1) The absence of money illusion means that
A) as real income doubles, the demand for money doubles
B) as interest rates double, the demand for money doubles
C) as the money supply doubles, the demand for money doubles
D) as the price level doubles, the demand for money doubles
2) A financial crisis is
A) not possible in the modern financial environment
B) a major disruption in the financial markets
C) a feature of developing economies only
D) typically followed by an economic boom
3) In Keynes’s liquidity preference framework, individuals are assumed to hold their
wealth in two forms:
A) real assets and financial assets
B) stocks and bonds
C) money and bonds
D) money and gold
4) When interest rates fall in the United States (with the price level fixed), the value of
the dollar ________, domestic goods become ________ expensive, and net exports
________
A) falls; less; fall
B) falls; less; rise
C) falls; more; fall
D) rises; less; fall
5) Suppose on any given day there is an excess supply of reserves in the federal funds
market If the Federal Reserve wishes to keep the federal funds rate at its current level,
then the appropriate action for the Federal Reserve to take is a ________ open market
________, everything else held constant
A) defensive; sale
B) defensive; purchase
C) dynamic; sale
D) dynamic; purchase
6) A fall in inventories is synonymous with ________ investment
A) negative fixed
B) positive fixed
C) positive inventory
D) negative inventory
7) ________ in the foreign interest rate causes the demand for domestic assets to
increase and the domestic currency to ________, everything else held constant
A) An increase; appreciate
B) An increase; depreciate
C) A decrease; appreciate
D) A decrease; depreciate
8) If the required reserve ratio is equal to 10 percent, a single bank can increase its
loans up to a maximum amount equal to
A) its excess reserves
B) 10 times its excess reserves
C) 10 percent of its excess reserves
D) its total reserves
9) The figure above illustrates the effect of an increased rate of money supply growth at
time period T0 From the figure, one can conclude that the
A) Fisher effect is dominated by the liquidity effect and interest rates adjust slowly to
changes in expected inflation
B) liquidity effect is dominated by the Fisher effect and interest rates adjust slowly to
changes in expected inflation
C) liquidity effect is dominated by the Fisher effect and interest rates adjust quickly to
changes in expected inflation
D) Fisher effect is smaller than the expected inflation effect and interest rates adjust
quickly to changes in expected inflation
10) The ________ problem helps to explain why the private production and sale of
information cannot eliminate ________
A) free-rider; adverse selection
B) free-rider; moral hazard
C) principal-agent; adverse selection
D) principal-agent; moral hazard
11) In explaining the evolution of money
A) government regulation is the most important factor
B) commodity money, because it is valued more highly, tends to drive out paper money
C) new forms of money evolve to lower transaction costs
D) paper money is always backed by gold and therefore more desirable than checks
12) Disintermediation resulted from
A) interest rate ceilings combined with inflation-driven increases in interest rates
B) elimination of Regulation Q (the regulation imposing interest rate ceilings on bank
deposits)
C) increases in federal income taxes
D) reserve requirements
13) There are ________ members of the Board of Governors of the Federal Reserve
System
A) 5
B) 7
C) 12
D) 19
14) If the Federal Reserve conducts open market sales, the money supply ________,
shifting the LM curve to the ________, everything else held constant
A) decreases; right
B) decreases; left
C) increases; right
D) increases; left
15) If the ________ curve is relatively more unstable than the ________ curve, a
money supply target is preferred
A) IS; IS
B) IS; LM
C) LM; IS
D) LM; LM
16) Under the Basel Accord, assets and off-balance sheet activities were sorted
according to ________ categories with each category assigned a different weight to
reflect the amount of ________
A) 2; adverse selection
B) 2; credit risk
C) 4; adverse selection
D) 4; credit risk
17) If the maturity of a debt instrument is less than one year, the debt is called
A) short-term
B) intermediate-term
C) long-term
D) prima-term
18) When I purchase a 10 percent coupon bond, I calculate a yield to maturity of 8
percent If I hold this bond to maturity, then my return on this asset is
A) 10 percent
B) 8 percent
C) 12 percent
D) there is not enough information to determine the return
19) The primary assets of a finance company are
A) municipal bonds
B) corporate stocks and bonds
C) consumer and business loans
D) mortgages
20) A reason why rogue traders have bankrupt their banks is due to
A) the separation of trading activities from the bookkeepers
B) stringent supervision of trading activities by bank management
C) accounting errors
D) a failure to maintain proper internal controls