Using the federal funds rate as an operating target
(a) will reduce its stability.
(b) may lead to a procyclical policy.
(c) will tend to reduce the inflation rate, but at the cost of higher unemployment.
(d) will increase the stability of M1 and M2.
Answer:
The FDIC was created in
(a) 1863.
(b) 1913.
(c) 1934.
(d) 1991.
Answer:
Banks in the United States have been prohibited from investing deposits in significant
equity holdings since the passage of the
(a) Bank Reform Act of 1980.
(b) Securities and Exchange Acts of 1933 and 1934.
(c) National Banking Acts of 1863 and 1864.
(d) Sherman Antitrust Act of 1890.
Answer:
Financial markets enable individuals to transfer risk by
(a) effectively prohibiting investments in common stock by unsophisticated investors.
(b) leading conservative investors to put their money in government bonds.
(c) ensuring that increased risk is offset by increased liquidity.
(d) creating instruments that transfer risk from those less willing to bear risk to those
more willing to bear risk.
Answer:
In which of the following countries was a deposit insurance fund first established?
(a) The United States
(b) France
(c) Japan
(d) The United Kingdom
Answer:
In the new classical view, if the Chairman of the Fed announces a 10% increase in the
money supply and then takes actions that cause the money supply to grow by 10%, the
result will be
(a) a 10% increase in the price level, and no change in output.
(b) a 10% increase in the price level, and a small increase in output.
(c) a less than 10% increase in the price level, and a small increase in output.
(d) a less than 10% increase in the price level, and no change in output.
Answer:
Increases in which of the following items from the Fed’s balance sheet will result in
decreases in the monetary base?
(a) U.S. Treasury deposits
(b) U.S. Treasury currency outstanding
(c) Federal Reserve float
(d) Discount loans
Answer:
A person takes out a car loan at a bank but actually uses the money to play the lottery.
This situation is an example of which problem banks face in lending?
(a) Adverse selection
(b) Moral hazard
(c) Interest rate risk
(d) Illiquidity
Answer:
At a point above the LM curve,
(a) there is an excess demand for money.
(b) there is an excess demand for nonmoney assets.
(c) the real interest rate is below its equilibrium level.
(d) there is an excess demand for goods.
Answer:
If a government’s income tax receipts exceed its expenditures, the government is
running a
(a) surplus and is a net borrower of funds.
(b) surplus and is a net saver of funds.
(c) deficit and is a net borrower of funds.
(d) deficit and is a net saver of funds.
Answer:
In the new Keynesian approach, an increase in the nominal money supply
(a) raises real balances in the short run but not in the long run.
(b) raises real balances in the long run but not in the short run.
(c) raises real balances in both the short and long runs.
(d) does not raise real balances in either the short or long runs.
Answer:
Which of the following is NOT a responsibility of the Board of Governors?
(a) Approving bank mergers
(b) Determining permissible activities for bank holding companies
(c) Carrying out open market operations
(d) Setting the salaries of the presidents and officers of district banks
Answer:
Why was the Securities and Exchange Commission established?
(a) To ensure that “noise trading” on the New York Stock Exchange did not become
excessive
(b) To regulate the commission charged by stockbrokers
(c) In response to disreputable underwriting practices
(d) In response to the financial panic of 1907
Answer:
Basis risk refers to the risk
(a) associated with anticipated price movements.
(b) associated with unanticipated price movements.
(c) of default on the futures contract.
(d) from a change in the spread between the rate on the hedged instrument and the rate
on the instrument actually traded.
Answer:
The Treasury was in conflict with Alan Greenspan early in the Bush administration
because the treasury
(a) wanted the Fed to make fighting inflation its top priority.
(b) wanted the Fed to raise interest rates.
(c) wanted the Fed to lower the required reserve ratio.
(d) wanted the Fed to pursue an expansionary monetary policy.
Answer:
A bond’s price and its yield to maturity are inversely related because
(a) discounting future payments at a higher rate reduces the present value of the
payments.
(b) discounting future payments at a higher rate increases the present value of the
payments.
(c) an increase in the yield to maturity will lower a bond’s coupon rate and hence its
price.
(d) a fall in a bond’s price will lower its par value and hence its yield to maturity.
Answer:
Findings by various researchers have shown that
(a) the money supply declines almost immediately in response to a contractionary
policy by the Fed and that output declines with a lag of between six months and one
year.
(b) the money supply declines with a lag of between six months and one year in
response to a contractionary policy by the Fed and output declines almost immediately.
(c) the money supply and output decline almost immediately in response to a
contractionary policy by the Fed.
(d) the money supply and output decline with a lag of between six months and one year
to a contractionary policy by the Fed.
Answer:
The current account balance plus the capital account balance
(a) equals the trade balance.
(b) equals the net outflow of currency from the domestic economy.
(c) will be negative during economic expansions and positive during economic
contractions.
(d) equals zero.
Answer:
If the returns to Mammoth Computer and Stupendous Chemicals are independent (have
zero correlation), adding Stupendous Chemicals to a portfolio already containing
Mammoth Computer
(a) reduces the overall portfolio risk.
(b) does not affect the overall portfolio risk.
(c) increases the overall portfolio risk.
(d) affects the overall portfolio risk only if the saver is risk averse.
Answer:
When economists refer to the role of money as a store of value, they mean that
(a) money never loses its value, unlike other assets.
(b) money allows value to be stored easily.
(c) the value of money falls only when the quantity of money in circulation falls.
(d) the value of money falls only when the quantity of money in circulation rises.
Answer:
Which of the following statements is correct?
(a) The financial sector is a large source of jobs in the U.S. economy, but a relatively
small source of jobs in other major economies.
(b) The financial sector is a relatively small source of jobs in the U.S. economy, but a
large source of jobs in other major economies.
(c) The financial sector is a large source of jobs in the U.S. and other major economies.
(d) The financial sector is a relatively small but important source of jobs in the U.S. and
other major economies.
Answer:
Which of the following is NOT a financial intermediary?
(a) Salomon Brothers
(b) Chase Manhattan Bank
(c) Aetna Insurance Company
(d) California State Teachers Pension Fund
Answer:
An open market purchase
(a) decreases the price of Treasury securities and also decreases their yield.
(b) increases the price of Treasury securities and decreases their yield.
(c) increases the price of Treasury securities and also increases their yield.
(d) decreases the price of Treasury securities and increases their yield.
Answer:
Most Fed watchers believe that the Fed is
(a) centralized in theory, but decentralized in practice.
(b) decentralized in theory, but centralized in practice.
(c) decentralized in both theory and practice.
(d) centralized in both theory and practice.
Answer:
In October 1982, the Fed
(a) began to pay more attention to the federal funds rate.
(b) stated that nonborrowed reserves would be the operating target.
(c) tightened its control over money growth.
(d) began to pay more attention to the growth in monetary aggregates.
Answer:
Economists generally believe that prices are
(a) always perfectly flexible.
(b) always perfectly inflexible.
(c) more flexible in the short run than in the long run.
(d) more flexible in the long run than in the short run.
Answer:
In the money channel, the main way in which an expansionary monetary policy
increases output in the short run is by
(a) lowering the real interest rate, which increases spending by households and firms.
(b) directly increasing the funds available for households and firms to spend.
(c) increasing the ability of banks to make loans.
(d) increasing the funds available for government spending.
Answer:
In which of the following decades was the rate of inflation the highest?
(a) 1930s
(b) 1970s
(c) 1980s
(d) 1990s
Answer:
On the Fed’s balance sheet the Fed’s holdings of foreign exchange reserves
(a) is an asset.
(b) is a liability.
(c) represents promises by the Fed to make loans to foreign governments.
(d) consists of gold bars.
Answer:
Interest rate risk
(a) is currently a severe problem for banks.
(b) isn’t currently much of a problem for banks.
(c) would be a very severe problem in the absence of deposit insurance.
(d) has been exacerbated by the increased use of flexible-rate financial securities.
Answer:
Government regulation of banks in the United States
(a) changes slowly over time as knowledge of the best way to organize the system
increases.
(b) generally increases during election campaigns as politicians exploit the public’s
hostility toward banks.
(c) changes abruptly in response to periodic financial crises.
(d) has remained essentially unchanged since the early twentieth century.
Answer: