1) Which of the following is not one of the eight basic puzzles about financial
structure?
A) Stocks are the most important source of finance for American businesses
B) Issuing marketable securities is not the primary way businesses finance their
operations
C) Indirect finance, which involves the activities of financial intermediaries, is many
times more important than direct finance, in which businesses raise funds directly from
lenders in financial markets
D) Banks are the most important source of external funds to finance businesses
2) The economy recovers quickly from most recessions, but the increase in adverse
selection and moral hazard problems in the credit markets caused by ________ led to
the severe economic contraction known as The Great Depression.
A) debt deflation
B) illiquidity
C) an improvement in banks’ balance sheets
D) increases in bond prices
3) IPOs have become very important in the U.S. economy because they are a major
source of financing for
A) so-called “blue-chip” companies
B) hedge funds
C) internet companies
D) mutual funds
4) If a financial institution has 50% of its portfolio in a bond with a five-year duration
and 50% of its portfolio in a bond with a seven-year duration, what is the duration of
the portfolio?
A) 12 years
B) 7 years
C) 6 years
D) 5 years
5) Banks hold excess and secondary reserves to
A) reduce the interest-rate risk problem
B) provide for deposit outflows
C) satisfy margin requirements
D) achieve higher earnings than they can with loans
6) The seignorage for a government is greater for ________ than for ________.
A) dollarization; a currency board
B) dollarization; exchange-rate targeting
C) dollarization; monetary targeting
D) dollarization; inflation targeting
E) exchange-rate targeting; dollarization
7) Excessive volatility refers to the fact that
A) stock returns display mean reversion
B) stock prices can be slow to react to new information
C) stock price tend to rise in the month of January
D) stock prices fluctuate more than is justified by dividend fluctuations
8) The most common type of discount lending that the Fed extends to banks is called
A) seasonal credit
B) secondary credit
C) primary credit
D) installment credit
9) The chartering process is similar to ________ potential borrowers and the restriction
of risk assets by regulators is similar to ________ in private financial markets.
A) screening; restrictive covenants
B) screening; branching restrictions
C) identifying; branching restrictions
D) identifying; credit rationing
10) There are two ways in which the Fed can provide additional reserves to the banking
system: it can ________ government bonds or it can ________ discount loans to
commercial banks.
A) sell; extend
B) sell; call in
C) purchase; extend
D) purchase; call in
11) The three players in the money supply process include
A) banks, depositors, and the U.S. Treasury
B) banks, depositors, and borrowers
C) banks, depositors, and the central bank
D) banks, borrowers, and the central bank
12) As in the United States, an important factor in the banking crises in Latin America
was the
A) financial liberalization that occurred in the 1980s
B) decline in real interest rates that occurred in the 1980s
C) high inflation that occurred in the 1980s
D) sluggish economic growth that occurred in the 1980s
13) The Volcker Rule addresses the off-balance-sheet problem involving
A) trading risks
B) selling loans
C) loan guarantees
D) interest rate risks
14) A feature of debt markets in emerging-market countries is that debt contracts are
typically
A) very short term
B) long term
C) intermediate term
D) perpetual
15) Using Taylor’s rule, when the equilibrium real federal funds rate is 2 percent, there
is no output gap, the actual inflation rate is zero, and the target inflation rate is 2
percent, the nominal federal funds rate should be
A) 0 percent
B) 1 percent
C) 2 percent
D) 3 percent
16) In the late 1990s, the stock market bubble ________ the value of Tobin’s q, and
caused ________ in business equipment.
A) increased; underinvestment
B) increased; overinvestment
C) decreased; underinvestment
D) decreased; overinvestment
17) Everything else held constant, an increase in the liquidity of bonds results in a
________ in demand for bonds and the demand curve shifts to the ________.
A) rise; right
B) rise; left
C) fall; right
D) fall; left
18) Under the Exchange Rate Mechanism of the European Monetary System, when the
German mark depreciated below its lower limit against the British pound, the Bank of
England was required to buy ________ and sell ________, thereby ________
international reserves.
A) pounds; marks; losing
B) pounds; marks; gaining
C) marks; pounds; gaining
D) marks; pounds; losing
19) If brokerage commissions on stocks fall, everything else held constant, the demand
for bonds ________, the price of bonds ________, and the interest rate ________.
A) decreases; decreases; increases
B) decreases; decreases; decreases
C) increases; decreases; increases
D) increases; increases; increases
20) Regulations designed to provide information to the marketplace so that investors
can make informed decisions are called
A) disclosure requirements
B) efficient market requirements
C) asset restrictions
D) capital requirements
21) Banks subject to reserve requirements set by the Federal Reserve System include
A) only nationally chartered banks
B) only banks with assets less than $100 million
C) only banks with assets less than $500 million
D) all banks whether or not they are members of the Federal Reserve System
22) High unemployment is undesirable because it
A) results in a loss of output
B) always increases inflation
C) always increases interest rates
D) reduces idle resources
23) When the Fed supplies the banking system with an extra dollar of reserves, deposits
________ by ________ than one dollara process called multiple deposit creation.
A) increase; less
B) increase; more
C) decrease; less
D) decrease; more
24) Since 1980, ________ are subject to reserve requirements.
A) only commercial banks
B) only the member institutions of the Federal Reserve
C) only nationally chartered depository institutions
D) all depository institutions
25) Under a fixed exchange rate system, countries that ran large, persistent balance of
payments deficits would ________ international reserves, thereby pressuring them into
________ their exchange rate.
A) gain; devaluing
B) gain; revaluing
C) lose; devaluing
D) lose; revaluing
26) Allowing individuals to manage a portion of their Social Security funds is
A) socialization
B) privatization
C) democratization
D) regeneration
27) If the money supply is $500 and nominal income is $4,000, the velocity of money is
A) 1/20
B) 1/8
C) 8
D) 20
28) Financial institutions that accept deposits and make loans are called ________
institutions.
A) investment
B) contractual savings
C) depository
D) underwriting
29) Economists consider the ________ to be the most accurate measure of interest
rates.
A) simple interest rate
B) current yield
C) yield to maturity
D) real interest rate