The problem of a double coincidence of wants refers to
A) the insatiability of wants in a free market economy.
B) poorly-managed companies producing what consumers want only by coincidence.
C) the necessity in a barter system of each trading partner wanting what the other has to
trade.
D) the likelihood that needs will not be the same as wants.
Answer:
A one-year bond currently pays 5% interest. It’s expected that it will pay 4.5% next year
and 4% the following year. The two-year term premium is 0.2% while the three-year
term premium is 0.35%. What is the interest rate on a two-year bond according to the
liquidity premium theory?
A) 4.5%
B) 4.75%
C) 4.95%
D) 4.975%
Answer:
Which of the following is NOT a reason given by economists for the failure of Okun’s
law to account for the rise in unemployment during the recession of 2007-2009?
A) increased willingness among firms to lay off workers during recessions
B) a surge in productivity during the recession
C) the unusual severity of the recession
D) it does not take into account the effect of the stimulus
Answer:
As wealth decreases, which of the following is likely to account for a larger fraction of
a saver’s portfolio?
A) corporate stock
B) corporate bonds
C) U.S. government securities
D) checking account balance
Answer:
As of October 2012, the amount of money as measured by M2 was about
A) $880 billion.
B) $1700 billion.
C) $10.2 trillion.
D) $14 trillion.
Answer:
What unusual measures did the Fed take in trying to reduce long-term interest rates
during the Financial Crisis of 2007-2009?
A) buying mortgage-backed securities issued by Fannie Mae and Freddie Mac
B) reducing the federal funds rate multiple times
C) issuing its own securities
D) eliminating the discount rate on loans to member banks
Answer:
Which of the following is NOT an important criterion for whether a good will be usable
as a medium of exchange?
A) The good must be of standardized quality.
B) The good must be valuable relative to its weight.
C) The good must have value even if it were not being used as money.
D) The good must be durable so that value is not lost through product spoilage.
Answer:
What is the rate of return on a bond with a coupon of $55 that was purchased for $900
and sold one year later for $950?
A) 5.56%
B) 6.11%
C) 11.67%
D) 12.43%
Answer:
If you deposit $500 in a savings account at an annual interest rate of 5%, how much
will you have in the account at the end of five years?
A) $625
B) $392
C) $638
D) $550
Answer:
The output gap can best be described as:
A) the percentage difference between GDP and its potential
B) the difference between GDP in the current year compared to the previous year
C) the difference between a nation’s GDP and that of the nation with the highest GDP
D) the difference between GDP and its forecasted level
Answer:
According to the efficient markets hypothesis,
A) the equilibrium price of an asset equals the optimal forecast of fundamental value
based on available information.
B) the actual and expected prices of an asset will be equal.
C) the actual price of an asset reflects only information on past returns on the asset.
D) the expected price of an asset incorporates only information on past returns on the
asset.
Answer:
According to the liquidity premium theory
A) investors prefer longer to shorter maturities.
B) investors prefer shorter to longer maturities.
C) investors are indifferent between short and long maturities.
D) investors are more interested in the tax treatment of bonds than they are in the
liquidity of bonds.
Answer:
In financial markets, leverage refers to:
A) the use of borrowed money in an investment
B) the power to influence the market
C) the use of political connections in attaining financial outcomes
D) the role that speculators have in impacting market outcomes
Answer:
Which of the following is NOT a responsibility of the Board of Governors?
A) approving bank mergers
B) determining permissible activities for bank holding companies
C) carrying out open market operations
D) setting the salaries of the presidents and officers of district banks
Answer:
Which of the following statements is correct?
A) The Fed has difficulty covering its normal expenses, but is reluctant to ask Congress
for money.
B) The Fed is dependent on the annual appropriations it receives from Congress.
C) The Fed’s profits are substantial, even when compared to the largest U.S.
corporations.
D) At one time the Fed made substantial profits, but falling interest rates have greatly
reduced them.
Answer:
Why has the Federal Reserve chairman often been called the second most important
person in terms of affecting the economy?
A) The Fed chairman has veto power over all federal spending.
B) The Fed is in control of monetary policy.
C) The Fed chairman draws the second highest salary of any official of the federal
government.
D) The Fed has regulatory power over all financial markets.
Answer:
Which of the following is NOT true of the interest rate channel?
A) Bank loans play no special role.
B) The Fed changes the real interest rate which affects the components of aggregate
expenditures.
C) Borrowers are indifferent as to how and from whom they raise funds.
D) Alternative sources of funds are not substitutes for each other.
Answer:
A borrower and a lender agree on a mortgage interest rate. If inflation turns out to be
less than expected
A) the actual real interest rate will exceed the expected real interest rate.
B) the actual real interest rate will be less than the expected real interest rate.
C) the actual nominal interest rate will be higher than expected.
D) the actual nominal interest rate will be less than expected.
Answer:
Issuers of coupon bonds
A) make a single payment of principal when the bonds matures, but multiple payments
of interest over the life of the bond.
B) make a single payment of interest and principal.
C) make multiple payments of principal, but a single payment of interest.
D) make a single payment of principal at the time the bond is issued and multiple
payments of interest over the life of the bond.
Answer:
By designating Federal Reserve currency as legal tender, the federal government
A) has ensured that Federal Reserve currency will serve as money.
B) has guaranteed that Federal Reserve currency may be exchanged for an equivalent
amount of gold or silver.
C) has mandated that Federal Reserve currency be accepted for payment of debts.
D) has mandated that Federal Reserve currency be accepted by citizens of foreign
countries in exchange for their countries’ currencies.
Answer:
If a central bank wishes to lower the foreign-exchange value of its currency, it will
A) buy domestic currency and sell foreign assets.
B) sell domestic currency and buy foreign assets.
C) attempt to raise domestic interest rates.
D) attempt to lower the domestic price level relative to foreign price levels.
Answer:
The balance sheet channel describes ways in which interest rate changes resulting from
monetary policy affect
A) the portfolio decisions of households.
B) the portfolio decisions of businesses.
C) borrowers’ net worth.
D) lenders’ net worth.
Answer:
When economists state that money is neutral in the long run, they mean that in the long
run,
A) fluctuations in the money supply are equally likely to lead to recessions as to
expansions.
B) changes in the money supply have the same impact on the rich as they do on the
poor.
C) the level of output is independent of the nominal money supply.
D) the price level is independent of the nominal money supply.
Answer:
A financial contract in which a bank agrees to sell the expected future returns from an
underlying bank loan to a third party is referred to as:
A) loan sale
B) loan commitment
C) credit rationing
D) microlending
Answer:
Bond ratings
A) are published annually by the federal government and are based largely on
information contained in corporate tax returns.
B) are published annually by the federal government and are based on publicly
available information.
C) are published monthly by the federal government and are based on publicly available
information.
D) are published by private bond-rating agencies.
Answer:
The main argument in favor of Fed independence is that
A) interest rates would probably be lower if Congress controlled the Fed; thus hurting
savers.
B) the Constitution requires it.
C) monetary policy is too important and too technical to be determined in the political
arena.
D) congressional control of the Fed was tried during the 1960s and did not work well.
Answer:
Which of the following accurately describes the relationship between excess reserves
and checkable deposits following the financial crisis of 2007-2009?
A) Excess reserves declined as the excess reserve ratio returned to near zero.
B) Excess reserves rose to nearly one-third of checkable deposits.
C) Excess reserves approached the same level as checkable deposits.
D) Excess reserves exceeded checkable deposits.
Answer:
An important reason why economies at an early stage of development tend to operate
inefficiently is
A) they tend to be dominated by the agricultural sector, where productivity is usually
low.
B) they tend to have authoritarian governments that stifle innovation.
C) they tend to be plagued by superstitious beliefs that stifle innovation.
D) the high transactions costs associated with barter.
Answer:
Which of the following is NOT generally recognized as a channel for monetary policy?
A) interest rate channel
B) balance sheet channel
C) financial market channel
D) bank lending channel
Answer:
If you sell a futures contract for U.S. Treasury bills and on the delivery date the interest
rate of T-bills is higher than you expected, you will have
A) lost money on your long position.
B) gained money on your long position.
C) lost money on your short position.
D) gained money on your short position.
Answer:
In the current U.S. economy, who plays the role of lender of last resort?
A) The Securities and Exchange Commission
B) The Federal Deposit Insurance Corporation
C) The Federal Reserve System
D) The Social Security Administration
Answer:
Which of the following is NOT a result of the double taxation of dividends?
A) Because profits that firms distribute to stockholders are taxed a second time, firms
have an incentive
to retain profits rather than to distribute them to stockholders.
B) The return investors receive from buying stocks is reduced, which reduces the
incentive people have to save in the form of stock investments and increases the costs to
firms of raising funds.
C) It gives firms an incentive to take on what may be an excessive level of debt rather
than issue stock.
D) The decline in retained profits results in increased inefficiency.
Answer:
What is the multiplier? If MPC =0.75, what is the value of the multiplier in the simple
model of the economy?
Answer:
Suppose you are considering buying shares of a stock to hold for one year. The stock
has an expected annual dividend of $2 and an expected price at the end of the year of
$25. If your required rate of return is 10%, what is the most that you should be willing
to pay for the stock? Round off to the nearest cent.
Answer:
In 2008, the liquidity of mortgage-backed securities declined significantly. Make use of
a graph of the bond market to show how this affected the price of mortgage-backed
securities.
Answer:
Why are forward contracts typically illiquid?
Answer:
In what ways do futures contracts differ from forward contracts?
Answer:
How does the goods market return to equilibrium if AE is less than production?
Answer:
What is the primary objective of the Financial Stability Oversight Council?
Answer:
What is meant by inflation targeting? Does the Fed engage in inflation targeting?
Answer:
How does the liquidity premium theory explain an upward sloping yield curve during
normal economic times?
Answer:
How does an expansionary monetary policy affect aggregate expenditures according to
the bank lending channel?
Answer:
Why must the spot price equal the futures price on the settlement date?
Answer:
Suppose you purchase a bond with a coupon of $30 for $1025. You sell it one year later
for $1050. What rate of return did you earn? Report a percentage with two decimal
places.
Answer:
Suppose banks incur heavy losses and become more cautious, increasing their demand
for reserve. Make use of a graph of the loanable funds market to show how the Fed can
use open market operations to maintain the same federal funds rate.
Answer:
What unusual policy actions did the Fed take during the Financial Crisis of 2007-2009
that affected its balance sheet?
Answer:
Suppose a bond has a coupon of $40, face value of $1000, and current price of $950.
What is the coupon rate? What is its current yield? Report a percentage with two
decimal places.
Answer:
What are the risks and reward for investment banks involved in underwriting a new
security issue?
Answer: