U.S. government bonds have no default risk because
A) they are issued in strictly limited quantities.
B) the federal government can increase taxes or print money to pay its obligations.
C) they are backed with gold reserves.
D) they can be exchanged for silver at any time.
When financial intermediaries deleverage, firms cannot fund investment opportunities
resulting in
A) a contraction of economic activity.
B) an economic boom.
C) an increased opportunity for growth.
D) a call for government regulation.
The subprime financial crisis caused a recession because of the ________ in adverse
selection and moral hazard problems and the ________ in housing prices.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
Which of the following is not an element of inflation targeting?
A) a public announcement of medium-term numerical targets for inflation
B) an institutional commitment to price stability as the primary long-run goal
C) an information-inclusive approach in which only monetary aggregates are used in
making decisions about monetary policy
D) increased accountability of the central bank for attaining its inflation objectives
A decrease in ________ increases the money supply since it causes the ________ to
rise.
A) reserve requirements; monetary base
B) reserve requirements; money multiplier
C) margin requirements; monetary base
D) margin requirements; money multiplier
The Federal Reserve Act of 1913 required that
A) state banks be subject to the same regulations as national banks.
B) national banks establish branches in the cities containing Federal Reserve banks.
C) national banks join the Federal Reserve System.
D) state banks could not join the Federal Reserve System.
Bank reserves include
A) deposits at the Fed and short-term treasury securities.
B) vault cash and short-term Treasury securities.
C) vault cash and deposits at the Fed.
D) deposits at other banks and deposits at the Fed.
The Federal Reserve ________ pay interest on reserves held on deposit. The European
System of Central Banks ________ pay interest on reserves held on deposit.
A) does; does
B) does; does not
C) does not; does
D) does not; does not
Holding large amounts of bank capital helps prevent bank failures because
A) it means that the bank has a higher income.
B) it makes loans easier to sell.
C) it can be used to absorb the losses resulting from bad loans.
D) it makes it easier to call in loans.
The Federal Reserve has been ________ preemptive because of the changing view that
monetary policy has to be ________ looking.
A) more; forward
B) more; backward
C) less; forward
D) less; backward
In the 1970s, the Fed selected an interest rate as an operating target rather than a reserve
aggregate primarily because it
A) had no interest in targeting a monetary aggregate, as evidenced by its unwillingness
to target a reserve aggregate.
B) was still very concerned with achieving interest rate stability.
C) was committed to targeting free reserves.
D) was committed to the real bills doctrine.
Approaches to establishing central bank credibility include
A) continued success at keeping inflation under control.
B) inflation targeting.
C) exchange rate targeting.
D) all of the above.
Money market mutual fund shares function like
A) checking accounts that pay interest.
B) bonds.
C) stocks.
D) currency.
An autonomous easing of monetary policy results in a ________ level of equilibrium
output, shifting the aggregate demand curve to the ________.
A) higher; right
B) lower; right
C) higher; left
D) lower; left
The risk structure of interest rates is
A) the structure of how interest rates move over time.
B) the relationship among interest rates of different bonds with the same maturity.
C) the relationship among the term to maturity of different bonds.
D) the relationship among interest rates on bonds with different maturities.
When the economy is hit by a temporary negative supply shock and the central bank
does not respond by changing the autonomous component of monetary policy, then in
the long run
A) inflation will be lower.
B) output will be at its potential.
C) output will be lower.
D) inflation will be unchanged.
E) both B and D.
When the Federal Reserve sells a government bond to a primary dealer, reserves in the
banking system ________ and the monetary base ________, everything else held
constant.
A) increase; increases
B) increase; decreases
C) decrease; increases
D) decrease; decreases
Under exchange-rate targeting, the central bank in the targeting country ________ lose
the ability to pursue its own independent monetary policy and any shocks to the anchor
country is ________ transmitted to the targeting country.
A) does; directly
B) does not; directly
C) does; not directly
D) does not; not directly
The primary assets of a finance company are
A) municipal bonds.
B) corporate stocks and bonds.
C) consumer and business loans.
D) mortgages.
Everything else held constant, a decrease in net exports ________ aggregate ________.
A) increases; demand
B) decreases; demand
C) decreases; supply
D) increases; supply
When you deposit a $50 bill in the Security Pacific National Bank
A) its liabilities decrease by $50.
B) its assets increase by $50.
C) its reserves decrease by $50.
D) its cash items in the process of collection increase by $50.
In a bank panic, the source of contagion is the
A) free-rider problem.
B) too-big-to-fail problem.
C) transactions cost problem.
D) asymmetric information problem.
Keynes hypothesized that the transactions component of money demand was primarily
determined by the level of
A) interest rates.
B) velocity.
C) income.
D) stock market prices.
In explaining the evolution of money
A) government regulation is the most important factor.
B) commodity money, because it is valued more highly, tends to drive out paper money.
C) new forms of money evolve to lower transaction costs.
D) paper money is always backed by gold and therefore more desirable than checks.
Everything else held constant, when households save less, wealth and the demand for
bonds ________ and the bond demand curve shifts ________.
A) increase; right
B) increase; left
C) decrease; right
D) decrease; left
One suggested method of dealing with the too-big-to-fail problem is to reimpose the
restrictions that were in place under
A) Glass-Steagall.
B) McFadden.
C) the Edge Act.
D) the Federal Reserve Act.
Equity contracts
A) are claims to a share in the profits and assets of a business.
B) have the advantage over debt contracts of a lower costly state verification.
C) are used much more frequently to raise capital than are debt contracts.
D) are not subject to the moral hazard problem.
Researchers at the Federal Reserve found that M2 money demand functions performed
________ in the 1980s, with M2 velocity moving ________ with the opportunity cost
of holding M2.
A) poorly; erratically
B) poorly; closely
C) well; erratically
D) well; closely
Situation 20-1
Assume a closed economy with no government. Suppose that autonomous
consumption equals $400, planned investment equals $500, and the mpc equals 0.9.
Using the information contained in Situation 20-1, if autonomous consumption
increases by $100, then equilibrium aggregate output will change by
A) -$1,000.
B) -$100.
C) $100.
D) $1,000.
A borrowed reserves target is ________ because increases in income ________ interest
rates and discount loans, causing the Fed to ________ the monetary base, everything
else held constant.
A) procyclical; increase; increase
B) countercyclical; increase; increase
C) procyclical; reduce; reduce
D) countercyclical; reduce; reduce
If the money supply is $500 and nominal income is $3,000, the velocity of money is
A) 1/60.
B) 1/6.
C) 6.
D) 60.
In the long run, following a combination of a negative demand shock and a temporary
negative supply shock,
A) both inflation and output return to the original long-run equilibrium values.
B) inflation is permanently increased, while output returns to potential output.
C) output returns to potential output, while inflation may be higher or lower than its
initial value.
D) inflation is permanently reduced, while output returns to potential output.
E) None of the above.
If the optimal forecast of the return on a security exceeds the equilibrium return, then
A) the market is inefficient.
B) no unexploited profit opportunities exist.
C) the market is in equilibrium.
D) the market is myopic.
The theory of PPP suggests that if one country’s price level falls relative to another’s, its
currency should
A) depreciate in the long run.
B) appreciate in the long run.
C) appreciate in the short run.
D) depreciate in the short run.