In an economy, the actual inflation rate is increasing while the ideal inflation rate is
constant. In such a case, the inflation gap in the economy will
a. increase over time.
b. decrease over time.
c. stay the same.
d. initially decrease then increase.
Answer:
Suppose the economy is thought to be 1 percent below potential (i.e., the output gap is
−1 percent), when potential output grows 4 percent per year. Suppose the Fed is
following the Taylor rule, with an inflation rate of 4 percent over the past year. The
equilibrium real fed funds rate is 3 percent and the weights on the output gap and
inflation gap are 0.5 each. The federal funds rate is 8.5 percent. What is the inflation
target?
a. 0 percent
b. 1 percent
c. 2 percent
d. 3 percent
Answer:
One way that homeowners and banks can share the risk of inflation is through
a. fixed-rate mortgages.
b. refinancing.
c. default.
d. adjustable-rate mortgages.
Answer:
Which of the following is likely to happen to short-term and long-term interest rates
during recessions?
a. The short-term interest rates rise during recessions but the long-term interest rates fall
during recessions.
b. The short-term interest rates fall during recessions but the long-term interest rates rise
during recessions.
c. Both the short-term and the long-term interest rates fall during recessions.
d. Both the short-term and the long-term interest rates rise during recessions.
Answer:
In the CAPM, a stock has a beta coefficient of 0.1. The average returns to all stocks in
the market is 10%. If the interest rate on three-month T-bills is at around 2 percent,
what is the expected return to this stock? Assume that unsystematic risk is zero.
a. 2.5 percent
b. 5.0 percent
c. 7.5 percent
d. 10.0 percent
Answer:
The lag between when a change in policy is decided and when it is put into action is
referred to as the ____lag.
a. implementation
b. recognition
c. effectiveness
d. decision
Answer:
If the natural rate of unemployment is 2 percent and the unemployment rate is 5
percent, then the unemployment gap is
a. −5.8 percent.
b. −0.3 percent.
c. +0.3 percent.
d. +5.8 percent.
Answer:
Borrowers who default are more likely to seek loans than the borrowers who don’t
default. This is an example of
a. irrational expectations.
b. rent-seeking behavior.
c. moral hazard.
d. adverse selection.
Answer:
Treasury bills issued by the U.S. government that mature in a year or less are similar to
a. perpetuities.
b. discount bonds.
c. coupon bonds.
d. fixedincome securities.
Answer:
When the Fed engages in an overnight reverse repo
a. a bank agrees to hold a certain amount of clearing balances at the Fed.
b. the fed sells securities and agrees to buy them back in one day.
c. a primary government securities dealer agrees to sell a security to the Fed one day
and buy it back the next day.
d. The Fed repossesses property that a bank owns as punishment for the bank’s failure
to pay off a discount loan.
Answer:
In recessions, the average real return to the stock market is often
a. negative.
b. between 0% to 5%.
c. between 5% to 10%.
d. between 10% to 20%.
Answer:
The Federal Deposit Insurance Corporation is the main supervisor for
a. national banks that are part of a financial holding company or a bank holding
company.
b. national banks that are not in a financial holding company or a bank holding
company.
c. state banks that are not members of the Federal Reserve System.
d. state banks that do not have Federal Deposit Insurance Corporation insurance.
Answer:
In the ATM model, if the nominal interest rate declines, then the
a. number of days between visits to the ATM and the quantity of money demanded both
rise.
b. number of days between visits to the ATM and the quantity of money demanded both
fall.
c. number of days between visits to the ATM rises and the quantity of money demanded
falls.
d. number of days between visits to the ATM falls and the quantity of money demanded
rises.
Answer:
Which of the following is NOT a function of money?
a. It acts as a medium of exchange.
b. It acts as a Store of value.
c. It enables barter trade.
d. It can be used as a standard of deferred payment.
Answer:
To prop up a currency, a country must
a. reduce its interest rates.
b. limit the movement of capital.
c. use its reserves to purchase its own currency in the foreign-exchange market.
d. sell its gold stock.
Answer:
Which of the following is likely to happen to short-term and long-term interest rates
during expansions?
a. Both the short-term and the long-term interest rates rise during expansions.
b. The short-term interest rates fall during expansions but the long-term interest rates
rise during expansions.
c. Both the short-term and the long-term interest rates fall during expansions.
d. The short-term interest rates rise during expansions but the long-term interest rates
fall during expansions.
Answer:
The Office of the Comptroller of the Currency is the main supervisor for
a. national banks that are part of a financial holding company or a bank holding
company.
b. national banks that are not in a financial holding company or a bank holding
company.
c. state banks that are not members of the Federal Reserve and are not in a financial
holding company or a bank holding company.
d. state banks that are members of the Federal Reserve System.
Answer:
During the holiday season in December, people use more currency than usual. To offset
this increase in demand for money, the Fed increases the money supply through
a. defensive open-market operations.
b. dynamic open-market operations.
c. discount loans for profit.
d. discount loans for business needs.
Answer:
Which of the following statements is true?
a. During recessions, there is an increase in the demand for debt securities.
b. During recessions, there is an increase in the supply of debt securities.
c. During recessions, the supply-curve of debt securities shift comparatively more, to
the left, than the demand- curve for securities.
d. During recessions, the demand-curve for debt securities shift comparatively more, to
the left, than the supply- curve of securities.
Answer:
Consider the following production function
Y= A×Ka×L1−a.
If a = 0.5, over the past year output grew by 2 percent, total factor productivity grew 1
percent , and labor grew by 1 percent, capital grew by
a. 1 percent.
b. 0.5 percent
c. 2 percent.
d. 2.5 percent.
Answer:
Under the fiat money system, the revenue that the government makes on every coin
issued is referred to as
a. fiat revenue.
b. fullbodied revenue.
c. money tax.
d. seignorage revenue.
Answer:
The nominal interest rate in an economy decreases when
a. the aggregate demand curve shifts to the left.
b. the money supply curve shifts to the left.
c. the aggregate supply curve shifts to the right.
d. the money demand curve shifts to the left.
Answer:
Realized capital gains are
a. increases in the value of a firm that occur because a firm has retained earnings that
are exempt from corporate profits taxes.
b. capital gains that are owned by foreigners.
c. capital gains that an investor receives from actually selling stock.
d. capital gains that have been accrued but not yet received because the stock has not
been sold.
Answer:
Which of the following equations is true of aggregate demand?
a. Aggregate demand = consumption + investment – government spending – net exports
b. Aggregate demand = consumption – investment – government spending – net exports
c. Aggregate demand = consumption + investment + government spending + net
exports
d. Aggregate demand = consumption – investment + government spending + net exports
Answer:
When two producers are trading without money, each must want what the other
produces. This requirement is referred to as
a. the barter condition.
b. double coincidence of wants.
c. comparative advantage.
d. specialization in production.
Answer:
Beth’s financial adviser has asked her to invest in a number of securities rather than
investing in one. This is an example of
a. securitization.
b. free-riding.
c. sterilization.
d. diversification.
Answer:
Which of the following statements is true?
a. In a static model, an economy is assumed to start at a point where all variables are
constant.
b. In the dynamic model of money, the longer prices take to adjust to shocks, the more
longlived is the liquidity effect.
c. In the dynamic model of money, all variables are initially growing at an increasing
rate but they eventually reach a steady state.
d. Money supply is the only endogenous variable in the dynamic model of money.
Answer:
In the U.S., data on potential output come from
a. estimates made by the Congressional Budget Office.
b. data calculated by the Bureau of Trade.
c. estimates generated by the National Bureau of Economic Research.
d. forecasts from the United Nations Development Program.
Answer:
The ease with which you can buy or sell a security in the secondary market when you
want to without incurring significant costs is known as
a. liquidity.
b. risk.
c. secondary marketization.
d. secondary market penetration.
Answer:
Consider three investments, where expected return is the expected value of the total
return and risk is measured by the standard deviation. The investments are identical in
every way except for their expected return and risk:
Investment A: expected return = 2 percent, risk = 5 percent
Investment B: expected return = 5 percent, risk = 4 percent
Investment C: expected return = 14 percent, risk = 20 percent
Investment D expected return = 6 percent, risk = 12 percent
If a risk-averse investor can buy only one of the three investments and compares each
investment with the other three, which investment option would he never choose?
a. Investment A, because its expected return is lower than Investment B and its risk is
higher.
b. Investment B, because its expected return is so much lower than Investment C.
c. Investment C, because its risk exceeds its expected return.
d. Investments D, because the expected return to investment D is so much lower than
Investment C.
Answer:
Another name for an equity security is
a. bond.
b. debt.
c. option.
d. stock.
Answer:
In the United States, the biggest issuers of debt securities are
a. households.
b. business firms.
c. governments.
d. financial intermediaries.
Answer:
Suppose a bank has $200 million as transaction deposits, and holds $25 million as
reserves. If the reserve requirement is uniformly 10% on any positive amount, the
bank’s excess reserves equals
a. $25 million.
b. $10 million.
c. $5 million.
d. $1 million.
Answer: