Which of the following statements is most correct?
A. Money is wealth but not all wealth is money.
B. Money is a means of payment but is not part of wealth.
C. In order to be considered part of a person’s wealth, an asset must have a positive
return.
D. Wealth is a store of value and a means of payment.
Answer:
Since 1950, the U.S. economy has likely experienced:
A. more periods of deflation than disinflation.
B. more periods of disinflation than deflation.
C. an equal number of periods of deflation and disinflation since they are synonymous.
D. none of the answers provided is correct.
Answer:
When considering different investments, a risk-averse investor is most likely to focus
on purchasing:
A. investments with the greatest spread in the expected rate of return.
B. investments that offer the lowest standard deviation in the investments’ expected
rates of return for any given expected rate of return.
C. only risk-free investments.
D. investments with the lowest risk premium, regardless of the expected rate of return.
Answer:
Any theory of the term structure of interest rates needs to explain each of the following,
except why:
A. short-term yields are more volatile than long-term yields.
B. the yields of different maturities tend to move together.
C. short-term yields are usually higher than long-term yields.
D. long-term yields are usually higher than short-term yields.
Answer:
Under the expectations hypothesis, if expectations are for lower inflation in the future
than what it currently is, the yield curve’s slope will:
A. become more upward sloping.
B. become flat.
C. be negative.
D. be vertical.
Answer:
Which of the following is true?
A. A flat dynamic aggregate demand curve corresponds to a steep monetary policy
reaction curve and means that supply shocks will create large changes in current output.
B. A flat dynamic aggregate demand curve corresponds to a flat monetary policy
reaction curve and means that supply shocks will create large changes in current output.
C. A flat dynamic aggregate demand curve corresponds to a steep monetary policy
reaction curve and means that supply shocks will create small changes in current
output.
D. A flat dynamic aggregate demand curve corresponds to a flat monetary policy
reaction curve and means that supply shocks will create small changes in current
output.
Answer:
Which of the following statements about the result of a deterioration in business
conditions that also causes a decrease in a nation’s wealth is false?
A. The impact on bond prices will be ambiguous since both the bond demand and
supply curves shift left.
B. The price of bonds will increase if bond supply decreases more than bond demand.
C. Interest rates will increase if bond demand decreases more than bond supply.
D. Neither bond demand nor bond supply will shift.
Answer:
The theory of efficient markets implies:
A. stock prices should be highly unpredictable.
B. the price at which stocks currently trade only reflect past information.
C. expectations do not play a role in stock prices because this isn’t real information.
D. the chartists are in fact correct that there are patterns in stock prices.
Answer:
The difference between a bank’s reserves and its required reserves is:
A. profits.
B. net interest income.
C. excess reserves.
D. vault cash.
Answer:
Within the United States, every city has:
A. a fixed exchange rate with every other city.
B. a floating exchange rate with every other city.
C. an independent monetary policy.
D. their own currency board.
Answer:
An automobile insurance company that writes millions of policies is practicing a form
of:
A. mutual fund.
B. hedging risk.
C. spreading risk.
D. eliminating systematic risk.
Answer:
An American traveling to Europe will find it easier to make purchases now because:
A. most countries in Europe accept U.S. dollars.
B. most of the countries of Europe have adopted the British pounds as the standard
currency.
C. many of the countries in Europe now use the same currency, the euro.
D. all of the countries in Europe now use the same currency, the euro.
Answer:
In calculating the current yield for a bond the:
A. coupon payment and purchase price is all that is needed.
B. present value of the capital gain/loss is ignored.
C. present value of the final payment is the only important consideration.
D. present value of the coupon payments is the only important consideration.
Answer:
A $500 investment has the following payoff frequency: half of the time it will pay $350
and the other half of the time it will pay $900. Its standard deviation and value at risk
respectively are:
A. $275; $150
B. $625; $275
C. $275; $350
D. $125; $500
Answer:
The Fed would use a reverse repo when they:
A. want to temporarily increase the monetary base.
B. forecast a permanent decrease in the demand for monetary base.
C. forecast a permanent increase in the demand for monetary base.
D. want to temporarily decrease the monetary base.
Answer:
Bank panics have often begun as a result of:
A. rumors only.
B. real economic events only.
C. both rumors and real economic events.
D. neither rumors nor economic events.
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:
In 2012, the average daily volume on the Federal Reserve’s Fedwire system was:
A. $24 billion.
B. $240 billion.
C. $2.4 trillion.
D. $240 million.
Answer:
One reason most central bankers do not set an inflation target of zero is:
A. it is almost impossible to achieve.
B. they believe it would cause price volatility.
C. the central bank could hit the zero nominal-interest-rate bound.
D. none of the answers given is correct.
Answer:
An increase in aggregate demand with no adjustment in monetary policy will result in:
A. an increase in potential output and higher inflation.
B. a decrease in potential output and higher inflation.
C. no change in potential output but higher inflation.
D. no change in inflation.
Answer:
Currently the requirement of holding a non-interest-bearing reserve account at the Fed
must be met by:
A. all banks, member or not.
B. only member banks.
C. member banks and nonmember banks over $100 million in assets.
D. only nationally chartered banks.
Answer:
At a growth rate of 6% an economy will double in size in:
A. 7 years.
B. 14 years.
C. 12 years.
D. 6 years.
Answer:
If the inflation rate in the economy were to fall by 2% below the target inflation rate,
the target federal funds rate would:
A. Decrease by 3.0%.
B. Remain at 2.5%.
C. Decrease by 1.0%.
D. Increase by 1.0%.
Answer:
Which of the following statements is most correct?
A. The current rate of inflation is the result of money growth.
B. Money growth is the result of inflation.
C. There is no clear link between high, sustained inflation and the monetary
aggregates.
D. It is impossible to have high, sustained inflation without monetary accommodation.
Answer:
As general business conditions deteriorate, all other factors constant:
A. the demand for bonds will decrease.
B. the supply of bonds will increase.
C. bond prices will decrease.
D. bond yields will increase.
Answer:
The market for bonds is initially described by the supply of bonds – S0, and the demand
for bonds – D0, with the equilibrium price and quantity being P0 and Q0. Suppose that
the expected return on bonds falls relative to other assets. In the bond market this will
result in:
A. Bond supply curve to shift to S1
B. Bond demand curve to shift to D1
C. Bond supply curve to shift to S2
D. Bond demand curve to shift to D2
Answer:
Which of the following is not a bank liability?
A. Reserves
B. Demand deposits
C. Non-transaction deposits
D. Federal fund borrowings
Answer:
Most financial markets in the United States operate under a system:
A. without any formal rules or regulation.
B. with many rules and regulation to ensure a fair market.
C. where it depends on which state where the financial market is located since some
states do not have any regulations.
D. that is totally controlled by the federal government.
Answer:
For fiscal policymakers, one of the results of an independent central bank is:
A. to finance government spending the Treasury has to order more currency from the
central bank.
B. fiscal policymakers always have to borrow to increase spending.
C. fiscal policymakers cannot borrow unless the Federal Reserve prints more money.
D. increased government spending has to be financed with either higher taxes or
increased government borrowing.
Answer:
Without the stockholders’ limited liability, the risk from the use of leverage would:
A. be significantly less.
B. be significantly greater.
C. still be the same.
D. be irrelevant.
Answer:
Management fees for mutual funds are:
A. fixed by regulation.
B. fixed by regulation and can vary by the size of the fund.
C. usually a percentage of the gains the fund achieves.
D. usually a percentage of the funds under management.
Answer:
There is a futures contract for the purchase of 1000 bushels of corn at $3.00 per bushel.
At the end of the day when the market price of corn falls to $2.50:
A. the buyer (long position) needs to transfer $500 to the seller (short position).
B. the seller (long position) needs to transfer $500 to the buyer (short position).
C. nothing happens since marked to market adjustments only occur if the market price
rises above the contract price.
D. nothing happened since no funds are transferred until the settlement date.
Answer:
During the 1990s many countries developed a monetary policy framework that focused
on inflation targeting. This is an example of policymakers:
A. focusing exclusively on an intermediate target.
B. bypassing intermediate targets and focusing directly on an objective.
C. focusing on multiple numerical targets.
D. developing a new intermediate target.
Answer:
Small savers would rather use financial institutions than lend directly to borrowers
because:
A. financial institutions will offer the savers higher interest rates than the savers could
obtain directly from borrowers.
B. lenders wouldn’t want to deal with small savers.
C. it allows them to diversify risk.
D. the liquidity is lower with financial institutions but the return is higher.
Answer:
The Fed could use reserve requirements as a monetary policy instrument. In terms of
desirable features for policy instruments, assess the viability of using reserve
requirements.
Answer:
After one year, a company will pay $5 in dividends. It commits to paying $5.30 two
years from the current date. This growth rate for dividends is expected to continue
indefinitely. The U.S. Treasury bond yield is 8% and the equity-risk premium is equal
to 2.5%. Compute the required stock return and current price of this stock, using the
dividend-discount model.
Answer:
What is the difference between the European System of Central Banks and the Euro
system?
Answer:
During the latter 1990s and into the early 2000s, the U.S. stock market boomed
reflecting rapid growth in the U.S. economy. In terms of demand for and supply of
dollars, explain what possible impacts this rapid increase in stock market values could
have on the exchange rate.
Answer:
An individual owns a $100,000 home. She determines that her chances of suffering a
fire in any given year to be 1/1000(0.001). She correctly calculates her expected loss in
any year to be $100. Explain why this really isn’t a good way to measure her potential
for loss.
Answer:
If an investor wants to compare commercial paper to a corresponding default-free
investment, which security would he/she use and why?
Answer:
Identify the four broad categories that make up the asset side of the balance sheet for
banks and which category is usually the largest.
Answer:
Chapter 23 pointed out lower interest rates can lead to higher home prices, and this can
lead to increased household spending since homeowners can spend this additional
equity. If you were a lender, is there any danger in making loans to homeowners for this
new equity or are these really risk-free loans since they are secured by the equity in the
house?
Answer:
What makes countries with fixed exchange rates prone to speculative attacks? Why
don’t the central banks of these countries stop these attacks?
Answer:
Explain why a bank manager and a bank regulator would likely view the timing at
which a loan should be charged to the loan loss reserve differently.
Answer:
An investment grows from $2,000 to $2,750 over the period of 10 years. What average
annual growth rate will produce this result?
Answer:
Answer:
Imagine you own a retail mail order business. You produce your catalog, where items
and prices are listed, in January and you use the same catalog all year. The central bank
in your country increases the money supply by an amount to cause inflation to average
one percent each month. Ignoring any seasonality in sales (like the holiday season),
what should happen to your sales as the year progresses and why?
Answer:
The growth of internet banking seems to be on the rise. Discuss what the continued
growth of internet banking should do to both the economies of scale and scope of
banking.
Answer:
Why are options referred to as derivative instruments?
Answer:
Explain how the introduction of asset-backed securities has allowed investors to take
advantage of higher returns from loans that most investors could never make on their
own.
Answer: