1) State whether the following statement is true or false AND explain why: “An
increase in the interest rate paid on excess reserves will always cause an increase in the
federal reserve funds rate”
2) State whether the following statement is true or false AND explain why: “A decrease
in the discount rate will always cause a decrease in the federal reserve funds rate”
3) The efficient markets hypothesis suggests that investors
A) should purchase no-load mutual funds which have low management fees
B) can use the advice of technical analysts to outperform the market
C) let too many unexploited profit opportunities go by if they adopt a “buy and hold”
strategy
D) act on all “hot tips” they hear
4) Keynes argued that the precautionary component of the demand for money was
primarily determined by the level of people’s ________, which he believed were
proportional to ________
A) incomes; wealth
B) incomes; age
C) transactions; income
D) transactions; age
5) Members of Congress are able to influence monetary policy, albeit indirectly,
through their ability to
A) withhold appropriations from the Board of Governors
B) withhold appropriations from the Federal Open Market Committee
C) propose legislation that would force the Fed to submit budget requests to Congress,
as must other government agencies
D) instruct the General Accounting Office to audit the foreign exchange market
functions of the Federal Reserve
6) The rational expectations hypothesis implies that when macroeconomic policy
changes,
A) the economy will become highly unstable
B) the way expectations are formed will change
C) people will be slow to catch on to the change
D) people will make systematic mistakes
7) The interest rate that equates the present value of payments received from a debt
instrument with its value today is the
A) simple interest rate
B) current yield
C) yield to maturity
D) real interest rate
8) Real interest rates are difficult to measure because
A) data on them are not available in a timely manner
B) real interest rates depend on the hard-to-determine expected inflation rate
C) they fluctuate too often to be accurate
D) they cannot be controlled by the Fed
9) Banks and other financial institutions engage in financial intermediation, which
A) can hurt the performance of the economy
B) can benefit economic performance
C) has no effect on economic performance
D) involves borrowing from investors and lending to savers
10) If the economy is on the IS curve, but is to the left of the LM curve, then the
________ market is in equilibrium, but the interest rate is ________ the equilibrium
level
A) goods; below
B) goods; above
C) money; below
D) money; above
11) All of the following are examples of coupon bonds except
A) Corporate bonds
B) US Treasury bills
C) US Treasury notes
D) US Treasury bonds
12) The quantity interest income minus interest expenses divided by assets is a measure
of bank performance known as
A) operating income
B) net interest margin
C) return on assets
D) return on equity
13) A bank has excess reserves of $10,000 and demand deposit liabilities of $100,000
when the required reserve ratio is 20 percent If the reserve ratio is raised to 25 percent,
the bank’s excess reserves will be
A) -$5,000
B) -$1,000
C) $1,000
D) $5,000
14) New computer technology has
A) increased the cost of financial innovation
B) increased the demand for financial innovation
C) reduced the cost of financial innovation
D) reduced the demand for financial innovation
15) A ________ is a provision that restricts or specifies certain activities that a borrower
can engage in
A) residual claimant
B) risk hedge
C) restrictive barrier
D) restrictive covenant
16) Everything else held constant, a decrease in the currency ratio will mean ________
in the M1 money multiplier and ________ in the M2 money multiplier
A) an increase; an increase
B) an increase; a decrease
C) a decrease; an increase
D) a decrease; a decrease
17) Which of the following functions is not performed by any of the twelve regional
Federal Reserve Banks?
A) Check clearing
B) Conducting economic research
C) Setting interest rates payable on time deposits
D) Issuing new currency
18) Prior to 1980, member banks left the Federal Reserve System due to
A) the high cost of discount loans
B) the high cost of required reserves
C) a desire to avoid interest rate regulations
D) a desire to avoid credit controls
19) When the Fed supplies the banking system with an extra dollar of reserves, deposits
increase by more than one dollara process called
A) extra deposit creation
B) multiple deposit creation
C) expansionary deposit creation
D) stimulative deposit creation
20) Explain through the component parts of aggregate demand why the aggregate
demand curve slopes down with respect to the inflation rate Be sure to discuss two
channels through which changes in inflation rates affect demand
21) Use demand and supply analysis to explain why an expectation of Fed rate hikes
would cause Treasury prices to fall
22) Explain the traditional interest-rate channel for expansionary monetary policy
Explain how a tight monetary policy affects the economy through this channel
23) Why is it important to understand the bond market?
24) Banking crises have occurred throughout the world What similarities do we find
when we look at the different countries?