1) Suppose the economy is producing at the natural rate of output. Assuming a fixed
natural rate of output and everything else held constant, the development of a new,
more productive technology will cause ________ in the unemployment rate in the long
run and ________ in inflation in the short run.
A) an increase; an increase
B) a decrease; a decrease
C) no change; a decrease
D) no change; no change
2) Lower tariffs and quotas cause a country’s currency to ________ in the ________
run, everything else held constant.
A) depreciate; short
B) appreciate; short
C) depreciate; long
D) appreciate; long
3) The money supply is ________ related to the nonborrowed monetary base, and
________ related to the level of borrowed reserves.
A) positively; negatively
B) negatively; not
C) positively; positively
D) negatively; negatively
4) If reserves in the banking system increase by $100, then checkable deposits will
increase by $1000 in the simple model of deposit creation when the required reserve
ratio is
A) 0.01
B) 0.10
C) 0.05
D) 0.20
5) With ________ finance, borrowers obtain funds from lenders by selling them
securities in the financial markets.
A) active
B) determined
C) indirect
D) direct
6) If a bank has excess reserves of $15,000 and demand deposit liabilities of $80,000,
and if the reserve requirement is 20 percent, then the bank has total reserves of
A) $11,000
B) $21,000
C) $31,000
D) $41,000
7) The legislation that separated investment banking from commercial banking until its
repeal in 1999 is known as the
A) National Bank Act of 1863
B) Federal Reserve Act of 1913
C) Glass-Steagall Act
D) McFadden Act
8) A firm that sells goods to foreign countries on a regular basis can avoid
exchange-rate risk by
A) buying stock options
B) selling puts on financial futures
C) using a foreign exchange swap
D) buying swaptions
9) The opportunity cost of holding excess reserves is the federal funds rate
A) minus the discount rate
B) plus the discount rate
C) plus the interest rate paid on excess reserves
D) minus the interest rate paid on excess reserves
10) In the liquidity trap a small change in interest rates produces ________ change in
the quantity of money demanded.
A) a small
B) no
C) a proportionate
D) a very large
11) If policymakers set a target for unemployment that is too low because it is less than
the natural rate of unemployment, this can set the stage for a higher rate of money
growth and
A) cost-push inflation
B) demand-pull inflation
C) cost-pull inflation
D) demand-push inflation
12) ________ in the expected future domestic exchange rate causes the demand for
domestic assets to ________ and the domestic currency to appreciate, everything else
held constant.
A) An increase; increase
B) An increase; decrease
C) A decrease; increase
D) A decrease; decrease
13) The principal lender-savers are
A) governments
B) businesses
C) households
D) foreigners
14) If the expected path of one-year interest rates over the next five years is 4 percent, 5
percent, 7 percent, 8 percent, and 6 percent, then the expectations theory predicts that
today’s interest rate on the five-year bond is
A) 4 percent
B) 5 percent
C) 6 percent
D) 7 percent
15) Subject to the approval of the Board of Governors, the decision of choosing the
president of a district Federal Reserve Bank is made by
A) all nine district bank directors
B) the six district bank directors elected by the member banks
C) three district bank directors who are professional bankers
D) district bank directors who are not professional bankers
E) class A and class B directors.
16) When the exchange rate for the Mexican peso changes from 9 pesos to the U.S.
dollar to 10 pesos to the U.S. dollar, then the Mexican peso has ________ and the U.S.
dollar has ________.
A) appreciated; appreciated
B) depreciated; appreciated
C) appreciated; depreciated
D) depreciated; depreciated
17) If a $5,000 face-value discount bond maturing in one year is selling for $5,000, then
its yield to maturity is
A) 0 percent
B) 5 percent
C) 10 percent
D) 20 percent
18) Adjustable rate mortgages
A) protect households against higher mortgage payments when interest rates rise
B) keep financial institutions’ earnings high even when interest rates are falling
C) benefit homeowners when interest rates are falling
D) generally have higher initial interest rates than on conventional fixed-rate mortgages
19) The ________ states that exchange rates between any two currencies will adjust to
reflect changes in the price levels of the two countries.
A) theory of purchasing power parity
B) law of one price
C) theory of money neutrality
D) quantity theory of money
20) If the incentive to take advantage of a conflict of interest is high
A) removing the economies of scope that created the conflict may induce higher costs
because of the decrease in the flow of reliable information
B) then the government must step in to remove the conflict
C) the costs of non-action in removing the conflict will always be higher than the cost
of removing the conflict
D) firms will always step in and work to remove the conflict
21) When I purchase a corporate ________, I am lending the corporation funds for a
specific time. When I purchase a corporation’s ________, I become an owner in the
corporation.
A) bond; stock
B) stock; bond
C) stock; debt security
D) bond; debt security
22) According to the household liquidity effect, higher stock prices lead to increased
consumption expenditures because consumers
A) feel more secure about their financial position
B) want to sell stocks and spend the proceeds before stock prices fall
C) believe that their wages will increase due to increased profitability of firms
D) can now afford more expensive imports
23) The spread between the interest rates on bonds with default risk and default-free
bonds is called the
A) risk premium
B) junk margin
C) bond margin
D) default premium
24) A decrease in ________ leads to an equal ________ in the monetary base in the
short run.
A) float; increase
B) float; decrease
C) Treasury deposits at the Fed; decrease
D) discount loans; increase
25) Interest rates increased continuously during the 1970s. The most likely explanation
is
A) banking failures that reduced the money supply
B) a rise in the level of income
C) the repeated bouts of recession and expansion
D) increasing expected rates of inflation
26) ________ in the foreign interest 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
27) Even if the Fed could completely control the money supply, monetary policy would
have critics because
A) the Fed is asked to achieve many goals, some of which are incompatible with others
B) the Fed’s goals do not include high employment, making labor unions a critic of the
Fed
C) the Fed’s primary goal is exchange rate stability, causing it to ignore domestic
economic conditions
D) it is required to keep Treasury security prices high
28) An agreement to exchange dollar bank deposits for euro bank deposits in one month
is a
A) spot transaction
B) future transaction
C) forward transaction
D) deposit transaction
29) Thrift institutions importance as a source of funds for borrowers
A) has shrunk from around 40 percent of total credit advanced in the late 1970s to
below 30 percent by 2011
B) has shrunk from over 20 percent of total credit advanced in the late 1970s to around
3 percent by 2011
C) has expanded dramatically, from around 15 percent of total credit advanced in the
late 1970s to above 25 percent by 2011
D) has expanded dramatically, from around 15 percent of total credit advanced in the
late 1970s to above 30 percent by 2011
30) A decrease in the availability of raw materials that increases the price level is called
a ________ shock
A) negative demand
B) positive demand
C) negative supply
D) positive supply
31) On ________, October 19, 1987, the market experienced its worst one-day drop in
its entire history with the DJIA falling by 22%.
A) “Terrible Tuesday”
B) “Woeful Wednesday”
C) “Freaky Friday”
D) “Black Monday”
32) Paper currency that has been declared legal tender but is not convertible into coins
or precious metals is called ________ money.
A) commodity
B) fiat
C) electronic
D) funny
33) If reserves in the banking system increase by $200, then checkable deposits will
increase by $500 in the simple model of deposit creation when the required reserve
ratio is
A) 0.04
B) 0.25
C) 0.40
D) 0.50
34) Provisions in loan contracts that prohibit borrowers from engaging in specified
risky activities are called
A) proscription bonds
B) restrictive covenants
C) due-on-sale clauses
D) liens
35) If a central bank does not want to see its currency rise in value, it may pursue
________ monetary policy to ________ the domestic interest rate, thereby weakening
its currency.
A) expansionary; raise
B) contractionary; raise
C) expansionary; lower
D) contractionary; lower