Why did the risks associated with underwriting bond issues rise during the 1980s?
(a) Because rising federal taxes forced a number of issuing firms close to bankruptcy
(b) Because of the higher volatility of interest rates
(c) Because accelerating inflation during the decade led to ever-increasing bond prices
(d) Because excessive government regulation reduced the profitability of underwriting
Answer:
If the expected price level increases at the same time that the federal government cuts
taxes, in the short run
(a) aggregate output and the price level will both increase.
(b) aggregate output will increase, but the price level will fall.
(c) aggregate output and the price level will both fall.
(d) the price level will increase, but aggregate output may either increase or decrease.
Answer:
In the context of analyzing movements in stock prices, “fads” refer to
(a) trading days on which bond prices and stock prices move in opposite directions.
(b) gaps between futures prices and the prices of the underlying assets.
(c) trades made as a result of computer programs.
(d) overreaction to good or bad news.
Answer:
Which of the following is an example of fiat money?
(a) A cowry shell used as money on a South Pacific island
(b) A gold coin used as money in 19th century England
(c) A Federal Reserve Note used as money in the 20th century United States
(d) A pound of salt used as money in medieval France
Answer:
Which of the following statements is correct?
(a) New classicals believe that the aggregate supply curve is vertical in the short run.
(b) New Keynesians believe that the aggregate supply curve is vertical in the short run.
(c) New Keynesians believe that the aggregate supply curve slopes upward in the long
run.
(d) New classicals believe that the aggregate supply curve slopes upward in the short
run.
Answer:
An increase in oil prices will shift the short-run aggregate supply curve
(a) up and to the left, causing the level of current output to fall.
(b) up and to the left, causing the level of current output to rise.
(c) down and to the right, causing the level of current output to rise.
(d) down and to the right, causing the level of current output to fall.
Answer:
The IS curve for a small open economy is
(a) steeper than the IS curve for a large open economy.
(b) steeper than the IS curve for a closed economy.
(c) vertical at the level of full-employment output.
(d) horizontal at the world real interest rate.
Answer:
The default risk premium is
(a) relevant only for securities issued by very small companies.
(b) the additional yield a saver requires for holding a risky instrument.
(c) zero for corporate bonds, but quite substantial for corporate stock.
(d) constant across the business cycle.
Answer:
Holding everything else constant, which of the following would cause an increase in
short-term inflation?
(a) A decrease in the nominal money supply
(b) A decrease in net exports
(c) A decrease in consumer spending
(d) A decrease in the growth rate of aggregate supply
Answer:
Secondary markets for financial instruments are important because, among other things,
(a) they are where companies and governments raise new funds.
(b) taxes on trading in these markets are an important source of revenue for
governments.
(c) they make it easier for investors to hold a diversified portfolio of assets.
(d) they provide a place where people interested in financial matters can meet.
Answer:
If money is declared to be legal tender, it must be
(a) minted from a precious metal.
(b) acceptable to citizens of foreign countries.
(c) possible to exchange it for an equivalent amount of precious metal.
(d) accepted to settle private transactions and it must be used in paying taxes.
Answer:
Transactions velocity
(a) was rejected by Irving Fisher as the correct definition of velocity in the quantity
theory of money demand.
(b) is much smaller than the value of velocity obtained from dividing GDP by the
money stock.
(c) is much smaller than the value of velocity obtained from dividing the money stock
by GDP.
(d) is much larger than the value of velocity obtained from dividing GDP by the money
stock.
Answer:
The argument that changes in output cause changes in the money supply is known as
(a) the liquidity effect.
(b) the money multiplier effect.
(c) reverse causation.
(d) direct causation.
Answer:
Which of the following statements is correct?
(a) Throughout U.S. history prices have fallen in more years than they have risen.
(b) Prices have risen every year in the United States since 1800.
(c) Prices have fallen in the majority of years since 1939.
(d) Prices fell every year in the 1980s.
Answer:
In Friedman’s theory of money demand, when households expect a high rate of
inflation, they will
(a) buy bonds.
(b) buy houses and consumer durable goods.
(c) increase their nominal balances.
(d) increase their real balances.
Answer:
If the economy is initially at equilibrium and an unexpected decline in aggregate
demand takes place, in the short run aggregate output will
(a) fall in the new classical view, but not in the new Keynesian view.
(b) fall in the new Keynesian view, but not in the new classical view.
(c) fall in both the new Keynesian and new classical views.
(d) remain at full employment in both the new classical and new Keynesian views.
Answer:
During the 19741975 recession the rate on commercial paper increased relative to the
rate on
T-Bills. This was an indication of the fact that
(a) investors had become nervous about the ability of the federal government to meet its
financial obligations.
(b) the inflation rate had increased significantly.
(c) investors had become concerned about default risk in the short-term market.
(d) interest on commercial paper had lost its exemption from the federal income tax.
Answer:
In the Baumol-Tobin view, a decrease in interest rates will cause individuals to hold
(a) larger money balances, and velocity will increase.
(b) larger money balances, and velocity will decrease.
(c) smaller money balances, and velocity will increase.
(d) smaller money balances, and velocity will decrease.
Answer:
One reason why financial panics in the United States in the nineteenth and early
twentieth centuries resulted in less bank lending is that
(a) depositors converted significant amounts of bank deposits to currency.
(b) banks shifted from loans to purchases of U.S. government securities as the yields on
these securities rose sharply.
(c) the U.S. government restricted bank lending in order to free funds to cover its
budget deficits.
(d) companies shifted from bank loans to the bond market as rates on bonds dropped
below rates charged by banks.
Answer:
In an over-the-counter market trading takes place
(a) face-to-face at the front counter of a securities firm.
(b) on the floor of an exchange.
(c) over the telephone or by computer.
(d) at SEC-approved trading locations.
Answer:
Eight cents earned in 1940 would have been able to buy goods and services worth how
much today?
(a) $0.10
(b) $0.20
(c) $1.00
(d) $10.00
Answer:
Why are savers often unwise in lending to borrowers who are willing to pay very high
interest rates?
(a) Very high interest rates are against the law in many states.
(b) The high tax rates on interest income make high-interest rate loans unappealing to
lenders.
(c) Borrowers will usually pay very high interest rates only when inflation is high,
which makes the real interest rate on such loans low.
(d) Adverse selection and moral hazard problems reduce the likelihood of repayment on
high-interest rate loans.
Answer:
The purpose of diversification is to
(a) increase the liquidity of a financial portfolio.
(b) reduce the brokerage fees involved in managing a financial portfolio.
(c) reduce risk.
(d) reduce tax liability.
Answer:
In the long run, exchange rates are determined by
(a) economic fundamentals such as price levels or productivity levels in different
countries.
(b) agreement among the governments of the major industrial countries.
(c) the rate at which each country’s currency exchanges for gold.
(d) the difference between short-run and long-run interest rates in each country.
Answer:
If a 1% increase in the market portfolio leads to an increase of 3% in the value of an
asset, then the asset’s beta equals
(a) 0.333
(b) 1
(c) 3
(d) Not enough information has been given to determine the asset’s beta.
Answer:
The Fed
(a) controls discount policy more completely than it controls open market operations.
(b) must abide by discount rates set by Congress.
(c) controls discount policy less completely than it controls open market operations.
(d) controls discount policy completely, just as it does open market operations.
Answer:
The Fed generally conducts open market operations in
(a) long-term corporate bond markets.
(b) the federal funds market.
(c) the Treasury securities market.
(d) the commercial paper market.
Answer:
Between 1965 and 2002, the percentage of goods and services purchased by U.S.
consumers, businesses, and governments from foreigners
(a) remained about the same.
(b) roughly tripled.
(c) increased by more than ten times.
(d) declined by about half.
Answer:
Definitive money
(a) is used only in primitive economies.
(b) does not have to be converted into a more basic medium of exchange.
(c) can be either gold or silver, but cannot be both.
(d) is useful mainly for making purchases in foreign countries.
Answer:
Excess reserves equal
(a) total reserves less required reserves.
(b) required reserves less total reserves.
(c) total reserves plus required reserves.
(d) required reserves divided by total reserves.
Answer:
In late 1998 the Fed averted a possible financial panic by
(a) lowering interest rates.
(b) raising interest rates.
(c) using its influence to bring together the creditors of Long-Term Capital
Management.
(d) using its influence to encourage banks to make loans to broker-dealers in the
securities industry.
Answer:
A researcher shows that stock prices reflect all available information, including “insider
information” known only to corporate managers. This results indicates that the efficient
markets hypothesis has passed the a test of
(a) weak-form efficiency.
(b) semistrong-form efficiency.
(c) strong-form efficiency.
(d) noise-trading efficiency.
Answer:
Which of the following is NOT a nontransaction deposit?
(a) A money market deposit account
(b) A certificate of deposit
(c) A savings account
(d) A super-NOW account
Answer: