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1) Banks face the problem of ________ in loan markets because bad credit risks are the
ones most likely to seek bank loans
A) adverse selection
B) moral hazard
C) moral suasion
D) intentional fraud
2) The Dow reached a peak of over 11,000 before the collapse of the ________ bubble
in 2000
A) housing
B) manufacturing
C) high-tech
D) banking
3) The primary liabilities of depository institutions are
A) premiums from policies
B) shares
C) deposits
D) bonds
4) In the figure above, the decrease in the interest rate from i1 to i2 can be explained by
A) a decrease in money growth
B) a decline in the expected price level
C) an increase in income
D) an increase in the expected price level
5) On ________, October 19, 1987, the market experienced its worst one-day drop in its
entire history with the DJIA falling by 22%
A) "Terrible Tuesday"
B) "Woeful Wednesday"
C) "Freaky Friday"
D) "Black Monday"
6) According to Tobin's q theory, if q is ________, new plant and equipment capital is
________ relative to the market value of business firms, so companies can buy a lot of
new investment goods with only a ________ issue of stock
A) high; dear; large
B) high; cheap; large
C) high; cheap; small
D) low; cheap; large
E) low; cheap; small
7) Currency includes
A) paper money and coins
B) paper money, coins, and checks
C) paper money and checks
D) paper money, coins, checks, and savings deposits
8) Adverse selection is a problem associated with equity and debt contracts arising from
A) the lender's relative lack of information about the borrower's potential returns and
risks of his investment activities
B) the lender's inability to legally require sufficient collateral to cover a 100% loss if
the borrower defaults
C) the borrower's lack of incentive to seek a loan for highly risky investments
D) the borrower's lack of good options for obtaining funds
9) The interest rate charged on overnight loans of reserves between banks is the
A) prime rate
B) discount rate
C) federal funds rate
D) Treasury bill rate
10) All else the same, if a bank's liabilities are more sensitive to interest rate
fluctuations than are its assets, then ________ in interest rates will ________ bank
profits
A) an increase; increase
B) an increase; reduce
C) a decline; reduce
D) a decline; not affect
11) If the Fed adopts a policy of pegging the interest rate, a ________ in government
spending forces the Fed to increase the money supply to prevent interest rates from
________
A) fall; increasing
B) fall; decreasing
C) rise; decreasing
D) rise; increasing
12) In a closed economy, aggregate demand is the sum of
A) consumer expenditure, actual investment spending, and government spending
B) consumer expenditure, planned investment spending, and government spending
C) consumer expenditure, actual investment spending, government spending, and net
exports
D) consumer expenditure, planned investment spending, government spending, and net
exports
13) In the bond market, the bond demanders are the ________ and the bond suppliers
are the ________
A) lenders; borrowers
B) lenders; advancers
C) borrowers; lenders
D) borrowers; advancers
14) ________ are financial intermediaries that acquire funds by selling shares to many
individuals and using the proceeds to purchase diversified portfolios of stocks and
bonds
A) Mutual funds
B) Investment banks
C) Finance companies
D) Credit unions
15) Which of the following is not a reason financial regulation and supervision is
difficult in real life?
A) Financial institutions have strong incentives to avoid existing regulations
B) Unintended consequences may happen if details in the regulations are not precise
C) Regulated firms lobby politicians to lean on regulators to ease the rules
D) Financial institutions are not required to follow the rules
16) When the Fed decreases the money stock, the money supply curve shifts to the
________ and the interest rate ________, everything else held constant
A) right; rises
B) right; falls
C) left; falls
D) left; rises
17) Everything else held constant, an appreciation of the domestic currency will cause
the IS curve to shift to the ________ and aggregate demand will ________
A) right; increase
B) right; decrease
C) left; increase
D) left; decrease
18) Which of the following is most likely to result from a stronger dollar?
A) US goods exported aboard will cost less in foreign countries, and so foreigners will
buy more of them
B) US goods exported aboard will cost more in foreign countries and so foreigners will
buy more of them
C) US goods exported abroad will cost more in foreign countries, and so foreigners will
buy fewer of them
D) Americans will purchase fewer foreign goods
