As a result of an open market purchase, bank reserves
(a) rise and interest rates fall.
(b) fall and interest rates rise.
(c) and interest rates both rise.
(d) and interest rates both fall.
Answer:
Why did Monetarist critics of the Fed welcome the appointment of Arthur Burns as
chairman of the Board of Governors in 1970?
(a) Burns promised to make fighting unemployment his top priority.
(b) Burns promised to use the federal funds rate as an operating target.
(c) Burns promised to use monetary aggregates as targets.
(d) Burns promised to stabilize the exchange value of the dollar.
Answer:
What accounted for much of policymakers’ concern over U.S. current account deficits
in the 1980s and 1990s?
(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:
According to Baumol and Tobin, the transactions demand for money is
(a) negatively related to market interest rates, but the velocity of money is positively
related to market interest rates.
(b) positively related to market interest rates, but the velocity of money is negatively
related to market interest rates.
(c) negatively related to market interest rates, as is the velocity of money.
(d) positively related to market interest rates, as is the velocity of money.
Answer:
If there is an excess demand for loanable funds at a given interest rate, then
(a) the price of bonds will fall.
(b) the price of bonds will rise.
(c) the interest rate will fall.
(d) the price of bonds may rise or fall depending upon the reasons for the excess
demand for loanable funds.
Answer:
Before World War II what was the leading global financial and commercial center?
(a) London
(b) New York
(c) Tokyo
(d) Berlin
Answer:
The Fed uses operating targets as well as intermediate targets because
(a) the Federal Reserve Act of 1913 requires it to do so.
(b) the Fed controls intermediate targets only indirectly.
(c) the public is much more unfamiliar with the variables used as operating targets, so
for policy to be effective intermediate targets must also be announced.
(d) if one set of targets proves ineffective in attaining policy goals, the other set is
available.
Answer:
Financial intermediaries
(a) channel funds directly between borrowers and lenders.
(b) issue claims on individual borrowers directly to savers.
(c) act as go-betweens by holding a portfolio of assets and issuing claims based on that
portfolio to savers.
(d) generally provide lenders with higher returns than do financial markets.
Answer:
The Depository Institutions Deregulation and Monetary Control Act of 1980
(a) eliminated the requirement that banks hold reserve deposits with the Fed.
(b) required all state banks to join the Federal Reserve System.
(c) required all banks to maintain reserve deposits with the Fed.
(d) prohibited nonmember banks from receiving discount loans.
Answer:
What is the most important source of change in the monetary base?
(a) Fluctuations in Treasury spending
(b) Changes in the volume of discount loans
(c) Changes in the volume of Fed holdings of securities
(d) Changes in the value of the money multiplier
Answer:
The bond demand curve slopes down because
(a) interest rates decline as bond prices decline.
(b) when bond prices are low, inflation is low.
(c) the lender is willing and able to purchase more bonds when the price of the bond is
low.
(d) the borrower is willing and able to purchase more bonds when the price of the bond
is low.
Answer:
U.S. Treasury bonds
(a) carry no risk of default and are therefore not risky investments.
(b) have constant yields to maturity and are therefore not risky investments.
(c) have constant coupon rates and are therefore not risky investments.
(d) are subject to fluctuations in their market prices and are therefore risky investments.
Answer:
Critics of the Fed’s use of financial variables as targets have proposed that the Fed
(a) use indicator variables such as nominal GDP, the yield curve, and the exchange rate.
(b) abandon open market operations and use only discount loans and changes in the
required reserve ratio as tools.
(c) should concentrate solely on its role as lender of last resort.
(d) be made subordinate to the Treasury.
Answer:
Comparing average annual real rates of return on long-term government bonds and on
common stocks for the period from 1926 to 1999 reveals that
(a) the rates of return have been about the same.
(b) the rates of return on common stocks have been higher.
(c) the rates of return on long-term government bonds have been higher.
(d) there has been no consistent relationship between the rates of return on these
securities.
Answer:
In a graph illustrating the determination of the exchange rate that has the yen-dollar
exchange rate on the vertical axis and the expected rate of return, in dollars terms, from
investing in a U.S. or Japanese asset on the horizontal axis, the line representing R, the
return on a U.S. asset in dollar terms, is
(a) a vertical line.
(b) a horizontal line.
(c) an upward-sloping line.
(d) a downward-sloping line.
Answer:
Nonbank offices
(a) took demand deposits but did not make loans.
(b) made loans but did not take demand deposits.
(c) neither took demand deposits nor made loans.
(d) were another name for ATMs.
Answer:
A central bank might attempt to offset an increase in the cost of foreign goods by
(a) selling its own currency in the foreign-exchange market.
(b) buying its own currency in the foreign-exchange market.
(c) lowering domestic interest rates.
(d) raising the prices of domestic goods by a similar amount.
Answer:
A bank’s remaining value after it has met all its liabilities is known as
(a) a bank’s assets.
(b) a bank’s liabilities.
(c) a bank’s equity capital.
(d) a bank’s income.
Answer:
Suppose that when your wealth increases from $1 million to $2 million, your holdings
of stock mutual funds increases from $100,000 to $300,000. Your wealth elasticity of
demand for stock mutual funds then is
(a) less than 1 and stock mutual funds are a necessity asset.
(b) greater than 1 and stock mutual funds are a necessity asset.
(c) less than 1 and stock mutual funds are a luxury asset.
(d) greater than 1 and stock mutual funds are a luxury asset.
Answer:
A Federal Reserve repurchase agreement involves
(a) an agreement by a bank to repay a discount loan on a specific day.
(b) an agreement by a dealer to buy back securities she has sold to the Fed.
(c) an agreement between the Fed and the Treasury for the Fed to purchase a specified
amount of Treasury securities.
(d) an agreement by a commercial bank to make a loan to another bank in the federal
funds market.
Answer:
As of 1997, about fraction of Citicorp’s assets are held abroad?
(a) 1%
(b) 5%
(c) 60%
(d) 90%
Answer:
Discount loans intended for banks that are not financial healthy are called
(a) primary credit.
(b) secondary credit.
(c) seasonal credit.
(d) repo loans.
Answer:
Which of the following bond ratings by Moody’s Investors Service would NOT be
considered to be below investment grade?
(a) Baa
(b) Ba
(c) B
(d) All of these ratings are considered below investment grade.
Answer:
According to Keynes’s liquidity preference theory of the demand for money, the
demand for money will
(a) increase when output increases but decrease when the interest rate increases.
(b) decrease when output increases but increase when the interest rate increases.
(c) increase when output or the interest rate increases.
(d) decrease when output or the interest rate increases.
Answer:
We would expect that yields on long-term corporate bonds
(a) to always equal the coupon rate on those bonds.
(b) be far more stable than their market prices.
(c) to vary inversely with their par values.
(d) would always be higher than the yields on long-term U.S. Treasury bonds.
Answer:
Congress has attempted to reduce competition among banks in order to
(a) increase the tax revenues generated from bank profits.
(b) lower interest rates charged on bank loans.
(c) reduce the chance of moral hazard in banks’ behavior.
(d) make the process of check clearing easier.
Answer:
The Banking Acts of 1933 and 1935
(a) established the Federal Reserve System.
(b) increased central control of the Federal Reserve System.
(c) eliminated the authority of the Board of Governors to set reserve requirements.
(d) made the Secretary of the Treasury a member of the Board of Governors.
Answer:
Fixed exchange rate regimes
(a) existed prior to the nineteenth century but were then superseded by the gold
standard.
(b) lower the transactions costs of buying and selling goods and assets.
(c) result in higher world interest rates.
(d) were first established by the GATT in 1971.
Answer:
Primary bond dealers are those
(a) permitted to trade directly with the Fed.
(b) who work under the account manager at the Federal Reserve Bank of New York.
(c) who specialize in selling bonds to small private investors.
(d) responsible for assuring that interest rates do not decline unless the FOMC has
given specific instructions that they decline.
Answer:
Why did state banks begin to offer demand deposits?
(a) They were prohibited by federal banking law from offering time deposits.
(b) They were prohibited by federal banking law from offering loans to small
businesses.
(c) They were prohibited by federal banking law from offering loans to households.
(d) Federal banking law imposed a tax on state bank notes.
Answer:
The most important difference between M1, on the one hand, and M2 and M3, on the
other hand, is that
(a) M1 includes currency, but M2 and M3 do not.
(b) M1 includes checkable deposits, but M2 and M3 do not.
(c) M2 and M3 include assets with less liquidity than those included in M1.
(d) M2 and M3 include assets with greater liquidity than those included in M1.
Answer:
For Japanese firms, since 1980 the share of external funds raised by bank borrowing has
(a) fallen.
(b) risen.
(c) remained the same.
(d) risen until 1985 and fallen after 1985.
Answer:
Between 1992 and 1999, Poland experienced
(a) strong economic growth, but increasing inflation.
(b) weak economic growth, but falling inflation.
(c) strong economic growth and falling inflation.
(d) weak economic growth and increasing inflation.
Answer:
A firm with both auction market and over-the-counter capabilities was formed late in
1998 when
(a) the New York and American Stock Exchanges merged.
(b) the New York Stock Exchange merged with the Chicago Mercantile Exchange.
(c) the National Association of Securities Dealers merged with the American Stock
Exchange.
(d) the American Stock Exchange merged with the Chicago Mercantile Exchange.
Answer:
Menu costs of inflation are costs arising from
(a) the failure to fully index the tax system for inflation.
(b) attempts by households and firms to avoid paying an inflation tax on money
balances.
(c) the need for firms to change prices during times of inflation.
(d) high nominal interest rates.
Answer: