The default risk premium is
A) relevant only for securities issued by very small companies.
B) the additional yield a saver requires for holding a bond with some default risk.
C) zero for corporate bonds, but quite substantial for corporate stock.
D) constant across the business cycle.
Answer:
If the forward exchange rate of the dollar in terms of pounds is less than the spot
exchange rate,
A) inflation must be lower in the United States than in Britain.
B) inflation must be higher in the United States than in Britain.
C) market participants must be expecting the dollar to appreciate against the pound.
D) market participants must be expecting the dollar to depreciate against the pound.
Answer:
What was the name of the plan, enacted in 2011, in which the Fed bought $400 billion
worth of long-term securities while selling $400 billion worth of short-term securities?
A) Operation Go Long
B) Operation Twist
C) QE2
D) QE3
Answer:
If market participants rely only past stock prices to forecast future stock prices,
A) they will be better able to forecast future price increases than future price decreases.
B) they will be better able to forecast future price decreases than future price increases.
C) they have adaptive expectations.
D) they have rational expectations.
Answer:
Suppose some members of Enron’s board of directors are aware of the company’s true
financial condition, information that is not available to most investors. This is an
example of
A) lemon problem.
B) moral hazard.
C) adverse selection.
D) asymmetric information.
Answer:
One benefit of a swap compared to futures and options is that they
A) promote liquidity.
B) reduce the risk for both the buyer and seller.
C) can be better tailored to meet the needs of market participants.
D) can involve financial instruments and not just commodities.
Answer:
Which of the following is NOT true of adverse selection?
A) It would not exist in a world of perfect information.
B) It arises because borrowers typically know more than lenders.
C) It describes a lender’s problem of distinguishing the good-risk applicants from the
bad-risk applicants.
D) It describes a lender’s problem in verifying borrowers are using their funds as
intended.
Answer:
Which investment bank avoided bankruptcy by being purchased by JP Morgan Chase in
March 2008?
A) Morgan Stanley
B) Lehman Brothers
C) Bear Stearns
D) Merrill Lynch
Answer:
According to the quantity theory of money, if the long-run economic growth rate is
2.5%, by how much should the Fed increase the money supply if it wants inflation to be
2%?
A) 0.5%
B) 1.25%
C) 4.5%
D) 5%
Answer:
In the balance-of-payments accounts, the statistical discrepancy
A) equals the capital account balance minus the current account balance.
B) equals the current account balance minus the capital account balance.
C) probably reflects hidden capital flows.
D) must equal zero.
Answer:
If currency outstanding equals $200 million, checkable deposits equal $1 billion,
reserves equal $150 million, and the required reserve ratio is 0.10, the money multiplier
equals
A) 0.86.
B) 3.14.
C) 3.43.
D) 4
Answer:
When you borrow stock from a broker and sell it now with plans to buy it back after it
drops in price, you are engaging in a
A) margin call
B) European option
C) American option
D) short sale
Answer:
You own a 2007 Ford Explorer. Although it has high mileage, you have maintained it
very well. You want to sell it, but after checking the prices other owners of 2007 Ford
Explorers are able to get for their cars in the used car market, you decide the prices are
too low and you decide not to sell. This is an example of
A) the “lemons problem.”
B) moral hazard.
C) economies of scale.
D) low information costs.
Answer:
What happened to the risk premium on Baa corporate bonds during the Financial Crisis
of 2007-2009?
A) it declined slightly
B) it rose to about 2%
C) it rose to about 4%
D) it rose to about 6%
Answer:
Which of the following statements is NOT true of the VIX?
A) It is calculated based on prices of call and put options of the S&P
B) Investors who want to hedge against stock market volatility can sell VIX options.
C) A VIX of 10 indicates investors expect the S&P 500 to fluctuate by 10% at an annual
rate over the next 30 days.
D) The VIX is a measure of fear in the stock market.
Answer:
Which of the following is true of the U.S. balance of payments?
A) It includes as receipts all inflows of funds from foreigners to the United States.
B) It includes as receipts only inflows of funds used to purchase U.S. produced goods
and services.
C) It includes as receipts inflows of funds used to purchase U.S. goods or services or to
acquire U.S. assets but not funds received as unilateral transfers.
D) It includes as receipts inflows of funds used to purchase U.S. goods or services and
funds received as unilateral transfers but not inflows of funds used to acquire U.S.
assets.
Answer:
Bank borrowing from the Fed is referred to as:
A) federal funds
B) discount loans
C) repurchase agreements
D) reverse repurchase agreements
Answer:
The company that manufactures Screaming Chocolate Zonkers breakfast cereal finds
that its sales collapse, it is forced into bankruptcy, and it defaults on its bonds, as a
result of information on the filthy conditions in its factory, which had long been known
to management, leaking out to the general public. This incident is best thought of as an
example of
A) symmetric information in the financial markets.
B) asymmetric information in the financial markets.
C) moral hazard in the financial markets.
D) the generally poor state of sanitation in the food-processing industry in the United
States.
Answer:
Securitization is the process of
A) issuing stocks to finance capital spending.
B) issuing bonds to finance purchases of equipment and structures.
C) reducing risk by decreasing corporate debt loads.
D) converting loans into securities.
Answer:
To conduct open market operations, the FOMC issues a directive to
A) the trading desk at the Federal Reserve Bank of New York.
B) the Board of Governors in Washington, D.C.
C) the presidents of the district banks.
D) the chairman of the New York Stock Exchange.
Answer:
Which of the following is an example of adverse selection?
A) A homeowner with a large fire insurance policy allows the wiring in her house to
deteriorate.
B) A woman with a large life insurance policy takes up sky diving.
C) Your brother-in-law borrows $20,000 from you to open a pizza parlor, but spends it
gambling at the racetrack instead.
D) A man with a bad heart condition buys a large life insurance policy.
Answer:
What accounted for much of policymakers’ concern over U.S. current account deficits
in the 1980s, 1990s, and 2000s?
A) The current account deficits were thought to be largely responsible for the federal
budget deficit.
B) Current account deficits lower U.S. interest rates, thereby leading to reduced
domestic saving.
C) Current account deficits require the United States to borrow funds from foreign
savers.
D) The United States had signed international agreements in which it had pledged not to
run a current account deficit for more than three years in a row.
Answer:
Most foreign exchange is bought and sold
A) by governments.
B) by tourists.
C) in over-the-counter markets.
D) on the New York Stock Exchange.
Answer:
Which of the following is NOT a reason for the weak recovery following the 2007-2009
recession?
A) Recessions started by financial crises are almost always severe.
B) The decline in the automobile industry appeared to be structural.
C) The collapse of the housing market was long lived.
D) The recession was caused by a decline in short-run aggregate supply.
Answer:
If the Fed buys securities worth $10 million, then
A) bank reserves will increase by $10 million.
B) bank reserves will decrease by $10 million.
C) currency in circulation will increase by $10 million.
D) bank holdings of securities increase by $10 million.
Answer:
Money market mutual funds
A) hold portfolios of stocks.
B) hold portfolios of short-term assets.
C) are always load funds.
D) hold only U.S. Treasury securities.
Answer:
How many times is GDP for a particular quarter estimated?
A) once
B) twice
C) three times
D) more than three times
Answer:
All of the following are consequences of adverse selection on good firms EXCEPT
A) the cost of external financing increases.
B) firms need to rely more on internal funds.
C) firms need to rely more on accumulated profits.
D) firms will only be able to attain financing from the government.
Answer:
Suppose that your marginal federal income tax rate is 30%, the sum of your marginal
state and local tax rates is 5%, and the yield on a thirty-year corporate bond is 10%. You
would be indifferent between buying this corporate bond and buying a thirty-year
municipal bond issued within your state (ignoring differences in liquidity, risk, and
costs of information) if the municipal bond has a yield of
A) 6.5%.
B) 7%.
C) 9.5%.
D) 10%.
Answer:
In the IS-MP model, when the Fed increases the real interest rate
A) the MP curve shifts up resulting in a decline in the output gap.
B) the MP curve shifts up resulting in an increase in the output gap.
C) the MP curve shifts down resulting in a decline in the output gap.
D) the MP curve shifts down resulting in an increase in the output gap.
Answer:
In what year did sales of gold for investment exceed that for jewelry for the first time?
A) 1933
B) 1971
C) 2001
D) 2009
Answer:
What was the primary reason that Congress initiated deposit insurance in the 1930s?
A) protect the deposits of individual savers
B) provide more of an incentive for depositors to monitor bank activities
C) reduce systemic risk to the financial system
D) reduce information problems in the banking system
Answer:
The LM curve is the combinations of
A) the output gap and the real interest rate for which the money market is in
equilibrium.
B) the inflation rate and nominal interest rate for which the money market is in
equilibrium.
C) the inflation rate and real interest rate for which the money market is in equilibrium.
D) the inflation rate and real interest rate for which the goods market is in equilibrium.
Answer:
The members of Federal Reserve district bank boards of directors appointed by the
Board of Governors are known as
A) Class A directors.
B) Class B directors.
C) Class C directors.
D) Class D directors.
Answer: