Under narrow banking
(a) banks would make loans only from bank equity.
(b) banks would not be allowed more than one branch.
(c) federal deposit insurance would be eliminated.
(d) banks would not be allowed to make any risky loans.
Answer:
Which of the following is a securities market institution?
(a) The New York Stock Exchange
(b) Greater Illinois Savings and Loan
(c) Prudential Insurance Company
(d) Fidelity Magellan Mutual Fund
Answer:
The oldest U.S. government intervention in financial intermediation is government
lending to
(a) individual home buyers.
(b) large corporations.
(c) small corporations.
(d) farmers.
Answer:
SEC Rule 415
(a) decreased competition among security underwriters.
(b) requires firms to sell an issue within two months of registering it with the SEC.
(c) requires firms to choose an underwriter before registering a security.
(d) led to underwriters taking positions in bonds on their own account.
Answer:
Purchasing power parity’s assumption that the real exchange is constant
(a) is correct in nearly all instances.
(b) would be correct were it not for the existence of trade barriers.
(c) is not reasonable.
(d) is correct for trade between the United States and Japan, but incorrect in most other
bilateral trading relations.
Answer:
Milton Friedman and Anna Schwartz believe that money’s impact on output appears
(a) within a few months.
(b) only in the very long run.
(c) with a long and variable lag.
(d) only in the very short run.
Answer:
In the spot foreign exchange market
(a) only dollars, yen, and pounds may be traded.
(b) only dollars and yen may be traded.
(c) currencies or bank deposits are exchanged immediately.
(d) currencies or bank deposits are exchanged at a fixed date (or spot) in the future.
Answer:
An increase in the expected price level
(a) shifts the short-run aggregate supply curve up and to the left.
(b) shifts the short-run aggregate supply curve down and to the right.
(c) has no effect on the short-run aggregate supply curve.
(d) results in a movement along the short-run aggregate supply curve, rather than a shift
in the short-run aggregate supply curve.
Answer:
The balance in the Gold and SDR certificate account on the Fed’s balance sheet
increases when
(a) the Fed buys gold.
(b) the Fed sells gold.
(c) the Treasury buys gold.
(d) the U.S. mint issues gold coins.
Answer:
During the 1970s
(a) Japanese disinflation policy was not credible, but that of the United States was
credible.
(b) neither Japanese nor U.S. disinflation policies were credible.
(c) both Japanese and U.S. disinflation policies were credible.
(d) U.S. disinflation policy was not credible, but Japanese disinflation policy was
credible.
Answer:
An important problem facing the Fed is that
(a) it has goals for economic growth and price stability, but no direct control over real
output or the price level.
(b) it lost effective control over the monetary base.
(c) it has been given responsibility for meeting policy goals, but true control over
monetary policy remains with Congress.
(d) it has been given responsibility for meeting policy goals, but true control over
monetary policy remains with the President.
Answer:
About how many banks are there in the United States?
(a) 10
(b) 57
(c) 2,500
(d) 7,900
Answer:
If a central bank wishes to raise the foreign-exchange value of its currency, it will
(a) buy domestic currency and sell foreign assets.
(b) sell domestic currency and buy foreign assets.
(c) attempt to reduce domestic interest rates.
(d) attempt to raise the domestic price level relative to foreign price levels.
Answer:
If you deposit $10,000 in a savings account at an annual interest rate of 5%, how much
will you have in the account at the end of eight years?
(a) $10,500
(b) $12,763
(c) $14,775
(d) $16,289
Answer:
Why are securities market institutions not considered to be financial intermediaries?
(a) Because they have no direct dealings with the general public
(b) Because they don’t acquire funds from savers to invest in borrowers
(c) Because they are not allowed to pay interest on the deposits they receive
(d) Because they fail to provide the services of risk-sharing, liquidity, and information
Answer:
Which of the following increased its share of the percentage of total assets of financial
intermediaries by the most between 1960 and 2003?
(a) Money market mutual funds
(b) Life insurance companies
(c) Private pension funds
(d) Commercial banks
Answer:
A higher discount rate exerts upward pressure on other short-term interest rates because
(a) banks try to raise funds from sources other than discount loans.
(b) by law the spread between the discount rate and other interest rates must remain
constant.
(c) other lenders become aware that the Fed would like them to raise their interest rates
as well.
(d) banks generally increase their lending following a rise in the discount rate.
Answer:
If the forward exchange rate of the dollar in terms of pounds is less than the spot
exchange rate,
(a) inflation must be lower in the United States than in Britain.
(b) inflation must be higher in the United States than in Britain.
(c) market participants must be expecting the dollar to appreciate against the pound.
(d) market participants must be expecting the dollar to depreciate against the pound.
Answer:
If the coefficient a in the new classical expression for short-run aggregate supply were
equal to zero,
(a) aggregate output would always be at its full-employment level.
(b) the short-run aggregate supply curve would slope down.
(c) the short-run aggregate supply curve would be a horizontal line.
(d) aggregate output would only differ from its full-employment level if the actual price
level did not equal the expected price level.
Answer:
Which groups were opposed to the Bank of the United States?
(a) Northeastern industrial interests
(b) Northeastern financial interests
(c) Southern and western agrarian and small-business interests
(d) Exporters
Answer:
The most important loss to the economy during the 1980s from the thrift crisis was
(a) the loss of output represented by the $200 billion spent to pay off depositors of
failed thrifts.
(b) the increase in funds spent to hire more regulators.
(c) the diversion of savings to less productive investments funded by insured deposits.
(d) the increase in deposit insurance premiums mandated by new legislation.
Answer:
The Riegle-Neal Act of 1994
(a) subjected foreign banks in the United States to the same branching rules that applied
to U.S. banks.
(b) prohibited foreign bank branches from making commercial loans within the United
States.
(c) exempted foreign bank branches from reserve requirements.
(d) subjected foreign bank branches to deposit interest rate ceilings.
Answer:
If nominal money balances increase from $2 billion to $3 billion, while the price level
increases from 100 to 150, real money balances will
(a) have increased by 50%.
(b) have decreased by 50%.
(c) have increased by 100%.
(d) be unchanged.
Answer:
How may a U.S. bank keep its balance sheet entirely in U.S. dollars?
(a) By selling financial futures
(b) By buying put options
(c) By buying call options
(d) By using currency swaps
Answer:
According to the expectations theory, if investors believed that, for a holding period the
average of the expected future short-term yields was greater than the long-term yield,
they would act so as to
(a) drive up the price of the short-term security and drive down the price of the
long-term security.
(b) drive down the price of the short-term security and drive up the price of the
long-term security.
(c) drive down the prices of the short-term and long-term securities.
(d) drive up the prices of the short-term and long-term securities.
Answer:
Which of the following is NOT a consideration when a bank decides the appropriate
interest rate to charge on a loan?
(a) The bank’s cost of funds
(b) The ratio of the bank’s assets to its liabilities
(c) The default risk on the loan
(d) The rates of return on alternative investments available to the bank
Answer:
Congress created the Federal Reserve System
(a) to serve as a lender of last resort.
(b) to process the receipt of taxes received by the Internal Revenue Service.
(c) to regulate the value of the U.S. dollar against foreign currencies.
(d) to provide a source of mortgage loans to the residential housing market.
Answer:
The Bretton Woods system lasted from
(a) 1801 to 1861.
(b) 1863 to 1914.
(c) 1945 to 1971.
(d) 1981 to 1993.
Answer:
A lender, who is worried that its cost of funds might rise during the term of a loan it has
made, can hedge against this rise without eliminating the chance to profit from a decline
in the cost of funds by
(a) buying futures contracts on Treasury bills.
(b) selling futures contracts on Treasury bills.
(c) buying put options on Treasury bills.
(d) buying call options on Treasury bills.
Answer:
On the Fed’s balance sheet an item in the process of collection
(a) is an asset.
(b) is a liability.
(c) represents funds the Fed has promised to pay to a bank that has presented a check to
be cleared.
(d) represents an overdue discount loan to a commercial bank.
Answer:
Which of the following statements is correct?
(a) The volume of open market operations is determined jointly by the actions of the
public, banks, and the Fed.
(b) The volume of open market operations is determined jointly by the actions of banks
and the Fed.
(c) The volume of open market operations is determined jointly by the actions of the
public and the Fed.
(d) The volume of open market operations is determined solely by the Fed.
Answer:
The expression for velocity derived from Keynes’s liquidity preference theory is
(a) V = P/L(Y, i).
(b) V = L(Y, i)/P.
(c) V = Y/L(Y, i).
(d) V = L(Y, i)/Y.
Answer:
As wealth increases in the economy, savers are
(a) willing to hold more cash relative to their holdings of bonds.
(b) willing to buy fewer bonds at any given price.
(c) willing to lend more at any given interest rate.
(d) willing to lend less at any given interest rate.
Answer:
Suppose a group of investors decide they want to establish a bank. How would they go
about
doing so?
Answer:
Briefly discuss the trend in recent years with respect to the relative importance for
banks’ earnings of traditional banking activities versus off-balance-sheet activities. Has
this trend been unique to the United States? What are the consequences of this trend for
bank regulation?
Answer:
Irving Fisher originally described velocity using transactions, rather than income or
output. Would velocity calculated using transactions be a larger or a smaller number
than velocity calculated using national income or GDP? Why do economists use income
or output, rather than transactions, when calculating velocity? Under what
circumstances might it matter how velocity is defined?
Answer:
What is meant by “value investing?” Is it consistent with the efficient markets
hypothesis?
Answer:
The financial system allows some savers and borrowers to transfer risk to other savers
and borrowers. Why do savers and borrowers differ in their willingness to bear risk?
Answer:
Throughout most of the post-World War II period, the use of capital controls by
governments around the world was declining. But in the late 1990s, a number of
governments expressed renewed interest in capital controls. What accounts for this
renewed interest?
Answer:
Suppose your bank has made a e50 million loan, but has deposits of only e25 million. If
the exchange rate was $1 = e0.75 at the time the loan was made, but subsequently
changes to $1 = e0.90, what is the impact on the net worth of your bank? Suppose the
exchange rate changes to $1 = e0.65?
Answer:
Suppose you are considering buying one of two coupon bonds. Bond A has a current
market price of $975 and a face value of $1000. Bond B has a current market price of
$1025 and a face value of $1000. Is Bond A the better investment?
Answer:
Suppose the First National Bank pays 6.5% interest on checkable deposits and that the
required reserve ratio is 10%. What is First National Bank’s effective cost of funds?
Answer:
If one-time shifts in the SRAS curve do not lead to inflation, why is it sometimes said
that a wave of wage increases during a given year can lead to cost-push inflation?
Answer:
Why if the Federal Reserve was set up as a lender of last resort for the banking system
did it perform effectively after the stock market crash of 1929, but poorly during the
banking panics that began in late 1930?
Answer:
What is a Euroloan? What are its typical characteristics? Why is it very likely to be
syndicated?
Answer:
An economist argues: “The only effective guarantee of low inflation is an independent
central bank.” Do you agree?
Answer:
As a country develops will businesses become more or less likely to borrow in financial
markets? Explain.
Answer:
Which model of the demand for real balances discussed in this chapter relies solely on
the transactions motive? Is this model able completely to explain observed movements
in real balances? Briefly explain why or why not.
Answer:
According to the Taylor rule, what should the federal funds rate target be if inflation is
5%, the target rate of inflation is 2%, the equilibrium real federal funds rate is 2%,
full-employment real GDP is $9 trillion, and current real GDP is $8.55 trillion?
Answer: