Compare two economies: a barter economy versus an economy that uses money. In
order to exchange goods and services:
A. a double coincidence of wants is necessary in the barter economy.
B. a double coincidence of wants is more likely to occur in the barter economy.
C. transactions are likely to be smoother in the barter economy because goods and
services are exchanged directly.
D. the money economy requires that sellers have more information about buyers’
wants.
Answer:
Specialization usually increases the output of a country; however effective
specialization requires:
A. everyone in the country producing the same thing.
B. that workers have very similar skills.
C. an effective low-cost means to exchange goods and services.
D. a large stock of capital.
Answer:
Bank’s hold marketable securities as part of their assets. For U.S. banks these
marketable securities include:
A. stocks and bonds.
B. only the stocks of U.S. corporations.
C. only the bonds of the U.S. treasury.
D. only bonds.
Answer:
According to the Expectations Hypothesis, if investors believed that, for a given
holding period, the average of the expected future short-term yields was greater than the
long-term yield for the holding period, they would act so as to drive:
A. down the price of the short-term bond and drive up the price of the long-term bond.
B. up the price of the short-term bond and drive down the price of the long-term bond.
C. up the prices of both the short- and long-term bonds.
D. down the prices of both the short- and long-term bonds.
Answer:
The growth of international banking has:
A. decreased the competition that domestic banks face.
B. decreased the efficiency of most banks.
C. enhanced economic growth in many countries.
D. increased the monopoly power of most banks.
Answer:
The screening process a bank follows for a loan applicant:
A. uses information that anyone can obtain, the bank can usually obtain it cheaper.
B. includes information that can be available to other firms, as well as proprietary
information that only the bank would have.
C. is based on just public information.
D. uses only confidential information.
Answer:
Stagflation is a term that usually describes an economy experiencing:
A. low inflation.
B. low inflation coupled with low growth.
C. high inflation with a recessionary gap.
D. low unemployment rates and low inflation rates.
Answer:
One key difference between options contracts and futures contracts is:
A. in a futures contract, one part has more rights than the other.
B. with an options contract both parties have equal rights.
C. in an options contract, the rights belong to one party.
D. in a futures contract all rights are held by just one party.
Answer:
The primary use of derivative contracts is:
A. for IRA and other pension plans since they only have value well into the future.
B. to shift risk among investors.
C. for investors seeking a greater return by taking greater risk.
D. to add to the profits an investor obtains through information asymmetry.
Answer:
Which of the following statements is most accurate?
A. Potential output is determined by current output.
B. When an expansionary gap exists, current output is below potential output.
C. Current output cannot exceed potential output.
D. During a recessionary gap, current output is below potential output.
Answer:
One way for a bank to deal with credit risk is to:
A. charge all borrowers from the same industry an average rate for that industry.
B. add a mark-up for a specific borrower based on the borrower’s credit history to the
cost of funds.
C. avoid making loans to borrowers from a broad spectrum and to specialize
geographically and in specific industries.
D. increase the number of loans made in any year.
Answer:
Without a change in target inflation, anything that shifts the aggregate demand curve to
the right will cause:
A. a temporary increase in output.
B. a permanent reduction in inflation.
C. a temporary decrease in inflation.
D. an increase in output in the long run.
Answer:
An investor puts $2,000 into an investment that will pay $2,500 one-fourth of the time;
$2,000 one-half of the time, and $1,750 the rest of the time. What is the investor’s
expected return?
A. 12.5%
B. $250.00
C. 6.25%
D. 3.125%
Answer:
If a recession were the result of monetary policy, we should observe:
A. inflation increasing as output decreases.
B. potential output decreasing.
C. inflation slowing as output falls.
D. a high rate of money growth.
Answer:
Over-the-counter (OTC) markets:
A. employ specialists to minimize price volatility.
B. are centralized exchanges but you must be a dealer to be part of an exchange.
C. only deal in the stocks of companies with over $100 million in capital.
D. are networks of security dealers linked electronically.
Answer:
The interest rate that equates the price of a bond with the present value of its payments:
A. will vary directly with the value of the bond.
B. should be the one that makes the value equal to the par value of the bond.
C. will vary inversely with the value of the bond.
D. should always be greater than the coupon rate.
Answer:
Of the following, which would not be considered an unconventional monetary policy
approach?
A. Discount rate
B. Policy duration commitment
C. Quantitative easing
D. Credit easing
Answer:
One reason the theory of purchasing power parity may not explain price differences
between countries is:
A. real exchange rates are almost impossible to calculate.
B. inflation rates differ across countries.
C. some products do not trade.
D. nominal exchange rates are flexible.
Answer:
Which statement best completes the following sentence; “The U.S. dollar is to the fifty
states as the euro is to”?
A. The European Central Bank
B. The states of the European Monetary Union
C. The National Central Banks
D. The European System of Central Banks
Answer:
For the European Central Bank (ECB), the equivalent of the FOMC’s target federal
funds rate is the:
A. European target discount rate.
B. European target federal funds rate.
C. target refinancing rate.
D. London Inter-Bank Offer Rate.
Answer:
Which of the following statements is correct?
A. If you can buy the same goods this year as you bought last year with less money
there must have been inflation.
B. If purchasing the same goods today that were purchased one year ago requires more
money, there must have been deflation.
C. If purchasing the same goods today as one year ago requires less money, the money
supply likely decreased.
D. If purchasing the same goods today as one year ago requires less money, the money
supply likely increased.
Answer:
During the financial crisis of 2007-2009 which of the following countries experienced a
decline in real GDP roughly twice that of the United States?
A. Canada
B. United Kingdom
C. Japan
D. Turkey
Answer:
As the time of settlement gets closer:
A. the price of the futures contract will diverge from the price of the underlying asset.
B. the price of the futures contract will always be above the price of the underlying
asset.
C. the price of the underlying asset and the future’s price will show no correlation at all.
D. the price of the futures contract will move in lockstep with the price of the
underlying asset.
Answer:
Consider the period from 1995 to 1999. The U.S. economy:
A. experienced the great productivity slowdown.
B. experienced increases in productivity that allowed the Fed the opportunity to raise
the inflation rate.
C. experienced increases in productivity that allowed the Fed the opportunity to let the
inflation rate fall.
D. saw its potential level of output decrease.
Answer:
Loans made in the federal funds market:
A. are highly collateralized.
B. are made by the Federal Reserve System to the bank within 24 hours.
C. are unsecured loans.
D. are insured by the FDIC.
Answer:
The reasons for the government to get involved in the financial system include each of
the following, except:
A. to protect the bank’s monopoly position.
B. to protect investors.
C. to ensure the stability of the financial system.
D. to protect bank customers from monopolistic exploitation.
Answer:
If the slope of the monetary policy reaction curve is relatively flat, it means that central
bankers are:
A. very concerned about keeping inflation close to the target rate.
B. not concerned at all about inflation.
C. less concerned about keeping inflation close to its short-run target.
D. not going to let inflation deviate from its target at all.
Answer:
The Standard & Poor’s 500 Index:
A. gives more weight to large companies than small companies.
B. actually includes more than 500 of the largest corporations in the U.S.
C. is a price-weighted index.
D. assigns equal weight to all the prices of all the stocks in the index.
Answer:
One use of a monetary policy framework is to clarify all of the following except:
A. the likely response when policy goals are in conflict with one another.
B. the goal that is currently receiving the most attention.
C. how goals will be measured.
D. why zero inflation is not desirable.
Answer:
Hedging risk and spreading risk are two ways to:
A. increase expected returns from a portfolio.
B. diversify a portfolio.
C. lower transaction costs.
D. match up perfectly positively correlated assets.
Answer:
The annual volume of foreign exchange transactions:
A. is small relative to most financial markets.
B. is one-eighth the world GDP.
C. is three times the world trade volume.
D. is more than 15 times larger than world GDP.
Answer:
The price of a coupon bond will increase as the:
A. face value decreases.
B. yield increases.
C. coupon payments increase.
D. term to maturity is shorter.
Answer:
The long-run aggregate supply curve intersects the horizontal axis at the:
A. potential level of output.
B. current level of output.
C. expected rate of inflation.
D. actual rate of inflation.
Answer:
Explain how a currency speculator would use something like the Big Mac Index in
order to make a profit trading currencies.
Answer:
It is not uncommon to read about highly successful mutual fund managers that spend
considerable amounts of time visiting the companies that they have placed their clients’
funds with. What might be the motive(s) behind these visits?
Answer:
We have a country, Fantasyland, where the current per capita real income is 20,000
units of output, and the current average growth rate is 2.0 percent. What will be the
difference in the standard of living twenty years from now if Fantasyland grows at a
rate of 3.5 percent and we assume population is constant?
Answer:
How did CDS’ contribute to the financial crisis of 2007-2009?
Answer:
In theory, the law of one price makes a lot of sense. So why do we see it fail so often?
Answer:
A famous American has been visiting the same tropical island for 15 years for
vacations. When she goes she pays for everything by writing checks drawn on her U.S.
bank. The currency the natives use are not U.S. dollars; they use a currency called a
fungo. The natives never cash her checks. She is so well known on the island that the
natives simply trade her checks among themselves. The question you need to answer,
complete with an explanation, is: who is paying for her vacation? (You can assume her
bank would honor the checks if presented for payment even after a considerable period
of time has passed.)
Answer:
Consider an island where people use sand dollars (shells) as currency. For simplicity,
assume that people consume only one good: fish. Currently, there are 400 sand dollars
in circulation and there are 200 fish purchased each year. Based on this information,
what is the price of fish?
Now, suppose that a change in climate leads to new sand dollars washing ashore,
leaving a total of 500 sand dollars. If there are still 200 fish purchased each year, what
is the new price of fish? In order to prevent inflation, what would have to happen to the
amount of fish purchased each year?
Answer:
What is the expected value of a $100 bet on a flip of a fair coin, where heads pays
double and tails pays zero?
Answer:
Describe the concept of flight to quality in terms of the Russian government default of
August 1998.
Answer:
In 2001, the FOMC lowered the target federal funds rate eleven times, cutting the rate
from 6½ percent to 1¾ percent. Why didn’t the Fed just cut the rate by larger amounts
early on?
Answer:
What role did rating agencies play in the financial crisis of 2007-2009?
Answer:
How does policy forward guidance influence the economy and inflation?
Answer:
How might Freddie Mac and Fannie Mae have contributed to the financial crisis
experienced in the United States in 2007-2009?
Answer:
The trading losses that some banks incurred could be thought to be from trading risk,
but in many cases the real cause of the losses could be attributed to moral hazard. Why
was this the case?
Answer:
Explain the popularity of options in the sense of the potential gains and losses they
offer.
Answer:
Why is it more correct to say that there may be correlation between high interest rates
and the growth rate of output but there is no clear causation?
Answer:
What are the conditions for long-run equilibrium?
Answer:
Everything else equal, if the Fed decided to fix the euro/dollar exchange rate, what
would be the impact on the money supply in the U.S. if the euro started to decline in
value and why?
Answer: