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1) Each Fed bank president attends FOMC meetings; although only ________ Fed bank
presidents vote on policy, all ________ provide input
A) three; ten
B) five; ten
C) three; twelve
D) five; twelve
2) Suppose the economy is producing at the natural rate of output A decrease in
consumer and business confidence will cause ________ in real GDP in the long run and
________ in inflation in the long run, everything else held constant
A) an increase; an increase
B) a decrease; a decrease
C) no change; an increase
D) no change; a decrease
3) A borrower who takes out a loan usually has better information about the potential
returns and risk of the investment projects he plans to undertake than does the lender
This inequality of information is called
A) moral hazard
B) asymmetric information
C) noncollateralized risk
D) adverse selection
4) In the market for money, an interest rate below equilibrium results in an excess
________ money and the interest rate will ________
A) demand for; rise
B) demand for; fall
C) supply of; fall
D) supply of; rise
5) A bank has excess reserves of $4,000 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
6) Under a fixed exchange rate regime, if the domestic currency is initially undervalued,
that is, above par, the central bank must intervene to sell the ________ currency by
purchasing ________ assets
A) domestic; foreign
B) domestic; domestic
C) foreign; foreign
D) foreign; domestic
7) Because ________ are less liquid for the depositor than ________, they earn higher
interest rates
A) money market deposit accounts; time deposits
B) checkable deposits; passbook savings
C) passbook savings; checkable deposits
D) passbook savings; time deposits
8) Fed policy since the early 1990s indicates that it is pursuing a policy of targeting the
A) monetary base
B) money supply
C) federal funds interest rate
D) exchange rate
9) The interest rate on a consol equals the
A) price times the coupon payment
B) price divided by the coupon payment
C) coupon payment plus the price
D) coupon payment divided by the price
10) Researchers at the Federal Reserve found that M2 money demand functions
performed ________ in the 1980s, with M2 velocity moving ________ with the
opportunity cost of holding M2
A) poorly; erratically
B) poorly; closely
C) well; erratically
D) well; closely
11) Because of the adverse selection problem,
A) good credit risks are more likely to seek loans causing lenders to make a
disproportionate amount of loans to good credit risks
B) lenders may refuse loans to individuals with high net worth, because of their greater
proclivity to 'skip town"
C) lenders are reluctant to make loans that are not secured by collateral
D) lenders will write debt contracts that restrict certain activities of borrowers
12) The ________ describes the combinations of interest rates and aggregate output for
which the quantity of money demanded equals the quantity of money supplied
A) IS curve
B) LM curve
C) consumption function
D) investment schedule
13) Direct finance involves the sale to ________ of marketable securities such as stocks
and bonds
A) households
B) insurance companies
C) pension funds
D) financial intermediaries
14) Sometimes one observes that the price of a company's stock falls after the
announcement of favorable earnings This phenomenon is
A) clearly inconsistent with the efficient markets hypothesis
B) consistent with the efficient markets hypothesis if the earnings were not as high as
anticipated
C) consistent with the efficient markets hypothesis if the earnings were not as low as
anticipated
D) consistent with the efficient markets hypothesis if the favorable earnings were
expected
15) At the time of the South Korean financial crisis, the government allowed many
chaebol owned finance companies to convert to merchant banks Finance companies
________ allowed to borrow abroad and merchant banks ________
A) were not; could borrow abroad
B) were not; could not borrow abroad
C) were; could borrow abroad
D) were; could not borrow abroad
16) Assuming initially that rr = 10%, c = 40%, and e = 0, an increase in c to 50% causes
the M1 money multiplier to ________, everything else held constant
A) increase from 25 to 28
B) decrease from 28 to 25
C) increase from 233 to 28
D) decrease from 28 to 233
17) If a forecast made using all available information is not perfectly accurate, then it is
A) still a rational expectation
B) not a rational expectation
C) an adaptive expectation
D) a second-best expectation
18) When the expected inflation rate increases, the real cost of borrowing ________ and
bond supply ________, everything else held constant
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
