Econ 2035 Final (Part 1)

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"Tips" published in leading commercial or financial publications are unlikely to lead to profitable trades because A) only wealthy individuals can buy stocks in the volume necessary to take advantage of tips. B) whatever is gained by trading on the basis of tips will be taxed away by the government. C) the news will already be reflected in the market prices of the assets. D) the news contained in the tips is usually inaccurate.

$1 received n years from now has a value today of A) ($1 + i)/i. B) $1/(1 + i). C) ($1 + i)^n/i. D) $1/(1 + i)^n.

What is the percent value of $500 to be paid in two years if the interest rate is 5%?

$453.51

Which of the following $1,000 face-value securities has the highest yield to maturity? 1. a 12 percent coupon bond selling for $1,000 2. a 12 percent coupon bond selling for $1,000 3. a 5 percent coupon bond selling for $1,000 4. a 10 percent coupon bond selling for $1,000

1. a 12 percent coupon bond selling for $1,000

Which of the following increase aggregate supply in the short-run, everything else held constant? 1. an increase in the price of crude oil 2. a technological improvement that increases worker productivity 3. a successful wage push by workers 4. expectations of a higher inflation

2. a technological improvement that increases worker productivity

Assume that the following are the predicted inflation rates in these countries for the year: 2% US, 3% Canada, 4% Mexico, and 5% Brazil. According to the purchasing power parity, which of the following would we expect to happen, everything else held constant? 1. the US dollar will deprecate against the Canadian dollar 2. The Brazilian real will depreciate against the US dollar 3. the Canadian dollar will depreciate against the Mexican peso 4. The Mexican peso will depreciate against the Brazilian real

2. the Brazilian real will depreciate against the US dollar

According to the law of one price, if the prie of Colombian coffee is 100 Colombian pesos per pound and the price of Brazilian coffee is 4 Brazilians reals per pound, then the exchange rate between the Colombian peso and the Brazilian real is...

25 pesos per real

What is the return on a 5% coupon bond that initially sells for $1,000 and sells for $1,200 the next year?

25%

In which of the following situations would you prefer to be the lender? 1. the interest rate is 13 percent and the expected inflation is 15 percent 2. the interest rate is 25 percent and the expected inflation rate is 50 percent 3. the interest rate is 4 percent and the expected inflation rate is 1 percent 4. the interest rate is 9 percent and the expected inflation rate is 7 percent

3. the interest rate is 4 percent and the expected inflation rate is 1 percent

A $10,000, 8% coupon bond that sells for $10,000 has a yield to maturity of?

A "primary market" is a market A) for government securities. B) in which newly issued claims are sold to buyers by borrowers. C) in which newly issued claims are sold by savers to borrowers. D) for debt by large or "primary" corporations.

A $10 million open market purchase will increase the monetary base by A) $10 million. B) $10 million times the money multiplier. C) $10 million divided by the money multiplier. D) an amount between $0 and $10 million, depending on the fraction of the purchase the public wishes to hold as currency.

A $10 million open market sale will decrease the monetary base by A) $10 million. B) $10 million times the money multiplier. C) $10 million divided by the money multiplier. D) an amount between $0 and $10 million, depending on the fraction of the purchase the public wishes to hold as currency.

$15 million

A $15 million open market purchase will increase the monetary base by

1 peso = 8 yen

A Big Mac costs 400 yen in Japan and 50 pesos in Mexico. The purchasing power parity (PPP) theory would predict that the

A Federal Reserve repurchase agreement involves A) an agreement by a bank to repay a discount loan on a specific day. B) an agreement by a dealer to buy back securities she has sold to the Fed. C) an agreement between the Fed and the Treasury for the Fed to purchase a specified amount of Treasury securities. D) an agreement by a commercial bank to make a loan to another bank in the federal funds market.

A Japanese television sells for ¥100,000 and a dollar is equal to ¥100. What is the dollar price of the television? A) $1000 B) $99,900 C) $10,000,000 D) $100,100

A balance sheet A) is a statement showing an individual's or a firm's financial position at a particular point in time. B) is a statement showing an individual's or a firm's income over a period of time. C) is a statement listing the tax liabilities incurred by an individual or a firm. D) can be constructed for any nonfinancial firm, but cannot be constructed for a financial firm.

both involve funds being channeled from savers to borrowers through financial intermediaries

A bank lending depositors' money to a local business and a pension fund investing contributions in shares of a company are similar financial activities in that

A bank lending depositors' money to a local business and a pension fund investing contributions in shares of a company are similar financial activities in that A) both involve the use of financial markets. B) both involve funds being channeled from savers to borrowers through financial intermediaries. C) both involve a reduction in the overall level of liquidity in the financial system. D) both involve in an increase in the overall level of risk in the financial system.

A bank panic occurs when A) a bank is worried that its loans will not be repaid. B) an individual bank cannot meet its reserve requirements. C) a bank lacks sufficient funds with which to make loans. D) the situation in which many banks experience a bank run simultaneously.

A bank run involves A) a failure by a bank to get the maximum return on its investments. B) large numbers of depositors withdrawing their deposits within a short period of time. C) a bank being forced out of business. D) fraud on the part of a bank's managers.

want the duration of its asstes to be greater than the duration of its liabilities - a positive duration gap

A bank that expects interest rates to fall will

A bank that expects interest rates to fall will A) want the duration of its assets to be greater than the duration of its liabilities—a positive duration gap. B) want the duration of its assets to be less than the duration of its liabilities—a positive duration gap. C) want the duration of its assets to be greater than the duration of its liabilities—a negative duration gap. D) want the duration of its assets to be less than the duration of its liabilities—a negative duration gap.

A bank's costs include all of the following EXCEPT A) the interest it pays to depositors. B) the interest it pays on its loans or debt. C) the cost of providing services. D) the fees paid to maintain its reserve at the Federal Reserve.

A bank's remaining value after it has met all its liabilities is known as a A) bank's assets. B) bank's liabilities. C) bank capital. D) bank's income.

A bank's revenue comes from all of the following EXCEPT A) interest earned on vault cash. B) fees for services provided. C) interest on loans. D) interest on securities.

A bond that is generally agreed to have higher default risk will experience all of the following EXCEPT: A) declining demand B) declining supply C) higher yield D) lower price

A bond's price and its yield to maturity are inversely related because A) discounting future payments at a higher rate reduces the present value of the payments. B) discounting future payments at a higher rate increases the present value of the payments. C) an increase in the yield to maturity will lower a bond's coupon rate and hence its price. D) a fall in a bond's price will lower its par value and hence its yield to maturity.

A borrower and a lender agree on a mortgage interest rate. If inflation turns out to be less than expected A) the actual real interest rate will exceed the expected real interest rate. B) the actual real interest rate will be less than the expected real interest rate. C) the actual nominal interest rate will be higher than expected. D) the actual nominal interest rate will be less than expected.

A bubble occurs when A) the price of a stock is above its fundamental value. B) inside information is used to make profits from trading a company's stock. C) a company reports profits that are significantly above or below the expectations of financial analysts. D) the futures price is greater than the price of the underlying asset.

A capital gain occurs when the A) coupon rate increases. B) current yield increases. C) price of an asset increases. D) yield to maturity increases.

A cash item in the process of collection is A) a U.S. Treasury bill that has matured, but for which the bank has not yet received payment. B) a car loan payment that is due but not yet received by the bank. C) a check drawn against another bank, from whom the funds have not yet been collected. D) currency that has been deposited in the bank, but not yet formally counted and entered into the bank's balance sheet.

A change in the dollar value of the British pound from $1.60 to $1.50 represents A) an increase in the pound price of British goods. B) an appreciation of the dollar relative to the pound. C) an appreciation of the pound relative to the dollar. D) an increase in the dollar price of British goods.

A checkable deposit that pays no interest is known as a A) demand deposit. B) certificate of deposit. C) NOW account. D) time deposit.

A chief criticism of adaptive expectations is that A) it assumes people ignore information that would be useful in making forecasts B) people have a hard time adapting C) it doesn't rely on technical analysis D) it violates the efficient markets hypothesis

A closed economy is one in which A) investment spending is zero. B) government spending is zero. C) there are no imports or exports. D) demand equals supply in every market.

A closed economy is one that A) has no government sector. B) neither borrows from nor lends to foreign countries. C) produces mainly agricultural goods. D) produces mainly manufactured goods.

A company that retains a high bond rating during a recession in which many other companies see their bond ratings cut will experience A) an increased flow of funds into the market for its securities. B) an increased demand for its securities, resulting in a higher expected return. C) a decreased demand for its securities, resulting in a lower expected return. D) a decreased flow of funds into the market for its securities.

A consequence of the impact lag is that the Fed A) may not know the impact of a change in policy. B) might not be able to correct a mistaken policy soon enough. C) may not have current information about the state of the economy. D) may see the impact of a change in policy on inflation, but not economic growth.

A corporation's market capitalization is best described as A) the total value of its stocks and bonds. B) the total value of its common and preferred stock. C) its total profit for a particular year. D) its average profit over a period of years.

A coupon bond has an annual coupon of $75, a par value of $1000, and a market price of $900. Its current yield equals A) 7.50%. B) 8.33%. C) its yield to maturity. D) Not enough information has been provided to calculate the current yield for this bond.

A coupon bond involves A) interest payments from the borrower to the lender periodically during the life of the loan and payment by the borrower to the lender of the face value of the loan at maturity. B) interest and principal payments from the borrower to the lender periodically during the life of the loan. C) periodic payments by the borrower to the lender that include both principal and interest. D) periodic payments by the borrower to the lender that include principal, but not interest.

A debt instrument represents A) an ownership claim by the purchaser on the issuer. B) a promise by a borrower to repay principal plus interest to a lender. C) an attempt by a borrower in default to restore his or her credit. D) a nontaxable asset, owned primarily by large corporations.

A decline in bank lending has the most significant effect on A) small businesses. B) large businesses. C) state governments. D) federal government.

A decline in the output gap causes the demand for real balances A) to rise and the interest rate to fall. B) to fall and the interest rate to rise. C) and the interest rate to fall. D) and the interest rate to rise.

A decrease in expected inflation A) usually leads to falling nominal interest rates. B) results in increased nominal capital gains on physical assets. C) will shift the bond demand curve to the left. D) will shift the supply curve for loanable funds to the left.

decrease;increase

A decrease in money supply will result in a(n) ___ in the quantity of money demanded and cause the nominal interest rate to ___

A defined benefits plan A) is always fully funded. B) may be underfunded but cannot be overfunded. C) may be overfunded but cannot be underfunded. D) may be either underfunded or overfunded.

A depreciating nominal exchange rate results from A) a depreciating real exchange rate. B) a low domestic inflation rate relative to the foreign inflation rate. C) an appreciating real exchange rate. D) a large government budget deficit.

A discount bond involves A) interest payments from the borrower to the lender periodically during the life of the loan. B) payment by the borrower to the lender of the face value of the loan at maturity. C) no payment of principal by the borrower to the lender. D) payment of interest by the borrower to the lender every six months during the life of the loan.

A discount bond resembles a simple loan in that A) the interest on neither is taxable. B) the borrower repays in a single payment. C) both represent assets to the borrowers who issue them. D) both have par values greater than their face values.

A falling dollar makes U.S. goods A) more expensive abroad and increases the volume of U.S. exports. B) less expensive abroad and increases the volume of U.S. exports. C) less expensive abroad and decreases the volume of U.S. exports. D) more expensive abroad and decreases the volume of U.S. exports.

A financial contract in which a bank agrees to sell the expected future returns from an underlying bank loan to a third party is referred to as: A) loan sale B) loan commitment C) credit rationing D) microlending

A firm's agents are its A) shareholders. B) management. C) marketing department. D) customers.

A firm's net worth is equal to the value of its A) assets minus the value of its liabilities. B) liabilities minus the value of its assets. C) common stock minus the value of its outstanding bonds. D) outstanding bonds minus the value of its common stock.

A firm's principals are its A) shareholders. B) management. C) values. D) customers.

A flight to quality refers to a shift by savers from A) bonds and into stocks. B) stocks and into gold or other precious metals. C) bonds and into real assets, such as real estate. D) low-quality bonds and into high-quality bonds.

A hyperinflation occurs when A) inflation persists for more than two years. B) inflation persists for more than five years. C) the inflation rate exceeds 50% per year. D) the inflation rate exceeds 50% per month

A key difference between small-denomination and large-denomination time deposits is that A) small-denomination time deposits pay no interest. B) large-denomination time deposits may be bought and sold on secondary markets. C) large-denomination time deposits carry a significant penalty for early withdrawal. D) small-denomination time deposits carry a significant penalty for early withdrawal.

value of a stock depends on investor's expectations about the future profitability of a firm

A key feature of Gordon growth model in that the

A key point made by the Gordon-Growth model is that the A) value of a stock depends on investor's expectations about the future profitability of a firm. B) past trends in a stock's behavior indicate future price trends. C) dividends have little to do with a stock's value. D) risk has little effect on a stock's value.

A load fund A) charges a commission for purchases or sales. B) is not obligated to redeem shares issued. C) earns income only from management fees. D) issues shares that may sell at a discount to the market value of the underlying assets.

A loan officer uses a credit scoring system to A) compare the interest rate on a loan to interest rates on other assets with comparable risk. B) keep track of the fraction of a bank's assets tied up in loans to a single individual or business. C) predict statistically whether an individual is likely to default on a loan. D) match any particular loan with the deposits being used to fund it.

A matched sale-purchase transaction is also known as a A) reverse repo. B) discount loan. C) put option. D) federal funds loan.

A monetary aggregate is a measure of A) the inflation rate. B) the total economic activity of the country. C) money broader than currency. D) definitive money.

A one-year bond currently pays 5% interest. It's expected that it will pay 4.5% next year and 4% the following year. The two-year term premium is 0.2% while the three-year term premium is 0.35%. What is the interest rate on a three-year bond according to the liquidity premium theory? A) 4.5% B) 4.68% C) 4.85% D) 5.05%

A one-year bond currently pays 5% interest. It's expected that it will pay 4.5% next year and 4% the following year. The two-year term premium is 0.2% while the three-year term premium is 0.35%. What is the interest rate on a two-year bond according to the liquidity premium theory? A) 4.5% B) 4.75% C) 4.95% D) 4.975%

A one-year discount bond with a face value of $10,000 that is currently selling for $9400 has an interest rate of A) 3.10%. B) 6%. C) 6.38%. D) 60%.

A one-year discount bond with a face value of $1000 has an interest rate of 4%. What is its price? A) $960 B) $961.54 C) $996 D) $1,040

A one-year discount bond with a face value of $1000 that is currently selling for $900 has an interest rate of A) 5.26%. B) 10%. C) 11.1%. D) 100%.

A one-year discount bond with a par value of $1000 sold today, at issuance, for $943 has a yield to maturity of A) 4.30%. B) 5.70%. C) 6.04%. D) 9.43%.

A one-year discount bond with a par value of $5000 sold today, at issuance, for $4750 has a yield to maturity of A) 5.00%. B) 5.26%. C) 2.50%. D) 9.75%.

A part of the Jumpstart Our Business Startups (JOBS) Act: A) banks were required to provide special financing for start ups B) differences between qualified and unaccredited investors were removed C) the SEC is no longer is allowed to regulate funding of business start ups D) Congress removed some of the restrictions on using crowd-funding to allow small investors to buy equity in start-ups

moral hazard

A person takes out a car loan at a bank, but actually uses the money to play the lottery. This situation is an example of which problem banks face in lending

A person takes out a car loan at a bank, but actually uses the money to play the lottery. This situation is an example of which problem banks face in lending? A) adverse selection B) moral hazard C) interest rate risk D) illiquidity

A person's earnings over a period of time is known as A) money B) income C) wealth D) all of the above

A portfolio is a A) brokerage house specializing in the trading of common stock. B) brokerage house specializing in the trading of corporate bonds. C) measure of the risk involved with a holding a particular asset. D) collection of assets.

A primary criticism of preferential tax treatment of dividends and capital gains is: A) there is not a double taxation of dividends B) it adversely affects the distribution of after-tax income C) there is no locked-in effect resulting from taxation of capital gains D) it does not have any impact on efficiency

A quota refers to: A) a tax on imported goods B) a limit on the amount of a good that can be imported C) the range within which an exchange rate is allowed to fluctuate D) a limit on the size of a trade deficit

A reduction in expected inflation will result in all of the following EXCEPT: A) lower nominal interest rates B) lower real interest rates C) reduced demand for bonds D) increased supply of bonds

A reduction in the money supply will result in: A) a lower interest rate and more negative output gap B) a higher interest rate and more positive output gap C) a lower interest rate and more positive output gap D) a higher interest rates and more negative output gap

A rising dollar makes U.S. goods A) more expensive abroad and increases the volume of U.S. exports. B) less expensive abroad and increases the volume of U.S. exports. C) less expensive abroad and decreases the volume of U.S. exports. D) more expensive abroad and decreases the volume of U.S. exports.

A simple loan involves A) interest payments from the borrower to the lender periodically during the life of the loan. B) no payment of interest by the borrower to the lender. C) payment of interest by the borrower to the lender only at the time the loan matures. D) payment only of principal. by the borrower to the lender at maturity.

A small open economy A) is unable to affect the world real interest rate by its borrowing and lending decisions. B) will always be a net borrower from abroad. C) will always be a net lender abroad. D) is almost never able to borrow abroad.

A specified amount of a claim that the insurance company does not need to pay is called: A) coinsurance B) deductible C) copayments D) premium

A stress test of banks, such as that undertaken in the Spring of 2009, is designed to: A) ensure that banks have followed proper accounting standards B) make sure that banks are properly managed C) gauge how well banks would fare if the economy worsens D) estimate the impact of a bank panic on the overall economy

A substantial appreciation of the U.S. dollar will likely result in, all else equal, A) lower demand for U.S. products and layoffs of U.S. workers. B) increased demand for U.S. products and increased employment of U.S. workers. C) lower foreign currency prices of U.S. products in foreign countries. D) higher U.S. dollar prices of foreign products in the United States.

A sustained decrease in the price level is known as A) inflation. B) disinflation. C) reflation. D) deflation.

A syndicate is A) a group of brokers illegally making use of insider information. B) a group of commercial banks that agrees to accept the checks of each other's depositors. C) a group of investment banks underwriting a large security issue. D) a group of dealers that markets a government bond issue.

A system of barter has substantial transactions costs because A) taxes under such a system are generally a large fraction of the value of output. B) traders must spend considerable time searching for trading partners. C) the uncertainties of trade result in high legal fees being incurred to draw up binding contracts. D) the uncertainties of trade result in high insurance premiums.

A tariff is a A) limit on the volume of foreign goods that can be brought into the country. B) tax on goods purchased from other countries. C) tax on goods exported to other countries. D) subsidy by governments to firms that produce goods for export to other countries.

4) Who organized the Bank of the United States?

A) Alexander Hamilton

2) Which central bank gained the power to set interest rates independent of the government in the late 1990s?

A) Bank of England

54) The Dodd-Frank Act removed which group from decisions regarding the presidents of Federal Reserve Banks?

A) Class A directors

23) The members of Federal Reserve district bank boards of directors who are bankers are known as

A) Class A directors.

28) Which economist is credited with having been the first to discuss the "lemons problem"?

A) George Akerlof

43) The national economic forecast for the next two years prepared by the staff of the Board of Governors is published in the

A) Green Book.

5) What is the main reason the Fed operates in a political arena?

A) It lacks a constitutional mandate.

38) Which of the following men has NOT served as Chairman of the Board of Governors?

A) Milton Friedman

33) Why did fewer state banks choose to become or remain members of the Federal Reserve System during the 1960s and 1970s?

A) Nominal interest rates rose.

58) Which of the following agencies has established standardized accounting principles for reporting corporate earnings?

A) The Securities and Exchange Commission

33) Why is adverse selection more likely in financial markets when interest rates rise?

A) The remaining borrowers are more likely to be risky.

32) When interest rates in the bond market rise

A) adverse selection problems increase.

43) Requirements for information disclosure for firms that desire to sell securities in financial markets

A) are very common in industrialized countries, including the United States.

48) A firm's net worth is equal to the value of its

A) assets minus the value of its liabilities.

50) Lenders may be reluctant to increase the interest rate they charge borrowers because these higher interest rates may

A) attract less creditworthy borrowers, increasing adverse selection.

64) Moral hazard is NOT eliminated in debt financing because

A) borrowers have an incentive to assume greater risk than is in the interest of the lender.

6) Generally

A) countries with the most independent central banks have the lowest inflation rates.

68) In effect, banks are able to charge

A) depositors for banks' superior information about borrowers.

42) The Beige Book is prepared by

A) district banks.

49) A majority of the members of the boards of the 12 Federal Reserve Banks are

A) elected by bankers.

72) Banks require collateral for loans in order to

A) ensure that borrowers have significant amounts of their own funds invested in their businesses.

4) Which of the following is NOT an example of transactions costs?

A) high interest rates

5) Small investors face

A) high transactions costs in financial markets.

17) The main argument against Fed independence is that

A) in a democracy, elected officials should make public policy.

17) Which of the following is the most likely result of financial intermediaries?

A) increased funds available to borrowers

78) Many economists and policymakers have raised concerns about crowdfunding due to the existence of

A) information costs facing small investors.

9) Due in part to record low interest rates on U.S. Treasury Bonds

A) investors searching for higher yields bought corporate bonds.

62) In the United States, the stake of top management in firms' ownership usually is

A) less than 5%.

51) The Bank of the United States faced opposition from which of the following?

A) local banks who resented the Bank's supervision B) advocates of limited government who distrusted its power C) farmers and small businesses who resented the Bank's interference with their ability to obtain loans D) all of the above

5) Why are corporations more likely to raise funds externally by debt instead of equity?

A) moral hazard is less of a problem with debt contracts

1) From 2010 2015, which of the following was the primary source of external financing for small to medium-size firms?

A) mortgages

1) Apart from the United States, in countries where central bank board members serve fixed terms of office

A) none have terms as long as fourteen years.

8) By reducing transactions and information costs, financial intermediaries can

A) offer savers higher interest rates. B) offer borrowers lower interest rates. C) earn a profit. D) all of the above.

27) Which of the following is NOT an activity carried out by Federal Reserve district banks?

A) open market operations

71) Financial intermediaries are able to act as delegated monitors for individual savers because

A) other investors are unable to gain a free ride on their monitoring efforts.

3) In 1791, Congress established the Bank of the United States, which was set up as a

A) private corporation with stock sold to the general public.

40) The margin requirement set by the Federal Reserve is the

A) proportion of the purchase price of a security that an investor must pay in cash.

75) The existence of adverse selection results in

A) reduced market efficiency.

38) One reaction of firms to the adverse selection problem is to

A) rely on internal funds to finance investment.

74) All of the following are benefits of securitization EXCEPT

A) risk sharing.

59) A firm's principals are its

A) shareholders.

30) You own a 2007 Ford Explorer. Although it has high mileage, you have maintained it very well. You want to sell it, but after checking the prices other owners of 2007 Ford Explorers are able to get for their cars in the used car market, you decide the prices are too low and you decide not to sell. This is an example of

A) the "lemons problem."

62) Who is considered to wield the most power in the Federal Reserve System?

A) the Fed chair

46) To conduct open market operations, the FOMC issues a directive to

A) the Open Market Desk at the Federal Reserve Bank of New York.

14) Financial intermediaries are able to exploit economies of scale since

A) the equipment or expertise necessary for one transaction can be applied to other transactions.

56) Suppose one person buys a copy of Consumer Reports and gives away free copies to all who request one. This is an example of

A) the free rider problem.

9) The public interest view of Fed motivation holds that the Fed acts in the interest of

A) the general public.

82) Since crowdfunding sites do not themselves invest in business startups that raise funds on their sites, they don't reduce

A) the principal-agent problem.

20) Who owns the Federal Reserve banks?

A) the private commercial banks in each district which are members of the Federal Reserve System

61) When managers do NOT own very much of the net worth of the firm, then

A) there may be a principal-agent problem.

4) Smaller firms tend to rely on financial intermediaries instead of financial markets for external financing due to

A) transactions costs. B) adverse selection. C) moral hazard. D) all of the above.

9) The National Monetary Commission

A) was created by Congress to study the setting up of a central bank.

About what percentage of U.S. output was exported to foreigners in 2012? A) 1% B) 14% C) 18% D) 25%

About what percentage of bank assets is made up of cash items in 2012? A) 8% B) 20% C) 37% D) 50%

About what percentage of the goods and services purchased by U.S. consumers, businesses, and governments in 2012 were produced by foreigners? A) 5% B) 14% C) 18% D) 40%

Above-normal returns on stock investments can be expected by investors who A) possess insider information. B) are wealthy enough to hold the stock of many different companies in their portfolios. C) are risk seeking. D) concentrate their investments in one or two stocks.

yield curve

According to Taylor's rule, all of the following variables help explain the behavior of the federal funds rate EXCEPT

According to Taylor's rule, all of the following variables help explain the behavior of the federal funds rate EXCEPT A) output gap. B) current inflation. C) inflation gap. D) yield curve.

According to a 2012 study of the crowd funding site Kickstarter, what percent of firms failed to meet the deadlines for finishing a product? A) 25% B) 50% C) 75% D) 90%

According to the Efficient Markets Hypothesis, prices of securities A) change infrequently. B) change frequently to reflect news about changes in the fundamental values of the securities. C) change frequently as evaluations of existing information about the securities change. D) are not allowed, under federal securities laws, to change more frequently than once a month.

According to the Fisher effect, an increase in expected inflation results in: A) lower nominal interest rates B) higher nominal interest rates C) lower real interest rates D) higher real interest rates

According to the Gordon-Growth model, an increase in the required return on equity A) increases the future value of the stock. B) reduces the current dividend. C) reduces the value of a stock. D) reduces the expected growth rate of the dividend.

According to the Gordon-Growth model, if the stock price is $21, required return on equity is 10% and the current dividend is $1, what is the expected growth rate of dividends? A) 2% B) 5% C) 10% D) 15%

According to the Gordon-Growth model, what is the value of a stock with a dividend of $1, required return on equity of 10% and expected growth rate of dividends of 5%? A) $2 B) $10 C) $20 D) $21

According to the Gordon-Growth model, what is the value of a stock with a dividend of $2, required return on equity of 8% and expected growth rate of dividends of 4%? A) $25 B) $26 C) $50 D) $52

According to the Gordon-Growth model, what will be the percentage change in the value of a stock of a company whose current dividend is $10.00 and whose dividends had been expected to grow by 3% but now are expected to grow by 4% per year? A) 4.0% B) 17.8% C) 25.0% D) 33.3%

According to the Gordon-Growth model, what will be the percentage change in the value of the stock of a company whose current dividend is $10.00 and whose dividends had been expected to grow by 3% per year but now are expected to grow by 1% per year? A) -4.0% B) -23.7% C) -31.1% D) -66.0%

According to the Gordon-Growth model, which of the following can cause the value of a stock to decline? A) higher expected growth rate of dividends B) increase in the current dividend C) increased systemic risk D) decreased required return on equity

According to the Phillips Curve, which of the following may have taken place if both the unemployment rate and inflation have risen? A) a negative supply shock B) an increase in expected inflation C) a severe recession D) a negative demand shock

According to the efficient markets hypothesis, A) common stock prices should be constant. B) the price of a corporation's stock is likely to fluctuate substantially in response to news about changes in the company's short-term prospects. C) the price of a corporation's stock will fluctuate significantly only in response to news about changes in the company's long-term prospects. D) price fluctuations in common stock are a response to fads and are only infrequently the result of changes in the expected profitability of the companies involved.

According to the efficient markets hypothesis, A) the equilibrium price of an asset equals the optimal forecast of fundamental value based on available information. B) the actual and expected prices of an asset will be equal. C) the actual price of an asset reflects only information on past returns on the asset. D) the expected price of an asset incorporates only information on past returns on the asset.

According to the efficient markets hypothesis, the difference between today's price for a share of stock and tomorrow's price is A) predictable given currently available information. B) equal to today's price minus yesterday's price. C) unforecastable. D) zero.

According to the efficient markets hypothesis, who is most likely to benefit from frequently moving funds from one asset to another? A) your broker B) small investors C) big investors D) only those who consistently beat the market

According to the efficient markets hypothesis, who should earn the highest risk-adjusted return on stocks? A) a financial expert who can devote considerable time to research B) the average investor who doesn't do too much research C) someone throwing darts at possible stock picks D) all of the above should earn the same average return

velocity increases

According to the equation of exchange, how can national income grow even though the amount of money does NOT

According to the equation of exchange, how can national income grow even though the amount of money does not? A) price level increases B) real GDP decrease C) velocity increases D) velocity decreases

According to the equation of exchange, the money supply times the velocity of money equals the A) price level. B) growth rate of the money supply. C) real GDP. D) nominal GDP.

According to the liquidity premium theory A) investors prefer longer to shorter maturities. B) investors prefer shorter to longer maturities. C) investors are indifferent between short and long maturities. D) investors are more interested in the tax treatment of bonds than they are in the liquidity of bonds.

According to the liquidity premium theory, a steep yield curve may be an indicator of A) expectations of a significant increase in inflation. B) an upcoming recession. C) an economic slowdown. D) lower future short-term interest rates.

According to the liquidity premium theory, if market participants expect that inflation in the future will be lower than it currently is, the yield curve will A) slope upward. B) be flat. C) be inverted. D) be vertical.

According to the liquidity premium theory, the yield curve normally has a positive slope because A) short-term interest rates are expected to rise. B) term premiums rise as the time to maturity increases. C) risk premiums rise over time. D) long-term bonds are more liquid than short-term bonds.

According to the liquidity premium theory, what does a flat yield curve indicate? A) Short-term interest rates are expected to remain stable. B) Short-term interest rates are expected to rise. C) Short-term interest rates are expected to fall. D) Long-term interest rates are expected to fall.

According to the quantity theory of money, if the long-run economic growth rate is 2.5%, by how much should the Fed increase the money supply if it wants inflation to be 2%? A) 0.5% B) 1.25% C) 4.5% D) 5%

According to the quantity theory of money, the growth rate of which of the following is zero? A) money supply B) velocity C) real GDP D) price level

According to the theory of purchasing power parity, if the inflation rate in England is greater than the inflation rate in Japan, A) the law of one price has been violated. B) the nominal value of the pound will appreciate against the yen. C) the nominal value of the yen will appreciate against the pound. D) the nominal value of the pound will appreciate against the yen, but only if the two countries are on the gold standard.

According to the theory of purchasing power parity, whenever a country's price level is expected to fall relative to another country's price level, A) its currency's real exchange rate relative to the other country's currency should rise. B) its currency should depreciate relative to the other country's currency. C) its currency should appreciate relative to the other country's currency. D) its nominal interest rate should rise relative to the other country's nominal interest rate.

Acme Widget tells investors it wants to build a new widget factory and sell investors $10,000,000 in bonds to finance it. Once they have raised the $10,000,000 the owners of Acme Widget use the funds to finance a trip to Atlantic City to try out a new scheme they have devised to win at blackjack. This is an example of A) the adverse selection problem in financial markets. B) the moral hazard problem in financial markets. C) the difficulty lenders have in distinguishing good from lemon firms. D) the problems with using rational expectations in financial markets.

Adverse selection and moral hazard are examples of: A) transaction costs B) information cost C) symmetric information D) financial market efficiency

increase; appreciate

All else being equal, an increase in the foreign demand for U.S goods causes the demand for dollars to ___ and the dollar will ___ relative to foreign currencies.

All of the following accurately describe microlending EXCEPT: A) it involves small loans B) lending is primarily undertaken by the government C) the borrowers are people who are attempting to start or expand a small business D) many economists think it has aided economic growth in many low-income countries

All of the following are benefits of securitization EXCEPT A) risk sharing. B) reduced interest rates that borrowers pay on loans. C) increased liquidity. D) fewer adverse selection problems.

All of the following are characteristics of debit cards EXCEPT: A) payments are deferred until a later date B) they can be used like checks C) they eliminate the problem of trust since the bank's computer authorizes the transaction D) when used at a store, his bank instantly credits the store's account with the amount and deducts it from his account.

All of the following are consequences of adverse selection on good firms EXCEPT A) the cost of external financing increases. B) firms need to rely more on internal funds. C) firms need to rely more on accumulated profits. D) firms will only be able to attain financing from the government.

All of the following are differences between hedge funds and mutual funds EXCEPT A) hedge funds are largely unregulated. B) hedge funds consist of a relatively number of wealthy investors. C) hedge funds make risky investments that mutual funds cannot make. D) hedge funds use money collected from savers to make investments.

All of the following are examples of borrowings by a bank EXCEPT A) federal funds. B) repurchase agreements. C) discount loans. D) commercial loans.

All of the following are examples of electronic funds EXCEPT A) credit cards. B) debit cards. C) stored value cards. D) e-cash.

All of the following are examples or risky mortgages that became more common in the 2000s EXCEPT A) alt-A mortgages. B) adjustable-rate mortgages with low rates for a few years and then higher rates in later years. C) mortgages requiring down payments of at least 20%. D) subprime mortgages.

All of the following are likely results of a negative demand shock EXCEPT A) a negative output gap. B) lower inflation. C) IS shifts to the left. D) Phillips curve shifts to the left.

All of the following are names for bonds receiving low ratings EXCEPT: A) junk B) garbage C) high yield D) speculative

All of the following are new rules affecting the shadow banking system as a result of the Dodd-Frank Act EXCEPT: A) some trading of derivatives are required to take place on exchanges B) large hedge funds are required to register with the SEC C) firms selling mortgage-backed securities and similar assets are required to hold 5% of the credit risk D) securitized loans must now be insured

All of the following are possible consequences of noise traders EXCEPT A) increased volatility in the financial market. B) asset prices differing from fundamental values. C) herd behavior contributing to speculative bubbles. D) reduced volatility of asset prices.

All of the following are potential benefits of defined contribution plans EXCEPT: A) clear ownership rights to the balances of their 401Ks B) lower risk for employees C) if the employee's investments are profitable, the employee can have high income during retirement D) contributions to traditional 401Ks are tax deductible

commodities tend to have little value in and of themselves

All of the following are problems associated with commodity money EXCEPT

All of the following are problems associated with commodity money EXCEPT A) it is a cumbersome form of payments system. B) commodities tend to have little value in and of themselves. C) its value is dependent on its purity. D) costs are incurred in certifying the purity and weight of commodity money.

All of the following are reasons for caution when considering investing in emerging markets EXCEPT: A) in rapidly growing economies, expectations of future growth are already reflected in stock prices. B) economies experiencing rapid growth typically experience a dilution effect. C) fees for investing in funds that specialize in emerging markets tend to be higher than other funds. D) most economists expect the economies of emerging markets to grow more slowly than that of more advanced economies.

All of the following are types of finance companies EXCEPT A) government finance. B) consumer finance. C) sales finance. D) business finance.

the Fed has little influence on inflation

All of the following arguments are made against inflation targeting EXCEPT

All of the following arguments are made against inflation targeting EXCEPT A) rigid numerical targets would diminish the flexibility of monetary policy. B) the Fed would need to depend on future forecasts of inflation since monetary policy acts with a lag. C) the Fed has little influence on inflation. D) Holding the Fed accountable for low inflation may make it difficult for elected officials to monitor whether the Fed is supporting good overall economic policy.

All of the following arguments are presented in favor of inflation targeting EXCEPT A) it would draw attention to what the central bank can achieve in practice. B) it would provide an anchor for inflationary expectations. C) it would promote accountability by providing a yardstick by which policy can be measured. D) it would reduce the lags inherent in monetary policy.

All of the following concerns have been raised about crowd funding EXCEPT: A) possibility of fraud B) lack of liquidity C) information costs D) limits access to funds for business start ups

All of the following have contributed to increased use of ATMs EXCEPT: A) some banks charging customers for services performed by tellers than can be done by ATMs B) some banks closing branches in low-income neighborhoods C) ease by which customers can make use of ATMs to make deposits and withdrawals D) increased use of debit cards for transactions

All of the following help make the Fed independent of the political process EXCEPT A) financial independence. B) chair of Fed receives a lifetime appointment. C) Board members receive a long, nonrenewable appointment. D) Board members' terms expire at different times, reducing the possible number of appointees by any one president.

All of the following help provide the basis for the Fed controlling the real interest rate in the IS-MP model EXCEPT A) the Fed controls the federal funds rate through open market operations. B) if expected future inflation remains stable, changes in nominal interest rates reflect changes in real interest rates. C) short-term and long-term interest rates tend to move together. D) the Fed's increased use of TIPS in conducting monetary policy.

All of the following represent returns to savers EXCEPT: A) dividends on stocks B) fees on loans C) interest on deposits D) coupon payments on bonds

All of the following statements about secondary credit are true EXCEPT A) they are temporary, short-term loans to satisfy seasonal requirements. B) the secondary credit interest rate is set above the primary credit rate. C) it is intended for banks not eligible for primary credit. D) borrowers of secondary credit are less financially healthy.

All of the following tends to occur when unemployment is above the natural rate EXCEPT: A) wage increases will be limited B) inflation will rise C) increases in the cost of production will be limited D) there is slack in the labor market

All of the following took place during the economic crisis that began in 2007 EXCEPT: A) the financial system was disrupted B) large portions of the U.S. economy were cut off from the funds they needed to thrive C) there was a devastating decline in the production of goods and services throughout the economy D) unlike households, most businesses still has easy access to funds

All of the following were actions taken by the government or the Fed in response to the Financial Crisis of 2007-2009 EXCEPT A) purchasing of most toxic assets such as mortgage-backed securities. B) reducing the federal funds rate to near zero. C) insuring deposits in money market mutual funds. D) effective nationalization of Fannie Mae and Freddie Mac.

All of the following were reasons that the Fed increase the required reserve ration in 1936 EXCEPT: A) concerns over the possibility of future inflation B) to eliminate the high level of excess reserves C) fears that the economy was overheating D) concerns over a speculative bubble

All of the following were significant changes in the mortgage market in the 2000s EXCEPT A) investment banks became significant participants in the secondary mortgage market. B) lenders loosened lending standards. C) mortgage-backed securities became popular with investors. D) borrowers tended to increase the amount of their down payments.

All of the following were took place during the German hyperinflation in the 1920s EXCEPT A) banks reduced lending. B) some banks only made loans to customers who agreed to repay in terms of foreign currencies or commodities. C) Deutsche Bank had to lay off many workers due to lack of business. D) households and firms increased their demand for loans.

Almost every time that there has been an inverted yield curve, what took place within one year? A) recession B) rising inflation C) financial crisis D) higher bond yields

Alt-A borrowers were those who A) used mortgages to purchase apartments. B) chose adjustable-rate mortgages instead of fixed-rate mortgages. C) borrowed using "interest-only" mortgages. D) did not provide documentation of their income when applying for a mortgage.

Alternating periods of economic expansion and recession are known as the: A) Fisher effect B) business cycle C) market risk D) systematics

Although open market operations and discount loans both change the monetary base, the Fed has A) greater control over open market operations than over discount loans. B) greater control over discount loans than over open market operations. C) very little control over either discount loans or open market operations. D) complete control over both discount loans and open market operations.

investors looking for safe havens when other investments were perceived to be very risky

Although rate, there are times when interest rates are negative. Situations of negative interest on short-terme

An ATS account A) converts a corporation's checking account balance at the end of the day into an overnight repurchase agreement. B) is the name given to NOW accounts outside of New England. C) are negotiable certificates of deposit of less than $100,000. D) were used during the Great Depression by depositors who had lost faith in conventional checking accounts.

An asset is A) the same thing as a liability. B) a thing of value that can be owned. C) money, as opposed to stock or bonds. D) anything that never declines in value.

An asset's fundamental value equals A) its face value. B) its maturity value. C) the market's best guess of the present value of the asset's expected future returns. D) the weighted sum of its market price over the recent past.

An autonomous expenditure is one that does not depend on: A) government policy B) the automobile sector C) interest rates D) GDP

An exception to the law of one price occurs if A) the good is not tradeable. B) demand for the good is stronger in some countries than in others. C) exchange rates are flexible, rather than fixed. D) interest rates differ across countries.

An exporter can hedge against the possible decline in a foreign currency by purchasing A) put options on the currency. B) call options on the currency. C) the currency on the spot market. D) currency on forward contracts.

An implication of the efficient markets hypothesis is that A) only sophisticated investors will be able to earn above-normal profits from financial investments. B) above-normal profits are available only to major traders. C) above-normal profits will be eliminated in the trading process. D) unless he or she acts recklessly, the average investor should be able to make above-normal profits.

the goals for economic growth and price stability may conflict in the short run

An important problem facing the Fed is that

An important problem facing the Fed is that A) the goals for economic growth and price stability may conflict in the short run. B) it lost effective control over the monetary base. C) it has been given responsibility for meeting policy goals, but true control over monetary policy remains with Congress. D) it has been given responsibility for meeting policy goals, but true control over monetary policy remains with the President.

the high transactions costs associated with barter

An important reason why economies at an early stage of development tend to operate inefficiently is

An important reason why economies at an early stage of development tend to operate inefficiently is A) they tend to be dominated by the agricultural sector, where productivity is usually low. B) they tend to have authoritarian governments that stifle innovation. C) they tend to be plagued by superstitious beliefs that stifle innovation. D) the high transactions costs associated with barter.

An increase in expected inflation results in A) lower nominal interest rates and higher bond prices. B) lower real interest rates and higher bond prices. C) higher real interest rates and lower bond prices. D) higher nominal interest rates and lower bond prices.

An increase in the corporate profits tax is likely to cause A) the equilibrium interest rate to rise and the equilibrium price of bonds to fall. B) the equilibrium interest rate to fall and the equilibrium price of bonds to rise. C) the equilibrium interest rate and the equilibrium price of bonds both rise. D) the equilibrium interest rate and the equilibrium price of bonds both fall.

An increase in the expected profitability of investment will cause A) IS to shift right. B) IS to shift left. C) MP to shift upward. D) MP to shift downward.

An increase in the money supply will cause A) the IS curve to shift down and to the right. B) the IS curve to shift up and to the left. C) the LM curve to shift down and to the right. D) the LM curve to shift up and to the left.

An increase in the output gap causes the demand for real balances A) to rise and the interest rate to fall. B) to fall and the interest rate to rise. C) and the interest rate to fall. D) and the interest rate to rise.

An increase in the real interest rate causes A) the IS curve to shift to the right. B) the IS curve to shift to the left. C) a movement up the IS curve. D) a movement down the IS curve.

An increase in the tax rate on dividends, other things equal, is likely to result in a(n): A) increased demand for bonds due to an increase in the expected return on bonds relative to stocks B) increased supply of bonds due to an increase in the expected return on bonds relative to stocks C) reduced demand for bonds due to a decrease in the expected return on bonds relative to stocks D) reduced demand for bonds due to an increase in the expected return on bonds relative to stocks

An insurance premium is a A) payment made by an insurance company to a policyholder after the occurrence of an insurable event. B) payment made by an insurance company to a policyholder following a period in which the policyholder has filed no claims against the company. C) fee paid by policyholders to insurance companies as payment for coverage. D) fee paid by policyholders to insurance companies in exchange for special considerations, such as a particularly large policy.

An investor who bases the decision to buy an asset solely on the expected return of an asset is considered to be: A) risk loving B) risk averse C) risk neutral D) risk avoiding

An investor who desired the ability to have quick and easy access to cash would prefer to hold which type of asset? A) risky B) liquid C) tax free D) any form of bond

An investor will generally find that hiring an investment firm to actively manage his or her portfolio will A) result in a higher return than would be received from an index mutual fund. B) be less expensive than simply placing money in an index mutual fund. C) result in a higher return, but will be more expensive than placing money in an index mutual fund. D) result in about the same return, but be more expensive than placing money in an index mutual fund.

An most important service provided by underwriters is A) lowering of information costs. B) dealing with problems of moral hazard. C) insuring firms against loss from fire. D) insuring firms against loss from employee theft.

An open economy is one that A) has a large government sector. B) lends and borrows in the international capital market. C) produces mainly agricultural goods. D) produces mainly manufactured goods.

increases the price of Treasury securities and decreses their yield

An open market purchase

An open market purchase A) decreases the price of Treasury securities and also decreases their yield. B) increases the price of Treasury securities and decreases their yield. C) increases the price of Treasury securities and also increases their yield. D) decreases the price of Treasury securities and increases their yield.

An open market purchase A) increases the monetary base. B) decreases the monetary base. C) increases the federal funds rate. D) is another name for a discount loan.

An open market sale A) decreases the price of Treasury securities and also decreases their yield. B) increases the price of Treasury securities and decreases their yield. C) increases the price of Treasury securities and also increases their yield. D) decreases the price of Treasury securities and increases their yield.

An speculator who buys a fifty-year corporate bond A) must be expecting to still be alive in fifty years. B) is subject to substantial reinvestment risk. C) is probably expecting market interest rates to increase in the future. D) is probably expecting market interest rates to decrease in the future.

Analysts have attempted to model the impact of monetary policy on net worth by emphasizing A) the impact of lower interest rates on business spending on fixed investment. B) the impact of lower interest rates on household spending on housing and durable goods. C) the liquidity of balance sheet positions as a determinant of business and household spending. D) the greater variability of business spending compared to household spending.

Andy can't make a deal with Danny. Andy has a Alex Rodriguez baseball card and would like to trade it to Danny for Danny's Albert Pujols card, but Danny doesn't want a Alex Rodriquez card. Andy's problem illustrates the drawback to a barter system known as A) the specialization problem. B) the double coincidence of wants problem. C) the many prices problem. D) the transactions problem.

85) How are financial intermediaries able to reduce transactions costs?

Answer: Financial intermediaries are able to take advantage of economies of scale, which refers to the reduction in average cost that results from an increase in the volume of a good or service produced.

11) What are the three key features of the financial system that result from the existence of transactions and information costs?

Answer: First, loans from financial intermediaries are the most important external source of funds for small to medium-sized firms. Second, the stock market is a less important source of external funds to corporations than is the bond market. Third, debt contracts usually require collateral or restrictive covenants.

94) What are the reasons why disclosure by the SEC does not eliminate the information costs of adverse selection?

Answer: First, some good firms may be too young to have much information for potential investors to evaluate. Second, lemon firms will try to present the information in the best possible light so that investors will overvalue their securities. Third, there can be legitimate differences of opinion about how to report some items on income statements and balance sheets. Finally, the interpretation of whether information is material can be tricky.

84) What are the information costs faced by savers?

Answer: Information costs are the costs that savers incur to determine the creditworthiness of borrowers and to monitor how they use the acquired funds.

92) How do high interest rates increase the risk of adverse selection in the bond market?

Answer: Investors often reason that as interest rates on bonds rise, a larger fraction of the firms willing to pay the high interest rates are lemon firms. After all, the managers of a firm facing bankruptcy may well be willing to pay very high interest rates to borrow funds that can be used to finance risky investments.

91) How does adverse selection affect the participation of small and medium-sized firms in the stock market?

Answer: Many small- and medium-sized firms will be unwilling to issue shares of stock for a price below its true value. Many will be unable to find investors who will be willing to purchase their stock due to fears about adverse selection.

97) How can restrictive covenants help to reduce moral hazard in bond markets?

Answer: Restrictive covenants either place limits on the uses of the funds the borrower receives or require that the borrower pay off the bond if the borrower's net worth drops below a certain level.

90) How does adverse selection affect the willingness of corporations to issue stock?

Answer: Since adverse selection reduces the price of the stock of a good corporation below its true value, corporations will be less likely to issue shares of stock.

88) How does adverse selection affect the economic efficiency of the used car market?

Answer: Since potential buyers have a difficult time distinguishing good cars from lemons, the prices of good cars decline to below their true values.

86) What are the various ways that financial intermediaries can take advantage of economies of scale?

Answer: Standardized legal contracts enable the cost of writing contracts to be spread over many loans. Bank loan officers are able to process loans efficiently by specializing in evaluating and processing loans. Fees for high-dollar purchases of financial assets do not differ much from fees for low-dollar purchases. Financial intermediaries can use sophisticated computers to provide financial services.

10) Briefly explain what was done in the early years of George Washington's administration that helped the United States develop a modern financial system.

Answer: The federal government paid off the bonds issued by the Continental Congress and state governments, which reassured investors that they could buy bonds with a reduced risk of default. Congress also established a central bank, the Bank of the United States, which with its branches in several states made loans more widely available to businesses and inspired state governments to allow other private banks to be established. Stock and bond markets were established in New York, Boston, and Philadelphia, and once these financial markets were organized, they provided corporations with a way to raise funds and investors with a way to participate in the growth of the economy by buying part ownership of corporations.

87) How is the lemons problem in the used car market an example of asymmetric information?

Answer: The seller of a used car has more information about the quality of the car than the potential buyer.

96) How does the principal agent problem increase the possibility of moral hazard?

Answer: The shareholders, as owners of the firm, are the principals, while the top managers, who are hired to carry out the owner's wishes, are the agents. Although the shareholders are interested in the managers running the firm so as to maximize the value of the shareholders' investment, the managers may have other objectives. Some top managers are accused of being "empire builders" who are interested in making the firm as large as possible through growth and the acquisition of other firms, even if the firm would be more profitable if it were smaller. Other top managers seem more concerned with using corporate jets and holding meetings in expensive vacation spots than with the firm's profits. Managers even have an incentive to underreport profits so that they can reduce the dividends they owe to shareholders and retain the use of the funds.

89) How do car dealers help reduce adverse selection?

Answer: To maintain their reputations with buyers, dealers are less willing to take advantage of private information about the quality of the used cars that they are selling than are individual sellers.

95) How does the use of collateral and net worth help reduce the problem of adverse selection?

Answer: To make it more costly for firms to take advantage of their asymmetric information, lenders often require borrowers to pledge some of their assets as collateral, which the lender claims if the borrower defaults. When the firm's net worth is high, the firm's managers have more to lose by using borrowed money for high-risk investments.

93) How does adverse selection in financial markets affect the method by which firms raise funds?

Answer: When investors have difficulty obtaining information on good firms, the cost of raising funds for those firms increases. This situation forces many firms to grow primarily through investment of internal funds.

Any reserves beyond what is required are called A) required reserves. B) excess reserves. C) secondary reserves. D) bank capital.

Apart from the United States, in countries where central bank board members serve fixed terms of office, A) none have terms as long as fourteen years. B) many serve for life or good behavior. C) all have terms longer than fourteen years. D) the head of the central bank rarely has a term longer than one year.

As a person's wealth increases, which of the following portfolio holdings is likely to increase the least? A) checking account B) stocks C) money market fund D) bonds

As a result of an open market purchase, bank reserves A) rise and interest rates fall. B) fall and interest rates rise. C) and interest rates both rise. D) and interest rates both fall.

As a result of higher expected inflation, A) the demand and supply curves for loanable funds both shift to the right and the equilibrium interest rate usually rises. B) the demand and supply curves for loanable funds both shift to the left and the equilibrium interest rate usually falls. C) the demand curve for loanable funds shifts to the right, the supply curve for loanable funds shifts to the left, and the equilibrium interest rate usually rises. D) the demand curve for loanable funds shifts to the left, the supply curve for loanable funds shifts to the right, and the equilibrium interest rate usually rises.

As a result of low interest rates on CDs and the perceived riskiness of alternative investments following the financial crisis of 2007-2009, the bond market was affected in all of the following ways EXCEPT: A) higher demand for bonds B) higher real interest rates C) lower nominal interest rates D) higher price of bonds

As a result of the financial crisis of 2007-2009, the size of the shadow banking system: A) became smaller than the commercial banking system B) became larger than the commercial banking system C) declined, but remained larger than the commercial banking system D) increased, but remained smaller than the commercial banking system

As a result of the financial crisis, checkable deposits: A) became a smaller portion of overall liabilities B) experienced little change C) hit a new record high in terms of the percent of liabilities D) nearly doubled in terms of the percent of liabilities

As of 2011, which of the following was the largest stock exchange in terms of total value traded? A) the New York Stock Exchange B) London Stock Exchange C) Shanghai Stock Exchange D) Tokyo Stock Exchange

As of 2012, about how many banks were there in the United States? A) 57 B) 2000 C) 6200 D) 14,000

As of 2012, carried interest was taxed as: A) capital gains B) dividends C) interest income D) ordinary income

As of 2012, mortgage-backed securities made up approximately what portion of securities held by a bank? A) 5% B) 20% C) 50% D) 70%

As of 2012, the bank portion of TARP: A) earned a profit of $21 billion B) earned a profit of $245 billion C) cost $266 billion D) cost $700 billion

As of 2012, what portion of bank assets were owned by the five largest bank holding companies? A) 10% B) 25% C) 50% D) 80%

As of October 2012, approximately what portion of U.S. currency is held outside of the United States? A) 1/10 B) 1/3 C) 1/2 D) 2/3

As of October 2012, the amount of money as measured by M2 was about A) $880 billion. B) $1700 billion. C) $10.2 trillion. D) $14 trillion.

As of October 2012, the value of currency in circulation was about A) $1.1 billion. B) $11 billion. C) $1.1 trillion. D) $11 trillion.

As of October 2012, which of the following was true? A) deposits of foreign governments and international organizations > bank reserves > currency in circulation B) currency in circulation > bank reserves > deposits of foreign governments and international organizations C) bank reserves > currency in circulation > deposits of foreign government and international organizations D) currency in circulation > deposits of foreign governments and international organizations > bank reserves

As of late 2012, what was the all-time high price for an ounce of gold? A) $1078 B) $1780 C) $7800 D) $14,163

banks suffered significant capital losses as the value of their holdings of mortgage-backed securities declined

As the housing bubble began to burst in 2006-2008, investors would only buy mortgage-backed securities at high yields to compensate for higher perceived default risk. As a result

As the housing bubble began to burst in 2006-2008, investors would only buy mortgage-backed securities at high yields to compensate for higher perceived default risk. As a result:: A) banks suffered significant capital losses as the value of their holdings of mortgage-backed securities declined B) funds available for mortgages increased C) bank profits rose as they earned higher interest on mortgages D) the price of mortgage-backed securities tended to rise due to the higher yields

As wealth decreases, which of the following is likely to account for a larger fraction of a saver's portfolio? A) corporate stock B) corporate bonds C) U.S. government securities D) checking account balance

As wealth decreases, which of the following is likely to account for a smaller fraction of a saver's portfolio? A) stocks B) corporate bonds C) cash D) U.S. government securities

As wealth increases in the economy, savers are willing to A) hold more cash relative to their holdings of bonds. B) buy fewer bonds at any given price. C) buy more bonds at any given price. D) lend less at any given interest rate.

As wealth increases in the economy, savers are willing to A) hold more cash relative to their holdings of bonds. B) buy fewer bonds at any given price. C) lend more at any given interest rate. D) lend less at any given interest rate.

As wealth increases in the economy, we would expect to observe A) bond prices and interest rates both rise. B) bond prices and interest rates both fall. C) bond prices rise and interest rates fall. D) bond prices fall and interest rates rise.

Assuming a required reserve ratio of 10% and the Fed purchased $1 million worth of mortgage-backed securities, make use of the simple deposit multiplier to determine how much checking deposits would change. A) increase by $1 million B) increase by $10 million C) decrease by $1 million D) decrease by $10 million

Assuming a required reserve ratio of 5%, interest rate on reserves of 1%, and interest rate on loans of 6%, what is the effective cost of the reserve requirement on a $10,000 deposit? A) 0.05% B) 0.25% C) 0.30% D) 1%

Assuming a required reserve ratio of 8%, interest rate on reserves of 0.5%, and interest rate on loans of 4%, what is the effective cost of the reserve requirement on a $1,000 deposit? A) 0.05% B) 0.28% C) 0.32% D) 4%

At an interest rate of 3%, what is the present value of $1000 to be received five years from now? A) $863 B) $1,667 C) $1,159 D) $850

At an interest rate of 6%, how much will need to be invested today to have $10,000 in 5 years? A) $5,000 B) $7,473 C) $10,000 D) $13,382

At any point along the LM curve, A) the quantity of money demanded equals the quantity of money supplied. B) the economy must be in general equilibrium. C) the nominal interest rate must equal the real interest rate. D) saving must equal investment.

holding too many Treasury bonds

At the beginning of the financial crisis, banks were hurt by all of the following EXCEPT

At the beginning of the financial crisis, banks were hurt by all of the following EXCEPT A) declines in the value of mortgage-backed securities. B) defaults on mortgages by those with subprime mortgages. C) holding too many Treasury bonds. D) not being repaid on loans to real estate developers.

Automatic teller machines and debit cards are examples of A) electronic funds transfer systems. B) commodity monies. C) legal tender in the United States. D) modern barter systems.

80) In regard to crowdfunding, investors with incomes or net worth of less than $100,000 can buy up to ________ in equity in startups through online crowdfunding sites.

B) $2,000

58) Assuming a required reserve ratio of 5%, interest rate on reserves of 1%, and interest rate on loans of 6%, what is the effective cost of the reserve requirement on a $10,000 deposit?

B) 0.25%

57) Assuming a required reserve ratio of 8%, interest rate on reserves of 0.5%, and interest rate on loans of 4%, what is the effective cost of the reserve requirement on a $1,000 deposit?

B) 0.28%

7) The movement to set up a central bank in the United States was spurred by the financial panic that occurred in

B) 1907.

10) When did the Federal Reserve Act become law?

B) 1913

32) What percentage of all commercial banks in the United States belong to the Federal Reserve System?

B) 34%

25) Which of the following is NOT an example of adverse selection?

B) A company uses the proceeds of a new stock sale to build an unnecessarily luxurious new headquarters.

56) Which of the following statements regarding member banks is TRUE?

B) A minority of banks are part of the Federal Reserve System, but they hold a majority of all bank deposits.

6) Which president failed to renew the charter of the Second Bank of the United States?

B) Andrew Jackson

35) Why do higher interest rates increase adverse selection problems in the loan market?

B) As interest rates rise, the creditworthiness of the average loan applicant declines.

25) The members of Federal Reserve district bank boards of directors who are leaders in industry, commerce, and agriculture are known as

B) Class B directors.

12) Which of the following is NOT considered one of the four groups in the Federal Reserve System?

B) Federal Deposit Insurance Corporation

8) Who had served as a de facto lender of last resort during the 1907 panic?

B) J. P. Morgan

19) The only state to have two Federal Reserve District Banks is

B) Missouri.

30) What is the name of the entity, composed of Federal Reserve district bankers, that consults on monetary policy?

B) The Federal Advisory Council

66) Which of the following is NOT true of restrictive covenants?

B) They increase the marketability and liquidity of loans.

36) Members of the Board of Governors are

B) appointed by the President of the United States, subject to confirmation by the Senate.

21) The company that manufactures Screaming Chocolate Zonkers breakfast cereal finds that its sales collapse, it is forced into bankruptcy, and it defaults on its bonds, as a result of information on the filthy conditions in its factory, which had long been known to management, leaking out to the general public. This incident is best thought of as an example of

B) asymmetric information in the financial markets.

69) The main reason why banks are the leading source of external finance for businesses is

B) banks have an information-cost advantage in reducing adverse selection problems.

6) Which of the following is the most important source of external financing for corporations?

B) bond market

41) When there's asymmetric information, who tends to have the better information?

B) borrower

18) How did the Fed peg interest rates during World War II?

B) by agreeing to purchase any bonds that were not purchased by private investors

3) Who sets the inflation target for the Bank of England?

B) chancellor of the Exchequer

1) The chair of the Federal Reserve is

B) chosen by the president.

47) The free rider problem faced by private information-collection firms results in their

B) collecting less than all the available information about the firms they investigate.

12) Individual investors can reduce transactions costs by

B) combining their purchases through an intermediary.

34) To help offset the costs from loan defaults, the First National Bank of Gotham decides to increase the interest rate it charges on its business loans. As a result of this increase in the interest rate, the creditworthiness of Gotham's loan applicants is likely to

B) deteriorate.

52) Congress authorized the Second Bank of the United States partly in response to

B) difficulty in funding the War of 1812.

51) If banks experience higher costs in making loans, they may decide to

B) engage in credit rationing rather than raise interest rates in an attempt to not increase adverse selection.

28) The Federal Reserve district banks

B) engage in monetary policy directly through discount lending.

39) What is the length of a term for the Chairman of the Board of Governors?

B) four years

67) Banks deal with problems of adverse selection by

B) gathering information about the default risk of borrowers.

10) Which of the following concerns were raised as a result of record low interest rates in 2016?

B) high interest rate risk

9) For the most part, countries with ________ of financial development have ________ of real GDP per capita.

B) high levels; high levels

9) The presence of information and transactions cost result in all of the following EXCEPT

B) higher returns for savers.

2) Information costs

B) include the costs that savers incur to determine the credit worthiness of borrowers.

42) Government regulations requiring firms that desire to sell securities in financial markets to disclose all available information

B) increase the difficulty that young firms may have in raising funds.

50) The Banking Acts of 1933 and 1935

B) increased central control of the Federal Reserve System.

2) In the early post-war years, the Fed was reluctant to continue its wartime agreement with the Treasury because it believed the result would be

B) inflation.

18) Adverse selection and moral hazard are examples of

B) information costs.

7) Most of the Fed's earnings come from

B) interest on the securities it holds.

83) The problem of moral hazard

B) is considerably more serious when an investor buys a firm's stock than when the investor buys a firm's bonds.

53) The original intent of the Federal Reserve Act of 1913 was to provide the Fed with what role?

B) lender of last resort

73) The use of collateral

B) makes it more costly for borrowers to take advantage of their asymmetric information.

21) Which of the following was NOT advocated by former Texas Congressman Ron Paul?

B) making the Fed Board of Governors lifetime appointments

60) A firm's agents are its

B) management.

63) With debt financing

B) moral hazard problems are reduced but not eliminated.

31) Under the Federal Reserve Act, which banks must be members of the Federal Reserve System?

B) national banks

3) From 2010 2015, which source of funds for corporations grew the most?

B) net new bond issues

44) Moody's Investors Service is able to make a profit because

B) of the existence of adverse selection problems.

8) Which of the following is the mandate of the European Central Bank?

B) price stability

76) Crowdfunding can best be described as

B) raising small amounts of money from large numbers of people.

6) It is generally agreed that

B) small- and medium-sized firms benefit by the actions of intermediaries.

12) The political business cycle theory predicts that

B) the Fed acts to stimulate economic activity before an election.

6) All of the following help make the Fed independent of the political process EXCEPT

B) the chair of the Fed receives a lifetime appointment.

26) The "lemons problem" in the used car market arises from

B) the difficulty buyers have in distinguishing good cars from lemons.

10) Which of the following appears to be evidence against the public interest view of the Fed's motivation?

B) the failure of the Fed to emphasize the goal of price stability

2) In the 1790s, Treasury Secretary Alexander Hamilton made a series of decisions that helped the United States develop a modern financial system. These decisions included

B) the federal government taking responsibility for paying off bonds issued by the Continental

55) Acme Widget tells investors it wants to build a new widget factory and sell investors $10,000,000 in bonds to finance it. Once they have raised the $10,000,000 the owners of Acme Widget use the funds to finance a trip to Atlantic City to try out a new scheme they have devised to win at blackjack. This is an example of

B) the moral hazard problem in financial markets.

49) Lenders prefer to lend to firms with high net worth because

B) the owners of such firms have more to lose if the firm defaults on a loan.

11) Economies of scale are

B) the reduction in costs per unit that accompanies an increase in volume.

22) The Federal Reserve Act of 1913 made who the chairman of the Federal Reserve Board?

B) the secretary of the Treasury

Bank borrowing from the Fed is referred to as: A) federal funds B) discount loans C) repurchase agreements D) reverse repurchase agreements

Bank capital can best be described as: A) funds contributed by shareholder purchasers of a bank's stock plus the accumulated retaining earnings B) the accumulated amount of reserves held by a bank C) the location of most of the major banks of a country D) another name for bank assets

Bank capital is A) the current market value of the bank's physical assets. B) the historical or original value of the bank's physical assets. C) the capital contributed by the bank's shareholders plus accumulated retained profits. D) the sum of the value of the bank's assets plus the value of the bank's liabilities.

Bank capital is equal to A) the value of the capital originally invested in the bank by its owners. B) the value of everything the bank owns. C) the difference between the value of the bank's assets and the value of its liabilities. D) the value of the buildings and other physical assets the bank owns.

Bank capital will decline following an increase in interest rates if the value of its A) fixed-rate assets is greater than the value of its fixed-rate liabilities. B) fixed-rate assets is less than the value of its fixed-rate liabilities. C) fixed-rate assets is greater than the value of its variable-rate assets. D) fixed-rate liabilities is greater than the value of its variable-rate liabilities.

Banks are exposed to interest rate risk primarily because A) interest rates are very difficult to forecast. B) the maturities of banks' assets and liabilities differ. C) borrowers from banks are prone to default. D) depositors are always searching for a slightly higher interest rate.

Banks deal with problems of adverse selection by A) charging high interest rates. B) gathering information about the default risk of borrowers. C) making only short-term loans. D) making only long-term loans.

Banks experience interest rate risk A) if adverse selection problems are particularly severe. B) if moral hazard problems are particularly severe. C) on any investment that has high information costs. D) if changes in interest rates cause bank profits to fluctuate.

Banks face liquidity risk because A) they can have difficulty meeting their depositor's demands to withdraw money. B) they are unable to borrow from the Federal Reserve. C) households and businesses may seek to borrow a large amount of funds in a short period of time. D) governments tend to run high budget deficits.

Banks have a maturity mismatch since A) they borrow long term, but lend short term. B) they borrow short term, but lend long term. C) some of their loans are short term while others are long term. D) some of their borrowings are short term while others are long term.

Banks have responded to new regulations resulting from the Dodd-Frank Act in all of the following ways EXCEPT: A) raising minimum balances on free checking accounts B) closing branches in low-income neighborhoods C) raising overdraft fees D) increased marketing of securities and financial advice to high-income customers

Banks in the United States have been prohibited from investing deposits in significant equity holdings since the passage of the A) Bank Reform Act of 1980. B) Securities and Exchange Acts of 1933 and 1934. C) National Banking Acts of 1863 and 1864. D) Sherman Antitrust Act of 1890.

manage liquidity risk

Banks make use of the federal funds market in part to

Banks make use of the federal funds market in part to A) pay their tax liabilities. B) manage liquidity risk. C) deal with moral hazard. D) deal with adverse selection.

Banks require collateral for loans in order to A) ensure that borrowers have significant amounts of their own funds invested in their businesses. B) charge higher interest rates on loans. C) reduce their tax liability on the interest they collect on loans. D) reduce the total amount they are obliged to lend to any one borrower.

Banks use "credit-risk analysis" to A) determine the appropriate interest rate to charge borrowers. B) determine whether to invest in the stock of a corporation. C) determine the appropriate interest rate to pay depositors. D) determine the likelihood of an audit by bank regulators.

Banks use credit rationing rather than simply raising the interest rate charged borrowers with higher default risks because A) of fear of adverse selection problems. B) of interest rate ceilings in many states. C) of fear of offending the loan applicants. D) use of credit rationing is encouraged by the Federal Reserve.

Banks use repurchase agreements to A) ensure that payments on consumer loans are made on time. B) borrow funds from business firms or other banks. C) guard against price fluctuations on long-term bonds. D) ensure that they always have enough funds on hand to meet their federal tax liabilities.

Banks who held mortgage-backed securities "took a bath" during the financial crisis of 2007-2009 due to: A) rising yields in secondary markets which led to a decline in the price of mortgage-backed securities. B) falling yields in secondary markets which led to a decline in the price of mortgage-backed securities. C) their inability to issue new mortgages. D) more rapid pre-payment of mortgages.

Banks with which type of loans were most likely to fail during the early 1930s? A) mortgage loans B) agricultural loans C) commercial real estate loans D) international loans

Barter is A) another name for money. B) an exchange of goods and services directly for goods and services. C) the basis for economic specialization. D) the main system of exchange in the United States today.

Behavioral economics can best be described as A) the study of situations in which people's choices do not appear to be economically rational. B) the study of human economic behavior. C) the basis for efficient markets. D) the study of how the economy affects human behavior.

Between late 2007 and 2012, the Fed's balance sheet: A) remained about the same B) more than doubled C) more than tripled D) rose tenfold

Blood tests administered to applicants for medical insurance are an example of an attempt by insurance companies to deal with the problem of A) moral hazard. B) the drug abuse problems currently plaguing the country. C) adverse selection. D) failure of policyholders to keep paying their premiums.

Bond ratings A) are published annually by the federal government and are based largely on information contained in corporate tax returns. B) are published annually by the federal government and are based on publicly available information. C) are published monthly by the federal government and are based on publicly available information. D) are published by private bond-rating agencies.

Bonds receiving one of the top four ratings are considered: A) junk B) speculative C) AAA D) investment grade

Borrowers who stated but did not document their incomes are referred to as: A) subprime B) alt A C) adjustable D) securitized

Business finance companies A) purchase accounts receivable of small firms at a discount. B) sell commercial paper and buy long-term corporate bonds. C) take in deposits from savers and buy corporate commercial paper. D) are strictly regulated by state governments.

Businesses hold substantial balances in demand deposits for all of the following reasons EXCEPT: A) they cannot hold NOW accounts B) the existence of low transaction costs C) to maintain liquidity D) relatively high interest rates

Businesses typically issue bonds to finance A) their inventories. B) payments to their workers. C) spending on new plant and equipment. D) dividend payments to their stockholders.

By "specialization" economists mean a situation where A) individuals produce the goods or services for which they have relatively the best ability. B) goods are traded directly for goods and money is not used. C) individuals who produce goods do not also produce services and individuals who produce services do not also produce goods. D) individuals are assigned to occupations on the basis of tests that gauge their relative abilities.

By 2012, what share of U.S. assets were held by the 10 largest banks in the United States? A) 10% B) 29% C) 55% D) 68%

By designating Federal Reserve currency as legal tender, the federal government A) has ensured that Federal Reserve currency will serve as money. B) has guaranteed that Federal Reserve currency may be exchanged for an equivalent amount of gold or silver. C) has mandated that Federal Reserve currency be accepted for payment of debts. D) has mandated that Federal Reserve currency be accepted by citizens of foreign countries in exchange for their countries' currencies.

By how much did real GDP decline between 1929 and 1933? A) 18% B) 20% C) 27% D) 81%

By how much did real investment decline between 1929 and 1933? A) 18% B) 20% C) 27% D) 81%

By providing and communicating information, the financial system A) reduces the difference between the return on three-month U.S. Treasury bills and the return on thirty-year U.S. Treasury bonds. B) relieves individual savers from the necessity of searching out individual borrowers. C) eliminates the risk in investing in the stock market. D) guarantees investors a reasonable return on their money.

By reducing transactions and information costs, financial intermediaries can A) offer savers higher interest rates. B) offer borrowers lower interest rates. C) earn a profit. D) all of the above.

By the summer of 2008, about what percent of subprime mortgages were overdue by at least 30 days? A) 10% B) 25% C) 34% D) 50%

81) In regard to crowdfunding, investors with incomes or net worth of greater than $100,000 can invest up to ________ per year in equity in startups through online crowdfunding sites.

C) 10% of their income or net worth

14) How many Federal Reserve districts are there?

C) 12

3) Private banks in each region which are part of the Federal Reserve System elect

C) 6 members of the regional Reserve Bank's board of directors.

24) The members of Federal Reserve district bank boards of directors who represent the public interest are known as

C) Class C directors.

26) The members of Federal Reserve district bank boards of directors appointed by the Board of Governors are known as

C) Class C directors.

22) Which of the following statements is correct?

C) Federal Reserve district banks pay dividends on their earnings to member banks.

47) In 1976, Congress passed legislation which requires most federal government agencies to give public notice before a meeting. This legislation is the

C) Government in the Sunshine Act.

59) If a member of the Board of Governors is limited to one 14-year term, how did Alan Greenspan serve 19 years on the Board of Governors?

C) He completed the remaining years left on someone else's term and then served one 14-year term.

23) Which of the following is NOT true of moral hazard?

C) It describes a lender's problem of distinguishing the good-risk applicants from the bad-risk applicants.

16) Which of the following cities does NOT contain a Federal Reserve bank?

C) Los Angeles

45) Which of the following is NOT a company that collects information on individual borrowers and sells it to savers?

C) NASDAQ

10) In 2010, doubts were raised about the debt of all of the following countries EXCEPT

C) Poland.

14) Why might Congress benefit from the Fed being self-financed?

C) Self-financing gives the Fed an incentive to expand the money supply, which ultimately results in Congress having additional funds to spend.

8) Which of the following statements is correct?

C) The Fed's profits are substantial, even when compared to the largest U.S. corporations.

4) In the 1790s, stock and bond markets were established in all of the following cities EXCEPT

C) Washington, D.C.

11) Which of the following is NOT a way in which power was divided up in the Federal Reserve System?

C) between importers and exporters

53) Moral hazard problems arise when

C) borrowers have an incentive to act in ways that do not reflect the lender's interests.

20) The assumption of asymmetric information means that

C) borrowers know more than lenders.

15) The reduction in transactions costs brought about by financial intermediaries benefits

C) both small savers and small borrowers.

60) How does the Fed reach its target for the federal funds rate?

C) by buying and selling Treasury securities

41) Which of the following is NOT a responsibility of the Board of Governors?

C) carrying out open market operations

13) The facts show that the political business cycle theory

C) does not generally hold true in the United States.

7) Which of the following does NOT serve on the Governing Council of the European Central Bank?

C) finance ministers of each country

70) Venture capital firms attempt to overcome the principal agent problem by

C) holding large equity stakes in the firms they invest in.

11) The principal-agent view of Fed motivation predicts that the Fed acts

C) in order to increase its power, influence, and prestige.

4) The Fed does NOT have to go through the normal congressional appropriations process because

C) it is self financing.

3) The presence of transactions costs and information costs

C) lowers the expected return to lenders.

16) The main argument in favor of Fed independence is that

C) monetary policy is too important and too technical to be determined in the political arena.

7) The purpose of collateral and restrictive covenants is to reduce ________ in debt contracts.

C) moral hazard

27) The "lemons problem" exists in the market for goods because

C) of the differences in the quality of the goods being exchanged.

19) Generally, when there is asymmetric information

C) practical solutions are devised to allow lending to take place.

65) Restrictive covenants

C) put restrictions on the use of borrowed funds.

36) One method that lenders use to mitigate the adverse selection problem is to

C) ration credit.

8) The best measure economists have of how successful a country is in providing a high standard of living to its residents is

C) real GDP per capita.

34) The Depository Institutions Deregulation and Monetary Control Act of 1980

C) required all banks to maintain reserve deposits with the Fed.

52) Moral hazard arises from

C) savers' difficulties in monitoring borrowers.

55) Which of the following is NOT a role of Federal Reserve Banks?

C) set the interest rate on reserves

29) Federal Reserve district banks perform all of the following roles EXCEPT

C) setting the federal funds rate.

6) During the 1800s, the United States experienced ________ growth rates when compared to other countries that had also experienced substantial European immigration.

C) significantly higher

46) Private information collection firms fail to eliminate the adverse selection problem because

C) some investors who do not pay for their services will still profit from them.

5) Which groups were opposed to the Bank of the United States?

C) southern and western agrarian and small-business interests

5) Initially, the securities traded in the financial markets established in the 1790s were primarily

C) stock issued by the Bank of the United States and government bonds.

10) Financial intermediaries reduce transactions costs by

C) taking advantage of economies of scale.

1) During World War II

C) the Fed agreed to hold interest rates on short-term Treasury securities at low levels.

1) Transactions costs are

C) the costs of direct financial transactions.

61) As of 2015, the dividend the Fed pays to member banks with assets greater than $10 billion is

C) the lesser of 6% or the interest rate on 10-year Treasury notes.

31) If there were no adverse selection problems in the stock market

C) the willingness of savers to invest in the market would be increased.

7) Financial intermediaries emerged

C) to reduce transactions costs for small savers and borrowers.

Changes in net worth and liquidity may significantly affect the volume of lending and economic activity according to the A) interest rate channel. B) balance sheet channel. C) money channel. D) bank lending channel.

Charging drivers with good records lower premiums than drivers with bad records is an example of an attempt by insurance companies to deal with the problem of A) moral hazard. B) adverse selection. C) drunk driving. D) failure of policyholders to keep paying their premiums.

Checks are A) not acceptable for settling transactions in most industrialized countries. B) less important than currency as a means of settling transactions. C) promises to pay on demand money deposited with a financial institution. D) promises to pay coins minted from precious metals on demand.

Collateral is A) the interest rate that banks charge high-quality borrowers. B) assets pledged to the bank in the event the borrower defaults. C) the difference between the value of a bank's assets and the value of a bank's liabilities. D) required reserves minus excess reserves.

Commodity money can best be described as A) money used to purchase agricultural products B) a good used as money that also has value independent of its use as money C) standardized goods like gold that trade in a financial market D) the form of money used in a barter system

Compared to CDs and money market funds, crowd funding A) provides higher expected returns with increased safety B) provides lower expected returns in exchange for increased safety C) is likely to result in lower returns due to higher volatility D) provides opportunities for higher returns but also significant losses

Compounding refers to A) the calculation of interest rates after the compounding effect of taxes has been allowed for. B) the paying back of both interest and principal during the life of a fixed payment loan. C) the process of earning interest on both the interest and the principal of an investment. D) the increased value of an investment that arises from the payment of periodic interest.

Congress authorized a second Bank of the United States partly in response to: A) difficulty in funding the American Revolution B) difficulty in funding the War of 1812 C) difficulty in funding the Industrial Revolution D) difficulty in funding the Civil War

Congress created the Federal Reserve System A) to serve as a lender of last resort. B) to process the receipt of taxes received by the Internal Revenue Service. C) to regulate the value of the U.S. dollar against foreign currencies. D) to provide a source of mortgage loans to the residential housing market.

Congress established the FOMC because A) a group was needed to set reserve requirements for member banks. B) of a lack of coordination among district banks in carrying out open market operations. C) Congress was attempting to expand its influence within the Federal Reserve System. D) a group was needed to coordinate the setting of discount rates by the district banks.

Congress introduced deposit insurance in response to A) the savings-and-loan crisis of the 1980s. B) the banking crisis of the 1930s. C) the demise of the Second Bank of the United States in 1836. D) the demise of the First Bank of the United States in 1811.

Consider an open economy that is a net borrower (like the United States). What would be the impact of a shift to a closed economy? A) domestic interest rates would decline B) domestic savings would decline C) domestic investment would decline D) net borrowing would increase

Credit rationing refers to A) the increase in the interest rate that occurs when the demand for credit increases. B) the increase in the interest rate that occurs when the supply of credit increases. C) the increase in the interest rate that occurs when the supply of credit decreases. D) a restriction in the availability of credit.

Credit risk is the risk that A) an insufficient number of borrowers will apply for loans or credit. B) interest rates will rise after a loan has been granted. C) interest rates will fall after a loan has been granted. D) borrowers might default on their loans.

Crowd funding can best be described as: A) raising funds in a very large market B) raising small amounts of money from large numbers of people C) many firms competing for the same source of funds D) making funds available for a large number of business start ups

Currently, a three-month Treasury bill has a yield of 5% while the yield on a ten-year Treasury bond is 4.7%. What is the risk premium of the typical A-rated ten-year corporate bond with a yield of 5.5%? A) 0.5% B) 0.8% C) 5.5% D) 1.17%

Currently, a three-year Treasury note pays 4.75%. Assuming that your tax rate is 20%, what is the minimum interest rate that you would you need to earn on a tax-free municipal bond in order to buy it instead? A) 0.95% B) 3.8% C) 5.7% D) 15.25%

Currently, the FDIC insures deposits up to a limit of A) $1000. B) $100,000. C) $250,000. D) $1,000,000.

Customers who have long-term relationships with banks A) pose particular problems with respect to adverse selection. B) pose particular problems with respect to moral hazard. C) often obtain credit at a lower rate or with fewer restrictions. D) are more likely to default or violate restrictive covenants.

24) Which of the following is an example of adverse selection?

D) A man with a bad heart condition buys a large life insurance policy.

8) Which of the following is TRUE regarding transactions costs and information costs?

D) Both create profit opportunities for those who can reduce these costs.

77) A part of the Jumpstart Our Business Startups (JOBS) Act i

D) Congress removed some of the restrictions on using crowdfunding to allow small investors to buy equity in start-ups.

15) Which of the following cities contains a Federal Reserve bank?

D) Dallas

9) Which country was least supportive of expansionary policy by the European Central Bank during the Financial Crisis of 2007-2009?

D) Germany

22) Which of the following is NOT true of adverse selection?

D) It describes a lender's problem in verifying borrowers are using their funds as intended.

35) Which of the following statements about the Depository Institutions Deregulation and Monetary Control Act of 1980 is NOT correct?

D) It eliminated restrictions on interstate banking for member banks.

45) The president of which Federal Reserve Bank is always a voting member of the Federal Open Market Committee?

D) New York

3) Which of the following statements is correct?

D) The Fed is only partially insulated from external pressures.

20) Which of the following statements is NOT true?

D) The federal courts have never upheld the constitutionality of the Federal Reserve Act.

21) Which best describes the Federal Reserve district banks?

D) They are private-government joint ventures.

48) During the financial crisis of 2007-2009, Fed Chairman Ben Bernanke relied on an informal group of three advisors to help make quick decisions on policy actions. Which of the following was NOT one of those advisors?

D) Treasury Secretary Henry Paulson

19) Which of the following officially ended the cooperation between the Treasury and the Fed that had taken place during World War II?

D) Treasury-Federal Reserve Accord

37) Credit rationing refers to

D) a restriction in the availability of credit.

57) Suppose some members of Enron's board of directors are aware of the company's true financial condition, information that is not available to most investors. This is an example of

D) asymmetric information.

54) Moral hazard problems arise when

D) borrowers have an incentive to conceal information.

13) In 1913, Congress and the president did not envision that the Fed would control

D) broad control over most aspects of money and the banking system.

17) Federal Reserve districts

D) cut across state and economic boundaries.

16) The reduction in average cost resulting from an increase in the volume of a good or service produced is called

D) economies of scale.

39) All of the following are consequences of adverse selection on good firms EXCEPT

D) firms will only be able to attain financing from the government.

5) Which of the following is the most common goal for central banks of industrialized countries?

D) low inflation

40) Symmetric information

D) means that savers and borrowers have the same information.

13) Which of the following does NOT represent a way in which financial intermediaries take advantage of economies of scale?

D) paying lower taxes per dollar invested

2) The regional Federal Reserve Banks are owned by

D) private banks which are part of the Federal Reserve System in each region.

79) Compared to CDs and money market funds, crowdfunding

D) provides opportunities for higher returns but also significant losses.

37) Members of the Board of Governors

D) serve one nonrenewable fourteen-year term.

18) The Federal Reserve Act of 1913

D) specified neither the boundaries nor city locations for the district banks.

2) From 2010 - 2015, the primary source of external funds for corporations was

D) stocks.

4) The European Central Bank is responsible for the monetary policy of

D) the 19 sovereign countries that use the euro as their currency.

1) All of the following are factors that determine whether a country's economy can provide a high standard of living for its residents and whether that standard of living can increase over time EXCEPT

D) the ability of the country's government to print money in response to high levels of inflation.

44) The Chairman of the Federal Open Market Committee is also

D) the chairman of the Board of Governors.

29) The "lemons problem" is overcome in the used car market by

D) the existence of used car dealers who are concerned about maintaining their reputations.

15) The issue of Fed independence is most often raised by

D) the public's negative reaction to Fed policy.

7) The connection between a developed country's financial system and the performance of the country's economy

D) was recognized in the early days of the country and remains strong today.

Debt instruments are also called A) equities. B) credit market instruments. C) prospectuses. D) units of account.

Default risk A) is the probability that a borrower will not pay in full the promised coupon or principal. B) exists only for the bonds of small corporations. C) is also known as market risk. D) is zero for bonds issued by cities and states.

Default risk arises from the fact that A) borrowers differ in their ability to repay in full the principal and interest required by a loan agreement. B) the bond price drops when interest rates rise. C) it is inherently riskier to wait for a capital gain than to receive an immediate interest payment. D) interest rates are far more likely to go up than to go down.

Defensive open market transactions A) are aimed at achieving changes in monetary policy. B) are used much less frequently than dynamic open market transactions. C) are used to offset disturbances to the supply or demand for reserves. D) make it easy to deduce the Fed's intentions for monetary policy.

Differences in price levels A) explain well actual exchange rate movements. B) are not capable of explaining well actual exchange rate movements, particularly in the short run. C) have been small for most countries in the post-World War II period. D) only can be explained by the fact that little foreign trade actually takes place.

create differences in yields among credit market instruments

Differences in the taxation of returns

Differences in the taxation of returns A) only affect the yields of illiquid credit market instruments. B) have a negligible effect on the yields of credit market instruments. C) only affect the yields of high-information cost credit market instruments. D) create differences in yields among credit market instruments.

Discount loans available to health banks which can be used for any purpose are called A) primary credit. B) secondary credit. C) seasonal credit. D) repo loans.

Discount loans intended for banks that are not financially healthy are called A) primary credit. B) secondary credit. C) seasonal credit. D) repo loans.

Disintermediation refers to the A) failure of financial intermediaries due to moral hazard problems. B) failure of financial intermediaries due to adverse selection problems. C) movement of savers and borrowers from banks to financial markets. D) removal of government regulations of financial intermediaries.

Diversification is most effective in reducing: A) market risk B) systemic risk C) idiosyncratic risk D) all forms of risk

Diversification refers to the A) splitting of wealth into many assets. B) difference between the liquidity of an asset and its risk. C) difficulty of converting investments in common stocks into investments in bonds. D) difficulty of selling common stocks in a weak market.

Dividends are A) payments made to stock holders. B) payments made to bond holders. C) the total profit earned by a corporation. D) payments to holders of common stock, not preferred stock.

Due in part to record low interest rates on U.S. Treasury Bonds, A) investors searching for higher yields bought corporate bonds B) interest rates on corporate bonds rose C) corporations faced higher borrowing costs D) many corporations were at greater risk of defaulting

During World War II A) the Board of Governors was temporarily disbanded. B) the Fed was not allowed to make discount loans. C) the Fed agreed to hold interest rates on short-term Treasury securities at low levels. D) the Fed agreed not to buy Treasury securities.

During a banking panic, a lender of last resort will A) purchase banks which are having difficulty but appear sound. B) make loans to solvent but temporality illiquid banks. C) make loans to insolvent but liquid banks. D) make loans to any banks which request them.

the supply curve of bonds shifts to the right

During a period of economic expansion, when expected profitability is high

During a period of economic expansion, when expected profitability is high, A) the demand curve for bonds shifts to the left. B) the supply curve of bonds shifts to the right. C) the equilibrium interest rate falls. D) the equilibrium price of bonds rises.

During an economic recession, A) the bond demand and supply curves both shift to the left and the equilibrium interest rate usually falls. B) the bond demand and supply curves both shift to the right and the equilibrium interest rate usually rises. C) the bond demand curve shifts to the right, the bond supply curve shifts to the left, and the equilibrium interest rate usually falls. D) the bond demand curve shifts to the left, the bond supply curve shifts to the right, and the equilibrium interest rate usually rises.

During an economic recession, A) the demand and supply curves for loanable funds both shift to the right and the equilibrium interest rate usually rises. B) the demand and supply curves for loanable funds both shift to the left and the equilibrium interest rate usually falls. C) the demand curve for loanable funds shifts to the right, the supply curve for loanable funds shifts to the left, and the equilibrium interest rate usually falls. D) the demand curve for loanable funds shifts to the left, the supply curve for loanable funds shifts to the right, and the equilibrium interest rate usually rises.

purchses of both long-term Treasury securities and mortgage-backed securtities

During and after the financial crisis of 2007-2009, the Fed greatly increased the supply of reserves through three rounds of quantitative easing by

During most of the time in recent decades, the domestic government sector was A) a net borrower. B) a net lender. C) neither a borrower nor a lender. D) a major factor in keeping real interest rates low.

During most of the time in recent decades, the government sector A) has not spent more than it collected in taxes. B) has run large deficits. C) has run large surpluses. D) has balanced its budget every year.

During the Great Depression, unemployment peaked at A) 10%. B) between 15 and 20%. C) over 20%. D) 81%.

During the early 1930s, the Fed was reluctant to rescue nonsolvent banks out of fear of encouraging: A) moral hazard B) adverse selection C) bank run D) sovereign debt crisis

During the financial crisis of 2007-09, the prices of U.S. Treasury securities A) rose and the price of corporate bonds declined. B) fell relative to the prices of corporate bonds. C) remained in the same relative position to the prices of corporate bonds. D) were frozen by order of the federal government.

During the financial crisis of 2007-2009, A) mortgage-backed securities became more liquid. B) information costs of mortgage-backed securities rose. C) information costs of mortgage-backed securities declined. D) the tax treatment of mortgage-backed securities was changed.

During the financial crisis, which type of risk was the biggest problem faced by investment banks? A) interest-rate risk B) currency risk C) hedging risk D) credit risk

Dynamic open market operations A) are aimed at achieving changes in monetary policy. B) are used much more frequently than defensive open market transactions. C) are used to offset disturbances to the monetary base. D) make it easy to deduce the Fed's intentions for monetary policy.

Economies of scale are A) charges to savers and borrowers imposed by banks in exchange for reducing transactions costs. B) the reduction in costs per unit that accompanies an increase in volume. C) decreases in transactions costs that occur as information costs increase. D) decreases in information costs that occur as transactions costs increase.

increase the fraction of wealth held as common stock

Economists believe that as a saver's wealth increases, the saver will generally

Economists believe that as a saver's wealth increases, the saver will generally A) increase his or her holdings of all assets proportionately. B) increase the fraction of wealth held as cash. C) increase the fraction of wealth held as common stock. D) decrease the fraction held as corporate bonds.

Economists define liquidity as A) the difference between the return on an asset and the return on a long-term U.S. Treasury bond. B) the fraction the asset makes up of an investor's portfolio. C) the ease with which an asset can be exchanged for money. D) the difference between the total demand for an asset and the total supply of the asset.

Economists define money as A) cash in circulation. B) deposits in commercial banks. C) anything that people are willing to accept in payment for goods and services or to pay off debts. D) bonds issued by large corporations.

Economists define risk as A) the difference between as interest rate borrowers pay and the interest rate lenders receive. B) the chance that the value of financial assets will change from what you expect. C) the ease with which an asset can be exchanged for other assets or for goods and services. D) the difference between the return on common stock and the return on corporate bonds.

Economists who have studied the Phillips curve have concluded that it can shift due to all of the following EXCEPT A) demand shocks. B) supply shocks. C) changes in household expectations of inflation. D) changes in firms' expectations of inflation.

Employees of brokerage firms that rely on forecasting future profits of firms in order to forecast future stock prices are called A) rational analysts B) adaptive analysts C) technical analysts D) fundamental analysts

Evidence indicates that there's a strong relationship between money and inflation in: A) both the short and long run B) neither the short nor the long run C) short run, but not the long run D) long run, but not the short run

Excess reserves equal A) total reserves less required reserves. B) required reserves less total reserves. C) total reserves plus required reserves. D) required reserves divided by total reserves.

Excess volatility refers to A) the unwillingness of financial analysts to consistently recommend the same stocks. B) the greater volatility of futures prices compared to the volatility of prices of the underlying assets. C) the tendency for stocks with high rates of returns also to have quite variable returns. D) the larger movements in market prices of stock than in their fundamental values.

Expansionary monetary policy consists of all of the following EXCEPT A) open market sales. B) lower interest rates. C) increased monetary base. D) increased money supply.

open market sales

Expansionary monetary policy consists of all the following EXCEPT

Expectations of asset values by participants in financial markets A) are not possible to model, given the current state of economic knowledge. B) determine market prices, but are not related to changes in market prices. C) generally do not change. D) determine current market prices and changes in market prices.

Explicit provisions in a loan agreement that prohibit the borrower from engaging in certain activities is called: A) credit rationing B) restrictive covenants C) credit-risk analysis D) adverse selection

Factoring A) involves selling stocks and using the proceeds to buy bonds. B) is purchasing accounts receivable at a discount. C) is calculating the optimal par values of stocks and bonds. D) has been declared illegal under the Factoring Reform Act of 1994.

Fannie Mae and Freddie Mac both A) sell bonds to investors and use the funds to purchase mortgages. B) help regulate the banking system. C) directly lend funds to people seeking mortgages. D) reduce access to funds for mortgages by purchasing existing mortgages.

The Federal Reserve entity that makes decisions regarding the conduct of open market operations is the....

Federal Open Market Committee (FOMC)

Federal Reserve district bank perform all of the following roles EXCEPT A) managing checking clearing in the payments system. B) performing regulatory functions. C) setting the federal funds rate. D) managing currency in circulation by issuing new Federal Reserve Notes.

Federal Reserve districts A) conform to state boundaries. B) group together economically similar states. C) have equal populations. D) cut across state and economic boundaries.

Federal funds are A) the tax revenues of the Federal government. B) loans by the Federal Reserve to banks. C) loans by banks to the Federal Reserve. D) short-term loans between banks.

Fiat money A) is money that would have no value if it were not usable as money. B) is illegal in most advanced, industrial countries. C) is usually some type of precious metal. D) will generally be accepted in trade for less than its face value.

Finance companies A) issue stock and use the proceeds to purchase bonds. B) raise funds in financial markets to lend to households and firms. C) raise funds from banks to lend to households and firms. D) issue bonds and use the proceeds to purchase stock.

Finance companies A) take in deposits from savers and make loans to borrowers. B) sell commercial paper and securities and make loans to borrowers with the funds. C) take in deposits from savers and purchase assets with the funds. D) bring together small savers and large borrowers.

Financial instruments with high information costs A) will usually be more liquid than similar instruments with low information costs. B) will have lower yields than U.S. Treasury securities. C) may not be offered for sale in some states. D) will have lower prices than similar instruments with low information costs.

Financial intermediaries A) include banks and other depository institutions. B) include the New York and American stock exchanges. C) directly issue claims on individual borrowers to savers. D) are owned and operated by the federal government.

Financial intermediaries are able to act as delegated monitors for individual savers because A) other investors are unable to gain a free ride on their monitoring efforts. B) borrowers consider this role to be traditional for financial intermediaries and are willing to put up with it. C) the federal government has granted them waivers from laws protecting privacy. D) they employ a vast network of private detectives to carry out their monitoring role.

Financial intermediaries are able to exploit economies of scale since A) the equipment or expertise necessary for one transaction can be applied to other transactions. B) they have special licenses needed to perform financial transactions. C) financial markets fail to do so. D) they can reduce transactions cost, but not information costs.

Financial intermediaries emerged A) to make loans to governments. B) to provide a market for municipal bonds. C) to reduce transactions costs for small savers and borrowers. D) to reduce transactions costs for traders in stocks and bonds.

Financial intermediaries reduce transactions costs by A) charging fees to small savers. B) charging fees to small investors. C) taking advantage of economies of scale. D) avoiding risky investments.

Financial markets A) channel funds indirectly between borrowers and lenders. B) channel funds directly from lenders to borrowers. C) act as go-betweens by holding a portfolio of assets and issuing claims based on that portfolio to savers. D) generally provide lenders with lower returns than do financial intermediaries.

Financial securities are exchanged by dealers linked by computers in a A) stock exchange. B) public exchange. C) financial exchange. D) over the counter market.

stocks

Financial securities that represent partial ownership of a corporation are known as

Financial securities that represent partial ownership of a corporation are known as A) bonds. B) stocks. C) coupons. D) dividends.

hurt U.S. firms that produced goods for export to Great Britain

Following the Brexit vote, the decline in value of the British pound relative to the U.S. dollar

Following the downgrade of U.S. debt by Standard & Poor's in August, 2011: A) other rating agencies also downgraded U.S. debt B) interest rates spiked as investor's perception of risk increased C) investors didn't seem to be any more concerned about default risk than before the downgrade D) the U.S. implemented a plan to significantly reduce its budget deficit later that year

For a bank, the ration of after-tax profit to assets is its: A) net interest margin. B) return on assets. C) return on equity. D) spread.

For a specific change in the yield to maturity A) the shorter the time until a bond matures, the greater will be the change in its price. B) the longer the time until a bond matures, the greater will be the change in its price. C) the longer the time until a bond matures, the greater will be the change in its par value. D) the shorter the time until a bond matures, the greater will be the change in its coupon rate.

For how long must most hedge fund investors wait before withdrawing funds? A) 1 to 3 days B) 1 to 3 weeks C) 1 to 3 months D) 1 to 3 years

is always equal to the specified simple interest rates

For simple loans, the yield to maturity

For simple loans, the yield to maturity A) is always less than the specified simple interest rate. B) is always greater than the specified simple interest rate. C) is always equal to the specified simple interest rate. D) may be less than, greater than, or equal to the specified simple interest rate, depending on the maturity of the loan.

For state residents, interest on most bonds issued by their state government is A) exempt from state and federal income taxes. B) exempt from state, but not from federal, income taxes. C) exempt from federal, but not from state, income taxes. D) subject to both state and federal income taxes.

For the goods market to be in equilibrium in a closed economy, which of the following must be true? A) Y = S + I + G B) S + I = C + G C) S + G = Y + C D) S = I

high levels; high levels

For the most part, countries with ___ of financial development have ___ of the real GDP per capita.

Former Fed chair Alan Greenspan's use of ambiguous and vague language came to be known as: A) Greenspeak B) Fedspeak C) Alanguage D) jibberish

Fundamentally, to reap the benefits of specialization, an economy must A) be heavily industrial. B) be heavily agricultural. C) have an extensive system of higher education. D) develop ways for individuals to trade goods with one another.

Funds flow from lenders to borrowers A) indirectly through financial markets. B) directly through financial markets. C) indirectly through financial intermediaries. D) primarily through government agencies.

Generally, A) countries with the most independent central banks have the lowest inflation rates. B) countries with the least independent central banks have the lowest inflation rates. C) countries without central banks have the lowest inflation rates. D) the degree of independence of a country's central banks has little to do with its inflation rate.

Generally, when there is asymmetric information A) a lender will only lend to the government. B) a lender will only lend to well-known borrowers. C) practical solutions are devised to allow lending to take place. D) a lender will cease all lending activities.

Geographic restrictions on banks A) reduce their ability to take advantage of economies of scale. B) raise the costs of their providing risk-sharing, liquidity, and information services. C) reduce their exposure to credit risk. D) reduce the amount of local lending they undertake.

George is trying to forecast the future price of IBM's common stock. To do so he makes use only of past prices of IBM stock. George A) has adaptive expectations. B) has rational expectations. C) is likely to rapidly adjust his forecast to news affecting the future profitability of IBM. D) is likely to make forecasts that reflect closely IBM stock's fundamental value.

Given that most banks have positive gap and negative durations, banks prefer A) lower market interest rates. B) higher market interest rates. C) higher market fixed rates but lower market floating rates. D) either higher or lower market interest rates since interest rates have little effect on bank profits.

Given that most investors tend to be risk averse, A) no one buys risky assets. B) there's a trade-off between risk and return. C) low risk assets provide the best return. D) it must be a superior strategy compared to one that is risk loving.

Given the behavior of the stock market in recent years: A) most economists still think the efficient markets hypothesis is an accurate description of the daily behavior of the stock market B) most economists think the efficient markets hypothesis provides little insight into the behavior of the stock market C) most economists think the rational investor can outperform the stock market in the long run D) many economists still believe that it is unlikely that investors can hope to earn above-average returns in the stock market by following traditional strategies

Government regulations requiring firms that desire to sell securities in financial markets to disclose all available information A) eliminate the adverse selection problem (when rigorously enforced). B) increase the difficulty that young firms may have in raising funds. C) eliminate the moral hazard problem in securities markets. D) fail to eliminate the adverse selection problem, in part because they do not greatly reduce the difficulty that young firms have in raising funds.

Suppose the growth rate of a stock is expected to be 2% and the expected dividend payment is $1. Suppose further that Jacob has a required return to equity of 20%, Marie 15%, and Jess 18%. The market price of this stock will be...

Greater than Jess' willingness to pay, but less than or equal to Marie's willingness to pay

Hedge funds have been criticized for A) their heavy use of short selling. B) their inability to mobilize a large amount of funds. C) forcing quick price changes that reduce market inefficiencies. D) excessive use of hedging strategies.

Herd behavior can best be described as A) the large number of investors involved in the stock market. B) how large participation in financial markets increase market efficiency. C) informed investors can outperform relatively uninformed investors. D) relatively uninformed investors follow the behavior of other investors instead of consider fundamentals.

High employment spurs economic growth because high employment A) usually reduces inflation. B) discourages foreign imports. C) often leads to a high birth rate. D) often leads to high rates of investment.

How are TIPS adjusted for inflation? A) The interest rate is adjusted for inflation during each period. B) The principal is adjusted once the bond reaches maturity. C) The principal is adjusted for inflation each period. D) The interest rate is adjusted once the bond reaches maturity.

How can a bond have a negative rate of return? A) if the current yield is greater than the coupon rate B) if the current yield is less than the coupon rate C) if the rate of capital loss exceeds the current yield D) if the rate of capital gains is less than the current yield

How can a global savings glut affect the United States? A) It can reduce the world real interest rate, thus encouraging borrowing by Americans. B) It can increase the world real interest rate, thus encouraging saving by Americans. C) It can reduce the supply of loanable funds for the United States. D) It can reduce the demand for loanable funds for the United States.

How can the Fed reduce the implicit tax on banks resulting from reserve requirements? A) lowering the discount rate B) paying interest on reserves C) reducing the federal funds rate D) increasing the federal funds rate

How can the Gordon Growth model help explain the major decline in stock indexes during 2007-2009? A) There was an increase in the required return on equities and a decrease in the expected growth rate of dividends. B) There was a decrease in the required return on equities and an increase in the expected growth rate of dividends. C) There was an increase in the required return on equities and an increase in the expected growth rate of dividends. D) There was a decrease in the required return on equities and a decrease in the expected growth rate of dividends.

How did Operation Twist affect the monetary base? A) reduced B) increased C) no change D) indeterminate

How did the Fed peg interest rates during World War 2? A) by setting a low federal funds rate B) by agreeing to purchase any bonds that were not purchased by private investors C) through extensive use of discount loans D) through nationalization of the banking system

How does the Fed reach its target for the federal funds rate? A) by changing the discount rate B) by changing reserve requirements C) by adjusting the level of reserves D) by directly setting the federal funds rate

How does the Open Market Trading Desk conduct its operations? A) directly with private securities dealers on the floor of the New York Stock Exchange B) directly with private securities dealers on the floor of the Federal Reserve Bank of New York C) over-the-counter electronically with private securities dealers D) by sending its buy and sell orders to the U.S. Treasury for execution

How does the use of adjustable-rate mortgages affect interest-rate risk? A) It reduces the interest-rate risk of lenders. B) It reduces the interest-rte risk of borrowers. C) It reduces the interest-rate risk of both lenders and borrowers. D) It increases the interest-rate risk of both lenders and borrowers.

How is the interest rate that prevails in the bond market determined? A) by the interaction of stock prices and bond prices B) by the decision of the president, in consultation with Congress C) by the demand for and supply of bonds D) by the Board of Governors of the New York Stock Exchange

How long does it take prices of securities to adjust so as to eliminate arbitrage profits? A) seconds B) hours C) days D) months

How many Federal Reserve districts are there? A) 1 B) 2 C) 12 D) 50

How many prices would there be in a barter economy with 100 goods? A) 100 B) 1,000 C) 4,950 D) 10,000

How many times has the Fed has changed reserve requirements since 1993? A) never B) about once a year C) only once D) only twice

How many times is GDP for a particular quarter estimated? A) once B) twice C) three times D) more than three times

How were open market operations conducted prior to 1935? A) They were carried out by the Federal Open Market Committee. B) They were carried out under the direction of the Secretary of the Treasury. C) They were carried out by the district Federal Reserve banks. D) They were carried out by the Banking Committee of the House of Representatives.

Hyperinflations are usually caused by large budget deficits financed by A) selling bonds to private investors. B) selling bonds to the central bank. C) raising taxes. D) borrowing from commercial banks.

selling bonds to the central bank

Hyperinflations are usually caused by large budget deflicts financed by

If AE < Y, which of the following will NOT occur? A) inventories will decline B) actual investment will be more than planned investment C) employment will decline D) GDP will decline

If AE > Y, which of the following will NOT occur? A) inventories will decline B) actual investment will be more than planned investment C) employment will increase D) GDP will increase

If Sony keeps the price of PlayStation 3 constant in terms of dollars, what is the impact on Sony of a stronger yen? A) a decline in exports to the United States B) an increase in imports from the United States C) lower profit D) higher profit

If U.S. inflation is 2%, Japanese inflation is 1%, and Mexican inflation is 3%, which of the following is true according to the theory of purchasing power parity? A) The dollar should rise by 1% versus the yen and fall by 1% versus the peso. B) The dollar should rise by 1% versus the peso and fall by 1% versus the yen. C) The dollar should rise by 1% versus both the peso and the yen. D) The dollar should fall by 1% versus both the peso and the yen.

If a $10 billion increase in investment leads to a $20 billion increase in GDP, the multiplier is A) 0.5 B) 2 C) 10 D) 30

If a British automobile sells for £20,000 and the British pound is worth $1.50, then the dollar price of the automobile is A) $1.60. B) $12,500. C) $20,000. D) $30,000.

If a bank grants you a mortgage, the mortgage is A) an asset to you as well as an asset to the bank. B) an asset to you, but a liability to the bank. C) a liability to you, but an asset to the bank. D) a liability to you as well as a liability to the bank.

If a bank has a leverage ratio of 0.1 and a return on capital of 2%, what is its return on equity? A) 0.2% B) 2.1% C) 5% D) 20%

If a bank's ratio of assets to capital is 25 and it's return on assets is -5%, what is its return on equity? A) -0.2% B) -5% C) -30% D) -125%

If a corporation pays a dividend, which group receives priority in receiving the dividend? A) bond holders B) holders of common stock C) holders of preferred stock D) dividends are evenly divided by holders of common and preferred stock

If a government's income tax receipts exceed its expenditures, the government is running a A) surplus and is a net borrower of funds. B) surplus and is a net saver of funds. C) deficit and is a net borrower of funds. D) deficit and is a net saver of funds.

If a large open economy, like the United States, reduces its budget deficit, what impact would this have on a small open economy? A) higher savings B) increased investment C) increased net savings D) no change in interest rates

If a member of the Board of Governors is limited to one 14-year term, how did Alan Greenspan serve 19 years on the Board of Governors? A) A special exemption was approved for him. B) The rule was not in place at the time. C) He completed the remaining years left on someone else's term and then served one 14-year term. D) He didn't serve consecutive terms.

If a one-year bond currently yields 5% and is expected to yield 7% next year, the liquidity premium theory predicts that the yield today on a two-year bond should be A) 5%. B) less than 6%, but more than 5%. C) 6%. D) more than 6%.

If a small open economy reduces its budget deficit, the result will be: A) a lower world real interest rate, but no change in the domestic real interest rate B) a lower domestic real interest rate, but no change in the world real interest rate C) lower domestic and world real interest rates D) no change in either the domestic or world real interest rate

If an investor is certain that market interest rates will decline in the future, which of the following will she be most likely to purchase? A) a six-month government bill B) a two-year government note C) a ten-year government bond D) a fifty-year government bond

If banks hold no excess reserves, checkable deposits total $1.5 billion, currency totals $400 million, and the required reserve ratio is 10%, then the monetary base equals A) $550 million. B) $1.54 billion. C) $1.9 billion D) $15 billion.

If bond investors think they lack enough details to evaluate the likelihood of defaults on certain bonds, this will result in higher: A) expected return B) liquidity C) information costs D) expected inflation

If currency outstanding equals $200 million, checkable deposits equal $1 billion, reserves equal $150 million, and the required reserve ratio is 0.10, the money multiplier equals A) 0.86. B) 3.14. C) 3.43. D) 4.

If currency outstanding equals $500 million, checkable deposits equal $2 billion, reserves equal $200 million, and the required reserve ratio is 0.10, the money multiplier equals A) 1.14. B) 3.57. C) 4.35. D) 5.

If expected inflation declines by 2%, what should happen to nominal interest rates according to the Fisher effect? A) rise by 2% B) fall by 2% C) be cut in half D) double in size

If foreign interest rates rise A) the demand for domestic currency rises, causing it to appreciate. B) the demand for domestic currency falls, causing it to depreciate. C) the demand for domestic currency rises, causing it to depreciate. D) the demand for domestic currency falls, causing it to appreciate.

If households increase their saving at the same time that the government increases its deficit, A) the demand and supply curves for bonds will be unaffected. B) the demand curve for bonds will shift to the left. C) the supply curve for bonds will shift to the right. D) the equilibrium interest rate will definitely rise.

If i is the yield to maturity of a fixed-payment loan, A) the value of the loan today equals i times the sum of the values of all the loan payments. B) i equals the present value of the loan payments. C) the value of the loan today equals the sum of the values of the loan payments. D) the value of the loan today equals the present value of the loan payments discounted at rate i.

If lenders anticipate no changes in liquidity, information costs, and tax differences, the yield on a risky security should be A) greater than that on a safe security and the price of a risky security should also be greater than that of a safe security. B) less than that on a safe security and the price of a risky security should also be less than that of a safe security. C) greater than that on a safe security and the price of a risky security should be lower than that of a safe security. D) less than that on a safe security and the price of a risky security should be greater than that on a safe security.

If major traders believe the price of a stock should be higher than its current market price, A) they have an incentive to sell the stock. B) their actions will result in the information they possess being incorporated into the price of the stock. C) there is little they can do because government regulation precludes their acting on what they know. D) they should petition the Securities and Exchange Commission to authorize an adjustment in the price of the stock.

If market participants have rational expectations, A) they can assume the stock prices they observe represent the fundamental values of those stocks B) they know to purchase stocks that are priced below their fundamental value C) they will achieve higher returns than those with adaptive expectations D) they can earn above-average returns on their investments

If market participants have rational expectations, then the best forecast of the price of a stock in the next period is A) equal to an average of the prices of the stock in previous periods. B) equal to the price of the stock in the current period. C) dependent upon all information available in the current period, including, but not limited to, the price of the stock in the current period. D) dependent on information available in the previous period.

If market participants rely only past stock prices to forecast future stock prices, A) they will be better able to forecast future price increases than future price decreases. B) they will be better able to forecast future price decreases than future price increases. C) they have adaptive expectations. D) they have rational expectations.

If money is declared to be legal tender, it must be A) minted from a precious metal. B) acceptable to citizens of foreign countries. C) possible to exchange it for an equivalent amount of precious metal. D) accepted to settle private transactions and it must be used in paying taxes.

If oranges sell for $100 per crate in the United States and 4000 pesos per crate in Mexico, the law of one price indicates that you should be able to exchange $1 for A) 0.025 peso. B) 4 pesos. C) 40 pesos. D) 400 pesos.

If pepperoni pizzas sell for $10 in Berkeley, California, and £10 in London, England, and the exchange rate is $1.35 = £1, A) the law of one price has been violated. B) either the British government or the American government must be interfering with the market determination of the exchange rate. C) the value of the dollar versus the pound is likely to rise. D) there is no contradiction in the information given because pizza is not a tradeable good.

money's usefulness as a store of value is diminished

If prices increase rapidly

If prices increase rapidly A) money's usefulness as a store of value is diminished. B) money increases in value. C) deflation is likely. D) prices will decline to their normal level.

If the British pound depreciates against the U.S. dollar, A) British businesses gain by an increase in the dollar price of exports to the United States. B) British consumers gain by a decrease in the pound price of U.S. exports to Britain. C) British consumers lose by an increase in the pound price of U.S. exports Britain. D) U.S. consumers lose by an increase in the dollar price of British exports to the United States.

If the FOMC's directive indicates a change in monetary policy, the account manager at the Fed's Open Market Trading Desk must A) design dynamic open market operations. B) design defensive open market operations. C) seek approval of the change from the Secretary of the Treasury. D) seek approval of the change from a majority of the presidents of the Federal Reserve district banks.

If the Fed buys securities worth $10 million, then A) bank reserves will increase by $10 million. B) bank reserves will decrease by $10 million. C) currency in circulation will increase by $10 million. D) bank holdings of securities increase by $10 million.

it would conduct an open market purchase, increasing reserve supply

If the Fed desired to reduce the federal funds rate

If the Fed desired to reduce the federal funds rate, A) it would conduct an open market sale, reducing reserve supply. B) it would conduct an open market purchase, increasing reserve supply. C) it would conduct an open market sale, increasing reserve demand. D) it would conduct an open market purchase, reducing reserve demand.

If the Fed makes a discount loan of $2 million to a commercial bank, the Fed's balance sheet will show A) an increase in discount loans of $2 million and an increase in bank reserves of $2 million. B) an increase in discount loans of $2 million and a decrease in bank reserves of $2 million. C) a decrease in discount loans of $2 million and an increase in bank reserves of $2 million. D) a decrease in discount loans of $2 million and a decrease in bank reserves of $2 million.

If the Fed purchases $1 million in securities from the nonbank public, the monetary base will rise by $1 million A) if the public holds the proceeds as currency. B) if the public deposits the proceeds as checkable deposits. C) if the public deposits the proceeds with the Treasury in a monetary base account. D) whether the public holds the proceeds as currency or deposits them as checkable deposits.

If the Fed purchases $1 million worth of securities and the required reserve ratio is 8%, by how much will deposits increase (assuming no change in excess reserves or the public's currency holdings)? A) rise by $1 million B) decline by $1 million C) rise by $8 million D) rise by $12.5 million

If the Fed purchases $50,000 in T-bills from a bank, by how much will the bank's excess reserves increase? A) by $50,000 B) by $50,000 times the required reserve ratio C) by $50,000 divided by the required reserve ratio D) Not enough information has been provided to answer the question.

If the Fed purchases securities worth $10 million from a commercial bank, the banking system's balance sheet will show A) an increase in securities held of $10 million and an increase in bank reserves of $10 million. B) an increase in securities held of $10 million and a decrease in bank reserves of $10 million. C) a decrease in securities held of $10 million and an increase in bank reserves of $10 million. D) a decrease in securities held of $10 million and a decrease in bank reserves of $10 million.

If the Fed sells securities worth $10 million to a commercial bank, the Fed's balance sheet will show A) an increase in securities held of $10 million and an increase in bank reserves of $10 million. B) an increase in securities held of $10 million and a decrease in bank reserves of $10 million. C) a decrease in securities held of $10 million and an increase in bank reserves of $10 million. D) a decrease in securities held of $10 million and a decrease in bank reserves of $10 million.

raise the interest rate it pays on reserves

If the Fed wished to decrease the money supply, it could

If the German interest rate is 4% and the U.S. interest rate is 5%, what is the expected change in the value of the dollar in terms of the euro? A) 1% B) -1% C) 9% D) -9%

If the Japanese yen appreciates against the U.S. dollar, A) Japanese businesses gain by a decrease in the dollar price of exports to the United States. B) Japanese consumers gain by a decrease in the yen price of U.S. exports to Japan. C) Japanese consumers lose by an increase in the yen price of U.S. exports to Japan. D) U.S. consumers gain by an decrease in the dollar price of Japanese exports to the United States.

If the account manager does NOT use a Federal Reserve reverse repurchase agreement or a matched sale-purchase transaction in carrying out open market operations, he will use A) an outright purchase or sale. B) a limited-duration purchase or sale. C) an indirect purchase or sale. D) a reverse duration purchase or sale.

If the account manager finds that the current level of bank reserves is greater than the desired level indicated in the most recent directive from the FOMC, he will A) order banks to reduce their reserves. B) order banks to raise their interest rates in an attempt to get them to loan out more of their reserves. C) conduct an open market purchase. D) conduct an open market sale.

If the annual interest rate is 8%, what would you expect to pay for a bond paying a lump sum of $10,000 in ten years? A) $4,632 B) $9,259 C) $10,000 D) $21,589

If the annual interest rate is 9%, what would you expect to pay for a bond paying a lump sum of $10,000 in two years? A) $8,417 B) $8,200 C) $10,000 D) $11,881

If the current price of a bond is equal to its face value, A) there is no capital gain or loss from holding the bond until maturity. B) the yield to maturity must be greater than the current yield. C) the current yield must be greater than the coupon rate. D) the coupon rate must be greater than the yield to maturity.

If the current price of a bond is greater than its face value A) an investor will receive a capital gain by holding the bond until maturity. B) the yield to maturity must be less than the coupon rate. C) the coupon rate must be less than the current yield. D) the coupon rate must be equal to the current yield.

If the current price of a bond is less than its face value, A) an investor will receive a capital gain by holding the bond until maturity. B) the yield to maturity must be less than the current yield. C) the coupon rate must be greater than the current yield. D) the coupon rate must be equal to the current yield.

the demand curve for bonds will shift to the left

If the expected gains on stock rise, while the expected returns on bonds do NOT change, then

If the expected gains on stocks rise, while the expected returns on bonds do not change, then A) the demand curve for bonds will shift to the left. B) the supply curve for loanable funds will shift to the right. C) the demand curve for loanable funds will shift to the left. D) the equilibrium interest rate will fall.

If the expected gains on stocks rise, while the expected returns on bonds do not change, then A) the demand curve for bonds will shift to the right. B) the supply curve for loanable funds will shift to the right. C) the equilibrium interest rate will fall. D) the equilibrium interest rate will rise.

If the expected path of interest rates on one-year bonds over the next five years is 2%, 4%, 3%, 2%, and 1%, the expectations theory predicts that the bond with the lowest interest rate today is the one with a maturity of A) one year. B) two years. C) three years. D) five years.

If the federal government decreases its spending and doesn't decrease taxes, the bond supply shifts to the A) left and the equilibrium interest rate rises. B) left and the equilibrium interest rate falls. C) right and the equilibrium interest rate rises. D) right and the equilibrium interest rate falls.

If the federal government replaced the current income tax with a value-added tax A) the prices of Treasury and municipal bonds would rise. B) the prices of Treasury and municipal bonds would fall. C) the prices of Treasury bonds would rise, while the prices of municipal bonds would fall. D) the prices of Treasury bonds would fall, while the prices of municipal bonds would rise.

If the forward exchange rate of the dollar in terms of pounds is less than the spot exchange rate, A) inflation must be lower in the United States than in Britain. B) inflation must be higher in the United States than in Britain. C) market participants must be expecting the dollar to appreciate against the pound. D) market participants must be expecting the dollar to depreciate against the pound.

If the forward exchange rate of the yen in terms of dollars is greater than the spot exchange rate, A) Japanese interest rates must be higher than U.S. interest rates. B) U.S. interest rates must be higher than Japanese interest rates. C) market participants must be expecting the dollar to appreciate against the yen. D) market participants must be expecting the dollar to depreciate against the yen.

If the government increases taxes while holding expenditures constant, A) the bond supply curve will shift to the left and the equilibrium interest rate will fall. B) the bond supply curve will shift to the right and the real interest rate will fall. C) government borrowing will be increased. D) the government's deficit will increase.

If the government were to simultaneously cut the personal income tax and the corporate profits tax, the equilibrium interest rate A) would fall. B) would rise. C) would be unaffected. D) might either rise or fall.

If the interest rate in the United States rises A) investors increase their demand for dollars and the U.S. exchange rate appreciates. B) investors increase their demand for dollars and the U.S. exchange rate depreciates. C) investors decrease their demand for dollars and the U.S. exchange rate appreciates. D) investors decrease their demand for dollars and the U.S. exchange rate depreciates.

If the interest rate on a U.S. one-year bond is 1%, the interest rate on a Mexican one-year bond is 5%, and investors expect the dollar to appreciate by 1% versus the peso, what is the currency premium for U.S. investors to hold Mexican pesos? A) -3% B) 3% C) 4% D) 7%

If the interest rate on a U.S. one-year bond is 2%, the interest rate on a Brazilian one-year bond is 8%, and the currency premium on reals (Brazilian currency) is 3%, what is the expected rate of appreciation of the U.S. dollar according to interest-rate parity? A) -3% B) 3% C) 5% D) 6%

If the nominal interest rate parity condition is not met, A) imports will exceed exports. B) the return from holding domestic assets must exceed the expected return from holding foreign assets. C) the return from holding domestic assets must be less than the expected return from holding foreign assets. D) the return from holding domestic assets must be greater or less than the expected return from holding foreign assets.

the Japanese yen to depreciate against the British pound

If the price level in Japan increases more rapidly than the price level in Britain, we would expect

If the price level in Japan increases more rapidly than the price level in Britain, we would expect A) interest rates in Japan to lower than interest rates in Britain. B) the Japanese yen to depreciate against the British pound. C) the British pound to depreciate against the Japanese yen. D) Japanese productivity to have increased more rapidly than British productivity.

If the price level in the United States increases more slowly than the price level in Canada, we would expect A) interest rates in the United States to be higher than interest rates in Canada. B) the U.S. dollar to depreciate against the Canadian dollar. C) the Canadian dollar to depreciate against the U.S. dollar. D) U.S. productivity to have increased more slowly than Canadian productivity.

If the price of a Toyota Camry is Y2,000,000 and the price of a Ford Fusion is $20,000, according to the law of one price, the exchange rate between the yen and the dollar should be: A) Y100 = $1 B) $100 = Y1 C) Y1,980,000=$1 D) the law of one price does not apply since the goods are differentiated

If the prices of financial assets follow a random walk, then A) they should be easy to forecast, provided market participants have rational expectations. B) they should be easy to forecast, provided market participants have adaptive expectations. C) the change in price from one trading period to the next is not predictable. D) major traders in the market must not be making use of all available information about the assets.

If the real interest rate is -1.4% and the nominal interest rate is 0.6%, expected inflation equals A) -2% B) -0.8% C) 0.8% D) 2%

If the real interest rate is 2% and expected inflation is 2%, the nominal interest rate is: A) 0% B) 1% C) 2% D) 4%

If the required reserve ratio is 5%, what is the value of the simple deposit multiplier? A) 0.05 B) 0.20 C) 5 D) 20

If the required reserve ration 10%, what is the value of the simple deposit multiplier

If the value of bank's loans declines, what is the corresponding reduction in a liability entry that the bank makes? A) Deposits are reduced by the amount of the decline in the value of the loan. B) Borrowings are reduced by the amount of the decline in the value of the loan. C) Net worth is reduced by the amount of the decline in the value of the loan. D) Cash items in the process of collection are reduced by the amount of the decline in the value of the loan.

the interest rate will fall

If there is an excess demand for bonds at a given price of bonds, then

If there is an excess demand for bonds at a given price of bonds, then A) the interest rate will fall. B) the interest rate will rise. C) the price of bonds will fall. D) the interest rate may rise or the interest rate may fall depending upon the reasons for the excess demand for bonds.

If there is an excess supply of bonds at a given price of bonds, then A) the interest rate will fall. B) the interest rate will rise. C) the price of bonds will fall. D) the interest rate may rise or the interest rate may fall depending upon the reasons for the excess demand for bonds.

If there were no adverse selection problems in the stock market, A) some well-run firms would pay more to raise funds. B) some poorly-run firms would pay less to raise funds. C) the willingness of savers to invest in the market would be increased. D) the volume of new stock issues would be lower.

If traders in a market have rational expectations, then A) the price of an asset equals its fundamental value. B) prices of riskier assets are higher than prices of less risky assets. C) past prices of assets do not affect market participants' expectations of future asset prices. D) they make use of less information than they would if they had adaptive expectations.

If you are indifferent between investing $1000 for one year in a U.S. Treasury security that has an interest rate of 5% or in a Canadian government security that has an interest rate of 8%, you must be expecting A) the inflation rate in the United States will be higher than the inflation rate in Canada during the year. B) the U.S. dollar to depreciate against the Canadian dollar by 3% during the year. C) the U.S. dollar to appreciate against the Canadian dollar by 3% during the year. D) productivity growth in Canada to be greater than productivity growth in the United States during the year.

If you buy a bond issued by Intel, the bond is a(n): A) liability to Intel and an asset to you. B) liability to you and an asset to Intel. C) liability to both you and Intel. D) asset to both you and Intel.

If you deposit $10,000 in a savings account at an annual interest rate of 6%, how much will you have in the account at the end of three years? A) $8,396 B) $11,800 C) $11,910 D) $10,600

If you deposit $300 in your bank and the required reserve ratio is 10%, your bank will have A) an increase in required reserves of $300. B) an increase in required reserves of $270. C) an increase in required reserves of $3000. D) an increase in required reserves of $30 and an increase in excess reserves of $270.

If you deposit $500 in a savings account at an annual interest rate of 5%, how much will you have in the account at the end of five years? A) $625 B) $392 C) $638 D) $550

If you deposit a $50 check in the bank, the immediate impact on your bank's balance sheet will be a A) $50 increase in reserves and a $50 increase in checkable deposits. B) $50 decrease in reserves and a $50 increase in checkable deposits. C) $50 increase in reserves and a $50 decrease in checkable deposits. D) $50 decrease in liabilities and a $50 increase in checkable deposits.

If you have $2 million in a CD at a commercial bank that is a member of the FDIC, how much of your funds are uninsured? A) $0 B) $1 million C) $1.75 million D) $2 million

If you have a checking account at First National Bank, the account is A) an asset to both you and First National. B) a liability to both you and First National. C) an asset to First National and a liability to you. D) an asset to you and a liability to First National.

an asset to you and a liability to One National

If you have a checking account at One National Bank, the account is

M1 would fall and M2 would remain unchanged

If you move funds from checkable deposits to savings accounts

If you purchase a Treasury bond, the Treasury bond is A) an asset to you as well as an asset to the U.S. government. B) an asset to you, but a liability to the U.S. government. C) a liability to you, but an asset to the U.S. government. D) a liability to you as well as a liability to the U.S. government.

the interest rate on other similar bonds must have risen

If, while you are holding a coupon bond, its market price falls, you can be sure that

If, while you are holding a coupon bond, its market price falls, you can be sure that A) the coupon payment you are receiving must have been reduced. B) the interest rate on other similar bonds must have fallen. C) the interest rate on other similar bonds must have risen. D) the par value of the bond must have declined.

If, while you are holding a coupon bond, the interest rates on other similar bonds fall, you can be sure that A) the coupon payments on your bond will fall. B) the market price of your bond will rise. C) the market price of your bond will fall. D) the par value of your bond will rise.

In 1913, Congress and the President did not envision that the Fed would control A) the money supply. B) discount loans. C) lender-of-last-resort activity. D) broad control over most aspects of money and the banking system.

In 1971 money market mutual funds were introduced as an alternative to A) commercial paper. B) Treasury bills. C) repurchase agreements. D) bank deposits.

In 2006, the Bank of Japan adopted a policy framework focusing on A) expected inflation one to two years in the future. B) current inflation. C) maintaining a fixed exchange rate. D) the growth in the money supply.

In 2010, doubts were raised about the debt of all of the following countries EXCEPT A) Ireland. B) Greece. C) Poland. D) Portugal.

In 2012, Ben Bernanke expressed which concern about persistently high unemployment? A) It would result in high inflation. B) It would result in structural damage to the economy that would last for years. C) It would never decline to desired levels. D) It would cost him his job.

In 2012, net worth was about what percentage of total funds raised by banks? A) 2% B) 7% C) 13% D) 35%

In 2012, the House of Representatives voted to have what type of audit of the Fed? A) auditing of financial statements B) auditing lending policy that took place during the financial crisis of 2007-2009 C) auditing of monetary policy decisions. D) auditing of personal finances of members of the Board of Governors.

In January 2010, President Obama appointed which of the following to be chair of the Federal Reserve? A) Greenspan B) Bernanke C) Geithner D) Trichet

In July 2010, what was the total value of U.S. currency in circulation? A) $500 million B) $150 billion C) $1080 billion D) $6 trillion

In Moscow in 1989, what were taxi drivers using as a medium of exchange? A) Russian rubles B) Marlboro cigarettes C) gold coins D) caviar

In November 2012, HP claimed that they had weak earnings due to questionable accounting by a company that they had taken over. This is an example of: A) market risk B) systemic risk C) idiosyncratic risk D) liquidity risk

In October 2012, the largest liability of the Fed was A) currency in circulation. B) reserves. C) discount loans to banks. D) vault cash.

In Wall Street Jargon, a "Bear Market" typically means A) stock prices have declined by at least 20%. B) stock prices have declined by at least 50%. C) stock prices have risen by at least 20%. D) stock prices have risen by at least 50%.

In a barter system individuals A) find it impossible to specialize. B) must be entirely self-sufficient. C) find it difficult to specialize, but may be able to do so. D) will almost invariably specialize.

In a closed economy, if the goods market is in equilibrium, national saving is $2 trillion, national consumption is $7 trillion, and government purchases are $2.5 trillion, then GDP equals A) $7 trillion. B) $9.5 trillion. C) $11.5 trillion. D) Not enough information has been provided to determine the answer.

In a closed economy, national saving equals A) C + I + G. B) Y - C - G. C) Y - C - I. D) Y - G - I.

In a closed economy, the goods market is in equilibrium when A) Y = S + I + G. B) C + S = I + G. C) C + I = S + G. D) Y = C + I + G.

In a closed economy, the total quantity of goods demanded equals the sum of A) consumption spending, investment spending, and government spending. B) consumption spending, national saving, and taxes. C) consumption spending, government spending, and taxes. D) investment spending, national saving, and taxes.

In a competition of financial analysts vs. throwing a dart to choose stocks, according Burton Malkiel, financial analysts came out ahead due to all of the following reasons EXCEPT: A) it considered only stock prices, not dividends B) investors that followed the contest were influenced to purchase the stocks recommended by the analysts C) failure of the Efficient Markets Hypothesis D) part of the return for the analysts resulted from compensation for the higher risk of the stocks chosen

In a defined contribution pension plan, A) pension income varies depending on how well the plan's investments have done. B) the employee is promised an assigned benefit based on earnings and years of service. C) if the funds in the pension plan exceed the amount promised, the excess accrues to the issuing firm or institution. D) all earnings are taxable as regular income.

In a large open economy, A) domestic lending and borrowing decisions have no impact on the world real interest rate. B) an increase in the domestic supply of loanable funds would lower the world real interest rate. C) the domestic equilibrium real interest rate is determined independently of foreign borrowing and lending. D) an increase in the domestic demand for loanable funds would lower the world real interest rate.

In a matched sale-purchase transaction, the Fed A) buys securities from a dealer and the dealer agrees to buy them back. B) sells securities to a dealer and the dealer agrees to sell them back. C) buys securities from one dealer and sells the same dollar amount of securities to another dealer. D) sells securities to one dealer and buys the same dollar amount of securities from another dealer.

In a move up the IS curve, A) investment rises. B) output falls. C) the real interest rate falls. D) saving rises.

In a simple model of the economy, if the MPC is 0.8, the multiplier will equal A) 0.2 B) 0.8 C) 1.25 D) 5

In an article, "Preparing for the Next Black Swan" (Wall Street Journal, Aug 21, 2010), the point is made that diversification may be insufficient in protecting one's portfolio during a "Black Swan" event. Why may this be true? A) virtually all asset classes may decline at the same time B) investors may be unable to buy different assets during a "Black Swan" event C) some assets may rise while others decline during a "Black Swan" event D) Black Swan events are surprises and thus one cannot prepare for such an event.

In an efficient market with rational expectations, the actual price of an asset A) will equal its expected price. B) will often be below its expected price. C) will often be above its expected price. D) equals its expected price plus a random error term.

In an effort to increase government revenue, Congress and the president decide to increase the corporate profits tax. The likely result will be A) the supply curve for bonds shifts to the left. B) the demand curve for bonds shifts to the left. C) the equilibrium interest rate rises. D) the equilibrium price of bonds falls.

In an open economy, desired domestic lending A) must equal desired domestic borrowing. B) must equal desired domestic borrowing plus the amount of international lending. C) is always greater than desired domestic borrowing. D) is always less than desired domestic borrowing.

In banking, the spread refers to the difference between the A) interest rate on long-term bonds and the interest rate on short-term bonds. B) interest rate on car loans and the interest rate on home mortgages. C) average interest rate earned on assets and the average interest rate paid on liabilities. D) bid and asked prices on a bond.

Eugene Fama

In class, we discussed about the economist who was awarded the Nobel prize for his early empirical work supporting the efficient markets hypothesis. Who is he

In comparing actively managed mutual funds with those funds that simply buy and hold a large market portfolio (index funds), we would expect that A) the actively managed funds provide a higher return than the index funds. B) the index funds provide a higher return after expenses than the actively managed funds. C) actively managed funds and index funds provide the same returns. D) index funds provide a lower return than actively managed funds only if taxes are taken into consideration.

both money and shares of Apple stock are stores of value

In comparing money to shares of Apple stock, we can say that

In comparing money to shares of Apple stock, we can say that A) money is a store of value, but shares of Apple stock are not. B) shares of Apple stock are a store of value, but money is not. C) both money and shares of Apple stock are stores of value. D) neither money nor shares of Apple stock are stores of value.

In comparing the yield to maturity on a Treasury bill with the yield on a discount basis on the same bill, we can say that the yield to maturity A) will always be greater than the yield on a discount basis. B) will always be less than the yield on a discount basis. C) will always be equal to the yield on a discount basis, provided the holding period is the same as the number of years to maturity. D) rises whenever the yield on a discount basis falls.

In effect, banks are able to charge A) depositors for banks' superior information about borrowers. B) borrowers for banks' superior information about depositors. C) the government for banks' superior information about borrowers and depositors. D) interest rates that are in fact above those legally allowed.

In financial markets, leverage refers to: A) the use of borrowed money in an investment B) the power to influence the market C) the use of political connections in attaining financial outcomes D) the role that speculators have in impacting market outcomes

In forward transactions, A) the exchange takes place at the same exchange rate as in the spot market. B) currencies are exchanged at a set date in the future. C) currencies may only be exchanged at rates set by governments well in advance. D) currency is bought and sold for delivery later that same day.

In investment banking the "spread" is the difference between A) the value of a firm's assets and the value of its liabilities. B) the bid and asked prices on a bond. C) the price of new capital guaranteed to the issuing firm and the price that can be obtained in the market. D) the price of a new stock issue and the price of an equivalent new bond issue.

In late 2008, the average risk premium rose because A) investors feared a revival of inflation. B) large tax increases in the United States reduced corporate profits and led to fears of increased defaults. C) of the financial crisis. D) of fraud in the market for municipal bonds.

In late 2012, President Obama proposed raising the top income tax rate. All of the following are likely impacts of higher income tax rates on bonds EXCEPT: A) higher interest rates on Treasury bonds B) lower interest rates on Municipal bonds C) increased demand for Municipal bonds D) lower prices for Municipal bonds

In managing its liabilities to deal with liquidity problems, banks trade off A) credit risk against interest rate risk. B) adverse selection against moral hazard. C) the need for available funds to meet deposit outflows against the desire for greater profit. D) present tax liabilities against future tax liabilities.

In managing the monetary base, the Fed most often uses A) open market purchases. B) printing money. C) discount loans. D) tax increases.

In order to increase its target for the federal funds rate, the Fed would normally A) conduct open market sales. B) conduct open market purchases. C) increase the discount rate. D) increase reserve requirements.

In order to reduce the likelihood of excessive leverage in the banking system, governments have traditionally A) imposed capital requirements on commercial banks. B) imposed capital requirement on investment banks. C) imposed capital requirements on both commercial and investment banks. D) imposed asset requirements on all banks.

In practice, the Board of Governors and FOMC typically defer to the policy proposals of the: A) President B) Chair of the Fed C) Secretary of Treasury D) Speaker of the House

In practice, the ECB has committed to what type of strategy for monetary policy? A) inflation targeting B) monetary targeting C) unclear as to inflation or monetary targeting D) exchange rate targeting

In quantity theory terms, during a hyperinflation, A) money supply increases rapidly, but velocity does not B) velocity increases rapidly, but money supply does not C) both the money supply and velocity increase rapidly D) neither the money supply nor velocity increase rapidly

In recent decades, the United States A) was essentially a closed economy. B) was generally a net borrower of foreign funds. C) was generally a net lender abroad. D) experienced a net outflow of savings.

In regard to crowd funding, it was expected that the SEC would limit the amount that small investors can invest in any one company to no more than: A) $1000 B) $10,000 C) $100,000 D) $1,000,000

In the IS-MP model, when the Fed increases the real interest rate A) the MP curve shifts up resulting in a decline in the output gap. B) the MP curve shifts up resulting in an increase in the output gap. C) the MP curve shifts down resulting in a decline in the output gap. D) the MP curve shifts down resulting in an increase in the output gap.

In the United States the stake of top management in firms' ownership usually is A) less than 5%. B) more than 25%. C) more than 50%. D) more than 75%.

In the United States, monetary policy is carried out by A) the Federal Reserve System. B) Congress. C) the President. D) Congress and the President acting together.

In the United States, the lender of the last resort is A) Fannie Mae. B) the Federal Reserve. C) the Federal Deposit Insurance Corporation. D) Securities and Exchange Commission.

In the bank lending channel, an important reason for output increases in the short run after an expansionary monetary policy is that A) the funds directly available for households and firms to spend will increase. B) prices will increase, making increased production more profitable for firms. C) the increase in government spending from an expansionary monetary policy increases output through the multiplier effect. D) the ability of banks to make loans will increase.

In the bond market, the buyer is considered to be A) the lender. B) the borrower. C) the lender or the borrower, depending upon the use to which the funds are put. D) the lender or the borrower, depending upon whether interest rates are rising or falling.

In the bond market, the seller is considered to be A) the lender. B) the borrower. C) the lender or the borrower depending upon the use to which the funds are put. D) the lender or the borrower depending upon whether interest rates are rising or falling.

Certificate of Deposit

In the class, we discussed CDs as a financial asset considered to be an exxample of M2 (only but not M1). What does CD stand for?

In the context of the evaluation of the efficient markets hypothesis, pricing anomalies refer to A) the existence of trading strategies that appear to have offered above-normal returns. B) the gap between actual and expected prices. C) the spread between the price at which a broker will purchase stock from an investor and the price at which the broker will sell stock to an investor. D) the difficulty in practice of computing stock prices on the basis of expectations of future dividends.

In the current U.S. economy, who plays the role of lender of last resort? A) The Securities and Exchange Commission B) The Federal Deposit Insurance Corporation C) The Federal Reserve System D) The Social Security Administration

In the early post-war years, the Fed was reluctant to continue its wartime agreement with the Treasury because it believed the result would be A) recession. B) inflation. C) higher taxes. D) lower taxes.

In the federal funds market diagram, a decrease in the required reserve ratio A) shifts the demand curve for reserves to the left. B) increases the federal funds rate. C) results in a multiple expansion of deposits, which increases the equilibrium level of reserves held by banks. D) shifts the supply curve for reserves to the right.

shifts the reserves supply to the left

In the federal funds market diagram, an open market sale by the Fed

In the federal funds market diagram, an open market sale by the Fed A) shifts the reserve supply curve to the right. B) shifts the reserve supply curve to the left. C) decreases the federal funds rate. D) increases the volume of federal funds traded.

In the foreign-exchange market, trading A) is restricted to the hours 10 A.M. to 3 P.M. New York time. B) may not take place after 5 P.M. London time. C) takes place at any hour of the night or day. D) takes place at prices set by the U.S. government in consultation with the governments of other leading countries.

In the late 2000s, the primary source of external funds for corporations was A) commercial paper. B) loans. C) bonds. D) stocks.

In the late 2000s, which of the following was the primary source of external financing for small to medium-size firms? A) mortgages B) bank loans other than mortgages C) trade credit D) other loans

In the late 2000s, which source of funds for corporations grew the most? A) net new stock issues B) net new bond issues C) net new loans D) net new commercial paper

In the market for loanable funds the price of the funds exchanged is A) the price of bonds. B) the volume of bonds purchased. C) the volume of bonds sold. D) the interest rate.

In the market for loanable funds, the seller is considered to be A) the lender. B) the borrower. C) the lender or the borrower depending upon the use to which the funds are put. D) the lender or the borrower depending upon whether interest rates are rising or falling.

In the spot foreign exchange market, A) only dollars, yen, and pounds may be traded. B) only dollars and yen may be traded. C) currencies or bank deposits are exchanged immediately. D) currencies or bank deposits are exchanged at a fixed date (or spot) in the future.

In what sense do self-fulfilling expectations determine the acceptability of a medium of exchange? A) People like to do what the government expects them to do. B) People value something as money only if they believe others will accept it from them as payment. C) People expect that money will never lose its value. D) People expect that eventually every country will use the same medium of exchange.

In what way can the stock market affect the overall economy? A) It's an important source of funds for corporations. B) It can affect consumer and business sentiment. C) It is an important factor affecting consumer wealth and thus consumer spending. D) All of the above

In what way did the Dodd-Frank Act reduce bank revenue? A) It increased the amount banks had to pay on interest to depositors. B) It reduced fees banks could charge when customers took out loans. C) It reduced the amount of interest banks could charge on mortgages. D) It capped the fees that banks could charge stores for debit card transactions.

In what way is a stronger yen/weaker dollar a burden for Japanese exporters? A) They received dollars when they sell goods but most of their costs of production are in yen. B) They receive yen when they sell goods but most of their costs of production are in dollars. C) The price of their exports will decline, resulting in lower profits. D) The stronger yen is likely to increase Japanese inflation, resulting in lower profits.

In what year did sales of gold for investment exceed that for jewelry for the first time? A) 1933 B) 1971 C) 2001 D) 2009

In what year did the United States go off the gold standard? A) 1933 B) 1945 C) 1981 D) 2001

In what year did the economy return to normal conditions following the Great Depression? A) 1933 B) 1937 C) 1941 D) 1945

In what year did the mutual fund industry in the United States begin? A) 1812 B) 1924 C) 1974 D) 1990

In which of the following assets are commercial banks in the United States NOT allowed to invest checkable deposits? A) home mortgages B) corporate bonds C) municipal bonds D) U.S. Treasury bonds

In which of the following have pension funds invested the most? A) corporate equities and mutual fund shares B) government securities C) corporate bonds D) mortgages

February 2007

In which of the following periods was the yield curve inverted

In which of the following periods was the yield curve inverted? A) February 2004 B) February 2007 C) February 2010 D) The yield curve was not inverted during any of these periods.

Increased liquidity in recent decades has reduced interest rates on which of the following assets (holding constant all other things that affect interest rates)? A) U.S. government bonds B) bonds issued by large corporations C) business loans D) bonds issued by state governments

Increases in interest rates A) reduce borrowers' net worth. B) reduce lenders' net worth. C) increase the present value of borrowers' assets. D) raise the cost to businesses of internal funding.

Increases in interest rates are often blamed on A) Congress. B) the President. C) the Fed. D) the U.S. Treasury.

According to the quantity theory of money, an increase in the money supply _____ aggregate _____, everything else held constant

Increases; demand

Indirect quotations in terms of foreign currency refers to: A) expressing exchange rates as units of foreign currency in terms of domestic currency B) expressing exchange rates as units of domestic currency in terms of foreign currency C) expressing exchange rates of less traded currency by using a "major" currency D) expressing exchange rates in terms of commodities such as gold

Individual investors can reduce transactions costs by A) buying common stock rather than bonds. B) combining their purchases through an intermediary. C) common stocks directly, rather than through a mutual fund. D) making loans directly, rather than depositing funds in a bank.

Individual investors who always want to hold gold are known as: A) goldfinger B) golden boys C) gold bugs D) goldilocks

Inflation is an economic problem because it A) leads inevitably to unemployment. B) makes prices less useful as signals for resource allocation. C) leads to recession. D) results in rapid increases in the money supply.

Information costs A) are the costs of buying and selling financial claims. B) include the costs that savers incur to determine the credit worthiness of borrowers. C) include the costs borrowers incur to discover the best investments to make with the money they have borrowed. D) are zero in financial markets, but high for transactions carried out through financial intermediaries.

Interest and capital gains are taxed differently in the United States in that A) interest is exempt from state and local taxes. B) interest is taxed as ordinary income, but capital gains are taxed only when realized. C) interest is taxed as ordinary income, but capital gains are taxed as accrued. D) capital gains when realized are exempt from state and local taxes.

Interest rate fluctuations A) are usually not considered to be of much importance and are largely ignored by the Fed. B) have the paradoxical effect of increasing the rate of economic growth. C) make it difficult for households and firms to plan for the future. D) have largely been eliminated by the Fed during the past two decades.

Interest-rate risk can best be characterized as the risk that A) you could have earned a higher interest rate if you waited to purchase a bond. B) fluctuations in the price of a financial asset in response to changes in market interest rates. C) you could have gotten a lower interest rate if you waited to lock in a mortgage. D) short-term interest rates may exceed long-term interest rates.

Intermediate targets are A) interim goals set on the way to fully achieving policy goals. B) targets for policy goals that are of secondary importance. C) targets the Fed hopes to achieve by June of each year. D) financial variables, such as interest rates or monetary aggregates, the Fed believes will help it to achieve policy goals.

International capital mobility refers to A) the ease with which manufacturing equipment can be transported across countries. B) the ease with cash may be transferred from one country to another without having to be converted into a foreign currency. C) the ease with which investors move funds among international financial markets. D) the ease with which exchange rates may be adjusted to reflect changes in the relative economic strengths of countries.

Investment banks are vulnerable because A) the maturity of their liabilities is less than the maturity of their assets. B) the maturity of their assets is less than the maturity of their liabilities. C) they tend to be underleveraged. D) they tend to primarily hold short-term assets.

Investment banks do NOT engage in which of the following? A) proprietary trading B) securitization C) lending to households D) underwriting

Investors often pay professional analysts to gather and monitor information on the creditworthiness of borrowers because A) federal law requires it. B) most investors are risk neutral. C) the cost of acquiring information about a borrower's creditworthiness can be high. D) doing so increases the net-of-tax yield on most investments.

Investors value liquidity in an asset because A) liquid assets tend to have high rates of return. B) liquid assets incur lower selling costs. C) liquid assets incur lower tax liabilities. D) whereas liquid assets have high information costs, their low risk offsets this.

Issuers of coupon bonds A) make a single payment of principal when the bonds matures, but multiple payments of interest over the life of the bond. B) make a single payment of interest and principal. C) make multiple payments of principal, but a single payment of interest. D) make a single payment of principal at the time the bond is issued and multiple payments of interest over the life of the bond.

It is generally agreed that A) the financial system would be more efficient if intermediaries were eliminated. B) small- and medium-sized firms benefit by the actions of intermediaries. C) the addition of intermediaries adds to transactions costs. D) intermediaries should not seek to profit from reducing transactions costs.

structurally unemplyed

Jane Doe lost her job at a steel company because of a permanent decline in the demand for steel. Jane Doe is considered

John Smith leaves his job in New York to go to California in hopes of finding a better one. If John Smith is unemployed while searching for a job in California, economists would consider him to be A) frictionally unemployed. B) structurally unemployed. C) cyclically unemployed. D) naturally unemployed.

Large commercial banks are considered to be market makers because: A) without them, there would be no foreign exchange market B) they can easily manipulate the value of currencies in the foreign exchange market C) they are willing to buy and sell major currencies at any time D) they created the foreign exchange market

Lenders prefer to lend to firms with high net worth because A) such firms are usually willing to pay higher interest rates. B) the owners of such firms have more to lose if the firm defaults on a loan. C) the government requires most bank loans to be made to such firms. D) such firms usually are unable to raise funds directly through financial markets.

shields owners of a corporation from losing more than what they invested in a firm

Limited liability can best be defined as the legal provision that

Limited liability can best be defined as the legal provision that A) shields owners of a corporation from losing more than what they invested in a firm. B) protects bond holders from being sued by other creditors. C) gives holders of preferred stock priority over holders of common stock. D) reduces the exposure of sole proprietorships to law suits.

Limits on the value of the assets that commercial banks can acquire relative to their capital is known as: A) equity requirements B) capital requirements C) required reserves D) asset requirements

Liquidity A) is the best available measure of the riskiness of an asset. B) is a characteristic of money, and of no other asset. C) is the ease with which an asset can be exchanged for money. D) was declining for many financial assets during the 1990s.

investors prefer shorter to longer maturities

Liquidity premium theory was the only model that could explain all 3 facts about the term structure of interest rates. According to the liquidity premium theory,

Loanable funds refers to A) only those funds loaned from one bank to another. B) only those funds loaned to banks by the Federal Reserve. C) only those funds loaned by banks to private individuals. D) all those funds changing hands between lenders and borrowers in the bond market.

Loans by the Federal Reserve to banks are known as A) repurchase agreements. B) Federal funds. C) discount loans. D) cash items in the process of collection.

Losses in which holding resulted in BNP Paribas not allowing investors to redeem shares from three of its investment funds? A) mortgage-backed securities B) Lehman Brothers C) Bear Stearns D) Real Estate Investment Trusts

Lower interest rates which reduce the debt-servicing burden of households, thus increasing their net worth, is best described by the A) bank lending channel. B) money channel. C) financial market channel. D) balance sheet channel.

If an individual moves money from a savings account to a money market mutual fund share...

M1 and M2 both stay the same

If an individual uses money from a checking account to purchase the US Treasury bond...

M1 decreases and M2 decreases

Many economists and policymakers have raised concerns about crowd funding due to the existence of: A) information costs facing small investors B) information costs facing business start ups C) transaction costs facing business start ups D) increased competition for banks in funding business start ups

Many economists believe A) the Fed could have reduced the severity of the Great Depression by raising interest rates. B) the Fed could have reduced the severity of the Great Depression by encouraging banks to make fewer loans to insolvent businesses. C) bank failures increased the severity of the Great Depression. D) the severity of the Great Depression and the policies of the Fed were unrelated.

Many savers are willing to accept a lower interest rate on municipal bonds than on comparable instruments because A) the after-tax yield on municipal bonds is greater. B) municipal bonds invariably have lower default risk. C) municipal bonds are more liquid than most other instruments. D) the yield on municipal bonds is considered inflation proof.

Mean reversion refers to the tendency for A) futures prices to revert to the prices of the underlying securities. B) the long-run mean return on stocks to equal the long-run mean return on bonds. C) stocks with high returns today to experience low returns in the future and for stocks with low returns today to experience high returns in the future. D) financial analysts whose stock picks have earned above-normal returns in the past to be unable to pick stocks that will perform as well in the future.

Members of the Board of Governors A) must resign when the President who has appointed them leaves office. B) may serve no more than three consecutive four-year terms. C) serve for life or good behavior. D) serve one nonrenewable fourteen-year term.

Members of the Board of Governors are A) elected by the district bank presidents. B) appointed by the President of the United States, subject to confirmation by the Senate. C) appointed by the National Monetary Commission. D) appointed by the Securities and Exchange Commission, subject to congressional veto.

Modern hedge funds typically make investments that involve A) hedging. B) speculating. C) acquiring safe, short-term assets. D) focus on stocks instead of bonds.

Momentum investing can be described as A) consistent with the efficient markets hypothesis. B) similar to mean reversion. C) follow the picks of investors who have been successful in the past. D) the trend is your friend.

Monetary policy can have substantial effects on the economy even when nominal interest rates are very low A) since real rates are what affects borrowing and spending decisions. B) by improving borrower and bank balance sheets. C) by reducing transactions costs. D) only when the policy is substantial.

Monetary policy refers to the government's A) decisions on how much money to spend. B) decisions on how much money to collect in taxes. C) plans for retiring the national debt. D) management of the money supply and interest rates to achieve macroeconomic objectives.

Money as a medium of exchange refers only to A) currency. B) gold coins. C) anything that is generally accepted as payment for goods and services. D) checks at commercial banks.

Money can BEST be described as: A) anything that is generally accepted as payment for goods and services or in the settlement of debts. B) paper that can be used to purchase goods and services C) commodities that have intrinsic value D) any form of wealth possessed by consumers

Money eliminates the need for A) any government role in the economy. B) specialization. C) people to have a double coincidence of wants. D) the market system.

Money is a medium of exchange in that A) money is generally accepted for buying and selling goods and services. B) currency may be exchanged for gold at any national bank. C) other assets may be better or worse in facilitating exchange than money. D) it must maintain most of its value over time.

Money market deposit accounts are included in A) only M1. B) only M2. C) M1 and M2. D) neither M1 nor M2.

Money market mutual funds A) hold portfolios of stocks. B) hold portfolios of short-term assets. C) are always load funds. D) hold only U.S. Treasury securities.

Money that has no value other apart from its use as money: A) is known as commodity money B) is known as fiat money C) will result in a return to a barter system D) will result in rapid inflation

Moody's Investors Service is able to make a profit because A) most investors are irrational. B) of the existence of adverse selection problems. C) fluctuations in interest rates make default risk on corporate bonds difficult to gauge. D) small investors like the mutual funds they sell.

Moral hazard arises from A) the difficulty of distinguishing good-risk borrowers from bad-risk borrowers. B) the likelihood that bad-risk borrowers are more likely to accept a loan than are good-risk borrowers. C) savers' difficulties in monitoring borrowers. D) borrowers' difficulties in locating savers.

Moral hazard can contribute to high bank leverage in all of the following ways EXCEPT A) having high capital requirements. B) bank managers are compensated in part on providing shareholders with high returns on equity. C) high bank leverage provides shareholders with a potential for a higher return on equity. D) federal deposit insurance has reduced the incentive of depositors to monitor the behavior of bank managers.

Moral hazard is not eliminated in debt financing because A) borrowers have an incentive to assume greater risk than is in the interest of the lender. B) firms with a great deal of debt often go bankrupt. C) principal-agent problems are greater with debt financing than with equity financing. D) the use of restrictive covenants tends to increase moral hazard.

Moral hazard problems arise when A) lenders have difficulty in distinguishing between good and lemon firms. B) when a downturn in economic activity makes repaying loans difficult for borrowers. C) borrowers default on loans. D) borrowers have an incentive to conceal information.

Moral hazard problems arise when A) lenders have difficulty in distinguishing between good and lemon firms. B) when a downturn in economic activity makes repaying loans difficult for borrowers. C) borrowers have an incentive to act in ways that do not reflect the lender's interests. D) borrowers default on loans.

Most economists believe that a zero rate of unemployment A) is obtainable with the correct monetary policy. B) would result in a better functioning economy. C) is inconsistent with a well-functioning economy. D) is obtainable only if the inflation rate is also zero.

Most economists think changes in which type of unemployment affects inflation? A) frictional unemployment B) cyclical unemployment C) structural unemployment D) natural rate of unemployment

Most foreign exchange is bought and sold A) by governments. B) by tourists. C) in over-the-counter markets. D) on the New York Stock Exchange.

Most macroeconomic policy consists of: A) monetary policy B) fiscal policy C) exchange-rate policy D) regulatory policy

Most of the Fed's earnings come from A) fees charged to financial institutions for check clearing. B) interest on the securities it holds. C) interest on discount loans. D) congressional appropriations.

Most of the TARP funds were used to A) fund a stimulus package. B) pay for losses incurred by Fannie Mae and Freddie Mac. C) finance the operations of the Federal Reserve. D) make direct purchases of preferred stock in banks to increase their capital.

Most of the increase in the monetary base between 2007 and 2012 was due to increases in: A) currency B) bank deposits C) excess reserves D) Treasury bills

Municipal bonds are issued A) only by local governments. B) only by state governments. C) by both state and local governments. D) by the federal government, and by state and local governments.

Mutual funds A) take in deposits from savers and make loans to borrowers. B) sell shares to savers and purchase assets with the funds. C) take in deposits from savers and purchase assets with the funds. D) bring together small savers and small borrowers.

NOW accounts were developed in order to A) circumvent Regulation Q. B) provide banks with a checkable deposit on which they did not have to pay interest. C) provide banks with a liquid, interest-earning asset. D) provide banks with a means of earning interest on the funds in their reserve accounts with the Fed.

National banks are chartered by the A) Office of the Comptroller of the Currency. B) Office of Bank Supervision. C) Securities and Exchange Commission. D) Office of Management and the Budget.

Negotiable certificates of deposit were developed in order to A) compete for loan business that had been going to the commercial paper market. B) circumvent interest rate regulations on deposits. C) increase assets that were acceptable as collateral for discount loans. D) circumvent reserve requirements.

The president from which Federal Reserves Bank always has a vote in the FederalOpen Market Committee?

New York

Noise traders A) pursue trading strategies based on inflated view of their ability to understand the significance of a piece of news. B) make use of inside information. C) reduce the amount of risk in the market. D) help to ensure that asset prices reflect the fundamental values of the securities being traded.

Noise traders A) tend to lose money on stock trades, but help to stabilize the market. B) tend to make higher returns than do "buy-and-hold" investors. C) create additional risk in the market by increasing price fluctuations. D) trade only when they have inside information.

Noise traders involves investors who A) overreact to good and bad news. B) strictly follow the efficient markets hypothesis. C) filter out the noise involved in following their stocks. D) ignore new information about stocks.

Nominal exchange rates differ from real exchange rates in that nominal exchange rates A) do not correct for differing interest rates across countries. B) do not measure the purchasing power of the currency. C) are fixed, while real exchange rates are flexible. D) are flexible, while real exchange rates are fixed.

Nominal interest rates are higher than real interest rates as long as A) expected inflation is positive. B) the government taxes interest income. C) inflation is expected to decline in the future. D) long-term interest rates are higher than short-term interest rates.

On a bank's balance sheet, "borrowings" are A) loans to households. B) loans to businesses. C) nondeposit liabilities. D) U.S. Treasury securities.

On a bank's balance sheet, assets are A) the uses of acquired funds. B) the sources of acquired funds. C) those items owed by the bank to depositors and others. D) by definition equal to the bank's liabilities.

On a bank's balance sheet, bank capital is considered: A) an asset B) a liability C) the difference between a firm's assets and it's shareholder's equity D) the total amount of funds banks have availability to make loans

the sources of acquired funds

On a bank's balance sheet, liabilities are

On a bank's balance sheet, liabilities are A) the uses of acquired assets. B) the sources of acquired funds. C) all those items of value owned by the bank. D) by definition equal to the bank's assets.

On a coupon bond, the yield to maturity A) always equals the coupon rate. B) equates the present value of all the bond's payments to its price today. C) increases when the market price of the bond increases. D) equals the coupon payment divided by the current price of the bond.

On the books of the Fed the difference between borrowed reserves and discount loans is equal to A) excess reserves. B) required reserves. C) currency in circulation. D) zero; they are the same thing.

zero; they are the same thing

On the books of the Fed, the difference between borrowed reserves and discount loans is equal to

One implication of the efficient markets hypothesis is that investors should A) concentrate their investments in just a few well-chosen assets. B) hold a diversified portfolio of assets. C) buy stocks rather than bonds. D) buy bonds rather than stocks.

One method that lenders use to mitigate the adverse selection problem is to A) charge higher interest rates to less creditworthy borrowers. B) monitor closely the behavior of borrowers after a loan is made. C) ration credit. D) provide default insurance.

One of the most important enforcement tools of the Consumer Finance Protection Bureau is: A) the threat of civil charges against those who violate the laws involving money transfers, foreclosure and many other financial services B) the ability to audit financial firms and institutions C) the ability to initiate new regulations D) the authority to impose criminal penalties

One reaction of firms to the adverse selection problem is to A) rely on internal funds to finance investment. B) use the stock market rather than the bond market to raise funds. C) use the bond market rather than the stock market to raise funds. D) borrow long-term rather than short-term.

Open market operations A) lack flexibility because only very small purchases or sales may be carried out in any given month. B) lack flexibility because open market purchases cannot easily be offset by subsequent open market sales. C) are more flexible than other policy tools. D) may be carried out only on the third Friday of each month.

the Fed buying and selling U.S. government securities

Open market operations generally involve

Open market operations generally involve A) the Fed making discount loans to depository institutions. B) the Fed buying and selling common stock in order to affect the liquidity of the stock market. C) the Fed buying and selling U.S. government securities. D) private investors buying and selling securities directly on exchanges, rather than through brokers.

Other assets are inferior to money in the sense that A) they increase in value more slowly than does money. B) they have a lower overall return than money. C) they are more vulnerable to losing their real value as inflation increases. D) they generate transaction costs when they are exchanged for money.

Other things equal, an increase in the tax on dividends is likely to result in all of the following EXCEPT: A) higher expected return on bonds relative to stocks B) increased demand for bonds C) lower interest rates D) higher interest rates

Owners of small firms in countries with weak banking systems have to rely on funds from all of the following EXCEPT: A) their own savings B) local lenders who charge high interest rates C) global investors D) the savings of relatives and friends

Primary credit is only a backup source of funds for health banks since A) the primary credit rate is set above the federal funds rate. B) restrictions as to its use limit its benefits. C) the secondary credit rate pays 0.5% more. D) banks must seek funds from other sources prior to requesting a discount loan.

Primary dealers are those A) permitted to trade directly with the Fed. B) who work under the account manager at the Federal Reserve Bank of New York. C) who specialize in selling bonds to small private investors. D) responsible for assuring that interest rates do not decline unless the FOMC has given specific instructions that they decline.

Private information-collection firms fail to eliminate the adverse selection problem because A) the law does not allow them to disclose private information about the creditworthiness of firms. B) they do not monitor borrowers after loans have been made. C) some investors who do not pay for their services will still profit from them. D) most companies refuse to provide them with any information.

Purchasing power parity's assumption that the real exchange is constant A) is correct in nearly all instances. B) would be correct were it not for the existence of trade barriers. C) is not reasonable. D) is correct for trade between the United States and Japan, but incorrect in most other bilateral trading relations.

Rates of inflation in the hundreds or thousands of percent per year are known as A) super inflation. B) megainflation. C) hyperinflation. D) overinflation.

Rational expectations involve the assumption that A) market participants make use only of information on the past performance of an asset in determining what they believe its price should be. B) market participants rarely change their minds about the correct price of an asset. C) financial markets are good at increasing liquidity, but poor at transmitting information. D) market participants makes use of all available information.

This theory views shocks to tastes (workersȇ willingness to work, for example) and technology (productivity) as the major driving forces behind short-run fluctuations in the business cycle because these shocks lead to substantial short-run fluctuations in the natural rate of output.

Real business ccle theory

Regulation Q A) prohibited interstate banking. B) placed ceilings on allowable interest rates on time and savings deposits. C) required all banks to hold reserves against demand deposits. D) broadened the basis on which the Fed could make discount loans.

Regulation Q was intended to A) maintain banks' profitability by limiting competition for funds. B) increase the reserves banks would hold against demand deposits. C) increase the reserves banks would hold against time deposits. D) eliminate the need for discount loans.

Required reserves are A) the portion of demand deposits and NOW accounts banks must hold. B) zero on demand deposits. C) zero on NOW accounts. D) imposed on all deposits at commercial banks.

Requirements for information disclosure for firms that desire to sell securities in financial markets A) are very common in industrialized countries, including the United States. B) are common in other industrialized countries, but have not yet been adopted in the United States. C) have been adopted in the United States, but have not yet been adopted in other industrialized countries. D) have yet to be adopted in the United States or other industrialized countries.

Research by Reinhart and Rogoff indicate that most of the increase in national debt as a result of a financial crisis is due to A) government bail outs of financial institutions. B) increase spending on social welfare programs. C) government stimulus programs. D) sharp declines in tax revenues.

Research has shown that nations with highly independent central banks tend to have low A) inflation. B) interest rates. C) economic growth. D) unemployment.

Reserve deposits are A) assets for financial institutions, but liabilities for the Fed. B) liabilities for financial institutions, but assets for the Fed. C) assets for both financial institutions and the Fed. D) liabilities for both financial institutions and the Fed.

Reserve requirements are changed A) more frequently than the discount rate is changed, but less frequently than open market operations are conducted. B) more frequently than the discount rate is changed and more frequently than open market operations are conducted. C) more frequently than open market operations are conducted, but less frequently than the discount rate is changed. D) less frequently than open market operations are conducted and less frequently than the discount rate is changed.

Board of Governors

Reserve requirements are set by

Reserve requirements are set by A) the Secretary of Treasury. B) the President. C) Congress. D) the Fed.

Reserves equal A) deposits with the Fed plus holdings of U.S. government securities. B) currency in circulation plus vault cash. C) deposits with the Fed plus vault cash. D) currency outstanding plus currency in circulation.

Restrictive covenants A) generally require that firms use debt finance rather than equity finance. B) generally require that firms use equity finance rather than debt finance. C) put restrictions on the use of borrowed funds. D) were outlawed under the Civil Rights Act of 1964.

Risk that is common to all assets of a certain type is referred to as A) systematic risk. B) unsystematic risk. C) idiosyncratic risk. D) structural risk.

Sales finance companies A) purchase accounts receivable of small firms at a discount. B) sell commercial paper and buy long-term corporate bonds. C) take in deposits from savers and buy corporate commercial paper. D) are affiliated with companies which manufacture or sell goods.

Sally Jones lost her job at a steel company because of a permanent decline in the demand for steel. Sally Jones is considered by economists to be A) naturally unemployed. B) cyclically unemployed. C) structurally unemployed. D) frictionally unemployed.

Securities that banks sell and agree to repurchase are known as A) federal funds. B) discount loans. C) repurchase agreements. D) NOW accounts.

Securitization is the process of A) issuing stocks to finance capital spending. B) issuing bonds to finance purchases of equipment and structures. C) reducing risk by decreasing corporate debt loads. D) converting loans into securities.

selling directly to investors loans or securities that were formerly held by financial intermediaries

Securitization refers to

Securitization refers to A) changing the mix in a financial portfolio away from stocks and toward bonds. B) selling directly to investors loans or securities that were formerly held by financial intermediaries. C) banks insisting that collateral be supplied on previously unsecured loans. D) reducing the exposure of a bank's portfolio to interest rate risk.

Short-term loans between banks are called A) federal funds. B) repurchase agreements. C) repos. D) discount loans.

Simple loans and discount bonds differ from coupon bonds and fixed-payment loans in that A) interest on simple loans and discount bonds is taxable, while interest on coupon bonds and fixed-payment loans is not. B) interest on coupon bonds and fixed-payment loans is taxable, while interest on simple loans and discount bonds is not. C) interest rates on simple loans and discount bonds are generally higher than interest rates on comparable coupon bonds and fixed-payment loans. D) interest on simple loans and discount bonds is paid in a single payment, while issuers of coupon bonds and fixed-payment loans make multiple payments of interest and principal.

Since 1980, discount loans have been available A) only to member banks of the Federal Reserve System. B) only to national banks. C) only to state banks. D) to all depository institutions.

Since Germany is a large open economy, the increase in German borrowing and investment in what was formerly East Germany in the early 1990s resulted in A) a decline in the world real interest rate. B) a shift to the right in the German supply of loanable funds curve. C) an increase in the real interest rate in the United States. D) a shift to the left in the German demand for loanable funds curve.

Since all assets typically do not move together, how can investors typically reduce risk? A) Purchase only the best performing assets. B) Diversify one's portfolio across different asset classes. C) Avoid poor performing assets. D) Actively manage one's portfolio.

Since capital gains are only taxed when an investor sells an asset and realizes the gain, a possible result is: A) the locked-in effect B) double taxation C) an increase in capital losses D) limited liability

Since crowd funding sites do not themselves invest in business start ups that raise funds on their sites, they don't reduce: A) the principal-agent problem B) information costs C) transaction costs D) asymmetric information

Since most banks have positive gaps and negative duration gaps, an increase in market interest rates will A) increase bank profits and increase bank capital. B) increase bank profits and decrease bank capital. C) decrease bank profits and increase bank capital. D) decrease bank profits and decrease bank capital.

Since the 1960s, the percentage of U.S. output exported to foreigners A) remained about the same. B) more than doubled. C) increased by more than ten times. D) declined by about half.

Situations of negative interest rates on short-term bonds resulted from: A) high income tax rates B) government regulations requiring financial firms to purchase government bonds C) very low risk premiums D) investors were looking for safe havens when other investments were perceived to be very risky

Small investors face A) high transactions costs in financial markets. B) low transactions costs in financial markets. C) high transactions costs in financial intermediaries. D) high information costs in financial intermediaries.

all of the above

Smaller firms tend to rely on financial intermediaries instead of financial markets for external financing due to

Smaller firms tend to rely on financial intermediaries instead of financial markets for external financing due to A) transactions costs. B) adverse selection. C) moral hazard. D) all of the above.

Some claim that ratings agencies have a conflict of interest since: A) they rate the quality of their own bonds B) since agencies charge firms for their services rather than investors, they have an incentive to give high ratings to gain business C) government began to include bond ratings as part of regulations of mutual funds, banks, and financial firms D) they issued many of the mortgages that were later securitized into bonds

Sovereign debt refers to A) debt owned by the government. B) bonds issued by the government. C) debt owed to the government. D) debt only issued by nations with kings or queens.

Speculators who think the euro is likely to decline over the next year can take all of the following actions EXCEPT A) buying put options on euros. B) sell euro futures contracts. C) sell euro forward contracts. D) buying call options on euros.

Standby letters of credit A) are a form of swaps. B) are a promise by a bank to lend the borrower funds to pay off its maturing commercial paper. C) are a promise by a large depositor to provide additional funds to a bank should the bank face an unexpectedly large deposit outflow. D) represent the unused balance on a bank credit card.

States that restrict banks to having a single branch are said to require A) mono banking. B) nonbank banking. C) unit banking. D) semi-banking.

Stocks of small firms have a higher annual average return than stocks in general. Some economists attribute this to: A) compensation for the higher risk of small firms B) lower liquidity of stocks of small firms C) higher information costs of stocks of small firms D) all of the above

Studies by economists suggest that A) households do not increase their saving as the government's dissaving increases. B) households increase their saving, but not by the full amount of an increase in government dissaving. C) households also increase their dissaving when the government increases its dissaving. D) households also increase their saving when the government increases its saving.

Suppose $100 buys less in the year 2013 than in 2000. Then we can say that A) money's store of value has decreased. B) money's store of value has increased. C) the economy must have been growing rapidly between 2000 and 2013. D) the economy must have been growing slowly between 2000 and 2013.

Suppose Apple announces that its earnings for the fourth quarter of 2013 rose to $2 billion. As a result of this announcement the price of Apple's stock does not change. The best explanation of this is A) market participants were expecting Apple's earnings to be greater than $2 billion. B) market participants expected Apple's earnings to be $2 billion. C) market participants expected Apple's earnings to be less than $2 billion. D) market participants have adaptive expectations.

Suppose Exxon-Mobil announces that its profits in the third quarter of 2013 were $40 billion. This will cause the price of Exxon-Mobil stock to A) rise. B) fall. C) remain unchanged. D) rise, fall, or remain unchanged depending on the expectations of market participants before the announcement.

Suppose First National Bank makes a one-year simple loan of $1,000 at 7% interest to Harry's Restaurant. At the end of one year Harry's Restaurant will pay First National A) $934.58. B) $1007. C) $1700. D) $1070.

Suppose Matt's New Cars issues a bond in which they'll need to pay $10,000 in one year, which includes 4% interest. How much will they receive for the bond? A) $9,600 B) $9,615 C) $10,000 D) $10,400

Suppose Matt's New Cars issues and sells a one-year discount bond for $9,259 and repays $10,000 at maturity. The interest rate on this bond would be A) 2.6%. B) 7.41%. C) 8%. D) 10%.

Suppose a coupon bond with a par value of $1000 is currently priced at $950 and has a coupon of $40. Which of the following is true? A) current yield > coupon rate B) current yield < coupon rate C) coupon rate has risen D) coupon rate has declined

Suppose an investment bank has a leverage ratio of 10 and the value of its securities decline by 10%. What happens to its return on equity investment? A) declines by 1% B) increases by 1% C) declines by 100% D) increases by 100%

Suppose nominal GDP is $14 trillion and the money supply is $2 trillion. What is the velocity of money? A) 0.143 B) 7 C) 12 D) 28

Suppose one person buys a copy of Consumer Reports and gives away free copies to all who request one. This is an example of A) free rider problem. B) moral hazard. C) adverse selection. D) economies of scale.

Suppose some members of Enron's board of directors are aware of the company's true financial condition, information that is not available to most investors. This is an example of A) lemon problem. B) moral hazard. C) adverse selection. D) asymmetric information.

Suppose that Congress passes an investment tax credit. The likely result will be A) the supply curve for bonds will shift to the right. B) the demand curve for bonds will shift to the left. C) the demand curve for bonds will shift to the right. D) the equilibrium interest rate will fall.

Suppose that Google announces that its profits for the third quarter of 2013 were $1.6 billion. As a result of this announcement the price of Google's stock declines. The best explanation of this is A) market participants expected Google's profits to be greater than $1.6 billion for the third quarter. B) market participants expected Google's profits to be less than $1.6 billion for the third quarter. C) the stock market is not an efficient market. D) market participants have adaptive expectations.

Suppose that a bank with no excess reserves receives a deposit into a checking account of $10,000 in currency. If the required reserve ratio is 0.20, what is the maximum amount that the bank can lend out? A) $2,000 B) $8,000 C) $10,000 D) $50,000

Suppose that a new bond rating service is established that specializes in rating municipal bonds that had not previously been rated. The likely result would be A) a shift to the left in the demand curve for municipal bonds. B) a shift to the left in the supply curve for municipal bonds. C) an increase in the equilibrium interest rate. D) a decrease in the equilibrium interest rate.

Suppose that a slice of pepperoni pizza costs £1 in London and $2 in San Francisco. If the real exchange rate is one-third of a slice of U.S. pizza for one slice of British pizza, how many pounds should you receive in exchange for $1? A) 1/3 B) 1.5 C) 2 D) 3

Suppose that a small economy that had previously been closed becomes open. If its real interest rate had previously been below the world real interest rate, we would expect that A) the country's real interest rate would remain below the world level. B) the country would become a net lender abroad. C) the country would become a new borrower abroad. D) the amount of loanable funds supplied in the country would decline.

Suppose that research shows that by buying stocks issued by companies whose names begin with the letter G investors can earn above-normal returns in even-numbered years. From the perspective of the efficient markets hypothesis, A) this is further evidence that the hypothesis is correct. B) this would be considered a pricing anomaly. C) investors must have insider information on these companies. D) purchasers of these stocks must have been noise traders.

Suppose that savers become less willing to purchase medium-quality corporate bonds. The result will be that the prices of medium-quality corporate bonds will A) fall relative to the price of U.S. Treasury securities, but rise relative to the price of high-quality corporate bonds. B) rise relative to the price of U.S. Treasury securities, but fall relative to the price of high-quality corporate bonds. C) rise relative to the prices of U.S. Treasury securities and high-quality corporate bonds. D) fall relative to the prices of U.S. Treasury securities and high-quality corporate bonds.

Suppose that savers become much more willing to purchase a certain type of municipal bond. The result will be that the bond's price will A) fall relative to the price of U.S. Treasury securities but rise relative to the price of corporate bonds. B) rise relative to the price of U.S. Treasury securities but fall relative to the price of corporate bonds. C) rise relative to the prices of U.S. Treasury securities and corporate bonds. D) fall relative to the prices of U.S. Treasury securities and corporate bonds.

Suppose that the banking system currency has no excess reserves and that a bank receives a deposit into a checking account of $10,000 in currency. If the required reserve ratio is 0.20, what is the maximum amount that the banking system can lend out? A) $8,000 B) $10,000 C) $40,000 D) $50,000

Suppose that there is concern about the stability of the global financial system causing a flight to the safety of U.S. government bonds. Which of the following is NOT a likely consequence? A) higher price of U.S. government bonds B) lower interest rate on U.S. government bonds C) increased demand for U.S. government bonds D) reduced supply of U.S. government bonds

Suppose that you expect during the next year the dollar will appreciate against the pound from 0.5 pound to the dollar to 0.75 pound to the dollar. How much will you expect to make on an investment of $10,000 in British government securities that will mature in one year and pay interest of 8%? A) -59.5% B) -28% C) 8% D) 28%

Suppose that you own $10,000 worth of stock in General Motors. Adding stock in which of the following companies would be least likely to reduce the risk in your portfolio? A) Google B) Walmart C) Ford D) General Electric

Suppose that your marginal federal income tax rate is 30%, the sum of your marginal state and local tax rates is 5%, and the yield on a thirty-year corporate bond is 10%. You would be indifferent between buying this corporate bond and buying a thirty-year municipal bond issued within your state (ignoring differences in liquidity, risk, and costs of information) if the municipal bond has a yield of A) 6.5%. B) 7.0%. C) 9.5%. D) 10.0%.

Suppose that your marginal federal income tax rate is 30%, the sum of your marginal state and local tax rates is 5%, and the yield on thirty-year U.S. Treasury bonds is 10%. You would be indifferent between buying a thirty-year Treasury bond and buying a thirty-year municipal bond issued within your state (ignoring differences in liquidity, risk, and costs of information) if the municipal bond has a yield of A) 6.5%. B) 7.0%. C) 9.5%. D) 10.0%.

Suppose the GDP implicit price deflator was 112.7 in 2013 and 116.0 in 2014. Therefore, the inflation rate in 2014 would be A) 2.8%. B) 2.9%. C) 3.3%. D) 16%.

Suppose the exchange rate is 10 pesos per dollar and you use $1000 to purchase a one-year Mexican bond that pays 10% interest. Next year, the exchange rate is 11 pesos per dollar. Assuming you convert your funds back to U.S. dollars, how much money will you have in one year? A) $1000 B) $1100 C) $91 D) $0

$100 million

Suppose the required reserve ratio is 8% and the Fed purchases $100 million worth of Treasury bills from Wells Fargo. By how much is Wells Fargo able to increase its loans

Suppose the required reserve ratio is 8% and the Fed purchases $100 million worth of Treasury bills from Wells Fargo. By how much is Wells Fargo able to increase its loans? A) $8 million B) $92 million C) $100 million D) $1.25 billion

Suppose there's a 50% chance of a stock rising by 20% and a 50% chance of it falling by 20%. What is the expected rate of return on the stock? A) -20% B) 0% C) 10% D) 20%

Suppose there's an 80% chance of a stock rising by 20% and a 20% chance of it falling by 40%. What is the expected rate of return on the stock? A) -40% B) -20% C) 8% D) 16%

Suppose there's an 80% chance of a stock rising by 20% and a 20% chance of it falling by 40%. Which type of investor would prefer an investment with a guaranteed return of 5%? A) risk loving investor B) risk neutral investor C) risk averse investor D) risk is not relevant in this example

Suppose you have a fixed-rate mortgage with a nominal interest rate of 6% and the expected annual inflation rate over the life of the mortgage is 2%. What is the expected real interest rate? A) 3% B) 4% C) 8% D) 12%

Suppose you plan to hold a stock for one year. You expect that, in one year, it will sell for $30 and pay a dividend of $3 per share. If your required return on equity is 10%, what is the most you should be willing to pay for the share today? A) $3.30 B) $23 C) $30 D) $33

If the dollar depreciates relative to the Swiss franc...

Swiss chocolate will become more expensive in the US

Symmetric information A) is the same as perfect information. B) holds under the assumption of rational expectations. C) is true only in efficient markets. D) means that savers and borrowers have the same information.

Technical Analysis is a version of: A) insider trading B) adaptive expectations C) rational expectations D) efficient markets

Temporary, short-term discount loans to banks in areas in which agriculture and tourism are important are known as A) primary credit. B) secondary credit. C) seasonal credit. D) repo loans.

The "greater fool" theory assumes that A) markets are efficient. B) bubbles cannot exist in well-organized markets. C) it makes sense for an investor to buy an asset as long as there is someone else to buy it later for a higher price. D) bond market returns are always above stock market returns.

The "lemons problem" exists in the market for goods because A) sellers tend to try to take advantage of buyers. B) buyers tend to try to take advantage of sellers. C) differences in the quality of the goods being exchanged. D) of moral hazard.

The "lemons problem" in the used car market arises from A) the difficulty U.S. producers have in making reliable cars. B) the difficulty buyers have in distinguishing good cars from lemons. C) the tendency of buyers of used cars to pay for them with bad checks. D) the reluctance of many car dealers to handle used cars.

The "lemons problem" is overcome in the used car market by A) strict government regulation of private deals between individual buyers and sellers of used cars. B) most used cars selling for well below their true values. C) "lemon insurance" policies being offered by insurance companies. D) the existence of used car dealers who are concerned about maintaining their reputations.

The Bank of the United States faced opposition from which of the following? A) local banks who resented the Bank's supervision B) advocates of limited government who distrusted its power C) farmers and small businesses who resented the Bank's interference with their ability to obtain loans D) all of the above

The Banking Acts of 1933 and 1935 A) established the Federal Reserve System. B) increased central control of the Federal Reserve System. C) eliminated the authority of the Board of Governors to set reserve requirements. D) made the Secretary of the Treasury a member of the Board of Governors.

The Chairman of the Federal Open Market Committee is also A) the president of the Federal Reserve Bank of New York. B) the chairman of the Securities and Exchange Commission. C) the chairman of the Federal Deposit Insurance Corporation. D) the chairman of the Board of Governors.

The Consumer Financial Protection Bureau is part of the A) Treasury Department B) Federal Reserve System C) Justice Department D) Commerce Department

The Depository Institutions Deregulation and Monetary Control Act of 1980 A) eliminated the requirement that banks hold reserve deposits with the Fed. B) required all state banks to join the Federal Reserve System. C) required all banks to maintain reserve deposits with the Fed. D) prohibited nonmember banks from receiving discount loans.

The Dodd-Frank Act removed which group from decisions regarding the presidents of Federal Reserve Banks? A) Class A directors B) Class B directors C) Class C directors D) Board of Governors

The Employment Act of 1946 codified the federal government's commitment to A) promote high employment consistent with price stability. B) promote high employment irrespective of the effects on price stability. C) guarantee a job to every unemployed person. D) fine companies that engage in excessive layoffs during recessions.

The FDIC was created in A) 1863. B) 1913. C) 1934. D) 1991.

The FOMC states its overall objectives for interest rates in A) the Governors' Order. B) the Policy Directive. C) the Federal Reserve Bulletin. D) the Chairman's Order.

The Fed and Treasury took action to restore the flow of funds from savers to borrowers in order to encourage all of the following EXCEPT: A) increase the return to savers B) enable households to purchase durable goods C) increase the likelihood of purchases of houses D) allow firms to finance purchases of structures and equipment

The Fed can implement open market operations A) more rapidly than changes in reserve requirements, but less rapidly than changes in the discount rate. B) more rapidly than changes in the discount rate, but less rapidly than changes in reserve requirements. C) less rapidly than either changes in the discount rate or changes in reserve requirements. D) more rapidly than either changes in the discount rate or changes in reserve requirements.

The Fed does not have to go through the normal congressional appropriations process because A) its expenses are very small. B) it was given enough funds at the time of its founding to provide for its expenses indefinitely. C) it is self financing. D) it is not part of the legislative branch of the federal government.

The Fed has attempted to solve the problems of being unable to directly control the variables that determine economic performance and the timing lags in observing and reacting to economic fluctuations by A) pressing Congress for legislation which would expand its powers. B) using targets to meet its goals. C) abandoning some goals in order to achieve others. D) devising new monetary policy tools.

the nonborrowed monetary base

The Fed has the greatest control over which of the following.

The Fed has the greatest control over which of the following? A) the money multiplier B) discount loans C) the amount of excess reserves D) the nonborrowed monetary base

The Fed pledged to continue QE3 until: A) inflation got out of control B) real GDP and employment returned to more normal levels C) the financial crisis was over D) it was time to begin QE4

The Fed tends not to use discount policy as its principal tool in influencing the money supply since A) discount loans do not affect the money supply. B) it does not have as much control over discount loans as it has on open market operations. C) it is prohibited from doing so by an act of Congress. D) it prefers to use reserve requirements.

The Fed uses operating targets as well as intermediate targets because A) the Federal Reserve Act of 1913 requires it to do so. B) the Fed controls intermediate targets only indirectly. C) the public is much more unfamiliar with the variables used as operating targets, so for policy to be effective intermediate targets must also be announced. D) if one set of targets proves ineffective in attaining policy goals, the other set is available.

The Fed was created A) after financial panics in the late 1800s and early 1900s. B) after the stock market crash of 1929. C) to help finance government expenditures during World War II. D) to help channel funds to the residential mortgage market.

The Fed's current position towards the existing monetary aggregates is A) it is convinced that M1 is the best measure of the money supply. B) it is convinced that M2 is the best measure of the money supply. C) it is an issue of ongoing research. D) it is reverting to considering currency alone as the best measure of the money supply.

The Fed's goal of interest rate stability A) was formally abandoned in 1998. B) is motivated by political pressure as well as by a desire for a stable saving and investment environment. C) is undermined by actions the Fed takes to further its goal of stability in financial markets and institutions. D) is undermined by actions the Fed takes to further its goal of price stability.

The Fed's inability to instantaneously observe changes in inflation and economic growth result in A) information lag. B) impact lag. C) policy lag. D) jet lag.

information lag

The Fed's inability to instantanesouly observe changes in inflation and economic growth result in

The Fed's monetary policy tools A) have proven to be of little value in helping the Fed to achieve its monetary policy goals. B) have allowed the Fed to achieve its monetary policy goals directly. C) have allowed the Fed to achieve its monetary policy goals indirectly. D) are no longer as effective in achieving its monetary policy goals, due to restrictive legislation passed by Congress in the 1990s.

The Fed's portfolio of securities consists principally of A) municipal bonds. B) corporate bonds. C) U.S. Treasury obligations. D) obligations of foreign governments.

The Federal Reserve System A) is in charge of managing the New York Stock Exchange. B) is headed by the Secretary of the Treasury. C) is the central bank of the United States. D) is responsible for conducting fiscal policy for the United States.

The Federal Reserve System was created in A) 1836. B) 1863. C) 1913. D) 1945.

The Federal Reserve System was created in response to A) the stock market crash of 1929. B) the ending of the Civil War. C) the banking panic of 1907. D) difficulties of the free-banking era.

The Federal Reserve district banks A) do not engage in monetary policy. B) engage in monetary policy directly through discount lending. C) engage in monetary policy directly through open market operations. D) engage in monetary policy directly through their membership on Federal Reserve committees.

The Federal Reserve issues a report indicating that future inflation will be higher than had previously seemed likely. As a result A) the supply curve for bonds shifts to the right. B) the demand curve for loanable funds shifts to the left. C) the equilibrium interest rate falls. D) the equilibrium price of bonds rises.

it does not have as much control over discount loans as it has on open market operations

The Feds tends not to use discount policy as its principal tool in in fluencing the money supply since

The Franklin National Bank Crisis had its greatest impact on the market for A) commercial paper. B) commodity futures. C) negotiable certificates of deposit. D) Eurodollars.

The Glass-Steagall Act was designed to A) legally separate investment banking from commercial banking. B) promote mergers in the banking industry. C) impose high capital ratios on investment banks. D) promote the interests of community banks.

The IS curve depicts the relationship between A) aggregate output and the real interest rate. B) investment demand and the real interest rate. C) investment demand and the level of current output. D) national saving and the level of current output.

The January effect A) largely disappeared after receiving attention in the 1980s. B) refers to the gap between futures prices and the prices of the underlying securities that occurs each January. C) was stronger during the 1980s than during previous decades. D) is the observation that stocks tend to be sold off in January.

The LM curve is the combinations of A) the output gap and the real interest rate for which the money market is in equilibrium. B) the inflation rate and nominal interest rate for which the money market is in equilibrium. C) the inflation rate and real interest rate for which the money market is in equilibrium. D) the inflation rate and real interest rate for which the goods market is in equilibrium.

The LM curve slopes upward to the right because A) the demand for money plus the demand for nonmoney assets must equal the supply of money plus the supply of nonmoney assets. B) a higher real interest rate is associated with a higher level of the output gap in money market equilibrium. C) a higher real interest rate is associated with a higher level of saving in goods market equilibrium. D) in equilibrium the actual real interest rate must increase one-for-one with expected real interest rate.

The M2 aggregate A) includes M1 plus short-term investment accounts. B) includes M1 plus large-denomination time deposits. C) equals currency plus checking account deposits at commercial banks. D) is the best definition of money purely as a medium of exchange.

The MP curve represents A) the Fed's monetary policy actions in setting a target for the federal funds rate. B) the relationship between the money supply and the price level. C) a relationship between the real interest rate and manufacturing production. D) the relationship between real interest rates and potential GDP.

The McFadden Act of 1927 A) separated commercial banking from investment banking. B) put a tax on the issuance of bank notes by state banks. C) prohibited national banks from operating branches outside their home states. D) established the Federal Reserve System.

The National Monetary Commission A) was created by Congress to study the setting up of a central bank. B) authorizes open market operations. C) oversees nationally chartered banks. D) chooses Federal Reserve district bank presidents.

The Open Market Trading Desk is A) another name for the Federal Open Market Committee. B) an organization of private traders in government securities. C) the area on the floor of the New York Stock Exchange set aside for bond trading. D) a group of private securities traders that the Fed has selected to participate in open market operations.

The Troubled Asset Relief Program (TARP) allowed A) the Treasury to inject funds into commercial banks in return for stock in the banks. B) the Fed to provide funds to commercial banks in return for stock. C) the Treasury to insure bank deposits at major U.S. banks. D) the Fed to make loans to banks as the lender of last resort.

The United States has a dual banking system in the sense that A) the public may deposit money in either commercial banks or savings-and-loan associations. B) banks offer both demand deposits and time deposits to savers. C) banks are chartered by the federal government and by state governments. D) banks both take in deposits and make loans.

The additional interest that investors require to buy a long-term bond instead of a sequence of short-term bonds is known as the: A) risk premium B) default premium C) term premium D) segmented premium

The aggregate M1 consists of A) currency plus all deposits in financial institutions. B) currency plus all deposits in all institutions. C) currency plus checkable deposits in financial institutions. D) currency plus all checkable deposits.

The aggregate expenditure line is upward sloping since as GDP increases, A) consumption increases B) investment increases C) government purchases increase D) net exports increase

The amount of funds the borrower receives from the lender with a simple loan is called the A) principal. B) equity. C) claim. D) collateral.

The assumption of asymmetric information means that A) borrowers and lenders have the same information. B) borrowers and lenders have perfect information. C) borrowers know more than lenders. D) lenders know more than borrowers.

The attribute that distinguishes money from other assets is that only money A) retains its value during times of inflation. B) is counted in determining the size of an individual's wealth. C) serves as a medium of exchange. D) may be used as collateral for a bank loan.

The average investor must weigh the benefits of liquidity against A) the high taxes generally levied on liquid assets. B) the lower returns on liquid assets. C) the high transactions costs involved in disposing of liquid assets. D) the greater variability in the nominal returns on liquid assets.

The balance sheet channel describes ways in which interest rate changes resulting from monetary policy affect A) the portfolio decisions of households. B) the portfolio decisions of businesses. C) borrowers' net worth. D) lenders' net worth.

The bank lending channel A) emphasizes the role of interest rates in the money supply process. B) emphasizes the importance of borrowers' net worth to the decision of lenders to grant loans. C) emphasizes the behavior of bank-dependent borrowers. D) is another name for the interest rate channel.

The beige book is prepared by A) district banks. B) Board of Governors. C) FOMC staff members. D) commerce department.

The benchmark default-free interest rate of the financial system is generally considered to be: A) the federal funds rate B) the interest rate on the 10-year Treasury note C) the discount rate D) the 30-year fixed rate mortgage

The bid price for a bond is A) the minimum price that you are allowed to bid for a bond that is being auctioned by the government. B) the maximum price that you are allowed to bid for a bond that is being auctioned by the government. C) the price that you will receive from a securities dealer if you sell the bond. D) the price that you must pay a securities dealer to purchase a bond.

The bond demand curve slopes down because A) interest rates decline as bond prices decline. B) when bond prices are low, inflation is low. C) the lender is willing and able to purchase more bonds when the price of the bond is low. D) the borrower is willing and able to purchase more bonds when the price of the bond is low.

The bond supply curve A) shows the quantity of bonds lenders are willing to supply as bond prices change. B) shows the quantity of bonds lenders are willing to supply as interest rates change. C) shows the quantity of bonds borrowers are willing to supply as bond prices change. D) is represented by a downward-sloping line when the price of bonds is on the vertical axis and the quantity of bonds supplied is on the vertical axis.

The bond supply curve slopes up because A) interest rates rise as bond prices rise. B) when bond prices are high, inflation is high. C) the lender is willing and able to offer more bonds when the price of the bond is low. D) the borrower is willing and able to offer more bonds when the price of the bond is high.

The capacity of a firm can best be described as: A) when a firm are producing maximum output B) a firm's production when operating normal hours using a normal sized workforce C) when a firm makes full use of all the space available in his factory or building D) when all of the firm's workers are producing at their maximum potential

The company that manufactures Screaming Chocolate Zonkers breakfast cereal finds that its sales collapse, it is forced into bankruptcy, and it defaults on its bonds, as a result of information on the filthy conditions in its factory, which had long been known to management, leaking out to the general public. This incident is best thought of as an example of A) symmetric information in the financial markets. B) asymmetric information in the financial markets. C) moral hazard in the financial markets. D) the generally poor state of sanitation in the food-processing industry in the United States.

The coupon rate is the A) annual coupon payment divided by the face value of the bond. B) annual coupon payment divided by the market value of the bond. C) difference between the face value of the bond and its par value. D) coupon paid every 6 months divided by par value.

The creation of a lender of last resort in the United States A) occurred in response to banking panics. B) was mandated in the U.S. Constitution. C) occurred in response to the S&L crisis of the 1980s. D) has been recommended by the Treasury in its report of late 1992.

The currency premium in foreign-exchange markets A) helps to offset anticipated declines in exchange rates. B) helps to offset anticipated increases in exchange rates. C) indicates investors' collective preference for financial instruments denominated in one currency relative to those denominated in another. D) rises as domestic interest rates fall.

The current yield is equal to A) the coupon divided by the market price of the bond. B) the yield to maturity, if the bond is a coupon bond. C) the coupon divided by the par value of the bond. D) the market price of the bond divided by its par value.

The daily turnover in the foreign exchange market is: A) millions of dollars. B) billions of dollars. C) trillions of dollars. D) declining in the last decade.

The default risk premium fluctuates mainly A) because bond rating agencies tend to be inconsistent in their ratings of bonds. B) because risk-neutral investors will often become risk-averse as time passes. C) because taxes tend to rise over the long run. D) as new information about a borrower's creditworthiness becomes available.

The default risk premium is A) relevant only for securities issued by very small companies. B) the additional yield a saver requires for holding a bond with some default risk. C) zero for corporate bonds, but quite substantial for corporate stock. D) constant across the business cycle.

The default risk premium is measured A) by an index published monthly by the Securities and Exchange Commission. B) by an index published monthly by The Wall Street Journal. C) as the difference between the yield on a non-Treasury security and the yield on a U.S. Treasury security of the same maturity. D) as the difference between the nominal yield on the security and the real after-tax yield on the security.

The demand curve for bonds would be reduced by A) a decrease in expected returns on other assets. B) an increase in the information costs of bonds relative to other assets. C) an increase in wealth. D) an increase in the liquidity of bonds relative to other assets.

The demand curve for bonds would be shifted to the left by A) an increase in expected returns on other assets. B) a decrease in the information costs of bonds relative to other assets. C) a decrease in expected inflation. D) an increase in the liquidity of bonds relative to other assets.

The demand curve for bonds would be shifted to the left by an A) increase in wealth. B) increase in expected returns on bonds. C) increase in expected inflation. D) increase in the liquidity of bonds relative to other assets.

The demand curve for loanable funds slopes down because A) at lower bond prices more loanable funds will be supplied. B) lower interest rates reduce the inflation rate. C) an increase in the interest rate makes borrowers more willing and able to demand more funds. D) a decrease in the interest rate makes borrowers more willing and able to demand more funds.

The demand for U.S. dollars represents: A) the demand for U.S. goods and financial assets by households and firms outside the United States. B) the demand for foreign goods and financial assets by households and firms within the United States. C) the demand for U.S. goods and financial assets by households and firms within the United States. D) the willingness of households and firms that own dollars to exchange them for foreign currency.

The demand for bonds is A) equivalent to the demand for loanable funds. B) equivalent to the supply of loanable funds. C) represented by an upward-sloping line when the price of bonds is on the vertical axis and the quantity of bonds demanded is on the horizontal axis. D) represented by a downward-sloping line when the interest rate is on the vertical axis and the quantity of bonds demanded is on the horizontal axis.

The development of new financial securities or investment strategies using sophisticated models is known as A) underwriting. B) factoring. C) financial engineering. D) hedging.

The difference between a demand deposit and a NOW account is that A) checks may not be written against NOW account balances. B) demand deposits pay no interest. C) NOW accounts pay no interest. D) checks may not be written against demand deposit balances.

The difference between a firm's assets and its liabilities is known as: A) limited liability B) stock C) equity D) profit

The difference between a savings deposit and a time deposit is A) time deposits pay no interest. B) savings deposits pay no interest. C) time deposits have specified maturities. D) savings deposits have specified maturities.

The difference between currency outstanding and currency in circulation is equal to A) vault cash. B) bank reserves. C) coins issued by the U.S. Treasury. D) zero; they are the same thing.

The difference between money and income is that whereas income is an individual's A) flow of earnings over a period of time, money is an individual's stock of currency and currency substitutes. B) stock of all assets, money is an individual's stock of currency and currency substitutes. C) flow of earnings over a period of time, money is an individual's stock of all assets. D) stock of currency and currency substitutes, money is an individual's stock of all assets.

The difference between the interest a bank earns on loans and securities and the interest paid on deposits and debt divided by the total value of its assets is called A) interest spread. B) net interest margin. C) return on assets. D) return on equity.

The difference between the yield on 3-month Treasury bills and 10-year Treasury notes is largest typically during: A) recessions B) expansions C) periods of high inflation D) when the yield curve is inverted

The discount window is A) another name for the discount rate. B) the means by which the Fed makes discount loans to banks. C) the spread between the discount rate and the T-bill rate. D) the period each month during which banks are allowed to apply for discount loans.

The distinguishing feature of a well-functioning financial market is the A) continual increase in the liquidity of most assets. B) continual reduction in the riskiness of most assets. C) increased ease of converting common stocks into bonds. D) incorporation of available information into asset prices.

The double taxation of dividends typically refers to A) dividends being taxed first as corporate profits and then as income after being paid to stock holders. B) stock holders paying both income and social security taxes on dividends. C) stock holders paying an income tax and dividend surtax on dividends. D) dividends being taxed at both the state and local level.

The due diligence process is A) the process by which a firm chooses an investment bank. B) when an investment bank researches a firm's value. C) how an investment bank underwrites large issues. D) the review of a prospectus by the SEC.

The economist known for his early empirical work supporting the efficient markets hypothesis is A) Milton Friedman. B) John Muth. C) Eugene Fama. D) Glenn Hubbard.

The efficient markets hypothesis A) assumes that market participants form their expectations adaptively. B) applies rational expectations to the pricing of assets. C) applies to the stock market, but not to the bond market. D) indicates that the stock market is efficient, but not rational.

all of the above

The efficient markets hypothesis implies that stock investments should have the same expected return after adjusting for

The efficient markets hypothesis implies that stock investments should have the same expected return after adjusting for A) risk. B) information costs. C) liquidity. D) all of the above.

The efficient markets hypothesis predicts that an investor A) will not be able consistently to earn above-normal profits from buying or selling stocks. B) will be able consistently to earn above-normal profits from buying or selling stocks so long as he or she makes use of rational expectations. C) will be able consistently to earn above-normal profits from buying or selling stocks so long as he makes use of adaptive expectations. D) will be able consistently to earn above-normal profits so long as stock prices in general are rising.

The equilibrium real interest rate in Belgium will be A) generally above the world real interest rate. B) generally below the world real interest rate. C) equal to the world real interest rate. D) determined by the equilibrium between desired domestic saving and desired domestic investment.

The era of bank panics in the United States was effectively ended by A) establishing the Fed as lender of last resort. B) implementing the gold standard. C) abandoning the gold standard. D) introducing deposit insurance.

The existence of adverse selection results in: A) reduced market efficiency B) an increase in the likelihood of moral hazard C) increase market transactions D) higher transaction costs

The existence of rating agencies has A) lowered returns on corporate bonds. B) raised returns on corporate bonds. C) left returns on corporate bonds largely unaffected. D) raised returns on both corporate bonds and Treasury securities.

The expectations theory A) has difficulty explaining why U.S. Treasury securities have lower yields than corporate bonds. B) has difficulty explaining why yields on bonds of different maturities move together. C) has difficulty explaining why yield curves usually slope upward. D) accounts well for the fact that yield curves usually slope upward.

The expectations theory suggests that A) the yield curve should usually be upward-sloping. B) the yield curve should usually be downward-sloping. C) the slope of the yield curve depends on the expected future path of short-term rates. D) the slope of the yield curve reflects the risk premium incorporated into the yields on long-term bonds.

The expected real interest rate approximately equals A) the nominal interest rate minus the tax rate. B) the nominal interest rate minus the expected rate of inflation. C) the nominal interest rate plus the expected rate of inflation. D) the yield to maturity on a coupon bond held to maturity.

The facts show that the political business cycle theory A) does a good job of explaining monetary policy during presidential election years. B) is unable to explain monetary policy during presidential election years. C) doesn't generally support the political business cycle theory. D) explains monetary policy best during years in which the President is running for reelection.

The fee charged by a typical hedge fund are sometimes called: A) 12b-1 fees B) hedging premiums C) loads D) carried interest

The financial crisis of 2007-2009 worsened after the failure of which firm? A) General Motors B) Lehman Brothers C) Bear Stearns D) American International Group (AIG)

The financial system is primarily a means by which A) funds are transferred from savers to borrowers. B) money is put into circulation. C) the government puts into operations its plans for the economy. D) business firms distribute their goods.

incorporating all available information into the prices of financial assets

The financial system performs the role of communcating information by

The financial system performs the role of communicating information by A) constantly increasing the liquidity of most assets. B) constantly reducing the riskiness of most assets. C) incorporating all available information into the prices of financial assets. D) providing to investors for a nominal charge all government reports available about a particular company.

savers to hold many assests

The financial system provides risk sharing by allowing

The financial system provides risk sharing by allowing A) borrowers to obtain funds either directly or indirectly. B) savers to earn interest tax-free. C) borrowers to convert liabilities into assets. D) savers to hold many assets.

The first Fed chair to hold a press conference was: A) Paul Volcker B) Alan Greenspan C) Ben Bernanke D) Mario Draghi

The first stage in the regulatory process is A) a crisis. B) response by the financial system. C) regulation. D) regulatory response.

The formula for the yield to maturity, i, on a discount bond is A) i = (Face value - Discount price)/Discount price. B) i = (Discount price - Face value)/Discount price. C) i = (Face value - Discount price)/Face value. D) i = (Discount price - Face value)/Face value.

The fourth stage in the regulatory process is A) a crisis. B) response by the financial system. C) regulation. D) regulatory response.

The free-rider problem faced by private information-collection firms results in their A) usually going out of business within a few years. B) collecting less than all the available information about the firms they investigate. C) being plagued by lawsuits. D) charging fees higher than can be justified by market conditions.

The fundamental value of a stock equals A) the future value of all future dividends. B) the present value of all future dividends. C) the present value of current and future dividends. D) the present value of all future capital gains.

The gap between the current unemployment rate and the natural rate of unemployment is called: A) frictional unemployment B) structural unemployment C) cyclical unemployment D) full employment

The graph of the short-run relationship between the unemployment rate and inflation is called a(n) A) MP curve. B) LM curve. C) IS curve. D) Phillips curve.

The greatest appeal of U.S. Treasury securities is that A) they have high yields. B) they have no default risk. C) the U.S. Treasury will repurchase them at any time. D) their market prices fluctuate very little.

The idea that nominal interest rates rise or fall one-for-one with expected inflation is known as A) market risk. B) systematic risk. C) idiosyncratic risk. D) the Fisher effect.

The impact lag facing the Fed is A) the delay before open market operations are able to affect the monetary base. B) the delay before the Fed's announcement of a new policy has an impact on the decisions of the public. C) the time required for monetary policy changes to affect output, employment, and prices. D) the delay before the impact of a recession on output and prices becomes clear to the Fed.

The implication of the expectations theory that expected returns for a holding period must be the same for bonds of different maturities depends on the assumption that A) yield curves usually slope upward. B) yield curves usually slope downward. C) instruments with different maturities are perfect substitutes. D) savers are usually risk averse.

The inflation gap can best be described as: A) the percentage difference between GDP and its potential B) the difference between inflation and its target C) the change in the inflation rate from one year to the next D) the difference between the inflation rate and the average inflation rate of that of the nations with the 3 lowest inflation rates

The information lag facing the Fed is A) the difficulty of becoming informed quickly of changes in public opinion about which policy goal is most important. B) the delay in receiving accurate information about the state of the economy. C) the delay in Congress and the President communicating their policy goals for the Fed to act on. D) the time required for monetary policy changes to affect output, employment, and prices.

The interest rate on interbank loans is called the A) discount rate. B) federal funds rate. C) repo rate. D) prime rate.

The interest rate on unsecured loans between banks is called the A) discount rate. B) repurchase rate. C) T-bill rate. D) federal funds rate.

The interest rate the Fed charges on loans to depository institutions is known as A) the federal funds rate. B) the Fed loan rate. C) the discount rate. D) the interbank clearing rate.

The introduction of money to an economy results in: A) higher incomes B) higher productivity C) increased specialization D) a more efficient barter system

The issue of Fed independence is most often raised by A) disagreement over the role the Fed should play in managing monetary policy. B) the Fed's refusal to carry out the wishes of the President. C) the Fed's refusal to carry out the wishes of Congress. D) the public's negative reaction to Fed policy.

The key assumption of the liquidity premium theory is that investors A) view bonds of different maturities as perfect substitutes. B) view bonds of different maturities as completely unsubstitutable. C) always choose the bond with the highest expected return, regardless of maturity. D) care about both expected returns and time to maturity.

The key to present value calculations is that they A) are appropriate only for funds in the same time period. B) provide a common unit for measuring funds at different times. C) provide accurate answers only in a low-inflation environment. D) provide accurate answers only in a high-inflation environment.

The largest financial market in the world is the: A) stock market B) bond market C) options market D) foreign exchange market

The largest institutional participants in capital markets are A) pension funds. B) insurance companies. C) consumer finance companies. D) business finance companies.

The law of large numbers allows insurance companies to A) hold capital market instruments as assets without fearing overly large numbers of defaults. B) hold money market instruments as assets without fearing overly large numbers of defaults. C) predict the average number of occurrences of insurable events in a large population of policyholders. D) charge higher premiums than necessary, knowing that large numbers of individuals will pay them.

The law of one price does not hold for A) agricultural goods. B) tradeable goods. C) differentiated goods. D) goods whose production causes pollution.

The law of one price states that A) most countries require that all entering goods have the same price. B) most countries require that all exported goods have the same price. C) identical goods should have the same price anywhere in the world. D) most countries require that the price of a good not be changed once it is already in a store and available for sale.

The leading federal regulatory body for financial markets in the United States is the A) Federal Bureau of Investigation. B) Securities and Exchange Commission. C) Federal Financial Market Bureau. D) Investors Protection Agency.

The level of potential GDP A) increases as the real rate of interest decreases. B) increases as the real rate of interest increases. C) is unaffected by the real rate of interest. D) is represented on the IS-MP model by a horizontal line at the world real rate of interest.

The liquidity premium theory holds that investors A) always choose the bond with the highest expected return, regardless of maturity. B) require a term premium to compensate them for investing in a less preferred maturity. C) view bonds of different maturities as perfect substitutes. D) view bonds of different maturities as completely unsubstitutable.

in a democracy, elected officials should make public policy

The main argument against Fed independence is that

The main argument against Fed independence is that A) in a democracy elected officials should make public policy. B) monetary and fiscal policy would be easier to coordinate if the Fed were not independent. C) the Fed has proven irresponsible on many occasions. D) congressional control was tried during the 1960s and it worked well.

The main argument in favor of Fed independence is that A) interest rates would probably be lower if Congress controlled the Fed; thus hurting savers. B) the Constitution requires it. C) monetary policy is too important and too technical to be determined in the political arena. D) congressional control of the Fed was tried during the 1960s and did not work well.

The main reason why banks are the leading source of external finance for businesses is A) the interest rates on bank loans are usually lower than interest rates on corporate bonds. B) banks have an information-cost advantage in reducing adverse selection problems. C) interest paid on bank loans is deductible against the corporate income tax, whereas interest paid on corporate bonds is not. D) government regulators encourage small businesses to obtain funding from banks.

The main role of financial intermediaries is to A) provide funds to the federal government to cover the budget deficit. B) borrow funds from savers and lend them to borrowers. C) provide advice to consumers on how they should handle their finances. D) help ensure that there is enough money in circulation.

The margin requirement set by the Federal Reserve is the A) proportion of the purchase price of a security that an investor must pay in cash. B) difference between the interest rate banks charge on loans and the interest rate they receive from deposits. C) same thing as the required reserve ratio on deposits. D) difference banks must maintain between the value of their assets and the value of their liabilities.

The marginal propensity to consume can best be described as: A) consumption/income B) the impact of a change in income on GDP C) the change in income divided by the change in consumption D) the change in consumption divided by the change in income

The members of Federal Reserve district bank boards of directors appointed by the Board of Governors are known as A) Class A directors. B) Class B directors. C) Class C directors. D) Class D directors.

The members of Federal Reserve district bank boards of directors who are bankers are known as A) Class A directors. B) Class B directors. C) Class C directors. D) Class D directors.

The members of Federal Reserve district bank boards of directors who are leaders in industry, commerce, and agriculture are known as A) Class A directors. B) Class B directors. C) Class C directors. D) Class D directors.

The members of Federal Reserve district bank boards of directors who represent the public interest are known as A) Class A directors. B) Class B directors. C) Class C directors. D) Class D directors.

The monetary base is equal to A) all currency in circulation plus all deposits in financial institutions. B) all currency in circulation plus checkable deposits in financial institutions. C) all currency in circulation plus reserves held by banks. D) checkable deposits in depository institutions plus reserves held by banks.

The money multiplier A) equals 1 over the required reserve ratio. B) is an expression that converts the monetary base to the money supply. C) is larger than the simple deposit multiplier. D) is completely controlled by the Fed.

The most common type of simple loan is a(an) A) automobile loan from a bank. B) mortgage loan from a bank. C) commercial loan from a bank. D) corporate bond.

The most important economic benefit from specialization is that it A) makes it possible for an economy to begin using money. B) leads to an increase in the standard of living in an economy. C) makes barter possible. D) eliminates the need for financial markets.

The movement to set up a central bank in the United States was spurred by the financial panic that occurred in A) 1816. B) 1907. C) 1929. D) 1987.

The narrowest money measure is A) currency plus non-interest bearing checking accounts. B) currency plus all checking accounts. C) currency plus all deposits at financial institutions. D) definitive money.

The national economic forecast for the next two years prepared by the staff of the Board of Governors is published in the A) green book. B) beige book. C) blue book. D) Fed book.

The nominal exchange rate is A) the difference between the interest rate in one country and the interest rate in another country. B) the rate at which a bond may be exchanged for currency. C) the rate at which a stock may be exchanged for currency. D) the price of one country's currency in terms of another's.

The nominal interest rate parity condition states that A) domestic and foreign assets must have nominal returns that are identical, irrespective of the characteristics of the assets. B) when domestic and foreign assets have identical risk, liquidity, and information characteristics, their nominal returns must also be identical. C) while nominal returns are equalized across all foreign and domestic assets, real returns may vary widely. D) while real returns are equalized across all foreign and domestic assets, nominal returns may vary widely.

The original Federal Reserve Act A) specified open market operations as the Fed's main policy tool. B) specified open market operations as one of several Fed policy tools. C) specified that open market operations be employed by the Fed only in circumstances where discount loans were ineffective. D) did not specifically mention open market operations.

lender of last resort

The original intent of the Federal Reserve Act of 1913 was to provide the Fed with what role

The original intent of the Federal Reserve Act of 1913 was to provide the Fed with what role? A) regulator of the banking system B) lender of last resort C) manage the exchange rate D) maintain a balanced budget

The original intention of the Fed's role as lender of last resort was to make loans to banks that were A) not illiquid nor insolvent. B) illiquid, but not insolvent. C) insolvent, but not illiquid. D) both illiquid and insolvent.

The output gap can best be described as: A) the percentage difference between GDP and its potential B) the difference between GDP in the current year compared to the previous year C) the difference between a nation's GDP and that of the nation with the highest GDP D) the difference between GDP and its forecasted level

The paper currency of the United States is issued by A) state governments and the Fed. B) state governments and the U.S. Treasury. C) the U.S. Congress. D) the Fed.

The payments system is A) the mechanism for conducting economic transactions. B) another name for the system of foreign exchange rates. C) the phrase used to describe how transactions are carried out in an economy that does not use money. D) the way in which economic transactions are carried out in a government-controlled economy, such as the former Soviet Union.

The percentage of deposits that banks must hold as reserves is called the A) percentage rate. B) required reserve ratio. C) Fed rate. D) discount rate.

The policy directive from the FOMC is carried out by A) the presidents of the district banks. B) the presidents of commercial banks that are members of the Federal Reserve System. C) the account manager at the Federal Reserve Bank of New York. D) private dealers in the bond market.

the Fed acts to stimulate economic activity before an election

The political business cycle theory predicts that

The political business cycle theory predicts that A) the Fed acts to promote the interests of the general public. B) the Fed acts to stimulate economic activity before an election. C) the President's appointments to the Board of Governors will usually be politicians. D) political factors over which the Fed has no control are most important in explaining the business cycle.

The portfolios that mutual funds offer to savers are A) usually made up of bonds. B) usually made up of common stocks. C) tax free in most states. D) usually more liquid than the underlying assets.

The presence of information and transactions cost result in all of the following EXCEPT: A) reduced efficiency of financial markets. B) higher returns for savers C) some funds not being lent at all D) borrowers need to pay more for funds

higher returns for savers

The presence of information and transactions cost result in all of the following EXPECT

The presence of transactions costs and information costs A) lowers the cost of funds to borrowers. B) raises the expected return to lenders. C) lowers the expected return to lenders. D) increases the efficiency of the financial system.

The president of which Federal Reserve bank is always a voting member of the Federal Open Market Committee? A) Philadelphia B) Boston C) Chicago D) New York

The price of a financial asset equals the A) future value of all payments B) sum of all payments C) present value of all future payments D) difference between the future value and present value of all payments

The primary assets of the Fed are A) discount loans and reserves. B) discount loans and government securities. C) government securities and reserves. D) discount loans and open market operations.

The primary motive for financial innovation during the regulatory process is A) profit. B) adherence to the new regulations. C) return to the way business was conducted prior to the new regulations. D) increase coordination with other financial institutions.

The prime interest rate is the A) interest rate on six-month U.S. Treasury bills. B) discount rate. C) Federal funds rate. D) interest rate that banks charge high-quality borrowers.

The principal-agent view of Fed motivation predicts that the Fed acts A) to promote the interests of the general public. B) to promote the interests of the Fed's principal—the President of the United States. C) in order to increase its power, influence, and prestige. D) in order to make sure its agents—commercial banks—carry out its wishes.

The problem of a double coincidence of wants refers to A) the insatiability of wants in a free market economy. B) poorly-managed companies producing what consumers want only by coincidence. C) the necessity in a barter system of each trading partner wanting what the other has to trade. D) the likelihood that needs will not be the same as wants.

The process by which banks screen potential applicants by eliminating bad risks and to obtain a pool of creditworthy borrowers is called: A) gap analysis B) duration analysis C) credit-risk analysis D) liquidity analysis

The process by which identical products that are tradeable converge to the same price is called A) arbitrage. B) hedging. C) speculation. D) risk aversion.

The process by which investment banks guarantee a certain price to a firm issuing stocks or bonds is knows as: A) underwriting B) securitization C) proprietary trading D) microlending

The process by which simultaneous withdrawals by a particular bank's depositors results in the bank closing is known as a A) contagion. B) bank run. C) financial crisis. D) bank panic.

The process in which a cycle of falling asset prices and falling prices of goods and services can increase the severity of an economic downturn is called: A) financial crisis B) bank run C) sovereign debt crisis D) debt-deflation process

The public interest view of Fed motivation holds that the Fed acts in the interest of A) the general public. B) banks. C) Congress. D) itself.

rises when prices fall

The purchasing power of money

The purchasing power of money A) rises when prices fall. B) rises when prices rise. C) is set by the Fed in January of each year. D) is constant.

The purpose of collateral and restrictive covenants is to reduce ________ in debt contracts. A) adverse selection B) transactions costs C) moral hazard D) loan amounts

The purpose of diversification is to A) increase the liquidity of a financial portfolio. B) reduce the brokerage fees involved in managing a financial portfolio. C) reduce risk. D) reduce tax liability.

the current yield plus the rate of capital gains

The rate of return is equal to

The rate of return is equal to A) the coupon rate plus the rate of capital gains. B) the coupon rate plus the current yield. C) the current yield plus the rate of capital gains. D) the coupon rate multiplied by the rate of capital gains.

The rate of return is equal to the A) sum of the coupon rate and the current yield. B) yield to maturity. C) sum of the current yield and the actual rate of capital gain or loss. D) sum of the current yield and the expected rate of capital gain.

The rate of return of a stock held for one year equals A) the change in the price of the stock. B) the dividend yield plus the rate of capital gain. C) the rate of capital gain minus the dividend yield. D) the dividend yield minus the rate of capital gain.

The ratio of a bank's after-tax profit to bank capital is known as A) net interest margin. B) return on equity. C) return on capital. D) spread.

The ratio of bank capital to bank assets is known as the bank's A) leverage ratio. B) net interest margin. C) return on equity. D) return on capital.

The recession that became the Great Depression began A) two months prior to the stock market crash of 1929. B) with the stock market crash of 1929. C) one year after the stock market crash of 1929. D) with the banking panics of the early 1930s.

The reduction in average cost resulting from an increase in the volume of a good or services produced is called: A) information cost B) transaction cost C) diminishing returns D) economies of scale

The reduction in transactions costs brought about by financial intermediaries benefits A) small savers, but not small borrowers. B) small borrowers, but not small savers. C) both small savers and small borrowers. D) society through greater economic efficiency; small savers and borrowers do not gain directly.

member banks which are part of the Federal Reserve System in each region

The regional Federal Reserve Banks are owned by

The relation between the nominal and real exchange rates is given by which of the following equations? A) EX = (EXr × P)/Pf B) EXr = (EX × P)/Pf C) EX = (EXr × Pf)/P D) EXr = (EX × Pf)/P

The relationship between the output gap and the cyclical rate of unemployment is known as A) the Phillips curve. B) the LM curve. C) Murphy's law. D) Okun's law.

The required return on equity for an individual stock includes which of the following? A) systemic risk B) idiosyncratic risk C) risk-free interest rate D) all of the above

The risk premium of corporate bonds typically increases A) when the average price of corporate bonds increase. B) during a recession. C) when the interest rates on corporate bonds decreases. D) when the risk premium on treasury bonds increases.

The risk structure of interest rates refers to A) the amount of additional interest necessary to compensate savers for the greater risk of default on some bonds. B) the relationship among the interest rates on similar bonds with different maturities. C) the relationship among the interest rates on bonds with the same maturity. D) the amount of additional yield necessary to compensate savers for the lesser liquidity of some bonds.

The risk that increased market interest rates will cause a decline in the value of an investment bank's holdings of long-term securities is known as A) credit risk. B) interest-rate risk. C) currency risk. D) security risk.

The risk that the party on the other side of a financial transaction fails to meet its obligation is called A) credit risk. B) currency risk. C) counterparty risk. D) leverage.

The second stage in the regulatory process is A) a crisis. B) regulation. C) response by the financial system. D) regulatory response.

The segmented markets theory A) explains upward-sloping yield curves as resulting from the demand for long-term bonds being high relative to the demand for short-term bonds. B) explains upward-sloping yield curves as resulting from the demand for long-term bonds being low relative to the demand for short-term bonds. C) explains upward-sloping yield curves as resulting from the favorable tax treatment of long-term bonds. D) is unable to account for upward-sloping yield curves.

The segmented markets theory A) has difficulty explaining why yield curves usually slope up. B) has difficulty explaining why yield curves usually slope down. C) has difficulty explaining why yields on instruments of different maturities tend to move together. D) provides a good explanation of why yields on instruments of different maturities tend to move together.

The sensitivity of bank capital to market interest rates is measured by A) gap analysis. B) duration analysis. C) leverage ratio. D) capital analysis.

The series of induced changes in consumption spending that result from an initial change in autonomous expenditure is called the A) induced effect. B) autonomous effect. C) multiplier effect. D) consumption effect

The shadow banking system refers to A) commercial banks. B) community banks. C) pawn shops and institutions that offer payday loans. D) nonbank financial institutions such as investment banks and hedge funds.

The situation in which investors choose to put their funds in a safe asset during uncertain times is known as A) hedging. B) speculation. C) flight to quality. D) arbitrage.

The size of the money multiplier depends upon all of the following EXCEPT A) the required reserve ratio. B) the currency-deposit ratio. C) excess reserves relative to deposits. D) the discount rate.

The small-firm effect A) shows that investments in the stocks of small firms would have earned a below-normal return during the period beginning in the mid-1920s. B) may be the result of the low liquidity and high information costs of small-firm stock. C) was stronger during the 1980s than in previous decades. D) is the tendency for stocks of large firms to outperform those of small firms.

The supply curve for bonds would be shifted to the left by A) a decrease in government borrowing. B) a decrease in the corporate tax on profits. C) an increase in tax subsidies for investment. D) an increase in expected inflation.

The supply curve for bonds would be shifted to the right by A) a decrease in expected profitability. B) a decrease in the corporate tax on profits. C) a decrease in tax subsidies for investment. D) a decrease in government borrowing.

The supply curve for loanable funds would decline due to A) an increase in wealth. B) an increase in the expected return on bonds. C) an increase in expected inflation. D) a decrease in the riskiness of bonds relative to other assets.

The supply curve for loanable funds would increase due to a(n) A) increase in wealth. B) increase in expected inflation. C) decrease in the liquidity of bonds relative to other assets. D) increase in the information costs of bonds relative to other assets.

The supply curve of loanable funds slopes up because A) at higher bond prices more loanable funds will be supplied. B) higher interest rates reduce the inflation rate. C) an increase in the interest rate makes lenders more willing and able to supply more funds. D) a decrease in the interest rate makes lenders more willing and able to supply more funds.

The term structure is usually defined with yields on which securities? A) corporate bonds B) commercial paper C) U.S. Treasury securities D) municipal bonds

The term structure of interest rates A) represents the relationship among the interest rates on bonds that are otherwise similar but that have different maturities. B) reflects differing tax treatment received by different instruments. C) always results in an upward-sloping yield curve. D) usually results in a downward-sloping yield curve.

The theory of purchasing power parity A) extends the law of one price to a group of goods. B) assumes that most changes in nominal exchange rates are the result of changes in real exchange rates. C) assumes that inflation rates are roughly the same in most countries. D) was valid only under the gold standard.

The theory of purchasing power parity assumes that A) movements in nominal exchange rates are the result of movements in relative price levels. B) real exchange rates are volatile. C) movements in nominal exchange rates are the result of movements in real exchange rates. D) inflation rates are roughly the same in most countries.

The theory of purchasing power parity assumes that A) nominal exchange rates are not affected by movements in relative price levels. B) real exchange rates are fixed. C) movements in nominal exchange rates are the result of movements in real exchange rates. D) inflation rates are roughly the same in most countries.

The third round of quantitative easing, announced in September 2012, was focused on purchases of: A) short-term Treasury bills B) long-term Treasury notes C) long-term Treasury notes and sales of short-term Treasury bills D) mortgage-backed securities

The third stage in the regulatory process is A) a crisis. B) response by the financial system. C) regulation. D) regulatory response.

The total payment to a lender for a one-period simple loan is A) (P + i)^n. B) P + i. C) i(1 + i). D) P(1 + i).

The unemployment that is caused by changes in the economy, such as shifts in manufacturing techniques, increased use of computers and electronic machines, and increases in the production of services instead of goods, is called A) frictional unemployment. B) structural unemployment. C) cyclical unemployment. D) natural unemployment.

The use of checks in transactions A) entails lower information costs than the use of currency. B) entails fewer steps than settling transactions with currency. C) avoids the cost of transporting currency back and forth. D) entails lower information and fewer steps than settling transactions with currency.

The use of collateral A) allows banks to charge higher interest rates on loans. B) makes it more costly for borrowers to take advantage of their asymmetric information. C) makes it more costly for lenders to take advantage of their asymmetric information. D) has important tax implications for both borrowers and lenders.

The use of deductibles and coinsurance are examples of attempts by insurance companies to deal with the problem of A) moral hazard. B) adverse selection. C) failure of policyholders to keep paying their premiums. D) excessive government regulation.

The usual response of the banking system to new government regulations is A) evasion through whatever means are necessary. B) strict compliance. C) an attempt to circumvent the regulations through financial innovation. D) bankruptcy.

The velocity of money can best be described as A) how quickly prices are increasing. B) how quickly output is increasing. C) the number of times each dollar in the money supply is used to buy goods and services included in GDP. D) the growth rate of the money supply.

The very low interest rates following the financial crisis of 2007-2009 resulted in: A) many people moving their funds from CDs and money market accounts to checking accounts in order to have more liquidity without sacrificing much interest B) funds being transferred from checking accounts to time deposits C) further declines in checking accounts that began in the early 1970s D) people switching their funds from checking deposits to CDs in the pursuit of higher interest rates

The ways in which monetary policy affect output and prices are known as: A) channels B) stations C) vehicles D) means

The wealth of most people declined as a result of the financial crisis of 2007-2009. As a result, which asset was most likely became a larger portion of their portfolio? A) bonds B) stocks C) house D) checking account

The world real interest rate is A) set annually by a special commission at the United Nations. B) set annually by a special commission at the International Monetary Fund. C) determined in the international capital market. D) determined daily on the New York Stock Exchange.

The yield on a thirty-year Treasury bond is 8% at the same time as the yield on two-year Treasury note is 5%. This occurrence A) indicates that the yield curve is downward sloping. B) is well explained by the segmented markets theory. C) is largely explained by the favorable tax treatment of Treasury notes. D) indicates that the bond market is anticipating that inflation will fall.

The yield to maturity is equal to A) the interest rate at which the present value of an asset's returns is equal to its price today. B) the face value or par value of a coupon bond. C) any payments received from an asset at the date the asset matures. D) interest rate on the asset minus any taxes owed on the interest received.

The yield to maturity on a new one-year discount bond equals A) (F V- P)/P. B) (D - FV)/P. C) (FV - P)/FV. D) (P - FV)/FV.

Though Treasury bonds may have little default risk, what type of risk exists when current interest rates are low? A) price risk B) refinancing risk C) interest-rate risk D) present value risk

Though useful, purchasing power parity does not completely explain long-run movements in exchange rates due to A) some goods being nontradeable. B) changes in the real exchange rate. C) differentiated products. D) all of the above.

To conduct open market operations, the FOMC issues a directive to A) the trading desk at the Federal Reserve Bank of New York. B) the Board of Governors in Washington, D.C. C) the presidents of the district banks. D) the chairman of the New York Stock Exchange.

To deal with difficulties in administering pension funds, Congress in 1974 passed the A) Corrupt Pension Fund Reform Act. B) Securities and Exchange Act. C) Employee Retirement Income Security Act. D) Social Security Act.

To help offset the costs from loan defaults, the First National Bank of Gotham decides to increase the interest rate it charges on its business loans. As a result of this increase in the interest rate, the creditworthiness of Gotham's loan applicants is likely to A) improve. B) deteriorate. C) be unchanged. D) be unchanged, unless the economy enters a recession at the same time as the interest rate is increased.

Transaction and information costs A) benefit borrowers at the expense of savers. B) benefit savers at the expense of borrowers. C) transaction costs hurt savers while information costs hurt borrowers. D) create profit opportunities for those who can reduce these costs.

Transactions costs are A) zero in financial markets. B) zero in financial intermediaries. C) the costs of direct financial transactions. D) equal to the taxes imposed on financial transactions.

U.S. Treasury bonds A) carry no risk of default and are therefore not risky investments. B) have constant yields to maturity and are therefore not risky investments. C) have constant coupon rates and are therefore not risky investments. D) are subject to fluctuations in their market prices and are therefore risky investments.

U.S. Treasury securities A) are considered risk free because their prices never change. B) have been defaulted on several time in U.S. history. C) are considered default-risk-free instruments. D) have a large default risk premium.

Under a barter system A) each good has many prices. B) each good has a single price. C) no prices for goods exist. D) prices for goods are very stable.

Under a system of barter A) each individual trades output directly with another. B) only agricultural goods may be traded. C) goods may be traded for money, but money may not be traded for goods. D) currency is accepted for purchases, but personal checks are not.

Under the Federal Reserve Act, which banks must be members of the Federal Reserve System? A) all commercial banks B) national banks C) state banks D) all banks with capital in excess of $100 million

Under the efficient markets hypothesis, for news about a company's prospects to have a large impact on the price of the company's stock the news must A) have an impact on the company's profitability in the short term. B) have an impact on the company's profitability in the long term. C) significantly increase the likelihood that the company will go bankrupt. D) significantly reduce the liquidity of the company's stock.

Under the efficient markets hypothesis, what would be the price per share of a company whose current dividend is $10.00 and whose dividends are expected to grow by 3% per year (assume the risk-adjusted interest rate is 10%)? A) $74.62 B) $79.23 C) $142.86 D) $147.14

Under the expectations theory if market participants expect that future short-term rates will be higher than current short-term rates, the yield curve will A) slope upward. B) slope downward. C) be flat. D) slope upward, slope downward, or be flat, depending on risk, liquidity, cost of information, and tax considerations.

Under the expectations theory, an upward-sloping yield curve indicates that investors expect future short-term rates to A) fall. B) rise. C) remain constant. D) either rise or remain constant.

Under the liquidity premium theory the shape of the yield curve depends on A) the relative return of investments in common stocks versus investments in corporate bonds. B) the size of the federal government's budget deficit. C) government tax treatment of long-term versus short-term bonds. D) the expected pattern of future short-term rates and the size of the term premium at each maturity.

Under the liquidity premium theory, a flat yield curve indicates that investors expect future short-term rates to A) fall. B) rise. C) remain constant. D) either fall or remain constant.

Under the liquidity premium theory, the expectation that future short-term rates will be constant results in a yield curve that A) is flat. B) slopes upward. C) slopes downward. D) is flat, slopes upward, or slopes downward, depending on the size of the term premium at each maturity.

Under the theory of purchasing power parity, an increase in the U.S. price level of 10% relative to the Japanese price level will result in A) a 10% appreciation of the yen. B) a 10% appreciation of the dollar. C) an appreciation of the yen by an amount that depends upon what happens to the real exchange rate. D) an appreciation of the dollar by an amount that depends upon what happens to the real exchange rate.

Under which chair did the Fed implement the policy of inflation targeting? A) Volcker B) Bernanke C) Greenspan D) Geithner

Under which circumstance is the Fed most likely to carry out a defensive open market operation? A) to prevent an increase in inflation B) if a snowstorm results in a delay in check clearing, resulting in an increase in the Federal Reserve float C) to defend the value of the U.S. dollar on the foreign exchange market D) to prevent the negative impact of a demand shock

Underwriting involves A) insuring the life or health of individuals. B) guaranteeing a price for new capital to the issuing firm. C) selling stock more cheaply than conventional stockbrokers. D) issuing stock and using the proceeds to buy bonds.

Unless otherwise indicated, when economists or investors refer to the interest rate on a financial asset, they referring to the: A) current yield B) coupon rate C) yield to maturity D) prime rate

Unlike the segmented markets theory, the expectations theory attributes the slope of the yield curve to A) tax considerations. B) the fact that short-term bonds are not perfect substitutes for long-term bonds. C) the market's view of future short-term interest rates. D) the variance in the inflation rates over the business cycle.

a significantly higher enrollment in 401k plans if people are automatically enrolled rather than having the option of signing up on their own

Use your understanding of behavioral finance to answer which of the following is an example of behavior that is NOT rational

Using a good as a medium of exchange confers the benefit that A) the need to quote so many prices in trade is reduced. B) the need for a double coincidence of wants is greatly increased. C) the need for specialization is reduced. D) transactions costs are increased, but they now may be paid in money terms.

Using estimates of past returns, which monthly investment is most likely to result in the largest amount of money at retirement for a person in the early 20s? A) CDs B) Treasury bills C) stocks D) all of the above will result in a similar amount of money

Using statistical models to estimate the maximum losses a portfolio's value is likely to sustain over a particular time period is called: A) gap analysis B) duration analysis C) value-at-risk approach D) credit-risk analysis

Vault cash is a(an) A) liability of the Fed and is counted as reserves. B) asset of the Fed and is counted as reserves. C) liability of the Fed and is not counted as reserves. D) asset of the Fed and is not counted as reserves.

Venture capital firms attempt to overcome the principal-agent problem by A) investing only in industries with high profit rates. B) charging high interest rates on loans. C) holding large equity stakes in the firms they invest in. D) avoiding investing in common stock.

Vesting refers to A) the right of the holder of an insurance policy to collect for an insurable event. B) the shielding of returns on whole life policies from taxation. C) the length of service required of an employee before he or she is eligible for a pension. D) the payments made by an employee into a pension plan.

We would not expect a Japanese financial asset and a U.S. financial asset with identical risk, liquidity, and information characteristics to have different expected returns because A) the U.S. and Japanese governments have pledged themselves to avoid this outcome. B) traders would buy the asset with the higher expected yield and sell the asset with the lower expected yield until the yields were brought into equality. C) traders would sell the asset with the higher expected yield and buy the asset with the lower expected yield until the yields were brought into equality. D) the exchange rate between the dollar and the yen would adjust automatically to eliminate any difference in yields.

Wealth is A) the sum of the value of assets. B) equal to income. C) a flow variable. D) the sum of the value of assets minus value of liabilities.

What action did many Japanese car manufacturers take in response to the stronger yen following the 2007-2009 financial crisis? A) They only accepted payments in the form of yen. B) They chose to target China as the primary market for exports. C) They abandoned the market in the United States. D) They moved their production to the United States.

What are federally chartered banks called? A) federal banks B) Federal Reserve banks C) national banks D) central banks

What determines the acceptability of dollar bills as a medium of exchange? A) our society's willingness to use green paper notes issued by the Federal Reserve as money B) the willingness of the Federal Reserve to redeem dollar bills for gold C) the willingness of the U.S. Treasury to redeem dollar bills for gold D) the public's fear that failing to accept dollar bills will trigger a hyperinflation

What do many economists blame for the severity of the Great Depression? A) The collapse of the banking system. B) A rapid increase in the money supply. C) The issuing of an excessively large amount of currency by the Federal Reserve. D) The collapse of the electronic funds transfer system.

What do many economists see finance companies as having an advantage in? A) purchasing commercial paper B) selling long-term securities C) monitoring the value of collateral D) charging consumers particularly low interest rates

What does it mean for a money market mutual fund to "break the buck"? A) The value of its share declines below $1. B) It incurs losses on its investments. C) It increases its fees to more than 1% of net asset value. D) It is unable to meet the demand for withdrawals by investors.

What does it mean for an investment bank conducts a "road show"? A) It involves an investment bank marketing its services to firms considering new issues. B) It is when an investment bank goes to the SEC to seek approval for a new issue. C) It is when firms seeking an underwriter consider alternative investment banks. D) It involves visits to institutional investors who might want to buy the security issue.

What effect would economic weakness in Europe due to a sovereign debt crisis have on the U.S. economy? A) IS shifts to the right B) IS shifts to the left C) potential GDP increases D) potential GDP decreases

What factors do some who promote the profitability of elaborate trading strategies leave out? A) the effect of trading costs and taxes B) the difficulty of calculating the return on investment C) ignoring the effect of dividends D) not accounting for both capital gains and dividends

What happened to consumer prices as measured by the CPI between 1929 and 1933? A) rose by more than 20% B) didn't change C) declined by about 25% D) declined by about 80%

What happened to real interest rates during the early 1930s? A) They declined as nominal interest rates declined. B) They rose as nominal interest rates rise. C) They declined due to deflation. D) They rose due to deflation.

What happened to the risk premium on Baa corporate bonds during the Financial Crisis of 2007-2009? A) it declined slightly B) it rose to about 2% C) it rose to about 4% D) it rose to about 6%

What is a primary reason for the yield on 3-month Treasury bills being low during recessions? A) low risk premium B) the Fed pushing short-term interest rates down C) rising inflation D) the inversion of the yield curve

What is meant by senior debt? A) debt that has been around for the longest period of time B) debt that must be paid before junior debt is paid C) debt owed to the federal government D) debt issued by the federal government as opposed to states or corporations

What is the current limit on balances that are covered by federal deposit insurance? A) $100,000 B) $250,000 C) $500,000 D) $1,000,000

What is the largest category of bank assets? A) loans B) reserves C) securities D) cash items in the process of collection

What is the length of a term for the Chairman of the Board of Governors? A) one year B) four years C) 14 years D) 28 years

What is the main reason the Fed operates in a political arena? A) It lacks a constitutional mandate. B) The members of the Board of Governors must run for reelection every fourteen years. C) The members of the Board of Governors are typically prominent politicians. D) It is under the direct control of Congress.

its excess reserves

What is the maximum amount a bank can lead

What is the maximum amount a bank can lend? A) its total reserves B) its excess reserves C) its excess reserves divided by the required reserve ratio D) the value of its checkable deposits times the required reserve ratio

What is the most direct method the Fed uses to change the monetary base? A) open market operations B) changing the required reserve ratio C) changing the federal funds rate D) changing the level of discount loans

What is the most important contrast between the segmented markets theory and the expectations theory? A) The expectation theory states that investors view similar assets that differ only with respect to maturity as perfect substitutes. B) The segmented markets theory states that investors view similar assets that differ only with respect to maturity as perfect substitutes. C) The expectations theory does a better job of explaining why yield curves typically are upward-sloping. D) The segmented markets theory does a better job of explaining why yields on instruments of different maturities tend to move together.

What is the most important factor for Federal Reserve currency to be accepted as money? A) its acceptance by businesses and households in the United States in exchange for goods and services B) its designation as legal tender by the federal government C) the willingness of the federal government to accept it in exchange for an equivalent amount of gold or silver coins D) the willingness of foreign businesses and banks to accept it in exchange for goods and services

What is the name of the entity, composed of Federal Reserve district bankers, that consults on monetary policy? A) The Federal Open Market Committee B) The Federal Advisory Council C) The Monetary Policy Council D) The District Bank Committee

What is the name of the pension plan under which employees can make tax-deductible contributions through regular payroll deductions? A) 401(k) plans B) Social Security plans C) Early retirement plans D) 486(b) plans

What is the price of a coupon bond that has annual coupon payments of $75, a par value of $1000, a yield to maturity of 5%, and a maturity of two years? A) $1043.08 B) $1046.49 C) $1000.00 D) $1150.00

What is the price of a coupon bond that has annual coupon payments of $85, a par value of $1000, a yield to maturity of 10%, and a maturity of three years? A) $211.38 B) $898.84 C) $962.70 D) $1255.0

What is the primary reason for the differences between the U.S. banking system and those in other major industrial countries? A) Economies of scale are greater in banking in the United States than in banking in other countries. B) legislation that led to the development of state and national banks C) the Federal Reserve System D) the National Bank

What is the rate of return on a bond with a coupon of $38 payable in one year that was purchased for $950 and sold one year later for $931? A) 2% B) 4% C) 6% D) 19%

What is the rate of return on a bond with a coupon of $55 that was purchased for $900 and sold one year later for $950? A) 5.56% B) 6.11% C) 11.67% D) 12.43%

What is the yield on a discount basis for a U.S. Treasury bill that has a face value of $10,000, has a price of $9500, and will mature in 180 days? A) 5.00% B) 5.25% C) 10.00% D) 10.67%

What is the yield to maturity of a consol with a coupon of $85 and a price of $944.44? A) 5.56% B) 8.50% C) 9.00% D) Not enough information has been provided to determine the answer.

What is the yield to maturity on a simple loan that requires payment of $500 plus $30 in interest one year from now? A) 6% B) 6.38% C) 5.3% D) Not enough information has been provided to determine the answer.

it was accompanied by a financial crisis

What made the recession of 2007-2009 different than any other recession since the Great Depression

What made the recession of 2007-2009 different than any other recession since the Great Depression? A) the government did not implement a fiscal stimulus B) the Fed failed to reduce interest rates C) it was accompanied by a financial crisis D) the impact was primarily limited to the financial sector

What new authority did the ECB receive in 2012? A) the authority to oversee the banking systems of all member countries B) the ability to set different interest rates in different member countries C) the ability to require that member nations balance their budget D) permission to monetize the debt of member countries

What percentage of all banks in the United States belong to the Federal Reserve System? A) 5% B) 38% C) 75% D) 90%

What percentage of bank assets were in loans in 2012? A) 8% B) 20% C) 37% D) 60%

What percentage of bank assets were in security holdings in 2012? A) 5% B) 13% C) 22% D) 37%

What regulatory change did Congress approve in 2010 to reduce counterparty risk in the shadow banking system? A) push more trading of derivatives onto exchanges B) required investment banks to follow the same rules on leverage as commercial banks C) require increased collateral for those trading derivatives D) banned trading of mortgage-backed securities

What unusual measures did the Fed take in trying to reduce long-term interest rates during the Financial Crisis of 2007-2009? A) buying mortgage-backed securities issued by Fannie Mae and Freddie Mac B) reducing the federal funds rate multiple times C) issuing its own securities D) eliminating the discount rate on loans to member banks

What was the approximate peak amount of borrowing from the Fed during the Financial Crisis of 2007-2009? A) $2 billion B) $100 billion C) $270 billion D) $1 trillion

What was the decline in the value of mutual funds held by households during the depths of the financial crisis, between the third quarter of 2008 and the first quarter of 2009 A) $2 million B) $2 billion C) $200 billion D) $2 trillion

What was the goal of Operation Twist? A) to reduce long-term interest rates and increase short-term interest rates B) to reduce short-term interest rates and increase long-term interest rates C) to reduce both short-term and long-term interest rates D) to increase both short-term and long-term interest rates

What was the name of the plan, enacted in 2011, in which the Fed bought $400 billion worth of long-term securities while selling $400 billion worth of short-term securities? A) Operation Go Long B) Operation Twist C) QE2 D) QE3

What was the primary reason that Congress initiated deposit insurance in the 1930s? A) protect the deposits of individual savers B) provide more of an incentive for depositors to monitor bank activities C) reduce systemic risk to the financial system D) reduce information problems in the banking system

What was the purpose of the stress test administered by the Treasury in 2009? A) Evaluate potential losses of Fannie Mae and Freddie Mac. B) Assess the viability of AIG. C) Gauge how well the largest financial firms would fare if the recession deepened. D) Evaluate the solvency of the major investment banks.

What would happen in the foreign exchange market if the European Central Bank raises European interest rates? A) There will be a decline in the value of the euro. B) There will be a decline in the value of the dollar. C) There will be an increase in the value of the dollar. D) U.S. interest rates will decline.

there will be a decline in the value of the dollar

What would happen in the foreign exchange market if the European Centrl Bank raises European interest rates.

When Ben Bernanke referred to the exit strategy of the Fed, he was referring to: A) his plans to retire as chair of the Fed B) when the Fed would stop implementing monetary policy C) the process by which the Fed would shrink its balance sheet D) increasing the federal funds rate back to where it was prior to the financial crisis

When a bank issues a checkable deposit and loans the funds out to a business, it has transformed A) a financial asset for a saver into a liability for a borrower. B) a financial liability for a saver into a financial asset for a borrower. C) a short-term liability to a borrower into a long-term asset to a saver. D) one liability into another liability.

it must offer investors higher yields to compensate them for the risk they take in buying their bonds or making loans

When a company whose ability to repay its debt obligations in full is uncertain to investors

When a company whose ability to repay its obligations in full is uncertain, A) it will have to issue debt with longer maturities than would a company with a lower probability of default. B) its bonds will sell for higher prices than would the bonds of a company with a lower probability of default. C) it must offer investors higher yields to compensate them for the risk they take in buying their bonds or making loans. D) it must do so through financial markets rather than through financial intermediaries.

that country's goods abroad increases

When a country's nominal exchange rate appreciates, the price of

When a country's nominal exchange rate appreciates, the price of A) that country's goods abroad increases. B) that country's goods abroad decreases. C) foreign goods sold in the country increases. D) that country's goods produced and sold at home increases.

When a country's nominal exchange rate depreciates, the price of A) that country's goods abroad increases. B) that country's goods abroad decreases. C) foreign goods sold in the country decreases. D) that country's goods produced and sold at home decreases.

When a country's real exchange rate appreciates, A) its nominal exchange rate must also have appreciated. B) its nominal exchange rate must have depreciated. C) it can trade its goods for fewer units of foreign goods. D) it can trade its goods for more units of foreign goods.

When a country's real exchange rate depreciates, A) its nominal exchange rate must have appreciated. B) its nominal exchange rate must also have depreciated. C) it can trade its goods for fewer units of foreign goods. D) it can trade its goods for more units of foreign goods.

unemployment is at its natural rate

When all workers who want jobs have them and the demand for and supply of labor are in equilibrium

When all workers who want jobs have them and the demand for and supply of labor are in equilibrium, A) the unemployment rate will be zero. B) unemployment is at its natural rate. C) the economy will be experiencing high rates of inflation. D) frictional unemployment will be zero.

When an economy relies on specialization, A) the economy will generally produce only one product. B) the economy will usually be heavily agricultural. C) each individual in the economy produces the goods or services for which he or she has relatively the best ability. D) each individual will be assigned by the government to produce that good or service the government believes the economy should specialize in.

When an insurance company makes a direct loan to a firm, the loan is known as A) a private placement. B) a commercial paper. C) an account receivable. D) an account payable.

When bank loan officers screen loan applicants to eliminate potentially bad risks, they are attempting to mitigate the problem of A) adverse selection. B) moral hazard. C) interest rate risk. D) illiquidity.

When banks hold excess reserves, the size of the money multiplier A) is less than the simple deposit multiplier would suggest. B) is greater than the simple deposit multiplier would suggest. C) is equal to the size of the simple deposit multiplier. D) becomes infinite.

When conducting open market operations, at what price is it willing to buy or sell securities? A) at the price agreed upon by the Federal Open Market Committee B) at the price agreed upon by the Board of Governors C) at the price set by the Fed chair D) at whatever price is necessary to carry out its open market operations

When deciding between domestic and foreign financial investments, investors typically consider A) domestic and foreign inflation rates and expected changes in the exchange rate. B) domestic and foreign budget deficits. C) shifts in the relative demand for foreign and domestic goods. D) domestic and foreign interest rates and expected changes in the exchange rate.

When did Regulation Q finally disappear? A) 1934 B) 1945 C) 1986 D) 2000

When did the Fed first begin to use open market operations as a policy tool? A) the 1920s B) the 1930s C) the 1960s D) the 1980s

When did the Federal Reserve Act become law? A) 1836 B) 1913 C) 1936 D) 1951

When economists and policymakers refer to the Fed's dual mandate, they are referring to: A) price and exchange rate stability. B) price stability and maximum employment. C) moderate long-term interest rates and maximum employment. D) price stability and moderate long-term interest rates.

When economists refer to the role of money as a standard of deferred payment, they mean that A) payments by checks are usually deferred until the checks clear the bank. B) money earns interest while loan payments are deferred. C) money provides a standard for payments that will occur in the future. D) money today is worth less than money tomorrow.

When economists refer to the role of money as a store of value, they mean that A) money never loses its value, unlike other assets. B) money allows value to be stored easily. C) the value of money falls only when the quantity of money in circulation falls. D) the value of money falls only when the quantity of money in circulation rises.

When economists refer to the role of money as a unit of account, they mean that A) most accounting systems reflect that goods are purchased with currency. B) most accounting systems reflect that goods are purchased with checks. C) money gives traders a way of measuring value in the economy. D) money makes it possible for specialization to take place.

When economists say consumers, firms, or investors are behaving rationally, they mean: A) they recognize that it is not worthwhile to invest in risky stocks B) they are taking actions to reach their goals, given the available information C) they have significant investment expertise D) they are consistently able to avoid poor performing stocks

When economists, policymakers, or journalists refer to the Fed's balance sheet, they are typically referring to the: A) money supply B) size of the Fed's assets C) amount of bank reserves D) amount of foreign reserves

When financial markets and institutions are not efficient in matching savers and borrowers, A) interest rates fall, which discourages saving even further. B) interest rates fall, which discourages investment even further. C) resources are lost. D) investment rises.

When interest rates in the bond market rise, A) adverse selection problems increase. B) adverse selection problems are mitigated. C) moral hazard problems increase. D) moral hazard problems are mitigated.

When investment banks buy or sell securities on their own account, it's called A) financial engineering. B) proprietary trading. C) underwriting. D) factoring.

When it takes more euros to purchase a dollar, the dollars is said to have: A) depreciated B) appreciated C) it depends on whether one is using direct or indirect quotations D) it depends on whether one is considering cross rates or exchange rates

When managers do not own very much of the net worth of the firm, then A) there may be a principal-agent problem. B) the firm will usually have to raise most of its funds in financial markets. C) the firm will have to rely more on equity financing than debt financing. D) the firm will have to rely more on debt financing than equity financing.

When market participants have adaptive expectations A) they use all information available to them. B) they only slowly adjust their expectations to news which could affect prices or returns. C) they are more likely to make accurate forecasts than if they have rational expectations. D) they are able to forecast interest rates more accurately than inflation rates.

not predictable

When market participants have rational expectation, the deviation of the expected price from the actual future price

When market participants have rational expectations, A) the information they use contains only past experiences. B) the information they use contains not only past experiences, but also their expectations for the future. C) the information they use contains only their expectations for the future. D) their forecasts are always correct.

When market participants have rational expectations, A) they use all information available to them. B) they only slowly adjust their expectations to news which could affect prices or returns. C) they are less likely to make accurate forecasts than if they have adaptive expectations. D) they are able to forecast interest rates more accurately than inflation rates.

When market participants have rational expectations, the deviation of the expected price from the actual future price is A) zero. B) predictable, provided all relevant information is made use of. C) not predictable. D) predictable under certain circumstances, but not under others.

low; high

When nominal interest rates on financial assets are low, the opportunity cost of holding money is___, so the quantity of money demanded by households are firms will be___

When prices of new houses rise significantly faster than rent prices, this is evidence of a: A) debt-deflation process B) bubble C) financial crisis D) sovereign debt crisis

When prices rise, the purchasing power of money A) rises. B) falls. C) is unaffected. D) may rise, fall, or be unaffected depending upon circumstances.

When the Fed extends loans to depository institutions A) it increases the level of reserves. B) it decreases the level of reserves. C) it reduces the total value of the assets on its balance sheet. D) it reduces the total value of the liabilities on its balance sheet.

When the Fed lends to depository institutions, the loans are called A) federal funds. B) discount loans. C) repurchase agreements. D) reverse repurchase agreements.

When the Fed reduces the real interest rate, which of the following does NOT increase? A) consumption B) investment C) government purchases D) net exports

When the price of a coupon bond increases, A) the coupon rate declines B) the coupon rate increases C) the current yield declines D) the current yield increases

When the staff of the account manager at the Fed's Open Market Trading Desk analyzes forecasts on Treasury deposits and information on the timing of future Treasury sales of securities, what agency does it interact with? A) The Securities and Exchange Commission B) The Treasury's Office of Government Finance C) The Treasury's Office of Federal Reserve Relations D) The Federal Deposit Insurance Corporation

When the yield curve is downward-sloping, A) short-term yields are higher than long-term yields. B) long-term yields are higher than short-term yields. C) the bond market is anticipating the U.S. Treasury may default on its obligations. D) the inflation rate is expected to rise.

When there's asymmetric information, who tends to have the better information? A) lender B) borrower C) intermediary D) equally likely to be the borrower or the lender

Where do the FDIC's funds come from? A) Congress appropriates money for the FDIC, just as it does for other federal agencies. B) The FDIC earns income through the insurance premiums paid by insured banks and from investment earnings. C) The FDIC sells bonds in the financial markets. D) The FDIC relies on voluntary contributions from the banking community.

Which agency did Congress create in the 1930s to reduce information costs in financial markets? A) FDIC B) SEC C) Federal Reserve D) Consumer Financial Protection Agency

Which asset is sometimes referred to as a bank's secondary reserves? A) vault cash B) U.S. government securities C) repurchase agreements D) federal funds

Which best describes the Federal Reserve district banks? A) They are private ventures. B) They are government ventures. C) Some are private while others are government. D) They are private-government joint ventures.

Which best describes the relationship between the cost of acquiring information and return? A) A high return must compensate for a high cost of acquiring information. B) A higher cost of information corresponds with a low return. C) A low cost of acquiring information corresponds with a high return. D) A higher return results in a lower cost of acquiring information.

Which central bank gained the power to set interest rates independent of the government in the late 1990s? A) Bank of England B) Bank of Canada C) Bank of China D) Federal Reserve Board

Which central bank has its exchange rate as a focus of its monetary policy? A) Bank of Canada B) Bank of England C) European Central Bank D) Federal Reserve

Which combination of assets represents the most diversification? A) holding corporate and Treasury bonds B) holding shares of Google and Yahoo C) holding shares of Google and Microsoft D) holding shares of Google along with Treasury bonds

Which country experiencing hyperinflation in excess of 15 billion percent in 2008? A) Argentina B) Canada C) Iceland D) Zimbabwe

Which country was least supportive of expansionary policy by the European Central Bank during the Financial Crisis of 2007-2009? A) Spain B) Portugal C) Greece D) Germany

Which criterion for suitability as a medium of exchange do Federal Reserve Notes meet? A) They are of standardized quality. B) They are durable. C) They are acceptable to most traders. D) Federal Reserve Notes meet all of the criteria for suitability as a medium of exchange.

Which criterion is NOT useful when evaluating a theory? A) It has predictive power. B) It fits one's pre-conceived bias. C) It offers a model consistent with investor behavior. D) It explains actual data well.

Which economist is credited with having been the first to discuss the "lemons problem"? A) George Akerlof B) Milton Friedman C) Robert Shiller D) James Tobin

Which firm did the Treasury allow to fail during the financial crisis? A) J.P. Morgan B) Bear Stearns C) Lehman Brothers D) American International Group (AIG)

Which function of money allows for specialization to take place? A) medium of exchange B) unit of account C) store of value D) standard of deferred payment

Which function of money eliminates the need for multiple prices for each good as in a barter system? A) store of value B) standard of deferred payment C) unit of account D) valuable relative to its weight

Which function of money enhances the ability of households to accumulate wealth A) medium of exchange B) store of value C) valuable relative to its weight D) does not become worn out too quickly

Which government agency regulates futures markets? A) SEC B) Commodity Futures Trading Commission C) Board of Trade D) the Federal Futures Agency

Which group is hurt by inflation being less than expected? A) holders of TIPS B) lenders of fixed-rate mortgages C) borrowers with fixed-rate mortgages D) all of the above

Which group of investors vote for a corporation's board of directors? A) bond holders B) holders of preferred stock C) holders of common stock D) both holders of common and preferred stock

Which groups were opposed to the Bank of the United States? A) northeastern industrial interests B) northeastern financial interests C) southern and western agrarian and small-business interests D) exporters

Which interest rate is typically the lowest? A) 3-month Treasury bills B) 2-year Treasury notes C) 10-year Treasury bonds D) 30-year Treasury bonds

Which interest rates is most relevant in determining aggregate expenditures? A) federal funds rate B) short-term real interest rate C) long-term nominal interest rate D) long-term real interest rate

Which investment bank avoided bankruptcy by being purchased by JP Morgan Chase in March 2008? A) Morgan Stanley B) Lehman Brothers C) Bear Stearns D) Merrill Lynch

Which investment caused the Reserve Primary Fund to incur heavy losses? A) mortgage-backed securities B) real estate investment trusts C) commercial paper issued by Bear Stearns D) commercial paper issued by Lehman Brothers

Which is the best example of idiosyncratic risk? A) a financial crisis B) a lawsuit because the corporation produced a faulty product C) a recession D) rising interest rates

Which of the following accurately describes the Fed's inflation target? A) It is implicit rather than explicit. B) It seeks to maintain an average inflation rate of 2% per year. C) It seeks to keep inflation at 2% all the time. D) Its goal is to achieve zero inflation.

Which of the following accurately describes the relationship between excess reserves and checkable deposits following the financial crisis of 2007-2009? A) Excess reserves declined as the excess reserve ratio returned to near zero. B) Excess reserves rose to nearly one-third of checkable deposits. C) Excess reserves approached the same level as checkable deposits. D) Excess reserves exceeded checkable deposits.

Which of the following accurately describes the tax treatment of municipal bonds? A) All income from municipal bonds is tax free. B) Interest is tax free, but unrealized capital gains are taxable. C) Interest is tax free, but realized capital gains are taxable. D) Interest is taxable, but capital gains are tax free.

Which of the following activities is NOT a primary concern of investment banks? A) taking in deposits and making loans B) providing advice and financing for mergers and acquisitions C) underwriting new security issues D) providing advice on new security issues

Which of the following agencies has established standardized accounting principles for reporting corporate earnings? A) The Securities and Exchange Commission B) The Federal Trade Commission C) The National Accounting Board D) The Fair Reporting Commission

Which of the following appears to be evidence against the public interest view of the Fed's motivation? A) The conflict with the Treasury over interest rate fixing during World War II. B) The failure of the Fed to emphasize the goal of price stability. C) The unwillingness of the Fed to turn over its excess profits to the Treasury. D) The independence of Fed chairmen from the authority of the President.

Which of the following are statisticians who compile statistics to predict the risk of an event occurring in the population? A) rocket scientists B) quants C) actuaries D) risk analysts

Which of the following assets had both the lowest average annual return and lowest risk between 1926 and 2011? A) small company stocks B) large company stocks C) long-term corporate bonds D) U.S. Treasury bills

Which of the following assets is the least liquid? A) money market mutual fund B) stock C) treasury bond D) house

Which of the following assets is the most liquid? A) money market mutual fund B) computer C) washing machine D) U.S. Treasury bond

Which of the following assigns widely-followed bond ratings? A) Standard & Poor's Corporation B) Securities and Exchange Commission C) Federal Reserve D) IBM

Which of the following assumptions made in deriving the simple deposit multiplier is unrealistic? A) The Fed sets the required reserve ratio. B) The Fed is able to affect the level of reserves in the banking system. C) Banks loan out all of their excess reserves. D) The simple deposit multiplier is equal to 1 divided by the required reserve ratio.

Which of the following banned most proprietary trading by commercial banks? A) Consumer financial Protection Bureau B) Regulation Q C) Greenspan rule D) Volcker rule

Which of the following best describes a "bubble"? A) when the price of an asset reaches a new high B) an unsustainable increase in the price of a class of assets C) rapid increases in inflation D) when bond prices rise more quickly than stock prices

Which of the following best describes a policy of inflation targeting? A) It's an inflexible rule that requires the central bank to always achieve a specified inflation rate. B) It allows monetary policy to focus on inflation and inflation forecasts except in the case of severe recession. C) It allows the central bank the flexibility of setting different inflation targets each year. D) It requires central banks to target current inflation rather than inflation forecasts.

of financial crisis

Which of the following best describes why average risk premium rose in (late) 2008

borrowers know more than lenders

Which of the following best fits the assumption of asymmetric information

Which of the following bond ratings by Moody's Investors Service would NOT be considered to be below investment grade? A) Baa B) Ba C) B D) All of these ratings are considered below investment grade.

Which of the following bonds will have the highest yield-to-maturity if all three bonds appear identical to investors in terms of risk, liquidity, information costs, tax treatment? A) one with a coupon of $50 B) one with a coupon of $100 C) one with a coupon of $200 D) none of the above

Which of the following can be described as when a bank buying securities owned by a business while agreeing to sell them back at a later date? A) repurchase agreement B) reverse repurchase agreement C) federal funds D) discount loans

Which of the following can best be characterized as a "Black Swan" event? A) decline in stock prices due to a recession B) rising market interest rates as the Fed tightens monetary policy C) a financial crisis causing credit to dry up D) an individual firm unexpectedly filing for bankruptcy

Which of the following cities contains a Federal Reserve bank? A) Pittsburgh B) Los Angeles C) Seattle D) Dallas

Which of the following concerns were raised as a result of record low interest rates in 2012? A) high perceived risk of default B) high interest rate risk C) corporations facing a lack of demand for bonds D) high risk premiums on investment-grade corporate bonds

Which of the following countries does NOT use the U.S. dollar as its official currency? A) Panama B) El Salvador C) Ecuador D) Guatemala

Which of the following countries experienced hyperinflation during the 1920s? A) The United States B) Canada C) Germany D) England

Which of the following countries had an unemployment rate in excess of 20% as of late 2012? A) Ireland B) Spain C) Portugal D) Italy

Which of the following describes the behavior of M1 in recent decades? A) it soared during the recessions of 1990-91, 2001, and 2007-2009 B) it tended to grow more rapidly than M2 C) it was more stable than M2 D) it has not declined since the 1970s

Which of the following describes the relationship between the actual federal funds rate and that suggested by Taylor's rule following the recovery from the 2001 recession? A) The federal funds rate was above that suggested by Taylor's rule. B) The federal funds rate was below that suggested by Taylor's rule. C) The federal funds rate was about equal to that suggested by Taylor's rule. D) There was not a clear relationship between the federal funds rate and that suggested by Taylor's rule.

Which of the following did NOT play a role in keeping Greece from defaulting between 2010 and 2012? A) International Monetary Fund B) United Nations C) European Union D) European Central Bank

Which of the following did NOT significantly exacerbate the banking crisis of the early 1930s? A) the Fed's decision not to make loans to insolvent banks B) the large number of small, poorly diversified banks C) the large number of rural banks that held agricultural loans during a time of falling commodity prices D) the large amount of fraud carried out by bank managers

Which of the following does NOT contain a Federal Reserve bank? A) Cleveland B) Dallas C) Los Angeles D) Boston

Which of the following does NOT describe the relationship between banks and small business during the 2000s (prior to the financial crisis)? A) Banks typically applied fixed guidelines for granting loans, leaving little room for personal judgment. B) Fewer small businesses received loans as banks shifted their focus to mortgages. C) Many small businesses were receiving loans from regional and national banks. D) More banks became convinced that it would be profitable to loosen their loan guidelines to make more borrowers eligible to receive credit.

Which of the following does NOT lead to an increase in potential GDP? A) labor force grows B) technological change takes place C) new machinery and equipment are installed D) aggregate expenditures increase

Which of the following does NOT represent a way in which financial intermediaries take advantage of economies of scale? A) paying lower brokerage fees per dollar invested B) paying lower legal fees per dollar invested C) purchasing sophisticated computer systems D) paying lower taxes per dollar invested

Which of the following does not serve on the Governing Council of the European Central Bank? A) governors of the national central banks B) members of the executive board C) finance ministers of each country D) chair of the executive board

Which of the following equations is correct? A) M = m(Bnon + ER) B) M = m(Bnon + BR) C) M = m(C + BR) D) M = C + R

Which of the following expressions gives the present value of future dividends for a company whose current dividend is $5.00 and whose future dividends are expected to grow at rate g? A) [$5.00(1 - g)]/(i - g) B) [$5.00(1 + g)]/(i + g) C) [$5.00(1 - g)]/(i + g) D) [$5.00(1 + g)]/(i - g)

Which of the following expressions is correct? A) B = Bnon + BR B) BR = Bnon + B C) Bnon = B + BR D) Bnon = -BR - B

Which of the following financial assets has both the highest risk and highest return for the period of 1926-2011? A) small company stocks B) large company stocks C) corporate bonds D) Treasury bills

Which of the following forms the largest share of household holdings of financial assets? A) corporate equities B) bank deposits C) pension funds reserves D) life insurance

Which of the following groups is an investment bank NOT likely to visit during a "road show"? A) institutional investors B) individual investors C) university endowments D) mutual funds

Which of the following has led to reduced use of ATMs? A) some banks closing branches in low-income neighborhoods B) some banks charging fees for transactions performed by tellers that could be done by ATMs C) increased use of debit card transactions D) reductions in fees for overdrafts

Which of the following has the largest impact on short-run movements in exchange rates? A) growth rate of exports B) growth rate of imports C) investment opportunities D) changes in the trade deficit

Which of the following helps explain why depositors sometimes put their funds in demand deposits rather than NOW accounts? A) Demand deposits pay interest, whereas NOW accounts do not pay interest. B) Businesses may not hold NOW accounts. C) Checks may be written against demand deposits, but not against NOW accounts. D) Demand deposits are more liquid than NOW accounts.

Which of the following interest rates tends to fluctuate the most? A) interest rate on corporate bonds B) interest rate on 10-year Treasury bonds C) mortgage interest rate D) federal funds rate

Which of the following involves banks borrowing funds from firms or other banks using the value of underlying securities as collateral? A) federal funds B) repurchase agreement C) counterparty lending D) money market account

Which of the following involves payment of part of the face value or principal prior to maturity? A) fixed-payment loan B) coupon bond C) discount bond D) simple loan

Which of the following is NOT a bank liability? A) checkable deposits B) CDs C) mortgage loans D) borrowings from the Federal Reserve

Which of the following is NOT a company that collects information on individual borrowers and sells it to savers? A) Moody's Investor Service B) Value Line C) NASDAQ D) Dun and Bradstreet

Which of the following is NOT a discount bond? A) a U.S. savings bond B) a U.S. Treasury bill C) a U.S. Treasury note D) a zero-coupon bond

Which of the following is NOT a financial asset? A) a bond issued by Google B) Wells Fargo Bank C) a home mortgage loan D) a certificate of deposit

Which of the following is NOT a financial intermediary? A) NASDAQ B) Allstate Insurance Company C) Bank of America D) Vanguard Total Stock Market Index Fund

Which of the following is NOT a financial intermediary? A) mutual fund B) bank C) stock exchange D) insurance company

Which of the following is NOT a fixed payment loan? A) a home mortgage B) a car loan C) a U.S. Treasury note D) a student loan

Which of the following is NOT a fixed-payment loan? A) mortgage B) car loan C) student loan D) corporate bond

Which of the following is NOT a form of a short-term loan in the shadow banking system? A) repurchase agreements B) commercial paper C) money market mutual fund shares D) bank deposits

Which of the following is NOT a key financial service provided by the financial system? A) corporate equities B) bank deposits C) pension funds reserves D) life insurance

Which of the following is NOT a likely impact on the bond market if corporations become convinced that a robust economic recovery is underway? A) increased demand for bonds B) increased supply of bonds C) lower bond prices D) higher interest rates

Which of the following is NOT a nontransaction deposit? A) a money market deposit account B) a certificate of deposit C) a savings account D) a NOW account

Which of the following is NOT a popular stock market index? A) Dow Jones Industrial Average B) NASDAQ C) S&P 500 D) Moody's Market Index

Which of the following is NOT a primary center of foreign-exchange trading? A) New York B) London C) Munich D) Tokyo

Which of the following is NOT a problem with barter? A) each good has multiple prices B) high transactions costs C) the commodity money having value for other uses besides money D) lack of standardization of products exchanged

Which of the following is NOT a reason given by economists for the failure of Okun's law to account for the rise in unemployment during the recession of 2007-2009? A) increased willingness among firms to lay off workers during recessions B) a surge in productivity during the recession C) the unusual severity of the recession D) it does not take into account the effect of the stimulus

Which of the following is NOT a reason that credit ratings agencies became more relevant beginning in the late 1970s? A) the number of bond defaults rose due to periods of recession and inflation B) rating agencies began to charge investors for their services C) governments began to include bond ratings in their regulation of banks, mutual funds, and other financial firms D) rating agencies began to rate bonds issued by foreign governments and firms

Which of the following is NOT a reason that firms in the shadow banking system were more vulnerable than commercial banks during the financial crisis of 2007-2009? A) They could invest in riskier assets. B) Investors had no insurance against loss of principal. C) They made investments that would lose value if housing prices decline. D) They were more heavily regulated than commercial banks, making them less able to adjust to changing market conditions.

increases in expected inflation

Which of the following is NOT a reason that interest rates remained low despite high budget deficits following the

Which of the following is NOT a reason that interest rates remained low despite high budget deficits following the financial crisis? A) increased demand for U.S. government bonds B) the perceived riskiness of alternative investments such as stocks C) low interest rates on CDs and similar short-term assets D) increases in expected inflation

Which of the following is NOT a responsibility of the Board of Governors? A) approving bank mergers B) determining permissible activities for bank holding companies C) carrying out open market operations D) setting the salaries of the presidents and officers of district banks.

Which of the following is NOT a result of the double taxation of dividends? A) Because profits that firms distribute to stockholders are taxed a second time, firms have an incentive to retain profits rather than to distribute them to stockholders. B) The return investors receive from buying stocks is reduced, which reduces the incentive people have to save in the form of stock investments and increases the costs to firms of raising funds. C) It gives firms an incentive to take on what may be an excessive level of debt rather than issue stock. D) The decline in retained profits results in increased inefficiency.

Which of the following is NOT a role of Federal Reserve Banks? A) conduct discount lending B) serve on the FOMC C) set the interest rate on reserves D) manage check clearing in the banking system

Which of the following is NOT a significant cost that a barter system imposes on an economy? A) Many prices must be maintained for each good. B) Only agricultural goods may be traded. C) Specialization of labor is hindered. D) The costs arising from the problem of finding two people who each want what the other produces.

Which of the following is NOT a step involved in using checks? A) The recipient must take the check to the bank. B) The bank must present the check to the checkwriter's bank. C) The funds must be transferred from the checkwriter's bank to the recipient's bank. D) The funds must be transferred from the recipient's bank to the checkwriter's bank.

Which of the following is NOT a way in which power was divided up in the Federal Reserve System? A) between bankers and business interests B) among states and regions C) between importers and exporters D) between government and the private sector

Which of the following is NOT an accurate description of open market operations prior to 2008? A) It was used to affect the market for bank reserves. B) It was used to control the federal funds rate. C) It involved buying and selling of short-term Treasury securities. D) It involved buying and selling long-term securities.

Which of the following is NOT an accurate description of the recession that accompanied the financial crisis of 2007-2009? A) GDP declined by more than twice the rate of the average recession. B) Inflation rose at nearly twice the rate as the average recession. C) It lasted just under twice as long as the typical recession. D) Peak unemployment was about one-third higher than usual.

Which of the following is NOT an activity carried out by Federal Reserve district banks? A) open market operations B) issuing new Federal Reserve Notes C) making discount loans D) examining state member banks

Which of the following is NOT an example of adverse selection? A) A family with a home ten feet from a large river buys flood insurance. B) A company uses the proceeds of a new stock sale to build an unnecessarily luxurious new headquarters. C) A terminal cancer patient buys life insurance. D) A company in serious financial trouble offers to pay you 30% on a loan.

Which of the following is NOT an example of off-balance-sheet lending? A) a swap B) a standby letter of credit C) a loan commitment D) a loan sale

Which of the following is NOT an example of transactions costs? A) high interest rates B) lawyers' fees C) brokerage commissions D) minimum investment requirements

Which of the following is NOT an implication of the theory of purchasing power parity? A) Exchange rates move to equalize the purchasing power of different currencies. B) Exchange rates should be at a level that makes it possible to buy the same amount of goods and services with the equivalent amount of any country's currency in the long run. C) A country with a higher inflation rate should experience an appreciation of its currency. D) The real exchange rate should equal one.

Which of the following is NOT an important criterion for whether a good will be usable as a medium of exchange? A) The good must be of standardized quality. B) The good must be valuable relative to its weight. C) The good must have value even if it were not being used as money. D) The good must be durable so that value is not lost through product spoilage.

Which of the following is NOT considered a cash item by banks? A) U.S. Treasury bills B) deposits at other banks C) deposits at the Federal Reserve D) vault cash

Which of the following is NOT considered one of the four groups in the Federal Reserve System? A) Federal Reserve banks B) Federal Deposit Insurance Corporation C) Board of Governors D) Federal Open Market Committee

fair wages

Which of the following is NOT considered to be a goal of monetary policy

Which of the following is NOT considered to be a goal of monetary policy? A) fair wages B) high employment C) economic growth D) price stability

Which of the following is NOT covered by federal deposit insurance? A) savings account B) money market mutual funds C) checking account D) money market deposit account

Which of the following is NOT fixed on a coupon bond? A) coupon B) coupon rate C) market price D) par value

Which of the following is NOT generally recognized as a channel for monetary policy? A) interest rate channel B) balance sheet channel C) financial market channel D) bank lending channel

Which of the following is NOT included in M1? A) currency B) savings account deposits C) checking account deposits D) traveler's checks

Which of the following is NOT included in M2? A) currency B) savings bonds C) money market deposit accounts D) overnight repurchase agreements

the borrower is left with a substantial unpaid principal at the maturity of the loan

Which of the following is NOT true of a fixed payment loan

Which of the following is NOT true of a fixed payment loan? A) The borrower is required to make regular periodic payments to the lender. B) The payments made by the borrower include both interest and principal. C) The borrower is left with a substantial unpaid principal at the maturity of the loan. D) A home mortgage is an example of fixed payment loan.

Which of the following is NOT true of adverse selection? A) It would not exist in a world of perfect information. B) It arises because borrowers typically know more than lenders. C) It describes a lender's problem of distinguishing the good-risk applicants from the bad-risk applicants. D) It describes a lender's problem in verifying borrowers are using their funds as intended.

Which of the following is NOT true of an insolvent bank? A) Its net worth is negative. B) It may be unable to pay off its depositors. C) The value of its assets is less than the value of its liabilities. D) It must have no more deposits.

Which of the following is NOT true of moral hazard? A) It would not exist in a world of perfect information. B) It arises because borrowers typically know more than lenders. C) It describes a lender's problem of distinguishing the good-risk applicants from the bad-risk applicants. D) It describes a lender's problem in verifying borrowers are using their funds as intended.

Which of the following is NOT true of restrictive covenants? A) They sometimes require borrowers to maintain the value of collateral offered to the lender. B) They increase the marketability and liquidity of loans. C) They sometimes require a borrower to maintain a certain minimum level of net worth. D) They sometimes limit a borrower's risk taking.

Which of the following is NOT true of the foreign-exchange market? A) It is an over-the-counter market. B) Most foreign-exchange trading takes place in London. C) The busiest trading time is morning east coast time, when markets in New York and London are both open. D) Trading volume worldwide exceeds $1 trillion per day.

Which of the following is NOT true of the interest rate channel? A) Bank loans play no special role. B) The Fed changes the real interest rate which affects the components of aggregate expenditures. C) Borrowers are indifferent as to how and from whom they raise funds. D) Alternative sources of funds are not substitutes for each other.

Which of the following is NOT true of the term premium? A) It is zero under the expectations theory. B) It is infinite under the segmented markets theory. C) It increases as a bond's maturity increases. D) It is zero for thirty-year bonds.

Which of the following is NOT true of the yield curve for U.S. Treasury securities? A) Typically, it slopes upward. B) It depicts the relationship among yields on securities of different maturities. C) Typically, it shifts up or down rather than twists. D) Typically, it slopes downward.

Which of the following is a bank asset? A) checkable deposits B) savings deposits C) borrowings in the federal funds market D) cash items in the process of collection

Which of the following is a bank liability? A) reserves B) consumer loans C) nontransaction deposits D) securities

Which of the following is a behavior inconsistent with the Efficient Markets Hypothesis? A) diversification of one's portfolio B) avoiding active trading of stocks C) holding onto a losing stock while being more likely to sell a stock that has increased in value D) the purchase of a stock index fund

Which of the following is a checkable deposit? A) a NOW account B) a money market deposit account C) a certificate of deposit D) a savings account

Which of the following is a consequence of extending the payback period of a student loan from 10 to 30 years? A) higher monthly payments B) more interest paid over the life of the loan C) faster payoff of principal D) lower monthly payments initially, but higher monthly payments in the future

Which of the following is a contractual saving institution? A) The New York Stock Exchange B) Greater Illinois Savings and Loan C) Prudential Insurance Company D) Fidelity Magellan Mutual Fund

Which of the following is a coupon bond? A) a U.S. savings bond B) a U.S. Treasury bill C) a U.S. Treasury note or bond D) a zero-coupon bond

Which of the following is a fixed payment loan? A) a home mortgage B) a U.S. Treasury bill C) a U.S. Treasury note D) a zero-coupon bond

Which of the following is a hybrid of a checking and savings account? A) CD B) negotiable CD C) passbook accounts D) money market deposit account

Which of the following is a liability of the Fed? A) U.S. government securities B) currency in circulation C) discount loans to banks D) checkable deposits in commercial banks

Which of the following is a liability of the Fed? A) reserves B) U.S. government securities C) discount loans to banks D) checkable deposits in commercial banks

Which of the following is a name for when a bank promises to lend funds to a borrower to pay off its commercial paper? A) loan commitment B) standby letter of credit C) securitization D) loan sale

Which of the following is a possible impact of a global savings glut on a small open economy? A) interest rate would increase B) interest rate would decrease C) domestic savings would increase D) domestic investment would increase

Which of the following is a single statistic that summarizes a rating agency's view of the issuer's likely ability to make the required payments on its bonds? A) grade B) bond rating C) speculation D) yield

Which of the following is a term for the total value of a firm's outstanding shares? A) market value B) intrinsic value C) fair value D) fairness value

Which of the following is an advantage of hedging with options instead of forward contracts? A) Options prices tend to be lower than forward prices. B) If the price moves in the opposite direction to the one hedged against, the hedger can decline to exercise the option and limit the loss to what was paid for the option. C) If the price moves in the direction of the one hedged against, the hedger can decline to exercise the option and limit the loss to what was paid for the option. D) Options allow investors to purchase a forward contract at a later date.

discount loans to banks

Which of the following is an asset of the Fed

Which of the following is an asset of the Fed? A) reserves of banks B) currency in circulation C) discount loans to banks D) checkable deposits in commercial banks

Which of the following is an example of a barter transaction? A) An individual pays her electric bill with a check. B) An individual pays her electric bill with currency. C) An individual provides three light bulbs to her neighbor in exchange for two gallons of milk. D) An individual deposits three twenty-dollar bills in her checking account.

Which of the following is an example of a commodity money? A) gold coins B) dollar bills C) British pound notes D) Japanese yen notes

Which of the following is an example of adverse selection? A) A homeowner with a large fire insurance policy allows the wiring in her house to deteriorate. B) A woman with a large life insurance policy takes up sky diving. C) Your brother-in-law borrows $20,000 from you to open a pizza parlor, but spends it gambling at the racetrack instead. D) A man with a bad heart condition buys a large life insurance policy.

Which of the following is an example of behavior that is not rational? A) buying stocks after stock prices have declined B) buying stocks after stock prices have risen C) a significantly higher enrollment in 401K plans if people are automatically enrolled rather than having the option of signing up on their own D) enrollment in 401K plans during a bear market

Which of the following is an example of fiat money? A) a cowry shell used as money on a South Pacific island B) a gold coin used as money in nineteenth century England C) a Federal Reserve Note used as money in the twenty-first century United States D) a pound of salt used as money in medieval France

Which of the following is an intermediate target

Which of the following is an intermediate target? A) M2 B) reserves C) unemployment rate D) inflation rate

Which of the following is an investment institution? A) The New York Stock Exchange B) Greater Illinois Savings and Loan C) Prudential Insurance Company D) Fidelity Magellan Mutual Fund

Which of the following is an operating target? A) M1 B) M2 C) nonborrowed reserves D) the inflation rate

Which of the following is considered a default-risk-free instrument? A) a three-month commercial paper issued by GE B) a share of stock issued by Google C) a three-month Treasury bill D) a ten-year bond issued by Intel

Which of the following is considered to be a goal of monetary policy? A) a low federal budget deficit B) fair wages C) price stability D) an end to poverty

Which of the following is fixed on a coupon bond? A) coupon rate B) current yield C) market price D) yield to maturity

Which of the following is included in M1, but not in M2? A) currency B) checking account deposits C) travelers checks D) Everything in M1 is in M2.

Which of the following is likely to be more of a problem after the introduction of deposit insurance? A) moral hazard B) adverse selection C) contagion D) bank runs

Which of the following is most likely to lead to an increase in the value of the dollar? A) decline in U.S. interest rates B) increase in imports to the United States C) decrease in exports from the United States D) increase in U.S. interest rates compared to foreign interest rates

Which of the following is the correct expression for the approximate expected real interest rate? A) r = i + P^e B) r = i - P^e C) r = i/P^e D) r = iP^e

Which of the following is the highest bond rating assigned by Moody's Investors Service? A) Aaa B) A C) B D) Baa

Which of the following is the largest component of M1? A) traveler's checks B) savings deposits C) checking deposits D) currency

Which of the following is the largest measure of money in the United States? A) Federal Reserve notes B) definitive money C) M1 D) M2

Which of the following is the least likely take place if the Fed responds to a negative demand shock by reducing the real interest rate? A) IS shifts to the right B) output gap returns to zero C) inflation returns to its previous rate D) MP shifts down

Which of the following is the lowest rating given to an investment-grade bond by Moody's? A) Aa B) A C) Baa D) B

Which of the following is the mandate of the European Central Bank? A) high economic growth B) price stability C) low unemployment D) a fixed exchange rate

Which of the following is the most common goal for central banks of industrialized countries? A) high employment B) high economic growth C) low interest rates D) low inflation

Which of the following is the most efficient means of trade? A) barter B) money C) government rationing D) the combination of barter with some government rationing

bond market

Which of the following is the most important source of external financing for comporations

Which of the following is the most important source of external financing for corporations? A) stock market B) bond market C) retained earnings D) mortgages

Which of the following is the most likely explanation of Japan's very low market interest rates in the early 2000s? A) expected deflation B) an increasing budget deficit C) an increasing trade surplus D) an increase in corporate profits

Which of the following is the most likely result of financial intermediaries? A) increased funds available to borrowers B) higher transaction costs C) higher information costs D) lower information cost but higher transaction costs

Which of the following is the source of funds for bank loans? A) marketable securities B) required reserves C) excess reserves D) bank capital

Which of the following is true of the segmented markets theory? A) It assumes that borrowers have particular periods for which they want to borrow. B) It assumes that lenders always lend for short periods. C) It provides a good explanation for why yield curves usually slope upward. D) It assumes that instruments with different maturities are perfect substitutes.

Which of the following is when an investment bank purchases securities outright in case it misjudged the state of the market and it may have to sell the securities at a lower price than what was guaranteed? A) credit risk B) liquidity risk C) principal risk D) default risk

Which of the following led to a "bank jog" in Greece? A) high unemployment B) high inflation C) speculation that Greece would abandon the euro D) the default of several Greek banks

Which of the following makes up the largest share of M2? A) M1 B) savings deposits C) small time deposits D) money market mutual fund shares

Which of the following men has NOT served as Chairman of the Board of Governors? A) Milton Friedman B) Arthur Burns C) Paul Volcker D) Alan Greenspan

Which of the following occurred following the failure of the Bank of the United States in 1930? A) Interest rates on low-grade corporate bonds rose relative to high-rated corporate bonds. B) Other banks in New York City suffered liquidity problems. C) A bank panic ensued within days. D) The stock market crashed.

Which of the following officially ended the cooperation between the Treasury and the Fed that had taken place during World War 2? A) Truman doctrine B) Federal Reserve Act of 1951 C) Dodd-Frank Act D) Treasury-Federal Reserve Accord

Which of the following prevented the Fed from reducing long-term real interest rates during the Financial Crisis of 2007-2009? A) an increase in expected inflation B) an increase in the risk premium C) the collapse in the housing market D) the failure of the federal funds rate to respond to monetary policy

Which of the following represented the largest liability on the balance sheet of U.S. commercial banks in 2012? A) checkable deposits B) loans C) nontransaction deposits D) borrowings

Which of the following represents the equation that would be used to determine the yield to maturity of a corporate bond with a face value of $1000, price of $1100, coupon rate of 5%, and maturity in three years? A) $1100 = $1500/(1 + i)^3 B) $1100 = $500/(1 + i) + $500/(1 + i)^2 + 1000/(1 + i)^3 C) $1100 = $500/(1 + i) + $500/(1 + i)^2 + 500/(1 + i)^3 D) $1100 = $500/(1 + i) + $500/(1 + i)^2 + 1500/(1 + i)^3

Which of the following represents the equation that would be used to determine the yield to maturity of a three-year fixed payment loan of $1400 which has payments of $500 per year? A) $1400 = $500/(1+i) + $500/(1+i)^2 + $500/(1+i)^3 B) $1400 = $500/(1+i)^3 C) i = (1400-500)/1400 D) $1400 = $500/(1+i) + $500/(1+i)^2 + $500(1+i)^3 + 1400/(1+i)^3

Which of the following rules affected hedge funds as a result of the Dodd-Frank Act of 2010? A) Hedge funds have to make detailed disclosure of their asset holdings. B) Large hedge funds must register with the SEC. C) Investors are allowed to make withdrawals after the first week. D) Carried interest is taxed as ordinary income.

Which of the following statements about ACH transactions is false? A) They reduce the likelihood of missed payments. B) They reduce transactions costs associated with check processing. C) They reduce the costs that lenders incur in notifying customers of missed payments. D) They typically involve digital cash.

Which of the following statements about checkable deposits is correct? A) Checkable deposits are a larger fraction of banks' funds today than in 1973. B) Checkable deposits are a smaller fraction of banks' funds today than in 1973. C) All checkable deposits pay interest. D) No checkable deposits pay interest.

Which of the following statements about checking deposits is true? A) It is a liability for both households and banks. B) It is an asset for both households and banks. C) It is an asset for households but a liability for a bank. D) It is a liability for households but an asset for a bank.

Which of the following statements about junk (high-risk) bonds is true? A) They never outperform treasury bonds since they're too risky. B) The price of junk bonds increase as their perceived risk increases. C) They tend to perform best during recessions. D) One can profit by owning them if market perceptions of their risk decline.

Which of the following statements about junk bonds is false? A) Given the likelihood of default, it is never profitable to purchase junk bonds. B) They pay higher interest rates than investment grade bonds due to higher perceived risk. C) Prior to the 1970s, corporations were unable to issue junk bonds. D) A popular measure of junk bond yields reached a record low in 2012.

Which of the following statements about potential GDP is false? A) The Fed's goal is to have equilibrium GDP close to potential GDP. B) When GDP is at potential, cyclical unemployment is zero. C) It occurs when firms are producing at their maximum level of output. D) It occurs when firms are producing with a workforce of normal size working normal hours.

Which of the following statements about the Depository Institutions Deregulation and Monetary Control Act of 1980 is NOT correct? A) It required all banks to maintain reserve deposits with the Fed. B) It gave member and nonmember banks equivalent access to discount loans. C) It halted the decline in Fed membership. D) It eliminated restrictions on interstate banking for member banks.

Which of the following statements about the natural rate of unemployment is correct? A) Currently, most economists think that the natural rate is between 5% and 6%. B) Currently, most economists believe the natural rate is zero. C) When unemployment is at its natural rate, then only frictional unemployment remains. D) When unemployment is at its natural rate, then only structural unemployment remains.

Which of the following statements about the rate of return is NOT correct? A) The total rate of return may be greater or less than the current yield. B) The total rate of return may be greater or less than the rate of capital gain. C) The total rate of return may never be negative. D) The total rate of return is greater than the coupon, holding everything else constant.

Which of the following statements about the supply of dollars in the foreign exchange market is true? A) It is equal to the money supply. B) It represents the demand for U.S. goods and financial assets by firms and households outside the United States. C) It represents the supply of U.S. goods and financial assets by firms and households within the United States. D) It is determined by the willingness of households and firms that own dollars to exchange them for foreign currency.

Which of the following statements accurately describes the Fed's control of discount policy? A) It controls discount policy more completely than it controls open market operations. B) It must abide by discount rates set by Congress. C) It controls discount policy less completely than it controls open market operations. D) It controls discount policy completely, just as it controls open market operations.

Which of the following statements concerning seasonal credit is true? A) It tends to have a lower interest rate than federal funds. B) It has become increasingly more important in recent years. C) Only firms receiving secondary credit are eligible to receive seasonal credit. D) Improvements in credit markets have reduced the need for a seasonal credit facility.

Which of the following statements is NOT true of consumer finance companies? A) Their borrowers have higher default risk than bank customers. B) They charge higher interest rates than banks do on similar loans. C) They lend primarily to consumers. D) They are strictly regulated by state governments.

Which of the following statements is NOT true? A) Each Federal Reserve bank maintains its own discount window. B) Before 1980, the Fed rarely made loans to banks which were not members of the Federal Reserve System. C) Since 1980, all depository institutions have had access to the discount window. D) Each Federal District Bank can charge a different discount rate.

Federal Reserve district banks pay dividends on their earnings to member banks

Which of the following statements is correct

Which of the following statements is correct? A) Because in practice few borrowers are bank-dependent, the bank lending channel is of little real-world importance. B) In the interest rate channel, an expansionary monetary policy may cause a leftward shift in the AD curve. C) In the bank lending channel, an expansionary monetary policy can increase output in the short run even if it does not result in a decrease in the real interest rate. D) In the interest rate channel, an expansionary monetary policy affects spending but not output.

Which of the following statements is correct? A) Dynamic open market operations are carried out to offset fluctuations in the monetary base. B) Defensive open market operations are carried out to change monetary policy. C) The volume of defensive open market operations is much greater than the volume of dynamic open market operations. D) Defensive open market operations are usually carried out through outright purchases or sales.

Which of the following statements is correct? A) Federal Reserve district banks are owned by the government. B) Member banks receive no return on the stock they own in Federal district banks. C) Federal Reserve district banks pay dividends on their earnings to member banks. D) The boards of directors of the district banks are all local bankers.

Which of the following statements is correct? A) Open market purchases are expansionary and open market sales are contractionary. B) Open market purchases are contractionary and open market sales are expansionary. C) Both open market purchases and open market sales are expansionary. D) Both open market purchases and open market sales are contractionary.

Which of the following statements is correct? A) The Fed has difficulty covering its normal expenses, but is reluctant to ask Congress for money. B) The Fed is dependent on the annual appropriations it receives from Congress. C) The Fed's profits are substantial, even when compared to the largest U.S. corporations. D) At one time the Fed made substantial profits, but falling interest rates have greatly reduced them.

Which of the following statements is correct? A) The Fed is fully insulated from external pressures due to the long terms that members of the Board of Governors serve. B) The Fed is fully insulated from external pressures because it does not need to go through the normal congressional appropriations process. C) The Fed is fully insulated from external pressures because it has a constitutional mandate. D) The Fed is only partially insulated from external pressures.

Which of the following statements is correct? A) The discount rate is determined by market forces. B) The Fed's control over discount lending is more complete than its control over open market operations. C) Decisions by both banks and the Fed determine the volume of discount loans. D) The discount rate is typically greater than other short-term market interest rates.

Which of the following statements is correct? A) The discount rate is generally above the federal funds rate. B) The discount rate is generally below the federal funds rate. C) The discount rate is generally equal to the federal funds rate. D) There is no general pattern to the relation between the discount rate and the federal funds rate.

Which of the following statements is correct? A) The supply curve for loanable funds slopes up, whereas the supply curve for bonds slopes down. B) The demand curve for loanable funds slopes up, whereas the demand curve for bonds slopes down. C) The demand curve for loanable funds and the demand curve for bonds both slope up. D) The supply curve for bonds and the supply curve for loanable funds both slope up.

Which of the following statements is correct? A) The volume of open market operations is determined jointly by the actions of the Fed, the banking system, and the nonbank public. B) The Fed's control over discount lending is more complete than its control over open market operations. C) The Fed completely controls the volume of open market operations. D) The Fed has complete control over the volume of both discount loans and open market operations.

Which of the following statements is correct? A) The volume of open market operations is determined jointly by the actions of the public, banks, and the Fed. B) The volume of open market operations is determined jointly by the actions of banks and the Fed. C) The volume of open market operations is determined jointly by the actions of the public and the Fed. D) The volume of open market operations is determined solely by the Fed.

Which of the following statements is true about M2? A) Its total value is smaller than that of M1. B) Apart from those assets also included in M1, it includes no assets that offer check-writing features. C) Its total value is about five times as large as M1. D) It includes large-denomination time deposits.

Which of the following statements is true of rational expectations? A) Rational expectations forecasts are always correct. B) For a trader with rational expectations, the expectation of an asset's price equals the optimal price forecast. C) If traders have rational expectations, any announcement by a company will have an effect on its stock price, even if the market was already aware of the facts being announced. D) If a trader really has rational expectations, he or she was always earn a greater than normal return on his or her financial portfolio.

Which of the following statements is true? A) The more liquid the bond, the lower the yield. B) Tax-free bonds normally have a higher interest rate than other types of bonds. C) The price of a bond increases as it becomes more risky. D) The yield curve illustrates the relative default risks of alternative types of bonds.

Which of the following statements regarding member banks is true? A) A majority of banks are part of the Federal Reserve System as well as a majority of bank deposits. B) A minority of banks are part of the Federal Reserve System, but they have a majority of deposits. C) A majority of banks are part of the Federal Reserve System, but they have a minority of deposits. D) A minority of banks are part of the Federal Reserve System as well as a minority of deposits.

Which of the following things do banks do with the funds they acquire from savers? A) invest in corporate stock B) invest in corporate bonds C) make loans to individuals D) all of the above

Which of the following types of mortgage loans became more common during the housing boom of the early-to-mid 2000s? A) those with flawed credit histories B) thirty-year, fixed-rate mortgages C) prime Mortgages D) those with down payments of at least 20%

Which of the following was NOT a result of the passage of the Gramm-Leach-Bliley Act? A) It repealed the Glass-Steagall Act. B) It allowed commercial banks to participate in securities, insurance, and real estate activities. C) It authorized new financial holding companies which permitted securities and investment firms to own commercial banks. D) It increased the capital requirements for commercial banks.

Which of the following was the main reason for increased counterparty risk in the shadow banking system prior to the financial crisis of 2007-2009? A) increased leverage B) government insuring money market deposits C) many firms borrowing long term for short-term investments D) trading of derivatives on exchanges

increased perceived risk of default

Which of the following will lead to a higher interest rate on a loan

Which of the following will lead to a higher interest rate on a loan? A) lower inflation B) lower opportunity cost C) increased perceived risk of default D) reduced likelihood of borrower not paying the loan

Which of the following will result in a decrease in the price of an existing corporate bond? A) lower expectations of inflation B) new bonds issued at a lower interest rate C) increased default risk D) all of the above

Which of the following will take place in the foreign exchange market if there is an increase in the demand for products made in the United States? A) The supply of dollars will decrease. B) The demand for dollars will decrease. C) The demand for dollars will increase. D) The dollar will decrease in value.

Which of the following would NOT cause a shift in the IS curve? A) an increase in the domestic real interest rate B) an increase in consumer confidence C) a decrease in the expected future profitability of capital D) a decrease in government purchases

Which of the following would NOT cause the IS curve to shift to the left? A) a decrease in government purchases B) an increase in consumer confidence C) a decrease in foreign demand for domestic products D) a decrease in the expected future profitability of capital

Which of the following would NOT cause the demand curve for bonds to shift? A) a change in wealth B) a change in the price of bonds C) a change in the liquidity of bonds D) a change in expected inflation

a decrease in real GDP

Which of the following would cause the money demand curve to shift to the left?

Which of the following would cause the nominal exchange rate to appreciate? A) The real exchange rate depreciates. B) The domestic inflation rate decreases. C) The domestic inflation rate increases. D) The government budget deficit decreases.

Which of the following would cause the nominal exchange rate to depreciate? A) The real exchange rate appreciates. B) The domestic inflation rate increases. C) The foreign inflation rate increases. D) The government budget deficit increases.

Which president failed to renew the charter of the Second Bank of the United States? A) George Washington B) Andrew Jackson C) Franklin Roosevelt D) Lyndon Johnson

Which president said, "Prosperity is just around the corner"? A) Herbert Hoover near the start of the Great Depression B) Franklin Delano Roosevelt near the start of the Great Depression C) George W. Bush near the start of the Great Recession D) Barack Obama near the start of the Great Recession

Which theory explains all three facts about the term structure? A) expectations B) segmented markets C) preferential treatment D) liquidity premium

Which type of analyst should generally outperform market index according to the Efficient Markets Hypothesis? A) technical analysts B) fundamental analysts C) those that follow the random walk D) none of the above

Which type of bond would you purchase if you expected higher rates of inflation during the life of the bond? A) Treasury bond B) TIPS C) corporate bond D) municipal bond

Which type of borrowers were least likely to default in their mortgage at the beginning of the financial crisis? A) those with fixed-rate mortgages who made large down payments B) those with alt-A loans C) subprime borrowers D) those with adjustable-rate mortgages.

Which type of investor is most likely to have a diversified portfolio? A) risk averse B) risk loving C) risk neutral D) risk tolerant

Which type of offering typically has the lowest fees? A) initial public offering of stocks B) secondary offering C) offering of investment-grade bonds D) offering of non-investment-grade bonds

Which type of stock should result in the best return according to the Efficient Markets Hypothesis? A) a firm that is expected to be highly profitable in the future B) a firm that is considered to be undervalued C) a firm expected to earn little profit in the future D) none of the above

Who benefits from rising inflation? A) those who already have fixed-rate loans B) those considering taking out a loan C) lenders that already made loans D) lenders considering whether to make new loans

Who had served as a de facto lender of last resort during the 1907 panic? A) The U.S. Treasury B) J.P. Morgan C) Henry Ford D) John D. Rockefeller

Who organized the Bank of the United States? A) Alexander Hamilton B) George Washington C) Andrew Jackson D) Woodrow Wilson

Who owns the Federal Reserve banks? A) the private commercial banks in each district which are members of the Federal Reserve System B) those households which have purchased stock in Federal Reserve System C) the federal government D) the governments of the states in which the banks are located

Who sets the inflation target for the Bank of England? A) Prime Minister B) Chancellor of the Exchequor C) head of the monetary policy committee D) majority vote of the monetary policy committee

Who was the effectively in charge of the Fed during the early 1930s? A) Secretary of Treasury B) Head of the Federal Reserve bank of New York C) Comptroller of the Currency D) no one

Why are U.S. government securities referred to as a bank's secondary reserves? A) Their current market value may count toward meeting a bank's legal reserve requirements. B) They are very liquid. C) Banks are legally required to hold a certain minimum amount of these securities. D) They are the same thing as vault cash.

Why are corporations more likely to raise funds externally by debt instead of equity? A) moral hazard is less of a problem with debt contracts B) transactions costs tend to be higher in the stock market than bond market C) to avoid paying dividends D) interest rates tend to be lower than dividend rates

Why did fewer state banks choose to become or remain members of the Federal Reserve System during the 1960s and 1970s? A) Nominal interest rates rose. B) The required reserve ratio rose. C) The discount rate rose. D) Open market operations declined.

Why didn't the surge in the monetary base between 2008-2012 lead to a similar surge in the money supply? A) The currency-deposit ratio rose significantly, resulting in a much smaller money multiplier. B) The excess reserve-deposit ratio rose significantly, resulting in a much smaller money multiplier. C) The Fed increase the required reserve ratio, resulting in a much smaller money multiplier. D) Nonborrowed reserves declined, offsetting the increase in the monetary base.

Why do CDs have lower rates of return than stocks? A) CDs are much riskier investments than stocks. B) CDs are less risky than stocks. C) CDs are not taxed while stock s returns are taxable. D) CDs are not as liquid as stocks.

Why do higher interest rates increase adverse selection problems in the loan market? A) Higher interest rates reduce the gains from economies of scale. B) As interest rates rise, the creditworthiness of the average loan applicant declines. C) Higher interest rates reduce information problems in the loan market. D) At higher interest rates fewer investment projects are profitable.

Why do individuals hold money when it does not provide the services that, say, a house does? A) Money is the most liquid asset. B) Money is the only form in which wealth may be held. C) Money increases in value faster than other assets. D) Money is useful in avoiding taxes on certain transactions.

the amount of funds in CDs and money market mutual funds shares has grown faster than currency or checking deposits

Why has M2 grown more quickly than M1 in recent decades

Why has M2 grown more quickly than M1 in recent decades? A) Currency in circulation has declined. B) People own more shares of stock than in the past. C) The amount of funds in CDs and money market mutual funds shares has grown faster than currency or checking deposits. D) Most people use debit cards instead of checking accounts.

Why has the Federal Reserve chairman often been called the second most important person in terms of affecting the economy? A) The Fed chairman has veto power over all federal spending. B) The Fed is in control of monetary policy. C) The Fed chairman draws the second highest salary of any official of the federal government. D) The Fed has regulatory power over all financial markets.

Why is adverse selection more likely in financial markets when interest rates rise? A) The remaining borrowers are more likely to be risky. B) Higher interest rates are likely to hurt the economy. C) If firms have to pay higher interest rates, they may choose to use the funds differently than they first intended. D) Banks eliminate risky borrowers by raising interest rates.

Why isn't the current yield a good indicator of holding a bond? A) It doesn't account for the yield to maturity. B) It doesn't account for capital gains or losses. C) It doesn't account for the coupon. D) It assumes that the current price equals its par value.

concern about the high default risk of alternative investments

Why may investors buy a Treasury bill with a negative real interest rate

Why may investors buy a Treasury bill with a negative real interest rate? A) fear of rising inflation B) concern about high yields on other bonds C) fear of default by the U.S. government D) concern about the high default risk of alternative investments

Why might Congress benefit from the Fed being self-financed? A) Self-financing increases Congressional control over the Fed. B) Self-financing reduces the Fed's exposure to external pressures. C) Self-financing gives the Fed an incentive to expand the money supply, which ultimately results in Congress having additional funds to spend. D) Congress does not benefit from the Fed being self-financed; Congress is obliged by the Constitution to allow the Fed to be self-financed.

Why might a nation seek to maintain a pegged exchange rate? A) It makes business planning easier for firms involved in the global economy. B) It removes the need to intervene in the foreign exchange market. C) It ensures that the exchange rate will remain at its equilibrium. D) It makes their currency more attractive on the foreign exchange market.

Why was the Fed reluctant to rescue insolvent banks? A) It thought it may lead to moral hazard. B) It thought it may lead to adverse selection. C) It thought they were still liquid. D) It did not think they were insolvent.

With debt financing A) moral hazard problems are eliminated. B) moral hazard problems are reduced but not eliminated. C) adverse selection problems are eliminated. D) firms reduce the risk that they will become bankrupt during a recession.

With regard to crowd funding, all of the following accurately describe "qualified investors" EXCEPT: A) they must have incomes of at least $200,000 per year B) there are no longer any distinctions between investors following the passage of the JOBS act C) they must have assets of at least $1 million not including the value of their house D) they must make up a majority of investors in each start up

With respect to U.S. Treasury bills, A) the bid price is always greater than the asked price. B) the asked price is always greater than the bid price. C) the bid price is only greater than the asked price if investors expect interest rates to decline in the future. D) the asked price is only greater than the bid price if investors expect interest rates to decline in the future.

adverse selection

You own a 2004 Toyota 4Runner. Although it has high mileage, you have maintained it very well. You want to sell it, but after checking the prices other owners of 2004 Toyota 4Runner are able to get for their cars in the used market, you decide the prices are too low and you decide not to sell. This is an example of

You own a 2007 Ford Explorer. Although it has high mileage, you have maintained it very well. You want to sell it, but after checking the prices other owners of 2007 Ford Explorers are able to get for their cars in the used car market, you decide the prices are too low and you decide not to sell. This is an example of A) the "lemons problem." B) moral hazard. C) economies of scale. D) low information costs.

reserves

a bank asset consisting of vault cash plus bank deposits with ht federal reserves

restrictive covenant

a clause in a bond contract that places limits o the uses of funds that a borrower receives

restrictive covenant

a clause in a bond contract that places limits on the uses of funds that a borrower receives

currency swap

a contract in which counterparties agree to exchange principal amounts denominated in different currencies

credit swap

a contract in which interest-rate payments are exchanged, with the intention of reducing default risk.

interest rate swap

a contract under which counterparties agree to swap interest payments over a specified period on a fixed dollar amount (the notional principal)

publicly traded company

a corporation that sells stock in the U.S. stock market; only 5100 of the 5 million US corporations are publicly traded companies

publicly traded company

a corporation that sells stock in the US stock market; only 5,100 of the 5 million US corporations

depreciation

a decrease in the value of a currency in exchange for another currency

Suppose the U.S. economy is producing at the natural rate of output. An appreciation of the U.S. dollar will cause ________ in real GDP in the short run and ________ in the aggregate price level in the short run, everything else held constant. (Assume the appreciation causes no effects in the supply side of the economy.)

a decrease; a decrease

Suppose the economy is producing at the natural rate of output. A decrease in consumer and business confidence will cause ________ in real GDP in the short run and ________ in the aggregate price level in the short run, everything else held constant.

a decrease; a decrease

Suppose the economy is producing at the natural rate of output. A decrease in consumer and business confidence will cause ____ in real GDP in the short-run and ____ in inflation in the short-run, everything else held constant

a decrease; a decrease

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 the aggregate price level in the short run, everything else held constant.

a decrease; a decrease

Suppose the economy is producing at the natural rate of output. Assuming a fixed natural rate of output and everything else held constant, the development of a new, more productive technology will cause ________ in the unemployment rate in the short run and ________ in the aggregate price level in the short run.

a decrease; a decrease

credit default swaps

a derivative that requires the seller to make payments to the buyer if the price of the underlying security declines in value; in effect, a type of insurance

national bank

a federally chartered bank

loan sale

a financial contract in which a bank agrees to sell the expected future returns from an underlying bank loan to a third party

hedge fund

a financial firm organized as partnership of wealthy investors that make relatively high risk, speculative investments

investment institution

a financial firm, such as a mutual fund or a hedge fund, that raises funds to invest in loans and securities

contractual saving institution

a financial intermediary such as a pension fund or an insurance company that receives payments from individuals as a result of a contract and uses the funds to make investments

pension fund

a financial intermediary that invests contributions of workers and firms in stocks, bonds, and mortgages to provide for pension benefit payments during workers' retirements

mutual fund

a financial intermediary that raises funds by selling shares to individual savers and invests the funds in a portfolio of stocks, bonds, mortgages, and money market securities

insurance company

a financial intermediary that specializes in writing contracts to protect policyholders from the risk of financial loss associated with particular events

market maker

a firm that holds an inventory of a security and seven as an intermediary between buyers and sellers of the security

venture capital firm

a firm that raises equity capital from investors to invest in startup firms

private equity firm (corporate restructuring firm)

a firm that raises equity capital to acquire shares in other firms to reduce free rider and meal hazard problems

private equity firm

a firm that raises equity capital to acquire shares in other firms to reduce free-rider and moral hazard problems

federal deposit insurance

a government guarantee of deposit account balances up to $250,000

troubled asset relief program (TARP)

a government program congress passed in 2008 under which the US Treasury purchased stock in hundreds of banks to increase the banks capital

syndicate

a group of investment banks that jointly underwrite a security issue

corporation

a legal form of a business that provides owners with protection from losing more than their investment if the business fails

corporation

a legal form of business that provides owners with protection from losing more than their investment if the business fails

limited liability

a legal provision that shields owners of a corporation from losing more than they have invested in the firm

quota

a limit a government imposes on the quantity of a good that can be imported

By looking at aggregate demand via its component parts, we can conclude that the aggregate demand curve is downward sloping because

a lower price level, holding the nominal quantity of money constant, leads to a larger quantity of money in real terms, causes the interest rate to fall, and stimulated planned investment spending

over the counter market

a market in which financial securities are bought and sold by dealers linked by computer

over the counter market

a market in which financial securities are bought and sold by dealers linker by computer

leverage

a measure of how much debt an investor assumes in making an investment

Gordon growth model (dividend discount model)

a model that uses the current dividend paid, the expected growth rate of dividends and the required return on equities to calculate the price of a stock

gordon growth model

a model that uses the current dividend paid, the expected growth rate of dividends, and the required return on equities to calculate the price of a stock; we can analyze changes in stock prices by not looking too much

money market mutual fund

a mutual fund that invests exclusively in short-term assets, such as Treasury bills, negotiable certificates of deposits and commercial paper

finance company

a nonbank financial intermediary that raises money through sales of commercial paper and other securities and uses the funds to make small loans to households and firms

dividend

a payment that a corporation makes to stockholders typically on a quarterly basis

dividend

a payment that a corporation makes to stockholders, typically on a quarterly basis; income earned

dealers

a person who attempt to match up the orders they receive from investors to buy and sell the stocks

stock exchange

a physical location where stocks are bought and sold face to face on a trading floor

stock exchange

a physical location where stocks are bought and sold face-to-face on a trading floor

standby letter of credit

a promise by a bank to lend funds, if necessary, to a seller of commercial paper at the time that the commercial paper matures

bubble

a situation in which the price of an asset rises well above the asset's fundamental value

bubble

a situation in which the price of an asset rises well above the assist's fundamental value

futures contract

a standardized contract to buy or sell a specified amount of a commodity or a financial asset on a specific future date

balance sheet

a statement that lists an individual's or a firms's assets and liabilities to indicate individuals's or firm's financial position on a particular day

tariff

a tax a government imposes on imports

Which of the following increases aggregate supply in the short-run, everything else held constant?

a technological improvement that increases worker productivity

option

a type of derivative contract in which the buyer has the right to buy or sell the underlying asset at a set price during a set period of time

call option

a type of derivative contract that gives the buyer the right to buy the underlying asset at a set price during a set period of time

put option

a type of derivative contract that gives the buyer the right to sell the underlying asset at a set price during a set period of time

the longrun aggregate supply curve is

a vertical line through the natural rate level of output

The discount rate is kept ____ the federal funds rate because the Fed prefers that....

above; banks borrow reserves from each other

Everything else held constant, when the federal funds rate ____ the interest rate paid on reserves, the quantity of reserves demanded rises when the federal funds rate ____

above; falls

Everything else held constant, when output is ________ the natural rate level, wages will begin to ________, decreasing short-run aggregate supply.

above; rise

checkable deposits

accounts against which depositors can write checks

off balance sheet activities

activities that do not affect a bank's balance sheet because they do not increase either the bank's assets or its liabilities

In order to reduce the ____ problem in loan markets, bankers collect information from prospective borrowers to screen out the bad credit risks from the good ones

adverse selection

Collateral requirmenets lessen the consequences of ____ because the collateral reduces the lender's losses in the case of a loan default and it reduces ____ because the borrower has more to lose from a default

adverse selection; moral hazard

By analyzing aggregate demand via its component parts, we can conclude that changes in the money supply

affect aggregate demand in the same direction as the change in government spending

When the economy suffers a temporary negative supply shock and the central bank responds by changing the autonomous component of monetary policy to keep inflation at the target inflation rate, then...

aggregate output drops in the short run and output will return to potential output over time

A theory of aggregate economic fluctuations called real business cycle theory holds that

aggregate suply shocks do affect the natural rate of output

t account

an accounting tool used to show changes in balance sheets items

underwriting

an activity in which an investment bank guarantees to the issuing corporation the price of a new security and then resells the security for a profit

swap

an agreement between two or more counterparties to exchange sets of cash flows over some future period

loan commitment

an agreement by a bank to provide a borrower with a stated amount of funds during a specified period of time

forward contracts

an agreement to buy or sell an asset at an agreed-upon price at a future time

duration analysis

an analysis of how sensitive a bank's capital is to changes in market interest rates

gap analysis

an analysis of the difference, or gap, between the dollar value of a bank's variable rate assets and the dollar value of its variable-rate liabilities

derivatives

an asset that derives its economic value from an underlying asset, such as a stock or bond

stock market index

an average of stock prices that investors use to measure the overall performance of the stock market

New information that might lead to a decrease in a stock's price might be....

an expected decrease in the level of future dividends

everything else held constant, which of the following does not cause aggregate demand to increase?

an increase in taxes

By analyzing aggregate demand through its component parts, we can conclude that, everything else held constant, a decline in the price level causes

an increase in teh real money supply, a decline in interest rates, an increase in investment spending, and an increase in aggregate output demand

appreciation

an increase in the value of a currency in exchange for another currency

appreciation

an increase in value of a currency in exchange for another currency

Suppose the economy is producing below the natural rate of output and the government is suffering from large budget deficits. To deal with the deficit problem, suppose the government takes a policy action to reduce the size of the deficits. This policy action will cause ________ in the unemployment rate in the short run and ________ in the aggregate price level in the short run, everything else held constant.

an increase; a decrease

Suppose the economy is producing below the natural rate of output and the government is suffering from large budget deficits. To deal with the deficit problem, suppose the government takes a policy action to reduce the size of the deficits. This policy action will cause ____ in the unemployment rate in the short run and ____ in inflation in the short run, everything else held constant.

an increase; a decrease

Suppose the U.S. economy is producing at the natural rate of output. A depreciation of the U.S. dollar will cause ________ in real GDP in the short run and ________ in the aggregate price level in the short run, everything else held constant. (Assume the depreciation causes no effects in the supply side of the economy.)

an increase; an increase

Suppose the US economy is producing at the natural rate of output. An autonomous depreciation of the US dollar will cause ___ in real GDP in the short run and ____ in inflation in the long run, everything else held constant

an increase; an increase

Suppose the economy is producing at the natural rate of output and the government passes legislation that severely restricts a companyȇs ability to reduce production costs via outsourcing. Everything else held constant, this policy action will cause ________ in the unemployment rate in the short run and ________ in the aggregate price level in the short run.

an increase; an increase

Suppose the economy is producing at the natural rate of output. An increase in consumer and business confidence will cause ________ in real GDP in the short run and ________ in the aggregate price level in the short run, everything else held constant.

an increase; an increase

Suppose the economy is producing at the natural rate of output. An open market purchase of bonds by the Fed will cause ________ in real GDP the the short run and ________ in the aggregate price level in the short run, everything else held constant.

an increase; an increase

Assuming the economy is starting at the natural rate of output and everything else held constant, the effect of ________ in aggregate ________ is a rise in both the price level and output in the short-run, but in the long-run the only effect is a rise in the price level.

an increase; demand

The aggregte demand curve slopes downward because a decrease in the price level means _______ in the real money supply and therefore a _____ level of real spending

an increase; higher

All else the same, if a bank's liabilities are more sensitive to interest rate fluctuations than are its assets, then ____ in interest rates will ____ bank profits

an increase; reduce

If tariffs are expected to ____ in the future, this will cause the demand for domestic assets to shift to the ____ and the domestic currency to ____, everything else held constant.

an increase; right; appreciate

foreign exchange market

an over the counter market where international currencies are traded and exchange rates are determined

foreign exchange market

an over-the-counter market where international currencies are traded and exchange rates are determined

excess reserves

any reserves banks hold above those necessary to meet reserve requirements

collateral

assets that a borrower pledges to a lender that the lender may seize if the borrower defaults on the loan

momentum investing

based on the idea that there can be persistence in stock movements, so that a stock that is increasing in price is somewhat more likely to rise than to fall; example: if a lot of people are buying the same stock even though the price increased because they don't want to be "missing out" ; feels like the other people know something that they don't

Everything else held constant, when output is ________ the natural rate level, wages will begin to ________, increasing short-run aggregate supply.

below; fall

If the price of bonds is set ____ the equilibrium price, the quantity of bonds demanded is ____ the quantity of bonds supplied, a condition called excess.

below; greater than; demand

Both stocks and 30-year Treasury bonds are traded in the ____ market

capital

vault cash

cash on hand in a bank; includes currency in ATMs and deposits with other banks

Which of the following are reported as liabilities on a bank's balance sheet? 1. reserves 2. consumer loans 3. deposits with other banks 4. checkable deposits

checkable deposits

compared to an electronic payments system, a payments system based on checks has the major drawback that...

checks take longer to process, meaning that it may take several days before the depositor can get her cash

One way to derive aggregate demand is by looking at its four component parts, which are:

consumer expenditures, planned invesstment spending, government spending, and net exports

The principal-agent problem that exists for bank trading activities can be reduced through....

creation of internal controls that separate trading activities from bookkeeping

An eleven month Treasury bill is a(n) ____ instrument that is traded in the ____ market

debt; money

According to the liquidity premium theory of the term structure, a downward sloping yield curve indicates that short-term interest rates are expected to...

decline sharply in the future

All else the same, when the Fed calls in a $100 discount loan previously extended to the First National Bank, reserves in the banking system...

decrease by $100

____ in the foreign interest rate causes demand for domestic assets to increase and the domestic currency to ____, everything else held constant

decrease; appreciate

Everything else held constant, an increase in the excess reserves ratio causes the money multiplier to ____ and the money supply to ____

decrease; decrease

Everything else held constant, an increase in the required reserve ration on checkable deposits causes the money multiplier to ____ and the money supply to ____

decrease; decrease

Everything else held constant, an increase in currency holdings will cause the money multiplier to ____ and the money supply to ____

decrease; increase

Everything else held constant, if the federal government were to guarantee today that it will pay creditors if a corporation goes bankrupt in the future, the interest rate on corporate bonds will ____ and the interest rate on Treasury securities will ____

decrease; increase

Risk premiums on corporate bonds tend to ____ during business cycle expansions, and ____ during recessions, everything else held constant.

decrease; increase

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

decrease; supply

An equal increase in all bond interest rates...

decreases long-term bond returns more than short-term bond returns

Everything else held constant, an increase in net taxes ____ the ____ component of aggregate ____

decreases; consumption; demand

According to the quantity theory of money, a decrease in the money supply, ______ aggregate _________, everything else held constant

decreases; demand

Everything else held constant a decrease in net exports _____ aggregate ______

decreases; demand

Everything else held constant, a decrease in government spending _____ aggregate ______

decreases; demand

Everything else held constant, a decrease in planned investment expenditure _____ aggregate ____

decreases; demand

Everything else held constant, an increase in net taxes _____ aggregate _______

decreases; demand

everything else held constant, an increase in the cost of production _____ aggregate ______

decreases; supply

According to aggregate demand and supply analysis, the negative demand shock of 2000 -2004 had the effect of

decreasing aggregate output, raising unemployment, and lowering inflation

According to aggregate demand and supply analysis, the negative supply shocks of 1973 -1975 and 1978-1980 had the effect of

decreasing aggregate output, raising unemployment, and raising the price level

A group of economists believe that the natural rate of output is affected by aggregate ________ shocks. They contend that the natural rate level of unemployment and output are subject to ________, a departure from full employment levels as a result of past high unemployment.

demand; hysterisis

Everything else held constant, if interest rates are expected to fall in the future, the ____ for long-term bonds today ____, and the interest rate today ____

demand; increases; falls

If stock prices are expected to climb next year, everything else held constant, the ____ curve for bonds shift ____ and the interest rate ____

demand; left; rises

When the exchange rate changes from 0.5 British pounds per dollar to 0.75 British pounds per dollar, then the British pound has ____ and the US dollar has ____

depreciated; appreciated

common stock

dividend payments can change depending on how the corporation is doing

preferred stock

dividends are fixed, regardless of how the corporation is doing

When Americans or foreigners expect the return on ____ assets to be high relative to return on ____ assets, there is higher demand for dollar assets and the foreign currency will ____ against the dollar

dollar; foreign; depreciate

There are two types of open market operations: ____ open market operations are intended to change the level of reserves and the monetary base, and ____ open market operations are intended to offset movements in other factors that affect the monetary base

dynamic; defensive

When banks use the same contract for a mortgage loan thereby reducing the transaction cost, this is an example of ____

economies of scale

The political business cycle refers to the phenomenon that just before elections, politicies enact ____ policies. After the elections, the bad effects of these policies (for example, ____) have to be counteracted with ____ policies

expansionary; higher inflation rate; contractionary

Everything else held constant, increased demand for a country's ____ causes its currency to appreciate in the long run, while increased demand for ____ causes its currency to depreciate

exports; imports

The aggregate demand curve is the total quantity of an economy's

final goods and services demanded at different price levels

the aggregate supply curve is the total quantity of

final goods and servies offered for sale at different price levels

investment banking

financial activities that involve underwriting new security issues and providing advice and financial services to clients, particularly with respect to mergers and acquisitions

the short-run aggregate supply curve is upward sloping because in the shrot run, costs of many factors that go into producing goods and services are _____, meaning that the prce for a unit of output will _____ relative to input prices and the profit per unit will rise

fixed; rise

growth stocks

focusing on growth of the corporation; not expecting dividends right away

prime rate

formerly, the interest rate banks charged on six- month loans to high- quality borrowers; currently an interest rate banks charge primarily to smaller borrowers

behavioral economics

generally say that consumers act "rationally"; trying to explain why people make irrational decisions that are inconsistent with their goals

The ability of a central bank to set monetary goals is

goal independence

If merchants in the country Alpha choose to close their doors, preferring to be stuck with rotting merchandise rather than worthless currency, then one can conclude that Alpha is experiencing ____

hyperinflation

A reduction of aggregate demand may raise the natural rate of unemployment above the full employment level, meaning that the self-correcting mechanism will only be able to return the economy to the natural rate level of output and unemploymentNnot to the full employment levels. Such a view is consistent with

hysterisis

long position

in a futures contract, the right and obligation of the buyer to receive or buy the underlying asset on the specified future date

short position

in a futures contract, the right and obligation of the seller to sell or deliver the underlying asset on the specified future date

marketing to market

in the futures market, a daily settlement in which the exchange transfers funds from a buyer's account to a seller's account or vice versa, depending on changes in the price of the contract

margin requirement

in the futures market, the minimum deposit that an exchange requires from the buyer and seller of a financial asset; reduces default risk

Everything else held constant, the interest rate on municipal bonds rises relative to the interest rate on Treasury securities when...

income tax rates are lowered

Everything else held constant, a balanced budget increase in government spending(that is, an increase in government spending that is matched by an identical increase in net taxes) will

increase aggregate demand, but not by as much as if just government spending increases

All else held constant, when Simon deposits $200 cash into his bank account, reserves in the banking system ____ and the monetary base ____

increase by $200; remains unchanged

According to aggregate demand and supply analysis, the rising oil prices coupled with the subprime financial crisis in 2007-2008 caused the unemployment rate to ________ and the level of real aggregate output to ________.

increase; decrease

A decrease in the expected inflation rate causes the demand for bonds to ____ the supply of bonds to ____, and interest rates to ____, everything else held constant

increase; decrease; decrease

Suppose the economy is producing at the natural rate of output and the government passes legislation that severely restricts a company's ability to reduce production costs via outsourcing. Everything else held constant, this policy action will cause ____ in the unemployment rate in the short run and ____ in inflation in the short run

increase; increase

Suppose the economy is initially operating at full employment and the target rate of inflation when, everything else held constant, there is an autonomous ____ in financial frictions causing output to fall in the short-run. The Fed will intervene by ____ interest rates in order to shift the AD curve ____

increase; lowering; rightward

A fall in the level of prices...

increases the value of money

Everything else held constant, a decrease in net taxes _____ aggregate ______

increases; demand

Everything else held constant, an increase in government spending _______ aggregate ______

increases; demand

Everything else held constant, an increase in net exports _____ aggregate _______

increases; demand

Everything else held constant, an increase in planned investment expenditure aggregate ________

increases; demand

Expansionary monetary policy ____ stock prices due to a decrease in the ____ and an increase in the ____, everything else held constant

increases; required rate of return; dividend growth rate

Everything else held constant, a decrease in the cost of production ________ aggregate ________.

increases; supply

According to aggregate demand and supply analysis, the favorable supply shock of 1995 -1999 had the effect of

increasing aggregate output, lowering unemployment, and lowering inflation

According to aggregate demand and supply analysis, Americaȇs involvement in the Vietnam War had the effect of

increasing aggregate output, lowering unemployment, and raising the price level

noise trading

involves investors overreacting to good or bad news

Holding large amounts of bank capital helps prevent bank failures because

it can be used to absorb the losses resulting from bad loans

Suppose when it rains, you are always 3 minutes late for class. According to the rational expectations theory, you should:

leave 3 minutes earlier when it rains

the positively sloped short run aggregate supply curve reflects the assumption that factor prices are

less flexible than output prices

By looking at aggregate demand through its component parts, we can conclude that a ______ price level _____ the real quantity of money, ______ higher spending

lower; expands; encouraging

zero-sum game

means that if the seller makes a profit, the buyer must suffer a loss of exactly the same amount (and vice versa)

The different between money and income is that...

money is a stock and income is a flow

An example of the problem of ____ is when a corporation uses the funds raised from selling bonds to fund corporate expansion to pay for Caribbean cruises for all its employees and their families.

moral hazard

All ____ are required to be members of the Fed

national banks chartered by the Office of the Comptroller of the Currency

the long-run rate of unemployment to which an economy always gravitates is the

natural rate of unemployment

A decrease in the availability of raw materials that increases the price level is called a ________ shock

negative supply

Suppose the economy is producing at the natural rate of output. A decrease in consumer and business confidence will cause ________ in real GDP in the long run and ________ in the aggregate price level in the long run, everything else held constant.

no change, a decrease

Suppose the economy is producing at the natural rate of output. An open market purchase of bonds by the Fed will cause ________ in real GDP in the long run and ________ in the aggregate price level in the long run, everything else held constant.

no change, an increase

Suppose the U.S. economy is producing at the natural rate of output. An appreciation of the U.S. dollar will cause ________ in real GDP in the short run and ________ in the aggregate price level in the long run, everything else held constant. (Assume the appreciation causes no effects in the supply side of the economy.)

no change; a decrease

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 long run and ________ in the aggregate price level in the long run, everything else held constant.

no change; a decrease

Suppose the economy is producing at the natural rate of output. Assuming a fixed natural rate of output and everything else held constant, the development of a new, more productive technology will cause ________ in the unemployment rate in the long run and ________ in the aggregate price level in the short run.

no change; a decrease

16) Suppose the U.S. economy is producing at the natural rate of output. A depreciation of the U.S. dollar will cause ________ in real GDP in the short run and ________ in the aggregate price level in the long run, everything else held constant. (Assume the depreciation causes no effects in the supply side of the economy.)

no change; an increase

Suppose the U.S. economy is operating at potential output. A negative supply shock that is accommodated by an open market purchase by the Federal Reserve will cause ________ in real GDP in the long run and ________ in the aggregate price level in the long run, everything else held constant.

no change; an increase

Suppose the economy is producing at the natural rate of output. An increase in consumer and business confidence will cause ________ in real GDP in the long run and ________ in the aggregate price level in the long run, everything else held constant.

no change; an increase

Suppose the economy is producing at the natural rate of output. Assuming a fixed natural rate of output and everything else held constant, the development of a new, more productive technology will cause ________ in the unemployment rate and ________ in the aggregate price level in the long run.

no change; no change

Suppose the federal funds rate is below the discount rate and above the interest rate paid on excess reserves. When the Fed conducts open market purchases, the ____ portion of the monetary base ____ thereby ____ the federal funds rate

non-borrowed increases; decreasing

Everything else held constant, when the Fed sells a $1- million bond to a primary dealer at a bank, the ____ portion of the monetary base ____ and the money supply ____

non-borrowed; decreases; decreases

Everything else held constant, when the Fed extends a $100 million discount loan the ____ portion of the monetary base ____ and the money supply ____

non-borrowed; rises; rises

If aggregate output is below the natural rate level, advocates of the non-activists policies would recommend that the government do...

nothing (non-activists do not want government intervention)

The global financial crisis led to a decline in stock prices because...

of a lowered expected dividend growth rate

When the economy is hit by a negative demand shock the central bank pursues policies to increase aggregate demand to its initial level, then in the long run...

output will be at its potential and inflation will be unchanged

When the economy is hit by a temporary adverse supply shock and the central bank does not respond by changing the autonomous component of monetary policy, then in the long run...

output will be at its potential and inflation will be unchanged

Everything else held constant, aggregate demand increases when

planned investment spending increases

A corporation acquires new funds only when its securities are sold in the...

primary market by an investment bank

In the simple deposit expansion model, an expansion in checkable deposits of $1,000 when the required reserve ratio is equal to 10 percent implied that the Fed...

purchased $100 in government bonds

The Federal Reserve Banks are ____ institutions since they are own by the ____

quasi-public; private commercial banks in the district where the Reserve Bank is located

Everything else held constant, in the market for reserves, when the federal funds rate is 1%, increasing the interest rate paid on excess reserves from 1% to 2%...

raises the federal funds rate

Everything else held constant, in the market for reserves, when the federal funds rate is 5% and borrowed reserves are greater than zero, raising the discount rate for 5% to 6%...

raises the federal funds rate

January effect

rates of return on stocks in the month of January are traditionally higher; doesn't matter what kind of stock either

Because shifts in aggregate demand are not viewed as being particularly important to aggregate output fluctuations, they do not see much need for activist policy to eliminate high unemployment. ȈTheyȈ refers to proponents of

real business cycle theory

small firm effect

refers to the fact that over the long run, investment in small firms has yielded higher return than has investment in large firms

herd behavior

relatively uninformed investors imitate the behavior of other investors rather than attempt to trade on the basis of fundamental values

inside information

relevant information about a security that is not publicly available

inside information

relevant information about a security that is not publicly available (think Martha Stewart...)

A $100 deposit into my checking account at My Bank increases my checkable deposits by $100, and the bank's ____ by $100.

reserves

required reserves

reserves the Fed requires banks to hold against demand deposit and NOW account balances

Suppose the economy is initially operating at full employment and the target rate of inflation when there is an autonomous increase in business confidence. In the short run, inflation will ____ the target rate of inflation and the Fed will intervene by conducting open market ____ in order to ____ the autonomous interest rate.

rise above; sales; raise

In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, a ____ in the reserve requirement increases the demand for reserves, ____ the federal funds interest rate, everything else held constant

rise; raising

The aggregate demand-aggregate supply framework indicates that the long-run effect of a ________ in the money supply is an increase in ________, everything else held constant.

rise; the price level

13) If workers demand and receive higher real wages (a successful wage push), the cost of production ________ and the short-run aggregate supply curve shifts ________.

rises; leftward

systematic risk

risk that results from generl price fluctuations in the stock market that effects all stocks

unsystematic (or idiosyncratic)

risk that results from movements in the price of that particular stock that are not caused by general fluctuations in the stock market

systemic risk

risk to the entire financial system rater than to individual firms or investors

Everything else held constant, when the Federal Reserves conducts open market ____ the ____ bonds shifts right causing interest rates to ____

sales; supply of; rise

Everything else held constant, a change in workersȇ expectations about the aggregate price level will cause ________ to change.

short-run aggregate supply

A negative supply shock causes ________ to ________.

short-run aggregate supply; decrease

A positive supply shock causes ________ to ________.

short-run aggregate supply; increase

Everything else held constant, if workers expect an increase in the price level, ________ aggregate supply ________.

short-run; decreases

Everything else held constant, when actual output exceeds the natural rate of output ________ aggregate supply ________.

short-run; decreases

broker

someone who buys and sells securities for someone else

asset

something of value that an individual oe a firm owns; in particular, a financial claim

liability

something that an individual or a firm owes; a claim on an individual or a firm

According to the expectations theory, a(n) ____ yield curve predicts a future increase in inflation

steeply upward sloping

Patrick places his pocket change into his piggy bank on his desk each evening. By his actions, Patrick is using currency to fulfill which function of money?

store of value

When the government has a surplus, as occurred in the late 1990s, the ____ curve of bonds shifts to the ____, the price of bonds ____, and interest rates ____, everything else held constant.

supply; left; rise; fall

Everything else held constant, aggregate demand increases when

taxes are cut

Everything else held constant, aggregate demand increases when ____

taxes are cut

mean reversion

tendency for stocks that have recently been earning high returns to experience low returns in the future and vice versa

relationship banking

the ability of banks to assess credit risks on the basis of private information about borrowers

The total quantity of an economy's final goods and services demanded at different price levels is

the aggregate demand curve

behavioral finance

the application of concepts from behavioral economics to understand how people make choices in financial markets

efficient market hypothesis

the application of rational expectations to financial markets; the hypothesis that the equilibrium price of a security is equal to its fundamental value

efficient markets hypothesis

the application of rational expectations to financial markets; the hypothesis that the equilibrium price of a security is equal to its fundamental value

adaptive expectations

the assumption that people forecast future values of a variable using only past values of the variable

rational expectations

the assumption that people make forecasts of future values of a variable using all available information; formally the assumption that expectations equal optimal forecasts, using all available information

rational expectations

the assumption that people make forecasts of future values of a variable using all available information; formally, the assumption that expectations equal optimal forecasts, using all available information

transactions costs

the cost of a trade or a financial transaction; for example, the brokerage commission charged for buying or selling a financial asset

transaction costs

the cost of a trade or a financial transaction; for example, the brokerage commission charged for buying or selling a financial assets

information costs

the costs that savers incur to determine the creditworthiness of borrowers and to monitor how the use the funds acquired

information costs

the costs that savers incur to determine the creditworthiness of borrowers and to monitor how they use the funds acquired

Critics of the current system of Fed independence contend that

the current system is undemocratic

settlement date

the date on which the delivery of a commodity or financial asset specified in a forward contract must take place

net interest margins

the difference between the interest a bank receives on its securities and loans and the interest it pays on deposits and debts, decided by the total value of its earning assets

bank capital

the difference between the value of a bank's assets and the value of its liabilities; also called shareholder's equity

net worth

the difference between the value of a firm's assets and the value of its liabilities

interest rate risk

the effect of a change in market interest rates on a bank's profit or capital

As approached through the quantity theory of money, aggregate demand is derived from

the equation of exchange

The quantity theory of money is derived from

the equation of exchange

dividend yield

the expected annual dividend divided by the current price of a stock

required return on equities

the expected return necessary to compensate for the risk of investing in stocks

initial public offering (IPO)

the first time a firm sells stock to the public

law of one price

the fundamental economic idea that identical products should sell for the same price everywhere

law of one price

the fundamental economic idea that identical products should sell for the same price everywhere ** nominal exchange rate should settle on the same price everywhere

Using the Gordon growth model, a stock's current price decreases when...

the growth rate of dividends decreases

required return of equities

the lowest return you require on equities in order to be interested in buying them

the mix of stocks and bonds a firm uses to raise funds is called: A) diversification B) capital structure C) market value D) asset management

principal agent problem

the moral hazard problem of managers (the agents) pursuing their own interest rater than those of shareholders (the principals)

The long-run aggregate supply curve is a vertical line passing though

the natural rate of output

liquidity risk

the possibility that a bank may not be able to meet its cash needs by selling assets or raising funds at a reasonable costs

spot price

the price at which a commodity or financial asset can be sold at the current date

strike price

the price at which the buyer of an option has the right to buy or sell the underlying asset

the aggregate supply curve shows the relationship between

the price level and the level of aggregate output supplied

option premium

the price of an option

nominal exchange rate

the price of one currency in terms of another currency; also called the exchange rate

adverse selection

the problem investors experience in distinguishing low risk borrowers from high risk borrowers before making an investment

adverse selection

the problem investors experience in distinguishing low-risk borrowers from high-risk borrowers before making an investment

financial arbitrage

the process of buying and selling securities to profit from price changes over a brief period of time

credit risk analysis

the process that bank loan officers use to screen loan applicants

interest rate parity condition

the proposition that differences in interest rates on similar bonds in different countries reflect expectations of future changes in exchange rates

real exchange rate

the rate at which goods and services in one country can be exchanged for goods and services in another country

return on equity (ROE)

the ratio of the value of a bank's after tax profit to the value of its capital

return on assets (ROA)

the ratio of the value of a bank's after-Tax profit to the value of its assets

bank leverage

the ratio of the value of a bank's assets to the value of its capital, the inverse of which (capital to assets) is called a bank's leverage ratio

The time it takes for policy makers to be sure of what the data are signaling about the future course of the economy is called...

the recognition lag

economies of scale

the reduction in average cost that results from an increase in the volume of a good or service produced

economies of scale

the reduction in average costs that results from an increase in the volume of a good or service produced

credit rationing

the restriction of credit by lenders such that borrowers cannot obtain the funds they desire at the given interest rate

credit rationing

the restriction of credit by lenders with the result that borrowers cannot obtain all the funds they desire at the given interest rate

exchange rate risk

the risk that an investor or firm will suffer losses because of fluctuations in exchange rates

credit risk

the risk that borrowers might default on their loans

moral hazard

the risk that people will take actions after they have entered into a transaction that will make the other party worse off

counterparty risk

the risk that the person or firm on the other side of the transaction will default

The fact that an economy always returns to the natural rate level of output is known as

the self-correcting mechanism

asymmetric information

the situation in which one party to an economic transaction has better information than does the other party

dual banking system

the system in the united states in which banks are chartered by either a state government or the federal government

theory of purchasing power (ppp)

the theory that exchange rates move to equalize the purchasing power of different currencies

Theory of purchasing power parity (PPP)

the theory that exchange rates move to equalize the purchasing power of different currencies **leads to a prediction about movements in exchange rates in the long run

Theoretically, one can distinguish a demand-pull inflation from a cost-push inflation by comparing...

the unemployment rate with its natural rate level

random walk

the unpredictable movements in the price of a security

speculate

to place financial bets, as in buying or selling futures or option contracts, in an attempt to profit from movements in asset prices

hedge

to take action to reduce risk by, for example, purchasing a derivative contract that will increase in value when another asset in an investor's portfolio decreases in value

Jacob notices that jackets are on sale for $89. In this case, money is functioning as a...

unit of account

notional principal

used as a base for calculations but is not an amount actually transferred between the counterparties

excess volatility

volatility in stock prices are consistently higher than in the market prices

The theory of bureaucratic behavior when applied to the Fed helps to explain why the Fed...

Econ 2035 Final (Part 1)

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