1) A central bank ________ of domestic currency and corresponding ________ of
foreign assets in the foreign exchange market leads to an equal ________ in its
international reserves and the monetary base.
A) sale; purchase; increase
B) sale; sale; decline
C) purchase; sale; increase
D) purchase; purchase; decline
2) The return on a 5 percent coupon bond that initially sells for $1,000 and sells for
$1,100 one year later is
A) 5 percent
B) 10 percent
C) 14 percent
D) 15 percent
3) If the FDIC uses the purchase and assumption method to handle a failed bank,
A) all deposits will suffer losses
B) small deposits will be paid in full but deposits over the insurance limit will not
C) all deposits will be paid in full
D) none of the above will occur
4) By making a market in thinly traded stocks, securities dealers solve the ________
trading problem, which is of particular benefit to ________ businesses.
A) synchronous; large
B) synchronous; small
C) nonsynchronous; large
D) nonsynchronous; small
5) If the yield curve has a mild upward slope, the liquidity premium theory indicates
that the market is predicting
A) a rise in short-term interest rates in the near future and a decline further out in the
future
B) constant short-term interest rates in the near future and further out in the future
C) a decline in short-term interest rates in the near future and a rise further out in the
future
D) a decline in short-term interest rates in the near future and an even steeper decline
further out in the future
6) Which of the following would substitute for discount loans?
A) loans to businesses
B) repurchase agreements
C) investing in Eurodollars
D) loans to bank holding companies
E) reverse repurchase agreements
7) In the early 1900s, banks did not offer loans to purchase automobiles. This is because
A) banks could not make a profit on car loans
B) only finance companies were permitted to offer car loans
C) banks could not repossess a car if the loan defaulted
D) banks did not view a car as a productive asset
8) (I) Preferred stockholders hold a claim on assets that has priority over the claims of
common stockholders, but after that of bondholders.
(II) Firms issue preferred stock in far greater amounts than common stock.
A) (I) is true, (II) false
B) (I) is false, (II) true
C) Both are true
D) Both are false
9) Holding other things constant, a stock’s value will be highest if the investor’s
required return on investments in equity is
A) 20%
B) 15%
C) 10%
D) 5%
10) Because passbook savings are ________ liquid for the depositor than checking
accounts, they earn ________ interest rates.
A) less; higher
B) less; lower
C) more; higher
D) more; lower
11) The case for Federal Reserve independence includes the idea that
A) a politically insulated Fed would be more concerned with long-run objectives and
thus be a defender of a sound dollar and a stable price level
B) a Federal Reserve under the control of Congress or the president might make the
so-called political business cycle more pronounced
C) the principal-agent problem is perhaps worse for the Fed than for congressmen since
the former does not answer to the voters on election day
D) only A and B of the above
12) A ________ is a type of loan that has the same cash flow payment every year
throughout the life of the loan.
A) discount loan
B) simple loan
C) fixed-payment loan
D) interest-free loan
13) Bank failures and mergers have caused the number of commercial banks in the U.S.
to decline from around ________ in the 1970s to below ________ today.
A) 25,000; 10,000
B) 15,000; 10,000
C) 25,000; 20,000
D) 15,000; 5,000
14) Regular bank examinations and restrictions on asset holdings indirectly help to
reduce the ________ problem because, given fewer opportunities to take on risk,
risk-prone entrepreneurs will be discouraged from entering the banking industry.
A) moral hazard
B) adverse selection
C) ex post shirking
D) post-contractual opportunism
15) As a result of restrictive banking regulations, the United States
A) has too few banks when compared to other industrialized countries
B) has banks that are quite large relative to those in other countries
C) has too many banks when compared to other industrialized countries
D) has both A and B of the above
16) Futures contracts are regularly traded on the
A) Chicago Board of Trade
B) New York Stock Exchange
C) American Stock Exchange
D) Chicago Board Options Exchange
17) When the demand for bonds ________ or the supply of bonds ________, interest
rates fall.
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases
18) If you buy a long contract on financial futures, you hope interest rates will
________.
A) rise
B) fall
C) not change
D) fluctuate
19) As the relative expected return on dollar deposits increases,
A) foreigners will want to hold fewer dollar deposits and more foreign deposits
B) Americans will want to hold more dollar deposits and less foreign deposits
C) Americans will want to hold fewer dollar deposits and more foreign deposits
D) Americans and foreigners will be indifferent toward holding dollar deposits or
foreign deposits
20) A call option gives the owner the ________ to ________ the underlying security.
A) right; sell
B) obligation; sell
C) right; buy
D) obligation; buy
21) When there is a mismatch between job requirements and the skills of available
workers, the resulting unemployment is called
A) structural unemployment
B) frictional unemployment
C) cyclical unemployment
D) underemployment
22) When the expected inflation rate increases, the demand for bonds ________, the
supply of bonds ________, and the interest rate ________.
A) increases; increases; rises
B) decreases; decreases; falls
C) increases; decreases; falls
D) decreases; increases; rises
23) In factoring, a finance company makes a loan and
A) purchases the firm’s accounts receivables at a premium
B) purchases the firm’s accounts payables at a premium
C) purchases the firm’s accounts receivables at a discount
D) purchases the firm’s accounts payables at a discount
24) The ________ value of a bond is the amount that the issuer must pay at maturity.
A) market
B) present
C) discounted
D) face
25) The Federal Open Market Committee makes the Fed’s decisions on the purchase or
sale of government securities, but these purchases or sales are executed by the Federal
Reserve Bank of
A) Chicago
B) Boston
C) New York
D) San Francisco
26) Because of the lemons problem in the used car market, the average quality of the
used cars offered for sale will be ________, which gives rise to the problem of
________.
A) low; moral hazard
B) low; adverse selection
C) high; moral hazard
D) high; adverse selection
27) In the usual GNMA pass-through security, the ________ has direct ownership of a
pro-rata share of the portfolio of mortgage loans.
A) seller
B) buyer
C) financial institution issuing the mortgage loan
D) financial institution securitizing the mortgage loan