Demand-pull inflation results from
(a) workers’ pressure for higher wages.
(b) policymakers’ attempts to increase aggregate demand for current output above the
full-employment level.
(c) attempts by financial markets to deal with bracket creep.
(d) attempts by the public to receive higher after-tax returns on their savings.
Answer:
Why did many economists suspect a credit crunch occurred in the fall of 1998?
(a) Interest rates rose sharply.
(b) The U.S. economy entered a recession.
(c) Banks curtailed lending to risky borrowers.
(d) Investment spending declined dramatically.
Answer:
Bracket creep
(a) results in a tax on money balances.
(b) would be zero if the same tax rate were applied to all income.
(c) is greater in 2001 than it was in 1971.
(d) invariably leads to an excess burden.
Answer:
Securities dealers make most of their income from
(a) commissions charged to buyers.
(b) the spread between the bid and the asked price on securities.
(c) reports they sell investors containing information on the securities they handle.
(d) underwriting.
Answer:
An increase in expected future market interest rates
(a) raises bond prices.
(b) raises long-term yields relative to short-term yields.
(c) raises short-term yields relative to long-term yields.
(d) results from forecasts of declining inflation.
Answer:
Which of the following helps explain why depositors sometimes put their funds in
demand deposits rather than NOW accounts?
(a) Demand deposits pay interest, whereas NOW accounts do not pay interest.
(b) Businesses may not hold NOW accounts.
(c) Checks may be written against demand deposits, but not against NOW accounts.
(d) Demand deposits are more liquid than NOW accounts.
Answer:
Which of the following did NOT significantly exacerbate the banking crisis of the early
1930s?
(a) The Fed’s inability to lend against anything other than good commercial loans
(b) The large number of small, poorly diversified banks
(c) The large number of rural banks that held agricultural loans during a time of falling
commodity prices
(d) The large amount of fraud carried out by bank managers
Answer:
Which of the following expressions is correct?
(a) Yd= C + I +G NX.
(b) Yd= C + I + G + NX.
(c) Yd= C + I + (G T) + NX.
(d) Yd= C + I + (G T) NX.
Answer:
A firm with both auction market and over-the-counter capabilities was formed late in
1998 when
(a) the New York and American Stock Exchanges merged.
(b) the New York Stock Exchange merged with the Chicago Mercantile Exchange.
(c) the National Association of Securities Dealers merged with the American Stock
Exchange.
(d) the American Stock Exchange merged with the Chicago Mercantile Exchange.
Answer:
Rates of inflation in the hundreds or thousands of percent per year are known as
(a) super inflation.
(b) megainflation.
(c) hyperinflation.
(d) overinflation.
Answer:
In comparing the actions of the Fed in the fall of 1998 with its actions in the fall of
1991, we can say
(a) in both instances the Fed moved quickly to raise interest rates in the face of an
expected increase in inflation.
(b) in both instances the Fed moved quickly to cut interest rates in the face of signs of a
credit crunch.
(c) the Fed moved more quickly in 1998 than in 1991 to cut interest rates in the face of
signs of a credit crunch.
(d) the Fed failed in both cases to take action in the face of signs of a credit crunch.
Answer:
The Glass-Steagall Act of 1933
(a) prohibited branching across state lines.
(b) separated commercial banking from investment banking.
(c) forbade the opening of nonbank banks.
(d) made bank holding companies illegal.
Answer:
Suppose that you own $10,000 worth of stock in Mammoth Computer Company.
Adding stock in which of the following companies would be least likely to reduce the
risk in your portfolio?
(a) Giant Automobile Company
(b) Midget Furniture Company
(c) Orange Computer Company
(d) Stupendous Electric Company
Answer:
The International Banking Act of 1978
(a) equalized deposit rates being paid by banks in different countries.
(b) reduced the cost advantages that foreign banks had previously enjoyed in the United
States.
(c) brought the Eurodollar market under the control of U.S. regulators.
(d) was an agreement reached under the auspices of the United Nations to allow banks
to operate more freely in foreign countries.
Answer:
The theory of purchasing power parity assumes that
(a) nominal exchange rates are not affected by movements in relative price levels.
(b) real exchange rates are fixed.
(c) movements in nominal exchange rates are the result of movements in real exchange
rates.
(d) inflation rates are roughly the same in most countries.
Answer:
In August 1998 the 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 Asian financial crisis.
(d) of fraud in the market for municipal bonds.
Answer:
An increase in the expected inflation rate in the United States will
(a) reduce the nominal interest rate in the United States.
(b) cause the U.S. exchange rate to depreciate.
(c) cause the U.S. exchange rate to appreciate.
(d) increase the budget deficit in the United States relative to the budget deficits of
foreign governments.
Answer:
In the quantity theory of money demand,
(a) velocity is assumed to be constant.
(b) the demand for real balances is determined by the price level.
(c) the price level is assumed to be constant.
(d) velocity is assumed to vary with the price level.
Answer:
The formal name of the World Bank is
(a) the International Monetary Fund.
(b) the International Bank for Reconstruction and Development.
(c) the United Nations Bank for Economic Stability.
(d) the Bank for International Financial Stability and Reform.
Answer:
The life-cycle model of consumption and saving focuses on
(a) the tendency of young consumers to purchase fashionable or trendy goods.
(b) the tendency of older people to be very reluctant to spend.
(c) the pattern of using the financial system to match saving with consumption needs.
(d) the reluctance of most Americans to save for retirement.
Answer:
Monetary policy can have substantial effects on the economy even when nominal
interest rates are very low
(a) since real rates are what affects borrowing and spending decisions.
(b) by improving borrower and bank balance sheets.
(c) by reducing transactions costs.
(d) only when the policy is substantial.
Answer:
What is the primary motivation for loan syndication in the Euroloan market?
(a) Reduction in information costs
(b) Reduction in transactions costs
(c) Risk sharing
(d) Tax advantages
Answer:
In an efficient market the price of a bond
(a) is generally greater than the present value of future interest and principal payments.
(b) is generally less than the present value of future interest and principal payments.
(c) equals the present value of future interest and principal payments.
(d) will be less than, greater than, or equal to the present value of future interest and
principal payments, depending upon prevailing interest rates.
Answer:
The official settlement balance
(a) is an amount that the IMF requires each member country to pay annually.
(b) must by definition always be zero.
(c) equals the current account balance divided by the capital account balance.
(d) equals the net increase in a country’s official reserve assets.
Answer:
In the mid-1980s, the Fed attempted to
(a) increase the value of the dollar by raising short-term interest rates.
(b) decrease the value of the dollar by reducing short-term interest rates.
(c) decrease the value of the dollar by raising short-term interest rates.
(d) increase the value of the dollar by reducing short-term interest rates.
Answer:
Blood tests administered to applicants for medical insurance are an example of an
attempt by insurance companies to deal with the problem of
(a) moral hazard.
(b) the drug abuse problems currently plaguing the country.
(c) adverse selection.
(d) failure of policyholders to keep paying their premiums.
Answer:
If the U.S. current account balance is positive,
(a) U.S. citizens must have purchased more merchandise abroad than they sold abroad.
(b) the foreign-exchange value of the dollar must be rising.
(c) the foreign-exchange value of the dollar must be falling.
(d) U.S. citizens have funds to lend to foreigners.
Answer:
If labor costs rise at the same time that the federal government decreases its spending,
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) aggregate output will fall, but the price level may either increase or decrease.
Answer:
Which of the following countries suffered a banking crisis during the early 1930s?
(a) Germany
(b) Canada
(c) United Kingdom
(d) Japan
Answer:
The main reason for diversifying a portfolio is
(a) to take advantage of the fact that returns on assets are imperfectly correlated.
(b) to take advantage of the favorable tax treatments diversified portfolios receive from
the federal government.
(c) that diversified portfolios have greater liquidity than undiversified portfolios.
(d) that diversified portfolios have lower information costs than undiversified
portfolios.
Answer:
What is the Fedwire used for?
(a) Relaying important developments in financial markets to broker-dealers
(b) Relaying important business developments to Federal Reserve officials in
Washington
(c) Clearing securities transactions
(d) Sending federal government funds to disaster areas
Answer:
A “tombstone” is a
(a) company in danger of bankruptcy.
(b) an advertisement of a new security issue by an investment bank.
(c) a bond that has been defaulted on.
(d) a share of stock in a failed company.
Answer:
A monetary aggregate is a
(a) measure of the inflation rate.
(b) measure of the total economic activity of the country.
(c) measure of money broader than currency.
(d) measure of definitive money.
Answer:
If the federal government replaced the current income tax with a consumption tax
(a) the prices of corporate and municipal bonds would rise.
(b) the prices of corporate and municipal bonds would fall.
(c) the prices of corporate bonds would rise, while the prices of municipal bonds would
fall.
(d) the prices of corporate bonds would fall, while the prices of municipal bonds would
rise.
Answer:
The efficient markets hypothesis explains the fact that the stock picks of some
investment analysts earn returns greater than broad-based market indexes as resulting
from
(a) the superior insight of these analysts.
(b) the ability of these analysts to exploit loopholes in the tax laws.
(c) the inside information these analysts possess.
(d) chance.
Answer: