Money Banking Midterm
Capital Market Instrument Government Security Stocks Agency Securities Corporate Bonds Mortgages Description 1. These long-term bonds are issued by institutions such as Ginnie Mae, the Federal Farm Credit Bank, and the TVA. Many of these securities are guaranteed by the federal government. 2. These long-term debt instruments are issued by the U.S. Treasury to finance the deficits of the federal government. 3. These are loans to households or firms to purchase housing, land, or other real structures, where the structure or land itself serves as collateral for the loans. 4. These are equity claims on the net income and assets of a corporation. 5. State and local bonds are long-term debt instruments issued by state and local governments to finance expenditures on schools, roads, and other large programs. 6. These long-term bonds are issued by corporations with very strong credit ratings.
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Concept Adverse selection Asymmetric information Moral hazard Description 1. A situation where the borrower might engage in activities that are undesirable from the lender's point of view, because they make it less likely that the loan will be paid back. 2. Investing in a collection (portfolio) of assets whose returns do not always move together, with the result that overall risk is lower than for individual assets. 3. Occurs when the potential borrowers who are the most likely to produce an undesirable (adverse) outcomelong dash—the bad credit riskslong dash—are the ones who most actively seek out a loan and are thus most likely to be selected. 4. A situation where one party often does not know enough about the other party to make accurate decisions. 5. A process of borrowing funds from the lender-savers and then using these funds to make loans to borrower-spenders.
341
Federal Reserve FDIC Office of Thrift Supervision Comptroller of the Currency SEC Description 1. Examines the books of savings and loan associations and imposes restrictions on assets they can hold. 2. Charters and examines the books of federally chartered commercial banks and imposes restrictions on assets they can hold. 3. Examines the books of commercial banks that are members of the Federal Reserve System and sets reserve requirements for all banks. 4. Provides insurance of at $250,000 for each depositor at a bank, examines the books of insured banks, and imposes restrictions on assets they can hold. 5. Requires disclosure of information of financial instruments traded in organized exchanges. 6. Regulates procedures for trading in futures markets.
34125
Financial market Primary market Capital market Money market Secondary market Debt market 1. A financial market in which only short-term debt instruments (generally those with original maturity of less than one year) are traded. 2. A financial market in which securities that have been previously issued can be resold. 3. A financial market in which new issues of a security, such as a bond or a stock, are sold to initial buyers by the corporation or government agency borrowing the funds. 4. A market in which longer-term debt (generally those with original maturity of one year or greater) and equity instruments are traded. 5. A market where bonds or mortgages, which are contractual agreements by the borrower to pay the holder of the instrument fixed dollar amounts at regular intervals until a specified date when a final payment is made, are traded. 6. A market in which dealers at different locations who have an inventory of securities stand ready to buy and sell securities to anyone who comes to them and is willing to accept their price.
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Commercial Bank Savings and Loan Credit Union Mutual Fund Description 1. These financial institutions are very small cooperative lending institutions organized around a particular group: union members, employees of a firm, and so forth. They acquire funds from deposits called shares and primarily make consumer loans. 2. These intermediaries raise funds by selling commercial paper (a short-term debt instrument) and by issuing stocks and bonds. They lend these funds to consumers and to small businesses. 3. These financial intermediaries raise funds primarily by issuing checkable deposits, savings deposits, and time deposits. They then use these funds to make commercial, consumer, and mortgage loans and to buy U.S. government securities and municipal bonds. 4. These depository institutions obtain funds primarily through savings deposits (often called shares) and time and checkable deposits. In the past, these institutions were constrained in their activities and mostly made mortgage loans for residential housing. 5. These financial intermediaries acquire funds by selling shares to many individuals and use the proceeds to purchase diversified portfolios of stocks and bonds.
3415
Financial market Foreign bonds Eurocurrency Eurodollars Eurobonds 1. A common currency used in the Euro-zone for buying and selling goods or for investments. 2. US dollars deposited in foreign banks outside the United States or in foreign branches of US banks. 3. Bonds sold in a foreign country and denominated in that country's currency. 4. A bond denominated in a currency other than that of the country in which it is soldlong dash—for example, a bond denominated in US dollars sold in London. 5. Foreign currencies deposited in banks outside the home country.
3524
Bonds account for a larger fraction of external funds relative to equities raised by American businesses because: A. costly state verification makes the equity contract less desirable than the debt contract. B. there is no moral hazard problem when using a debt contract. C. of the reduced scope for moral hazard problems under equity contracts as compared to debt contracts. D. equity contracts do not permit borrowing firms to raise additional funds by issuing debt.
A
Critics of Fed independence argue that: A. it is undemocratic to have monetary policy controlled by an elite group responsible to no one B. the Fed, since it does not face a binding budget constraint, spends too much of its earnings C. an independent Fed conducts monetary policy with a consistent inflationary bias D. Only A and B are correct
A
Financial intermediaries have a role to play in matching savers and borrowers for all of the following reasons except: A. information symmetries B. minimising transaction costs C. economies of scale D. risk sharing
A
How can economies of scale help explain the existence of financial intermediaries .. ? A. Financial intermediaries are able to operate with lower transaction costs relative to individual lenders or borrowers. B. Financial intermediaries are relatively large institutions. C. Financial intermediaries with their vault technology can specialize in keeping deposits safe. D. Financial intermediaries have exclusive access to communications technology in the financial sector.
A
How does a fall in the value of the pound sterling affect British consumers? A. Foreign goods are now relatively more expensive; British consumers are hurt B. Foreign goods are now relatively cheaper; British consumers will benefit C. Domestic goods are now relatively more expensive; British consumers are hurt D. Domestic interest rates increase; British consumers find it more expensive to borrow
A
If the Federal Reserve has a specific mandate from Congress to achieve "maximum employment and low, stable prices," then how does the Fed have goal independence? A. The Fed can choose any method it wants in order to achieve the assigned goal. B. The Fed is free to interpret exactly what these objectives mean. C. The Fed is free to discuss the assigned goals with Congress. D. The Fed is able to change its goals frequently.
A
If the Federal Reserve has a specific mandate from Congress to achieve "maximum employment and low, stable prices," then how does the Fed have goal independence? A. The Fed is free to interpret exactly what these objectives mean. B. The Fed can choose any method it wants in order to achieve the assigned goal. C. The Fed is free to discuss the assigned goals with Congress. D. The Fed is able to change its goals frequently.
A
If you are risk-averse and had to choose between the stock or the bond investments, you would choose: A. the bond portfolio because there is less uncertainty over the outcome. B. the bond portfolio because of greater expected return. C. the stock portfolio because there is less uncertainty over the outcome. D. the stock portfolio because of greater expected return.
A
Much of the U.S. government debt is held as Treasury bonds and bills by foreign investors. How do fluctuations in the dollar exchange rate affect the value of that debt held by foreigners? A. As the dollar becomes stronger relative to a foreign currency, for a given face value of bond holdings, it will yield more home currency to foreigners, so the asset will be worth more to foreign investors. B. Fluctuations in the dollar exchange rate affect the value of Treasury bonds and bills only if they are followed by changes in long-term interest rates. C. If the dollar becomes weaker relative to a foreign currency, U.S. exports rise, causing an increase in GDP and in the economy as a whole. As a result, the maturity date on T-bonds may be lowered and the profitability of debt held by foreigners rises. D. If the dollar is worth less relative to a foreign currency, the U.S. economy becomes weaker and the government decreases the interest rate on T-bonds, so for a given face value of bond holdings, the asset will be worth less to foreign investors.
A
The European System of Central Banks (ESCB) is similar to the Federal Reserve System in that: A. it is structured such that the central banks for each country have a similar role to that of the Federal Reserve banks. B. the ECB is involved in supervision and regulation of financial institutions. C. monetary operations are centralized. D. it is structured such that the central banks for each country control their own budgets as Federal Reserve banks do.
A
Which firms are most likely to use bank financing rather than to issue bonds or stocks to finance their activities? A. Sole proprietorships, partnerships, and small corporations. B. Industrial firms producing manufactured goods. C. Multinational firms. D. State-owned business firms.
A
Which of the following correctly lists a procedure used to reduce asymmetric information problems as well as the type of asymmetric information problem it reduces? A. Covenants are used to reduce moral hazard. B. Monitoring is used to reduce adverse selection. C. Screening is used to reduce moral hazard. D. All of the above correctly list a procedure and the type of problem it reduces.
A
Which of the following entities in the Federal Reserve System sets reserve requirements? A. The Board of Governors B. The FDIC C. The Federal Advisory Council D. Member commercial banks
A
"No one who is risk-averse will ever buy a security that has a lower expected return, more risk, and less liquidity than another security." Is this statement true, false, or uncertain? A. True because for a risk-averse person, those characteristics make a security less desirable. B. False because by diversifying or hedging your portfolio, it is possible to avoid risks and increase your expected return. C. Uncertain because there may be other crucial characteristics to consider when purchasing a security
A
Banks, savings and loan associations, mutual savings banks, and credit unions: A. have been adept at innovating in response to changes in the regulatory environment. B. have been deregulated and now provide services only to small depositors. C. produce nothing of value and are therefore a drain on society's resources. D. are no longer important players in financial intermediation.
A
A strong U.S. dollar means that U.S. goods exported abroad will cost: A. less in foreign countries and foreign goods imported will cost less in the United States. B. more in foreign countries and foreign goods imported will cost less in the United States. C. more in foreign countries and foreign goods imported will cost more in the United States. D. less in foreign countries and foreign goods imported will cost more in the United States.
B
Economists group commercial banks, savings and loan associations, credit unions, mutual funds, mutual savings banks, insurance companies, pension funds, and finance companies together under the heading financial intermediaries. What function do financial intermediaries perform? A. They produce nothing of value and are therefore a drain on society's resources. B. They provide a channel for linking those who want to save with those who want to invest. C. They are a source of slow and resistant financial innovation. D. These institutions can hurt the performance of the economy
B
Eliminating the Fed's independence might lead to a more pronounced political business cycle because a politically exposed Fed would be more concerned with: A. long-run objectives and thus be a defender of a sound dollar and a stable price level. B. short-run objectives and thus be more likely to engage in expansionary policies designed to lower unemployment and interest rates before an election. C. short-run objectives and thus be a defender of a sound dollar and a stable price level. D. long-run objectives and thus be more likely to engage in expansionary policies designed to lower unemployment and interest rates before an election.
B
How do checkable deposits ... differ from demand deposits ... ? A. Only checkable deposits can be utilized as a medium of exchange. B. Demand deposits are those transactions accounts against which an unlimited number of checks can ordinarily be written. Checkable deposits often carry restrictions on transferability. C. Only demand deposits can be utilized as a medium of exchange. D. Demand deposits are those transactions accounts against which a limited number of checks can ordinarily be written. Checkable deposits carry no restrictions on transferability.
B
If bond investors decide that 30-year bonds are no longer as desirable an investment, the yield curve would: A. result in a jump in the 30 minus year rate comma with the remainder of the yield curve unchangedresult in a jump in the 30−year rate, with the remainder of the yield curve unchanged. B. steepen at the end of the yield curve and flatten somewhere along the rest of the curvesteepen at the end of the yield curve and flatten somewhere along the rest of the curve. .C. flatten near the 30-year rate and steepen slightly along the smaller rates. D. slope less steeply upward toward the 30-year rate and remain the same after it.
B
If the next chair of the Federal Reserve Board has a reputation for advocating an even slower rate of money growth than the current chair, what will happen to interest rates? A. Slower money growth will lead to a liquidity effect, which will lower interest rates; however, the lower income, price level, and inflation will tend to raise interest rates. B. Slower money growth will lead to a liquidity effect, which will raise interest rates; however, the lower income, price level, and inflation will tend to lower interest rates. C. Slower money growth will lead to a liquidity effect, which will lower interest rates. Moreover, the lower income, price level, and inflation will reinforce the decrease in interest rates. D. Slower money growth will lead to a liquidity effect, which will raise interest rates. Moreover, the lower income, price level, and inflation will reinforce the increase in interest rates.
B
Is it better for bondholders when the yield to maturity increases or decreases? Bondholders are better off when the yield to maturity: A. increases, since this represents a decrease in the price of the bond and an increase in potential capital gains. B. decreases, since this represents an increase in the price of the bond and a decrease in potential capital losses. C. decreases, since this represents an increase in the coupon payment and an increase in potential capital gains. D. increases, since this represents a decrease in the bond maturity and a decrease in potential capital losses.
B
Risk premiums on corporate bonds are usually anticyclical; that is, they decrease during business cycle expansions and increase during recessions. Why is this so? A. In anticipation of a recession, the Federal Reserve will begin to lower interest rates. B. As the economy enters an expansion, there is greater likelihood that borrowers will be able to service their debt. .C. As an economy enters a recession, business firms are less likely to default on their debt. D. During an economic expansion, there is greater inflationary pressure driving interest rates upward.
B
The Fed is the most independent of all US government agencies. What is the main difference between it and other government agencies that explains the Fed's greater independence? A. Congress cannot pass legislation that would restrict the Fed's independence B. The Fed's source of revenue is free from the appropriations process C. The Fed is a private, profit-making institution D. The Fed has established performance measures that it is required to achieve
B
The primary reason for the creation of the Federal Reserve System ... was: A. to eliminate state-chartered banks. B. to reduce or eliminate future bank panics. C. to stabilize short-term interest rates. D. to create a single central bank similar to the Bank of England.
B
The theory of bureaucratic behavior suggests that the objective of a bureaucracy is to maximize: A. conflicts between the executive and legislative branches of government. B. its own welfare. C. profits. D. the public's welfare.
B
To maximize your expected return, you should choose: A. stocks. B. commodities. C. bonds. D. All of the portfolios have the same expected return.
B
What is the difference between a mortgage and a mortgage-backed security? A. No interest is paid on mortgage-backed securities, whereas interest and principal payments are paid on mortgages. B. Mortgages are loans, whereas mortgage-backed securities are bond-like debt instruments. C. Mortgages are usually used to create a portfolio, whereas mortgage-backed securities are held separately. D. Mortgages are provided to households or firms, whereas mortgage-backed securities are provided mainly to financial institutions.
B
What is the primary tool that Congress uses to exercise some control over the Fed? A. The threat that Congress can remove some members of the Board of Governors on a whim. B. The threat that Congress will acquire greater control over the Fed's finances and budget. C. The threat that Congress can withhold the Fed's appropriations. D. All of the above are correct.
B
What will happen to interest rates if the public suddenly expects a large increase in stock prices? A. Interest rates will fall because the expected increase in stock prices raises the liquidity of stocks relative to bonds and so the demand for bonds decreases B. Interest rates will rise because the expected increase in stock prices raises the expected return on stocks relative to bonds and so the demand for bonds decreases .C. Interest rates will rise because the expected increase in stock prices raises the liquidity of stocks relative to bonds and so the demand for bonds decreases D. Interest rates will fall because the expected increase in stock prices raises the expected return on stocks relative to bonds and so the demand for bonds decreases
B
When interest rates decrease, how might businesses and consumers change their economic behavior? A. Consumers and businesses will spend less and save more. B. There will be more consumption spending on interest-sensitive items and more investment by businesses. C. Consumers and businesses will hold smaller (average) cash balances. D. Consumers and businesses will invest in bonds or similar debt instruments.
B
Which of the following is a disadvantage of using fiat money... ? A. Fiat money is not easily divisible or suitable for small purchases B. Public authorities may be tempted to produce too much of it C. Fiat money is not portable or widely accepted
B
Which of the following is not a function or service provided by secondary markets? A. Providing information to borrowers and lenders about expectations and attitudes of the economic climate B. Matching lenders (savers) with borrowers in need of funds C. Determining the price of the security that the issuing firm sells in the primary market D. Providing liquidity to owners of existing financial instruments
B
Which of the following is not an important financial intermediary in the economy? A. Insurance companies B. The Fed .C. Finance companies D. Commercial banks.
B
Which of the following is not part of the checks and balances of the Federal Reserve System LOADING... ? A. The provision for three types of directors to district banks (A, B, and C) that would represent different groups (professional bankers, business people, and the public). B. The requirement that all depository institutions keep deposits at the Fed. C. The ability of the twelve regional banks to affect discount policy. D. The Fed's independence from the federal government and the setting up of the Federal Reserve banks as incorporated institutions.
B
Which of the following is true about techniques used to reduce asymmetric information problems? A. Monitoring is used before the transaction; screening is used after the transaction. B. Screening is used before the transaction; monitoring is used after the transaction. C. Both screening and monitoring are used after the transaction. D. Both screening and monitoring are used before the transaction.
B
Will there be an effect on interest rates if brokerage commissions on stocks fall? A. Yes, interest rates would fall because stocks would have a relatively higher rate of return than bonds, which would reduce the demand for bonds B. Yes, interest rates would rise because stocks become more liquid than before, which would reduce the demand for bonds C. No, interest rates would remain the same because the brokerage commissions would only affect the stock market D. Yes, interest rates would rise because people would want to hold more stocks and fewer bonds, which would increase the demand for bonds
B
Would you be more willing to lend to a friend if she put all of her life savings into her business than you would if she had not done so? A. You would be less willing because putting her life savings into a business that can potentially fail makes it more risky for you to loan her money. If the business fails, she will protect her investment before she considers repaying you B. You would be more willing because putting her life savings into her business provides you protection against the problem of moral hazard .C. Whether or not she puts her life savings into her business has no bearing on whether she repays the loan or not. Therefore, it should have no effect on your decision to loan her money D. You would be more willing because putting her life savings into her business provides you protection against the problem of adverse selection
B
A share of Microsoft common stock is: A. identical to a bond issued by Microsoft. B. an asset for Microsoft because it allows Microsoft to invest in capital equipment or other companies. C. an asset for its owner, which Microsoft shows as shareholder equity on its balance sheet. D. a liability to the shareholder because it must be sold to realise a capital gain.
C
During 2008, the difference in yield (the yield spread) between 3-month AA-rated financial commercial paper and 3-month AA-rated nonfinancial commercial paper steadily increased from its usual level of close to zero, spiking to over a full percentage point at its peak in October 2008. Which of the following explains this sudden increase? A. The increase in the yield spread was due to government efforts to ease the debt burden for financial companies during the financial crisis. B. Increased yield spreads tend to occur because of the inefficient nature of nonfinancial commercial paper when economic instability is present. C. The increase in the yield spread was a result of the decrease in demand for financial commercial paper due to the uncertainty and soundness of financial companies and banks. D. The increase in the yield spread was caused by an increase in the supply of financial commercial paper to fund future real estate investments.
C
Evidence from business cycle fluctuations in the United States indicates that: A. recessions have been preceded by declines in share prices on the stock exchange. B. recessions have been preceded by dollar depreciation. C. recessions have been preceded by a decline in the growth rate of money. D. a negative relationship between money growth and general economic activity exists.
C
How can the existence of asymmetric information . provide a rationale for government regulation of financial markets? A. The production of information to combat these asymmetries is subject to moral hazard B. Good information becomes quickly obsolete C. The production of information to combat these asymmetries is subject to the free-rider problem D. The production of good information is so costly that all potential buyers of this information are priced out of the market
C
How do conflicts of interest make the asymmetric information problem worse? A. Competing interests may limit a financial institution's economies of scope, which lowers overall economy efficiency and profits. B. Conflicts of interest create an adverse selection problem, which prevents financial markets from channeling funds into the most productive investment opportunities. C. Competing interests may lead a financial institution to conceal information or disseminate misleading information, which prevents financial markets from channeling funds into the most productive investment opportunities. D. Conflicts of interest tend to lead financial institutions to lend money to the most risky borrowers, deepening the asymmetric information problem.
C
How does the Federal Reserve have a high degree of instrument independence? A. The Federal Reserve is not subject to the influence of Congress. B. The Federal Reserve is able to set the goals of monetary policy. C. The Federal Reserve can choose any method it wants in order to achieve a given set of policy objectives. D. The Federal Reserve can contract with independent experts to choose the appropriate fiscal instruments.
C
In prison, cigarettes are sometimes used among inmates as a form of payment. All of the following explain how cigarettes solve the "double coincidence of wants" problem, even if a prisoner does not smoke, except: A. cigarettes are widely accepted as a form of payment in prison. B. prisoners can exchange cigarettes for other goods and services. C. exchanging cigarettes for other goods and services increases transaction costs. D. cigarettes serve as a medium of exchange.
C
People in the United States in the nineteenth century were sometimes willing to be paid by cheque rather than with gold, even though they knew that there was a possibility that the cheque might bounce. Which of the following would represent an advantage of gold over cheques as a form of money? A. Gold is easy to transfer from one city to another or one state to another B. Gold is easily divisible and may be used for small expenditures C. Gold has intrinsic value when compared to cheques D. Gold is easy for an individual to carry from place to place
C
Prior to 2008, mortgage lenders required a house inspection to assess its value, and often used the same one or two inspection companies in the same geographical market. Following the collapse of the housing market in 2008, mortgage lenders required a house inspection, but this was arranged through a third party. How does this illustrate a conflict of interest similar to the role that credit-rating agencies played in the global financial crisis? A. Mortgage lenders may have wanted to increase home sales without assuming the additional costs to add more inspection companies. B. Fees for home inspections may have been unreasonably high to ensure high profits for the inspection company. C. Inspection companies may have provided overly optimistic assessments of home values to ensure continued work in the future. D. This situation does not illustrate any conflict of interest, as the services provided by credit-ratings agencies and home inspection companies are unrelated.
C
The foreign exchange market is: A. the price of one country's currency in terms of another country's currency B. where imports and exports are traded for one another C. where the currency of one country is converted into the currency of another country D. the amount of loans made from one country's bank to another country's bank
C
The free rider problem: A. makes it easier for an investor to continue to buy securities at less than the true value B. will make more people willing to provide information services C. results from the production of information being much like a public good where exclusion is not possible D. will only occur if information costs are zero
C
True or False: With a discount bond, the return on a bond is equal to the rate of capital gain. A. False: Bond returns can never equal the rate of capital gain; there must be a capital loss or gain indicated. B. True: A discount bond pays fixed interest payments every year so the return is equal to the rate of capital gain. C. True: A discount bond has no coupon payments so the return on the bond is equal to the rate of capital gain. D. There is no way to determine this without the knowing the coupon amount and interest rate.
C
What would happen to the risk premium.. on corporate bonds if brokerage commissions were lowered in the corporate bond market? A. Lower brokerage commissions for corporate bonds would only reduce the cost of buying and selling the bonds, which would have no impact on the risk premium B. Lower brokerage commissions for corporate bonds would make them more desirable to hold and thus increase demand; consequently, this would raise interest rates and thus raise the risk premium C. Lower brokerage commissions for corporate bonds would make them more liquid and thus increase demand, which would lower the risk premium D. None of the above
C
Which of the following entities in the Federal Reserve System LOADING... controls the discount rate LOADING... ? A. Member commercial banks B. The Federal Advisory Council C. The Board of Governors D. The FDIC
C
Which of the following statements about central bank structure and independence is true? A. In recent years, greater independence has been granted to many central banks with the exception of the Bank of England and the Bank of Japan, which are still subject to strict governmental control. B. In theory, central banks subject to government control produce better monetary policy, but experience suggests that more independent central banks have produced superior monetary policy results. C. In recent years, there has been a remarkable trend toward increasing independence. D. Only A and C are correct. E. All of the above are correct.
C
Why do managers of financial institutions care so much about the activities of the Federal Reserve System? A. Because the Federal Reserve conducts fiscal policy, which can have important impacts on the profitability of financial institutions. B. Because financial institutions count on the Federal Reserve as being the lender of last resort and, as such, follow the Fed's activities closely to monitor whether there are enough reserves in the system to receive a bailout, if necessary. C. Because the Federal Reserve affects interest rates, inflation, and business cycles, all of which have an important impact on the profitability of financial institutions. D. None of the abovelong dash—financial institutions are only directly influenced by the activities of Congress and the Securities and Exchange Commission.
C
Why would a life insurance company be concerned about the financial stability of major corporations or the health of the housing market? A. During financial crises and recessions, the number of deaths is much higher than usual and payments of insurance indemnity increase significantly. B. Today life insurance companies are the largest holders of corporate stocks and mortgage-backed securities. C. Most life insurance companies hold large amounts of corporate bonds and mortgage assets. D. When there are negative changes in financial or housing markets, people have no money for life insurance payments.
C
Would interest rates of Treasury securities be affected by the tax rate change? A. Yes, because municipal bonds are less risky than Treasury securities, the demand for Treasury securities will decrease. B. No, there would be no impact on the market for Treasury securities. C. Yes, because the reduction in the tax-exempt privilege in municipal bonds would raise the relative value of Treasury securities, making Treasury securities more desirable. D. Yes, because the increase in interest rates would increase the desire to hold more municipal bonds and less Treasury securities.
C
A financial adviser has just given you the following advice: "Long-term bonds are a great investment because their interest rate is over 20%." Is the financial adviser necessarily right? A. Yes. The higher the annual interest rate, the higher the annual income on bonds. B. No. When making an investment decision, you should take the yield to maturity into account, not the interest rate. C. Yes. If the interest rate remains unchanged until maturity, the price of the bond will be more than its face value. D. No. If interest rates rise sharply in the future, long-term bonds may suffer a sharp fall in price, causing their return to be quite low.
D
Asymmetric information 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. A. debt deflation B. adverse selection C. free-rider D. principal-agent
D
Evidence from the United States and other foreign countries indicates that: A. money growth is clearly unrelated to inflation. B. there is little support for the assertion that "inflation is always and everywhere a monetary phenomenon." C. countries with low monetary growth rates tend to experience higher rates of inflation, all else being constant. D. there is a strong positive association between inflation and the growth rate of money over long periods of time.
D
Following a policy meeting on March 19, 2009, the Federal Reserve made an announcement that it would purchase up to $300 billion of longer-term Treasury securities over the following six months. What effect might this policy have on the yield curve? A. The yield curve would jump with medium- and long-term rates and remain unchanged with short-term rates. B. The yield curve would steadily shift up, with slightly more increase in short-term rates. C. The yield curve would steepen at the end and flatten somewhere along the rest of the curve. D. The yield curve would shift down, but mostly on medium- and long-term maturities.
D
How do financial intermediaries benefit by providing risk-sharing services? A. They are able to turn safe assets into high-risk, high-return investments B. A collection of riskier assets is always more profitable for a bank or intermediary C. Customers pay a fee to financial intermediaries for being able to invest in safer assets D. They are able to earn a profit on the spread between the returns they earn on risky assets and the payments they make on the assets they have sold
D
Problems created by asymmetric information after the transaction occurs is called ________, while the problem created before a transaction occurs is called ________. A. costly state verification; free riding B. free riding; costly state verification C. adverse selection; moral hazard D. moral hazard; adverse selection
D
What effect will a sudden increase in the volatility of gold prices have on interest rates? A. Interest rates will increase because bonds will become relatively more risky, which decreases the demand for bonds B. Interest rates will increase because bonds will become relatively less risky, which increases the demand for bonds C. Interest rates will decrease because bonds will become relatively more risky, which decreases the demand for bonds D. Interest rates will decrease because bonds will become relatively less risky, which increases the demand for bonds
D
What effect would reducing income tax rates have on the interest rates of municipal bonds? A. Interest rates would fall because Treasury securities are now less valuable and more people will want to hold municipal bonds. B. Interest rates would fall because the reduction in income tax rates would make the tax-exempt privilege for municipal bonds less valuable and reduce the demand for municipal bonds. C. Interest rates would rise because Treasury securities are now less valuable and more people will want to hold municipal bonds. D. Interest rates would rise because the reduction in income tax rates would make the tax-exempt privilege for municipal bonds less valuable and reduce the demand for municipal bonds.
D
What is the main disadvantage of moving to e-money ... or moving to a cashless society? A. The use of e-money does not work with vending machines or other coin-based transactions B. It is difficult to keep track of electronic purchases C. Funds are debited too quickly from the payer's account D. There are problems with security and privacy
D
What is the typical relationship between interest rates on 6-month Treasury bills, 10-year Treasury notes, and Baa corporate bonds? A. They tend to move randomly and independent of each other B. All three rates are virtually exact representations of the rate of inflation C. They tend to move together over time with the 6-month Treasury bill having the highest rate of interest D. They tend to move together over time with the corporate bond having the highest rate of interest
D
What was the main cause of the recession that began in 2007? A. Collapse of the high-tech bubble. B. Rapid increases in the money supply. C. Large fluctuations in interest rates. D. Defaults in subprime residential mortgages.
D
Which of the following entities in the Federal Reserve System directs open market operations LOADING... ? A. The Federal Advisory Council B. The Board of Governors C. Member commercial banks D. The FOMC
D
Which of the following statements concerning external sources of financing for nonfinancial businesses in the United States is true? A. Financial intermediaries such as banks are the least important source of external funds for businesses B. Stocks and bonds combined supply more than one-half of the external funds C. Since 1970, more than half of the new issues of stock have been sold to American households D. Bonds are a far more important source of financing than are stocks
D
While legislation enacted in 1998 granted the Bank of Japan new powers and greater autonomy, its critics contend that: A. its independence is too great since the Ministry of Finance no longer has veto power over the Bank's budget. B. its independence is too great because it need not pursue a policy of price stability even if that is the popular will of the people C. its independence is limited since the Ministry of Finance can dismiss senior bank officials D. its independence is limited by the Ministry of Finance's veto power over part of the Bank's budget E. None of the above are correct
D
Why was the Federal Reserve System set up with twelve regional Federal Reserve banks rather than one central bank, as in other countries? A. By creating twelve regional banks, writers of the Federal Reserve Act could ensure that finances from all parts of the country would flow through the Federal Reserve System. B. With twelve regional banks, employees of the Federal Reserve could quickly and easily get to a monetary crisis point anywhere in the United States. C. With twelve regional banks, the Federal Reserve could easily influence politics in all parts of the United States. D. The writers of the Federal Reserve Act wanted to ensure the Fed's power was not centralized in a single location.
D
Gustavo is a young doctor who lives in a country with a relatively inefficient legal and financial system. When Gustavo applied for a mortgage, he found that banks usually required collateral for up to 300% of the amount of the loan. Why might banks require that much collateral in a financial system like Gustavo's country? A. An inefficient legal system implies weak property rights but also high property values, making collateral more highly valued and hence more desirable. B. An inefficient legal system implies strong property rights, and collateral helps banks recoup some of their loan if the borrower defaults. C. An inefficient legal system implies strong property rights, and under such a strong system, collateral is more highly valued and hence more desirable. D. An inefficient legal system implies weak property rights, and collateral helps banks recoup some of their loan if the borrower defaults. As a result, when compared to other countries, we would expect Gustavo's nation to have: A. less investment and faster economic growth. B. more investment and faster economic growth. C. more investment and slower economic growth. D. less investment and slower economic growth.
DD
The European Central Bank (ECB) has complete control over monetary policy in eleven euro countries and has a charter that cannot be changed by legislation. In comparison to the Federal Reserve System , the ECB is: A. equally independent. B. more independent. C. less independent.
b
The theory of bureaucratic behaviour when applied to the Fed ... helps to explain why the Fed: A. sought less control over banks in the 1980s B. is so secretive about the conduct of future monetary policy C. is supportive of congressional attempts to limit the central bank's autonomy D. is willing to take on powerful groups that may threaten its autonomy
b