If i is the yield to maturity of a fixed-payment loan,
A) the value of the loan today equals i times the sum of the values of all the loan
payments.
B) i equals the present value of the loan payments.
C) the value of the loan today equals the sum of the values of the loan payments.
D) the value of the loan today equals the present value of the loan payments discounted
at rate i.
Answer:
The additional interest that investors require to buy a long-term bond instead of a
sequence of short-term bonds is known as the:
A) risk premium
B) default premium
C) term premium
D) segmented premium
Answer:
Which of the following would NOT cause the demand curve for bonds to shift?
A) a change in wealth
B) a change in the price of bonds
C) a change in the liquidity of bonds
D) a change in expected inflation
Answer:
In the new Keynesian view a monopolistically competitive firm may fail to increase the
price of its product as demand increases because
A) if it does so it will lose all of its customers.
B) the cost to it of changing prices may exceed the benefit of doing so.
C) prices of monopolistically competitive firms are regulated by the federal government
and may only be changed with permission.
D) for a monopolistically competitive firm, price is below marginal cost.
Answer:
U.S. Treasury bonds
A) carry no risk of default and are therefore not risky investments.
B) have constant yields to maturity and are therefore not risky investments.
C) have constant coupon rates and are therefore not risky investments.
D) are subject to fluctuations in their market prices and are therefore risky investments.
Answer:
Debt instruments are also called
A) equities.
B) credit market instruments.
C) prospectuses.
D) units of account.
Answer:
The new classical approach to the aggregate supply curve assumes that businesses are
A) better informed about the general price level than they are about prices in their own
markets.
B) better informed about prices in their own markets than they are about the general
price level.
C) equally well informed about prices in their own markets and the general price level.
D) reluctant to engage in investment spending because of a lack of information
concerning future prices.
Answer:
An increase in the price level reduces net exports because
A) it leads indirectly to a higher exchange rate.
B) it leads indirectly to a lower exchange rate.
C) it leads indirectly to a lower real interest rate.
D) it leads directly to higher real money balances.
Answer:
Purchasing power parity’s assumption that the real exchange is constant
A) is correct in nearly all instances.
B) would be correct were it not for the existence of trade barriers.
C) is not reasonable.
D) is correct for trade between the United States and Japan, but incorrect in most other
bilateral trading relations.
Answer:
Why has the IMF come in for widespread criticism for its handling of the Asian
financial crisis?
A) It refused to make loans to any of the countries whose currencies were under
speculative attack.
B) Its policies did not sufficiently punish speculators with losses, giving rise to moral
hazard.
C) Its policies led to unsustainably low interest rates in a number of Asian countries.
D) Its policies failed to lead to sufficient hardship for citizens in a number of Asian
countries, giving rise to moral hazard.
Answer:
Suppose there’s a 50% chance of a stock rising by 20% and a 50% chance of it falling
by 20%. What is the expected rate of return on the stock?
A) -20%
B) 0%
C) 10%
D) 20%
Answer:
The Depository Institutions Deregulation and Monetary Control Act of 1980
A) eliminated the requirement that banks hold reserve deposits with the Fed.
B) required all state banks to join the Federal Reserve System.
C) required all banks to maintain reserve deposits with the Fed.
D) prohibited nonmember banks from receiving discount loans.
Answer:
Foreign-exchange market interventions will always
A) lead to a decline in domestic interest rates relative to foreign interest rates.
B) lead to a rise in domestic interest rates relative to foreign interest rates.
C) lead to a decline in the domestic money supply.
D) alter a central bank’s holdings of international reserves.
Answer:
Which of the following statements is correct?
A) The supply curve for loanable funds slopes up, whereas the supply curve for bonds
slopes down.
B) The demand curve for loanable funds slopes up, whereas the demand curve for
bonds slopes down.
C) The demand curve for loanable funds and the demand curve for bonds both slope up.
D) The supply curve for bonds and the supply curve for loanable funds both slope up.
Answer:
The fee charged by a typical hedge fund are sometimes called:
A) 12b-1 fees
B) hedging premiums
C) loads
D) carried interest
Answer:
The speculative attack on the British pound in 1967 succeeded because
A) the pound was seriously undervalued relative to the dollar.
B) Britain decided to drop out of the Bretton Woods system.
C) British exports greatly exceeded British imports, causing a large inflow of gold.
D) the Bank of England lacked the international reserves to defend the existing
exchange rate indefinitely.
Answer:
When a central bank buys 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:
Following the downgrade of U.S. debt by Standard & Poor’s in August, 2011:
A) other rating agencies also downgraded U.S. debt
B) interest rates spiked as investor’s perception of risk increased
C) investors didn’t seem to be any more concerned about default risk than before the
downgrade
D) the U.S. implemented a plan to significantly reduce its budget deficit later that year
Answer:
Compounding refers to
A) the calculation of interest rates after the compounding effect of taxes has been
allowed for.
B) the paying back of both interest and principal during the life of a fixed payment loan.
C) the process of earning interest on both the interest and the principal of an
investment.
D) the increased value of an investment that arises from the payment of periodic
interest.
Answer:
Credit risk is the risk that
A) an insufficient number of borrowers will apply for loans or credit.
B) interest rates will rise after a loan has been granted.
C) interest rates will fall after a loan has been granted.
D) borrowers might default on their loans.
Answer:
Noise traders involves investors who
A) overreact to good and bad news.
B) strictly follow the efficient markets hypothesis.
C) filter out the noise involved in following their stocks.
D) ignore new information about stocks.
Answer:
If the account manager finds that the current level of bank reserves is greater than the
desired level indicated in the most recent directive from the FOMC, he will
A) order banks to reduce their reserves.
B) order banks to raise their interest rates in an attempt to get them to loan out more of
their reserves.
C) conduct an open market purchase.
D) conduct an open market sale.
Answer:
Which of the following is NOT included in M2?
A) currency
B) savings bonds
C) money market deposit accounts
D) overnight repurchase agreements
Answer:
Which of the following is an example of a barter transaction?
A) An individual pays her electric bill with a check.
B) An individual pays her electric bill with currency.
C) An individual provides three light bulbs to her neighbor in exchange for two gallons
of milk.
D) An individual deposits three twenty-dollar bills in her checking account.
Answer:
All of the following have contributed to increased use of ATMs EXCEPT:
A) some banks charging customers for services performed by tellers than can be done
by ATMs
B) some banks closing branches in low-income neighborhoods
C) ease by which customers can make use of ATMs to make deposits and withdrawals
D) increased use of debit cards for transactions
Answer:
Limited liability can best be defined as the legal provision that
A) shields owners of a corporation from losing more than what they invested in a firm.
B) protects bond holders from being sued by other creditors.
C) gives holders of preferred stock priority over holders of common stock.
D) reduces the exposure of sole proprietorships to law suits.
Answer:
The bid price for a bond is
A) the minimum price that you are allowed to bid for a bond that is being auctioned by
the government.
B) the maximum price that you are allowed to bid for a bond that is being auctioned by
the government.
C) the price that you will receive from a securities dealer if you sell the bond.
D) the price that you must pay a securities dealer to purchase a bond.
Answer:
The Bretton Woods system lasted from
A) 1801 to 1861.
B) 1863 to 1914.
C) 1945 to 1971.
D) 1981 to 1993.
Answer:
Currently, a three-year Treasury note pays 4.75%. Assuming that your tax rate is 20%,
what is the minimum interest rate that you would you need to earn on a tax-free
municipal bond in order to buy it instead?
A) 0.95%
B) 3.8%
C) 5.7%
D) 15.25%
Answer:
In what way did the Dodd-Frank Act reduce bank revenue?
A) It increased the amount banks had to pay on interest to depositors.
B) It reduced fees banks could charge when customers took out loans.
C) It reduced the amount of interest banks could charge on mortgages.
D) It capped the fees that banks could charge stores for debit card transactions.
Answer:
Which interest rate is typically the lowest?
A) 3-month Treasury bills
B) 2-year Treasury notes
C) 10-year Treasury bonds
D) 30-year Treasury bonds
Answer:
The liquidity premium theory holds that investors
A) always choose the bond with the highest expected return, regardless of maturity.
B) require a term premium to compensate them for investing in a less preferred
maturity.
C) view bonds of different maturities as perfect substitutes.
D) view bonds of different maturities as completely unsubstitutable.
Answer:
What effect would economic weakness in Europe due to a sovereign debt crisis have on
the U.S. economy?
A) IS shifts to the right
B) IS shifts to the left
C) potential GDP increases
D) potential GDP decreases
Answer:
What is the inflation gap? What is the output gap?
Answer:
What impact do savings rates in Belgium have on the real interest rate that businesses in
Belgium must pay to obtain the funds to finance their spending on plant and
equipment?
Answer:
The American Civil War lasted from the spring of 1861 to the spring of 1865. 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 you are risk averse and you are deciding between two investments. One has a
guaranteed return of 5% while the second has a 50% chance of a 10% return and a 50%
chance of a 0% return. Which investment would you choose? Why?
Answer:
Briefly explain the process of multiple deposit creation.
Answer:
How do payments on a fixed-payment loan differ from a coupon bond?
Answer:
How does adverse selection in financial markets affect the method by which firms raise
funds?
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:
How does the relationship between housing prices and rental rates provide evidence for
or against the existence of a housing bubble?
Answer:
According to some economists, what contributed to the unusual uncertainty that
adversely affected aggregate supply during the recovery following the recession of
2007-2009?
Answer:
In late 2008 and early 2009, many feared that the economy may experience deflation.
Make use of a graph of the bond market to show how this affected interest rates.
Answer:
Suppose the required reserve ratio is 8% and banks do not hold excess reserves.
Illustrate on a bank’s balance sheet what happens if the Fed buys $250,000 worth of
securities from a bank.
Answer:
What are the steps involved in using options for a short sale of a stock?
Answer:
Suppose you purchase a bond with a coupon of $50 for $1010. You sell it one year later
for $900. What rate of return did you earn? Report a percentage with two decimal
places.
Answer:
Suppose the Fed sells $500,000 worth of securities to First National Bank. Illustrate the
immediate effect on the bank’s balance sheet.
Answer: