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1) In order to reduce risk and increase the safety of financial institutions, commercial
banks and other depository institutions are prohibited from
A) owning municipal bonds
B) making real estate loans
C) making personal loans
D) owning common stock
2) A decrease in the foreign interest rate causes the demand for domestic assets to shift
to the ________ and the domestic currency to ________, everything else held constant
A) right; appreciate
B) right; depreciate
C) left; appreciate
D) left; depreciate
3) An advantage of an international lender of last resort is its ability to prevent
________, in which a successful speculative attack on one currency leads to attacks on
others; its disadvantage is the problem of ________ if creditors expect to be protected if
a crisis occurs
A) contagion; moral hazard
B) contagion; adverse selection
C) currency virus; moral hazard
D) currency virus; adverse selection
4) In the long run, following a combination of a negative demand shock and a
temporary negative supply shock,
A) both inflation and output return to the original long-run equilibrium values
B) inflation is permanently increased, while output returns to potential output
C) output returns to potential output, while inflation may be higher or lower than its
initial value
D) inflation is permanently reduced, while output returns to potential output
E) None of the above
5) In the market for reserves, if the federal funds rate is above the interest rate paid on
excess reserves, then an open market ________ the supply of reserves, raising the
federal funds interest rate, everything else held constant
A) sale decreases
B) sale increases
C) purchase increases
D) purchase decreases
6) If the required reserve ratio is one-third, currency in circulation is $300 billion, and
checkable deposits are $900 billion, then the money supply is ________ billion
A) $2700
B) $3000
C) $1200
D) $1800
7) Recent Japanese experience has been characterized by tight monetary policy, as
indicated by
A) falling interest rates
B) short-term interest rates near zero
C) falling asset prices
D) low real interest rates
8) A depreciation of the US dollar makes American goods cheaper relative to foreign
goods, resulting in a ________ in net exports in the US and a ________ shift of the IS
curve in the US, everything else held constant
A) fall; leftward
B) rise; leftward
C) fall; rightward
D) rise; rightward
9) The problem of adverse selection helps to explain
A) why firms are more likely to obtain funds from banks and other financial
intermediaries, rather than from securities markets
B) why collateral is an important feature of consumer, but not business, debt contracts
C) why direct finance is more important than indirect finance as a source of business
finance
D) why lenders refuse loans to individuals with high net worth
10) According to the Lucas critique, if past increases in the short-term interest rate have
always been temporary, then
A) the term-structure relationship using past data will then show only a weak effect of
changes in the short-term interest rate on the long-term rate
B) the term-structure relationship using past data will show no effect of changes in the
short-term interest rate on the long-term rate
C) one cannot predict the term-structure relationship as it depends on expectations
D) the term-structure relationship using past data will nevertheless show a strong effect
of changes in the short-term interest rate on the long-term rate because of a change in
the way expectations are formed
