift to the left.
B. bond demand curve to shift to the right.
C. price of bonds to decrease.
D. price of bonds to increase.
Answer:
Interest rates that are adjusted for expected inflation are known as:
A. coupon rates.
B. ex ante real interest rates.
C. ex post real interest rates.
D. nominal interest rates.
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:
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:
Many people believed that when the calendar changed from December 31, 1999 to
January 1, 2000, many bank records were going to be wiped out, so many people
planned on withdrawing their funds. If this were to happen, this would be an example
of:
A. credit risk.
B. operational risk.
C. interest rate risk.
D. liquidity risk.
Answer:
Which of the following investment strategies involves generating a higher expected rate
of return through increasing risk?
A. Diversifying
B. Hedging risk
C. Leverage
D. Value at risk
Answer:
The problem of adverse selection created the opportunity for:
A. lenders to profit significantly at the expense of borrowers.
B. significant deregulation of financial markets.
C. a new market in the trading of information.
D. stock prices for many years to be much lower than what they should have been.
Answer:
If output in the economy were to fall by an additional one percent below potential, the
target federal funds rate would:
A. Increase by 1.5%.
B. Decrease by 1.5%.
C. Remain at 2.5%.
D. Decrease by 0.5%.
Answer:
An option’s value will never be less than zero because:
A. the intrinsic value is always less than zero.
B. the option seller is required to make up any shortfall faced by the option buyer.
C. an option holder will never make an additional payment to exercise the option.
D. the time value of the option is always less than zero.
Answer:
The risk structure of interest rates says:
A. the interest rates on a variety of bonds will move independently of each other.
B. lower rated bonds will have higher yields.
C. U.S. Treasury bond yields always change by more than other bonds.
D. interest rates only compensate for risk during recessions.
Answer:
To obtain a discount loan from the Fed, a commercial bank must:
A. prove that it will fail if it does not obtain the loan.
B. prove that the loan will be used to make loans.
C. provide collateral.
D. agree to more frequent examinations.
Answer:
Changes in general economic conditions usually produce:
A. systematic risk.
B. idiosyncratic risk.
C. risk reduction.
D. lower risk premiums.
Answer:
Which fact about the term structure is the Expectations Theory able to explain?
A. Why interest rates on bonds with different terms to maturity tend to move together
over time.
B. Why yields on short-term bonds are more volatile than yields on long-term bonds.
C. Why longer-term yields tend to be higher than shorter-term yields.
D. Why long-term bonds usually are less liquid than short-term bonds with the same
default risk.
Answer:
The velocity of money increases if:
A. each unit of money is used more frequently.
B. each unit of money is used less frequently.
C. more purchases are made.
D. none of the above answers is correct; the velocity of money is constant.
Answer:
When the Fed makes a discount loan, the impact on the Fed’s balance sheet will reflect:
A. no change in liabilities but an increase in assets.
B. a decrease in assets and liabilities.
C. an increase in assets and liabilities.
D. an increase in assets and a decrease in liabilities.
Answer:
In the United States, monetary policy is formed by:
A. an individual advised by a close group of people.
B. committee.
C. the President and approved by Congress.
D. the Chairman of the Federal Reserve and can only be overturned by the presidents
of the Regional Federal Reserve Banks.
Answer:
The point where the central bank’s target inflation rate is consistent with the long-run
real interest rate lies:
A. above the monetary policy reaction curve.
B. below the monetary policy reaction curve.
C. on the monetary policy reaction curve.
D. on the horizontal (inflation) axis.
Answer:
Everything else equal, if the ratio of bank assets to bank capital increases, the bank’s
return on equity should:
A. remain constant.
B. decrease.
C. increase.
D. cannot be determined from the information provided.
Answer:
The basic dividend-discount model is a bit of an oversimplification for valuing stocks
because it:
A. ignores expected dividend growth.
B. ignores the value of future dividends.
C. ignores the risk involved in holding stocks.
D. cannot handle stocks that do not pay dividends.
Answer:
If the market federal funds rate were below the target rate, the response from the Fed
would likely be to:
A. raise the required reserve rate.
B. purchase U.S. Treasury securities.
C. sell U.S. Treasury securities.
D. raise the discount rate.
Answer:
The debate over the causes of recessions in the U.S. in recent years has included
arguments about:
A. monetary policy, but not higher oil prices.
B. decreases in exports.
C. higher oil prices, but not monetary policy.
D. both monetary policy and higher oil prices.
Answer:
Assume there are two companies. Both issue stock, but one is high quality and the other
low quality. If potential investors cannot distinguish the quality of the company:
A. the shares of the low quality firm will disappear from the market.
B. the shares of both companies will trade on the market.
C. the shares of the high quality firm will disappear from the market.
D. this is an example of moral hazard and the shares of both companies will cease to
trade.
Answer:
Which of the books used at the FOMC meetings contain the Board staff’s economic
forecast for the next few years?
A. The blue book
B. The beige book
C. The teal book
D. Both the beige and blue books
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:
An advantage that money has over other assets is that it:
A. increases in value over time.
B. has lower transaction costs to use as a means of payment than other assets.
C. provides a higher return to the owner.
D. is a safer asset to hold during times of inflation.
Answer:
Economists study the link between money and inflation because:
A. they want to understand how to keep inflation low and stable.
B. economists believe that inflation in the 3-6% range is healthy for an economy.
C. as prices increase money becomes more valuable.
D. the Fed needs to increase the money supply as prices increase.
Answer:
The value of a derivative is determined by:
A. the Federal Reserve.
B. SEC regulation.
C. the value of the underlying asset.
D. the risk-free rate.
Answer:
During the 2007-2009 financial crisis, what prevented policy easing from being
transmitted as usual to the real economy?
Answer:
Capital flows freely between two countries and the countries have fixed exchange rates.
The treasury bonds of each country have similar maturities but different expected
returns. What can you deduce from this information?
Answer:
Given that the velocity of money can be unstable in the short run, is this reason enough
to dismiss money growth as a policy target? Explain.
Answer:
Why can monetary policymakers neutralize demand shocks but not supply shocks?
Answer:
Use the monetary policy reaction curve to link a higher inflation rate to lower aggregate
demand.
Answer:
Explain why understanding short-run fluctuations in output and inflation requires that
we study shifts in dynamic aggregate demand and short-run aggregate supply.
Answer:
The income velocity of money is defined as nominal GDP divided by the money supply.
In the first quarter of 2013 the U.S. nominal GDP was estimated to be around $16
trillion annually and M2 was $10460.3 billion. Would the income velocity of M2 be
equal to 1; < 1; or > 1? Explain.
Answer:
Using a model of supply and demand for the dollar-pound market, where the horizontal
axis is labeled quantity of British pounds, explain what happens when Americans have
an increased demand for British automobiles.
Answer:
Why do negative supply shocks pose a particularly difficult dilemma for monetary
policymakers?
Answer:
Is the conflict between a lender to a firm and the borrower/owner an example of adverse
selection or moral hazard? Explain.
Answer:
Consider a call option; in terms of the option writer and option holder, who is the
buyer? Who is the seller? Finally, who has the option? Explain.
Answer:
If we look back in history, why has the role of creating money fallen to central banks?
Answer:
Traveler’s checks have no reserve requirements and are included in M1. When people
travel during the summer and convert some of their checking account deposits into
traveler’s checks, explain what happens to the monetary base.
Answer:
What three strategies are employed by government officials to ensure that the risks
created by the government safety net are contained?
Answer:
If the price of money is determined by supply and demand, what impact should a
decrease in the supply of money (given steady money demand) have on the price of
money and the rate of inflation?
Answer:
Explain how money solves the problem of the “double coincidence of wants.”
Answer:
How did lax financial institution regulation in the 1990s actually contribute to the long
recession in Japan and the ineffectiveness of expansionary monetary policy?
Answer: