A central bank’s attempt to prevent an appreciation of its currency can stimulate
domestic inflation if the ________ of its currency leads to ________ international
reserves which ________ the monetary base.
A) purchase; higher; increases
B) purchase; lower; decreases
C) sale; lower; decreases
D) sale; higher; increases
Forward contracts are of limited usefulness to financial institutions because
A) of default risk.
B) it is impossible to hedge risk.
C) they are relatively inflexible.
D) of interest-rate risk.
Monetary policy authorities can affect real interest rates
A) in the short run, but not in the long run.
B) in the long run, but not in the short run.
C) permanently.
D) both in the long run and the short run.
The belief that bank failures were regularly caused by fraud or the lack of sufficient
bank capital explains, in part, the passage of
A) the National Bank Charter Amendments of 1918.
B) the Garn-St. Germain Act of 1982.
C) the National Bank Act of 1863.
D) Federal Reserve Act of 1913.
A continuing increase in the growth of the money supply is likely followed by
A) a recession.
B) a depression.
C) an increase in the price level.
D) no change in the economy.
________ in the domestic interest rate causes the demand for domestic assets to shift to
the left and the domestic currency to ________, everything else held constant.
A) An increase; appreciate
B) An increase; depreciate
C) A decrease; appreciate
D) A decrease; depreciate
The Second Bank of the United States
A) was disbanded in 1811 when its charter was not renewed.
B) had its charter renewal vetoed in 1832.
C) is considered to be the primary cause of the bank panic of 1907.
D) None of the above.
The Fed can exert more precise control over ________ than it can over ________.
A) high-powered money; reserves
B) high-powered money; the monetary base
C) the monetary base; high-powered money
D) reserves; high-powered money
The Fed’s discount lending is of three types: ________ is the most common category;
________ is given to a limited number of banks in vacation and agricultural areas;
________ is given to banks that have experienced severe liquidity problems.
A) seasonal credit; secondary credit; primary credit
B) secondary credit; seasonal credit; primary credit
C) primary credit; seasonal credit; secondary credit
D) seasonal credit; primary credit; secondary credit
The number and availability of discount brokers has grown rapidly since the mid-1970s.
The efficient markets hypothesis predicts that people who use discount brokers
A) will likely earn lower returns than those who use full-service brokers.
B) will likely earn about the same as those who use full-service brokers, but will net
more after brokerage commissions.
C) are going against evidence suggesting that full-service brokers can help outperform
the market.
D) are likely to outperform the market by a wide margin.
The long-run aggregate supply curve is a vertical line passing through
A) the natural rate of output.
B) the natural-rate price level.
C) the actual rate of unemployment.
D) the expected rate of inflation.
Banks hold capital because
A) they are required to by regulatory authorities.
B) higher capital increases the returns to the owners.
C) it increases the likelihood of bankruptcy.
D) higher capital increases the return on equity.
The agreement to provide a standardized commodity to a buyer on a specific date at a
specific future price is
A) a put option.
B) a call option.
C) a futures contract.
D) a mortgage-backed security.
In financial markets, when a firm issuing new securities has previously issued
securities, these securities are called
A) seasoned issues.
B) an initial public offering.
C) secondary issues.
D) investment-grade issues.
Property promised to the lender as compensation if the borrower defaults is called
A) collateral.
B) deductibles.
C) restrictive covenants.
D) contingencies.
If the Fed decides to reduce bank reserves, it can
A) purchase government bonds.
B) extend discount loans to banks.
C) sell government bonds.
D) print more currency.
Everything else held constant, an increase in the time deposit ratio will result in
________ in the M1 money multiplier and ________ in the M2 money multiplier.
A) an increase; an increase
B) no change; an increase
C) a decrease; a decrease
D) no change; a decrease
The time-inconsistency problem in monetary policy can occur when the central bank
conducts policy
A) using a nominal anchor.
B) using a strict and inflexible rule.
C) on a discretionary, day-by-day basis.
D) using a flexible, discretionary rule.
The key factor leading to the financial crises in Mexico and the East Asian countries
was
A) a deterioration in banks’ balance sheets because of increasing loan losses.
B) severe fiscal imbalances.
C) a sharp increase in the stock market.
D) a sharp decline in interest rates.
The quantity of reserves supplied equals
A) nonborrowed reserves minus borrowed reserves.
B) nonborrowed reserves plus borrowed reserves.
C) required reserves plus borrowed reserves.
D) total reserves minus required reserves.
The current structure of financial markets can be best understood as the result of
attempts by financial market participants to
A) adapt to continually changing government regulations.
B) deal with the great number of small firms in the United States.
C) reduce transaction costs.
D) cartelize the provision of financial services.
When a bank suspects that a $1 million loan might prove to be bad debt that will have
to be written off in the future the bank
A) can set aside $1 million of its earnings in its loan loss reserves account.
B) reduces its reported earnings by $1, even though it has not yet actually lost the $1
million.
C) reduces its assets immediately by $1 million, even though it has not yet lost the $1
million.
D) reduces its reserves by $1 million, so that they can use those funds later.
The financing of government spending by issuing debt
A) causes both reserves and the monetary base to rise.
B) causes both reserves and the monetary base to decline.
C) causes reserves to rise, but the monetary base to decline.
D) has no net effect on the monetary base.
Which of the following is a TRUE statement?
A) Money or the money supply is defined as Federal Reserve notes.
B) The average price of goods and services in an economy is called the aggregate price
level.
C) The inflation rate is measured as the rate of change in the federal government budget
deficit.
D) The aggregate price level is measured as the rate of change in the inflation rate.
While legislation enacted in 1998 granted the Bank of Japan new powers and greater
autonomy, its critics contend that its independence is
A) limited by the Ministry of Finance’s veto power over a portion of its budget.
B) too great because it need not pursue a policy of price stability even if that is the
popular will of the people.
C) too great since the Ministry of Finance no longer has veto power over the bank’s
budget.
D) limited since the Ministry of Finance can dismiss senior bank officials.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 created an
Office of Credit Ratings at the SEC with its own staff and the authority to fine
credit-rating agencies and to deregister an agency if it produces bad ratings. This is an
example of which remedy of conflicts of interest?
A) regulate for transparency
B) supervisory oversight
C) leave it to the market
D) socialization of information production
Because of securitization, a new class of residential mortgages offered to borrowers
with less-than-stellar credit records developed. These mortgages are known as
A) risk-enhanced mortgages.
B) subprime mortgages.
C) bundled mortgages.
D) adjustable-rate mortgages.
Most of a bank’s operating income results from
A) interest on assets.
B) service charges on deposit accounts.
C) off-balance-sheet activities.
D) fees from standby lines of credit.
A situation in which the quantity of bonds supplied exceeds the quantity of bonds
demanded is called a condition of excess supply; because people want to sell ________
bonds than others want to buy, the price of bonds will ________.
A) fewer; fall
B) fewer; rise
C) more; fall
D) more; rise
The monetary policy strategy that does NOT allow the policy to focus on domestic
considerations is
A) exchange-rate targeting.
B) monetary targeting.
C) inflation targeting.
D) the implicit nominal anchor.
Real interest rates are difficult to measure because
A) data on them are not available in a timely manner.
B) real interest rates depend on the hard-to-determine expected inflation rate.
C) they fluctuate too often to be accurate.
D) they cannot be controlled by the Fed.
The Fed accidentally discovered open market operations when
A) it came to the rescue of failing banks in the early 1930s, and found that its purchases
of bank loans injected reserves into the banking system.
B) it purchased securities for income following the 1920-1921 recession.
C) it attempted to slow inflation in 1919 by selling securities and found that its sales
drained reserves from the banking system.
D) it reinterpreted a key provision of the Federal Reserve Act.
The problem created by asymmetric information before the transaction occurs is called
________, while the problem created after the transaction occurs is called ________.
A) adverse selection; moral hazard
B) moral hazard; adverse selection
C) costly state verification; free-riding
D) free-riding; costly state verification