According to the interest parity condition, if the domestic interest rate is 10 percent and
the foreign interest rate is 12 percent, then the expected ________ of the foreign
currency must be ________ percent.
A) appreciation; 4
B) appreciation; 2
C) depreciation; 2
D) depreciation; 4
Everything else held constant, if the expected return on ABC stock rises from 5 to 10
percent and the expected return on CBS stock is unchanged, then the expected return of
holding CBS stock ________ relative to ABC stock and the demand for CBS stock
________.
A) rises; rises
B) rises; falls
C) falls; rises
D) falls; falls
The January effect refers to the fact that
A) most stock market crashes have occurred in January.
B) stock prices tend to fall in January.
C) stock prices have historically experienced abnormal price increases in January.
D) the football team winning the Super Bowl accurately predicts the behavior of the
stock market for the next year.
A major disruption in financial markets characterized by sharp declines in asset prices
and firm failures is called a
A) financial crisis.
B) fiscal imbalance.
C) free-rider problem.
D) “lemons” problem.
If brokerage commissions on stocks fall, everything else held constant, the demand for
bonds ________, the price of bonds ________, and the interest rate ________.
A) decreases; decreases; increases
B) decreases; decreases; decreases
C) increases; decreases; increases
D) increases; increases; increases
If Treasury deposits at the Fed are predicted to fall, the manager of the trading desk at
the New York Fed bank will likely conduct ________ open market operations to
________ reserves.
A) defensive; inject
B) defensive; drain
C) dynamic; inject
D) dynamic; drain
A put option gives the owner the
A) right to sell the underlying security.
B) obligation to sell the underlying security.
C) right to buy the underlying security.
D) obligation to buy the underlying security.
When the economy suffers a permanent negative supply shock and the central bank
does not respond by changing the autonomous component of monetary policy, then
A) inflation will be lower.
B) output will be at its potential.
C) output will be lower.
D) inflation will not change.
E) both B and C.
U.S. Treasury deposits at the Fed are ________ for the Fed but ________ for the
Treasury. Thus an increase in U.S. Treasury deposits ________ the monetary base.
A) a liability; an asset; increases
B) a liability; an asset; decreases
C) an asset; a liability; increases
D) an asset; a liability; decreases
The primary difference between the “payoff” and the “purchase and assumption”
methods of handling failed banks is
A) that the FDIC guarantees all deposits when it uses the “payoff” method.
B) that the FDIC guarantees all deposits when it uses the “purchase and assumption”
method.
C) that the FDIC is more likely to use the “payoff” method when the bank is large and it
fears that depositor losses may spur business bankruptcies and other bank failures.
D) that the FDIC is more likely to use the purchase and assumption method for small
institutions because it will be easier to find a purchaser for them compared to large
institutions.
Forty or so dealers establish a “market” in these securities by standing ready to buy and
sell them.
A) secondary stocks
B) surplus stocks
C) U.S. government bonds
D) common stocks
A financial innovation that developed as a result of banks avoidance of bank branching
restrictions was
A) money market mutual funds.
B) commercial paper.
C) junk bonds.
D) bank holding companies.
Which of the following are TRUE for a coupon bond?
A) When the coupon bond is priced at its face value, the yield to maturity equals the
coupon rate.
B) The price of a coupon bond and the yield to maturity are positively related.
C) The yield to maturity is greater than the coupon rate when the bond price is above
the par value.
D) The yield is less than the coupon rate when the bond price is below the par value.
Which of the following is NOT a disadvantage of exchange-rate targeting?
A) It relies on a stable money-inflation relationship.
B) The targeting country gives up an independent monetary policy.
C) The targeting country is left open for a speculative attack.
D) It can weaken the accountability of policymakers.
Which of the following criteria need NOT be satisfied for choosing a policy
instrument?
A) The variable must be measurable.
B) The variable must be controllable.
C) The variable must be predictable.
D) The variable must be transportable.
When the interest rate on a bond is above the equilibrium interest rate, in the bond
market there is excess ________ and the interest rate will ________.
A) demand; rise
B) demand; fall
C) supply; fall
D) supply; rise
The theory of portfolio choice indicates that factors affecting the demand for money
include
A) income.
B) nominal interest rate.
C) liquidity of other assets.
D) all the above.
One reason China has been able to grow so rapidly even though its financial
development is still in its early stages is
A) the high savings rate of around 40%.
B) the shift of labor to the agricultural sector.
C) the stringent enforcement of financial contracts.
D) the ease of obtaining high-quality information about creditors.
If 1-year interest rates for the next three years are expected to be 1, 1, and 1 percent,
and the 3-year term premium is 1 percent, than the 3-year bond rate will be
A) 1 percent.
B) 2 percent.
C) 3 percent.
D) 4 percent.
The rate of inflation tends to remain constant when
A) the unemployment rate is above the NAIRU.
B) the unemployment rate equals the NAIRU.
C) the unemployment rate is below the NAIRU.
D) the unemployment rate increases faster than the NAIRU increases.
If you purchase a $100,000 interest-rate futures contract for 105, and the price of the
Treasury securities on the expiration date is 108, your ________ is ________.
A) profit; $3000
B) loss; $3000
C) profit; $8000
D) loss; $8000
A $10,000 8 percent coupon bond that sells for $10,000 has a yield to maturity of
A) 8 percent.
B) 10 percent.
C) 12 percent.
D) 14 percent.
Debt deflation occurs when
A) an economic downturn causes the price level to fall and a deterioration in firms’ net
worth because of the increased burden of indebtedness.
B) rising interest rates worsen adverse selection and moral hazard problems.
C) lenders reduce their lending due to declining stock prices (equity deflation) that
lowers the value of collateral.
D) corporations pay back their loans before the scheduled maturity date.
The Dodd-Frank legislation of 2010 permanently increased the federal deposit
insurance to
A) $40,000.
B) $100,000.
C) $200,000.
D) $250,000.
According to Keynes’s theory of liquidity preference, velocity increases when
A) income increases.
B) wealth increases.
C) brokerage commissions increase.
D) interest rates increase.
Because the quantity theory of money tells us how much money is held for a given
amount of aggregate income, it is also a theory of
A) interest-rate determination.
B) the demand for money.
C) exchange-rate determination.
D) the demand for assets.
Positive spending shocks lead to ________ output ________.
A) higher; in both the short and long runs
B) higher; in the short run but not in the long run
C) lower; in both the short and long runs
D) lower; in the short run but not in the long run
A tool for managing interest-rate risk that requires exchange of payment streams is a
A) futures contract.
B) forward contract.
C) swap.
D) micro hedge.
In order to ensure that borrowers have an ability to repay residential mortgages, the new
consumer protection legislation requires lenders to do all of the following EXCEPT
A) verify the income of the borrower.
B) verify the borrower’s job status.
C) check the credit history of the borrower.
D) verify that the borrower can read and understand a loan contract.
The major criticism of the view that expectations are formed adaptively is that
A) this view ignores that people use more information than just past data to form their
expectations.
B) it is easier to model adaptive expectations than it is to model rational expectations.
C) adaptive expectations models have no predictive power.
D) people are irrational and therefore never learn from past mistakes.
If Treasury deposits at the Fed are predicted to increase, the manager of the trading desk
at the New York Fed bank will likely conduct ________ open market operations to
________ reserves.
A) defensive; inject
B) defensive; drain
C) dynamic; inject
D) dynamic; drain
Based on the Net Interest Margin the poor bank performance in the late 1980s
A) was not the result of interest-rate movements.
B) was not the result of risky loans made in the early 1980s.
C) resulted from a narrowing of the gap between interest earned on assets and inters
paid on liabilities.
D) resulted from a huge decrease in provisions for loan losses.
Under the Sarbanes-Oxley Act of 2002, the provision that gives more funding to the
SEC is an example of
A) regulate for transparency.
B) supervisory oversight.
C) separation of functions.
D) socialization of information production.