1) Policy makers cannot achieve both price stability and economic activity stability
when facing
A) temporary supply shocks
B) permanent supply shocks
C) demand shocks
D) all of the above
2) A ________ is a subsidiary of a U.S. bank that is engaged primarily in international
banking.
A) Edge Act corporation
B) Eurodollar agency
C) universal bank
D) McFadden corporation
3) Everything else held constant, an increase in wealth will cause the holdings of
checkable deposits to the holdings of currency to ________ and the currency ratio will
________.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
4) The problem created by asymmetric information before the transaction occurs is
called ________, while the problem created after the transaction occurs is called
________.
A) adverse selection; moral hazard
B) moral hazard; adverse selection
C) costly state verification; free-riding
D) free-riding; costly state verification
5) A advantage of using swaps to hedge interest-rate risk is that swaps
A) are less costly than futures
B) can be written for long horizons
C) are not subject to default risk
D) are more liquid than futures
6) Which policy measure makes it unlawful for a registered public accounting firm to
provide any nonaudit service to a client contemporaneously with an impermissable
audit?
A) Sarbanes-Oxley Act of 2002
B) Global Legal Settlement of 2002
C) Gramm-Leach-Bliley Act of 1999
D) Riegle-Neal Act of 1994
7) Under a fixed exchange rate regime, if a country’s central bank runs out of
international reserves, it cannot keep its currency from
A) depreciating
B) appreciating
C) deflating
D) inflating
8) If a central bank does not want to see its currency ________ in value, it may pursue
contractionary monetary policy to raise the domestic interest rate, thereby ________ its
currency.
A) fall; strengthening
B) fall; weakening
C) rise; strengthening
D) rise; weakening
9) Foreign banks may engage in banking activities in the United States by opening all
of the following except
A) an agency office of the foreign bank
B) a subsidiary U.S. bank
C) a branch of the foreign bank
D) a McFadden Corporation
10) The Fed accidentally discovered open market operations when
A) it came to the rescue of failing banks in the early 1930s, and found that its purchases
of bank loans injected reserves into the banking system
B) it purchased securities for income following the 1920-1921 recession
C) it attempted to slow inflation in 1919 by selling securities and found that its sales
drained reserves from the banking system
D) it reinterpreted a key provision of the Federal Reserve Act
11) Small-denomination time deposits refer to certificates of deposit with a
denomination of less than
A) $1,000
B) $10,000
C) $100,000
D) $1,000,000
12) According to the liquidity premium theory of the term structure, a downward
sloping yield curve indicates that short-term interest rates are expected to
A) rise in the future
B) remain unchanged in the future
C) decline moderately in the future
D) decline sharply in the future
13) If fluctuations in interest rates become smaller, then, other things equal, the demand
for stocks ________ and the demand for long-term bonds ________.
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases
14) Starting in 1974, the conventional M1 money demand function began to severely
________ the demand for money. Stephen Goldfeld labeled this phenomenon “the case
of the missing ________.”
A) underpredict; velocity
B) overpredict; velocity
C) underpredict; money
D) overpredict; money
15) An expansionary monetary policy increases net exports by ________ interest rates
and ________ the value of the dollar.
A) lowering nominal; decreasing
B) lowering real; decreasing
C) raising nominal; increasing
D) raising real; increasing
16) According to the liquidity premium theory of the term structure
A) bonds of different maturities are not substitutes
B) if yield curves are downward sloping, then short-term interest rates are expected to
fall by so much that, even when the positive term premium is added, long-term rates fall
below short-term rates
C) yield curves should never slope downward
D) interest rates on bonds of different maturities do not move together over time
17) In the market for reserves, if the federal funds rate is between the discount rate and
the interest rate paid on excess reserves, a decline in the reserve requirement ________
the ________ curve of reserves and causes the federal funds interest rate to fall,
everything else held constant.
A) decreases; demand
B) increases; demand
C) increases; supply
D) decreases; supply
18) As a result of its power to dictate loan terms to borrowing countries (under the
Bretton Woods system), the IMF could encourage ________ countries to pursue
________ monetary policies that would strengthen their currency or eliminate their
balance of payments deficits.
A) surplus; contractionary
B) surplus; expansionary
C) deficit; contractionary
D) deficit; expansionary
19) The Federal Reserve Bank of ________ plays a special role in the Federal Reserve
System because it houses the open market desk.
A) Boston
B) New York
C) Chicago
D) San Francisco
20) So-called fallen angels differ from junk bonds in that
A) junk bonds refer to newly issued bonds with low credit ratings, whereas fallen
angels refer to previously issued bonds that have had their credit ratings fall below Baa
B) junk bonds refer to previously issued bonds that have had their credit ratings fall
below Baa, whereas fallen angels refer to newly issued bonds with low credit ratings
C) junk bonds have ratings below Baa, whereas fallen angels have ratings below C
D) fallen angels have ratings below Baa, whereas junk bonds have ratings below C
21) The efficient markets hypothesis indicates that investors
A) can use the advice of technical analysts to outperform the market
B) do better on average if they adopt a “buy and hold” strategy
C) let too many unexploited profit opportunities go by if they adopt a “buy and hold”
strategy
D) do better if they purchase loaded mutual funds
22) When the economy suffers a permanent negative supply shock and the central bank
does not respond by changing the autonomous component of monetary policy, then
A) inflation will be higher
B) output will be at its potential
C) output will be unchanged
D) inflation will be unchanged
E) both A and B.
23) The mismanagement of financial liberalization in emerging market countries can be
understood as a severe
A) principal/agent problem
B) asymmetric information problem
C) lemons problem
D) free-rider problem
24) Hedging risk for a long position is accomplished by
A) taking another long position
B) taking a short position
C) taking additional long and short positions in equal amounts
D) taking a neutral position
25) In Keynes’s liquidity preference framework,
A) the demand for bonds must equal the supply of money
B) the demand for money must equal the supply of bonds
C) an excess demand of bonds implies an excess demand for money
D) an excess supply of bonds implies an excess demand for money
26) Which of the following is not a financial derivative?
A) Stock
B) Futures
C) Options
D) Forward contracts
27) Bonds that are sold in a foreign country and are denominated in a currency other
than that of the country in which it is sold are known as
A) foreign bonds
B) Eurobonds
C) equity bonds
D) country bonds
28) Which policy measure increases the punishment for white-collar crime and
obstruction of official investigations?
A) Sarbanes-Oxley Act of 2002
B) Global Legal Settlement of 2002
C) Gramm-Leach-Bliley Act of 1999
D) Riegle-Neal Act of 1994
29) If the required reserve ratio is one-third, currency in circulation is $300 billion,
checkable deposits are $900 billion, and there is no excess reserve, then the M1 money
multiplier is
A) 2.5
B) 2.8
C) 2.0
D) 0.67
30) With direct finance, funds are channeled through the financial market from the
________ directly to the ________.
A) savers, spenders
B) spenders, investors
C) borrowers, savers
D) investors, savers
31) A simple deposit multiplier equal to four implies a required reserve ratio equal to
A) 100 percent
B) 50 percent
C) 25 percent
D) 0 percent
32) The most important category of assets on a bank’s balance sheet is
A) discount loans
B) securities
C) loans
D) cash items in the process of collection
33) Suppose on any given day there is an excess demand of reserves in the federal
funds market. If the Federal Reserve wishes to keep the federal funds rate at its current
level, then the appropriate action for the Federal Reserve to take is a ________ open
market ________, everything else held constant.
A) defensive; sale
B) defensive; purchase
C) dynamic; sale
D) dynamic; purchase