Acme Widget has been sued. It had been expected to lose suit and to be liable for
massive payments that would have imperiled the future of the company. If Acme
unexpectedly wins the suit,
(a) the price of its bonds will rise.
(b) the price of its bonds will fall because Acme will now be able to pay higher interest.
(c) the price of its bonds will fall because investors will sell Acme’s bonds and buy its
stock.
(d) be unchanged; once issued prices on bonds do not change.
Answer:
The existence of a substantial gap in the long run between rates of return on common
stock and rates of return on long-term government bonds indicates that investors
(a) are risk averse and require higher returns on stock investments to compensate them
for the greater risk.
(b) are risk averse and require higher returns on long-term government bonds to
compensate them for the greater risk.
(c) are risk loving and invest in common stock because of its greater riskiness.
(d) are risk loving and invest in long-term government bonds because of their greater
riskiness.
Answer:
About what fraction of depositors are fully insured under FDIC?
(a) 1%
(b) 5%
(c) 50%
(d) 99%
Answer:
If during a particular year, output grows 5%, velocity declines 2%, and the inflation rate
is 1%, then the money supply must have grown
(a) 6%.
(b) 2%.
(c) 4%.
(d) 8%.
Answer:
In the early 1930s
(a) countries that abandoned the gold standard suffered severe inflation.
(b) countries that tried to defend the gold standard suffered more depression than
countries that abandoned the gold standard.
(c) the gold standard was abandoned by every major industrial country except England.
(d) the United States was the first major industrial country to abandon the gold
standard.
Answer:
Fluctuations in velocity indicate that
(a) changes in money holdings cannot be completely explained by changes in the price
level.
(b) changes in money holdings cannot be completely explained by changes in the
volume of transactions.
(c) the Fed will have an easier time in hitting monetary aggregate targets than in hitting
interest rate targets.
(d) inflation must be accelerating.
Answer:
Friedman’s expression for the demand for real balances is
(a) M/P = L(Y*, i iM, e iM).
(b) M/P = L(Y*, i).
(c) M/P = L(Y*, iM i, e iM).
(d) M/P = L(Y*, i iM, iM e).
Answer:
During the postwar period which of the following goals has been emphasized by the
Fed?
(a) Stablizing share prices on the New York Stock Exchange
(b) Stabilizing economic growth
(c) Stabilizing the value of the dollar versus the yen
(d) Stabilizing short-term nominal interest rates
Answer:
The seller of a futures contract
(a) assumes the short position.
(b) assumes the long position.
(c) has the obligation to receive the underlying financial instrument at the specified
future date.
(d) is expecting the price of the underlying financial instrument to rise.
Answer:
Suppose First National Bank has $200 million of assets and $20 million of equity
capital. If First National has a 2% return on assets (ROA), what is its return on equity
(ROE)? Suppose First National’s equity capital declines to $10 million, while its assets
and ROA are unchanged. What is First National’s ROE now?
Answer:
Savings institutions originated as
(a) commercial banks.
(b) building and loan societies.
(c) farm cooperatives.
(d) consumer cooperatives.
Answer:
If the Fed purchases a new computer system for $50 million, the monetary base will
(a) rise by $50 million.
(b) fall by $50 million.
(c) be unchanged.
(d) either rise or fall depending upon whether the Fed purchases the computer system
by writing a check or by paying cash.
Answer:
Shoe leather costs of inflation
(a) increase as the inflation rate rises.
(b) decline as the inflation rate rises.
(c) would be eliminated by the indexing of income tax brackets.
(d) are the same as menu costs.
Answer:
The terms on the right-hand side of the Fed’s balance sheet
(a) represent the Fed’s assets.
(b) represent the net worth of the Fed.
(c) represent uses of the monetary base.
(d) equal the difference between the value of the Fed’s assets and the value of its
liabilities.
Answer:
The key concept in the new classical approach to the aggregate supply curve is
(a) the impact of imperfect information on business decisions.
(b) the impact of changes in the price level on real balances.
(c) the inverse relationship between the real interest rate and desired investment
spending.
(d) the crowding out of investment spending by government spending.
Answer:
Futures trading practices in the United States are regulated by
(a) the Chicago Board of Trade.
(b) the Chicago Mercantile Exchange.
(c) the Commodities Futures Trading Commission.
(d) the Board of Futures Trading.
Answer:
The law of large numbers allows insurance companies to
(a) hold capital market instruments as assets without fearing overly large numbers of
defaults.
(b) hold money market instruments as assets without fearing overly large numbers of
defaults.
(c) predict the average number of occurrences of insurable events in a large population
of policyholders.
(d) charge higher premiums than necessary, knowing that large numbers of individuals
will pay them.
Answer:
Narrow banking is seen by some economists as an answer to the problem of
(a) adverse selection.
(b) moral hazard.
(c) the decline in competition in the banking industry.
(d) the ineffectiveness of the Fed’s use of discount loans.
Answer:
Under the Federal Reserve Act, which banks must be members of the Federal Reserve
System?
(a) All commercial banks
(b) National banks
(c) State banks
(d) All banks with capital in excess of $100 million
Answer:
Savings institutions originated as
(a) commercial banks.
(b) building and loan societies.
(c) farm cooperatives.
(d) consumer cooperatives.
Answer:
If the Fed is generous in its granting of discount loans during a crisis,
(a) the result will likely be a contraction of the money supply.
(b) risk taking by banks and corporations may be encouraged.
(c) the discount rate will be bid up as the demand for loans exceeds the supply.
(d) market interest rates will rise sharply.
Answer:
Which of the following statements is correct concerning the views of new Keynesians
and new classicals concerning aggregate supply?
(a) New classical economists believe the short-run and long-run aggregate supply
curves are both vertical.
(b) New Keynesian economists believe the short-run and long-run aggregate supply
curves slope upward.
(c) Both new Keynesian and new classical economists believe the aggregate supply
curve slopes upward in the long run.
(d) Both new Keynesian and new classical economists believe the aggregate supply
curve slopes upward in the short run.
Answer:
An open economy is one that
(a) has a large government sector.
(b) lends and borrows in the international capital market.
(c) produces mainly agricultural goods.
(d) produces mainly manufactured goods.
Answer:
Under the preferred habitat theory, a flat yield curve indicates that investors expect
future short-term rates to
(a) fall.
(b) rise.
(c) remain constant.
(d) either fall or remain constant.
Answer:
Velocity equals
(a) PY/M.
(b) M/PY.
(c) MP/Y.
(d) MY/P.
Answer:
Which of the following decreased its share of the percentage of total assets of financial
intermediaries between 1960 and 2003?
(a) Money market mutual funds
(b) Private pension funds.
(c) State and local government retirement funds
(d) Life insurance companies
Answer:
In the United States, budget deficits are financed by
(a) the Fed borrowing from the general public
(b) the Fed borrowing from banks.
(c) the Treasury selling securities.
(d) Congress borrowing from foreign governments.
Answer:
As a saver’s wealth increases, explain whether each of the following is likely to become
a smaller or a larger fraction of her portfolio.
(a) Corporate bonds
(b) Corporate stock
(c) Cash
(d) Checking account balance
Answer:
Investors are better off when financial asset prices are determined in an efficient market
because
(a) returns on assets will be higher.
(b) funds will flow from savers to investors offering the most profitable investment
opportunities.
(c) returns from assets traded in an efficient market are not subject to state or local
taxes.
(d) risky assets are not allowed to be traded in an efficient market.
Answer:
Which of the following is the correct statement of the government budget constraint?
(a) Federal budget deficit + change in Treasury securities held by public + increase in
monetary base.
(b) Federal budget deficit + change in Treasury securities held by public increase in
monetary base.
(c) Federal budget deficit + increase in monetary base change in Treasury securities
held by public.
(d) Federal budget deficit + change in reserves of banking system + change in currency
outstanding.
Answer:
In early 2001, most economists were predicting that the federal government would be
running budget surpluses for the next ten years (note: it didn’t take place!). Would these
surpluses have had any impact on the ability of the Fed to control the monetary base?
Answer:
Suppose that the futures index for the S&P 500 for delivery one year from now is
selling for $960,000, whereas the stocks are selling for $900,000. If the one-year
Treasury bill rate is 5%, is it possible to use index arbitrage to make a profit?
Answer:
What services are finance companies able to offer consumers and businesses that banks
do not offer?
Answer:
Assess the impact on the bond market of the rise in Internet trading of stocks.
Answer:
Suppose you purchase a call option to buy IBM common stock at $35 per share in
September. The current price of IBM is 37 and the option premium is 4. What is the
intrinsic value of the option? As the expiration date on the option approaches, what will
happen to the size of the option premium?
Answer:
Compare the rights and obligations of buyers and sellers of futures contracts with the
rights of buyers and sellers of options contracts.
Answer:
Briefly describe how the Bretton Woods System worked. What advantages did it have
over the gold standard? What problems did the Bretton Woods System eventually
encounter?
Answer:
Which countries are the most important centers of international banking? Why is
international banking concentrated in these countries?
Answer:
Suppose the private bond rating agencies ceased to exist. What would be the impact on
the bond market?
Answer:
Discuss the implications of the Fed’s lacking of a constitutional mandate.
Answer:
In 1979 most S&Ls had mortgage loans on their books that paid nominal interest rates
of less than 10%. The inflation rate for 1979 was greater than 11%. Why weren’t these
S&Ls charging mortgage interest rates greater than the inflation rate?
Answer:
How would the Fed go about “pegging” the interest rate on Treasury securities, as it did
during World War II? What would be the consequences of pegging the monetary base?
Answer:
Suppose you start up an Internet company and, although you are currently not
profitable, you are very confident that you will be quite profitable in the near future.
Assuming that you are able to issue either debt or equity to raise the funds necessary to
expand your business, which would you prefer to issue?
Answer:
Discuss what happened to the market prices on corporate securities relative to
government securities during the years 19291931.
Answer:
What criteria should be used in deciding the best definition of the money supply?
Answer:
What important change did the Fed make in its FOMC statement in February 2000?
What change in the FOMC’s views on the economy became evident from the FOMC
statements issue between November 2000 and January 2001?
Answer: