When the Federal Reserve purchases a U.S. Treasury bond for $1 million by writing a
check, when the check returns, the Fed’s balance sheet will show:
A. an increase in assets and a decrease in liabilities of $1 million.
B. only an increase in assets of $1 million.
C. only an increase in liabilities of $1 million.
D. an increase in assets and liabilities of $1 million.
Answer:
A central bank’s balance sheet will categorize the following as liabilities:
A. currency.
B. loans.
C. securities.
D. foreign exchange reserves.
Answer:
Contagion is:
A. the failure of one bank spreading to other banks through depositors withdrawing of
funds.
B. the phenomenon that if one bank loan defaults it will cause other bank loans to
default.
C. the rapid contraction of investment spending that occurs when interest rates are
increased by the Federal Reserve.
D. the rapid inflation that results from the printing of money.
Answer:
When an individual withdraws funds from a checking account the:
A. bank’s balance sheet shrinks but the size of the Fed’s balance sheet is not affected.
B. bank’s balance sheet shrinks and so does the Fed’s balance sheet.
C. bank’s balance sheet shrinks but the size of the Fed’s balance sheet increases.
D. size of the bank’s balance sheet stays the same but the size of the Fed’s balance sheet
shrinks.
Answer:
Monetary policy has the following advantage(s) over fiscal policy:
A. it is less influenced by politics.
B. it can be implemented faster.
C. it can usually be fine-tuned.
D. all of the answers given are correct.
Answer:
Real business cycle theory explains fluctuations in output through:
A. changes in aggregate demand.
B. changes in productivity.
C. shifts of the short-run aggregate supply curve.
D. changes in monetary policy.
Answer:
The key part of the real business cycle theory model is:
A. the importance of monetary policy.
B. the short-run aggregate supply curve.
C. changes in aggregate demand.
D. changes in potential output.
Answer:
Which of the following statements most accurately describes the state of banking in the
U.S.?
A. A large number of large banks and a small number of small banks
B. A large number of large and small banks
C. A small number of large and small banks
D. A large number of small banks and a small number of large banks
Answer:
Systematic risk:
A. is the risk eliminated through diversification.
B. represents the risk affecting a specific company.
C. cannot be eliminated through diversification.
D. is another name for risk unique to an individual asset.
Answer:
In quoting exchange rates:
A. one should always quote these as units of foreign currency over a unit of domestic
currency.
B. one should always quote the rate as the units of domestic currency over a unit of
foreign currency.
C. usually one should quote the rate in such a way that the value is greater than one.
D. each country’s central bank determines how the rate is to be quoted.
Answer:
A rightward shift in the dynamic aggregate demand curve could result from:
A. a decrease in government purchases.
B. an increase in investment resulting from a lower inflation rate.
C. a rightward shift of the monetary policy reaction curve.
D. a leftward shift of the monetary policy reaction curve.
Answer:
Suppose that interest rates are expected to remain unchanged over the next few years.
However, there is a risk premium for longer-term bonds. According to the liquidity
premium theory, the yield curve should be:
A. upward sloping and very steep.
B. upward sloping and relatively flat.
C. inverted.
D. vertical.
Answer:
Stable inflation implies:
A. that the rate of inflation averaged over many years is zero.
B. that inflation is predictable.
C. that the rate of inflation conceals relative price changes.
D. low rates of unemployment.
Answer:
An increase in the nation’s wealth, all other factors constant, would cause:
A. bond prices to fall and yields to increase.
B. bond prices and yields to increase.
C. bond prices to rise and yields to decrease.
D. the bond supply curve to shift right.
Answer:
If your bank offers you free checking if your average balance is at least $1000 and you
would normally carry an average balance of $500, what is the annual cost to you of free
checking if bonds are paying a 5.0% return?
A. $50.00
B. $0.00
C. $20.00
D. $25.00
Answer:
During the period of October 1979 to October 1982; the FOMC’s primary operating
target resulted in:
A. the most stable period for the federal funds rate in history.
B. reserves being highly volatile.
C. the federal funds rate experiencing high volatility.
D. the federal funds rate dropping to 2 percent (an all-time low to that date) and not
rising above 3 percent.
Answer:
An automobile insurance company on average charges a premium that:
A. equals the expected loss from each driver.
B. is less than the expected loss from each driver.
C. is greater than the expected loss from each driver.
D. equals 1/(expected loss) of each driver.
Answer:
The risk spread is:
A. the difference between a bond’s purchase price and selling price.
B. the difference between the bond’s yield and the yield on a U.S. Treasury bond of the
same maturity.
C. less than 0 (zero) for a U.S. Treasury bond.
D. assigned by a bond-rating agency.
Answer:
An output gap occurs when:
A. aggregate demand does not equal short-run aggregate supply.
B. aggregate demand equals long-run aggregate supply.
C. aggregate demand equals short-run aggregate supply but not long-run aggregate
supply.
D. short-run aggregate supply equals long-run aggregate supply.
Answer:
Banks can effectively choose their regulators by deciding whether to:
A. be a private or public corporation.
B. be a member of the Federal Reserve or not.
C. purchase FDIC insurance or to forego the coverage.
D. be chartered at the national or state level.
Answer:
During the Civil War, the North issued currency, known as “greenbacks”. Which of the
following is true of “greenbacks”?
A. Greenbacks are still legal tender in the U.S.
B. Greenbacks were tied to the value of gold and silver.
C. The South used “greenbacks” to pay for salaries and supplies.
D. Greenbacks are a historical example of commodity money.
Answer:
Derivatives are financial instruments that:
A. present high levels of risk and should only be used by the wealthy.
B. when used correctly can actually lower risk.
C. should only be used by people seeking high returns from low risk.
D. represent the outright purchase of a bond.
Answer:
Which of the following statements is most correct?
A. Usually higher expected returns are associated with higher risk premiums.
B. Usually higher risk premiums are associated with lower expected returns.
C. Usually lower expected returns are associated with higher risk premiums.
D. Usually expected returns are not associated with risk premiums.
Answer:
The time value of the option should:
A. decrease the longer the time to expiration.
B. increase the longer the time to expiration.
C. not change with time to expiration.
D. approach infinity at expiration.
Answer:
Modern forms of insurance can be traced back to around:
A. the early 1900s.
B. the early 1400s.
C. the mid 1800s.
D. the late 1700s.
Answer:
For the Federal Reserve’s balance sheet, the asset listed Securities would include:
A. private and public debt.
B. mainly U.S. Treasury and municipal bonds.
C. bonds issued by commercial banks.
D. U.S. Treasury securities.
Answer:
For a given call option price, which of the following statements is correct?
A. The closer the strike price is to the current price of the underlying asset, the smaller
the time value of the option.
B. The closer the strike price is to the current price of the underlying asset, the larger
the time value of the option.
C. As the strike price approaches the price of the underlying asset, the time value of the
option approaches zero.
D. As the strike price approaches the price of the underlying asset, the intrinsic value of
the option increases and the time value of the option decreases.
Answer:
If the federal government were to offer larger tax breaks on the purchase of new
equipment for businesses, all other factors constant, we would expect to see the:
A. bond demand curve shift right.
B. bond supply curve shift left.
C. bond supply curve shift right.
D. bond demand curve shift left.
Answer:
If the federal government replaced the current income tax with a national sales tax, the
price of:
A. corporate bonds and municipal bonds would rise.
B. municipal bonds would rise and corporate bonds would not change.
C. corporate bonds would fall while the price of municipal bonds would rise.
D. municipal bonds would fall while the price of corporate bonds would rise.
Answer:
Sophia receives a $400 gift card for her campus bookstore from her parents. Which of
the following is true regarding the $400 gift card?
A. It is counted only in M1.
B. It is included in both M1 and M2.
C. It is counted in only M2.
D. Stored-value cards are not counted in either M1 or M2.
Answer:
Setting an explicit numerical inflation target is most associated with the goal(s) of:
A. transparency.
B. accountability.
C. both transparency and accountability.
D. neither transparency nor accountability; it’s about moral hazard.
Answer:
You are considering purchasing a home. You find one that you like but you realize that
you will need to obtain a mortgage for $100,000. The mortgage company presents you
with two options: a 15-year mortgage at a 6.0% annual rate and a 30-year mortgage at a
6.5% annual rate. What will be the fixed annual payment for each mortgage?
Answer:
How does adverse selection factor into explaining the reduced supply of loans when
interest rates increase?
Answer:
Explain how an interest rate futures contract differs from an outright purchase of a
bond.
Answer:
What price would an individual be willing to pay today for a stock he/she expects can
be sold for $200 one year from now, if the individual has a discount rate of 6% (.06)
and the stock pays an annual dividend of $7.50?
Answer:
Given the democratic political structure of the United States, make an argument against
the independence granted the Federal Reserve.
Answer:
Suppose that IBM considers expanding its operations. The expansion will require $400
million for two new factories which the corporation plans to raise by selling stock and
bonds. Which of the core principles will come into play as investors decide whether or
not to buy the stock and the bonds?
Answer:
What is the effective after-tax yield to an investor from a bond paying $70 per $1,000
annually, if the investor is in a 25% marginal tax bracket? Explain.
Answer:
If the exchange rate between the Canadian dollar and the American dollar was fixed at
1.30 Canadian dollars per U.S. dollar and investors perceived Canadian bonds to be
equal in value and risk to U.S. bonds, if the U.S. bonds are selling for $1,000 and have
a 5 percent interest rate, assuming capital flows freely between the two countries what
will be the price and the interest rate of the Canadian bonds?
Answer:
What possibilities exist to explain the claim made by many professional portfolio
managers that they can exceed the average stock market return year after year?
Answer:
If greater stock prices can lead to greater investment spending, should central bankers
ever worry about stock prices becoming too high?
Answer:
Why does the Fed have to be concerned with money growth even though their main
focus seems to be on interest rates?
Answer:
Imagine a situation where the deposits at state chartered banks would be insured by a
state insurance fund and deposits at nationally chartered banks would be insured by
FDIC. How would you expect both depositors and banks would react?
Answer:
Explain why the following statement is true, “money is an asset but not all assets are
money.”
Answer:
Explain why the two parties in a futures contract technically do not make a bilateral
agreement with each other.
Answer:
At the beginning of 2006 the yield curve was usually flat, and sometimes downward
sloping (inverted). This raised concerns that a recession might be on the way. But the
slope of the yield curve is only part of the story. What else is important?
Answer:
Temporary changes in inflation lead to adjustments in the price level. What causes
permanent increases in inflation and why?
Answer:
Rank the components of aggregate demand by their sensitivity to changes in the real
interest rate. Start with the most sensitive to the least sensitive.
Answer:
How do central banks, like the U.S. Federal Reserve, contribute to the welfare of a
society?
Answer:
Explain why most retired individuals are not likely to be heavily invested in municipal
bonds.
Answer:
Explain how an easing of monetary policy works through the exchange rate and what
potential impact on the economy this would have.
Answer: