As wealth increases in the economy, savers are willing to
A) hold more cash relative to their holdings of bonds.
B) buy fewer bonds at any given price.
C) lend more at any given interest rate.
D) lend less at any given interest rate.
Answer:
Most economists believe that the short-run aggregate supply curve
A) slopes down.
B) slopes up.
C) is a vertical line.
D) is a horizontal line.
Answer:
Which criterion is NOT useful when evaluating a theory?
A) It has predictive power.
B) It fits one’s pre-conceived bias.
C) It offers a model consistent with investor behavior.
D) It explains actual data well.
Answer:
Marking to market refers to
A) the determination of the prices of options contracts by the interaction of demand and
supply.
B) the determination of the prices of futures contracts by the interaction of demand and
supply.
C) the settlement of gains and losses on futures contracts each day.
D) the settlement of gains and losses on forward contracts each day.
Answer:
Members of the European Exchange Rate Mechanism (ERM)
A) agreed to buy and sell gold at a fixed rate.
B) promised to maintain the values of their currencies within a fixed range.
C) attempted to maintain a fixed exchange rate against the dollar.
D) all agreed to charge the same interest rate on central bank loans.
Answer:
Which of the following are statisticians who compile statistics to predict the risk of an
event occurring in the population?
A) rocket scientists
B) quants
C) actuaries
D) risk analysts
Answer:
A decline in the output gap causes the demand for real balances
A) to rise and the interest rate to fall.
B) to fall and the interest rate to rise.
C) and the interest rate to fall.
D) and the interest rate to rise.
Answer:
The Franklin National Bank Crisis had its greatest impact on the market for
A) commercial paper.
B) commodity futures.
C) negotiable certificates of deposit.
D) Eurodollars.
Answer:
A quota refers to:
A) a tax on imported goods
B) a limit on the amount of a good that can be imported
C) the range within which an exchange rate is allowed to fluctuate
D) a limit on the size of a trade deficit
Answer:
In recent decades, the United States
A) was essentially a closed economy.
B) was generally a net borrower of foreign funds.
C) was generally a net lender abroad.
D) experienced a net outflow of savings.
Answer:
With debt financing
A) moral hazard problems are eliminated.
B) moral hazard problems are reduced but not eliminated.
C) adverse selection problems are eliminated.
D) firms reduce the risk that they will become bankrupt during a recession.
Answer:
U.S. Treasury securities
A) are considered risk free because their prices never change.
B) have been defaulted on several time in U.S. history.
C) are considered default-risk-free instruments.
D) have a large default risk premium.
Answer:
The economist known for his early empirical work supporting the efficient markets
hypothesis is
A) Milton Friedman.
B) John Muth.
C) Eugene Fama.
D) Glenn Hubbard.
Answer:
Which of the following can best be characterized as a “Black Swan” event?
A) decline in stock prices due to a recession
B) rising market interest rates as the Fed tightens monetary policy
C) a financial crisis causing credit to dry up
D) an individual firm unexpectedly filing for bankruptcy
Answer:
Adverse selection and moral hazard are examples of:
A) transaction costs
B) information cost
C) symmetric information
D) financial market efficiency
Answer:
Why is adverse selection more likely in financial markets when interest rates rise?
A) The remaining borrowers are more likely to be risky.
B) Higher interest rates are likely to hurt the economy.
C) If firms have to pay higher interest rates, they may choose to use the funds
differently than they first intended.
D) Banks eliminate risky borrowers by raising interest rates.
Answer:
In the aggregate demand-aggregate supply model, if entrepreneurs become convinced
that future profitability of capital has increased,
A) current output will fall, but the price level will rise.
B) current output will rise, but the price level will fall.
C) current output and the price level will both rise.
D) current output and the price level will both fall.
Answer:
In late 2008, the average risk premium rose because
A) investors feared a revival of inflation.
B) large tax increases in the United States reduced corporate profits and led to fears of
increased defaults.
C) of the financial crisis.
D) of fraud in the market for municipal bonds.
Answer:
Which of the following would shift the aggregate demand curve to the left?
A) an increase in the money supply
B) a cut in federal income taxes
C) an expected decrease in future income
D) an increase in the price level
Answer:
Increases in interest rates
A) reduce borrowers’ net worth.
B) reduce lenders’ net worth.
C) increase the present value of borrowers’ assets.
D) raise the cost to businesses of internal funding.
Answer:
Which of the following is NOT a reason that firms in the shadow banking system were
more vulnerable than commercial banks during the financial crisis of 2007-2009?
A) They could invest in riskier assets.
B) Investors had no insurance against loss of principal.
C) They made investments that would lose value if housing prices decline.
D) They were more heavily regulated than commercial banks, making them less able to
adjust to changing market conditions.
Answer:
Which of the following statements about the presence of speculators in futures markets
is correct?
A) Their main objective is to reduce their exposure to risk.
B) They aid hedgers by increasing the liquidity in futures markets.
C) They make it difficult for hedgers to find someone to take the opposite side of their
positions.
D) Once a futures market participant is known to be a speculator he or she is no longer
allowed to participate in the market.
Answer:
When the Fed extends loans to depository institutions
A) it increases the level of reserves.
B) it decreases the level of reserves.
C) it reduces the total value of the assets on its balance sheet.
D) it reduces the total value of the liabilities on its balance sheet.
Answer:
Since most banks have positive gaps and negative duration gaps, an increase in market
interest rates will
A) increase bank profits and increase bank capital.
B) increase bank profits and decrease bank capital.
C) decrease bank profits and increase bank capital.
D) decrease bank profits and decrease bank capital.
Answer:
What factors do some who promote the profitability of elaborate trading strategies leave
out?
A) the effect of trading costs and taxes
B) the difficulty of calculating the return on investment
C) ignoring the effect of dividends
D) not accounting for both capital gains and dividends
Answer:
A speculator who believes strongly that interest rates will rise would be likely to
A) buy futures contracts on Treasury bills.
B) sell futures contracts on Treasury bills.
C) buy Treasury bonds in the spot market.
D) increase now the amount of money which he lends.
Answer:
Which of the following is the least likely take place if the Fed responds to a negative
demand shock by reducing the real interest rate?
A) IS shifts to the right
B) output gap returns to zero
C) inflation returns to its previous rate
D) MP shifts down
Answer:
The monetary base is equal to
A) all currency in circulation plus all deposits in financial institutions.
B) all currency in circulation plus checkable deposits in financial institutions.
C) all currency in circulation plus reserves held by banks.
D) checkable deposits in depository institutions plus reserves held by banks.
Answer:
What does it mean for a money market mutual fund to “break the buck”?
A) The value of its share declines below $1.
B) It incurs losses on its investments.
C) It increases its fees to more than 1% of net asset value.
D) It is unable to meet the demand for withdrawals by investors.
Answer:
The National Monetary Commission
A) was created by Congress to study the setting up of a central bank.
B) authorizes open market operations.
C) oversees nationally chartered banks.
D) chooses Federal Reserve district bank presidents.
Answer: