One major difference between a debit card and a credit card is:
A. only the debit card helps you to build a credit history.
B. the debit card has lower minimum monthly payments.
C. you do not need to actually have the funds in your account when you use a debit
card.
D. debit cards have no late fees.
Answer:
If the market federal funds rate were above the target rate, the response from the Fed
would likely be to:
A. purchase U.S. Treasury securities.
B. sell U.S. Treasury securities.
C. lower the required reserve rate.
D. lower the discount rate.
Answer:
A $1,000 face value bond purchased for $965.00, with an annual coupon of $60, and 20
years to maturity has a:
A. current yield and coupon rate equal to 6.22% and a coupon rate above this.
B. current yield equal to 6.22% and a coupon rate below this.
C. coupon rate equal to 6.00% and a current yield below this.
D. yield to maturity and current yield equal to 6.00%.
Answer:
Which of the following statements is most correct?
A. The use of monetary policy in the U.S. has not changed much since the creation of
the Fed.
B. The quantitative impact on output of altering the target federal funds rate has been
quite stable.
C. Monetary policymakers operate in an environment with very little uncertainty.
D. Monetary policymakers operate in an environment where change is quite common.
Answer:
Equilibrium in the money market would be expressed by which of the following?
A. Ms = (1/V)Y
B. Ms = Md
C. Ms = (1/V)P
D. Md = (1/V)P
Answer:
A pure discount bond is also known as a:
A. consol.
B. fixed payment loan.
C. coupon bond.
D. zero-coupon bond.
Answer:
Which component of aggregate expenditures is the least sensitive to changes in the real
interest rate?
A. Investment
B. Consumption
C. Net exports
D. Government purchases
Answer:
Which of the following statements is true?
A. Call options can be sold prior to expiration but put options cannot.
B. Put options can be sold prior to expiration but call options cannot.
C. No option can be sold prior to expiration.
D. Both American and European options can be sold prior to expiration.
Answer:
The largest of the regional Federal Reserve Banks is located in:
A. Washington D.C.
B. San Francisco since it serves almost one-third of the country.
C. New York City.
D. Kansas City.
Answer:
Which of the following is not a reason why interbank lending dried up during the
financial crisis of 2007-2009?
A. Banks preferred to hold on to their liquid assets in case their own need for them
increased.
B. Banks grew increasingly concerned about the ability of their trading partners to
repay the loans.
C. The increased cost of loans.
D. The Fed grew increasingly wary of making liquidity available to banks.
Answer:
The fact that many corporations use debt financing as well as equity financing creates
all of the following except:
A. the opportunity for a greater expected return for the stockholders.
B. greater risk for the stockholders.
C. leverage for the stockholders.
D. consistently lower debt-to-equity ratios.
Answer:
The Consumer Price Index (CPI):
A. is calculated using a basket of goods and services adjusted annually by government
statisticians.
B. answers the question, “How much more does it cost today to buy the same basket of
goods and services that were purchased at some fixed time in the past?”
C. does not suffer from substitution bias because the basket used to measure prices
changes every year.
D. understates the impact of price changes.
Answer:
To compensate for the collapse of intermediation and the fragility of financial markets
during the 2007-2009 financial crisis, central banks deployed all but which of the
following unconventional tools:
A. Forward guidance
B. Lowering interbank lending interest rate targets
C. Quantitative easing
D. Targeted asset purchases
Answer:
A country running a current account surplus over many years is likely to see its
exchange rate:
A. appreciate.
B. depreciate.
C. hold steady.
D. the rate can rise, fall, or hold steady; the current account and the exchange rate are
not linked.
Answer:
The two parts that make up an option’s price are:
A. extrinsic value and the time value of the option.
B. the commission and the time value of the option.
C. the intrinsic value and the time value of the option.
D. the price of the underlying asset and the time value of the option.
Answer:
Interest rate volatility is a problem because:
A. it adds to uncertainty, thereby diminishing the investment.
B. it decreases risk.
C. it can impact productivity in a positive way.
D. financial decisions become less difficult when interest rates are more volatile.
Answer:
The services the Federal Reserve provides to foreign central banks and other
international organizations are handled:
A. directly by the Board of Governors in Washington D.C.
B. by all of the Reserve Banks.
C. only by the Reserve Bank in New York.
D. only by the Reserve Bank in San Francisco.
Answer:
A country announces capital outflow controls that will take effect in three months. This
announcement will likely:
A. stabilize the country’s exchange rate.
B. attract significant amounts of foreign investors.
C. result in a significant appreciation of the country’s currency.
D. result in a significant depreciation in the country’s currency.
Answer:
When the price of a bond is above face value the yield to maturity:
A. is below the coupon rate.
B. will be above the coupon rate.
C. will equal the current yield.
D. will equal the coupon rate.
Answer:
The importance of the bank-lending channel of monetary policy transmission:
A. becomes more important the more important banks are as a source of funds for
firms and individuals.
B. is likely to become more important with the growth of loan brokers and
asset-backed securities.
C. has become more important as technology has solved the problems of information
and moral hazard.
D. none of the answers given is correct.
Answer:
The Agreement to form a European monetary union was formalized in the Treaty of:
A. Maastricht.
B. Paris.
C. Amsterdam.
D. Milan.
Answer:
In the fall of 1998 we saw an increase in the risk spread because:
A. the risk spread always increases as we approach the end of the year.
B. the Russian government defaulted on some of its bonds.
C. there was an extraordinarily large amount of corporate fraud being reported in 1998.
D. there was a significant increase in U.S. income tax rates.
Answer:
Which of the following would be an example of a capital outflow control?
A. Mexico limiting the number of U.S. dollars an American can bring into the country
B. Mexico excludes foreigners from purchasing short-term debt
C. Mexico limiting the number of pesos its citizens can take out of the country
D. All of the answers given would be examples of capital outflow controls
Answer:
Many financial instruments are standardized because:
A. it is believed that most parties to a contract do not read them anyway.
B. complexity is costly, the more complex a contract, the more it costs to create.
C. the standardization of contracts makes them harder to understand.
D. it is required by the government.
Answer:
In comparing money to a share of Microsoft stock held by an individual, we can say:
A. the share of stock is an asset, but money is a liability.
B. only the money is a means of payment, but both are stores of value.
C. only the money is a means of payment, but both are units of account.
D. both the Microsoft stock and the money are liabilities.
Answer:
The Chairman of the Board of Governors:
A. serves a four-year term that cannot be renewed.
B. is selected from the Board of Governors, appointed by the U.S. President.
C. serves the same four-year term as the U.S. President.
D. serves an eight-year term.
Answer:
Central bankers with a relatively flat monetary policy reaction curve will:
A. move interest rates more aggressively when inflation rises, leading to more
volatility in output.
B. move interest rates more aggressively when inflation rises, leading to less volatility
in output.
C. move interest rates less aggressively when inflation rises, leading to more volatility
in output.
D. move interest rates less aggressively when inflation rises, leading to less volatility in
output.
Answer:
The usual situation in banking regarding asymmetric information is:
A. borrowers know more than lenders.
B. lenders know more than borrowers.
C. borrowers and lenders have the same information.
D. lenders and borrowers have perfect information.
Answer:
Banks exert some control over who will regulate them because banks:
A. spend a lot of money contributing to political campaigns.
B. can switch their charter from state to federal and vice versa.
C. have the right to decide on which regulator will oversee their bank.
D. pay the salary of the regulator.
Answer:
Which of the following statements best completes the following statement: “Over the
past 40 years, the percentage(s) of assets for all financial intermediaries”?
A. controlled by banks has increased while the percentage for mutual funds has
decreased.
B. controlled by banks has decreased as has the percentage for mutual funds while
insurance companies have increased their percentage.
C. controlled by insurance companies and mutual funds has decreased and the
percentage controlled by banks has increased.
D. controlled by banks has decreased while the percentage for mutual funds has
increased.
Answer:
The policy directive that is produced from the FOMC meeting:
A. details the exact amount of U.S. Treasury securities the System Open Market
Account Manager is to purchase or sell.
B. sets the specific discount rate for the next eight weeks.
C. sets the specific range that the target interest rate can fall within.
D. instructs the staff of the New York Fed on how to manage the Fed’s balance sheet.
Answer:
You purchase a good by writing a check for $1,000. Considering the financial payments
system this check follows, when is the check money? Explain.
Answer:
A bank has $100 million in assets and 50 percent of its assets are interest sensitive. The
bank has $75 million in liabilities, 50 percent of which are interest sensitive. What is
the bank’s gap between interest-sensitive assets and liabilities?
Answer:
As the chapter points out, there have been many cases where derivatives have led to a
lot of abuse. If this is the case, why do derivatives exist?
Answer:
What impact should an economic slowdown have on the risk structure of interest rates?
Answer:
The Treasury usually requires most businesses to regularly deposit taxes withheld from
employees into accounts at designated commercial banks. On a regular basis, the funds
in these accounts are transferred to the Treasury’s account at the Fed. Discuss what is
happening to the balance sheet of the banking system as the businesses are making
deposits and these tax accounts are increasing. What happens to the Banking system’s
balance sheet when the funds are transferred to the Fed?
Answer:
Inflation can reduce the true cost of debt, and policymakers lower interest rates to
encourage borrowing. Is it a good idea then to always take advantage of lower interest
rates to borrow and rely on inflation to reduce the cost of debt and to increase your
ability to repay the loan?
Answer:
Why might it be argued that prolonged recessionary or expansionary gaps could
actually affect potential output?
Answer:
Do the voting rights possessed by common stockholders ensure that managers and
directors have the same objectives as stockholders? Explain.
Answer:
Completely flexible exchange rates are fairly self-explanatory, and hard pegs include
dollarization and currency boards. These seem to be the extremes. Assuming free flow
of capital, why do you think soft pegs are never used?
Answer:
What does it mean to say the United States has a dual banking system?
Answer:
The FDIC used to charge all banks the same rate for insurance on deposits. From what
you have learned, what problems did this create for not only the FDIC but for well-run
banks?
Answer:
Why might Congress actually prefer the higher rate of inflation that might result from
deficit spending to higher taxes and/or a cut in government spending?
Answer:
What would be the impact of leverage on the expected return and standard deviation of
purchasing an asset with 10% of the owner’s funds and 90% borrowed funds?
Answer:
Explain how mutual funds offer small investors a low-cost way to achieve
diversification.
Answer:
Suppose a two-year coupon bond has payments of $40 and a face value of $800. The
interest rate is 8%. Compute the present value of the coupon payments and the principal
payment of the bond. What is the price of this bond?
Answer:
Explain why a corporation may find it advantageous to undertake greater investment
when the value of its stock shares increase.
Answer: