1) Financial markets have the basic function of
A) bringing together people with funds to lend and people who want to borrow funds
B) assuring that the swings in the business cycle are less pronounced
C) assuring that governments need never resort to printing money
D) both A and B of the above
E) both B and C of the above
2) The most active stock exchange in the world is the
A) Nikkei Stock Exchange
B) London Stock Exchange
C) Shanghai Stock Exchange
D) New York Stock Exchange
3) The case for Federal Reserve independence does not include the idea that
A) political pressure would impart an inflationary bias to monetary policy
B) a politically insulated Fed would be more concerned with long-run objectives and
thus be a defender of a sound dollar and a stable price level
C) policy is always performed better by an elite group such as the Fed
D) a Federal Reserve under the control of Congress or the president might make the
so-called political business cycle more pronounced
4) In the one-period valuation model, a stock’s value falls if the ________ rises.
A) dividend
B) expected future price
C) required return on equity
D) current price
5) When the growth rate of the money supply is increased, interest rates will rise
immediately if the liquidity effect is ________ than the other effects and if there is
________ adjustment of expected inflation.
A) larger; rapid
B) larger; slow
C) smaller; slow
D) smaller; rapid
6) The oldest central bank, founded in 1694, is the
A) Bank of England
B) Deutsche Bundesbank
C) Bank of Japan
D) Federal Reserve System
7) Which of the following are not duties of the Board of Governors of the Federal
Reserve System?
A) Setting margin requirements, the fraction of the purchase price of securities that has
to be paid for with cash
B) Setting the maximum interest rates payable on certain types of time deposits under
Regulation Q
C) Approving the discount rate “established” by the Federal Reserve banks
D) Representing the United States in negotiations with foreign governments on
economic matters
8) Holding other factors constant, which of the following would increase the size of the
U.S. current account deficit?
A) sales of U.S. farm products in Europe
B) visits by European tourists to the United States
C) increasing travel by American college students in Europe
D) both A and B of the above
9) Because sterilized interventions mean offsetting open market operations, there is no
impact on the monetary base and the money supply, and therefore a sterilized
intervention
A) causes the exchange rate to overshoot in the short run
B) causes the exchange rate to undershoot in the short run
C) causes the exchange rate to depreciate in the short run, but has no effect on the
exchange rate in the long run
D) has no effect on the exchange rate
10) Solutions to the moral hazard problem include
A) high net worth
B) monitoring and enforcement of restrictive covenants
C) greater reliance on equity contracts and less on debt contracts
D) all of the above
E) only A and B of the above
11) Futures markets have grown rapidly because futures contracts
A) are standardized
B) have lower default risk
C) are liquid
D) are all of the above
12) When the federal government’s budget deficit increases, the ________ curve for
bonds shifts to the ________.
A) demand; right
B) demand; left
C) supply; left
D) supply; right
13) In the late 1960s,
A) money market banks no longer needed to depend on checkable deposits as the
primary source of bank funds
B) banks aggressively set target goals for their asset growth
C) the new management of liabilities created more flexibility
D) all of the above
14) The process of deleveraging refers to
A) cutbacks in lending by financial institutions
B) a reduction in debt owed by banks
C) both A and B
D) none of the above
15) What shows international transactions that involve currently produced goods and
services?
A) current account
B) balance of payments
C) trade balance
D) capital account
16) A situation in which the price of an asset differs from its fundamental market value
A) indicates that unexploited profit opportunities exist
B) indicates that unexploited profit opportunities do not exist
C) need not indicate that unexploited profit opportunities exist
D) indicates that the efficient market hypothesis is fundamentally flawed
17) Which of the following is not a financial derivative?
A) stocks
B) futures
C) options
D) forward contracts
18) Diversification benefits an investor by
A) increasing wealth
B) increasing expected return
C) reducing risk
D) increasing liquidity
19) When a $10 check written on the First National Bank is deposited in an account at
the Second National Bank, then
A) the liabilities of the First National Bank decrease by $10
B) the liabilities of the Second National Bank increase by $10
C) the reserves of the First National Bank increase by $10
D) all of the above occur
E) only A and B of the above occur
20) (I) An increase in default risk on corporate bonds shifts the demand curve for
corporate bonds to the left.
(II) An increase in default risk on corporate bonds shifts the demand curve for Treasury
bonds to the right.
A) (I) is true, (II) false
B) (I) is false, (II) true
C) Both are true
D) Both are false
21) An arrangement with a broker to borrow stocks from them and then sell it in the
market, with the hope that they earn a profit by buying the stock back again after it has
fallen in price is called
A) behavioral finance.
B) short sales
C) smart money
D) random walk
22) With the creation of the Federal Deposit Insurance Corporation,
A) member banks of the Federal Reserve System were given the option to purchase
FDIC insurance for their depositors, while nonmember commercial banks were required
to buy deposit insurance
B) member banks of the Federal Reserve System were required to purchase FDIC
insurance for their depositors, while nonmember commercial banks could choose to buy
deposit insurance
C) both member and nonmember banks of the Federal Reserve System were required to
purchase FDIC insurance for their depositors
D) both member and nonmember banks of the Federal Reserve System could choose,
but were not required, to purchase FDIC insurance for their depositors
23) Savings and loans lost a total of $10 billion in 1981-1982 due to a combination of
rising interest rates in 1979-1981 and
A) the recession of 1981-1982 that reduced real estate prices enough to cause
significant loan defaults
B) the regulatory restrictions enacted by Congress in 1981 and 1982
C) the loss of market share to commercial banks that were allowed to compete directly
with thrifts in the real estate market
D) the acceleration of inflation in 1981-1982 that caused thrifts to lose additional funds
to money market mutual funds
24) Discount loans to healthy banks, who may borrow as much as they wish from the
Fed, are called
A) primary credit
B) secondary credit
C) seasonal credit
D) lender-of-last-resort credit
25) An open market purchase
A) shifts the supply curve for reserves to the right and causes the federal funds rate to
fall
B) shifts the demand curve for reserves to the right and causes the federal funds rate to
rise
C) shifts the supply curve for reserves to the left and causes the federal funds rate to rise
D) shifts the demand curve for reserves to the left and causes the federal funds rate to
fall
26) Depreciation of a currency occurs when
A) a floating exchange rate adjusts upward
B) a floating exchange rate adjusts downward
C) a fixed exchange rate is adjusted upward
D) a fixed exchange rate is adjusted downward
27) To list on the NYSE, a firm must
A) have earnings of at least $10 million per year
B) have at least $500 million in outstanding debt
C) have a total of $100 million in market value
D) meet all of the above requirements
E) meet A and C of the above requirements
28) Holding other things constant, a stock’s value will be highest if its most recent
dividend is
A) $2.00
B) $5.00
C) $0.50
D) $1.00
29) Major differences between the United States and Japanese banking systems include:
A) American banks are allowed to hold substantial equity stakes in commercial firms,
whereas Japanese banks cannot
B) Japanese banks are allowed to hold substantial equity stakes in commercial firms,
whereas American banks cannot
C) bank holding companies are illegal in Japan
D) both A and C of the above
E) both B and C of the above
30) Stock values computed by valuation models may differ from actual market prices
because it is difficult to
A) estimate future dividend growth rates
B) estimate the risk of a stock
C) forecast a stock’s future dividends
D) all of the above are true
31) The Federal Reserve will engage in an outright purchase if it wants to ________
reserves ________ in the banking system.
A) increase; permanently
B) increase; temporarily
C) decrease; temporarily
D) decrease; permanently
32) In which industry is factoring a common practice?
A) automobile
B) tech services
C) entertainment
D) apparel
33) A financial institution can achieve cost savings in its credit card operations if it
increases the number of cardholders. This is an example of economies of
A) scope
B) scale
C) complexity
D) information
34) If a $5,000 face value discount bond maturing in one year is selling for $5,000, then
its yield to maturity is
A) 0 percent.
B) 5 percent
C) 10 percent
D) 20 percent
35) Typically, discount points should not be paid if the borrower will pay off the loan in
________ years or less.
A) 5
B) 10
C) 15
D) 20
36) The conflict of interest in credit-rating agencies arises because ________ pay to
have securities rated and, as a result, the agencies’ ratings may be biased ________.
A) security issuers; downward
B) security issuers; upward
C) investors; downward
D) regulators; upward
37) Which of the following has not contributed to the growth of pension plans?
A) privatization of Social Security
B) urbanization
C) retirement at earlier ages
D) increases in life expectancy
38) A valid concern about financial derivatives is that
A) they allow financial institutions to increase their leverage
B) they are too sophisticated because they are so complicated
C) the notional amounts can greatly exceed a financial institution’s capital
D) all of the above are valid concerns
E) none of the above are valid concerns
39) The current yield is a less accurate approximation of the yield to maturity the
________ the time to maturity of the bond and the ________ the price is from/to the par
value.
A) shorter; closer
B) shorter; farther
C) longer; closer
D) longer; farther