The Bank Holding Company Act of 1956 defined a bank as a financial institution that
(a) makes commercial loans.
(b) accepts demand deposits.
(c) makes commercial loans and accepts demand deposits.
(d) makes commercial loans, accepts demand deposit, and holds government securities.
Answer:
Nominal exchange rates differ from real exchange rates in that nominal exchange rates
(a) do not correct for differing interest rates across countries.
(b) do not measure the purchasing power of the currency.
(c) are fixed, while real exchange rates are flexible.
(d) are flexible, while real exchange rates are fixed.
Answer:
The risk structure of interest rates refers to
(a) the amount of additional interest necessary to compensate savers for the greater risk
of default on some bonds.
(b) the relationship among the interest rates on similar bonds with different maturities.
(c) the relationship among the interest rates on bonds with the same maturity.
(d) the amount of additional interest necessary to compensate savers for the lesser
liquidity of some bonds.
Answer:
Suppose a substantial snowstorm in the Northeast slows down the check-clearing
process. The likely result will be
(a) the monetary base will increase.
(b) the monetary base will decrease.
(c) deferred availability cash items will increase relative to cash items in the process of
collection.
(d) bank reserves will fall.
Answer:
In the money channel, an expansionary monetary policy will in the short run
(a) increase the real interest rate.
(b) decrease the real interest rate.
(c) leave the real interest rate unaffected.
(d) have an ambiguous effect on the real interest rate.
Answer:
Which of the following is NOT true of over-the-counter markets?
(a) Prices are set by competitive bidding by a large number of traders.
(b) Trading does not take place in one physical location.
(c) Traders are willing to buy and sell stocks and bonds at a posted price.
(d) Traders are linked by computer.
Answer:
Money market deposit accounts are included in
(a) only M1.
(b) only M2.
(c) only M3.
(d) M2 and M3.
Answer:
The currency premium in foreign-exchange markets
(a) helps to offset anticipated declines in exchange rates.
(b) helps to offset anticipated increases in exchange rates.
(c) indicates investors’ collective preference for financial instruments denominated in
one currency relative to those denominated in another.
(d) rises as domestic interest rates fall.
Answer:
Suppose that when your wealth increases from $1 million to $2 million, your holdings
of U.S. government securities increases from $50,000 to $125,000. Your wealth
elasticity of demand for U.S. government securities then is
(a) less than 1 and U.S. government securities are a luxury asset.
(b) greater than 1 and U.S. government securities are a luxury asset.
(c) less than 1 and U.S. government securities are a necessity asset.
(d) greater than 1 and U.S. government securities are a necessity asset.
Answer:
People use money primarily
(a) to carry out transactions.
(b) as a measure of their income.
(c) as a measure of their wealth.
(d) as an asset in their portfolios.
Answer:
Which of the following is NOT a widely used measure of the price level?
(a) The Price Level Indicator
(b) The Producer Price Index
(c) The Consumer Price Index
(d) The GDP Implicit Price Deflator
Answer:
A favorable shock to productivity may raise investment by
(a) increasing firms’ internal funds.
(b) reducing government spending, which would otherwise crowd out investment
spending.
(c) causing interest rates to fall as the economy expands.
(d) reducing taxes on corporate profits.
Answer:
Which of the following would NOT cause the IS curve to shift to the left?
(a) A decrease in government purchases
(b) An increase in consumer confidence
(c) A decrease in foreign demand for domestic products
(d) A decrease in the expected future profitability of capital
Answer:
In which of the following have pension funds invested the most?
(a) Corporate equities and mutual fund shares
(b) Government securities
(c) Corporate bonds
(d) Mortgages
Answer:
Which of the following is NOT true of the U.S. economy before World War II?
(a) The U.S. economy was an open economy.
(b) Capital flows between the United States and other economies were restricted by
regulation.
(c) The volume of international trade was small relative to the level of domestic
economic activity.
(d) Cross-border communication costs were relatively high.
Answer:
The Fed can use open market operations to regulate the money supply provided that
(a) interest rates are low enough.
(b) the inflation rate is low enough.
(c) the money multiplier is stable.
(d) the President or Congress does not object.
Answer:
If wages and prices in long-term contracts were fully indexed,
(a) prices would be more sticky in the short run.
(b) prices would be more sticky in the long run.
(c) prices would be less sticky in the short run.
(d) the stickiness of prices would not be affected.
Answer:
Which of the following would cause the long-run aggregate supply curve to shift?
(a) An increase in the price level
(b) A decrease in the expected price level
(c) An increase in labor productivity
(d) An autonomous increase in consumption spending
Answer:
Which of the following expressions gives the nominal interest rate parity condition?
(a) i = if+ EXe/EX
(b) i = if EXe/EX
(c) i = EXe/EX if
(d) if= i EXe/EX
Answer:
The main reason the Fed cannot control the real interest rate is that
(a) it cannot control expectations of inflation.
(b) M1 fluctuates too widely to allow interest rates to be easily controlled.
(c) M2 fluctuates too widely to allow interest rates to be easily controlled.
(d) the real interest rate is mainly determined by the behavior of banks.
Answer:
What was the “big bang?”
(a) The stock market crash of October 1987
(b) The deregulation of financial markets in England in 1986
(c) The Wall Street insider trading scandal of 1989
(d) The explosion of short-term interest rates in 1981
Answer:
Which of the following is the correct expression for the price of an asset at time t?
(a) Pt= + )/(1 + i)
(b) = + Pt+1)/(1 + i)
(c) Pt= + /(1 + i)
(d) Pt= + )
Answer:
The difference between a demand deposit and a NOW account is that
(a) checks may not be written against NOW account balances.
(b) demand deposits pay no interest.
(c) NOW accounts pay no interest.
(d) checks may not be written against demand deposit balances.
Answer:
The preferred habitat theory holds that investors
(a) always choose the bond with the highest expected return, regardless of maturity.
(b) require a term premium to compensate them for investing in a less preferred
maturity.
(c) view bonds of different maturities as perfect substitutes.
(d) view bonds of different maturities as completely unsubstitutable.
Answer:
Which of the following assets is the most liquid?
(a) Dollar bill
(b) Personal check
(c) Corporate bond
(d) Family home
Answer:
Most critics believe that the Fed’s early attempt at monetary targeting under Arthur
Burns failed because he used
(a) free reserves as an operating target.
(b) the federal funds rate as an operating target.
(c) M1 instead of M2 as an intermediate target.
(d) M2 instead of M1 as an intermediate target.
Answer:
The main argument in favor of Fed independence is that
(a) interest rates would probably be lower if Congress controlled the Fed; thus hurting
savers.
(b) the Constitution requires it.
(c) monetary policy is too important and too technical to be determined in the political
arena.
(d) congressional control of the Fed was tried during the 1960s and did not work well.
Answer:
The principal-agent view of Fed motivation predicts that the Fed acts
(a) to promote the interests of the general public.
(b) to promote the interests of the Fed’s principalthe President of the United States.
(c) in order to increase its power, influence, and prestige.
(d) in order to make sure its agentscommercial bankscarry out its wishes.
Answer:
In what sense do self-fulfilling expectations determine the acceptability of a medium of
exchange?
(a) People like to do what the government expects them to do.
(b) People value something as money only if they believe others will accept it from
them as payment.
(c) People expect that money will never lose its value.
(d) People expect that eventually every country will use the same medium of exchange.
Answer:
Banks experience interest rate risk
(a) if adverse selection problems are particularly severe.
(b) if moral hazard problems are particularly severe.
(c) on any investment that has high information costs.
(d) if changes in interest rates cause bank profits to fluctuate.
Answer:
In what year did the Treasury-Federal Reserve Accord take place?
(a) 1913
(b) 1951
(c) 1975
(d) 1998
Answer:
Which of the following schools of thought among economists believe that expected
changes in the money supply can affect output in the short run?
(a) Only new Keynesian
(b) Only new Keynesian and new classical
(c) Only new Keynesian and real business cycle
(d) New Keynesian, new classical, and real business cycle
Answer:
If the federal government were to guarantee a minimum rate of return on corporate
bonds, the result would be a
(a) decline in the equilibrium interest rate.
(b) shift to the left in the supply curve for loanable funds.
(c) shift to the left in the demand curve for loanable funds.
(d) decline in bond prices.
Answer:
Reserve requirements
(a) may be set by the FOMC at whatever level they choose.
(b) may be set by the Board of Governors at whatever level it chooses.
(c) are established annually by Congress.
(d) are set by the Board of Governors within limits set by Congress.
Answer: