An increase in stock prices ________ the size of people’s wealth and may ________
their willingness to spend, everything else held constant.
A) increases; increase
B) increases; decrease
C) decreases; increase
D) decreases; decrease
If aggregate demand is less than the level of aggregate output, then ________ inventory
investment will be ________.
A) planned; positive
B) actual; positive
C) actual; negative
D) planned; negative
In response to the overvalued dollar in the early 1970s, the German Bundesbank bought
dollars and sold marks to keep the exchange rate fixed, gaining international reserves.
The huge purchase of international reserves meant that the German monetary base
began to ________, leading to ________ growth in the German money supply.
A) decline; sluggish
B) decline; rapid
C) grow; sluggish
D) grow; rapid
Holding everything else constant, if interest rates are expected to increase, the demand
for bonds ________ and the demand curve shifts ________.
A) increases; right
B) decreases; right
C) increases; left
D) decreases; left
The principal-agent problem would not occur if ________ of a firm had complete
information about actions of the ________.
A) owners; customers
B) owners; managers
C) managers; customers
D) managers; owners
Since the Federal Reserve sets the required reserve ratio to less than one, one dollar of
reserves can support ________ of checkable deposits.
A) exactly one dollar
B) less than one dollar
C) more than one dollar
D) exactly twice the amount
Which of the following is NOT an advantage to exchange-rate targeting?
A) It provides a strong nominal anchor to keep inflation under control.
B) It provides an automatic rule for policy to help avoid the time-inconsistency
problem.
C) It is simple and clear so that the public can easily understand it.
D) It increases the accountability of policymakers.
________ in the expected future domestic exchange rate causes the demand for
domestic assets to shift to the left and the domestic currency to ________, everything
else held constant.
A) An increase; appreciate
B) An increase; depreciate
C) A decrease; appreciate
D) A decrease; depreciate
That only large, well-established corporations have access to securities markets
A) explains why indirect finance is such an important source of external funds for
businesses.
B) can be explained by the problem of moral hazard.
C) can be explained by government regulations that prohibit small firms from acquiring
funds in securities markets.
D) explains why newer and smaller corporations rely so heavily on the new issues
market for funds.
When the price of a bond decreases, all else equal, the bond demand curve
A) shifts right.
B) shifts left.
C) does not shift.
D) inverts.
The principal-agent problem that exists for bank trading activities can be reduced
through
A) creation of internal controls that combine trading activities with bookkeeping.
B) creation of internal controls that separate trading activities from bookkeeping.
C) elimination of regulation of banking.
D) elimination of internal controls.
A ________ yield curve predicts a future increase in inflation.
A) steeply upward sloping
B) slight upward sloping
C) flat
D) downward sloping
Under the current managed float exchange rate regime, countries with balance of
payments deficits frequently do not want to see their currencies depreciate because it
makes ________ goods more expensive for ________ consumers and can stimulate
inflation.
A) foreign; foreign
B) foreign; domestic
C) domestic; foreign
D) domestic; domestic
Conventional money demand functions tended to ________ money demand in the
middle and late 1970s, and ________ velocity beginning in 1982.
A) overpredict; overpredict
B) overpredict; underpredict
C) underpredict; overpredict
D) underpredict; underpredict
An increase in the foreign interest rate causes the demand for domestic assets to
________ and the domestic currency to ________, everything else held constant.
A) increase; appreciate
B) increase; depreciate
C) decrease; appreciate
D) decrease; depreciate
Loss aversion can explain why very little ________ actually takes place in the securities
market.
A) short selling
B) bargaining
C) bartering
D) negotiating
If the price of a euro (the European currency) increases from $1.00 to $1.10, then,
everything else held constant
A) a European vacation becomes less expensive.
B) a European vacation becomes more expensive.
C) the cost of a European vacation is not affected.
D) foreign travel becomes impossible.
According to the liquidity premium theory of the term structure
A) bonds of different maturities are not substitutes.
B) if yield curves are downward sloping, then short-term interest rates are expected to
fall by so much that, even when the positive term premium is added, long-term rates fall
below short-term rates.
C) yield curves should never slope downward.
D) interest rates on bonds of different maturities do not move together over time.
Secondary reserves are so called because
A) they can be converted into cash with low transactions costs.
B) they are not easily converted into cash, and are, therefore, of secondary importance
to banking firms.
C) 50% of these assets count toward meeting required reserves.
D) they rank second to bank vault cash in importance of bank holdings.
In the 1990s Japan had the lowest interest rates in the world due to a combination of
A) inflation and recession.
B) deflation and expansion.
C) inflation and expansion.
D) deflation and recession.
For a 3-year simple loan of $10,000 at 10 percent, the amount to be repaid is
A) $10,030.
B) $10,300.
C) $13,000.
D) $13,310.
For a given return on assets, the lower is bank capital
A) the lower is the return for the owners of the bank.
B) the higher is the return for the owners of the bank.
C) the lower is the credit risk for the owners of the bank.
D) the lower the possibility of bank failure.
The monetary base minus reserves equals
A) currency in circulation.
B) the borrowed base.
C) the nonborrowed base.
D) discount loans.
The German central bank gained international reserves in the early 1970s because it
sold ________ to prevent mark ________.
A) marks; appreciation
B) dollars; appreciation
C) marks; depreciation
D) dollars; depreciation
A decrease in the liquidity of corporate bonds, other things being equal, shifts the
demand curve for corporate bonds to the ________ and the demand curve for Treasury
bonds shifts to the ________.
A) right; right
B) right; left
C) left; left
D) left; right
The process where financial intermediaries create and sell low-risk assets and use the
proceeds to purchase riskier assets is known as
A) risk sharing.
B) risk aversion.
C) risk neutrality.
D) risk selling.
Positive spending shocks lead to ________ inflation ________.
A) higher; in both the short and long runs
B) higher; in the short run but not in the long run
C) lower; in both the short and long runs
D) lower; in the short run but not in the long run
Bonds with relatively high risk of default are called
A) Brady bonds.
B) junk bonds.
C) zero coupon bonds.
D) investment grade bonds.
Property and casualty insurance companies are organized
A) both as stock and mutual companies.
B) only as stock companies.
C) only as mutual companies.
D) primarily as cooperatives.
Suppose that there is a positive aggregate demand shock and the central bank commits
to an inflation rate target. But if the commitment is not credible, then
A) the public’s expected inflation will remain unchanged.
B) the short-run aggregate supply curve will rise.
C) over time inflation will fall back down to the inflation target.
D) all of the above.
E) both A and B.
According to Tobin’s q theory, if q is ________, new plant and equipment capital is
________ relative to the market value of business firms, so companies can buy a lot of
new investment goods with only a ________ issue of stock.
A) high; dear; large
B) high; cheap; large
C) high; cheap; small
D) low; cheap; large
E) low; cheap; small
Hong Kong chooses to have ________ and ________ and therefore, cannot have an
independent monetary policy at the same time.
A) capital control; a fixed exchange rate
B) free capital mobility; a fixed exchange rate
C) free capital mobility; a flexible exchange rate
D) capital control; a flexible exchange rate
Which policy measure bans spinning?
A) Sarbanes-Oxley Act of 2002
B) Global Legal Settlement of 2002
C) Gramm-Leach-Bliley Act of 1999
D) Riegle-Neal Act of 1994
Stock market crashes lead us to believe that
A) factors other than market fundamentals have an effect on asset prices.
B) unexploited profit opportunities never exist.
C) crashes are always predictable when market participants behave rationally.
D) bubbles are a natural outcome of an efficient market.
Under a fixed exchange rate regime, if a country’s central bank runs out of international
reserves, it cannot keep its currency from
A) depreciating.
B) appreciating.
C) deflating.
D) inflating.
