Significant skepticism has been expressed about which of the following being an
efficient market?
(a) The market for U.S. Treasury securities
(b) The stock market
(c) The market for financial futures
(d) The commercial paper market
Answer:
In 1995, then Senator Connie Mack of Florida introduced a bill that
(a) would force the Fed to focus almost entirely on achieving price stability.
(b) would force the Fed to rely entirely on interest rate targets.
(c) would force the Fed to keep the unemployment rate below 5%.
(d) place the Secretary of the Treasury on the Board of Governors.
Answer:
The largest institutional participants in capital markets are
(a) pension funds.
(b) insurance companies.
(c) consumer finance companies.
(d) business finance companies.
Answer:
Money market mutual funds
(a) hold portfolios of stocks.
(b) hold portfolios of short-term assets.
(c) are always load funds.
(d) hold only U.S. Treasury securities.
Answer:
An open market purchase
(a) increases the monetary base.
(b) decreases the monetary base.
(c) increases the federal funds rate.
(d) is another name for a discount loan.
Answer:
The exchange rate system followed by the United States is known as
(a) the gold standard.
(b) a fixed exchange rate system.
(c) a flexible exchange rate system.
(d) a barter system.
Answer:
Which of the following would cause demand for M1 to increase?
(a) Banks make taking out home equity loans easier.
(b) The market for closed-end stock mutual funds becomes more liquid.
(c) Early withdrawal penalties for certificates of deposit are eliminated.
(d) Several major corporations default on their commercial paper.
Answer:
Under a current SEC proposal,
(a) the majority of the directors of any individual mutual fund must be independent of
the fund’s sponsor.
(b) funds that hold common stock may not also hold bonds.
(c) funds that hold short-term assets may not also hold long-term assets.
(d) the tax rate on returns to the fund would be greatly reduced.
Answer:
An increase in the price level reduces net exports because
(a) it leads indirectly to a higher exchange rate.
(b) it leads indirectly to a lower exchange rate.
(c) it leads indirectly to a lower real interest rate.
(d) it leads directly to higher real money balances.
Answer:
In banking, the spread refers to the difference between the
(a) interest rate on long-term bonds and the interest rate on short-term bonds.
(b) interest rate on car loans and the interest rate on home mortgages.
(c) return earned from lending and the cost of the needed funds.
(d) bid and asked prices on a bond.
Answer:
If on average a dollar is spent five times each year to purchase goods and services in the
economy, then
(a) the value of velocity must be 0.2.
(b) the value of velocity must be 5.
(c) the value of nominal GDP divided by the money supply must be 0.2.
(d) the value of the money supply divided by nominal GDP must be 5.
Answer:
Economists have found that the greater is a borrower’s net worth compared to the
borrower’s desired level of capital investment
(a) the larger is the gap between the cost of external and internal financing.
(b) the smaller is the gap between the cost of external and internal financing.
(c) the larger is the borrower’s tax liability.
(d) the smaller is the borrower’s tax liability.
Answer:
In 1979, President Carter hoped to appoint a Fed chairman who would bring down
inflation, thus helping President Carter to be reelected in 1980. In this respect, President
Carter was
(a) successful; inflation was brought down and he was reelected.
(b) unsuccessful; inflation remained high and he was defeated for reelection.
(c) partly successful; inflation was brought down but he was defeated for reelection.
(d) partly successful; inflation remained high but he was reelected.
Answer:
The Fed tends not to use discount policy as its principal tool in influencing the money
supply since
(a) discount loans do not affect the money supply.
(b) it does not have as much control over discount loans as it does open market
operations.
(c) it’s prohibited from doing so by an act of Congress.
(d) it prefers to use reserve requirements.
Answer:
Which of the following statements is NOT true of consumer finance companies?
(a) Their borrowers have higher default risk than bank customers.
(b) They charge higher interest rates than banks do on similar loans.
(c) They lend primarily to consumers.
(d) They are strictly regulated by state governments.
Answer:
A discount bond resembles a simple loan in that
(a) the interest on neither is taxable.
(b) the borrower repays in a single payment.
(c) both represent assets to the borrowers who issue them.
(d) both have par values greater than their face values.
Answer:
A credit crunch refers to a
(a) sharp rise in interest rates that banks charge on business loans.
(b) sharp rise in interest rates that banks charge on consumer loans.
(c) decline in the willingness of households and firms to borrow from banks.
(d) reduction in borrowers’ ability to obtain credit at prevailing interest rates.
Answer:
The default risk premium fluctuates mainly
(a) because bond rating agencies tend to be inconsistent in their ratings of bonds.
(b) because risk-neutral investors will often become risk-averse as time passes.
(c) because taxes tend to rise over the long run.
(d) as new information about a borrower’s creditworthiness becomes available.
Answer:
Property and casualty insurance companies hold more liquid assets than do life
insurance companies because
(a) they face greater adverse selection problems.
(b) they face greater moral hazard problems.
(c) events such as fires and earthquakes are difficult to predict.
(d) they are required to do so by law.
Answer:
What is the name of the pension plan under which employees can make tax-deductible
contributions through regular payroll deductions?
(a) 401(k) plans
(b) Social security plans
(c) Early retirement plans
(d) 486(b) plans
Answer:
The futures price
(a) is established each year by act of Congress.
(b) is established each month by the Chairman of the Chicago Board of Trade.
(c) is specified in each futures contract.
(d) is set by supply and demand in the futures market.
Answer:
The total rate of return is equal to
(a) the coupon rate plus the rate of capital gains.
(b) the coupon rate plus the current yield.
(c) the current yield plus the rate of capital gains.
(d) the coupon rate multiplied by the rate of capital gains.
Answer:
Mutual funds arose to
(a) reduce the transactions costs small savers incur when diversifying.
(b) take advantage of the tax breaks the federal government grants for diversified
portfolios.
(c) provide home buyers with an inexpensive source of mortgage funds.
(d) provide personal financial advice to small savers.
Answer:
The interest rate on unsecured loans between banks is called the
(a) discount rate.
(b) repurchase rate.
(c) T-bill rate.
(d) federal funds rate.
Answer:
In the new Keynesian view, an increase in real money balances increases investment
spending by
(a) giving business firms more funds to invest.
(b) raising the real interest rate, which makes saving and investing more attractive.
(c) lowering the real interest rate, which reduces the opportunity cost of investing in
new plant and equipment.
(d) allowing the government to increase its spending on bridges, highways, and other
public works.
Answer:
At points not on the IS curve,
(a) the federal government’s budget must not be balanced.
(b) saving must not equal investment.
(c) the interest rate must not equal the inflation rate.
(d) the demand for money must not equal the supply of money.
Answer:
Milton Friedman and Anna Schwartz found in their study of money and business cycles
from the Civil War to 1960 that
(a) the growth rate of the money supply falls before output declines in every business
cycle.
(b) the growth rate of the money supply rises before output declines in every business
cycle.
(c) the growth rate of the money supply falls before output declines during some
business cycles and rises before output declines during other business cycles.
(d) there is no consistent relationship between money and output over the business
cycle.
Answer:
Increased liquidity during the past two 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:
A decline in money demand
(a) is expansionary because it results in a decline in the real interest rate.
(b) is expansionary because it results in an increase in the nominal money supply.
(c) is contractionary because it results in a decline in the real interest rate.
(d) is contractionary because it results in a decline in the nominal money supply.
Answer:
Following a decline in the quantity of real money balances supplied, equilibrium is
restored in the money market by
(a) a rise in the price level.
(b) a decline in the price level.
(c) a decline in the quantity of money demanded.
(d) a decline in the current level of output.
Answer:
Why did the risks associated with underwriting bond issues rise during the 1980s?
(a) Because rising federal taxes forced a number of issuing firms close to bankruptcy
(b) Because of the higher volatility of interest rates
(c) Because accelerating inflation during the decade led to ever-increasing bond prices
(d) Because excessive government regulation reduced the profitability of underwriting
Answer:
The fact that capital-asset ratios in the banking industry are today at about half their
level of 1930 is best explained by the
(a) existence of deposit insurance.
(b) wider range of good investments available to bank managers today.
(c) fact that the value of bank assets has not increased as fast as the value of bank
capital.
(d) absence of federal regulation.
Answer:
Stephen Goldfeld’s estimate of the demand for money failed to predict the actual level
of M1 demanded in the years after 1973 because
(a) nominal interest rates fell to very low levels during those years.
(b) financial innovation produced substitutes for checkable deposits.
(c) the economy suffered through several recessions.
(d) the Fed unexpectedly decided to decrease the rate of growth of M1.
Answer: