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1) The interest rate the Fed charges banks borrowing from the Fed is the
A) federal funds rate
B) Treasury bill rate
C) discount rate
D) prime rate
2) If the economy is on the IS curve, but is to the left of the LM curve, aggregate output
will ________ and the interest rate will ________
A) rise; rise
B) rise; fall
C) fall; rise
D) fall; fall
3) The speculative demand for money may not exist because
A) banks now pay interest on some types of checkable deposits
B) there are alternative riskless assets paying higher returns than the return on money
C) the transactions demand can be shown to depend on interest rates
D) government regulations have eliminated risk in the financial markets
4) If the price level increases from 200 in year 1 to 220 in year 2, the rate of inflation
from year 1 to year 2 is
A) 20%
B) 10%
C) 11%
D) 120%
5) If the Taylor Principle is not followed and nominal interest rates are increased by less
than the increase in the inflation rate, then real interest rates will ________ and
monetary policy will be too ________
A) rise; tight
B) rise; loose
C) fall; tight
D) fall; loose
6) Psychologists have found that people tend to be ________ in their own judgments
A) underconfident
B) overconfident
C) indecisive
D) insecure
7) The ________ of a coupon bond and the yield to maturity are inversely related
A) price
B) par value
C) maturity date
D) term
8) Under the European System of Central Banks, the Governing Council is similar in
structure to the ________ of the Federal Reserve System
A) Board of Governors
B) Federal Open Market Committee
C) Federal Reserve Banks
D) Federal Advisory Council
9) The excess reserves ratio is ________ related to expected deposit outflows, and is
________ related to the market interest rate
A) negatively; negatively
B) negatively; positively
C) positively; negatively
D) positively; positively
10) Financial instruments whose payoffs are linked to previously issued securities are
called
A) grandfathered bonds
B) financial derivatives
C) hedge securities
D) reversible bonds
11) Why did the interest rate volatility of the 1970s spur financial innovation?
12) Explain and demonstrate graphically how targeting the federal funds rate can result
in fluctuations in nonborrowed reserves
13) Explain and demonstrate graphically the situation of an overvalued exchange rate in
a fixed exchange rate system What alternative policies are available to eliminate the
overvaluation of the exchange rate?
14) Because there is an imbalance of information in a lending situation, we must deal
with the problems of adverse selection and moral hazard Define these terms and explain
how financial intermediaries can reduce these problems
15) Using the ISLM model, show graphically and explain the effects of a monetary
contraction What is the effect on the equilibrium interest rate and level of output?
