The dividend-discount model of stock valuation:
A. is an application of the net present value formula.
B. takes the net present value of expected dividends and add it to the future sale price
of the stock.
C. takes the net present value of the expected future price of the stock and adds the
annual dividend.
Answer:
The actual results of the McFadden Act included:
A. increased efficiency of banking across the country.
B. a tight network of interconnected banks across the country.
C. the continued operation of small inefficient banks.
D. the elimination of banking monopolies.
Answer:
Pension plans can be thought of as the opposite of life insurance because life insurance:
A. costs far more than pension plans.
B. companies spread risk while pension plans are only spread within the company.
C. pays off when you die while the pension plan pays off if you don’t.
D. pools the savings of many and pension plans do not.
Answer:
If the Fed were to enter the foreign exchange market and purchase euros, the impact on
domestic banking reserves would be:
A. the opposite of what it would be with an open market purchase.
B. domestic banking reserves would decrease.
C. the same as it would be with an open market purchase.
D. uncertain.
Answer:
Eurodollars are:
A. the currency of the European Economic Union.
B. euro-denominated deposits in U.S. Banks.
C. dollar-denominated deposits in banks outside the United States.
D. dollars that are specially printed for use abroad to minimize counterfeiting.
Answer:
If central bankers raise the interest rate, the asset-price channel of monetary policy
implies:
A. stock prices will decrease.
B. stock prices will remain the same but bond prices will increase.
C. bond prices will remain flat.
D. stock prices will increase and bond prices will remain flat.
Answer:
The owner of a small business applies for a bank loan and tells the loan officer that the
funds will be used to expand inventory for the upcoming holiday season. The small
business finds itself in need of additional funds to meet the monthly rent for the next
quarter and the owner uses the loan proceeds to pay the rent. This is an example of:
A. liquidity risk.
B. default risk.
C. a lack of diversification for the bank.
D. information asymmetry.
Answer:
A risk-averse investor will:
A. never prefer an investment with a lower expected return.
B. always prefer an investment with a certain return to one with the same expected
return but that has any amount of uncertainty.
C. always require a certain return.
D. always focus exclusively on the expected return.
Answer:
A stock currently does not pay an annual dividend. An investor expects this policy to
remain in force. She believes, however, the stock of this company will sell for $110.00
per share four years from now. If she has an interest (discount) rate of 7% (0.07), the
dividend discount model predicts the current price of this stock should be:
A. you cannot apply the model to this example since it requires a dividend be offered.
B. $82.00
C. $83.92
D. $86.35
Answer:
Recent history has shown that the government regulations requiring the disclosure of
information from public corporations have:
A. all but eliminated the problems of asymmetric information.
B. reduced but not eliminated the problems of asymmetric information.
C. just about eliminated the market for information services.
D. resulted in symmetric information.
Answer:
During a bank crisis:
A. officials at the Federal Reserve find it easy to sort out solvent from insolvent banks.
B. it is important for regulators to be able to distinguish insolvent from illiquid banks.
C. it is easy to determine the market prices of bank’s assets.
D. a bank will go to the central bank for a loan before going to other banks.
Answer:
Globalization and trade:
A. reduce inflation in the short run but not in the long run.
B. reduce inflation in the short run and in the long run.
C. increase inflation in the short run but not in the long run.
D. reduce inflation in the short run but increase inflation in the long run.
Answer:
Consider a $2 billion open market purchase of U.S. Treasury securities by the Federal
Reserve. The Banking System’s balance sheet will specifically show:
A. only an increase in liabilities of $2 billion.
B. only a decrease in assets of $2 billion.
C. no net change in assets or liabilities, only a change in the composition of assets with
securities decreasing and reserves increasing by $2 billion respectively.
D. no net change in assets or liabilities, only a change in the composition of assets with
securities increasing and reserves decreasing by $2 billion respectively.
Answer:
A way for policymakers to avoid the problems that deflation can present and still meet
their objective of price stability is to:
A. set a target of zero inflation.
B. keep the monetary base fixed.
C. set an inflation target of two to three percent.
D. target a nominal interest rate of zero.
Answer:
Prior to the Civil War most state banks issued their own banknotes. This resulted in all
of the following problems except:
A. their values decreased as the holder moved further from the bank.
B. they were worthless if the bank failed.
C. they were not efficient as a means of payment if the holder was far from the bank.
D. they were usually redeemable in gold.
Answer:
Tom buys a futures contract for U.S. Treasury bonds and on the settlement date the
interest rate on U.S. Treasury bonds is higher than Tom expected. Tom will have:
A. gained money on his short position.
B. lost money on his long position.
C. gained money on his long position.
D. lost money on his short position.
Answer:
The interest rate that the FOMC currently chooses to control is:
A. the federal funds rate.
B. the 30-year Treasury bond rate.
C. the discount rate.
D. the prime rate.
Answer:
While money is an asset not all assets are money because:
A. only money stores value.
B. money works as a means of payment.
C. only money is a good asset to hold during times of inflation.
D. money must be legal tender.
Answer:
Differences in inflation rates between two countries can explain:
A. short-run changes in the exchange rate but not long-run changes.
B. changes in the real exchange rate over the long run, but not changes in the nominal
exchange rate.
C. long-run changes in the exchange rate but not short-run changes.
D. changes in the exchange rate in both the short run and the long run.
Answer:
Prior to 1980:
A. member banks of the Federal Reserve did not have to hold non-interest-bearing
reserve deposits at the Fed.
B. nonmember banks had to hold non-interest-bearing reserve deposits at the Fed.
C. nonmember banks did not have to hold non-interest-bearing reserve deposits at the
Fed.
D. all banks, member or not, had to hold reserve deposits at the Fed in a
non-interest-bearing account.
Answer:
Most central banks, including the Fed and the ECB, provide discount loans at a rate:
A. equal to the target interest rate.
B. below the target interest rate.
C. above the target interest rate.
D. that is equal to the overnight interbank lending rate.
Answer:
Savings and loan institutions:
A. are owned by the depositors.
B. originally were formed primarily to make home mortgages.
C. today offer a much smaller array of services than when originally formed.
D. are owned by depositors who also have a common bond.
Answer:
If the level of current output suddenly falls below the potential level of output, central
bankers would:
A. lower the real interest rate.
B. raise the real interest rate.
C. keep the real interest rate constant and focus on only changing the nominal interest
rate.
D. attempt to shift the aggregate expenditures curve.
Answer:
If an investment has a 20%(0.20) probability of returning $1,000; a 30%(0.30)
probability of returning $1,500; and a 50%(0.50) probability of returning $1,800; the
expected value of the investment is:
A. $1,433.33
B. $1,550.00
C. $2,800.00
D. $1,600.00
Answer:
Under the purchase-and-assumption method, the FDIC usually finds it:
A. can sell the failed bank for more than the bank is actually worth.
B. can sell the bank at a price equaling the value of the failed banks assets.
C. has to sell the bank at a negative price since the bank is insolvent.
D. cannot sell the bank and almost always has to revert to the payoff method for
dealing with a failed bank.
Answer:
The New York Stock Exchange (NYSE) originated as:
A. a decentralized electronic market made up of dealers all over the world.
B. an example of a centralized exchange.
C. a financial market where nearly 100 million shares of stock are traded every
business day.
D. the only centralized stock exchange in the world.
Answer:
If a dollar will currently purchase 120 Japanese yen but it is expected that one year
from now a dollar will purchase 130 yen:
A. the demand for dollars now will increase.
B. the demand for dollars now will decrease.
C. the dollar is expected to depreciate.
D. the yen is expected to appreciate.
Answer:
An investor who diversifies by purchasing a 50-50 mix of two stocks that are not
perfectly positively correlated will find that the standard deviation of the portfolio is:
A. the sum of the standard deviations of the two individual stocks.
B. greater than the sum of the standard deviations of the individual stocks.
C. greater than the standard deviation from holding the same balance in only one of
these stocks.
D. less than the standard deviation from holding the same balance in only one of these
stocks.
Answer:
Lines of credit provided by financial intermediaries:
A. decrease liquidity for customers but increase income for the intermediary.
B. are pre-approved loans that can increase liquidity and lowering transaction costs.
C. are costly for intermediaries to provide so are only available to large commercial
customers.
D. require deposits in the intermediary that equal or exceed the amount of the line of
credit.
Answer:
Inflation targeting does all of the following except:
A. increase policymakers’ credibility.
B. increase policymakers’ accountability.
C. communicate policymakers’ objectives clearly and openly.
D. hinder economic growth.
Answer:
Which of the following statements seems to be verified by economic data?
A. Inflation tends to rise during recessions.
B. Inflation adjusts within three months to output gaps.
C. Inflation tends to fall during expansions.
D. It can take over a year for inflation to adjust to output gaps.
Answer:
The amount of currency in the hands of the public is approximately what percentage of
M1?
A. 45%
B. 25%
C. 30%
D. 90%
Answer: