Unless otherwise indicated, when economists or investors refer to the interest rate on a
financial asset, they referring to the:
A) current yield
B) coupon rate
C) yield to maturity
D) prime rate
Answer:
Which of the following assets is the least liquid?
A) money market mutual fund
B) stock
C) treasury bond
D) house
Answer:
Banks experience interest rate risk
A) if adverse selection problems are particularly severe.
B) if moral hazard problems are particularly severe.
C) on any investment that has high information costs.
D) if changes in interest rates cause bank profits to fluctuate.
Answer:
Financial securities are exchanged by dealers linked by computers in a
A) stock exchange.
B) public exchange.
C) financial exchange.
D) over the counter market.
Answer:
If the Japanese central bank performed a sterilized intervention to reduce the value of
the yen, the most likely result is:
A) a lower value of the yen due to an increase in the monetary base in Japan.
B) a lower value of the yen due to a decrease in Japanese interest rates.
C) a higher value of the yen since the intervention was sterilized.
D) no change in the value of the yen since neither the monetary base nor Japanese
interest rates would be affected.
Answer:
All of the following were actions taken by the government or the Fed in response to the
Financial Crisis of 2007-2009 EXCEPT
A) purchasing of most toxic assets such as mortgage-backed securities.
B) reducing the federal funds rate to near zero.
C) insuring deposits in money market mutual funds.
D) effective nationalization of Fannie Mae and Freddie Mac.
Answer:
Banks require collateral for loans in order to
A) ensure that borrowers have significant amounts of their own funds invested in their
businesses.
B) charge higher interest rates on loans.
C) reduce their tax liability on the interest they collect on loans.
D) reduce the total amount they are obliged to lend to any one borrower.
Answer:
Fracking involves:
A) extracting certain forms of energy from shale rock formations
B) deep water drilling for energy with minimal externalities
C) the reduction of menu costs thus allowing prices to adjust more freely
D) breaking down the production of goods resulting in more competitive markets
Answer:
Individual investors can reduce transactions costs by
A) buying common stock rather than bonds.
B) combining their purchases through an intermediary.
C) common stocks directly, rather than through a mutual fund.
D) making loans directly, rather than depositing funds in a bank.
Answer:
The trade balance is
A) by definition, identical to the current account balance.
B) is a major portion, but not the only component, of the current account balance.
C) almost invariably larger than the financial account balance.
D) the largest component of the financial account.
Answer:
If the real interest rate is -1.4% and the nominal interest rate is 6%, expected inflation
equals
A) -2%
B) -0.8%
C) 0.8%
D) 2%
Answer:
Noise traders
A) tend to lose money on stock trades, but help to stabilize the market.
B) tend to make higher returns than do “buy-and-hold” investors.
C) create additional risk in the market by increasing price fluctuations.
D) trade only when they have inside information.
Answer:
Why do individuals hold money when it does not provide the services that, say, a house
does?
A) Money is the most liquid asset.
B) Money is the only form in which wealth may be held.
C) Money increases in value faster than other assets.
D) Money is useful in avoiding taxes on certain transactions.
Answer:
In October 2012, the largest liability of the Fed was
A) currency in circulation.
B) reserves.
C) discount loans to banks.
D) vault cash.
Answer:
Which of the following is NOT true of the term premium?
A) It is zero under the expectations theory.
B) It is infinite under the segmented markets theory.
C) It increases as a bond’s maturity increases.
D) It is zero for thirty-year bonds.
Answer:
Which of the following is a single statistic that summarizes a rating agency’s view of
the issuer’s likely ability to make the required payments on its bonds?
A) grade
B) bond rating
C) speculation
D) yield
Answer:
Liquidity
A) is the best available measure of the riskiness of an asset.
B) is a characteristic of money, and of no other asset.
C) is the ease with which an asset can be exchanged for money.
D) was declining for many financial assets during the 1990s.
Answer:
When economists, policymakers, or journalists refer to the Fed’s balance sheet, they are
typically referring to the:
A) money supply
B) size of the Fed’s assets
C) amount of bank reserves
D) amount of foreign reserves
Answer:
A bond’s price and its yield to maturity are inversely related because
A) discounting future payments at a higher rate reduces the present value of the
payments.
B) discounting future payments at a higher rate increases the present value of the
payments.
C) an increase in the yield to maturity will lower a bond’s coupon rate and hence its
price.
D) a fall in a bond’s price will lower its par value and hence its yield to maturity.
Answer:
National banks are chartered by the
A) Office of the Comptroller of the Currency.
B) Office of Bank Supervision.
C) Securities and Exchange Commission.
D) Office of Management and the Budget.
Answer:
An increase in the corporate profits tax is likely to cause
A) the equilibrium interest rate to rise and the equilibrium price of bonds to fall.
B) the equilibrium interest rate to fall and the equilibrium price of bonds to rise.
C) the equilibrium interest rate and the equilibrium price of bonds both rise.
D) the equilibrium interest rate and the equilibrium price of bonds both fall.
Answer:
How are TIPS adjusted for inflation?
A) The interest rate is adjusted for inflation during each period.
B) The principal is adjusted once the bond reaches maturity.
C) The principal is adjusted for inflation each period.
D) The interest rate is adjusted once the bond reaches maturity.
Answer:
If the central bank buys foreign assets,
A) the domestic monetary base will decline.
B) domestic short-term interest rates will decline.
C) the foreign-exchange value of the domestic currency will rise.
D) its holdings of international reserves will rise.
Answer:
Large commercial banks are considered to be market makers because:
A) without them, there would be no foreign exchange market
B) they can easily manipulate the value of currencies in the foreign exchange market
C) they are willing to buy and sell major currencies at any time
D) they created the foreign exchange market
Answer:
All of the following represent returns to savers EXCEPT:
A) dividends on stocks
B) fees on loans
C) interest on deposits
D) coupon payments on bonds
Answer:
Which of the following assets is the most liquid?
A) money market mutual fund
B) computer
C) washing machine
D) U.S. Treasury bond
Answer:
Interest and capital gains are taxed differently in the United States in that
A) interest is exempt from state and local taxes.
B) interest is taxed as ordinary income, but capital gains are taxed only when realized.
C) interest is taxed as ordinary income, but capital gains are taxed as accrued.
D) capital gains when realized are exempt from state and local taxes.
Answer:
Which of the following helps explain why depositors sometimes put their funds in
demand deposits rather than NOW accounts?
A) Demand deposits pay interest, whereas NOW accounts do not pay interest.
B) Businesses may not hold NOW accounts.
C) Checks may be written against demand deposits, but not against NOW accounts.
D) Demand deposits are more liquid than NOW accounts.
Answer:
All of the following were took place during the German hyperinflation in the 1920s
EXCEPT
A) banks reduced lending.
B) some banks only made loans to customers who agreed to repay in terms of foreign
currencies or commodities.
C) Deutsche Bank had to lay off many workers due to lack of business.
D) households and firms increased their demand for loans.
Answer:
The distinguishing feature of a well-functioning financial market is the
A) continual increase in the liquidity of most assets.
B) continual reduction in the riskiness of most assets.
C) increased ease of converting common stocks into bonds.
D) incorporation of available information into asset prices.
Answer:
If the nominal interest rate parity condition is not met,
A) imports will exceed exports.
B) the return from holding domestic assets must exceed the expected return from
holding foreign assets.
C) the return from holding domestic assets must be less than the expected return from
holding foreign assets.
D) the return from holding domestic assets must be greater or less than the expected
return from holding foreign assets.
Answer:
Since capital gains are only taxed when an investor sells an asset and realizes the gain, a
possible result is:
A) the locked-in effect
B) double taxation
C) an increase in capital losses
D) limited liability
Answer: