In 1998, in order to avoid contagion, the Fed
(a) expanded the deposit insurance system.
(b) made substantial loans to three of the top 10 U.S. banks.
(c) brought together the creditors of Long-Term Capital Management.
(d) raised interest rates.
Answer:
Suppose that a small economy that had previously been closed becomes open. If its real
interest rate had previously been below the world real interest rate, we would expect
that
(a) the country’s real interest rate would remain below the world level.
(b) the country would become a net lender abroad.
(c) the country would become a new borrower abroad.
(d) the amount of loanable funds supplied in the country would decline.
Answer:
A closed economy is one in which
(a) investment spending is zero.
(b) government spending is zero.
(c) there are no international flows of saving and investment.
(d) demand equals supply in every market.
Answer:
Which of the following is NOT fixed on a coupon bond?
(a) Coupon
(b) Coupon rate
(c) Market price
(d) Par value
Answer:
The difference between money and income is that whereas income is an individual’s
(a) flow of earnings over a period of time, money is an individual’s stock of currency
and currency substitutes.
(b) stock of all assets, money is an individual’s stock of currency and currency
substitutes.
(c) flow of earnings over a period of time, money is an individual’s stock of all assets.
(d) stock of currency and currency substitutes, money is an individual’s stock of all
assets.
Answer:
Concern for the health of banking institutions has focused on
(a) interest rate risk.
(b) fraud by bank officers.
(c) reckless, but not fraudulent, investments by bank officers.
(d) information problems and liquidity risk.
Answer:
If, while you are holding a coupon bond, its market price falls, you can be sure that
(a) the coupon payment you are receiving must have been reduced.
(b) the interest rate on other similar bonds must have fallen.
(c) the interest rate on other similar bonds must have risen.
(d) the par value of the bond must have declined.
Answer:
Which of the following means of financing federal government spending will increase
the monetary base?
(a) Raising the corporate income tax
(b) Raising the personal income tax
(c) Selling bonds to the public
(d) Selling bonds to the Fed
Answer:
During the early 1980s as interest-bearing checkable deposits were incorporated into
the definition of M1,
(a) the demand for M1 balances increased substantially.
(b) the demand for M1 balances decreased substantially.
(c) the dollar value of M1 became greater than the dollar value of M2.
(d) the nominal return on M1 balances declined.
Answer:
The experiences of Eastern Europe and the former Soviet Union have demonstrated that
(a) using private networks in a financial system to channel funds from savers to
borrowers is not a good approach.
(b) using the government to channel funds from savers to borrowers is not a good
approach.
(c) the government can be very effective in increasing private saving.
(d) savers are usually willing to lend greater amounts than borrowers wish to borrow.
Answer:
In the expression i =if EXe/EX hf,d the term hf,d represents
(a) the currency premium.
(b) the difference between the inflation rate in the home country and the inflation rate in
the foreign country.
(c) the average brokerage fee charged in the home country when domestic currency is
exchanged for foreign currency.
(d) the tax levied by the home country’s government on foreign exchange transactions.
Answer:
In a large open economy
(a) domestic saving need not equal domestic investment.
(b) the domestic interest rate must equal the world interest rate.
(c) the IS curve will be steeper than in a closed economy.
(d) the IS curve will shift only if the FE curve shifts.
Answer:
Why did seats on the major exchanges decline in value in the late 1990s?
(a) The decline in stock prices
(b) The rise in interest rates
(c) Competition from electronic trading
(d) Increased government regulation
Answer:
In macroeconomic models, Y stands for
(a) only aggregate output.
(b) only aggregate income.
(c) only aggregate output or aggregate income.
(d) either aggregate output or aggregate income or the volume of transactions.
Answer:
About what fraction of their financial wealth do households invest in banks?
(a) 1%
(b) 20%
(c) 50%
(d) 75%
Answer:
Electronic communications networks (ECNs) are
(a) stock-trading systems that rely on computer software to match buy and sell orders.
(b) systems for communicating financial information to private investors over the
Internet.
(c) systems for private investors to communicate buy and sell orders to their brokers.
(d) systems by which the government is able to monitor securities trades for possibly
fraudulent activities.
Answer:
The largest institutional participants in capital markets are
(a) pension funds.
(b) insurance companies.
(c) consumer finance companies.
(d) business finance companies.
Answer:
Which of the following equations correctly describes equilibrium in the two asset
markets?
(a) (Md Nd) + (Ms Ns) = 0
(b) (Md Ms) + (Nd Ns) = 0
(c) (Md+ Ms) (Nd +Ns) = 0
(d) (Md Ms) (Nd Ns) = 0
Answer:
In the long run a permanent increase in government spending will
(a) lead to a permanently higher level of real output.
(b) lead to a permanently higher price level.
(c) lead to a permanently higher level of investment spending.
(d) have no effect on the level of output, the price level, or the level of investment
spending.
Answer:
High employment spurs economic growth because high employment
(a) usually reduces inflation.
(b) discourages foreign imports.
(c) often leads to a high birth rate.
(d) often leads to high rates of investment.
Answer:
If a country has a poorly functioning risk structure of corporate bond yields,
(a) yields on long-term bonds will be relatively low.
(b) the country’s tax code will have to be adjusted to reflect this.
(c) low interest rates will lead to rapid rates of growth in physical capital.
(d) corporations will rely more heavily on bank loans and on new equity issues.
Answer:
Which of the following is true of the real business cycle approach to stabilization
policy?
(a) It is necessary, but it should not be overused.
(b) It is necessary during recessions but not during booms.
(c) It is unnecessary because output fluctuations reflect productivity disturbances.
(d) It is unnecessary because output fluctuations are largely the result of policy mistakes
by the Fed.
Answer:
If the bank lending channel is correct, a credit crunch in bank lending should
(a) lower interest rates.
(b) be felt disproportionately by borrowers for whom transactions costs of nonbank
finance are the highest.
(c) increase the money supply.
(d) lead to disintermediation.
Answer:
A monopolistically competitive market differs from a perfectly competitive market in
that a monopolistically competitive market has
(a) more sellers.
(b) products that are identical.
(c) less sticky prices.
(d) firms that are price setters.
Answer:
When economists state that in the long run prices are flexible they mean
(a) inflation must be zero in the long run.
(b) in the long run firms adjust their prices to reflect changes in cost or demand.
(c) changes in the nominal money supply have greater impact on the level of economic
activity in the long run than in the short run.
(d) a one-time increase in the money supply will affect output only in the long run.
Answer:
Which of the following would cause the nominal exchange rate to depreciate?
(a) The real exchange rate appreciates.
(b) The domestic inflation rate increases.
(c) The foreign inflation rate increases.
(d) The government budget deficit increases.
Answer:
If the volume of discount loans increases by $2 billion, the monetary base will increase
by
(a) $2 billion times the money multiplier.
(b) $2 billion divided by the money multiplier.
(c) $2 billion.
(d) an amount that can be determined only if the ratio of excess reserves to checkable
deposits is known.
Answer:
The increase in German investment in what was formerly East Germany resulted in
(a) a decline in the world real interest rate.
(b) a shift to the right in the German supply of loanable funds curve.
(c) an increase in the real interest rate in the United States.
(d) a shift to the left in the German demand for loanable funds curve.
Answer:
Property and casualty insurance companies hold more liquid assets than do life
insurance companies because
(a) they face greater adverse selection problems.
(b) they face greater moral hazard problems.
(c) events such as fires and earthquakes are difficult to predict.
(d) they are required to do so by law.
Answer:
The “equity premium” refers to
(a) the exemption of stock dividends from federal income tax.
(b) the gap between the return on stocks and the return on bonds.
(c) the premium investors are willing to pay for Internet stocks.
(d) the low mortgage rates available to borrowers who make large down payments
when purchasing a home.
Answer:
By ‘specialization” economists mean a situation where
(a) individuals produce the goods or services for which they have relatively the best
ability.
(b) goods are traded directly for goods and money is not used.
(c) individuals who produce goods do not also produce services and individuals who
produce services do not also produce goods.
(d) individuals are assigned to occupations on the basis of tests that gauge their relative
abilities.
Answer:
Monetary policy refers to the government’s
(a) decisions on how much money to spend.
(b) decisions on how much money to collect in taxes.
(c) plans for retiring the national debt.
(d) management of the money supply.
Answer:
A syndicate is
(a) a group of brokers illegally making use of insider information.
(b) a group of commercial banks that agrees to accept the checks of each other’s
depositors.
(c) a group of investment banks underwriting a large security issue.
(d) a group of dealers that markets a government bond issue.
Answer:
In the saving-investment diagram, an increase in output will lead to
(a) a reduction in saving and a rise in the real interest rate.
(b) an increase in saving and a fall in the real interest rate.
(c) a reduction in saving and a fall in the real interest rate.
(d) an increase in saving and a rise in the real interest rate.
Answer:
Savers who are risk-averse
(a) care only about expected returns.
(b) care only about the variability of returns.
(c) care about both expected returns and the variability of returns.
(d) always prefer an investment with a higher expected return to one with a lower
expected return.
Answer: