The cost of going to an ATM is $1 in an economy. If the nominal interest rate in the
economy is 5 percent, what is the total cost associated with holding cash for an
individual who spends $10 daily and has a 15 percent probability of having his cash lost
or stolen? Assume that he visits the ATM once in every T days.
a. (182.5/T) + (0.2 × T)
b. (182.5/T) + (0.2 × T)
c. (365/T) + (0.5 × T)
d. (365/T) + T
Answer:
What does an upward-sloping yield curve imply, according to the expectations theory of
the term structure of interest rates?
a. Investors expect long-term interest rates to fall in the future.
b. Investors expect future short-term interest rates to be lower than the current
short-term interest rate.
c. Investors expect future short-term interest rates to be the same as the current
short-term interest rate.
d. Investors expect future short-term interest rates to be higher than the current
short-term interest rate.
Answer:
Suppose the Fed has set the federal funds rate at 4.5 percent using the Taylor rule. If the
inflation rate increases by
1 percentage point and the weight on inflation gap is 0.5, all other variables remain
unchanged, the federal funds rate should
a. decrease to 3.5 percent.
b. decrease to 4 percent.
c. increase to 5.5 percent.
d. increase to 5 percent.
Answer:
If the Open-Market Desk at the Fed buys securities, the most likely effect is that the
a. federal funds rate decreases.
b. primary credit discount rate decreases.
c. primary credit discount rate increases.
d. federal funds rate increases.
Answer:
Paul, a customer of a bank, writes a check for $50,000 to a customer of another bank.
Which of the following changes will be reflected in Paul’s bank’s balance sheet?
a. Reserves decrease by $50,000.
b. Transactions deposits increase by $50,000.
c. Nontransactions deposits increase by $50,000.
d. Borrowings increase by $50,000.
Answer:
Which of the following statements is true?
a. Recessions occur at regular intervals.
b. Each phase of the business cycle is of equal length.
c. Several economic variables move together during recessions.
d. The length of each phase of the business cycle can be predicted in advance.
Answer:
Outside money is
a. money created by the government or by nature.
b. money created by the private sector, such as checking accounts at banks.
c. foreign currency.
d. checks that are in the process of clearing but have not cleared yet.
Answer:
Collateral is a(n)____ that a borrower promises to give to the bank if that borrower is
unable to repay the bank’s loan
a. document
b. liability
c. asset
d. interest payment
Answer:
The agreement concluded in 2010 imposed higher capital requirements on banks all
over the world.
a. Basel III.
b. Basel II.
c. Basel I.
d. Basel IV.
Answer:
The nominal interest rate is
a. endogenous in the ATM model, while it is exogenous in the liquiditypreference
model.
b. exogenous in the ATM model, while it is endogenous in the liquiditypreference
model.
c. endogenous in both the liquiditypreference and ATM model.
d. exogenous in both the liquiditypreference and ATM model.
Answer:
Mr.Smith bought stocks of several companies from the secondary market. He used
a. micro finance.
b. public finance.
c. direct finance.
d. indirect finance.
Answer:
If actual output is $11.7 trillion and potential output is $12.8 trillion, then the output gap
is approximately
a. +9.4 percent.
b. +8.6 percent.
c. −8.6 percent.
d. −9.4 percent.
Answer:
In the United States, the biggest investors in debt securities are
a. households.
b. business firms.
c. governments.
d. financial intermediaries.
Answer:
A model that does not allow variables to change over time is referred to as a
a. static model.
b. dynamic model.
c. partial-equilibrium model.
d. general-equilibrium model.
Answer:
The equation that says money times velocity equals total spending is known as
a. the national income identity.
b. purchasing-power parity.
c. a covenant.
d. the equation of exchange.
Answer:
Principal is
a. the amount of interest accumulated on a bond.
b. the amount of dividends paid each year on a stock.
c. the original amount invested in a security.
d. the time until a borrowed fund is repaid.
Answer:
The probabilities of different returns on a stock over the year are:
Probability Return
10% −5%
15% 0%
20% 5%
30% 10%
25% 20%
a. Calculate the stock’s expected return.
b. Calculate the stock’s standard deviation.
Answer:
If there is no policy action in an economy that is producing an output below its
full-employment level, then
a. the output returns to full-employment level quickly.
b. the price level declines slowly.
c. the price level rises quickly.
d. the output stays below full-employment for a short period, then rises quickly.
Answer:
Suppose a bank’s excess reserves are equal to $100 million. The bank is required to
hold $50 million as reserves. The bank currently holds as reserves.
a. $50 million
b. $100 million
c. $150 million
d. $200 million
Answer:
Consider a perpetuity making one payment each year that has a present value of $1,000.
If the annual rate of discount is 7 percent, the annual payment is
a. $70.00.
b. $107.00.
c. $1,428.57.
d. $14,285.71.
Answer:
Which of the following is true of shortterm interest rates?
a. Short-term interest rates decline when long-term interest rates increase.
b. Shortterm interest rates are more volatile than longterm interest rates.
c. Shortterm interest rates are higher than longterm interest rates.
d. Shortterm interest rates are less volatile than longterm interest rates.
Answer:
Savings-and-loan associations suffered losses in the late 1970s when
a. the farm sector of the economy became unprofitable, forcing many farmers into
bankruptcy, leading to many bad farm loans.
b. inflation rose, causing short-term interest rates to rise.
c. oil prices rose sharply, causing S&Ls to lose money invested in the oil sector.
d. short-term interest rates fell, causing S&Ls to suffer capital losses on their portfolios
of short-term securities.
Answer:
In the ATM model, if the probability of loss or theft decreases, then
a. the number of days between visits to the ATM rises and the quantity of money
demanded falls.
b. the number of days between visits to the ATM falls and the quantity of money
demanded rises.
c. both the number of days between visits to the ATM and the quantity of money
demanded rises.
d. both the number of days between visits to the ATM and the quantity of money
demanded falls.
Answer:
The Depository Institutions Deregulation and Monetary Control Act that allows
payments on interest on transactions
accounts of individuals was passed in the year
a. 1990.
b. 1980.
c. 1965.
d. 1975.
Answer:
M1 money multiplier equals
a. (transaction accounts + currency) ÷ monetary base
b. (transaction accounts currency) ÷ monetary base
c. (transaction accounts + currency) × monetary base
d. (transaction accounts currency) × monetary base
Answer:
Money whose value is determined by its value as a material is referred to as
a. inside money.
b. outside money.
c. commodity money.
d. artificial money.
Answer:
Identify the correct statement from the following.
a. Dividend payments are subject to taxes while realized capital gains are not.
b. Realized capital gains are subject to taxes while dividend payments are not.
c. Both dividend payments and realized capital gains are subject to taxes.
d. Neither dividend payments nor realized capital gains are subject to taxes.
Answer:
The probabilities of different returns on a stock over the year are:
Probability Return
10% −5%
15% 0%
20% 5%
30% 10%
25% 20%
The expected return on the stock is____ percent.
a. 8.5
b. 9.0
c. 9.5
d. 10.0
Answer:
Which of the following is the best example of a nonfinancial security?
a. Coupon bonds
b. Stocks
c. Human capital
d. Foreign exchange
Answer:
A bond that makes a regular interest payment until maturity, at which time the face
value is repaid is referred to as a
a. coupon bond.
b. fixed-payment security.
c. discount bond.
d. perpetuity.
Answer:
In which region of the world did a financial crisis occur in 1997, characterized by a
reduced confidence of foreign investors who began to withdraw their investments from
the region?
a. Asia
b. North America
c. Africa
d. Europe
Answer: