The demand for U.S. government bonds is high relative to other bond issues because:
A. liquidity of other bond issues is high relative to U.S. government bonds.
B. U.S. bond market has low transaction spreads due to high illiquidity.
C. market for U.S. government bonds is more liquid than most if not all other bond
markets.
D. U.S. government bonds have higher default.
Answer:
Which of the following cities does not have a Federal Reserve Bank located in it?
A. Denver
B. Atlanta
C. San Francisco
D. Chicago
Answer:
If the Fed were to purchase euros for dollars and at the same time sell U.S. Treasury
securities in the open market, this would be an example of:
A. an unsterilized foreign exchange intervention.
B. the Fed not changing their balance sheet at all.
C. a sterilized foreign exchange intervention.
D. the Fed altering the domestic monetary base.
Answer:
As a portion of total assets measured in billions of dollars, the most important asset on
the Fed’s balance sheet is:
A. gold.
B. securities.
C. foreign exchange reserves.
D. loans.
Answer:
In its role as bank for the U.S. government, the Federal Reserve performs all of the
following services, except:
A. issuing new currency.
B. making discount loans.
C. maintaining the U.S. Treasury’s bank account.
D. managing U.S. Treasury borrowings.
Answer:
If the U.S. were to revert to a gold standard, trade deficits would:
A. result in gold reserves in the U.S. decreasing.
B. result in lower domestic interest rates.
C. quickly disappear.
D. result in high inflation.
Answer:
If ABC Inc. and XYZ Inc. have returns that are perfectly positively correlated:
A. adding XYZ Inc. to a portfolio that consists of only ABC Inc. will reduce risk.
B. adding ABC Inc. to a portfolio that includes only XYZ Inc. will increase risk.
C. adding XYZ Inc. to a portfolio that consists of only ABC Inc. will neither increase
nor decrease the risk of the portfolio.
D. adding XYZ Inc. to a portfolio that consists of only ABC Inc. will neither increase
nor decrease idiosyncratic risk but will lower systematic risk.
Answer:
An arbitrageur is someone who:
A. always takes the long position in a futures contract.
B. always takes the short position in a futures contract.
C. seeks the high returns that come from the high risk inherent in futures markets.
D. simultaneously buys and sells financial instruments to benefit from temporary price
differences.
Answer:
The Federal Reserve’s Open Market Committee currently meets:
A. monthly.
B. bi-weekly.
C. eight times a year.
D. once every quarter, unless a crisis warrants more frequent meetings.
Answer:
Unit banks are:
A. banks with no branches.
B. more numerous in the United States than they were in previous decades.
C. no longer permitted to exist in the United States.
D. commercial banks that have combined into one unit with an investment bank.
Answer:
The financial system is inherently more unstable than most other industries due to the
fact that:
A. while in most other industries customers disappear at a faster rate, in banking they
disappear slowly so the damage is done before the real problem is identified.
B. banks deal in paper profits, not in real profits.
C. a single firm failing in banking can bring down the entire system; this isn’t true in
most other industries.
D. there is less competition than in other industries.
Answer:
The Federal Reserve’s policy regarding announcing its policy decisions has:
A. always been to announce it immediately; that was part of the original Federal
Reserve Act of 1913.
B. only recently gone to immediate announcement; until 1994 these policy decisions
were secret.
C. been to release the decisions immediately since its early failure at preventing the
Great Depression.
D. changed so that now the Fed does not release its decisions publicly.
Answer:
The amount of currency in the hands of the public is approximately what percentage of
M1?
A. 45%
B. 25%
C. 30%
D. 90%
Answer:
Juan purchases automobile insurance; the insurance contract is a:
A. financial instrument.
B. form of money.
C. transfer of risk from the insurance company to Juan.
D. financial intermediary.
Answer:
Financial instruments are used to channel funds from:
A. savers to borrowers in financial markets and via financial institutions.
B. savers to borrowers in financial markets but not through financial institutions.
C. borrowers to savers in financial markets but not through financial institutions.
D. borrowers to savers through financial institutions, but not in financial markets.
Answer:
During the early years of the Great Depression, the monetary base and M2:
A. both increased significantly.
B. both decreased significantly.
C. moved in opposite directions; M2 increased while the monetary base decreased.
D. moved in opposite directions; the monetary base increased but M2 decreased.
Answer:
One impact of the 2007-2009 financial crisis was to heighten the challenges faced by
monetary policymakers. All but which of the following was grew more prominent as a
result of the crisis?
A. Stock and property values have a tendency to go through boom and bust cycles.
B. The nation’s current account deficit keeps widening.
C. Policymakers options are limited since the nominal interest rate cannot fall below
zero.
D. The structures of the economy and financial system are constantly evolving.
Answer:
In the U.S., most of the recessions are associated with:
A. ill-timed fiscal policy.
B. decreasing net exports.
C. decreases in investment.
D. large decreases in consumption.
Answer:
A bank’s net worth is synonymous with its:
A. assets.
B. assets + a bank’s liabilities.
C. capital.
D. required reserves.
Answer:
The principal-agent problem is quite common in large public corporations due to:
A. the fact that large corporations generate large sales volumes.
B. the fact that large companies employ many people.
C. too little regulation by government.
D. the fact that the people making the operational decisions are usually not the owners.
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:
A wheat farmer who must purchase his inputs now but will sell his wheat at a market
price at a future date:
A. faces a market risk that cannot be offset.
B. is a good example of what the chapter refers to as a speculator.
C. would hedge by taking the short position in a wheat futures contract.
D. would hedge by taking the long position in a wheat futures contract.
Answer:
Changes in general economic conditions usually produce:
A. systematic risk.
B. idiosyncratic risk.
C. risk reduction.
D. lower risk premiums.
Answer:
If a recession results from higher oil prices:
A. inflation should increase as output decreases.
B. inflation should fall as output falls.
C. output should not change but inflation should increase.
D. an expansionary gap should occur.
Answer:
Uncertainties that are not quantifiable:
A. are what we define as risk.
B. are factored into the price of an asset.
C. cannot be priced.
D. are benchmarks against which quantifiable risks can be assessed.
Answer:
Which of the following statements is true?
A. Leverage increases expected return and increases risk.
B. Leverage increases expected return and reduces risk.
C. Leverage decreases expected return but has no effect on risk.
D. Leverage decreases expected return and increases risk.
Answer:
Financial instruments and money share which of the following characteristics?
A. Both can function as a means of payment and a store of value.
B. Both can function as a store of value and allow for trading of risk.
C. Both can function by acting as a means of payment and allow for trading of risk.
D. Both can function as a store of value even though they do not allow for trading of
risk.
Answer:
Another name for the expected value of an investment would be the:
A. mean value.
B. upper-end value.
C. certain value.
D. risk-free value.
Answer:
You have a portfolio valued at $10,000. Over the next twelve months it loses 50% of its
value. What return does the portfolio need to earn over the following twelve months to
be restored to its original value?
A. 100%
B. 50%
C. 200%
D. 25%
Answer:
Which of the following is not a financial intermediary?
A. A bank
B. An insurance company
C. The New York Stock Exchange
D. A mutual fund
Answer:
The driving force in the balance-sheet channel of monetary policy mechanism is which
of the following?
A. Information
B. Timing
C. Asset diversity
D. Bank net worth
Answer:
Compare two economies: a barter economy versus an economy that uses money. In
order to exchange goods and services:
A. a double coincidence of wants is necessary in the barter economy.
B. a double coincidence of wants is more likely to occur in the barter economy.
C. transactions are likely to be smoother in the barter economy because goods and
services are exchanged directly.
D. the money economy requires that sellers have more information about buyers’
wants.
Answer: