The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 did not
prohibit companies issuing securities from paying the credit-rating agencies to rate
them. This is an example of which remedy of conflicts of interest?
A) regulate for transparency
B) supervisory oversight
C) leave it to the market
D) socialization of information production
IPOs have become very important in the U.S. economy because they are a major source
of financing for
A) so-called “blue-chip” companies.
B) hedge funds.
C) internet companies.
D) mutual funds.
When short-term interest rates are expected to fall sharply in the future, the yield curve
will
A) slope up.
B) be flat.
C) be inverted.
D) be an inverted U shape.
Assume a closed economy with no government. Suppose that autonomous consumption
equals $400, planned investment equals $500, and the mpc equals 0.9.
Using the information in Situation 20-1, if aggregate output equals $8,000, the
unplanned inventory investment equals
A) -$100
B) $0
C) $100
D) $500
An inverted yield curve predicts that short-term interest rates
A) are expected to rise in the future.
B) will rise and then fall in the future.
C) will remain unchanged in the future.
D) will fall in the future.
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.
The process in which people seeking higher yielding securities take their funds out of
the banking system thus restricting the amount of funds banks can lend is called
A) capital mobility.
B) loophole mining.
C) disintermediation.
D) deposit jumping.
If a firm must pay for goods it has ordered with foreign currency, it can hedge its
foreign exchange-rate risk by ________ foreign exchange futures ________.
A) selling; short
B) buying; long
C) buying; short
D) selling; long
The practice of factoring involves
A) the syndication of underwriting large security issues.
B) the selling of accounts receivable at a discount in return for cash.
C) breaking up large mutual funds into smaller funds.
D) spreading the risk of insurance through reinsurance.
The global financial crisis of 2007-2009 not only led to a worldwide recession, but also
a ________ in the European nations that use the euro currency.
A) currency devaluation
B) budget surplus
C) sovereign debt crisis
D) tax cut
According to the liquidity premium theory, a yield curve that is flat means that
A) bond purchasers expect interest rates to rise in the future.
B) bond purchasers expect interest rates to stay the same.
C) bond purchasers expect interest rates to fall in the future.
D) the yield curve has nothing to do with expectations of bond purchasers.
When a financial institution hedges the interest-rate risk for a specific asset, the hedge
is called a
A) macro hedge.
B) micro hedge.
C) cross hedge.
D) futures hedge.
Tools to help solve the adverse selection problem in financial markets include all of the
following EXCEPT
A) diversification.
B) government regulations to increase information.
C) the use of financial intermediaries.
D) the private production and sale of information.
During the Great Depression, real interest rates
A) rose to unprecedentedly high levels.
B) rose only slightly above the long-run trend.
C) fell to unprecedentedly low levels.
D) fell only slightly below the long-run trend.
Assuming initially that the required reserve ratio = 10%, the currency-deposit ratio =
40%, and the excess reserve ratio = 0, a decrease in the required reserve ratio to 5%
causes the M1 money multiplier to ________, everything else held constant.
A) increase from 2.8 to 3.11
B) decrease from 3.11 to 2.8
C) increase from 2 to 2.22
D) decrease from 2.22 to 2
The spread between the interest rates on Baa corporate bonds and U.S. government
bonds is very large during the Great Depression years 1930-1933. Explain this
difference using the bond supply and demand analysis.
Explain the type of conflicts of interest that can arise from the development of universal
banking.
Explain the factors that account for the large increase in market share experienced by
mutual funds since 1980.
If the federal government where to raise the income tax rates, would this have any
impact on a state’s cost of borrowing funds? Explain.
Explain how the market can reduce the incentive for credit-rating firms to take
advantage of conflicts of interest.
Describe what is meant by economies of scope and explain how financial institutions’
realizing economies of scope has led to an increase in conflicts of interest.
If a higher inflation is expected, what would you expect to happen to the shape of the
yield curve? Why?