A credit market instrument that pays the owner a fixed coupon payment every year until
the maturity date and then repays the face value is called a
A) simple loan.
B) fixed-payment loan.
C) coupon bond.
D) discount bond.
Situation 20-2
Assume a closed economy. Suppose that autonomous consumption equals $400,
planned investment equals $500, government expenditure equals $200, net taxes
equals $50, and the mpc equals 0.9.
Using the information in Situation 20-2, if taxes increase by $10, then the equilibrium
aggregate output will change by
A) -$90.
B) -$10.
C) $10.
D) $90.
Because borrowers, once they have a loan, are more likely to invest in high-risk
investment projects, banks face the
A) adverse selection problem.
B) lemon problem.
C) adverse credit risk problem.
D) moral hazard problem.
If a forecast is made using all available information, then economists say that the
expectation formation is
A) rational.
B) irrational.
C) adaptive.
D) reasonable.
The case for Federal Reserve independence does NOT include the idea that
A) political pressure would impart an inflationary bias to monetary policy.
B) a politically insulated Fed would be more concerned with long-run objectives and
thus be a defender of a sound dollar and a stable price level.
C) policy is always performed better by an elite group such as the Fed.
D) a Federal Reserve under the control of Congress or the president might make the
so-called political business cycle more pronounced.
Lack of competition in the United States banking industry can be attributed to
A) the fact that competition does not benefit consumers.
B) the fact that branching has eliminated competition.
C) recent legislation restricting competition.
D) nineteenth-century populist sentiment.
Well-functioning financial markets
A) cause inflation.
B) eliminate the need for indirect finance.
C) cause financial crises.
D) allow the economy to operate more efficiently.
According to the liquidity premium theory of the term structure, a flat yield curve
indicates that short-term interest rates are expected to
A) rise in the future.
B) remain unchanged in the future.
C) decline moderately in the future.
D) decline sharply in the future.
If there are five goods in a barter economy, one needs to know ten prices in order to
exchange one good for another. If, however, there are ten goods in a barter economy,
then one needs to know ________ prices in order to exchange one good for another.
A) 20
B) 25
C) 30
D) 45
If the central bank pursues a monetary policy that is more expansionary than what firms
and people expect, then the central bank must be trying to
A) boost output in the short run.
B) constrain output in the short run.
C) constrain prices.
D) boost prices in the short run.
Of the following assets, the least liquid is
A) stocks.
B) traveler’s checks.
C) checking deposits.
D) a house.
Using Taylor’s rule, when the equilibrium real federal funds rate is 2 percent, there is no
output gap, the actual inflation rate is zero, and the target inflation rate is 2 percent, the
nominal federal funds rate should be
A) 0 percent.
B) 1 percent.
C) 2 percent.
D) 3 percent.
Deflation causes the demand for bonds to ________, the supply of bonds to ________,
and bond prices to ________, everything else held constant.
A) increase; increase; increase
B) increase; decrease; increase
C) decrease; increase; increase
D) decrease; decrease; increase
A firm issuing credit cards earns income from
A) loans it makes to credit card holders.
B) subsidies from the local governments.
C) payments made to it by manufacturers of the products sold in stores on credit card
purchases.
D) sales of the card in foreign countries.
Everything else held constant, if the sum of the required reserve ratio and the excess
reserve ratio is less than one, an increase in the currency-deposit ratio causes the M1
money multiplier to ________ and the money supply to ________.
A) decrease; increase
B) increase; decrease
C) decrease; decrease
D) increase; increase
If people expect nominal interest rates to be lower in the future, the expected return to
bonds ________, and the demand for money ________.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
The goal for high employment should be a level of unemployment at which the demand
for labor equals the supply of labor. Economists call this level of unemployment the
A) frictional level of unemployment.
B) structural level of unemployment.
C) natural rate level of unemployment.
D) Keynesian rate level of unemployment.
A venture capital firm protects its equity investment from moral hazard through which
of the following means?
A) It places people on the board of directors to better monitor the borrowing firm’s
activities.
B) It writes contracts that prohibit the sale of an equity investment to the venture capital
firm.
C) It prohibits the borrowing firm from replacing its management.
D) It requires a 50% stake in the company.
The collapse of the subprime mortgage market increased the spread between Baa and
default-free U.S. Treasury bonds. This is due to
A) a reduction in risk.
B) a reduction in maturity.
C) a flight to quality.
D) a flight to liquidity.
The Fed can engage in preemptive strikes against a rise in inflation by ________ the
federal funds interest rate; it can act preemptively against negative demand shocks by
________ the federal funds interest rate.
A) raising; lowering
B) raising; raising
C) lowering; lowering
D) lowering; raising
Professional athletes often have contract clauses prohibiting risky activities such as
skiing and motorcycle riding. These clauses are
A) limited-liability clauses.
B) risk insurance.
C) restrictive covenants.
D) illegal.
If the required reserve ratio is 5 percent, currency in circulation is $400 billion,
checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the M1
money multiplier is
A) 2.5.
B) 2.72.
C) 2.3.
D) 0.551.
The monetary base minus currency in circulation equals
A) reserves.
B) the borrowed base.
C) the nonborrowed base.
D) discount loans.
The concept of adverse selection helps to explain
A) why collateral is not a common feature of many debt contracts.
B) why large, well-established corporations find it so difficult to borrow funds in
securities markets.
C) why financial markets are among the most heavily regulated sectors of the economy.
D) why stocks are the most important source of external financing for businesses.
An essential characteristic of credit unions is that
A) they are typically large.
B) branching across state lines is prohibited.
C) their lending is primarily for mortgage loans.
D) they are organized for individuals with a common bond.
A debit card differs from a credit card in that
A) a debit card is a loan while for a credit card purchase, payment is made immediately.
B) a debit card is a long-term loan while a credit card is a short-term loan.
C) a credit card is a loan while for a debit card purchase, payment is made immediately.
D) a credit card is a long-term loan while a debit card is a short-term loan.
The policy of ________ exacerbated ________ problems as savings and loans took on
increasingly huge levels of risk on the slim chance of returning to solvency.
A) regulatory forbearance; moral hazard
B) regulatory forbearance; adverse hazard
C) regulatory agnosticism; moral hazard
D) regulatory agnosticism; adverse hazard
Periodic payments of net earnings to shareholders are known as
A) capital gains.
B) dividends.
C) profits.
D) interest.
Tobin’s model of the speculative demand for money shows that people hold money as a
store of wealth as a way of
A) reducing risk.
B) reducing income.
C) avoiding taxes.
D) reducing transactions cost.
In the model of the money supply process, the Federal Reserve’s role in influencing the
money supply is represented by
A) both the required reserve ratio and the market interest rate.
B) the required reserve ratio, nonborrowed reserves, and borrowed reserves.
C) only borrowed reserves.
D) only nonborrowed reserves.
________ in the foreign interest rate causes the demand for domestic assets to increase
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