One way insurance companies deal with the problem of adverse selection is by:
A. charging the same price to everyone.
B. screening applicants.
C. monitoring policyholders after they have purchased insurance.
D. spreading the risk in the same geographic area.
Answer:
The only solution available to a country experiencing extremely high rates of inflation
is to:
A. raise interest rates.
B. peg your currency to another country’s currency.
C. reduce money growth.
D. revert to a gold standard.
Answer:
The Governors of the Federal Reserve System are appointed by the:
A. member banks from their home district.
B. Board of Directors of the Reserve Bank from their home district.
C. President of the United States.
D. Chairman of the Federal Reserve System.
Answer:
Which of the following is a problem of moral hazard?
A. A lender cannot distinguish good risk from bad risk borrowers.
B. An individual who purchases auto insurance begins to leave his or her keys in the
car while running into a store.
C. Life insurance companies offer an average premium to smokers and non-smokers so
they do not have to have two different premiums.
D. An auto insurance company charges higher premiums to younger drivers than what
they charge to older drivers.
Answer:
Which of the following is a bank asset?
A. Demand deposits
B. Borrowings from other banks
C. Mortgage loans
D. CDs
Answer:
With a call option, the option holder:
A. has the right to sell the asset.
B. has the right to buy the asset.
C. can buy or sell, it is their option.
D. can buy the asset but only after the date specified.
Answer:
The interest rate decisions made by the Federal Open Market Committee:
A. can be overridden by the President.
B. can be overridden by the Secretary of the Treasury.
C. can be overridden by the U.S. Senate by a two-thirds majority.
D. cannot be overridden by anyone outside of the Federal Reserve.
Answer:
The ECB’s temporary operations typically involve the use of:
A. discount loans.
B. repurchase agreements.
C. an outright purchase of U.S. Treasury Securities.
D. an outright sale of U.S. Treasury Securities.
Answer:
Which of the following would not be considered a characteristic of money?
A. It is a store of value.
B. It is a means of payment.
C. It must have intrinsic value.
D. It is a unit of account.
Answer:
Money as a means of payment refers to:
A. only actual currency.
B. only coins and currency.
C. only coins, currency and credit cards.
D. anything that is generally accepted as payment for goods and services.
Answer:
Policymakers can stabilize the economy by shifting:
A. the short-run aggregate supply curve.
B. the dynamic aggregate demand curve.
C. the long-run aggregate supply curve.
D. neither the short-run aggregate supply curve nor the dynamic aggregate supply
curve.
Answer:
If information in a financial market is symmetric, this means:
A. borrowers and lenders have perfect information.
B. borrowers would have more information than lenders.
C. borrowers and lenders have the same information.
D. lenders have more information than borrowers.
Answer:
The bond dealer’s spread is:
A. the asking price less the bid price.
B. the difference between the current yield and the yield to maturity.
C. the bid price less the asking price.
D. usually negative; the dealer makes a profit holding the bonds.
Answer:
The information concerning the issuer of a financial instrument:
A. needs to be complete and closely monitored by the buyers of the instrument for
change.
B. is somewhat non-standardized to minimize the cost of the instrument.
C. is usually standardized to the essential information required by the buyers.
D. is closely monitored by the buyers of these instruments for change.
Answer:
A decline in the yields earned by bonds should:
A. not impact the demand for money since money doesn’t earn any interest.
B. also decrease the demand for money.
C. increase the demand for money.
D. increase the velocity of money.
Answer:
Financial instruments are different from money because they:
A. can act as a store of value and money cannot.
B. can’t be a means of payment but money can.
C. can allow for the transfer of risk.
D. have greater liquidity.
Answer:
What is the present value of $200 promised two years from now at 5% annual interest?
A. $190.00
B. $220.00
C. $180.00
D. $181.41
Answer:
All of the following are depository institutions, except:
A. commercial banks.
B. credit unions.
C. insurance companies.
D. savings banks.
Answer:
A student receives a five-year loan to pay for a $2,000 used car. The lender and the
student agree to an 8% interest rate on a fixed-rate loan. Expected inflation was
estimated to equal 2.5%, but unexpectedly decreases to 2%. Which of the following is
true?
A. The real interest rate decreased.
B. The student is made worse off because her real cost of borrowing is higher.
C. The lender is made worst off because his real return on the car loan is lower.
D. Both the student and the lender benefit.
Answer:
The original Basel Accord was:
A. the basic set of guidelines the Federal Reserve applies in regulating domestic banks.
B. a set of guidelines for basic capital requirements for internationally active banks.
C. an agreement between state and federal regulators to try to have one standard set of
guidelines for all banks.
D. a set of guidelines applied only to international banks operating with U.S.
boundaries.
Answer:
Empirical evidence suggests that over the last ten years:
A. the nominal and real federal funds rates are related inversely.
B. the nominal and real federal funds rates are highly positively correlated.
C. while the FOMC has had a lot of influence over the nominal federal funds rate, they
have been less successful at changing the real federal funds rate.
D. there is no correlation between the nominal and real federal funds.
Answer:
Current critics of fiat money are urging governments to do what?
A. Return to a system of legal tender.
B. Move to a system of electronic transactions only.
C. Return to a gold standard.
D. Place limits on the creation.
Answer:
Standardization of derivative contracts:
A. results in increased risk for the parties involved.
B. makes them more difficult to understand and therefore leads to increased misuse.
C. makes the premiums involved with these contracts increase.
D. leads to greater liquidity and lower risk.
Answer:
Given a choice between two investments with the same expected payoff most people
will:
A. choose the one with the lower standard deviation.
B. opt for the one with the higher standard deviation.
C. be indifferent since the expected payoffs are the same.
D. calculate the variance to assess the relative risks of the two choices.
Answer:
Most economists agree that a well-designed central bank would:
A. be independent of political pressure.
B. make its policy actions difficult to interpret.
C. be accountable only to other banks.
D. be run by one key policy maker.
Answer:
If monetary policymakers fear a recession resulting from increased pessimism on the
part of business people, and they want to avoid the recession, they would:
A. shift the monetary policy reaction curve to the right.
B. shift the monetary policy reaction curve to the left.
C. likely lower their target rate for inflation.
D. encourage fiscal policymakers to act.
Answer:
Bonds with the same tax status and ratings:
A. always have the same yield.
B. can have different yields due to different maturities.
C. should sell for the same price.
D. will still have different yields depending on their face values.
Answer:
A put option described as out of the money would find:
A. the strike price is below the market price of the stock.
B. the market price of the stock and the strike price are equal.
C. the market price of the stock is below the strike price.
D. the option has expired.
Answer:
The need for a lender of last resort was identified as far back as:
A. the start of the Great Depression in 1929.
B. 1913, when the Federal Reserve was created.
C. 1873, by British economist Walter Bagehot.
D. 1776, by the first U.S. Secretary of the Treasury, Alexander Hamilton.
Answer:
Most responsible central banks publish their balance sheet:
A. at least once a year.
B. quarterly.
C. at least monthly.
D. semi-annually.
Answer:
Which of the following would be classified as a negative supply shock?
A. An increase in the legal minimum wage
B. A decrease in the price of oil
C. An increase in government purchases
D. An increase in demand for exports
Answer:
Usually an investment will be profitable if:
A. the internal rate of return is less than the cost of borrowing.
B. the cost of borrowing is equal to the internal rate of return.
C. it is financed with retained earnings.
D. the cost of borrowing is less than the internal rate of return.
Answer:
The interest-rate risk that is associated with bond investing:
A. exists even if an investor plans on holding the bond to maturity.
B. arises because of a mismatch between the investor’s investment horizon and the
maturity of the bond.
C. is not reflected in the risk premium.
D. can be eliminated by holding only consols.
Answer:
Bank mergers require government approval because banking officials want to make
sure that:
A. the merger will create a larger bank.
B. the merger will not create a monopoly.
C. the merged bank will be more profitable.
D. the merger will not result in regulatory competition.
Answer:
If Americans develop a greater appreciation for Mexican-made goods, we should
observe the following change(s) in the U.S. dollar-peso market:
A. the demand curve for dollars shifts right.
B. the supply curve of dollars shifts left.
C. the demand curve for pesos shifts right.
D. a movement down the supply curve of dollars.
Answer: