On November 20, 1985, the Bank of New York needed to use the lender of last resort
function due to:
A. a run on the bank started by a rumor that the president of the bank embezzled tens
of millions of dollars from the bank.
B. a computer error caused the bank’s records to wipe out the balances of all of its
customers.
C. a rumor that the bank was about to be taken over by FDIC due to insolvency.
D. a computer error that made it impossible for the bank to keep track of its Treasury
bond trades.
Answer:
Money markets are where trades occur for:
A. stocks.
B. bonds of all maturities.
C. derivatives.
D. short-term bonds issued by both governments and private companies.
Answer:
When measuring the risk of an asset:
A. one must measure the uncertainty about the size of future payoffs.
B. it is necessary to incorporate uncertainties that are not quantifiable.
C. one must remember that the concept of risk applies only to financial markets, not to
financial intermediaries.
D. one cannot use other investments to evaluate the asset’s risk.
Answer:
A customer of Bank A writes a $20,000 check for a new car, which the car dealer
deposits in his bank, Bank B. Which of the following statements pertaining to this
transaction is most true?
A. Banks A’s reserves will decrease by the required reserve rate times $20,000 and
Banks B’s reserves will increase by (1 – required reserve rate) times $20,000
B. Bank A’s reserves decrease by $20,000 and Bank B’s reserves increase by $20,000
C. Neither Bank A’s nor B’s reserves will change
D. Bank B’s reserves will decrease and Bank A’s reserves will increase by $20,000
Answer:
The Taylor rule is:
A. the monetary policy setting formula followed explicitly by the FOMC.
B. an approximation that seeks to explain how the FOMC sets their target.
C. an explicit tool used by the ECB but not the Fed.
D. a rule adopted by Congress to make the Fed’s monetary policy more accountable to
the public.
Answer:
Many governments give their central bank control over issuing currency because:
A. printing currency can be profitable for a government so government officials may
have a strong incentive to print too much.
B. having large amounts of currency can lead to lower rates of inflation.
C. central banks use the profits from issuing currency to finance their operations.
D. the only way to distribute currency to banks is through the central bank.
Answer:
Tom obtains a car loan from Old Town Bank.
A. The car loan is Tom’s asset and the bank’s liability.
B. The car loan is Tom’s asset, but the liability belongs to the bank’s depositors.
C. The car loan is Tom’s liability and an asset for Old Town Bank.
D. The car loan is Tom’s liability and a liability of the bank until Tom pays it off.
Answer:
It has been argued that the information technology age has greatly increased
productivity and potential output. If this is true:
A. the long-run real interest rate is also higher as a result.
B. nominal long-run interest rates should have increased.
C. we should have seen lower short-run interest rates than we have seen.
D. the long-run real interest rate is lower as a result.
Answer:
The velocity of money equals:
A. nominal GDP times the price level.
B. nominal GDP times the money supply.
C. nominal GDP divided by the price level.
D. nominal GDP divided by the money supply.
Answer:
A company currently pays a dividend of $4.00 per share. It expects the growth rate of
the dividend to be 3% (0.03) annually. If the interest rate is 6% (0.06) what does the
dividend-discount model predict the current price of the stock should be?
A. $103.33
B. it doesn’t, you need an expected future selling price to use the model.
C. $137.33
D. $66.67
Answer:
The main risk that investment banks face from their underwriting services is:
A. the client will not pay for the service.
B. the company issuing the securities will go bankrupt.
C. the price investors pay for the security is less than the guaranteed price to the
issuing firm.
D. the price paid by investors exceeds the guaranteed price to the issuing firm.
Answer:
Which of the following features would characterize a good monetary policy
instrument?
A. observable only to monetary policy officials.
B. tightly linked to monetary policy objectives.
C. controllable and rigid.
D. difficult to change.
Answer:
The supervision of banks includes:
A. requiring bank officers to attend classes on an annual basis.
B. on-site examinations of the bank.
C. extensive background checks of all bank officers.
D. requiring banks to file monthly reports on their revenues, expenses and profits.
Answer:
Two characteristics that make owning stock attractive are:
A. unlimited liability and first claim on assets.
B. share prices are relatively inexpensive and are transferable.
C. each share represents a large percentage of ownership and dividends are fixed.
Answer:
Potential output of the country when viewed over long periods of time:
A. rises in spurts and then starts a downward trend that can last years.
B. is surprisingly constant.
C. always decreases.
D. tends to rise over time.
Answer:
Bonds rated as “highly speculative” are:
A. rated so because they guarantee high returns for the buyer.
B. commonly referred to as junk bonds.
C. ranked just above investment grade by Standard & Poor’s.
D. rated so because they do not have any default risk.
Answer:
Derivative markets exist to allow for:
A. allow for the transfer of risk.
B. direct transfers of common stocks for bonds.
C. cash receipts from the sale of bonds.
D. reduced information asymmetry.
Answer:
If the axes in the model for the monetary policy reaction curve are the real interest rate
(vertical axis) and the rate of inflation (horizontal axis), then the monetary policy
reaction curve would:
A. have a positive slope.
B. have a negative slope.
C. have a zero slope.
D. be vertical.
Answer:
An investor who purchases a call option is:
A. highly leveraged for a gain but is limited in losses.
B. limited in his or her gain but is highly leveraged in losses.
C. highly leveraged for both gains and losses.
D. limited in both gains and losses.
Answer:
If money were valued in terms of how many minutes a person needs to work to buy a
dollar, an increase in the number of minutes of work needed would be:
A. a decline in the price of money.
B. an increase in the price of money.
C. no change in the real price of money, just the nominal price increases.
D. no change in the real or nominal price of money.
Answer:
A lesson that policymakers should learn from the Argentinean experience with currency
boards is:
A. poor fiscal policies can undermine any monetary policy regime.
B. a flexible exchange rate is always preferred to a pegged exchange rate.
C. the only fixed exchange rate that works is the gold standard.
D. they never work
Answer:
The Expectations Hypothesis assumes each of the following, except:
A. long-term bond rates are equal to the average of current and expected future
short-term interest rates.
B. bonds of different maturities are not perfect substitutes.
C. bonds of different maturities have the same risk characteristics.
D. bonds of different maturities are perfect substitutes.
Answer:
The tools of monetary policy available to the Fed include each of the following, except
the:
A. currency-to-deposit ratio.
B. discount rate.
C. target federal funds rate.
D. reserve requirement.
Answer:
Financial intermediaries, through their ability to lower transaction costs:
A. reduce the opportunity cost of specialization.
B. decrease the efficiency of an economy.
C. allow for people to be more self-sufficient.
D. make collecting and processing information unprofitable.
Answer:
Two problems that arise from asymmetric information are:
A. adverse selection and diseconomies of scale.
B. moral hazard and the free-rider problem.
C. moral hazard and adverse selection.
D. the free-rider problem and adverse selection.
Answer:
Considering a put option; if the price of the underlying asset increases:
A. the value of the put option also increases.
B. the intrinsic value of the option increases.
C. the value of the option decreases.
D. the time value of the option decreases.
Answer:
The monetary base is the sum of:
A. reserves and M2.
B. M1 and reserves.
C. currency in the hands of the public, reserves and M1.
D. currency in the hands of the public and reserves in the banking system.
Answer:
The Lucas critique focuses specifically on:
A. the relationship between Fed policy and the money supply.
B. the role that economic policymaking has on people’s economic behavior.
C. the inability to measure economic performance accurately.
D. the moving away from fixed exchange rates to flexible exchange rates.
Answer:
The reduction in transaction costs provided by financial intermediaries benefit:
A. small borrowers and small savers.
B. large borrowers but not small savers.
C. society in the net, but small savers bear much of the cost.
D. small borrowers but not small savers.
Answer:
Since one function of financial intermediaries is to provide liquidity:
A. they must keep all of their funds in short-term securities.
B. they keep almost all of their funds in cash.
C. they must know approximately how much liquidity their customers will need each
day and have these funds available.
D. regulations require financial intermediaries to keep 50% of their assets in cash.
Answer:
Which of the following is the best analogy? Inflation is like:
A. a pound having more ounces.
B. a day having more hours.
C. a minute having fewer seconds.
D. a mile having more feet.
Answer:
Compare/contrast the Nasdaq Composite Index with the Dow Jones Industrial Average.
Answer:
How does the lender of last resort potentially create a moral hazard problem?
Answer:
Discuss the short-and long-run output responses resulting from an increase in money
growth when the economy is producing a current level of output that equals potential
output, all other factors constant.
Answer:
The government of a country that is experiencing strong currency appreciation might
find itself under pressure from some of its own citizens. Who would be likely to be
bringing pressure and why?
Answer:
If the Fed sells euros valued at $100 million to commercial banks, will this change the
size of the Fed’s liabilities and assets? Explain.
Answer:
What do modern central bankers not do?
Answer:
Does the lender of last resort function guarantee an end to bank runs? Explain.
Answer:
What potential problems are created by regulatory competition?
Answer:
How can we link the lack of futures markets in poor countries to the fact that farmers in
poor countries are likely to remain poor?
Answer:
Historically, many cultural groups have outlawed usury, or the practice of levying
interest on loans. Some groups oppose usury because it exacerbates problems of income
inequality (as wealthier individuals can afford to lend to poorer individuals), while
others claim investment and loans should be made charitably. Evaluate these arguments
against usury based on your knowledge of present value. Do such prohibitions make
sense?
Answer:
How has the Bureau of Labor Statistics (BLS) changed the calculation of the CPI in
order to take substitution bias into account?
Answer:
Discussions in recent years about the vulnerability of the Social Security System cause
some people to feel the payments promised will not materialize. Discuss the possible
changes we might observe now.
Answer:
What is a credit-default swap?
Answer:
While monetary policymakers cannot shift the short-run aggregate supply curve
following inflation shocks, they can minimize the impact that the changes in inflation
have on output. Describe how they can do this through the monetary policy reaction
curve.
Answer:
Given the following Taylor rule:
Target federal funds rate = 2 + current inflation + ½(inflation gap) + ½(output gap);
Explain what happens to the real interest rate and why it happens, each time inflation
increases by 1 percent.
Answer:
Credit cards usually charge higher rates of interest than most other forms of lending. In
terms of information, collateral and monitoring, how might these higher rates be
explained?
Answer:
In what ways have financial innovations affected the demand for money?
Answer:
What argument can you offer to justify the policy prohibiting formal voting during the
Euro systems Governing Council meetings?
Answer: