Econ 3229 Final Exam
If the required reserve ratio is one-third, currency in circulation is $300 billion, and checkable deposits are $900 billion, then the money supply is ________ billion. A) $1200 B) $1800 C) $2700 D) $3000
A) $1200
If a bank has excess reserves of $4,000 and demand deposit liabilities of $100,000, and if the reserve requirement is 10 percent, then the bank has actual reserves of A) $14,000. B) $19,000. C) $24,000. D) $29,000.
A) $14,000
If a $1000 face value coupon bond has a coupon rate of 3.75 percent, then the coupon payment every year is A) $37.50. B) $3.75. C) $375.00. D) $13.75
A) $37.50
What is the present value of $500.00 to be paid in two years if the interest rate is 5 percent? A) $453.51 B) $500.00 C) $476.25 D) $550.00
A) $453.51
Suppose in 2014 you buy 4% coupon rate, $100 face value bond for $100 that has 2 years left till maturity. If in 2015 interest rates increase to 6%, what will be the price of your bond and what will be your rate of return if you decide to sell it? A) $98.1 and 2.1% B) $99.4 and 3.4% C) $101.6 and 7.6% D) $102 and 8%
A) $98.1 and 2.1%
If the expected path of interest rates on one-year bonds over the next five years is 5%, 4%, 3%, 2%, and 1%, the expectations theory predicts that two-year bond and three-year bonds at present will pay A) 4.5% and 4% B) 4% and 3% C) 5% and 4% D) 3.5% and 2%
A) 4.5% and 4%
If the interest rates on all bonds rise from 5 to 6 percent over the course of the year, which bond would you prefer to have been holding? A) a bond with one year to maturity B) a bond with five years to maturity C) a bond with ten years to maturity D) a bond with twenty years to maturity
A) A bond with one year to maturity
Which of the following can be described as involving direct finance? A) A corporation issues new shares of stock. B) People buy shares in a mutual fund. C) A pension fund manager buys a short-term corporate security in the secondary market. D) An insurance company buys shares of common stock in the over-the-counter markets.
A) A corporation issues new shares of stock
Debt deflation occurs when A) an economic downturn causes the price level to fall and a deterioration in firms' net worth because of the increased burden of indebtedness. B) rising interest rates worsen adverse selection and moral hazard problems. C) lenders reduce their lending due to declining stock prices (equity deflation) that lowers the value of collateral. D) corporations pay back their loans before the scheduled maturity date.
A) An economic downturn causes the price level to fall and a deterioration in firms net worth because of the increased burden on indebtedness
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 countercyclical bias to monetary policy. C) a disinflationary bias to monetary policy. D) a deflationary bias to monetary policy.
A) An inflationary bias to monetary policy
When asset prices rise above their fundamental economic values, a(n) ________ occurs. A) asset-price bubble B) liability war C) decline in lending D) decrease in moral hazard
A) Asset-price bubble
If uncertainty about banks' health causes depositors to begin to withdraw their funds from banks, the country experiences a(n) A) banking panic. B) financial recovery. C) reduction of the adverse selection and moral hazard problems. D) increase in information available to investors.
A) Banking panic
Of the following, which would be the last choice for a bank facing a reserve deficiency? A) Call in loans. B) Borrow from the Fed. C) Sell securities. D) Borrow from other banks.
A) Call in loans
Which of the following long-term bonds has the highest interest rate? A) corporate Baa bonds B) U.S. Treasury bonds C) corporate Aaa bonds D) municipal bonds
A) Corporate Baa bonds
When financial institutions go on a lending spree and expand their lending at a rapid pace they are participating in a A) credit boom. B) credit bust. C) deleveraging. D) market race.
A) Credit boom
When the value of loans begins to drop, the net worth of financial institutions falls causing them to cut back on lending causing A) credit crunch. B) releveraging. C) capitulation. D) inflation
A) Credit crunch
The monetary base minus reserves equals A) currency in circulation. B) the borrowed base. C) the non-borrowed base. D) discount loans.
A) Currency in circulation
Under the European System of Central Banks, the Governing Council is similar in structure to the ________ of the Federal Reserve System. A) Federal Open Market Committee B) Federal Reserve Banks C) Federal Advisory Council D) Board of Governors
A) Federal Open Market Committee
Financial markets have the basic function of A) getting people with funds to lend together with people who want to borrow funds. B) assuring that the swings in the business cycle are less pronounced. C) assuring that governments need never resort to printing money. D) providing a risk-free repository of spending power.
A) Getting people with funds to lend together with people who want to borrow funds
Asymmetric information problems in the subprime mortgage market included all of the following EXCEPT A) homeowners could refinance their houses with larger loans when their homes appreciated in value. B) mortgage originators had little incentives to make sure that the mortgagee is a good credit risk. C) underwriters of mortgage-backed securities had weak incentives to make sure that the holders of the securities would be paid back. D) the evaluators of securities, the credit rating agencies, were subject to conflicts of interest.
A) Homeowners could refinance their houses with larger loans when their homes appreciated in value
When the Fed buys $100 worth of bonds from a primary dealer, reserves in the banking system A) increase by $100. B) increase by more than $100. C) decrease by $100. D) decrease by more than $100.
A) Increase by $100
When the Fed extends a $100 discount loan to the First National Bank, reserves in the banking system A) increase by $100. B) increase by more than $100. C) decrease by $100. D) decrease by more than $100.
A) Increase by $100
When a bank sells a government bond to the Federal Reserve, reserves in the banking system ________ and the monetary base ________, everything else held constant. A) increase; increases B) decrease; decreases C) increase; decreases D) decrease; increases
A) Increase; increase
During the 2007-2009 financial crisis the excess reserve ratio A) increased sharply. B) decreased sharply. C) increased slightly. D) decreased slightly.
A) Increased sharply
A venture capital firm protects its equity investment from moral hazard through which of the following means? A) It places people on the board of directors to better monitor the borrowing firm's activities. B) It writes contracts that prohibit the sale of an equity investment to the venture capital firm. C) It prohibits the borrowing firm from replacing its management. D) It requires a 50% stake in the company.
A) It places people on the board of directors to better monitor the borrowing firm's activities
If an individual moves money from a small-denomination time deposit to a checking deposit account A) M1 increases and M2 stays the same. B) M1 stays the same and M2 increases. C) M1 stays the same and M2 stays the same. D) M1 increases and M2 decreases.
A) M1 increases and M2 stays the same
Although debt contracts require less monitoring than equity contracts, debt contracts are still subject to ________ since borrowers have an incentive to take on more risk than the lender would like. A) moral hazard B) agency theory C) diversification D) the "lemons" problem
A) Moral hazard
The yield to maturity for a discount bond is ________ related to the current bond price. A) negatively B) positively C) not D) directly
A) Negatively
An important source of short-term funds for commercial banks are ________ which can be resold on the secondary market. A) negotiable CDs B) commercial paper C) mortgage-backed securities D) municipal bonds
A) Negotiable CD's
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) New York. B) San Francisco. C) Chicago. D) Boston.
A) New York
Expansionary monetary policy consists of all of the following EXCEPT A) open market sales. B) lower interest rates. C) increased monetary base. D) increased money supply.
A) Open market sales
Currency includes A) paper money and coins. B) paper money, coins, and checks. C) paper money and checks. D) paper money, coins, checks, and savings deposits.
A) Paper money and coins
A bond with default risk will always have a ________ risk premium and an increase in its default risk will ________ the risk premium. A) positive; raise B) positive; lower C) negative; raise D) negative; lower
A) Positive; raise
Reserves are equal to the sum of A) required reserves and excess reserves. B) required reserves and vault cash reserves. C) excess reserves and vault cash reserves. D) vault cash reserves and total reserves.
A) Required reserves and excess reserves
In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves and below discount rate, then an open market ________ the supply of reserves, raising the federal funds interest rate, everything else held constant. A) sale decreases B) sale increases C) purchase increases D) purchase decreases
A) Sale decreases
Under the expectations theory if market participants expect that future short-term rates will be higher than current short-term rates, the yield curve will A) slope upward. B) slope downward. C) be flat. D) slope upward, slope downward, or be flat, depending on risk, liquidity, cost of information, and tax considerations
A) Slope upward
Adverse selection is a problem associated with equity and debt contracts arising from A) the lender's relative lack of information about the borrower's potential returns and risks of his investment activities. B) the lender's inability to legally require sufficient collateral to cover a 100% loss if the borrower defaults. C) the borrower's lack of incentive to seek a loan for highly risky investments. D) the lender's inability to restrict the borrower from changing his behavior once given a loan.
A) The lenders relative lack of information about the borrowers potential returns and risks of his investment activities
In September 2008, the Reserve Primary Fund, a money market mutual fund, found itself in the situation know as "breaking the buck." This means that A) they could no longer afford to redeem shares at the par value of $1. B) they required shareholders to contribute a dollar more in fees each month. C) shareholders were able to redeem shares for more than a $1. D) shares earned more than a dollar in interest.
A) They could no longer afford to redeem shares at the par value of $1
Holding the expected return on bonds constant, an increase in the expected return on common stocks would ________ the demand for bonds, shifting the demand curve to the ________. A) decrease; left B) decrease; right C) increase; left D) increase; right
A) decrease; left
The mandate for the monetary policy goals that has been given to the Federal Reserve System is an example of a ________ mandate. A) dual B) hierarchical C) secondary D) primary
A) dual
Although open market operations and discount loans both change the monetary base, the Fed has A) greater control over open market operations than over discount loans. B) greater control over discount loans than over open market operations. C) very little control over either discount loans or open market operations. D) complete control over both discount loans and open market operations.
A) greater control over open market operations
When a primary dealer sells a government bond to the Federal Reserve, reserves in the banking system ________ and the monetary base ________, everything else held constant. A) increase; increases B) increase; decreases C) decrease; increases D) decrease; decreases
A) increases; increases
In the bond market, the bond demanders are the ________ and the bond suppliers are the ________. A) lenders; borrowers B) lenders; advancers C) borrowers; lenders D) borrowers; advancers
A) lenders; borrowers
The economist Irving Fisher, after whom the Fisher effect is named, explained why interest rates ________ as the expected rate of inflation ________, everything else held constant. A) rise; increases B) rise; stabilizes C) fall; stabilizes D) fall; increases
A) rise; increases
When the yield curve is downward-sloping, A) short-term yields are higher than long-term yields. B) long-term yields are higher than short-term yields. C) the bond market is anticipating the U.S. Treasury may default on its obligations. D) the inflation rate is expected to rise.
A) short-term yields are higher than long-term yields
When $1 million is deposited at a bank, the required reserve ratio is 20 percent, and the bank chooses not to make any loans but decides to hold excess reserves instead, then, in the bank's final balance sheet A) the assets at the bank increase by $1 million. B) the liabilities of the bank decrease by $1 million. C) reserves increase by $200,000. D) liabilities increase by $200,000.
A) the assets at the bank increase by $1 million
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) the Board of Governors is held responsible for policy missteps.
A) the current system is undemocratic
As a result of the global financial crisis several of the large, free-standing investment banking firms chose to become bank holding companies. This means that they will now be regulated by A) the Federal Reserve. B) the FDIC. C) the state banking authorities. D) the Treasury.
A) the federal reserve
The Volcker Rule addresses the off-balance-sheet problem involving A) trading risks. B) selling loans. C) loan guarantees. D) interest rate risks.
A) trading risks
If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the money supply is ________ billion. A) $8000 B) $1200 C) $1200.8 D) $8400
B) $1200
If a bank has $100,000 of checkable deposits, a required reserve ratio of 20 percent, and it holds $40,000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet is A) $30,000. B) $25,000. C) $20,000. D) $10,000.
B) $25,000
What would the correct risk premium on 10-year municipal bond with yield of 2.5%, given that 10-year Treasuries pay 3.0% and the investor is in 30% income tax bracket? A) -0.5% B) 0.4% C) 0.5% D) 2.1%
B) .4%
Currently, a three-month Treasury bill has a yield of 5% while the yield on a ten-year Treasury bond is 4.7%. What is the risk premium of the typical A-rated ten-year corporate bond with a yield of 5.5%? A) 0.5% B) 0.8% C) 5.5% D) 1.17%
B) 0.8%
If the required reserve ratio is equal to 10 percent, a single bank can increase its loans up to a maximum amount equal to A) its excess reserves. B) 10 times its excess reserves. C) 10 percent of its excess reserves. D) its total reserves.
B) 10 times its excess reserves
If bad credit risks are the ones who most actively seek loans then financial intermediaries face the problem of A) moral hazard. B) adverse selection. C) free-riding. D) costly state verification.
B) Adverse selection
The assumption of asymmetric information means that A) lenders know more than borrowers. B) borrowers know more than lenders. C) borrowers and lenders have the same information. D) borrowers and lenders have perfect information.
B) Borrowers know more than lenders
Which of the following are reported as liabilities on a bank's balance sheet? A) reserves B) checkable deposits C) consumer loans D) deposits with other banks
B) Checkable deposits
The M1 measure of money includes A) small denomination time deposits. B) checking account deposits. C) money market deposit accounts. D) money market mutual fund shares.
B) Checking account deposits
An important function of the regional Federal Reserve Banks is A) setting reserve requirements. B) clearing checks. C) determining monetary policy. D) setting margin requirements.
B) Clearing checks
Which of the following instruments are traded in a money market? A) bank commercial loans B) commercial paper C) state and local government bonds D) residential mortgages
B) Commercial Paper
Which of the following are NOT contractual savings institutions? A) life insurance companies B) credit unions C) pension funds D) state and local government retirement funds
B) Credit unions
Open market sale of $10 million worth of securities will A) increase bank reserves by $10 million B) decrease bank reserves by $10 million C) increase monetary base by $10 million D) leave monetary base unchanged
B) Decrease bank reserves by $10 million
Everything else held constant, an increase in the excess reserves ratio causes the M1 money multiplier to ________ and the money supply to ________. A) increase; decrease B) decrease; decrease C) increase; increase D) decrease; increase
B) Decrease; decrease
Open market operations intended to offset temporary movements in noncontrollable factors that affect reserves and the monetary base are called A) dynamic open market operations. B) defensive open market operations. C) offensive open market operations. D) reactionary open market operations.
B) Defensive open market operations
Decisions by depositors to increase their holdings of ________, or of banks to hold ________ will result in a smaller expansion of deposits than the simple model predicts. A) deposits; required reserves B) deposits; excess reserves C) currency; required reserves D) currency; excess reserves
B) Deposits; excess reserves
Bank loans from the Federal Reserve are called ________ and represent a ________ of funds. A) discount loans; use B) discount loans; source C) fed funds; use D) fed funds; source
B) Discount loans; source
The reduction in transactions costs per dollar of investment as the size of transactions increases is A) discounting. B) economies of scale. C) economies of trade. D) diversification.
B) Economies of scale
One of the purposes of Glass Steagall Act of 1933 was to A) prohibit interstate branching of state banks. B) establish a separation of investment and commercial banking. C) allow commercial banks to purchase common stock. D) remove a separation of investment and commercial banking.
B) Establish a separation of investment and commercial banking
The political business cycle refers to the phenomenon that just before elections, politicians enact ________ policies. After the elections, the bad effects of these policies (for example, ________ ) have to be counteracted with ________ policies. A) expansionary; higher unemployment; contractionary B) expansionary; a higher inflation rate; contractionary C) contractionary; higher unemployment; expansionary D) contractionary; a higher inflation rate; expansionary
B) Expansionary; a higher inflation rate; contractionary
The research document given to the Federal Open Market Committee that contains information on the state of the economy in each Federal Reserve district is called the A) beige book. B) green book. C) blue book. D) black book.
B) Green book
When the Fed supplies the banking system with an extra dollar of reserves, deposits ________ by ________ than one dollar—a process called multiple deposit creation. A) increase; less B) increase; more C) decrease; less D) decrease; more
B) Increase; more
Bonds with relatively low risk of default are called ________ securities and have a rating of Baa (or BBB) and above; bonds with ratings below Baa (or BBB) have a higher default risk and are called ________. A) investment grade; lower grade B) investment grade; junk bonds C) high quality; lower grade D) high quality; junk bonds
B) Investment grade; junk bonds
According to the liquidity premium theory A) investors prefer longer to shorter maturities. B) investors prefer shorter to longer maturities. C) investors are indifferent between short and long maturities. D) investors are more interested in the tax treatment of bonds than they are in the liquidity of bonds.
B) Investors prefer shorter to longer maturities
The Federal Reserve Bank of ________ houses the open market desk. A) Boston B) New York C) Chicago D) San Francisco
B) New York
Which of the following best explains "death spiral?" A) insurance companies requiring high deductibles from customers with terminal diseases. B) not enough healthy customers purchasing insurance so that cost of covering sick customers becomes prohibitively expensive. C) typically customers with perfect health records are offered the best policies. D) typically customers with bad health records are denied.
B) Not enough healthy customers purchasing insurance so that cost of covering sick customers becomes prohibitively expensive
In a(n) ________ market, dealers in different locations buy and sell securities to anyone who comes to them and is willing to accept their prices. A) exchange B) over-the-counter C) common D) barter
B) Over-the-counter
The principal-agent problem would not occur if ________ of a firm had complete information about actions of the ________. A) owners; customers B) owners; managers C) managers; customers D) managers; owners
B) Owners; managers
A discount bond A) pays the bondholder a fixed amount every period and the face value at maturity. B) pays the bondholder the face value at maturity. C) pays all interest and the face value at maturity. D) pays the face value at maturity plus any capital gain.
B) Pays the bondholder the face value at maturity.
The ________ interest rate more accurately reflects the true cost of borrowing. A) nominal B) real C) discount D) market
B) Real
Which of the following bank assets is the most liquid? A) consumer loans B) reserves C) state and local government securities D) U.S. government securities
B) Reserves
A financial market in which previously issued securities can be resold is called a ________ market. A) primary B) secondary C) tertiary D) used securities
B) Secondary market
Collateralized debt is also know as A) unsecured debt. B) secured debt. C) unrestricted debt. D) promissory debt.
B) Secured debt
In general, banks make profits by selling ________ liabilities and buying ________ assets. A) long-term; shorter-term B) short-term; longer-term C) illiquid; liquid D) risky; risk-free
B) Short-term; longer-term
In the simple deposit expansion model, a decline in checkable deposits of $500 when the required reserve ratio is equal to 10 percent implies that the Fed A) sold $500 in government bonds. B) sold $50 in government bonds. C) purchased $50 in government bonds. D) purchased $500 in government bonds.
B) Sold $50 in government bonds
Of the following sources of external finance for American non-financial businesses, the least important is A) loans from banks. B) stocks. C) bonds and commercial paper. D) loans from other financial intermediaries.
B) Stocks
Because of securitization, a new class of residential mortgages offered to borrowers with less-than-stellar credit records developed. These mortgages are known as A) risk-enhanced mortgages. B) subprime mortgages. C) bundled mortgages. D) adjustable-rate mortgages.
B) Subprime mortgages
Which of the following is an entity of the Federal Reserve System? A) the FDIC B) the FOMC C) the Comptroller of the Currency D) the U.S. Treasury Secretary
B) The FOMC
In order to ensure that the target federal funds rate is met: A) the Fed sets the rate, and commands that it be made B) the Fed uses open market operations to change supply of reserves to meet the demand for reserves at the target rate C) the Fed lends to banks at that rate D) the Fed coerces banks to adjust their demand for reserves so that the target is met
B) The Fed uses Open Market Operations to change supply of reserves to meet the demand for reserves at the target rate.
For a given return on assets, the lower is bank capital A) the lower is the return for the owners of the bank. B) the higher is the return for the owners of the bank. C) the lower is the credit risk for the owners of the bank. D) the lower the possibility of bank failure.
B) The higher is the return for the owners of the bank
In which of the following situations would you prefer to be the lender? A) The interest rate is 9 percent and the expected inflation rate is 7 percent. B) The interest rate is 4 percent and the expected inflation rate is 1 percent. C) The interest rate is 13 percent and the expected inflation rate is 15 percent. D) The interest rate is 25 percent and the expected inflation rate is 50 percent.
B) The interest rate is 4% and the expected inflation rate is 1%
When the federal funds rate equals the discount rate A) the demand curve for reserves is horizontal. B) the supply curve of reserves is horizontal. C) the demand curve for reserves is vertical. D) the supply curve of reserves is vertical.
B) The supply curve of reserves is horizontal
________ are the time and resources spent trying to exchange goods and services. A) Bargaining costs B) Transaction costs C) Contracting costs D) Barter costs
B) Transaction costs
Dennis notices that jackets are on sale for $99. In this case money is functioning as a A) medium of exchange. B) unit of account. C) store of value. D) payments-system ruler.
B) Unit of account
If the demand for reserves is supposed to increase temporarily, the manager of the trading desk at the Federal Reserve Bank of New York will likely conduct a ________ open market ________ of securities. A) defensive; sale B) defensive; purchase C) dynamic; sale D) dynamic; purchase
B) defensive; purchase
In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on reserves, an increase in the reserve requirement ________ the demand for reserves, ________ the federal funds rate, everything else held constant. A) decreases; raising B) increases; raising C) decreases; lowering D) increases; lowering
B) increases; raising
Everything else held constant, an increase in marginal tax rates would likely have the effect of ________ the demand for municipal bonds, and ________ the demand for U.S. government bonds. A) increasing; increasing B) increasing; decreasing C) decreasing; increasing D) decreasing; decreasing
B) increasing; decreasing
Everything else held constant, when stock prices become ________ volatile, the demand curve for bonds shifts to the ________ and the interest rate ________. A) more; right; rises B) more; right; falls C) less; left; falls D) less; left; does not change
B) more; right; falls
Each governor on the Board of Governors can serve A) only one nonrenewable fourteen-year term. B) one full nonrenewable fourteen-year term plus part of another term. C) only one nonrenewable eight-year term. D) one full nonrenewable eight-year term plus part of another term.
B) one full nonrenewable fourteen-year term plus part of another term.
Which of the following is NOT an entity of the Federal Reserve System? A) Federal Reserve Banks B) the Comptroller of the Currency C) the Board of Governors D) the Federal Open Market Committee
B) the Comptroller of the Currency
In the simple deposit expansion model, if the Fed purchases $100 worth of bonds from a bank that previously had no excess reserves, deposits in the banking system can potentially increase by A) $10. B) $100. C) $100 times the reciprocal of the required reserve ratio. D) $100 times the required reserve ratio.
C) $100 times the reciprocal of the required reserve ratio
If a bank has excess reserves of $5,000 and demand deposit liabilities of $80,000, and if the reserve requirement is 20 percent, then the bank has actual reserves of A) $11,000. B) $20,000. C) $21,000. D) $26,000.
C) $21,000
A consol paying $20 annually when the interest rate is 5 percent has a price of A) $100. B) $200. C) $400. D) $800
C) $400
What is a future value of $50 five years from now at 2%? A) $48.5 B) $51.3 C) $55.2 D) $58.4
C) $55.2
A bank has excess reserves of $1,000 and demand deposit liabilities of $80,000 when the reserve requirement is 20 percent. If the reserve requirement is lowered to 10 percent, the bank's excess reserves will be A) $1,000. B) $8,000. C) $9,000. D) $17,000.
C) $9,000
In 2012, banks held required reserves $111.6 billion, excess reserves $1,458.7 billion. Currency in non-bank public was $1,092.4 billion and deposit accounts were $1,401.6 billion. What was money multiplier? A) 1.57 B) 1.12 C) 0.94 D) 0.87
C) 0.94
When was the Fed established? A) 1789, as a part of US constitution B) 1866, as a part of new banking regulations C) 1913, as a part of Federal Reserve Act D) 1934, as a part of Glass-Steagall Act
C) 1913, as a part of Federal Reserve Act
A one-year bond currently pays 5% interest. It's expected that it will pay 4.5% next year and 4% the following year. The two-year term premium is 0.2% while the three-year term premium is 0.35%. What is the interest rate on a two-year bond according to the liquidity premium theory? A) 4.5% B) 4.75% C) 4.95% D) 4.975%
C) 4.95%
Factors that decrease the demand for bonds include A) an increase in the volatility of stock prices. B) a decrease in the expected returns on stocks. C) an increase in the inflation rate. D) an increase in the riskiness of stocks.
C) An increase in the inflation rate
Equity instruments are traded in the ________ market. A) money B) bond C) capital D) commodities
C) Capital
Which of the following are transaction deposits? A) savings accounts B) small-denomination time deposits C) checkable deposits D) certificates of deposit
C) Checkable deposits
A credit market instrument that pays the owner a fixed coupon payment every year until the maturity date and then repays the face value is called a A) simple loan. B) fixed-payment loan. C) coupon bond. D) discount bond.
C) Coupon bond
According to the liquidity premium theory of the term structure, a flat yield curve indicates that short-term interest rates are expected to A) rise in the future. B) remain unchanged in the future. C) decline in the future. D) rise sharply in the future.
C) Decline in the future
Assuming initially that the required reserve ratio = 10%, the currency-deposit ratio = 75%, and the excess reserve ratio = 156%, an increase in the required reserve ratio to 15% causes the M1 money multiplier to ________, everything else held constant. A) decrease from 1.67 to 1.54 B) increase from 0.15 to 0.33 C) decrease from 0.73 to 0.71 D) increase from 0.54 to 0.67
C) Decrease from 0.73 to 0.71
Suppose a person cashes his payroll check and holds all the funds in the form of currency. Everything else held constant, total reserves in the banking system ________ and the monetary base ________. A) remain unchanged; increases B) decrease; increases C) decrease; remains unchanged D) decrease; decreases
C) Decrease; remains unchanged
Which of the following is a policy tool? A) federal funds interest rate B) reserves reserves C) discount rate D) monetary base
C) Discount rate
The Federal Reserve entity that makes decisions regarding the conduct of open market operations is the A) Board of Governors. B) chairman of the Board of Governors. C) Federal Open Market Committee. D) Open Market Advisory Council
C) Federal Open Market Committee
The Chairman of the Board of Governors is chosen from among the seven governors and serves a ________, renewable term. A) one-year B) two-year C) four-year D) eight-year
C) Four-year
In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, an increase in the reserve requirement ________ the demand for reserves, ________ the federal funds rate, everything else held constant. A) decreases; lowering B) increases; lowering C) increases; raising D) decreases; raising
C) Increases; raising
Which of the following cities does not have a federal reserve bank? A) Chicago B) Philadelphia C) Los Angeles D) New York
C) Los Angeles
The excess reserves ratio is ________ related to expected deposit outflows, and is ________ related to the market interest rate. A) negatively; negatively B) negatively; positively C) positively; negatively D) positively; positively
C) Positively; negatively
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) instruct the General Accounting Office to audit the foreign exchange market functions of the Federal Reserve.
C) Propose legislation that would force the Fed to submit budget requests to Congress, as must other government agencies
There are two ways in which the Fed can provide additional reserves to the banking system: it can ________ government bonds or it can ________ discount loans to commercial banks. A) sell; extend B) sell; call in C) purchase; extend D) purchase; call in
C) Purchase; extend
Both ________ and ________ are Federal Reserve assets. A) currency in circulation; reserves B) currency in circulation; securities C) securities; loans to financial institutions D) securities; reserves
C) Securities; loans to financial institutions
If, after a deposit outflow, a bank needs an additional $3 million to meet its reserve requirements, the bank can A) reduce deposits by $3 million. B) increase loans by $3 million. C) sell $3 million of securities. D) repay its discount loans from the Fed.
C) Sell $3 million of securities
Which of the following benefits directly from any increase in the corporation's profitability? A) a bond holder B) a commercial paper holder C) a shareholder D) a T-bill holder
C) Shareholder
Which of the following statements concerning external sources of financing for non-financial businesses in the United States are TRUE? A) Issuing marketable securities is the primary way that they finance their activities. B) Bonds are the least important source of external funds to finance their activities. C) Stocks are a relatively unimportant source of finance for their activities. D) Selling bonds directly to the American household is a major source of funding for American firms
C) Stocks are relatively unimportant source of finance for their activities
Which of the following countries does not belong to Eurozone? A) Italy B) Austria C) Switzerland D) France E) Norway
C) Switzerland and E) Norway
The policy directive from the FOMC is carried out by A) the presidents of the district banks. B) the presidents of commercial banks that are members of the Federal Reserve System. C) the account manager at the Federal Reserve Bank of New York. D) private dealers in the bond market.
C) The account manager at the Federal Reserve bank of New York
Government regulations require publicly traded firms to provide information, reducing A) transactions costs. B) the need for diversification. C) the adverse selection problem. D) economies of scale.
C) The adverse selection problem
Which of the following bonds are considered to be default-risk free? A) municipal bonds B) investment-grade bonds C) U.S. Treasury bonds D) junk bonds
C) U.S. Treasury bonds
If the Fed purchases securities worth $10 million from a commercial bank, the banking system's balance sheet will show A) an increase in securities held of $10 million and an increase in bank reserves of $10 million. B) an increase in securities held of $10 million and a decrease in bank reserves of $10 million. C) a decrease in securities held of $10 million and an increase in bank reserves of $10 million. D) a decrease in securities held of $10 million and a decrease in bank reserves of $10 million.
C) a decrease in securities held of $10 million and an increase in bank reserves of $10 million.
In the market for reserves, a lower interest rate paid on excess reserves A) decreases the supply of reserves. B) increases the supply of reserves. C) decreases the effective floor for the federal funds rate. D) increases the effective floor for the federal funds rate.
C) decreases the effective floor for the federal funds rate
When good weather increases number of transactions which in turn increases demand for reserves, then New York Fed would have to conduct ________ open market ________. A) dynamic; purchases B) defensive; sales C) defensive; purchases D) dynamic; sales
C) defensive; purchases
The collapse of the subprime mortgage market increased the spread between Baa and default-free U.S. Treasury bonds. This is due to A) a reduction in risk. B) a reduction in maturity. C) a flight to quality. D) a flight to liquidity.
C) flight to quality
Everything else held constant, in the market for reserves, when the federal funds rate is 3%, lowering the discount rate from 5% to 4% A) lowers the federal funds rate. B) raises the federal funds rate. C) has no effect on the federal funds rate. D) has an indeterminate effect on the federal funds rate.
C) has no effect on the federal funds rate
In the market for reserves, if the federal funds rate is above the interest rate paid on reserves and below the discount rate, an open market purchase ________ the supply of reserves and causes the federal funds interest rate to ________, everything else held constant. A) decreases; fall B) increases; rise C) increases; fall D) decreases; rise
C) increases; fall
The free-rider problem occurs because A) people who pay for information use it freely. B) people who do not pay for information use it. C) information can never be sold at any price. D) it is never profitable to produce information.
C) information can never be sold at any price
The implication of the expectations theory that expected returns for a holding period must be the same for bonds of different maturities depends on the assumption that A) yield curves usually slope upward. B) yield curves usually slope downward. C) instruments with different maturities are perfect substitutes. D) savers are usually risk averse.
C) instruments with different maturities are perfect substitutes
Holding large amounts of bank capital helps prevent bank failures because A) it means that the bank has a higher income. B) it makes loans easier to sell. C) it can be used to absorb the losses resulting from bad loans. D) it makes it easier to call in loans.
C) it can be used to absorb the losses resulting from bad loans
When you deposit $50 in currency at Old National Bank A) its assets increase by less than $50 because of reserve requirements. B) its reserves increase by less than $50 because of reserve requirements. C) its liabilities increase by $50. D) its liabilities decrease by $50.
C) its liabilities increase by $50
Other things being equal, an increase in the default risk of corporate bonds shifts the demand curve for corporate bonds to the ________ and the demand curve for Treasury bonds to the ________. A) right; right B) right; left C) left; right D) left; left
C) left; right
Because of the adverse selection problem A) good credit risks are more likely to seek loans causing lenders to make a disproportionate amount of loans to good credit risks. B) lenders may refuse loans to individuals with high net worth, because of their greater proclivity to "skip town." C) lenders are reluctant to make loans that are not secured by collateral. D) lenders will write debt contracts that restrict certain activities of borrowers.
C) lenders are reluctant to make loans that are not secured by collateral
Open market purchases ________ reserves and the monetary base thereby ________ the money supply. A) lower; lowering B) raise; lowering C) raise; raising D) lower; raising
C) raise; raising
An increase in the riskiness of corporate bonds will ________ the price of corporate bonds and ________ the price of Treasury bonds, everything else held constant. A) increase; increase B) reduce; reduce C) reduce; increase D) increase; reduce
C) reduce; increase
During business cycle expansions when income and wealth are rising, the demand for bonds ________ and the demand curve shifts to the ________, everything else held constant. A) falls; right B) falls; left C) rises; right D) rises; left
C) rises; right
When the federal funds rate equals the interest rate paid on reserves A) the demand curve for reserves is vertical. B) the supply curve of reserves is vertical. C) the demand curve for reserves is horizontal. D) the supply curve of reserves is horizontal.
C) the demand curve for reserves is horizontal
Everything else held constant, an increase in currency holdings will cause A) the money supply to rise. B) the money supply to remain constant. C) the money supply to fall. D) checkable deposits to rise
C) the money supply to fall
Suppose reserve requirement ratio is 16% and a bank receives new $10,000 deposit. What's the maximum amount the banking system can lend out? A) $10,000 B) $12,000 C) $120 D) $52,500 E) $62,500
D) $52,500
What is the price of $1000 face-value one year zero coupon discount bond that offers 1.5% yield? A) $992.3 B) $1001.5 C) $998.5 D) $985.2
D) $985.2
What yield does one year 4% coupon rate $1000 face value bond offer if it currently sells for $1050? A) 4% B) 2% C) 1% D) -1%
D) -1%
If reserves in the banking system increase by $100, then checkable deposits will increase by $500 in the simple model of deposit creation when the required reserve ratio is A) 0.01. B) 0.10. C) 0.05. D) 0.20
D) .20
If the required reserve ratio is 10 percent, currency in circulation is $1,200 billion, checkable deposits are $1,600 billion, and excess reserves total $2,500 billion, then the M1 money multiplier is A) 2.5. B) 1.7. C) 7.3. D) 0.73.
D) 0.73
If the nominal rate of interest is 2 percent, and the expected inflation rate is -10 percent, the real rate of interest is A) 2 percent. B) 8 percent. C) 10 percent. D) 12 percent.
D) 12%
Current target for federal funds rate is: A) 0-0.25% B) 0.5-0.75% C) 1.50-1.75% D) 2.00-2.25%
D) 2.00-2.25%
If a bank has a capital to asset ratio of 0.1 and a return on assets of 2%, what is its return on equity? A) 0.2% B) 2.1% C) 5% D) 20%
D) 20%
What is the return on a 5 percent coupon $1000 face value bond that initially sells for $1,000 and sells for $1,200 next year? A) 5 percent B) 10 percent C) -5 percent D) 25 percent
D) 25%
A discount bond selling for $15,000 with a face value of $20,000 in one year has a yield to maturity of A) 3 percent. B) 20 percent. C) 25 percent. D) 33.3 percent.
D) 33.3 percent
The nine directors of the Federal Reserve Banks are split into three categories: ________ are professional bankers, ________ are leaders from industry, and ________ are to represent the public interest and are not allowed to be officers, employees, or stockholders of banks. A) 5; 2; 2 B) 2; 5; 2 C) 4; 2; 3 D) 3; 3; 3
D) 3; 3; 3
If interest rates for one year, two year and three years bonds are 1.25, 1.5, and 3 percent, what is expected interest rate on one year bond 2 years from now according to Expectations Theory? A) 1 percent. B) 3 percent. C) 4 percent. D) 6 percent.
D) 6%
Managers (________) may act in their own interest rather than in the interest of the stockholder-owners (________) because the managers have less incentive to maximize profits than the stockholder-owners do. A) principals; agents B) principals; principals C) agents; agents D) agents; principals
D) Agents; principals
Banks subject to reserve requirements set by the Federal Reserve System include A) only nationally chartered banks. B) only banks with assets less than $100 million. C) only banks with assets less than $500 million. D) all banks whether or not they are members of the Federal Reserve System.
D) All banks whether or not they are members of the Federal Reserve System
The monetary liabilities of the Federal Reserve include A) securities and reserves. B) currency in circulation and loans to financial institutions. C) securities and loans to financial institutions. D) currency in circulation and reserves.
D) Currency in circulation and reserves
The risk that interest payments will not be made, or that the face value of a bond is not repaid when a bond matures is A) interest rate risk. B) inflation risk. C) liquidity risk. D) default risk.
D) Default risk
If the Fed injects reserves into the banking system and they are held as excess reserves, then the money supply A) increases by only the initial increase in reserves. B) increases by only one-half the initial increase in reserves. C) increases by a multiple of the initial increase in reserves. D) does not change.
D) Does not change
If investors expect short-term interest rates to fall significantly in the future, the yield curve will be inverted. This means that the yield curve has a ________ slope. A) steep upward B) slight upward C) flat D) downward
D) Downward
Of the following assets, the least liquid is A) stocks. B) traveler's checks. C) checking deposits. D) a house.
D) House
The ability of a central bank to set monetary policy instruments is A) political independence. B) goal independence. C) policy independence. D) instrument independence.
D) Instrument independence
The riskiness of an asset's returns due to changes in interest rates is A) exchange-rate risk. B) price risk. C) asset risk. D) interest-rate risk.
D) Interest-rate risk
Which of the following is true about ten year $1,000 face-value 6% coupon bond that's selling for $1,050? A) Its yield to maturity and coupon rate equal to 5.7%. B) Its current yield and coupon rate equal to 6%. C) Its yield to maturity is 8%. D) Its current yield is 5.7%
D) Its current yield is 5.7%
________ is used to make purchases while ________ is the total collection of assets that serve to store value. A) Money; income B) Wealth; income C) Income; money D) Money; wealth
D) Money; wealth
The price of a coupon bond and the yield to maturity are ________ related; that is, as the yield to maturity ________, the price of the bond ________. A) positively; rises; rises B) negatively; falls; falls C) positively; rises; falls D) negatively; rises; falls
D) Negatively; rises; falls
A ________ is a provision that restricts or specifies certain activities that a borrower can engage in. A) residual claimant B) risk hedge C) restrictive barrier D) restrictive covenant
D) Restrictive covenant
Which of the following is a potential operating instrument for the central bank? A) nominal GDP B) the discount rate C) the M1 money supply D) short-term interest rates
D) Short-term interest rates
An example of economies of scale in the provision of financial services is A) investing in a diversified collection of assets. B) providing depositors with a variety of savings certificates. C) hiring more support staff so that customers don't have to wait so long for assistance. D) spreading the cost of writing a standardized contract over many borrowers.
D) Spreading the cost of writing a standardized contract over many borrowers
Open market purchase by Fed will shift A) demand for reserves left B) demand for reserves right C) supply of reserves left D) supply of reserves right
D) Supply of reserves right
Other than savings deposits, small CDs and money market mutual fund shares (MMMFs), broader money supply M2 also includes money market deposit accounts (MMDAs). Which of the following about MMDAs is correct? A) They are just as liquid as checking or savings account deposits B) They pay lower interest rate than savings deposits C) They focus exclusively on stocks and long-term bonds D) They are very similar to MMMFs, except the fact that MMDAs are federally insured
D) They are very similar to MMMF's, except the fact that MMDAs are federally insured
Which of the following $1,000 face-value securities has the lowest yield to maturity? A) a 5 percent coupon bond selling for $1,000 B) a 5 percent coupon bond selling for $900 C) a 12 percent coupon bond selling for $900 D) a 5 percent coupon bond selling for $1,200
D) a 5 percent coupon bond selling for $1,200
When the expected inflation rate increases, the demand for bonds ________, the supply of bonds ________, and the interest rate ________, everything else held constant. A) increases; increases; rises B) decreases; decreases; falls C) increases; decreases; falls D) decreases; increases; rises
D) decreases; increases; rises
If the expected path of 1-year interest rates over the next five years is 1 percent, 2 percent, 3 percent, 4 percent, and 5 percent, the expectations theory predicts that the bond with the highest interest rate today is the one with a maturity of A) two years. B) three years. C) four years. D) five years.
D) five years
Federal funds are A) funds raised by the federal government in the bond market. B) loans made by the Federal Reserve System to banks. C) loans made by banks to the Federal Reserve System. D) loans made by banks to each other.
D) loans made by banks to each other
The Obama administration increased the tax on the top income tax bracket from 35% to 39%. Supply and demand analysis shows the impact of this change was a ________ interest rate on municipal bonds and a ________ interest rate on Treasury bonds, all else the same. A) higher; lower B) lower; lower C) higher; higher D) lower; higher
D) lower; higher
The opportunity cost of holding excess reserves is the federal funds rate A) minus the discount rate. B) plus the discount rate. C) plus the interest rate paid on excess reserves. D) minus the interest rate paid on excess reserves.
D) minus the interest rate paid on excess reserves
If the FDIC decides that a bank is too big to fail, it will use the ________ method, effectively ensuring that ________ depositors will suffer losses. A) payoff; large B) payoff; no C) purchase and assumption; large D) purchase and assumption; no
D) purchase and assumption; no
Under the liquidity premium theory the shape of the yield curve depends on A) the relative return of investments in common stocks versus investments in corporate bonds. B) the size of the federal government's budget deficit. C) government tax treatment of long-term versus short-term bonds. D) the expected pattern of future short-term rates and the size of the term premium at each maturity.
D) the expected pattern of future short-term rates and the size of the term premium at each maturity
Suppose FOMC increased its target federal funds rate. Assuming that demand for reserves has not changed, if the New York Fed wishes to keep the effective federal funds rate close to the target level, then the appropriate action to take is a ________ open market ________, everything else held constant. A) defensive; sale B) defensive; purchase C) dynamic; sale D) dynamic; purchase
Dynamic; sale
Suppose reserve requirement ratio is 16% and a bank receives new $10,000 deposit. What's the maximum amount the bank can lend out? A) $10,000 B) $12,000 C) $120 D) $1,200 E) $8,400
E) $8,400
D) the supply curve for bonds shifts to the right and the interest rate rises
Everything else held constant, when the government has higher budget deficits A) the demand curve for bonds shifts to the left and the interest rate rises. B) the demand curve for bonds shifts to the left and the interest rate falls. C) the supply curve for bonds shifts to the right and the interest rate falls. D) the supply curve for bonds shifts to the right and the interest rate rises.
