Assume that the required reserve rate is ten percent, banks want to hold excess reserves
in an amount that equals three percent of deposits, and the public withdraws ten percent
of every deposit in cash. An open market purchase of $1 million by the Fed will see
banking system deposits increase by:
A. more than $1 million but less than $10 million.
B. exactly $1 million.
C. less than $1 million.
D. more than $10 million but less than $20 million.
Answer:
Derivatives would include all of the following except:
A. options.
B. U.S. Treasury securities.
C. swaps.
D. futures.
Answer:
If prices were to adjust quickly:
A. output gaps would be persistent.
B. output gaps would disappear quickly.
C. inflation would adjust slowly.
D. the short-run aggregate supply curve would not shift.
Answer:
To an economist, the term “inflation” refers to:
A. any price increases.
B. a continually rising price level.
C. a one-time change in the average price level.
D. increases in prices of important goods like food and energy.
Answer:
Ignoring risk differences, if we observe American investors purchasing foreign bonds
when the U.S. interest rate is above the foreign interest rate, we could assume that:
A. American investors lack good information.
B. these investors expect the dollar to appreciate over the life of their investment.
C. these investors expect the dollar to depreciate over the life of their investment.
D. these investors expect that U.S. inflation will slow.
Answer:
What matters most during a bank run is:
A. the number of loans outstanding.
B. the solvency of the bank.
C. the liquidity of the bank.
D. the size of the bank’s assets.
Answer:
In reading bond quotes:
A. the bid price is usually above the asked price.
B. the asked price is fixed over the life of the bond.
C. the asked price is usually above the bid price.
D. bid and asked prices must be equal as set forth by SEC regulations.
Answer:
The primary risk in swaps is that:
A. interest rates will not change.
B. one of the parties will default.
C. they are highly liquid and the market price will change.
D. high U.S. government deficits will limit the availability of swaps.
Answer:
If 10% is the annual rate, considering compounding, the monthly rate is:
A. 0.0833%
B. 0.833%
C. 0.00797%
D. 1.0833%
Answer:
If the current market federal funds rate equals the target rate and the demand for
reserves decreases, the likely response in the federal funds market will be:
A. the market federal funds rate will decrease.
B. the market federal funds rate will equal the target rate.
C. the market federal funds rate will increase.
D. nothing; the Fed would act immediately and the market would not be affected.
Answer:
Which of the following statements best describes financial markets?
A. Financial markets lower the cost and increase the speed of buying and selling
financial instruments.
B. Financial markets increase the speed of buying and selling, but they also increase
the cost since people are earning fees for these transactions.
C. Financial markets are a good example of unregulated markets.
D. Financial markets today offer fewer instruments than they did in the past.
Answer:
If the annual interest rate is 5%(.05), the price of a one-year Treasury bill per $100 of
face value would be:
A. $95.00
B. $97.50
C. $95.24
D. $96.10
Answer:
Speculators differ from hedgers in the sense that:
A. speculators do not like risk.
B. hedgers seek to transfer risk.
C. speculators seek to transfer risk.
D. speculators are hedgers, there isn’t any difference.
Answer:
Risk-free investments have rates of return:
A. equal to zero.
B. with a standard deviation equal to zero.
C. that are uncertain, but have a certain time horizon.
D. that exhibit a large spread of potential payoffs.
Answer:
France, Germany, and Italy are:
A. all members of the European Union and the Euro system.
B. all members of the Euro system but not the European Union.
C. all members of the European Union but not the Euro system.
D. not members of either the Euro system or the European Union; they have their own
economic union.
Answer:
The purpose of the government’s safety net for banks is to do each of the following,
except:
A. protect the integrity of the financial system.
B. eliminate all risk that investors face.
C. stop bank panics.
D. improve the efficiency of the economy.
Answer:
Reserves in the banking system will increase if the Fed:
A. buys euros or sells dollars.
B. sells euros or buys dollars.
C. sells euro-dominated bonds and exchanges the euros for dollars.
D. sells euro-dominated bonds and keeps the euros from the sale.
Answer:
Secondary reserves for banks are:
A. the same as the bank’s net worth.
B. mainly the bank’s liquid securities.
C. vault cash.
D. deposits the bank has at the Federal Reserve.
Answer:
Unique risk is another name for:
A. market risk.
B. systematic risk.
C. the risk premium.
D. idiosyncratic risk.
Answer:
Whole life insurance differs from term life in which of the following ways?
A. Whole life has a rising premium as the policyholder ages, but term life has a fixed
premium.
B. Term life has a savings component while whole life is pure insurance.
C. Term life is usually more expensive than whole life.
D. Whole life is a combination of term life insurance and a savings account.
Answer:
A unit bank is a bank that:
A. only makes one type of loan, (i.e.; home mortgages).
B. only offers savings accounts.
C. provides a myriad of financial services, so customers get all or most of their
financial needs taken care of at the bank.
D. has no branches.
Answer:
U.S. currency is:
A. A commodity money
B. Fiat money
C. Tied to the value of gold at a fixed rate
D. The only store of value
Answer:
Instruments that have been securitized include:
A. mortgage-backed securities held by government-sponsored enterprises.
B. car loans and student loans.
C. credit card debt.
D. all of the answers given are correct.
Answer:
The fact that a bank’s assets tend to be long-term while its liabilities are short-term
creates:
A. interest-rate risk.
B. credit risk.
C. lower risk for the bank, this is why they follow this strategy.
D. trading risk.
Answer:
People differ on the method by which stock should be valued. Some people are
chartists, others behaviorists. The basic difference between these groups is:
A. chartists rely on astrological charts to predict stock values, behaviorists rely on
psychology.
B. behaviorists are finance based, chartists study charts of investor psychology.
C. chartists study charts of stock prices; behaviorists focus on investor psychology and
behavior.
D. chartists and behaviorists are the same in their approach; essentially there aren’t any
differences.
Answer:
One reason lenders may require a large net worth before making a loan is because:
A. then the borrower does not need the funds.
B. it tells the lender the firm has good employees.
C. it is one way to treat the problem of moral hazard.
D. banking laws require firms have significant net worth before a bank can make a
loan.
Answer:
If capital flows freely between countries and a country has a fixed exchange rate, one
thing you know is that the country:
A. exports more than it imports.
B. must have ample gold reserves.
C. cannot have a discretionary monetary policy.
D. must be running large trade deficits
Answer:
Which of the following is (are) not a permanent voting member(s) on the FOMC?
A. The seven Governors of the Fed
B. The Secretary of the Treasury
C. The President of the Federal Reserve Bank of New York
D. The chair of the Board of Governors
Answer:
The long position in a futures contract is the party that will:
A. benefit from decreases in the price of the underlying asset.
B. agree to make delivery of a commodity or financial instrument at a future date.
C. benefit from increases in the price of the underlying asset.
D. accept the greater share of the risk.
Answer:
A country that has a capital account surplus:
A. is a net seller of assets.
B. has a current account surplus.
C. is a net buyer of assets.
D. will see its currency remain steady.
Answer:
A stock has an annual dividend of $10.00 and it is expected not to grow. It is believed
the stock will sell for $100 one year from now, and an investor has a discount (interest)
rate of 6% (0.06). The dividend discount model predicts the stock’s current price should
be:
A. $94.67
B. $116.00
C. $103.77
D. $106.60
Answer:
Roles served by financial markets include the following, except:
A. eliminating risk.
B. providing liquidity.
C. pooling and communicating information.
D. sharing of risk.
Answer:
The 1990s saw inflation fall and real growth increase in the U.S. and in many other
countries. This is partially attributed to all of the following except:
A. technological innovation.
B. redesign of many central banks.
C. central banks became better at their jobs.
D. central banks focused more on exchange rates in a global environment.
Answer:
How did financial regulation affect bank lending in the 1980s?
Answer:
Bank managers seem to have to walk a tightrope between managing risk and earning a
profit. Explain.
Answer:
Explain how bank regulators seem to face a bit of a paradox regarding preventing
monopoly power by banks and spurring competition.
Answer:
Describe a scenario where a negative supply shock (that raises the rate of inflation)
results in a permanently higher rate of inflation.
Answer:
What are the unconventional policy options that central bankers can use if the
traditional target interest rate hits zero?
Answer:
What happens to the monetary base if people, fearing a bank run, convert their checking
deposits into currency holdings?
Answer:
Explain why depository institutions receive a disproportionate amount of attention from
government regulators (compared to most other industries).
Answer:
A friend of yours tells you she has an idea for a new product. She believes that once the
prototype is built she can sell the rights to the product for $250,000. The problem is she
needs $20,000 to build the prototype and she only has $5,000. She asks you to invest
$15,000 in the idea and she will give you 75% of whatever amount she obtains when
she sells the rights. You have the money available but should be reluctant to provide the
money. Why?
Answer:
Given the following Taylor rule:
Target federal funds rate = 2 + current inflation + 2x(inflation gap) + x(output gap);
What do the coefficients on the inflation and output gaps (2x, x) reveal?
Answer:
You have a friend that has run up a pretty large balance on his credit card. He mentions
to you that he has missed a few payments but doesn’t think it is that big of a deal since
all it cost him is a little more interest on his balance. You tell him it may end up costing
him a lot more that. He presses you for an explanation. Explain to him how his handling
of this debt can impact what he pays for future debt.
Answer:
Discuss the ramifications of the FDIC reducing deposit insurance limits to $25,000.
Answer:
Private Mortgage Insurance (PMI) is often required by mortgage lenders when the
borrowers have less than a 20% down payment. Link the requirement of PMI to the
concepts of net worth, moral hazard, and transfer of risk.
Answer:
Answer:
Given a central bank’s monetary policy reaction curve, if inflation increases by 1% why
would policymakers likely have to increase the nominal interest rate by more than the
increase in the expected rate of inflation?
Answer:
What would be the value of an option on a stock that sells at a fixed price with a
standard deviation of zero? Explain.
Answer: