Which of the following is true of the Fed’s balance sheet?
(a) The sum of Federal Reserve Notes and Reserve deposits by depository institutions
equals the total of Fed assets.
(b) The sum of Federal Reserve Notes and Reserve deposits by depository institutions
equals the total of Fed liabilities.
(c) The sum of Federal Reserve Notes and Reserve deposits by depository institutions
equals the total of Fed assets plus the total of other Fed liabilities.
(d) The sum of Federal Reserve Notes and Reserve deposits by depository institutions
equals the total of Fed assets minus the total of other Fed liabilities.
Answer:
The supply curve for loanable funds would be shifted to the left by
(a) an increase in wealth.
(b) an increase in the expected return on bonds.
(c) a decrease in expected inflation.
(d) an increase in the riskiness of bonds relative to other assets.
Answer:
The use of checks in transactions
(a) entails lower information costs than the use of currency.
(b) entails fewer steps than settling transactions with currency.
(c) avoids the cost of shipping currency back and forth.
(d) entails lower information and fewer steps than settling transactions with currency.
Answer:
In the balance sheet channel, an expansionary monetary policy will shift to the right
(a) only the money supply line.
(b) only the money supply line and the aggregate demand curve.
(c) only the money supply line and the money demand curve.
(d) the money supply line, the money demand curve, and the aggregate demand curve.
Answer:
The financial system provides risk sharing by allowing
(a) borrowers to obtain funds either directly or indirectly.
(b) savers to earn interest tax-free.
(c) borrowers to convert liabilities into assets.
(d) savers to hold many assets.
Answer:
A foreign branch bank
(a) may not make loans within the United States.
(b) may not accept deposits from U.S. residents.
(c) may not accept deposits from non-U.S. residents.
(d) may accept deposits from U.S. residents and make loans to them.
Answer:
What was the approximate value of the U.S. current account balance in 2002?
(a) +$60 billion
(b) +$65 billion
(c) $480 billion
(d) $680 billion
Answer:
According to the real business cycle model, the economy’s short-run aggregate supply
curve is
(a) affected by monetary policy but not fiscal policy.
(b) flatter than the long-run aggregate supply curve.
(c) horizontal.
(d) vertical.
Answer:
Andy can’t make a deal with Danny. Andy has a Barry Bonds baseball card and would
like to trade it to Danny for Danny’s Ken Griffey card, but Danny doesn’t want a Barry
Bonds card. Andy’s problem illustrates the drawback to a barter system known as
(a) the specialization problem.
(b) the double coincidence of wants problem.
(c) the many prices problem.
(d) the transactions problem.
Answer:
In September 1992 the British government was forced to abandon efforts to stabilize the
value of the pound against other European currencies because
(a) British dependence on imports of foreign oil was escalating rapidly.
(b) British nominal interest rates were much higher than nominal interest rates in other
European countries.
(c) the value of the pound against the yen was increasing rapidly, reducing the ability of
British goods to compete in the Japanese market.
(d) foreign exchange traders had become convinced that the foreign exchange value of
the pound would soon fall.
Answer:
New Keynesians believe that an increase in the nominal money supply will result in
(a) no change in the price level.
(b) a proportional increase in the price level.
(c) a less than proportional increase in the price level.
(d) a fall in the price level.
Answer:
If the Fed is targeting interest rates, then during an economic downturn it will be led to
take actions that will
(a) raise interest rates, thus spurring economic growth.
(b) raise interest rates, thus slowing economic growth.
(c) lower interest rates, thus spurring economic growth.
(d) lower interest rates, thus slowing economic growth.
Answer:
The 19811982 recession hurt thrifts by
(a) lowering interest rates.
(b) raising interest rates.
(c) raising default rates on mortgages.
(d) reducing the demand for negotiable CDs.
Answer:
Which of the following is true of mutual insurance companies?
(a) Most life insurance companies are mutual insurance companies.
(b) The largest life insurance companies are mutual insurance companies.
(c) They are owned by their shareholders.
(d) They only grant group policies to large corporations.
Answer:
When a bank presents a check to the Fed for clearing, the Fed promises to credit the
bank for the amount
(a) as soon as the Fed is able to present the check to the payor bank.
(b) immediately.
(c) within two business days.
(d) within six months.
Answer:
Derivative instruments are
(a) assets such as bonds or common stock that derive their value from the value of the
companies that issue them.
(b) assets whose rates of returns must be derived from information published in
financial tables.
(c) assets that derive their value from underlying assets.
(d) computers that display real-time financial information.
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:
Under William McChesney Martin, the Fed began to target free reserves, which are
(a) another name for excess reserves.
(b) the difference between excess reserves and borrowed reserves.
(c) the difference between borrowed reserves and discount loans.
(d) the difference between total reserves and borrowed reserves.
Answer:
Which of the following is NOT true of the expectations theory?
(a) It assumes that instruments with different maturities are perfect substitutes.
(b) It implies that a long-term bond rate equals the average of short-term rates covering
the same investment period.
(c) It implies that the yield curve will usually slope upward.
(d) It implies that the shape of the yield curve depends on the expected pattern of future
short-term rates.
Answer:
A discount bond involves
(a) interest payments from the borrower to the lender periodically during the life of the
loan.
(b) payment by the borrower to the lender of the face value of the loan at maturity.
(c) no payment of principal by the borrower to the lender.
(d) payment of interest by the borrower to the lender every six months during the life of
the loan.
Answer:
A loan officer uses a credit scoring system to
(a) compare the interest rate on a loan to interest rates on other assets with comparable
risk.
(b) keep track of the fraction of a bank’s assets tied up in loans to a single individual or
business.
(c) predict statistically whether an individual is likely to default on a loan.
(d) match any particular loan with the deposits being used to fund it.
Answer:
The decline in the dominance of U.S. financial markets has been the result of
(a) the rapid post-war growth of Japan and Europe.
(b) the unwillingness of U.S. financial markets to allow trading in options and futures
contracts.
(c) the difficulties experienced by the U.S. commercial banking system during the
1980s.
(d) unfair trading practices on the part of Japan and Europe.
Answer:
The quantity of M1 demanded varies inversely with market interest rates because
(a) higher market interest rates lead the public to demand more money to make
investments with.
(b) high interest rates discourage investments in fixed capital.
(c) market interest rates represent the opportunity cost of holding M1.
(d) high interest rates encourage banks to make more loans.
Answer:
Discussion of the possibility of setting up an international lender of last resort began
following the
(a) collapse of Communism.
(b) stock market crash of 1987.
(c) developing nations’ debt crisis of the early 1980s.
(d) the oil price increases of the 1970s.
Answer:
Investment banks
(a) lease machinery and equipment to business firms.
(b) acquire deposits from savers and lend them to borrowers.
(c) assist business firms in raising new capital in primary markets.
(d) aid the government to raise funds to cover the budget deficit.
Answer:
Suppose that the number of buyers and sellers of municipal bonds increases
substantially. The result should be a (an)
(a) decline in municipal bond yields.
(b) increase in municipal bond yields.
(c) decline in U.S. Treasury bond yields.
(d) increase in the tax rate on municipal bond yields.
Answer:
For breakdowns in lending by financial institutions to affect the volume of funds
flowing from savers to borrowers,
(a) financial institutions must charge lower interest rates than other lenders.
(b) financial institutions must charge higher interest rates than other lenders.
(c) alternative sources of funds to borrowers must be imperfect substitutes for loans
from financial institutions.
(d) financial institutions must be subject to less regulation than other lenders.
Answer:
Buying and selling securities on the basis of insider information is against the law
(a) in all cases.
(b) only in the state of New York.
(c) for those who obtained the information because of their position within the firms
involved in the trade.
(d) for those who, having obtained the information, refuse to divulge it to the general
public.
Answer:
Suppose that information is made public that Mammoth Computer is having severe
financial difficulties. The effect will be to
(a) increase the yield on Mammoth’s long-term bonds.
(b) increase the yield on rival Orange Computer’s long-term bonds.
(c) lower the yield on Mammoth’s long-term bonds.
(d) increase the yield on both Mammoth’s long-term bonds and rival Orange Computer’s
long-term bonds.
Answer:
The currency outstanding account on the Fed’s balance sheet
(a) is a liability.
(b) is an asset.
(c) represents chiefly the coins minted and issued by the U.S. Treasury.
(d) includes only that currency held by commercial banks.
Answer:
According to the new classical view, if Fed policy during the early 1980s had been
more credible
(a) the SRAS curve would have shifted less than it did.
(b) the AD curve would have shifted less than it did.
(c) output would have declined by less than it did.
(d) the price level would have declined by more than it did.
Answer:
The LM curve is the combinations of
(a) current output 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:
Christina and David Romer identify six independent monetary policy shifts after 1960
in which the Fed
(a) increased the money supply when output increased and decreased the money supply
when output decreased.
(b) announced a contractionary monetary policy to fight inflation, after which output
fell.
(c) announced a contractionary monetary policy to fight inflation, after which output
rose.
(d) raised nominal interest rates in order to fight recession, after which the money
supply rose.
Answer: