In order to reduce risk and increase the safety of financial institutions, commercial
banks and other depository institutions are prohibited from
A) owning municipal bonds.
B) making real estate loans.
C) making personal loans.
D) owning common stock.
The lon-run aggregate supply curve can be expressed by
A) output as a function of potential output.
B) inflation as a function of past inflation.
C) inflation as a function of past inflation and output gap.
D) output as a function of inflation and output gap.
If the economy suffers a permanent negative supply shock because there is an increase
in regulations that permanently reduce the level of potential output, then
A) potential output falls.
B) the long-run aggregate supply curve shifts leftward.
C) the short-run aggregate supply curve shifts upward.
D) all of the above.
From the standpoint of ________, specialization in lending is surprising but makes
perfect sense when one considers the ________ problem.
A) moral hazard; diversification
B) diversification; moral hazard
C) adverse selection; diversification
D) diversification; adverse selection
If the price level doubles, the value of money
A) doubles.
B) more than doubles, due to scale economies.
C) rises but does not double, due to diminishing returns.
D) falls by 50 percent.
When money prices are used to facilitate comparisons of value, money is said to
function as a
A) unit of account.
B) medium of exchange.
C) store of value.
D) payments-system ruler.
The guiding principle for the conduct of monetary policy that held that as long as loans
were being made for “productive” purposes, then providing reserves to the banking
system to make these loans would not be inflationary became known as the
A) free reserves doctrine.
B) Benjamin Strong doctrine.
C) efficient liquidity doctrine.
D) real bills doctrine.
The equation of exchange is
A) M × P = V × Y.
B) M + V = P + Y.
C) M + Y = V + P.
D) M × V = P × Y.
With a 10 percent interest rate on dollar deposits, and an expected appreciation of 7
percent over the coming year, the expected return on dollar deposits in terms of the
dollar is
A) 3 percent.
B) 10 percent.
C) 13.5 percent.
D) 17 percent.
If a bank has excess reserves greater than the amount of a deposit outflow, the outflow
will result in equal reductions in
A) deposits and reserves.
B) deposits and loans.
C) capital and reserves.
D) capital and loans.
Fraudulent practices and other abuses of private pension funds led Congress to enact the
A) FDIC Act.
B) Federal Reserve Act.
C) FHLBS.
D) Employee Retirement Income Security Act.
Monetarists directly study the link between money and economic activity using
A) structural models.
B) reduced-form models.
C) scientific models.
D) experimental models.
The higher a security’s price in the secondary market the ________ funds a firm can
raise by selling securities in the ________ market.
A) more; primary
B) more; secondary
C) less; primary
D) less; secondary
The countries that have made the least use of securities markets are ________ and
________; in these two countries finance from financial intermediaries has been almost
ten times greater than that from securities markets.
A) Germany; Japan
B) Germany; Great Britain
C) Great Britain; Canada
D) Canada; Japan
A clause in a debt contract requiring that the borrower purchase insurance against loss
of the asset financed with the loan is called a
A) collateral-insurance clause.
B) prescription covenant.
C) restrictive covenant.
D) proscription covenant.
By taking the long position on a futures contract of $100,000 at a price of 96 you are
agreeing to ________ a ________ face value security for ________.
A) sell; $100,000; $96,000.
B) sell; $96,000; $100,000.
C) buy; $100,000; $96,000.
D) buy; $96,000; $100,000.
Banks, savings and loan associations, mutual savings banks, and credit unions
A) are no longer important players in financial intermediation.
B) since deregulation now provide services only to small depositors.
C) have been adept at innovating in response to changes in the regulatory environment.
D) produce nothing of value and are therefore a drain on society’s resources.
The stock market is
A) where interest rates are determined.
B) the most widely followed financial market in the United States.
C) where foreign exchange rates are determined.
D) the market where most borrowers get their funds.
The total quantity of an economy’s final goods and services demanded at different
inflation rates is
A) the aggregate supply curve.
B) the aggregate demand curve.
C) the Phillips curve.
D) the aggregate expenditure function.
Everything else held constant, when stock prices become less volatile, the demand
curve for bonds shifts to the ________ and the interest rate ________.
A) right; rises
B) right; falls
C) left; falls
D) left; rises
If reserves in the banking system increase by $200, then checkable deposits will
increase by $500 in the simple model of deposit creation when the required reserve
ratio is
A) 0.04.
B) 0.25.
C) 0.40.
D) 0.50.
Which of the following is not a financial derivative?
A) stock
B) futures
C) options
D) forward contracts
A permanent negative supply shock leads to ________ output ________.
A) higher; in both the short and long runs
B) higher; in the short run but not in the long run
C) lower; in both the short and long runs
D) lower; in the short run but not in the long run
An example of the problem of ________ is when a corporation uses the funds raised
from selling bonds to fund corporate expansion to pay for Caribbean cruises for all of
its employees and their families.
A) adverse selection
B) moral hazard
C) risk sharing
D) credit risk
One of the concerns of increased bank consolidation is the reduction in community
banks which could result in
A) less lending to small businesses.
B) loss of cultural identity.
C) higher interest rates.
D) more bank regulation.
The Japanese banking system went through a cycle of ________ in the 1990s similar to
the one that occurred in the U.S. in the 1980s.
A) regulatory forbearance
B) policy antagonism
C) regulatory ignorance
D) policy renewal
An increase in the liquidity of corporate bonds will ________ the price of corporate
bonds and ________ the yield of Treasury bonds, everything else held constant.
A) increase; increase
B) reduce; reduce
C) increase; reduce
D) reduce; increase
The most significant change in the economic environment that changed the demand for
financial products in recent years has been
A) the aging of the baby-boomer generation.
B) the dramatic increase in the volatility of interest rates.
C) the dramatic increase in competition from foreign banks.
D) the deregulation of financial institutions.
Because it is a unit of account, money
A) increases transaction costs.
B) reduces the number of prices that need to be calculated.
C) does not earn interest.
D) discourages specialization.
The price of a barrel of oil doubled between 2007 and the middle of 2008. To make
matters worse, a financial crisis hit the U.S. economy starting in August of 2007. Which
of the following is TRUE of the United Kingdom’s experience?
A) The increase in the price of oil immediately shifted the AS curve to the left.
B) The financial crisis did not take hold right away so the AD curve did not
immediately shift.
C) Eventually, the Lehman Brothers bankruptcy caused a negative demand shock
leading to a further fall in output and an increase in the unemployment rate.
D) All of the above.
E) None of the above.
The seller of an option has the ________ to buy or sell the underlying asset while the
purchaser of an option has the ________ to buy or sell the asset.
A) obligation; right
B) right; obligation
C) obligation; obligation
D) right; right