First National Bank
Assuming that the average duration of its assets is five years, while the average duration
of its liabilities is three years, then a 5 percentage point increase in interest rates will
cause the net worth of First National to decline by ________ of the total original asset
value.
A) 5 percent
B) 10 percent
C) 15 percent
D) 25 percent
The efficient markets hypothesis implies that future changes in exchange rates should
for all practical purposes be
A) unpredictable.
B) set by each country.
C) increasing.
D) pegged to a standard such as the U.S. dollar or the Euro.
Liquidity provision and asset purchase may not be enough to stimulate the economy
unless the these policy actions are able to
A) lower the real interest rate for investments.
B) lower the short-term real interest rate.
C) raise the policy rate above zero.
D) lower the policy rate.
The declining trend in the currency-deposit ratio during 2007-2014 can be explained by
A) the increased holdings of U.S. currency by foreigners.
B) bank panics.
C) a drop in the rate of interest paid on checking deposits.
D) the increasing use of debit cards.
Which of the following is NOT a government-sponsored enterprise?
A) Fannie Mae.
B) Freddie Mac.
C) Federal Home Loan Banks.
D) Ginnie Mae.
Potential weaknesses of nominal GDP targeting include
A) it requires accurate estimates of potential GDP growth, which are not easy to
achieve.
B) it implies that the central bank will respond to slowdowns in the real economy even
if inflation is not falling.
C) real GDP growth that is below potential or inflation that is below the inflation
objective will encourage more expansionary monetary policy.
D) it focuses not only on controlling inflation but also explicitly on stabilizing real
GDP.
If the price of diamonds is expected to decrease, all else equal, then the demand for
diamonds ________ and the demand for platinum ________.
A) decreases; increases
B) decreases; decreases
C) increases; increases
D) increases; decreases
According to the segmented markets theory of the term structure
A) bonds of one maturity are close substitutes for bonds of other maturities, therefore,
interest rates on bonds of different maturities move together over time.
B) the interest rate for each maturity bond is determined by supply and demand for that
maturity bond.
C) investors’ strong preferences for short-term relative to long-term bonds explains why
yield curves typically slope downward.
D) because of the positive term premium, the yield curve will not be observed to be
downward-sloping.
The European Central Bank (ECB) pursues a hybrid monetary policy strategy that has
elements in common with the -targeting strategy previously used by the Bundesbank
but also includes some elements of targeting.
A) monetary; inflation
B) inflation; monetary
C) monetary; exchange rate
D) monetary; nominal GDP
The real interest rate for investments reflects not only the short-term real interest rate
set by the central bank, but also the financial frictions. When the policy rate has hit the
floor of zero, to stimulate the economy at given inflation rates, policymakers can
A) lower the financial frictions.
B) lower the short-term real interest rate.
C) lower both the short-term real interest rate and the financial frictions.
D) lower the policy rate.
If interest rates increase from 9 percent to 10 percent, a bank with a duration gap of 2
years would experience a decrease in its net worth of
A) 0.9 percent of its assets.
B) 0.9 percent of its liabilities.
C) 1.8 percent of its liabilities.
D) 1.8 percent of its assets.
Everything else held constant, abolishing the individual income tax will
A) increase the interest rate on corporate bonds.
B) reduce the interest rate on municipal bonds.
C) increase the interest rate on municipal bonds.
D) increase the interest rate on Treasury bonds.
Adverse selection occurs when those ________ likely to get ________ insurance
payoffs are the ones who want to purchase insurance the most.
A) least; large
B) least; small
C) most; large
D) most; small
First National Bank
If interest rates rise by 5 percentage points, say from 10 to 15%, bank profits (measured
using gap analysis) will
A) decline by $0.5 million.
B) decline by $1.5 million.
C) decline by $2.5 million.
D) increase by $2.0 million.
If the aggregate price level at time t is denoted by Pt, the inflation rate from time t – 1 to
t is defined as
A) = (Pt – Pt – 1)/Pt – 1.
B) = (Pt + 1 – Pt – 1)/Pt – 1.
C) = (Pt + 1 – Pt )/Pt.
D) = (Pt – Pt – 1)/Pt.
Which of the following is not a part of the Sarbanes-Oxley Act of 2002?
A) the establishment of a Public Company Accounting Oversight Board (PCAOB) to
supervise accounting firms and thus insure that audits are independent and controlled
for quality
B) increased penalties for white-collar crime and obstruction of official investigations
C) requires a CEO and CFO to certify that periodic financial statements and disclosure
of the firm are accurate
D) requires investment banks to make public their analysts’ recommendations
The advantage of forward contracts over future contracts is that they
A) are standardized.
B) have lower default risk.
C) are more liquid.
D) are more flexible
An option that can only be exercised at maturity is called
A) a swap.
B) a stock option.
C) an European option.
D) an American option.
On January 25, 2009, one U.S. dollar traded on the foreign exchange market for about
0.75 euros. Therefore, one euro would have purchased about ________ U.S. dollars.
A) 0.75
B) 1.00
C) 1.33
D) 1.75
U.S. government bonds have no default risk because
A) they are issued in strictly limited quantities.
B) the federal government can increase taxes or print money to pay its obligations.
C) they are backed with gold reserves.
D) they can be exchanged for silver at any time.