Investors who wish to reduce their risk should
a. buy stocks of small companies.
b. diversify.
c. buy stocks of large companies.
d. keep large amounts of cash.
Answer:
Which of the following statements is true?
a. Different stock indexes normally show the same total returns.
b. Stock indexes do not provide information on dividends.
c. Mutual funds encourage investors to invest in the same security instead of
diversifying.
d. The S&P 500 is an example of a mutual fund.
Answer:
Which of the following bonds has a comparatively higher yield to maturity?
a. A oneyear bond with a 6.7 percent interest today
b. A threeyear bond with a 5 percent interest today
c. A twoyear bond with a 4 percent interest today
d. A fouryear bond with a 4.5 percent interest today
Answer:
A rise in wealth, everything else remaining unchanged, will cause household investment
in housing to
a. decline.
b. not change.
c. rise.
d. fall at first, then rise later.
Answer:
From 1991 to 2001, Argentina established commitment by
a. following the Taylor rule.
b. following a strict money growth rule.
c. establishing a currency board.
d. using a system of inflation targeting.
Answer:
M2 consists of
a. amounts in savings accounts, money-market mutual funds (held by individuals), and
small time deposits (under $100,000).
b. amounts in savings accounts, and money-market mutual funds (held by individuals).
c. M1 plus amounts in savings accounts, money-market mutual funds (held by
individuals), small time deposits (under $100,000), and repurchase agreements issued
by banks.
d. M1 plus amounts in savings accounts, money-market mutual funds (held by
individuals), and small time deposits (under $100,000).
Answer:
The real exchange rate between the domestic currency of a country and the foreign
currency increases by 2 percent. If the domestic price level increases by 4 percent while
the foreign price level increases by 3 percent, the nominal exchange rate will
a. increase by 1 percent.
b. decrease by 3 percent
c. increase by 5 percent
d. decrease by 3 percent
Answer:
Suppose that a change in the expected inflation rate leads supply and demand to adjust
so that the expected real interest rate is unchanged at 3.0 percent. The tax rate is 30
percent. Initially, the expected inflation rate is 3.0 percent. If the expected inflation rate
falls from 6 percent to 0 percent, the after-tax expected real interest rate
a. rises by 1.8 percent.
b. rises by 0.9 percent.
c. falls by 0.9 percent.
d. falls by 1.8 percent.
Answer:
In the two-period model, suppose a household’s income in period one is $30,000 and its
income in period two is $40,000. Also assume that the household face the real interest
rate of 25 percent. What is the present value of the household’s income?
a. $62,000
b. $46,000
c. $20,000
d. $30,000
Answer:
Which size category of banks generally has the largest spread?
a. Small banks
b. Medium-sized banks
c. The 100 largest banks
d. The 10 largest banks
Answer:
Which of the following is a way in which banks can equalize the time to maturity of
their assets and liabilities?
a. Securitization
b. Quantitative easing
c. Privatization
d. Credit easing
Answer:
An investor buys a stock for $1,200 at the beginning of a year. The stock pays him a
dividend of $150 over the year, and the worth of the stock appreciates by $300 at the
end of the year. If the annual rate of inflation is 6%, what is the loss in principal value
due to inflation?
a. $18
b. $27
c. $72
d. $247.5
Answer:
From 1970 to 2000, the U.S. dollar against the Japanese yen and against the German
mark.
a. depreciated against both the Japanese yen and the German mark.
b. appreciated against both the Japanese yen and the German mark.
c. depreciated against the Japanese yen and appreciated against the German mark.
d. appreciated against the Japanese yen and depreciated against the German mark.
Answer:
Which of the following is true of a financial market?
a. Only new securities can be traded in a financial market.
b. Some financial markets are local.
c. All financial markets have a central physical location.
d. All financial markets are secondary markets.
Answer:
The interest that an investor will earn, on maturity, if she purchases a two year bond by
paying 6.6 percent today is
a. 1.1025.
b. 1.1363.
c. 1.0036.
d. 1.0003.
Answer:
Which of the following will NOT play a role in eliminating the shortcoming of the
taxation system, particularly the fact that the tax system taxes nominal return rather
than real return?
a. Eliminating taxation of interest
b. Introducing inflation-indexed bonds
c. Taxing only real interest income, not nominal interest income
d. Reducing inflation to zero
Answer:
If you expect inflation to be 3 percent next year and you buy a one-year bond paying 4
percent interest, what is your after-tax expected real interest rate if you face a tax rate of
30 percent?
a. −0.2 percent
b. 0.0 percent
c. 0.3 percent
d. 1.0 percent
Answer:
What does a flat yield curve imply, according to the expectations theory of the term
structure of interest rates?
a. The price level will not change in the future.
b. Future long-term rates are expected to rise.
c. Future long-term rates are expected to fall.
d. Future short-term rates are not expected to change.
Answer:
A central bank that is explicit about its goals and plans is said to be
a. obvious.
b. transparent.
c. translucent.
d. opaque.
Answer:
Suppose the economy is thought to be 1 percent below potential (i.e., the output gap is
−1 percent), when potential output grows 4 percent per year. Suppose the Fed is
following the Taylor rule, with an inflation rate of 4 percent over the past year. The
equilibrium real federal funds rate is 3 percent and the weights on the output gap and
inflation gap are 0.5 each. The inflation target is 1 percent. What should the federal
funds rate be?
a. 4 percent
b. 6 percent
c. 8 percent
d. 12 percent
Answer:
The longest economic expansion in U.S. history occurred in the
a. 1960s.
b. 1970s.
c. 1980s.
d. 1990s.
Answer:
Which of the following is a possible outcome of a negative or low term spread?
a. A low of negative spread may indicate higher short-term interest rates in the future.
b. A low or negative spread may cause the yield curve to slope upward.
c. A low or negative spread may reduce lending by banks.
d. A low or negative spread may indicate the early stages of economic expansions.
Answer:
A Federal Reserve policymaker voting to tighten monetary policy is most likely voting
for option
a. A.
b. B.
c. C.
d. D.
Answer:
Risk that can be eliminated by diversification is
a. unsystematic risk.
b. systematic risk.
c. default risk.
d. interest-rate risk.
Answer:
Consumption spending is about of aggregate demand.
a. 2/3
b. 1/2
c. 3/4
d. 5/6
Answer:
Which of the following is a possible drawback of a bank run?
a. It leaves the banks with excess reserves.
b. It leads to a fall in investment activities because of lack of loans available to business
firms.
c. It leads to a fall in the demand for loans by the business firms.
d. It leads to an excessive increase in the supply of money by the banks.
Answer:
Suppose that a change in the expected inflation rate leads supply and demand to adjust
so that the after-tax expected real interest rate is unchanged at 2.0 percent. The tax rate
is 30 percent. Initially, the expected inflation rate is 3.0 percent. If the expected inflation
rate rises from 3 percent to 6 percent, the expected real interest rate
a. rises by 0.75 percent.
b. rises by 1.25 percent.
c. falls by 1.25 percent.
d. falls by 0.75 percent.
Answer:
Under relative purchasing-power parity,
a. the exchange rate equals the ratio of price indexes in two countries.
b. interest-rate parity holds.
c. absolute purchasing-power parity also holds.
d. a currency depreciates relative to another currency by the amount by which the
inflation rate is higher in the first country than in the second country.
Answer:
If the equation for the Phillips curve is
π = πe− 5(U− 5),
then the natural rate of unemployment is
a. 10 percent.
b. 5 percent.
c. 2.5 percent.
d. 0.5 percent.
Answer:
Consider the following production function
Y= A×Ka×L1−a.
If a = 0.4, and over the past year output grew 4 percent, total factor productivity (TFP)
grew 2.6 percent, and capital grew 2 percent, what was the growth rate of labor?
a. 4 percent
b. 3 percent
c. 2 percent
d. 1 percent
Answer:
People’s beliefs about future economic variables are known as
a. microeconomic foundations.
b. real interest rates.
c. expectations.
d. permutations.
Answer: