Economists study the link between money and inflation because:
A. they want to understand how to keep inflation low and stable.
B. economists believe that inflation in the 3-6% range is healthy for an economy.
C. as prices increase money becomes more valuable.
D. the Fed needs to increase the money supply as prices increase.
Answer:
All other factors equal, if the costs of converting bonds and other financial securities to
a means of payment increase:
A. the transactions demand for money should increase.
B. the transactions demand for money should decrease.
C. it shouldn’t impact the transactions demand for money.
D. nominal interest rates should decrease.
Answer:
Compounding refers to the
A. calculation of after tax interest returns.
B. internal rate of return a firm earns on an investment.
C. real interest return after taxes.
D. process of earning interest on both the principal and the interest of an investment.
Answer:
Which of the following investment strategies involves generating a higher expected rate
of return through increasing risk?
A. Diversifying
B. Hedging risk
C. Leverage
D. Value at risk
Answer:
Which of the following expresses the equation of exchange?
A. MY = PV
B. MV = Y
C. MV = PY
D. MP = VY
Answer:
The price of a coupon bond is determined by:
A. taking the present value of the bond’s final payment and subtracting the coupon
payments.
B. taking the present value of the coupon payments and adding this to the face value.
C. taking the present value of all of the bond’s payments.
D. estimating its future value.
Answer:
A bank’s net interest margin is calculated by taking net interest income and:
A. dividing it by the bank’s capital.
B. dividing it by the bank’s assets.
C. dividing it by the sum of the bank’s assets and capital.
D. subtracting taxes.
Answer:
Between 1970 and 2000, if the Fed had tried to hit the money growth targets:
A. the economy would have likely experienced very high inflation.
B. the federal funds rate would have changed often and by large amounts.
C. the interest rates would have likely been more stable.
D. the economy would have likely experienced very high inflation but the interest rates
would have likely been more stable.
Answer:
The publication, Consumer’s Reports, is one tool designed to address:
A. adverse selection.
B. moral hazard.
C. the free-rider problem.
D. symmetric information.
Answer:
Monetary policymakers can respond to the impact that positive inflation shocks have on
output by shifting the:
A. monetary policy reaction curve left.
B. monetary policy reaction curve right.
C. short-run aggregate supply curve to the left.
D. short-run aggregate supply curve to the right.
Answer:
If a bank has customer deposits of $150 million, $15 million in reserves and the amount
of excess reserves equals 0 (zero):
A. the required reserve rate is 15 percent.
B. the required reserve rate is 10 percent.
C. the required reserve rate is 1 percent.
D. the bank’s net interest margin is zero (0).
Answer:
Unemployment insurance and the proportional nature of the tax system are examples
of:
A. discretionary fiscal policy.
B. automatic fiscal policy.
C. both discretionary and automatic fiscal policy.
D. expansionary fiscal policy.
Answer:
One reason a bank’s officer may be reluctant to write off a past-due loan is that it will:
A. increase the bank’s liabilities.
B. decrease the bank’s assets and capital.
C. increase the bank’s liabilities and assets, requiring more capital to be held.
D. make the bank’s accounts less transparent.
Answer:
In the meetings of the Governing Council of the European Central Bank, formal votes
are:
A. taken and published immediately.
B. not taken, since formal voting could get in the way of good policy.
C. taken but not published for five years.
D. taken and released two years after the meetings.
Answer:
A policy is time consistent when:
A. policymakers have incentives to adhere to a policy decision made today, in the
future.
B. policymakers have incentives to make policy decisions in a time-sensitive fashion.
C. policymakers consider the future when making current policies.
D. the timing of a policy is irrelevant.
Answer:
Unique risk is another name for:
A. market risk.
B. systematic risk.
C. the risk premium.
D. idiosyncratic risk.
Answer:
The moral hazard that can result from debt financing is mainly due to the:
A. borrower not working as hard once he or she obtains the loan.
B. borrower wanting to refinance the loan.
C. borrower taking greater risk in hopes of obtaining a larger return.
D. economy turning sour and the borrower defaulting.
Answer:
What should be the impact on aggregate expenditures from an increase in the real
interest rate?
A. It should increase
B. It should decrease
C. It should remain constant
D. The impact is indeterminate
Answer:
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:
With a call option, the option holder:
A. has the right to sell the asset.
B. has the right to buy the asset.
C. can buy or sell, it is their option.
D. can buy the asset but only after the date specified.
Answer:
The problem of adverse selection created the opportunity for:
A. lenders to profit significantly at the expense of borrowers.
B. significant deregulation of financial markets.
C. a new market in the trading of information.
D. stock prices for many years to be much lower than what they should have been.
Answer:
Tom borrows $100,000 from his local bank to purchase inventory for his store for the
upcoming holiday season. Tom’s neighbor tells him about a get-rich-quick scheme that
can take this $100,000 and triple it in a month. Tom decides to buy into this scheme
figuring he can repay the bank and still have plenty left for inventory. This is an
example of:
A. adverse selection.
B. sound risk analysis on Tom’s part.
C. diversification.
D. moral hazard.
Answer:
If a one-year bond currently yields 4% and is expected to yield 6% next year, the
Liquidity Premium Theory suggests the yield today on a two-year bond will be:
A. More than 4% but less than 5%.
B. 5%.
C. 4%.
D. More than 5%.
Answer:
If policymakers are not aggressive about keeping inflation close to the target rate, the
slope of the monetary policy reaction curve would be:
A. steep.
B. relatively flat.
C. horizontal.
D. negative.
Answer:
Depreciation of the real exchange rate:
A. makes U.S. exports more expensive to foreigners.
B. makes U.S. exports less expensive to foreigners.
C. means a basket of U.S. goods would exchange for more foreign goods.
D. means an appreciation of the nominal exchange rate.
Answer:
Given the following formula for the Taylor rule:
Target federal funds rate = 2 + current inflation + ½(inflation gap) + ½(output gap). If
the current rate of inflation is 4% and the target rate of inflation is 2%, and output is 3%
above its potential, the target federal funds rate would be:
A. 7%.
B. 8.5%.
C. 5%.
D. 4.5%.
Answer:
Many states prohibited bank branching because of all of the following except:
A. they feared the concentration and monopoly power of large banks.
B. they generated significant revenue from issuing bank charters.
C. they wanted to protect the profits of banks since they generated tax revenue from
these profits.
D. the McFadden Act of 1927.
Answer:
The economy is in both a short- and long-run equilibrium if:
A. current inflation equals expected inflation and current output equals potential
output.
B. the aggregate demand curve intersects the short-run aggregate supply curve.
C. the long-run aggregate supply curve is at potential output.
D. the short-run aggregate supply curve intersects the long-run aggregate supply curve
at potential output.
Answer:
If consumer and business sentiment were to increase dramatically, causing an
expansionary gap:
A. monetary policymakers could stabilize the economy by shifting their monetary
policy reaction curve to the right.
B. fiscal policymakers could stabilize aggregate demand by cutting income and
business taxes.
C. monetary policymakers would likely shift the monetary policy reaction curve to the
left to shift the dynamic aggregate demand left.
D. fiscal policymakers could stabilize aggregate demand by increasing government
purchases.
Answer:
The market for reserves derives from the fact that:
A. reserves pay a relatively high return.
B. desired reserves don’t always equal actual reserves.
C. the Fed refuses to lend to banks.
D. banks do not want excess reserves.
Answer:
An investment will pay $2,000 half of the time and $1,400 half of the time. The
standard deviation for this investment is:
A. $90,000.
B. $300.
C. $1,700.
D. $30.
Answer:
An investor puts $1,000 into an investment that will return $1,250 one-half of the time
and $900 the remainder of the time. The expected return for this investor is:
A. $1,075
B. 5.0%
C. 7.5%
D. 0%
Answer:
The monetary base is also known as:
A. M1.
B. M2.
C. high-powered money.
D. free reserves.
Answer:
When the growth rate of the economy slows we would expect:
A. the risk to increase for U.S. Treasury securities.
B. the risk spread to increase more between U.S. Treasury Securities and Aaa securities
than between Aaa and Baa securities.
C. the risk spread to increase more between Aaa and Baa securities than U.S.
Treasuries and Aaa securities.
D. investors to purchase more junk bonds in search of a higher yield.
Answer:
Since one function of financial intermediaries is to provide liquidity:
A. they must keep all of their funds in short-term securities.
B. they keep almost all of their funds in cash.
C. they must know approximately how much liquidity their customers will need each
day and have these funds available.
D. regulations require financial intermediaries to keep 50% of their assets in cash.
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