We should expect a country that experiences volatile inflation to also have:
A. volatile nominal interest rates.
B. volatile real interest rates but stable nominal rates.
C. stable nominal interest rates.
D. volatile real interest rates.
Answer:
The Fed purchases German bonds from commercial banks. Which of the following best
describes the impact on the Fed’s and the Banking System’s balance sheets resulting
from this transaction?
A. The Fed’s assets and liabilities increase, the banking systems assets and liabilities
decrease.
B. The Fed’s assets increase and its liabilities increase, for the banking system, the
value of assets and liabilities do not change, only the composition of assets changes.
C. The Fed’s assets and liabilities do not change, only the compositions of the assets
change. For the banking system, assets and liabilities increase.
D. The Fed’s assets increase and its liabilities decrease, for the banking system, the
value of assets and liabilities do not change, only the composition of assets changes.
Answer:
Considering the law of one price, evidence in the foreign exchange markets over brief
intervals shows:
A. the law works most of the time.
B. this is the closest thing to a perfect law in economics.
C. that the law fails most of the time.
D. the law only works in the very short run.
Answer:
If real GDP stays the same but the price level increases:
A. nominal money demand should remain the same.
B. nominal money demand should decrease.
C. nominal money demand should increase.
D. real money demand should decrease.
Answer:
Studying money and banking through five core principles is helpful because:
A. studies have shown students have a difficult time remembering more than five
topics.
B. everything in economics can be reduced to five core principles.
C. money and banking can undergo drastic changes overtime, but the five principles do
not.
D. these five principles are understood by everyone.
Answer:
Which of the following best expresses the equation for holding period return?
A. Current yield + coupon rate
B. Yield to maturity – current yield
C. Current yield + capital gain
D. Coupon rate + capital gain
Answer:
The fundamental characteristics influencing the value of a financial instrument include
each of the following except:
A. the size of the payment promised.
B. when the promised payment will be made.
C. where the instrument is traded.
D. the likelihood of payment.
Answer:
The clearing corporation’s main role in the futures market is to:
A. set the market price of the contract.
B. act as the counterparty to both sides of the transaction, thereby guaranteeing
payment.
C. provide the underlying assets so the contracts can be created.
D. all of the above.
Answer:
Voting rights in a corporation are held by the:
A. board of directors.
B. preferred stockholders.
C. corporate bondholders.
D. common stockholders.
Answer:
Accounts receivable loans provided by finance companies provide firms with:
A. start-up capital.
B. the ability to turn a liability into an asset.
C. the ability to turn a relatively illiquid asset into liquidity.
D. inventory loans.
Answer:
Which of the following could the lemons problem, applied to financial markets,
explain?
A. Lenders seeing a disproportionate share of high quality loan applicants
B. An average interest rate that is too high for the actual risk obtained
C. Profits for many lenders increasing significantly
D. High quality potential borrowers relying more on internally generated funds to
finance investment
Answer:
A monthly growth rate of 0.6% is an annual growth rate of:
A. 7.20%
B. 6.00%
C. 7.60%
D. 7.44%
Answer:
For many of the countries that made up the Soviet Union, the period immediately
following the collapse of the Soviet Union in 1990 found these countries experiencing:
A. rapid economic growth.
B. severe deflation.
C. rapid development of financial intermediaries.
D. extremely high rates of inflation.
Answer:
Select the answer which best completes the following statement: “at any point along the
long-run aggregate supply curve”
A. expected inflation equals current inflation and current output is below potential
output.
B. the economy is moving toward its potential output level.
C. current output equals potential output and expected inflation equals current
inflation.
D. expected inflation is moving toward current inflation.
Answer:
Which of the following statements is incorrect?
A. A fall in the central bank’s target inflation rate shifts the monetary policy reaction
curve to the left.
B. A decrease in the central bank’s inflation target raises the real interest rate
policymakers set at each level of inflation.
C. Shifts in the monetary policy reaction curve shift the dynamic aggregate demand
curve in the same direction.
D. A fall in the central bank’s target inflation rate causes the monetary policy reaction
curve to flatten.
Answer:
The theory of efficient markets means
A. professional fund managers should be able to consistently beat the market average.
B. a professional fund manager should really not expect to beat the market average
consistently.
C. a professional fund manager who beats the market average one year should be
expected to beat the market average the next year.
D. a professional fund manager who beats the market average one year should be
expected to not beat the market average the next year.
Answer:
One of the results of the limit on bank branching was:
A. increased diversification in the loan portfolio of small banks.
B. curtailment of credit availability for borrowers in small towns.
C. lower profits for banks.
D. increased efficiency in the operations of banks.
Answer:
Business cycles are viewed as:
A. movements in the short-run equilibrium.
B. situations where aggregate demand does not equal short-run aggregate supply.
C. inevitable; every economy must experience them.
D. movements in the long-run equilibrium.
Answer:
A rumor starts that says a bank has suffered significant losses and may not be able to
honor its promises to depositors. This causes most of the depositors to line up in front
of the bank the next morning wanting to withdraw their deposits. This is an example
of:
A. liquidity risk.
B. operational risk.
C. interest rate risk.
D. credit risk.
Answer:
The difference in the prices of a zero-coupon bond and a coupon bond with the same
face value and maturity date is simply:
A. zero, since they are the same.
B. the present value of the final payment.
C. the present value of the coupon payments.
D. the future value of the coupon payments.
Answer:
The dividend-discount model predicts that stock prices:
A. should be high when dividends are high.
B. will be high when interest rates are high.
C. will be higher when the growth rate of dividends is low.
D. should be high when dividends are low.
Answer:
People have a portfolio demand for money in part because:
A. money is part of a well-diversified financial portfolio.
B. the return on money is often higher than other financial assets.
C. money is needed to pay brokerage commissions.
D. there is no cost to holding money which gives it a relatively high return.
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:
A decrease in the inflation target by the central bank would:
A. have no impact on the positioning of the dynamic aggregate demand curve.
B. cause the dynamic aggregate demand curve to shift to the left.
C. cause the dynamic aggregate demand curve to shift to the right.
D. be reflected by a movement down and along the existing dynamic aggregate
demand curve.
Answer:
If a bank sells off all of its assets and pays all of its liabilities, the amount remaining
would be its:
A. net profit.
B. reserves.
C. net worth.
D. excess reserves.
Answer:
A price of a futures contract for U.S. Treasury bonds listed as “111-15” is measured in:
A. 32nds.
B. 12ths.
C. 4ths.
D. dollars; it stands for $111.15 but a dash is used instead of a period.
Answer:
Considering foreign exchange transactions:
A. the U.S. dollar is exchanged in roughly 50% of all currency transactions.
B. all transactions involve the use of the U.S. dollar.
C. most of these transactions are handled in New York.
D. more transactions are handled in London than anywhere else.
Answer:
One outcome that would result if the Fed paid interest on reserves would be:
A. banks would hold less excess reserves.
B. the federal government’s deficit would be larger (or surplus smaller).
C. banks would no longer hold excess reserves.
D. the target federal funds rate would have to be fixed at a constant rate.
Answer:
Suppose the economy has an inverted yield curve. According to the Expectations
Hypothesis, which of the following interpretations could be used to explain this?
A. Interest rates are expected to fall in the future.
B. Investors prefer bonds with less default risk.
C. Investors prefer bonds with less interest-rate risk.
D. The term spread is positive.
Answer:
Fiscal policy suffers from the problem of:
A. being formulated and implemented by politicians subject to short-run incentives.
B. being slow to implement.
C. being influenced by special interest groups.
D. all of the answers given are correct.
Answer:
Which of the following statements is true?
A. While the Fed emphasizes money growth more than the ECB, both central banks
have chosen interest rates as their operating target.
B. While the Fed emphasizes money growth less than the ECB, both central banks
have chosen interest rates as their operating target.
C. Because the Fed emphasizes money growth less than the ECB, the Fed uses interest
rates as their operating target while the ECB looks at growth in money aggregates.
D. Both the Fed and the ECB use growth in money aggregates as their operating target.
Answer:
Member banks of the Federal Reserve System include:
A. only nationally chartered banks.
B. all state chartered banks with assets exceeding $100 million.
C. nationally chartered banks and state chartered banks that decide to join.
D. nationally chartered banks and all state chartered banks.
Answer:
Where would the economy be operating relative to the dynamic aggregate demand
curve, the short-run aggregate supply curve and the long-run aggregate supply curve, if
the economy is experiencing an expansionary gap?
Answer:
Answer:
What is the difference between primary and secondary credit offered by the Fed and
who would use secondary credit?
Answer:
Why can’t the nominal interest rate be negative?
Answer:
From a transaction cost perspective, discuss why a firm may contract with an
investment bank to underwrite or place an issue.
Answer:
Answer:
If we consider the quantity theory of money and Professor Irving Fisher, who did a lot
of his work in the early 20th century, why might Professor Fisher feel less confident
about predicting constant velocity of money today than when he did his work?
Answer:
A bank develops specialized skills in analyzing companies from one specific industry.
This contributes significantly to the bank achieving economies of scale because a large
portion of its total loan portfolio is made up of companies in this industry. What are the
long-run profit prospects for this bank? Explain.
Answer:
After one year, a company will pay $20 in dividends. It commits to paying $21 two
years from the current date. This growth rate in dividends is expected to continue
indefinitely. The interest rate is 8%. Compute the current price of this stock, using the
dividend-discount model.
Answer:
Identify the six parts of the financial system.
Answer: