An expansionary monetary policy that successfully counteracts a recession has the side
effect of
A) lower investment spending than if no action had been taken.
B) a larger government deficit than if no action had been taken.
C) a higher price level than if no action had been taken.
D) lower output than if no action had been taken.
Answer:
Most economists think changes in which type of unemployment affects inflation?
A) frictional unemployment
B) cyclical unemployment
C) structural unemployment
D) natural rate of unemployment
Answer:
During the financial crisis, which type of risk was the biggest problem faced by
investment banks?
A) interest-rate risk
B) currency risk
C) hedging risk
D) credit risk
Answer:
In which of the following have pension funds invested the most?
A) corporate equities and mutual fund shares
B) government securities
C) corporate bonds
D) mortgages
Answer:
Interest rate fluctuations
A) are usually not considered to be of much importance and are largely ignored by the
Fed.
B) have the paradoxical effect of increasing the rate of economic growth.
C) make it difficult for households and firms to plan for the future.
D) have largely been eliminated by the Fed during the past two decades.
Answer:
An increase in expected inflation results in
A) lower nominal interest rates and higher bond prices.
B) lower real interest rates and higher bond prices.
C) higher real interest rates and lower bond prices.
D) higher nominal interest rates and lower bond prices.
Answer:
Which of the following is considered a default-risk-free instrument?
A) a three-month commercial paper issued by GE
B) a share of stock issued by Google
C) a three-month Treasury bill
D) a ten-year bond issued by Intel
Answer:
When did the Fed first begin to use open market operations as a policy tool?
A) the 1920s
B) the 1930s
C) the 1960s
D) the 1980s
Answer:
Almost every time that there has been an inverted yield curve, what took place within
one year?
A) recession
B) rising inflation
C) financial crisis
D) higher bond yields
Answer:
Symmetric information
A) is the same as perfect information.
B) holds under the assumption of rational expectations.
C) is true only in efficient markets.
D) means that savers and borrowers have the same information.
Answer:
One method that lenders use to mitigate the adverse selection problem is to
A) charge higher interest rates to less creditworthy borrowers.
B) monitor closely the behavior of borrowers after a loan is made.
C) ration credit.
D) provide default insurance.
Answer:
A stock option is said to be “out of the money” if:
A) the strike price equals the exercise price.
B) stock price equals the strike price.
C) strike price exceeds the stock price.
D) stock price exceeds the strike price.
Answer:
When a company whose ability to repay its obligations in full is uncertain,
A) it will have to issue debt with longer maturities than would a company with a lower
probability of default.
B) its bonds will sell for higher prices than would the bonds of a company with a lower
probability of default.
C) it must offer investors higher yields to compensate them for the risk they take in
buying their bonds or making loans.
D) it must do so through financial markets rather than through financial intermediaries.
Answer:
If the price level in Japan increases more rapidly than the price level in Britain, we
would expect
A) interest rates in Japan to lower than interest rates in Britain.
B) the Japanese yen to depreciate against the British pound.
C) the British pound to depreciate against the Japanese yen.
D) Japanese productivity to have increased more rapidly than British productivity.
Answer:
Requirements for information disclosure for firms that desire to sell securities in
financial markets
A) are very common in industrialized countries, including the United States.
B) are common in other industrialized countries, but have not yet been adopted in the
United States.
C) have been adopted in the United States, but have not yet been adopted in other
industrialized countries.
D) have yet to be adopted in the United States or other industrialized countries.
Answer:
Banks have responded to new regulations resulting from the Dodd-Frank Act in all of
the following ways EXCEPT:
A) raising minimum balances on free checking accounts
B) closing branches in low-income neighborhoods
C) raising overdraft fees
D) increased marketing of securities and financial advice to high-income customers
Answer:
The opportunity cost of holding money is measured by:
A) short-term nominal interest rate
B) short-term real interest rate
C) long-term nominal interest rate
D) long-term real interest rate
Answer:
The issue of Fed independence is most often raised by
A) disagreement over the role the Fed should play in managing monetary policy.
B) the Fed’s refusal to carry out the wishes of the President.
C) the Fed’s refusal to carry out the wishes of Congress.
D) the public’s negative reaction to Fed policy.
Answer:
If you have $2 million in a CD at a commercial bank that is a member of the FDIC,
how much of your funds are uninsured?
A) $0
B) $1 million
C) $1.75 million
D) $2 million
Answer:
Consider an open economy that is a net borrower (like the United States). What would
be the impact of a shift to a closed economy?
A) domestic interest rates would decline
B) domestic savings would decline
C) domestic investment would decline
D) net borrowing would increase
Answer:
Which of the following was NOT cited as contributing to unusual uncertainty having an
adverse effect on aggregate supply?
A) the possibility that Congress may let the 2001, 2003 tax cuts to expire
B) the Fed’s limited use of monetary policy in fighting the recession
C) the severity of the financial crisis
D) concern that the Affordable Care Act would increase the cost of hiring workers
Answer:
A central bank may be reluctant to see its currency appreciate because
A) rising prices of imports will contribute to inflation.
B) falling prices of exports will contribute to inflation.
C) the country’s goods may become uncompetitive in world markets.
D) the country’s monetary base will increase.
Answer:
The most important economic benefit from specialization is that it
A) makes it possible for an economy to begin using money.
B) leads to an increase in the standard of living in an economy.
C) makes barter possible.
D) eliminates the need for financial markets.
Answer:
If a government’s income tax receipts exceed its expenditures, the government is
running a
A) surplus and is a net borrower of funds.
B) surplus and is a net saver of funds.
C) deficit and is a net borrower of funds.
D) deficit and is a net saver of funds.
Answer:
If a bank’s ratio of assets to capital is 25 and it’s return on assets is -5%, what is its
return on equity?
A) -0.2%
B) -5%
C) -30%
D) -125%
Answer:
If the economy is initially at equilibrium and an unexpected decline in aggregate
demand takes place, in the short run aggregate output will
A) fall in the new classical view, but not in the new Keynesian view.
B) fall in the new Keynesian view, but not in the new classical view.
C) fall in both the new Keynesian and new classical views.
D) remain at full employment in both the new classical and new Keynesian views.
Answer:
Increased liquidity in recent decades has reduced interest rates on which of the
following assets (holding constant all other things that affect interest rates)?
A) U.S. government bonds
B) bonds issued by large corporations
C) business loans
D) bonds issued by state governments
Answer:
The initial deposit required by a buyer or seller of a futures contract is known as
A) credit.
B) margin requirement.
C) debit.
D) marking.
Answer:
A change in the dollar value of the British pound from $1.60 to $1.50 represents
A) an increase in the pound price of British goods.
B) an appreciation of the dollar relative to the pound.
C) an appreciation of the pound relative to the dollar.
D) an increase in the dollar price of British goods.
Answer:
Which president said, “Prosperity is just around the corner”?
A) Herbert Hoover near the start of the Great Depression
B) Franklin Delano Roosevelt near the start of the Great Depression
C) George W. Bush near the start of the Great Recession
D) Barack Obama near the start of the Great Recession
Answer:
In an efficient market with rational expectations, the actual price of an asset
A) will equal its expected price.
B) will often be below its expected price.
C) will often be above its expected price.
D) equals its expected price plus a random error term.
Answer:
If, while you are holding a coupon bond, the interest rates on other similar bonds fall,
you can be sure that
A) the coupon payments on your bond will fall.
B) the market price of your bond will rise.
C) the market price of your bond will fall.
D) the par value of your bond will rise.
Answer:
Reserve requirements are changed
A) more frequently than the discount rate is changed, but less frequently than open
market operations are conducted.
B) more frequently than the discount rate is changed and more frequently than open
market operations are conducted.
C) more frequently than open market operations are conducted, but less frequently than
the discount rate is changed.
D) less frequently than open market operations are conducted and less frequently than
the discount rate is changed.
Answer:
The seller of a futures contract
A) assumes the long position.
B) has the obligation to deliver the underlying financial instrument at the specified date.
C) has the obligation to receive the underlying financial instrument at the specified
future date.
D) may, at his or her option, deliver or receive the underlying financial instrument at the
specified date.
Answer:
How do defined-contribution plans differ from defined-benefit plans?
Answer:
How is the economy likely to respond when AE (sales) exceed production?
Answer:
What was the dilemma that faced the European Central Bank in response to the
sovereign debt crisis of 2010?
Answer:
Why do governments want to maintain the health of the banking system?
Answer:
What criteria should be used in deciding the best definition of the money supply?
Answer:
Describe two useful purposes served by speculators in derivatives markets.
Answer:
How do exchanges seek to reduce default risk in the futures market?
Answer:
How does the interest paid on reserves set a floor for the federal funds rate?
Answer:
How does the existence of money affect economic growth?
Answer:
Illustrate the effect of an open market sale of $20 million worth of Treasury bills on the
Fed’s balance sheet.
Answer:
What are two ways that governments can prevent banking panics?
Answer:
What are the likely effects of a sovereign debt crisis in terms of the government’s ability
to finance its debt?
Answer:
If the six-month Treasury bill has an interest rate of 0.5%, the ten-year Treasury bond
has an interest rate of 1.6%, and a ten-year bond issued by Dell has an interest rate of
4%, what is the risk premium on Dell’s bond?
Answer:
How does adverse selection affect the participation of small- and medium-sized firms in
the stock market?
Answer:
If the required reserve ratio is 10% and the Fed purchases $20 million worth of
securities, what is the simple deposit multiplier and what happens to the amount of
deposits in the banking system? Assume that banks do not hold excess reserves and the
public does not change its currency holdings.
Answer:
What is an advantage of using options instead of forward contracts when hedging
against exchange-rate risk?
Answer:
Southwest Airlines relies on jet fuel to operate its planes. If it chooses to hedge against
future changes in fuel prices, what positions (long or short) will it take in the spot and
futures markets?
Answer: