Fishing Class

Chapter 10 Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics 10.1 Multiple Choice 1) Assets on the Fed's balance sheet include A) government securities and currency in circulation. B) discount loans and reserves. C) government securities and discount loans. D) currency in circulation and reserves. Answer: C Topic: Chapter 10. 1 The Federal Reserve's Balance Sheet Question Status: Previous Edition 2) The monetary base consists of A) currency in circulation and reserves. B) government securities held by the Fed and discount loans. C) government securities held by the Fed and currency in circulation. D) discount loans and reserves. Answer: A Topic: Chapter 10. 1 The Federal Reserve's Balance Sheet Question Status: Previous Edition 3) An open market purchase of securities by the Fed will A) increase assets of the nonbank public and increase assets of the banking system. B) decrease assets of the nonbank public and increase assets of the Fed. C) decrease assets of the banking system and increase assets of the Fed. D) have no effect on assets of the nonbank public but increase assets of the Fed. E) increase assets of the banking system and decrease assets of the Fed. Answer: D Topic: Chapter 10. 1 The Federal Reserve's Balance Sheet Question Status: Previous Edition 4) An open market sale of securities by the Fed will A) decrease liabilities of the Fed and not affect assets of the banking system. B) decrease assets of the nonbank public and decrease assets of the Fed. C) increase liabilities of the banking system and increase assets of the Fed. D) have no effect on assets of the nonbank public but increase liabilities of the Fed. E) decrease assets of the banking system and increase assets of the Fed. Answer: A Topic: Chapter 10. 1 The Federal Reserve's Balance Sheet Question Status: Previous Edition 5) If the Federal Reserve wants to expand reserves in the banking system, it will A) purchase government securities. B) raise the discount rate. C) sell government securities. D) raise reserve requirements. Answer: A Topic: Chapter 10. 1 The Federal Reserve's Balance Sheet Question Status: Previous Edition 6) If the Federal Reserve wants to lower the monetary base and the money supply, it will A) increase bank reserves. B) lower the discount rate. C) sell government securities. D) lower reserve requirements. Answer: C Topic: Chapter 10. 1 The Federal Reserve's Balance Sheet Question Status: Previous Edition 7) A discount loan by the Fed to a bank causes a(n) ________ in reserves in the banking system and a(n) ________ in the monetary base. A) increase; decrease B) decrease; decrease C) decrease; increase D) increase; increase Answer: D Topic: Chapter 10. 1 The Federal Reserve's Balance Sheet Question Status: Previous Edition 8) When a bank repays a discount loan to the Fed, there is a(n) ________ in reserves in the banking system and a(n) ________ in the monetary base. A) increase; decrease B) decrease; decrease C) decrease; increase D) increase; increase Answer: B Topic: Chapter 10. 1 The Federal Reserve's Balance Sheet Question Status: Previous Edition 9) The federal funds rate is A) the interest rate on loans from the Fed to a bank. B) the price the Fed pays for government securities. C) the interest rate on loans of reserves from one bank to another. D) the price banks pay the Fed for government securities. E) the interest rate on loans from a bank to the federal government. Answer: C Topic: Chapter 10. 2 The Market for Reserves and the Federal Funds Rate Question Status: Previous Edition 10) The discount rate is A) the interest rate on loans from the Fed to a bank. B) the price the Fed pays for government securities. C) the interest rate on loans of reserves from one bank to another. D) the price banks pay the Fed for government securities. E) the interest rate on loans from a bank to the federal government. Answer: A Topic: Chapter 10. 2 The Market for Reserves and the Federal Funds Rate Question Status: Previous Edition 11) Holding everything else constant, if the federal funds rate rises, then the demand for A) excess reserves rises because they have a higher return. B) excess reserves falls because they have a higher cost. C) required reserves falls because the cost of borrowing from the Fed is relatively higher. D) required reserves rises because the cost of borrowing from the Fed is relatively lower. E) reserves will not change because the Fed sets the level of required reserves. Answer: B Topic: Chapter 10. 2 The Market for Reserves and the Federal Funds Rate Question Status: Previous Edition 12) Holding everything else constant, if the federal funds rate falls, then the demand for A) excess reserves falls because they have a lower return. B) excess reserves rises because they have a lower cost. C) required reserves rises because the cost of borrowing from the Fed is relatively higher. D) required reserves rises because the cost of borrowing from the Fed is relatively lower. E) reserves will not change because the Fed sets the level of required reserves. Answer: B Topic: Chapter 10. 2 The Market for Reserves and the Federal Funds Rate Question Status: Previous Edition 13) Bank reserves can be categorized as A) vault cash and deposits at the Fed. B) required reserves and excess reserves. C) borrowed reserves and nonborrowed reserves. D) all of the above. Answer: D Topic: Chapter 10. 2 The Market for Reserves and the Federal Funds Rate Question Status: Previous Edition 14) An open market purchase A) shifts the supply curve for reserves to the right and causes the federal funds rate to fall. B) shifts the demand curve for reserves to the right and causes the federal funds rate to rise. C) shifts the supply curve for reserves to the left and causes the federal funds rate to rise. D) shifts the demand curve for reserves to the left and causes the federal funds rate to fall. Answer: A Topic: Chapter 10. 2 The Market for Reserves and the Federal Funds Rate Question Status: Previous Edition 15) The supply curve for reserves is ________ when the federal funds rate is below the discount rate and ________ when the federal funds rate is above the discount rate. A) upward sloping; horizontal B) upward sloping; vertical C) vertical; horizontal D) vertical; downward sloping Answer: C Topic: Chapter 10. 2 The Market for Reserves and the Federal Funds Rate Question Status: Previous Edition 16) The supply curve for reserves shifts to the left and the federal funds rate rises when the Fed A) raises reserves requirements. B) does an open market purchase. C) does an open market sale. D) raises the discount rate. Answer: C Topic: Chapter 10. 2 The Market for Reserves and the Federal Funds Rate Question Status: Previous Edition 17) The demand curve for reserves shifts to the left and the federal funds rate falls when the Fed A) decreases reserve requirements or does an open market purchase. B) lowers the discount rate. C) lowers the discount rate or does an open market purchase. D) decreases reserves requirements. E) does an open market sale. Answer: D Topic: Chapter 10. 2 The Market for Reserves and the Federal Funds Rate Question Status: Previous Edition 18) Under usual circumstances, an increase in the discount rate causes A) the federal funds rate to fall. B) the federal funds rate to rise. C) no change in the federal funds rate. D) the supply of reserves to increase. E) the supply of reserves to decrease. Answer: C Topic: Chapter 10. 2 The Market for Reserves and the Federal Funds Rate Question Status: Previous Edition 19) If the Fed increases reserve requirements, the demand for reserves ________ and the equilibrium federal funds rate ________. A) increases; drops B) decreases; rises C) decreases; drops D) increases; rises Answer: D Topic: Chapter 10. 2 The Market for Reserves and the Federal Funds Rate Question Status: Previous Edition 20) The actual execution of open market operations is done at A) the Board of Governors in Washington, D.C. B) the Federal Reserve Bank of New York. C) the Federal Reserve Bank of Philadelphia. D) the Federal Reserve Bank of Boston. Answer: B Topic: Chapter 10. 3 Conventional Monetary Policy Tools Question Status: Previous Edition 21) During 2007 as the global financial crisis started, the Fed implemented several new lending programs to increase liquidity, including ________. A) expansion of the discount window B) setting up the Term Auction Facility, making loans through competitive auctions C) lending to investment banks D) only A and B above. E) A, B, and C, are all correct. Answer: E Topic: Chapter 10. 3 Conventional Monetary Policy Tools Question Status: New Question 22) During QE1, the Fed purchased ________. A) $1.25 trillion in mortgage-backed securities B) $600 billion in long-term Treasury securities C) $40 billion in mortgage-backed securities and $45 billion in long-term Treasuries (to start) D) $500 billion in U.S. corporate debt Answer: A Topic: Chapter 10. 5 Nonconventional Monetary Policy Tools and Quantitative Easing Question Status: New Question 23) During QE2, the Fed purchased ________. A) $1.25 trillion in mortgage-backed securities B) $600 billion in long-term Treasury securities C) $40 billion in mortgage-backed securities and $45 billion in long-term Treasuries (to start) D) $500 billion in U.S. corporate debt Answer: B Topic: Chapter 10. 5 Nonconventional Monetary Policy Tools and Quantitative Easing Question Status: New Question 24) During QE3, the Fed purchased ________. A) $1.25 trillion in mortgage-backed securities B) $600 billion in long-term Treasury securities C) $40 billion in mortgage-backed securities and $45 billion in long-term Treasuries (to start) D) $500 billion in U.S. corporate debt Answer: C Topic: Chapter 10. 5 Nonconventional Monetary Policy Tools and Quantitative Easing Question Status: New Question 25) 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 A) Chicago. B) Boston. C) New York. D) San Francisco. Answer: C Topic: Chapter 10. 3 Conventional Monetary Policy Tools Question Status: Previous Edition 26) An open market transaction intended to change the level of bank reserves is a A) repurchase agreement. B) reverse repo. C) dynamic operation. D) defensive operation. Answer: C Topic: Chapter 10. 3 Conventional Monetary Policy Tools Question Status: Previous Edition 27) If the Federal Reserve wants to drain reserves from the banking system, it will A) purchase government securities. B) lower the discount rate. C) sell government securities. D) raise reserve requirements. Answer: C Topic: Chapter 10. 3 Conventional Monetary Policy Tools Question Status: Previous Edition 28) The Federal Reserve will engage in an outright purchase if it wants to ________ reserves ________ in the banking system. A) increase; permanently B) increase; temporarily C) decrease; temporarily D) decrease; permanently Answer: A Topic: Chapter 10. 3 Conventional Monetary Policy Tools Question Status: Previous Edition 29) If the Fed wants to temporarily drain reserves from the banking system, it will engage in A) a repurchase agreement. B) a matched sale-purchase transaction. C) a "pump" agreement. D) none of the above. Answer: B Topic: Chapter 10. 3 Conventional Monetary Policy Tools Question Status: Previous Edition 30) The Federal Reserve will engage in a matched sale-purchase transaction when it wants to ________ reserves ________ in the banking system. A) increase; permanently B) increase; temporarily C) decrease; temporarily D) decrease; permanently Answer: C Topic: Chapter 10. 3 Conventional Monetary Policy Tools Question Status: Previous Edition 31) Discount loans to banks experiencing severe liquidity problems are called A) primary credit. B) secondary credit. C) seasonal credit. D) lender-of-last-resort credit. Answer: B Topic: Chapter 10. 3 Conventional Monetary Policy Tools Question Status: Previous Edition 32) Discount loans to healthy banks, who may borrow as much as they wish from the Fed, are called A) primary credit. B) secondary credit. C) seasonal credit. D) lender-of-last-resort credit. Answer: A Topic: Chapter 10. 3 Conventional Monetary Policy Tools Question Status: Previous Edition 33) Disadvantages of using reserve requirements to control the money supply include A) their overly-powerful impact on the money supply. B) creating potential liquidity problems for banks with high levels of excess reserves. C) their overly-powerful impact on the monetary base. D) all of the above. Answer: A Topic: Chapter 10. 4 Reserve Requirements Question Status: Previous Edition 34) The Fed is reluctant to use reserve requirements to control the money supply because A) of their overly-powerful impact on the money supply. B) they have the potential to create liquidity problems for banks with low excess reserves. C) frequent changes in reserve requirements complicate liquidity management for banks. D) of all of the above. E) of only A and B of the above. Answer: D Topic: Chapter 10. 4 Reserve Requirements Question Status: Previous Edition 35) When the Federal Reserve was created, its most important role was intended to be A) a storage facility for the nation's gold. B) a lender of last resort. C) a regulator of bank holding companies. D) none of the above. Answer: B Topic: Chapter 10. 3 Conventional Monetary Policy Tools Question Status: Previous Edition 36) At its inception, the Federal Reserve was intended to be A) the Treasury's banker. B) the issuer of government debt. C) a lender of last resort. D) a regulator of bank holding companies. Answer: C Topic: Chapter 10. 3 Conventional Monetary Policy Tools Question Status: Previous Edition 37) Price stability is desirable because A) inflation creates uncertainty, making it difficult to plan for the future. B) everyone is better off when prices are stable. C) price stability increases the profitability of the Fed. D) it guarantees full employment. Answer: A Topic: Chapter 10. 7 The Price Stability Goal and the Nominal Anchor Question Status: Previous Edition 38) The Federal Reserve desires interest rate stability because A) it allows for less uncertainty about future planning. B) interest rate volatility often leads to demands to curtail the Fed's power. C) it guarantees full employment. D) both A and B of the above. Answer: D Topic: Chapter 10. 8 Other Goals of Monetary Policy Question Status: Previous Edition 39) When workers voluntarily quit a job or decline a job offer so they can search for a better one, the resulting unemployment is called A) structural unemployment. B) frictional unemployment. C) cyclical unemployment. D) underemployment. Answer: B Topic: Chapter 10. 8 Other Goals of Monetary Policy Question Status: Previous Edition 40) When there is a mismatch between job requirements and the skills of available workers, the resulting unemployment is called A) structural unemployment. B) frictional unemployment. C) cyclical unemployment. D) underemployment. Answer: A Topic: Chapter 10. 8 Other Goals of Monetary Policy Question Status: Previous Edition 41) 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 A) frictional rate of unemployment. B) structural rate of unemployment. C) natural rate of unemployment. D) ideal rate of unemployment. Answer: C Topic: Chapter 10. 8 Other Goals of Monetary Policy Question Status: Previous Edition 42) Although the goals of high employment and economic growth are closely related, policies can be specifically aimed at encouraging economic growth by A) encouraging firms to invest. B) encouraging people to save. C) both A and B of the above. D) neither A nor B of the above. Answer: C Topic: Chapter 10. 8 Other Goals of Monetary Policy Question Status: Previous Edition 43) Although the goals of high employment and economic growth are closely related, policies can be specifically aimed at encouraging economic growth by A) encouraging firms to invest and people to save. B) encouraging firms to limit their price increases. C) encouraging people to consume. D) all of the above. E) only A and C of the above. Answer: A Topic: Chapter 10. 8 Other Goals of Monetary Policy Question Status: Previous Edition 44) The Fed's monetary policy strategy can be described as follows: A) The Fed uses its policy tools to adjust intermediate targets that directly impact its operating targets in a way that allows the Fed to achieve its goals. B) The Fed uses its policy tools to adjust operating targets that directly impact its intermediate targets in a way that allows the Fed to achieve its goals. C) The Fed uses its operating targets to adjust its intermediate targets that directly impact its policy tools in a way that allows the Fed to achieve its goals. D) None of the above. Answer: B Topic: Chapter 10.12 Tactics: Choosing the Policy Instrument Question Status: Previous Edition 45) If the Fed's strategy for conducting monetary policy is thought of as a game plan that proceeds in stages, then the game plan can be summarized as follows: A) The Fed selects its policy goals, then the intermediate targets consistent with achieving its policy goals, then the operating targets consistent with its intermediate targets. Finally, it adjusts its policy tools to effect the desired targets and goals. B) The Fed selects its policy goals, then the operating targets consistent with achieving its policy goals, then the intermediate targets consistent with its operating targets. Finally, it adjusts its policy tools to effect the desired targets and goals. C) The Fed selects its policy goals, then the intermediate targets consistent with achieving its policy goals, then the policy tools consistent with its intermediate targets. Finally, it adjusts its operating targets to effect the desired targets and tools. D) The Fed selects its policy tools, then the operating targets consistent with achieving its policy tools, then the intermediate targets consistent with its operating targets. Finally, it adjusts its policy goals to effect the desired targets and tools. E) None of the above. Answer: A Topic: Chapter 10.12 Tactics: Choosing the Policy Instrument Question Status: Previous Edition 46) An advantage of an intermediate targeting strategy is that it provides the Fed with A) more timely information regarding the effect of monetary policy. B) a slow adjustment process. C) a target that is precisely correlated with economic activity. D) all of the above. E) only A and B of the above. Answer: A Topic: Chapter 10.12 Tactics: Choosing the Policy Instrument Question Status: Previous Edition 47) Which of the following is not a requirement in selecting an intermediate target? A) Measurability B) Controllability C) Flexibility D) Predictability Answer: C Topic: Chapter 10.12 Tactics: Choosing the Policy Instrument Question Status: Previous Edition 48) Which of the following is a potential operating target for the Fed? A) The monetary base B) The M1 money supply C) Nominal GDP D) The discount rate Answer: A Topic: Chapter 10.12 Tactics: Choosing the Policy Instrument Question Status: Previous Edition 49) Which of the following is a potential operating target for the Fed? A) Nonborrowed reserves B) The federal funds rate C) The monetary base D) All of the above Answer: D Topic: Chapter 10.12 Tactics: Choosing the Policy Instrument Question Status: Previous Edition 50) Which of the following is not an operating target? A) Nonborrowed reserves B) Monetary base C) Federal funds interest rate D) Discount rate E) All are operating targets Answer: D Topic: Chapter 10.12 Tactics: Choosing the Policy Instrument Question Status: Previous Edition 51) When it comes to choosing an operating target, both the ________ rate and ________ aggregates are easily controllable using the Fed's policy tools. A) federal funds; monetary B) federal funds; reserve C) three-month Treasury bill; monetary D) ten-year Treasury bond; reserve Answer: B Topic: Chapter 10.12 Tactics: Choosing the Policy Instrument Question Status: Previous Edition 52) If the desired intermediate target is an interest rate, then the preferred operating target will be a(n) ________ variable like the ________. A) interest rate; three-month Treasury bill rate B) interest rate; federal funds rate C) reserve aggregate; monetary base D) reserve aggregate; nonborrowed base Answer: B Topic: Chapter 10.12 Tactics: Choosing the Policy Instrument Question Status: Previous Edition 53) If the desired intermediate target is a monetary aggregate, then the preferred operating target will be a(n) ________ variable like the ________. A) interest rate; three-month Treasury bill rate B) interest rate; federal funds rate C) reserve aggregate; monetary base D) reserve aggregate; nonborrowed reserves Answer: C Topic: Chapter 10.12 Tactics: Choosing the Policy Instrument Question Status: Previous Edition 54) If the Fed uses nonborrowed reserves, a reserve aggregate, as a target, fluctuations in the reserves demand curve will cause ________ to fluctuate. A) nonborrowed reserves B) the federal funds interest rate C) monetary aggregates D) the inflation rate Answer: B Topic: Chapter 10.12 Tactics: Choosing the Policy Instrument Question Status: Previous Edition 55) If the Fed uses nonborrowed reserves, a reserve aggregate, as a target, an increase in the demand for reserves will result in a(n) ________ in ________. A) increase; nonborrowed reserves B) decrease; nonborrowed reserves C) increase; the federal funds interest rate D) decrease; the federal funds interest rate Answer: C Topic: Chapter 10.12 Tactics: Choosing the Policy Instrument Question Status: Previous Edition 56) If the Fed uses the federal funds rate as an interest rate target, fluctuations in the reserves demand curve will cause ________ to fluctuate. A) nonborrowed reserves B) the federal funds interest rate C) Treasury bill interest rates D) the inflation rate Answer: A Topic: Chapter 10.12 Tactics: Choosing the Policy Instrument Question Status: Previous Edition 57) If the Fed uses the federal funds rate as an interest rate target, an increase in the demand for reserves will result in a(n) ________ in ________. A) increase; nonborrowed reserves B) decrease; nonborrowed reserves C) increase; the federal funds interest rate D) decrease; the federal funds interest rate Answer: A Topic: Chapter 10.12 Tactics: Choosing the Policy Instrument Question Status: Previous Edition 58) Under inflation targeting, a central bank must pursue policies that A) keep the inflation rate at a target value of zero. B) keep the inflation rate at some specific target value. C) keep the inflation rate within a specific target range. D) lower the inflation rate, provided this can be done without raising the unemployment rate above a specified target value. Answer: C Topic: Chapter 10.12 Tactics: Choosing the Policy Instrument Question Status: Previous Edition 59) The first country to mandate that its central bank adopt inflation targeting was A) the United States. B) the United Kingdom. C) Canada. D) New Zealand. Answer: D Topic: Chapter 10.10 Inflation Targeting Question Status: Previous Edition 60) Banks' holding of deposits in accounts with the Fed, plus currency that is physically held in banks are called A) the monetary base. B) government securities. C) open market operations. D) reserves. Answer: D Topic: Chapter 10. 4 Reserve Requirements Question Status: Previous Edition 61) An open market ________ leads to a(n) ________ of reserves and deposits in the banking system and hence to a(n) ________ of the monetary base and the money supply. A) sale; expansion; contraction B) purchase; expansion; contraction C) sale; expansion; expansion D) purchase; expansion; expansion Answer: D Topic: Chapter 10. 2 The Market for Reserves and the Federal Funds Rate Question Status: Previous Edition 62) Regulations making it obligatory for depository institutions to keep a certain fraction of their deposits in accounts with the Fed are A) open market operations. B) federal funds rate. C) required reserve ratio. D) reserve requirements. Answer: D Topic: Chapter 10. 4 Reserve Requirements Question Status: Previous Edition 63) Which type of open market operation is intended to change the level of reserves? A) Defensive open market operations B) Reserve requirements C) Dynamic open market operations D) Market equilibrium Answer: C Topic: Chapter 10. 3 Conventional Monetary Policy Tools Question Status: Previous Edition 64) The type of open market operation intended to offset movements in other factors that affect reserves and the monetary base is A) the dynamic open market operations. B) the defensive open market operations. C) the reserve requirements. D) market equilibrium. Answer: B Topic: Chapter 10. 3 Conventional Monetary Policy Tools Question Status: Previous Edition 65) What goals are continually mentioned by central bank officials when discussing the objectives of monetary policy? A) High unemployment B) Instability in foreign exchange markets C) Interest-rate stability D) All of the above Answer: C Topic: Chapter 10. 8 Other Goals of Monetary Policy Question Status: Previous Edition 66) Which of the following statements is correct, concerning price stability as a monetary goal? A) In the long run, no inconsistency exists between the price stability goal and the other goals, such as high unemployment. B) In the short run price stability often conflicts with the goals of high employment and interest-rate stability. C) Neither A nor B is true. D) Both A and B are correct. Answer: D Topic: Chapter 10. 9 Should Price Stability Be the Primary Goal of Monetary Policy? Question Status: New Question 67) Which of the following statements is correct, concerning price stability as a monetary goal? A) In the long run, inconsistencies exists between the price stability goal and the other goals, such as high unemployment. B) In the short run price stability does not conflict with the goals of high employment and interest-rate stability. C) Neither A nor B is true. D) Both A and B are correct. Answer: C Topic: Chapter 10. 9 Should Price Stability Be the Primary Goal of Monetary Policy? Question Status: New Question 68) The Bank of England, as well as the ECB, put price stability first among all goals. This is known as a ________. A) hierarchical mandate B) dual mandate C) singular mandate D) ubiquitous mandate Answer: A Topic: Chapter 10. 9 Should Price Stability Be the Primary Goal of Monetary Policy? Question Status: New Question 69) The Fed puts price stability along with maximum employment as its primary goals. This is known as a ________. A) hierarchical mandate B) dual mandate C) singular mandate D) ubiquitous mandate Answer: B Topic: Chapter 10. 9 Should Price Stability Be the Primary Goal of Monetary Policy? Question Status: New Question 70) Hierarchical mandates can cause a problem that Mervyn King, Governor of the Bank of England, refers to as an "inflation nutter," that can lead to large ________. A) inflation spikes B) output fluctuations C) unemployment rates D) economic growth Answer: B Topic: Chapter 10. 9 Should Price Stability Be the Primary Goal of Monetary Policy? Question Status: New Question 71) Inflation targeting involves A) a public announcement of medium-term numerical targets for inflation. B) increased accountability of the central bank for attaining its inflation objectives. C) an information-inclusive approach in which many variables are used in making decisions about monetary policy. D) all of the above. Answer: A Topic: Chapter 10.10 Inflation Targeting Question Status: Previous Edition 72) During the 2007-2009 financial crisis, what actions did the Fed take to limit the scope of the crisis? A) The Fed lowered the spread on the discount rate to 50 basis points, and then to 25. B) The Fed set up the Term Auction Facility to provide further liquidity to banks. C) The Fed purchased assets of Bear Stearns to facilitate the purchase of Bear Stearns by J.P. Morgan. D) all of the above. Answer: D Topic: Chapter 10. 5 Nonconventional Monetary Policy Tools and Quantitative Easing Question Status: New Question 73) Which of the following statements is true regarding the Fed's procedures for operating the discount window? A) The Fed's operating procedures and paying interest on reserves contains the federal funds rate between the interest rate paid on reserves and the discount rate. B) The Fed's operating procedures and paying interest on reserves creates more fluctuation in the federal funds rate than if they simply didn't pay interest on reserves. C) The Fed's operating procedures and paying interest on reserves has no impact on the fluctuation of the federal funds rate. D) None of the above is correct. Answer: A Topic: Chapter 10. 4 Reserve Requirements Question Status: New Question 74) Which of the following statements is true? A) Credit-driven asset bubbles are particularly dangerous. When asset prices fall, the deleveraging of credit markets reduces economic activity. B) Bubbles driven soley by irrational exuberance lead to a failure of financial institutions. C) Both A and B are correct. D) Neither A nor B is correct. Answer: A Topic: Chapter 10.11 Should Central Banks Respond to Asset-Price Bubbles? Lessons from the Global Financial Crisis Question Status: New Question 75) If the Fed wants to "prick" an asset-pricing bubble driven by a credit boom, what is the primary tool for accomplishing this? A) Raising interest rates B) Lowering interest rates C) Increasing reserve requirements D) Taking a short position in the overpriced asset Answer: A Topic: Chapter 10.11 Should Central Banks Respond to Asset-Price Bubbles? Lessons from the Global Financial Crisis Question Status: New Question 76) In response to an asset-price bubble, macroprudential regulation appears to be the right tool. What is macroprudential regulation? A) Increasing the federal funds rate across the macroeconomy B) The use of tax incentives to capture some of the gains from bubbles C) Regulatory policy to affect what is happening in credit markets in the aggregate D) None of the above is correct. Answer: C Topic: Chapter 10.11 Should Central Banks Respond to Asset-Price Bubbles? Lessons from the Global Financial Crisis 77) As of June 2013, the consolidated balance sheet of the Federal Reserve System included about ________ in assets. A) $3.5 trillion B) $2.0 trillion C) $1.5 trillion D) $500 billion Answer: A Topic: Chapter 10.A1 The Fed's Balance Sheet and the Monetary Base Question Status: New Question 10.2 True/False 1) An objective of the Federal Reserve in its conduct of monetary policy is high employment. Answer: TRUE Topic: Chapter 10. 8 Other Goals of Monetary Policy Question Status: Previous Edition 2) When workers voluntarily leave work while they look for better jobs, the resulting unemployment is called frictional unemployment. Answer: TRUE Topic: Chapter 10. 8 Other Goals of Monetary Policy Question Status: Previous Edition 3) The discount rate is an operating target. Answer: FALSE Topic: Chapter 10.12 Tactics: Choosing the Policy Instrument Question Status: Previous Edition 4) The federal funds rate is an operating target. Answer: TRUE Topic: Chapter 10.12 Tactics: Choosing the Policy Instrument Question Status: Previous Edition 5) Open market purchases by the Fed increase the supply of nonborrowed reserves. Answer: TRUE Topic: Chapter 10. 1 The Federal Reserve's Balance Sheet Question Status: Previous Edition 6) Open market purchases by the Fed cause the federal funds rate to rise. Answer: FALSE Topic: Chapter 10. 2 The Market for Reserves and the Federal Funds Rate Question Status: Previous Edition 7) Flexibility is a requirement in selecting an intermediate target. Answer: FALSE Topic: Chapter 10.12 Tactics: Choosing the Policy Instrument Question Status: Previous Edition 8) Inflation targeting makes the central bank less accountable. Answer: FALSE Topic: Chapter 10.10 Inflation Targeting Question Status: Previous Edition 9) An open market sale leads to an expansion of reserves and deposits in the banking system and hence to a decline in the monetary base and the money supply. Answer: FALSE Topic: Chapter 10. 3 Conventional Monetary Policy Tools Question Status: Previous Edition 10) Decreased transparency of the monetary policy strategy through communication with the public and the markets about the plans and objectives of monetary policymakers is an element of inflation targeting. Answer: FALSE Topic: Chapter 10.10 Inflation Targeting Question Status: Previous Edition 11) The Fed's operating procedures and paying interest on reserves contains the federal funds rate between the interest rate paid on reserves and the discount rate. Answer: TRUE Topic: Chapter 10. 2 The Market for Reserves and the Federal Funds Rate Question Status: New Question 12) An important lesson from the global financial crisis is that central banks and other regulators should have a laissez-faire attitude and let credit-driven bubbles proceed without any reaction. Intervention is always a mistake. Answer: FALSE Topic: Chapter 10.11 Should Central Banks Respond to Asset-Price Bubbles? Lessons from the Global Financial Crisis Question Status: New Question 13) Quantitative easing and credit easing are essentially the same thing. Answer: FALSE Topic: Chapter 10. 5 Nonconventional Monetary Policy Tools and Quantitative Easing Question Status: New Question 14) In the long run, the price stability goal is inconsistent with other goals, such as economics growth, stability of financial markets, etc. Answer: FALSE Topic: Chapter 10. 9 Should Price Stability Be the Primary Goal of Monetary Policy? Question Status: New Question 15) The natural rate of unemployment is not lowered by high inflation, so higher inflation cannot produce lower unemployment or more employment in the long run. Answer: TRUE Topic: Chapter 10. 9 Should Price Stability Be the Primary Goal of Monetary Policy? Question Status: New Question 16) In the short run, price stability often conflicts with the goals of high employment and interest-rate stability. Answer: TRUE Topic: Chapter 10. 9 Should Price Stability Be the Primary Goal of Monetary Policy? Question Status: New Question

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Chapter 11 The Money Markets 11.1 Multiple Choice 1) Activity in money markets increased significantly in the late 1970s and early 1980s because of A) rising short-term interest rates. B) regulations that limited what banks could pay for deposits. C) both A and B of the above. D) neither A nor B of the above. Answer: C Topic: Chapter 11.1 The Money Markets Defined Question Status: Previous Edition 2) Money market securities have all the following characteristics except they are not A) short term. B) money. C) low risk. D) very liquid. Answer: B Topic: Chapter 11.1 The Money Markets Defined Question Status: Previous Edition 3) Money market instruments A) are usually sold in large denominations. B) have low default risk. C) mature in one year or less. D) are characterized by all of the above. E) are characterized by only A and B of the above. Answer: D Topic: Chapter 11.1 The Money Markets Defined Question Status: Previous Edition 4) The banking industry A) should have an efficiency advantage in gathering information that would eliminate the need for the money markets. B) exists primarily to mediate the asymmetric information problem between saver-lenders and borrower-spenders. C) is subject to more regulations and governmental costs than the money markets. D) all of the above are true. E) only A and B of the above are true. Answer: D Topic: Chapter 11.1 The Money Markets Defined Question Status: Previous Edition 5) In situations where asymmetric information problems are not severe, A) the money markets have a distinct cost advantage over banks in providing short-term funds. B) the money markets have a distinct cost advantage over banks in providing long-term funds. C) banks have a distinct cost advantage over the money markets in providing short-term funds. D) the money markets cannot allocate short-term funds as efficiently as banks can. Answer: A Topic: Chapter 11.1 The Money Markets Defined Question Status: Previous Edition 6) Brokerage firms that offered money market security accounts in the 1970s had a cost advantage over banks in attracting funds because the brokerage firms A) were not subject to deposit reserve requirements. B) were not subject to the deposit interest rate ceilings. C) were not limited in how much they could borrow from depositors. D) had the advantage of all the above. E) had the advantage of only A and B of the above. Answer: E Topic: Chapter 11.1 The Money Markets Defined Question Status: Previous Edition 7) Which of the following statements about the money markets are true? A) Not all commercial banks deal for their customers in the secondary market. B) Money markets are used extensively by businesses both to warehouse surplus funds and to raise short-term funds. C) The single most influential participant in the U.S. money market is the U.S. Treasury Department. D) All of the above are true. E) Only A and B of the above are true. Answer: E Topic: Chapter 11.3 Who Participates in the Money Markets? Question Status: Previous Edition 8) Which of the following statements about the money markets are true? A) Most money market securities do not pay interest. Instead, the investor pays less for the security than it will be worth when it matures. B) Pension funds invest a portion of their assets in the money market to have sufficient liquidity to meet their obligations. C) Unlike most participants in the money market, the U.S. Treasury Department is always a demander of money market funds and never a supplier. D) All of the above are true. E) Only A and B of the above are true. Answer: D Topic: Chapter 11.3 Who Participates in the Money Markets? Question Status: Previous Edition 9) Which of the following are true statements about participants in the money markets? A) Large banks participate in the money markets by selling large negotiable CDs. B) The U.S. government and corporations borrow in the money markets because cash inflows and outflows are rarely synchronized. C) The Federal Reserve is the single most influential participant in the U.S. money market. D) All of the above are true. E) Only A and B of the above are true. Answer: D Topic: Chapter 11.3 Who Participates in the Money Markets? Question Status: Previous Edition 10) The most influential participant(s) in the U.S. money market A) is the Federal Reserve. B) is the U.S. Treasury Department. C) are the large money center banks. D) are the investment banks that underwrite securities. Answer: A Topic: Chapter 11.3 Who Participates in the Money Markets? Question Status: Previous Edition 11) The Fed is an active participant in money markets mainly because of its responsibility to A) lower borrowing costs to encourage capital investment. B) control the money supply. C) increase the interest income of retirees holding money market instruments. D) assist the Securities and Exchange Commission in regulating the behavior of other money market participants. Answer: B Topic: Chapter 11.3 Who Participates in the Money Markets? Question Status: Previous Edition 12) Commercial banks are large holders of ________ and are the major issuer of ________. A) negotiable certificates of deposit; U.S. government securities B) U.S. government securities; negotiable certificates of deposit C) commercial paper; Eurodollars D) Eurodollars; commercial paper Answer: B Topic: Chapter 11.3 Who Participates in the Money Markets? Question Status: Previous Edition 13) The primary function of large diversified brokerage firms in the money market is to A) sell money market securities to the Federal Reserve for its open market operations. B) make a market for money market securities by maintaining an inventory from which to buy or sell. C) buy money market securities from corporations that need liquidity. D) buy T-bills from the U.S. Treasury Department. Answer: B Topic: Chapter 11.3 Who Participates in the Money Markets? Question Status: Previous Edition 14) Finance companies raise funds in the money market by selling A) commercial paper. B) federal funds. C) negotiable certificates of deposit. D) Eurodollars. Answer: A Topic: Chapter 11.3 Who Participates in the Money Markets? Question Status: Previous Edition 15) Finance companies play a unique role in money markets by A) giving consumers indirect access to money markets. B) combining consumers' investments to purchase money market securities on their behalf. C) borrowing in capital markets to finance purchases of money market securities. D) assisting the government in its sales of U.S. Treasury securities. Answer: A Topic: Chapter 11.3 Who Participates in the Money Markets? Question Status: Previous Edition 16) When inflation rose in the late 1970s, A) consumers moved money out of money market mutual funds because their returns did not keep pace with inflation. B) banks solidified their advantage over money markets by offering higher deposit rates. C) brokerage houses introduced highly popular money market mutual funds, which drew significant amounts of money out of bank deposits. D) consumers were unable to take advantage of higher rates in money markets because of the requirement of large transaction sizes. Answer: C Topic: Chapter 11.3 Who Participates in the Money Markets? Question Status: Previous Edition 17) Which of the following is the largest borrower in the money markets? A) Commercial banks B) Large corporations C) The U.S. Treasury D) U.S. firms engaged in foreign trade Answer: C Topic: Chapter 11.3 Who Participates in the Money Markets? Question Status: Previous Edition 18) Money market instruments issued by the U.S. Treasury are called A) Treasury bills. B) Treasury notes. C) Treasury bonds. D) Treasury strips. Answer: A Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 19) Which of the following statements are true of Treasury bills? A) The market for Treasury bills is extremely deep and liquid. B) Occasionally, investors find that earnings on T-bills do not compensate them for changes in purchasing power due to inflation. C) By volume, most Treasury bills are sold to individuals who submit noncompetitive bids. D) All of the above are true. E) Only A and B of the above are true. Answer: E Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 20) Suppose that you purchase a 91-day Treasury bill for $9,850 that is worth $10,000 when it matures. The security's annualized yield if held to maturity is about A) 4 percent. B) 5 percent. C) 6 percent. D) 7 percent. Answer: C Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 21) Suppose that you purchase a 182-day Treasury bill for $9,850 that is worth $10,000 when it matures. The security's annualized yield if held to maturity is about A) 1.5%. B) 2%. C) 3%. D) 6%. Answer: C Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 22) Treasury bills do not A) pay interest. B) have a maturity date. C) have a face amount. D) have an active secondary market. Answer: A Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 23) If your competitive bid for a Treasury bill is successful, then you will A) certainly pay less than if you had submitted a noncompetitive bid. B) probably pay more than if you had submitted a noncompetitive bid. C) pay the average of prices offered in other successful competitive bids. D) pay the same as other successful competitive bidders. Answer: B Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 24) If your noncompetitive bid for a Treasury bill is successful, then you will A) certainly pay less than if you had submitted a competitive bid. B) certainly pay more than if you had submitted a competitive bid. C) pay the average of prices offered in other noncompetitive bids. D) pay the same as other successful noncompetitive bidders. Answer: D Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 25) Federal funds A) are short-term funds transferred between financial institutions, usually for a period of one day. B) actually have nothing to do with the federal government. C) provide banks with an immediate infusion of reserves. D) are all of the above. E) are only A and B of the above. Answer: D Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 26) Federal funds are A) usually overnight investments. B) borrowed by banks that have a deficit of reserves. C) lent by banks that have an excess of reserves. D) all of the above. E) only A and B of the above. Answer: D Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 27) The Fed can influence the federal funds interest rate by adjusting the level of reserves available to banks. The Fed can A) lower the federal funds interest rate by adding reserves. B) raise the federal funds interest rate by removing reserves. C) remove reserves by selling securities. D) do all of the above. E) do only A and B of the above. Answer: D Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 28) The Federal Reserve can influence the federal funds interest rate by buying securities, which ________ reserves, thereby ________ the federal funds rate. A) adds; raising B) removes; lowering C) adds; lowering D) removes; raising Answer: C Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 29) The Fed can lower the federal funds interest rate by ________ securities, thereby ________ reserves. A) selling; adding B) selling; lowering C) buying; adding D) buying; lowering Answer: C Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 30) If the Fed wants to lower the federal funds interest rate, it will ________ the banking system by ________ securities. A) add reserves to; selling B) add reserves to; buying C) remove reserves from; selling D) remove reserves from; buying Answer: B Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 31) If the Fed wants to raise the federal funds interest rate, it will ________ securities to ________ the banking system. A) sell; add reserves to B) sell; remove reserves from C) buy; add reserves to D) buy; remove reserves from Answer: B Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 32) Government securities dealers frequently engage in repos to A) manage liquidity. B) take advantage of anticipated changes in interest rates. C) lend or borrow for a day or two with what is essentially a collateralized loan. D) do all of the above. E) do only A and B of the above. Answer: D Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 33) Repos are A) usually low-risk loans. B) usually collateralized with Treasury securities. C) low interest rate loans. D) all of the above. E) only A and B of the above. Answer: D Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 34) A negotiable certificate of deposit A) is a term security because it has a specified maturity date. B) is a bearer instrument, meaning whoever holds the certificate at maturity receives the principal and interest. C) can be bought and sold until maturity. D) all of the above. E) only A and B of the above. Answer: D Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 35) Negotiable certificates of deposit A) are bearer instruments because their holders earn the interest and principal at maturity. B) typically have a maturity of one to four months. C) are usually denominated at $100,000. D) are all of the above. E) are only A and B of the above. Answer: E Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 36) Commercial paper securities A) are issued only by the largest and most creditworthy corporations, as they are unsecured. B) carry an interest rate that varies according to the firm's level of risk. C) never have a term to maturity that exceeds 270 days. D) all of the above. E) only A and B of the above. Answer: D Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 37) Unlike most money market securities, commercial paper A) is not generally traded in a secondary market. B) usually has a term to maturity that is longer than a year. C) is not popular with most money market investors because of the high default risk. D) all of the above. E) only A and B of the above. Answer: A Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 38) A banker's acceptance is A) used to finance goods that have not yet been transferred from the seller to the buyer. B) an order to pay a specified amount of money to the bearer on a given date. C) a relatively new money market security that arose in the 1960s as international trade expanded. D) all of the above. E) only A and B of the above. Answer: E Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 39) Banker's acceptances A) can be bought and sold until they mature. B) are issued only by large money center banks. C) carry low interest rates because of the very low default risk. D) are all of the above. E) are only A and B of the above. Answer: D Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 40) Eurodollars A) are time deposits with fixed maturities and are, therefore, somewhat illiquid. B) may offer the borrower a lower interest rate than can be received in the domestic market. C) are limited to London banks. D) are all of the above. E) are only A and B of the above. Answer: E Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 41) Which of the following statements about money market securities are true? A) The interest rates on all money market instruments move very closely together over time. B) The secondary market for Treasury bills is extensive and well developed. C) There is no well-developed secondary market for commercial paper. D) All of the above are true. E) Only A and B of the above are true. Answer: D Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 42) Money market transactions A) do not take place in any one particular location or building. B) are usually arranged purchases and sales between participants over the phone by traders and completed electronically. C) are both A and B of the above. D) are none the the above. Answer: C Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 43) Two important characteristics of any financial market are flexibility and A) risk. B) innovation. C) tolerance. D) capital. Answer: B Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 44) The main role of investment companies in the money market is to A) trade on behalf of commercial accounts. B) mediate the symmetric information problem between server-lender and borrower-spenders. C) both A and B of the above. D) neither A nor B of the above. Answer: A Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 45) In a direct placement A) the issuer bypasses the dealer and sells indirectly to the end investor. B) the dealer sells directly to the end investor. C) the issuer bypasses the dealer and sells directly to the end investor. D) none of the above. Answer: A Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 46) The advantage of mutual funds is that they A) require no cash up front. B) give investors with relatively small amounts of cash to invest access to large-denomination securities. C) always yield the highest returns. D) both A and B of the above. Answer: B Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 47) Asset-backed commercial paper differs from conventional commercial paper in that A) it is backed (secured) by some bundle of assets. B) its maturity usually extends well beyond 1 year. C) both A and B of the above. D) neither A nor B of the above. Answer: A Topic: Chapter 11.4 Money Market Instruments Question Status: New Question 48) The usual maturity range for commercial paper is ________. A) 1 to 270 days B) 1 to 15 days C) 4, 13, and 26 weeks D) 1 to 7 days Answer: A Topic: Chapter 11.5 Comparing Money Market Securities Question Status: New Question 49) The usual maturity range for fed funds is ________. A) 1 to 270 days B) 1 to 15 days C) 4, 13, and 26 weeks D) 1 to 7 days Answer: D Topic: Chapter 11.5 Comparing Money Market Securities Question Status: New Question 11.2 True/False 1) Money market securities are short-term instruments with an original maturity of less than one year. Answer: TRUE Topic: Chapter 11.1 The Money Markets Defined Question Status: Previous Edition 2) Money market securities include Treasury bills, commercial paper, federal funds, repurchase agreements, negotiable certificates of deposit, banker's acceptances, and Eurodollars. Answer: TRUE Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 3) The term money market is actually a misnomer, because liquid securities are traded in these markets rather than money. Answer: TRUE Topic: Chapter 11.1 The Money Markets Defined Question Status: Previous Edition 4) Money markets are referred to as retail markets because small individual investors are the primary buyers of money market securities. Answer: FALSE Topic: Chapter 11.1 The Money Markets Defined Question Status: Previous Edition 5) The U.S. Treasury Department is the single most influential participant in the U.S. money market. Answer: FALSE Topic: Chapter 11.3 Who Participates in the Money Markets? Question Status: Previous Edition 6) The U.S. Treasury Department is the single largest borrower in the U.S. money market. Answer: TRUE Topic: Chapter 11.3 Who Participates in the Money Markets? Question Status: Previous Edition 7) Banks are unusual participants in the money market because they buy, but do not sell, money market instruments. Answer: FALSE Topic: Chapter 11.3 Who Participates in the Money Markets? Question Status: Previous Edition 8) Money markets are used extensively by businesses both to warehouse surplus funds and to raise short-term funds. Answer: TRUE Topic: Chapter 11.3 Who Participates in the Money Markets? Question Status: Previous Edition 9) The market for U.S. Treasury bills is a shallow market because so few individual investors buy T-bills. Answer: FALSE Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 10) The T-bill is not an investment to be used for anything but temporary storage of excess funds because it barely keeps up with inflation. Answer: TRUE Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 11) The main purpose of federal funds is to provide banks with an immediate infusion of reserves should they be short. Answer: TRUE Topic: Chapter 11.2 The Purpose of the Money Markets Question Status: Previous Edition 12) The Fed can influence the federal funds rate by adjusting the level of reserves in the banking system. Answer: TRUE Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 13) Commercial paper securities are unsecured promissory notes, issued by corporations, that mature in no more than 270 days. Answer: TRUE Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 14) A banker's acceptance is an order to pay a specified amount of money to the bearer on a given date. Banker's acceptances have been used since the twelfth century. Answer: TRUE Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 15) Interest rates on banker's acceptances are low because the risk of default is very low. Answer: TRUE Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 16) The size of the asset-backed commercial paper market nearly doubled between 2004 and 2007 to about $1 trillion. Answer: TRUE Topic: Chapter 11.4 Money Market Instruments 17) In general, money market instruments are low-risk, high-yield securities. Answer: FALSE Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 18) Commercial paper has been used in various forms since the 1930s. Answer: FALSE Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 19) The Treasury accepts noncompetitive bids in ascending order of yield until the accepted bids reach the offering amount. Answer: FALSE Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 20) Not all commercial banks deal in the secondary money market for their customers. Answer: TRUE Topic: Chapter 11.3 Who Participates in the Money Markets? Question Status: Previous Edition

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Chapter 12 The Bond Market 12.1 Multiple Choice 1) Compared to money market securities, capital market securities have A) more liquidity. B) longer maturities. C) lower yields. D) less risk. Answer: B Topic: Chapter 12. 1 Purpose of the Capital Market Question Status: Previous Edition 2) (I) Securities that have an original maturity greater than one year are traded in capital markets. (II) The best known capital market securities are stocks and bonds. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: C Topic: Chapter 12. 1 Purpose of the Capital Market Question Status: Previous Edition 3) (I) Securities that have an original maturity greater than one year are traded in money markets. (II) The best known money market securities are stocks and bonds. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: D Topic: Chapter 12. 1 Purpose of the Capital Market Question Status: Previous Edition 4) (I) Firms and individuals use the capital markets for long-term investments. (II) Capital markets provide an alternative to investment in assets such as real estate and gold. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: C Topic: Chapter 12. 1 Purpose of the Capital Market Question Status: Previous Edition 5) The primary reason that individuals and firms choose to borrow long-term is to reduce the risk that interest rates will ________ before they pay off their debt. A) rise B) fall C) become more volatile D) become more stable Answer: A Topic: Chapter 12. 1 Purpose of the Capital Market Question Status: Previous Edition 6) The primary reason that individuals and firms choose to borrow long-term is to A) reduce the risk that interest rates will fall before they pay off their debt. B) reduce the risk that interest rates will rise before they pay off their debt. C) reduce monthly interest payments, as interest rates tend to be higher on short-term than long-term debt instruments. D) reduce total interest payments over the life of the debt. Answer: B Topic: Chapter 12. 1 Purpose of the Capital Market Question Status: Previous Edition 7) A firm will borrow long-term A) if the extra interest cost of borrowing long-term is less than the expected cost of rising interest rates before it retires its debt. B) if the extra interest cost of borrowing short-term due to rising interest rates does not exceed the expected premium that is paid for borrowing long-term. C) if short-term interest rates are expected to decline during the term of the debt. D) if long-term interest rates are expected to decline during the term of the debt. Answer: A Topic: Chapter 12. 1 Purpose of the Capital Market Question Status: Previous Edition 8) The primary issuers of capital market securities include A) the federal and local governments. B) the federal and local governments, and corporations. C) the federal and local governments, corporations, and financial institutions. D) local governments and corporations. Answer: B Topic: Chapter 12. 2 Capital Market Participants Question Status: Previous Edition 9) Governments never issue stock because A) they cannot sell ownership claims. B) the Constitution expressly forbids it. C) both A and B of the above. D) neither A nor B of the above. Answer: A Topic: Chapter 12. 2 Capital Market Participants Question Status: Previous Edition 10) (I) The primary issuers of capital market securities are federal and local governments, and corporations. (II) Governments never issue stock because they cannot sell ownership claims. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: C Topic: Chapter 12. 2 Capital Market Participants Question Status: Previous Edition 11) (I) The primary issuers of capital market securities are financial institutions. (II) The largest purchasers of capital market securities are corporations. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: D Topic: Chapter 12. 2 Capital Market Participants Question Status: Previous Edition 12) The distribution of a firm's capital between debt and equity is its A) current ratio. B) liability structure. C) acid ratio. D) capital structure. Answer: D Topic: Chapter 12. 2 Capital Market Participants Question Status: Previous Edition 13) The largest purchasers of capital market securities are A) households. B) corporations. C) governments. D) central banks. Answer: A Topic: Chapter 12. 2 Capital Market Participants Question Status: Previous Edition 14) Individuals and households frequently purchase capital market securities through financial institutions such as A) mutual funds. B) pension funds. C) money market mutual funds. D) all of the above. E) only A and B of the above. Answer: E Topic: Chapter 12. 2 Capital Market Participants Question Status: Previous Edition 15) (I) There are two types of exchanges in the secondary market for capital securities: organized exchanges and over-the-counter exchanges. (II) When firms sell securities for the very first time, the issue is an initial public offering. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: C Topic: Chapter 12. 3 Capital Market Trading Question Status: Previous Edition 16) (I) Capital market securities fall into two categories: bonds and stocks. (II) Long-term bonds include government bonds and long-term notes, municipal bonds, and corporate bonds. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: B Topic: Chapter 12. 4 Types of Bonds Question Status: Previous Edition 17) The ________ value of a bond is the amount that the issuer must pay at maturity. A) market B) present C) discounted D) face Answer: D Topic: Chapter 12. 4 Types of Bonds Question Status: Previous Edition 18) The ________ rate is the rate of interest that the issuer must pay. A) market B) coupon C) discount D) funds Answer: B Topic: Chapter 12. 4 Types of Bonds Question Status: Previous Edition 19) (I) The coupon rate is the rate of interest that the issuer of the bond must pay. (II) The coupon rate is usually fixed for the duration of the bond and does not fluctuate with market interest rates. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: C Topic: Chapter 12. 4 Types of Bonds Question Status: Previous Edition 20) (I) The coupon rate is the rate of interest that the issuer of the bond must pay. (II) The coupon rate on old bonds fluctuates with market interest rates so they will remain attractive to investors. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: A Topic: Chapter 12. 4 Types of Bonds Question Status: Previous Edition 21) Treasury bonds are subject to ________ risk but are free of ________ risk. A) default; interest-rate B) default; underwriting C) interest-rate; default D) interest-rate; underwriting Answer: C Topic: Chapter 12. 5 Treasury Notes and Bonds Question Status: Previous Edition 22) The prices of Treasury notes, bonds, and bills are quoted A) as a percentage of the coupon rate. B) as a percentage of the previous day's closing value. C) as a percentage of $100 face value. D) as a multiple of the annual interest paid. Answer: C Topic: Chapter 12. 5 Treasury Notes and Bonds Question Status: Previous Edition 23) The security with the longest maturity is a Treasury A) note. B) bond. C) acceptance. D) bill. Answer: B Topic: Chapter 12. 5 Treasury Notes and Bonds Question Status: Previous Edition 24) (I) To sell an old bond when interest rates have risen, the holder will have to discount the bond until the yield to the buyer is the same as the market rate. (II) The risk that the value of a bond will fall when market interest rates rise is called interest-rate risk. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: C Topic: Chapter 12.10 Finding the Value of Coupon Bonds Question Status: Previous Edition 25) To sell an old bond when interest rates have ________, the holder will have to ________ the price of the bond until the yield to the buyer is the same as the market rate. A) risen; lower B) risen; raise C) fallen; lower D) risen; inflate Answer: A Topic: Chapter 12.10 Finding the Value of Coupon Bonds Question Status: Previous Edition 26) Most of the time, the interest rate on Treasury notes and bonds is ________ that on money market securities because of ________ risk. A) above; interest-rate B) above; default C) below; interest-rate D) below; default Answer: A Topic: Chapter 12. 5 Treasury Notes and Bonds Question Status: Previous Edition 27) (I) In most years, the rate of return on short-term Treasury bills is below that on the 20-year Treasury bond. (II) Interest rates on Treasury bills are more volatile than rates on long-term Treasury securities. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: C Topic: Chapter 12. 5 Treasury Notes and Bonds Question Status: Previous Edition 28) (I) Because interest rates on Treasury bills are more volatile than rates on long-term securities, the return on short-term Treasury securities is usually above that on longer-term Treasury securities. (II) A Treasury STRIP separates the periodic interest payments from the final principal repayment. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: B Topic: Chapter 12. 5 Treasury Notes and Bonds Question Status: Previous Edition 29) Which of the following statements about Treasury inflation-indexed bonds is not true? A) The principal amount used to compute the interest payment varies with the consumer price index. B) The interest payment rises when inflation occurs. C) The interest rate rises when inflation occurs. D) At maturity, the securities pay the greater of face value or inflation-adjusted principal. Answer: A Topic: Chapter 12. 5 Treasury Notes and Bonds Question Status: Previous Edition 30) (I) Municipal bonds that are issued to pay for essential public projects are exempt from federal taxation. (II) General obligation bonds do not have specific assets pledged as security or a specific source of revenue allocated for their repayment. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: C Topic: Chapter 12. 6 Municipal Bonds Question Status: Previous Edition 31) (I) Most corporate bonds have a face value of $1,000, pay interest semiannually, and can be redeemed anytime the issuer wishes. (II) Registered bonds have now been largely replaced by bearer bonds, which do not have coupons. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: A Topic: Chapter 12. 7 Corporate Bonds Question Status: Previous Edition 32) The bond contract that states the lender's rights and privileges and the borrower's obligations is called the A) bond syndicate. B) restrictive covenant. C) bond covenant. D) bond indenture. Answer: D Topic: Chapter 12. 7 Corporate Bonds Question Status: Previous Edition 33) Policies that limit the discretion of managers as a way of protecting bondholders' interests are called A) restrictive covenants. B) debentures. C) sinking funds. D) bond indentures. Answer: A Topic: Chapter 12. 7 Corporate Bonds Question Status: Previous Edition 34) Typically, the interest rate on corporate bonds will be ________ the more restrictions are placed on management through restrictive covenants, because ________. A) higher; corporate earnings will be limited by the restrictions B) higher; the bonds will be considered safer by bondholders C) lower; the bonds will be considered safer by buyers D) lower; corporate earnings will be higher with more restrictions in place Answer: C Topic: Chapter 12. 7 Corporate Bonds Question Status: Previous Edition 35) Restrictive covenants can A) limit the amount of dividends the firm can pay. B) limit the ability of the firm to issue additional debt. C) restrict the ability of the firm to enter into a merger agreement. D) do all of the above. E) do only A and B of the above. Answer: D Topic: Chapter 12. 7 Corporate Bonds Question Status: Previous Edition 36) (I) Restrictive covenants often limit the amount of dividends that firms can pay the stockholders. (II) Most corporate indentures include a call provision, which states that the issuer has the right to force the holder to sell the bond back. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: C Topic: Chapter 12. 7 Corporate Bonds Question Status: Previous Edition 37) Call provisions will be exercised when interest rates ________ and bond values ________. A) rise; rise B) fall; rise C) rise; fall D) fall; fall Answer: B Topic: Chapter 12. 7 Corporate Bonds Question Status: Previous Edition 38) A requirement in the bond indenture that the firm pay off a portion of the bond issue each year is called A) a sinking fund. B) a call provision. C) a restrictive covenant. D) a shelf registration. Answer: A Topic: Chapter 12. 7 Corporate Bonds Question Status: Previous Edition 39) (I) Callable bonds usually have a higher yield than comparable noncallable bonds. (II) Convertible bonds are attractive to bondholders and sell for a higher price than comparable nonconvertible bonds. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: C Topic: Chapter 12. 7 Corporate Bonds Question Status: Previous Edition 40) Long-term unsecured bonds that are backed only by the general creditworthiness of the issuer are called A) junk bonds. B) callable bonds. C) convertible bonds. D) debentures. Answer: D Topic: Chapter 12. 7 Corporate Bonds Question Status: Previous Edition 41) A secured bond is backed by A) the general creditworthiness of the borrower. B) an insurance company's financial guarantee. C) the expected future earnings of the borrower. D) specific collateral. Answer: D Topic: Chapter 12. 7 Corporate Bonds Question Status: Previous Edition 42) Financial guarantees A) are insurance policies to back bond issues. B) are purchased by financially weaker security issuers. C) lower the risk of the bonds covered by the guarantee. D) do all of the above. E) do only A and B of the above. Answer: D Topic: Chapter 12. 8 Financial Guarantees for Bonds Question Status: Previous Edition 43) In its simplest form, a credit default swap provides A) insurance against default in the principle and interest payments of a credit instrument. B) an alternative method for bond issuers to pay principle and interest payments via a swap. C) bond investors with a method to swap interest payments for principle payments during a "credit event." D) the government with a guarantee that certain bond issues will not run into credit problems. Answer: A Topic: Chapter 12. 8 Financial Guarantees for Bonds Question Status: New Question 44) Corporate bonds are less risky if they are ________ bonds and municipal bonds are less risky if they are ________ bonds. A) secured; revenue B) secured; general obligation C) unsecured; revenue D) unsecured; general obligation Answer: B Topic: Chapter 12. 7 Corporate Bonds Question Status: Previous Edition 45) Which of the following are true for the current yield? A) The current yield is defined as the yearly coupon payment divided by the price of the security. B) The formula for the current yield is identical to the formula describing the yield to maturity for a discount bond. C) The current yield is always a poor approximation for the yield to maturity. D) All of the above are true. E) Only A and B of the above are true. Answer: A Topic: Chapter 12. 9 Current Yield Calculation Question Status: Previous Edition 46) The nearer a bond's price is to its par value and the longer the maturity of the bond, the more closely the ________ approximates the ________. A) current yield; yield to maturity B) current yield; coupon rate C) yield to maturity; current yield D) yield to maturity; coupon rate Answer: A Topic: Chapter 12. 9 Current Yield Calculation Question Status: Previous Edition 47) Which of the following are true for the current yield? A) The current yield is defined as the yearly coupon payment divided by the price of the security. B) The current yield and the yield to maturity always move together. C) The formula for the current yield is identical to the formula describing the yield to maturity for a discount bond. D) All of the above are true. E) Only A and B of the above are true. Answer: E Topic: Chapter 12. 9 Current Yield Calculation Question Status: Previous Edition 48) The current yield is a less accurate approximation of the yield to maturity the ________ the time to maturity of the bond and the ________ the price is from/to the par value. A) shorter; closer B) shorter; farther C) longer; closer D) longer; farther Answer: B Topic: Chapter 12. 9 Current Yield Calculation Question Status: Previous Edition 49) The current yield on a $6,000, 10 percent coupon bond selling for $5,000 is A) 5%. B) 10%. C) 12%. D) 15%. Answer: C Topic: Chapter 12. 9 Current Yield Calculation Question Status: Previous Edition 50) The current yield on a $5,000, 8 percent coupon bond selling for $4,000 is A) 5%. B) 8%. C) 10%. D) 20%. E) none of the above. Answer: C Topic: Chapter 12. 9 Current Yield Calculation Question Status: Previous Edition 51) When an old bond's market value is above its par value, the bond is selling at a ________. This occurs because the old bond's coupon rate is ________ the coupon rates of new bonds with similar risk. A) premium; below B) premium; above C) discount; below D) discount; above Answer: B Topic: Chapter 12.10 Finding the Value of Coupon Bonds Question Status: Previous Edition 52) Corporations may enter the capital markets because A) they do not have sufficient capital to fund their investment opportunities. B) they want to preserve their capital to protect against expected needs. C) it is required by the Securities and Exchange Commission (SEC). D) none of the above. Answer: A Topic: Chapter 12. 1 Purpose of the Capital Market Question Status: Previous Edition 53) Capital market trading occurs in A) the primary market. B) the secondary market. C) both A and B of the above. D) none of the above. Answer: C Topic: Chapter 12. 3 Capital Market Trading Question Status: Previous Edition 54) Bonds A) are securities that represent a debt owed by the issuer to the investor. B) obligate the issuer to pay a specified amount at a given date, generally without periodic interest payments. C) both A and B of the above. D) none of the above. Answer: A Topic: Chapter 12. 4 Types of Bonds Question Status: Previous Edition 55) STRIPS (Separate Trading of Registered Interest and Principal Securities) are also called A) interest-based securities. B) zero-coupon securities. C) leveraged securities. D) covenant securities. Answer: B Topic: Chapter 12. 5 Treasury Notes and Bonds Question Status: Previous Edition 56) The risk on an agency bond is A) high. B) zero. C) moderate. D) low. Answer: D Topic: Chapter 12. 5 Treasury Notes and Bonds Question Status: Previous Edition 57) The first step in finding the value of a bond is to A) discount back the cash flows using an interest rate that represents the yield available on other bonds of like risk and maturity. B) identify the cash flows the holder of the bond will receive. C) contact the holder of the bond. D) none of the above. Answer: B Topic: Chapter 12.10 Finding the Value of Coupon Bonds Question Status: Previous Edition 58) A change in the current yield ________ signals a change in the same direction of the yield to maturity. A) never B) rarely C) always D) often Answer: C Topic: Chapter 12.10 Finding the Value of Coupon Bonds Question Status: Previous Edition 59) By the time the subprime financial crisis hit in force, Fannie and Freddie had ________ subprime and Alt-A assets on their books. A) over $1 trillion of B) very few C) been prohibited from holding D) none of the above Answer: A Topic: Chapter 12. 5 Treasury Notes and Bonds Question Status: New Question 12.2 True/False 1) Firms and individuals use the money markets primarily to warehouse funds for short periods of time until a more important need or a more productive use for the funds arises. Answer: TRUE Topic: Chapter 12. 1 Purpose of the Capital Market Question Status: New Question 2) The primary issuers of capital market securities are local governments and corporations. Answer: FALSE Topic: Chapter 12. 2 Capital Market Participants Question Status: Previous Edition 3) Capital market securities are less liquid and have longer maturities than money market securities. Answer: TRUE Topic: Chapter 12.11 Investing in Bonds Question Status: Previous Edition 4) Governments never issue stock because they cannot sell ownership claims. Answer: TRUE Topic: Chapter 12. 2 Capital Market Participants Question Status: Previous Edition 5) To sell an old bond when rates have risen, the holder will have to discount the bond until the yield to the buyer is the same as the market rate. Answer: TRUE Topic: Chapter 12.10 Finding the Value of Coupon Bonds Question Status: Previous Edition 6) Most of the time, the interest rate on Treasury notes is below that on money market securities because of their low default risk. Answer: FALSE Topic: Chapter 12. 5 Treasury Notes and Bonds Question Status: Previous Edition 7) Municipal bonds that are issued to pay for essential public projects are exempt from federal taxation. Answer: TRUE Topic: Chapter 12. 6 Municipal Bonds Question Status: Previous Edition 8) Most municipal bonds are revenue bonds rather than general obligation bonds. Answer: TRUE Topic: Chapter 12. 6 Municipal Bonds Question Status: Previous Edition 9) Most corporate bonds have a face value of $1,000, are sold at a discount, and can only be redeemed at the maturity date. Answer: FALSE Topic: Chapter 12. 7 Corporate Bonds Question Status: Previous Edition 10) Registered bonds have now been largely replaced by bearer bonds, which do not have coupons. Answer: FALSE Topic: Chapter 12. 7 Corporate Bonds Question Status: Previous Edition 11) A sinking fund is a requirement in the bond indenture that the firm pay off a portion of the bond issue each year. Answer: TRUE Topic: Chapter 12. 7 Corporate Bonds Question Status: Previous Edition 12) Debentures are long-term unsecured bonds that are backed only by the general creditworthiness of the issuer. Answer: TRUE Topic: Chapter 12. 8 Financial Guarantees for Bonds Question Status: Previous Edition 13) In a leveraged buy-out, a firm greatly increases its debt level by issuing junk bonds to finance the purchase of another firm's stock. Answer: TRUE Topic: Chapter 12. 7 Corporate Bonds Question Status: Previous Edition 14) A financial guarantee ensures that the lender (bond purchaser) will be paid both principal and interest in the event the issuer defaults. Answer: TRUE Topic: Chapter 12. 8 Financial Guarantees for Bonds Question Status: Previous Edition 15) The Commodity Futures Modernization Act (2000) removed derivative securities, such as credit default swaps, from regulatory oversight. Answer: TRUE Topic: Chapter 12. 8 Financial Guarantees for Bonds Question Status: New Question 16) The current yield on a bond is a good approximation of the bond's yield to maturity when the bond matures in five years or less and its price differs from its par value by a large amount. Answer: FALSE Topic: Chapter 12. 9 Current Yield Calculation Question Status: Previous Edition 17) The secondary market is where new issues of stocks and bonds are introduced. Answer: FALSE Topic: Chapter 12. 3 Capital Market Trading Question Status: Previous Edition 18) General obligation bonds have specific assets pledged as security or specific sources of revenue allocated for their repayment. Answer: FALSE Topic: Chapter 12. 6 Municipal Bonds Question Status: Previous Edition

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Chapter 13 The Stock Market 13.1 Multiple Choice 1) (I) A share of common stock in a firm represents an ownership interest in that firm. (II) A share of preferred stock is as much like a bond as it is like common stock. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: C Topic: Chapter 13.1 Investing in Stocks Question Status: Previous Edition 2) Preferred stockholders hold a claim on assets that has priority over the claims of A) both common stockholders and bondholders. B) neither common stockholders nor bondholders. C) common stockholders, but after that of bondholders. D) bondholders, but after that of common stockholders. Answer: C Topic: Chapter 13.1 Investing in Stocks Question Status: Previous Edition 3) (I) Preferred stockholders hold a claim on assets that has priority over the claims of common stockholders, but after that of bondholders. (II) Firms issue preferred stock in far greater amounts than common stock. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: A Topic: Chapter 13.1 Investing in Stocks Question Status: Previous Edition 4) (I) Preferred stockholders hold a claim on assets that has priority over the claims of common stockholders. (II) Bondholders hold a claim on assets that has priority over the claims of preferred stockholders. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: C Topic: Chapter 13.1 Investing in Stocks Question Status: Previous Edition 5) (I) Firms issue common stock in far greater amounts than preferred stock. (II) In a given year, the total volume of stock issued is much less than the volume of bonds issued. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: C Topic: Chapter 13.1 Investing in Stocks Question Status: Previous Edition 6) The riskiest capital market security is A) preferred stock. B) common stock. C) corporate bonds. D) Treasury bonds. Answer: B Topic: Chapter 13.1 Investing in Stocks Question Status: Previous Edition 7) (I) The largest of the organized stock exchanges in the United States is the New York Stock Exchange. (II) To be listed on the NYSE, a firm must have a minimum of $100 million in market value or $10 million in revenues. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: A Topic: Chapter 13.1 Investing in Stocks Question Status: Previous Edition 8) To list on the NYSE, a firm must A) have earnings of at least $10 million per year. B) have at least $500 million in outstanding debt. C) have a total of $100 million in market value. D) meet all of the above requirements. E) meet A and C of the above requirements. Answer: E Topic: Chapter 13.1 Investing in Stocks Question Status: Updated from Previous Edition 9) Securities not listed on one of the exchanges trade in the over-the-counter market. In this exchange, dealers "make a market" by A) buying stocks for inventory when investors want to sell. B) selling stocks from inventory when investors want to buy. C) doing both of the above. D) doing neither of the above. Answer: C Topic: Chapter 13.1 Investing in Stocks Question Status: Previous Edition 10) The most active stock exchange in the world is the A) Nikkei Stock Exchange. B) London Stock Exchange. C) Shanghai Stock Exchange. D) New York Stock Exchange. Answer: A Topic: Chapter 13.1 Investing in Stocks Question Status: Previous Edition 11) Which of the following statements about trading operations in an organized exchange is correct? A) Floor traders all deal in a wide variety of stocks. B) In most trades, specialists match buy and sell orders. C) In most trades, specialists buy for or sell from their own inventories. D) The SuperDOT system is used to expedite large trades of over 100,000 shares. Answer: B Topic: Chapter 13.1 Investing in Stocks Question Status: Previous Edition 12) Which of the following is not an advantage of Electronic Communications Networks (ECNs)? A) All unfilled orders are available for review by ECN traders. B) Transactions costs are lower for ECN trades. C) Trades are made and confirmed faster. D) ECNs work well for thinly traded stocks. Answer: D Topic: Chapter 13.1 Investing in Stocks Question Status: Previous Edition 13) Which of the following statements is false regarding Electronic Communications Networks (ECNs)? A) Archipelago and Instinet are two examples of ECNs. B) Competition from ECNs has forced NASDAQ to cut its fees. C) Traders benefit from lower trading costs and faster service. D) ECNs allow institutional investors, but not individuals, to trade after hours. Answer: D Topic: Chapter 13.1 Investing in Stocks Question Status: Previous Edition 14) A basic principle of finance is that the value of any investment is A) the present value of all future net cash flows generated by the investment. B) the undiscounted sum of all future net cash flows generated by the investment. C) unrelated to the future net cash flows generated by the investment. D) unrelated to the degree of risk associated with the future net cash flows generated by the investment. Answer: A Topic: Chapter 13.2 Computing the Price of Common Stock Question Status: Previous Edition 15) A stock currently sells for $25 per share and pays $0.24 per year in dividends. What is an investor's valuation of this stock if she expects it to be selling for $30 in one year and requires a 15 percent return on equity investments? A) $30.24 B) $26.30 C) $26.09 D) $27.74 Answer: B Topic: Chapter 13.2 Computing the Price of Common Stock Question Status: Previous Edition 16) A stock currently sells for $30 per share and pays $1.00 per year in dividends. What is an investor's valuation of this stock if he expects it to be selling for $37 in one year and requires a 12 percent return on equity investments? A) $38 B) $33.50 C) $34.50 D) $33.93 Answer: D Topic: Chapter 13.2 Computing the Price of Common Stock Question Status: Previous Edition 17) In the one-period valuation model, a stock's value will be higher A) the higher its expected future price is. B) the lower its dividend is. C) the higher the required return on investments in equity is. D) all of the above. Answer: A Topic: Chapter 13.2 Computing the Price of Common Stock Question Status: Previous Edition 18) In the one-period valuation model, a stock's value falls if the ________ rises. A) dividend B) expected future price C) required return on equity D) current price Answer: C Topic: Chapter 13.2 Computing the Price of Common Stock Question Status: Previous Edition 19) In the generalized dividend valuation model, a stock's value depends only on A) its future dividend payments and its future price. B) its future dividend payments and the required return on equity. C) its future price and the required return on investments on equity. D) its future dividend payments. Answer: B Topic: Chapter 13.2 Computing the Price of Common Stock Question Status: Previous Edition 20) Which of the following is not an element of the Gordon growth model of stock valuation? A) The stock's most recent dividend paid B) The expected constant growth rate of dividends C) The required return on investments in equity D) The stock's expected future price Answer: D Topic: Chapter 13.2 Computing the Price of Common Stock Question Status: Previous Edition 21) According to the Gordon growth model, what is an investor's valuation of a stock whose current dividend is $1.00 per year if dividends are expected to grow at a constant rate of 10 percent over a long period of time and the investor's required return is 11 percent? A) $110 B) $100 C) $11 D) $10 E) $5.24 Answer: A Topic: Chapter 13.2 Computing the Price of Common Stock Question Status: Previous Edition 22) According to the Gordon growth model, what is an investor's valuation of a stock whose current dividend is $1.00 per year if dividends are expected to grow at a constant rate of 10 percent over a long period of time and the investor's required return is 15 percent? A) $20 B) $11 C) $22 D) $7.33 E) $4.40 Answer: C Topic: Chapter 13.2 Computing the Price of Common Stock Question Status: Previous Edition 23) Holding other things constant, a stock's value will be highest if its dividend growth rate is A) 15%. B) 10%. C) 5%. D) 2%. Answer: A Topic: Chapter 13.2 Computing the Price of Common Stock Question Status: Previous Edition 24) Holding other things constant, a stock's value will be highest if its most recent dividend is A) $2.00. B) $5.00. C) $0.50. D) $1.00. Answer: B Topic: Chapter 13.2 Computing the Price of Common Stock Question Status: Previous Edition 25) Holding other things constant, a stock's value will be highest if the investor's required return on investments in equity is A) 20%. B) 15%. C) 10%. D) 5%. Answer: D Topic: Chapter 13.2 Computing the Price of Common Stock Question Status: Previous Edition 26) Suppose the average industry PE ratio for auto parts retailers is 20. What is the current price of Auto Zone stock if the retailer's earnings per share is projected to be $1.85? A) $21.85 B) $37 C) $10.81 D) $9.25 Answer: B Topic: Chapter 13.2 Computing the Price of Common Stock Question Status: Previous Edition 27) Which of the following is true regarding the Gordon growth model? A) Dividends are assumed to grow at a constant rate forever. B) The dividend growth rate is assumed to be greater than the required return on equity. C) Both A and B of the above. D) Neither A nor B of the above. Answer: A Topic: Chapter 13.2 Computing the Price of Common Stock Question Status: Previous Edition 28) The PE ratio approach to valuing stock is especially useful for valuing A) privately held firms. B) firms that don't pay dividends. C) both A and B of the above. D) neither A nor B of the above. Answer: C Topic: Chapter 13.2 Computing the Price of Common Stock Question Status: Previous Edition 29) The PE ratio approach to valuing stock is especially useful for valuing A) publicly held corporations. B) firms that regularly pay dividends. C) both A and B of the above. D) neither A nor B of the above. Answer: D Topic: Chapter 13.2 Computing the Price of Common Stock Question Status: Previous Edition 30) A weakness of the PE approach to valuing stock is that it is A) difficult to estimate the constant growth rate of a firm's dividends. B) difficult to estimate the required return on equity. C) difficult to predict how much a firm will pay in dividends. D) based on industry averages rather than firm-specific factors. Answer: D Topic: Chapter 13.2 Computing the Price of Common Stock Question Status: Previous Edition 31) (I) The market price of a security at a given time is the highest value any investor puts on the security. (II) Superior information about a security increases its value by reducing its risk. A) (I) is true, (II) is false. B) (I) is false, (II) is true. C) Both are true. D) Both are false. Answer: B Topic: Chapter 13.2 Computing the Price of Common Stock Question Status: Previous Edition 32) The main cause of fluctuations in stock prices is changes in A) tax laws. B) errors in technical stock analysis. C) daily trading volume in stock markets. D) information available to investors. E) total household wealth in the economy. Answer: D Topic: Chapter 13.3 How the Market Sets Security Prices Question Status: Previous Edition 33) Stock values computed by valuation models may differ from actual market prices because it is difficult to A) estimate future dividend growth rates. B) estimate the risk of a stock. C) forecast a stock's future dividends. D) all of the above are true. Answer: D Topic: Chapter 13.4 Errors in Valuation Question Status: Previous Edition 34) The 2001 terrorist attacks and the Enron financial scandal caused anticipated dividend growth to ________, investors' required return on equity to ________, and stock prices to ________. A) decrease; increase; decrease B) decrease; increase; increase C) increase; decrease; decrease D) increase; decrease; increase Answer: A Topic: Chapter 13.4 Errors in Valuation Question Status: Previous Edition 35) Which of the following is not an objective of the Securities and Exchange Commission? A) Maintain integrity of the securities markets B) Advise investors about which particular stocks are good buys C) Require firms to provide specific information to investors D) Regulate major participants in securities markets Answer: B Topic: Chapter 13.6 Regulation of the Stock Market Question Status: Previous Edition 36) A share of common stock in a firm represents an ownership interest in that firm and allows stockholders to A) vote. B) receive dividends. C) receive interest payments. D) only A and B of the above. Answer: D Topic: Chapter 13.1 Investing in Stocks Question Status: Previous Edition 37) In 2013, the NYSE traded ________ shares on an average trading day. A) 4 billion B) 7 billion C) 10 billion D) 12 billion Answer: A Topic: Chapter 13.1 Investing in Stocks Question Status: Updated from Previous Edition 38) Exchange traded funds (ETFs) have which of the following features? A) They are listed and traded as individual stocks on a stock exchange. B) They are indexed rather than actively managed. C) Their value is based on the underlying net asset value of the stocks held in the index basket. D) All of the above. Answer: D Topic: Chapter 13.1 Investing in Stocks Question Status: Previous Edition 39) What is the primary disadvantage of an ETF? A) ETFs tend to have lower management fees than comparable index mutual bonds. B) ETFs usually have no minimum investment amount. C) Investors have to pay a broker commission each time they buy or sell shares. D) None of the above are disadvantages of an ETF. Answer: C Topic: Chapter 13.1 Investing in Stocks Question Status: Previous Edition 40) A high price earnings ratio (PE) gives what interpretation? A) The market expects earnings to fall in the future. B) The market feels the firm's earnings are very high risk and are willing to pay a premium for them. C) The market expects the earnings to rise in the future. D) The firm is not paying a dividend. Answer: C Topic: Chapter 13.2 Computing the Price of Common Stock Question Status: Previous Edition 41) A ________ PE may indicate that the market feels the firm's earnings are very ________ risk and is therefore willing to pay a ________ for them. A) high; low; premium B) high; high; discount C) low; low; discount D) high; high; premium Answer: A Topic: Chapter 13.2 Computing the Price of Common Stock Question Status: Previous Edition 42) The subprime financial crisis led to one of the worst bear markets in the last 50 years. Stock prices likely fell due to A) an increase in required returns on equity investments. B) a decline in growth prospects for U.S. companies. C) Both A and B are likely reasons. D) None of the above are correct. Answer: A Topic: Chapter 13.4 Errors in Valuation Question Status: New Question 43) The Securities Acts of 1933 and 1934 established the S.E.C. to enforce which of the follow laws? A) Require firms to tell the public the truth about their businesses. B) Require brokers, dealers, and exchanges to treat investors fairly. C) To ensure that no investment ever loses money. D) All of the above are laws the S.E.C. enforces. E) A and B above are laws the S.E.C. enforces. Answer: E Topic: Chapter 13.6 Regulation of the Stock Market Question Status: New Question 44) Which of the following is not a division of the S.E.C.? A) The Division of Fraud Investigation B) The Division of Corporate Finance C) The Division of Market Regulation D) The Division of Investment Management E) The Division of Enforcement Answer: A Topic: Chapter 13.6 Regulation of the Stock Market Question Status: New Question 13.2 True/False 1) More stock trading in the U.S. occurs in over-the-counter markets rather than on organized exchanges. Answer: FALSE Topic: Chapter 13.1 Investing in Stocks Question Status: Previous Edition 2) In over-the-counter markets, dealers increase the liquidity of thinly traded securities. Answer: TRUE Topic: Chapter 13.1 Investing in Stocks Question Status: Previous Edition 3) Electronic Communications Networks apply technology to make organized exchanges more efficient and speedy. Answer: FALSE Topic: Chapter 13.1 Investing in Stocks Question Status: Previous Edition 4) All stocks pay dividends, as that is the only way an investor can profit from holding stock. Answer: FALSE Topic: Chapter 13.1 Investing in Stocks Question Status: Previous Edition 5) Common stock is the riskiest corporate security, followed by preferred stock and then bonds. Answer: TRUE Topic: Chapter 13.1 Investing in Stocks Question Status: Previous Edition 6) The Enron financial scandal increased uncertainty about the quality of accounting information and as a result, increased required return on investment in stocks. Answer: TRUE Topic: Chapter 13.4 Errors in Valuation Question Status: Previous Edition 7) The Dow Jones Industrial Average is the broadest and best indicator of the stock market's day-to-day performance. Answer: FALSE Topic: Chapter 13.4 Stock Market Indexes Question Status: Previous Edition 8) The Securities and Exchange Commission requires firms to submit various documents to increase the flow of information to investors but does not verify the accuracy of that information. Answer: TRUE Topic: Chapter 13.6 Regulation of the Stock Market Question Status: Previous Edition 9) About half of new equity issues are preferred stock. Answer: FALSE Topic: Chapter 13.1 Investing in Stocks Question Status: Previous Edition 10) A stock's market value will be higher the higher its expected dividend stream is, all else being equal. Answer: TRUE Topic: Chapter 13.2 Computing the Price of Common Stock Question Status: Previous Edition 11) The Gordon growth model assumes that a stock's dividend grows at a constant rate forever. Answer: TRUE Topic: Chapter 13.2 Computing the Price of Common Stock Question Status: Previous Edition 12) A stock's market value will be higher the higher the investor's required rate of return is, all else being equal. Answer: FALSE Topic: Chapter 13.2 Computing the Price of Common Stock Question Status: Previous Edition 13) A lower than average PE may mean that the market expects earnings to rise in the future. Answer: FALSE Topic: Chapter 13.2 Computing the Price of Common Stock Question Status: Previous Edition 14) About 75% of orders to buy or sell on the NYSE are executed using SuperDOT. Answer: TRUE Topic: Chapter 13.1 Investing in Stocks

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Chapter 6 Are Financial Markets Efficient? 6.1 Multiple Choice 1) How expectations are formed is important because expectations influence A) the demand for assets. B) bond prices. C) the risk structure of interest rates. D) the term structure of interest rates. E) all of the above. Answer: E Topic: Chapter 6.1 The Efficient Market Hypothesis Question Status: Previous Edition 2) According to the efficient market hypothesis, the current price of a financial security A) is the discounted net present value of future interest payments. B) is determined by the highest successful bidder. C) fully reflects all available relevant information. D) is a result of none of the above. Answer: C Topic: Chapter 6.1 The Efficient Market Hypothesis Question Status: Previous Edition 3) The efficient market hypothesis A) is based on the assumption that prices of securities fully reflect all available information. B) holds that the expected return on a security equals the equilibrium return. C) both A and B. D) neither A nor B. Answer: C Topic: Chapter 6.1 The Efficient Market Hypothesis Question Status: Previous Edition 4) If the optimal forecast of the return on a security exceeds the equilibrium return, then A) the market is inefficient. B) an unexploited profit opportunity exists. C) the market is in equilibrium. D) only A and B of the above are true. E) only B and C of the above are true. Answer: D Topic: Chapter 6.1 The Efficient Market Hypothesis Question Status: Previous Edition 5) According to the efficient market hypothesis A) one cannot expect to earn an abnormally high return by purchasing a security. B) information in newspapers and in the published reports of financial analysts is already reflected in market prices. C) unexploited profit opportunities abound, thereby explaining why so many people get rich by trading securities. D) all of the above are true. E) only A and B of the above are true. Answer: E Topic: Chapter 6.1 The Efficient Market Hypothesis Question Status: Previous Edition 6) Another way to state the efficient market condition is that in an efficient market, A) unexploited profit opportunities will be quickly eliminated. B) unexploited profit opportunities will never exist. C) arbitrageurs guarantee that unexploited profit opportunities never exist. D) both A and C of the above occur. Answer: A Topic: Chapter 6.1 The Efficient Market Hypothesis Question Status: Previous Edition 7) Another way to state the efficient market hypothesis is that in an efficient market, A) unexploited profit opportunities will never exist as market participants, such as arbitrageurs, ensure that they are instantaneously dissipated. B) unexploited profit opportunities will not exist for long, as market participants will act quickly to eliminate them. C) every financial market participant must be well informed about securities. D) only A and C of the above. Answer: B Topic: Chapter 6.1 The Efficient Market Hypothesis Question Status: Previous Edition 8) A situation in which the price of an asset differs from its fundamental market value is called A) an unexploited profit opportunity. B) a bubble. C) a correction. D) a mean reversion. Answer: B Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 9) A situation in which the price of an asset differs from its fundamental market value A) indicates that unexploited profit opportunities exist. B) indicates that unexploited profit opportunities do not exist. C) need not indicate that unexploited profit opportunities exist. D) indicates that the efficient market hypothesis is fundamentally flawed. Answer: C Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 10) Studies of mutual fund performance indicate that mutual funds that outperformed the market in one time period A) usually beat the market in the next time period. B) usually beat the market in the next two subsequent time periods. C) usually beat the market in the next three subsequent time periods. D) usually do not beat the market in the next time period. Answer: D Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 11) The efficient market hypothesis suggests that allocating your funds in the financial markets on the advice of a financial analyst A) will certainly mean higher returns than if you had made selections by throwing darts at the financial page. B) will always mean lower returns than if you had made selections by throwing darts at the financial page. C) is not likely to prove superior to a strategy of making selections by throwing darts at the financial page. D) is good for the economy. Answer: C Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 12) Raj Rajaratnam, a successful investor in the 2000s who consistently beat the market, was able to outperform the market on a consistent basis, indicating that A) securities markets are not efficient. B) unexploited profit opportunities were abundant. C) investors can outperform the market with inside information. D) only B and C of the above. Answer: C Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Updated from Previous Edition 13) To say that stock prices follow a "random walk" is to argue that A) stock prices rise, then fall. B) stock prices rise, then fall in a predictable fashion. C) stock prices tend to follow trends. D) stock prices are, for all practical purposes, unpredictable. Answer: D Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 14) To say that stock prices follow a "random walk" is to argue that A) stock prices rise, then fall, then rise again. B) stock prices rise, then fall in a predictable fashion. C) stock prices tend to follow trends. D) stock prices cannot be predicted based on past trends. Answer: D Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 15) Rules used to predict movements in stock prices based on past patterns are, according to the efficient markets theory, A) a waste of time. B) profitably employed by all financial analysts. C) the most efficient rules to employ. D) consistent with the random walk hypothesis. Answer: A Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 16) Tests used to rate the performance of rules developed in technical analysis conclude that A) technical analysis outperforms the overall market. B) technical analysis far outperforms the overall market, suggesting that stockbrokers provide valuable services. C) technical analysis does not outperform the overall market. D) technical analysis does not outperform the overall market, suggesting that stockbrokers do not provide services of any value. Answer: C Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 17) Which of the following types of information will most likely enable the exploitation of a profit opportunity? A) Financial analysts' published recommendations B) Technical analysis C) Hot tips from a stockbroker D) Insider information Answer: D Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 18) Which of the following types of information will most likely enable the exploitation of a profit opportunity? A) Financial analysts' published recommendations B) Technical analysis C) Hot tips from a stockbroker D) None of the above Answer: D Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 19) The advantage of a "buy and hold strategy" is that A) net profits will tend to be higher because there will be fewer brokerage commissions. B) losses will eventually be eliminated. C) the longer a stock is held, the higher its price will be. D) only B and C of the above are true. Answer: A Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 20) The efficient market hypothesis suggests that A) investors should not try to outguess the market by constantly buying and selling securities. B) investors do better on average if they adopt a "buy and hold" strategy. C) buying into a mutual fund is a sensible strategy for a small investor. D) all of the above are sensible strategies. E) only A and B of the above are sensible strategies. Answer: D Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 21) Sometimes one observes that the price of a company's stock falls after the announcement of favorable earnings. This phenomenon is A) clearly inconsistent with the efficient market hypothesis. B) consistent with the efficient market hypothesis if the earnings were not as high as anticipated. C) consistent with the efficient market hypothesis if the earnings were not as low as anticipated. D) the result of none of the above. Answer: B Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 22) Important implications of the efficient market hypothesis include which of the following? A) Future changes in stock prices should, for all practical purposes, be unpredictable. B) Stock prices will respond to announcements only when the information in these announcements is new. C) Sometimes a stock price declines when good news is announced. D) All of the above. E) Only A and B of the above. Answer: D Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 23) Although the verdict is not yet in, the available evidence indicates that, for many purposes, the efficient market hypothesis is A) a good starting point for analyzing expectations. B) not a good starting point for analyzing expectations. C) too general to be a useful tool for analyzing expectations. D) none of the above. Answer: A Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 24) The efficient market hypothesis suggests that A) investors should purchase no-load mutual funds, which have low management fees. B) investors can use the advice of technical analysts to outperform the market. C) investors let too many unexploited profit opportunities go by if they adopt a "buy and hold" strategy. D) only A and B of the above are sensible strategies. Answer: A Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 25) The efficient market hypothesis applies to A) both the stock market and the foreign exchange market. B) the stock market but not the foreign exchange market. C) the foreign exchange market but not the stock market. D) neither the stock market nor the foreign exchange market. Answer: A Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 26) According to the January effect, stock prices A) experience an abnormal price rise from December to January. B) experience an abnormal price decline from December to January. C) follow a random walk during January. D) set the pattern for the entire year in January. Answer: A Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 27) The small-firm effect refers to the observation that small firms' stocks A) follow a random walk but large firms' stocks do not. B) have earned abnormally low returns given their greater risk. C) have earned abnormally high returns even taking into account their greater risk. D) sell for lower prices than do large firms' stocks. Answer: C Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 28) The efficient markets hypothesis is weakened by evidence that A) stock prices tend to follow a random walk. B) stock prices are more volatile than fluctuations in their fundamental values can explain. C) technical analysis does not outperform the overall market. D) an investment adviser's past success or failure at picking stocks does not predict his or her future performance. Answer: B Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 29) Mean reversion refers to the observation that A) stock prices overact to news announcements. B) stocks prices are more volatile than fluctuations in their fundamental value would predict. C) stocks with low returns are likely to have high returns in the future. D) stocks with low returns are likely to have even lower returns in the future. Answer: C Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 30) Which of the following does not weaken the efficient markets hypothesis? A) Mean reversion B) Success of buy-and-hold strategy C) January effect D) Excessive volatility Answer: B Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 31) An important lesson from the Black Monday Crash of 1987 and the tech crash of 2000 is that A) factors other than market fundamentals affect stock prices. B) the strong version of the efficient market hypothesis, that stock prices reflect the true fundamental value of securities, is correct. C) market psychology has little if any effect on stock prices. D) there is no such thing as a rational bubble. Answer: A Topic: Chapter 6.3 Why the Efficient Market Hypothesis Does Not Imply That Financial Markets Are Efficient Question Status: Previous Edition 32) An investor gains from short selling by ________ and then later ________. A) buying a stock; selling it at a higher price B) selling a stock; buying it back at a lower price C) buying a stock; selling it at a lower price D) selling a stock; buying it back at a higher price Answer: B Topic: Chapter 6.4 Behavioral Finance Question Status: Previous Edition 33) Which of the following is an insight from behavioral finance? A) The price of securities fully reflects all available information. B) Investor overconfidence leads to high trading volumes. C) The optimal forecast of a security's return equals the security's equilibrium return. D) Investment advisers cannot consistently beat the market. Answer: B Topic: Chapter 6.4 Behavioral Finance Question Status: Previous Edition 34) Which of the following is empirical evidence indicating that the efficient market hypothesis may not always be generally applicable? A) Small-firm effect B) January effect C) Market overreaction D) All of the above Answer: D Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 35) An arrangement with a broker to borrow stocks from them and then sell it in the market, with the hope that they earn a profit by buying the stock back again after it has fallen in price is called A) behavioral finance. B) short sales. C) smart money. D) random walk. Answer: B Topic: Chapter 6.4 Behavioral Finance Question Status: Previous Edition 36) Evidence in favor of market efficiency includes A) performance of investment analysts and mutual funds. B) whether stock prices reflect publicly available information. C) the random-walk behavior of stock prices. D) all of the above. Answer: D Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 37) Evidence against market efficiency does not include A) the small-firm effect. B) technical analysis. C) excessive volatility. D) mean reversion. Answer: B Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 38) Evidence in favor of market efficiency does not include A) random-walk behavior. B) technical analysis. C) performance of investment analysts and mutual funds. D) the January effect. Answer: D Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 39) The elimination of a riskless profit opportunity in a market is called A) the efficient market hypothesis. B) random walk. C) arbitrage. D) market fundamentals. Answer: C Topic: Chapter 6.1 The Efficient Market Hypothesis Question Status: Previous Edition 40) According to the strong view of the efficient markets hypothesis, security prices reflect ________ and so financial markets are efficient. A) market fundamentals B) rational expectations C) momentum effects D) current market trends Answer: A Topic: Chapter 6.3 Why the Efficient Market Hypothesis Does Not Imply That Financial Markets Are Efficient Question Status: New Question 41) When a market bubble occurs, ________. A) prices of assets rise well above their fundamental values B) a "thin layer" of trading masks true market movements C) market fundamentals and actual security prices converge D) prices of assets fluctuate rapidly above and below market fundamentals Answer: A Topic: Chapter 6.3 Why the Efficient Market Hypothesis Does Not Imply That Financial Markets Are Efficient Question Status: New Question 6.2 True/False 1) Evidence that stock prices sometimes fall when a firm announces good news contradicts the efficient market hypothesis. Answer: FALSE Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 2) If the security markets are truly efficient, there is no need to pay for help selecting securities. Answer: TRUE Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 3) Evidence that a mutual fund has performed extraordinarily well in the past contradicts the efficient market hypothesis. Answer: FALSE Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 4) Technical analysts look at historical prices for information to project future prices. Answer: TRUE Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 5) The evidence suggests technical analysts are not superior stock pickers. Answer: TRUE Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 6) If the markets are efficient, the optimal investment strategy will be to buy and hold so as to minimize transaction costs. Answer: TRUE Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 7) In an efficient market, abnormal returns are not possible, even using inside information. Answer: FALSE Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 8) "Short selling" refers to the practice of buying a stock and holding it for only a short time before selling it. Answer: FALSE Topic: Chapter 6.4 Behavioral Finance Question Status: Previous Edition 9) Loss aversion means the unhappiness a person feels when he or she suffers a monetary loss exceeds the happiness the same person experiences from receiving a monetary gain of the same amount. Answer: TRUE Topic: Chapter 6.4 Behavioral Finance Question Status: Previous Edition 10) It is probably a good use of an investor's time to watch as many shows featuring technical analysts as possible. Answer: FALSE Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 11) Having performed well in the past indicates that an investment adviser or a mutual fund will perform well in the future. Answer: FALSE Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 12) Technical analysis is a popular technique used to predict stock prices by studying past stock price data and searching for patterns such as trends and regular cycles. Answer: TRUE Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 13) The efficient market hypothesis does not have to imply that financial markets are efficient. Answer: TRUE Topic: Chapter 6.3 Why the Efficient Market Hypothesis Does Not Imply That Financial Markets Are Efficient

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Chapter 9 Central Banks and the Federal Reserve System 9.1 Multiple Choice 1) Americans' fear of centralized power and their distrust of moneyed interests explain why the U.S. did not have a central bank until the A) 17th century. B) 18th century. C) 19th century. D) 20th century. Answer: D Topic: Chapter 9.1 Origins of the Federal Reserve System Question Status: Previous Edition 2) Bank panics in 1819, 1837, 1857, 1873, 1884, 1893, and 1907 convinced many that A) the Federal Reserve needed greater control over the banking system. B) the Federal Reserve needed greater authority to deal with problem banks. C) a central bank was needed to prevent future financial panics. D) both A and B of the above. Answer: C Topic: Chapter 9.1 Origins of the Federal Reserve System Question Status: Previous Edition 3) The unusual structure of the Federal Reserve System is perhaps best explained by A) Americans' fear of centralized power. B) the traditional American distrust of moneyed interests. C) Americans' desire to remove control of the money supply from the U.S. Treasury. D) all of the above. E) only A and B of the above. Answer: E Topic: Chapter 9.1 Origins of the Federal Reserve System Question Status: Previous Edition 4) The traditional American distrust of moneyed interests and the fear of centralized power help to explain A) the failures of the first two experiments in central banking in the United States. B) the decentralized structure of the Federal Reserve System. C) why the Board of Governors of the Federal Reserve System is not located in New York. D) all of the above. E) only A and B of the above. Answer: D Topic: Chapter 9.1 Origins of the Federal Reserve System Question Status: Previous Edition 5) The financial panic of 1907 resulted in such widespread bank failures and substantial losses to depositors that the American public finally became convinced that A) the First Bank of the United States had failed to serve as a lender of last resort. B) the Second Bank of the United States had failed to serve as a lender of last resort. C) the Federal Reserve System had failed to serve as a lender of last resort. D) a central bank was needed to prevent future panics. Answer: D Topic: Chapter 9.1 Origins of the Federal Reserve System Question Status: Previous Edition 6) Nationwide financial panics in 1873, 1884, 1893, and 1907 might have been avoided had A) the First Bank of the United States served its intended role of lender of last resort. B) the Second Bank of the United States not been abolished in 1836 by President Andrew Jackson. C) the Second Bank of the United States served its intended role of lender of last resort. D) the Federal Reserve served its intended role of lender of last resort. Answer: B Topic: Chapter 9.1 Origins of the Federal Reserve System Question Status: Previous Edition 7) The many regional Federal Reserve banks resulted from a compromise between parties favoring A) the establishment of a central bank and those opposed to its establishment. B) a private central bank and those favoring a government institution. C) the establishment of the Board of Governors in Washington, D.C., and those preferring its establishment in New York City. D) none of the above. Answer: B Topic: Chapter 9.1 Origins of the Federal Reserve System Question Status: Previous Edition 8) Which of the following is an element of the Federal Reserve System? A) The Federal Reserve banks B) The Board of Governors C) The FDIC D) All of the above E) Only A and B of the above Answer: E Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 9) Which of the following is an element of the Federal Reserve System? A) The Federal Reserve banks B) The Board of Governors C) The FOMC D) All of the above Answer: D Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 10) Which of the following is not an entity of the Federal Reserve System? A) Federal Reserve banks B) The FDIC C) The Board of Governors D) The Federal Advisory Council E) Member commercial banks Answer: B Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 11) Which of the following functions are not performed by any of the twelve regional Federal Reserve banks? A) Check clearing B) Conducting economic research C) Setting interest rates payable on time deposits D) Issuing new currency Answer: C Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 12) Which Federal Reserve Bank president always has a vote in the Federal Open Market Committee? A) Philadelphia B) New York C) Boston D) San Francisco Answer: B Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 13) Each Fed bank president attends FOMC meetings; although only ________ Fed bank presidents vote on policy, all ________ provide input. A) three; ten B) five; ten C) three; twelve D) five; twelve Answer: D Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 14) The ________ Fed bank, with about 25 percent of the system's assets, is the most important of the Federal Reserve banks. A) Chicago B) Los Angeles C) Miami D) New York E) Washington, D.C. Answer: D Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 15) Member commercial banks have purchased stock in their district Fed banks; the dividend paid by that stock is limited to A) four percent annually. B) five percent annually. C) six percent annually. D) eight percent annually. Answer: C Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 16) All ________ are required to be members of the Fed. A) state-chartered banks B) nationally chartered banks C) banks with more than $100 million in assets D) banks with more than $500 million in assets Answer: B Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 17) Which of the following banks are required to be members of the Federal Reserve System? A) State-chartered banks B) Insured banks C) Banks having over $500 million in assets D) None of the above Answer: D Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 18) Of all commercial banks, about ________ percent belong to the Federal Reserve System. A) 10 B) 25 C) 33 D) 50 Answer: C Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Updated from Previous Edition 19) Banks subject to reserve requirements set by the Federal Reserve System include A) only state-chartered banks. B) only nationally chartered banks. C) only banks with less than $100 million in assets. D) only banks with less than $500 million in assets. E) all banks whether or not they are members of the Federal Reserve System. Answer: E Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 20) The Fed's support of the Depository Institutions Deregulation and Monetary Control Act of 1980 stemmed in part from its A) concern over declining Fed membership. B) belief that all banking regulations should be eliminated. C) belief that interest rate ceilings were too low. D) belief that depositors had to become more knowledgeable about banking operations. Answer: A Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 21) Which of the following are duties of the Board of Governors of the Federal Reserve System? A) Setting margin requirements, the fraction of the purchase price of securities that has to be paid for with cash. B) Setting the maximum interest rates payable on certain types of time deposits under Regulation Q. C) Regulating credit with the approval of the President under the Credit Control Act of 1969. D) None of the above has been a duty of the Board since the mid-1980s. Answer: A Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 22) Which of the following are not duties of the Board of Governors of the Federal Reserve System? A) Setting margin requirements, the fraction of the purchase price of securities that has to be paid for with cash. B) Setting the maximum interest rates payable on certain types of time deposits under Regulation Q. C) Approving the discount rate "established" by the Federal Reserve banks. D) Representing the United States in negotiations with foreign governments on economic matters. Answer: B Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 23) The chairman of the Board of Governors of the Federal Reserve System exercises a high degree of control over the board A) through his ability to set the agenda of the Board and the FOMC. B) through his role as spokesperson for the Fed with the President and before Congress. C) because he can veto decisions made by a majority of the other Board members. D) because of all of the above. E) because of only A and B of the above. Answer: E Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 24) Members of the Board of Governors are A) chosen by the Federal Reserve Bank presidents. B) appointed by the newly elected president of the United States, as are cabinet positions. C) appointed by the president of the United States and confirmed by the Senate as members resign. D) never allowed to serve more than seven-year terms. Answer: C Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 25) Each member of the seven-member Board of Governors is appointed by the president and confirmed by the Senate to serve A) 4-year terms. B) 6-year terms. C) 14-year terms. D) as long as the appointing president remains in office. Answer: C Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 26) The Board of Governors A) establishes, within limits, reserve requirements. B) effectively sets the discount rate. C) sets margin requirements. D) does all of the above. E) does only A and B of the above. Answer: D Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 27) Although neither ________ nor the ________ is officially set by the Federal Open Market Committee, decisions concerning these policy tools are effectively made by the committee. A) margin requirements; discount rate B) margin requirements; federal funds rate C) reserve requirements; discount rate D) reserve requirements; federal funds rate Answer: C Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 28) Although the Federal Open Market Committee does not have formal authority to set ________ and the ________, it does possess the authority in practice. A) margin requirements; discount rate B) margin requirements; federal funds rate C) reserve requirements; discount rate D) reserve requirements; federal funds rate Answer: C Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 29) Which of the following are true statements? A) The FOMC usually meets every six weeks to set monetary policy. B) The FOMC issues directives to the trading desk at the New York Fed. C) Designers of the Federal Reserve Act did not envision the use of open market operations as a monetary policy tool. D) All of the above are true statements. E) Only A and B of the above are true statements. Answer: D Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 30) The Federal Open Market Committee consists of A) the five senior members of the seven-member Board of Governors. B) the seven members of the Board of Governors and seven presidents of the regional Fed banks. C) the seven members of the Board of Governors and five presidents of the regional Fed banks. D) the twelve regional Fed bank presidents and the chairman of the Board of Governors. Answer: C Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 31) The Federal Reserve entity that determines monetary policy strategy is the A) Board of Governors. B) Federal Open Market Committee. C) Chairman of the Board of Governors. D) Shadow Open Market Committee. Answer: B Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 32) Which of the following are true statements? A) The FOMC usually meets every six weeks to set monetary policy. B) The FOMC issues directives to the trading desk at the New York Fed. C) Designers of the Federal Reserve Act did not envision the use of discount lending as a monetary policy tool. D) All of the above are true statements. E) Only A and B of the above are true statements. Answer: E Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 33) The designers of the Federal Reserve Act meant to create a central bank characterized by its A) system of checks and balances and decentralization of power. B) strong concentration of power in the hands of a few people. C) inability to function as a lender of last resort. D) responsiveness to the electorate. Answer: A Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 34) The power within the Federal Reserve was effectively transferred to the Board of Governors by A) the banking legislation of the Great Depression. B) Supreme Court decisions in the 1950s. C) the Depository Institutions Deregulation and Monetary Control Act of 1980. D) the Treasury-Federal Reserve Accord of 1951. Answer: A Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 35) Factors that provide the Federal Reserve with a high degree of independence include A) 14-year terms for members of the Board of Governors. B) a four-year term for the chairman of the Board of Governors that is not coincident with the president's term of office. C) constitutional independence from Congress and the president. D) all of the above. E) only A and B of the above. Answer: E Topic: Chapter 9.3 How Independent Is the Fed? Question Status: Previous Edition 36) Federal Reserve independence is thought to A) introduce a short-term bias to monetary policymaking. B) lead to better fiscal and monetary policy coordination. C) introduce longer-run considerations to monetary policymaking. D) do both A and B of the above. Answer: C Topic: Chapter 9.3 How Independent Is the Fed? Question Status: Previous Edition 37) Members of Congress are able to influence monetary policy, albeit indirectly, through their ability to A) withhold appropriations from the Board of Governors. B) withhold appropriations from the Federal Open Market Committee. C) propose legislation that would force the Fed to submit budget requests to Congress, as must other government agencies. D) do all of the above. Answer: C Topic: Chapter 9.3 How Independent Is the Fed? Question Status: Previous Edition 38) Although it enjoys a high degree of autonomy, the Fed is still subject to the influence of Congress because A) Congress can pass legislation that would restrict the Fed's independence. B) Congress can withhold the Fed's budget requests. C) Congress can remove members of the Board of Governors whose views on policy differ from those of key members of Congress. D) All of the above. Answer: A Topic: Chapter 9.3 How Independent Is the Fed? Question Status: Previous Edition 39) According to the textbook authors, the Fed is A) remarkably free of the political pressures that influence other government agencies. B) more responsive to the political pressures that influence other government agencies. C) probably somewhat constrained in its policymaking by the congressional threat to reduce Fed independence. D) both A and C of the above. Answer: D Topic: Chapter 9.3 How Independent Is the Fed? Question Status: Previous Edition 40) According to the textbook authors, A) the Fed appears to be remarkably free of the political pressures that influence other government agencies. B) since the president can protect the Fed from Congress, the Fed may be responsive to the president's policy preferences. C) the Fed appears to be more responsive to the political pressures that influence other government agencies. D) both A and B of the above. E) both B and C of the above. Answer: D Topic: Chapter 9.3 How Independent Is the Fed? Question Status: Previous Edition 41) The oldest central bank, founded in 1694, is the A) Bank of England. B) Deutsche Bundesbank. C) Bank of Japan. D) Federal Reserve System. Answer: A Topic: Chapter 9.6 Structure and Independence of Other Foreign Central Banks Question Status: Previous Edition 42) The newest central bank, which began operations in January 1999, is the A) European Central Bank. B) Bank of Argentina. C) Bank of Korea. D) Bank of New Zealand. Answer: A Topic: Chapter 9.5 Structure and Independence of the European Central Bank Question Status: Previous Edition 43) Which of the following central banks has the greatest degree of independence? A) Bank of England B) European Central Bank C) Bank of Japan D) Federal Reserve System Answer: B Topic: Chapter 9.5 Structure and Independence of the European Central Bank Question Status: Previous Edition 44) A trend in recent years is that more and more governments A) have been granting greater independence to their central banks. B) have been reducing the independence of their central banks to make them more accountable for poor economic performance. C) have mandated that their central banks give up multiple policy goals to focus strictly on inflation. D) have required their central banks to coordinate policies with their ministers of finance. Answer: A Topic: Chapter 9.6 Structure and Independence of Other Foreign Central Banks Question Status: Previous Edition 45) The theory of bureaucratic behavior suggests that the objective of a bureaucracy is to maximize A) the public's welfare. B) its own welfare. C) profits. D) conflict between the executive and legislative branches of government. Answer: B Topic: Chapter 9.4 Should the Fed Be Independent? Question Status: Previous Edition 46) The theory of bureaucratic behavior suggests that the Federal Reserve will A) try to avoid a conflict with the president and Congress over increases in interest rates. B) try to gain regulatory power over more banks. C) devise clever strategies in an effort to avoid blame for poor economic performance. D) do all of the above. Answer: D Topic: Chapter 9.4 Should the Fed Be Independent? Question Status: Previous Edition 47) According to the theory of bureaucratic behavior, the objective of bureaucracy is A) to maximize its own welfare, meaning that it seeks additional power and prestige. B) to maximize consumers' surplus, meaning that it seeks additional regulatory powers. C) to protect the industry it regulates, meaning that it seeks additional regulatory powers. D) none of the above. Answer: A Topic: Chapter 9.4 Should the Fed Be Independent? Question Status: Previous Edition 48) According to the theory of bureaucratic behavior, A) the objective of a bureaucracy is to maximize its own welfare, meaning that it seeks additional power and prestige. B) the bureaucracy will fight vigorously to preserve its autonomy; thus, it will attempt to avoid conflict with the president and Congress. C) the bureaucracy will support legislation that gives it additional regulatory power. D) all of the above describe bureaucratic behavior. Answer: D Topic: Chapter 9.4 Should the Fed Be Independent? Question Status: Previous Edition 49) The theory of bureaucratic behavior when applied to the Fed helps to explain why the Fed A) resists so vigorously congressional attempts to limit the central bank's autonomy. B) is secretive about the conduct of future monetary policy. C) sought less control over banks in the 1980s. D) all of the above. E) only A and B of the above. Answer: E Topic: Chapter 9.4 Should the Fed Be Independent? Question Status: Previous Edition 50) The theory of bureaucratic behavior when applied to the Fed helps to explain why the Fed A) is supportive of congressional attempts to limit the central bank's autonomy. B) is secretive about the conduct of future monetary policy. C) sought less control over banks in the 1980s. D) is willing to take on powerful groups that may threaten its autonomy. Answer: B Topic: Chapter 9.4 Should the Fed Be Independent? Question Status: Previous Edition 51) The strongest argument for an independent Federal Reserve rests on the view that subjecting the Fed to more political pressures would impart A) an inflationary bias to monetary policy. B) a deflationary bias to monetary policy. C) a disinflationary bias to monetary policy. D) a countercyclical bias to monetary policy. Answer: A Topic: Chapter 9.4 Should the Fed Be Independent? Question Status: Previous Edition 52) Politicians in a democratic society may be shortsighted because of their desire to win reelection; thus, the political process can A) impart an inflationary bias to monetary policy. B) impart a deflationary bias to monetary policy. C) generate a political business cycle in which, just before an election, expansionary policies are pursued to lower unemployment and interest rates. D) cause both A and C of the above to occur. Answer: D Topic: Chapter 9.4 Should the Fed Be Independent? Question Status: Previous Edition 53) The case for Federal Reserve independence includes the idea that A) political pressure would impart an inflationary bias to monetary policy. B) a politically insulated Fed would be more concerned with long-run objectives and thus be a defender of a sound dollar and a stable price level. C) a Federal Reserve under the control of Congress or the president might make the so-called political business cycle more pronounced. D) all of the above. Answer: D Topic: Chapter 9.4 Should the Fed Be Independent? Question Status: Previous Edition 54) The case for Federal Reserve independence includes the idea that A) a politically insulated Fed would be more concerned with long-run objectives and thus be a defender of a sound dollar and a stable price level. B) a Federal Reserve under the control of Congress or the president might make the so-called political business cycle more pronounced. C) the principal-agent problem is perhaps worse for the Fed than for congressmen since the former does not answer to the voters on election day. D) only A and B of the above. Answer: D Topic: Chapter 9.4 Should the Fed Be Independent? Question Status: Previous Edition 55) The case for Federal Reserve independence does not include the idea that A) political pressure would impart an inflationary bias to monetary policy. B) a politically insulated Fed would be more concerned with long-run objectives and thus be a defender of a sound dollar and a stable price level. C) policy is always performed better by an elite group such as the Fed. D) a Federal Reserve under the control of Congress or the president might make the so-called political business cycle more pronounced. Answer: C Topic: Chapter 9.4 Should the Fed Be Independent? Question Status: Previous Edition 56) The case for Federal Reserve independence does not include the idea that A) political pressure would impart an inflationary bias to monetary policy. B) the principal-agent problem is perhaps worse for the Fed than for congressmen since the former does not answer to the voters on election day. C) a politically insulated Fed would be more concerned with long-run objectives and thus be a defender of a sound dollar and a stable price level. D) a Federal Reserve under the control of Congress or the president might make the so-called political business cycle more pronounced. Answer: B Topic: Chapter 9.4 Should the Fed Be Independent? Question Status: Previous Edition 57) Advocates of Fed independence fear that subjecting the Fed to direct presidential or congressional control would A) impart an inflationary bias to monetary policy. B) force monetary authorities to sacrifice the long-run objective of price stability. C) make the so-called political business cycle even more pronounced. D) do all of the above. E) do only A and B of the above. Answer: D Topic: Chapter 9.4 Should the Fed Be Independent? Question Status: Previous Edition 58) Advocates of Fed independence fear that subjecting the Fed to direct presidential or congressional control would A) impart an inflationary bias to monetary policy. B) force monetary authorities to sacrifice the long-run objective of price stability. C) make the so-called political business cycle less pronounced. D) do all of the above. E) do only A and B of the above. Answer: E Topic: Chapter 9.4 Should the Fed Be Independent? Question Status: Previous Edition 59) Supporters of the current system of Fed independence believe that a less autonomous Fed would A) adopt a long-run bias toward policymaking. B) pursue overly expansionary monetary policies. C) be more likely to create a political business cycle. D) do only B and C of the above. Answer: D Topic: Chapter 9.4 Should the Fed Be Independent? Question Status: Previous Edition 60) Critics of the current system of Fed independence contend that A) the current system is undemocratic. B) voters have too much say about monetary policy. C) the president has too much control over monetary policy on a day-to-day basis. D) all of the above are true. Answer: A Topic: Chapter 9.4 Should the Fed Be Independent? Question Status: Previous Edition 61) Critics of Fed independence argue A) that it is undemocratic to have monetary policy controlled by an elite group responsible to no one. B) that an independent Fed conducts monetary policy with a consistent inflationary bias. C) that the Fed, since it does not face a binding budget constraint, spends too much of its earnings. D) only A and B of the above. Answer: A Topic: Chapter 9.4 Should the Fed Be Independent? Question Status: Previous Edition 62) Critics of Fed independence argue A) that it is undemocratic to have monetary policy controlled by an elite group responsible to no one. B) that independence seemingly does little to guarantee good monetary policy. C) that its independence may encourage the Fed to pursue a course of narrow self-interest rather than the public interest. D) all of the above. Answer: D Topic: Chapter 9.4 Should the Fed Be Independent? Question Status: Previous Edition 63) Instrument independence means the central bank is free from A) political pressure regarding how it uses the tools of monetary policy. B) political pressure regarding the goals it pursues. C) both A and B of the above. D) neither A nor B of the above. Answer: A Topic: Chapter 9.3 How Independent Is the Fed? Question Status: Previous Edition 64) Suppose legislation requiring the Fed to keep the inflation rate between 1.5% and 2.5% per year is passed by Congress. This law restricts the Fed's A) instrument independence. B) goal independence. C) both A and B of the above. D) neither A nor B of the above. Answer: B Topic: Chapter 9.3 How Independent Is the Fed? Question Status: Previous Edition 65) Cross-country evidence suggests that an increase in central bank independence results in a ________ inflation rate and ________ unemployment. A) lower; higher B) lower; no worse C) higher; lower D) higher; higher Answer: B Topic: Chapter 9.4 Should the Fed Be Independent? Question Status: Previous Edition 66) The Board of Governors of the Federal Reserve System A) appoint three directors to each Federal Reserve Bank. B) elect six members to member commercial banks. C) both of the above. D) none of the above. Answer: A Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 67) The Federal Advisory Council has ________ member(s) from each district. A) one B) two C) three D) can have any number of Answer: A Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 68) The three largest Federal Reserve banks in terms of assets are those of New York, Chicago, and A) Atlanta. B) Los Angeles. C) Baltimore. D) San Francisco. Answer: D Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 69) The directors of a district bank are classified into three categories: A, B, and C. The three B directors are A) professional bankers. B) prominent leaders from industry, labor, agriculture, or the consumer sector. C) elected by the board of governors to represent the public interest. D) all of the above. Answer: B Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 70) The 12 Federal Reserve banks are involved in monetary policy in which of the following ways? A) Their directors establish the discount rate. B) They decide which banks can obtain discount loans from the Federal Reserve Bank. C) Their directors select one commercial banker from each bank's district to serve on the Federal Advisory Council. D) all of the above. Answer: D Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 71) The ________ of the Board of Governors is the spokesperson for the Fed. A) chairman B) president C) either of the above can be the spokesperson D) neither of the above Answer: A Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 72) Currently, there are ________ countries that are members of the European Monetary Union. A) 10 B) 17 C) 15 D) 20 Answer: B Topic: Chapter 9.5 Structure and Independence of the European Central Bank Question Status: Updated from Previous Edition 9.2 True/False 1) The unusual structure of the Federal Reserve System is best explained by Americans' fear of centralized power. Answer: TRUE Topic: Chapter 9.1 Origins of the Federal Reserve System Question Status: Previous Edition 2) Rapid money supply growth and uncontrollable inflation were among the factors which motivated the creation of the Federal Reserve System. Answer: FALSE Topic: Chapter 9.1 Origins of the Federal Reserve System Question Status: Previous Edition 3) The Washington, D.C. Fed bank, with over 30 percent of the system's assets, is the most important Federal Reserve Bank. Answer: FALSE Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 4) The FOMC is an element of the Federal Reserve System. Answer: TRUE Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 5) All nationally chartered banks are required to be members of the Fed. Answer: TRUE Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 6) Each member of the seven-member Board is appointed by the president and confirmed by the Senate to serve 14-year terms. Answer: TRUE Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 7) The Board of Governors sets reserve requirements. Answer: TRUE Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 8) Monetary policy is set by the Board of Governors. Answer: FALSE Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 9) Federal Reserve monetary policy decisions must be approved by the Secretary of the Treasury before they may be implemented. Answer: FALSE Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 10) The FOMC issues directives to the trading desk at the New York Fed. Answer: TRUE Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 11) Critics of the current system of Fed independence contend that the president has too much control over monetary policy on a day-to-day basis. Answer: FALSE Topic: Chapter 9.4 Should the Fed Be Independent? Question Status: Previous Edition 12) Countries with more independent central banks have lower inflation rates, but these have come at the expense of greater output fluctuations. Answer: FALSE Topic: Chapter 9.6 Structure and Independence of Other Foreign Central Banks Question Status: Previous Edition 13) Announcing the FOMC's policy decision immediately after the FOMC meeting is an example of how Fed policymaking has become more transparent. Answer: TRUE Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 14) The Fed has goal independence but not instrument independence. Answer: FALSE Topic: Chapter 9.3 How Independent Is the Fed? Question Status: Previous Edition 15) The Federal Reserve banks act as liaisons between the business community and the Federal Reserve System. Answer: TRUE Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 16) The FOMC does not actually carry out securities purchases or sales. Answer: TRUE Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 17) In the ECB, the Governing Council has the right to vote, and this right is taken very seriously, with all important matters decided by a majority vote. Answer: FALSE Topic: Chapter 9.5 Structure and Independence of the European Central Bank Question Status: New Question 

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