In order for insurance companies to generate predictable payouts, they need to:
A. spread the risk across many policies.
B. accept policyholders from a very specific geographic area.
C. focus on insuring only specific events, for example only fire.
D. offer only life insurance.
Answer:
Assuming the free flow of capital across borders, which of the following statements is
most correct?
A. A central bank can have both a fixed exchange rate and an independent inflation
policy.
B. A central bank cannot have both a fixed exchange rate and an independent inflation
policy.
C. The central banks of most industrialized countries focus on fixed exchange rates.
D. While most central banks of industrialized countries favor fixing exchange rates,
their primary concern is on domestic inflation.
Answer:
The short position in a futures contract is the party that will:
A. deliver a commodity or financial instrument to the buyer at a future date.
B. suffer the loss.
C. accept the risk.
D. benefit from increases in price of the underlying asset.
Answer:
If we look at the equation for money demand from Irving Fisher, which of the following
statements is true?
A. Velocity does not play any role in the equation
B. Money demand is not a factor of nominal income
C. The price level does not impact money demand
D. There isn’t an explicit role for the interest rate in the equation
Answer:
Loans made in the federal funds market:
A. are highly collateralized.
B. are made by the Federal Reserve System to the bank within 24 hours.
C. are unsecured loans.
D. are insured by the FDIC.
Answer:
Each of the following can contribute to the change in the supply of loans resulting from
an interest rate change, except:
A. changes in the percentage of loan payment to income.
B. changes in the potential of moral hazard.
C. changes in borrowers’ net worth.
D. increases in the demand for loans.
Answer:
If a point lies on the monetary policy reaction curve, and at this point the inflation rate
equals the target rate of inflation, we know that:
A. the real interest rate corresponding to this point is above the long-run real interest
rate.
B. the real interest rate corresponding to this point is equal to the long-run real interest
rate.
C. the real interest rate corresponding to this point is below the long-run real interest
rate.
D. current output is above potential output.
Answer:
Which of the following would be classified as precautionary demand for money?
A. You keep a $1000 in a money market account because the return is better than a
savings account at your bank
B. You apply for and receive a credit card with a $1000 limit
C. You put $1000 in a savings account at your bank for emergencies
D. You put $1000 in your checking account each month to cover your regular expenses
Answer:
Without the use of money, workers in an economy would:
A. become more specialized
B. have to spend a lot less time trading
C. probably specialize less
D. be far more productive
Answer:
Defined-benefit plans:
A. are more common than defined contribution plans.
B. pay a pension based on the amount contributed into the plan by the employee and
employer.
C. do not require any responsibility on the part of the employer for the employees’
retirement income; it is based on employee contributions.
D. usually require an employee to work a very long time for the same employer in
order to reap a large benefit.
Answer:
When an individual withdraws funds from a checking account the:
A. bank’s balance sheet shrinks but the size of the Fed’s balance sheet is not affected.
B. bank’s balance sheet shrinks and so does the Fed’s balance sheet.
C. bank’s balance sheet shrinks but the size of the Fed’s balance sheet increases.
D. size of the bank’s balance sheet stays the same but the size of the Fed’s balance sheet
shrinks.
Answer:
For the Federal Reserve’s balance sheet, the asset listed Securities would include:
A. private and public debt.
B. mainly U.S. Treasury and municipal bonds.
C. bonds issued by commercial banks.
D. U.S. Treasury securities.
Answer:
Considering the value of a financial instrument, the circumstances under which the
payment is to be made influence the value because:
A. we like uncertain payoffs because this adds to the return.
B. payments that are made when we need them the most are more valuable.
C. the sooner the payment is to be made the better.
D. we know when certain events are going to occur and that is when we want the
payment.
Answer:
If an investment offered an expected payoff of $100 with $0 variance, you would know
that:
A. half of the time the payoff is $100 and the other half it is $0.
B. the payoff is always $100.
C. half of the time the payoff is $200 and the other half it is $0.
D. half of the time the payoff is $200 and the other half it is $50.
Answer:
The bond rating of a security reflects the:
A. size of the coupon payment relative to the face value.
B. likelihood the lender/borrower will be repaid by the borrower/issuer.
C. return a holder is likely to receive.
D. size of the coupon rate relative to other interest rates.
Answer:
When interest rates fall a bank’s capital will usually:
A. not change.
B. decrease.
C. turn negative.
D. increase.
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:
In which situation will inflation fall the fastest?
A. A negative supply shock occurs, the dynamic aggregate demand curve is steep and
so is the monetary policy reaction curve
B. A negative supply shock occurs, the dynamic aggregate demand curve is flat and so
is the monetary policy reaction curve
C. A negative supply shock occurs, the dynamic aggregate demand curve is flat, and
the monetary policy reaction curve is steep
D. A negative supply shock occurs, the dynamic aggregate demand curve is steep, and
the monetary policy reaction curve is flat
Answer:
The existence of a lender of last resort creates moral hazard for bank managers
because:
A. they have an incentive to take too much risk in their operations.
B. officials are likely to undervalue the bank’s portfolio of assets.
C. they are less likely to apply for a direct loan from the central bank.
D. banks seek loans from the central bank only after exploring other options.
Answer:
Checks and currency function similarly, however:
A. currency is a more effective means of payment.
B. carrying currency entails greater risk, because it cannot be replaced if lost or stolen.
C. currency is a better store of value than checking deposits.
D. checks are not included in measures of money, whereas currency is.
Answer:
If the target federal funds rate reaches zero the FOMC:
A. must stop purchasing securities since they cannot lower nominal rates below zero.
B. would likely shift their focus to purchasing longer-term securities.
C. would likely raise the required reserve rate.
D. would likely raise the discount rate.
Answer:
Which of the following is a bank liability?
A. Mortgage loans
B. Demand deposits
C. Reserves
D. U.S. Treasury securities
Answer:
A bank that specializes in granting loans to firms in a specific line of business:
A. may decrease its operating cost and decrease its credit risk.
B. may increase both its operating cost and its credit risk.
C. may increase its operating cost and decrease its credit risk.
D. may decrease its operating costs and increase its credit risk.
Answer:
Buying and selling U.S. Treasury Securities for the Fed’s own portfolio is called:
A. managing the float.
B. discount buying.
C. open market operations.
D. reserve adjustment.
Answer:
Sharon deposits $150.00 in her savings account at the bank. At the end of one year she
has $156.38. What was the interest rate that Sharon earned?
A. 4.25%
B. 6.38%
C. 4.52%
D. 5.63%
Answer:
Consider a $2 billion open market purchase of U.S. Treasury securities by the Federal
Reserve. The Fed’s balance sheet will show:
A. only an increase in the asset of securities of $2 billion.
B. only show an increase in the liability of reserves of $2 billion.
C. no change in the size of the balance sheet, just the composition of assets will change
from cash to securities.
D. an increase in the asset category of securities and the liability category of reserves
by $2 billion.
Answer:
The nominal exchange rate:
A. is the amount of one country’s goods that could be obtained with a basket of goods
of another country.
B. is always expressed as units of a foreign currency per U.S. dollar.
C. is the rate that one can exchange the currency of one country for the currency of
another country.
D. is a synonymous term for the swap rate.
Answer:
The tools of monetary policy include:
A. the target federal funds rate.
B. the excess reserve rate.
C. the currency-to-deposit ratio.
D. both the excess reserve rate and the target federal funds rate.
Answer:
Which of the following is not a reason to create large financial holding companies?
A. Financial holding companies offer a wide array of services under one brand name.
B. Financial holding companies need only one CEO, one Board of Directors, and one
accounting system regardless of size.
C. Financial holding companies are well diversified so risk is reduced.
D. Financial holding companies are exempt from having to pay for FDIC insurance on
deposits.
Answer:
The Taylor rule assumes the real long-term interest rate would be:
A. approximately 2%.
B. zero.
C. five percent less the inflation rate.
D. one percent.
Answer:
The Bretton Woods System failed in 1971 due to:
A. high rates of inflation in the U.S.
B. greater mobility of capital across international borders.
C. the desire on the part of participating countries to have an independent monetary
policy.
D. all of the reasons given are correct.
Answer:
In the U.S. today:
A. most banks are federally chartered.
B. most banks are state chartered.
C. there are approximately equal numbers of state and federally chartered banks.
D. all new banks are federally chartered.
Answer:
Increases in potential output shift:
A. the long-run aggregate supply curve.
B. the short-run aggregate supply curve.
C. both the long-run aggregate supply curve and the short-run aggregate supply curve.
D. the long-run aggregate supply curve, the short-run aggregate supply curve, and the
dynamic aggregate demand curve.
Answer:
Which of the following could the lemons problem, applied to financial markets,
explain?
A. Lenders seeing a disproportionate share of high quality loan applicants
B. An average interest rate that is too high for the actual risk obtained
C. Profits for many lenders increasing significantly
D. High quality potential borrowers relying more on internally generated funds to
finance investment
Answer:
The decimal equivalent of a basis point is:
A. 0.0001
B. 1.00
C. 0.001
D. 0.01
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