Analysis of adverse selection indicates that financial intermediaries, especially banks
A) have advantages in overcoming the free-rider problem, helping to explain why
indirect finance is a more important source of business finance than is direct finance.
B) despite their success in overcoming free-rider problems, nevertheless play a minor
role in moving funds to corporations.
C) provide better-known and larger corporations a higher percentage of their external
funds than they do to newer and smaller corporations which rely to a greater extent on
the new issues market for funds.
D) must buy securities from corporations to diversify the risk that results from holding
non-tradable loans.
If the U.S. Congress imposes a quota on imports of Japanese cars due to claims of
“unfair” trade practices, and Japanese demand for American exports increases at the
same time, then, in the long run ________, everything else held constant.
A) the Japanese yen will appreciate relative to the U.S. dollar
B) the Japanese yen will depreciate relative to the U.S. dollar
C) the Japanese yen will either appreciate, depreciate or remain constant against the
U.S. dollar
D) there will be no effect on the Japanese yen relative to the U.S. dollar
A central bank’s attempt to prevent an appreciation of its currency can stimulate
domestic inflation if the ________ of foreign currencies leads to ________ international
reserves which ________ the monetary base.
A) purchase; higher; increases
B) purchase; lower; decreases
C) sale; lower; decreases
D) sale; higher; increases
When regulators chose to allow insolvent S&Ls to continue to operate rather than to
close them, they were pursuing a policy of
A) regulatory forbearance.
B) regulatory kindness.
C) ostrich reasoning.
D) ignorance reasoning.
Targeting interest rates can be procyclical because
A) an increase in income increases interest rates, causing the Fed to buy bonds,
increasing the monetary base and money supply, leading to further increases in income.
B) an increase in interest rates increases income, causing the Fed to buy bonds,
increasing the monetary base and money supply, leading to further increases in income.
C) an increase in the monetary base increases the money supply, causing the Fed to buy
bonds, increasing the monetary base and money supply, leading to further increases in
income.
D) an increase in income increases the monetary base and money supply, causing the
Fed to buy bonds to increase interest rates and income.
In the market for reserves, if the federal funds rate is above the interest rate paid on
excess reserves, an open market purchase ________ the supply of reserves and causes
the federal funds interest rate to ________, everything else held constant.
A) decreases; fall
B) increases; fall
C) increases; rise
D) decreases; rise
The monetary policy (MP) curve indicates the relationship between
A) the Federal Funds Rate and the real interest rate.
B) the Federal Funds Rate and the inflation rate.
C) the inflation rate and the expected inflation rate.
D) the real interest rate the central bank sets and the inflation rate.
Keynes reasoned that consumer expenditure is most closely related to
A) the level of interest rates.
B) the price level.
C) disposable income.
D) the marginal tax rate.
There are two ways in which the Fed can provide additional reserves to the banking
system: it can ________ government bonds or it can ________ discount loans to
commercial banks.
A) sell; extend
B) sell; call in
C) purchase; extend
D) purchase; call in
Nonactivists of policies contend that a policy of shifting the aggregate ________ curve
will be costly because it produces ________ volatility in both the price level and output.
A) supply; less
B) supply; more
C) demand; less
D) demand; more
Well-functioning financial markets promote
A) inflation.
B) deflation.
C) unemployment.
D) growth.
Using the Gordon growth model, a stock’s current price decreases when
A) the dividend growth rate increases.
B) the required return on equity decreases.
C) the expected dividend payment increases.
D) the growth rate of dividends decreases.
The money supply is ________ related to the nonborrowed monetary base, and
________ related to the level of borrowed reserves.
A) positively; negatively
B) negatively; not
C) positively; positively
D) negatively; negatively
If reserves in the banking system increase by $100, then checkable deposits will
increase by $667 in the simple model of deposit creation when the required reserve
ratio is
A) 0.01.
B) 0.05.
C) 0.15.
D) 0.20.
If the required reserve ratio is 10 percent, currency in circulation is $400 billion,
checkable deposits are $1000 billion, and excess reserves total $1 billion, then the M1
money multiplier is
A) 2.5.
B) 2.8.
C) 2.0.
D) 0.7.
A simple deposit multiplier equal to one implies a required reserve ratio equal to
A) 100 percent.
B) 50 percent.
C) 25 percent.
D) 0 percent.
Which of the following can be described as involving direct finance?
A) A corporation takes out loans from a bank.
B) People buy shares in a mutual fund.
C) A corporation buys a short-term corporate security in a secondary market.
D) People buy shares of common stock in the primary markets.
The legislation that separated investment banking from commercial banking until its
repeal in 1999 is known as the
A) National Bank Act of 1863.
B) Federal Reserve Act of 1913.
C) Glass-Steagall Act.
D) McFadden Act.
The directive of prompt corrective action means that
A) the FDIC will intervene earlier and more vigorously when a bank gets into trouble.
B) the banks must take actions quickly to resolve reserve disputes.
C) bank failures cannot occur.
D) there must be an immediate response to an increase in interest rates.
Which of the following instruments is NOT traded in a money market?
A) residential mortgages
B) U.S. Treasury Bills
C) negotiable bank certificates of deposit
D) commercial paper
When stock prices become more volatile, the ________ curve for gold shifts right and
gold prices ________, everything else held constant.
A) demand; increase
B) demand; decrease
C) supply; increase
D) supply; decrease
As default risk decreases, the expected return on corporate bonds ________, and the
return becomes ________ uncertain, everything else held constant.
A) increases; less
B) increases; more
C) decreases; less
D) decreases; more
The president from which Federal Reserve Bank always has a vote in the Federal Open
Market Committee?
A) Philadelphia
B) Boston
C) San Francisco
D) New York
Fluctuations in the demand for reserves cause the Fed to lose control over a monetary
aggregate if the Fed targets
A) a monetary aggregate.
B) the monetary base.
C) an interest rate.
D) nominal GDP.
Which of the following bonds would you prefer to be buying?
A) a $10,000 face-value security with a 10 percent coupon selling for $9,000
B) a $10,000 face-value security with a 7 percent coupon selling for $10,000
C) a $10,000 face-value security with a 9 percent coupon selling for $10,000
D) a $10,000 face-value security with a 10 percent coupon selling for $10,000
In the case of an insurance policy, ________ occurs when the existence of insurance
encourages the insured party to take risks that increase the likelihood of an insurance
payoff.
A) moral hazard
B) opportunism
C) adverse selection
D) shirking
The price paid for the rental of borrowed funds (usually expressed as a percentage of
the rental of $100 per year) is commonly referred to as the
A) inflation rate.
B) exchange rate.
C) interest rate.
D) aggregate price level.
Assume that disposable income equals $1000 and the mpc equals 0.6. If total
consumption equal $800, then autonomous consumption is equal to
A) $0.
B) $200.
C) $800.
D) $1000.
Microprudential supervision does all of the following EXCEPT
A) checking capital ratios of a bank.
B) checking a bank’s compliance with disclosure requirements.
C) assessing the riskiness of an individual bank’s activities.
D) focusing on financial system liquidity.
The opportunity cost of holding money is
A) the level of income.
B) the price level.
C) the interest rate.
D) the discount rate.
When the SEC requires companies to publicly release financial statements, which of the
following remedies of conflicts of interest does this fall under?
A) leave it to the market
B) regulate for transparency
C) supervisory oversight
D) separation of functions
Options on futures contracts are referred to as
A) stock options.
B) futures options.
C) American options.
D) individual options.
In the money market, a condition of excess demand for money can be eliminated by a
________ in aggregate output or a ________ in the interest rate, everything else held
constant.
A) rise; rise
B) rise; fall
C) fall; rise
D) fall; fall
The situation in which expansionary fiscal policy does not lead to a rise in aggregate
output is referred to as
A) fiscal neutrality.
B) a recession.
C) complete crowding out.
D) inflation.