The credit derivative that, for a fee, gives the purchaser the right to receive profits that
are tied either to the price of an underlying security or to an interest rate is called a
A) credit option.
B) credit swap.
C) credit-linked note.
D) credit default swap.
The steeply upward sloping yield curve in the figure above indicates that
A) short-term interest rates are expected to rise in the future.
B) short-term interest rates are expected to fall moderately in the future.
C) short-term interest rates are expected to fall sharply in the future.
D) short-term interest rates are expected to remain unchanged in the future.
A decrease in the riskiness of corporate bonds will ________ the yield on corporate
bonds and ________ the yield on Treasury securities, everything else held constant.
A) increase; increase
B) decrease; decrease
C) increase; decrease
D) decrease; increase
In the long-run equilibrium
A) output is a function of autonomous expenditures.
B) inflation is a function of past inflation.
C) inflation equals potential output.
D) output equals potential output.
An analysis of the political economy of the savings and loan crisis helps one to
understand
A) why politicians aided the efforts of thrift regulators, raising regulatory
appropriations and encouraging closing of insolvent thrifts.
B) why thrift regulators were so quick to inform Congress of the problems that existed
in the thrift industry.
C) why thrift regulators willingly acceded to pressures placed upon them by members
of Congress.
D) why politicians listened so closely to the taxpayers they represented.
The mound-shaped yield curve in the figure above indicates that short-term interest
rates are expected to
A) rise in the near-term and fall later on.
B) fall moderately in the near-term and rise later on.
C) fall sharply in the near-term and rise later on.
D) remain unchanged in the near-term and fall later on.
When prices are measured in terms of fixed (base-year) prices they are called ________
prices.
A) nominal
B) real
C) inflated
D) aggregate
Through correspondent banking, large banks provide services to small banks, including
A) loan guarantees.
B) foreign exchange transactions.
C) issuing stock.
D) debt reduction.
An important function of the regional Federal Reserve Banks is
A) setting reserve requirements.
B) clearing checks.
C) determining monetary policy.
D) setting margin requirements.
Everything else held constant, an increase in financial frictions ________ aggregate
________.
A) increases; demand
B) decreases; demand
C) decreases; supply
D) increases; supply
If initially the money supply is $1 trillion, velocity is 5, the price level is 1, and real
GDP is $5 trillion, an increase in the money supply to $2 trillion
A) increases real GDP to $10 trillion.
B) causes velocity to fall to 2.5.
C) increases the price level to 2.
D) increases the price level to 2 and velocity to 10.
The equivalent to the Federal Reserve’s discount rate in the European System of Central
Banks is the
A) federal funds rate.
B) marginal lending rate.
C) deposit facility rate.
D) lombard rate.
The name economists give the process by which stockholders gather information by
frequent monitoring of the firm’s activities is
A) costly state verification.
B) the free-rider problem.
C) costly avoidance.
D) debt intermediation.
Everything else held constant, increased demand for a country’s ________ causes its
currency to appreciate in the long run, while increased demand for ________ causes its
currency to depreciate.
A) imports; imports
B) imports; exports
C) exports; imports
D) exports; exports
When the Fed ________ the money stock, the money supply curve shifts to the
________ and the interest rate ________, everything else held constant.
A) decreases; right; rises
B) increases; right; falls
C) decreases; left; falls
D) increases; left; rises
Suppose the U.S. economy is producing at the natural rate of output. A depreciation of
the U.S. dollar will cause ________ in real GDP in the short run and ________ in
inflation in the long run, everything else held constant. (Assume the depreciation causes
no effects in the supply side of the economy.)
A) an increase; an increase
B) a decrease; a decrease
C) no change; an increase
D) no change; a decrease
Suppose the economy is producing at the natural rate of output and the government
passes legislation that severely restricts a company’s ability to reduce production costs
via outsourcing. Everything else held constant, this policy action will cause ________
in the unemployment rate in the short run and ________ in inflation in the short run.
A) an increase; an increase
B) a decrease; a decrease
C) a decrease; an increase
D) no change; no change
Which of the following is not a disadvantage to inflation targeting?
A) There is a delayed signal about achievement of the target.
B) Inflation targets could impose a rigid rule on policymakers.
C) There is potential for larger output fluctuations.
D) There is a lack of transparency.
The discount rate is kept ________ the federal funds rate because the Fed prefers that
________.
A) below; banks borrow reserves from each other
B) below; banks borrow reserves from the Fed
C) above; banks borrow reserves from each other
D) above; banks borrow reserves from the Fed
Suppose the economy is producing at the natural rate of output. A decrease in consumer
and business confidence will cause ________ in real GDP in the long run and ________
in inflation in the long run, everything else held constant.
A) an increase; an increase
B) a decrease; a decrease
C) no change; an increase
D) no change; a decrease
Nonactivists of the policies believe that
A) wages and prices are very flexible.
B) the self-correcting mechanism is very rapid.
C) government action is unnecessary.
D) all of the above.
Predicting the impact of institutional change on the effectiveness of monetary policy is
best done with a
A) structural model.
B) reduced-form model.
C) black-box model.
D) scientific model.
The price of a coupon bond and the yield to maturity are ________ related; that is, as
the yield to maturity ________, the price of the bond ________.
A) positively; rises; rises
B) negatively; falls; falls
C) positively; rises; falls
D) negatively; rises; falls
Everything else held constant, if aggregate output is to the ________ of the LM curve,
then there is an excess demand of money which will cause the interest rate to
________.
A) right; fall
B) right; rise
C) left; fall
D) left; rise
Because information is scarce
A) helps explain why equity contracts are used so much more frequently to raise capital
than are debt contracts.
B) monitoring managers gives rise to costly state verification.
C) government regulations, such as standard accounting principles, have no impact on
problems such as moral hazard.
D) developing nations do not rely heavily on banks for business financing.
The purpose of the commitment by the Fed to keep the federal funds rate at zero for a
long period of time is to
A) lower the long term interest rates.
B) lower the short term interest rates.
C) increase the long term interest rates.
D) increase the short term interest rates.
If the probability of a bond default increases because corporations begin to suffer large
losses, then the default risk on corporate bonds will ________ and the expected return
on these bonds will ________, everything else held constant.
A) decrease; increase
B) decrease; decrease
C) increase; increase
D) increase; decrease
The segmented markets theory can explain
A) why yield curves usually tend to slope upward.
B) why interest rates on bonds of different maturities tend to move together.
C) why yield curves tend to slope upward when short-term interest rates are low and to
be inverted when short-term interest rates are high.
D) why yield curves have been used to forecast business cycles.
Real business cycle theory states that the most important cause of business cycles is
A) shocks to the money supply.
B) interest rate shocks.
C) Federal Reserve policy decisions.
D) shocks to tastes and technology.
If policymakers set a target for unemployment that is too low because it is less than the
natural rate of unemployment, this can set the stage for a higher rate of money growth
and
A) cost-push inflation.
B) demand-pull inflation.
C) cost-pull inflation.
D) demand-push inflation.
That several hundred S&Ls were not even examined once in the period January 1984
through June 1986 can be explained by
A) Congress’s unwillingness to allocate the necessary funds to thrift regulators.
B) regulators’ reluctance to find the specific problem thrifts that they knew existed.
C) slower growth in lending meant that less regulation was needed.
D) Congress’s unwillingness to listen to campaign contributors.
Suppose that there is a negative aggregate supply shock and the central bank commits
to an inflation rate target.
A) If the commitment is credible, the public’s expected inflation will remain unchanged.
B) Credible policy produces better outcomes on both inflation and output in the short
run.
C) Policies that are not credible produce worse economic contraction.
D) all of the above.
E) both A and C.
A business cycle expansion increases income, causing money demand to ________ and
interest rates to ________, everything else held constant.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase