If the internal rate of return from an investment is more than the opportunity cost of
funds the firm should:
A. make the investment.
B. not make the investment.
C. only make the investment using retained earnings.
D. only make part of the investment and wait to see if interest rates decrease.
Answer:
Fiscal policymakers may actually welcome some inflation for all of the following
reasons except:
A. it potentially raises tax revenues.
B. it reduces the real value of the national debt allowing governments to “default” on a
portion of their debt.
C. interest payments tend to be fixed so the real interest payments are reduced.
D. it weakens the independence of the central bank.
Answer:
When expected inflation increases, for any given nominal interest rate the:
A. cost of borrowing increases and the desire to borrow decreases.
B. real interest rate increases.
C. bond supply curve shifts to the left.
D. cost of borrowing decreases and the desire to borrow increases.
Answer:
A decrease in the real interest rate in the U.S. will cause net exports to:
A. increase because exports will remain constant but imports will decrease.
B. decrease because exports will decrease and imports will increase.
C. decrease because exports will increase but imports will increase.
D. increase because exports will increase and imports will decrease.
Answer:
A country that has a capital account deficit:
A. is a net seller of assets.
B. is importing more goods and services than it exports.
C. also has a current account deficit.
D. is a net buyer of assets.
Answer:
If you were going to write a function for money demand, you would say that the
demand for money holdings:
A. varies directly with both the nominal interest rate and nominal income.
B. varies inversely with both the nominal interest rate and nominal income.
C. varies inversely with nominal income and directly with the nominal interest rate.
D. varies inversely with the nominal interest rate and directly with nominal income.
Answer:
How many prices would a trader of a particular good need to know in a barter economy
with 5 goods?
A. 5
B. 10
C. 20
D. 50
Answer:
The fact that U.S. currency is legal tender means:
A. U.S. currency is good anywhere in the world.
B. the only money the government will accept for settlement of debts is U.S. currency.
C. private businesses in the U.S. and the U.S. government must accept currency for
payment.
D. it cannot be backed by gold or other metals.
Answer:
An increase in potential output will result in:
A. a temporary expansionary gap.
B. a higher rate of inflation eventually.
C. a temporary recessionary gap.
D. an immediate shift upward in the short-run aggregate supply curve.
Answer:
The yield curve for U.S. Treasury securities allows us to draw the following
conclusions, except that:
A. long-term yields tend to higher than short term yields.
B. interest rates of different maturities tend to move.
C. long-term rates tend to equal short-term rates.
D. yields on short-term securities are more volatile than yields on long-term bonds.
Answer:
If the purchase price of a bond exceeds the face value, the yield to maturity:
A. is greater than the coupon rate because the capital gain is positive.
B. will equal the current yield.
C. will be less than the coupon rate because the capital gain will be negative.
D. will be greater than the current yield.
Answer:
If Bank A sells some its loans to Bank B for cash, everything else equal:
A. Bank A’s assets decrease and Bank B’s assets increase.
B. Bank A becomes less liquid while Bank B becomes more liquid.
C. Banks A’s total assets do not change, but Bank A is more liquid.
D. Bank A’s liabilities decrease by the amount of the loans that are sold.
Answer:
On a particular day, the actual federal funds rate can deviate from the target federal
funds rate. This might be due to all of the following except:
A. unexpected changes in the demand for reserves.
B. the forecasts of the Fed’s staff were in error.
C. there may have been more float in the banking system than anticipated.
D. daily changes in the target rate.
Answer:
An inflation shock that shifts the short-run aggregate supply curve leftward and leaves
the long-run supply curve unchanged means the economy’s potential level of output
will:
A. increase.
B. not change.
C. decrease.
D. decrease only if monetary policymakers do not respond.
Answer:
Considering the Federal Reserve Districts, which of the following is true?
A. With the exception of New York, no district coincides with a single state.
B. No district coincides with a single state.
C. Some districts are made up of single states.
D. The districts are divided with equal population.
Answer:
Central bankers with a relatively steep monetary policy reaction curve will:
A. move interest rates more aggressively when inflation rises, leading to more
volatility in output.
B. move interest rates more aggressively when inflation rises, leading to less volatility
in output.
C. move interest rates less aggressively when inflation rises, leading to more volatility
in output.
D. move interest rates less aggressively when inflation rises, leading to less volatility in
output.
Answer:
The interest rate on primary credit extended by the Fed is:
A. the average of the prime interest rate charged by the ten largest banks in the nation.
B. below the target federal funds rate.
C. equal to the target federal funds rate.
D. above the target federal funds rate.
Answer:
The failure of the Argentinean currency board can be attributed to many factors,
including the:
A. failure right from the start to lower inflation.
B. pegging of the Argentine peso to the euro.
C. pegging of the Argentine peso to the U.S. dollar, even though the countries’
economies were not that highly integrated.
D. prices of goods Argentine exported dropped significantly in the late 1990s hurting
their economy.
Answer:
In many cases, life insurance companies will require applicants to take a physical. This
is done to avoid the problem of:
A. adverse selection.
B. moral hazard.
C. free riding.
D. transaction costs.
Answer:
Bank A has checkable deposits of $140 million, vault cash equaling $1 million and
deposits at the Fed equaling $14 million. If the required reserve rate is ten percent what
is the amount of excess reserves Bank A is holding?
A. It does not have any excess reserves
B. $15 million
C. $2 million
D. $1 million
Answer:
With a put option, the option holder:
A. has the right to buy the asset.
B. can buy or sell the asset, it is their option.
C. has the right to sell the asset.
D. can buy the asset but only on the date specified.
Answer:
The government provides deposit insurance; this insurance protects:
A. large corporate deposit accounts, but only the amounts that exceed the $250,000
deductible.
B. depositors for up to $250,000 should a bank fail.
C. the deposits of banks in their Federal Reserve accounts.
D. the deposits that people have, but only for federally chartered banks.
Answer:
Exchange-rate stability is likely to be a more important goal for the central banks of:
A. emerging market economies than the central bank of the U.S.
B. the U.S. and Japan than most small developing countries.
C. countries where exports and imports make up a small total of all economic activity.
D. large, closed economies.
Answer:
Which of the following have the same impact on the Fed’s balance sheet?
A. An open market purchase and an increase in loans by the Fed to banks
B. An open market sale and an increase in foreign exchange reserves
C. An open market purchase and a decrease in foreign exchange reserves
D. An increase in loans by the Fed to banks and a decrease in foreign exchange
reserves
Answer:
Leverage:
A. reduces risk.
B. is synonymous with risk-free investment.
C. increases expected rate of return.
D. leads to smaller changes in the investment’s price.
Answer:
A mortgage, where the monthly payments are the same for the duration of the loan, is
an example of a(n):
A. variable payment loan.
B. installment loan.
C. fixed payment loan.
D. equity security.
Answer:
In 2008, as a result of a run on government-sponsored enterprise debt, the U.S. Treasury
placed Fannie Mae and Freddie Mac in:
A. conservatorship.
B. receivership.
C. bankruptcy.
D. trusteeship.
Answer:
One lesson learned from the bank panics of the early 1930’s is:
A. the lender of last resort function almost guarantees that bank panics are a thing of
the past.
B. the mere existence of a lender of last resort will not keep the financial system from
collapsing.
C. only the U.S. Treasury can be a true lender of last resort.
D. the financial system will collapse without a lender of last resort.
Answer:
A large step toward independence occurred for the Fed in 1935 when the:
A. Fed went from two to twelve districts.
B. Secretary of the Treasury and the Comptroller of the Currency were removed from
the Board of Governors.
C. Chairman of the Board of Governors was no longer a cabinet position.
D. Fed was given the ability to control its own budget.
Answer:
The reason for the increase in inflation risk over time is due to the fact that:
A. the inflation rate always increases over time.
B. we always have inflation.
C. it is more difficult to forecast inflation over longer periods of time.
D. investors are more focused on nominal returns than real returns.
Answer:
The collapse of the Thai currency, the baht, was partially due to:
A. inaction by the Federal Reserve.
B. the European Central Bank.
C. information provided by the central bank of Thailand.
D. information not provided by the central bank of Thailand.
Answer:
If the Federal Reserve in the United States begins to purchase foreign currency and pay
for these purchases with dollars, this should cause:
A. the dollar to appreciate.
B. the dollar to depreciate.
C. import prices to decrease.
D. exports to decrease.
Answer:
A very controversial issue in many states currently is whether or not insurance
companies should be allowed to use a person’s credit history as a tool in determining the
individual’s automobile and homeowner insurance premium. Without getting into the
legal or ethical issues, what do you think the insurance companies’ motives might be for
wanting to use the credit report?
Answer:
Explain why non-transactions accounts have become a more important source of funds
for the bank than transaction accounts over the past thirty years?
Answer:
Explain why an increase in expected inflation will result in an increase in nominal
interest rates, holding other factors constant.
Answer:
If the Federal Reserve were to do away with the required reserve regulation, do you
think banks would stop holding reserves? Explain.
Answer:
Why would it be correct to say that, if we assume that people do not change their
currency holdings and that banks do not hold any excess reserves, the equation
really could be stated as ?
Answer:
What are the four characteristics of a financial instrument?
Answer:
Explain the suggestion that people may have their own “personal discount rate” and
how that may affect decisions about borrowing and other financial matters.
Answer:
A bank has a need for cash for a short period of time to meet its liquidity needs. The
bank has significant holding of U.S. treasury securities. The bank really does not want
to sell the securities, realizing the liquidity need is a temporary problem. A pension fund
has significant cash holdings and would like to earn some return on part of these
holdings. The problem is the fund will need this cash in a few days to honor a purchase
agreement it made for municipal bonds being issued. Is there any way these two
organizations can work together to solve each other’s problem?
Answer:
Will an open market sale by the Federal Reserve increase banks’ willingness to make
loans? Explain.
Answer:
Provide an example where monetary policymakers in the United States would be put in
a position of conflicting goals and as a result forced to make a tradeoff.
Answer:
Suppose that an internet-based program, Novus, wants to raise $10 million to expand its
business operations. Describe how Novus can raise these funds directly through each of
the follow options: issuing stock, issuing bonds, or obtaining a bank loan. Compare and
contrast these three options.
Answer:
Why didn’t the over-the-counter (OTC) exchanges suffer the disruption of service that
the New York Stock Exchange did after the terrorist attacks of September 11, 2001?
Answer:
Does the Expectations Hypothesis allow for people to have a preference for longer-term
investments? Explain.
Answer:
In 2002 and 2003, the financial markets were hit by many corporate accounting
scandals. Discuss these scandals and the impact they would have not only in terms of a
flight to quality, but also in terms of the faith that people place in bond rating agencies.
Answer:
Answer:
Is the monetary policy reaction curve applicable only to central banks that have an
explicit inflation target? Explain.
Answer: