The speculative attack on the German mark in 1971 resulted in
A) a large increase in the German monetary base.
B) a decline in the value of the mark relative to the dollar.
C) a decision to end the floating of the mark against the dollar.
D) a large decrease in the German monetary base.
Answer:
If you purchase a Treasury bond, the Treasury bond is
A) an asset to you as well as an asset to the U.S. government.
B) an asset to you, but a liability to the U.S. government.
C) a liability to you, but an asset to the U.S. government.
D) a liability to you as well as a liability to the U.S. government.
Answer:
A discount bond resembles a simple loan in that
A) the interest on neither is taxable.
B) the borrower repays in a single payment.
C) both represent assets to the borrowers who issue them.
D) both have par values greater than their face values.
Answer:
Short-term loans between banks are called
A) federal funds.
B) repurchase agreements.
C) repos.
D) discount loans.
Answer:
Which of the following cities does NOT contain a Federal Reserve bank?
A) Cleveland
B) Dallas
C) Los Angeles
D) Boston
Answer:
Finance companies
A) take in deposits from savers and make loans to borrowers.
B) sell commercial paper and securities and make loans to borrowers with the funds.
C) take in deposits from savers and purchase assets with the funds.
D) bring together small savers and large borrowers.
Answer:
A bank lending depositors’ money to a local business and a pension fund investing
contributions in shares of a company are similar financial activities in that
A) both involve the use of financial markets.
B) both involve funds being channeled from savers to borrowers through financial
intermediaries.
C) both involve a reduction in the overall level of liquidity in the financial system.
D) both involve in an increase in the overall level of risk in the financial system.
Answer:
Which of the following officially ended the cooperation between the Treasury and the
Fed that had taken place during World War 2?
A) Truman doctrine
B) Federal Reserve Act of 1951
C) Dodd-Frank Act
D) Treasury-Federal Reserve Accord
Answer:
The original intention of the Fed’s role as lender of last resort was to make loans to
banks that were
A) not illiquid nor insolvent.
B) illiquid, but not insolvent.
C) insolvent, but not illiquid.
D) both illiquid and insolvent.
Answer:
In practice, the ECB has committed to what type of strategy for monetary policy?
A) inflation targeting
B) monetary targeting
C) unclear as to inflation or monetary targeting
D) exchange rate targeting
Answer:
The “lemons problem” is overcome in the used car market by
A) strict government regulation of private deals between individual buyers and sellers
of used cars.
B) most used cars selling for well below their true values.
C) “lemon insurance” policies being offered by insurance companies.
D) the existence of used car dealers who are concerned about maintaining their
reputations.
Answer:
Which of the following is NOT a discount bond?
A) a U.S. savings bond
B) a U.S. Treasury bill
C) a U.S. Treasury note
D) a zero-coupon bond
Answer:
The purpose of diversification is to
A) increase the liquidity of a financial portfolio.
B) reduce the brokerage fees involved in managing a financial portfolio.
C) reduce risk.
D) reduce tax liability.
Answer:
Under the Federal Reserve Act, which banks must be members of the Federal Reserve
System?
A) all commercial banks
B) national banks
C) state banks
D) all banks with capital in excess of $100 million
Answer:
The existence of rating agencies has
A) lowered returns on corporate bonds.
B) raised returns on corporate bonds.
C) left returns on corporate bonds largely unaffected.
D) raised returns on both corporate bonds and Treasury securities.
Answer:
Who benefits from rising inflation?
A) those who already have fixed-rate loans
B) those considering taking out a loan
C) lenders that already made loans
D) lenders considering whether to make new loans
Answer:
Which of the following is an operating target?
A) M1
B) M2
C) nonborrowed reserves
D) the inflation rate
Answer:
A monetary aggregate is a measure of
A) the inflation rate.
B) the total economic activity of the country.
C) money broader than currency.
D) definitive money.
Answer:
The main reason central banks engage in foreign-exchange interventions is to
A) stabilize the domestic money supply.
B) stabilize domestic interest rates.
C) stabilize foreign interest rates.
D) stabilize the exchange rate.
Answer:
Dynamic open market operations
A) are aimed at achieving changes in monetary policy.
B) are used much more frequently than defensive open market transactions.
C) are used to offset disturbances to the monetary base.
D) make it easy to deduce the Fed’s intentions for monetary policy.
Answer:
Which of the following is an advantage of hedging with options instead of forward
contracts?
A) Options prices tend to be lower than forward prices.
B) If the price moves in the opposite direction to the one hedged against, the hedger can
decline to exercise the option and limit the loss to what was paid for the option.
C) If the price moves in the direction of the one hedged against, the hedger can decline
to exercise the option and limit the loss to what was paid for the option.
D) Options allow investors to purchase a forward contract at a later date.
Answer:
Why was the Fed reluctant to rescue insolvent banks?
A) It thought it may lead to moral hazard.
B) It thought it may lead to adverse selection.
C) It thought they were still liquid.
D) It did not think they were insolvent.
Answer:
The United States has a dual banking system in the sense that
A) the public may deposit money in either commercial banks or savings-and-loan
associations.
B) banks offer both demand deposits and time deposits to savers.
C) banks are chartered by the federal government and by state governments.
D) banks both take in deposits and make loans.
Answer:
Congress introduced deposit insurance in response to
A) the savings-and-loan crisis of the 1980s.
B) the banking crisis of the 1930s.
C) the demise of the Second Bank of the United States in 1836.
D) the demise of the First Bank of the United States in 1811.
Answer:
What is the current limit on balances that are covered by federal deposit insurance?
A) $100,000
B) $250,000
C) $500,000
D) $1,000,000
Answer:
Suppose that you expect during the next year the dollar will appreciate against the
pound from 0.5 pound to the dollar to 0.75 pound to the dollar. How much will you
expect to make on an investment of $10,000 in British government securities that will
mature in one year and pay interest of 8%?
A) -59.5%
B) -28%
C) 8%
D) 28%
Answer:
An unsterilized foreign-exchange intervention occurs
A) whenever a central bank purchases or sells domestic currency.
B) whenever a central bank purchases or sells foreign currency.
C) whenever a central bank allows the monetary base to respond to the sale or purchase
of domestic currency.
D) whenever a central bank fails to reduce its holdings of gold by the amount of a
foreign-exchange purchase.
Answer:
What does the coefficient a in the new classical expression for short-run aggregate
supply represent?
A) the full employment level of output
B) the price level in the previous period
C) how much output responds when the actual price level differs from the expected
price level
D) how much the price level responds when the actual level of output differs from the
full employment level of output
Answer:
Diversification is most effective in reducing:
A) market risk
B) systemic risk
C) idiosyncratic risk
D) all forms of risk
Answer:
Financial futures contracts are regulated by
A) the Commodity Futures Trading Commission.
B) the Federal Trade Commission.
C) the Interstate Commerce Commission.
D) the Options and Futures Commission.
Answer:
What is potential GDP? What happens to unemployment when GDP is at its potential?
Answer:
Suppose a firm receives $975 for a discount bond with a face value of $1000 to be
repaid in one year. What is the amount of interest on the bond? What is the interest rate
on the bond? Report a percentage with two decimal places.
Answer:
What type of economic research do analysts at investment banks conduct?
Answer:
What are the information costs associated with forward contracts?
Answer:
Suppose an investment bank buys $100 million worth of mortgage-backed securities. It
finances the purchase by borrowing $90 million and using $10 million from its equity.
If the value of holdings of mortgage-backed securities declines by 5%, what is its return
on equity investment?
Answer:
A one-year discount bond has a face value of $1000 and a price of $925. What is the
yield to maturity on the bond? Report using percentages with two decimal places.
Answer:
Briefly explain how a U.S. company that exports to Europe can hedge against exchange
rate risk.
Answer:
What is an advantage of using forward contracts instead of options to hedge against
exchange-rate risk?
Answer:
Suppose that businesses in Japan reduce their spending on plant and equipment. What
will be the effect on spending on plant and equipment by businesses in the United
States?
Answer:
A corporation issues a three-year bond with a coupon of $50 and a face value of $1000.
A year later, market interest rates have declined to 4%. What is the price of the bond a
year after it was issued? Report your answer to the nearest dollar.
Answer:
Why do some economists think that taxing capital gains results in a locked-in effect?
Answer:
In what way are other assets less liquid than money?
Answer:
How does the principal-agent problem increase the possibility of moral hazard?
Answer:
What was the original intent of the Federal Reserve Act of 1913?
Answer:
Shouldn’t better informed investors be able to profit from the deviations from pricing
efficiency caused by noise traders?
Answer:
In 2012, many investors feared that Greece may default on its bonds. Make use of a
graph of the bond market to show how this affected interest rates on Greek bonds.
Answer:
In November 2012, concern was raised about Spain’s sovereign debt. Make use of a
graph of the bond market to show how this would affect the price of Spanish bonds.
Answer:
What would happen to the value of the dollar if prices in the U.S. increased more
rapidly relative to prices in other countries?
Answer:
According to New Keynesians, why can firms increase output in the short run in
response to higher prices?
Answer:
What is the multiplier effect?
Answer: