ECON 302 (Exam #1 MC Questions)

Dollarization occurs when... a. a country officially adopts another country's currency as their legal tender. b. a country officially adopts the US dollar as their legal tender. c. the US Treasury prints more currency. d. the Federal Reserve prints more currency.

a. a country officially adopts another country's currency as their legal tender.

One of the most important functions of the US Federal Reserve is to serve as... a. a lender of last resort. b. the printer of currency for the US economy. c. the repository of all gold deposits in the US financial system. d. the chief monitor of economic activity in the US economy.

a. a lender of last resort.

Inflation is a benefit to a. no one. b. borrowers. c. lenders. d. both borrowers and lenders.

b. borrowers.

An individual who begins to participate in extreme sports after taking out a $1,000,000 life insurance policy is an example of the issue of moral hazard. a. True b. False

a. True

If the market interest rate is the same as the coupon rate on a newly issued bond, then the bond will sell... a. at par. b. above par. c. below par. d. at a discount.

a. at par.

You are having a conversation with your friend Belinda about the upward-sloping yield curve that currently exists in the bond market. She explains this to you by saying that the upward slope to the yield curve is because longer-term bonds are less desirable than shorter-term bonds so that the issuers of longer term bonds must offer a higher interest rate as an incentive to attract buyers. Her observation means that she is a proponent of the __________ theory of interest rates. a. term premium b. default premium c. pure expectations d. segmented market

a. term premium

Three things fully describe the aspects of a bond. They are... a. the face value, the coupon rate, and the term to maturity. b. the face value, the term to maturity, and the bond price. c. the coupon rate, the term to maturity, and the issuer of the bond. d. the face value, the coupon rate, and the bond price.

a. the face value, the coupon rate, and the term to maturity.

14. The slope of a yield curve is always constant. a. True b. False

b. False

Bank reserves are a liability to banks. a. True b. False

b. False

Financial assets include which of the following? a. Money, credit cards, and bonds b. Money, bonds, and stocks c. Credit cards, bonds, and stocks d. Savings accounts, money, and credit cards

b. Money, bonds, and stocks

The supply of bonds is best described as a(n) __________ relationship between the price of bonds and the quantity of bonds supplied, all else equal. a. inverse b. direct c. negative d. exponential

b. direct

In the market for used cars, asymmetric information will tend to a. drive the clunker used cars out of the market. b. drive the better used cars out of the market. c. have no impact on the market for used cars. d. lead to a highly efficient market.

b. drive the better used cars out of the market.

A decrease in aggregate demand would be caused by a(n) __________ in __________. a. increase; exports b. increase; imports c. decrease; imports d. increase; net exports

b. increase; imports

Nominal interest rates are made up of... a. expected interest rates plus expected inflation. b. real interest rates plus inflation. c. inflation plus adjusted interest rates. d. adjusted interest rates plus expected inflation.

b. real interest rates plus inflation.

Daniella is considering the purchase of a 10-year, $10,000 bond being issued by Disreputable, Inc. The bond offers an interest rate of 5.5%. The rate on a similar US Treasury bond is 2.5%. All else equal, Daniella will be getting a default premium of _____, if she purchases the Disreputable, Inc. bond. a. 0% b. 2.5% c. 3.0% d. 5.5%

c. 3.0%

One of the main reasons that banks exist is to deal with the issues of __________ and __________. a. morality; natural selection b. natural selection; moral hazard c. adverse selection; moral hazard d. biased selection; profiling

c. adverse selection; moral hazard

Within an economy, money gets created when banks a. print currency. b. accept demand deposits. c. make loans. d. accept saving deposits.

c. make loans.

Commercial banks face competition from a variety of institutions, including... a. central banks, private equity companies, and finance companies. b. government, central banks, and investment banks. c. mutual funds, investment banks, and insurance companies. d. government, finance companies, and mutual funds.

c. mutual funds, investment banks, and insurance companies.

Money is generally thought of as... a. whatever a nation's government declares it to be. b. being printed by the government. c. a measure of the wealth of a nation. d. anything generally accepted in exchange for goods and services.

d. anything generally accepted in exchange for goods and services.

The Panic of 1907 was triggered by... a. excessive speculation in the stock market, excessively tight lending by banks and trusts, and excessively restrictive regulation of financial markets. b. excessively loose lending by banks and trusts, a need to divert cash to San Francisco following the 1906 earthquake, and excessively restrictive regulation of financial markets. c. a need to divert cash to San Francisco following the 1906 earthquake, government intervention that broke up many of the major trusts, and a lack of effective oversight of financial markets. d. excessive speculation in the stock market, excessively loose lending by banks and trusts, and a lack of effective oversight of financial markets.

d. excessive speculation in the stock market, excessively loose lending by banks and trusts, and a lack of effective oversight of financial markets.

Assets accepted for repayment of debt to the government as well as private transactions are known as a. dollarization. b. fiat money. c. money aggregates. d. legal tender.

d. legal tender.

Petra has an automobile accident and finds that as a result her auto insurance premium will increase by 25%. This is an example of an adjustable premium that insurance companies often use as a mechanism to combat a. short-sightedness. b. adverse selection. c. free-riders. d. moral hazard.

d. moral hazard.

Financial markets bring together __________ and __________. a. households; banks b. firms; households c. borrowers; lenders d. lenders; savers

c. borrowers; lenders

As the federal marginal tax rate rises, the advantage of municipal bonds over corporate bonds... a. is eliminated. b. remains unchanged. c. decreases. d. increases.

d. increases.

The relationship between the economy-wide price level and the level of real GDP illustrated by the aggregate demand curve is a. neutral. b. positive. c. direct. d. indirect (inverse).

d. indirect (inverse).