The Federal Open Market Committee began operating in:
A. 1913.
B. 1929.
C. 1914.
D. 1936.
Answer:
Tax-exempt bonds:
A. generate higher returns for the bondholder when purchased through a tax-exempt
retirement account.
B. are not affected by changes in yields on taxable bonds.
C. are most beneficial to those who pay higher income tax rates.
D. include U.S. Treasury securities because the Internal Revenue Service does not
charge income tax on interest earned from these bonds.
Answer:
During the 1990s, the Japanese recession did not respond to the continual interest rate
reductions implemented by monetary policymakers. Which of the following
contributing to this lack of response?
A. Many banks were actually insolvent
B. The Japanese stock market collapsed
C. Property values fell dramatically
D. All of the answers given are correct
Answer:
A futures contract is an example of:
A. a derivative instrument.
B. an instrument used solely by financial institutions.
C. a high-risk security that will only have value if certain events occur.
D. a contract that is traded but is not a financial instrument.
Answer:
Which of the following statements is incorrect?
A. A foreign exchange intervention affects the value of a country’s currency by
changing domestic interest rates.
B. Any central bank policy that influences the domestic interest rate will affect the
exchange rate.
C. Higher U.S. interest rates would likely result in an appreciation of the U.S. dollar.
D. Sterilized changes in foreign exchange reserves alter a country’s monetary base.
Answer:
If inflation increases, this could be illustrated as a:
A. rightward shift of the long-run aggregate supply curve.
B. leftward shift of the long-run aggregate supply curve.
C. rightward shift of the short-run aggregate supply curve.
D. movement down along the short-run aggregate supply curve.
Answer:
Gold would be a superior commodity money compared to wheat because:
A. wheat has a high value relative to weight, which gold does not.
B. it is easier to divide wheat into small units.
C. wheat has more practical uses than gold.
D. wheat is perishable.
Answer:
Providing stock options to corporate managers was an idea designed to: A. hide
increases in pay of corporate executives from stockholders.
B. align managers’ interest with the stockholders’ interest.
C. treat adverse selection.
D. treat the free-rider problem.
Answer:
Most commercial paper is:
A. issued with maturities exceeding one year.
B. issued with maturities between 50 and 75 days.
C. used exclusively for short-term financing needs.
D. issued by foreign companies doing business in the United States.
Answer:
The time value of the option can best be defined as (excluding its intrinsic value):
A. the commission earned by a broker.
B. the fee earned for the potential benefits from buying the option.
C. the service fee charged by the SEC for regulating the option market.
D. the fee paid for the potential benefits from buying an option.
Answer:
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:
The rationale for the existence of central banks is mainly that:
A. financial markets lack transparency.
B. they are needed for the supervision of banks.
C. financial intermediation cannot occur without a central bank.
D. financial systems are prone to periods of extreme volatility.
Answer:
Sue sells a futures contract for U.S. Treasury bonds and on the settlement date the
interest rate on U.S. Treasury bonds is lower than Sue expected. Sue will have:
A. lost money on her short position.
B. gained money on her long position.
C. gained money on her short position.
D. lost money on her long position.
Answer:
If government purchases increase and as a result push current output above potential
output, monetary policymakers are likely to:
A. lower the real interest rate.
B. raise the real interest rate.
C. keep the real interest rate constant and focus on only changing the nominal interest
rate.
D. purchase Treasury securities.
Answer:
When arbitrage occurs across countries with flexible exchange rates and when the
bonds in each country are identical and there are no barriers to capital flows:
A. the interest rates on the bonds will be identical.
B. the prices of the bonds will be identical.
C. the inflation rates in each country will be identical.
D. none of the answers provided is correct.
Answer:
Catastrophe bonds or “cat bonds” were developed:
A. by reinsurance companies to finance their growth.
B. as an alternative to purchasing reinsurance.
C. prior to the creation of reinsurance companies but are being phased out.
D. by the U.S. government to provide insurance against national disasters.
Answer:
Which of the following would be classified as a negative supply shock?
A. An increase in the price of oil
B. An increase in government purchases
C. An increase in export demand
D. A decline of investor optimism
Answer:
The Federal Reserve’s Fedwire system is used mainly to provide:
A. a means for foreign banks to transfer funds to U.S. banks.
B. an inexpensive and reliable way for financial institutions to transfer funds to one
another.
C. an inexpensive way for individuals to pay their bills on-line.
D. a means for the Treasury to collect tax payments.
Answer:
Moral hazard problems arise because:
A. lenders cannot distinguish good from bad risks.
B. borrowers have incentives to act in ways that do not reflect the lender’s interest.
C. firms hire incompetent employees.
D. lenders charge interest rates that are too low.
Answer:
Which of the following is not an example of bartering?
A. Sue trading candles with Tom for his bread.
B. Mary paying for her new shoes with her credit card.
C. John cutting his neighbor’s grass in return for his neighbor washing John’s car.
D. Mrs. Smith treating the neighbor children to pizza after they helped clean up her
yard.
Answer:
If the interest rate is zero, a promise to receive a $100 payment one year from now is:
A. more valuable than receiving $100 today.
B. less valuable than receiving $100 today.
C. equal in value to receiving $100 today.
D. equal in value to receiving $101 today.
Answer:
Which of the following would not be included in a definition of risk?
A. Risk is a measure of uncertainty.
B. Risk can always be avoided at no cost.
C. Risk has a time horizon.
D. Risk usually involves some future payoff.
Answer:
A ‘shock” is something that creates a shift in:
A. the demand curve only.
B. the supply curve only.
C. either the demand curve or the supply curve.
D. both the demand curve and the supply curve at the same time.
Answer:
Standardization of financial instruments has occurred as a result of:
A. the rule of 70.
B. the law of demand.
C. economies of scale.
D. the law of supply.
Answer:
People who claim to have the ability to accurately predict the future prices of stocks:
A. are strong advocates of the theory of efficient markets.
B. should be looked at with skepticism, unless they have information not available to
others.
C. are unusually lucky, and should be listened to intently.
D. are always psychologists.
Answer:
Universal banks are:
A. firms that engage in banking services across many countries.
B. firms that engage a wide array of financial and non-financial activities.
C. banks that make direct investment in non-financial firms.
D. multinational corporations that own U.S. banks.
Answer:
The price of a coupon bond is determined by:
A. taking the present value of the bond’s final payment and subtracting the coupon
payments.
B. taking the present value of the coupon payments and adding this to the face value.
C. taking the present value of all of the bond’s payments.
D. estimating its future value.
Answer:
What do bondholders and stockholders have in common?
A. Both are claimants.
B. Both have voting rights.
C. Both are shareholders in the company.
D. Both receive fixed payments on their securities each year.
Answer:
The notion that stock prices reflect all current available information:
A. makes the risk of holding stocks greater.
B. indicates that mutual fund managers will not, on average, outperform market
averages.
C. says stock prices should be more rigid than they are.
D. makes it easier to predict the movements in the price of a stock.
Answer:
Which of the following statements best describes financial instruments?
A. All financial instruments are a means of payment.
B. Financial instruments can transfer resources between people but not risk.
C. Financial instruments can transfer resources and risk between people.
D. Financial instruments can transfer risk but not resources between people.
Answer:
If in late 2016 100 U.S. dollars exchanged for 118 euros and in mid-2017 100 U.S.
dollars exchanged for 127 euros, then:
A. the euro appreciated relative to the dollar.
B. the dollar appreciated relative to the euro.
C. European goods became more expensive to Americans.
D. American goods became more expensive to Americans.
Answer:
Central banks that have a hierarchical mandate with inflation targeting basically are
saying:
A. hitting the inflation target is the first priority after all other stated objectives are
reached.
B. hitting the inflation target is the only objective.
C. the inflation target is the second most important goal after economic growth, which
is always the most important goal for monetary policymakers.
D. hitting the inflation target comes first, everything else comes second.
Answer:
Which of the following best expresses the formula for determining the price of a U.S.
Treasury bill that matures n periods from now per $100 of face value when the interest
rate is i?
A. $100/(1 + i)n
B. $100(1 + i)
C. $100/(1 + i)
D. 1 + $100/(1 + i)n
Answer:
The main purpose of reserve requirements today is to:
A. decrease the demand for reserves.
B. make sure depositors can withdraw currency on demand.
C. enable the FOMC to keep the market federal funds rate closer to the target reserve
rate.
D. keep banks sound.
Answer:
You have a value-weighted index made up of two companies. One company, we will
call A, has a stock price of $25 per share and there are 10,000 shares outstanding. The
other company, we will call B, has a stock price of $100 per share and has 1000 shares
outstanding. What will be the percentage change in the index from a 10% increase in
the share price of company A? What will be the percentage change in the index from a
10% increase in the share price of company B?
Answer:
An individual faces two alternatives for an investment: Asset A has the following
probability return schedule:
Asset B has a certain return of 8.0%. If the individual selects asset A does she violate
the principle of risk aversion? Explain.
Answer:
Use the long-run model presented in Chapter 22 to answer this question. If there is a
decrease in aggregate demand, and monetary policymakers counter the decrease in
aggregate demand, what will be the impact on output and inflation? Explain.
Answer:
Identify at least two problems a borrower would face if banks were not required to
disclose the information that they are currently required to make available.
Answer:
Evidence seems to point out that just before recessions interest rates rose. Why would
monetary policymakers choose to cause recessions?
Answer:
Explain why inflation degrades the information content of prices.
Answer:
Under the Expectations Hypothesis of the term structure of interest rates, explain the
impact of a U.S. Treasury decision to phase out the 30-year bond and to only focus on
3-month, 1-year, 5-year and 10-year bonds.
Answer:
What may be the reasons that explain the observation that during periods of
hyperinflation economic growth actually slows or even contracts?
Answer:
Why is it that a run on a single bank can turn into a widespread financial panic, or what
the text identified as contagion?
Answer:
Briefly describe the two different types of junk bonds (high-yield bonds).
Answer:
What is the main purpose (function) of bond rating services?
Answer:
Considering the return an investor requires from a stock, what are the two components
that make up that return? Briefly explain each of these components.
Answer:
If diversification is such a good idea for a saver, why do so many people put a lot of
their savings in the same bank?
Answer:
Explain the difference(s) between a debit card and a credit card.
Answer:
If monetary policymakers cannot accurately forecast shifts in money demand, what are
they really only left with for a short-term policy instrument and why?
Answer: