If the equilibrium interest rate in the loanable funds market on a one-year discount bond
is 12%, then the equilibrium price in the bond market must be
(a) $8800.
(b) $8928.57.
(c) $9214.36.
(d) $10,000.
Answer:
Which of the following is the highest bond rating assigned by Moody’s Investors
Service?
(a) Aaa
(b) A
(c) B
(d) Baa
Answer:
Credit unions have invested primarily in
(a) corporate stock.
(b) commercial paper.
(c) corporate bonds.
(d) mortgages.
Answer:
What is a “central bank?”
(a) Any commercial bank located in the capital of a country
(b) The largest bank in a particular banking system
(c) Any commercial bank that is willing to make loans to other commercial banks
(d) A special governmental or quasi-governmental institution in the financial system
that regulates the medium of exchange
Answer:
In macroeconomic models, Y typically represents
(a) aggregate wealth.
(b) the money supply.
(c) gross domestic product (GDP).
(d) the income velocity of money.
Answer:
In the Baumol-Tobin view, an increase in interest rates will cause individuals to hold
(a) larger money balances, and velocity will increase.
(b) larger money balances, and velocity will decrease.
(c) smaller money balances, and velocity will increase.
(d) smaller money balances, and velocity will decrease.
Answer:
Under Paul Volcker, the Fed
(a) pegged the federal funds rate.
(b) used free reserves as an operating target.
(c) used nonborrowed reserves as an operating target.
(d) tightened its control over money growth.
Answer:
When a bank makes a car loan, the loan
(a) is an asset to the bank.
(b) is a liability to the bank.
(c) is an asset to the person taking it out.
(d) is a money market instrument.
Answer:
If a central bank engages in an unsterilized foreign-exchange intervention with the
intention of raising the foreign-exchange value of its currency,
(a) the central bank’s holdings of international reserves will fall.
(b) the domestic money supply will rise.
(c) domestic interest rates will fall.
(d) it will buy foreign assets.
Answer:
In a move up the IS curve,
(a) investment rises.
(b) output falls.
(c) the real interest rate falls.
(d) saving rises.
Answer:
Capital inflow restrictions
(a) receive less support from economists than full capital controls.
(b) may lessen domestic lending booms and risk-taking by domestic banks.
(c) were imposed in the United States during the late 1990s.
(d) were imposed in Europe in May 2000.
Answer:
Blood tests administered to applicants for medical insurance are an example of an
attempt by insurance companies to deal with the problem of
(a) moral hazard.
(b) the drug abuse problems currently plaguing the country.
(c) adverse selection.
(d) failure of policyholders to keep paying their premiums.
Answer:
Which of the following rankings of sources of funds for businesses from the least
important to the most important is correct?
(a) Stock issues, bond issues, loans from financial institutions
(b) Bond issues, stock issues, loans from financial institutions
(c) Loans from financial institutions, stock issues, bond issues
(d) Loans from financial institutions, bond issues, stock issues
Answer:
Which of the following is a securities market institution?
(a) The New York Stock Exchange
(b) Greater Illinois Savings and Loan
(c) Prudential Insurance Company
(d) Fidelity Magellan Mutual Fund
Answer:
Spot transactions
(a) involve immediate settlement.
(b) may only take place in face-to-face trading.
(c) take place on the spot, rather than on an organized exchange.
(d) are relatively unimportant in financial markets.
Answer:
Risk sharing
(a) generally reduces the tax liability of savers.
(b) increases borrowers’ ability to raise funds in the financial system.
(c) comes at the cost of lower liquidity.
(d) is sometimes offset by the effects of diversification.
Answer:
Sally Jones lost her job at a steel company because of a permanent decline in the
demand for steel. Sally Jones is considered by economists to be
(a) naturally unemployed.
(b) cyclically unemployed.
(c) structurally unemployed.
(d) frictionally unemployed.
Answer:
Negotiable order of withdrawal accounts
(a) are available only to large depositors.
(b) are like checking accounts but may not legally pay interest.
(c) first appeared in New England during the early 1970s.
(d) were declared illegal in the Depository Institution Deregulation and Monetary
Control Act of 1980.
Answer:
The Federal Deposit Insurance Corporation Improvement Act of 1991
(a) eliminated the too-big-to-fail doctrine.
(b) introduced a system of coinsurance for deposit insurance.
(c) authorized risk-based deposit insurance premiums.
(d) abolished the FSLIC.
Answer:
If the Fed buys $2 billion of short-term securities issued by the Bank of Japan and pays
for them by writing a check for $2 billion
(a) its assets will rise by $2 billion and its liabilities will fall by $2 billion.
(b) its assets will fall by $2 billion and its liabilities will rise by $2 billion.
(c) its assets and liabilities will both fall by $2 billion.
(d) its assets and liabilities will both rise by $2 billion.
Answer:
When the yield curve is downward-sloping
(a) short-term yields are higher than long-term yields.
(b) long-term yields are higher than short-term yields.
(c) the bond market is anticipating the U.S. Treasury may default on its obligations.
(d) the inflation rate is expected to rise.
Answer:
Funds flow from lenders to borrowers
(a) indirectly through financial markets.
(b) directly through financial intermediaries.
(c) indirectly through financial intermediaries.
(d) primarily through government agencies.
Answer:
On what do economists place the blame for the persistent increases in the price level
that began in the late 1960s?
(a) The government’s decision not to raise taxes to finance the Vietnam war
(b) The deep recession that began in 1969
(c) The Federal Reserve’s failure to keep interest rates low
(d) The slowdown in productivity growth
Answer:
The liquidity preference theory emphasizes
(a) the transactions motive for holding money.
(b) the sensitivity of money demand to changes in interest rates.
(c) the precautionary motive for holding money.
(d) the effect of price level changes on the demand for real balances.
Answer:
Historically, commercial banks have dominated the short-term credit market by
(a) specializing in reducing information costs.
(b) being willing to pay whatever rate is necessary to attract deposits.
(c) maintaining only short-term relationships with borrowers.
(d) issuing commercial paper.
Answer:
Under the Federal Reserve-Treasury Accord of 1951,
(a) the Fed promised to peg interest rates at a level agreed on with the Treasury.
(b) the Fed stopped pegging interest rates.
(c) the Secretary of the Treasury was removed from the Board of Governors.
(d) the Treasury lost its power to set required reserve ratios.
Answer:
Compounding refers to
(a) the calculation of interest rates after the compounding effect of taxes has been
allowed for.
(b) the paying back of both interest and principal during the life of a fixed payment
loan.
(c) the process of earning interest on both the interest and the principal of an
investment.
(d) the increased value of an investment that arises from the payment of periodic
interest.
Answer:
Which of the following assets made up the largest fraction of the portfolios of U.S.
households in 2003?
(a) Pension reserves
(b) Equities
(c) Mortgages
(d) U.S. government securities
Answer:
Charging drivers with good records lower premiums than drivers with bad records is an
example of an attempt by insurance companies to deal with the problem of
(a) moral hazard.
(b) adverse selection.
(c) drunk driving.
(d) failure of policyholders to keep paying their premiums.
Answer:
The Fed’s role as lender of last resort
(a) has been taken over by the FDIC.
(b) has been expanded to include ensuring general financial stability.
(c) was eliminated by the Banking Reform Act of 1995.
(d) has remained unchanged since 1913.
Answer: