Interest-rate risk can best be characterized as the risk that
A) you could have earned a higher interest rate if you waited to purchase a bond.
B) fluctuations in the price of a financial asset in response to changes in market interest
rates.
C) you could have gotten a lower interest rate if you waited to lock in a mortgage.
D) short-term interest rates may exceed long-term interest rates.
Answer:
The implication of the expectations theory that expected returns for a holding period
must be the same for bonds of different maturities depends on the assumption that
A) yield curves usually slope upward.
B) yield curves usually slope downward.
C) instruments with different maturities are perfect substitutes.
D) savers are usually risk averse.
Answer:
Suppose you are a manager for a company that produces grape jelly. Which of the
following is the best way for you to reduce your risk?
A) acquire a derivative that increases in value if grape prices increase
B) acquire a derivative that increases in value if grape jelly prices increase
C) sell a derivative that increases in value if grape prices increase
D) sell a derivative that increases in value if grape jelly prices increase
Answer:
Economists believe that as a saver’s wealth increases, the saver will generally
A) increase his or her holdings of all assets proportionately.
B) increase the fraction of wealth held as cash.
C) increase the fraction of wealth held as common stock.
D) decrease the fraction held as corporate bonds.
Answer:
Under the Bretton Woods system the international reserve currency was the
A) U.S. dollar.
B) British pound.
C) German mark.
D) Japanese yen.
Answer:
What percentage of all banks in the United States belong to the Federal Reserve
System?
A) 5%
B) 38%
C) 75%
D) 90%
Answer:
Which of the following statements is correct?
A) The discount rate is determined by market forces.
B) The Fed’s control over discount lending is more complete than its control over open
market operations.
C) Decisions by both banks and the Fed determine the volume of discount loans.
D) The discount rate is typically greater than other short-term market interest rates.
Answer:
Which of the following is NOT a way in which power was divided up in the Federal
Reserve System?
A) between bankers and business interests
B) among states and regions
C) between importers and exporters
D) between government and the private sector
Answer:
Which of the following statements is correct?
A) New classicals believe that the aggregate supply curve is vertical in the short run.
B) New Keynesians believe that the aggregate supply curve is vertical in the short run.
C) New Keynesians believe that the aggregate supply curve slopes upward in the long
run.
D) New classicals believe that the aggregate supply curve slopes upward in the short
run.
Answer:
The risk that increased market interest rates will cause a decline in the value of an
investment bank’s holdings of long-term securities is known as
A) credit risk.
B) interest-rate risk.
C) currency risk.
D) security risk.
Answer:
The ratio of bank capital to bank assets is known as the bank’s
A) leverage ratio.
B) net interest margin.
C) return on equity.
D) return on capital.
Answer:
Between late 2007 and 2012, the Fed’s balance sheet:
A) remained about the same
B) more than doubled
C) more than tripled
D) rose tenfold
Answer:
Which of the following statements is true about M2?
A) Its total value is smaller than that of M1.
B) Apart from those assets also included in M1, it includes no assets that offer
check-writing features.
C) Its total value is about five times as large as M1.
D) It includes large-denomination time deposits.
Answer:
As the housing bubble began to burst in 2006-2008, investors would only buy
mortgage-backed securities at high yields to compensate for higher perceived default
risk. As a result::
A) banks suffered significant capital losses as the value of their holdings of
mortgage-backed securities declined
B) funds available for mortgages increased
C) bank profits rose as they earned higher interest on mortgages
D) the price of mortgage-backed securities tended to rise due to the higher yields
Answer:
An increase in the tax rate on dividends, other things equal, is likely to result in a(n):
A) increased demand for bonds due to an increase in the expected return on bonds
relative to stocks
B) increased supply of bonds due to an increase in the expected return on bonds relative
to stocks
C) reduced demand for bonds due to a decrease in the expected return on bonds relative
to stocks
D) reduced demand for bonds due to an increase in the expected return on bonds
relative to stocks
Answer:
Momentum investing can be described as
A) consistent with the efficient markets hypothesis.
B) similar to mean reversion.
C) follow the picks of investors who have been successful in the past.
D) the trend is your friend.
Answer:
One of the most important enforcement tools of the Consumer Finance Protection
Bureau is:
A) the threat of civil charges against those who violate the laws involving money
transfers, foreclosure and many other financial services
B) the ability to audit financial firms and institutions
C) the ability to initiate new regulations
D) the authority to impose criminal penalties
Answer:
If the expected price level increases at the same time that the federal government cuts
taxes, in the short run
A) aggregate output and the price level will both increase.
B) aggregate output will increase, but the price level will fall.
C) aggregate output and the price level will both fall.
D) the price level will increase, but aggregate output may either increase or decrease.
Answer:
Which of the following is a possible impact of a global savings glut on a small open
economy?
A) interest rate would increase
B) interest rate would decrease
C) domestic savings would increase
D) domestic investment would increase
Answer:
Standardization of derivative contracts
A) increases their liquidity.
B) is the rule with respect to contracts whose underlying asset is a financial security, but
not for contracts whose underlying asset is a commodity.
C) is the rule with respect to contracts whose underlying asset is a commodity, but not
for contracts whose underlying asset is a financial asset.
D) has been proposed many times by financial analysts, but has not yet been carried out
by the SEC.
Answer:
According to the aggregate demand-aggregate supply model, what is the short-run
impact of a reduction in the money supply by the Fed?
A) Current output will fall, but the price level will rise.
B) Current output will rise, but the price level will fall.
C) Current output and the price level will both rise.
D) Current output and the price level will both fall.
Answer:
A firm’s principals are its
A) shareholders.
B) management.
C) values.
D) customers.
Answer:
An most important service provided by underwriters is
A) lowering of information costs.
B) dealing with problems of moral hazard.
C) insuring firms against loss from fire.
D) insuring firms against loss from employee theft.
Answer:
Which of the following is the largest measure of money in the United States?
A) Federal Reserve notes
B) definitive money
C) M1
D) M2
Answer:
According to Robert Gordon, what led to the decline in unemployment in the 1940s?
A) structural barriers to expanding output and employment disappeared once a
sufficiently large increase in aggregate demand had taken place
B) decline in unionization of the workforce
C) President Truman moving away from the policies implemented by President
Roosevelt
D) the strengthening of property rights following the end of the New Deal
Answer:
Which of the following is NOT a problem with barter?
A) each good has multiple prices
B) high transactions costs
C) the commodity money having value for other uses besides money
D) lack of standardization of products exchanged
Answer:
How were open market operations conducted prior to 1935?
A) They were carried out by the Federal Open Market Committee.
B) They were carried out under the direction of the Secretary of the Treasury.
C) They were carried out by the district Federal Reserve banks.
D) They were carried out by the Banking Committee of the House of Representatives.
Answer:
A balance sheet
A) is a statement showing an individual’s or a firm’s financial position at a particular
point in time.
B) is a statement showing an individual’s or a firm’s income over a period of time.
C) is a statement listing the tax liabilities incurred by an individual or a firm.
D) can be constructed for any nonfinancial firm, but cannot be constructed for a
financial firm.
Answer:
The introduction of money to an economy results in:
A) higher incomes
B) higher productivity
C) increased specialization
D) a more efficient barter system
Answer:
In order to increase its target for the federal funds rate, the Fed would normally
A) conduct open market sales.
B) conduct open market purchases.
C) increase the discount rate.
D) increase reserve requirements.
Answer:
A closed economy is one that
A) has no government sector.
B) neither borrows from nor lends to foreign countries.
C) produces mainly agricultural goods.
D) produces mainly manufactured goods.
Answer:
According to the theory of purchasing power parity, if the inflation rate in England is
greater than the inflation rate in Japan,
A) the law of one price has been violated.
B) the nominal value of the pound will appreciate against the yen.
C) the nominal value of the yen will appreciate against the pound.
D) the nominal value of the pound will appreciate against the yen, but only if the two
countries are on the gold standard.
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:
Investors often pay professional analysts to gather and monitor information on the
creditworthiness of borrowers because
A) federal law requires it.
B) most investors are risk neutral.
C) the cost of acquiring information about a borrower’s creditworthiness can be high.
D) doing so increases the net-of-tax yield on most investments.
Answer:
What is an important difference between certificates of deposits (CDs) worth less than
$100,000 compared to those worth $100,000 or more?
Answer:
Make use of a T-account to show the effect of the Fed’s purchase of $5 billion worth of
foreign government securities on the Fed’s balance sheet (note: assume the Fed writes a
check to purchase the securities)
Answer:
What is a matched sale-purchase transaction (also known as a reverse repo)?
Answer:
In what ways does a certificate of deposit (CD) differ from a savings deposit?
Answer:
Economic studies have shown that countries that have high inflation rates have lower
rates of economic growth than do countries with low inflation rates. Explain what
underlies this relationship between inflation and economic growth.
Answer:
What does it mean to “cover a short”?
Answer:
How can the difference between the current unemployment rate and the natural rate of
unemployment help explain changes in inflation?
Answer:
Make use of the quantity theory of money to solve the following problem. If the Fed
has an inflation target of 2% and the velocity of money is constant, by how much
should it increase the money supply each year if economic growth is expected to
average 3%?
Answer:
Why did some economists and policymakers criticize the Fed and Treasury for
arranging the sale of Bear Stearns to JP Morgan Chase in 2008?
Answer:
What other markets were affected by the decline in the housing market beginning in
2006? Briefly explain why.
Answer:
In what way do owners of stocks have limited liability?
Answer:
What are the primary arguments for and against the independence of the Fed?
Answer:
Suppose Ireland is a small open economy that is neither a net international borrower or
international lender. Many countries increase their savings resulting in a lower world
real interest rate. Make use of a graph of the loanable funds market for a small open
economy to show the impact this has on Ireland’s international financial position.
Answer:
What is the difference between an autonomous change in spending and an induced
change in spending?
Answer:
A one-year bond has an interest rate of 3% and is expected to fall to 5% next year and
2% in two years. The term premium for a two-year bond is 0.3% and for a three-year
bond is 0.5%. What are the interest rates on a two-year bond and three-year bond
according to the liquidity premium theory?
Answer:
How should a financial plan of an older saver differ from that of a younger saver?
Answer: