1) According to the expectations theory of the term structure
A) the interest rate on long-term bonds will exceed the average of short-term interest
rates that people expect to occur over the life of the long-term bonds, because of their
preference for short-term securities
B) interest rates on bonds of different maturities move together over time
C) buyers of bonds prefer short-term to long-term bonds
D) buyers require an additional incentive to hold long-term bonds
2) The velocity of money is
A) the average number of times that a dollar is spent in buying the total amount of final
goods and services
B) the ratio of the money stock to high-powered money
C) the ratio of the money stock to interest rates
D) the average number of times a dollar is spent in buying financial assets
3) If workers do not believe that policymakers are serious about fighting inflation, they
are most likely to push for higher wages, which will ________ aggregate ________ and
lead to unemployment or inflation or both, everything else held constant.
A) decrease; demand
B) increase; demand
C) decrease; supply
D) increase; supply
4) When a new depositor opens a checking account at the First National Bank, the
bank’s assets ________ and its liabilities ________.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
5) ________ in the foreign interest rate causes the demand for domestic assets to shift
to the ________ and the domestic currency to appreciate, everything else held constant.
A) An increase; right
B) An increase; left
C) A decrease; right
D) A decrease; left
6) If expectations of the future inflation rate are formed solely on the basis of a
weighted average of past inflation rates, then economics would say that expectation
formation is
A) irrational
B) rational
C) adaptive
D) reasonable
7) In the simple deposit expansion model, if the Fed extends a $100 discount loan to a
bank that previously had no excess reserves, the bank can now increase its loans by
A) $10
B) $100
C) $100 times the reciprocal of the required reserve ratio
D) $100 times the required reserve ratio
8) For a given return on assets, the lower is bank capital,
A) the lower is the return for the owners of the bank
B) the higher is the return for the owners of the bank
C) the lower is the credit risk for the owners of the bank
D) the lower the possibility of bank failure
9) If reserves in the banking system increase by $100, then checkable deposits will
increase by $2,000 in the simple model of deposit creation when the required reserve
ratio is
A) 0.01
B) 0.05
C) 0.10
D) 0.20
10) The ________ interest rate is adjusted for expected changes in the price level.
A) ex ante real
B) ex post real
C) ex post nominal
D) ex ante nominal
11) The amount of deposits that banks must hold in reserve is
A) excess reserves
B) required reserves
C) total reserves
D) vault cash
12) An important function of the regional Federal Reserve Banks is
A) setting reserve requirements
B) clearing checks
C) determining monetary policy
D) setting margin requirements
13) An option that gives the owner the right to sell a financial instrument at the exercise
price within a specified period of time is a
A) call option
B) put option
C) American option
D) European option
14) The conversion of a barter economy to one that uses money
A) increases efficiency by reducing the need to exchange goods and services
B) increases efficiency by reducing the need to specialize
C) increases efficiency by reducing transactions costs
D) does not increase economic efficiency
15) Factors that can cause the supply curve for bonds to shift to the right include
A) an expansion in overall economic activity
B) a decrease in expected inflation
C) a decrease in government deficits
D) a business cycle recession
16) Probably the most significant factor explaining the drastic drop in the number of
bank failures since the Great Depression has been
A) the creation of the FDIC
B) rapid economic growth since 1941
C) the employment of new procedures by the Federal Reserve
D) better bank management
17) Which of the following $5,000 face-value securities has the highest yield to
maturity?
A) A 6 percent coupon bond selling for $5,000
B) A 6 percent coupon bond selling for $5,500
C) A 10 percent coupon bond selling for $5,000
D) A 12 percent coupon bond selling for $4,500
18) Credit risk management tools include
A) deductibles
B) collateral
C) interest rate swaps
D) duration analysis
19) Which of the following are not contractual savings institutions?
A) Life insurance companies
B) Credit unions
C) Pension funds
D) State and local government retirement funds
20) Coinsurance reduces moral hazard in exactly the same way as
A) limits on insurance
B) risk-based premiums
C) deductibles
D) restrictive provisions
21) Which of the following are true for discount bonds?
A) A discount bond is bought at par
B) The purchaser receives the face value of the bond at the maturity date
C) U.S. Treasury bonds and notes are examples of discount bonds
D) The purchaser receives the par value at maturity plus any capital gains
22) The present value of a fixed-payment loan is calculated as the ________ of the
present value of all cash flow payments.
A) sum
B) difference
C) multiple
D) log
23) Keynes’s model of the demand for money suggests that velocity is
A) constant
B) positively related to interest rates
C) negatively related to interest rates
D) positively related to bond values
24) Everything else constant, a stronger dollar will mean that
A) vacationing in England becomes more expensive
B) vacationing in England becomes less expensive
C) French cheese becomes more expensive
D) Japanese cars become more expensive
25) When the interest rate on a bond is ________ the equilibrium interest rate, in the
bond market there is excess ________ and the interest rate will ________.
A) above; demand; rise
B) above; demand; fall
C) below; supply; fall
D) above; supply; rise
26) The time it takes for policy makers to change policy instruments once they have
decided on the new policy is called
A) the data lag
B) the recognition lag
C) the legislative lag
D) the implementation lag
E) the effectiveness lag
27) In a world with few impediments to capital mobility, the domestic interest rate
equals the sum of the foreign interest rate and the expected depreciation of the domestic
currency, a situation known as the
A) interest parity condition
B) purchasing power parity condition
C) exchange rate parity condition
D) foreign asset parity condition
28) Using the liquidity preference framework, what will happen to interest rates if the
Fed increases the money supply?
29) Typically, the economy recovers fairly quickly from a recession. Why did this not
happen in the United States during the Great Depression?
30) What crucial role do financial intermediaries perform in an economy?
31) Explain two reasons why the Fed does not have complete control over the level of
bank deposits and loans. Explain how a change in either factor affects the deposit
expansion process.
32) If the interest rate is 5%, what is the present value of a security that pays you
$1,050 next year and $1,102.50 two years from now? If this security sold for $2200, is
the yield to maturity greater or less than 5%? Why?
33) Explain through the component parts of aggregate demand why the aggregate
demand curve slopes down with respect to the inflation rate. Be sure to discuss two
channels through which changes in inflation rates affect demand.
34) Would it make sense to buy a house when mortgage rates are 14% and expected
inflation is 15%? Explain your answer.