The amount paid for an option is the
A) strike price.
B) premium.
C) discount.
D) yield.
The primary purpose of deposit insurance is to
A) improve the flow of information to investors.
B) prevent banking panics.
C) protect bank shareholders against losses.
D) protect bank employees from unemployment.
Suppose that there is a negative aggregate demand shock and the central bank commits
to an inflation rate target. If the commitment is credible, then
A) the public’s expected inflation will remain unchanged.
B) the short-run aggregate supply curve will rise.
C) over time inflation will fall.
D) all of the above.
E) both A and C.
Keynes’s model of the demand for money suggests that velocity is ________ related to
________.
A) positively; interest rates
B) negatively; interest rates
C) positively; bond values
D) positively; stock prices
A ________ makes investment in established businesses which are publicly traded and
takes them private.
A) sovereign wealth fund
B) capital buyout fund
C) hedge fund
D) venture capital fund
Suppose that Wells Fargo Home Mortgage sells $10 million worth of mortgage
payments to GMAC in exchange for $10 million in auto loan payments. This type of
transaction is called a
A) credit option.
B) credit swap.
C) credit-linked note.
D) credit default swap.
Everything else held constant, an increase in interest rates on student loans
A) increases the cost of a college education.
B) reduces the cost of a college education.
C) has no effect on educational costs.
D) increases costs for students with no loans.
The volume of loans that the Fed makes to banks is affected by the Fed’s setting of the
interest rate on these loans, called the
A) federal funds rate.
B) prime rate.
C) discount rate.
D) interbank rate.
From the earlier 1990s until 2012, the Japanese monetary was ________ and stock and
real estate prices were ________.
A) tight; rising.
B) easy; rising.
C) tight; falling.
D) easy; falling.
Unanticipated moral hazard contingencies can be reduced by
A) screening.
B) long-term customer relationships.
C) specialization in lending.
D) credit rationing.
________ and ________ may provide an explanation for stock market bubbles.
A) Overconfidence; social contagion
B) Underconfidence; social contagion
C) Overconfidence; social isolationism
D) Underconfidence; social isolationism
When the economy is hit by a negative demand shock and the central bank does not
respond by changing the autonomous component of monetary policy, then
A) inflation will be lower.
B) output will be at its potential.
C) output will be lower.
D) inflation will not change.
E) both A and B.
The Volcker Rule addresses the off-balance-sheet problem involving
A) trading risks.
B) selling loans.
C) loan guarantees.
D) interest rate risks.
Reducing risk through the purchase of assets whose returns do not always move
together is
A) diversification.
B) intermediation.
C) intervention.
D) discounting.
Lucas argues that when policies change, expectations will change thereby
A) changing the relationships in econometric models.
B) causing the government to abandon its discretionary stance.
C) forcing the Fed to keep its deliberations secret.
D) making it easier to predict the effects of policy changes.
During business cycle expansions when income and wealth are rising, the demand for
bonds ________ and the demand curve shifts to the ________, everything else held
constant.
A) falls; right
B) falls; left
C) rises; right
D) rises; left
The ________, the difference between the interest rate on Baa corporate bonds and U.S.
Treasury bonds. rose sharply during the Great Depression.
A) credit boom
B) credit spread
C) adjustable-rate
D) default swap
Arguments for adopting a policy rule include
A) discretion avoids the straightjacket that would lock in the wrong policy if the model
that was used to derive the policy rule proved to be incorrect.
B) discretion enables policy makers to change policy settings when an economy
undergoes structural changes.
C) discretionary policies pursue overly expansionary monetary policies to boost
employment in the short run but generate higher inflation in the long run.
D) all of the above.
The problems of raising the level of the inflation target include
A) if the zero-lower-bound problem is rare, then the benefits of a higher inflation target
are not very large.
B) the costs of higher inflation in terms of the distortions it produces in the economy
are high.
C) it is more difficult to stabilize the inflation rate at a higher targeting level.
D) all of the above.
A lesson of the Enron collapse is that government regulation
A) always fails.
B) can reduce but not eliminate asymmetric information.
C) increases the problem of asymmetric information.
D) should be reduced.
If unplanned investment is negative, firms will ________ production and output will
________.
A) cut; rise
B) cut; fall
C) increase; rise
D) increase; fall
Suppose the economy is producing below the natural rate of output and the government
is suffering from large budget deficits. To deal with the deficit problem, suppose the
government takes a policy action to reduce the size of the deficits. This policy action
will cause ________ in the unemployment rate in the short run and ________ in
inflation in the short run, everything else held constant.
A) an increase; an increase
B) a decrease; a decrease
C) a decrease; an increase
D) an increase; a decrease
Economic theory suggests that ________ interest rates are ________ important than
________ interest rates in explaining investment behavior.
A) nominal; more; real
B) real; less; nominal
C) real; more; nominal
D) market; more; real
Which of the following are TRUE of fixed payment loans?
A) The borrower repays both the principal and interest at the maturity date.
B) Installment loans and mortgages are frequently of the fixed payment type.
C) The borrower pays interest periodically and the principal at the maturity date.
D) Commercial loans to businesses are often of this type.
In the Keynesian cross diagram, an increase in investment spending because companies
become more optimistic about investment profitability causes the aggregate demand
function to shift ________, the equilibrium level of aggregate output to rise, and the IS
curve to shift to the ________, everything else held constant.
A) up; left
B) up; right
C) down; left
D) down; right
________ in the expected future domestic exchange rate causes the demand for
domestic assets to shift to the right 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 Fed’s lender-of-last-resort function
A) has proven to be ineffective.
B) cannot prevent runs by large depositors.
C) is no longer necessary due to FDIC insurance.
D) creates a moral hazard problem.
________ is a flow of earnings per unit of time.
A) Income
B) Money
C) Wealth
D) Currency
People have a strong incentive to form rational expectations because
A) they are guaranteed of success in the stock market.
B) it is costly not to do so.
C) it is costly to do so.
D) everyone wants to be rational.
An increase in the riskiness of corporate bonds will ________ the yield on corporate
bonds and ________ the yield on Treasury securities, everything else held constant.
A) increase; increase
B) reduce; reduce
C) increase; reduce
D) reduce; increase
For restrictive covenants to help reduce the moral hazard problem, they must be
________ by the lender.
A) monitored and enforced
B) written in all capitals
C) easily changed
D) impossible to remove
According to rational expectations theory, forecast errors of expectations
A) are more likely to be negative than positive.
B) are more likely to be positive than negative.
C) tend to be persistently high or low.
D) are unpredictable.
Because ________ are less liquid for the depositor than ________, they earn higher
interest rates.
A) savings accounts; time deposits
B) money market deposit accounts; time deposits
C) money market deposit accounts; savings accounts
D) time deposits; savings accounts
Since Regulation Q has been abolished, there have been doubts raised about the size of
the effect of the ________ channel.
A) balance sheet
B) bank lending
C) cash flow
D) unanticipated price level