1) The entry of AT&T and GM into the credit card business is an indication of
A) government’s efforts to deregulate the provision of financial services
B) the rising profitability of credit card operations.
C) the reduction in costs of credit card operations since 1990
D) the sale of unprofitable operations by Bank of America and Citicorp
2) Privatization of Social Security involves
A) tax reductions
B) benefit reductions
C) increasing the retirement age
D) investing portions of the trust fund in corporate securities
3) If a bank has $100,000 of checkable deposits, a required reserve ratio of 20 percent,
and it holds $40,000 in reserves, then the maximum deposit outflow it can sustain
without altering its balance sheet is
A) $30,000
B) $25,000
C) $20,000
D) $10,000
4) The analysis of how asymmetric information problems affect economic behavior is
called ________ theory.
A) uneven
B) parallel
C) principal
D) agency
5) When the price level falls, the ________ curve for nominal money ________, and
interest rates ________, everything else held constant.
A) demand; decreases; fall
B) demand; increases; rise
C) supply; increases; rise
D) supply; decreases; fall
6) When the effects of the global financial crisis started to spread more quickly
throughout the rest of the world, the U.S. dollar ________ because demand for U.S.
assets ________.
A) appreciated; increased
B) depreciated; increased
C) appreciated; decreased
D) depreciated; decreased
7) The mandate for the monetary policy goals that has been given to the European
Central Bank is an example of a ________ mandate.
A) primary
B) dual
C) secondary
D) hierarchical
8) When banks calculate the losses the institution would incur if an unusual
combination of bad events happened, the bank is using the ________ approach.
A) stress-test
B) value-at-risk
C) trading-loss
D) maximum value
9) ________ in the expected future domestic exchange rate causes the demand for
domestic assets to decrease and the domestic currency to ________, everything else
held constant.
A) An increase; appreciate
B) An increase; depreciate
C) A decrease; appreciate
D) A decrease; depreciate
10) When gold production was low in the 1870s and 1880s, the money supply grew
________ causing ________.
A) rapidly; inflation
B) rapidly; disinflation
C) slowly; deflation
D) slowly; disinflation
11) A financial market in which previously issued securities can be resold is called a
________ market.
A) primary
B) secondary
C) tertiary
D) used securities
12) The Governing Council usually meets ________ times a year.
A) four
B) six
C) eight
D) twelve
13) Under the Bretton Woods system, the IMF could encourage ________ countries to
pursue ________ monetary policies that would strengthen their currency or eliminate
their balance of payment deficits.
A) surplus; expansionary
B) surplus; contractionary
C) deficit; expansionary
D) deficit; contractionary
14) Which of the following is NOT an entity of the Federal Reserve System?
A) Federal Reserve Banks
B) The Comptroller of the Currency
C) The Board of Governors
D) The Federal Open Market Committee
15) The quantity of reserves supplied equals
A) nonborrowed reserves minus borrowed reserves
B) nonborrowed reserves plus borrowed reserves
C) required reserves plus borrowed reserves
D) total reserves minus required reserves
16) Keynes hypothesized that the speculative component of money demand was
primarily determined by the level of
A) interest rates
B) velocity
C) income
D) stock market prices
17) An ECU was
A) a paper substitute for gold issued by the IMF
B) a loan by European countries to the IMF
C) a paper currency issued by the European Common Market
D) a monetary unit created by the European Monetary System
18) ________ assist in the initial sale of securities in the primary market; ________
assist in the trading of securities in the secondary markets.
A) Investment banks; mutual funds
B) Commercial banks; mutual funds
C) Investment banks; securities brokers and dealers
D) Commercial banks; securities brokers and dealers
19) If there are economies of scale in the transactions demand for money, as income
increases, money demand
A) increases proportionately
B) increases less than proportionately
C) increases more than proportionately
D) does not change
20) A bond with default risk will always have a ________ risk premium and an increase
in its default risk will ________ the risk premium.
A) positive; raise
B) positive; lower
C) negative; raise
D) negative; lower
21) If the required reserve ratio is 5 percent, currency in circulation is $400 billion,
checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the M1
money multiplier is
A) 2.5
B) 2.72
C) 2.3
D) 0.551
22) If the required reserve ratio is 10 percent, currency in circulation is $400 billion,
checkable deposits are $1000 billion, and excess reserves total $1 billion, then the M1
money multiplier is
A) 2.5
B) 2.8
C) 2.0
D) 0.7
23) Open market sales shrink ________ thereby lowering ________.
A) the money multiplier; the money supply
B) the money multiplier; reserves and the monetary base
C) reserves and the monetary base; the money supply
D) the money base; the money multiplier
24) A debit card differs from a credit card in that
A) a debit card is a loan while for a credit card purchase, payment is made immediately
B) a debit card is a long-term loan while a credit card is a short-term loan
C) a credit card is a loan while for a debit card purchase, payment is made immediately
D) a credit card is a long-term loan while a debit card is a short-term loan
25) Inflation results in
A) ease of planning for the future
B) ease of comparing prices over time
C) lower nominal interest rates
D) difficulty interpreting relative price movements
26) Which of the following is NOT an argument against using monetary policy to prick
asset-price bubbles?
A) The effect of increasing interest rates on asset prices is uncertain
B) A bubble may only exist in some asset-prices and monetary policy will affect all
asset prices
C) Using monetary policy to prick an asset-price bubble may have adverse effect on the
aggregate economy
D) Even though credit-drive bubbles are easier to identify, they are still relatively hard
to identify
27) When rare coin prices become volatile, the ________ curve for bonds shifts to the
________, everything else held constant.
A) demand; right
B) demand; left
C) supply; right
D) supply; left
28) The case for Federal Reserve independence does not include the idea that
A) political pressure would impart an inflationary bias to monetary policy
B) a politically insulated Fed would be more concerned with long-run objectives and
thus be a defender of a sound dollar and a stable price level
C) policy is always performed better by an elite group such as the Fed
D) a Federal Reserve under the control of Congress or the president might make the
so-called political business cycle more pronounced
29) Assume that no banks hold excess reserves, and the public holds no currency. If a
bank sells a $100 security to the Fed, explain what happens to this bank and two
additional steps in the deposit expansion process, assuming a 10% reserve requirement.
How much do deposits and loans increase for the banking system when the process is
completed?
30) Use demand and supply analysis to explain why an expectation of Fed rate hikes
would cause Treasury prices to fall.
31) Explain what inflation targeting is. What are the advantages and disadvantages of
this type of monetary policy strategy?
32) Explain the Fed’s three tools of monetary policy and how each is used to change the
money supply. Does each tool affect the monetary base or the money multiplier?
33) Explain how cigarettes could be called “money” in prisoner-of-war camps of World
War II.
34) The spread between the interest rates on Baa corporate bonds and U.S. government
bonds is very large during the Great Depression years 1930-1933. Explain this
difference using the bond supply and demand analysis.
35) How does a mutual fund lower transactions costs through economies of scale?
36) Explain and show graphically the effect of an increase in the expected inflation rate
on the equilibrium exchange rate, everything else held constant.
37) From 1980-1985, the dollar strengthened in value against other currencies. Who
was helped and who was hurt by this strong dollar?
38) If the federal government where to raise the income tax rates, would this have any
impact on a state’s cost of borrowing funds? Explain.