All of the following took place during the economic crisis that began in 2007 EXCEPT:
A) the financial system was disrupted
B) large portions of the U.S. economy were cut off from the funds they needed to thrive
C) there was a devastating decline in the production of goods and services throughout
the economy
D) unlike households, most businesses still had easy access to funds
Answer:
Since all assets typically do not move together, how can investors typically reduce risk?
A) Purchase only the best performing assets.
B) Diversify one’s portfolio across different asset classes.
C) Avoid poor performing assets.
D) Actively manage one’s portfolio.
Answer:
As an option nears its expiration date, the size of the premium approaches
A) zero.
B) infinity.
C) its intrinsic value.
D) an amount which varies, depending on prevailing market interest rates on the
expiration date.
Answer:
If the account manager does NOT use a Federal Reserve reverse repurchase agreement
or a matched sale-purchase transaction in carrying out open market operations, he will
use
A) an outright purchase or sale.
B) a limited-duration purchase or sale.
C) an indirect purchase or sale.
D) a reverse duration purchase or sale.
Answer:
Forward transactions
A) provide little risk sharing.
B) are very liquid.
C) have information problems.
D) are widely used by sellers of commodities, but rarely used by buyers of
commodities.
Answer:
The third stage in the regulatory process is
A) a crisis.
B) response by the financial system.
C) regulation.
D) regulatory response.
Answer:
Which of the following did NOT significantly exacerbate the banking crisis of the early
1930s?
A) the Fed’s decision not to make loans to insolvent banks
B) the large number of small, poorly diversified banks
C) the large number of rural banks that held agricultural loans during a time of falling
commodity prices
D) the large amount of fraud carried out by bank managers
Answer:
When economists refer to the role of money as a store of value, they mean that
A) money never loses its value, unlike other assets.
B) money allows value to be stored easily.
C) the value of money falls only when the quantity of money in circulation falls.
D) the value of money falls only when the quantity of money in circulation rises.
Answer:
In November 2012, HP claimed that they had weak earnings due to questionable
accounting by a company that they had taken over. This is an example of:
A) market risk
B) systemic risk
C) idiosyncratic risk
D) liquidity risk
Answer:
According to the Gordon-Growth model, which of the following can cause the value of
a stock to decline?
A) higher expected growth rate of dividends
B) increase in the current dividend
C) increased systemic risk
D) decreased required return on equity
Answer:
Suppose First National Bank has $200 million of assets and $20 million of equity
capital. If First National has a 2% return on assets (ROA), what is its return on equity
(ROE)? Suppose First National’s equity capital declines to $10 million, while its assets
and ROA are unchanged. What is First National’s ROE now?
Answer:
Suppose there’s an 80% chance of a stock rising by 20% and a 20% chance of it falling
by 40%. What is the expected rate of return on the stock?
A) -40%
B) -20%
C) 8%
D) 16%
Answer:
The yen is considered to be stronger if:
A) it takes fewer yen to acquire a foreign currency such as a dollar
B) it takes more yen to acquire a foreign currency such as a dollar
C) it takes fewer dollars to acquire a yen
D) it takes fewer dollars and fewer euros to acquire a yen
Answer:
The risk that the party on the other side of a financial transaction fails to meet its
obligation is called
A) credit risk.
B) currency risk.
C) counterparty risk.
D) leverage.
Answer:
Sally Jones lost her job at a steel company because of a permanent decline in the
demand for steel. Sally Jones is considered by economists to be
A) naturally unemployed.
B) cyclically unemployed.
C) structurally unemployed.
D) frictionally unemployed.
Answer:
Government regulations requiring firms that desire to sell securities in financial markets
to disclose all available information
A) eliminate the adverse selection problem (when rigorously enforced).
B) increase the difficulty that young firms may have in raising funds.
C) eliminate the moral hazard problem in securities markets.
D) fail to eliminate the adverse selection problem, in part because they do not greatly
reduce the difficulty that young firms have in raising funds.
Answer:
Bonds receiving one of the top four ratings are considered:
A) junk
B) speculative
C) AAA
D) investment grade
Answer:
The bond supply curve
A) shows the quantity of bonds lenders are willing to supply as bond prices change.
B) shows the quantity of bonds lenders are willing to supply as interest rates change.
C) shows the quantity of bonds borrowers are willing to supply as bond prices change.
D) is represented by a downward-sloping line when the price of bonds is on the vertical
axis and the quantity of bonds supplied is on the vertical axis.
Answer:
Which of the following is a bank asset?
A) checkable deposits
B) savings deposits
C) borrowings in the federal funds market
D) cash items in the process of collection
Answer:
Suppose that a new bond rating service is established that specializes in rating
municipal bonds that had not previously been rated. The likely result would be
A) a shift to the left in the demand curve for municipal bonds.
B) a shift to the left in the supply curve for municipal bonds.
C) an increase in the equilibrium interest rate.
D) a decrease in the equilibrium interest rate.
Answer:
The FOMC states its overall objectives for interest rates in
A) the Governors’ Order.
B) the Policy Directive.
C) the Federal Reserve Bulletin.
D) the Chairman’s Order.
Answer:
When an economy relies on specialization,
A) the economy will generally produce only one product.
B) the economy will usually be heavily agricultural.
C) each individual in the economy produces the goods or services for which he or she
has relatively the best ability.
D) each individual will be assigned by the government to produce that good or service
the government believes the economy should specialize in.
Answer:
Which of the following cities contains a Federal Reserve bank?
A) Pittsburgh
B) Los Angeles
C) Seattle
D) Dallas
Answer:
The payments system is
A) the mechanism for conducting economic transactions.
B) another name for the system of foreign exchange rates.
C) the phrase used to describe how transactions are carried out in an economy that does
not use money.
D) the way in which economic transactions are carried out in a government-controlled
economy, such as the former Soviet Union.
Answer:
Which best describes a credit default swap?
A) It is designed to reduce interest-rate risk.
B) The issuer receives payments from the buyer in return for agreeing to make
payments to the buyer if the security goes into default.
C) Issuers are taking out insurance in case of default.
D) It represents a way for the issuer to establish its creditworthiness.
Answer:
The use of checks in transactions
A) entails lower information costs than the use of currency.
B) entails fewer steps than settling transactions with currency.
C) avoids the cost of transporting currency back and forth.
D) entails lower information and fewer steps than settling transactions with currency.
Answer:
A depreciating nominal exchange rate results from
A) a depreciating real exchange rate.
B) a low domestic inflation rate relative to the foreign inflation rate.
C) an appreciating real exchange rate.
D) a large government budget deficit.
Answer:
Venture capital firms attempt to overcome the principal-agent problem by
A) investing only in industries with high profit rates.
B) charging high interest rates on loans.
C) holding large equity stakes in the firms they invest in.
D) avoiding investing in common stock.
Answer:
Congress authorized a second Bank of the United States partly in response to:
A) difficulty in funding the American Revolution
B) difficulty in funding the War of 1812
C) difficulty in funding the Industrial Revolution
D) difficulty in funding the Civil War
Answer:
A corporation’s market capitalization is best described as
A) the total value of its stocks and bonds.
B) the total value of its common and preferred stock.
C) its total profit for a particular year.
D) its average profit over a period of years.
Answer:
Moral hazard can contribute to high bank leverage in all of the following ways
EXCEPT
A) having high capital requirements.
B) bank managers are compensated in part on providing shareholders with high returns
on equity.
C) high bank leverage provides shareholders with a potential for a higher return on
equity.
D) federal deposit insurance has reduced the incentive of depositors to monitor the
behavior of bank managers.
Answer:
When conducting open market operations, at what price is it willing to buy or sell
securities?
A) at the price agreed upon by the Federal Open Market Committee
B) at the price agreed upon by the Board of Governors
C) at the price set by the Fed chair
D) at whatever price is necessary to carry out its open market operations
Answer:
Fundamentally, to reap the benefits of specialization, an economy must
A) be heavily industrial.
B) be heavily agricultural.
C) have an extensive system of higher education.
D) develop ways for individuals to trade goods with one another.
Answer:
The Dodd-Frank Act removed which group from decisions regarding the presidents of
Federal Reserve Banks?
A) Class A directors
B) Class B directors
C) Class C directors
D) Board of Governors
Answer:
In the late 2000s, the primary source of external funds for corporations was
A) commercial paper.
B) loans.
C) bonds.
D) stocks.
Answer:
How do New Keynesians use the existence of long-term nominal contracts to help
explain the failure of prices to adjust in the short run?
Answer:
Why does the segmented markets theory suggest think that bonds of different maturities
are not perfect substitutes for each other?
Answer:
What actions must a central bank take if it is trying to maintain a pegged exchange rate,
but there’s downward pressure on the value of its currency.
Answer:
What is the difference between money, income, and wealth?
Answer:
What are the limitations to the Fed’s independence?
Answer: