U.S. government bonds that provide for bondholders to receive a fixed rate of interest
plus the change in the consumer price index were designed to remove:
A. default risk.
B. liquidity risk.
C. inflation risk.
D. interest-rate risk.
Answer:
Suppose that the current dividend for a stock is Dtoday, the expected dividend growth
rate is r, and the interest rate is i. If we ignore risk, which of the following represents the
dividend-discount model formula for the fundamental price of a stock?
A. Dtoday/(i + g)
B. (i + g)/Dtoday
C. Dtoday(1 + g)/(i – g)
D. Dtoday/(i – g)
Answer:
Considering the balance sheet for all commercial banks in the U.S., the largest category
of assets is:
A. cash items.
B. U.S. Government Securities.
C. required reserves.
D. loans.
Answer:
Increases in the real interest rate will result in a(n):
A. increase in net exports because it will lead to a depreciation of the dollar.
B. decrease in net exports because it will lead to a depreciation of the dollar.
C. increase in net exports because it will lead to an appreciation of the dollar.
D. decrease in net exports because it will lead to an appreciation of the dollar.
Answer:
The use of money makes us more efficient because:
A. we spend more time trading and more time producing.
B. people can specialize in what they do well.
C. with money we borrow less.
D. money increases in value over time.
Answer:
In the United Kingdom accountability and transparency for its central bank is achieved
by setting:
A. a numerical target for unemployment each year.
B. a numerical target for economic growth.
C. numerical targets for economic growth and the exchange rate.
D. an explicit numerical target for inflation.
Answer:
In a survey of forecasters toward the end of the financial crisis of 2007-2009, forecast
inflation rates for the next decade in the United States were:
A. 0%.
B. 2%.
C. 4%.
D. 7%.
Answer:
When a currency is described as overvalued, this typically implies:
A. it is overvalued relative to the exchange rate set by the nation’s central bank.
B. it is selling at an exchange rate less than one.
C. the exchange rate is higher than one year previous.
D. its current market value is higher than the value that is thought to be consistent with
purchasing power parity.
Answer:
The assumption that prices and wages are flexible implies that the:
A. short-run aggregate supply curve is irrelevant.
B. short-run aggregate supply curve shifts slowly in response to deviations of current
output from potential output.
C. long-run aggregate supply curve is irrelevant.
D. long-run aggregate supply curve could not shift.
Answer:
Purchasing power parity says that:
A. differences in inflation rates between countries should have no impact on the
exchange rate between those countries.
B. differences in inflation rates between countries will create changes in exchange
rates.
C. the changes in exchange rates move independently from inflation.
D. for inflation to change the exchange rate, the rate of inflation has to be the same
between countries.
Answer:
A bank is a financial intermediary. Which of the following statements is most accurate?
A. The bank’s depositors are the ultimate lenders and the bank is the ultimate borrower.
B. People seeking loans from the bank are the ultimate spenders while the bank is the
ultimate lender.
C. The bank’s depositors are the ultimate lenders, while those seeking loans from the
bank are the ultimate spenders.
D. Those seeking loans from the bank are the ultimate spenders; the bank’s
stockholders are the ultimate lenders.
Answer:
Financial markets enable the transfer of risk by:
A. requiring that risk-averse investors have access to U.S. Treasury bond markets.
B. allowing individuals and firms less willing to bear risk to transfer risk to other
individuals and firms more willing to bear risk.
C. making sure that higher default risk is offset by greater liquidity.
D. enabling even unsophisticated investors to purchase highly complex financial
instruments.
Answer:
The rule of 72 says that at 6% interest $100 should become $200 in about:
A. 72 months
B. 100 months
C. 12 years
D. 7.2 years
Answer:
As the volatility of the stock price increases, the time value of the option:
A. decreases.
B. is zero.
C. increases.
D. doesn’t change.
Answer:
In 2002, the Federal Reserve changed its discount lending procedures. Which of the
following statements is correct?
A. For most of its history the Federal Reserve has lent reserve to banks at a rate equal
to the target federal funds rate; after 2002 the rate would be below the target federal
funds rate.
B. The changes made in 2002 have made it more difficult for the Fed to meet its
interest-rate stability objective.
C. Before 2002 the Fed discouraged banks from borrowing and actually destabilized
the interbank market for reserves.
D. The Fed now controls the quantity of credit extended as well as its price.
Answer:
Prior to the financial crisis of 2007-2009 banks did all but which of the following to
bulk up their profit:
A. bought or sponsored hedge funds.
B. traded securities for customers.
C. purchased equities for their own account.
D. colluded to fix benchmark interest rates.
Answer:
Most economists agree that the target rate of inflation for the central banks should be:
A. between 7 and 9 percent.
B. less than zero.
C. above zero for fears of deflation.
D. something over 3 but less than 6 percent.
Answer:
The fact that investors can always hold cash creates:
A. a problem for monetary policymakers when the short-term interest rates approach
zero.
B. an opportunity for the U.S. treasury to issue bonds that actually have negative
nominal interest rates.
C. an upward bound on nominal interest rates.
D. negative nominal interest rates.
Answer:
There is a futures contract for the purchase of 100 bushels of wheat at $2.50 per bushel.
At the end of the day when the market price of wheat increases to $3.00 per bushel:
A. the buyer (long position) needs to transfer $50 to the seller (short position).
B. the seller (short position) needs to transfer $50 to the buyer (long position).
C. nothing happens since with a futures contract all payments are made at the
settlement date.
D. nothing happens since marked to market adjustments only take place when the
market price falls below the contract price.
Answer:
Asymmetric information in financial markets is a potential problem usually resulting
from:
A. borrowers having more information than the lenders.
B. lenders having more information than borrowers.
C. the fact that people are basically dishonest.
D. the uncertainty about Federal Reserve monetary policy.
Answer:
The lowest rating for an investment grade bond assigned by Moody’s is:
A. Baa.
B. A.
C. BBB.
D. Aa.
Answer:
If we ignore transportation costs and the price of a pair of Nike shoes in Detroit is $100
U.S. what should be the price of the Nike shoes in Windsor, Canada (in Canadian
dollars) if the nominal exchange rate is 1.36 Canadian dollars/1 U.S. dollar?
A. 74
B. 100
C. 136
D. 64
Answer:
Which of the following is true of interest-rate risk?
A. It is the risk that the coupon rate for a bond will change, affecting current
bondholders’ coupon payments.
B. It refers to the probability that a borrower will default on debt obligations.
C. It is the risk that the face value of a bond will change before maturity.
D. Individuals owning long-term bonds are exposed to greater interest-rate risk.
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:
The short-run effects from an increase in aggregate demand will include:
A. an increase in potential output.
B. an increase in the current inflation rate.
C. a decrease in current output.
D. a recessionary gap.
Answer:
Which of the books used at the FOMC meetings is/are treated as secret documents and
not released to the public until after a number of years have passed?
A. The blue book and the beige book
B. The beige book and the green book
C. The teal book
D. The blue book and the green book
Answer:
In its role as the bankers’ bank, the Federal Reserve performs all of the following
services, except:
A. collecting and making available data on business conditions.
B. making discount loans.
C. managing U.S. Treasury borrowings.
D. clearing paper checks and transferring funds electronically.
Answer:
Which of the following statements is not true?
A. The largest source of funds for banks to lend comes from the owner’s capital.
B. Transaction deposits make up less than 10 percent of banks sources of funds.
C. The largest sources of funds for banks are non-transactions accounts.
D. Borrowing is a larger source of funds for banks than transaction deposits.
Answer:
A lender who wants to avoid the problem of adverse selection could:
A. charge a very high interest rate and assume all loan applicants are high risk.
B. charge the same average interest rate to all borrowers.
C. charge a low interest rate and make the applicant prove they warrant the low rate by
providing information.
D. only lend by issuing credit cards.
Answer:
Which of the following statements is not true?
A. The potential growth rate in the U.S. economy may have fallen following the
financial crisis of 2007-2009.
B. Periods of growth below the potential level are periods of low unemployment.
C. Periods of growth above the potential level are periods of low employment.
D. Periods of growth below the potential level are periods of high unemployment.
Answer:
A U.S. Treasury bond dealer with a large portfolio who sells a futures contract for U.S.
Treasury bonds is:
A. taking on additional risk in hopes of getting a larger return.
B. ensuring the sales price of the bond through hedging.
C. not likely to find a buyer for this transaction.
D. should see the value of the futures contract increase as bond prices rise.
Answer:
Which of the books used at the FOMC meetings contains a discussion of financial
markets and current policy options?
A. The teal book
B. The beige book
C. The green book
D. Both the beige and green books
Answer:
The slope of the yield curve seems to predict the performance of the economy usually:
A. with a 3-month lag.
B. with a one-year lag.
C. within a few weeks.
D. with a two-year lag.
Answer:
Why would most economists default usually first to monetary policy for stabilization
before using fiscal policy?
Answer:
Discuss the evolution of discount lending from a tool of monetary policy to its current
role.
Answer:
In terms of the decisions coming from the Euro system’s Governing Council, explain
why, at times, relatively small countries may be at a distinct disadvantage in terms of
monetary policy targets but perhaps have undue influence in terms of the actual
policies.
Answer:
The assets that appear on the central bank’s balance sheet include the category of loans.
Who are central banks lending to and are these loans associated with the central bank
functioning as the government’s bank? Explain.
Answer:
A bond offers a $50 coupon, has a face value of $1,000, and has 10 years to maturity. If
the interest rate is 4.0% what is the value of this bond?
Answer:
Many small companies currently pay no dividends to their shareholders. Based on the
dividend discount model, how is it possible for these stocks to sell for a positive price?
Answer:
Can a financial instrument be bought and sold in both a primary and secondary
financial market? Explain.
Answer:
Use the five issues an investor should consider when purchasing stock to explain the
popularity of mutual funds.
Answer:
Why would a bank usually want to minimize the amount of excess reserves it has on
hand?
Answer:
Does an increase in the rate of inflation always imply that aggregate demand is
increasing? Explain.
Answer:
Answer:
At the conclusion of its meeting on January 30, 2013, the Federal Open Market
Committee released a statement that included the following sentence: “The committee
will maintain the target range for the federal funds rate at 0 to ¼ percent and currently
anticipates that this exceptionally low range for the federal funds rate will be
appropriate as long as the unemployment rate remains above 6½ percent, inflation
between one and two years ahead is projected to be no more than a half percentage
point above the Committee’s 2 percent longer-run goal, and longer-term inflation
expectations continue to be well anchored.” What is the significance of this statement?
Answer:
What are the potential problems that can result if central bankers set a target of a zero
rate of inflation?
Answer:
Explain why the short-run aggregate supply curve has a positive slope.
Answer:
Explain why being a residual claimant can increase the risk from owning stocks.
Answer:
What is the link between the safety net provided by the government to the financial
industry and the relatively heavy regulation of the same industry by the government?
Answer: