Alt-A borrowers were those who
A) used mortgages to purchase apartments.
B) chose adjustable-rate mortgages instead of fixed-rate mortgages.
C) borrowed using “interest-only” mortgages.
D) did not provide documentation of their income when applying for a mortgage.
Answer:
Economies of scale are
A) charges to savers and borrowers imposed by banks in exchange for reducing
transactions costs.
B) the reduction in costs per unit that accompanies an increase in volume.
C) decreases in transactions costs that occur as information costs increase.
D) decreases in information costs that occur as transactions costs increase.
Answer:
A decrease in expected inflation
A) usually leads to falling nominal interest rates.
B) results in increased nominal capital gains on physical assets.
C) will shift the bond demand curve to the left.
D) will shift the supply curve for loanable funds to the left.
Answer:
The Glass-Steagall Act was designed to
A) legally separate investment banking from commercial banking.
B) promote mergers in the banking industry.
C) impose high capital ratios on investment banks.
D) promote the interests of community banks.
Answer:
Differences in price levels
A) explain well actual exchange rate movements.
B) are not capable of explaining well actual exchange rate movements, particularly in
the short run.
C) have been small for most countries in the post-World War II period.
D) only can be explained by the fact that little foreign trade actually takes place.
Answer:
Money as a medium of exchange refers only to
A) currency.
B) gold coins.
C) anything that is generally accepted as payment for goods and services.
D) checks at commercial banks.
Answer:
By providing and communicating information, the financial system
A) reduces the difference between the return on three-month U.S. Treasury bills and the
return on thirty-year U.S. Treasury bonds.
B) relieves individual savers from the necessity of searching out individual borrowers.
C) eliminates the risk in investing in the stock market.
D) guarantees investors a reasonable return on their money.
Answer:
If the price of a Toyota Camry is Y2,000,000 and the price of a Ford Fusion is $20,000,
according to the law of one price, the exchange rate between the yen and the dollar
should be:
A) Y100 = $1
B) $100 = Y1
C) Y1,980,000=$1
D) the law of one price does not apply since the goods are differentiated
Answer:
A loan officer uses a credit scoring system to
A) compare the interest rate on a loan to interest rates on other assets with comparable
risk.
B) keep track of the fraction of a bank’s assets tied up in loans to a single individual or
business.
C) predict statistically whether an individual is likely to default on a loan.
D) match any particular loan with the deposits being used to fund it.
Answer:
The gold standard probably made the Great Depression more severe in the United
States because
A) the value of gold declined sharply during those years.
B) the existence of the gold standard kept prices from falling.
C) the money supply in the United States increased rapidly as gold flowed into the
country.
D) the Fed attempted to reduce gold outflows by raising the discount rate.
Answer:
Geographic restrictions on banks
A) reduce their ability to take advantage of economies of scale.
B) raise the costs of their providing risk-sharing, liquidity, and information services.
C) reduce their exposure to credit risk.
D) reduce the amount of local lending they undertake.
Answer:
Fixed exchange rate regimes
A) existed prior to the nineteenth century but were then superseded by the gold
standard.
B) lower the transactions costs of buying and selling goods and assets.
C) result in higher world interest rates.
D) were first established by the GATT in 1971.
Answer:
Under the expectations theory if market participants expect that future short-term rates
will be higher than current short-term rates, the yield curve will
A) slope upward.
B) slope downward.
C) be flat.
D) slope upward, slope downward, or be flat, depending on risk, liquidity, cost of
information, and tax considerations.
Answer:
An unsterilized intervention in which the central bank sells foreign assets to purchase
domestic currency will result in
A) higher domestic interest rates.
B) lower domestic interest rates.
C) an increase in the money supply.
D) lower domestic interest rates and an increase in the money supply.
Answer:
The idea that nominal interest rates rise or fall one-for-one with expected inflation is
known as
A) market risk.
B) systematic risk.
C) idiosyncratic risk.
D) the Fisher effect.
Answer:
Customers who have long-term relationships with banks
A) pose particular problems with respect to adverse selection.
B) pose particular problems with respect to moral hazard.
C) often obtain credit at a lower rate or with fewer restrictions.
D) are more likely to default or violate restrictive covenants.
Answer:
Rates of inflation in the hundreds or thousands of percent per year are known as
A) super inflation.
B) megainflation.
C) hyperinflation.
D) overinflation.
Answer:
Under the liquidity premium theory, the expectation that future short-term rates will be
constant results in a yield curve that
A) is flat.
B) slopes upward.
C) slopes downward.
D) is flat, slopes upward, or slopes downward, depending on the size of the term
premium at each maturity.
Answer:
Money that has no value other apart from its use as money:
A) is known as commodity money
B) is known as fiat money
C) will result in a return to a barter system
D) will result in rapid inflation
Answer:
What percentage of bank assets were in loans in 2012?
A) 8%
B) 20%
C) 37%
D) 60%
Answer:
In practice, the Board of Governors and FOMC typically defer to the policy proposals
of the:
A) President
B) Chair of the Fed
C) Secretary of Treasury
D) Speaker of the House
Answer:
The expected real interest rate approximately equals
A) the nominal interest rate minus the tax rate.
B) the nominal interest rate minus the expected rate of inflation.
C) the nominal interest rate plus the expected rate of inflation.
D) the yield to maturity on a coupon bond held to maturity.
Answer:
The existence of adverse selection results in:
A) reduced market efficiency
B) an increase in the likelihood of moral hazard
C) increase market transactions
D) higher transaction costs
Answer:
Business finance companies
A) purchase accounts receivable of small firms at a discount.
B) sell commercial paper and buy long-term corporate bonds.
C) take in deposits from savers and buy corporate commercial paper.
D) are strictly regulated by state governments.
Answer:
Alternating periods of economic expansion and recession are known as the:
A) Fisher effect
B) business cycle
C) market risk
D) systematics
Answer:
If the coefficient a in the new classical expression for short-run aggregate supply were
equal to zero,
A) aggregate output would always be at its full-employment level.
B) the short-run aggregate supply curve would slope down.
C) the short-run aggregate supply curve would be a horizontal line.
D) aggregate output would only differ from its full-employment level if the actual price
level did not equal the expected price level.
Answer:
Differences in the taxation of returns
A) only affect the yields of illiquid credit market instruments.
B) have a negligible effect on the yields of credit market instruments.
C) only affect the yields of high-information cost credit market instruments.
D) create differences in yields among credit market instruments.
Answer:
An important problem facing the Fed is that
A) the goals for economic growth and price stability may conflict in the short run.
B) it lost effective control over the monetary base.
C) it has been given responsibility for meeting policy goals, but true control over
monetary policy remains with Congress.
D) it has been given responsibility for meeting policy goals, but true control over
monetary policy remains with the President.
Answer:
It is generally agreed that
A) the financial system would be more efficient if intermediaries were eliminated.
B) small- and medium-sized firms benefit by the actions of intermediaries.
C) the addition of intermediaries adds to transactions costs.
D) intermediaries should not seek to profit from reducing transactions costs.
Answer:
Negotiable certificates of deposit were developed in order to
A) compete for loan business that had been going to the commercial paper market.
B) circumvent interest rate regulations on deposits.
C) increase assets that were acceptable as collateral for discount loans.
D) circumvent reserve requirements.
Answer:
What is the most important contrast between the segmented markets theory and the
expectations theory?
A) The expectation theory states that investors view similar assets that differ only with
respect to maturity as perfect substitutes.
B) The segmented markets theory states that investors view similar assets that differ
only with respect to maturity as perfect substitutes.
C) The expectations theory does a better job of explaining why yield curves typically
are upward-sloping.
D) The segmented markets theory does a better job of explaining why yields on
instruments of different maturities tend to move together.
Answer:
Which of the following is the most efficient means of trade?
A) barter
B) money
C) government rationing
D) the combination of barter with some government rationing
Answer:
What was the approximate value of the U.S. current account balance in 2011?
A) +$10 billion
B) +$79 billion
C) -$380 billion
D) -$475 billion
Answer:
Most of the Fed’s earnings come from
A) fees charged to financial institutions for check clearing.
B) interest on the securities it holds.
C) interest on discount loans.
D) congressional appropriations.
Answer:
Which central bank has its exchange rate as a focus of its monetary policy?
A) Bank of Canada
B) Bank of England
C) European Central Bank
D) Federal Reserve
Answer:
What limited the effectiveness of monetary policy during the Financial Crisis of
2007-2009?
Answer:
What is quantitative easing? What was the Fed’s objective in implementing quantitative
easing?
Answer:
Analyze the following statement: “I know the fact that prices have started to rise rapidly
seems like bad news, but at least prices starting to go up means that output must be
starting to go up as well.”
Answer:
How do investment banks use the results of their research?
Answer:
If the three-month Treasury bill has an interest rate of 0.2%, the ten-tear Treasury bond
has an interest rate of 2.75%, and a ten-year bond issued by Time Warner has an interest
rate of 6%, what is the risk premium on Time Warner’s bond?
Answer:
Compare the characteristics of loans and marketable securities in terms of liquidity,
risk, and information costs.
Answer:
Why do restrictions on capital inflows receive more support from some economists than
restrictions of capital outflows?
Answer:
Compare and contrast hedge funds and mutual funds in terms of the benefits and
drawbacks of each.
Answer:
What are the four explanations given as to why the Fed did not intervene to stabilize the
banking system during the Great Depression?
Answer:
Which aspects of a bank’s operations are evaluated as part of the CAMELS rating
system?
Answer:
A one-year bond has an interest rate of 0.2% and is expected to rise to 0.5% next year
and 1.1% in two years. The term premium for a two-year bond is 0.1% and for a
three-year bond is 0.25%. What are the interest rates on a two-year bond and three-year
bond according to the liquidity premium theory?
Answer:
What are the economic implications of an inverted yield curve?
Answer:
What does research suggest as to the relationship between the independence of the
central bank and inflation? What is the rationale for this relationship?
Answer:
How can restrictive covenants help to reduce moral hazard in bond markets?
Answer:
What should affect the fundamental value of a stock according to the efficient markets
hypothesis?
Answer:
Suppose you buy 100 shares of 3M at $86 a share and sell all shares one year later for
$99 a share. During the year, you earned a dividend of $2.10 a share. What was your
rate of return? Report your answer in percentages with one decimal point.
Answer:
In 2009, global investors began to regain confidence in the financial system and
reversed the flight to safety that had taken place during the depths of the financial crisis.
Make use of a graph of the market for corporate bonds to show the impact on corporate
bonds prices and yields.
Answer:
