1) If the central bank targets a monetary aggregate, it is likely to lose control over the
interest rate because
A) of fluctuations in the demand for reserves
B) of fluctuations in the consumption function
C) bond values will tend to remain stable
D) of fluctuations in the business cycle
2) Using the Gordon growth model, if D1 is $.50, ke is 7%, and g is 5%, then the
present value of the stock is
A) $2.50
B) $25
C) $50
D) $46.73
3) Defining money becomes ________ difficult as the pace of financial innovation
________.
A) less; quickens
B) more; quickens
C) more; slows
D) more; stops
4) The Fed can offset the effects of an increase in float by engaging in
A) a repurchase agreement
B) a matched sale-purchase transaction
C) an interest rate swap
D) an open market purchase
5) Everything else held constant, during a business cycle expansion, the supply of
bonds shifts to the ________ as businesses perceive more profitable investment
opportunities, while the demand for bonds shifts to the ________ as a result of the
increase in wealth generated by the economic expansion.
A) right; left
B) right; right
C) left; left
D) left; right
6) The number of futures contracts outstanding is called
A) turnover
B) volume
C) float
D) open interest
7) If Treasury deposits at the Fed are predicted to ________, the manager of the trading
desk at the New York Fed bank will likely conduct ________ open market operations to
________ reserves.
A) rise; defensive; drain
B) fall; defensive; drain
C) rise; dynamic; inject
D) fall; dynamic; drain
8) The stock market is important because it is
A) where interest rates are determined
B) the most widely followed financial market in the United States
C) where foreign exchange rates are determined
D) the market where most borrowers get their funds
9) If there are five goods in a barter economy, one needs to know ten prices in order to
exchange one good for another. If, however, there are ten goods in a barter economy,
then one needs to know ________ prices in order to exchange one good for another.
A) 20
B) 25
C) 30
D) 45
10) If nominal GDP in 2001 is $9 trillion, and 2001 real GDP in 1996 prices is $6
trillion, the GDP deflator price index is
A) 7
B) 100
C) 150
D) 200
11) An option allowing the holder to buy an asset in the future is a
A) put option
B) call option
C) swap
D) forward contract
12) A borrower who takes out a loan usually has better information about the potential
returns and risk of the investment projects he plans to undertake than does the lender.
This inequality of information is called
A) moral hazard
B) asymmetric information
C) noncollateralized risk
D) adverse selection
13) When housing prices began to decline after their peak in 2006, many subprime
borrowers found that their mortgages were “underwater.” This meant that
A) the value of the house fell below the amount of the mortgage
B) the basement flooded since they could not afford to fix the leaky plumbing
C) the roof leaked during a rainstorm
D) the amount that they owed on their mortgage was less than the value of their house
14) Which of the following is a long-term financial instrument?
A) A negotiable certificate of deposit
B) A repurchase agreement
C) A U.S. Treasury bond
D) A U.S. Treasury bill
15) 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 monetary
base is
A) $300 billion
B) $600 billion
C) $333 billion
D) $667 billion
16) If Treasury deposits at the Fed are predicted to increase, the manager of the trading
desk at the New York Fed bank will likely conduct ________ open market operations to
________ reserves.
A) defensive; inject
B) defensive; drain
C) dynamic; inject
D) dynamic; drain
17) One way the venture capital firm avoids the free-rider problem is by
A) prohibiting the sale of equity in the firm to anyone except the venture capital firm
B) prohibiting members from serving on the board of directors
C) prohibiting the borrowing firm from replacing management
D) requiring collateral equal to the value of the borrowed funds
18) ________ means people are more unhappy when they suffer losses than they are
happy when they achieve gains.
A) Loss fundamentals
B) Loss aversion
C) Loss leader
D) Loss cycle
19) The “lemons problem” exists because of
A) transactions costs
B) economies of scale
C) rational expectations
D) asymmetric information
20) The total quantity of an economy’s final goods and services demanded at different
inflation rates is
A) the aggregate supply curve
B) the aggregate demand curve
C) the Phillips curve
D) the aggregate expenditure function
21) The government agency that oversees the banking system and is responsible for the
conduct of monetary policy in the United States is
A) the Federal Reserve System
B) the United States Treasury
C) the U.S. Gold Commission
D) the House of Representatives
22) When financial institutions go on a lending spree and expand their lending at a
rapid pace they are participating in a
A) credit boom
B) credit bust
C) deleveraging
D) market race
23) Which of the following instruments is not traded in a money market?
A) Residential mortgages
B) U.S. Treasury Bills
C) Negotiable bank certificates of deposit
D) Commercial paper
24) Which of the following $1,000 face-value securities has the highest yield to
maturity?
A) A 5 percent coupon bond with a price of $600
B) A 5 percent coupon bond with a price of $800
C) A 5 percent coupon bond with a price of $1,000
D) A 5 percent coupon bond with a price of $1,200
25) If you expect the inflation rate to be 4 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) -3 percent
B) -2 percent
C) 3 percent
D) 7 percent
26) According to the quantity theory of money demand,
A) an increase in interest rates will cause the demand for money to fall
B) a decrease in interest rates will cause the demand for money to increase
C) interest rates have no effect on the demand for money
D) an increase in money will cause the demand for money to fall
27) Everything else held constant, an increase in planned investment expenditure
________ aggregate ________.
A) increases; demand
B) decreases; demand
C) decreases; supply
D) increases; supply
28) A particularly attractive feature of the ________ is that it tells you what the market
is predicting about future short-term interest rates by just looking at the slope of the
yield curve.
A) segmented markets theory
B) expectations theory
C) liquidity premium theory
D) separable markets theory
29) Everything else held constant, abolishing all taxes will
A) increase the interest rate on corporate bonds
B) reduce the interest rate on municipal bonds
C) increase the interest rate on municipal bonds
D) increase the interest rate on Treasury bonds