Interest-rate risk is the riskiness of an asset’s returns due to
A) interest-rate changes.
B) changes in the coupon rate.
C) default of the borrower.
D) changes in the asset’s maturity.
Solutions to the moral hazard in equity contracts include all of the following EXCEPT
A) government regulations to increase information.
B) the use of financial intermediaries.
C) the use of debt contracts.
D) government ownership of resources.
If Second National Bank has more rate-sensitive assets than rate-sensitive liabilities, it
can reduce interest-rate risk with a swap that requires Second National to
A) pay fixed rate while receiving floating rate.
B) receive fixed rate while paying floating rate.
C) both receive and pay fixed rate.
D) both receive and pay floating rate.
Everything else held constant, the interest rate on municipal bonds rises relative to the
interest rate on Treasury securities when
A) income tax rates are lowered.
B) income tax rates are raised.
C) municipal bonds become more widely traded.
D) corporate bonds become riskier.
Inflation targets can increase the central bank’s flexibility in responding to declines in
aggregate spending. Declines in aggregate ________ that cause the inflation rate to fall
below the floor of the target range will automatically stimulate the central bank to
________ monetary policy without fearing that this action will trigger a rise in inflation
expectations.
A) demand: tighten
B) demand; loosen
C) supply; tighten
D) supply; loosen
When the economy suffers a temporary negative supply shock and the central bank
responds by changing the autonomous component of monetary policy to keep inflation
at the target inflation rate, then
A) aggregate output drops in the short run.
B) output will return to potential output over time.
C) aggregate output is stabilized.
D) all of the above.
E) both A and B.
A central bank has ________ chance to identify a credit-driven bubble compared to an
irrational exuberance bubble.
A) a greater
B) less of a
C) about the same level of a
D) a greater, less or about the same level of a
The seller of an option has the
A) right to buy or sell the underlying asset.
B) obligation to buy or sell the underlying asset.
C) ability to reduce transaction risk.
D) right to exchange one payment stream for another.
An increase in spending that results from expansionary ________ policy causes the
interest rate to ________, everything else held constant.
A) fiscal; rise
B) fiscal; fall
C) incomes; rise
D) incomes; fall
When the Federal Reserve engages in a repurchase agreement to offset a withdrawal of
Treasury funds from the Federal Reserve, the open market operation is said to be
A) defensive.
B) offensive.
C) dynamic.
D) reactionary.
Banks
A) provide a channel for linking those who want to save with those who want to invest.
B) produce nothing of value and are therefore a drain on society’s resources.
C) are the only financial institutions allowed to give loans.
D) hold very little of the average American’s wealth.
If the required reserve ratio is one-third, currency in circulation is $300 billion, and
checkable deposits are $900 billion, then the money supply is ________ billion.
A) $2700
B) $3000
C) $1200
D) $1800
The Lucas critique is an attack on the usefulness of
A) conventional econometric models as forecasting tools.
B) conventional econometric models as indicators of the potential impacts on the
economy of particular policies.
C) rational expectations models of macroeconomic activity.
D) the relationship between the quantity theory of money and aggregate demand.
In a business cycle expansion, the ________ of bonds increases and the ________
curve shifts to the ________ as business investments are expected to be more
profitable.
A) supply; supply; right
B) supply; supply; left
C) demand; demand; right
D) demand; demand; left
If the economy is characterized by a certain and stable LM curve, then ________ target
produces ________ fluctuations in aggregate output.
A) an interest rate; smaller
B) a money supply; smaller
C) a money supply; larger
D) an exchange rate; larger
If expectations are formed adaptively, then people
A) use more information than just past data on a single variable to form their
expectations of that variable.
B) often change their expectations quickly when faced with new information.
C) use only the information from past data on a single variable to form their
expectations of that variable.
D) never change their expectations once they have been made.
Which investment bank filed for bankruptcy on September 15, 2008 making it the
largest bankruptcy filing in U.S. history?
A) Lehman Brothers
B) Merrill Lynch
C) Bear Stearns
D) Goldman Sachs
From 1950-2014 the price level in the United States increased more than
A) twofold.
B) threefold.
C) sixfold.
D) tenfold.
When the economy suffers a permanent negative supply shock and the central bank
responds by changing the autonomous component of monetary policy to keep inflation
at the target inflation rate, then
A) aggregate demand curve shifts leftward.
B) output will be unchanged.
C) output will be at its potential.
D) all of the above.
E) both A and C.
Banks subject to reserve requirements set by the Federal Reserve System include
A) only nationally chartered banks.
B) only banks with assets less than $100 million.
C) only banks with assets less than $500 million.
D) all banks whether or not they are members of the Federal Reserve System.
When banks calculate the losses the institution would incur if an unusual combination
of bad events happened, the bank is using the ________ approach.
A) stress-test
B) value-at-risk
C) trading-loss
D) maximum value
A decline in the money supply shifts the LM curve to the left, causing the interest rate
to ________ and output to ________, everything else held constant.
A) rise; rise
B) rise; fall
C) fall; rise
D) fall; fall
Suppose that the short-run aggregate supply curve is: π= 2 + 1.5 (Y-10), where π is
inflation and Y is output; and the aggregate demand curve is Y= 11 – 0.5π. The
equilibrium output is ________ and the equilibrium inflation rate is ________ %.
A) 10; 2
B) 17.5; 2
C) 2; 10
D) 10; 7.5
If the expected return on bonds increases, all else equal, the demand for bonds
increases, the price of bonds ________, and the interest rate ________.
A) increases; decreases
B) increases; increases
C) decreases; decreases
D) decreases; increases
To say that inflation is a monetary phenomenon seems to beg the question
A) Why does inflationary monetary policy occur?
B) Why do politicians seek reelection?
C) Why is the Fed independent?
D) Why does the U.S. Treasury print so much money?
People hold money even during inflationary episodes when other assets prove to be
better stores of value. This can be explained by the fact that money is
A) extremely liquid.
B) a unique good for which there are no substitutes.
C) the only thing accepted in economic exchange.
D) backed by gold.
When in 1985 a British pound cost approximately $1.30, a Shetland sweater that cost
100 British pounds would have cost $130. With a weaker dollar, the same Shetland
sweater would have cost
A) less than $130.
B) more than $130.
C) $130, since the exchange rate does not affect the prices that American consumers
pay for foreign goods.
D) $130, since the demand for Shetland sweaters will decrease to prevent an increase in
price due to the stronger dollar.
If the required reserve ratio is 10 percent, currency in circulation is $400 billion,
checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the
monetary base is
A) $480 billion.
B) $480.8 billion.
C) $80 billion.
D) $80.8 billion.
A temporary supply shock that raises prices will cause the real interest rate to
A) rise in both the short and long runs.
B) rise in the short run but not in the long run.
C) fall in both the short and long runs.
D) fall in the short run but not in the long run.
In pursuing a strategy of monetary targeting, the central bank announces that it will
achieve a certain value (the target) of the annual growth rate of a ________.
A) a monetary aggregate
B) a reserve aggregate
C) the monetary base
D) GDP