Milton Friedman and Anna Schwartz believe that their evidence indicates that money
growth causes output fluctuations because they discovered that
(a) nominal interest rates move inversely with changes in the money supply.
(b) the Fed always responds passively to changes in money demand.
(c) in many episodes money changed as a result of a previous change in output.
(d) in many episodes money changes preceded output changes and were independent of
them.
Answer:
According to the new Keynesian approach, output fell during the early 1980s because
(a) fiscal policy was sufficiently contractionary to offset an expansionary monetary
policy.
(b) the leftward shift of the AD curve was greater than the rightward shift of the SRAS
curve.
(c) consumers and businesses came to expect higher inflation, thereby causing theSRAS
curve to shift to the left.
(d) Congress and the President decided to raise taxes and cut spending in order to
reduce the budget deficit.
Answer:
A bank’s net worth will decline following an increase in interest rates if the value of its
(a) fixed-rate assets is greater than the value of its fixed-rate liabilities.
(b) fixed-rate assets is less than the value of its fixed-rate liabilities.
(c) fixed-rate assets is greater than the value of its variable-rate assets.
(d) fixed-rate liabilities is greater than the value of its variable-rate liabilities.
Answer:
To peg the interest rate below its equilibrium level, the Fed must
(a) sell securities to drive security market prices up.
(b) sell securities to drive security market prices down.
(c) buy securities to drive security market prices up.
(d) buy securities to drive security market prices down.
Answer:
Which of the following had the largest percentage of total assets of financial
intermediaries in the United States?
(a) Money market mutual funds
(b) Life insurance companies
(c) Private pension funds
(d) Commercial banks
Answer:
The bank lending channel
(a) emphasizes the role of interest rates in the money supply process.
(b) emphasizes the importance of borrowers’ net worth to the decision of lenders to
grant loans.
(c) emphasizes the behavior of bank-dependent borrowers.
(d) is another name for the money channel.
Answer:
The big decline in share prices on the New York Stock Exchange that occurred in
October 1987
(a) was almost entirely attributable to the effects of index arbitrage.
(b) occurred despite the complete ban on index arbitrage in existence at the time.
(c) was not mainly the result of index arbitrage.
(d) was made less severe than it might have been because of the effects of index
arbitrage.
Answer:
Which of the following is NOT a stock?
(a) Currency
(b) Checking account balances
(c) Income
(d) Wealth
Answer:
Which of the following is true of bankers’ acceptances?
(a) There is no secondary market for them.
(b) They have high default risk.
(c) They are analogous to standby letters of credit in the domestic commercial paper
market.
(d) Their principal, but not their interest, is guaranteed by the International Monetary
Fund.
Answer:
Which of the following does NOT represent an important offshore market?
(a) The Bahamas
(b) The Cayman Islands
(c) Puerto Rico
(d) Hong Kong
Answer:
As a result of targeting free reserves, the Fed will tend to
(a) expand the money supply during expansions and contract the money supply during
recessions.
(b) contract the money supply during expansions and expand the money supply during
recessions.
(c) expand the money supply during both expansions and recessions.
(d) contract the money supply during both expansions and recessions.
Answer:
Currently, U.S. banks pay deposit insurance premiums on
(a) domestic deposits.
(b) Eurodollar deposits.
(c) domestic and Eurodollar deposits.
(d) all deposits.
Answer:
When households and businesses have to sell illiquid assets to meet current obligations,
they are said to be experiencing
(a) disintermediation.
(b) financial distress.
(c) moral hazard.
(d) adverse selection.
Answer:
Under the Bretton Woods system the international reserve currency was the
(a) U.S. dollar.
(b) British pound.
(c) German mark.
(d) Japanese yen.
Answer:
Which of the following is NOT considered a cash item by banks?
(a) U.S. Treasury bills
(b) Deposits at other banks
(c) Deposits at the Federal Reserve
(d) Vault cash
Answer:
According to the equation of exchange, the percentage change in the nominal money
supply (m) is equal to
(a) +Π + .
(b) +Π .
(c) Π + .
(d) + Π
Answer:
All else being equal, a one-time increase in the money supply leads to
(a) inflation.
(b) a one-time increase in the price level.
(c) a one-time shift to the left in the AD curve.
(d) a permanent shift to the right in the SRAS curve.
Answer:
If the Treasury sells $2 million in gold, the Fed’s gold and SDR certificate account will
(a) fall by $2 million, as will the monetary base.
(b) fall by $2 million, whereas the monetary base will rise by $2 million.
(c) rise by $2 million, as will the monetary base.
(d) rise by $2 million, whereas the monetary base will fall by $2 million.
Answer:
A bank lending depositors’ money to a local business and a pension fund investing
contributions in shares of a company are similar financial activities in that
(a) both involve the use of financial markets.
(b) both involve funds being channeled from savers to borrowers through financial
intermediaries.
(c) both involve a reduction in the overall level of liquidity in the financial system.
(d) both involve in an increase in the overall level of risk in the financial system.
Answer:
If the dollar is expected to depreciate against the Japanese yen during the next 60 days,
then
(a) the 60-day forward yen/dollar exchange rate should be lower than the current
exchange rate.
(b) the 60-day forward yen/dollar exchange rate should be higher than the current
exchange rate.
(c) the yen price of dollar-denominated asset is expected to rise.
(d) the foreign exchange market must not be an efficient market.
Answer:
Regulation Q was intended to
(a) maintain banks’ profitability by limiting competition for funds.
(b) increase the reserves banks would hold against demand deposits.
(c) increase the reserves banks would hold against time deposits.
(d) eliminate the need for discount loans.
Answer:
A cash item in the process of collection is
(a) a U.S. Treasury bill that has matured, but for which the bank has not yet received
payment.
(b) a car loan payment that is due but not yet received by the bank.
(c) a check drawn against another bank, from whom the funds have not yet been
collected.
(d) currency that has been deposited in the bank, but not yet formally counted and
entered into the bank’s balance sheet.
Answer:
The “international capital market” refers to
(a) the London Stock Exchange.
(b) the market for lending and borrowing across national boundaries.
(c) the buying and selling of machinery and equipment across national boundaries.
(d) the international section of the New York Stock Exchange.
Answer:
Above-normal returns on stock investments can be expected by investors who
(a) possess insider information.
(b) are wealthy enough to hold the stock of many different companies in their
portfolios.
(c) reasonably cautious.
(d) concentrate their investments in one or two stocks.
Answer:
The weakness of the Fed’s actions during the banking crisis of the early 1930s resulted
in
(a) a change in the law restricting its ability to make discount loans.
(b) the introduction of a federal system of deposit insurance.
(c) the establishment of the savings-and-loan industry.
(d) the elimination of reserve requirements on demand deposits.
Answer:
The amount that a borrower borrows is referred to as the
(a) principal.
(b) equity.
(c) maturity.
(d) lump sum.
Answer:
The unemployment that is caused by changes in the economy such as shifts in
manufacturing techniques, increased use of computers and electronic machines, and
increases in the production of services instead of goods is called
(a) frictional unemployment.
(b) structural unemployment.
(c) cyclical unemployment.
(d) natural unemployment.
Answer:
In comparing money market instruments to capital market instruments we can say that
(a) money market instruments tend to be less risky and less liquid than capital market
instruments.
(b) money market instruments tend to be more risky, but less liquid than capital market
instruments.
(c) money market instruments tend to be more risky and more liquid than capital market
instruments.
(d) money market instruments tend to be less risky, but more liquid than capital market
instruments.
Answer:
Under the preferred habitat theory the shape of the yield curve depends on
(a) the relative return of investments in common stocks versus investments in corporate
bonds.
(b) the size of the federal government’s budget deficit.
(c) government tax treatment of long-term versus short-term bonds.
(d) the expected pattern of future short-term rates and the size of the term premium at
each maturity.
Answer:
A general unwillingness of banks to lend
(a) results in monetary policy being ineffectual in the bank lending channel.
(b) results in monetary policy being ineffectual in the balance sheet channel.
(c) results in monetary policy being ineffectual in the money channel.
(d) does not result in monetary being ineffectual in the bank lending, balance sheet, or
money channels.
Answer:
Since World War II, contractionary monetary policy changes have had
(a) a larger impact on the output of small manufacturing firms than on the output of
large manufacturing firms.
(b) a larger impact on the output of large manufacturing firms than on the output of
small manufacturing firms.
(c) about the same negative impact on the output of both large and small manufacturing
firms.
(d) about the same positive impact on the output of large and small manufacturing
firms.
Answer:
Default risk
(a) is the probability that a borrower will not pay in full the promised interest or
principal.
(b) exists only for the bonds of small corporations.
(c) is also known as market risk.
(d) is zero for bonds issued by cities and states.
Answer:
Banks use “credit-risk analysis” to
(a) determine the appropriate interest rate to charge borrowers.
(b) determine whether to invest in the stock of a corporation.
(c) determine the appropriate interest rate to pay depositors.
(d) determine the likelihood of an audit by bank regulators.
Answer:
Mutual funds
(a) take in deposits from savers and make loans to borrowers.
(b) sell shares to savers and purchase assets with the funds.
(c) take in deposits from savers and purchase assets with the funds.
(d) bring together small savers and small borrowers.
Answer:
Which of the following statements is correct?
(a) Federal Reserve district banks are owned by the government.
(b) Member banks receive no return on the stock they own in Federal district banks.
(c) Federal Reserve district banks pay dividends on their earnings to member banks.
(d) The boards of directors of the district banks are all local bankers.
Answer: