The discount rate is kept ________ the federal funds rate because the Fed prefers that
________.
A) below; banks can monitor each other for credit risk
B) below; the Fed can monitor banks for credit risk
C) above; banks can monitor each other for credit risk
D) above; the Fed can monitor banks for credit risk
A reduction in government spending causes the equilibrium level of aggregate output to
________ at any given interest rate and shifts the ________ curve to the ________,
everything else held constant.
A) rise; LM; right
B) fall; IS; left
C) fall; LM; left
D) rise; IS; right
Which of the following are generally TRUE of bonds?
A) A bond’s return equals the yield to maturity when the time to maturity is the same as
the holding period.
B) A rise in interest rates is associated with a fall in bond prices, resulting in capital
gains on bonds whose terms to maturity are longer than the holding periods.
C) The longer a bond’s maturity, the smaller is the size of the price change associated
with an interest rate change.
D) Prices and returns for short-term bonds are more volatile than those for longer-term
bonds.
On the expiration date of a futures contract, the price of the contract converges to the
A) purchase price of the contract.
B) average price over the life of the contract.
C) price of the underlying asset.
D) average of the purchase price and the price of the underlying asset.
According to aggregate demand and supply analysis, America’s involvement in the
Vietnam War had the effect of
A) increasing aggregate output, lowering unemployment, and raising the inflation.
B) decreasing aggregate output, lowering unemployment, and lowering the inflation.
C) increasing aggregate output, raising unemployment, and raising the inflation.
D) decreasing aggregate output, raising unemployment, and lowering the inflation.
A movement along the bond demand or supply curve occurs when ________ changes.
A) bond price
B) income
C) wealth
D) expected return
The two types of open market operations are
A) offensive and defensive.
B) dynamic and reactionary.
C) active and passive.
D) dynamic and defensive.
Despite an expansionary monetary policy, an economy experiences a recession.
Everything else held constant, the recession could occur in spite of the rightward shift
of the LM curve if
A) consumer confidence decreases sharply.
B) there is an investment boom.
C) the money supply increases.
D) taxes are cut.
The interest rate the Fed charges banks borrowing from the Fed is the
A) federal funds rate.
B) Treasury bill rate.
C) discount rate.
D) prime rate.
If the required reserve ratio is 15 percent, currency in circulation is $400 billion,
checkable deposits are $1000 billion, and excess reserves total $1 billion, then the M1
money multiplier is
A) 2.54.
B) 2.67.
C) 2.35.
D) 0.551.
The demand for money as a cushion against unexpected contingencies is called the
A) transactions motive.
B) precautionary motive.
C) insurance motive.
D) speculative motive.
The management of money and interest rates is called ________ policy and is
conducted by a nation’s ________ bank.
A) monetary; superior
B) fiscal; superior
C) fiscal; central
D) monetary; central
The ________ is calculated by multiplying the coupon rate times the par value of the
bond.
A) present value
B) face value
C) coupon payment
D) maturity payment
In the loanable funds framework, the ________ is measured on the vertical axis.
A) price of bonds
B) interest rate
C) quantity of bonds
D) quantity of loanable funds
Under the Exchange Rate Mechanism of the European Monetary System, when the
German mark depreciated below its lower limit against the British pound, the Bank of
England was required to buy ________ and sell ________, thereby ________
international reserves.
A) pounds; marks; losing
B) pounds; marks; gaining
C) marks; pounds; gaining
D) marks; pounds; losing
Everything else held constant, an autonomous easing of monetary policy will cause
A) aggregate demand to increase.
B) aggregate demand to decrease.
C) the quantity of aggregate demand to increase.
D) the quantity of aggregate demand to decrease.
An example of permanent insurance is ________ insurance, and an example of
temporary insurance is ________ insurance.
A) term; variable life
B) whole life; variable life
C) whole life; term
D) term; whole life
Both the CAPM and APT suggest that an asset should be priced so that it has a higher
expected return
A) when it has a greater systematic risk.
B) when it has a greater risk in isolation.
C) when it has a lower systematic risk.
D) when it has a lower systematic risk and a lower risk in isolation.
Which of the following is NOT a requirement in selecting a policy instrument?
A) measurability
B) controllability
C) flexibility
D) predictability
In the Keynesian cross diagram, a decline in autonomous consumer expenditure causes
the aggregate demand function to shift ________ and the equilibrium level of aggregate
output to ________, everything else held constant.
A) up; rise
B) up; fall
C) down; rise
D) down; fall
When the Treasury bond market becomes more liquid, other things equal, the demand
curve for corporate bonds shifts to the ________ and the demand curve for Treasury
bonds shifts to the ________.
A) right; right
B) right; left
C) left; right
D) left; left
The primary liabilities of a commercial bank are
A) bonds.
B) mortgages.
C) deposits.
D) commercial paper.
The rate of inflation increases when
A) the unemployment rate equals the NAIRU.
B) the unemployment rate exceeds the NAIRU.
C) the unemployment rate is less than the NAIRU.
D) the unemployment rate increases faster than the NAIRU increases.
Assume a bank has $200 million of assets with a duration of 2.5, and $190 million of
liabilities with a duration of 1.05. The duration gap for this bank is
A) 0.5 year.
B) 1 year.
C) 1.5 years.
D) 2 years.
A(n) ________ in the riskiness of corporate bonds will ________ the price of corporate
bonds and ________ the yield on corporate bonds, all else equal.
A) increase; increase; increase
B) increase; decrease; increase
C) decrease; increase; increase
D) decrease; decrease;decrease
Everything else held constant, when the government has higher budget deficits
A) the demand curve for bonds shifts to the left and the interest rate rises.
B) the demand curve for bonds shifts to the left and the interest rate falls.
C) the supply curve for bonds shifts to the right and the interest rate falls.
D) the supply curve for bonds shifts to the right and the interest rate rises.
The bond supply and demand framework is easier to use when analyzing the effects of
changes in ________, while the liquidity preference framework provides a simpler
analysis of the effects from changes in income, the price level, and the supply of
________.
A) expected inflation; bonds
B) expected inflation; money
C) government budget deficits; bonds
D) government budget deficits; money
Suppose the U.S. economy is operating at potential output. A negative supply shock that
is accommodated by an open market purchase by the Federal Reserve will cause
________ in real GDP in the long run and ________ in inflation in the long run,
everything else held constant.
A) no change; an increase
B) no change; a decrease
C) an increase; an increase
D) a decrease; a decrease
Assume that autonomous consumption equals $200 and that the mpc equals 0.8. If
disposable income equals $1000, then total consumption equals
A) $80.
B) $200.
C) $800.
D) $1000.
If the quantity of money demanded is not affected by changes in the interest rate, the
LM curve is ________ and fiscal policy will be ________.
A) horizontal; very effective
B) horizontal; ineffective
C) vertical; ineffective
D) vertical; very effective
Which of the following is NOT a reason financial regulation and supervision is difficult
in real life?
A) Financial institutions have strong incentives to avoid existing regulations.
B) Unintended consequences may happen if details in the regulations are not precise.
C) Regulated firms lobby politicians to lean on regulators to ease the rules.
D) Financial institutions are not required to follow the rules.
The incentive for analysts in investment banks to distort research increases when
A) revenues from brokerage commissions increase.
B) the potential revenues from underwriting greatly exceed brokerage commissions.
C) the potential brokerage commissions greatly exceed revenues from underwriting.
D) revenues from underwriting decrease.
Which of the following statements is TRUE?
A) State and local governments cannot default on their bonds.
B) Bonds issued by state and local governments are called municipal bonds.
C) All government issued bonds—local, state, and federal—are federal income tax
exempt.
D) The coupon payment on municipal bonds is usually higher than the coupon payment
on Treasury bonds.