The Dow Jones Industrial Average:
A. gives equal weight to a change in the price of the stock of any company in the
index.
B. reflects that a 10% increase in a share of stock selling for $30 will have the same
effect on the index as a 10% increase in the price of a stock selling for $60.
C. is a value-weighted index.
D. gives greater weight to shares with higher prices.
Answer:
Which is a function of modern central banks?
A. To control securities markets
B. To control the government’s budget
C. To control the availability of money and credit
D. To manage fiscal policy
Answer:
Financial markets enable the transfer of risk by:
A. requiring that risk-averse investors have access to U.S. Treasury bond markets.
B. allowing individuals and firms less willing to bear risk to transfer risk to other
individuals and firms more willing to bear risk.
C. making sure that higher default risk is offset by greater liquidity.
D. enabling even unsophisticated investors to purchase highly complex financial
instruments.
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:
The U.S. Treasury yield curve:
A. shows the relationship among bonds with the same risk characteristics but different
maturities.
B. assumes maturities are constant, and reflects the difference in risk.
C. always has a positive slope.
D. always has a negative slope.
Answer:
Which of the following statements best completes this sentence: “On a bank’s balance
sheet”?
A. liabilities show the uses of funds and assets show the sources of funds.
B. assets show the sources of funds and the net worth shows the uses of funds.
C. net worth shows the sources of funds and liabilities show the uses of funds.
D. liabilities show the sources of funds and assets show the uses of funds.
Answer:
There is a futures contract for the purchase of 100 bushels of wheat at $2.50 per bushel.
At the end of the day when the market price of wheat increases to $3.00 per bushel:
A. the buyer (long position) needs to transfer $50 to the seller (short position).
B. the seller (short position) needs to transfer $50 to the buyer (long position).
C. nothing happens since with a futures contract all payments are made at the
settlement date.
D. nothing happens since marked to market adjustments only take place when the
market price falls below the contract price.
Answer:
Disinflation occurs when:
A. the inflation rate is negative.
B. the inflation rate is 2 percent or less.
C. the inflation rate goes above ten percent.
D. the rate of inflation declines.
Answer:
If an investor thinks interest rates are likely to rise, she would:
A. sell her bonds and hold more money.
B. buy more bonds now and hold less money.
C. not alter her bond portfolio until interest rates actually rise.
D. not change her money holdings at all.
Answer:
Comparing the European and the U.S. central bank systems, the Governing Council of
the European system resembles:
A. the Board of Governors.
B. the Presidents of the Regional Federal Reserve Banks.
C. the FOMC.
D. the Chairman of the Board of Governors of the Fed.
Answer:
U.S. Treasury securities are considered to carry no risk spread because:
A. they are the closest thing to default-risk free that an investor can obtain.
B. the prices of U.S. Treasury bonds never change.
C. the yields on U.S. Treasury bonds never change.
D. the yields on U.S. Treasury bonds are always low.
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 impact of a decrease in expected inflation in the bond market will have a relatively
large effect on the prices of bonds prices because the bond demand curve:
A. will shift right as will the bond supply curve.
B. will shift right but the bond supply curve shifts left.
C. and supply curves will shift left.
D. will shift left as the bond supply curve shifts right.
Answer:
When compared to Canada or Japan, the U.S. is unusual in that it has:
A. far fewer banks than either of those countries.
B. fewer banks than Japan but more than Canada.
C. more banks than Japan but fewer than Canada.
D. more banks than either Japan or Canada.
Answer:
Which of the following statements is most correct?
A. The velocity of M2 is relatively stable across all time periods.
B. The velocity of M2 is less stable than the velocity of M1.
C. The velocity of M2 is more volatile in the short run than the long run.
D. Fisher’s assumption about money velocity being stable in the long run was incorrect.
Answer:
With the U.S. Social Security System, the burden of funding the system rests on:
A. the current workers.
B. the retirees.
C. the federal government.
D. the Social Security Administration.
Answer:
In the United Kingdom accountability and transparency for its central bank is achieved
by setting:
A. a numerical target for unemployment each year.
B. a numerical target for economic growth.
C. numerical targets for economic growth and the exchange rate.
D. an explicit numerical target for inflation.
Answer:
The attendees at the FOMC meetings receive information prior to the meetings that is
contained in books with colorful names. The information that is released to the public
prior to the meetings is from the:
A. blue book only.
B. beige book only.
C. blue and green books, but not the teal book.
D. beige and blue books but not the green book.
Answer:
A homeowner discovers that a large tree in his yard is diseased and may fall in a bad
windstorm and if it falls, it will likely destroy the garage. The cost to have the tree cut
down is significant but the homeowner has an insurance policy and figures that if the
tree falls and destroys the garage, the insurance company will pay, and the deductible is
less than the cost to have the tree removed. This is an example of:
A. information symmetry.
B. adverse selection.
C. moral hazard.
D. screening.
Answer:
A typical FOMC meeting would best be described as:
A. an informal meeting with significant give and take among participants.
B. an informal meeting with the Chairman as a passive observer.
C. a fairly formal session with not much give and take.
D. a press conference, where the financial press can ask questions regarding the Fed’s
view of the economy.
Answer:
Reserves are:
A. assets of the central bank and liabilities of the commercial bank.
B. assets of the commercial banks and liabilities of the central bank.
C. liabilities of the commercial and central banks.
D. assets and liabilities for the central bank.
Answer:
If M = the money supply; Y = real output, P = the price level, and V = velocity, which
of the following equals the velocity of money?
A. (Y × M)/P
B. (P × M)/Y
C. (P × Y)/M
D. (P × Y) + M
Answer:
When stock prices reflect fundamental values:
A. all investors will have positive returns.
B. the allocation of resources will be more efficient.
C. all companies will have an easier task of obtaining financing for investment
projects.
D. the overall level of the stock market should move higher.
Answer:
Which of the following statements is most correct?
A. Stockholders have limited liability and have no control over corporate leadership.
B. Stockholders can dislodge the managers of the corporation but not the board of
directors.
C. Stockholders have unlimited liability and can dislodge members of the board of
directors.
D. Stockholders can dislodge members of the board and have limited liability.
Answer:
Some people who believe monetary policymakers should not address equity and
property price bubbles argue their position based on:
A. their belief that government should stay out of private matters.
B. the policymakers lack experience with financial markets.
C. price bubbles are virtually impossible to identify when they are developing.
D. all of the answers given are correct.
Answer:
If an investment will return $1,500 half of the time and $700 half of the time, the
expected value of the investment is:
A. $1,250.
B. $1,050.
C. $1,100.
D. $2,200.
Answer:
The method used by the ECB to measure inflation for meeting its objectives:
A. gives equal weight to each member country.
B. gives greater relative weight to smaller countries.
C. can result in a contractionary monetary policy being used in a country where
inflation is already very low.
D. is based on wholesale rather than retail prices.
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:
The daily reserve supply curve is:
A. upward sloping.
B. downward sloping.
C. vertical until the federal funds rate equals the discount rate; at that point it becomes
horizontal.
D. horizontal until the federal funds rate equals the discount rate; at that point it
becomes vertical.
Answer:
Which of the following is not a bank asset?
A. Securities
B. Mortgage loans
C. Reserves
D. Non-transaction deposits
Answer:
Providing stock options to corporate managers was an idea designed to:
A. hide increases in pay of corporate executives from stockholders.
B. align managers’ interest with the stockholders’ interest.
C. treat adverse selection.
D. treat the free-rider problem.
Answer:
A call option is:
A. any option written more than sixty days into the future.
B. an option giving the holder the right to buy a given quantity of an asset at a specific
price on or before a specified date.
C. an option giving the seller the right to sell a given quantity of an asset at a specific
price on or before a specified date.
D. an option where all rights are granted to the seller of the option.
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