If the required reserve ratio is 25 percent, the simple deposit multiplier is
A) 5.0.
B) 2.5.
C) 4.0.
D) 10.0.
The price of a barrel of oil doubled between 2007 and the middle of 2008. To make
matters worse, a financial crisis hit the U.S. economy starting in August of 2007. Which
of the following is an appropriate description of the mechanism that would have
ensued?
A) The increase in the price of oil would have immediately shifted the AS curve to the
right.
B) The financial crisis would have led to a sharp contraction in spending shifting the
AD curve to the right.
C) Shifts in both the AD and the AS curve would have ensued in the short-run but as
long as neither shock had an impact on potential output, ultimately unemployment will
have been unaffected in the long run.
D) All of the above.
E) None of the above.
A credit market instrument that requires the borrower to make the same payment every
period until the maturity date is known as a
A) simple loan.
B) fixed-payment loan.
C) coupon bond.
D) discount bond.
If float is predicted to increase because of bad weather, 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
The Phillips curve indicates that when the labor market is ________, production costs
will ________ and aggregate supply increases.
A) easy; rise
B) easy; fall
C) tight; fall
D) tight; rise
Suppose Barbara looks out in the morning and sees a clear sky so decides that a picnic
for lunch is a good idea. Last night the weather forecast included a 100% chance of rain
by midday but Barbara did not watch the local news program. Is Barbara’s prediction of
good weather at lunch time rational? Why or why not?
If float is predicted to decrease because of unseasonably good weather, the manager of
the trading desk at the Federal Reserve Bank of New York will likely conduct a
________ open market ________ of securities.
A) defensive; sale
B) defensive; purchase
C) dynamic; sale
D) dynamic; purchase
If aggregate demand equals output,
A) the economy is in a recession.
B) output will increase.
C) output will fall.
D) the economy is at its equilibrium level.
During a recession, the supply of bonds ________ and the supply curve shifts to the
________, everything else held constant.
A) increases; left
B) increases; right
C) decreases; left
D) decreases; right
The net amount of international reserves that move between governments to finance
international transactions is called the ________ balance.
A) capital account
B) current account
C) trade
D) official reserve transactions
In the Keynesian cross diagram, a decrease in investment spending because companies
become more pessimistic about investment profitability causes the aggregate demand
function to shift ________ and the equilibrium level of aggregate output to ________,
everything else held constant.
A) up; rise
B) up; fall
C) down; rise
D) down; fall
________ in the expected future domestic exchange rate causes the demand for
domestic assets to ________ and the domestic currency to depreciate, everything else
held constant.
A) An increase; increase
B) An increase; decrease
C) A decrease; increase
D) A decrease; decrease
Paper currency that has been declared legal tender but is not convertible into coins or
precious metals is called ________ money.
A) commodity
B) fiat
C) electronic
D) funny
A(n) ________ in the liquidity of corporate bonds will ________ the price of corporate
bonds and ________ the yield on corporate bonds, all else equal.
A) increase; increase; decrease
B) increase; decrease; decrease
C) decrease; increase; increase
D) decrease; decrease; decrease
Banks that suffered significant losses in the 1980s made the mistake of
A) holding too many liquid assets.
B) minimizing default risk.
C) failing to diversify their loan portfolio.
D) holding only safe securities.
The marginal propensity to consume (mpc) can be defined as the fraction of
A) a change in income that is spent.
B) a change in income that is saved.
C) income that is spent.
D) income that is saved.
Suppose your payroll check is directly deposited to your checking account. Everything
else held constant, total reserves in the banking system ________ and the monetary
base ________.
A) remain unchanged; remains unchanged
B) remain unchanged; increases
C) decrease; increases
D) decrease; decreases
The federal agency that ensures that potential security purchasers are well informed is
the
A) FCC.
B) FTC.
C) NRC.
D) SEC.
The government agency that oversees the banking system and is responsible for the
conduct of monetary policy in the United States is
A) the Federal Reserve System.
B) the United States Treasury.
C) the U.S. Gold Commission.
D) the House of Representatives.
In the Keynesian framework, as long as output is ________ the equilibrium level,
unplanned inventory investment will remain ________ and firms will continue to lower
production.
A) below; negative
B) above; negative
C) below; positive
D) above; positive
The General Motors Acceptance Company (GMAC) is a
A) sales finance company.
B) consumer finance company.
C) business finance company.
D) public finance company.
When talking about a coupon bond, face value and ________ mean the same thing.
A) par value
B) coupon value
C) amortized value
D) discount value
In the early stages of the 1980s banking crisis, financial institutions were especially
harmed by
A) declining interest rates from late 1979 until 1981.
B) the severe recession in 1981-82.
C) the disinflation from mid 1980 to early 1983.
D) the increase in energy prices in the early 80s.
Under Keynesian analysis, aggregate demand can be written as
A) Yad = C + I + G + NX.
B) Yad = C + I + G – NX.
C) Yad = C – I – G – NX.
D) Yad = C + I – G – NX.
If the required reserve ratio is equal to 10 percent, a single bank can increase its loans
up to a maximum amount equal to
A) its excess reserves.
B) 10 times its excess reserves.
C) 10 percent of its excess reserves.
D) its total reserves.
A major controversy involving the banking industry in its early years was
A) whether banks should both accept deposits and make loans or whether these
functions should be separated into different institutions.
B) whether the federal government or the states should charter banks.
C) what percent of deposits banks should hold as fractional reserves.
D) whether banks should be allowed to issue their own bank notes.
Which set of goals can, at times, conflict in the short run?
A) high employment and economic growth
B) interest rate stability and financial market stability
C) high employment and price level stability
D) exchange rate stability and financial market stability
If the First National Bank has a gap equal to a negative $30 million, then a 5 percentage
point increase in interest rates will cause profits to
A) increase by $15 million.
B) increase by $1.5 million.
C) decline by $15 million.
D) decline by $1.5 million.
The presence of ________ in financial markets leads to adverse selection and moral
hazard problems that interfere with the efficient functioning of financial markets.
A) noncollateralized risk
B) free-riding
C) asymmetric information
D) costly state verification
Suppose that the Federal Reserve conducts an open market sale. Everything else held
constant, this will cause the demand for U.S. assets to ________ and the U.S. dollar
will ________.
A) increase; appreciate
B) increase; depreciate
C) decrease; appreciate
D) decrease; depreciate
Since 1980
A) banks have decreased risk taking to offset the decline in profits.
B) banks have offset the decline in profits from traditional activities with increased
income from off-balance-sheet activities.
C) banks have offset the decline in profits from off-balance-sheet activities with
increased income from traditional activities.
D) bank profits have grown rapidly due to deregulation.
According to the expectations theory of the term structure
A) the interest rate on long-term bonds will exceed the average of short-term interest
rates that people expect to occur over the life of the long-term bonds, because of their
preference for short-term securities.
B) interest rates on bonds of different maturities move together over time.
C) buyers of bonds prefer short-term to long-term bonds.
D) buyers require an additional incentive to hold long-term bonds.
Debt contracts
A) are agreements by the borrowers to pay the lenders fixed dollar amounts at periodic
intervals.
B) have a higher cost of state verification than equity contracts.
C) are used less frequently to raise capital than are equity contracts.
D) never result in a loss for the lender.
Everything else held constant, an increase in the money market fund ratio will mean
________ in the M2 money multiplier and ________ in the M2 money supply.
A) an increase; an increase
B) an increase; a decrease
C) a decrease; an increase
D) a decrease; a decrease
Explain the factors that account for the large increase in market share experienced by
mutual funds since 1980.
Your favorite uncle advises you to purchase long-term bonds because their interest rate
is 10%. Should you follow his advice?
If a higher inflation is expected, what would you expect to happen to the shape of the
yield curve? Why?
Explain the complete formula for the M1 money supply, and explain how changes in
required reserves, excess reserves, the currency ratio, the nonborrowed base, and
borrowed reserves affect the money supply.
From 1980-1985, the dollar strengthened in value against other currencies. Who was
helped and who was hurt by this strong dollar?
Why did the interest rate volatility of the 1970s spur financial innovation?
Describe the two methods of organizing a secondary market.
If a corporation announces that it expects quarterly earnings to increase by 25% and it
actually sees an increase of 22%, what should happen to the price of the corporation’s
stock if the efficient markets hypothesis holds, everything else held constant?
Using T-accounts show what happens to reserves at Security National Bank if one
individual deposits $1000 in cash into her checking account and another individual
withdraws $750 in cash from her checking account.
Using the long-run ISLM model, explain and demonstrate graphically the neutrality of
money, for the case of an increase in the money supply.
What is the theory of bureaucratic behavior and how can it be used to explain the
behavior of the Federal Reserve?
Explain how expansionary and contractionary monetary policies affect aggregate
demand through the exchange rate channel.
Explain two reasons why the Fed does not have complete control over the level of bank
deposits and loans. Explain how a change in either factor affects the deposit expansion
process.
Explain the margin requirement for financial futures and how marking to market affects
the margin account.
Assume that no banks hold excess reserves, and the public holds no currency. If a bank
sells a $100 security to the Fed, explain what happens to this bank and two additional
steps in the deposit expansion process, assuming a 10% reserve requirement. How
much do deposits and loans increase for the banking system when the process is
completed?
As of 2009, China’s economy had recovered from the global recession that began in
2008. Use aggregate demand and aggregate supply analysis to explain why, and to
explain the likely consequences for China of an increase in the growth rate of the global
economy.
Discuss three ways in which U.S. banks can become involved in international banking.
Explain an additional disadvantage for a country undergoing dollarization compared to
a currency board or other exchange-rate targeting regimes.