1) Assume a bank has $200 million of assets with a duration of 25, and $190 million of
liabilities with a duration of 105 If interest rates increase from 5 percent to 6 percent,
the net worth of the bank falls by
A) $1 million
B) $24 million
C) $36 million
D) $48 million
2) A central feature of monetary policy strategies in all countries is the use of a nominal
variable that monetary policymakers use as an intermediate target to achieve an ultimate
goal such as price stability Such a variable is called a nominal
A) anchor
B) benchmark
C) tether
D) guideline
3) The “lemons problem” exists because of
A) transactions costs
B) economies of scale
C) rational expectations
D) asymmetric information
4) Consumer protection legislation includes legislation to
A) reduce discrimination in credit markets
B) require banks to make loans to everyone who applies
C) reduce the amount of interest that bank’s can charge on loans
D) require banks to make periodic reports to the Better Business Bureau
5) Assuming that the average duration of its assets is five years, while the average
duration of its liabilities is three years, then a 5 percentage point increase in interest
rates will cause the net worth of First National to decline by ________ of the total
original asset value
A) 5 percent
B) 10 percent
C) 15 percent
D) 25 percent
6) ________ in the foreign interest rate causes the demand for domestic assets to shift
to the right 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
7) Financial institutions that accept deposits and make loans are called
A) exchanges
B) banks
C) over-the-counter markets
D) finance companies
8) Foreign exchange rate stability is important because a decline in the value of the
domestic currency will ________ the inflation rate, and an increase in the value of the
domestic currency makes domestic industries ________ competitive with competing
foreign industries
A) increase; more
B) increase; less
C) decrease; more
D) decrease; less
9) Everything else held constant, an increase in the excess reserve ratio will mean
________ in the M2 money multiplier and ________ in the M2 money supply
A) an increase; an increase
B) an increase; a decrease
C) a decrease; an increase
D) a decrease; a decrease
10) For restrictive covenants to help reduce the moral hazard problem they must be
________ by the lender
A) monitored and enforced
B) written in all capitals
C) easily changed
D) impossible to remove
11) While the discount rate is “established” by the regional Federal Reserve Banks, in
truth, the rate is determined by
A) Congress
B) the president of the United States
C) the Senate
D) the Board of Governors
12) The theory of PPP suggests that if one country’s price level rises relative to
another’s, its currency should
A) depreciate in the long run
B) appreciate in the long run
C) depreciate in the short run
D) appreciate in the short run
13) When a bank suspects that a $1 million loan might prove to be bad debt that will
have to be written off in the future the bank
A) can set aside $1 million of its earnings in its loan loss reserves account
B) reduces its reported earnings by $1, even though it has not yet actually lost the $1
million
C) reduces its assets immediately by $1 million, even though it has not yet lost the $1
million
D) reduces its reserves by $1 million, so that they can use those funds later
14) The Basel Committee ruled that regulators in other countries can ________ the
operations of a foreign bank if they believe that it lacks effective oversight
A) restrict
B) encourage
C) renegotiate
D) enhance
15) Evidence from the time period 1960-1980 indicates that inflation in the United
States resulted from
A) an employment target that was set too high
B) the government’s inability to sell bonds to the Fed
C) an expansion in the money supply to finance federal government expenditures
D) the excessive sale of government bonds to the public
16) The quantity theory of inflation indicates that the inflation rate equals
A) the growth rate of the money supply minus the growth rate of aggregate output
B) the level of the money supply minus the level of aggregate output
C) the growth rate of the money supply plus the growth rate of aggregate output
D) the level of the money supply plus the level of aggregate output
17) Keynes’s theory of the demand for money is consistent with
A) countercyclical movements in velocity
B) a constant velocity
C) procyclical movements in velocity
D) a relatively stable velocity
18) The elimination of unexploited profit opportunities requires that ________ market
participants be well informed
A) all
B) a few
C) zero
D) many
19) You would be more willing to buy AT&T bonds (holding everything else constant)
if
A) the brokerage commissions on bond sales become cheaper
B) interest rates are expected to rise
C) your wealth has decreased
D) you expect diamonds to appreciate in value
20) The price of a coupon bond and the yield to maturity are ________ related; that is,
as the yield to maturity ________, the price of the bond ________
A) positively; rises; rises
B) negatively; falls; falls
C) positively; rises; falls
D) negatively; rises; falls