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1) Under a fixed exchange rate regime, if the domestic currency is initially overvalued,
that is, below par, the central bank must intervene to purchase the ________ currency
by selling ________ assets
A) domestic; foreign
B) domestic; domestic
C) foreign; foreign
D) foreign; domestic
2) A financial market in which only short-term debt instruments are traded is called the
________ market
A) bond
B) money
C) capital
D) stock
3) By analyzing aggregate demand through its component parts, we can conclude that,
everything else held constant, a decline in the inflation rate causes
A) an increase in real interest rates, an increase in investment spending, and a decline in
aggregate output demand
B) a decline in real interest rates, a decrease in investment spending, and an increase in
aggregate output demand
C) a decline in real interest rates, an increase in investment spending, and an increase in
aggregate output demand
D) an increase in real interest rates, a decline in investment spending, and a decline in
aggregate output demand
4) ________ in the domestic interest rate causes the demand for domestic assets to
________ and the domestic currency to depreciate, everything else held constant
A) An increase; increase
B) An increase; decrease
C) A decrease; increase
D) A decrease; decrease
5) In which of the following situations would you prefer to be the borrower?
A) The interest rate is 9 percent and the expected inflation rate is 7 percent
B) The interest rate is 4 percent and the expected inflation rate is 1 percent
C) The interest rate is 13 percent and the expected inflation rate is 15 percent
D) The interest rate is 25 percent and the expected inflation rate is 50 percent
6) When the total value of final goods and services is calculated using current prices,
the resulting measure is referred to as
A) real GDP
B) the GDP deflator
C) nominal GDP
D) the index of leading indicators
7) You can borrow $5000 to finance a new business venture This new venture will
generate annual earnings of $251 The maximum interest rate that you would pay on the
borrowed funds and still increase your income is
A) 25%
B) 125%
C) 10%
D) 5%
8) A bank failure is less likely to occur when
A) a bank holds less US government securities
B) a bank suffers large deposit outflows
C) a bank holds fewer excess reserves
D) a bank has more bank capital
9) The principal-agent problem
A) occurs when managers have more incentive to maximize profits than the
stockholders-owners do
B) in financial markets helps to explain why equity is a relatively important source of
finance for American business
C) would not arise if the owners of the firm had complete information about the
activities of the managers
D) explains why direct finance is more important than indirect finance as a source of
business finance
10) If a financial institution has 50% of its portfolio in a bond with a five-year duration
and 50% of its portfolio in a bond with a seven-year duration, what is the duration of
the portfolio?
A) 12 years
B) 7 years
C) 6 years
D) 5 years
11) Keynes was especially concerned with explaining the
A) recession of 1920-21
B) low levels of output and employment during the Great Depression
C) strong economic growth of the 1920s
D) high unemployment in Great Britain during the 1920s
12) According to Tobin's q theory, ________ policy can affect ________ spending
through its effect on the prices of common stock
A) fiscal; consumption
B) fiscal; investment
C) monetary; consumption
D) monetary; investment
13) If reserves in the banking system increase by $100, then checkable deposits will
increase by $667 in the simple model of deposit creation when the required reserve
ratio is
A) 001
B) 005
C) 015
D) 020
14) The theory of PPP suggests that if one country's price level falls relative to
another's, its currency should
A) depreciate in the long run
B) appreciate in the long run
C) appreciate in the short run
D) depreciate in the short run
15) If the inflation rate in the United States is higher than that in Mexico and
productivity is growing at a slower rate in the United States than in Mexico, then, in the
long run, ________, everything else held constant
A) the Mexican peso will appreciate relative to the US dollar
B) the Mexican peso will depreciate relative to the US dollar
C) the Mexican peso will either appreciate, depreciate, or remain constant relative to the
US dollar
D) there will be no effect on the Mexican peso relative to the US dollar
