Money and banking exam practice

The most important advantage of discount policy is that the Fed can use it to

B) perform its role as lender of last resort.

The M2 money multiplier is

B) positively related to the time deposit ratio.

Either a dual or hierarchial mandate is acceptable as long as ________ is the primary goal in the ________.

B) price stability; long run

An expansionary monetary policy lowers the real interest rate, causing the domestic currency to ________, thereby ________ net exports.

C) depreciate; raising

When the exchange rate for the British pound changes from $1.80 per pound to $1.60 per pound, then, holding everything else constant, the pound has ________ and ________ expensive.

C) depreciated; American wheat sold in Britain becomes more

According to the interest parity condition, if the domestic interest rate is 10 percent and the foreign interest rate is 12 percent, then the expected ________ of the foreign currency must be ________ percent.

C) depreciation; 2

The volume of loans that the Fed makes to banks is affected by the Fed's setting of the interest rate on these loans, called the

C) discount rate.

If the interest rate is 7 percent on euro-denominated assets and 5 percent on dollar-denominated assets, and if the dollar is expected to appreciate at a 4 percent rate, the expected return on ________-denominated assets in terms of ________ percent

C) dollar; euros is 9

As the relative expected return on dollar assets increases, foreigners will want to hold more ________ assets and less ________ assets, everything else held constant.

C) dollar; foreign

The Fed was committed to keeping interest rates low to assist Treasury financing of budget deficits

C) during World War I and World War II.

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

C) dynamic; defensive

Suppose on any given day the prevailing equilibrium federal funds rate is below the Federal Reserve's federal funds target rate. If the Federal Reserve wishes for the federal funds rate to be at their target level, then the appropriate action for the Federal Reserve to take is a ________ open market ________, everything else held constant.

C) dynamic; sale

The theory of portfolio choice suggests that the most important factor affecting the demand for domestic and foreign assets is the ________ on these assets relative to one another.

C) expected return

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.

C) exports; imports

Fed policy since the early 1990s indicates that it is pursuing a policy of targeting the

C) federal funds interest rate.

The interest rate charged on overnight loans of reserves between banks is the

C) federal funds rate

Since the early 1990s, the Fed has conducted monetary policy by setting a target for the

C) federal funds rate.

Which of the following is NOT a requirement in selecting a policy instrument?

C) flexibility

An increase in which of the following leads to a decline in the monetary base?

C) foreign deposits at the Fed

In an agreement to exchange dollars for euros in three months at a price of $0.90 per euro, the price is the

C) forward exchange rate.

An agreement to exchange dollar bank deposits for euro bank deposits in one month is a

C) forward transaction.

Everything else held constant, in the market for reserves, when the demand for federal funds intersects the reserve supply curve on the vertical section, increasing the discount rate

C) has no effect on the federal funds rate.

Everything else held constant, in the market for reserves, when the federal funds rate is 3%, increasing the interest rate paid on excess reserves from 1% to 2%

C) has no effect on the federal funds rate.

Everything else held constant, in the market for reserves, when the federal funds rate is 3%, lowering the discount rate from 5% to 4%

C) has no effect on the federal funds rate.

Everything else held constant, in the market for reserves, when the federal funds rate is 3%, lowering the interest rate paid on excess reserves rate from 2% to 1%

C) has no effect on the federal funds rate.

Everything else held constant, in the market for reserves, when the federal funds rate is 3%, raising the discount rate from 5% to 6%

C) has no effect on the federal funds rate.

Everything else held constant, in the market for reserves, when the supply for federal funds intersects the reserve demand curve on the downward sloping section, decreasing the interest rate paid on excess reserves

C) has no effect on the federal funds rate.

Which set of goals can, at times, conflict in the short run?

C) high employment and price level stability

According to Tobin's q theory, if q is ________, new plant and equipment capital is ________ relative to the market value of business firms, so companies can buy a lot of new investment goods with only a ________ issue of stock.

C) high; cheap; small

By the standard of low-grade bonds, interest rates were ________ and monetary policy was ________ during the Great Depression.

C) high; tight

When bad storms slow the check-clearing process, float tends to ________ causing the Fed to initiate ________ open market ________.

C) increase; defensive; sales

When bad storms slow the check-clearing process, float tends to ________ causing the Fed to initiate defensive open market ________.

C) increase; sales

The theory that monetary policy conducted on a discretionary, day-by-day basis leads to poor long-run outcomes is referred to as the

C) time-inconsistency problem

Due to the lack of timely data for the price level and economic growth, the Fed's strategy

C) uses an intermediate target, such as an interest rate.

Everything else held constant, an increase in the excess reserve ratio will mean ________ in the M2 money multiplier and ________ in the M2 money supply.

D) a decrease; a decrease

Everything else held constant, an increase in the required reserve ratio will mean ________ in the M2 money multiplier and ________ in the M2 money supply.

D) a decrease; a decrease

Everything else held constant, an increase in the required reserve ratio will result in ________ in M1 and ________ in M2.

D) a decrease; a decrease

According to the efficient markets hypothesis, the current price of a financial security

fully reflects all available relevant information.

One suggested method of dealing with the too-big-to-fail problem is to reimpose the restrictions that were in place under

glass-stegall

Second Bank of the United States

had its charter renewal vetoed in 1832.

Because information is scarce

monitoring managers gives rise to costly state verification.

in the one-period valuation model, the current stock price increases if

the expected sales price increases.

Using the Gordon growth model, a stock's current price decreases when

the growth rate of dividends decreases.

The exchange rate is

D) the price of one currency relative to another.

Economists believe that countries recently suffering hyperinflation have experienced

A) reduced growth.

The theory of PPP suggests that if one country's price level rises relative to another's, its currency should

A) depreciate in the long run.

With a 10 percent interest rate on dollar deposits, and an expected appreciation of 7 percent over the coming year, the expected return on dollar deposits in terms of the dollar is

10 percent.

A simple deposit multiplier equal to one implies a required reserve ratio equal to

100

Using the one-period valuation model, assuming a year-end dividend of $0.11, an expected sales price of $110, and a required rate of return of 10%, the current price of the stock would be

100.10

Using the Gordon growth formula, if D1 is $1.00, ke is 10% or 0.10, and g is 5% or 0.05, then the current stock price is

20

In the simple deposit expansion model, if the banking system has excess reserves of $75, and the required reserve ratio is 20%, the potential expansion of checkable deposits is

375

If the required reserve ratio is 25 percent, the simple deposit multiplier is

4

If during the past decade the average rate of monetary growth has been 5% and the average inflation rate has been 5%, everything else held constant, when the Federal Reserve announces that the new rate of monetary growth will be 10%, the adaptive expectation forecast of the inflation rate is

5%

An increase in U.S. Treasury deposits at the Fed reduces both ________ and the ________.

A) reserves; monetary base

Using the one-period valuation model, assuming a year-end dividend of $1.00, an expected sales price of $100, and a required rate of return of 5%, the current price of the stock would be

96.19

If in an efficient market all prices are correct and reflect market fundamentals, which of the following is a FALSE statement?

A stock that has done poorly in the past is more likely to do well in the future.

If the dollar appreciates from 1.5 Brazilian reals per dollar to 2.0 reals per dollar, the real depreciates from ________ per real to ________ per real.

A) $0.67; $0.50

On January 25, 2009, one U.S. dollar traded on the foreign exchange market for about 49.0 Indian rupees. Thus, one Indian rupee would have purchased about ________ U.S. dollars

A) 0.02

On January 25, 2009, one U.S. dollar traded on the foreign exchange market for about 3.33 Romanian new lei. Therefore, one Romanian new lei would have purchased about ________ U.S. dollars.

A) 0.30

If the U.S. dollar appreciates from 1.25 Swiss franc per U.S. dollar to 1.5 francs per dollar, then the franc depreciates from ________ U.S. dollars per franc to ________ U.S. dollars per franc.

A) 0.80; 0.67

Estimates from large macroeconometric models of the U.S. economy suggests that it takes over ________ for monetary policy to affect output and over ________ for monetary policy to affect the inflation rate.

A) 1 year; 2 years

If the Japanese yen appreciates from $0.01 per yen to $0.02 per yen, the U.S. dollar depreciates from ________ per dollar to ________ per dollar.

A) 100¥; 50¥

If the interest rate on euro-denominated assets is 13 percent and it is 15 percent on peso-denominated assets, and if the euro is expected to appreciate at a 4 percent rate, for Francois the Frenchman the expected rate of return on peso-denominated assets is

A) 11 percent.

The real bills doctrine was the guiding principle for the conduct of monetary policy during the

A) 1910s.

The Fed accidentally discovered open market operations in the early

A) 1920s.

________ in the domestic interest rate causes the demand for domestic assets to increase and the domestic currency to ________, everything else held constant.

A) An increase; appreciate

________ in the domestic interest rate causes the demand for domestic assets to shift to the right and the domestic currency to ________, everything else held constant.

A) An increase; appreciate

________ in the expected future domestic exchange rate causes the demand for domestic assets to increase and the domestic currency to ________, everything else held constant

A) An increase; appreciate

________ in the expected future domestic exchange rate causes the demand for domestic assets to shift to the right and the domestic currency to ________, everything else held constant.

A) An increase; appreciate

________ in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to appreciate, everything else held constant.

A) An increase; increase

________ in the expected future domestic exchange rate causes the demand for domestic assets to ________ and the domestic currency to appreciate, everything else held constant.

A) An increase; increase

________ in the domestic interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to appreciate, everything else held constant.

A) An increase; right

________ in the expected future domestic exchange rate causes the demand for domestic assets to shift to the ________ and the domestic currency to appreciate, everything else held constant.

A) An increase; right

________ bubble is driven entirely by unrealistic optimistic expectations.

A) An irrational exuberance

In the model of the money supply process for M2, the relationship between checkable deposits and the M2 money supply is represented by

A) D = × M2.

Although the subprime mortgage market problem began in the United States, the first indication of the seriousness of the crisis began in

A) Europe.

When the Treasury acquires gold or SDRs, it issues certificates to the ________, which are a claim on the gold or SDRs, and in turn is credited with deposit balances at the ________.

A) Federal Reserve System; Fed

One suggested method of dealing with the too-big-to-fail problem is to reimpose the restrictions that were in place under

A) Glass-Steagall.

Which of the following is a disadvantage to monetary targeting?

A) It relies on a stable money-inflation relationship

Which investment bank filed for bankruptcy on September 15, 2008 making it the largest bankruptcy filing in U.S. history?

A) Lehman Brothers

________ are the most important monetary policy tool because they are the primary determinant of changes in the ________, the main source of fluctuations in the money supply.

A) Open market operations; monetary base

In the FOMC's "Statement on Long-Run Goals and Monetary Policy Strategy,"the FOMC agreed to a single numerical value of the inflation objective, 2% on the ________.

A) PCE deflator

________ examines whether one variable has an effect on another by simply looking directly at the relationship between the two variables.

A) Reduced-form evidence

Analysis of the transmission mechanisms of monetary policy provides four basic lessons for a central bank's conduct of monetary policy. Which of the following is NOT one of these lessons?

A) Rising interest rates indicate a tightening of monetary policy, whereas falling interest rates indicate an easing of monetary policy.

________ is a process of bundling together smaller loans (like mortgages) into standard debt securities.

A) Securitization

Assume that the following are the predicted inflation rates in these countries for the year: 2% for the United States, 3% for Canada; 4% for Mexico, and 5% for Brazil. According to the purchasing power parity and everything else held constant, which of the following would we expect to happen?

A) The Brazilian real will depreciate against the U.S. dollar

Which of the following is an advantage to money targeting?

A) There is an immediate signal on the achievement of the target

The Fed's holdings of securities consist primarily of ________, but also in the past have included ________.

A) Treasury securities; bankers' acceptances

A serious consequence of a financial crisis is

A) a contraction in economic activity.

When financial intermediaries deleverage, firms cannot fund investment opportunities resulting in

A) a contraction of economic activity.

The FOMC "Statement on Long-Run Goals and Monetary Policy Strategy"made it clear that the Federal Reserve would be pursuing ________, consistent with its dual mandate

A) a flexible form of inflation targeting

A central bank has ________ chance to identify a credit-driven bubble compared to an irrational exuberance bubble.

A) a greater

In pursuing a strategy of monetary targeting, the central bank announces that it will achieve a certain value (the target) of the annual growth rate of a ________.

A) a monetary aggregate

A nominal variable, such as the inflation rate or the money supply, which ties down the price level to achieve price stability is called ________ anchor

A) a nominal

If the Fed wants to temporarily inject reserves into the banking system, it will engage in

A) a repurchase agreement.

After 2003, The Federal Reserve usually keeps the discount rate

A) above the target federal funds rate.

Funds held in ________ are subject to reserve requirements.

A) all checkable deposits

Having interest rate stability

A) allows for less uncertainty about future planning.

Debt deflation occurs when

A) an economic downturn causes the price level to fall and a deterioration in firms' net worth because of the increased burden of indebtedness.

The theory of PPP suggests that if one country's price level rises relative to another's, its currency should

A) depreciate.

Targeting interest rates can be procyclical because

A) an increase in income increases interest rates, causing the Fed to buy bonds, increasing the monetary base and money supply, leading to further increases in income.

Everything else held constant, a decrease in the currency ratio will mean ________ in the M1 money multiplier and ________ in the M2 money multiplier.

A) an increase; an increase

Everything else held constant, an increase in the money market fund ratio will mean ________ in the M2 money multiplier and ________ in the M2 money supply.

A) an increase; an increase

Everything else held constant, an increase in the time deposit ratio will mean ________ in the M2 money multiplier and ________ in the M2 money supply.

A) an increase; an increase

A central feature of monetary policy strategies in all countries is the use of a nominal variable that monetary policymakers use as an intermediate target to achieve an ultimate goal such as price stability. Such a variable is called a nominal

A) anchor.

When the effects of the global financial crisis started to spread more quickly throughout the rest of the world, the U.S. dollar ________ because demand for U.S. assets ________

A) appreciated; increased

A possible sequence for the three stages of a financial crisis might be ________ leads to ________ leads to ________.

A) asset price declines; banking crises; unanticipated decline in price level

When asset prices rise above their fundamental economic values, a(n) ________ occurs.

A) asset-price bubble

When asset prices increase above their fundamental values it is called an

A) asset-price bubble.

Although foreign exchange market trades are said to involve the buying and selling of currencies, most trades involve the buying and selling of

A) bank deposits denominated in different currencies.

If uncertainty about banks' health causes depositors to begin to withdraw their funds from banks, the country experiences a(n)

A) banking crisis.

The Fed prefers that ________ so that ________.

A) banks borrow reserves from each other; banks can monitor each other for credit risk

If the central bank pursues a monetary policy that is more expansionary than what firms and people expect, then the central bank must be trying to

A) boost output in the short run.

Large fluctuations in money supply growth and smaller fluctuations in the federal funds rate between October 1982 and the early 1990s indicate that the Fed had shifted to ________ as an operating target.

A) borrowed reserves

A financial crisis occurs when an increase in asymmetric information from a disruption in the financial system

A) causes severe adverse selection and moral hazard problems that make financial markets incapable of channeling funds efficiently.

According to Tobin's q theory, when equity prices are low the market price of existing capital is ________ relative to new capital, so expenditure on fixed investment is ________.

A) cheap; low

The global financial crisis showed the need for increased financial regulation, however, too much or poorly designed regulation could

A) choke off financial innovation.

A ________ pays out cash flows from a collection of assets in different tranches, with the highest-rated tranch paying out first, while lower ones paid out less if there are losses on the underlying assets.

A) collateralized debt obligation (CDO)

When financial institutions go on a lending spree and expand their lending at a rapid pace they are participating in a

A) credit boom.

The economy recovers quickly from most recessions, but the increase in adverse selection and moral hazard problems in the credit markets caused by ________ led to the severe economic contraction known as The Great Depression.

A) debt deflation

A substantial decrease in the aggregate price level that reduces firms' net worth may stall a recovery from a recession. This process is called

A) debt deflation.

In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, a decline in the reserve requirement ________ the ________ curve of reserves and causes the federal funds interest rate to fall, everything else held constant.

A) decreases; demand

In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, a decline in the reserve requirement ________ the demand of reserves, ________ the federal funds rate, everything else held constant.

A) decreases; lowering

Open market operations intended to offset movements in noncontrollable factors (such as float) that affect reserves and the monetary base are called

A) defensive open market operations

When the Federal Reserve engages in a repurchase agreement to offset a withdrawal of Treasury funds from the Federal Reserve, the open market operation is said to be

A) defensive.

If Treasury deposits at the Fed are predicted to increase, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves

A) defensive; inject

If float is predicted to decrease because of good weather, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves.

A) defensive; inject

Suppose on any given day there is an excess supply of reserves in the federal funds market. If the Federal Reserve wishes to keep the federal funds rate at its current level, then the appropriate action for the Federal Reserve to take is a ________ open market ________, everything else held constant.

A) defensive; sale

When the value of loans begins to drop, the net worth of financial institutions falls causing them to cut back on lending in a process called

A) deleveraging

Anything that increases the demand for foreign goods relative to domestic goods tends to ________ the domestic currency because domestic goods will only continue to sell well if the value of the domestic currency is ________, everything else held constant.

A) depreciate; lower

Which of the following are NOT liabilities on the Fed's balance sheet?

A) discount loans

Everything else held constant, the vertical section of the supply curve of reserves is lengthened when the

A) discount rate increases.

The Federal Reserve ________ pay interest on reserves held on deposit. The European System of Central Banks ________ pay interest on reserves held on deposit.

A) does; does

When the European System of Central Banks uses long-term refinancing operations, it is similar to the Federal Reserve using

A) dynamic open market operations

High inflation can spiral out of control when

A) expected inflation increases nominal interest rates, causing the Fed to buy bonds, increasing the money supply and further increasing inflation.

According to the household liquidity effect, higher stock prices lead to increased consumption expenditures because consumers

A) feel more secure about their financial position.

A major disruption in financial markets characterized by sharp declines in asset prices and firm failures is called a

A) financial crisis.

If the real exchange rate between the United States and Japan is ________, then it is cheaper to buy goods in Japan than in the United States.

A) greater than 1.0

Most U.S. financial crises have started during periods of ________ either after the start of a recession, a stock market crash, or the failure of a major financial institution.

A) high uncertainty

Agency problems in the subprime mortgage market included all of the following EXCEPT

A) homeowners could refinance their houses with larger loans when their homes appreciated in value.

Assuming initially that the required reserve ratio = 10%, the currency-deposit ratio = 75%, and the excess reserve ratio = 156%, an increase in the currency-deposit ratio to 150% causes the M1 money multiplier to ________, everything else held constant.

A) increase from 0.73 to 0.78

When the Fed wants to raise interest rates after banks have accumulated large amounts of excess reserves, it would

A) increase the interest rate paid on excess reserves.

Suppose a report was released today that showed the Euro-Zone inflation rate is running above the European Central Bank's inflation rate target. This leads people to expect that the European Central Bank will enact contractionary policy in the near future. Everything else held constant, the release of this report would immediately cause the demand for U.S. assets to ________ and the U.S. dollar will ________.

A) increase; appreciat

A decrease in the foreign interest rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant

A) increase; appreciate

An increase in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant

A) increase; appreciate

An increase in the expected future domestic exchange rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant.

A) increase; appreciate

Suppose that the European Central Bank enacts expansionary policy. Everything else held constant, this will cause the demand for U.S. assets to ________ and the U.S. dollar to ________.

A) increase; appreciate

Suppose that the Federal Reserve conducts an open market sale. Everything else held constant, this will cause the demand for U.S. assets to ________ and the U.S. dollar will ________.

A) increase; appreciate

Macroprudential supervision policies try to prevent a leverage cycle by changing capital requirements so that they ________ during an expansion and ________ during a downturn.

A) increase; decrease

If Treasury deposits at the Fed are predicted to ________, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves.

A) increase; defensive; inject

Franco Modigliani has found that an expansionary monetary policy can cause stock market prices to ________ and consumption to ________.

A) increase; increase

The growth of the subprime mortgage market led to

A) increased demand for houses and helped fuel the boom in housing prices.

During the bank panics of the Great Depression the excess reserve ratio

A) increased sharply

During the 2007-2009 financial crisis the excess reserve ratio

A) increased sharply.

During the bank panics of the Great Depression the currency ratio

A) increased sharply.

The Fed operating procedures employed between 1979 and 1982 resulted in ________ swings in the federal funds rate and ________ swings in the M1 growth rate.

A) increased; increased

According to the Taylor Principle, when the inflation rate rises, the nominal interest rate should be ________ by ________ than the inflation rate increase.

A) increased; more

Everything else held constant, in the market for reserves, when the demand for federal funds intersects the reserve supply curve along the horizontal section, increasing the discount rate

A) increases the federal funds rate.

Everything else held constant, in the market for reserves, when the federal funds rate equals the interest rate paid on excess reserves, raising the interest rate paid on excess reserves

A) increases the federal funds rate.

High unemployment is undesirable because it

A) results in a loss of output

In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, an open market purchase ________ the ________ of reserves which causes the federal funds rate to fall, everything else held constant.

A) increases; supply

Microprudential supervision focuses on the safety and soundness of

A) individual financial institutions

The time-inconsistency problem with monetary policy tells us that, if policymakers use discretionary policy, there is a higher probability that the ________ will be higher, compared to policy makers following a behavior rule.

A) inflation rate

The FOMC finally moved to ________ on January 25, 2012, when it issued its "Statement on Long-Run

A) inflation targeting

In a world with few impediments to capital mobility, the domestic interest rate equals the sum of the foreign interest rate and the expected depreciation of the domestic currency, a situation known as the

A) interest parity condition

The Fed-Treasury Accord of March 1951 provided the Fed greater freedom to

A) let interest rates increase.

Periods of price deflation, such as the Great Depression, are characterized by

A) low nominal rates but high real rates of interest.

According to Tobin's q theory, when q is ________, firms will not purchase new investment goods because the market value of firms is ________ relative to the cost of capital.

A) low; low

The purpose of the commitment by the Fed to keep the federal funds rate at zero for a long period of time is to

A) lower the long term interest rates.

Everything else held constant, in the market for reserves, when the federal funds rate is 5%, lowering the discount rate from 5% to 4%

A) lowers the federal funds rate.

In response to the early Keynesians, monetarists contended that

A) monetary policy during the Great Depression was not easy.

The Federal Reserve has been ________ preemptive because of the changing view that monetary policy has to be ________ looking.

A) more; forward

Everything else held constant, when a country's currency appreciates, the country's goods abroad become ________ expensive and foreign goods in that country become ________ expensive.

A) more; less

The Fed's open market operations normally involve only the purchase of government securities, particularly those that are short-term. However, during the crisis, the Fed started new programs to purchase

A) mortgage-backed securities and long-term Treasuries.

To lower interest rates on residential mortgages to stimulate the housing market, the Fed extended its open market operations to purchase

A) mortgage-backed securities.

Early Keynesians concluded that changes in monetary policy had no impact on aggregate output because early empirical studies found no linkage between movements in ________ and ________.

A) nominal interest rates; investment spending

Suppose it takes roughly two years for monetary policy to have a significant impact on inflation. If inflation is currently low but policymakers believe inflation will rise over the next two years with an unchanged stance of monetary policy, when should they tighten monetary policy to prevent the inflationary surge

A) now

If the central bank targets a monetary aggregate, it is likely to lose control over the interest rate because

A) of fluctuations in the demand for reserves.

Under Alan Greenspan and Ben Bernanke, the Federal Reserve was successful in pursuing a ________ policy.

A) preemptive

The primary goal of the European Central Bank is

A) price stability.

The discount rate refers to the interest rate on

A) primary credit.

The originate-to-distribute business model has a serious ________ problem since the mortgage broker has little incentive to make sure that the mortgagee is a good credit risk.

A) principal-agent

A borrowed reserves target is ________ because increases in income ________ interest rates and discount loans, causing the Fed to ________ the monetary base, everything else held constant.

A) procyclical; increase; increase

Suppose the Bank of China permanently decreases its purchases of U.S. government bonds and, instead, holds more dollars on deposit at the Federal Reserve. Everything else held constant, a open market ________ would be the appropriate monetary policy action for the Fed to take to offset the expected ________ in the monetary base in the United States.

A) purchase; decrease

A Fed purchase of gold, SDRs, a deposit denominated in a foreign currency or any other asset is just an open market ________ of these assets, ________ the monetary base.

A) purchase; raising

Everything else held constant, when the current value of the domestic exchange rate increases, the ________ of domestic assets ________.

A) quantity supplied; does not change

The Fed's mistakes of the early 1930s were compounded by its decision to

A) raise reserve requirements in 1936-1937.

A rise in stock prices ________ the net worth of firms and so leads to ________ investment spending because of the reduction in moral hazard.

A) raises; higher

The Fed can engage in preemptive strikes against a rise in inflation by ________ the federal funds interest rate; it can act preemptively against negative demand shocks by ________ the federal funds interest rate.

A) raising; lowering

Evidence from the United States during the period 1973-2002 indicates that the value of the dollar and the measure of the ________ interest rate rose and fell together.

A) real

n its earliest years, the Federal Reserve's guiding principle for the conduct of monetary policy was known as the

A) real bills doctrine.

A decrease in the foreign interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to ________, everything else held constant.

A) right; appreciate

An increase in the domestic interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to ________, everything else held constant.

A) right; appreciate

An increase in the expected future domestic exchange rate causes the demand for domestic assets to shift to the ________ and the domestic currency to ________, everything else held constant.

A) right; appreciate

During the Great Depression, real interest rates

A) rose to unprecedentedly high levels

In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, then an open market ________ the supply of reserves, raising the federal funds interest rate, everything else held constant.

A) sale decreases

Which is the most important category of Fed assets?

A) securities

If mortgage brokers do not make a strong effort to evaluate whether the borrower can pay off a loan, this creates a

A) severe adverse selection problem

Today 1 euro can be purchased for $1.10. This is the

A) spot exchange rate.

Predicting the impact of institutional change on the effectiveness of monetary policy is best done with a

A) structural model.

Even if the Fed could completely control the money supply, monetary policy would have critics because

A) the Fed is asked to achieve many goals, some of which are incompatible with others.

If the inflation rate in the United States is higher than that in Mexico and productivity is growing at a slower rate in the United States than in Mexico, then, in the long run, ________, everything else held constant.

A) the Mexican peso will appreciate relative to the U.S. dollar

According to the purchasing power parity theory, a rise in the United States price level of 5 percent, and a rise in the Mexican price level of 6 percent cause

A) the dollar to appreciate 1 percent relative to the peso.

In a study published in 1963, Milton Friedman and Anna Schwartz found that in every business cycle they studied over nearly a hundred-year period

A) the growth rate of the money supply decreased before output decreased.

An expansionary monetary policy may cause asset prices to rise, thereby reducing the likelihood of financial distress and causing consumer durable and housing expenditures to rise. This monetary transmission mechanism is referred to as

A) the household liquidity effect

The upward trend in the currency-deposit ratio during 1994-2007 can be explained by

A) the increased holdings of U.S. currency by foreigners.

The discount rate is

A) the interest rate the Fed charges on loans to banks.

Which of the following is a potential operating instrument for the central bank?

A) the monetary base

When housing prices began to decline after their peak in 2006, many subprime borrowers found that their mortgages were "underwater." This meant that

A) the value of the house fell below the amount of the mortgage.

The ________ suggests that the most important factor affecting the demand for domestic and foreign assets is the expected return on domestic assets relative to foreign assets.

A) theory of portfolio choice

The ________ states that exchange rates between any two currencies will adjust to reflect changes in the price levels of the two countries.

A) theory of purchasing power parity

The Volcker Rule addresses the off-balance-sheet problem involving

A) trading risks.

The monetary transmission mechanism that links monetary policy to GDP through real interest rates and investment spending is called the

A) traditional interest-rate channel.

The channels through which monetary policy affects economic activity are called the ________ of monetary policy.

A) transmission mechanisms

In the market for reserves, when the federal funds interest rate is below the discount rate, the supply curve of reserves is

A) vertical.

_______ occurs when market participants observe returns on a security that are larger than what is justified by the characteristics of that security and take action to quickly eliminate the unexploited profit opportunity.

Arbitrage

On January 25, 2009, one U.S. dollar traded on the foreign exchange market for about 1.15 Swiss francs. Therefore, one Swiss franc would have purchased about ________ U.S. dollars.

B) 0.87

Using Taylor's rule, when the equilibrium real federal funds rate is 2 percent, there is no output gap, the actual inflation rate is zero, and the target inflation rate is 2 percent, the nominal federal funds rate should be

B) 1 percent.

If a borrower takes out a $200 million loan in a repo agreement and is asked to post $220 million of mortgage-backed securities as collateral, the "haircut" is

B) 10%.

The interest rate for primary credit is usually set ________ basis points ________ the federal funds rate. In March 2008, this gap was changed to ________ basis points.

B) 100; above; 25

The Federal Reserve has had the authority to vary reserve requirements since the

B) 1930s.

If the interest rate is 7 percent on euro-denominated assets and 5 percent on dollar-denominated assets, and if the dollar is expected to appreciate at a 4 percent rate, for Francois the Frenchman the expected rate of return on dollar-denominated assets is

B) 9 percent

________ in the foreign interest rate causes the demand for domestic assets to ________ and the domestic currency to depreciate, everything else held constant.

B) An increase; decrease

________ in the foreign interest rate causes the demand for domestic assets to decrease and the domestic currency to ________, everything else held constant

B) An increase; depreciate

________ in the foreign interest rate causes the demand for domestic assets to shift to the left and the domestic currency to ________, everything else held constant.

B) An increase; depreciate

________ in the foreign interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to depreciate, everything else held constant.

B) An increase; left

Analysis of the transmission mechanisms of monetary policy provides four basic lessons for a central bank's conduct of monetary policy. These lessons include the following

B) Monetary policy can be highly effective in reviving a weak economy even if short-term interest rates are already near zero.

Which of the following are NOT assets on the Fed's balance sheet?

B) U.S. Treasury deposits

Suppose interest rates are kept very low for a long time such that there is a spike in the amount of lending. Everything else held constant, this could cause ________ bubble.

B) a credit-driven

The quantity of reserves supplied equals

B) nonborrowed reserves plus borrowed reserves.

U.S. Treasury deposits at the Fed are ________ for the Fed but ________ for the Treasury. Thus an increase in U.S. Treasury deposits ________ the monetary base.

B) a liability; an asset; decreases

The Fed can offset the effects of an increase in float by engaging in

B) a matched sale-purchase transaction.

Everything else held constant, when the federal funds rate is ________ the interest rate paid on reserves, the quantity of reserves demanded rises when the federal funds rate ________.

B) above, falls

Everything else held constant, an increase in the interest rate paid on checkable deposits will cause ________ in the amount of checkable deposits held relative to currency holdings and ________ in the currency ratio.

B) an increase; a decrease

The theory of PPP suggests that if one country's price level falls relative to another's, its currency should

B) appreciate in the long run.

The theory of PPP suggests that if one country's price level falls relative to another's, its currency should

B) appreciate.

An increase in productivity in a country will cause its currency to ________ because it can produce goods at a ________ price, everything else held constant.

B) appreciate; lower

A contractionary monetary policy raises the real interest rate, causing the domestic currency to ________, thereby ________ net exports.

B) appreciate; lowering

According to the interest parity condition, if the domestic interest rate is 12 percent and the foreign interest rate is 10 percent, then the expected ________ of the foreign currency must be ________ percent.

B) appreciation; 2

If monetary policy can influence ________ prices and conditions in ________ markets, then it can affect spending through channels other than the traditional interest-rate channel.

B) asset; credit

Since Regulation Q has been abolished, there have been doubts raised about the size of the effect of the ________ channel.

B) bank lending

The factor accounting for the steepest rise in the currency ratio since 1892 is

B) bank panics.

Discount policy affects the money supply by affecting the volume of ________ and the ________.

B) borrowed reserves; monetary base

The ________, the difference between the interest rate on Baa corporate bonds and U.S. Treasury bonds. rose sharply during the Great Depression.

B) credit spread

Assuming initially that the required reserve ratio = 10%, the currency-deposit ratio = 75%, and the excess reserve ratio = 156%, an increase in the excess reserve ratio to 200% causes the M1 money multiplier to ________, everything else held constant.

B) decrease from 0.73 to 0.61

When good weather speeds the check-clearing process, float tends to ________ causing the Fed to initiate defensive open market ________.

B) decrease; purchases

When the European System of Central Banks uses main refinancing operations, it is similar to the Federal Reserve using

B) defensive open market operations.

If Treasury deposits at the Fed are predicted to fall, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves

B) defensive; drain

If float is predicted to increase because of bad weather, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves.

B) defensive; drain

If float is predicted to decrease because of unseasonably good weather, the manager of the trading desk at the Federal Reserve Bank of New York will likely conduct a ________ open market ________ of securities.

B) defensive; purchase

Suppose on any given day there is an excess demand of reserves in the federal funds market. If the Federal Reserve wishes to keep the federal funds rate at its current level, then the appropriate action for the Federal Reserve to take is a ________ open market ________, everything else held constant.

B) defensive; purchase

Inflation targets can increase the central bank's flexibility in responding to declines in aggregate spending. Declines in aggregate ________ that cause the inflation rate to fall below the floor of the target range will automatically stimulate the central bank to ________ monetary policy without fearing that this action will trigger a rise in inflation expectations.

B) demand; loosen

When the exchange rate for the Mexican peso changes from 9 pesos to the U.S. dollar to 10 pesos to the U.S. dollar, then the Mexican peso has ________ and the U.S. dollar has ________.

B) depreciated; appreciated

When the value of the British pound changes from $1.50 to $1.25, then the pound has ________ and the U.S. dollar has ________.

B) depreciated; appreciated

When the value of the dollar changes from £0.5 to £0.75, then the British pound has ________ and the U.S. dollar has ________.

B) depreciated; appreciated

Everything else held constant, the vertical section of the supply curve of reserves is shortened when the

B) discount rate decreases.

When Americans or foreigners expect the return on ________ assets to be high relative to the return on ________ assets, there is a higher demand for dollar assets and a correspondingly lower demand for foreign assets.

B) dollar; foreign

The mandate for the monetary policy goals that has been given to the Federal Reserve System is an example of a ________ mandate.

B) dual

If Treasury deposits at the Fed are predicted to ________, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves

B) fall; defensive; drain

The European System of Central Banks signals the stance of its monetary policy by setting a target for the

B) overnight cash rate.

If the banking system has a large amount of reserves, many banks will have excess reserves to lend and the federal funds rate will probably ________; if the level of reserves is low, few banks will have excess reserves to lend and the federal funds rate will probably ________.

B) fall; rise

In the early 1930s, the currency-deposit ratio rose, as did the level of excess reserves. Money supply analysis predicts that, everything else held constant, the money supply should have

B) fallen.

The Fed's use of the ________ as an operating target in the 1970s resulted in ________ monetary policy.

B) federal funds rate; procyclical

During the Great Depression, Tobin's q

B) fell to unprecedentedly low levels.

If the Fed pursues a strategy of targeting an interest rate when fluctuations in money demand are prevalent

B) fluctuations of nonborrowed reserves will be large.

When workers voluntarily leave work while they look for better jobs, the resulting unemployment is called

B) frictional unemployment.

When Americans or foreigners expect the return on dollar assets to be high relative to the return on foreign assets, there is a ________ demand for dollar assets and a correspondingly ________ demand for foreign assets.

B) higher; lower

Everything else held constant, an increase in wealth will cause the holdings of checkable deposits to the holdings of currency to ________ and the currency ratio will ________.

B) increase; decrease

The subprime financial crisis caused a recession because of the ________ in adverse selection and moral hazard problems and the ________ in housing prices.

B) increase; decrease

Foreign exchange rate stability is important because a decline in the value of the domestic currency will ________ the inflation rate, and an increase in the value of the domestic currency makes domestic industries ________ competitive with competing foreign industries

B) increase; less

The Federal Reserve will engage in a repurchase agreement when it wants to ________ reserves ________ in the banking system.

B) increase; temporarily

In the late 1990s, the stock market bubble ________ the value of Tobin's q, and caused ________ in business equipment.

B) increased; overinvestment

In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, an increase in the reserve requirement ________ the ________ for reserves and causes the federal funds interest rate to rise, everything else held constant.

B) increases; demand

In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, an open market purchase ________ the supply of reserves and causes the federal funds interest rate to ________, everything else held constant.

B) increases; fall

The type of monetary policy that is used in Canada, New Zealand, and the United Kingdom is

B) inflation targeting.

Although the Fed professed employment of a monetary aggregate targeting strategy during the 1970s, its behavior suggests that it emphasized

B) interest-rate targeting.

The Fed accidentally discovered open market operations when

B) it purchased securities for income following the 1920-1921 recession.

A financial panic was averted in October 1987 following "Black Monday" when the Fed announced that

B) it would provide discount loans to any bank that would make loans to the security industry

An expansionary monetary policy raises firms' cash flows by ________ interest rates.

B) lowering nominal

An expansionary monetary policy increases net exports by ________ interest rates and ________ the value of the dollar.

B) lowering real; decreasing

Everything else held constant, in the market for reserves, when the supply for federal funds intersects the reserve demand curve along the horizontal section of the demand curve, lowering the interest rate paid on excess reserves

B) lowers the federal funds rate

Everything else held constant, in the market for reserves, when the federal funds rate equals the discount rate, lowering the discount rate

B) lowers the federal funds rate.

The equivalent to the Federal Reserve's discount rate in the European System of Central Banks is the

B) marginal lending rate

The monetary policy strategy that relies on a stable money-income relationship is

B) monetary targeting.

Early Keynesians felt that ________ policy was ________, so they stressed the importance of ________ policy.

B) monetary; ineffective; fiscal

As a result of recent empirical research, there has been a convergence of Keynesian and monetarist opinion to the view that

B) money does matter.

In practice, the Fed's policy of targeting ________ in the 1960s proved to be ________, destabilizing the economy.

B) money market conditions; procyclical

In a study published in 1963, Milton Friedman and Anna Schwartz found that in every business cycle they studied over nearly a hundred-year period, the growth rate of the ________ decreased before ________ decreased

B) money supply; output

The money supply is ________ related to expected deposit outflows, and is ________ related to the market interest rate.

B) negatively; positively

Everything else held constant, an increase in the money market fund ratio will result in ________ in the M1 money multiplier and ________ in the M2 money multiplier.

B) no change; an increase

Everything else held constant, an increase in the time deposit ratio will result in ________ in the M1 money multiplier and ________ in the M2 money multiplier

B) no change; an increase

The most common type of discount lending, ________ credit loans, are intended to help healthy banks with short-term liquidity problems that often result from temporary deposit outflows.

B) primary

Dodd-Frank addressed many of the issues that led to the financial crisis. Which of the following was NOT addressed by Dodd-Frank regulations?

B) privately owned, government-sponsored enterprises (GSEs) such as Fannie mae and Freddie Mac

In practice, the Fed's policy of targeting money market conditions in the 1960s proved to be

B) procyclical, destabilizing the economy.

The Federal Reserve System was created to

B) promote financial market stability

Suppose, at a given federal funds rate, there is an excess demand for reserves in the federal funds market. If the Fed wants the federal funds rate to stay at that level, then it should undertake an open market ________ of bonds, everything else held constant. If the Fed does nothing, however, the federal funds rate will ________.

B) purchase; increase

If the Fed expects currency holdings to rise, it conducts open market ________ to offset the expected ________ in reserves.

B) purchases; decrease

Open market purchases ________ reserves and the monetary base thereby ________ the money supply.

B) raise; raising

Due to asymmetric information in credit markets, monetary policy may affect economic activity through the balance sheet channel, where an increase in the money supply

B) raises firms' net worth, decreasing adverse selection and moral hazard problems, thus increasing banks' willingness to lend to finance investment spending.

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%

B) raises the federal funds rate.

Real interest rates are difficult to measure because

B) real interest rates depend on the hard-to-determine expected inflation rate.

The monetarist-Keynesian debate on the importance of monetary policy is unresolved because monetarists and Keynesians focus on two different types of evidence that generate conflicting conclusions. Monetarists tend to focus on

B) reduced-form evidence, while Keynesians focus on structural-model evidence.

When Keynesians argue that "correlation does not necessarily imply causation," they are probably criticizing

B) reduced-form evidence.

Monetarists directly study the link between money and economic activity using

B) reduced-form models

A decrease in ________ increases the money supply since it causes the ________ to rise.

B) reserve requirements; money multiplier

An increase in ________ reduces the money supply since it causes the ________ to fall.

B) reserve requirements; money multiplier

During World War II, whenever interest rates would ________ and the price of bonds would begin to ________, the Fed would make open market purchases.

B) rise; fall

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 ________ the demand for reserves, raising the federal funds interest rate, everything else held constant.

B) rise; increases

According to the household liquidity effect, an expansionary monetary policy causes a ________ in the value of households' financial assets, causing consumer durable expenditure to ________.

B) rise; rise

The two most important categories of assets on the Fed's balance sheet are ________ and ________ because they earn interest.

B) securities; discount loans

A criticism of the monetarist autonomous spending variable is that

B) some types of autonomous spending affect aggregate demand before the spending occurs. Some types of autonomous spending affect aggregate demand when they occur.

The immediate (two-day) exchange of one currency for another is a

B) spot transaction.

Monetarists' preference for reduced-form models is based on their belief that

B) structural models may understate money's effect on economic activity.

Unemployment resulting from a mismatch of workers' skills and job requirements is called

B) structural unemployment.

If the Brazilian demand for American exports rises at the same time that U.S. productivity rises relative to Brazilian productivity, then, in the long run, ________, everything else held constant.

B) the Brazilian real will depreciate relative to the U.S. dollar

The actual execution of open market operations is done at

B) the Federal Reserve Bank of New York.

The new Consumer Financial Protection Bureau is an independent agency but is funded and housed within

B) the Federal Reserve.

The steepest increase in the currency ratio since 1892 occurred during

B) the Great Depression.

If the U.S. Congress imposes a quota on imports of Japanese cars due to claims of "unfair" trade practices, and Japanese demand for American exports increases at the same time, then, in the long run ________, everything else held constant.

B) the Japanese yen will depreciate relative to the U.S. dollar

The theory of portfolio choice suggests that the most important factor affecting the demand for domestic and foreign assets is

B) the expected return on these assets relative to one another.

he primary indicator of the Fed's stance on monetary policy is

B) the federal funds rate.

Exchange rates are determined in

B) the foreign exchange market.

The condition that states that the domestic interest rate equals the foreign interest rate minus the expected appreciation of the domestic currency is called

B) the interest parity condition.

The starting point for understanding how exchange rates are determined is a simple idea called ________, which states: if two countries produce an identical good, the price of the good should be the same throughout the world no matter which country produces it.

B) the law of one price

An increase in Treasury deposits at the Fed causes

B) the monetary base to decrease.

When the federal funds rate equals the discount rate

B) the supply curve of reserves is horizontal.

The rate of inflation tends to remain constant when

B) the unemployment rate equals the NAIRU.

Real business cycle theorists are critical of monetarist reduced-form evidence because they believe

B) there is reverse causation from the business cycle to money.

The ________ problem of discretionary policy arises because economic behavior is influenced by what firms and people expect the monetary authorities to do in the future.

B) time-inconsistency

In the 1970s, the Fed selected an interest rate as an operating target rather than a reserve aggregate primarily because it

B) was still very concerned with achieving interest rate stability.

Everything else held constant, in the market for reserves, increases in the discount rate affect the federal funds rate

B) when the funds rate equals the discount rate.

Everything else held constant, in the market for reserves, decreases in the interest rate paid on excess reserves affect the federal funds rate

B) when the funds rate equals the interest rate paid on excess reserves.

If the British pound appreciates from $0.50 per pound to $0.75 per pound, the U.S. dollar depreciates from ________ per dollar to ________ per dollar.

B) £2; £1.33

According to PPP, the real exchange rate between two countries will always equal

C) 1.0.

On January 25, 2009, one U.S. dollar traded on the foreign exchange market for about 0.75 euros. Therefore, one euro would have purchased about ________ U.S. dollars

C) 1.33

If the interest rate on euro-denominated assets is 13 percent and it is 15 percent on peso-denominated assets, and if the euro is expected to appreciate at a 4 percent rate, for Manuel the Mexican the expected rate of return on euro-denominated assets is

C) 17 percent.

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

C) 25 pesos per real.

The interest rate on secondary credit is set ________ basis points ________ the primary credit rate.

C) 50; above

________ in the foreign interest rate causes the demand for domestic assets to increase and the domestic currency to ________, everything else held constant.

C) A decrease; appreciate

________ in the foreign interest rate causes the demand for domestic assets to shift to the right and the domestic currency to ________, everything else held constant.

C) A decrease; appreciate

From 1990s until 2012, the Japanese economy has experienced

C) tight monetary policy as indicated by falling asset prices

________ in the foreign interest rate causes the demand for domestic assets to ________ and the domestic currency to appreciate, everything else held constant.

C) A decrease; increase

________ in the foreign interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to appreciate, everything else held constant.

C) A decrease; right

The Dodd-Frank bill created an agency to monitor markets for asset price bubbles and the buildup of systemic risk. This agency is called the

C) Financial Stability Oversight Council.

________ are asymmetric information problems that act as a barrier to efficient allocation of capital.

C) Financial frictions

Special Drawing Rights (SDRs) are issued to governments by the ________ to settle international debts and have replaced ________ in international transactions.

C) International Monetary Fund; gold

The Federal Open Market Committee makes the Fed's decisions on the purchase or sale of government securities, but these purchases or sales are executed by the Federal Reserve Bank of

C) New York.

The first country to adopt inflation targeting was

C) New Zealand.

If the dollar depreciates relative to the Swiss franc

C) Swiss chocolate will become more expensive in the United States.

In both New Zealand and Canada, what has happened to the unemployment rate since the countries adopted inflation targeting?

C) The unemployment rate has declined substantially after a sharp increase.

Which of the following is not an advantage of inflation targeting?

C) There is an immediate signal on the achievement of the target

Suppose, while cleaning out its closets, a worker at the Federal Reserve bank branch in Memphis discovers a painting of Elvis (medium: acrylic 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 $19.95. This sale will cause ________ in the monetary base, everything else held constant

C) a decrease of $19.95

Everything else held constant, an increase in the excess reserve ratio will mean ________ in the M1 money multiplier and ________ in the M2 money multiplier

C) a decrease; a decrease

At its inception, the Federal Reserve was intended to be

C) a lender-of-last-resort.

The discount rate is kept ________ the federal funds rate because the Fed prefers that ________.

C) above; banks borrow reserves from each other

The discount rate is kept ________ the federal funds rate because the Fed prefers that ________.

C) above; banks can monitor each other for credit risk

A credit-driven bubble arises when ________ in lending causes ________ in asset prices which can cause ________ in lending.

C) an increase; an increase; a further increase

Which of the following is not an element of inflation targeting?

C) an information-inclusive approach in which only monetary aggregates are used in making decisions about monetary policy

Fluctuations in the demand for reserves cause the Fed to lose control over a monetary aggregate if the Fed targets

C) an interest rate.

When the exchange rate for the Mexican peso changes from 10 pesos to the U.S dollar to 9 pesos to the U.S. dollar, then the Mexican peso has ________ and the U.S. dollar has ________

C) appreciated; depreciated

When the value of the British pound changes from $1.25 to $1.50, the pound has ________ and the U.S. dollar has ________.

C) appreciated; depreciated

When the value of the dollar changes from £0.75 to £0.5, then the British pound has ________ and the U.S. dollar has ________.

C) appreciated; depreciated

International policy coordination refers to

C) central banks adopting policies in pursuit of joint objectives.

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 decreases the demand for reserves, ________ the federal funds interest rate, everything else held constant.

C) decline; lowering

Assuming initially that the required reserve ratio = 10%, the currency-deposit ratio = 75%, and the excess reserve ratio = 156%, an increase in the required reserve ratio to 15% causes the M1 money multiplier to ________, everything else held constant

C) decrease from 0.73 to 0.71

When good weather speeds the check-clearing process, float tends to ________ causing the Fed to initiate ________ open market ________.

C) decrease; defensive; purchases

The increase in the availability of ATMs has caused the cost of acquiring currency to ________ which will cause the currency ratio to ________, everything else held constant.

C) decrease; increase

The Federal Reserve will engage in a matched sale-purchase transaction when it wants to ________ reserves ________ in the banking system.

C) decrease; temporarily

In the market for reserves, a lower interest rate paid on excess reserves

C) decreases the effective floor for the federal funds rate.

In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, an open market sale ________ the ________ of reserves, causing the federal funds rate to increase, everything else held constant.

C) decreases; supply

In the long run, a rise in a country's price level (relative to the foreign price level) causes its currency to ________, while a fall in the country's relative price level causes its currency to ________.

C) depreciate; appreciate

Lower tariffs and quotas cause a country's currency to ________ in the ________ run, everything else held constant.

C) depreciate; long

In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, an increase in the reserve requirement ________ the demand for reserves, ________ the federal funds rate, everything else held constant.

C) increases; raising

In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, an increase in the reserve requirement ________ the demand of reserves and causes the federal funds interest rate to ________, everything else held constant

C) increases; rise

A nominal anchor promotes price stability by

C) keeping inflation expectations low.

Open market sales ________ reserves and the monetary base thereby ________ the money supply

C) lower; lowering

During World War II, whenever interest rates would rise and the price of bonds would begin to fall, the Fed would

C) make open market purchases of government securities.

Financial crises in advanced economies might start from a

C) mismanagement of financial innovations.

Although the Fed professed employment of ________ targeting during the 1970s, its behavior suggests that it emphasized ________ targeting.

C) monetary aggregate; interest-rate

Open market purchases raise the ________ thereby raising the ________.

C) monetary base; money supply

As "haircuts" increased during 2007-2009, financial institutions found that to borrow the same loan amount now required ________ collateral.

C) more

Everything else held constant, a credit-drive bubble is generally considered to have the potential to cause ________ damage to an economy compared to an irrational exuberance bubble

C) more

One suggested method of reducing excessive risk-taking by SIFIs is to require them to hold ________ capital when credit is expanding rapidly and ________ capital when credit is contracting.

C) more; less

Monetarists contend that the channels of monetary influence in Keynesian structural models are too ________ defined, ________ the importance of monetary policy.

C) narrowly; understating

The goal for high employment should be a level of unemployment at which the demand for labor equals the supply of labor. Economists call this level of unemployment the

C) natural rate level of unemployment.

The money multiplier is

C) negatively related to the required reserve ratio.

The policy tool of changing reserve requirements is

C) no longer used.

The time-inconsistency problem in monetary policy can occur when the central bank conducts policy

C) on a discretionary, day-by-day basis.

During World War II, the Fed in effect relinquished its control of monetary policy through its policy of

C) pegging interest rates.

Monetary policy is considered time-inconsistent because

C) policymakers are tempted to pursue discretionary policy that is more expansionary in the short run.

The excess reserves ratio is ________ related to expected deposit outflows, and is ________ related to the market interest rate.

C) positively; negatively

The most common type of discount lending that the Fed extends to banks is called

C) primary credit.

The Fed's use of the federal funds rate as an operating target in the 1970s resulted in

C) procyclical monetary policy.

Economic theory suggests that ________ interest rates are ________ important than ________ interest rates in explaining investment behavior.

C) real; more; nominal

Movements of ________ interest rates indicate that, contrary to the early Keynesians' beliefs, monetary policy was ________ during the Great Depression.

C) real; tight

The quantity of reserves demanded equals

C) required reserves plus excess reserves.

Open market sales shrink ________ thereby lowering ________.

C) reserves and the monetary base; the money supply

Because of the presence of asymmetric information problems in credit markets, an expansionary monetary policy causes a ________ in net worth, which ________ the adverse selection problem, thereby ________ increased lending to finance investment spending.

C) rise; reduces; encouraging

According to the Taylor rule, the Fed should raise the federal funds interest rate when inflation ________ the Fed's inflation target or when real GDP ________ the Fed's output target.

C) rises above; rises above

Suppose, at a given federal funds rate, there is an excess supply of reserves in the federal funds market. If the Fed wants the federal funds rate to stay at that level, then it should undertake an open market ________ of bonds, everything else held constant. If the Fed does nothing, however, the federal funds rate will

C) sale; decrease

If the Fed expects currency holdings to fall, it conducts open market ________ to offset the expected ________ in reserves

C) sales; increase

The Fed is considering eliminating

C) seasonal credit lending.

The theory of purchasing power parity cannot fully explain exchange rate movements in the short run because

C) some goods are not traded between countries

The global financial crisis of 2007-2009 not only led to a worldwide recession, but also a ________ in the European nations that use the euro currency

C) sovereign debt crisis

The expected return on dollar deposits in terms of foreign currency can be written as the ________ of the interest rate on dollar deposits and the expected appreciation of the dollar.

C) sum

The rate of inflation increases when

C) the unemployment rate is less than the NAIRU

Which of the following statements is an example of the Fed's conditional commitment policy?

D) "The exceptionally low range for the federal funds rate will be appropriate at least as long as the

The Dodd-Frank legislation of 2010 permanently increased the federal deposit insurance to

D) $250,000.

With a 10 percent interest rate on dollar deposits, and an expected appreciation of 7 percent over the coming year, the expected return on dollar deposits in terms of the foreign currency is

D) 17 percent.

Using Taylor's rule, when the equilibrium real federal funds rate is 3 percent, the positive output gap is 2 percent, the target inflation rate is 1 percent, and the actual inflation rate is 2 percent, the nominal federal funds rate target should be

D) 6.5 percent.

________ in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to depreciate, everything else held constant.

D) A decrease; decrease

________ in the expected future domestic exchange rate causes the demand for domestic assets to ________ and the domestic currency to depreciate, everything else held constant.

D) A decrease; decrease

________ in the domestic interest rate causes the demand for domestic assets to decrease and the domestic currency to ________, everything else held constant.

D) A decrease; depreciate

________ in the domestic interest rate causes the demand for domestic assets to shift to the left and the domestic currency to ________, everything else held constant

D) A decrease; depreciate

________ in the expected future domestic exchange rate causes the demand for domestic assets to decrease and the domestic currency to ________, everything else held constant.

D) A decrease; depreciate

________ in the expected future domestic exchange rate causes the demand for domestic assets to shift to the left and the domestic currency to ________, everything else held constant.

D) A decrease; depreciate

________ in the domestic interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to depreciate, everything else held constant

D) A decrease; left

________ in the expected future domestic exchange rate causes the demand for domestic assets to shift to the ________ and the domestic currency to depreciate, everything else held constant.

D) A decrease; left

Which of the following is NOT an advantage of a correctly specified structural model?

D) A structural model imposes no restrictions on the way monetary policy affects the economy.

Much of the credit for prevention of a financial market meltdown after "Black Monday" (October 19, 1987) must be given to the Federal Reserve System and then-chairman

D) Alan Greenspan.

Which of the following is NOT an argument against using monetary policy to prick asset-price bubbles?

D) Even though credit-drive bubbles are easier to identify, they are still relatively hard to identify.

Which of the following is not a disadvantage of of the Fed's "just do it" approach to monetary policy?

D) It relies on a stable money-inflation relationship.

The equation that represents M2 in the model of the money supply process is

D) M2 = C + D + T + MMF.

________ examines whether one variable affects another by using data to build a model that explains the channels through which this variable affects the other.

D) Structural-model evidence

Which of the following criteria need NOT be satisfied for choosing a policy instrument?

D) The variable must be transportable.

Which of the following is not a disadvantage to inflation targeting?

D) There is a lack of transparency.

The government passed the Economic Recovery Act in October 2008 to prevent the financial crisis from continuing to worsen. A controversial component of this act was the

D) Troubled Asset Relief Program (TARP).

Everything else held constant, an increase in the currency ratio will mean ________ in the M2 money multiplier and ________ in the M2 money supply

D) a decrease; a decrease

The decision by inflation targeters to choose inflation targets ________ zero reflects the concern of monetary policymakers that particularly ________ inflation can have substantial negative effects on real economic activity.

D) above; low

The interest rate on seasonal credit equals

D) an average of the federal funds rate and rates on certificates of deposits.

Factors causing an increase in currency holdings include

D) an increase in illegal activity

Higher tariffs and quotas cause a country's currency to ________ in the ________ run, everything else held constant.

D) appreciate; long

In a bank panic, the source of contagion is the

D) asymmetric information problem.

Part of the increase in currency holdings in the 1960s and 1970s can be attributed to

D) bracket creep due to inflation and progressive income taxes

The Fed's lender-of-last-resort function

D) creates a moral hazard problem.

According to Tobin's q theory, when equity prices are high the market price of existing capital is ________ relative to new capital, so expenditure on fixed investment is ________.

D) dear; high

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 ________ the demand for reserves, lowering the federal funds interest rate, everything else held constant.

D) decline; decreases

A decrease in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant.

D) decrease; depreciate

A decrease in the expected future domestic exchange rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant

D) decrease; depreciate

An increase in the foreign interest rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant.

D) decrease; depreciate

Suppose that the European Central Bank conducts a main refinancing sale. Everything else held constant, this would cause the demand for U.S. assets to ________ and the U.S. dollar will ________.

D) decrease; depreciate

Suppose that the Federal Reserve enacts expansionary policy. Everything else held constant, this will cause the demand for U.S. assets to ________ and the U.S. dollar to ________.

D) decrease; depreciate

Suppose that the latest Consumer Price Index (CPI) release shows a higher inflation rate in the U.S. than was expected. Everything else held constant, the release of the CPI report would immediately cause the demand for U.S. assets to ________ and the U.S. dollar would ________.

D) decrease; depreciate

Suppose the Federal Reserve releases a policy statement today which leads people to believe that the Fed will be enacting expansionary monetary policy in the near future. Everything else held constant, the release of this statement would immediately cause the demand for U.S. assets to ________ and the U.S. dollar to ________.

D) decrease; depreciate

The strengthening of the dollar between 1980 and 1985 contributed to a ________ in American competitiveness, putting pressure on the Fed to pursue a more ________ monetary policy.

D) decrease; expansionary

During the 2007-2009 financial crisis the currency ratio

D) decreased slightly.

In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, an open market sale ________ the supply of reserves causing the federal funds rate to ________, everything else held constant.

D) decreases; increase

During the beginning on the global financial crisis in the United States when the effects of the crisis were mostly confined within the United States, the U. S. dollar ________ because demand for U.S. assets ________.

D) depreciated; decreased

Inflation results in

D) difficulty interpreting relative price movements.

Which of the following is NOT an operating instrument?

D) discount rate

Everything else held constant, if a factor decreases the demand for ________ goods relative to ________ goods, the domestic currency will depreciate.

D) domestic; foreign

Everything else held constant, if a factor increases the demand for ________ goods relative to ________ goods, the domestic currency will appreciate.

D) domestic; foreign

The two types of open market operations are

D) dynamic and defensive.

Suppose on any given day the prevailing equilibrium federal funds rate is above the Federal Reserve's federal funds target rate. If the Federal Reserve wishes for the federal funds rate to be at their target level, then the appropriate action for the Federal Reserve to take is a ________ open market ________, everything else held constant.

D) dynamic; purchase

If the interest rate is 7 percent on euro-denominated assets and 5 percent on dollar-denominated assets, and if the dollar is expected to appreciate at a 4 percent rate, the expected return on ________-denominated assets in ________ percent.

D) euro; dollars is 3

If the interest rate is 7 percent on euro-denominated assets and 5 percent on dollar-denominated assets, and if the dollar is expected to appreciate at a 4 percent rate, the expected return on ________-denominated assets in terms of ________ percent.

D) euro; euros is 7

If the 2005 inflation rate in Canada is 4 percent, and the inflation rate in Mexico is 2 percent, then the theory of purchasing power parity predicts that, during 2005, the value of the Canadian dollar in terms of Mexican pesos will

D) fall by 2 percent.

The theory of purchasing power parity states that exchange rates between any two currencies will adjust to reflect changes in

D) the price levels of the two countries.

If the Taylor Principle is not followed and nominal interest rates are increased by less than the increase in the inflation rate, then real interest rates will ________ and monetary policy will be too ________.

D) fall; loose

When it comes to choosing an policy instrument, both the ________ rate and ________ aggregates are measured accurately and are available daily with almost no delay.

D) federal funds; reserve

Microprudential supervision does all of the following EXCEPT

D) focusing on financial system liquidity.

The mandate for the monetary policy goals that has been given to the European Central Bank is an example of a ________ mandate.

D) hierarchical

The increase in the currency ratio during World War II was due to

D) high taxes and illegal activities.

Supply-side economic policies seek to

D) increase saving and investment using tax incentives.

Firms that are designated as systemically important financial institutions (SIFIs) are subject to all of the following additional Federal Reserve regulations EXCEPT

D) interest rate ceilings on time deposits.

During the 1950s, Fed monetary policy targeted

D) interest rates.

A decrease in the domestic interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to ________, everything else held constant.

D) left; depreciate

A decrease in the expected future domestic exchange rate causes the demand for domestic assets to shift to the ________ and the domestic currency to ________, everything else held constant.

D) left; depreciate

An increase in the foreign interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to ________, everything else held constant.

D) left; depreciate

Everything else held constant, when a country's currency depreciates, its goods abroad become ________ expensive while foreign goods in that country become ________ expensive.

D) less; more

The most common definition that monetary policymakers use for price stability is

D) low and stable inflation

The opportunity cost of holding excess reserves is the federal funds rate

D) minus the interest rate paid on excess reserves.

If the relationship between the monetary aggregate and the goal variable is weak, then

D) monetary aggregate targeting will not work.

According to Tobin's q theory, ________ policy can affect ________ spending through its effect on the prices of common stock.

D) monetary; investment

During the 1950s, the Fed targeted

D) money market conditions.

The monetarist statistical evidence examines the correlations between both ________ and ________ with ________.

D) money; autonomous expenditures; aggregate spending

In the market for reserves, when the federal funds rate is above the interest rate paid on excess reserves, the demand curve for reserves is

D) negatively sloped.

The fluctuations in both money supply growth and the federal funds rate during 1979-1982 suggest that the Fed

D) never intended to target monetary aggregates.

Everything else held constant, when the current value of the domestic currency increases, the ________ domestic assets ________.

D) quantity demanded of; decreases

A contractionary monetary policy decreases net exports by ________ interest rates and ________ the value of the dollar.

D) raising real; increasing

The guiding principle for the conduct of monetary policy that held that as long as loans were being made for "productive" purposes, then providing reserves to the banking system to make these loans would not be inflationary became known as the

D) real bills doctrine.

On the evening news you hear of a scientific study that directly links premature births to cigarette smoking. This is an example of

D) reduced-form evidence

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

D) rise; raising

In the market for reserves, a lower discount rate

D) shortens the vertical section of the supply curve of reserves.

A model that is composed of many equations that show the channels through which monetary and fiscal policy affect aggregate output and spending is called a

D) structural model.

Which of the following monetary policy tools is more effective when the economy faces the interest rate zero-lower-bound problem?

D) the Fed's liquidity provision

If, in retaliation for "unfair" trade practices, Congress imposes a 30 percent tariff on Japanese DVD recorders, but at the same time, U.S. demand for Japanese goods increases, then, in the long run, ________, everything else held constant.

D) the Japanese yen could appreciate, depreciate or remain constant relative to the U.S. dollar

When the federal funds rate equals the interest rate paid on excess reserves

D) the demand curve for reserves is horizontal.

If a contractionary monetary policy lowers the price level by more than expected, it raises the real value of consumer debt. This reduces consumer expenditure through

D) the household liquidity effect

The declining trend in the currency-deposit ratio during 2007-2014 can be explained by

D) the increasing use of debit cards.

When the Fed purchases artwork to decorate the conference room at the Federal Reserve Bank of Kansas City

D) the monetary base rises.

If the aggregate price level adjusts slowly over time, then an expansionary monetary policy lowers

D) the short-term nominal, the short-term real, and the long-term real interest rates.

In order to ensure that borrowers have an ability to repay residential mortgages, the new consumer protection legislation requires lenders to do all of the following EXCEPT

D) verify that the borrower can read and understand a loan contract.

The M2 money supply is represented by

M2 = × MB.

Analysis of the transmission mechanisms of monetary policy provides four basic lessons for a central bank's conduct of monetary policy. These lessons include the following.

Monetary policy can be highly effective in reviving a weak economy even if short-term interest rates are already near zero.

The Federal Open Market Committee makes the Fed's decisions on the purchase or sale of government securities, but these purchases or sales are executed by the Federal Reserve Bank of

New York

________ are the most important monetary policy tool because they are the primary determinant of changes in the ________, the main source of fluctuations in the money supply.

Open market operations; monetary base

________ and ________ may provide an explanation for stock market bubbles.

Overconfidence; social contagion

Real business cycle theory states that the most important cause of business cycles is

Real business cycle theory states that the most important cause of business cycles is

In the United States, the government agency requiring that firms that sell securities in public markets adhere to standard accounting principles and disclose information about their sales, assets, and earnings is the

Securities and Exchange Commission.

Which of the following are NOT assets on the Fed's balance sheet?

Which of the following are NOT assets on the Fed's balance sheet?

One of the assumptions of the Gordon Growth Model is that dividends will continue growing at ________ rate.

a constant

A serious consequence of a financial crisis is

a contraction in economic activity

From before the financial crisis began in September of 2007 to when the crisis was over at the end of 2009, amount of Federal Reserve assets rose, leading to

a huge increase in the monetary base.

At its inception, the Federal Reserve was intended to be

a lender-of-last-resort.

if expectations of the future inflation rate are formed solely on the basis of a weighted average of past inflation rates, then economists would say that expectation formation is

adaptive

Everything else held constant, increased demand for a country's exports causes its currency to ________ in the long run, while increased demand for imports causes its currency to ________.

appreciate; depreciate

The efficient markets hypothesis implies that prices in the stock market

are unpredictable

If monetary policy can influence ________ prices and conditions in ________ markets, then it can affect spending through channels other than the traditional interest-rate channel.

asset; credit

A borrower who takes out a loan usually has better information about the potential returns and risk of the investment projects he plans to undertake than does the lender. This inequality of information is called

asymmetric information.

________ is the field of study that applies concepts from social sciences such as psychology and sociology to help understand the behavior of securities prices.

behavioral finance

Because of the "lemons problem" the price a buyer of a used car pays is

between the price of a lemon and a peach.

According to the traditional interest-rate channel, expansionary monetary policy lowers the real interest rate, thereby raising expenditure on

business fixed investment.

For small investors, the best way to pursue a "buy and hold" strategy is to

buy no-load mutual funds with low management fees.

A financial crisis occurs when an increase in asymmetric information from a disruption in the financial system

causes severe adverse selection and moral hazard problems that make financial markets incapable of channeling funds efficiently.

If expectations are formed rationally, then individuals

change their forecast when faced with new information.

According to rational expectations

expectations will not differ from optimal forecasts using all available information

The monetary base consists of

currency in circulation and reserves

The monetary liabilities of the Federal Reserve include

currency in circulation and reserves.

Assuming initially that the required reserve ratio = 10%, the currency-deposit ratio = 40%, and the excess reserve ratio = 0, an increase in the currency-deposit ratio to 50% causes the M1 money multiplier to ________, everything else held constant.

decrease from 2.8 to 2.5

When banks borrow money from the Federal Reserve, these funds are called

discount loans.

The interest rate the Fed charges banks borrowing from the Fed is the

discount rate.

The reduction in transactions costs per dollar of investment as the size of transactions increases is

economies of scale

Economists have focused more attention on the formation of expectations in recent years. This increase in interest can probably best be explained by the recognition that

expectations influence the behavior of participants in the economy and thus have a major impact on economic activity.

Everything else held constant, if the sum of the required reserve ratio and the excess reserve ratio is less than one, a decrease in the currency-deposit ratio causes the M1 money multiplier to ________ and the money supply to ________.

increase, increase

The subprime financial crisis caused a recession because of the ________ in adverse selection and moral hazard problems and the ________ in housing prices.

increase; decrease

A monetary expansion ________ 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

The ability of a central bank to set monetary policy instruments is

instrument independence.

Government regulations designed to reduce the moral hazard problem include

laws that force firms to adhere to standard accounting principles.

An expansionary monetary policy increases net exports by ________ interest rates and ________ the value of the dollar.

lowering real; decreasing

The Fed's open market operations normally involve only the purchase of government securities, particularly those that are short-term. However, during the crisis, the Fed started new programs to purchase

mortgage-backed securities and long-term Treasuries.

To lower interest rates on residential mortgages to stimulate the housing market, the Fed extended its open market operations to purchase

mortgage-backed securities.

From before the financial crisis began in September of 2007 to when the crisis was over at the end of 2009, the huge expansion in the Fed's balance sheet and the monetary base did not result in a large increase in monetary supply because

most of it just flowed into holdings of excess reserve.

Psychologists have found that people tend to be ________ in their own judgments.

overconfident

The free-rider problem occurs because

people who do not pay for information use it

The Fed's discount lending is of three types: ________ is the most common category; ________ is given to a limited number of banks in vacation and agricultural areas; ________ is given to banks that have experienced severe liquidity problems.

primary credit; seasonal credit; secondary credit

Moral hazard in equity contracts is known as the ________ problem because the manager of the firm has fewer incentives to maximize profits than the stockholders might ideally prefer.

principal-agent

Members of Congress are able to influence monetary policy, albeit indirectly, through their ability to

propose legislation that would force the Fed to submit budget requests to Congress, as must other government agencies.

The Federal Reserve Banks are ________ institutions since they are owned by the ________.

quasi-public; private commercial banks in the district where the Reserve Bank is located

Open market purchases ________ reserves and the monetary base thereby ________ the money supply.

raise; raising

A contractionary monetary policy decreases net exports by ________ interest rates and ________ the value of the dollar.

raising real; increasing

If future changes in stock prices are unpredictable, then we say that the stock prices follow a

random walk

Stockholders are residual claimants, meaning that they

receive the remaining cash flow after all other claims are paid.

An expectation may fail to be rational if

relevant information is available but ignored at the time the forecast is made

A change in perceived risk of a stock changes

required rate of return

Reserves are equal to the sum of

required reserves and excess reserves

Information plays an important role in asset pricing because it allows the buyer to more accurately judge

risk

If a market participant believes that a stock price is irrationally high, they may try to borrow stock from brokers to sell in the market and then make a profit by buying the stock back again after the stock falls in price. This practice is called

short selling

The efficient markets hypothesis suggests that investors

should purchase no-load mutual funds which have low management fees.

If additional information is not used when forming an optimal forecast because it is not available at that time, then expectations are

still considered to be formed rationally.

Tobin's q theory suggests that monetary policy may affect investment spending through its impact on

stock prices.

Which of the following is NOT an entity of the Federal Reserve System?

the Comptroller of the Currency

Which of the following is an entity of the Federal Reserve System?

the FOMC

The public's fear of centralized power and distrust of moneyed interests led to the demise of the first two experiments in central banking, otherwise known as

the First Bank of the United States and the Second Bank of the United States.

Adverse selection is a problem associated with equity and debt contracts arising from

the lender's relative lack of information about the borrower's potential returns and risks of his investment activities.

In the generalized dividend model, the current stock price is the sum of

the present value of the future dividend stream.

From the earlier 1990s until 2012, the Japanese monetary was ________ and stock and real estate prices were ________.

tight; falling.

The monetary transmission mechanism that links monetary policy to GDP through real interest rates and investment spending is called the

traditional interest-rate channel.

The efficient markets hypothesis implies that future changes in exchange rates should for all practical purposes be

unpredictable.

First Bank of the United States

was disbanded in 1811 when its charter was not renewed

The concept of adverse selection helps to explain all of the following EXCEPT

why direct finance is more important than direct finance as a source of business finance.