If the inflation rate is 5 percent and the real rate of interest is 3 percent, the nominal
interest rate is
A) 8 percent.
B) 5 percent.
C) 3 percent.
D) 2 percent.
A speculator may choose to buy a call option because
A) the possible gain is greater than with a futures contract.
B) the potential loss on the call is limited to the premium, while the potential loss is
unlimited with a futures contract.
C) the possible gain with the option is great than the possible gain from buying the
underlying stock itself.
D) calls eliminate the risk of loss so a speculator can lose nothing or just make a gain.
Which of the following ensures full employment in the Classical model?
A) Wage and price flexibility
B) The equation of exchange
C) Inventory adjustment
D) Constant velocity
The GAP ratio is a measure of __________ risk.
A) credit
B) leverage
C) interest rate
D) liquidity
Monetarists blame rising government deficits for rising inflation
A) because deficits shift aggregate demand to the right.
B) so long as the aggregate supply curve is vertical.
C) when financing these deficits involves money creation.
D) because the deficits increase the demand for money and thus interest rates.
If consumption increases by $400 when income increases by $500, then the marginal
propensity to consume is
A) 900.
B) 100.
C) 1.20.
D) 0.80.
In the Classical model, what is certain to shift the aggregate demand curve?
A) A rise in the price level
B) A rise in real GDP
C) A rise in the money supply
D) A rise in government expenditure
The slope of the IS curve will be steeper the __________ is the sensitivity of
investment to a unit change in the interest rate and the __________ is marginal
propensity to save.
A) greater; larger
B) greater; smaller
C) less; larger
D) less; smaller
Banks still have a strong comparative advantage in extending __________ to
__________ businesses.
A) traded securities; small
B) non-traded loans; small
C) traded securities; large
D) non-traded loans; large
A __________ may agree to waive a restrictive covenant, especially if doing so appears
to make the loan __________.
A) borrower; no riskier
B) borrower; riskier
C) lender; no riskier
D) lender; riskier
In the options market, the right to buy an underlying asset rests with
A) call buyers.
B) put buyers.
C) call sellers.
D) put sellers.
An increase in government spending will cause the
A) LM curve to shift to the right.
B) LM curve to shift to the left.
C) IS curve to shift to the right.
D) IS curve to shift to the left.
An increase in interest rates will cause investment to
A) increase.
B) decrease.
C) not change.
D) move erratically, depending on the interest rate effect on saving.
Keynesians argue that an exogenous decrease in investment is likely to lead to
A) an increase in interest rates.
B) an increase in saving.
C) a decrease in the money supply.
D) a decrease in output.
Suppose a bank has total assets of $4,000,000,000, of which $1,000,000,000 are cash
assets and government securities with a “risk weight” of 0% and $3,000,000,000 are
loans with a risk weight of 50%. The bank has total deposits and other liabilities of
$3,500,000,000. The bank’s risk-based capital ratio is
A) 14.3%.
B) 25.0%.
C) 33.3%.
D) 37.5%.
It is virtually impossible to save or lend nowadays without __________ being involved.
A) traded securities
B) financial intermediaries
C) direct finance
D) disintermediation
The quantity of money demanded decreases at every combination of GDP and interest
rate. If the Fed holds to an unchanged money supply target, the interest rate
__________ and GDP __________.
A) rises; rises
B) rises; falls
C) falls; rises
D) falls; falls
A sound policy to combat a temporary liquidity shortage in the banking system would
be
A) a reduction in the discount rate.
B) a decrease in the discount rate.
C) the purchase of government securities by the Fed under a repurchase agreement.
D) the sale of government securities by the Fed under a repurchase agreement.
The yield to maturity __________ capital gains; the current yield __________ capital
gains.
A) reflects; reflects
B) reflects; does not reflect
C) does not reflect; reflects
D) does not reflect; does not reflect
Immediately after the Federal Reserve buys government securities,
A) bank excess reserves rise.
B) bank excess reserves fall.
C) bank capital rises.
D) bank capital falls.
As of the end of 1994, which of the countries in our survey had the largest proportion of
stock held by individuals?
A) The United Kingdom
B) The United States
C) Japan
D) Germany
If the government collects taxes and makes expenditures of a smaller amount, bank
reserves
A) are unaffected.
B) may rise or fall.
C) rise.
D) fall.
Assume that the actual inflation rate is 3 percent, the target inflation rate is 3 percent,
and that the percentage difference between actual and potential real GDP is 2 percent.
According to the Taylor rule, the federal funds rate target should be
A) 3.5 percent.
B) 6.5 percent.
C) 5.5 percent.
D) 5.0 percent.
An example of a derivative financial instrument is a(n)
A) corporate bond.
B) option contract on U.S. Treasury bonds.
C) variable-rate mortgage.
D) preferred stock.
A change in inflationary expectations will influence
A) the supply of loanable funds only.
B) the demand for loanable funds only.
C) neither the supply nor demand for loanable funds.
D) both the supply and demand for loanable funds.