Which of the following is a contractual saving institution?
(a) The New York Stock Exchange
(b) Greater Illinois Savings and Loan
(c) Prudential Insurance Company
(d) Fidelity Magellan Mutual Fund
Answer:
The effects of interest rates on the transactions demand for money
(a) were explored by Irving Fisher.
(b) are usually considered to be negligible by modern economists.
(c) are of importance only during recessions.
(d) were explored by William Baumol and James Tobin.
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:
Which of the following is NOT an example of a supply shock?
(a) A drought in the Midwest
(b) A decline in natural gas prices following discovery of new fields
(c) The introduction of a new line of computer-controlled machine tools in
manufacturing
(d) A substantial increase in federal government spending on medicare
Answer:
In the market for loanable funds, the seller is considered to be
(a) the lender.
(b) the borrower.
(c) the lender or the borrower depending upon the use to which the funds are put.
(d) the lender or the borrower depending upon whether interest rates are rising or
falling.
Answer:
An asset’s fundamental value equals
(a) its face value.
(b) its maturity value.
(c) the market’s best guess of the present value of the asset’s expected future returns.
(d) the weighted sum of its market price over the previous seven trading periods.
Answer:
In the balance sheet channel, an expansionary monetary policy
(a) will lead to a greater increase in output than in the money channel.
(b) will not affect the real interest rate.
(c) will result in increased spending only for firms and households dependent for credit
on bank loans.
(d) will lead to a larger budget deficit than in the money channel.
Answer:
In which of the following periods was the yield curve inverted?
(a) Spring 1989
(b) Fall 1990
(c) Early 1991
(d) The yield curve was not inverted during any of these periods.
Answer:
Which of the following is NOT an important criterion for whether a good will be usable
as a medium of exchange?
(a) The good must be of standardized quality.
(b) The good must be valuable relative to its weight.
(c) The good must have value even if it were not being used as money.
(d) The good must be durable so that value is not lost through product spoilage.
Answer:
The Eurodollar arose from
(a) the desire of U.S. companies to shield their profits from the U.S. income tax.
(b) the reluctance of Eastern Bloc countries to deposit their dollar reserves in U.S.
banks.
(c) the scarcity of British pounds in the immediate postWorld War II period.
(d) the scarcity of U.S. dollars in the immediate postWorld War II period.
Answer:
Deposits by depository institutions with the Fed
(a) are an asset to the Fed but a liability to the depository institutions.
(b) are a liability to the Fed but an asset to the depository institutions.
(c) represent all of the depository institutions reserves.
(d) receive interest at market rates.
Answer:
Why aren’t Treasury deposits with the Fed part of the monetary base?
(a) Because they are currency and currency is not included in the monetary base
(b) Because no deposits at the Fed are included in the monetary base
(c) Because they aren’t assets of either the nonbank public or banks
(d) Because the Fed is unable to exercise effective control over their size
Answer:
When the market price of a financial instrument equals its present value, savers and
borrower can be sure
(a) that the inflation rate equals the interest rate.
(b) that the inflation rate will be zero in the future.
(c) that the interest rate will be zero in the future.
(d) that the price communicates information about market participants’ expectations of
value.
Answer:
Which of the following cities contains a Federal Reserve bank?
(a) Pittsburgh
(b) Los Angeles
(c) Seattle
(d) Dallas
Answer:
Savers cannot know the true health of banks because
(a) bank finance is too complicated for most savers to understand.
(b) bank balance sheets are kept confidential for competitive reasons.
(c) banks have private information about their loan portfolios.
(d) bank officials are barred by government regulation from divulging to the public
details of their loan portfolios.
Answer:
Which of the following is true of the New York Stock Exchange?
(a) It is an over-the-counter market.
(b) It maintains a liquid central market for small and medium-sized investors.
(c) It accounted for a larger fraction of all shares traded in the United States in 1991
than in 1971.
(d) Trading on it takes place over the telephone and by computer.
Answer:
Large commercial banks responded to the Credit Crunch of 1966 by
(a) raising the interest rates they paid on deposits.
(b) borrowing from the Fed.
(c) raising funds through unregulated sources.
(d) increasing their participation in the commercial paper market.
Answer:
What is the total rate of return on a bond with a coupon rate of 6.25% that was
purchased for $900 and sold one year later for $990?
(a) 6.25%
(b) 16.25%
(c) 16.94%
(d) 96.25%
Answer:
The impact lag facing the Fed is
(a) the delay before open market operations are able to affect the monetary base.
(b) the delay before the Fed’s announcement of a new policy has an impact on the
decisions of the public.
(c) the time required for monetary policy changes to affect output, employment, and
prices.
(d) the delay before the impact of a recession on output and prices becomes clear to the
Fed.
Answer:
John Smith leaves his job in New York to go to California in hopes of finding a better
one. If John Smith is unemployed while searching for a job in California, economists
would consider him to be
(a) frictionally unemployed.
(b) structurally unemployed.
(c) cyclically unemployed.
(d) naturally unemployed.
Answer:
When economists refer to the role of money as a standard of deferred payment, they
mean that
(a) payments by checks are usually deferred until the checks clear the bank.
(b) money earns interest while loan payments are deferred.
(c) money provides a standard for payments that will occur in the future.
(d) money today is worth less than money tomorrow.
Answer:
In an open economy
(a) the goods market is in equilibrium when domestic saving equals domestic
investment.
(b) the domestic real interest rate will be below the world real interest rate.
(c) the domestic real interest rate will be above the world real interest rate.
(d) the goods market is in equilibrium when desired international lending equals desired
international borrowing by other countries.
Answer:
The demand curve for bonds would be shifted to the right by
(a) a decrease in wealth.
(b) a decrease in expected returns on bonds.
(c) a decrease in expected inflation.
(d) a decrease in the liquidity of bonds relative to other assets.
Answer:
Which of the following is NOT considered one of the four principal groups in the
Federal Reserve System?
(a) Federal Reserve banks
(b) Federal Deposit Insurance Corporation
(c) Board of Governors
(d) Federal Open Market Committee
Answer:
The aggregate demand curve illustrates the relationship between
(a) the aggregate demand for goods and services and the real interest rate.
(b) the aggregate demand for goods and services and the level of current output.
(c) the level of current output and the real interest rate.
(d) the aggregate demand for goods and services and the aggregate price level.
Answer:
House Concurrent Resolution 133
(a) requires the Fed to announce targets for the growth of monetary aggregates.
(b) allows the President to appoint the chairman of the Board of Governors without
congressional approval.
(c) gives the Board of Governors a majority on the FOMC.
(d) requires congressional approval of changes in the discount rate.
Answer:
Futures trading has traditionally been dominated by
(a) the New York Stock Exchange.
(b) the Chicago Board of Trade and the Chicago Mercantile Exchange.
(c) the London Stock Exchange.
(d) the Omaha Grain Exchange.
Answer:
Households save through life insurance reserves, at least in part, because
(a) life insurance reserves are very liquid.
(b) the transactions costs of saving in this way are very low.
(c) life insurance reserves receive favorable tax treatment.
(d) life expectancy in the United States has been declining.
Answer:
A company that retains a high bond rating during a recession in which many other
companies see their bond ratings cut will experience
(a) an increased flow of funds into the market for its securities.
(b) an increased demand for its securities, driving up the expected return on them.
(c) a decreased demand for its securities, driving down the expected return on them.
(d) a decreased flow of funds into the market for its securities.
Answer:
In a covered option
(a) the strike price is always above the exercise price.
(b) the seller owns the underlying asset.
(c) the seller does not have an interest in the underlying asset.
(d) the option premium never deviates from the intrinsic value.
Answer:
The gap between the yield on a corporate bond and the yield on a U.S. Treasury bond of
the same maturity represents
(a) the market’s evaluation of the likelihood of future inflation.
(b) the market’s evaluation of the likelihood of default on the bond.
(c) the market’s evaluation of the greater liquidity of the corporate bond.
(d) evidence against the efficient markets hypothesis.
Answer:
What are venture capital funds? Why have they been successful? Is it likely that venture
capital firms will become as large mutual funds, insurance companies, or pension
funds?
Answer:
If you had been advising one of the governments in Eastern Europe following the fall of
Communism, would you have stressed the importance for economic growth of
establishing strong financial markets or the importance of establishing a strong system
of financial intermediaries? Explain.
Answer:
Under what circumstances might a private lender of last resort, such as the New York
Clearing House in the years before the founding of the Fed, be effective? Under what
circumstances would a private lender of last resort be ineffective?
Answer:
What is a “circuit breaker?” What is the rationale for employing them in the stock
market? Are they a good idea?
Answer:
Suppose that George is dissatisfied with the proportion of his wealth that is held in
money. Is he likely to be satisfied with his nonmoney asset holdings of savings in bonds
and stocks?
Answer:
If Paul Volcker was a “tough” central banker, why was he unable to reduce inflation
without the economy experiencing significant losses in output and employment?
Answer:
Evaluate the following argument: “Small businesses generally have to pay more for
funds they borrow from banks than they would if they raised the funds in financial
markets. This shows that small businesses must value the personal relationships they
maintain with bank loan officers. Otherwise, they would be taking advantage of the
cheaper funds available in financial markets.”
Answer:
What does the Treasury do with the tax funds withheld from workers’ paychecks? How
does the Treasury make use of these funds when making purchases for the federal
government? How do these activities affect the monetary base?
Answer:
What steps can a bank take to deal with a significant outflow of deposits?
Answer:
George has total wealth of $50,000. He allocates $40,000 to Treasury bills yielding 6%
and $10,000 to a NOW account yielding 3%. What value does George place on his
checkable deposits? What if the yield on T-bills rises to 12%?
Answer:
Evaluate the following observation: “It appears that the economy is suffering from a
credit crunch. Borrowing by households and small businesses has declined much more
sharply than has borrowing by large businesses.”
Answer:
Suppose the expected return on the market portfolio is 10%, the risk-free rate is 2%,
and the beta for an asset is 2. According to CAPM what is the expected return on the
asset?
Answer:
According to the text: “many economists link the severity of the Great Depression of
the 1930s to the breakdown in the banking system’s ability to provide financial
services.” The beginning of the Great Depression also coincided with a stock market
crash. Why might the problems of the banking system have been more damaging to the
economy than the problems on the stock market?
Answer:
Discuss the significance of the work of David Romer and Christina Romer that
identified six independent monetary policy shifts after 1960 in which the announcement
of a contractionary monetary policy was followed by a decline in output.
Answer:
Winners of state lotteries are often given the choice of receiving their winnings either as
one lump sum or as annual payments spread out over a period of twenty or more years.
For example, a state lottery winner may be given the choice of receiving $1.2 million at
once, or $125,000 per year for twenty years. In states where it is allowed, investors will
sometimes approach lottery winners and offer to pay them a lump sum greater than the
state is offering them (in this case, say, $1.4 million) in exchange for the lottery winner
signing over to the investor the right to receive the annual payments. Under what
circumstances might this be a good deal for both the lottery winner and the investor?
Answer:
In what sense does the IMF act as a lender of last resort? How might the IMF’s actions
during the Mexican crisis of the mid-1990s have contributed to the Asian currency
crisis a few years later?
Answer: