If oil prices fall at the same time that the federal government increases its purchases, in
the short run
A) aggregate output and the price level will both increase.
B) aggregate output will increase, but the price level will fall.
C) aggregate output and the price level will both fall.
D) aggregate output will increase, but the price level may either increase or decrease.
Answer:
According to the liquidity premium theory, what does a flat yield curve indicate?
A) Short-term interest rates are expected to remain stable.
B) Short-term interest rates are expected to rise.
C) Short-term interest rates are expected to fall.
D) Long-term interest rates are expected to fall.
Answer:
Default risk
A) is the probability that a borrower will not pay in full the promised coupon or
principal.
B) exists only for the bonds of small corporations.
C) is also known as market risk.
D) is zero for bonds issued by cities and states.
Answer:
If a bank has a leverage ratio of 0.1 and a return on capital of 2%, what is its return on
equity?
A) 0.2%
B) 2.1%
C) 5%
D) 20%
Answer:
An speculator who buys a fifty-year corporate bond
A) must be expecting to still be alive in fifty years.
B) is subject to substantial reinvestment risk.
C) is probably expecting market interest rates to increase in the future.
D) is probably expecting market interest rates to decrease in the future.
Answer:
What is the price of a coupon bond that has annual coupon payments of $75, a par value
of $1000, a yield to maturity of 5%, and a maturity of two years?
A) $1043.08
B) $1046.49
C) $1000.00
D) $1150.00
Answer:
Nominal exchange rates differ from real exchange rates in that nominal exchange rates
A) do not correct for differing interest rates across countries.
B) do not measure the purchasing power of the currency.
C) are fixed, while real exchange rates are flexible.
D) are flexible, while real exchange rates are fixed.
Answer:
The seller of a futures contract
A) assumes the short position.
B) assumes the long position.
C) has the obligation to receive the underlying financial instrument at the specified
future date.
D) is expecting the price of the underlying financial instrument to rise.
Answer:
The process by which identical products that are tradeable converge to the same price is
called
A) arbitrage.
B) hedging.
C) speculation.
D) risk aversion.
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:
What percentage of bank assets were in security holdings in 2012?
A) 5%
B) 13%
C) 22%
D) 37%
Answer:
What determines the acceptability of dollar bills as a medium of exchange?
A) our society’s willingness to use green paper notes issued by the Federal Reserve as
money
B) the willingness of the Federal Reserve to redeem dollar bills for gold
C) the willingness of the U.S. Treasury to redeem dollar bills for gold
D) the public’s fear that failing to accept dollar bills will trigger a hyperinflation
Answer:
In the federal funds market diagram, an open market sale by the Fed
A) shifts the reserve supply curve to the right.
B) shifts the reserve supply curve to the left.
C) decreases the federal funds rate.
D) increases the volume of federal funds traded.
Answer:
The interest rate at which international banks loan to each other is called
A) LIBOR
B) federal funds rate
C) prime rate
D) international bank lending rate
Answer:
A shortcoming of swaps that has led to the domination of the swaps market by large
firms and financial institutions is
A) the lack of privacy.
B) need to assess creditworthiness.
C) desire for more flexibility.
D) limited size of the market.
Answer:
Under the Bretton Woods system, an asymmetry in the ability of central banks to defend
their exchange rates existed because
A) a country experiencing a balance of payments surplus was limited in its ability to
defend its exchange rate by its stock of international reserves.
B) a country experiencing a balance of payments deficit was limited in its ability to
defend its exchange rate by its stock of international reserves.
C) central banks were allowed by the IMF to adjust their exchange rates upward
whenever they chose, but were rarely allowed to adjust their exchange rates downward.
D) central banks were allowed by the IMF to adjust their exchange rates downward
whenever they chose, but were rarely allowed to adjust their exchange rates upward.
Answer:
Information costs
A) are the costs of buying and selling financial claims.
B) include the costs that savers incur to determine the credit worthiness of borrowers.
C) include the costs borrowers incur to discover the best investments to make with the
money they have borrowed.
D) are zero in financial markets, but high for transactions carried out through financial
intermediaries.
Answer:
Which of the following is NOT a form of a short-term loan in the shadow banking
system?
A) repurchase agreements
B) commercial paper
C) money market mutual fund shares
D) bank deposits
Answer:
Which of the following is an intermediate target?
A) M2
B) reserves
C) unemployment rate
D) inflation rate
Answer:
If a small open economy reduces its budget deficit, the result will be:
A) a lower world real interest rate, but no change in the domestic real interest rate
B) a lower domestic real interest rate, but no change in the world real interest rate
C) lower domestic and world real interest rates
D) no change in either the domestic or world real interest rate
Answer:
An increase in the expected price level
A) shifts the short-run aggregate supply curve up and to the left.
B) shifts the short-run aggregate supply curve down and to the right.
C) has no effect on the short-run aggregate supply curve.
D) results in a movement along the short-run aggregate supply curve, rather than a shift
in the short-run aggregate supply curve.
Answer:
The difference between a firm’s assets and its liabilities is known as:
A) limited liability
B) stock
C) equity
D) profit
Answer:
Which of the following is NOT a result of the ability of investors to hedge?
A) increased access to funds by firms and households
B) investors are more willing to invest
C) increased risk aversion
D) slower economic growth
Answer:
What is the price of a coupon bond that has annual coupon payments of $85, a par value
of $1000, a yield to maturity of 10%, and a maturity of three years?
A) $211.38
B) $898.84
C) $962.70
D) $1255.0
Answer:
In comparing the yield to maturity on a Treasury bill with the yield on a discount basis
on the same bill, we can say that the yield to maturity
A) will always be greater than the yield on a discount basis.
B) will always be less than the yield on a discount basis.
C) will always be equal to the yield on a discount basis, provided the holding period is
the same as the number of years to maturity.
D) rises whenever the yield on a discount basis falls.
Answer:
Using estimates of past returns, which monthly investment is most likely to result in the
largest amount of money at retirement for a person in the early 20s?
A) CDs
B) Treasury bills
C) stocks
D) all of the above will result in a similar amount of money
Answer:
Mean reversion refers to the tendency for
A) futures prices to revert to the prices of the underlying securities.
B) the long-run mean return on stocks to equal the long-run mean return on bonds.
C) stocks with high returns today to experience low returns in the future and for stocks
with low returns today to experience high returns in the future.
D) financial analysts whose stock picks have earned above-normal returns in the past to
be unable to pick stocks that will perform as well in the future.
Answer:
As a result of the financial crisis of 2007-2009, the size of the shadow banking system:
A) became smaller than the commercial banking system
B) became larger than the commercial banking system
C) declined, but remained larger than the commercial banking system
D) increased, but remained smaller than the commercial banking system
Answer:
During a period of economic expansion, when expected profitability is high,
A) the demand curve for bonds shifts to the left.
B) the supply curve of bonds shifts to the right.
C) the equilibrium interest rate falls.
D) the equilibrium price of bonds rises.
Answer:
The key assumption of the liquidity premium theory is that investors
A) view bonds of different maturities as perfect substitutes.
B) view bonds of different maturities as completely unsubstitutable.
C) always choose the bond with the highest expected return, regardless of maturity.
D) care about both expected returns and time to maturity.
Answer:
Investors value liquidity in an asset because
A) liquid assets tend to have high rates of return.
B) liquid assets incur lower selling costs.
C) liquid assets incur lower tax liabilities.
D) whereas liquid assets have high information costs, their low risk offsets this.
Answer:
As wealth increases in the economy, we would expect to observe
A) bond prices and interest rates both rise.
B) bond prices and interest rates both fall.
C) bond prices rise and interest rates fall.
D) bond prices fall and interest rates rise.
Answer:
Which of the following statements is correct?
A) Because in practice few borrowers are bank-dependent, the bank lending channel is
of little real-world importance.
B) In the interest rate channel, an expansionary monetary policy may cause a leftward
shift in the AD curve.
C) In the bank lending channel, an expansionary monetary policy can increase output in
the short run even if it does not result in a decrease in the real interest rate.
D) In the interest rate channel, an expansionary monetary policy affects spending but
not output.
Answer: