The ability of a central bank to set monetary policy goals is
A) political independence.
B) goal independence.
C) policy independence.
D) instrument independence.
If the Fed injects reserves into the banking system and they are held as excess reserves,
then the money supply
A) increases by only the initial increase in reserves.
B) increases by only one-half the initial increase in reserves.
C) increases by a multiple of the initial increase in reserves.
D) does not change.
With an interest rate of 6 percent, the present value of $100 next year is approximately
A) $106.
B) $100.
C) $94.
D) $92.
A disadvantage of virtual banks (clicks) is that
A) their hours are more limited than physical banks.
B) they are less convenient than physical banks.
C) they are more costly to operate than physical banks.
D) customers worry about the security of on-line transactions.
A particularly attractive feature of the ________ is that it tells you what the market is
predicting about future short-term interest rates by just looking at the slope of the yield
curve.
A) segmented markets theory
B) expectations theory
C) liquidity premium theory
D) separable markets theory
This method of financing government spending is frequently called printing money
because high-powered money (the monetary base) is created in the process.
A) financing government spending with taxes
B) financing government spending through a Treasury sale of bonds that are then
purchased by the Fed
C) financing government spending by selling bonds to the public, which pays for the
bonds with currency
D) financing government spending by selling bonds to the public, which pays for the
bonds with checks
Suppose the economy is producing at the natural rate of output. An open market sale of
bonds by the Fed will cause ________ in real GDP in the long run and ________ in
inflation in the long run, everything else held constant.
A) an increase; an increase
B) a decrease; a decrease
C) no change; an increase
D) no change; a decrease
Due to the lack of timely data for the price level and economic growth, the Fed’s
strategy
A) targets the exchange rate, since the Fed can control this variable.
B) targets the price of gold, since it is closely related to economic activity.
C) uses an intermediate target, such as an interest rate.
D) stabilizes the consumer price index, since the Fed can control the CPI.
A central bank that does NOT follow the Taylor principle will fail to raise nominal
interest rates by more than the increase in expected inflation. As a result, the monetary
policy curve is ________ sloping and the aggregate demand curve is ________ sloping.
A) upward; downward
B) downward; downward
C) upward; upward
D) downward; upward
During the 1950s, Fed monetary policy targeted
A) the monetary base.
B) the exchange rate.
C) discount loans.
D) interest rates.
Suppose that the Federal Reserve enacts expansionary policy. Everything else held
constant, this will cause the demand for U.S. assets to ________ and the U.S. dollar to
________.
A) increase; appreciate
B) decrease; appreciate
C) increase; depreciate
D) decrease; depreciate
The research document given to the Federal Open Market Committee that contains
information on the state of the economy in each Federal Reserve district is called the
A) beige book.
B) green book.
C) blue book.
D) black book.
The ________ traces out the points for which total quantity of goods produced equals
total quantity of goods demanded.
A) LM curve
B) IS curve
C) consumption function
D) investment schedule
When a budget deficit occurs in the United States, the U.S. Treasury finances this
deficit by
A) borrowing.
B) imposing a moratorium of new government spending.
C) increasing the tax rate.
D) printing more dollars.
Which of the following is a potential operating instrument for the central bank?
A) the monetary base
B) the M1 money supply
C) nominal GDP
D) the discount rate
A call option gives the seller the
A) right to sell the underlying security.
B) obligation to sell the underlying security.
C) right to buy the underlying security.
D) obligation to buy the underlying security.
Regulatory forbearance
A) meant delaying the closing of “zombie S&Ls” as their losses mounted during the
1980s.
B) had the advantage of benefiting healthy S&Ls at the expense of “zombie S&Ls,” as
insolvent institutions lost deposits to health institutions.
C) had the advantage of permitting many insolvent S&Ls the opportunity to return to
profitability, saving the FSLIC billions of dollars.
D) increased adverse selection dramatically.
Investment banks purchase new security issues in the hope of making a profit. This is
the act of
A) reinsuring.
B) factoring.
C) syndicating.
D) underwriting.
Rules used to predict movements in stock prices based on past patterns are, according to
the efficient markets hypothesis
A) a waste of time.
B) profitably employed by all financial analysts.
C) the most efficient rules to employ.
D) consistent with the random walk hypothesis.
The conversion of a barter economy to one that uses money
A) increases efficiency by reducing the need to exchange goods and services.
B) increases efficiency by reducing the need to specialize.
C) increases efficiency by reducing transactions costs.
D) does not increase economic efficiency.
Prior to 2008, bank managers looked on reserve requirements
A) as a tax on deposits.
B) as a subsidy on deposits.
C) as a subsidy on loans.
D) as a tax on loans.
Suppose, at a given federal funds rate, there is an excess supply of reserves in the
federal funds market. If the Fed wants the federal funds rate to stay at that level, then it
should undertake an open market ________ of bonds, everything else held constant. If
the Fed does nothing, however, the federal funds rate will ________.
A) sale; increase
B) purchase; increase
C) sale; decrease
D) purchase; decrease
One way the venture capital firm avoids the free-rider problem is by
A) prohibiting the sale of equity in the firm to anyone except the venture capital firm.
B) prohibiting members from serving on the board of directors.
C) prohibiting the borrowing firm from replacing management.
D) requiring collateral equal to the value of the borrowed funds.
When Keynesians argue that “correlation does not necessarily imply causation,” they
are probably criticizing
A) structural-model evidence.
B) reduced-form evidence.
C) indirect-model evidence.
D) black-box evidence.
In the United States, loans from ________ are far ________ important for corporate
finance than are securities markets.
A) government agencies; more
B) government agencies; less
C) financial intermediaries; more
D) financial intermediaries; less
Everything else held constant, when financial frictions increase, the real cost of
borrowing ________ so that planned investment spending ________ at any given
inflation rate.
A) increases; falls
B) decreases; falls
C) decreases; rises
D) increases; rises
In the bond market, the bond demanders are the ________ and the bond suppliers are
the ________.
A) lenders; borrowers
B) lenders; advancers
C) borrowers; lenders
D) borrowers; advancers
Methods of financing government spending are described by an expression called the
government budget constraint, which states the following
A) the government budget deficit must equal the sum of the change in the monetary
base and the change in government bonds held by the public.
B) the government budget deficit must equal the difference between the change in the
monetary base and the change in government bonds held by the public.
C) the government budget deficit must equal the difference between the change in the
monetary base and the change in government bonds held by the Fed.
D) the government budget deficit must equal the difference between the change in the
monetary base and the change in government bonds held by the Treasury.
Increased uncertainty resulting from the global financial crisis ________ the required
return on investment in equity.
A) raised
B) lowered
C) had no impact on
D) decreased
If the aggregate price level adjusts slowly over time, then an expansionary monetary
policy lowers
A) only the short-term nominal interest rate.
B) only the short-term real interest rate.
C) both the short-term nominal and real interest rates.
D) the short-term nominal, the short-term real, and the long-term real interest rates.
In the Keynesian cross diagram, an increase in investment spending because companies
become more optimistic about investment profitability causes the aggregate demand
function to shift up, the equilibrium level of aggregate output to ________, and the IS
curve to shift to the ________, everything else held constant.
A) rise; left
B) rise; right
C) fall; left
D) fall; right
Severe fiscal imbalances can directly trigger a currency crisis since
A) investors fear that the government may not be able to pay back the debt and so begin
to sell domestic currency.
B) the government may stop printing money.
C) the government may have to cut back on spending.
D) the currency must surely increase in value.
If a perpetuity has a price of $500 and an annual interest payment of $25, the interest
rate is
A) 2.5 percent.
B) 5 percent.
C) 7.5 percent.
D) 10 percent.
The theory that monetary policy conducted on a discretionary, day-by-day basis leads to
poor long-run outcomes is referred to as the
A) adverse selection problem.
B) moral hazard problem.
C) time-inconsistency problem.
D) nominal-anchor problem.