Derivative instruments are
A) assets such as bonds or common stock that derive their value from the value of the
companies which issue them.
B) assets whose rates of returns must be derived from information published in
financial tables.
C) assets which derive their value from underlying assets.
D) computers which display real-time financial information.
Answer:
According to the equation of exchange, the money supply times the velocity of money
equals the
A) price level.
B) growth rate of the money supply.
C) real GDP.
D) nominal GDP.
Answer:
The third round of quantitative easing, announced in September 2012, was focused on
purchases of:
A) short-term Treasury bills
B) long-term Treasury notes
C) long-term Treasury notes and sales of short-term Treasury bills
D) mortgage-backed securities
Answer:
In the bond market, the buyer is considered to be
A) the lender.
B) the borrower.
C) the lender or the borrower, depending upon the use to which the funds are put.
D) the lender or the borrower, depending upon whether interest rates are rising or
falling.
Answer:
In managing the monetary base, the Fed most often uses
A) open market purchases.
B) printing money.
C) discount loans.
D) tax increases.
Answer:
What is the main reason the Fed operates in a political arena?
A) It lacks a constitutional mandate.
B) The members of the Board of Governors must run for reelection every fourteen
years.
C) The members of the Board of Governors are typically prominent politicians.
D) It is under the direct control of Congress.
Answer:
In the United States the stake of top management in firms’ ownership usually is
A) less than 5%.
B) more than 25%.
C) more than 50%.
D) more than 75%.
Answer:
An exception to the law of one price occurs if
A) the good is not tradeable.
B) demand for the good is stronger in some countries than in others.
C) exchange rates are flexible, rather than fixed.
D) interest rates differ across countries.
Answer:
In a defined contribution pension plan,
A) pension income varies depending on how well the plan’s investments have done.
B) the employee is promised an assigned benefit based on earnings and years of service.
C) if the funds in the pension plan exceed the amount promised, the excess accrues to
the issuing firm or institution.
D) all earnings are taxable as regular income.
Answer:
How can a bond have a negative rate of return?
A) if the current yield is greater than the coupon rate
B) if the current yield is less than the coupon rate
C) if the rate of capital loss exceeds the current yield
D) if the rate of capital gains is less than the current yield
Answer:
Which of the following is NOT considered a cash item by banks?
A) U.S. Treasury bills
B) deposits at other banks
C) deposits at the Federal Reserve
D) vault cash
Answer:
Transaction and information costs
A) benefit borrowers at the expense of savers.
B) benefit savers at the expense of borrowers.
C) transaction costs hurt savers while information costs hurt borrowers.
D) create profit opportunities for those who can reduce these costs.
Answer:
Which of the following is NOT a financial intermediary?
A) NASDAQ
B) Allstate Insurance Company
C) Bank of America
D) Vanguard Total Stock Market Index Fund
Answer:
Defensive open market transactions
A) are aimed at achieving changes in monetary policy.
B) are used much less frequently than dynamic open market transactions.
C) are used to offset disturbances to the supply or demand for reserves.
D) make it easy to deduce the Fed’s intentions for monetary policy.
Answer:
The promise that was to hold the Bretton Woods system together was the agreement
that
A) no industrial country would allow high rates of inflation.
B) foreign central banks would be able to convert U.S. dollars into gold at a fixed price.
C) no country would raise tariffs on the products of other countries.
D) all countries would be willing to redeem their paper currencies for gold.
Answer:
Increases in interest rates are often blamed on
A) Congress.
B) the President.
C) the Fed.
D) the U.S. Treasury.
Answer:
Which of the following is a consequence of extending the payback period of a student
loan from 10 to 30 years?
A) higher monthly payments
B) more interest paid over the life of the loan
C) faster payoff of principal
D) lower monthly payments initially, but higher monthly payments in the future
Answer:
A person takes out a car loan at a bank, but actually uses the money to play the lottery.
This situation is an example of which problem banks face in lending?
A) adverse selection
B) moral hazard
C) interest rate risk
D) illiquidity
Answer:
During most of the time in recent decades, the government sector
A) has not spent more than it collected in taxes.
B) has run large deficits.
C) has run large surpluses.
D) has balanced its budget every year.
Answer:
Which of the following led to a “bank jog” in Greece?
A) high unemployment
B) high inflation
C) speculation that Greece would abandon the euro
D) the default of several Greek banks
Answer:
Suppose Matt’s New Cars issues and sells a one-year discount bond for $9,259 and
repays $10,000 at maturity. The interest rate on this bond would be
A) 2.6%.
B) 7.41%.
C) 8%.
D) 10%.
Answer:
How did Operation Twist affect the monetary base?
A) reduced
B) increased
C) no change
D) indeterminate
Answer:
Which of the following assumptions made in deriving the simple deposit multiplier is
unrealistic?
A) The Fed sets the required reserve ratio.
B) The Fed is able to affect the level of reserves in the banking system.
C) Banks loan out all of their excess reserves.
D) The simple deposit multiplier is equal to 1 divided by the required reserve ratio.
Answer:
Which of the following factors would tend to increase the size of the premium on an
options contract?
A) The option is near its expiration date.
B) The current default-risk-free interest rate is high.
C) The price volatility of the underlying asset is low.
D) The option is far away from its expiration date.
Answer:
For the goods market to be in equilibrium in a closed economy, which of the following
must be true?
A) Y = S + I + G
B) S + I = C + G
C) S + G = Y + C
D) S = I
Answer:
A one-year discount bond with a face value of $1000 has an interest rate of 4%. What is
its price?
A) $960
B) $961.54
C) $996
D) $1,040
Answer:
If you look at the financial page listings for futures contracts and find that futures prices
on Treasury bonds are falling over a particular time period, futures market investors
must expect that
A) Treasury bond prices will be higher in the future.
B) Treasury bond yields will be higher in the future.
C) Treasury bond yields will be lower in the future.
D) futures prices will rise again at the end of the period.
Answer:
If a corporation pays a dividend, which group receives priority in receiving the
dividend?
A) bond holders
B) holders of common stock
C) holders of preferred stock
D) dividends are evenly divided by holders of common and preferred stock
Answer:
All of the following accurately describe microlending EXCEPT:
A) it involves small loans
B) lending is primarily undertaken by the government
C) the borrowers are people who are attempting to start or expand a small business
D) many economists think it has aided economic growth in many low-income countries
Answer:
Which of the following was the main reason for increased counterparty risk in the
shadow banking system prior to the financial crisis of 2007-2009?
A) increased leverage
B) government insuring money market deposits
C) many firms borrowing long term for short-term investments
D) trading of derivatives on exchanges
Answer:
If foreign interest rates rise
A) the demand for domestic currency rises, causing it to appreciate.
B) the demand for domestic currency falls, causing it to depreciate.
C) the demand for domestic currency rises, causing it to depreciate.
D) the demand for domestic currency falls, causing it to appreciate.
Answer:
Which agency did Congress create in the 1930s to reduce information costs in financial
markets?
A) FDIC
B) SEC
C) Federal Reserve
D) Consumer Financial Protection Agency
Answer:
The sale of foreign assets by a central bank accompanied by an open market purchase
of securities of the same size results in:
A) a reduction in the monetary base
B) an increase in the monetary base
C) a sterilized intervention
D) an unsterilized intervention
Answer:
Which of the following was NOT considered to have been a drawback of the pre-1914
gold standard?
A) It sometimes led to inflation, which several times in the late nineteenth century
caused recessions in the United States.
B) Countries had little control over their domestic monetary policies.
C) Countries with trade deficits experienced deflation.
D) Changes in the world money supply were strongly influenced by gold discoveries.
Answer:
How are interest payments on mortgages distributed to investors who own
mortgage-backed securities?
Answer:
Assess the impact on the bond market of the rise in Internet trading of stocks.
Answer:
Suppose you are risk neutral and you are deciding between two investments. One has a
guaranteed return of 2% while the second has a 60% chance of a 10% return and a 40%
chance of a -5% return. Which investment would you choose? Why?
Answer:
Why do some economists think a global savings glut contributed to the U.S. running a
current account deficit in the 2000s?
Answer:
How do car dealers help reduce adverse selection?
Answer:
How do individual become members of the Board of Governors?
Answer:
What are some reasons that hedge funds have become controversial?
Answer:
Suppose you have two clients who need your services for two years. One agreed to pay
you $50,000 one year from now and another $50,000 in two years while the other paid
$35,000 after one year, but $65,000 after two years. Assuming an interest rate of 10%,
which one has a higher present value? Round off to the nearest dollar.
Answer:
Briefly explain the process of securitizing mortgages.
Answer:
What are the five characteristics that make an asset suitable to be used as a medium of
exchange?
Answer:
What are the different forms of bank borrowings?
Answer:
If fiat money has no value apart from its use as money, how can it be used as a medium
of exchange?
Answer:
Suppose the Fed makes a $5 million discount loan to a bank. Illustrate how this affects
the balance sheets of the Fed and the banking system.
Answer:
What services are finance companies able to offer consumers and businesses that banks
do not offer?
Answer:
How did the federal funds rate compare to that suggested by Taylor’s rule following the
2001 recession and during the Financial Crisis of 2007-2009? How would proponents
of Taylor’s rule evaluate monetary policy in each period.
Answer:
Suppose a bank has $10 million in capital, $100 million in assets, and after-tax profit of
$2 million? what is its return on assets? What is its return on equity?
Answer:
Make use of the misperceptions theory to explain why the short-run aggregate supply
curve is upward sloping.
Answer:
Suppose you invest $5,000 in a one-year Japanese bond that pays 1% interest. At the
time of your purchase, 85 yen equals $1 while one year later, 80 yen equals $1. What
will be the value of your investment in one year when measured in dollars?
Answer:
Explain what is meant by the “double taxation of dividends”?
Answer: