1) Interest-rate risk is the riskiness of an asset’s returns due to
A) interest-rate changes
B) changes in the coupon rate
C) default of the borrower
D) changes in the asset’s maturity
2) For simple loans, the simple interest rate is ________ the yield to maturity.
A) greater than
B) less than
C) equal to
D) not comparable to
3) When the Fed purchases artwork to decorate the conference room at the Federal
Reserve Bank of Kansas City,
A) reserves rise, but the monetary base falls
B) reserves fall
C) currency in circulation falls
D) the monetary base rises
4) In the Keynesian liquidity preference framework, an increase in the interest rate
causes the demand curve for money to ________, everything else held constant.
A) shift right
B) shift left
C) stay where it is
D) invert
5) Of the following assets, the least liquid is
A) stocks
B) traveler’s checks
C) checking deposits
D) a house
6) The Federal Open Market Committee makes the Fed’s decisions on the purchase or
sale of government securities, but these purchases or sales are executed by the Federal
Reserve Bank of
A) Chicago
B) Boston
C) New York
D) San Francisco
7) ________ are the most important monetary policy tool because they are the primary
determinant of changes in the ________, the main source of fluctuations in the money
supply.
A) Open market operations; monetary base
B) Open market operations; money multiplier
C) Changes in reserve requirements; monetary base
D) Changes in reserve requirements; money multiplier
8) Although the subprime mortgage market problem began in the United States, the first
indication of the seriousness of the crisis began in
A) Europe
B) Australia
C) China
D) South America
9) According to the law of one price, if the price of Colombian coffee is 100 Colombian
pesos per pound and the price of Brazilian coffee is 4 Brazilian reals per pound, then
the exchange rate between the Colombian peso and the Brazilian real is:
A) 40 pesos per real
B) 100 pesos per real
C) 25 pesos per real
D) 0.4 pesos per real
10) Because checking accounts are ________ liquid for the depositor than passbook
savings, they earn ________ interest rates.
A) less; higher
B) less; lower
C) more; higher
D) more; lower
11) Which of the following can be described as involving indirect finance?
A) You make a loan to your neighbor
B) You buy shares in a mutual fund
C) You buy a U.S. Treasury bill from the U.S. Treasury
D) A corporation buys a short-term security issued by another corporation in the
primary market
12) If you sold a short futures contract you will hope that bond prices
A) rise
B) fall
C) are stable
D) fluctuate
13) If a forecast made using all available information is not perfectly accurate, then it is
A) still a rational expectation
B) not a rational expectation
C) an adaptive expectation
D) a second-best expectation
14) If the 2005 inflation rate in Canada is 4 percent, and the inflation rate in Mexico is 2
percent, then the theory of purchasing power parity predicts that, during 2005, the value
of the Canadian dollar in terms of Mexican pesos will
A) rise by 6 percent
B) rise by 2 percent
C) fall by 6 percent
D) fall by 2 percent
15) If a member of the nonbank public purchases a government bond from the Federal
Reserve in exchange for currency, the monetary base will ________, but reserves will
________.
A) remain unchanged; rise
B) remain unchanged; fall
C) rise; remain unchanged
D) fall; remain unchanged
16) An asset’s interest rate risk ________ as the duration of the asset ________.
A) increases; decreases
B) decreases; decreases
C) decreases; increases
D) remains constant; increases
17) Everything else held constant, a decrease in the currency-checkable deposit ratio
will mean
A) an increase in currency in circulation and an increase in the money supply
B) an increase in money supply
C) a decrease in the money supply
D) an increase in currency in circulation but no change in the money supply
18) Fisher’s quantity theory of money suggests that the demand for money is purely a
function of ________, and ________ no effect on the demand for money.
A) income; interest rates have
B) interest rates; income has
C) government spending; interest rates have
D) expectations; income has
19) Keough plans and IRAs are
A) individual pension plans
B) government pension plans
C) corporate pension plans
D) public pension plans
20) Thrift institutions include
A) banks, mutual funds, and insurance companies
B) savings and loan associations, mutual savings banks, and credit unions
C) finance companies, mutual funds, and money market funds
D) pension funds, mutual funds, and banks
21) Even economists have no single, precise definition of money because
A) money supply statistics are a state secret
B) the Federal Reserve does not employ or report different measures of the money
supply
C) the “moneyness” or liquidity of an asset is a matter of degree
D) economists find disagreement interesting and refuse to agree for ideological reasons
22) If the Fed expects currency holdings to fall, it conducts open market ________ to
offset the expected ________ in reserves.
A) purchases; increase
B) purchases; decrease
C) sales; increase
D) sales; decrease
23) Financial markets quickly eliminate unexploited profit opportunities through
changes in
A) dividend payments
B) tax laws
C) asset prices
D) monetary policy
24) When a country forgoes its own currency and starts using another country’s
currency as its own, we say that this country has
A) created a currency board
B) undergone dollarization
C) adopted a managed exchange system
D) adopted an exchange rate monetary system
25) Everything else held constant, when actual output exceeds the natural rate of output
________ aggregate supply ________.
A) short-run; decreases
B) short-run; increases
C) long-run; increases
D) long-run; decreases
26) In the market for reserves, when the federal funds interest rate is below the discount
rate, the supply curve of reserves is
A) vertical
B) horizontal
C) positively sloped
D) negatively sloped
27) The existence of deposit insurance can increase the likelihood that depositors will
need deposit protection, as banks with deposit insurance
A) are likely to take on greater risks than they otherwise would
B) are likely to be too conservative, reducing the probability of turning a profit
C) are likely to regard deposits as an unattractive source of funds due to depositors’
demands for safety
D) are placed at a competitive disadvantage in acquiring funds
28) Irving Fisher’s view that velocity is fairly constant in the short run transforms the
equation of exchange into the
A) Friedman’s theory of income determination
B) quantity theory of money
C) Keynesian theory of income determination
D) monetary theory of income determination
29) The Fed’s mistakes of the early 1930s were compounded by its decision to
A) raise reserve requirements in 1936-1937
B) lower reserve requirements in 1936-1937
C) raise the monetary base in 1936-1937
D) lower the monetary base in 1936-1937
30) Because interest rates have substantial fluctuations, the ________ theory of the
demand for money indicates that velocity has substantial fluctuations as well.
A) classical
B) Cambridge
C) liquidity preference
D) Pigouvian
31) A ________ is a provision that restricts or specifies certain activities that a borrower
can engage in.
A) residual claimant
B) risk hedge
C) restrictive barrier
D) restrictive covenant
32) The legislation that overturned the prohibition on interstate banking is
A) the McFadden Act
B) the Gramm-Leach-Bliley Act
C) the Glass-Steagall Act
D) the Riegle-Neal Act
33) Either a dual or hierarchial mandate is acceptable as long as ________ is the
primary goal in the ________.
A) price stability; short run
B) price stability; long run
C) reducing business-cycle fluctuations; short run
D) reducing business-cycle fluctuations; long run
34) Of the three motives for holding money suggested by Keynes, which did he believe
to be the most sensitive to interest rates?
A) The transactions motive
B) The precautionary motive
C) The speculative motive
D) The altruistic motive
35) The Basel Accord, an international agreement, requires banks to hold capital based
on
A) risk-weighted assets
B) the total value of assets
C) liabilities
D) deposits
36) To say that the forward market lacks liquidity means that
A) forward contracts usually result in losses
B) forward contracts cannot be turned into cash
C) it may be difficult to make the transaction
D) forward contracts cannot be sold for cash
37) In one sense ________ appears surprising since it means that the bank is not
________ its portfolio of loans and thus is exposing itself to more risk.
A) specialization in lending; diversifying
B) specialization in lending; rationing
C) credit rationing; diversifying
D) screening; rationing
38) A decrease in default risk on corporate bonds ________ the demand for these
bonds, and ________ the demand for default-free bonds, everything else held constant.
A) increases; lowers
B) lowers; increases
C) does not change; greatly increases
D) moderately lowers; does not change