Econ 215 HW

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

A. whether the public holds the proceeds as currency or deposits them as checkable deposits.

Everything else held constant, an increase in the U.S. demand for foreign goods causes the supply of dollars to __________ and the dollar will __________ relative to foreign currencies. A. Increase; Appreciate B Increase; Depreciate C. Decrease; Appreciate D. Decrease; Depreciate

B Increase; Depreciate

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

B. $50 increase in reserves and a $50 increase in checkable deposits.

At the beginning of the year, you buy a share of Apple stock for $130. If during the year you receive a dividends of $4, and stock is selling for 130 at the end of the year, what was your rate of return from investing in the stock? A. 34% B. -20% C. 4% D. -26%

B. -20%

Suppose a tube of Colgate costs 250 Yen in Tokyo and $5 in San Francisco. If the real exchange rate is one-fourth of a tube of Colgate in the U.S. for one tube of Colgate in Tokyo, how many yen should you receive in exchange for $1? A. 50 B. 200 C. 12.5 D. 100

B. 200

Suppose an investment bank is buying $50 million in long-term mortgage-backed securities and finances the investment by borrowing 80% and paying for the other 20% out of equity. What is the bank's leverage? A. 10 B. 5 C. 0.20 D. 4

B. 5

If the U.S. enters a period of deflation, while Mexico experiences inflation, we would expect ______ in the long run. A. .S. productivity to have increased more slowly than Mexican productivity. B. the U.S. dollar to appreciate against the Mexican peso. C. interest rates in the United States to be higher than interest rates in Mexico. D. the U.S. dollar to depreciate against the Mexican peso.

B. the U.S. dollar to appreciate against the Mexican peso.

If investors expect the future value of the U.S. dollar to decrease relative to the value of the euro, everything else held constant, this would cause all of the following EXCEPT: A. the demand for the U.S. dollars to decrease today B. the supply of the U.S. dollars to decrease today C. the euro to appreciate against the U.S. dollar today D. the U.S. dollar to depreciate against the euro today

B. the supply of the U.S. dollars to decrease today

Which of the following is NOT an example of adverse selection? A. A terminal cancer patient buys life insurance. B. A company in serious financial trouble offers to pay you 30% on a loan. C. A family with a home ten feet from a large river buys flood insurance. D. A company uses the proceeds of a new stock sale to build an unnecessarily luxurious new headquarters.

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

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. The real exchange rate should equal one. C. 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. D. A country with a higher inflation rate should experience an appreciation of its currency.

D. A country with a higher inflation rate should experience an appreciation of its currency.

Which of the following is a type of risk faced by commercial banks A. credit risk B. liquidity risk C. interest-rate risk D. All of the above

D. All of the above

An article in the Wall Street Journal discussed the fact that the Chinese government often intervenes to keep banks that make many bad loans from failing. The result was​ "moral hazard, or​ risk-taking based on the belief that someone else will pick up the tab if things go​ wrong." If the article is correct about what was happening in the Chinese banking​ system, what problems might arise as a​ result? A. Banks will become too restrictive and begin rationing credit. B. Risky borrowers will be less likely to apply for loans from banks. C. Banks will become less restrictive and begin rationing credit. D. Banks will make riskier and riskier loans over time

D. Banks will make riskier and riskier loans over time

In an interview in July​ 2020, during the​ Covid-19 pandemic, Federal Reserve Bank of Dallas President Robert Kaplan​ stated: "I just​ don't want to pull out one objective . . . pulling out inflation . . . without regard to other​ considerations, and without regard to the second part of the dual​ mandate." What was Kaplan referring to as the​ "second part of the dual​ mandate"? A. Low interest rates B. Low taxes C. High exchange rates D. High employment

D. High employment

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.

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

Which of the following is True about the Federal Reserve System? A. The majority of voting members of FOMC are selected from presidents of the Federal Reserve district banks. B. It is impossible for an individual to serve more than 14 years in the Board of Governors. C. President of the New York Federal Reserve Bank always votes on the target for the federal funds rate. D. conducting open market operations is part of the duties of the 12 Federal Reserve district banks.

C. President of the New York Federal Reserve Bank always votes on the target for the federal funds rate.

A Big Mac costs 400 yen in Japan and 50 pesos in Mexico. The purchasing power parity theory would predict that the exchange rate in the long run is A. 1 peso = 0.125 yen. B. 1 yen = 8 pesos. C. 1 yen = 20,000 pesos. D. 1 peso = 8 yen.

D. 1 peso = 8 yen.

Suppose there are two vacancies on the Board of Governors. Therefore, the make-up of the FOMC in this case would have______members: the_______ current members of the Board of Governors and the presidents of ______of the Federal Reserve Banks. A. 17; 5; 12 B. 12; 5; 7 C. 10; 7; 3 D. 10; 5; 5

D. 10; 5; 5

Suppose the value of a bank's assets is $80 billion and the value of its liabilities is $72 billion. If the bank has a 2% ROA, when is its ROE A. 10% B. 16% C. 2.22% D. 20%

D. 20%

In what ways are dividends similar to and different from coupons on​ bonds? A. Dividends are typically associated with equity​ investments, and coupons are associated with debt investments. B. Dividends and coupons are forms of payments to investors. C. Dividends and coupons are payments to stockholders based on a​ firm's profits. D. A and B only. E. All of the above.

D. A and B only.

when the exchange rate between the US dollar and the Swedish krona changes from 9.191 SEK per dollar to 11.029 SEK per dollar, everything else held constant, the US dollar has __________ and __________ expensive A. Depreciated; American cars sold in Sweden become more B. Appreciated; Swedish cars sold in the US become more C. Appreciated; Swedish cars sold in the US become less D. Appreciated; American cars sold in Sweden become less

C. Appreciated; Swedish cars sold in the US become less

Rising stock prices __________ household wealth, which __________ consumption spending. A. Increase; Decreases B. Decrease; Decrease C. Increase; Increase D. Decrease; Increase

C. Increase; Increase

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

C. It reduces the interest-rate of lenders

Before 2008, what was the most important monetary policy tool that the Fed relied​ on? A. Discount policy B. Interest rate on reserve balances C. Open market operations D. Reserve requirements

C. Open market operations

How do banks manage liquidity​ risk? A. Banks manage this risk by keeping some funds very​ liquid, such as a reverse repurchase agreement. Banks can increase their borrowings to cover liquidity risk. B. Banks can increase their assets to cover liquidity risk. C. Banks manage this risk by keeping some funds very​ liquid, such as in the federal funds market. D. Only A, B, and D are correct E. Only A, B, and C are correct F. All of the above are correct

D. Only A, B, and D are correct

Following the meeting of the Federal Open Market Committee on June​ 10, 2020, the Committee released a statement that contained the​ following: The ongoing public health crisis will weigh heavily on economic​ activity, employment, and inflation in the near​ term, and poses considerable risks to the economic outlook over the medium term. In light of these​ developments, the Committee decided to maintain the target range for the federal funds rate at 0 to​ 1/4 percent. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals. This statement shows the FOMC using a monetary policy tool. Briefly explain which monetary policy tool it was. A. Dollar exchange​ rate, since the Fed plans to manage the dollar exchange rate in order to keep the federal funds rate at its target ra

D. Open market​ operations, since the Fed plans to keep buying securities to keep the federal funds rate at its target rate.

What is the purpose of gap analysis and duration​ analysis? A. The purpose of gap analysis is to determine the​ bank's sensitivity to interest rate​ movements, whereas the purpose of duration analysis is to determine the​ bank's sensitivity to the liquidity risk. B. The purpose of both analysis is to determine the​ bank's sensitivity to the liquidity risk. C. The purpose of gap analysis is to determine the​ bank's sensitivity to the liquidity​ risk, whereas the purpose of duration analysis is to determine the​ bank's sensitivity to interest rate movements. D. The purpose of both analysis is to determine the​ bank's sensitivity to interest rate movements.

D. The purpose of both analysis is to determine the​ bank's sensitivity to interest rate movements.

On a bank's balance sheets, liabilities are A. The uses of acquired funds B. All those items of value owned by banks C. By definition equal to bank's asset D. The sources of acquired funds

D. The sources of acquired funds

Financial intermediaries have reduced lawyers' fees, which is an example of ___________ by taking advantage of __________. A. transaction costs, relationship banking B. Information costs, economies of scale C. Information costs, relationship banking D. Transaction costs, economies of scales

D. Transaction costs, economies of scales

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 a decrease in bank reserves of $10 million. B. a decrease in securities held of $10 million and a decrease in bank reserves of $10 million. C. an increase 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 an increase in bank reserves of $10 million.

D. a decrease in securities held of $10 million and an increase in bank reserves of $10 million.

Suppose the Federal Reserve announces contractionary monetary policy while, at the same time, the European Central Bank announces a more expansionary monetary policy. Everything else held constant, this would cause the U.S dollar to_________ against the Euro. A. remain constant B. change ambiguously C. depreciate D. appreciate

D. appreciate

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. setting the salaries of the presidents and officers of district banks D. carrying out open market operations

D. carrying out open market operations

Falling stock prices ________ the funds that firms can raise, which ________ their spending on physical capital. A. decreases; increases B. increases; decreases C. increases; increases D. decreases; decreases

D. decreases; decreases

According to the Gordon growth model, which of the following can cause the value of a stock to decline? A. decreased required return on equity B. higher expected growth rate of dividends C. lower short-term interest rate D. increased idiosyncratic risk

D. increased idiosyncratic risk

Before 2008, if the Fed desired to reduce the federal funds rate Ait would conduct an open market sale, increasing reserve demand. B. it would conduct an open market sale, reducing reserve supply. C. it would conduct an open market purchase, reducing reserve demand. D. it would conduct an open market purchase, increasing reserve supply.

D. it would conduct an open market purchase, increasing reserve supply.

After 2008, what were two most important monetary policy tools that the Fed relied on? A. the term deposit facility and discount loan forgiveness B. discount loan forgiveness and overnight reverse repos C. paying interest on bank reserves and the term deposit facility D. paying interest on bank reserves and overnight reverse repos

D. paying interest on bank reserves and overnight reverse repos

If the Fed purchases $10,000 worth of securities and the required reserve ratio is 8%, by how much will deposits change (assuming no change in excess reserves or the nonbank public's currency holdings)? A. rise by $10,000 B. rise by $80,000 C. decline by $10,000 D. rise by $125,000

D. rise by $125,000

Suppose Exxon-Mobil announces that its profits in the third quarter of 2020 were $40 billion. This will cause the price of Exxon-Mobil stock to A. fall. B. rise. C. remain unchanged. D. rise, fall, or remain unchanged depending on the expectations of market participants before the announcement.

D. rise, fall, or remain unchanged depending on the expectations of market participants before the announcement.

If investors are becoming concerned that investments in Argentina are at increased risk of default, these investors would be inclined to ________ Argentine pesos, ________ the value of the Argentine peso relative to other currencies. A. buy; raising B. buy; lowering C. sell; raising D. sell; lowering

D. sell; lowering

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

D. setting the federal funds rate.

In what ways is the Fed subject to external​ pressure? A. The Congress scrutinizes​ Fed's budgetary requests and can reduce the amounts requested if the Fed has fallen out of favor with key members of the House or Senate. B. The Congress can amend the​ Fed's charter and powers or even abolish it entirely. C. The president can exercise control over the membership of the Board of Governors and appoint a new chairman every four years. D. Through negative reporting journalists can rally public sentiment against Fed policies. E. Only B and C are correct F. Only A and C are correct G. All of the above are correct

E. Only B and C are correct

The required return on equity for an individual stock includes which of the following? A. idiosyncratic risk B. systemic risk C. risk-free interest rate E. all of the above

E. all of the above

How do banks manage credit​ risk? A. Banks can manage credit risk by diversifying their assets. B. Banks can manage credit risk by performing credit risk​ analysis, requiring borrowers to put up​ collateral, and using credit rationing. C. Banks can manage risk by creating​ long-term business relationships by which the bank could acquire information about the creditor. D. Only A and B are correct E. Only A and C are correct F. All of the above are correct

F. All of the above are correct

Suppose the value of a bank's variable-rate assets is $200 million, and the value of its variable-rate liabilities is $150 million dollar. Since this bank has a __________ gap, an increase in market interest rates will __________ bank profits. A. Positive; Increase B. Negative; Increase C. Negative; Decrease D. Positive; Decrease

A. Positive; Increase

Everything else held constant, which of the following changes would shift the demand curve for U.S. dollars to the left A. A decrease in the foreign demand for the U.S. goods B. The value of the dollar is expected to increase relative to the value of foreign currency in the future C. A decrease in the information costs of the U.S. financial assets D. An increase in the liquidity of U.S. financial assets.

A. A decrease in the foreign demand for the U.S. goods

We can think of a​ bank's liabilities as the sources of its​ funds, and we can think of a​ bank's assets as the uses of its funds. What does this​ mean? A. A​ bank's liabilities, principally deposits, and​ borrowings, are the sources of the funds the bank invests. A​ bank's assets, principally loans and​ securities, are the​ bank's uses of those funds. B. In order to create​ assets, banks have to borrow money. C. A​ bank's assets can be thought of as the uses of its funds because banks use assets to purchase securities. A​ bank's liabilities can be thought of as the sources of its funds because liabilities are the sources of profit for a bank. D. A​ bank's liabilities, principally loans, and​ securities, are the sources of the funds the bank invests. A​ bank's assets, principally deposits, and​ borrowings, are the​ bank's uses of those funds.

A. A​ bank's liabilities, principally deposits and​ borrowings, are the sources of the funds the bank invests. A​ bank's assets, principally loans and​ securities, are the​ bank's uses of those funds.

What is the maximum length a member of the Board of Governors can serve? A. Between 14 and just under 28 years B. 14 years C. 28 years D. 4 years

A. Between 14 and just under 28 years

Which of the following is NOT true of adverse selection? A. It describes a lender's problem in verifying borrowers are using their funds as intended. B. It arises because borrowers typically know more than lenders. C. It would not exist in a world of perfect information. D. It describes a lender's problem of distinguishing the good-risk applicants from the bad-risk applicants.

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

Suppose a bank's assets have an average duration of 5 years, and its liabilities have an average duration of 3 years. Since this bank has a __________ duration gap, an increase in market interest rate will __________ bank capital. A. Positive; Decrease B. Negative; Decrease C. Negative; Increase D. Positive; Increase

A. Positive; Decrease

Which body is more important within the Federal Reserve​ System, the Board of Governors or the Federal Open Market​ Committee? A. The Board of Governors since they control reserve​ requirements, the discount​ rate, and hold a majority of the seats on the Federal Open Market Committee. B. The Board of Governors since it is made up of the top 7 of the 12 Federal Reserve branch bank presidents who directly control monetary policy in their regions. C. The Federal Open Market Committee since they control reserve​ requirements, the discount​ rate, and are independent of any influence from Congress. D. The Federal Open Market Committee since they are the main policy making arm of the Federal Reserve System and took over control of monetary policy from the Board of Governors during the​ 2007-2009 financial crisis.

A. The Board of Governors since they control reserve​ requirements, the discount​ rate, and hold a majority of the seats on the Federal Open Market Committee.

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

A. The Canadian dollar to depreciate against the U.S. dollar

A Big Mac cost 400 yen in Japan and 50 pesos in Mexico. If the actual exchange rate is 1 peso= 8 yen, we can conclude that in this case A. The law of one price hold and the numbers are consistent with the theory of purchasing power parity. B. The law of one price does not hold but the numbers are consistent with the theory of purchasing power parity. C. The law of one price does not hold the number are not consistent with the theory of purchasing power parity. D. The law of one price hold and the numbers are not consistent with the theory of purchasing power parity.

A. The law of one price hold and the numbers are consistent with the theory of purchasing power parity.

Which of the following statements is INCORRECT? A. The member commercial banks have considerable influence over monetary policy. B. All nationally chartered banks are required to be members of the Fed. C. The Federal Reserve Bank of New York is a home to the Fed's open market trading desk. D. The Fed does not receive funds from the Treasury to operate.

A. The member commercial banks have considerable influence over monetary policy.

According to the Principal-Agent view, we should expect a political business cycle since the Fed would want to avoid conflicts with groups that could limit its power, influence, and prestige. A. True B. False

A. True

Corporates are more likely to raise funds externally using debit instead of equity because debt contracts less moral hazard problems than equity contracts A. True B. False

A. True

The interest-rate parity condition holds that if the interest rate on a one-year German bond is 3% and the interest rate on a one-year U.S. bond is 1%, the dollar is expected to appreciate by 2% against the euro. A. True B. False

A. True

Suppose, while cleaning out its closets, a worker at the Federal Reserve Bank of Atlanta discovers a painting of Elvis (medium oil on velvet) that used to grace the walls of the conference room. Suppose further that, at a public auction, the bank sells the painting for $24.95. This sale will cause______in the monetary base, everything else held constant. A. a decrease of $24.95 B. an increase of more than $24.95 C. an increase of $24.95 D. a decrease of more than $24.95

A. a decrease of $24.95

Members of the Board of Governors are A. appointed by the President of the United States, subject to confirmation by the Senate. B. appointed by the National Monetary Commission. C. elected by the district bank presidents. D. appointed by the Securities and Exchange Commission, subject to congressional veto.

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

Moral hazard problems arise when A. borrowers have an incentive to act in ways that do not reflect the lender's interests. B. a downturn in economic activity makes repaying loans difficult for borrowers. C. lenders have difficulty in distinguishing between good and lemon firms. D. borrowers default on loans.

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

Which of the following is NOT a responsibility of the Board of Governors A. carrying out open market operations B. setting the salaries of the presidents and officers of district banks C. determining permissible activities for bank holding companies D. approving bank mergers.

A. carrying out open market operations

After 2008, an expansionary monetary policy involves _________. A. decreasing both interest rates on reserve balances and ON RRP rate B. increasing interest rates on reserve balances and decreasing ON RRP rate C. increasing both interest rates on reserve balances and ON RRP rate D. decreasing interest rates on reserve balances and increasing ON RRP rate

A. decreasing both interest rates on reserve balances and ON RRP rate

Suppose all assets and liabilities can be split into two categories: fixed-rate and variable-rate. Bank profits will decline following a decrease in interest rates if the value of its A. fixed-rate assets is less than the value of its fixed-rate liabilities. B. fixed-rate liabilities is greater than the value of its variable-rate liabilities. C. fixed-rate assets is greater than the value of its variable-rate assets. D. fixed-rate assets is greater than the value of its fixed-rate liabilities.

A. fixed-rate assets is less than the value of its fixed-rate liabilities.

Suppose the currency-to-checkable deposit ratio decreases while, at the same time, the excess reserve-to-checkable deposit ratio also decreases. Everything else held constant, these changes would______the money supply. A. increase B. have no effect on C. decrease D. have an ambiguous effect on

A. increase

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

A. increase systemic risk

The "lemons problem" in the used car market arises from A. the difficulty buyers have in distinguishing good cars from lemons. B. the reluctance of many car dealers to handle used cars. C. the tendency of buyers of used cars to pay for them with bad checks. D. the difficulty U.S. producers have in making reliable cars.

A. the difficulty buyers have in distinguishing good cars from lemons.

What is the difference between adaptive expectations and rational​ expectations? A. Rational expectations assume that​ investors' expectations are based on past values of a​ variable, whereas adaptive expectations assume that investors make forecasts of future values using all available information. B. Adaptive expectations assume that​ investors' expectations are based on past values of a​ variable, whereas rational expectations assume that investors make forecasts of future values using all available information. C. Adaptive expectations assume that​ investors' expectations are based on the future values of a​ variable, whereas rational expectations assume that investors make forecasts using all available information. D. Adaptive expectations assume that​ investors' expectations are based on one​ variable, whereas rational expectations assume that investors make forecasts of future values using mu

B. Adaptive expectations assume that​ investors' expectations are based on past values of a​ variable, whereas rational expectations assume that investors make forecasts of future values using all available information.

How are the​ principal-agent view and the public interest view connected to the theory of the political business​ cycle? A. Under both views the Fed lowers interest rates to stimulate the economy before an election to avoid conflict with groups that could limit its power and influence. B. The political business cycle would be more likely with the​ principal-agent view where the Fed lowers interest rates to stimulate the economy before an election to avoid conflict with groups that could limit its power and influence. C. The political business cycle would be more likely with the public interest view where the Fed lowers interest rates to stimulate the economy before an election to avoid conflict with groups that could limit its power and influence. D. These views are unrelated to the theory of the political business cycle.

B. The political business cycle would be more likely with the​ principal-agent view where the Fed lowers interest rates to stimulate the economy before an election to avoid conflict with groups that could limit its power and influence.

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. Unforecastable C. Equal to today's price minus yesterdays price D. Zero

B. Unforecastable

The main reason why banks are the leading source of external finance for businesses is A. government regulators encourage small businesses to obtain funding from banks. B. banks have an information-cost advantage in reducing adverse selection problems. C. the interest rates on bank loans are usually lower than interest rates on corporate bonds. D. interest paid on bank loans is deductible against the corporate income tax, whereas interest paid on corporate bonds is not.

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

Suppose Bash the Investor deposits $1 million of currency into his checking account. Bash's action, everything else held constant, will cause total reserves in the banking system to______ and the monetary base to______. A. increase; remain unchanged B. decrease; remain unchanged C. decrease; decrease D. decrease; increase

B. decrease; remain unchanged

Suppose the Bank of Japan's deposits at the Fed are expected to decrease permanently. Everything else held constant, the most appropriate action for the Fed to take to combat this situation would be a _____ open market _____ of bonds. A. defensive; sale B. dynamic; sale C. defensive; purchase D. dynamic; purchase

B. dynamic; sale

The problem of moral hazard A. is considerably more serious when an investor buys a firm's bonds than when the investor buys a firm's stock. B. is considerably more serious when an investor buys a firm's stock than when the investor buys a firm's bonds. C. is equally serious whether an investor buys a firm's bonds or a firm's stock. D. is nonexistent for investors who buy corporate bonds or stock.

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

If commercial banks are holding excess reserves, then the size of money multiplier A. is equal to the simple deposit multiplier B. is less than the simple deposit multiplier C. is infinite. D. is greater than the simple deposit multiplier

B. is less than the simple deposit multiplier

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.

B. manage liquidity risk.

Netflix announces that its profits for the first quarter of 2022 rose roughly 10% to $7.87 billion. As a result of this announcement, the price of Netflix's stock declined. The best explanation of this is A. market participants expected Netflix's profits to be less than $7.87 billion. B. market participants expected Netflix's profits to be greater than $7.87 billion. C. market participants expected Netflix's profits to be $7.87 billion. D. market participants have adaptive expectations.

B. market participants expected Netflix's profits to be greater than $7.87 billion.

The United States is said to have a dual banking system because banks A. may operate as profit making institutions or as nonprofits. B. may be chartered either by state governments or by the federal government. C. can either be privately owned or publically owned. D. may have service areas that are either strictly local or national.

B. may be chartered either by state governments or by the federal government.

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. monetary policy is too important and too technical to be determined in the political arena. C. the Constitution requires it. D. congressional control of the Fed was tried during the 1960s and did not work well.

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

The paycheck protection program is part of the bast economic rescue package intended to help small businesses that are affected by the COVID-19 to raise funds to keep their workers on the payroll. The program requires that the federal money is used to cover payroll costs, mortgage interest, rent or utilities. This is a real-world example of using __________ to reduce ___________. A. credit rationing; adverse selection B. restrictive covenant; moral hazard C. credit rationing mortal hazard D. restrictive covenant; adverse selection

B. restrictive covenant; moral hazard

Suppose the required reserve ratio is 10% and the Fed purchases $100 million worth of Treasury bills from Wells Fargo. What is the maximum amount that Wells Fargo can lend out? A. $10 million. B. $110 million. C. $100 million. D. $90 million.

C. $100 million.

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

C. $50 increase in reserves and a $50 increase in checkable deposits.

Suppose that a Big Mac costs 100 Yen in Tokyo and $5 in New York. If the real exchange rate is one Big Mac in New York for one-half of a Big Mac in Tokyo, how many yen should you receive in exchange for $1? A. 500 B. 100 C. 10 D. 50

C. 10 (100/5= 20)(20x1/2= 10)

At the beginning of the year, you buy a share of Apple stock for $120. If during the year you receive a dividend of $2.50, and Apple stock is selling for $130 at the end of year, what was your rate of return from investing in the stock? A. 8.33% B. 9.62% C. 10.42% D. 12%

C. 10.42%

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

C. 12

How many feral Reserve Districts are there? A. 1 B. 2 C. 12 D. 50

C. 12

Suppose the value of a bank's assets is $80 billion and the value of its liabilities is $72 billion. If the bank has a 2% ROA, then what is its ROE? A. 16% B. 2.22% C. 20% D. 10%

C. 20%

In​ 2019, a Federal Reserve publication​ stated: "The Federal Reserve can no longer effectively influence the FFR by small changes in the supply of​ reserves." Is this statement​ true?A. No, the FFR always reacts to the level of​ reserves, so any changes in reserves by the Fed will impact the FFR. B. No, since the 20072009 financial​ crisis, the Fed has fixed the FFR to match the level of reserves held in the banking system. C. Yes, since the 20072009 financial​ crisis, banks have held substantial excess​ reserves, so small changes in reserves by the Fed do not significantly influence the FFR. D. Yes, since the 20072009 financial​ crisis, banks have stopped holding excess reserves​ altogether, so small changes in reserves have no impact on the FFR.

C. Yes, since the 20072009 financial​ crisis, banks have held substantial excess​ reserves, so small changes in reserves by the Fed do not significantly influence the FFR.

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

C. above-normal profits will be eliminated in the trading process.

The problem created by asymmetric information before the transaction occurs is called __________, while the problem created after the transaction occurs is called __________. A. moral hazard; adverse selection B. costly state verification; free riding C. adverse selection; moral hazard D. free riding; costly state verification

C. adverse selection; moral hazard

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

C. an increase in discount loans of $2 million and an increase in bank reserves of $2 million.

Which of the following increases the M2 multiplier? A. an increase in the currency-to-deposit ratio B. an increase in the required reserve ratio C. an increase in the nonbank public's preference for non-transaction accounts relative to checkable deposits D. a decrease in the nonbank public's preference for money market-type accounts relative to checkable deposits

C. an increase in the nonbank public's preference for non-transaction accounts relative to checkable deposits

When the value of the euro changes from $1.14 to $1.23, the euro has______ and the U.S. dollar has ______. A. depreciated; appreciated B. depreciated; depreciated C. appreciated; depreciated D. appreciated; appreciated

C. appreciated; depreciated

Lenders may be reluctant to increase the interest rate they charge borrowers because these higher interest rates may A. attract more creditworthy borrowers, increasing adverse selection. B. attract more creditworthy borrowers, decreasing adverse selection. C. attracts less creditworthy borrowers, increasing adverse selection. D. attract less creditworthy borrowers, decreasing adverse selection.

C. attracts less creditworthy borrowers, increasing adverse selection.

If a bank has a negative gap and a positive duration gap, an increase in market interest rate will _____ bank profits and _____ bank capital respectively. A. increase, increase B. decrease, increase C. decrease, decrease D. increase, decrease

C. decrease, decrease

Suppose the Federal Reserve reduces interest rates while interest rates in Europe do not change. Everything else held constant, this will ________ demand for dollars, causing the dollar to _____ against the euro. A. increase; appreciate B. increase; depreciate C. decrease; depreciate D. decrease; appreciate

C. decrease; depreciate

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

C. equal to the price of the stock in the current period.

Which of the following is NOT an example of transaction costs? A. brokerage commissions B. lawyers' fees C. high interest rates D. minimum investment requirements

C. high interest rates

The presence of information and transactions cost result in all of the following EXCEPT A. some funds not being lent at all. B. reduced efficiency of financial markets. C. higher returns for savers. D. borrowers need to pay more for funds.

C. higher returns for savers.

Why are corporations more likely to raise funds externally by debt instead of equity? A. interest rates tend to be lower than dividend rates B. to avoid paying dividends C. moral hazard is less of a problem with debt contracts D. transactions costs tend to be higher in the stock market than bond market

C. moral hazard is less of a problem with debt contracts

The demand for U.S. dollars represents A. the demand for U.S. goods and financial assets by households and firms within the United States. B. the willingness of households and firms that own dollars to exchange them for foreign currency. C. the demand for U.S. goods and financial assets by households and firms outside the United States. D. 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 outside the United States.

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

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