1) Suppose the economy is producing at the natural rate of output An open market sale
of bonds by the Fed 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
2) If unplanned investment is negative, firms will ________ production and output will
________
A) cut; rise
B) cut; fall
C) increase; rise
D) increase; fall
3) Which of the following statements about financial markets and securities is true?
A) Many common stocks are traded over-the-counter, although the largest corporations
usually have their shares traded at organized stock exchanges such as the New York
Stock Exchange
B) As a corporation gets a share of the broker’s commission, a corporation acquires new
funds whenever its securities are sold
C) Capital market securities are usually more widely traded than shorter-term securities
and so tend to be more liquid
D) Because of their short-terms to maturity, the prices of money market instruments
tend to fluctuate wildly
4) Keynes’s liquidity preference theory indicates that the demand for money is
________ related to ________
A) negatively; interest rates
B) positively; interest rates
C) negatively; income
D) negatively; wealth
5) Everything else held constant, in the market for reserves, when the federal funds rate
is 5%, lowering the discount rate from 5% to 4%
A) lowers the federal funds rate
B) raises the federal funds rate
C) has no effect on the federal funds rate
D) has an indeterminate effect on the federal funds rate
6) Which of the following are true for a coupon bond?
A) When the coupon bond is priced at its face value, the yield to maturity equals the
coupon rate
B) The price of a coupon bond and the yield to maturity are positively related
C) The yield to maturity is greater than the coupon rate when the bond price is above
the par value
D) The yield is less than the coupon rate when the bond price is below the par value
7) An individual’s annual salary is her
A) money
B) income
C) wealth
D) liabilities
8) Aggregate output is ________ related to autonomous consumer expenditure, and is
________ related to planned investment spending
A) negatively; negatively
B) negatively; positively
C) positively; negatively
D) positively; positively
9) If a bank has $50 million in rate-sensitive assets and $20 million in rate-sensitive
liabilities then
A) an increase in interest rates will reduce bank profits
B) a decrease in interest rates will reduce bank profits
C) interest rate changes will not impact bank profits
D) a decrease in interest rates will increase bank profits
10) Holding everything else constant, if interest rates are expected to increase, the
demand for bonds ________ and the demand curve shifts ________
A) increases; right
B) decreases; right
C) increases; left
D) decreases; left
11) If expectations of the future inflation rate are formed solely on the basis of a
weighted average of past inflation rates, then economics would say that expectation
formation is
A) irrational
B) rational
C) adaptive
D) reasonable
12) In the figure above, the decrease in the interest rate from i1 to i2 can be explained
by
A) a decrease in money growth
B) an increase in money growth
C) a decline in the expected price level
D) an increase in income
13) Which of the following can be described as involving indirect finance?
A) You make a loan to your neighbor
B) A corporation buys a share of common stock issued by another corporation in the
primary market
C) You buy a US Treasury bill from the US Treasury
D) You make a deposit at a bank
14) Prior to 1863, all commercial banks in the United States
A) were chartered by the US Treasury Department
B) were chartered by the banking commission of the state in which they operated
C) were regulated by the Federal Reserve
D) were regulated by the central bank
15) A rise in short-term interest rates that is believed to be only temporary
A) is likely to have a significant effect on long-term interest rates
B) will have a bigger impact on long-term interest rates than if the rise in short-term
rates had been permanent
C) is likely to have only a small impact on long-term interest rates
D) cannot possibly affect long-term interest rates
16) If a market participant believes that a stock price is irrationally high, they may try to
borrow stock from brokers to sell in the market and then make a profit by buying the
stock back again after the stock falls in price This practice is called
A) short selling
B) double dealing
C) undermining
D) long marketing
17) If the First National Bank has a gap equal to a negative $30 million, then a 5
percentage point increase in interest rates will cause profits to
A) increase by $15 million
B) increase by $15 million
C) decline by $15 million
D) decline by $15 million
18) Unlike banks, ________ have been allowed to branch statewide since 1980
A) federally-chartered S&Ls
B) state-chartered S&Ls
C) financially troubled S&Ls
D) technically insolvent S&Ls
19) Both ________ and ________ are monetary liabilities of the Fed
A) securities; loans to financial institutions
B) currency in circulation; reserves
C) securities; reserves
D) currency in circulation; loans to financial institutions
20) An assumption in the model of the money supply process is that the desired levels
of currency and excess reserves
A) are given as constants
B) grow proportionally with checkable deposits
C) grow proportionally with high-powered money
D) grow proportionally over time