Where would shares of stock in the Federal Reserve System purchased by the Fed’s
member banks be included on the Fed’s balance sheet?
(a) It would be included on the balance sheets of the member banks, but it would not be
included on the balance sheet of the Fed.
(b) It would be included under “Other Federal Reserve Assets and Capital Account.”
(c) It would be included under “Deferred Availability Cash Items.”
(d) It would be included under “Other Federal Reserve Assets.”
Answer:
Large firms find external funds to be more costly than internal funds because
(a) they must pay taxes on external funds but not on internal funds.
(b) external funds must be raised in financial markets, whereas internal funds may be
raised from banks.
(c) legally a portion of external funds must be distributed to shareholders, whereas all
internal funds may be used for investment projects.
(d) outside investors require a higher return to compensate them for having to obtain
information about the firms.
Answer:
Studies by economists suggest that
(a) households do not increase their saving as the government’s dissaving increases.
(b) households increase their saving, but not by the full amount of an increase in
government dissaving.
(c) households also increase their dissaving when the government increases its
dissaving.
(d) households also increase their saving when the government increases its saving.
Answer:
Congress introduced deposit insurance in response to
(a) the savings-and-loan crisis of the 1980s.
(b) the banking crisis of the 1930s.
(c) the demise of the Second Bank of the United States in 1836.
(d) the demise of the First Bank of the United States in 1811.
Answer:
Because of the bank failures of the early 1930s, many small and medium-sized
businesses were
(a) forced to move from bank loans to stock sales to raise funds.
(b) unable to obtain credit.
(c) forced to move from bank loans to bond sales to raise funds.
(d) forced to rely on government loans for credit.
Answer:
The supply curve for loanable funds would be shifted to the right by
(a) a decrease in wealth.
(b) a decrease in expected inflation.
(c) a decrease in the liquidity of bonds relative to other assets.
(d) a decrease in the information costs of bonds relative to other assets.
Answer:
According to the equation of exchange, the velocity of money is equal to
(a) M/PY.
(b) PY/M.
(c) PM/Y.
(d) MY/P.
Answer:
What is considered the original bubble?
(a) Gold in England in the 12th century
(b) Tulips in Holland in the 17th century
(c) Stocks in the United States in the 1920s
(d) Silver in the United States in the 1830s
Answer:
Liquidity is
(a) the ease with which an asset can be converted into cash.
(b) desirable but reduces the value of assets held to smooth spending.
(c) desirable but reduces the value of assets held for precautionary purposes.
(d) greater for common stock than for checkable deposits in commercial banks.
Answer:
Which of the following countries did not join in the establishment of a common
European currency beginning in 1999?
(a) Germany
(b) France
(c) England
(d) Italy
Answer:
If the expected path of interest rates on one-year bonds over the next five years is 2%,
4%, 3%, 2%, 1%, the expectations theory predicts that the bond with the lowest interest
rate today is the one with a maturity of
(a) one year.
(b) two years.
(c) three years.
(d) five years.
Answer:
Which of the following was NOT an important factor in the rise of the Eurodollar
market?
(a) Restrictions on British banks lending pounds abroad
(b) Restrictions on U.S. banks lending dollars abroad
(c) Regulation Q
(d) Reserve requirements on banks in the United States
Answer:
At any point along the LM curve,
(a) the quantity of money demanded equals the quantity of money supplied.
(b) the economy must be in general equilibrium.
(c) the nominal interest rate must equal the real interest rate.
(d) saving must equal investment.
Answer:
In the early postwar years the Fed was reluctant to continue its wartime agreement with
the Treasury because it believed the result would be
(a) recession.
(b) inflation.
(c) higher taxes.
(d) lower taxes.
Answer:
The finding that bank loans decline and the volume of commercial paper issued
increases when the Fed contracts the level of bank reserves appears to indicate that
(a) the impact of contractionary monetary policy comes mainly from its effect on
interest rates.
(b) during these episodes borrowers who are able to do so switch toward nonbank
sources of financing.
(c) changes in credit demand must be responsible.
(d) during these episodes savers must convert bank deposits into commercial paper
purchases.
Answer:
Which of the following did NOT occur as a result of the weakness of the Fed’s actions
during the banking crisis of the early 1930s?
(a) Congress amended the Fed’s charter to broaden the permissible collateral for
discount loans.
(b) Congress amended the Fed’s charter to limit the convertibility of dollars into gold.
(c) A federal system of deposit insurance was introduced.
(d) Congress amended the Fed’s charter to require it to make discount loans to any
banks requesting them.
Answer:
As wealth decreases, which of the following is likely to account for a larger fraction of
a saver’s portfolio?
(a) Corporate stock
(b) Corporate bonds
(c) U.S. government securities
(d) Checking account balance
Answer:
Suppose that Congress passes an investment tax credit. The likely result will be
(a) the supply curve for bonds will shift to the right.
(b) the demand curve for loanable funds will shift to the left.
(c) the supply curve for loanable funds will shift to the left.
(d) the equilibrium interest rate will fall.
Answer:
When a borrower’s net worth is high,
(a) the cost of its internal funds will be high.
(b) the cost of its internal funds will be low.
(c) the cost of its external funds will be high.
(d) information costs are less likely to constrain capital spending.
Answer:
Banks that can’t meet their reserve requirements
(a) must declare bankruptcy and liquidate their assets within 30 days.
(b) lose their privilege of borrowing at the discount window for a period of one year.
(c) must pay the Fed interest on the deficit at a rate 2% above the discount rate.
(d) are subject to criminal penalties, including possible jail terms for their officers.
Answer:
Under the efficient markets hypothesis, for news about a company’s prospects to have a
large impact on the price of the company’s stock the news must
(a) have an impact on the company’s profitability in the short term.
(b) have an impact on the company’s profitability in the long term.
(c) significantly increase the likelihood that the company will go bankrupt.
(d) significantly affect the liquidity of the company’s stock.
Answer:
Suppose General Motors announces that its profits in the third quarter of 2001 were $2
billion. This will cause the price of GM stock to
(a) rise.
(b) fall.
(c) remain unchanged.
(d) rise, fall, or remain unchanged depending on the expectations of market participants
before the announcement.
Answer:
The Fed was created
(a) after financial panics in the late 1800s and early 1900s.
(b) after the stock market crash of 1929.
(c) to help finance government expenditures during World War II.
(d) to help channel funds to the residential mortgage market.
Answer:
At the 1976 IMF conference in Jamaica,
(a) the United States reaffirmed its commitment to buy and sell gold at a fixed price.
(b) currencies were formally allowed to float.
(c) the major countries of the world agreed to continue a system of fixed exchange
rates.
(d) the gold standard was reestablished.
Answer:
Suppose you can buy more with $1 in the year 2005 than you could have in the year
2000. Then we can say that
(a) there must have been inflation between 2000 and 2005.
(b) there must have been deflation between 2000 and 2005.
(c) the economy must have been growing rapidly between 2000 and 2005.
(d) the economy must have been growing slowly between 2000 and 2005.
Answer:
Treasury STRIPS are
(a) coupon bonds.
(b) simple loans.
(c) discount bonds.
(d) fixed payment loans.
Answer:
Eurobonds
(a) account for only a small fraction of new issues in the international bond market.
(b) may not be legally sold in the United States.
(c) traditionally have been issued in London.
(d) are redeemable in gold.
Answer:
The segmented markets theory
(a) explains upward-sloping yield curves as resulting from the demand for long-term
bonds being high relative to the demand for short-term bonds.
(b) explains upward-sloping yield curves as resulting from the demand for long-term
bonds being low relative to the demand for short-term bonds.
(c) explains upward-sloping yield curves as resulting from the favorable tax treatment
of long-term bonds.
(d) is unable to account for upward-sloping yield curves.
Answer:
An increase in expected inflation leads to a decline in money demand if
(a) interest payments are taxed at the same rate as wage income.
(b) nominal output increases as least as much as the price level.
(c) market interest rates fall.
(d) market interest rates rise more than the interest paid on money balances.
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:
Which of the following would NOT be covered by federal deposit insurance?
(a) A $50,000 demand deposit
(b) A $50,000 NOW account
(c) A $75,000 NOW account
(d) A $200,000 certificate of deposit
Answer:
In the United States, the definitive money is
(a) gold coins.
(b) any coin minted from a precious metal.
(c) Federal Reserve Notes.
(d) Federal Reserve Notes plus checking account balances in commercial banks.
Answer:
In the long run a rightward shift of the FE line will result in
(a) the LM curve shifting down and to the right.
(b) the IS curve shifting up and to the left.
(c) an increase in the real interest rate.
(d) an increase in the price level.
Answer:
When inflation fluctuates significantly,
(a) the signals provided by relative prices improve.
(b) the signals provided by relative prices are distorted.
(c) the cost of inflation is minimized.
(d) nominal interest rates will be low.
Answer:
Using forward transactions allows
(a) holders of common stock to lock in future dividend payments.
(b) the federal government to stabilize fluctuations in tax receipts.
(c) corporations to reduce problems arising from future fluctuations in their dividend
payments.
(d) both buyers and sellers to reduce risks associated with price fluctuations.
Answer: