1) The Fed does not tightly control the monetary base because it does not completely
control
A) open market purchases
B) open market sales
C) borrowed reserves
D) the discount rate
2) Everything else held constant, an increase in the excess reserve ratio will mean
________ in the M1 money multiplier and ________ in the M2 money multiplier.
A) an increase; an increase
B) no change; an increase
C) a decrease; a decrease
D) no change; a decrease
3) If a banker expects interest rates to fall in the future, her best strategy for the present
is
A) to increase the duration of the bank’s liabilities
B) to buy short-term bonds
C) to sell long-term certificates of deposit
D) to increase the duration of the bank’s assets
4) A key finding of the economic analysis of financial structure is that
A) the existence of the free-rider problem for traded securities helps to explain why
banks play a predominant role in financing the activities of businesses
B) while free-rider problems limit the extent to which securities markets finance some
business activities, nevertheless the majority of funds going to businesses are channeled
through securities markets
C) given the great extent to which securities markets are regulated, free-rider problems
are not of significant economic consequence in these markets
D) economists do not have a very good explanation for why securities markets are so
heavily regulated
5) Each Fed bank president attends FOMC meetings; although only ________ Fed bank
presidents vote on policy, all ________ provide input.
A) three; ten
B) five; ten
C) three; twelve
D) five; twelve
6) When the Fed buys $100 worth of bonds from First National Bank, reserves in the
banking system
A) increase by $100
B) increase by more than $100
C) decrease by $100
D) decrease by more than $100
7) ________ assume the risk of issuing a new stock in the hope of earning profits on its
sale.
A) Stock brokers
B) Securities dealers
C) Underwriters
D) Stock speculators
E) Reinsurers
8) The velocity of money is defined as
A) real GDP divided by the money supply
B) nominal GDP divided by the money supply
C) real GDP times the money supply
D) nominal GDP times the money supply
9) Which of the following are generally true of bonds?
A) The only bond whose return equals the initial yield to maturity is one whose time to
maturity is the same as the holding period
B) A rise in interest rates is associated with a fall in bond prices, resulting in capital
gains on bonds whose terms to maturity are longer than the holding periods
C) The longer a bond’s maturity, the smaller is the size of the price change associated
with an interest rate change
D) Prices and returns for short-term bonds are more volatile than those for longer-term
bonds
10) Everything else held constant, a decrease in the currency ratio will mean ________
in the M1 money multiplier and ________ in the M2 money multiplier.
A) an increase; an increase
B) an increase; a decrease
C) a decrease; an increase
D) a decrease; a decrease
11) The Federal Reserve entity that makes decisions regarding the conduct of open
market operations is the
A) Board of Governors
B) chairman of the Board of Governors
C) Federal Open Market Committee
D) Open Market Advisory Council
12) When an individual sells a $100 bond to the Fed, she may either deposit the check
she receives or cash it for currency. In both cases
A) reserves increase
B) high-powered money increases
C) reserves decrease
D) high-powered money decreases
13) The Federal Reserve Banks are ________ institutions since they are owned by the
________.
A) quasi-public; private commercial banks in the district where the Reserve Bank is
located
B) public; private commercial banks in the district where the Reserve Bank is located
C) quasi-public; Board of Governors
D) public; Board of Governors
14) An inverted yield curve predicts that short-term interest rates
A) are expected to rise in the future
B) will rise and then fall in the future
C) will remain unchanged in the future
D) will fall in the future
15) Suppose interest rates are kept very low for a long time such that there is a spike in
the amount of lending. Everything else held constant, this could cause ________
bubble.
A) an irrational exuberance
B) a credit-driven
C) a stock
D) a debt-driven
16) Life insurance companies are regulated by state governments because
A) they have never experienced bankruptcy
B) they have never experienced profitability
C) they have never experienced widespread failures
D) they hold only highly liquid assets
17) Cutting the money supply by one-third is predicted by the quantity theory of money
to cause
A) a sharp decline in real output of one-third in the short run, and a fall in the price
level by one-third in the long run
B) a decline in real output by one-third
C) a decline in output by one-sixth, and a decline in the price level of one-sixth
D) a decline in the price level by one-third
18) Keynes argued that when interest rates were high relative to some normal value,
people would expect bond prices to ________, so the quantity of money demanded
would ________.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
19) In investment banking, a conflict usually is present between the issuers of
securities, who ________, and investors, who ________.
A) benefit from unbiased auditing; desire unbiased consulting
B) desire unbiased research; benefit from optimistic research
C) benefit from optimistic research; desire unbiased research
D) desire unbiased consulting; benefit from unbiased auditing
20) ________ occurs when market participants observe returns on a security that are
larger than what is justified by the characteristics of that security and take action to
quickly eliminate the unexploited profit opportunity.
A) Arbitrage
B) Mediation
C) Asset capitalization
D) Market intercession
21) A problem with barter exchange when there are many goods is that in a barter
system
A) transactions costs are minimized
B) there exists a multiple number of prices for each good
C) there is only one store of value
D) exchange of services is impossible
22) Banks’ asset portfolios include state and local government securities because
A) they help to attract business from these government entities
B) banks consider them helpful in attracting accounts of Federal employees
C) the Federal Reserve requires member banks to buy securities from state and local
governments located within their respective Federal Reserve districts
D) there is no default-risk with state and local government securities
23) An important feature of money market mutual fund shares is
A) deposit insurance
B) the ability to write checks against shareholdings
C) the ability to borrow against shareholdings
D) claims on shares of corporate stock
24) ________ work in the secondary markets matching buyers with sellers of securities.
A) Dealers
B) Underwriters
C) Brokers
D) Claimants
25) Milton Friedman called the response of lower interest rates resulting from an
increase in the money supply the ________ effect.
A) liquidity
B) price level
C) expected-inflation
D) income
26) Holding the expected return on bonds constant, an increase in the expected return
on common stocks would ________ the demand for bonds, shifting the demand curve
to the ________.
A) decrease; left
B) decrease; right
C) increase; left
D) increase; right
27) Everything else held constant, an increase in the excess reserve ratio will mean
________ in the M2 money multiplier and ________ in the M2 money supply.
A) an increase; an increase
B) an increase; a decrease
C) a decrease; an increase
D) a decrease; a decrease
28) Unlike banks, ________ have been allowed to branch statewide since 1980 .
A) federally-chartered S&Ls
B) state-chartered S&Ls
C) financially troubled S&Ls
D) technically insolvent S&Ls