1) Referring to the Economic Stimulus Act of 2008, the expansionary effect of the
government stimulus was overwhelmed by the continuing deterioration in credit market
conditions Everything else held constant and using the ISLM model, the net effect
would cause the ________ curve to ________ and output will ________
A) IS; shift left; decrease
B) IS; shift right; increase
C) LM; shift right; increase
D) LM shift left; decrease
2) Bank holding companies that rival money center banks in size, but are not located in
money center cities are
A) superregional banks
B) bank clearing houses
C) international banks
D) local banks
3) Of the following methods that banks might use to reduce moral hazard problems, the
one not legally permitted in the United States is the
A) requirement that firms keep compensating balances at the banks from which they
obtain their loans
B) requirement that firms place on their board of directors an officer from the bank
C) inclusion of restrictive covenants in loan contracts
D) requirement that individuals provide detailed credit histories to bank loan officers
4) The two types of open market operations are
A) offensive and defensive
B) dynamic and reactionary
C) active and passive
D) dynamic and defensive
5) Everything else held constant, an increase in the currency 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
6) Studies of the major developed countries show that when businesses go looking for
funds to finance their activities they usually obtain these funds from
A) government agencies
B) equities markets
C) financial intermediaries
D) bond markets
7) Of the following, which would be the first choice for a bank facing a reserve
deficiency?
A) Call in loans
B) Borrow from the Fed
C) Sell securities
D) Borrow from other banks
8) Of the three players in the money supply process, most observers agree that the most
important player is
A) the United States Treasury
B) the Federal Reserve System
C) the FDIC
D) the Office of Thrift Supervision
9) Since depositors, like any lender, only receive fixed payments while the bank keeps
any surplus profits, they face the ________ problem that banks may take on too
________ risk
A) adverse selection; little
B) adverse selection; much
C) moral hazard; little
D) moral hazard; much
10) A business cycle expansion increases income, causing money demand to ________
and interest rates to ________, everything else held constant
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
11) Suppose the economy is producing at the natural rate of output An open market sale
of bonds by the Fed will cause ________ in real GDP in the short run and ________ in
inflation in the short run, everything else held constant
A) an increase; an increase
B) a decrease; a decrease
C) no change; an increase
D) no change; a decrease
12) Everything else held constant, a decrease in net taxes ________ aggregate
________
A) increases; demand
B) decreases; demand
C) decreases; supply
D) increases; supply
13) Factors likely to cause a financial crisis in emerging market countries include
A) severe fiscal imbalances
B) decreases in foreign interest rates
C) a foreign exchange crisis
D) too strong oversight of the financial industry
14) One factor contributing to the rapid growth of the commercial paper market since
1970 is
A) the fact that commercial paper has no default risk
B) improved information technology making it easier to screen credit risks
C) government regulation
D) FDIC insurance for commercial paper
15) The simple deposit multiplier can be expressed as the ratio of the
A) change in reserves in the banking system divided by the change in deposits
B) change in deposits divided by the change in reserves in the banking system
C) required reserve ratio divided by the change in reserves in the banking system
D) change in deposits divided by the required reserve ratio
16) ________ in the domestic 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
17) 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
18) Because of the “lemons problem” the price a buyer of a used car pays is
A) equal to the price of a lemon
B) less than the price of a lemon
C) equal to the price of a peach
D) between the price of a lemon and a peach
19) Using the aggregate demand-aggregate supply model, explain and demonstrate
graphically the short-run and long-run effects of an increase in the money supply
20) 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
21) Your best friend calls and gives you the latest stock market “hot tip” that he heard at
the health club Should you act on this information? Why or why not?
22) What factors have slowed down the movement to a system where all payments are
made electronically?
23) As of 2009, China’s economy had recovered from the global recession that began in
2008 Use aggregate demand and aggregate supply analysis to explain why, and to
explain the likely consequences for China of an increase in the growth rate of the global
economy
24) Explain and demonstrate graphically how targeting nonborrowed reserves can result
in federal funds rate instability
25) Explain the Federal Reserve’s “just do it” approach to monetary policy What are the
advantages and disadvantages to this type of strategy?