A bond with a maturity of less than one year is classified as which of the following?

	a. Money market instrument
	b. Shot-term market instrument
	c. Capital market instrument
	d. One year market instrument

.

A debt instrument can be issued by which of the following?

	a. Corporation
	b. Individual
	c. Government
	d. All of the above

.

A deposits funds with B for safekeeping. B lends the funds to C and charges C interest. Which of the following is true?

	a. C is a financial intermediary.
	b. B is a financial intermediary.
	c. A is a financial intermediary.
	d. A, B, and C do not fulfill any financial role.

.

A financial instrument that promises to pay the holder a certain fixed amount periodically, and upon maturity pays the face value of the instrument is called which of the following?

	a. Bond
	b. Equity
	c. Receivable
	d. Credit

.

A financial instrument which does not promise the holder any fixed payment but entitles him/her to a claim of the net income is called which of the following?

	a. Bond
	b. Equity
	c. Receivable
	d. Credit

.

A government issues securities with maturities of six months. These securities would be known as which of the following?

	a. Equity market instruments
	b. Capital Market instruments
	c. Short-term debt instruments
	d. Medium-term instruments

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A new ten-year bond will be bought and sold in what market?

	a. Primary market
	b. Ten-year market
	c. Short-term market
	d. Secondary market

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Complete the following statement. Adverse selection occurs when:

	a. borrowers get loans by falsely presenting how profitable their projects really are.
	b. borrowers do not get the loans, because they suffer discrimination.
	c. lenders do not lend to borrowers with bad credit.
	d. lenders lend only to borrowers with good credit.

.

Complete the following statement. Capital market instruments have maturities of:

	a. Less than one year.
	b. More than one year.
	c. Any number of years.
	d. Usually ten years.

.

Complete the following statement. Money market instruments have maturities of:

	a. Less than one year.
	b. More than one year.
	c. Any number of years.
	d. Usually ten years.

.

Complete the following statement. The federal funds market is the market where:

	a. the federal government sells overnight securities.
	b. the federal government buys overnight securities.
	c. banks reserves at the Federal Reserve are bought and sold overnight.
	d. the Federal Reserve Bank loans overnight funds to banks.

.

Complete the following statement. The problem of adverse selection in financial markets, which financial intermediaries have evolved to minimize, refers to the difficulty in:

	a. Separating creditworthy borrowers from non-credit worthy borrowers
	b. Not knowing borrowers who will take more risk after the loan contract than those who will not
	c. Providing incentives for borrowers to behave responsibly
	d. Punishing borrowers when they default on their loan contracts

.

Consider whether the following statement is true or false and how so. Money is useful only when it can be held in the hand.

	a. This is true, because that is only when you can use it to buy something.
	b. This is true, because money has to be a commodity.
	c. This is false, because money is an accounting device that does not need be tangible.
	d. None of the above

.

Corporate bonds are issued by which of the following?

	a. Any corporation looking for funds
	b. Corporations emerging from bankruptcy that need funds
	c. Corporations with strong credit ratings that need funds
	d. Corporations that have the approval of the Board of Directors

.

Fill in the blanks. Financial intermediaries are the major means of moving funds from savers to borrowers, because they are able to provide financial services at ______ by taking advantage of ______.

	a. lower cost; economies of scale
	b. lower cost; adverse selection
	c. higher cost; economies of scale
	d. higher cost; adverse selection

.

Fill in the blanks. Financial intermediaries are efficient at moving funds from savers to borrowers, because they ______ by ______.

	a. lower risk; spreading it among many
	b. lower risk: confining it to the very rich
	c. raise risk; charging higher interest rates
	d. raise risk; charging lower interest rates

.

Fill in the blanks. In a world where there is only direct financing, small savers would be subject to ______, because their portfolios would not be sufficiently ______.

	a. high risks, diversified
	b. low risks, large to securitize
	c. no risk, diversified
	d. no risk, fully diversified

.

Fill in the blanks. The presence of asymmetric information in financial markets leads to ______ as people with investment opportunities ______.

	a. less economic growth; will not borrow at low interest rates
	b. less economic growth; cannot have access to loans
	c. more economic growth; are force to used their own funds
	d. more economic growth; can borrow from banks

.

Fill in the blanks. Underwriting is undertaken by __________ when they __________.

	a. commercial banks, give out loans
	b. commercial banks, foreclose on properties
	c. investment banks, guarantee security prices and buy them
	d. investment banks, guarantee security prices and sell them

.

Fill in the blanks. When a company wants to raise money from financial markets, it may go to _________, which will help it issue a(n) __________.

	a. the stock market, loan
	b. the capital market, equity
	c. an investment bank, initial public offering (IPO)
	d. commercial bank, initial public offering (IPO)

.

Financial intermediaries succeed in lending and borrowing by doing which of the following?

	a. Reducing moral hazard
	b. Increasing moral hazard
	c. Withholding information from borrowers
	d. Paying attention to borrowers

.

First All Bank is a financial intermediary. This means that First All Bank does which of the following?

	a. Lends its own funds money to borrowers
	b. Holds deposits for depositors and charges fees for the service
	c. Takes deposits from depositors and lends them to borrowers
	d. Seeks borrowers for depositors

.

How do financial markets promote economic development?

	a. They enable entrepreneurs without funds to have access to funds.
	b. They make the wealthy wealthier.
	c. They enable investment bankers to earn higher salaries.
	d. They make people with capital gains income pay lower taxes.

.

How do financial markets promote economic efficiency?

	a. They match borrowers who have productive business ideas with savers.
	b. They enable lenders to minimize the time it takes to find a borrower.
	c. They enable borrowers to minimize the time it takes to find a lender.
	d. All of the above

.

I lend funds to Jake, who has a reputation of being trustworthy. He turns around and lends the funds to Jane, whom I do not know. Which of the following characterizes Jake’s role?

	a. Money lender
	b. Intermediary
	c. Broker
	d. Dealer

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If money is a unit of account, then which of the following is true?

	a. Money stores value.
	b. Money is used to measure the value of things.
	c. Money is used to buy goods and services.
	d. Money has no value.

.

In a certain society, people use shells as a means of payment and store of value. The unit of account is gold. Which of the following is true of this economy?

	a. This economy is not a monetary economy, because shells are not money.
	b. This economy is not a monetary economy, because there are no denominations.
	c. This economy is a monetary economy, because all the functions of money are being performed.
	d. This economy is a monetary economy, because they use gold.

.

In a public school, everybody will accept a bubblegum as payment for goods or services rendered, even if they do not like bubblegum. Bubblegum in this school is considered which of the following?

	a. Income
	b. Money
	c. Insurance for when you want to chew gum
	d. Something to barter with

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In direct finance, as opposed to indirect finance, the transaction is between what entities?

	a. The lender and the borrower
	b. The lender the borrower and the intermediary
	c. The borrower and the bank
	d. The lender and the bank

.

James, John, and Kojo buy houses with funds from First All Bank. First All Bank puts all three loan agreements together, divides them into one hundred pieces of financial instruments, and sells them to several investors. The one hundred financial instruments can be accurately described as which of the following?

	a. Financial liabilities
	b. Financial assets
	c. Bank securities
	d. Mortgage-backed securities

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Joan borrows $100.00 from her sister with the promise to repay at the end of the month. Her sister goes to the bank to withdraw $100.00 from her bank account to give it to her. This is an instance of which of the following?

	a. Direct borrowing
	b. Direct financing
	c. Direct lending
	d. Indirect financing

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Loans to households to buy houses generate which of the following?

	a. Money market instruments
	b. Equity market instruments
	c. Mortgage-backed securities
	d. Commercial papers

.

Money functions as which of the following?

	a. Medium of exchange, store of value, and unit of account
	b. Medium of exchange, store of value, and income
	c. Store of value and income
	d. Store of value and a payment mechanism

.

Moral hazard occurs when a borrower does which of the following?

	a. Undertakes a less risky business venture after obtaining a loan
	b. Undertakes a more risky business venture after obtaining a loan
	c. Absconds with the loan proceeds and does not repay
	d. Suffers a setback through no fault of his/hers and is unable to repay

.

Pam asks her mother for a loan. Her mother does not have it, so she borrows from her sister, and gives it to Pam. This transaction can be described as which of the following?

	a. Refinance
	b. Direct finance
	c. Indirect finance
	d. Financial market transaction

.

Repurchase agreements (repos) can be classified as which of the following type of economic instrument?

	a. Short-term debt instruments
	b. Capital market instruments
	c. Equity market instruments
	d. Long-term debt instruments

.

Stocks are issued by which of the following?

	a. Individuals
	b. Partnerships
	c. Corporations
	d. Governments

.

The payment you receive for working is called which of the following?

	a. Money
	b. Income
	c. Interest
	d. Rents

.

Treasury bills are issued by which of the following?

	a. Domestic corporations
	b. Individuals
	c. Governments
	d. Foreign corporations

.

What are commercial papers?

	a. Long-term instruments issued by large banks and well-known corporations
	b. Short-term instruments issued by large banks and well-known corporations
	c. Medium-term instruments issued by corporations who cannot borrow from banks
	d. Long-term instruments issued by corporation who do not want to borrow from banks

.

What are convertible corporate bonds?

	a. Corporate bonds that allow the holder to convert them into shares
	b. Corporate bonds that can be converted into cash at any time
	c. Corporate bonds that have no maturity dates
	d. Corporate bonds that have maturity dates determined by the bondholder

.

What are equities?

	a. Capital market instruments
	b. Money market instruments
	c. Short-term market instruments
	d. Over-the-counter market instruments

.

What are Eurodollars?

	a. U.S. dollars which an individual takes on vacation to Europe
	b. Bonds issued in Europe but denominated in U.S. dollars
	c. U.S. dollar deposits owned by Europeans
	d. U.S. dollars deposited in banks outside the United States

.

What are treasury bills?

	a. Capital market instruments
	b. Money market instruments
	c. Over-the-market instruments
	d. Equity market instrument

.

What is a Eurobond?

	a. A bond issued and sold in the UK but denominated in U.S. dollars
	b. A bond issued by the European Union
	c. Any bond issued by any country in Europe
	d. A bond issued in the U.S. in dollars but bought by Europeans

.

What is a secondary market?

	a. A market where new securities are bought and sold
	b. A market where U.S. government treasuries are bought and sold
	c. A market where newly issued and outstanding securities are bought and sold
	d. A market where outstanding securities are bought and sold

.

What is an asset-backed security?

	a. A loan to buy an asset
	b. A loan with an asset as collateral
	c. A loan with no asset as collateral
	d. A loan with a co-signer

.

What is the Federal Funds rate?

	a. The Federal Funds rate is the interest rate on loans the Federal Reserve Bank makes to banks.
	b. The Federal Funds rate is the interest rate on loans made in the federal funds market.
	c. The Federal Funds rate is the interest rate on loans the Federal Reserve Bank makes to the government.
	d. The Federal Funds rate is the interest rate on loans banks make to the Federal Reserve Bank.

.

What would be a consequence of the failure of financial markets?

	a. There will be no savings.
	b. There will be no income earned.
	c. There will be no money in the economy.
	d. Economic activity will decline.

.

When a business borrows directly from a saver, the business incurs which of the following?

	a. Liability
	b. A credit
	c. Equity
	d. An asset

.

When a business borrows directly from financial markets, it issues which of the following?

	a. Securities
	b. Equities
	c. Dividends
	d. Credits

.

When a person lends to a business in the financial market, the person acquires which of the following?

	a. An asset
	b. A liability
	c. A debt
	d. A credit

.

When an individual takes out a loan from a bank to buy a car, the individual issues which of the following?

	a. Security
	b. Equity
	c. Commercial paper
	d. Certificate of deposit

.

Which of the following is a main reason for the dominance of financial intermediaries in the economy?

	a. They are able to reduce transaction costs through economies of scale.
	b. They are able to lend large sums of money to those who need it.
	c. They employ of a lot of people to market their loans.
	d. They have good management skills.

.

Which of the following is the best functional definition of money?

	a. Anything that the government says is money
	b. Anything that provides utility for people
	c. Anything that is generally acceptable as a medium of exchange
	d. Anything that is desirable, because it can be consumed

.

Which scenario best describes direct finance and not indirect finance?

	a. ABC Corporation uses its retained earnings to finance a new project.
	b. ABC Corporation sells its old equipment to finance a new project.
	c. ABC Corporation raises funds by selling commercial paper to DEF Finance Company.
	d. ABC Corporation raises funds by borrowing from its bank.

.

Who are the participants in financial markets?

	a. Households
	b. Households and businesses
	c. Households, businesses, and governments
	d. Households, businesses, governments, and foreigners

.

Why are bonds issued by municipalities to finance large projects attractive to investors?

	a. Because the interest rates on them are higher than the interest rate on corporate bonds
	b. Because the interest rates are exempt from federal income tax
	c. Because they are short-term instruments and therefore very liquid
	d. Because the capital gains on them are higher than on many securities

.

Why are financial markets important in the economy?

	a. They can make a lot of people wealthy.
	b. They can make businesses and people wealthy.
	c. They make it possible to transfer savings to borrowers.
	d. They make it possible for governments to borrow.

.

Why is an efficient secondary market essential for an efficient financial market?

	a. It makes it easier for firms to sell new bonds in the primary market.
	b. It makes it easier for firms to sell new bonds in the secondary market.
	c. It makes it easier for firms to sell new bonds in both the secondary and primary markets.
	d. It makes it easier for firms to buy and sell new bonds in the secondary and a primary markets.

.

Why is indirect finance more important than direct finance in the U.S. economy?

	a. It moves more funds from savers to borrowers than direct finance.
	b. It moves as much funds from savers to borrowers as direct finance.
	c. It is the only means by which funds can move from savers to borrowers.
	d. It is responsible for all the economic activity in the U.S.

.

Why would a modern economy not operate efficiently without money?

	a. People could not trade.
	b. People would not want to work, because there would be no money to pay them.
	c. People would take time away from work to search for trading partners.
	d. People would produce only what they want to consume.

.

Without financial intermediaries, why would small savers not benefit from financial markets?

	a. Nobody would want to borrow from them, because their funds would be too small.
	b. Nobody would want to borrow from them, because they are not banks.
	c. The cost of a one-time loan of a small amount would be too high to make it worth their while to lend.
	d. The return on lending would be too high for them to want to lend.

.

A commercial paper with a ten year maturity pays an annual interest rate of 7%, while a U.S. government bond with the same maturity pays 5%. What could account for the difference?

	a. The commercial paper is more attractive to investors.
	b. The commercial paper is less risky.
	c. The U.S. government bond is more liquid.
	d. The U.S. government bond is riskier.

.

Amelia gives Ben a one-hundred dollar loan payable in a year. She tells him that when he repays her, he should make sure that the repayment can buy as many hamburgers as the initial one hundred dollars bought. What would be the correct inference from Amelia’s stipulation?

	a. The interest rate on the loan is zero.
	b. The real interest rate on the loan is zero.
	c. The nominal interest rate on the loan is zero.
	d. The nominal interest rate on the loan is equal to the real interest rate.

.

Arianna took a one-year loan from Sammy at an interest rate of 7% at a time when expected inflation was 3%. The actual inflation turned out to be 10%. Which of the following is true?

	a. In real terms, Jane paid less than she expected to pay.
	b. In real terms, Jane paid more than she expected to pay.
	c. In nominal terms, Jane paid more than she expected to pay.
	d. Jane paid no more nor less than she expected to pay.

.

Complete the following statement. Interest rates on Greek Sovereign Bonds are higher than on German Sovereign Bonds. One possible explanation may be that:

	a. there is a higher demand for Greek Sovereign Bonds than there is for German Sovereign Bonds.
	b. Greek Sovereign Bonds are more liquid than German Sovereign Bonds.
	c. Greek Sovereign Bonds are more risky than German Sovereign Bonds.
	d. there is a lower demand for German Sovereign Bonds than there is for Greek Sovereign Bonds.

.

Complete the following statement. The more easily a security can be sold and bought:

	a. the more risky it is.
	b. the more liquid it is.
	c. the less desirable it is.
	d. the higher the interest rate it pays.

.

Complete the following statement. The present discounted value of a stream of cash payments will always be:

	a. Less than the sum of the stream of payments.
	b. More than the sum of the stream of payments.
	c. About the same as the sum of the stream of payments.
	d. Exactly equal to the sum of the stream payments.

.

Consider the following equation, where PV is the present value, CFi is the cash flow at time i, and n is the number of years. Which of the following is a proper interpretation of r?

	a. The interest rate
	b. The discount rate
	c. The nominal interest rate
	d. The real interest rate

.

Erica borrows $1,000.00 from Jorge. Jorge demands repayment in a year in the amount of $1,100.00. What is the yield to maturity?

	a. $100.00
	b. 10.00%
	c. 90.91%
	d. 9.09%

.

Erica borrows $1,000.00 from Jorge. Jorge demands repayment in a year in the amount of $1,100.00. What is the yield to maturity?

	a. The same as the simple interest rate
	b. Greater than the simple interest rate
	c. Less than the simple interest rate
	d. Cannot be determined from the given information

.

Everything else remaining constant, if the risk associated with holding security increases, what will happen to the price and interest rate?

	a. The price of the security will increase, and the interest rate will increase.
	b. The price of the security will increase, and the interest rate will decrease.
	c. The price of the security will decrease, and the interest rate will decrease.
	d. The price of the security will decrease, and the interest rate will increase.

.

How is risk premium defined?

	a. The spread between the interest rates on default-free and default-risk bonds of the same maturity
	b. The spread between interest rates on default-free and default risk bonds with different maturities
	c. The yield to maturity plus the expected inflation over the period the bond is held
	d. The yield to maturity plus the actual inflation over the period the bond is held

.

If the risk associated with holding an asset increases and expected inflation also increases, then what will happen to the equilibrium interest rate?

	a. It will increase.
	b. It will decrease.
	c. It will remain the same.
	d. It cannot be determined.

.

In Table 1 below, what will be the interest rate on a two-year bond?

TABLE 1
Expected interest rate on one-year bonds over the next five years is as follows:

	a. 2%
	b. 2.5%
	c. 3.0%
	d. 5.0%

.

In Table 1 below, what will be the slope of the yield curve?

TABLE 1
Expected interest rate on one-year bonds over the next five years is as follows:

	a. Downward sloping
	b. Flat
	c. Upward Sloping
	d. Flat then upward sloping

.

The interest rate is determined by which of the following?

	a. The demand for securities
	b. The supply of securities
	c. The demand and supply of securities
	d. The needs of banks

.

The rate of return on a security or bond can be negative under which circumstance?

	a. The interest rate falls, and you sell before maturity.
	b. The interest rate rises, and you sell before maturity.
	c. The interest rate does not change, and you sell it at par before maturity.
	d. The interest rate does not change, and you hold it to maturity.

.

The real interest rate is measured by which of the following?

	a. The difference between the actual interest rate and the observed interest rate
	b. The sum of the nominal interest rate and inflation
	c. The difference between the nominal interest rate and inflation
	d. The difference between the nominal interest rate and the prime rate

.

The U.S. government is running a big budget deficit and plans to finance the deficit by borrowing. If everything else remaining constant, then what will happen to the demand for bonds?

	a. It will increase.
	b. It will decrease.
	c. It will not change.
	d. It cannot be determined since other factors can change.

.

The U.S. government is running a big budget deficit and plans to finance the deficit by borrowing. If everything else remaining constant, then what will happen to the supply of bonds and the interest rate?

	a. The supply will increase, and the interest rate will decrease.
	b. The supply will decrease, and the interest rate will decrease.
	c. The supply will not change, but the interest rate will increase.
	d. The supply will increase, and the interest rate will increase.

.

The U.S. government is running a big budget deficit and plans to finance it by borrowing. If everything else remaining constant, then what will happen to the price of bonds and the interest rate?

	a. The price will increase, and the interest rate will increase.
	b. The price will increase, and the interest rate will decrease.
	c. The price will decrease, and the interest rate will increase.
	d. The price will decrease, and the interest rate will decrease.

.

Under what condition will real interest rate in the economy be negative?

	a. When the real interest rate is equal to inflation
	b. When the nominal interest rate is greater than the real interest rate
	c. When inflation is greater than the nominal interest rate
	d. When inflation is equal to the nominal interest rate

.

What does an upward sloping yield curve imply?

	a. Future short-term rates are expected to fall.
	b. Future short-term rates are expected to rise.
	c. Future long-term rates are expected to fall.
	d. Future long-term rates are expected to fall.

.

What is the yield to maturity?

	a. The rate at which the stream of cash flows from an instrument must be discounted to equal its value today
	b. Always the ratio of the price at which the instrument is sold, divided by the price at which it is bought
	c. The rate at which the stream of cash flow must be increased to equal its future value
	d. The difference between the future value and the present value

.

Why is one hundred dollars today not the same as one hundred dollars a year from now?

	a. Because one hundred dollars a year from now will buy less than one hundred dollars-worth of goods and services
	b. Because one hundred dollars a year from now will buy more than one hundred dollars-worth of goods and services.
	c. Because the statement does not take account of the time value of money
	d. Because people value what they receive in the future more than what they receive today

.

Why is the yield to maturity on municipal bonds with maturity of 15 years lower than the yield to maturity on U.S. government bonds with maturity of 15 years?

	a. U.S. government bonds are riskier than municipal bonds.
	b. U.S. government bonds are less liquid than municipal bonds.
	c. Municipal bonds are less liquid than U.S. government bonds.
	d. Municipal bond interest payments are exempt from federal income taxes.

.

Why would the interest rate on U.S. government bonds be lower than the interest rate on Mexican government bonds?

	a. U.S. government bonds have shorter maturities than Mexican government bonds.
	b. The U.S. government’s deficit is larger than the Mexican government deficit.
	c. The Mexican government’s debt is the same as the U.S. government’s debt, but the former is default-free.
	d. U.S. government bonds are more liquid than Mexican government bonds.

.

You buy a municipal bond with a face value of $1,000.00. The fixed interest payment is $100.00 a year. The bond matures in ten years. Five years before maturity, you sell the bond for $1,000.00. What will the rate of return be?

	a. The same as the yield to maturity
	b. Greater than the yield to maturity
	c. Less than the yield to maturity
	d. Cannot be calculated

.

You buy a municipal bond with a face value of $1,000.00. The fixed interest payment is $100.00 a year. The bond matures in ten years. Five years before maturity, you decide to sell. What will the yield to maturity be?

	a. The same as the fixed interest rate
	b. Higher than the fixed interest rate
	c. Lower than the fixed interest rate
	d. Cannot be calculated

.

You win a lottery which promises to pay you $1,000.00 over five years in equal installments. The interest rate is 5%. The amount you won is actually closest to what amount?

	a. $1,000.00
	b. $965.00
	c. $865.00
	d. $765.00

.

A firm accepts and keeps funds for several people with the promise that they can withdraw them anytime they want. The same firm then lends the funds to borrowers. Which of the following best identifies this type of firm?

	a. An insurance company
	b. A pension fund
	c. A depository institution
	d. A finance company

.

Banks are regulated, because governments want them to do which of the following?

	a. Lend to sectors that will make the economy grow
	b. Lend to sectors dictated by the government
	c. Avoid excessive risk
	d. Avoid making too much profit

.

Complete the following statement. Asymmetric information reduces financial transactions, because:

	a. it makes it costly to borrow and lend.
	b. it makes it costly to lend, so nobody wants to lend.
	c. it makes it cheaper to borrow, so nobody wants to lend.
	d. it makes it cheaper to lend, so nobody wants to lend.

.

Complete the following statement. Banks are regulated because governments want them to:

	a. Maximize profit.
	b. Operate safely.
	c. Minimize cost.
	d. Increase the money supply.

.

Fill in the blanks. By lending to many borrowers, financial intermediaries ______ through ______.

	a. lower costs; economies of scale
	b. raise costs; economies of scale
	c. raise costs; increasing marginal returns
	d. lower costs; decreasing marginal returns

.

Fill in the blanks. Financial markets foster economic growth by facilitating the transfer of funds from ______ to ______.

	a. the poor; the rich
	b. the government; the poor
	c. the rich; the poor
	d. savers; borrowers

.

In an effort to minimize bank failures through deposits insurance, regulators may increase which of the following?

	a. Moral hazard
	b. Adverse selection
	c. Principal agency problems
	d. Sequential service constraint

.

The asymmetric information problem that occurs after a financial transaction is called which of the following?

	a. Agency problem
	b. Moral hazard problem
	c. Adverse selection problem
	d. Lending problem

.

To minimize asymmetric information in financial markets, banks and financial institutions have to do which of the following?

	a. Disclose information to the public and the government
	b. Disclose information to shareholders
	c. Keep their proprietary information from potential saboteurs
	d. Tell the government whenever they change their portfolio of assets

.

Which of the following reasons accurately explains why governments regulate banks?

	a. To impose capital requirements
	b. To only allow them to buy safe stocks
	c. To appoint the members of the Board of Directors
	d. To only allow them to borrow from the Federal Reserve Bank

.

Which of the following reasons accurately explains why governments regulate banks?

	a. To require them to be under a bank holding company
	b. To require them to buy only preferred common stocks
	c. To supervise their activities
	d. To prevent them from branching

.

Which of the following reasons explains why financial institutions are heavily regulated?

	a. When they fail, owners of the bank lose their capital.
	b. When they fail, depositors lose their deposits.
	c. When they fail, the government has to bail them out.
	d. When they fail, it causes disruptions in economic activity.

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A central bank mandate might be established in order to do which of the following?

	a. Maintain price stability
	b. Make the most profit for shareholders
	c. Reduce the price level
	d. Control government spending

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Complete the following statement. If the Federal Reserve Bank uses the money supply as a target, then:

	a. it cannot at the same time control the monetary base.
	b. it cannot at the same time control the reserve deposit ratio.
	c. it cannot at the same time control the interest rate.
	d. it cannot at the same time control the price level.

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Complete the following statement. The effectiveness of monetary policy is often said to be asymmetric. This means that monetary policy is:

	a. Ineffective during both expansions recessions.
	b. Ineffective during recessions.
	c. Ineffective during expansions.
	d. Ineffective at the trough of the business cycle.

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In seeking to increase the money supply, the Federal Reserve Bank could do which of the following?

	a. Buy government bonds and thus increase reserves
	b. Sell government bonds and thus increase reserves
	c. Buy government bonds and thus decrease reserves
	d. Sell government bonds and thus decrease reserves

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One of the ways the Federal Reserve Bank can control the money supply is to do which of the following?

	a. Alter the required reserve ratio
	b. Alter the currency to deposit ratio
	c. Forbid the banks from taking deposits
	d. Encourage the banks to take more deposits

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The central bank can influence economic activity by doing which of the following?

	a. Conducting fiscal policy
	b. Conducting monetary policy
	c. Advising the president
	d. Advising Congress

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The Federal Open Market Committee (FOMC) of the Federal Reserve Bank is primarily responsible for which of the following?

	a. Conducting open market operations
	b. Conducting closed market operations
	c. Conducting fiscal policy
	d. Chartering state banks

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The Federal Reserve Bank of the U.S. is often said to have dual mandates. What is the purpose of dual mandates?

	a. They prevent the price level from increasing and keep the exchange rate stable.
	b. They prevent the price level from increasing and ensure full employment.
	c. They maintain price stability and ensure full employment.
	d. They maintain price stability and ensure zero unemployment.

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To achieve the mandate of full employment, the Federal Reserve Bank could do which of the following?

	a. Target the money supply and give up control of the interest rate
	b. Target the price level and increase the money supply
	c. Target both the interest rate and the money supply
	d. Do nothing and let the market decide what the interest rate should be

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What is meant by interest rate targeting in the conduct of monetary policy?

	a. The practice of keeping the interest rate within a certain range to achieve some macroeconomic goal
	b. The practice of setting the money supply at a certain level and letting the interest be determined by the market
	c. The practice of banks telling borrowers how much interest rate they will pay for loans
	d. The practice of setting the rate at which the money supply will with the level of interest rate

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What is one of the major roles of central banks, such as the Federal Reserve Bank?

	a. To make profit for the government
	b. To make profit for shareholders
	c. To maintain price stability
	d. To increase the money supply

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What is the preferred method the Federal Reserve Bank uses to control the money supply?

	a. Altering the reserve deposits ratio
	b. Using moral suasion
	c. Changing margin requirements
	d. Conducting open market operations

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When the central bank sells securities, what does it seek to do?

	a. Increase the money supply
	b. Decrease the money supply
	c. Reduce the interest rate
	d. Increase the monetary base

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When the Federal Reserve Bank increases the monetary base, this is a sign that it wants which of the following to occur?

	a. Money supply to increase and the interest rate and employment to increase
	b. Money supply to increase and the interest rate and employment to decrease
	c. Money supply and the interest rate to increase as well as employment to decrease
	d. Money supply and employment to increase as well as the interest rate to decrease

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Who heads the Federal Reserve System?

	a. FOMC
	b. Federal Advisory Council
	c. Board of Governors
	d. Discount Rate Committee

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Who owns the U.S. Federal Reserve?

	a. The government
	b. Member banks
	c. All the banks in the U.S.
	d. Only the state banks

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As an economy grows and people’s disposable income rises, what is likely to happen to the demand for foreign goods?

	a. It will decrease, because more goods can be produced at home.
	b. It will remain the same, because they are foreign goods.
	c. It will increase, because the demand for all good will increase.
	d. Exports from the country will increase, but imports will remain the same.

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C lowers its exchange rate with its major trading partner, U. With everything else being equal, which of the following is true?

	a. U will export more to C.
	b. C will export more to U.
	c. C will export no more to U than before.
	d. U will export nor more to C than before.

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C produces refrigerators at a lower cost than U. With everything else being equal, the likely consequence might be which of the following?

	a. The real exchange rate of U will rise.
	b. The real exchange rate of U will fall.
	c. The nominal exchange rate of C will rise.
	d. The nominal exchange rate of U will fall.

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C produces refrigerators at a lower cost than U. With everything else being equal, what are the consequences of this observation?

	a. The real exchange rate of U will fall, and U will import more refrigerators from C.
	b. The real exchange rate of U will rise, and U will import more refrigerators from C.
	c. The nominal exchange rate of C will rise, and C will import more from U.
	d. The nominal exchange rate of C will fall, and C will import more from U.

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Complete the following statement. In the long run, the value of the U.S. dollar will rise relative to other currencies:

	a. if U.S. businesses become less productive.
	b. if U.S. citizens choose to vacation at home.
	c. if foreigners choose to vacation at home.
	d. if U.S. businesses become more productive.

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Country C commits to maintaining parity of its currency with that of country U. What inference can be drawn from such a policy with everything else being equal?

	a. C’s currency is floating even if U’s currency is not.
	b. C’s currency is fixed even if U’s currency is not.
	c. U gains no trade advantage against C from devaluing its currency.
	d. U and C have currencies that float independently.

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If a country’s income rises and the country increases its imports of another country’s goods, what will happen to the exchange rate of the importing country?

	a. It will fall.
	b. It will rise.
	c. It will remain the same.
	d. It cannot be determined.

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If European goods are more to U.S. citizens what will be the result?

	a. The value of the dollar will decrease compared to the euro.
	b. The value of the dollar will increase compared to the euro.
	c. The U.S. will export more goods to Europe
	d. More U.S. citizens will travel to Europe.

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If the exchange rate is allowed to be determined by the forces of demand and supply, the exchange rate regime is classified as which of the following?

	a. Fixed exchange rate regime
	b. Managed exchange rate regime
	c. Demand set exchange rate regime
	d. Floating exchange rate regime

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The demand for foreign currency by U.S. businesses and citizens derives from which of the following?

	a. The income of foreigners
	b. The preference of foreigners for U.S. goods
	c. The income of U.S. residents
	d. The desire to accumulate foreign currency

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The real exchange rate of the U.S. dollar in terms of the euro can be defined as which of the following?

	a. The amount of euros one U.S. dollar can buy
	b. The amount of U.S. dollars one euro can buy
	c. The value of U.S. dollars that is exchanged for euros daily
	d. The value of goods one U.S. dollar can buy in a euro area

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What will make the equilibrium exchange rate increase?

	a. An increase in the demand for a country’s exports
	b. A decrease in the demand for a country’s exports
	c. An increase in the country’s imports
	d. A reduction in the interest rate in the country

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Why is the foreign exchange market important for economic welfare?

	a. The foreign exchange market makes it possible to buy foreign goods.
	b. The foreign exchange market makes it possible for foreigners to buy our goods.
	c. The foreign exchange market makes it possible for countries to show pride in their currencies.
	d. Both A and B

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Without foreign exchange markets, citizens of different countries would have to do which of the following?

	a. Live without foreign goods
	b. Travel abroad to get foreign goods
	c. Produce whatever they wanted to consume
	d. Barter

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An increase in the money supply, with everything else held constant, results in which of the following?

	a. The LM curve will shift to the left and decrease the interest rate.
	b. The LM curve will shift to the right and decrease the interest rate.
	c. The IS curve will shift to the right and increase the interest rate.
	d. The IS curve will shift to the right and decrease the interest rate.

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Based on the diagram below, which of the following best describes what will happen when the money supply increases?

	a. Interest rate falls, and GDP rises.
	b. Interest rate rises, and GDP rises.
	c. Interest rate falls, and GDP rises.
	d. Interest rate rises, and GDP falls.

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Complete the following statement. According to a monetarist, attempts to use policy to stabilize the economy:

	a. is likely to succeed in stabilizing the economy.
	b. is likely to introduce instability in the economy.
	c. will create higher inflation.
	d. will create higher deflation.

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If the money supply is growing at a rate of 3% a year, velocity is constant and real GDP is growing is growing at 2% a year, at what will inflation be in the economy?

	a. 6%
	b. 5%
	c. 3%
	d. 1%

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If the money supply is growing at a rate of 5%, real GDP is growing at a rate of 2% and velocity is growing at a rate of 1%, what will inflation be in the economy?

	a. 8%
	b. 7%
	c. 5%
	d. 1%

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What are the implications for policy when economic agents form rational expectations in making forecasts?

	a. Monetary policy is effective.
	b. Monetary policy is only effective when coupled with fiscal policy.
	c. Fiscal policy is only effective when it is not accommodated by monetary policy.
	d. Monetary policy is ineffective.

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What are the implications for the economy when economic agents form expectations adaptively?

	a. Real GDP cannot be increased by monetary policy.
	b. Real GDP can be increased only by reducing the money supply.
	c. Real GDP can be increased by monetary policy over time.
	d. Only nominal GDP can be increased by monetary policy.

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What do economists mean by the demand for money?

	a. The amount of money people want to hold at different interest rates
	b. The amount of income people want to hold at different interest rates
	c. The amount of money the central bank wants people to hold at different interest rates
	d. The amount of money supplied by the central bank at different interest rates

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What will be the impact of monetary policy if the LM curve is horizontal?

	a. There will be no effect on the interest rate.
	b. The interest rate will increase.
	c. The interest rate will decrease.
	d. The interest rate will immediately fall to zero.

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What would an increase in the money supply do in the economy?

	a. Lower the interest rate, reduce the demand for money and increase GDP
	b. Lower the interest, increase investment and increase GDP
	c. Raises the interest rate, increase investment and reduce GDP
	d. Raises interest rate, increase investment and reduce GDP

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When the economy is caught in a liquidity trap, which of the following is true?

	a. An increase in money supply will not lower the interest rate.
	b. An increase in the money supply will lower interest rate.
	c. An increase in the money supply will raise the GDP.
	d. An increase in the money supply will lower the GDP.

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Which of the following statements is true of the demand for money?

	a. The demand for money is positively related to the interest rate but negatively to income.
	b. The demand for money is positively related to the interest rate and positively to income.
	c. The demand for money is negatively related to the interest rate and negatively to income.
	d. The demand for money is negatively related to the interest rate but positively to income.

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Why do Keynesians advocate activist fiscal policy as opposed to activist monetary policy?

	a. They believe that the economy is inherently stable and fiscal policy is more effective than monetary policy in stabilizing the economy.
	b. They believe that the economy is inherently unstable and fiscal policy is more effective than monetary policy in stabilizing the economy.
	c. They believe that monetary policy is too effective in stabilizing an inherently unstable economy and should be used sparingly.
	d. They believe fiscal policy is quick, flexible, and more effective compared to monetary policy in stabilizing the economy.

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Why do monetarists see monetary policy as more effective than fiscal policy?

	a. They believe that monetary policy will have a bigger impact on nominal income than an increase in government expenditure.
	b. They believe that monetary policy will have as big an impact on nominal income as a change in government expenditure.
	c. They believe that monetary policy will cause real GDP to increase by a larger amount than an increase in government expenditure.
	d. They believe that monetary policy will cause the price level to increase by a larger amount than an increase in government expenditure.

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Why is the constant money-growth-rate rule (CMG) a non-activist monetary policy instead of an activist monetary policy?

	a. Because under CMG policy makers are using their discretion
	b. Because under CMG policy makers are not using their discretion
	c. Because under CMG policy makers have flexibility
	d. Because under CMG the money supply can grow at a rate that is variable

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Why might monetary policy be preferred to fiscal policy in stabilizing the economy?

	a. It does not have a recognition lag and is therefore timely.
	b. It is always effective whether the economy is in a recession or in expansion.
	c. It is flexible and can be speedily implemented.
	d. It follows rules that are times tested to be effective.

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With everything else held constant, when income increases, what happens to the demand for money?

	a. The demand for money decreases.
	b. The demand for money increases.
	c. The quantity demanded of money decreases.
	d. The quantity demanded of money increases.

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