When yield curves are steeply upward sloping
A) long-term interest rates are above short-term interest rates.
B) short-term interest rates are above long-term interest rates.
C) short-term interest rates are about the same as long-term interest rates.
D) medium-term interest rates are above both short-term and long-term interest rates.
When bad drivers line up to purchase collision insurance, automobile insurers are
subject to the
A) moral hazard problem.
B) adverse selection problem.
C) assigned risk problem.
D) ill queue problem.
If $22,050 is the amount payable in two years for a $20,000 simple loan made today,
the interest rate is
A) 5 percent.
B) 10 percent.
C) 22 percent.
D) 25 percent.
Adjustable rate mortgages
A) protect households against higher mortgage payments when interest rates rise.
B) keep financial institutions’ earnings high even when interest rates are falling.
C) benefit homeowners when interest rates are falling.
D) generally have higher initial interest rates than on conventional fixed-rate
mortgages.
In the open-economy ISLM model, net export is specified as a function of and
exchange arte is specified as a function of .
A) output; output.
B) money supply; interest rate.
C) exchange rate; interest rate.
D) exchange rate; money demand.
Which of the following sequences accurately describes the evolution of the payments
system?
A) barter, coins made of precious metals, paper currency, checks, electronic funds
transfers
B) barter, coins made of precious metals, checks, paper currency, electronic funds
transfers
C) barter, checks, paper currency, coins made of precious metals, electronic funds
transfers
D) barter, checks, paper currency, electronic funds transfers
The present value of an expected future payment ________ as the interest rate
increases.
A) falls
B) rises
C) is constant
D) is unaffected
Secondary reserves include
A) deposits at Federal Reserve Banks.
B) deposits at other large banks.
C) short-term U.S. government securities.
D) state and local government securities.
If you sell a $100,000 interest-rate futures contract for 105, and the price of the
Treasury securities on the expiration date is 108, your ________ is ________.
A) profit; $3000
B) loss; $3000
C) profit; $8000
D) loss; $8000
________ are financial intermediaries that acquire funds by selling shares to many
individuals and using the proceeds to purchase diversified portfolios of stocks and
bonds.
A) Mutual funds
B) Investment banks
C) Finance companies
D) Credit unions
The type of credit insurance that landed AIG into trouble in 2008 is called
A) insurance rate swaps.
B) monoline insurance.
C) default insurance.
D) credit default swaps.
Interest income minus interest expenses divided by assets is a measure of bank
performance known as the
A) operating income.
B) net interest margin.
C) return on assets.
D) return on equity.
Deposits in European banks denominated in dollars for the purpose of international
transactions are known as
A) Eurodollars.
B) European Currency Units.
C) European Monetary Units.
D) International Monetary Units.
If a bank has $100,000 of checkable deposits, a required reserve ratio of 20 percent, and
it holds $40,000 in reserves, then the maximum deposit outflow it can sustain without
altering its balance sheet is
A) $30,000.
B) $25,000.
C) $20,000.
D) $10,000.
Banks earn profits by selling ________ with attractive combinations of liquidity, risk,
and return, and using the proceeds to buy ________ with a different set of
characteristics.
A) loans; deposits
B) securities; deposits
C) liabilities; assets
D) assets; liabilities
A key assumption in the segmented markets theory is that bonds of different maturities
A) are not substitutes at all.
B) are perfect substitutes.
C) are substitutes only if the investor is given a premium incentive.
D) are substitutes but not perfect substitutes.
A simple deposit multiplier equal to two implies a required reserve ratio equal to
A) 100 percent.
B) 50 percent.
C) 25 percent.
D) 0 percent.
The sum of the current yield and the rate of capital gain is called the
A) rate of return.
B) discount yield.
C) perpetuity yield.
D) par value.
The Lucas critique indicates that
A) advocates of discretionary policies’ criticisms of rational expectations models are
well-founded.
B) advocates of discretionary policies’ criticisms of rational expectations models are not
well-founded.
C) expectations are important in determining the outcome of a discretionary policy.
D) expectations are not important in determining the outcome of a discretionary policy.
Firms that are designated as systemically important financial institutions (SIFIs) are
subject to all of the following additional Federal Reserve regulations EXCEPT
A) higher capital standards.
B) stricter liquidity requirements.
C) providing a plan for orderly liquidation if necessary.
D) interest rate ceilings on time deposits.
Suppose that from a new checkable deposit, First National Bank holds two million
dollars in vault cash, nine million dollars in excess reserves, and faces a required
reserve ratio of ten percent. Given this information, we can say First National Bank has
________ million dollars on deposit with the Federal Reserve.
A) one
B) two
C) eight
D) ten
Money ________ transaction costs, allowing people to specialize in what they do best.
A) reduces
B) increases
C) enhances
D) eliminates
The “lemons problem” exists because of
A) transactions costs.
B) economies of scale.
C) rational expectations.
D) asymmetric information.
Moral hazard and adverse selection problems increased in prominence in the 1980s
A) as deregulation required savings and loans and mutual savings banks to be more
cautious.
B) following a burst of financial innovation in the 1970s and early 1980s that produced
new financial instruments and markets, thereby widening the scope for risk taking.
C) following a decrease in federal deposit insurance from $100,000 to $40,000.
D) as interest rates were sharply decreased to bring down inflation.
If a security pays $55 in one year and $133 in three years, its present value is $150 if
the interest rate is
A) 5 percent.
B) 10 percent.
C) 12.5 percent.
D) 15 percent.
Assuming the same coupon rate and maturity length, the difference between the yield
on a Treasury Inflation Indexed Security and the yield on a nonindexed Treasury
security provides insight into
A) the nominal interest rate.
B) the real interest rate.
C) the nominal exchange rate.
D) the expected inflation rate.
A debt contract is incentive compatible
A) if the borrower has the incentive to behave in the way that the lender expects and
desires, since doing otherwise jeopardizes the borrower’s net worth in the business.
B) if the borrower’s net worth is sufficiently low so that the lender’s risk of moral
hazard is significantly reduced.
C) if the debt contract is treated like an equity.
D) if the lender has the incentive to behave in the way that the borrower expects and
desires.
In the figure above, the price of bonds would fall from P1 to P2 when
A) inflation is expected to increase in the future.
B) interest rates are expected to fall in the future.
C) the expected return on bonds relative to other assets is expected to increase in the
future.
D) the riskiness of bonds falls relative to other assets.
A depreciation of the U.S. dollar makes American goods cheaper relative to foreign
goods, resulting in a ________ in net exports in the U.S. and a ________ shift of the IS
curve in the U.S., everything else held constant.
A) fall; leftward
B) rise; leftward
C) fall; rightward
D) rise; rightward
The theory of portfolio choice indicates that higher interest rates make money
________ desirable, and the demand for real money balances ________.
A) less; falls
B) more; falls
C) less; rises
D) more; rises
The interest rate that describes how well a lender has done in real terms after the fact is
called the
A) ex post real interest rate.
B) ex ante real interest rate.
C) ex post nominal interest rate.
D) ex ante nominal interest rate.
During a “flight to quality”
A) the spread between Treasury bonds and Baa bonds increases.
B) the spread between Treasury bonds and Baa bonds decreases.
C) the spread between Treasury bonds and Baa bonds is not affected.
D) the change in the spread between Treasury bonds and Baa bonds cannot be
predicted.
Banks can lower the cost of information production by applying one information
resource to many different services. This process is called
A) economies of scale.
B) asset transformation.
C) economies of scope.
D) asymmetric information.
________ in the foreign interest rate causes the demand for domestic assets to shift to
the ________ and the domestic currency to depreciate, everything else held constant.
A) An increase; right
B) An increase; left
C) A decrease; right
D) A decrease; left
The interest rate falls when either the demand for bonds ________ or the supply of
bonds ________.
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases