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The "lemons problem" in the used car market arises from
A) the difficulty U.S. producers have in making reliable cars.
B) the difficulty buyers have in distinguishing good cars from lemons.
C) the tendency of buyers of used cars to pay for them with bad checks.
D) the reluctance of many car dealers to handle used cars.
Answer:
Congress created the Federal Reserve System
A) to serve as a lender of last resort.
B) to process the receipt of taxes received by the Internal Revenue Service.
C) to regulate the value of the U.S. dollar against foreign currencies.
D) to provide a source of mortgage loans to the residential housing market.
Answer:
According to the efficient markets hypothesis,
A) common stock prices should be constant.
B) the price of a corporation's stock is likely to fluctuate substantially in response to
news about changes in the company's short-term prospects.
C) the price of a corporation's stock will fluctuate significantly only in response to news
about changes in the company's long-term prospects.
D) price fluctuations in common stock are a response to fads and are only infrequently
the result of changes in the expected profitability of the companies involved.
Answer:
A Federal Reserve repurchase agreement involves
A) an agreement by a bank to repay a discount loan on a specific day.
B) an agreement by a dealer to buy back securities she has sold to the Fed.
C) an agreement between the Fed and the Treasury for the Fed to purchase a specified
amount of Treasury securities.
D) an agreement by a commercial bank to make a loan to another bank in the federal
funds market.
Answer:
If the expected gains on stocks rise, while the expected returns on bonds do not change,
then
A) the demand curve for bonds will shift to the left.
B) the supply curve for loanable funds will shift to the right.
C) the demand curve for loanable funds will shift to the left.
D) the equilibrium interest rate will fall.
Answer:
All of the following describe the market for credit default swaps on mortgage-backed
securities in the mid-2000s EXCEPT
A) an increasing number of buyers were speculators.
B) AIG apparently underestimated the risk involved with mortgage-backed securities.
C) the volume of credit default swaps was too low making it difficult to assess their
value.
D) payments by buyers were too low relative to risk.
Answer:
Which of the following is an example of behavior that is not rational?
A) buying stocks after stock prices have declined
B) buying stocks after stock prices have risen
C) a significantly higher enrollment in 401K plans if people are automatically enrolled
rather than having the option of signing up on their own
D) enrollment in 401K plans during a bear market
Answer:
A debt instrument represents
A) an ownership claim by the purchaser on the issuer.
B) a promise by a borrower to repay principal plus interest to a lender.
C) an attempt by a borrower in default to restore his or her credit.
D) a nontaxable asset, owned primarily by large corporations.
Answer:
The Consumer Financial Protection Bureau is part of the
A) Treasury Department
B) Federal Reserve System
C) Justice Department
D) Commerce Department
Answer:
What do many economists blame for the severity of the Great Depression?
A) The collapse of the banking system.
B) A rapid increase in the money supply.
C) The issuing of an excessively large amount of currency by the Federal Reserve.
D) The collapse of the electronic funds transfer system.
Answer:
Who was the effectively in charge of the Fed during the early 1930s?
A) Secretary of Treasury
B) Head of the Federal Reserve bank of New York
C) Comptroller of the Currency
D) no one
Answer:
Which of the following is a name for when a bank promises to lend funds to a borrower
to pay off its commercial paper?
A) loan commitment
B) standby letter of credit
C) securitization
D) loan sale
Answer:
If the annual interest rate is 9%, what would you expect to pay for a bond paying a
lump sum of $10,000 in two years?
A) $8,417
B) $8,200
C) $10,000
D) $11,881
Answer:
The Banking Acts of 1933 and 1935
A) established the Federal Reserve System.
B) increased central control of the Federal Reserve System.
C) eliminated the authority of the Board of Governors to set reserve requirements.
D) made the Secretary of the Treasury a member of the Board of Governors.
Answer:
Suppose that Acme Widget is currently selling for $100 per share and you own a call
option to buy Acme Widget at $75 per share. The intrinsic value of your option is
A) $25.
B) $75.
C) $100.
D) not possible to determine in the absence of information on values of the share price
of Acme Widget between now and the expiration date of the call.
Answer:
A "primary market" is a market
A) for government securities.
B) in which newly issued claims are sold to buyers by borrowers.
C) in which newly issued claims are sold by savers to borrowers.
D) for debt by large or "primary" corporations.
Answer:
During most of the time in recent decades, the domestic government sector was
A) a net borrower.
B) a net lender.
C) neither a borrower nor a lender.
D) a major factor in keeping real interest rates low.
Answer:
Swaps differ from futures and options in all of the following ways EXCEPT:
A) intended to reduce the risk faced by participants.
B) more flexibility.
C) more privacy.
D) less regulation.
Answer:
Moral hazard problems arise when
A) lenders have difficulty in distinguishing between good and lemon firms.
B) when a downturn in economic activity makes repaying loans difficult for borrowers.
C) borrowers have an incentive to act in ways that do not reflect the lender's interests.
D) borrowers default on loans.
Answer:
In the United States, monetary policy is carried out by
A) the Federal Reserve System.
B) Congress.
C) the President.
D) Congress and the President acting together.
Answer:
In an options contract, another name for the strike price is the
A) market price.
B) exercise price.
C) equilibrium price.
D) fixed price.
Answer:
Which investment caused the Reserve Primary Fund to incur heavy losses?
A) mortgage-backed securities
B) real estate investment trusts
C) commercial paper issued by Bear Stearns
D) commercial paper issued by Lehman Brothers
Answer:
"Tips" published in leading commercial or financial publications are unlikely to lead to
profitable trades because
A) only wealthy individuals can buy stocks in the volume necessary to take advantage
of tips.
B) whatever is gained by trading on the basis of tips will be taxed away by the
government.
C) the news will already be reflected in the market prices of the assets.
D) the news contained in the tips is usually inaccurate.
Answer:
Why might a nation seek to maintain a pegged exchange rate?
A) It makes business planning easier for firms involved in the global economy.
B) It removes the need to intervene in the foreign exchange market.
C) It ensures that the exchange rate will remain at its equilibrium.
D) It makes their currency more attractive on the foreign exchange market.
Answer:
the mix of stocks and bonds a firm uses to raise funds is called:
A) diversification
B) capital structure
C) market value
D) asset management
Answer:
Futures trading has traditionally been dominated by
A) the New York Stock Exchange.
B) the Chicago Board of Trade and the New York Mercantile Exchange.
C) the London Stock Exchange.
D) the Omaha Grain Exchange.
Answer:
Mutual funds
A) take in deposits from savers and make loans to borrowers.
B) sell shares to savers and purchase assets with the funds.
C) take in deposits from savers and purchase assets with the funds.
D) bring together small savers and small borrowers.
Answer:
Which of the following is NOT true of an insolvent bank?
A) Its net worth is negative.
B) It may be unable to pay off its depositors.
C) The value of its assets is less than the value of its liabilities.
D) It must have no more deposits.
Answer:
What was the approximate peak amount of borrowing from the Fed during the Financial
Crisis of 2007-2009?
A) $2 billion
B) $100 billion
C) $270 billion
D) $1 trillion
Answer:
Hedge funds have been criticized for
A) their heavy use of short selling.
B) their inability to mobilize a large amount of funds.
C) forcing quick price changes that reduce market inefficiencies.
D) excessive use of hedging strategies.
Answer:
The demand curve for bonds would be reduced by
A) a decrease in expected returns on other assets.
B) an increase in the information costs of bonds relative to other assets.
C) an increase in wealth.
D) an increase in the liquidity of bonds relative to other assets.
Answer:
Suppose the Federal Reserve reduces interest rates while interest rates in Europe do not
change. Make use of a graph of the foreign exchange market to show how this will
affect the value of the dollar.
Answer:
How is the lemons problem in the used car market an example of asymmetric
information?
Answer:
Suppose that investors perceive a higher risk of investing in Europe as a result of a
sovereign debt crisis. Make use of a graph of the foreign exchange market to show how
this will affect the value of the euro.
Answer:
Which types of unemployment still occur even when the economy is considered to be
operating at full employment?
Answer:
What are the reasons why disclosure by the SEC do not eliminate the information costs
of adverse selection?
Answer:
Suppose you purchase a call option to buy IBM common stock at $35 per share in
September. The current price of IBM is 37 and the option premium is 4. What is the
intrinsic value of the option? As the expiration date on the option approaches, what will
happen to the size of the option premium?
Answer:
How can stock prices affect spending by businesses and households?
Answer:
How do banks manage credit risk?
Answer:
How did maintaining the gold standard deepen the severity of the Great Depression?
Answer:
Suppose a bank repays a $10 million discount loan that it had previously borrowed
from the Fed. Illustrate how this affects the balance sheets of the Fed and the banking
system.
Answer:
Suppose that initially U.S. households are saving only a small fraction of their incomes
because they are relying on rapid increase in stock prices to increase their wealth. If
stock prices decline and households decide to increase their saving rate, what will be
impact on output in the new Keynesian view? Be sure to distinguish the short run from
the long run.
Answer:
What are the effects of the double taxation of dividends?
Answer:
How do expectations of higher inflation become embedded in the economy and affect
actual inflation?
Answer:
If the expectations theory of the term structure is correct, would a reduction in the
supply of thirty-year Treasury bonds affect their yields?
Answer:
What are three reasons that the interest-rate parity condition may not always hold?
Answer:
What real-world complications keep purchasing power parity from being a complete
explanation of exchange rates ?
Answer:
Suppose the current federal funds rate is 0.25% and the Fed chooses to raise its target to
0.5%. Make use of a graph of the federal funds market to show how it will use open
market operations to accomplish this.
Answer:
