1) The price of a consol equals the coupon payment
A) times the interest rate
B) plus the interest rate
C) minus the interest rate
D) divided by the interest rate
2) If the money supply is $600 and nominal income is $3,600, the velocity of money is
A) 1/60
B) 1/6
C) 6
D) 60
3) Complete Milton Friedman’s famous statement, “Inflation is always and everywhere
a ________ phenomenon”
A) recessionary
B) discretionary
C) repressionary
D) monetary
4) If the Fed injects reserves into the banking system and they are held as excess
reserves, then the money supply
A) increases by only the initial increase in reserves
B) increases by only one-half the initial increase in reserves
C) increases by a multiple of the initial increase in reserves
D) does not change
5) Which of the following statements about central bank structure and independence are
true?
A) In recent years, with the exception of the Bank of England and the Bank of Japan,
most countries have reduced the independence of their central banks, subjecting them to
greater democratic control
B) Before the Bank of England was granted greater independence, the Federal Reserve
was the most independent of the world’s central banks
C) Both theory and experience suggest that more independent central banks produce
better monetary policy
D) While the European Central Bank is independent, it is not as independent as the
Federal Reserve
6) A decrease in the domestic interest rate causes the demand for domestic assets to
________ and the domestic currency to ________, everything else held constant
A) increase; appreciate
B) increase; depreciate
C) decrease; appreciate
D) decrease; depreciate
7) Under the Exchange Rate Mechanism of the European Monetary System, when the
German mark depreciated below its lower limit against the British pound, the German
central bank was required to buy ________ and sell ________, thereby ________
international reserves
A) pounds; marks; losing
B) pounds; marks; gaining
C) marks; pounds; gaining
D) marks; pounds; losing
8) An increase in the domestic interest rate causes the demand for domestic assets to
________ and the domestic currency to ________, everything else held constant
A) increase; appreciate
B) increase; depreciate
C) decrease; appreciate
D) decrease; depreciate
9) In a world with few impediments to capital mobility, the domestic interest rate equals
the sum of the foreign interest rate and the expected depreciation of the domestic
currency, a situation known as the
A) interest parity condition
B) purchasing power parity condition
C) exchange rate parity condition
D) foreign asset parity condition
10) The Federal Open Market Committee’s “balance of risks” is an assessment of
whether, in the future, its primary concern will be
A) higher exchange rates or higher unemployment
B) higher inflation or a stronger economy
C) higher inflation or a weaker economy
D) lower inflation or a stronger economy
11) The demand for Picasso paintings rises (holding everything else equal) when
A) stocks become easier to sell
B) people expect a boom in real estate prices
C) Treasury securities become riskier
D) people expect gold prices to rise
12) Moral hazard problems increased in prominence in the 1980s
A) as deregulation required savings and loans and mutual savings banks to be more
cautious
B) following a burst of financial innovation in the 1970s and early 1980s that produced
new financial instruments and markets, thereby widening the scope for risk taking
C) following a decrease in federal deposit insurance from $100,000 to $40,000
D) as interest rates were sharply decreased to bring down inflation