1) The nominal interest rate minus the expected rate of inflation
A) defines the real interest rate
B) is a less accurate measure of the incentives to borrow and lend than is the nominal
interest rate
C) is a less accurate indicator of the tightness of credit market conditions than is the
nominal interest rate
D) defines the discount rate
2) The sum of the Fed’s monetary liabilities and the U.S. Treasury’s monetary liabilities
is called
A) the money supply
B) currency in circulation
C) bank reserves
D) the monetary base
3) The view that expectations change relatively slowly over time in response to new
information is known in economics as
A) rational expectations
B) irrational expectations
C) slow-response expectations
D) adaptive expectations
4) Everything else held constant, a credit-drive bubble is generally considered to have
the potential to cause ________ damage to an economy compared to an irrational
exuberance bubble.
A) less
B) about the same amount of
C) more
D) either more, less, or the same amount of
5) If in an efficient market all prices are correct and reflect market fundamentals, which
of the following is a false statement?
A) A stock that has done poorly in the past is more likely to do well in the future
B) One investment is as good as any other because the securities’ prices are correct
C) A security’s price reflects all available information about the intrinsic value of the
security
D) Security prices can be used by managers to assess their cost of capital accurately
6) When an economy grows out of a recession, normally the demand for bonds
________ and the supply of bonds ________, everything else held constant.
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases
7) If peanuts serve as a medium of exchange, a unit of account, and a store of value,
then peanuts are
A) bank deposits
B) reserves
C) money
D) loanable funds
8) Although the National Bank Act of 1863 was designed to eliminate state-chartered
banks by imposing a prohibitive tax on banknotes, these banks have been able to stay in
business by
A) issuing credit cards
B) ignoring the regulations
C) acquiring funds through deposits
D) branching into other states
9) Mutual funds that allow shares to be redeemed at any time at a price that is tied to the
asset value of the fund are known as
A) close-end funds
B) open-end funds
C) asset-value funds
D) redeemable funds
10) The aggregate supply curve shows the relationship between
A) the level of inputs and aggregate output
B) the inflation rate and the level of inputs
C) the wage rate and the level of employment
D) the inflation rate and the level of aggregate output supplied
11) In the generalized dividend model, if the expected sales price is in the distant future
A) it does not affect the current stock price
B) it is more important than dividends in determining the current stock price
C) it is equally important with dividends in determining the current stock price
D) it is less important than dividends but still affects the current stock price
12) When banks borrow money from the Federal Reserve, these funds are called
A) federal funds
B) discount loans
C) federal loans
D) Treasury funds
13) Under a fixed exchange rate regime, if a central bank must intervene to purchase
the domestic currency by selling foreign assets, then, like an open market sale, this
action ________ the monetary base and the money supply, causing the interest rate on
domestic assets to ________.
A) increases; rise
B) increases; fall
C) reduces; rise
D) reduces; fall
14) According to the Taylor Principle, when the inflation rate rises, the nominal interest
rate should be ________ by ________ than the inflation rate increase.
A) increased; more
B) increased; less
C) decreased; more
D) decreased; less
15) 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
16) The ________ is calculated by multiplying the coupon rate times the par value of
the bond.
A) present value
B) par value
C) coupon payment
D) maturity payment
17) The evolution of the payments system from barter to precious metals, then to fiat
money, then to checks can best be understood as a consequence of
A) government regulations designed to improve the efficiency of the payments system
B) government regulations designed to promote the safety of the payments system
C) innovations that reduced the costs of exchanging goods and services
D) competition among firms to make it easier for customers to purchase their products
18) If the Taylor Principle is not followed and nominal interest rates are increased by
less than the increase in the inflation rate, then real interest rates will ________ and
monetary policy will be too ________.
A) rise; tight
B) rise; loose
C) fall; tight
D) fall; loose
19) Although the Fed professed employment of a monetary aggregate targeting strategy
during the 1970s, its behavior suggests that it emphasized
A) free-reserve targeting
B) interest-rate targeting
C) a real-bills doctrine
D) price-index targeting
20) A share of common stock is a claim on a corporation’s
A) debt
B) liabilities
C) expenses
D) earnings and assets
21) The account that shows international transactions involving financial transactions
(stocks, bonds, bank loans, etc.) is called the
A) trade balance
B) current account
C) balance of payments
D) capital account
22) An increase in the foreign interest rate causes the demand for domestic assets to
shift to the ________ and the domestic currency to ________, everything else held
constant.
A) right; appreciate
B) right; depreciate
C) left; appreciate
D) left; depreciate
23) Which of the followings is not a current duty of the Board of Governors of the
Federal Reserve System?
A) Setting margin requirements, the fraction of the purchase price of the securities that
has to be paid for with cash
B) Setting the maximum interest rates payable on certain types of time deposits under
Regulation Q
C) Approving the discount rate “established” by the Federal Reserve banks
D) Representing the United States in negotiations with foreign governments on
economic matters
24) The monetary base declines when
A) the Fed extends discount loans
B) Treasury deposits at the Fed decrease
C) float increases
D) the Fed sells securities
25) Under the European System of Central Banks, the Governing Council is similar in
structure to the ________ of the Federal Reserve System.
A) Board of Governors
B) Federal Open Market Committee
C) Federal Reserve Banks
D) Federal Advisory Council