If the Fed sterilizes the purchase of foreign assets,
(a) its assets and liabilities rise by the same amount.
(b) its assets and liabilities fall by the same amount.
(c) the composition of its assets changes, but its liabilities are unaffected.
(d) the composition of its liabilities changes, but its assets are unaffected.
Answer:
From the mid-1970s to the late 1980s the largest source of deposits in Euromarkets was
(a) OPEC countries.
(b) multinational corporations.
(c) European governments.
(d) the U.S. government.
Answer:
The currency outstanding account on the Fed’s balance sheet
(a) represents coins minted and issued by the Treasury and held by the Fed.
(b) is an asset.
(c) represents Federal Reserve Notes.
(d) represents coins minted and issued by the U.S. Treasury and held by the commercial
banking system.
Answer:
TIAA-CREF is the pension plan for college professors. Professors can direct their
contributions entirely to the TIAA part of the plan which offers a guaranteed, but
generally relatively low, return or entirely to the CREF part of the plan, which invests in
the stock market, or they can divide their contributions between the two parts of the
plan. Funds invested in the CREF part of the plan will on average earn a higher rate of
return than funds invested in the TIAA part of the plan, but the return is not guaranteed
and in some years the value of funds invested in the CREF part of the plan will decline.
How would you expect each of the following professors to divide his or her
contributions between the TIAA and CREF parts of the plan: (a) a 28-year professor
just beginning her career; (b) a 58-year old professor who is about 10 years from
retirement; and (c) a 68-year old professor on the verge of retirement?
Answer:
The bulk of the Fed’s holdings of U.S. Treasury currency consists of
(a) Treasury paper currency.
(b) coins.
(c) Federal Reserve Notes.
(d) Treasury bills.
Answer:
When were U.S. banks authorized to use bankers’ acceptances for short-term financing
of their customers’ foreign and domestic trade?
(a) In 1789, by the U.S. Constitution
(b) In 1913, by the Federal Reserve Act
(c) In 1934, by the International Exchange Act
(d) In 1980, by the Deregulation of Domestic and International Exchange Act
Answer:
Elections to the boards of directors of Federal Reserve district banks
(a) have a sizeable impact on the conduct of monetary policy.
(b) typically involve only one candidate per position.
(c) have greatly increased in importance over the years.
(d) were abolished in 1985.
Answer:
If the nominal interest rate parity condition is not met,
(a) imports will exceed exports.
(b) the return from holding domestic assets must exceed the expected return from
holding foreign assets.
(c) the return from holding domestic assets must be less than the expected return from
holding foreign assets.
(d) the return from holding domestic assets must be greater or less than the expected
return from holding foreign assets.
Answer:
Which age group typically has the highest savings rate?
(a) Young people
(b) Middle-aged people
(c) Elderly people
(d) Savings rates are approximately the same for all age groups.
Answer:
The process of matching borrowers and lenders performed by the financial system
(a) greatly reduces the chances of inflation.
(b) is plagued by the double coincidence of wants problem.
(c) increases the economy’s ability to produce goods and services.
(d) occurs only through financial intermediaries.
Answer:
The new classical explanation of aggregate supply is also known as
(a) Monetarism.
(b) Keynesianism.
(c) the misperception theory.
(d) the adaptive expectations theory.
Answer:
According to Milton Friedman and Anna Schwartz, the loss of output during the early
1930s in the United States was due to
(a) high tax rates imposed by the federal government.
(b) the Fed’s increasing of the required reserve ratio.
(c) the stock market crash of 1929.
(d) a wave of bank failures.
Answer:
The bond supply curve slopes up because
(a) interest rates rise as bond prices rise.
(b) when bond prices are high, inflation is high.
(c) the lender is willing and able to offer more bonds when the price of the bond is low.
(d) the borrower is willing and able to offer more bonds when the price of the bond is
high.
Answer:
Suppose a bond is expected to be selling for $110 one year from now, its coupon
payment during the year will be $10.75 and the interest rate, adjusted for the bond’s
risk, is 5%. If the bond market is efficient, what will be the current market price of the
bond?
(a) $104.76
(b) $110
(c) $115
(d) $120.75
Answer:
The flight to quality during the early years of the Great Depression resulted in
(a) the yield on government securities being pushed close to zero.
(b) a decline in spread between medium-quality corporate bonds and long-term
Treasury securities.
(c) a fall in the commercial paper rate relative to the T-Bill rate.
(d) a decline in the price of T-Bills.
Answer:
As a result of the bank failures of the early 1930s
(a) bank reserves as a fraction of deposits rose and total bank deposits fell.
(b) bank reserves as a fraction of deposits and total bank deposits both fell.
(c) bank reserves as a fraction of deposits and total bank deposits both rose.
(d) bank reserves as a fraction of deposits fell and total bank deposits rose.
Answer:
Which of the following is a correct characterization of the views of economists on the
relation between changes in the money supply and changes in output in the short run?
(a) Economists agree that changes in the money supply are responsible for subsequent
changes in output.
(b) Economists agree that changes in the money supply reflect, rather than cause,
changes in output.
(c) Economists disagree over whether changes in the money supply are responsible for
subsequent changes in output or whether changes in the money supply reflect changes
in output.
(d) Economists disagree over whether changes in the money supply and changes in
output are closely related in the short run.
Answer:
Which of the following statements is true concerning the velocity of M1?
(a) It declined during most of the period from the late 1940s to 1980 but rose during the
1980s.
(b) It has increased during most of the period since the late 1940s.
(c) It has been roughly constant since the late 1940s.
(d) It declined during the 1980s.
Answer:
In the new classical view, if the Chairman of the Fed announces a 10% increase in the
money supply and then takes actions that cause the money supply to grow by more than
10%, the result will be
(a) a 10% increase in the price level, and no change in output.
(b) a 10% increase in the price level, and an increase in output.
(c) a greater than 10% increase in the price level, and an increase in output.
(d) a greater than 10% increase in the price level, and no change in output.
Answer:
The book in which Milton Friedman and Anna Schwartz reported on their study of the
relation between money and the business cycle is
(a) Money through the Ages.
(b) The General Theory of Employment, Interest, and Money.
(c) A Monetary History of the United States.
(d) Money and the Cycle.
Answer:
In making investment decisions, savers evaluate
(a) the variability of the expected return as well as the size of the return.
(b) the size of the expected return, but not the variability of the return.
(c) the variability of the expected return, but not the size of the return.
(d) neither the size nor the variability of the expected return.
Answer:
Inflation that is lower than expected redistributes wealth from
(a) employers to employees under nominal wage contracts.
(b) borrowers to lenders.
(c) lenders to borrowers.
(d) the federal government to taxpayers.
Answer:
Milton Friedman and Anna Schwartz traced the recession of 19371938 to
(a) the monetary contraction resulting from the Fed’s increase in the required reserve
ratio.
(b) the monetary contraction resulting from a wave of bank failures.
(c) the effects of World War II on the demand for U.S. exports.
(d) the increased foreign exchange value of the dollar.
Answer:
Financial markets provide arrangements for
(a) direct finance.
(b) indirect finance.
(c) financial intermediation.
(d) direct finance, indirect finance, and financial intermediation.
Answer:
Property and casualty insurers hold
(a) more short-term assets than do life insurance companies.
(b) fewer short-term assets than do life insurance companies.
(c) roughly the same amount of short-term assets as do life insurance companies.
(d) only long-term assets.
Answer:
In the new Keynesian view, the larger the proportion of firms in the economy with
sticky prices,
(a) the steeper the SRAS curve will be.
(b) the flatter the SRAS curve will be.
(c) the greater the increase in the price level for a given shift in the AD curve.
(d) the less effective is fiscal policy in increasing output.
Answer:
Compared to the banking systems in other major industrial countries, the banking
system in the United States has
(a) fewer banks and is more concentrated.
(b) more banks and is more concentrated.
(c) fewer banks and is less concentrated.
(d) more banks and is less concentrated.
Answer:
Increases in which of the following items from the Fed’s balance sheet will result in
increases in the monetary base?
(a) U.S. Treasury deposits
(b) Discount loans
(c) Other Federal Reserve liabilities and capital account
(d) Foreign and other deposits
Answer:
IBFs are
(a) U.S. branches of banks headquartered outside of the United States.
(b) foreign branches of U.S. banks.
(c) securities tradeable on the Eurodollar market.
(d) U.S. institutions that aren’t allowed to conduct domestic banking business.
Answer:
Vesting refers to
(a) the right of the holder of an insurance policy to collect for an insurable event.
(b) the shielding of returns on whole life policies from taxation.
(c) the length of service required of an employee before he or she is eligible for a
pension.
(d) the payments made by an employee into a pension plan.
Answer:
If you take out a car loan from a bank, the loan is a (an)
(a) liability to you and an asset to the bank.
(b) liability to the bank and an asset to you.
(c) liability to both you and the bank.
(d) asset to both you and the bank.
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:
Which of the following statements is correct?
(a) Whenever the federal government runs a budget deficit the monetary base increases.
(b) Whenever the U.S. Treasury sells securities the monetary base increases.
(c) Whenever the Fed sells securities the monetary base increases.
(d) When the Fed helps finance a federal budget deficit, the monetary base increases.
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 substantially 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:
Most economists believe that the aggregate supply curve is
(a) upward sloping in the short run, but vertical in the long run.
(b) upward sloping in the long run, but vertical in the short run.
(c) upward sloping in both the short run and in the long run.
(d) vertical in both the short run and in the long run.
Answer:
Evaluate the following assertion: “The new Keynesian economists reject the
misperception theory because they do not believe that households and businesses use all
available information in forming their expectations of money growth or the price level.”
Answer:
Economic studies have shown that countries that have high inflation rates have lower
rates of economic growth than do countries with low inflation rates. Explain what
underlies this relationship between inflation and economic growth.
Answer:
Why does the Pension Benefit Guaranty Corporation insure defined benefit pension
plans, but not defined contribution pension plans? Has the existence of PBGC increased
or decreased moral hazard problems in the financial system?
Answer:
Suppose that Canada has been experiencing high rates of inflation. If the Canadian
government institutes a plausible new policy to lower inflation, what will be the effect
on the value of the Canadian dollar?
Answer:
Discuss changes in the level of competition in security underwriting during the last
twenty years.
Answer:
At one time Milton Friedman proposed that banks be obliged to hold 100% reserves
against deposits. If this proposal were adopted, how would the relationship between M1
and the monetary base change? How would the process of financial intermediation be
affected by the proposal?
Answer:
Steve Forbes has run for president twice on a program of a “flat tax.” Under a flat tax,
there would be only one tax bracket for the federal income tax and most tax deductions
and tax exemptions would be eliminated. Suppose that Forbes wins the 2004
presidential election. What would be the likely impact on the market for municipal
bonds?
Answer:
Analyze the effect of the rise of retailing on the Internet in terms of the long-run
equilibrium in the IS-LM-FE model.
Answer:
Why did the share that money market mutual funds hold in the mutual fund market
more than triple between 1975 and 2003?
Answer:
If the Federal Reserve did not require them to do so, would banks still hold reserves?
Answer:
The text states that: “Few countries have as a complex a structure for their central bank
as the United States has in its Federal Reserve System.” Why does the Fed have such a
complex structure?
Answer:
Suppose that many households look to the stock market to gauge how the economy is
likely to perform in the future. When stock prices are rising, then households will be
optimistic about the future state of the economy and will increase their spending on
houses and consumer durables, such as cars and furniture. When stock prices are
falling, then households will be pessimistic about the future and will cut back on their
spending. If this view of the link between stock prices and household spending is
correct, then what will be the effect of a decline in stock prices on output in the new
Keynesian view? Be sure to distinguish the short run from the long run.
Answer:
The American Civil War lasted from the spring of 1861 to the spring of During the war
the Confederate government issued substantial amounts of fiat paper currency. What do
you think happened to the price level (measured in Confederate dollars) in the
Confederate states during the final months of the war?
Answer:
Suppose that households decrease their demand for checkable deposits. If the Fed is
using an interest rate as an intermediate target, will it have to take any action to
maintain the target?
Answer:
What has been the approach of the European Central Bank to monetary targeting?
Answer:
Evaluate the following assertion: “The oil price shock of 1974 was responsible for the
high rates of inflation the U.S. experienced throughout the remainder of the 1970s.”
Answer:
What services are finance companies able to offer consumers and businesses that banks
do not offer?
Answer: