1) An instrument developed to help investors and institutions hedge interest-rate risk is
A) a put option
B) a call option
C) a financial derivative
D) a mortgage-backed security
2) When those most likely to produce the outcome insured against are the ones who
purchase insurance, insurance companies are said to face the problem of
A) fraudulent claims
B) moral hazard
C) adverse selection
D) pecuniary purchases
3) A type of investment fund that makes long-term investments in companies that are
not publicly traded is called a
A) private equity fund
B) hedge fund
C) sovereign wealth fund
D) brokerage fund
4) Under the Basel Accord, assets and off-balance sheet activities were sorted according
to ________ categories with each category assigned a different weight to reflect the
amount of ________.
A) 2; adverse selection
B) 2; credit risk
C) 4; adverse selection
D) 4; credit risk
5) Which of the following are generally true of all bonds?
A) The longer a bond’s maturity, the greater is the rate of return that occurs as a result of
the increase in the interest rate
B) Even though a bond has a substantial initial interest rate, its return can turn out to be
negative if interest rates rise
C) Prices and returns for short-term bonds are more volatile than those for longer term
bonds
D) A fall in interest rates results in capital losses for bonds whose terms to maturity are
longer than the holding period
6) In the one-period valuation model, an increase in the required return on investments
in equity
A) increases the expected sales price of a stock
B) increases the current price of a stock
C) reduces the expected sales price of a stock
D) reduces the current price of a stock
7) In a barter economy the number of prices in an economy with N goods is
A) [N(N – 1)]/2
B) N(N/2)
C) 2N
D) N(N/2) – 1
8) If bad credit risks are the ones who most actively seek loans and, therefore, receive
them from financial intermediaries, then financial intermediaries face the problem of
A) moral hazard
B) adverse selection
C) free-riding
D) costly state verification
9) The average number of times that a dollar is spent in buying the total amount of final
goods and services produced during a given time period is known as
A) gross national product
B) the spending multiplier
C) the money multiplier
D) velocity
10) Everything else held constant, an increase in the currency-checkable deposit ratio
will mean
A) an increase in currency in circulation and an increase in the money supply
B) an increase in money supply but no change in reserves
C) a decrease in the money supply
D) an increase in currency in circulation but no change in the money supply
11) Which of the following is not a goal of financial regulation?
A) Ensuring the soundness of the financial system
B) Reducing moral hazard
C) Reducing adverse selection
D) Ensuring that investors never suffer losses
12) The risk structure of interest rates is
A) the structure of how interest rates move over time
B) the relationship among interest rates of different bonds with the same maturity
C) the relationship among the term to maturity of different bonds
D) the relationship among interest rates on bonds with different maturities
13) Bank consolidation will likely result in
A) less competition
B) the elimination of community banks
C) increased competition
D) a shift in assets from larger banks to smaller banks
14) Only ________ can issue monoline insurance policies.
A) life insurance companies
B) insurance companies that issue multiple types of insurance
C) property insurance companies
D) insurance companies that specialize in credit insurance alone
15) When bad storms slow the check-clearing process, float tends to ________ causing
the Fed to initiate defensive open market ________.
A) decrease; sales
B) decrease; purchases
C) increase; sales
D) increase; purchases
16) Of the sources of external funds for nonfinancial businesses in the United States,
corporate bonds and commercial paper account for approximately ________ of the
total.
A) 5%
B) 10%
C) 32%
D) 50%
17) When a bank sells a government bond to the Federal Reserve, reserves in the
banking system ________ and the monetary base ________, everything else held
constant.
A) increase; increases
B) increase; decreases
C) decrease; increases
D) decrease; decreases
18) Which of the following is not a disadvantage to inflation targeting?
A) There is a delayed signal about achievement of the target
B) Inflation targets could impose a rigid rule on policymakers
C) There is potential for larger output fluctuations
D) There is a lack of transparency
19) GDP measured with constant prices is referred to as
A) real GDP
B) nominal GDP
C) the GDP deflator
D) industrial production
20) The yield to maturity for a discount bond is ________ related to the current bond
price.
A) negatively
B) positively
C) not
D) directly
21) One of the problems experienced by the savings and loan industry during the 1980s
was
A) managers lack of expertise to manage risk in new lines of business
B) heavy regulations in the new areas open to S&Ls
C) slow growth in lending
D) close monitoring by the FSLIC
22) A credit-driven bubble arises when ________ in lending causes ________ in asset
prices which can cause ________ in lending.
A) a decrease; a decrease; an increase
B) a decrease; an increase; an increase
C) an increase; an increase; a further increase
D) a decrease; a decrease; a further decrease
23) The most important source of the changes in supply conditions that stimulate
financial innovation has been the
A) deregulation of financial institutions
B) dramatic increase in the volatility of interest rates
C) improvement in computer and telecommunications technology
D) dramatic increase in competition from foreign banks
24) High-powered money minus reserves equals
A) reserves
B) currency in circulation
C) the monetary base
D) the nonborrowed base
25) The process in which people take their funds out of the banking system seeking
higher -yielding securities is called
A) capital mobility
B) loophole mining
C) disintermediation
D) deposit jumping
26) In the simple model of multiple deposit creation in which banks do not hold excess
reserves, the increase in checkable deposits equals the product of the change in reserves
and the
A) reciprocal of the excess reserve ratio
B) simple deposit expansion multiplier
C) reciprocal of the simple deposit multiplier
D) discount rate
27) The payoffs for financial derivatives are linked to
A) securities that will be issued in the future
B) the volatility of interest rates
C) previously issued securities
D) government regulations specifying allowable rates of return
28) If gold becomes acceptable as a medium of exchange, the demand for gold will
________ and the demand for bonds will ________, everything else held constant.
A) decrease; decrease
B) decrease; increase
C) increase; increase
D) increase; decrease
29) When the Fed supplies the banking system with an extra dollar of reserves, deposits
increase by more than one dollara process called
A) extra deposit creation
B) multiple deposit creation
C) expansionary deposit creation
D) stimulative deposit creation
30) Nonactivists of policies contend that a policy of shifting the aggregate ________
curve will be costly because it produces ________ volatility in both the price level and
output.
A) supply; less
B) supply; more
C) demand; less
D) demand; more
31) The Federal Reserve has been ________ preemptive because of the changing view
that monetary policy has to be ________ looking.
A) more; forward
B) more; backward
C) less; forward
D) less; backward
32) The ________ suggests that the most important factor affecting the demand for
domestic and foreign assets is the expected return on domestic assets relative to foreign
assets.
A) theory of portfolio choice
B) law of one price
C) interest parity condition
D) theory of foreign capital mobility
33) Fear of a major recession causes stock prices to fall, everything else held constant,
which in turn causes consumer spending to
A) increase
B) remain unchanged
C) decrease
D) cannot be determined
34) 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
35) If an individual moves money from a savings deposit account to a money market
deposit account,
A) M1 decreases and M2 stays the same
B) M1 stays the same and M2 increases
C) M1 stays the same and M2 stays the same
D) M1 increases and M2 decreases
36) The concept of diversification is captured by the statement
A) don’t look a gift horse in the mouth
B) don’t put all your eggs in one basket
C) it never rains, but it pours
D) make hay while the sun shines