Book Title
Money, Banking, and the Financial System 2nd Edition

FC 29504

November 22, 2016
Which of the following is included in M1, but not in M2?
A) currency
B) checking account deposits
C) travelers checks
D) Everything in M1 is in M2.
Which of the following statements about ACH transactions is false?
A) They reduce the likelihood of missed payments.
B) They reduce transactions costs associated with check processing.
C) They reduce the costs that lenders incur in notifying customers of missed payments.
D) They typically involve digital cash.
The most common type of simple loan is a(an)
A) automobile loan from a bank.
B) mortgage loan from a bank.
C) commercial loan from a bank.
D) corporate bond.
In comparing the views of economists on stabilization policy in the 1960s with the
current views of economists on stabilization policy, one can say
A) few economists in the 1960s favored stabilization policy, while most economists
currently favor stabilization policy.
B) economists' views on stabilization policy have changed very little since the 1960s.
C) fewer economists currently believe it is possible to use stabilization policy to
fine-tune the economy than in the 1960s.
D) almost no economists in the currently believe stabilization policy should be used.
According to a 2012 study of the crowd funding site Kickstarter, what percent of firms
failed to meet the deadlines for finishing a product?
A) 25%
B) 50%
C) 75%
D) 90%
Countries in which region experienced disruptive capital flows in 1997-98?
A) Eastern Europe
B) Western Europe
C) Latin America
D) East Asia
Assuming a required reserve ratio of 5%, interest rate on reserves of 1%, and interest
rate on loans of 6%, what is the effective cost of the reserve requirement on a $10,000
A) 0.05%
B) 0.25%
C) 0.30%
D) 1%
The Fed was created
A) after financial panics in the late 1800s and early 1900s.
B) after the stock market crash of 1929.
C) to help finance government expenditures during World War II.
D) to help channel funds to the residential mortgage market.
If the current price of a bond is less than its face value,
A) an investor will receive a capital gain by holding the bond until maturity.
B) the yield to maturity must be less than the current yield.
C) the coupon rate must be greater than the current yield.
D) the coupon rate must be equal to the current yield.
If lenders anticipate no changes in liquidity, information costs, and tax differences, the
yield on a risky security should be
A) greater than that on a safe security and the price of a risky security should also be
greater than that of a safe security.
B) less than that on a safe security and the price of a risky security should also be less
than that of a safe security.
C) greater than that on a safe security and the price of a risky security should be lower
than that of a safe security.
D) less than that on a safe security and the price of a risky security should be greater
than that on a safe security.
When output is below its full-employment level, the short-run aggregate supply will
shift down and to the right because
A) the expected price level will be below the actual price level.
B) workers' wages will decline.
C) prices of nonlabor inputs will rise.
D) workers' wages will rise.
The political business cycle theory predicts that
A) the Fed acts to promote the interests of the general public.
B) the Fed acts to stimulate economic activity before an election.
C) the President's appointments to the Board of Governors will usually be politicians.
D) political factors over which the Fed has no control are most important in explaining
the business cycle.
If there were no adverse selection problems in the stock market,
A) some well-run firms would pay more to raise funds.
B) some poorly-run firms would pay less to raise funds.
C) the willingness of savers to invest in the market would be increased.
D) the volume of new stock issues would be lower.
The best explanation of why the aggregate demand curve has a negative slope is that
A) at a higher price level households cut back on their spending on goods and services.
B) at a higher price level business firms wish to produce more goods and services.
C) a higher price level results in lower real balances and a higher real interest rate.
D) a higher price level results in less government spending on transfers, such as
unemployment insurance and social security payments.
According to the Gordon-Growth model, what will be the percentage change in the
value of a stock of a company whose current dividend is $10.00 and whose dividends
had been expected to grow by 3% but now are expected to grow by 4% per year?
A) 4.0%
B) 17.8%
C) 25%
D) 33.3%
Productivity growth occurs when:
A) there are more inputs
B) firms can produce more output per unit of input
C) more output is produced
D) employees work extra hours
An options contract
A) confers the rights to buy or sell an underlying asset at a predetermined price by a
predetermined time.
B) is another name for a futures contract.
C) may be written for debt instruments, but not equities.
D) may be written for equities, but not for debt instruments.
In 1913, Congress and the President did not envision that the Fed would control
A) the money supply.
B) discount loans.
C) lender-of-last-resort activity.
D) broad control over most aspects of money and the banking system.
Employees of brokerage firms that rely on forecasting future profits of firms in order to
forecast future stock prices are called
A) rational analysts
B) adaptive analysts
C) technical analysts
D) fundamental analysts
If prices increase rapidly
A) money's usefulness as a store of value is diminished.
B) money increases in value.
C) deflation is likely.
D) prices will decline to their normal level.
By how much did real investment decline between 1929 and 1933?
A) 18%
B) 20%
C) 27%
D) 81%
John Smith leaves his job in New York to go to California in hopes of finding a better
one. If John Smith is unemployed while searching for a job in California, economists
would consider him to be
A) frictionally unemployed.
B) structurally unemployed.
C) cyclically unemployed.
D) naturally unemployed.
When the Fed sells foreign assets and buy domestic assets at the same time,
A) its assets and liabilities rise by the same amount.
B) its assets and liabilities fall by the same amount.
C) the composition of its assets changes, but its liabilities are unaffected.
D) the composition of its liabilities changes, but its assets are unaffected.
Which of the following expressions is correct?
A) B = + BR
B) BR = + B
C) = B + BR
D) = -BR - B
Currently, a three-month Treasury bill has a yield of 5% while the yield on a ten-year
Treasury bond is 4.7%. What is the risk premium of the typical A-rated ten-year
corporate bond with a yield of 5.5%?
A) 0.5%
B) 0.8%
C) 5.5%
D) 1.17%
Acme Widget tells investors it wants to build a new widget factory and sell investors
$10,000,000 in bonds to finance it. Once they have raised the $10,000,000 the owners
of Acme Widget use the funds to finance a trip to Atlantic City to try out a new scheme
they have devised to win at blackjack. This is an example of
A) the adverse selection problem in financial markets.
B) the moral hazard problem in financial markets.
C) the difficulty lenders have in distinguishing good from lemon firms.
D) the problems with using rational expectations in financial markets.
In effect, banks are able to charge
A) depositors for banks' superior information about borrowers.
B) borrowers for banks' superior information about depositors.
C) the government for banks' superior information about borrowers and depositors.
D) interest rates that are in fact above those legally allowed.
The risk premium of corporate bonds typically increases
A) when the average price of corporate bonds increase.
B) during a recession.
C) when the interest rates on corporate bonds decreases.
D) when the risk premium on treasury bonds increases.
Changes in net worth and liquidity may significantly affect the volume of lending and
economic activity according to the
A) interest rate channel.
B) balance sheet channel.
C) money channel.
D) bank lending channel.
A consequence of the impact lag is that the Fed
A) may not know the impact of a change in policy.
B) might not be able to correct a mistaken policy soon enough.
C) may not have current information about the state of the economy.
D) may see the impact of a change in policy on inflation, but not economic growth.
Steve Forbes has run for president twice on a program of a "flat tax." Under a flat tax,
there would be only one tax bracket for the federal income tax and most tax deductions
and tax exemptions would be eliminated. Suppose that Forbes wins the 2016
presidential election. What would be the likely impact on the market for municipal
What are the various ways that financial intermediaries can take advantage of
economies of scale?
Explain how a bubble can develop in the market for an asset.
Describe the debt-deflation process.
How does adverse selection affect the willingness of corporations to issue stock?
How does proprietary trading expose investment banks to interest-rate and credit risk?
Make use of a graph of the foreign exchange market to show how the Brazilian Central
Bank can use an unsterilized intervention to reduce the value of its currency, the real, in
terms of the dollar.
What are the advantages of bank deposits compared to other types of assets?
Suppose you purchase a call option with a strike price of $85 for an options price of $10
How much profit will you earn if you exercise it when the price is $100?
If you think that there is a 75% chance of a stock increasing by 8% and a 25% change
of it falling by 20%, what is the expected return on the stock? Report using percentages
with two decimal places.
During 2000, the government repurchased $30 billion in U.S. Treasury bonds
outstanding. This was the first time this had been done since the administration of
Herbert Hoover in the early 1930s. Analyze the impact of this repurchase on the bond
A one-year discount bond has a face value of $1000 and price of $880. What is the yield
to maturity on the bond? Report using percentages with two decimal places.
Suppose the stock market crashes resulting in a significant decline in the wealth of
consumers. Make use of the IS-MP model to illustrate the impact this has on the
economy. How is the Fed likely to respond? Show the impact of the change in monetary
policy on the graph of the IS-MP model.
In what ways did the stock market crash of 1929 increase the severity of the downturn?
Briefly discuss three reasons why firms may borrow funds from a bank.
What was the intent behind the intervention of the Fed and Treasury in financial
markets during the Financial Crisis of 2007-2009?
What information is typically included in a prospectus?