Which of the following is NOT a benefit of derivatives?
A) risk sharing
B) guaranteed minimum profit
C) liquidity
D) information services
Answer:
At any point along the LM curve,
A) the quantity of money demanded equals the quantity of money supplied.
B) the economy must be in general equilibrium.
C) the nominal interest rate must equal the real interest rate.
D) saving must equal investment.
Answer:
Which firm did the Treasury allow to fail during the financial crisis?
A) J.P. Morgan
B) Bear Stearns
C) Lehman Brothers
D) American International Group (AIG)
Answer:
The graph of the short-run relationship between the unemployment rate and inflation is
called a(n)
A) MP curve.
B) LM curve.
C) IS curve.
D) Phillips curve.
Answer:
The fixed exchange rates of the Bretton Woods system were maintained
A) by central bank interventions in the foreign-exchange market.
B) by the requirement that short-term interest rates be equalized in all participating
countries.
C) by the requirement that long-term interest rates be equalized in all participating
countries.
D) through the automatic workings of the foreign-exchange market.
Answer:
International financial transactions are most likely to affect the U.S. monetary base
when
A) the United States is in recession.
B) the United States is experiencing a severe inflation.
C) the Fed tries to influence the foreign-exchange value of the dollar.
D) interest rates in the United States are highly variable.
Answer:
A nation with an official settlements balance of $50 billion is likely to experience a:
A) balance of payments surplus and accumulate $50 billion in international reserves
B) balance of payments deficit and accumulate $50 billion in international reserves
C) balance of payments surplus and a decline of $50 billion in international reserves
D) balance of payments deficit and a decline of $50 billion in international reserves
Answer:
A portfolio is a
A) brokerage house specializing in the trading of common stock.
B) brokerage house specializing in the trading of corporate bonds.
C) measure of the risk involved with a holding a particular asset.
D) collection of assets.
Answer:
Which of the following countries does NOT use the U.S. dollar as its official currency?
A) Panama
B) El Salvador
C) Ecuador
D) Guatemala
Answer:
The process by which banks screen potential applicants by eliminating bad risks and to
obtain a pool of creditworthy borrowers is called:
A) gap analysis
B) duration analysis
C) credit-risk analysis
D) liquidity analysis
Answer:
Which of the following is a term for the total value of a firm’s outstanding shares?
A) market value
B) intrinsic value
C) fair value
D) fairness value
Answer:
If the Fed purchases $1 million worth of securities and the required reserve ratio is 8%,
by how much will deposits increase (assuming no change in excess reserves or the
public’s currency holdings)?
A) rise by $1 million
B) decline by $1 million
C) rise by $8 million
D) rise by $12.5 million
Answer:
Which of the following will NOT result from an unsterilized intervention in which the
central bank sells foreign assets to purchase domestic currency?
A) Domestic interest rates will rise.
B) The foreign-exchange value of the domestic currency will rise.
C) The central bank will experience a decrease in international reserves.
D) The domestic money supply will rise.
Answer:
An increase in the real interest rate causes
A) the IS curve to shift to the right.
B) the IS curve to shift to the left.
C) a movement up the IS curve.
D) a movement down the IS curve.
Answer:
George is trying to forecast the future price of IBM’s common stock. To do so he makes
use only of past prices of IBM stock. George
A) has adaptive expectations.
B) has rational expectations.
C) is likely to rapidly adjust his forecast to news affecting the future profitability of
IBM.
D) is likely to make forecasts that reflect closely IBM stock’s fundamental value.
Answer:
Which of the following does not serve on the Governing Council of the European
Central Bank?
A) governors of the national central banks
B) members of the executive board
C) finance ministers of each country
D) chair of the executive board
Answer:
Which of the following is likely to be more of a problem after the introduction of
deposit insurance?
A) moral hazard
B) adverse selection
C) contagion
D) bank runs
Answer:
Which of the following prevented the Fed from reducing long-term real interest rates
during the Financial Crisis of 2007-2009?
A) an increase in expected inflation
B) an increase in the risk premium
C) the collapse in the housing market
D) the failure of the federal funds rate to respond to monetary policy
Answer:
A purchase of foreign assets by a central bank has the same impact on the monetary
base as:
A) an open market purchase of government securities
B) an open market sale of government securities
C) an increase in the discount rate
D) a reduction in the interest on reserves
Answer:
The discount window is
A) another name for the discount rate.
B) the means by which the Fed makes discount loans to banks.
C) the spread between the discount rate and the T-bill rate.
D) the period each month during which banks are allowed to apply for discount loans.
Answer:
Moral hazard arises from
A) the difficulty of distinguishing good-risk borrowers from bad-risk borrowers.
B) the likelihood that bad-risk borrowers are more likely to accept a loan than are
good-risk borrowers.
C) savers’ difficulties in monitoring borrowers.
D) borrowers’ difficulties in locating savers.
Answer:
One reason for the controversy surrounding the decision by the European Central Bank
to buy Greek bonds was that:
A) it may increase moral hazard by encouraging other European governments to issue
more debt than private investors were willing to buy
B) it may increase adverse selection by encouraging other European governments to
issue more debt than private investors were willing to buy
C) it may result in higher risk premiums as private investors anticipate a default by
Greece
D) it may worsen the Greek recession by increasing Greek interest rates
Answer:
Who owns the Federal Reserve banks?
A) the private commercial banks in each district which are members of the Federal
Reserve System
B) those households which have purchased stock in Federal Reserve System
C) the federal government
D) the governments of the states in which the banks are located
Answer:
What is meant by senior debt?
A) debt that has been around for the longest period of time
B) debt that must be paid before junior debt is paid
C) debt owed to the federal government
D) debt issued by the federal government as opposed to states or corporations
Answer:
Which of the following statements about potential GDP is false?
A) The Fed’s goal is to have equilibrium GDP close to potential GDP.
B) When GDP is at potential, cyclical unemployment is zero.
C) It occurs when firms are producing at their maximum level of output.
D) It occurs when firms are producing with a workforce of normal size working normal
hours.
Answer:
If the current price of a bond is greater than its face value
A) an investor will receive a capital gain by holding the bond until maturity.
B) the yield to maturity must be less than the coupon rate.
C) the coupon rate must be less than the current yield.
D) the coupon rate must be equal to the current yield.
Answer:
For state residents, interest on most bonds issued by their state government is
A) exempt from state and federal income taxes.
B) exempt from state, but not from federal, income taxes.
C) exempt from federal, but not from state, income taxes.
D) subject to both state and federal income taxes.
Answer:
How long does it take prices of securities to adjust so as to eliminate arbitrage profits?
A) seconds
B) hours
C) days
D) months
Answer:
Why isn’t the current yield a good indicator of holding a bond?
A) It doesn’t account for the yield to maturity.
B) It doesn’t account for capital gains or losses.
C) It doesn’t account for the coupon.
D) It assumes that the current price equals its par value.
Answer:
The demand curve for bonds would be shifted to the left by
A) an increase in expected returns on other assets.
B) a decrease in the information costs of bonds relative to other assets.
C) a decrease in expected inflation.
D) an increase in the liquidity of bonds relative to other assets.
Answer:
Banks make use of the federal funds market in part to
A) pay their tax liabilities.
B) manage liquidity risk.
C) deal with moral hazard.
D) deal with adverse selection.
Answer:
Which type of analyst should generally outperform market index according to the
Efficient Markets Hypothesis?
A) technical analysts
B) fundamental analysts
C) those that follow the random walk
D) none of the above
Answer:
Suppose that short-term real interest rates fall in Japan. Is this likely to be good news or
bad news for the tourism industry in Hawaii?
Answer:
Suppose you had $1000 and were deciding between two investments. One pays 5% a
year for two years while the other pays 8% the first year and 2% the second year. Which
investment would provide a higher return?
Answer:
What are the three key features of the financial system that result from the existence of
transactions and information costs?
Answer:
Suppose a bank has assets of $500 million and capital of $100 million. Its return on
assets is -3%. What is its leverage ratio? What is its return on equity?
Answer:
What are the information costs faced by savers?
Answer:
What three parts of the economy are represented in the IS-MP model?
Answer:
Briefly describe how the Bretton Woods system worked. What advantages did it have
over the gold standard? What problems did the Bretton Woods system eventually
encounter?
Answer:
Describe the three ways that banks normally earn revenue.
Answer:
Why may some investors prefer forward contracts to futures?
Answer:
According to the New Classical theory, why may output differ from its full-employment
level in the short run?
Answer:
Explain why some economists claim that the persistence of high unemployment rates
during the recovery from the recession of 20072009 is evidence of “hysteresis.”
Answer:
Briefly describe the process of microlending.
Answer:
Make use of a graph of the foreign exchange market to show how the Central Bank of
Mexico can use an unsterilized intervention to increase the value of its currency, the
peso, in terms of the dollar.
Answer:
How does deflation affect those with debt?
Answer:
Suppose you put $500 in your savings account and earn 4% interest per year. How
much will you have in your account after two years? Be sure to round off to the nearest
cent
Answer:
Suppose a bond has a coupon of $75, face value of $1000, and current price of $1100.
What is the coupon rate? What is its current yield? Report a percentage with two
decimal places.
Answer:
Compare the rights and obligations of buyers and sellers of futures contracts with the
rights of buyers and sellers of options contracts.
Answer:
Discuss what happened to the market prices on corporate securities relative to
government securities during the Great Recession.
Answer: