Global Finance Final

A German automobile maker wants to build a manufacturing facility in China. To build its manufacturing facility, the German automobile maker needs to buy land in China. To purchase that land, the German automobile maker will need to sell its euro (the currency used in Germany) in the foreign exchange market and buy renminbi (the currency used in China). Thus, the German automobile maker will be a a. supplier of renminbi. b. demander of renminbi. c. demander of the euro. d. foreign tourist.

b

A foreign exchange intervention is when a. domestic consumers engage in actions in order to influence the exchange rate of their country's currency. b. central banks and/or national governments engage in actions in order to influence the exchange rate of their or another country's currency. c. political action groups lobby national governments in order to influence the exchange rate of their country's currency by blocking imports from flowing into the country. d. foreign companies engage in actions in order to influence the exchange rate of other country's currencies.

b

An "unsterilized intervention" is when a country's __________ buy(s) the country's own currency in the foreign exchange market to __________ the currency's market price. a. foreign investors; increase b. central bank; increase c. central bank; decrease d. speculators; decrease

b

An exchange rate system where the central bank or government sets official upper and lower bounds for the market value of the country's currency and the central bank or government pledges to undertake an intervention if the market-determined exchange rate approaches either the upper or lower bound is a a. crawling peg. b. target zone regime. c. currency board system. d. managed float system.

b

Banks that have some financial difficulty and borrow from the Federal Reserve in what is known as secondary credit will pay an interest rate equal to the a. discount rate. b. discount rate plus a penalty. c. federal funds rate. d. federal funds rate plus a penalty.

b

Following the Great Depression, the power of the Fed shifted to the a. New York Federal Reserve Bank. b. Federal Open Market Committee. c. board of governors of the Federal Reserve. d. Secretary of the Treasury.

b

The anchor currency in the Bretton Woods System was a. gold. b. the US dollar. c. the Canadian dollar. d. the euro.

b

The entity responsible for making the monetary policy decisions in the European Central Bank is the a. president of the ECB. b. governing council. c. general council. d. executive board.

b

The four types of foreign exchange market participants are a. buyers, sellers, traders, and manufacturing companies. b. banks, brokers, customers, and central banks. c. banks, brokers, traders, and financial companies. d. banks, brokers, bond underwriters, and securities companies.

b

The purchase of direct debt and mortgage-backed securities by the Federal Reserve in November 2008 is referred to as a. qualitative easing. b. quantitative easing. c. a repurchase agreement. d. liquidity easing.

b

The three governing bodies of the European Central Bank are the a. open market committee, executive board, and governing council. b. governing council, general council, and executive board. c. governing council, general council, and executive committee. d. executive board, general council, and monetary authority.

b

The two major goals of Canadian monetary policy are __________ and __________. a. flexible exchange rates; economic growth b. flexible exchange rates; inflation control c. inflation control; economic growth d. economic growth; low unemployment

b

When a negative shock to the economy is intensified by worsening financial market conditions, it is referred to as a(n) a. financial accelerator. b. financial disaster. c. economic accelerator. d. shock accelerator.

a

When the Federal Reserve buys US Treasury securities on the open market, it is attempting to a. lower interest rates. b. raise interest rates. c. reduce inflation. d. slow economic growth.

a

Which of the following is NOT one of Mundell's four characteristics for an optimal currency area? a. Central bank mobility b. Labor mobility c. Capital mobility d. Coordinated fiscal policies

a

Which of the following organizations was established to help oversee the Bretton Woods System? a. The International Monetary Fund b. The World Bank c. The Federal Reserve d. The Internal Revenue Service

a

Default risk is the risk that a borrower will not live up to their promise to pay the interest or principal on their loan. a. True b. False

A

Gwen is considering buying either a corporate bond or a municipal bond that are exactly the same except for their yield. Gwen is in the 33% marginal tax bracket, and the municipal bond she is considering pays a 6% interest rate. To make Gwen indifferent between the two bonds, the corporate bond must offer an interest rate of a. 8.96%. b. 7.5%. c. 6%. d. 5.65%.

A

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

A

Stagflation is an economic condition where an economy is experiencing a. a high and rising price level and little economic growth with high unemployment. b. a low and falling price level and little economic growth with high unemployment. c. a high and rising price level with high economic growth and low unemployment. d. a low and falling price level and high economic growth with high unemployment.

A

10. The acquisition of a public or private company that is financed largely by debt is referred to as a a. debt acquisition. b. leveraged buyout. c. junk bond. d. junk takeover.

B

24. The Chairman of the Federal Reserve, Paul Volcker, decided that dealing with stagflation would require a. a dramatic increase in the money supply. b. a shift in focus by the Federal Reserve from targeting interest rates to targeting the rate of growth of the money supply. c. an expansionary monetary policy that would lower unemployment rates. d. the Federal Reserve to continue to focus on interest rates and conduct monetary policy to bring interest rates down.

B

8. During World War II, the US government financed the dramatic increase in wartime spending by a. decreasing tax rates and selling war bonds. b. increasing tax rates and selling war bonds. c. increasing tax rates and purchasing war bonds. d. increasing tax rates and increasing the money supply.

B

A 5%, $10,000, 30-year bond will produce for the owner of the bond 30 annual payments of $500 from the issuer of the bond. a. True b. False

B

A corporate bond offering an interest rate of 5% is as good a deal as a municipal bond offering the same interest rate. a. True b. False

B

A yield curve illustrates the relationship between the a. default risk associated with bonds of a given maturity and the interest rate they pay, at a particular point of time. b. term to maturity of bonds and the interest rate they pay, at a particular point of time. c. marginal tax rate and the after-tax interest rate of return on taxable bonds. d. rate of inflation and the real rate of return on bonds.

B

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

B

One of the innovations that the Federal Housing Administration developed that helped make mortgage loans more accessible was the __________ mortgage. a. adjustable rate b. 30-year, fixed-rate c. subsidized interest d. guaranteed interest rate

B

The rate at which a lender needs to be compensated for taking on greater risk is known as a(n) __________ premium. a. scarcity b. default risk c. interest rate d. promise to pay

B

A bond's maturity refers to the a. rate of interest to be paid to the holder of a bond. b. amount that the bond issuer must repay. c. period of time when the issuer of the bond makes repayment of the bond's principal. d. issuer of the bond.

C

Aggregate demand is equal to a. C + I + G + (X + M). b. C + G + (X - M). c. C + I + G + (X - M). d. S + I + G + (X - M).

C

Bonds are issued by a. corporations only. b. governments only. c. many kinds of borrowers. d. government agencies only.

C

It is found that when the disposable income of Elvania increases by $100 billion, household consumption spending increases by $70 billion. In Elvania, the marginal propensity to consume is a. 0.3. b. 0.5. c. 0.7. d. 1.0.

C

27. One of the major reasons that the western European economies prospered following World War II was the a. coordinated conduct of expansionary fiscal policy among the western European nations. b. creation of the European Central Bank to coordinate monetary policy among the western European nations. c. influx of direct investment by the United States in the western European nations. d. elimination of trade barriers between the western European nations.

D

A decrease in the demand for loanable funds would be caused by a. lower expected household income. b. a deterioration in business confidence. c. a reduction in government deficits. d. a decrease in expectations about future inflation.

D

Diedre works for a pension fund and is thinking of buying some bonds that have a nominal interest rate of 6%. She believes that the inflation rate over the life of the bond will be 2%. The ex-post real interest rate on this bond is a. 6%. b. 4%. c. 2%. d. unknown

D

If the market price of a currency is above the equilibrium price, there is a __________ and __________ pressure on the price. a. shortage; downward b. shortage; upward c. surplus; downward d. surplus; upward

c

One of the important disadvantages of a crawling peg system is a. there is not enough gold to exchange for currency when citizens demand gold from the central bank in exchange for bank notes. b. it works too well. c. the official exchange rate does not change as often as it should because government bureaucracy does not react fast enough to changing economic conditions. d. economic conditions become too stable.

c

One of the ways to resolve the problems that the Sisters share is to a. allow the US government to have a supermajority in voting rights. b. allow US corporations a bigger voice in how funds are allocated. c. reduce the size and complexity of the World Bank and IMF. d. allow only board members from the largest multinational corporations to govern the Sisters.

c

Overnight bank borrowing from the Federal Reserve is known as a. seasonal credit. b. secondary credit. c. primary credit. d. federal funds borrowing.

c

Roughly two-thirds of all foreign exchange transactions involve a. brokers acting as intermediaries between banks. b. central banks acting on behalf of their governments. c. banks dealing directly with each other. d. customers buying foreign exchange to make purchases in foreign countries.

c

The Bank of Japan's ability to respond to the global financial crisis that began in 2007 was limited by a. the control exerted on the Bank of Japan by the central government. b. high interest rates in Japan. c. a bloated balance sheet, which was a result of its response to a financial crisis in Japan in the late 1990s. d. lack of coordination between the Bank of Japan and the US Federal Reserve Bank.

c

The most important of the open market operations the European Central Bank has in its tool kit are its __________ operations. a. longer-term refinancing b. fine-tuning c. main refinancing d. structural liquidity-providing

c

The most often used of the Federal Reserve's monetary tools is a. discount window lending. b. changing the reserve requirement. c. open market operations. d. quantitative easing.

c

A sterilized foreign exchange intervention taken by the European Central Bank to meet the objective of depreciating the euro might include __________ to sterilize the transaction. a. buying euros and US dollars, and then buying a similar amount of government securities b. buying government securities, and then buying a similar amount of euros c. selling US dollars, and then buying a similar amount of government securities d. selling euros and buying US dollars, and then selling a similar amount of government securities

d

An example of a currency board regime might be if the United States were to pledge to a. undertake an intervention in the currency market if the US dollar approaches the upper bound. b. undertake an intervention in the currency market if the US dollar approaches the lower bound. c. undertake an intervention in the currency market if the euro approaches either the upper or lower bound. d. convert or exchange US dollars for the euro at any time at a stated fixed price because the euro is the anchor currency of the US dollar.

d

Assume that the US currency is weakening due to a variety of domestic and global economic and social factors. Which of the following courses of action could be taken by the United States' central bank, the Federal Reserve, if it wants to help boost the dollar so it begins to appreciate? a. The Federal Reserve could buy government bonds. b. The Federal Reserve could sell government bonds. c. The Federal Reserve could sell US dollars in the foreign exchange market and buy other currencies. d. The Federal Reserve could buy US dollars in the foreign exchange market and sell other currency it holds.

d

By far, the largest asset on the Federal Reserve's balance sheet is a. gold. b. coin. c. discount loans. d. securities.

d

The chair of the Federal Reserve becomes the chair by being a. elected in a vote of the members of Congress. b. elected by the people of the United States. c. appointed by the president of the United States and confirmed by both the House of Representatives and the Senate. d. appointed by the president of the United States and confirmed by the US Senate.

d

Because the IMF and the World Bank helped rebuild western Europe after World War II and helped to create the post-war economic boom, they are two of the most trusted institutions in the global economic structure.

false

Federal government budget surpluses can lead to a "crowding out" effect, which pushes interest rates upward.

false

If a country is following a "beggar-thy-neighbor" policy, it is intentionally stabilizing its currency in order to promote the appreciation of its currency and encourage more imports.

false

The Bretton Woods System, the crawling peg, the target zone, currency boards, and managed float systems have all been successful currency exchange systems in use since the mid-1940s.

false

The Federal Reserve is part of the US Treasury.

false

The most powerful entity in the Federal Reserve is the board of governors

false

You work for a British company that is expanding its operations into continental Europe. In order to pay for the expenses of operations in Europe, your company will sell British pounds to purchase euros. Therefore, your company is a demander of pounds in the foreign exchange market.

false

You work for a firm that exports toys to retail customers around the world. In fact, 75 percent of your sales revenue comes from exports. Because you work for a firm that relies heavily on exports, you want to see your home country currency strengthen or appreciate and gain value in the foreign exchange markets.

false

The IMF changed focus after the collapse of the Bretton Woods System and assisted with a. the reestablishment of a new gold standard system that eventually became another gold exchange system. b. lending money to developed nations to build infrastructure such as highways and bridges. c. the establishment of crawling peg and fixed exchange rate regimes in developed countries. d. lending money to countries experiencing oil supply shocks, lending money to the Mexican government during financial crisis, and offering financial assistance to eastern Europe after the fall of the Berlin Wall.

d

What are some of the ways that fixed exchange rates can enhance stability in an economy? a. Fixed exchange rates reduce uncertainty and make foreign trade easier. b. Fixed exchange rates reduce uncertainty and make foreign investment easier. c. Fixed exchange rates can help end financial crises and help establish a new central bank's credibility. d. All of these are ways that fixed exchange rates can enhance stability in an economy.

d

When the Federal Reserve increases the reserve ratio, the impact will be to a. increase the size of the spending multiplier. b. decrease the size of the spending multiplier. c. increase the size of the money multiplier. d. decrease the size of the money multiplier.

d

When the Federal Reserve was created in 1913, its two primary purposes were to a. regulate the financial sector of the US economy and maintain the gold standard. b. be the banker for the US government and be a "lender of last resort" to commercial banks. c. regulate the financial sector and be a "lender of last resort" to commercial banks. d. maintain the gold standard and be a "lender of last resort" to commercial banks.

d

When the economy is caught in a liquidity trap, expansionary monetary policy will a. result in inflation. b. result in a significant contraction in economic activity. c. result in a significant expansion of economic activity. d. have little impact on the economy.

d

Which of the following demonstrates an arbitrage opportunity? a. Buying a good in one market and selling the exact same good in another market at a lower price b. Buying a currency with the belief that its value will appreciate in the near future c. Investing in an economy that is experiencing rapid economic growth d. Buying a good in one market and selling the exact same good in another market at a higher price

d

You own a local company. In the past year, you successfully expanded your sales market into Europe, and you now have profits and cash denominated in euros. You want to convert the euros to your home country currency to repatriate the profits and pay taxes. You are a. not required to convert the euros to the home currency to pay taxes. b. a demander of the euro in the foreign exchange market. c. a supplier of your home country's currency in the foreign exchange market. d. a demander of your home country's currency in the foreign exchange market.

d

The Panic of 1907 was essentially ended by one person, John D. Rockefeller. a. True b. False

B

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

B

The three theories that economists have developed to explain the shape of the yield curve are a. the term premium theory, the pure expectations theory, and the default premium theory. b. the pure expectations theory, the term premium theory, and the segmented market theory. c. the segmented market theory, the default premium theory, and the inflationary expectations theory. d. the pure expectations theory, the inflationary expectations theory, and the term premium theory.

B

When the economy simultaneously experiences growing unemployment and rising rates of inflation, it is called a. leverage. b. stagflation. c. stagnation. d. unemplation.

B

In the early twentieth century, the business scene in America was transformed by the formation of trusts. Business trusts are __________ integrated ownership structures. a. vertically b. diagonally c. horizontally d. backwards

C

The Keynesian aggregate demand/aggregate supply model assumed that people's expectations were a. rational. b. ex ante. c. adaptive. d. ex post.

C

Shareen buys a 30-year, $10,000 US Treasury bond with a coupon rate of 5%. After two years she needs some cash so she decides to sell her bond. Shareen will sell her bond in the __________ market. a. primary bond b. Treasury bond c. T-bond d. secondary bond

D

In order to fund World War II, the United States followed the policy prescription of a. John Maynard Keynes. b. Friedrich von Hayek. c. Adam Smith. d. Milton Friedman.

A

In the period following World War II, the US Treasury was in charge of monetary policy and instructed the Federal Reserve to a. keep interest rates low in order to keep spending high. b. keep interest rates high in order to keep saving high. c. keep the money supply stable to keep prices stable. d. let the money supply grow in order to stimulate employment for returning veterans.

A

Keynes's interest rate effect suggests that when the price level rises it causes an increase in the demand for money, which __________ the interest rate and __________ the level of business spending. a. increases; reduces b. increases; increases c. decreases; reduces d. decreases; increases

A

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

A

Suppose that the interest rate on a one-year bond is currently 3% and the market believes that the rate on a one-year bond one year from now will be 5%. If you follow the pure expectations theory of interest rates, then you would expect to see a(n) __________ yield curve. a. upward-sloping b. downward-sloping c. horizontal d. vertical

A

The expansion of the "junk bond" market in the 1980s was one factor that allowed for the rapid increase in the number of leveraged buyouts. a. True b. False

A

The individual credited with ending the Panic of 1907 in the United States was a. J. Pierpont Morgan. b. Frederick Taylor. c. Andrew Carnegie. d. John D. Rockefeller.

A

The quantity of loanable funds supplied is directly related to interest rates because as interest rates increase a. the opportunity cost of household consumption increases, causing households to bring more of their after-tax income to the pool of loanable funds. b. the opportunity cost to firms of funding projects with cash increases, causing firms to bring less of their cash to the pool of loanable funds. c. the opportunity cost of government borrowing increases, causing government to run budget surpluses instead of deficits and therefore bring more cash to the pool of loanable funds. d. in the US, savers in the rest of the world will be more inclined to save in their domestic market, thereby bringing less of their saving to the US pool of loanable funds.

A

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

A

When people use all available information to develop expectations about the future and use their expectations about the future to make current decisions, this is called __________ expectations. a. rational b. adaptive c. realistic d. Deterministic

A

You hear a report on the news by a well-respected financial analyst who says that the currently inverted yield curve is irrelevant to borrowing and lending decisions because yield curves are not an accurate reflection of the situation in bond markets. This analyst most likely is a proponent of the __________ theory of interest rates. a. segmented market b. pure expectations c. term premium d. default risk

A

The primary lesson learned from the Panic of 1907 was the a. downside of government intervention in the economy. b. value of a private banking system in the United States. c. need in the United States for a central bank. d. need for deregulation of financial markets in the United States.

C

The rational expectations approach postulates two aggregate supply curves: a. an upward-sloping short-run aggregate supply curve and a horizontal long-run supply curve at the maximum price level. b. an upward-sloping short-run aggregate supply curve and a vertical long-run supply curve at zero unemployment rate level of GDP. c. an upward-sloping short-run aggregate supply curve and a vertical long-run supply curve at the full-employment level of GDP. d. a vertical short-run aggregate supply curve at the full-employment level of GDP and an upward0sloping long-run supply curve.

C

The stagflation that began in the 1960s in the US economy was worsened in the 1970s by a. the resignation of President Nixon in 1974. b. the US pullout from Vietnam in 1973. c. an oil embargo instituted by the Organization of Petroleum Exporting Countries (OPEC) in 1973. d. the unilateral cancellation of the convertibility of the US dollar to gold by President Nixon in 1971.

C

The three reasons that the economy-wide price level and the level of real GDP move in opposite directions are a. the Pigou effect, the foreign trade effect, and the real savings effect. b. the foreign trade effect, Keynes's interest rate effect, and the price effect. c. the Pigou effect, Keynes's interest rate effect, and the foreign trade effect. d. the foreign trade effect, the government intervention effect, and the real savings effect.

C

When stagflation began to appear in the US economy in the late 1960s, economists and policymakers were perplexed because they had never seen __________ and __________ at the same time. a. a stagnant economy; high unemployment rates b. high inflation rates; high interest rates c. high inflation rates; high unemployment rates d. high unemployment rates; high growth rates

C

With a two-part aggregate supply curve, an increase in aggregate demand when the economy is at less than full employment will lead to __________ in real GDP and __________ in the price level. a. an increase; an increase b. an increase; a decrease c. an increase; no increase d. no change; an increase

C

You are having a conversation with your friend Yvonne about the upward-sloping yield curve that currently exists in the bond market. She explains this to you by saying that the upward slope to the yield curve is because the market expects future interest rates to be higher than current interest rates. Her observation means that she is a proponent of the __________ theory of interest rates. a. term premium b. default premium c. pure expectations d. segmented market

C

You give your friend $10,000 to help start a business, and you get $1,000 back. Your rate of return is a. 100%. b. 50%. c. 10%. d. 1%.

C

You own a 10-year, $10,000 US Treasury bond with a coupon rate of 3%. There are two years left to maturity, and you are planning to sell the bond in the secondary market. If the interest rate is 5%, how much can you expect to get for the bond? a. $10,600 b. $10,000 c. $9,628 d. $9,500

C

__________ proposed the aggregate supply/aggregate demand framework to explain what was happening in the economy during the Great Depression. a. Karl Marx b. Vladimir Lenin c. John Maynard Keynes d. Jean Baptiste Say

C

A 10-year, $10,000 bond with a coupon rate of 5% is a promise by the issuer of the bond to a. make a single payment to the bondholder of $10,500 in 10 years. b. pay the bondholder $5,000 every year for 10 years and also a $10,000 payment in 10 years. c. make a single payment to the bondholder of $15,000 in 10 years. d. pay the bondholder $500 every year for 10 years and also a $10,000 payment in 10 years.

D

A major concern of US policymakers as a result of the dramatic increase in wartime spending was a. deflation. b. excessive growth. c. unemployment. d. inflation.

D

A person who believes the pure expectations theory of interest rates would explain a steeply upward-sloping yield curve is suggesting that a. savers currently have a better use for funds, or savers are worried about the future. b. central banks have cut short-term interest rates and home sales have increased, or central banks have cut interest rates out of a fear of a slowdown in economic activity. c. the economy is headed for a slowdown, or relief from inflationary pressure is imminent. d. higher inflation is in the future, or more rapid economic growth is on the horizon.

D

According to the pure expectations theory, a flat yield curve means the market a. thinks that future interest rates will be higher than current interest rates. b. thinks that future interest rates will be lower than current interest rates. c. does not know what will happen to future interest rates. d. thinks that future interest rates will be exactly the same as current interest rates.

D

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

D

At the conclusion of World War II, an explosion in the home mortgage market was led by depository institutions known as a. depository banks. b. investment banks. c. commercial banks. d. Savings & Loans.

D

Emmel is the CFO for ABC Corporation. Ten years ago, under Emmel's instructions, the company invested in 10-year US Treasury bonds that paid 3% interest. At the time, Emmel's projection was that inflation over the 10-year period would be 0.5% per year. As it turns out, the annual rate of inflation over the 10-year period was 1.5%. As a result, the ex-post rate of return on ABC Corporation's investment was _____, instead of the _____ return that Emmel expected ex-ante. a. 3%; 2.5% b. 2.5%; 1.5% c. 3%; 0.5% d. 1.5%; 2.5%

D

In a 2003 analysis of the Federal Reserve's role in the stock market collapse in October of 1929, Allan Meltzer concluded that the a. federal government's action to intervene in the financial system in October of 1929 delayed the onset of the Great Depression. b. Federal Reserve acted appropriately and quickly in reaction to the events in October of 1929. c. federal government and the Federal Reserve effectively coordinated their response to the events in October of 1929. d. Federal Reserve followed the wrong policy doctrine and thus contributed to the onset of the Great Depression.

D

In the country of Trivia, it is widely believed that the marginal propensity to consume is 0.75. This means that a onetime increase in spending of $50 billion will result in a(n) __________ in GDP equal to __________. a. decrease; $66.67 billion b. increase; $50 billion c. increase; $66.67 billion d. increase; $200 billion

D

In the late 1970s and early 1980s, as the Federal Reserve squeezed the growth of the money supply, interest rates shot up and a. profits began to increase dramatically. b. the economy began to recover. c. the unemployment rate plummeted. d. the unemployment rate shot up as well.

D

Saladin is willing to lend her friend Astro $500 to buy a new smart phone. Saladin wants a 3% real rate of return on the loan when it is paid back at the end of the year. She believes that during the year the general level of prices will rise by 2%, so she should charge her friend Astro a nominal interest rate of a. 2%. b. 3%. c. 4%. d. 5%.

D

As envisioned at its creation at Bretton Woods, a. the IMF would be responsible for stabilizing global financial markets, and the World Bank would be responsible for rebuilding and economic development. b. the World Bank would be responsible for stabilizing global financial markets, and the IMF would be responsible for rebuilding and economic development. c. the IMF would be responsible for creating the EuroZone, and the World Bank would be in charge of developing the euro as a currency. d. the IMF would oversee all central banks around the globe, and the World Bank would be in charge of overseeing foreign currency exchanges.

a

Between yesterday and today, the US dollar has appreciated against the yen. One of the impacts of this will be a. US-made goods that sell in Japan will be more expensive. b. US-made goods that sell in the United States will be more expensive. c. Japanese-made goods that sell in the United States will be more expensive. d. nothing; there will be no impact on goods flowing overseas between the United States and Japan.

a

John Maynard Keynes argued that there were three reasons that people demand money. They are the a. transactions motive, precautionary motive, and speculative motive. b. quantity motive, speculative motive, and transparency motive. c. transactions motive, precautionary motive, and transparency motive. d. precautionary motive, speculative motive, and wealth motive.

a

Monetization of public debt can lead to a rapid increase in the money supply and hence to a. inflation. b. stagflation. c. unemployment. d. economic growth.

a

Rapid depreciations of a currency a. are not a good thing. b. are a good thing. c. only occur during periods of inflation. d. occur more often than rapid appreciations.

a

The Bank of England has two primary responsibilities, which are __________ and __________. a. monetary stability; financial stability b. employment stability; monetary stability c. economic growth; employment stability d. economic growth; financial stability

a

The European Central Bank (ECB), the central bank of the Eurozone, has determined that the euro is overvalued (has appreciated too much) relative to various other important currencies around the world. In order to help stabilize the euro in an attempt to keep it from appreciating more, the ECB might a. sell euros in the foreign exchange market. b. buy euros in the foreign exchange market. c. sell all the noneuro currencies it holds and keep the euros it holds. d. sell the currencies it holds that compete most directly with the euro.

a

The marginal propensity to import is a change in the __________ brought about by a change in the __________. a. purchase of imports; amount of disposable income b. amount of disposable income; purchase of imports c. purchase of imports; amount of exports d. purchase of imports; producer price index

a

The problems that developed with the Bretton Woods System included: a. the system was too rigid, and the dollar should have been devalued against the other currencies in the system when the US began suffering from inflation. b. the system was too flexibl,e and the dollar should have been devalued against the other currencies in the system when the US began suffering from inflation. c. other countries wanted to absorb the additional dollars that were being created in the US due to inflation, but the US did not want to create more dollars. d. other countries tried to sell too much gold to the US, and the demand for US currency went so high that the US could not keep up even though the dollar was being inflated.

a

The responsibilities of the European Central Bank include a. monetary policy, foreign exchange operations, and maintenance of the payments system. b. management of gold reserves, monetary policy, and foreign exchange operations. c. holding and management of official foreign reserves of Euro area countries, monetary policy, and management of economic growth in EuroZone countries. d. management of economic growth in EuroZone countries, monetary policy, and foreign exchange operations.

a

The securities that the Federal Reserve holds on its balance sheet include a. US Treasury securities, federal agency debt, and privately issued mortgage-backed securities. b. privately issued stocks, US Treasury securities, and federal agency debt. c. municipal bonds, privately issued stocks, and US Treasury securities. d. US Treasury securities, municipal bonds, and federal agency debt.

a

Throughout the 1880-1914 time period, the gold standard was maintained because the three major economic powers (the United Kingdom, the United States, and France) a. allowed interest rates to change in response to flows of gold. b. used their fiscal policy to maintain the gold standard. c. used floating exchange rates. d. increased their level of trade with each other.

a

What concept does the following graph illustrate? a. As the currency depreciates, the quantity of the currency demanded increases. b. As the currency appreciates, the quantity of the currency supplied increases. c. As the currency depreciates, the quantity of the currency demanded decreases. d. As the currency appreciates, the quantity of the currency supplied decreases.

a

Which of the following is NOT a characteristic of a target zone regime? a. The central bank will exchange currencies for gold on demand. b. The central bank sells its currency if the daily market-determined exchange rate approaches the upper bound of the target. c. The central bank buys its currency if the daily market-determined exchange rate approaches the lower bound of the target. d. The graph of the target zone regime looks like a snake in a tunnel.

a

Which of the following statements about a crawling peg exchange rate system is FALSE? a. The crawling peg system is the only system that has worked since the collapse of the Bretton Woods System. b. In a crawling peg system, the "official exchange rate" does not change as often as it should because of bureaucracy. c. A crawling peg system requires the central bank or government to closely monitor the myriad of items that can and do change that put pressure on an exchange rate. d. A crawling peg system seems to create a stable exchange rate but in reality often does not.

a

The Federal Reserve notices an increase in the public's desire to hold cash and fears that it may cause an increase in interest rates. To keep interest rates steady, the Federal Reserve would likely execute a a. repurchase agreement to provide a short-term reduction in the money supply. b. reverse repurchase agreement to provide a short-term reduction in the money supply. c. repurchase agreement to provide a short-term boost to the money supply. d. reverse repurchase agreement to provide a short-term boost to the money supply.

c

The US dollar-to-euro exchange rate was $1 = 0.921384 euros yesterday. Today, the US dollar-to-euro exchange rate is $1 = 0.891560. This means that between yesterday and today, the a. dollar has appreciated against the euro. b. dollar has gained in value against the euro. c. dollar has depreciated against the euro. d. euro has weakened against the dollar.

c

The concept of purchasing power parity refers to a. the decrease in the market value of a currency relative to another currency. b. consumers' preferences for imports over exports or goods produced at home. c. the exchange rate between currencies that equalizes the purchasing power of each currency by eliminating the differences in price levels in each economy. d. the exchange rate between currencies that equalizes the purchasing power of each currency by increasing the differences in price levels in each economy.

c

The rising popularity of ATMs has resulted in a(n) __________ as a tool of monetary policy. a. decline in the usefulness of open market operations b. decline in the usefulness of the discount rate c. decline in the usefulness of the reserve ratio d. increase in the usefulness of the reserve ratio

c

To ensure financial stability, the United Kingdom has a three-part system of regulators consisting of the a. Bank of England, Financial Services Authority, and House of Lords. b. Treasury Department, Bank of England, and House of Commons. c. Bank of England, Financial Services Authority, and Treasury Department. d. Financial Services Authority, British Parliament, and Bank of England.

c

When borrowers are hesitant to borrow to finance purchases because of pessimism about the future and banks are hesitant to lend because of a fear that borrowers will default on their loans, the economy is said to be experiencing a(n) __________ trap. a. stagflationary b. inflationary c. liquidity d. interest rate

c

If two countries allow people to move freely between them to find work and housing and also have integrated capital markets in terms of rules, regulations, and structures, what are the other two components they need in order to be an optimal currency area (according to Mundell)? a. They need a common central bank and a common language. b. They need a common central bank and wage and price flexibility to adjust to shocks that hit. c. They need a shared economic history and wage and price flexibility to adjust to shocks that hit. d. They need wage and price flexibility and coordinated fiscal policies so one economy does not run a significantly larger deficit than the other.

d

Some critics of the IMF point out that the organization should a. lend more long-term funds and learn to be more reactionary in a financial crisis. b. be more involved in all aspects of economic life around the globe because it is a very well-trusted organization. c. hire more consultants to test the feasibility of projects and encourage more import substitution policies. d. be more proactive in encouraging countries to follow sound economic advice, especially when experiencing positive economic times and discouraging long-term borrowing.

d

The market for bonds is a subset of the market for loanable funds. a. True b. False

A

The interest rate increases, so Enery reduces his consumption expenditures. This is an example of the Pigou effect

False

3. One of the tools the US government used to control inflation during World War II was wage and price controls. a. True b. False

A

. One of the important lessons that economists learned from the battle with stagflation in the late 1970s and early 1980s was that a. the money supply matters and has a very real impact on economic activity. b. unemployment rates and inflation rates move in opposite directions. c. high inflation rates are more devastating to a society than high unemployment rates. d. the money supply has no real impact on economic activity.

A

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

A

__________ predicted that capitalism would fail under the weight of growing unemployment. His economic ideas formed the basis for the system adopted by the Soviet Union. a. Karl Marx b. John Maynard Keynes c. Vladimir Lenin d. Jean Baptiste Say

A

An increase in the supply of loanable funds could be caused by a. an increase in government deficits. b. a more optimistic outlook on the future by business. c. expansionary monetary policy being followed by the Federal Reserve. d. expectations of future inflation.

C

9. Financial deregulation in the 1980s ultimately led to a. dramatic growth of Savings & Loan institutions. b. big profits for Savings & Loan institutions. c. the Savings & Loan crisis and the end of the Savings & Loan industry. d. a housing boom.

C

Under the Burgess-Riefler doctrine, a low level of bank borrowing and low nominal interest rates were considered to be evidence of __________ monetary policy. a. contractionary b. tight c. easy d. neutral

C

The coupon rate of a bond refers to the a. original amount of money borrowed by the bond issuer. b. number of years until repayment of the bond principal. c. discount offered to the bond purchaser. d. interest rate to be paid to the holder of the bond.

D

Rational expectations refers to the idea that people are adaptive in nature, and once something happens they will adapt to it.

False

An output gap exists in an economy when there is a difference between the actual level of real GDP and the economy's potential real GDP.

True

When resource markets are efficient, recessionary gaps close by themselves without any government intervention

True

A crawling peg exchange rate system is an exchange rate system a. where the stated official exchange rate remains unchanged day to day but is changed by the government or central bank when economic conditions warrant a change. b. awhere the official exchange rate is denominated in ounces of gold. c. where the official exchange rate is determined directly by the real, risk-adjusted interest rate. d. using an anchor currency tied to the price of gold.

a

Which of the following events brought an end to the gold standard? a. Industrial Revolution b. World War I c. 1926 General Strike d. World War II

b

Which of the following is NOT one of the five agencies of the World Bank Group? a. The International Bank for Reconstruction and Development b. The International Development Association c. The Unilateral Investment Insurance Agency d. The International Finance Corporation

c

You are a manager of a hedge fund that has a trading strategy based on picking which currencies you believe will change in value in a significant way in a short period of time. If you believe that the value of the British pound will appreciate in the near future against the euro, you will a. buy euros. b. sell euros. c. buy British pounds. d. sell British pounds.

c

16. World Bank governance and funding include all but which one of the following characteristics? a. In addition to the funds the World Bank gets from its member nations, it is a major borrower in the global financial markets. b. The World Bank is controlled by two representatives from each of its 188 member countries. c. The board of governors meets once a year. d. Because Germany, the main contributor, has 16.4% of votes, it has de facto veto power on any votes.

d

7. Which of the following statements is NOT true about a country's use of a currency board? a. In a currency board, the local government fixes the value of its currency to an "anchor currency." b. A currency board regime strips a central bank of its ability to use monetary policy to address local, country-specific problems. c. Perhaps the most difficult problem with the currency board is that there is no way to enforce it. d. Currency boards were first used in the twentieth century.

d

Alistair tells a friend that he likes to deposit his entire paycheck into his checking account just in case prices fall. This is an example of the __________ demand for money. a. inflationary b. transactions c. speculative d. precautionary

d

Irving Fisher's equation of exchange is expressed as a. MS × PL = V × T. b. MS / V = PL × T. c. MS × T = PL × V. d. V = (PL × T) / MS

d

You are a foreign exchange student studying in Switzerland. You are from Australia and currently have Australian dollars and some euros to use, so you decide to travel to Great Britain to sightsee on holiday break. In order to have pounds sterling to travel in Great Britain, you are a __________ in the foreign exchange market. a. seller of pounds and buyer of Australian dollars b. seller of pounds and buyer of Australian dollars and euros c. seller of pounds, Australian dollars, and euros d. buyer of pounds and seller of Australian dollars and euros

d

A graph of the target zone exchange regime would include an upper bound, a lower bound, and a market-determined exchange rate.

true

An increase in consumer income tends to cause an increase in the demand for money.

true

Arbitrage opportunities due to actual price differences for the exact same good sold by two different countries will not last long due to the tendency towards purchasing power parity.

true

Brokers earn profits by charging a commission on the transactions they arrange

true

One of the Federal Reserve's most used tools of monetary policy is the buying and selling of US government securities in the secondary market.

true

The Federal Reserve's largest asset is its holdings of securities.

true

The primary responsibility of all central banks is monetary policy.

true

An inverted yield occurs when a. long-term interest rates are higher than short-term interest rates. b. long-term interest rates are the same as short-term interest rates. c. long-term interest rates are lower than short-term interest rates. d. short-term interest rates are lower than mid-term interest rates, which are higher than long-term interest rates.

C

Armand buys a 10-year, $10,000 bond that pays him $500 every year for 10 years and repays the face value in year 10. During the 10-year period, the rate of inflation holds steady at 3% per year. The real rate of return on Armand's investment is a. 5%. b. 3%. c. 2%. d. 0%.

C

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

C

During World War II, US policymakers feared inflation would result from the dramatic increase in wartime spending. In order to prevent that inflation, US policymakers a. cut the money supply, implemented wage and price controls, and rationed many commodities. b. increased interest rates, issued war bonds, and implemented wage and price controls. c. implemented wage and price controls, issued war bonds, and rationed many commodities. d. cut the money supply, increased interest rates, and rationed many commodities.

C

Emily is in the 10% marginal income tax bracket and earned a 4.5% return on the corporate bonds that just matured. The nominal interest rate paid on these bonds was a. 4.05%. b. 4.5%. c. 5%. d. 5.05%.

C

If the before-tax rate of return on a corporate bond is 7%, an individual in the 25% marginal tax bracket would earn a _____ rate of return on the bond. a. 7% b. 5.95% c. 5.25% d. 4.55%

C

If the market for loanable funds is currently in equilibrium, a(n) __________ will cause an increase in the interest rate. a. increase in the household saving rate b. decrease in government budget deficits c. increase in business confidence d. expansionary monetary policy

C

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

C

The best way to measure the default risk premium that a borrower is paying is to a. look at the borrower's bond rating as reported by Moody's Investors Services. b. look at the borrower's bond rating as reported by Standard and Poor's Bond Rating Services. c. compare the interest rate the borrower pays with the risk-free premium, usually represented by the rate on US Treasury Securities. d. look at the profitability of the lender relative to its industry.

C

The graph in Figure 4-1 shows the supply and demand for bonds for Charter Corp. (SC and DC) and US Treasury Securities (SUS and DUS). The default risk premium paid by Charter Corp. in this market is represented by a. PUS0. b. PC0. c. PUSPC. d. PCa.

C

If GDP is $16 trillion and the money supply is $4 trillion, then the velocity of money is a. 0.25. b. 12. c. 4. d. 20.

c

The aggregate demand, three-part aggregate supply model has performed relatively well in all but which of the following situations? a. Explaining the Great Depression b. Managing the economy during World War II c. Understanding the post-World War II economic boom d. Understanding the stagflation of the late 1960s and early 1970s

D

The demand for bonds is best described as a(n) __________ relationship between the price of bonds and the quantity of bonds demanded, all else equal. a. linear b. positive c. direct d. inverse

D

Graeham has moved abroad to pursue his career after college. Unfortunately, the country where he is now living is experiencing a period of very high inflation. Graeham can expect the currency of his newly adopted country to a. decrease in value due to a decrease in demand as potential investors are no longer interested in investing in an inflationary economy. b. increase in value due to a decrease in demand as potential investors are no longer interested in investing in an inflationary economy. c. increase in value due to an increase in supply as investors who hold the country's currency rush to sell the currency as inflation fears grow. d. be stable because inflation is a very stabilizing influence on an economy in general.

a

If the European Central Bank is pursuing a contractionary monetary policy, it will a. raise the minimum reserve requirement. b. lower the interest rate paid by its deposit facility. c. sell assets to financial institutions through its open market operations. d. lower the minimum reserve requirement.

a

If the World Bank loans funds to an "infant industry" to try to develop a country's finished goods sector, the World Bank may be accused of a. encouraging import substitution policies. b. hiring too many consultants. c. giving funds directly to corrupt political regimes. d. misappropriating funds toward roads, bridges, and infrastructure.

a

In the early days of the Fed, the discount rate, the rate at which the regional Federal Reserve banks would lend to commercial banks, was determined by the a. regional Federal Reserve banks. b. board of governors. c. Secretary of the Treasury. d. Federal Reserve bank of New York.

a

If the goal of monetary policy is to keep interest rates stable, the Federal Reserve's response to increases in the demand for money will be to a. decrease the supply of money. b. increase the supply of money. c. hold the supply of money constant. d. decrease the demand for money.

b

If you work for a company that __________, you do not want the home currency to __________. a. depends on sales in foreign markets; depreciate b. faces a lot of foreign competition in the local market; appreciate c. makes most of its income from exports; depreciate d. imports a lot of goods; appreciate

b

In its early days, the Fed's role as a lender of last resort was subject to a. the gold standard. b. the real bills doctrine. c. the discount rate doctrine. d. approval by the Secretary of the Treasury.

b

In the face of a credit crunch, the Federal Reserve will most likely attempt to a. raise interest rates in order to inject liquidity into the financial system. b. lower interest rates to inject liquidity into the financial system. c. raise interest rates in order to take liquidity out of the financial system. d. lower interest rates in order to take liquidity out of the financial system.

b

Irving Fisher's equation of exchange led to the conclusion that the __________ is a function of the level of __________ income in the economy. a. demand for money; real b. demand for money; nominal c. supply of money; real d. supply of money; nominal

b

Open market operations in which the European Central Bank specifies an interest rate at which it will lend and then participating banks submit bids on the amount of money they wish to borrow at that rate are known as __________ tenders. a. fixed-rate reverse b. fixed-rate standard c. variable-rate standard d. variable-rate reverse

b

The Federal Reserve was created largely in response to the a. start of World War I. b. Panic of 1907. c. European immigration at the end of the nineteenth and beginning of the twentieth centuries. d. rise of industrial trusts.

b

The World Bank has been criticized for a. its import substitution policies and funding too many exceptional projects. b. its import substitution policies and paying high consultant fees. c. being too reactionary and lending too much. d. its export substitution policies and being too reactionary.

b

The World Bank is overseen by _____ executive directors from the five permanent nations of __________ and the remaining elected by all member nations. a. 19; France, Germany, Great Britain, China, and the United States b. 24; France, Germany, Great Britain, Japan, and the United States c. 24; France, Germany, Great Britain, Japan, and China d. 19; Spain, Portugal, Italy, Ireland, Greece, and Japan

b

The rise of sweep accounts and the increasing popularity of ATMs have resulted in a decline in the potential effectiveness of the reserve requirement as a tool of monetary policy.

true

You are a manager in a pharmaceutical company, and you oversee manufacturing operations in North America, Europe, and India. Under your careful management, the European operation becomes significantly more productive than either of the other two. This increase in productivity spreads to other manufacturers in Europe as well, and total factor productivity soars higher in Europe relative to other economies. Based on this information, which of the following statements is true? a. The value of the euro will depreciate. b. The value of the euro will appreciate. c. The value of the euro will remain stable and not be affected by productivity increases. d. The value of the dollar and rupee (currency in India) will appreciate.

b

Among the responsibilities of the Fed is a. printing US currency. b. repaying the federal government debt. c. acting as the fiscal agent of the US Treasury. d. setting market interest rates.

c

At its inception, the power of the Federal Reserve rested in the a. board of governors housed in the Treasury department. b. New York Federal Reserve bank. c. 12 independent regional Federal Reserve banks. d. commercial banks that became members of the Federal Reserve system.

c

Exchange rates are simply another price of __________, similar to __________. a. lending; interest rates b. doing business; inventory costs c. money; interest rates d. borrowing; bond issue costs

c

In Figure 9-1, the loanable funds market is in equilibrium at A with the interest rate IR1. In conducting monetary policy, the Federal Reserve engages in the buying of US Treasury securities on the open market, which causes a. no change in the loanable funds market, so the equilibrium interest rate remains IR1. b. the demand for loanable funds to increase to D', causing the equilibrium interest rate to increase to IR2. c. both the demand for loanable funds and the supply of loanable funds to increase to D' and S' respectively, keeping the equilibrium interest rate at IR1. d. the supply of loanable funds to increase to S', causing the equilibrium interest rate to fall to IR3

d

In Figure 9-1, the loanable funds market is in equilibrium at C with the interest rate IR1. In conducting monetary policy, the Federal Reserve engages in the selling of US Treasury securities on the open market, which causes a. no change in the loanable funds market, so the equilibrium interest rate remains IR1. b. the demand for loanable funds to decrease to D, causing the equilibrium interest rate to decrease to IR3. c. both the demand for loanable funds and the supply of loanable funds to decrease to D and S, respectively, keeping the equilibrium interest rate at IR1. d. the supply of loanable funds to decrease to S, causing the equilibrium interest rate to increase to IR2.

d

In order to overcome the stigma that might come from borrowing from the Federal Reserve following the 2007 financial crisis, the Federal Reserve created a. the discount window. b. quantitative easing. c. the Federal Open Market Committee (FOMC). d. the term auction facility (TAF).

d

In the 1970s, the Fed created the automated clearing house (ACH) in order to a. more effectively fulfill its financial market oversight function. b. centralize the collection and dissemination of economic information. c. enhance the protection of consumers. d. keep up with the increased paperwork associated with the administration of federal government debt.

d

Of the policy tools available to the European Central Bank, the most frequently used are the a. discount rates. b. standing lending facilities. c. minimum reserve requirements. d. open market operations (OMOs).

d

Participants in the foreign exchange market trade for all of the following reasons EXCEPT a. to earn short-term profits from fluctuations in exchange rates. b. to protect themselves from loss resulting from changes in exchange rates. c. to acquire the foreign currency necessary to buy goods and services from other countries. d. to acquire the currency necessary to buy goods and services from their home country.

d

The supply side of the foreign exchange markets includes a. foreign consumers and foreign firms selling locally. b. foreign tourists headed to local destinations and domestic consumers. c. both domestic and foreign firms selling locally. d. domestic consumers and domestic tourists headed abroad.

d

To achieve its goal of monetary stability, the Bank of England sets a target a. interest rate of 2%. b. economic growth rate of 2% per year. c. growth rate of the money supply of 2% per year. d. inflation rate of 2% per year.

d

When an economy sees higher real, risk-adjusted interest rates, it will most likely experience a(n) __________ in demand for its currency in the foreign exchange market, and the value of its currency will __________. a. decrease; depreciate b. decrease; appreciate c. increase; depreciate d. increase; appreciate

d

. In the late 1940s, economic theorists expanded on the Keynesian aggregate supply model by broadening it into a three-part aggregate supply curve with a. a flat initial segment, followed by a modestly upward-sloping middle segment until full-employment GDP is reached, and finally a more steeply upward-sloping segment beyond full-employment GDP. b. a flat initial segment, followed by an upward-sloping middle segment until full-employment GDP is reached, and finally a vertical segment at full-employment GDP. c. a flat initial segment until full-employment is reached, followed by a vertical segment at full-employment GDP, and finally followed by another flat segment once the full-employment price level is reached. d. an upward-sloping initial segment, followed by an upward-sloping segment until full-employment GDP is reached, and finally followed by another flat segment beyond full-employment GDP.

B

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

B

A major advantage that municipal bonds have over corporate bonds for investors is that a. municipal bonds have a lower default risk. b. the income earned on municipal bonds is not subject to federal income tax. c. corporate bonds are not as readily available as municipal bonds. d. municipal bonds have a shorter term to maturity.

B

An increase in the price of bonds will cause a decrease in the demand for bonds. a. True b. False

B

An inverted yield curve likely means the a. economy is expanding rapidly b. economy is headed for recession. c. economy is experiencing increasing inflationary pressure. d. Federal Reserve is conducting expansionary policy.

B

At the time of the Great Depression, the __________ believed that the economic disruptions being experienced were temporary and that market forces would eventually reestablish prosperity. a. Marxists b. classical economists c. Keynesian economists d. supply-side economists

B

Bond prices and interest rates are a. directly related. b. inversely related. c. unrelated. d. exponentially related

B

Harper just got a big raise at work, which pushed her from the 15% federal marginal tax bracket to the 25% marginal tax bracket. Which of the following best describes how this might affect her decision to buy municipal bonds? a. This will make her more likely to buy municipal bonds rather than corporate bonds because she is wealthier. b. This will make her more likely to buy municipal bonds because it will increase the difference between the nominal interest rate paid on the bonds and the after-tax interest rate she will receive relative to corporate bonds. c. This will make her less likely to buy municipal bonds rather than corporate bonds because the increase in taxes will reduce her wealth. d. This will make her neither more nor less likely to buy municipal bonds rather than corporate bonds.

B

If the market interest rate exceeds the coupon rate on a bond, the selling price of the bond will be greater than the bond's face value. a. True b. False

B

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

B

In the early 1980s, Paul Volcker used an easy monetary policy to bring inflation under control. a. True b. False

B

In the early days of the Federal Reserve, the Federal Reserve Bank of __________ quickly established itself as the most important of the 12 Federal Reserve banks. a. St. Louis b. New York c. Boston d. Philadelphia

B

In the early twentieth century, which of the following US industries were dominated by trusts? a. Banking, shipping, and publishing b. Steel, railroads, and banking c. Publishing, steel, and oil d. Oil, banking, and textiles

B

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

B

Julia is in the 10% marginal income tax bracket and earned a 4.5% return on the municipal bonds that just matured. The nominal interest rate paid on these bonds was a. 4.05%. b. 4.5%. c. 5%. d. 5.05%.

B

Lenders benefit from inflation. a. True b. False

B

One of the things that made the Savings & Loans eager to lend money for home mortgages was the existence of the a. Federal National Mortgage Association. b. Federal Housing Administration. c. Federal Reserve. d. Housing Assistance Council.

B

Originally, Keynes conceived of the aggregate supply curve as consisting of two distinct segments. In this conception, below the full-employment level of output the aggregate supply curve is __________, and once the economy reaches the full-employment level of output it becomes __________. a. upward sloping; vertical b. horizontal; vertical c. upward sloping; horizontal d. downward sloping; vertical

B

The Pigou effect is one of the reasons that the aggregate demand curve slopes downward. According to this argument, it suggests when the price level a. goes down, interest rates will fall resulting in an increase in the total level of spending. b. goes down, peoples' savings are able to purchase more stuff so the total level of spending increases. c. goes down, peoples' savings are able to purchase less stuff so the total level of spending decreases. d. in the US goes down, US goods and services become relatively cheaper compared to things produced overseas, so the total level of spending on US goods and services increases.

B

The face value of a bond is the a. rate of interest to be paid to the holder of the bond. b. original amount of money borrowed by the bond issuer. c. length of time until the repayment of the bond principal. d. issuer of the bond.

B

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

B

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

D

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

D

The rise of Savings & Loans following World War II played a key role in the post-war __________ boom. a. savings b. employment c. stock market d. housing

D

The risk that a bond issuer will not be able to live up to the promise they make when they issue a bond is known as __________ risk. a. inflation b. yield c. interest rate d. default

D

When a newly issued bond sells above its face value, it is said to sell a. below par value. b. at par value. c. at a discount. d. at a premium.

D

30. The British central bank may justify intervening in the free market currency exchange and creating a managed float regime because a. the British pound sterling has appreciated and the price of goods and services has appreciated directly consistent with the pound. b. prices of goods and services are "stickier" than exchange rates and there has been an unanticipated permanent increase in Great Britain's money supply. c. the British pound undershoots in the short run. d. there has been an unanticipated decrease in Great Britain's money supply and the exchange rate is "stickier" than the price of goods and services.

b

Comparing the fifty state-level economies in the United States with the country-level economies in the EuroZone, a. the EuroZone in general is closer to an optimal currency area than the fifty state economies in the United States. b. the fifty state economies in the United States are more closely coordinated in their fiscal policies than the countries in the EuroZone. c. there has never been a debate over whether or not the EuroZone can become an optimal currency area. d. the EuroZone has always been as integrated as the fifty state-level economies in the United States.

b

Domestic consumers a. rely on central banks to sell domestic currency in the foreign exchange market in order to purchase foreign-made goods. b. rely on importers to sell domestic currency in the foreign exchange market in order to purchase foreign-made goods. c. must convert their domestic currency to foreign currency themselves in order to purchase foreign-made goods. d. are part of the supply side of the foreign exchange markets.

b

Following the 2007 financial crisis, the Federal Reserve created the term auction facility (TAF) in order to a. reduce excess bank reserves and take liquidity out of financial markets. b. overcome the stigma banks experienced from borrowing from the Fed at the discount window in order to add liquidity to financial markets. c. better regulate the financial system. d. force banks to make loans to add liquidity to financial markets

b

Government deficits can complicate monetary policy because government borrowing can lead to a. "crowding out," which leads to lower interest rates. b. "crowding out," which leads to higher interest rates. c. "crowding in," which leads to lower interest rates. d. "crowding in," which leads to higher interest rates.

b

The biggest change in the Federal Reserve's balance sheet between May 2007 and March 2013 was the __________ on the __________ side of the balance sheet. a. increase in gold; asset b. jump in depository institution deposits; liability c. increase in currency outstanding; liability d. decrease in repurchase agreements; asset

b

The board of governors of the Federal Reserve has three primary responsibilities, which are a. oversight of the printing of money, commercial bank regulation, and the operations of the Fed. b. the operations of the Fed, commercial bank regulation, and monetary policy. c. monetary policy, fiscal policy, and the operations of the Fed. d. maintenance of the gold standard, the operations of the Fed, and monetary policy.

b

The main responsibility of the Bank of Japan is to use monetary policy to a. pursue employment stability. b. pursue price stability. c. pursue economic growth. d. eliminate poverty.

b

The president of which district bank is a permanent member of the Federal Open Market Committee? a. San Francisco b. New York c. Boston d. Washington

b

The steps taken toward monetary integration in the European Union to create the euro included (in order): a. increasing trade barriers, and then entering into an exchange rate mechanism where all economies fixed their currency with each other and eventually to the new currency, the euro. b. reducing trade barriers, and then entering into an exchange rate mechanism where all economies fixed their currency with each other and eventually to the new currency, the euro. c. entering into an exchange rate mechanism where all economies fixed their currency with the euro and then eventually to each other. d. entering into an exchange rate mechanism where all economies fixed their currency with each other and eventually to the new currency, the euro, and then reducing trade barriers.

b

Today in the Federal Reserve system, the power rests with the a. board of governors of the Federal Reserve. b. chair of the Federal Reserve. c. regional Federal Reserve banks. d. member banks.

b

If the US is facing a financial crisis while South Africa's economy is experiencing very strong growth and has not been impacted by a financial crisis, the loanable funds model discussed in Chapter 3 as applied to currency exchange would indicate that a. South African currency will be sold off and be devalued and US currency will be purchased and will appreciate. b. South African currency will be sold but nothing will happen to the US currency. c. US currency will be sold off and be devalued and South African currency will be purchased and will appreciate. d. neither currency will be impacted.

c

In 1968, Congress passed a key piece of legislation to protect consumers called the __________ Act. a. Fair Credit Reporting b. Fair Credit Billing c. Truth in Lending d. Truth in Savings

c

In a free-floating exchange rate system, the price of a country's currency in terms of another is determined purely through a. the central bank determining the free-floating equilibrium. b. the price of gold on the free market. c. market forces. d. market planners who observe the market forces

c

Term auction lending was introduced by the Fed in the early stages of the 2007 financial crisis in order to a. increase market interest rates. b. stabilize inflation rates. c. increase the amount of liquidity in the financial system. d. decrease the amount of liquidity in the financial system.

c

The Bank of Canada conducts monetary policy by setting a target for the a. rate of inflation. b. rate of growth of the money supply. c. overnight interest rate. d. rate of economic growth.

c

The Federal Reserve district banks are primarily responsible for a. interacting with the state governments within their districts, tracking the flow of money in and out of their districts, and tracking the flow of commerce in and out of their districts. b. the check-clearing system, supervising and examining banks in their districts, and interacting with the state governments within their districts. c. the check-clearing system, supervising and examining banks in their districts, and keeping track of the economy in their districts. d. supervising and examining banks in their districts, keeping track of the economy in their districts, and tracking the flow of money in and out of their districts.

c