Econ Final Exam

The bond rating of a security reflects the: a.) return a holder is likely to receive b.) size of the coupon payment relative to the face value c.) size of the coupon rate relative to other interest rates d.) likelihood the lender/borrower will be repaid by the borrower/issuer

All Correct

If a bank has $120 million of checkable deposits, a required reserve ratio of 15%, and it holds $26.5 million reserves, then the maximum deposit outflow it can sustain without running into reserve deficiency is a.) $10 million b.) $18 million c.) $4 million d.) $8.5 million

a.) $10 million

If the required reserve ratio is 10%, currency in circulation is $1,200 billion, checkable deposits are $1,600 billion, and excess reserves total $2,500 billion, then the M1 money multiplier is: a.) 0.73 b.) 2.5 c.) 7.3 d.) 1.7

a.) 0.73

The Governors of the Federal Reserve System serve terms of: a.) 14 years b.) 4 years, the same as the US President, and the terms are not renewable c.) 4 years that can be renewed d.) 7 years

a.) 14 years

A one-year bond currently pays 2.1% interest. It's expected that it will pay 2.0% next year and 1.9% the following year. The two-year term premium is 0.05% while the three-year term premium is 0.15%. What is the interest rate on a two-year bond according to the liquidity premium theory a.) 2.1% b.) 1.2% c.) 2.15% d.) 2.0%

a.) 2.1%

If a lender wants to earn a real interest rate of 3% and expects inflation to be 1%, he/she should charge a nominal interest rate of: a.) 4% b.) 3% c.) 2% d.) -2%

a.) 4%

If a perpetuity (a consol bond) has a price of $4,000 and an annual interest payment of $240, the interest rate is a.) 6% b.) 7% c.) 7.5% d.) 10%

a.) 6%

If M=the quantity of money, m the money multiplier, MB the Monetary Base, C=Currency, D=Deposits, R=Reserves, RR=required reserves, and ER = excess reserves, then m would equal: a.) M/MB b.) C+D c.) D-C d.) R/ER

a.) M/MB

The money aggregate M2 includes: a.) M1 b.) stock and bond mutual fund shares c.) savings deposits but not money market deposit accounts d.) bonds

a.) M1

Sophia moves $1,000 from her savings account to her checking account. Which of the following is correct? a.) M1 increases and M2 does not change b.) M1 increases and M2 decreases c.) both M1 and M2 increase d.) M1 does not change and M2 decreases

a.) M1 increases and M2 does not change

Which of the following is NOT a form of a short-term liability in the shadow banking system? a.) bank deposits b.) repurchase agreements c.) money market mutual fund shares d.) commercial paper

a.) bank deposits

According to the liquidity premium theory, an yield curve that is flat means that a.) bond purchasers expect short-term interest rates to fall in the future b.) the yield curve has nothing to do with expectations of bond purchasers c.) bond purchasers expect short-term interest rates to stay the same d.) bond purchasers expect short-term interest rates to rise in the future

a.) bond purchasers expect short-term interest rates to fall in the future

The value of fiat money: a.) comes from government decree b.) comes from its intrinsic value c.) means that it is more desirable than currency d.) is worth more as a commodity than its value as money

a.) comes from government decree

Financial instruments used primarily as stores of value include each of the following, EXCEPT: a.) futures contracts b.) stocks c.) home mortgages d.) bonds

a.) futures contracts

The Federal Deposit Insurance Corporation (FDIC) was created: a.) in 1933 as a part of the Glass-Steagall Act b.) in 1927 as part of the McFadden Act c.) when the Federal Reserve was created in 1914 d.) prior to the stock market crash in 1029

a.) in 1933 as a part of the Glass-Steagall Act

Everything else held constant, a decrease in the required reserve ratio on checkable deposits causes the M1 money multiplier to _________ and the money supply to ________ a.) increase; increase b.) increase; decrease c.) decrease; increase d.) decrease; decrease

a.) increase; increase

Suppose the economy has an inverted yield curve. According to the expectations hypothesis, which of the following interpretations could be used to explain this? a.) interest rates are expected to fall in the future b.) investors prefer bonds with less default risk c.) investors prefer bonds with less interest-rate risk d.) the term spread is positive

a.) interest rates are expected to fall in the future

A financial intermediary: a) is a third-party that facilitates a transaction between a borrower and a lender b.) is an agency that guarantees a loan c.) would be used in direct finance d.) must be a depository institution

a.) is a third-party that facilitates a transaction

The Federal Reserve Bank of New York is unique from other Reserve banks because it: a.) is where the Federal Reserve System's portfolio is managed b.) is the oldest and therefore the largest c.) is the only regional Bank located in a financial center d.) is the only regional Bank that serves just one state

a.) is where the Federal Reserve System's portfolio is managed

The government's too-big-to-fail policy applies to: a.) large banks whose failure would start a widespread panic in the financial system b.) large corporate payroll accounts held by some banks where many people would lose their income c.) certain highly populated states where a bank run impacts a large percent of the total population d.) banks that have branches in more than two states

a.) large banks whose failure would start a widespread panic in the financial system

When Jane Brown writes a $100 check to her nephew and he deposits the check at his bank, Ms. Brown's bank ________ assets of $100 and _________ liabilities of $100 a.) loses; loses b.) gains; gains c.) loses; gains d.) gains; loses

a.) loses; loses

Expansionary monetary policy consists of all the following EXCEPT: a.) open market sales b.) lower interest rates c.) increased monetary base d.) increased money supply

a.) open market sales

The Gramm-Leach Bliley Act: a.) repealed the Glass-Steagall Act's prohibition of mergers between commercial banks and insurance or securities firms b.) repealed the Riegle-Neal Interstate Banking and Branching Efficiency Act c.) reinforced the Glass-Steagall Act's limitation on commercial banks' availability to merge with insurance or securities firms by increasing the penalties for doing so d.) repealed the McFadden Act's restriction on bank branching

a.) repealed the Glass-Steagall Act's prohibition of mergers between commercial banks and insurance or securities firms

Which of the following involves banks borrowing funds from firms or other banks using the Treasury securities as collateral? a.) repurchase agreement b.) money market account c.) counterparty lending d.) federal funds

a.) repurchase agreement

The economist Irving Fisher, after whom the Fisher effect is named, explained why interest rates _________ as the expected rate of inflation ____________, everything else held constant a.) rise; increases b.) fall; increases c.) rise; stabilizes d.) fall; stabilizes

a.) rise; increases

In the market for reserves, if the federal funds rate is above the interest paid on excess reserves and below discount rate, then an open market _________ the supply of reserves, raising the federal funds interest rate, everything else held constant a.) sale decreases b.) sale increases c.) purchase increases d.) purchase decreases

a.) sale decreases

The additional incentive that the purchaser of a Treasury security requires to buy a long-term security rather than a short-term security is called the: a.) term premium b.) risk premium c.) market premium d.) tax premium

a.) term premium

The largest Federal Reserve District geographically is serviced by: a.) the Reserve Bank in San Fransisco b.) the Reserve Bank in Chicago c.) the districts are divided fairly equally d.) the Reserve Bank in New York

a.) the Reserve Bank in San Fransisco

If a bond's rating improves, we would expect: a.) the demand for this bond to increase, all other factors constant b.) the demand for this bond to decrease, and its yield to increase, all other factors constant c.) the demand for and the yield of this bond to increase, all other factors constant d.) both the demand for and the price of the bond to decrease, all other factors constant

a.) the demand for this bond to increase, all other factors constant

If in he late 2016 100 US dollars exchanged for 118 euros and in mid-2017 100 US dollars exchanged for 127 euros, then: a.) the dollar appreciated relative to the euro b.) the euro appreciated relative to the dollar c.) European goods became more expensive to Americans d.) American goods became more expensive to Americans

a.) the dollar appreciated relative to the euro

Everything else held constant, when the government has lower budget deficits a.) the supply curve for bonds shifts to the left and interest rate falls b.) the demand curve for bonds shifts to the left and the interest rate falls c.) the demand curve for bonds shifts to the left and the interest rate rises d.) the supply curve for bonds shifts to the right and the interest rate rises

a.) the supply curve for bonds shifts to the left and interest rate falls

If a Japanese Toyota sells for 2,500,000 yen and the nominal exchange rate is 100yen/$ US, then the dollar price of the Japanese automobile is: a.) $20,000 b.) $22,727 c.) 22,727 yen d.) $25,000

b.) $22,727

Your bank has the following balance sheet: Assets: Liabilities: Reserves $50mill Checkable deposits $400mill Securities $100mill . Bank Capital $40mill Loans $290mill If the required reserve ratio is 10%, what will be the size of this bank (as measured by its total assets and liabilities) after $20 million deposit outflow if it just meets reserve deficiency by borrowing money? a.) $400 million b.) $428 million c.) $40 million d.) $420 million

b.) $428 million

Suppose in 2017 you buy two-year $1,000 face-value 4% coupon bond for $1,000. In 2018, interest rates increase to 10%. If you decide to sell your bond in 2018, what will be the selling price and one-year rate of return for you? a.) $1,020; 7% b.) $945.5; -1.45% c.) $1,000; 2% d.) $927.3; -5.3%

b.) $945.5; -1.45%

If an American traveling abroad can obtain 115 euros for $100 US the current euro per $ exchange rate is: a.) 0.870 euros/$ b.) 1.15 euros/$ c.) 1 euro/1.15$ d.) 115 euros/$

b.) 1.15 euros/$

Suppose 1-year, 1-year, and 3-year interest rates today are 2.5%, 2.0%, and 1.8%, respectively. What's the expected 1-year interest rate two years from now according to the expectations theory? a.) 1.3% b.) 1.4% c.) 2.0% d.) 2.07%

b.) 1.4%

If the current 3-year interest rate is 1.8% and the expected 1-year interest rate three years from now is 2.0%, what is the interest rate on 4-year bond today according to the expectations theory? a.) 0.2% b.) 1.85% c.) 1.9% d.) 3.8%

b.) 1.85%

If a $5,000 face-value discount bond maturing in one year is selling for $4,400, then its yield to maturity is a.) 0% b.) 13.6% c.) 12% d.) 88%

b.) 13.6%

Suppose the tax rate is 25% and the taxable bond yield is 8%. What is the equivalent tax-exempt bond yield? a.) 6.9% b.) 6% c.) 2.3% d.) 2%

b.) 6%

The types of loans the Fed makes consist of each of the following, except: a.) seasonal credit b.) conditional credit c.) secondary credit d.) primary credit

b.) conditional credit

Which of the following are depository institutions? a.) mutual funds b.) credit unions c.) insurance companies d.) pension funds

b.) credit unions

A central bank's balance sheet will categorize the following as liabilities: a.) treasury securities b.) currency c.) foreign exchange rates d.) discount loans

b.) currency

A central bank's sale of securities from its portfolio will: a.) have no impact at all on the balance sheet b.) decrease the size of its balance sheet c.) only change the composition of its liabilities d.) only change the composition of its assets

b.) decrease the size of its balance sheet

Roles served by financial markets include the following, except: a.) providing liquidity b.) eliminating risk c.) pooling and communicating information d.) sharing of risk

b.) eliminating risk

The interest rate falls when either the demand for bonds ____________ or the supply of bond ___________ a.) decreases; increases b.) increases; decreases c.) decreases; decreases d.) increases; increases

b.) increases; decreases

In the market for reserve, everything else being the same, an open market purchase _______ the _______ of reserves which causes the market federal funds rate o fall, everything else help constant a.) decreases; supply b.) increases; supply c.) increases; demand d.) decreases; demand

b.) increases; supply

Everything else held constant, when a country's currency depreciates, its goods abroad become _________ expensive while foreign goods in the country become __________ expensive a.) more; less b.) less; more c.) less; less d.) more; more

b.) less; more

Money markets are where trades occur for: a.) bonds of all maturities b.) short-term bonds issued by both governments and private companies c.) stocks d.) derivatives

b.) short-term bonds issued by both governments and private companies

The three branches of the Federal Reserve System include each of the following expect: a.) the Federal Open Market Committee b.) the Federal Deposit Insurance Corporation c.) the Board of Governors d.) the twelve regional Federal Reserve Banks

b.) the Federal Deposit Insurance Corporation (FDIC)

Reserves currently are so abundant that: a.) the Fed prefers to target the discount rate b.) the federal funds rate is not easily manipulated with open market operations c.) the Fed cannot affect the federal funds rate d.) the IOER rate is ineffective

b.) the federal funds rate is not easily manipulated with open market operations

Differences in ________ explain why interest rates on Treasury securities are not all the same a.) tax characteristics b.) time to maturity c.) liquidity d.) risk

b.) time to maturity

What is the price of a coupon bond that has annual coupon payments of $5, and face value of $100, a yield to maturity of 10%, and a maturity of two years? a.) $87.84 b.) $87 c.) $91.32 d.) $107.70

c.) $91.32

If a bank's capital-to-assets ratio is 0.05 and its return on equity is 20%, what is its return on assets? a.) 400% b.) 20% c.) 1.0% d.) 2.0%

c.) 1.0%

A 1-year and 2-year bonds currently pays 2.4% and 2.0%, respectively. What is the expected interest rate on a 1-year bond next year according to the liquidity premium theory if the 2-year term premium is 0.2%? a.) 0.4% b.) 1.4% c.) 1.2% d.) 0.85%

c.) 1.2%

Suppose that your marginal federal income tax rate is 30%, your marginal state income tax rate is 5%, and the yield on 30-year US Treasury bonds is 4%. You would be indifferent between buying a 30-year Treasury bond and buying a 30-year municipal bond issued within your state (ignoring differences in liquidity, risk, and costs of information) if the municipal bond has a yield of a.) 10% b.) 1.6% c.) 2.8% d.) 3%

c.) 2.8%

Which of the books used at the FOMC meetings contains information about business conditions in 12 districts collected by the Federal Reserve Banks? a.) The Bluebook b.) The Tealbook c.) The Beigebook d.) Both the Beigebook and the Bluebook

c.) The Beigebook

Which of the following $1,000 face-value securities has the lowest yield to maturity? a.) a 4% coupon bond with a price of $1,000 b.) a 6% coupon bond with a price of $800 c.) a 4% coupon bond with a price of $1,050 d.) a 7% coupon bond with a price of $600

c.) a 4% coupon bond with a price of $1,050

Consider the bonds below. Which is subject to the greatest interest-rate risk? a.) a Treasury bill b.) a 20-year corporate bond c.) a consol d.) a 30-year Treasury bond

c.) a consol

When the long-term interest rates are smaller than short-term interest rates, this implies that the economy is more likely to enter a.) a recession b.) a period of increasing output c.) a recession d.) a boom time

c.) a recession

All of the following help make the Fed independent of the political process EXCEPT: a.) board members receive a long, nonrenewable appointment b.) board members' terms expire at different times, reducing the possible number of appointees by any one president c.) chair of Fed receives a lifetime appointment d.) financial independence

c.) chair of Fed receives a lifetime appointment

If stock prices are expected to drop dramatically, then, other things equal, the demand for stocks will __________ and that of Treasury bills will ___________ a.) increase; decrease b.) increase; increase c.) decrease; increase d.) decrease; decrease

c.) decrease; increase

In the market for reserves, a lower interest rate paid on excess reserves a.) decreases the supply of reserves b.) increases the supply of reserves c.) decreases the effective floor for the federal funds rate d.) increases the effective floor for the federal funds rate

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

Which of the following assets is the most liquid? a.) art b.) houses c.) demand deposits d.) stocks

c.) demand deposits

Considering the balance sheet for all commercial banks in the US, the largest category of liabilities is: a.) mortgage loans b.) borrowings from non-banks in the US c.) deposits d.) borrowing from other banks in the US

c.) deposits

Suppose FOMC decides to lower the target federal funds rate. If the Federal Reserve wishes for the federal funds rate to be at the newer target level, then the appropriate action for the New York Federal Reserve to take is a ___________ open market ___________ everything else held constant a.) dynamic; sale b.) defensive; purchase c.) dynamic; purchase d.) defensive; sale

c.) dynamic; purchase

Under the purchase-and-assumption method of dealing with a failed bank, the FDIC: a.) sells off the profitable loans of the failed bank in an open auction b.) sells the failed bank to the Federal Reserve c.) finds another bank to take over the insolvent bank d.) takes over the day to day management of the bank

c.) finds another bank to take over the insolvent bank

Everything else held constant, in the market for reserves, when the federal funds rate is 3%, lowering the discount rate from 5% to 4% a.) lowers the federal funds rate b.) raises the federal funds rate c.) has no effect on the federal funds rate d.) has an indeterminate effect on the federal funds 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%, raising the discount rate from 5% to 6% a.) lowers the federal funds rate b.) raises the federal funds rate c.) has no effect on the federal funds rate d.) has an indeterminate effect on the federal funds rate

c.) has no effect on the federal funds rate

The specific goals of central banks include all of the following EXCEPT: a.) high and stable real growth b.) a stable exchange rate c.) high stock prices d.) low and stable inflation

c.) high stock prices

If the expected return on bonds increases, all else equal, the demand for bonds increases, the price of bonds ________, and the interest rate ____________ a.) decreases; increases b.) increases; increases c.) increases; decreases d.) decreases; decreases

c.) increases; decreases

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 reserves requirement ____________ the demand for reserves, ___________ the federal funds rate, everything else held constant a.) decreases; lowering b.) increasing; lowering c.) increases; raising d.) decreases; raising

c.) increases; raising

Everything else held constant, an increase in marginal tax rates would likely have the effect of ______ the demand for municipal bonds, and ___________ the demand for US government bonds a.) increasing; increasing b.) decreasing; decreasing c.) increasing; decreasing d.) decreasing; increasing

c.) increasing; decreasing

A borrower has information that is not available to a prospective lender; this is an example of: a.) liquidity risk b.) a wise borrower and an unwise lender c.) information asymmetry d.) a transfer of risk

c.) information asymmetry

Which of the following is (are) not a permanent voting member(s) on the FOMC? a.) the chair of the Board of Governors b.) the seven Governors of the Fed c.) the Secretary of the Treasury d.) the President of the Federal Reserve Bank of New York

c.) the Security of the Treasury

The policy directive from the FOMC is carried out by a.) the presidents of the district banks b.) the presidents of commercial banks that are members of the Federal Reserve System c.) the account manager at the Federal Reserve Bank of New York d.) private dealers in the bond market

c.) the account manager at the Federal Reserve Bank of New York

Interest on excess reserves usually is: a.) unrelated to the federal funds target rate range b.) the upper bound of the federal funds target rate range c.) the lower bound of the federal funds target rate range d.) the target federal funds rate

c.) the lower bound of the federal funds target rate range

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

c.) they can have difficulty meeting their depositor's demands to withdraw money

If the require reserve rate is 10% and banks do not hold any excess reserves and there are no changes in currency holdings, a $1 million open market purchase by the Fed will result in deposit creation of: a.) $900,000 b.) $9 million c.) $90 million d.) $10 million

d.) $10 million

If a bond has a face value of $1,000 and a coupon rate of 4.25%, the bond owner will receive annual coupon payments of: a.) $4.25 b.) a value that cannot be determined from the information provided c.) $425.00 d.) $42.50

d.) $42.50

If the required reserve ratio is 10%, currency in circulation is $400 billion, checkable deposits are $1000 billion, and excess reserves total $1 billion, then the monetary base is: a.) $400 billion b.) $401 billion c.) $500 billion d.) $501 billion

d.) $501 billion

The number of voting members on the Federal Open Market Committee is: a.) 8 b.) 7 c.) 19 d.) 12

d.) 12

As a result of the 2007-2009 financial crisis, which of the following Big Five investment bank had a legally re-organize itself in order to accept bailout funds? a.) Merrill Lynch b.) Bear Stearns c.) Lehman Brothers d.) Morgan Stanley

d.) Morgan Stanley

Which of the following assigns widely followed bond ratings? a.) the US Treasury b.) the Federal Reserve c.) the New York Stock Exchange d.) Standard & Poor's

d.) Standard & Poor's

Money eliminates the need for: a.) specialization of labor b.) government regulation c.) financial Intermediaries d.) a search for a double coincidence of wants

d.) a search for a double coincidence of wants

A bank's net worth is synonymous with its: a.) assets + bank's liabilities b.) required reserves c.) assets d.) capital

d.) capital

If New York Fed expects the demand for reserves will temporarily decrease, then ordinary manager of the trading desk at the New York Fed bank will likely conduct _______ open market operations to _________ reserves a.) dynamic; drain b.) defensive; inject c.) dynamic; inject d.) defensive; drain

d.) defensive; drain

Which of the following is NOT one of the provisions of Dodd-Frank Act of 2010? a.) restrictions on certain trading activities by large banks b.) limitations on Fed's emergency lending authority c.) requiring SIFIs to submit approved living wills d.) extends Fed's regulatory powers to shadow banks

d.) extends Fed's regulatory powers to shadow banks

Higher the bank's asset-to-capital ratio, a.) less exposed to insolvency it is b.) safer the bank is c.) lower its leverage is d.) higher its ROE is for every dollar return on its assets

d.) higher its ROE is for every dollar return on its assets

President Trump reduced the top income bracket from 39.6% to 37%. Supply and demand analysis predicts the impact of this change was a ___________ interest rate on municipal bonds and a ______________ interest rate on Treasury bonds a.) higher; higher b.) lower; lower c.) lower; higher d.) higher; lower

d.) higher; lower

Most of the buying and selling in primary markets: a.) is done by the Federal Reserve b.) is highly transparent and closely monitored by the government c.) is in the public view d.) involve an investment bank

d.) involve an investment bank

Which of the following would not be considered a characteristic of money? a.) it is a means of payment b.) it is a unit of account c.) it is a store of value d.) it must have intrinsic value

d.) it must have intrinsic value

If prices in the bond market become more volatile, everything else held constant, the demand curve for bonds shifts ________ and interest rates ___________ a.) left; fall b.) right; rise c.) right; fall d.) left; rise

d.) left; rise

Considering the balance sheet for all commercial banks in the US, the largest category of assets is: a.) cash items b.) US Government Securities c.) required reserves d.) loans

d.) loans

The opportunity cost of holding excess reserves is the federal funds rate a.) minus the discount rate b.) plus the discount rate c.) plus the interest rate paid on excess reserves d.) minus the interest rate paid on excess reserves

d.) minus the interest rate paid on excess reserves

An open market sale of US Treasury securities by the Fed will cause the Banking System's balance sheet to show: a.) only a decrease in assets b.) only an increase in liabilities c.) no change in assets or liabilities, only a change in the composition of assets with securities decreasing and reserves increasing d.) no net change in assets or liabilities, only a change in the composition of assets with securities increasing and reserves decreasing

d.) no net change in assets or liabilities, only a change in the composition of assets with securities increasing and reserves decreasing

Inflation refers to growth in the economy's a.) money b.) GDP c.) interest rates d.) prices

d.) prices

The Glass-Steagall Act of 1933 a.) eliminated the FDIC b.) required all state banks to get federal charters c.) required federally chartered banks to meet the branching restrictions of the states d.) required commercial banks to sell off their investment banking operations

d.) required commercial banks to sell off their investment banking operations

Which of the following statements is most correct? a.) reserves are assets of the central bank and liabilities of the commercial banks b.) reserves are assets of the central bank and liabilities of the US Treasury c.) reserves are liabilities of the commercial banks and assets of the US Treasury d.) reserves are assets of the commercial banks and liabilities of the central bank

d.) reserves are assets of the commercial banks and liabilities of the central bank

Which of the following is a potential operating instrument for the central bank? a.) nominal GDP b.) the discount rate c.) the M1 money supply d.) short-term interest rates

d.) short-term interest rates

In the bond market, the buyer is considered to be a.) the lender or the borrower, depending upon whether interest rates are rising or falling b.) the borrower c.) the lender or the borrower, depending upon the use to which the funds are put d.) the lender

d.) the lender