Interest rate fluctuations
(a) are usually not considered to be of much importance and are largely ignored by the
Fed.
(b) have the paradoxical effect of increasing the rate of economic growth.
(c) make it difficult for households and firms to plan for the future.
(d) have largely been eliminated by the Fed during the past two decades.
Answer:
During an economic recession,
(a) the demand and supply curves for loanable funds both shift to the right and the
equilibrium interest rate usually rises.
(b) the demand and supply curves for loanable funds both shift to the left and the
equilibrium interest rate usually falls.
(c) the demand curve for loanable funds shifts to the right, the supply curve for loanable
funds shifts to the left, and the equilibrium interest rate usually falls.
(d) the demand curve for loanable funds shifts to the left, the supply curve for loanable
funds shifts to the right, and the equilibrium interest rate usually rises.
Answer:
Discount loans in the form of primary credit tend to
(a) increase the money supply by increasing bank reserves.
(b) decrease the money supply by increasing bank liabilities.
(c) increase the money supply by increasing the money multiplier.
(d) not to affect the money supply.
Answer:
Most economists believe that a zero rate of unemployment
(a) is obtainable with the correct monetary policy.
(b) would result in a better functioning economy.
(c) is inconsistent with a well-functioning economy.
(d) is obtainable only if the inflation rate is also zero.
Answer:
At the beginning of the 21st century most economists
(a) urged the Fed to focus on its goal of high employment.
(b) urged central banks to focus their energy on low inflation.
(c) believed the underlying inflation rate in the U.S. was higher than it had been in the
late 1970s.
(d) were critical of the performance of Alan Greenspan has Chairman of the Fed.
Answer:
In comparing futures contracts with options contracts, we can say that
(a) in a futures contract the buyer and seller have symmetric rights, whereas in an
options contract the buyer and seller have asymmetric rights.
(b) in a futures contract the buyer and seller have asymmetric rights, whereas in an
options contract the buyer and seller have symmetric rights.
(c) in both futures and options contracts the buyer and seller have symmetric rights.
(d) in both futures and options contracts the buyer and seller have asymmetric rights.
Answer:
Which of the following is an example of an equity?
(a) A thirty-year U.S. government bond
(b) A thirty-year corporate bond
(c) A checking account in a commercial bank
(d) A share of common stock in General Motors
Answer:
In the aggregate demand-aggregate supply model, if the Federal Reserve decides to
decrease the nominal money supply,
(a) current output will fall, but the price level will rise.
(b) current output will rise, but the price level will fall.
(c) current output and the price level will both rise.
(d) current output and the price level will both fall.
Answer:
In the bank lending channel, an expansionary monetary policy
(a) will lead to a greater increase in output than in the money channel.
(b) will not affect the real interest rate.
(c) will result in increased spending only for firms and households dependent for credit
on bank loans.
(d) will lead to a larger budget deficit than in the money channel.
Answer:
Contagion refers to
(a) the spreading of bad news about one bank to include other banks.
(b) the tendency for one bank regulator to become more strict if other bank regulators
become more strict.
(c) the tendency for the desire for increased bank regulation to spread from one
politician to another.
(d) the tendency for one bad loan in a bank portfolio to cause other loans in the
portfolio to go bad.
Answer:
The term structure is usually defined with to yields on which securities?
(a) Corporate bonds
(b) Commercial paper
(c) U.S. Treasury securities
(d) Municipal bonds
Answer:
Increases in interest rates
(a) reduce borrowers’ net worth.
(b) reduce lenders’ net worth.
(c) increase the present value of borrowers’ assets.
(d) raise the cost to businesses of internal funding.
Answer:
In comparison with a closed economy, in a large open economy
(a) an increase in desired saving will cause a larger decline in the domestic real interest
rate.
(b) the IS curve will be steeper.
(c) an increase in desired investment will cause a smaller increase in the domestic real
interest rate.
(d) the IS curve will be horizontal at the world real interest rate.
Answer:
The Fed’s monetary policy during Arthur Burns’s tenure
(a) was countercyclical, as opposed to the procyclical policy pursued by William
McChesney Martin.
(b) was procyclical, as opposed to the countercyclical policy pursued by William
McChesney Martin.
(c) was countercyclical, as was the policy pursued by William McChesney Martin.
(d) was procyclical, as was the policy pursued by William McChesney Martin.
Answer:
The variable beta
(a) measures the degree of liquidity in a portfolio.
(b) is the responsiveness of a stock’s expected return to changes in the value of the
complete market portfolio.
(c) measures the degree of idosyncratic risk in the complete market portfolio.
(d) is always less for an individual portfolio than for the complete market portfolio.
Answer:
What do many analysts see finance companies as having an advantage in?
(a) In purchasing commercial paper
(b) In selling long-term securities
(c) In monitoring the value of collateral
(d) In charging consumers particularly low interest rates
Answer:
Foreign-exchange market interventions will always
(a) lead to a decline in domestic interest rates relative to foreign interest rates.
(b) lead to a rise in domestic interest rates relative to foreign interest rates.
(c) lead to a decline in the domestic money supply.
(d) alter a central bank’s holdings of international reserves.
Answer:
What is the largest category of bank assets?
(a) Loans
(b) Reserves
(c) Securities
(d) Cash items in the process of collection
Answer:
Booking sites are
(a) international banking facilities that have been authorized to provide Eurodollar
banking in the United States.
(b) offices in London where foreign exchange trading takes place.
(c) offices in Hong Kong and Singapore where unregulated trading in Eurodollars takes
place.
(d) located within European central banks and provide European governments with
access to the Eurodollar market.
Answer:
When a company whose ability to repay its obligations in full is uncertain borrows
funds
(a) it will have to issue debt with longer maturities than would a company with a lower
probability of default.
(b) its bonds will sell for higher prices than would the bonds of a company with a lower
probability of default.
(c) it must offer investors higher yields to compensate them for the risk they take in
buying their bonds or making loans.
(d) it must do so through financial markets rather than through financial intermediaries.
Answer:
Which of the following is true of the segmented markets theory?
(a) It assumes that borrowers have particular periods for which they want to borrow.
(b) It assumes that lenders always lend for short periods.
(c) It provides a good explanation for why yield curves usually slope upward.
(d) It assumes that instruments with different maturities are perfect substitutes.
Answer:
The velocity of money represents
(a) the total number of times a dollar is spent on a purchase of final goods and services.
(b) the average number of times a dollar is spent on a purchase of final goods and
services.
(c) the speed with which one country’s currency may be converted into another
country’s currency.
(d) how quickly paper currency wears out and must be replaced.
Answer:
The economist who has expanded the Baumol-Tobin approach to address effects of
shifts between money and nonmoney assets on the economy is
(a) Milton Friedman.
(b) David Romer.
(c) Stephen Goldfeld.
(d) Ray Fair.
Answer:
If the interest rate is 8%, what would you expect to pay for a discount bond paying
$10,000 in ten years?
(a) $4632
(b) $9259
(c) $10,000
(d) $21,589
Answer:
Inflation that is higher than expected redistributes wealth from
(a) employers to employees under nominal wage contracts.
(b) borrowers to lenders.
(c) lenders to borrowers.
(d) the federal government to taxpayers.
Answer:
In Moscow in 1989 what were taxi drivers using as a medium of exchange?
(a) Russian rubles
(b) Marlboro cigarettes
(c) Gold coins
(d) Caviar
Answer:
A defined benefits plan
(a) is always fully funded.
(b) may be underfunded but cannot be overfunded.
(c) may be overfunded but cannot be underfunded.
(d) may be either underfunded or overfunded.
Answer:
Most economists credit the decline in short-term nominal rates over the 1980s and early
1990s to
(a) lower tax rates.
(b) decreased spending by the federal government.
(c) rising prices on the New York Stock Exchange.
(d) the Federal Reserve’s fight against inflation.
Answer:
Securities market institutions
(a) include insurance companies and pension funds.
(b) include commercial banks.
(c) include mutual funds.
(d) are not financial intermediaries.
Answer:
Which of the following is the correct expression for short-run aggregate supply in the
new classical view?
(a) Y*= Y + a(P Pe)
(b) Y = Y*+ a(P Pe)
(c) Y*= Y + a(P + Pe)
(d) Y = Y*+ a(P + Pe)
Answer:
Banks make use of the Federal funds market in part to
(a) pay their tax liabilities.
(b) manage liquidity risk.
(c) deal with moral hazard.
(d) deal with adverse selection.
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.
(d) trade only when they have inside information.
Answer:
According to Keynes, if the interest rate on bond falls, but aggregate income doesn’t
change,
(a) the demand for money will decrease.
(b) velocity will decrease.
(c) velocity will increase.
(d) the price level will decrease.
Answer:
Which of the following statements is correct?
(a) New classicals believe that the aggregate supply curve is a vertical line in both the
short run and the long run.
(b) Both new classicals and new Keynesians believe that the aggregate supply curve is
vertical in the long run.
(c) New Keynesians believe that the aggregate supply curve is vertical in the short run
but not in the long run.
(d) New Keynesians believe that the aggregate supply curve slopes upward in the long
run.
Answer:
Suppose that initially U.S. households are saving only a small fraction of their incomes,
because they are relying on rapid increase in stock prices to increase their wealth. If
stock prices decline and households decide to increase their saving rate, what will be
impact on output in the new Keynesian view? Be sure to distinguish the short run from
the long run.
Answer:
Suppose that the inflation rate is currently 8% and that most investors believe that
inflation will remain at this level indefinitely. You are convinced, however, that the
inflation will decline to 5% or less. Should you buy a 10-year Treasury bond or a
10-year TIPS?
Answer:
Suppose that the one-year Treasury bill rate in the United States is 6%, the one-year
government bond rate in Canada is 4%, and investors expect the U.S. dollar to
depreciate against the Canadian dollar by 4% over the coming year. Is the nominal
interest rate parity condition violated?
Answer:
What impact do savings rates in Belgium have on the real interest rate that businesses in
Belgium must pay to obtain the funds to finance their spending on plant and
equipment?
Answer:
Why have regulators in recent years increasingly focused attention on assessments of
banks’ internal risk management? Why might a bank’s current balance sheet not provide
sufficient information on a bank’s risk position?
Answer:
A member of Congress argues: “The Fed has too much discretion over granting
discount loans. Congress should set the discount rate and then require that the Fed grant
loans to any depository institution that wishes to borrow at that rate.” Do you agree that
this would be good policy?
Answer:
If the expectations theory of the term structure is correct, would a reduction in the
supply of 30-year Treasury bonds affect their yields?
Answer:
Most economists believe that the adoption of the euro as the common currency of most
countries in the European Community will result in substantial economic gains to those
countries. Discuss the nature of these economic gains.
Answer:
During 2000 the government repurchased $30 billion in U.S. Treasury bonds
outstanding. This was the first time this had been done since the administration of
Herbert Hoover in the early 1930s. Analyze the impact of this repurchase on the bond
market.
Answer:
In the spring of 2001 President George W. Bush proposed a substantial tax cut, when he
argued would increase aggregate demand. If the Ricardian equivalence proposition
holds, is President Bush’s analysis correct? Why might the Ricardian equivalence
proposition not hold?
Answer:
Why do economists and policy-makers view fluctuations in velocity as a problem?
What action did the Fed take in the late 1990s that was related to uncertainty about the
behavior of velocity?
Answer:
Suppose that Ruritania has a fixed exchange rate versus the U.S. dollar. If foreign
investors become convinced that the Ruritanian currency is overvalued, what actions
might they take to profit from this conviction? Would these actions make it easier or
harder for Ruritania to maintain the value of its currency versus the dollar? Why?
Answer:
What are venture capital funds? Why have they been successful? Is it likely that venture
capital firms will become as large mutual funds, insurance companies, or pension
funds?
Answer:
How do banks generate fee income in off-balance-sheet activities?
Answer:
Shouldn’t better informed investors be able to profit from the deviations from pricing
efficiency caused by noise traders?
Answer:
Why did the share that money market mutual funds hold in the mutual fund market
more than triple between 1975 and 2003?
Answer: