Assuming the economy is starting at the natural rate of output and everything else held
constant, the effect of ________ in aggregate ________ is a rise in both inflation and
output in the short-run, but in the long-run the only effect is a rise in inflation.
A) a decrease; supply
B) a decrease; demand
C) an increase; supply
D) an increase; demand
Answer:
Thrift institutions include
A) commercial banks.
B) brokerage firms
C) insurance companies.
D) mutual savings banks.
Answer:
If aggregate demand falls short of current output, business firms will ________
production to ________ inventories.
A) cut; keep from accumulating
B) expand; keep from accumulating
C) cut; build up
D) expand; build up
Answer:
________ in the money supply creates excess demand for ________, causing interest
rates to ________, everything else held constant.
A) An increase; money; rise
B) An increase; bonds; fall
C) A decrease; bonds; rise
D) A decrease; money; fall
Answer:
A breakdown of financial markets can result in
A) financial stability.
B) rapid economic growth.
C) political instability.
D) stable prices.
Answer:
Suppose that there is a negative aggregate supply shock and the central bank commits
to an inflation rate target.
A) If the commitment is credible, the public’s expected inflation will remain unchanged.
B) Credible policy produces better outcomes on both inflation and output in the short
run.
C) Policies that are not credible produce worse economic contraction.
D) all of the above.
E) both A and C.
Answer:
Everything else held constant, when households save less, wealth and the demand for
bonds ________ and the bond demand curve shifts ________.
A) increase; right
B) increase; left
C) decrease; right
D) decrease; left
Answer:
In the market for reserves, if the federal funds rate is above the interest rate paid on
excess reserves, an open market purchase ________ the ________ of reserves which
causes the federal funds rate to fall, everything else held constant.
A) increases; supply
B) increases; demand
C) decreases; supply
D) decreases; demand
Answer:
The Federal Reserve will engage in a matched sale-purchase transaction when it wants
to ________ reserves ________ in the banking system.
A) increase; permanently
B) increase; temporarily
C) decrease; temporarily
D) decrease; permanently
Answer:
The monetary policy strategy that suffers a lack of transparency is
A) exchange-rate targeting.
B) monetary targeting.
C) inflation targeting.
D) the implicit nominal anchor.
Answer:
Fed policy since the early 1990s indicates that it is pursuing a policy of targeting the
A) monetary base.
B) money supply.
C) federal funds interest rate.
D) exchange rate.
Answer:
The value of any investment is found by computing the
A) present value of all future sales.
B) present value of all future liabilities.
C) future value of all future expenses.
D) present value of all future cash flows.
Answer:
In contrast to the CAPM, the APT assumes that there can be several sources of
________ that cannot be eliminated through diversification.
A) nonsystematic risk
B) systematic risk
C) credit risk
D) arbitrary risk
Answer:
One financial intermediary in our financial structure that helps to reduce the moral
hazard from arising from the principal-agent problem is the
A) venture capital firm.
B) money market mutual fund.
C) pawn broker.
D) savings and loan association.
Answer:
The trend in recent years is that more and more governments
A) have been granting greater independence to their central banks.
B) have been reducing the independence of their central banks to make them more
accountable for poor economic performance.
C) have mandated that their central banks focus on controlling inflation.
D) have required their central banks to cooperate more with their Ministers of Finance.
Answer:
If the money supply is $600 and nominal income is $3,000, the velocity of money is
A) 1/50.
B) 1/5.
C) 5.
D) 50
Answer:
Foreign exchange rate stability is important because a decline in the value of the
domestic currency will ________ the inflation rate, and an increase in the value of the
domestic currency makes domestic industries ________ competitive with competing
foreign industries.
A) increase; more
B) increase; less
C) decrease; more
D) decrease; less
Answer:
Everything else held constant, a decrease in planned investment expenditure ________
aggregate ________.
A) increases; demand
B) decreases; demand
C) decreases; supply
D) increases; supply
Answer:
To say that stock prices follow a “random walk” is to argue that stock prices
A) rise, then fall, then rise again.
B) rise, then fall in a predictable fashion.
C) tend to follow trends.
D) cannot be predicted based on past trends.
Answer:
The Fed can offset the effects of an increase in float by engaging in
A) a repurchase agreement.
B) a matched sale-purchase transaction.
C) an interest rate swap.
D) an open market purchase.
Answer:
Which of the following statements best explains how the use of money in an economy
increases economic efficiency?
A) Money increases economic efficiency because it is costless to produce.
B) Money increases economic efficiency because it discourages specialization.
C) Money increases economic efficiency because it decreases transactions costs.
D) Money cannot have an effect on economic efficiency.
Answer:
The interest rate charged on overnight loans of reserves between banks is the
A) prime rate.
B) discount rate.
C) federal funds rate.
D) Treasury bill rate.
Answer:
If the probability of a bond default increases because corporations begin to suffer large
losses, then the default risk on corporate bonds will ________ and the expected return
on these bonds will ________, everything else held constant.
A) decrease; increase
B) decrease; decrease
C) increase; increase
D) increase; decrease
Answer:
If the required reserve ratio is 10 percent, currency in circulation is $400 billion,
checkable deposits are $1000 billion, and excess reserves total $1 billion, then the M1
money multiplier is
A) 2.5
B) 2.8
C) 2
D) 0.7
Answer:
Compared to an electronic payments system, a payments system based on checks has
the major drawback that
A) checks are less costly to process.
B) checks take longer to process, meaning that it may take several days before the
depositor can get her cash.
C) fraud may be more difficult to commit when paper receipts are eliminated.
D) legal liability is more clearly defined.
Answer:
Under a fixed exchange rate regime, if the domestic currency is initially overvalued,
that is, below par, the central bank must intervene to purchase the ________ currency
by selling ________ assets.
A) domestic; foreign
B) domestic; domestic
C) foreign; foreign
D) foreign; domestic
Answer:
The problem of adverse selection helps to explain
A) why firms are more likely to obtain funds from banks and other financial
intermediaries, rather than from securities markets.
B) why collateral is an important feature of consumer, but not business, debt contracts.
C) why direct finance is more important than indirect finance as a source of business
finance.
D) why lenders refuse loans to individuals with high net worth.
Answer:
Part of the increase in currency holdings in the 1960s and 1970s can be attributed to
A) increases in income tax rates.
B) the switch from progressive to proportional income taxes.
C) the adoption of regressive taxes.
D) bracket creep due to inflation and progressive income taxes.
Answer:
Measuring the sensitivity of bank profits to changes in interest rates by multiplying the
gap for several maturity subintervals times the change in the interest rate is called
A) basic gap analysis.
B) the maturity bucket approach to gap analysis.
C) the segmented maturity approach to gap analysis.
D) the segmented maturity approach to interest-exposure analysis.
Answer:
Which of the following statements about the characteristics of debt and equities is true?
A) They can both be long-term financial instruments.
B) Bond holders are residual claimants.
C) The income from bonds is typically more variable than that from equities.
D) Bonds pay dividends.
Answer:
From 1980 to early 1985 the dollar ________ in value, thereby benefiting American
________.
A) appreciated; consumers
B) appreciated, businesses
C) depreciated; consumers
D) depreciated, businesses
Answer:
The currency component includes paper money and coins held in
A) bank vaults.
B) ATMs.
C) the hands of the nonbank public.
D) the central bank.
Answer:
Severe fiscal imbalances can directly trigger a currency crisis since
A) investors fear that the government may not be able to pay back the debt and so begin
to sell domestic currency.
B) the government may stop printing money.
C) the government may have to cut back on spending.
D) the currency must surely increase in value.
Answer:
If the economy is on the IS curve, but is to the left of the LM curve, then the ________
market is in equilibrium, but the interest rate is ________ the equilibrium level.
A) goods; below
B) goods; above
C) money; below
D) money; above
Answer:
The argument that econometric policy evaluation is likely to be misleading if
policymakers assume stable economic relationships is known as
A) the monetarist revolution.
B) the Lucas critique.
C) public choice theory.
D) new Keynesian theory.
Answer: