1) Everything else held constant, changes in the interest rate affect planned investment
spending and hence the equilibrium level of output, but this change in investment
spending
A) merely causes a movement along the IS curve and not a shift
B) is crowded out by higher taxes
C) is crowded out by higher government spending
D) is crowded out by lower consumer expenditures
2) Regular bank examinations and restrictions on asset holdings help to indirectly
reduce the ________ problem because, given fewer opportunities to take on risk,
risk-prone entrepreneurs will be discouraged from entering the banking industry
A) moral hazard
B) adverse selection
C) ex post shirking
D) post-contractual opportunism
3) If in an efficient market all prices are correct and reflect market fundamentals, which
of the following is a false statement?
A) A stock that has done poorly in the past is more likely to do well in the future
B) One investment is as good as any other because the securities’ prices are correct
C) A security’s price reflects all available information about the intrinsic value of the
security
D) Security prices can be used by managers to assess their cost of capital accurately
4) Suppose that from a new checkable deposit, First National Bank holds eight million
dollars on deposit with the Federal Reserve, one million dollars in required reserves,
and faces a required reserve ratio of ten percent Given this information, we can say
First National Bank has ________ million dollars in excess reserves
A) two
B) eight
C) nine
D) ten
5) The other checkable deposits component of the M1 measure reported by the Federal
Reserve includes
A) negotiable time deposits
B) money market mutual fund shares
C) automatic transfer from savings accounts
D) money market deposit accounts
6) The theory of portfolio choice suggests that the most important factor affecting the
demand for domestic and foreign assets is
A) the level of trade and capital flows
B) the expected return on these assets relative to one another
C) the liquidity of these assets relative to one another
D) the riskiness of these assets relative to one another
7) When the value of the dollar changes from £075 to £05, then the British pound has
________ and the US dollar has ________
A) appreciated; appreciated
B) depreciated; appreciated
C) appreciated; depreciated
D) depreciated; depreciated
8) Under a fixed exchange rate regime, if the domestic currency is initially ________,
that is, ________ par, the central bank must intervene to sell the domestic currency by
purchasing foreign assets
A) overvalued; below
B) overvalued; above
C) undervalued; below
D) undervalued; above
9) The contagion effect refers to the fact that
A) deposit insurance has eliminated the problem of bank failures
B) bank runs involve only sound banks
C) bank runs involve only insolvent banks
D) the failure of one bank can hasten the failure of other banks
10) A credible nominal anchor
A) can help overcome the time-inconsistency problem by providing an expected
constraint on discretionary policy
B) can help to anchor inflation expectations, which leads to smaller fluctuations in
inflation
C) is required for a policy rule
D) all of the above
E) both A and B
11) Government regulations require publicly traded firms to provide information,
reducing
A) transactions costs
B) the need for diversification
C) the adverse selection problem
D) economies of scale
12) The rate of output at which the price level has no tendency to rise or fall is called
the
A) natural rate of output
B) potential level of income
C) bliss point
D) efficient level of output
13) Under a fixed exchange rate regime, if a country has an ________ exchange rate,
then its central bank’s attempt to keep its currency from appreciating will result in a
________ of international reserves
A) undervalued; gain
B) undervalued; loss
C) overvalued; gain
D) overvalued; loss
14) The strongest argument for an independent Federal Reserve rests on the view that
subjecting the Fed to more political pressures would impart
A) an inflationary bias to monetary policy
B) a deflationary bias to monetary policy
C) a disinflationary bias to monetary policy
D) a countercyclical bias to monetary policy
15) In the Gordon Growth Model, the growth rate is assumed to be ________ the
required return on equity
A) greater than
B) equal to
C) less than
D) proportional to
16) If reserves in the banking system increase by $100, then checkable deposits will
increase by $100 in the simple model of deposit creation when the required reserve
ratio is
A) 001
B) 010
C) 020
D) 100
17) The long-run rate of unemployment to which an economy always gravitates is the
A) normal rate of unemployment
B) natural rate of unemployment
C) neutral rate of unemployment
D) inflationary rate of unemployment
18) If you expect the inflation rate to be 12 percent next year and a one-year bond has a
yield to maturity of 7 percent, then the real interest rate on this bond is
A) -5 percent
B) -2 percent
C) 2 percent
D) 12 percent
19) One of the problems experienced by the savings and loan industry during the 1980s
was
A) managers lack of expertise to manage risk in new lines of business
B) heavy regulations in the new areas open to S&Ls
C) slow growth in lending
D) close monitoring by the FSLIC
20) Everything else held constant, when real estate prices are expected to decrease
A) the demand curve for bonds shifts to the left and the interest rate rises
B) the demand curve for bonds shifts to the left and the interest rate falls
C) the demand curve for bonds shifts to the right and the interest rate falls
D) the supply curve for bonds shifts to the right and the interest rate falls
21) Using T-accounts show what happens to reserves at Security National Bank if one
individual deposits $1000 in cash into her checking account and another individual
withdraws $750 in cash from her checking account
22) How does collateral help to reduce the adverse selection problem in credit market?
23) Explain why the simple deposit multiplier overstates the true deposit multiplier
24) Using the ISLM model, explain the effects of a monetary expansion combined with
a fiscal contraction How do the equilibrium level of output and interest rate change?
25) How do regulators help to ensure the soundness of financial intermediaries?
26) The Federal Reserve increases interest rates when it wants to reduce aggregate
demand to fight inflation How do increases in the interest rate reduce aggregate
demand?