The Baumol-Tobin analysis suggests that
A. velocity is relatively constant.
B. the transactions component of the demand for money is negatively related to the
level of interest rates.
C. the speculative motive is nonexistent.
D. velocity is unrelated to the transactions motive.
Answer:
The key factor leading to the financial crises in Mexico and the East Asian countries
was
A. a deterioration in banks’ balance sheets because of increasing loan losses.
B. severe fiscal imbalances.
C. a sharp increase in the stock market.
D. a sharp decline in interest rates.
Answer:
Because many emerging market countries have not developed the political or monetary
institutions that allow the successful use of discretionary monetary policy
A) they have little to gain from pegging their exchange rate to an anchor country like
the U.S. or Germany.
B) they have little to gain from using a nominal anchor, because it would mean a
monetary policy that is overly expansionary.
C) they have very little to gain from an independent monetary policy, but a lot to lose.
D) they would be better off giving their central bankers the independence to use
discretion, rather than take their discretion away through any nominal anchor.
Answer:
The theory of portfolio choice indicates that higher interest rates make money
________ desirable, and the demand for real money balances ________.
A. less; falls
B. more; falls
C. less; rises
D. more; rises
Answer:
If the deficit is financed by selling bonds to the ________, the money supply will
________, increasing aggregate demand, and leading to a rise in the price level.
A. public; rise
B. public; fall
C. central bank; rise
D. central bank; fall
Answer:
When yield curves are downward sloping
A. long-term interest rates are above short-term interest rates.
B. short-term interest rates are above long-term interest rates.
C. short-term interest rates are about the same as long-term interest rates.
D. medium-term interest rates are above both short-term and long-term interest rates.
Answer:
Which of the following is not an advantage of inflation targeting?
A. reduction of the time-inconsistency problem
B. increased monetary policy transparency
C. There is an immediate signal on the achievement of the target.
D. consistency with democratic principles
Answer:
A nominal variable, such as the inflation rate or the money supply, which ties down the
price level to achieve price stability is called ________ anchor.
A. a nominal
B. a real
C. an operating
D. an intermediate
Answer:
The case for Federal Reserve independence does NOT include the idea that
A. political pressure would impart an inflationary bias to monetary policy.
B. a politically insulated Fed would be more concerned with long-run objectives and
thus be a defender of a sound dollar and a stable price level.
C. policy is always performed better by an elite group such as the Fed.
D. a Federal Reserve under the control of Congress or the president might make the
so-called political business cycle more pronounced.
Answer:
If the quantity of money demanded is not affected by changes in the interest rate, the
LM curve is ________ and fiscal policy will be ________.
A. horizontal; very effective
B. horizontal; ineffective
C. vertical; ineffective
D. vertical; very effective
Answer:
Who has regulatory responsibility when a bank operates branches in many countries?
A. It is not always clear.
B. the WTO
C. the U.S. Federal Reserve System
D. the first country to submit an application
Answer:
To be considered well capitalized, a bank’s leverage ratio must exceed
A. 10%.
B. 8%.
C. 5%.
D. 3%.
Answer:
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
Answer:
When the exchange rate for the Mexican peso changes from 10 pesos to the U.S dollar
to 9 pesos to the U.S. dollar, then the Mexican peso has ________ and the U.S. dollar
has ________.
A. appreciated; appreciated
B. depreciated; appreciated
C. appreciated; depreciated
D. depreciated; depreciated
Answer:
The ________ describes the combinations of interest rates and aggregate output for
which the quantity of money demanded equals the quantity of money supplied.
A. IS curve
B. LM curve
C. consumption function
D. investment schedule
Answer:
Which of the following is not an element of inflation targeting?
A. a public announcement of medium-term numerical targets for inflation
B. an institutional commitment to price stability as the primary long-run goal
C. an information-inclusive approach in which only monetary aggregates are used in
making decisions about monetary policy
D. increased accountability of the central bank for attaining its inflation objectives
Answer:
Decisions by depositors to increase their holdings of ________, or of banks to hold
________ will result in a smaller expansion of deposits than the simple model predicts.
A. deposits; required reserves
B. deposits; excess reserves
C. currency; required reserves
A) currency; excess reserves
Answer:
If a bank has ________ rate-sensitive assets than liabilities, then ________ in interest
rates will increase bank profits.
A. more; a decline
B. more; an increase
C. fewer; an increase
D. fewer; a surge
Answer:
In the basic closed-economy ISLM model, as the interest sensitivity of money demand
increases, fiscal policy has ________ effect on output and monetary policy has
________ effect on output.
A. less; less
B. more; more
C. more; less
D. less; more
Answer:
An increase in the expected inflation rate causes the supply of bonds to ________ and
the supply curve to shift to the ________, everything else held constant.
A. increase; left
B. increase; right
C. decrease; left
D. decrease; right
Answer:
If the Federal Reserve conducts open market ________, the money supply ________,
shifting the LM curve to the left, everything else held constant.
A. purchases; decreases
B. sales; decreases
C. purchases; increases
D. sales; increases
Answer:
An increase in the time to the promised future payment ________ the present value of
the payment.
A. decreases
B. increases
C. has no effect on
D. is irrelevant to
Answer:
The time-inconsistency problem with monetary policy tells us that, if policymakers use
discretionary policy, there is a higher probability that the ________ will be higher,
compared to policy makers following a behavior rule.
A. inflation rate
B. unemployment rate
C. interest rate
D. foreign exchange rate
Answer:
Banks that suffered significant losses in the 1980s made the mistake of
A. holding too many liquid assets.
B. minimizing default risk.
C. failing to diversify their loan portfolio.
D. holding only safe securities.
Answer:
The practice of keeping high-risk assets on a bank’s books while removing low-risk
assets with the same capital requirement is known as
A. competition in laxity.
B. depositor supervision.
C. regulatory arbitrage.
D. a dual banking system.
Answer:
When the expected inflation rate increases, the demand for bonds ________, the supply
of bonds ________, and the interest rate ________, everything else held constant.
A. increases; increases; rises
B. decreases; decreases; falls
C. increases; decreases; falls
D. decreases; increases; rises
Answer:
Everything else held constant, when the federal funds rate is ________ the interest rate
paid on reserves, the quantity of reserves demanded rises when the federal funds rate
________.
A. above, rises
B. above, falls
C. below, rises
D. below, falls
Answer:
A financial market in which previously issued securities can be resold is called a
________ market.
A. primary
B. secondary
C. tertiary
D. used securities
Answer:
Although debt contracts require less monitoring than equity contracts, debt contracts are
still subject to ________ since borrowers have an incentive to take on more risk than
the lender would like.
A) moral hazard
B) agency theory
C) diversification
D) the “lemons” problem
Answer:
The monetary policy (MP) curve indicates the relationship between
A. the Federal Funds Rate and the real interest rate.
B. the Federal Funds Rate and the inflation rate.
C. the inflation rate and the expected inflation rate.
D. the real interest rate the central bank sets and the inflation rate.
Answer:
Of the following methods that banks might use to reduce moral hazard problems, the
one not legally permitted in the United States is the
A. requirement that firms keep compensating balances at the banks from which they
obtain their loans.
B. requirement that firms place on their board of directors an officer from the bank.
C. inclusion of restrictive covenants in loan contracts.
D. requirement that individuals provide detailed credit histories to bank loan officers.
Answer:
Which of the following is a contractual savings institution?
A. a life insurance company
B. a credit union
C. a savings and loan association
D. a mutual fund
Answer: