Past Exam 1 - Financial Markets and Economic Fluctuations | ECON 423, Exams of Financial Market

Download Past Exam 1 - Financial Markets and Economic Fluctuations | ECON 423 and more Exams Financial Market in PDF only on Docsity! 1 Econ 423: Questions from Previous Versions of Exam 1 1. Distributive efficiency in financial intermediation requires: (a) nondiscrimination and fairness in the allocation of savings, investments, and loans. (b) minimization of the difference between the rates of return savers receive and the interest rates charged borrowers. (c) portfolios to reflect savers’ relative time horizons and willingness to bear risk, and debt structures to reflect the sources and terms of funding relatively best suited to the needs of investors, government agencies, or deficit households. (d) savings to flow into the most desirable combination of feasible investments. 2. Risk that can be reduced significantly through diversification in a portfolio of financial instruments or other economic assets is called: (a) Knightian uncertainty. (b) specific risk, or unique risk. (c) market risk. (d) interest rate risk. (e) default risk. 3. The budget equation for the federal government can be summarized as (a) ability-to-pay taxes + benefit taxes = total tax revenue. (b) government purchases = government outlays + transfer payments. (c) G = T + change in national debt + change in monetary base. (d) G-T = [S-I] + [M- X]. (e) C + I + G + [X-M] = GDP. 4. According to the Coase theorem, the survival of financial intermediaries hinges on their ability to: (a) increase spread and eliminate defaults. (b) reduce transaction costs and convert savings to investment. (c) diversify portfolios and diversify clients. (d) buy low and sell high. (e) diversify portfolios and eliminate defaults. 5. Diversification will most efficiently reduce stockholders’ portfolio risk if the firms whose stocks are in the portfolio: (a) are merged into huge conglomerates. (b) are similarly affected by business cycles. (c) merge into huge horizontally integrated corporations. (d) have highly negative covariances on their net rates of return. (e) are managed by CEOs incentivised by huge stock options. 6. Suppose the economy begins at full employment and typical economic behavior is describable by a relatively tame hybrid mix of neoclassical and Keynesian theories. Consider likely adjustments by the U.S. Department of the Treasury, the Federal Reserve System, and both domestic and foreign financial institutions and investors. The short run macroeconomic consequences of 20% cuts in all marginal income tax rates are least likely to include increases in: (a) the current account deficits of the U.S. balance of payments. (b) in real interest rates. (c) deficits in the U.S. federal budget. (d) inflationary pressure. (e) the annual growth rates of potential GDP. 7. The idea that excessively high tax rates provide such powerful disincentives for productive effort that greater tax revenues would be generated by lower tax rates is: (a) central to Keynesian analysis. (b) central to classical analysis. (c) known as the Laffer curve. (d) known as the Magee curve. (e) the only reasonable explanation for why tax revenues rose during the 1980s after a 30% cut in tax rates during 1981-1983. 8. It is untrue that a simple version of Irving Fisher’s equation of exchange, which can be written as MV=PQ, is: (a) mathematically a truism [tautology] if velocity is computed as GDP/M. (b) convertible into the quantity theory of money if both real national income and the income velocity of money are assumed constant. (c) consistent with neoclassical macroeconomic theory, but inconsistent with Keynesian monetary theory. (d) valid regardless of whether the economy is experiencing prosperity or a period of economic depression. 2 9. Although John Maynard Keynes viewed money as possessing all of the properties listed below, classical and neoclassical macroeconomic theorists did not believe it reasonable to view money as: (a) a medium of exchange. (b) a store of value. (c) loanable at a positive interest rate. (d) a measure of value or standard unit of account. (e) useful in reducing transaction costs, relative to a barter system. 10. This figure most closely reflects the reasoning that underpins: (a) the Cambridge equation for the demand for money. (b) Keynesian liquidity preference theory. (c) Irving Fisher’s equation of exchange. (d) supply-side theory of monetary theory. 11. If people’s demands for money are based solely on expected transactions, the income velocity of money implicit in this figure is: (a) one. (b) two. (c) 2.5. (d) 3.0 (e) four. 12. A structural budget deficit is based on projections about how revenues and spending would be related, given current tax and government spending policies, and assuming that: (a) the economy would be at full employment levels of output. (b) the Phillips curve is stable. (c) automatic stabilizers are not operational. (d) financial markets operate efficiently. (e) None of the above. 13. Examples of firms that act primarily as financial intermediaries do not include: (a) Prudential Life Insurance Company. (b) Chase Manhattan Bank. (c) The Dreyfus Mutual Fund. (d) Time-Warner. (e) Freddie Mac [the Federal Home Loan Mortgage Corporation]. 14. Consider Milton Friedman’s advocacy of laws to compel macroeconomic policy rules that would [1] pay off the national debt; [2] consistently set the federal budget to balance at full employment; and (3) expand the money supply by a small fixed percentage each year. This set of policies would be: (a) inconsistent with the theories of classically-oriented supply-side economists. (b) most beneficial to financial investors who desire holdings of US bonds because of their minimal risk. (c) impossible if international trade continues to expand. (d) widely applauded by Keynesian economists. (e) logically inconsistent in the long run. 15. According to the strong version of efficient markets theory, pure economic profit that is predictable is most likely to arise from (a) unsought insider information acquired by chance. (b) careful analyses of corporations’ prospects for net revenue. (c) superior forecasting ability. (d) appropriate diversification of a portfolio. (e) stock options when corporate managers manipulate a firm’s balance sheets and income statements. 16. Allocative efficiency in the financial system requires: (a) channeling saving to the society’s most valuable potential economic investments. (b) the availability of an array of assets that accommodates people’s preferences about the structures of their portfolios. (c) minimizing “the spread,” which is the average cost of financial intermediation. (d) the availability of debt instruments that accommodate variations in the expected net cash flows generated across time by different potential economic investments. 5 34. According to the rational expectations hypothesis: (a) inflation fools workers more easily than firms' managers. (b) macroeconomic policies influence Aggregate Supply more when announced in advance so that nobody is surprised. (c) people learn to expect changes in macroeconomic policy, and begin adjusting their decisions even before expected monetary and fiscal policies are enacted. (d) investment decisions are based on "herd instincts." 35. Financial investors will tend to hold more money and fewer securities if they expect increases in the average: (a) price level. (b) interest rate on bonds. (c) prices of bonds. (d) rate of corporate profit. (e) exchange rates for the dollar in international markets. 36. Speculators will tend to go bankrupt if their activities: (a) consistently increase the magnitude and volatility of price fluctuations. (b) fail to generate economic profits. (c) dampen the volatility of prices. (d) enhance economic efficiency. (e) reduce transaction costs to other buyers or sellers. 37. If a severe depression causes a budget deficit that policymakers attempt to “cure” by raising tax rates and cutting government spending, Keynesians argue that: (a) automatic stabilizers may stimulate inflation. (b) the cyclical budget deficit could grow as the depression worsens even if the federal budget would generate a structural surplus. (c) import restrictions may be the only way to save American jobs. (d) price controls may become necessary to ensure stable levels of efficiency wages. 38. Suppose that, anticipating zero inflation, you pay $10,000 today for a bond that will generate $500 in nominal interest at the end of each of the next ten years, and that also pays the $10,000 face value at the end of ten years. However, the “external shock” effects of Wars in Afghanistan and Iraq and several hurricanes cause inflation over the next year to proceed at a rate of precisely 7 percent. Ignoring the possible expectation [Fisher] effect on interest rates and asset prices for the moment, the “real” [in terms of today’s dollars] purchasing power of the $500 you receive in interest at the end of the year would be equivalent to a “real” interest rate of: (a) 2.35 percent. (b) 2 percent. (c) zero. (d) minus 1.65 percent. (e) minus 2 percent. (f) minus 2.35 percent. 39. The U.S. progressive personal income tax structure yields a tendency for: (a) most state and local government budgets to be in balance. (b) federal tax revenue to grow proportionally faster than national income. (c) automatic destabilization. (d) no predictable effect on national income. (e) Presidential discretion over the size of the deficit. 40. The demand curve in the American market for bonds would shift to the right in response to an increase in the: (a) expected inflation rate. (b) liquidity of common stocks. (c) volatility of stock prices. (d) federal budget deficit. (e) value of the Euro relative to the dollar. 41. The theory that information about every conceivable change in any expected income stream anywhere in the world is immediately capitalized is known as: (a) globalized hedging theory. (b) the random walk hypothesis. (c) dynamic capitalism. (d) stochastic macroequilibration. (e) efficient markets theory. (f) irrational exuberance. 42. The supply curve for bonds would shift leftwards and the demand curve would shift rightwards if: (a) the expected inflation rate decreased. (b) tighter regulations were imposed in markets for short-term financial capital. (c) prices for common stock Note that all arrows indicate shifts or higher values. 6 became less volatile. (d) the exchange rate of the dollar increased dramatically. 43. The most likely cause of equilibrium shifting from point a to point b would be: (a) sales of US Treasury bonds by the Federal Reserve System. (b) a boom in the business cycle. (c) an increase in the expected rate of inflation. (d) an unexpectedly large surplus in the U.S. federal government’s budget. 44. When yield curves are steeply upward-sloping, (a) long-term interest rates are above short-term interest rates. (b) short-term interest rates are above long-term interest rates. (c) short-term interest rates are about the same as long-term interest rates. (d) medium-term interest rates are above both short-term and long-term interest rates. (e) medium-term interest rates are below both short-term and long-term interest rates. 45. The share of US national debt likely to impose relatively the heaviest potential burden on future generations of Americans is the portion: (a) in the portfolios of the Federal Reserve System and the Social Security Trust Fund. (b) held by foreigners. (c) transformed into monetary base according to the equation G – T = ∆B + ∆MB. (d) that reflects budget deficits to fund government investments in infrastructure. (e) devoted to interest payments on pre-existing national debt. 46. Supremely confident after winning $500 dollars playing poker in a casino, Chris put it all on number three at the roulette wheel. This action is known by behavioral economists as the: (a) free money effect. (b) risk neutral effect. (c) house-money effect. (d) risk seeking effect. (e) stupid money effect. 47. A foundation for both President Ronald Reagan’s and President George W. Bush’s tax cuts is the notion that excessively high tax rates reduce taxed behavior (via, e.g., tax evasion and avoidance, and less production) so much that tax revenue may fall. This idea is known as the: (a) Phillips curve. (b) Laffer curve. (c) efficient markets theory. (d) liquidity preference theorem. (e) Fisher effect. 48. People who seek monopoly profits by buying the assets of successful monopolists will probably: (a) receive only normal returns on the investment. (b) realize capitalized profits. (c) achieve monopoly economic profits. (d) thwart competition from innovating procedures of substitute goods. 49. When the likelihood of a certain event cannot be predicted with any reasonable degree of confidence, business decisionmakers are confronted by: (a) random selection. (b)Knightian uncertainty. (c) stochastic probability. (d) moral hazards. (e) actuarial risk. 7 50. The duration of a portfolio is: (a) the weighted average of the durations of the individual securities, with the weights reflecting the proportion of the portfolio invested in each. (b) the average length of time that was required for the total value of the portfolio to reach its current level. (c) a measure of how effectively the portfolio manager has managed to hedge against interest rate risk. (d) a weighted estimate of the average probabilities of default for the securities in the portfolio. (e) a measure of the volatility of the value of the portfolio across a complete business cycle, as measured by the National Bureau of Economic Research. 51. The most expansionary method of financing government outlays is: (a) borrowing within the country. (b) borrowing abroad. (c) taxation. (d) confiscation. (e) creating additional monetary base. 52. Financial intermediaries can substantially reduce transaction costs per dollar of transactions primarily because their relatively large size enables them to exploit: (a) economies of scope and subdivisions of labor. (b) their market power. (c) economies of scale. (d) poorly informed consumers. (e) their comparative disadvantages. 53. The basic asymmetric information problem between saver-lenders and borrower-spenders is mitigated in a mixed-capitalist economy primarily by: (a) financial intermediaries. (b) government regulations that reduce adverse selection and moral hazard. (c) collective bargaining between private principals and their individual agents. (d) frontier justice and self-help remedies. (e) the legal system. 54. The initial declines in nominal interest rates when unexpectedly expansionary monetary policies are introduced are examples of the: (a) Friedman effect. (b) liquidity (Keynes) effect. (c) financial income effect. (d) capitalization effect. (e) expected inflation (Fisher) effect. 55. If the federal government’s outlays were $3500 billion, while taxes it collected were $3600 billion, then there would necessarily be a $100 billion decrease in the: (a) U.S. international trade surplus. (b) monetary base. (c) privately-held public debt. (d) sum of the monetary base and privately-held public debt. (e) U.S. international payments deficit. 56. You own an asset that yielded a nominal return of 9% last year. If the inflation rate was 4%, your real return on this asset was closest to: (a) 5.2%. (b) 6.5%. (c) 4.64%. (d) 3.9%. (e) 6.1%. (Hint: The cross-partial terms matter on this question.) 57. The absorption equation [written [G-T] =[S – I] + [M – X]] is least reasonably interpreted as potentially implying that: (a) crowding out can reach across international borders. (b) U.S. government budget deficits tend to induce larger surpluses in the capital account of the U.S. balance of payments. (c) budget surpluses might impose upward pressure on the exchange rate of the dollar in a flexible exchange rate system. (d) foreign investors are more likely to buy domestic assets if the federal budget is in deficit. (e) budget deficits are likely to reduce people’s incentives to save while increasing the incentives for business firms to invest in economic capital. 58. Crowding out is most likely to be a significant problem when the economy is: (a) characterized by a huge structural budget deficit. (b) on the left side of a Laffer curve. (c) at full employment but the federal government runs a huge budget deficit. (d) in the midst of a deep depression. (e) suffering from severe fiscal drag. 59. The greater likelihood that people will ask for a higher price for an asset that they already own than they would be willing to pay for the same asset if they did not own it is the foundation for the: (a) endowment effect. (b) buyer’s remorse effect. (c) quid-pro-quo effect. (d) winner’s curse effect. (e) tournament effect. 10 82. Classical macroeconomic theory neither assumes nor concludes that, in a macroeconomic equilibrium: (a) the willingness of firms to operate depends critically on expectations that there is a ready market for their products. (b) a society’s production possibilities frontier is determined almost solely by the state of technology and available resources. (c) people can find a job almost immediately if they are willing to accept a wage commensurate with their productivity. (d) the nominal quantity of money demanded will be precisely proportional to the price level. 83. Upward pressure on interest rates in bond markets in the United States would be generated by increases in: (a) the outsourcing of jobs to foreign countries by U.S. corporations. (b) business expectations that the United States is sliding into a recession. (c) deficits in the current account of the US balance of payments accounts. (d) anxiety among baby-boomer about the adequacy of Social Security for retirement income. (e) surpluses in the capital account of the US balance of payments accounts. (f) federal government budget deficits. 84. People being more likely to ask for a higher price for an asset that they already own than they would be willing to pay for the same asset if they did not own it is known as the: (a) ownership effect. (b) winner’s curse effect. (c) endowment effect. (d) tournament effect. (e) buyer’s remorse effect. (f) status-quo effect. (g) halo effect. 85. Pre-1930s versions of neoclassical macro theory and Keynesian theory per the General Theory [1936] differ least about the: (a) importance of liquidity in determining optimal asset portfolios. (b) flexibility of wages, prices, and interest rates. (c) possibility that unemployment may be involuntary in the short run. (d) validity of the equation of exchange [MV=PQ] and the quantity theory of money in long run equilibrium. (e) opportunity cost of holding money. 86. Financial investors tend to be most reluctant to sell stock if: (a) rumors begin circulating that the top manager has accepted a job with a different firm. (b) its current price is significantly less than the price at which they purchased it. (c) they acquire insider information that a firm is experiencing unexpectedly low revenues or unexpectedly high costs. (d) the stock is primarily traded in deep markets. (e) the current price of the stock reflects a significant recent increase. 87. The idea that excessively high tax rates may hinder the attainment of potential national income and output is consistent with the concepts of: (a) fiscal drag and the Laffer curve. (b) crowding out and Phillips curves. (c) outsourcing and disintermediation. (d) capital deterioration and macroeconomic stagflation. 88. Inflation risk is most likely to eventually reduce the real wealth of financial investors when: (a) unstable governments issue vast quantities of treasury bonds denominated in the country’s own currency. (b) a severe wave of pessimism causes potential investors in real economic capital to panic. (c) shocks to an economy shift the Aggregate Supply curve to the right. (d) nominal interest rates plummet because of declines in the rate of expected inflation. (e) less developed countries are opened up to globalization. 89. Efficient markets theories suggest that small private investors who buy individual stocks based on their own hunches and analyses tend to be unsuccessful. NOT among reasons why these private investors are usually below the market line in this graph would be: (a) lack of information. (b) transaction costs. (c) inadequate diversification. (d) excessive laws and regulations in financial markets. 11 90. One lone small private investor has managed to invest at point a, above the market line. Efficient markets theories suggest that this investor is likely to be: (a) extremely gifted at digesting market information. (b) an Ivy League MBA graduate. (c) in accidental possession of insider information. (d) far more willing to bear risk than other investors. (e) the manager of an indexed mutual fund. 91. The interest rate will probably rise if: (a) households increase the loanable funds available for business investment by deciding to delay consumption. (b) investors in economic capital become more optimistic about the profitability of investment. (c) households decide that times are secure and decrease the liquidity of their assets. (d) households decide to save more because of retirement plans. (e) the stock market falls because speculators fear a depression. 92. If top corporate executives adopt policies that maximize their personal wealth and incomes, the most likely result is that the: (a) corporation will attempt to maximize total revenue. (b) market value of the shares of stockholders will be maximized. (c) firm’s value for shareholders will not be maximized because of principal-agent problems. (d) stockholders will experience maximum economic profits. (e) the common stock of the corporation will outperform the Dow-Jones Index. 93. The dividend appreciation model of asset pricing is least compatible with: (a) efficient markets theory. (b) classical or neoclassical microeconomics. (c) the “Keynesian beauty contest.” (d) rational expectations. 94. A graph showing a positive relationship between the interest rate and the expected inflation rate would illustrate the: (a) Cambridge equation. (b) Friedman’s liquidity effect. (c) Fisher effect. (d) Laffer curve. (e) quantity theory of money. 95. When one party to an on-going transaction has incentives to engage in activities detrimental to the other party after an agreement has been reached, there is a problem of: (a) moral hazard. (b) split incentives. (c) ex ante shirking. (d) pre-contractual opportunism. (e) adverse selection. 96. Productive (technical) efficiency in the financial system occurs when: (a) differences between loan costs to borrowers and interest income to ultimate lenders are minimized. (b) financial services to borrowers are governmentally subsidized at low interest rates. (c) government regulations eliminate risky loans. (d) numerous artificially differentiated financial intermediaries provide essentially identical services. (e) interest ceilings are established by the central authority. 97. When a fledgling corporation sells common stock for the first time, the issue is: (a) a big chunk of money. (b) an initial public offering. (c) sold through a secondary market. (d) an over-the-counter exchange. 12 98. In the long run, a mature and successful corporation’s cost of capital tends to be the highest if it relies most heavily on funds secured by: (a) borrowing short-term from banks based on the general credit-worthiness of the firm. (b) issuing bonds backed by the general credit-worthiness of the firm. (c) issuing preferred stock that can be converted into common stock. (d) posting collateral when borrowing from banks. (e) issuing new common stock. (f) issuing bonds that can be converted into common stock. 99. If land that yields net rents of $100,000 annually can be bought for $800,000 today, it will be a break-even investment if the market interest rate is: (a) 6%. (b) 10%. (c) 12.5%. (d) 15%. (e) 8%. 100. Efficient markets theory concludes that prices for individual stocks fluctuate primarily because of changes in the: (a) level of national income. (b) statistical errors in technical stock analysis. (c) volume of program trading in secondary markets. (d) information available to investors. (e) tax laws. 101. The demand curve for bonds would shift rightward if there were: (a) a decrease in the expected inflation rate. (b) a decline in the volatility of stocks. (c) an increase in the average liquidity of stock prices. (d) an increase in the expected inflation rate. (e) an increase in the exchange rate. 102. An increase in the equilibrium interest rate from il to i2 would be a consequence of: (a) an increase in the price of bonds. (b) a business cycle boom. (c) an increase in the expected inflation rate. (d) a decrease in the expected inflation rate. 103. Owners of corporate stock receive pure economic profit only to the extent that the rates of return realized from owning the stock exceed the: (a) interest rate that would have been generated by other investments entailing similar risks. (b) immediate gratification available by not delaying consumption. (c) funds saved by taking advantage of tax loopholes. (d) discount rate offered by exchange rate depreciation. (e) rate of arbitrage available in real estate investments. 104. Situations in which a party issuing a debt instrument is unable to make its interest payments are called: (a) market failures. (b) insolvencies. (c) devaluations. (d) defaults. (e) illiquidities. 15 124. The nominal interest rate roughly equals the real interest rate plus the expected rate of inflation according to the: (a) paradox of value. (b) Fisher equation. (c) Gordon equation. (d) theory of liquidity preference. (e) Solow residual. 125. Financial intermediation is not among the direct activities of: (a) commercial banks. (b) credit unions. (c) insurance companies. (d) central banks [e.g., the Fed]. (e) investment bankers. (f) finance companies. (f) pension funds. (g) venture capital firms. (h) hedge funds. (i) securities exchange markets. (j) over-the-counter markets. (k) primary markets. (l) secondary markets. 126. Technical analysis based on past patterns to try to predict future prices for financial securities is, according to the theory of efficient markets: (a) roughly as accurate as trying to foresee the future based on tea leaves or palm reading. (b) a demanding discipline requiring very sophisticated statistical techniques. (c) an efficient way to generate useful strategies for investments. (d) consistent with the random walk hypothesis. 127. The Federal Reserve System tool that is most flexible, precise, easily administered, and easily reversed to offset mistakes, was: (a) the only tool initially authorized when the Federal Reserve Act was passed in 1913. (b) discovered by accident when the Fed sought sources of funding for higher operating budgets than those passed by the Congress in the 1920s. (c) authorized by the Glass-Steagall Act during the Great Depression. (d) transferred from the Comptroller of the Currency and the 50 state banking agencies following problems in the 1970s. 128. The efficient markets hypothesis is most consistent with: (a) the theory of rational expectations. (b) Keynesian beauty contests. (c) research findings in behavioral finance and behavioral economics. (d) psychological explanations of business cycles. 129. The events of September 11, 2001, caused the Fed to almost immediately: (a) raise margin requirements to squelch excessive stock market speculation. (b) expand discount lending and aggressively purchase U.S. Treasury bonds through open market operations. (c) put caps on transfers of funds across international borders to reduce money laundering by suspected terrorist groups. (d) seek loans from foreign central banks to stabilize the exchange rate of the dollar. (e) facilitate funding of the federal budget deficit by selling newly-issued U.S. Treasury bonds. 130. If borrowers who are planning relatively risky investment projects seek bank loans in higher proportion than borrowers whose planned investments are relatively far less risky, banks are said to face the problem of: (a) adverse credit risk. (b) adverse selection. (c) moral hazard. (d) lemon borrowers. (e) high roller bias. 131. Between 1970 and 2005, major American corporations: (a) repurchased such large amounts of shares of their own stock that stock issues were a negative net source of corporate finance. (b) took advantage of an especially strong stock market to issue record numbers of new shares. (c) generally abandoned corporate bond and commercial paper markets to concentrate on new stock issues. (d) were unable to compete with most foreign firms for new financing. 132. If people become optimistic about living longer and consequently save more for their retirement years, the decline in interest rates will tend to: (a) raise capital costs for business firms. (b) decrease investment expenditures. (c) discourage buying on installment plans. (d) stimulate economic growth. 16 133. Gross private domestic investment in the GDP accounts would NOT include: (a) growth of manufacturers' inventories. (b) purchases of new shares of Google stock. (c) new machinery bought by firms. (d) new residential housing and production facilities. (e) a new Toyota factory built in California. 134. Contemporary Anachronism, Inc. issues one million shares of stock at its initial public offering. This is an example of: (a) underwriting. (b) a primary market. (c) a secondary market. (d) an over- the-counter [OTC] market. (e) a securities exchange. 135. If the Federal Reserve System buys more bonds than it sells, the money supply grows because of increases in: (a) our national debt and the indebtedness of the U.S. Treasury. (b) total bank reserves. (c) the actual money multiplier. (d) the proportion of stock-and-bond portfolios that financial investors can legally finance with credit. (e) the potential money multiplier. 136. Market capitalization is equal to: (a) assets minus liabilities. (b) the price of a company’s outstanding stock times the number of shares outstanding. (c) the sum of the value of all economic capital owned by a company. (d) the par value of stock issued in an IPO by a new company times that number of shares the company sells. 137. When maximizing firm profit conflicts with the self-interests of business managers, this can lead to: (a) negative economic profit. (b) negative accounting profit. (c) maximization of revenues. (d) principal/agent problems. 138. A decrease in the rate of monetary growth will drive interest rates up if the: (a) economy is in a perfect liquidity trap. (b) liquidity effect exceeds the sum of the income effect, price level effect, and the expected inflation [or deflation] effect. (c) price level declines because monetary growth triggers cost-push inflation. 139. Differences between the interest rates on U.S. Treasury bonds and other financial securities with similar maturities are primarily a reflection of the: (a) risk premium. (d) universal preference for liquidity. (b) yield premium. (c) differential impact of the U.S. tax code. 140. Long-term unsecured bonds backed only by the general creditworthiness of the corporation issuing them are: (a) junk bonds. (b) callable bonds. (c) convertible bonds. (d) debentures. (e) fallen angels. 141. Capitalization is the process whereby wealth is created and then recognized when: (a) financial institutions transform households’ saving into economic investment. (b) asset prices are adjusted by market forces to reflect the present values of the assets’ expected income streams. (c) corporations issue stocks or bonds to secure funding. (d) stocks are converted into flows. (e) commercial banks make loans, thereby expanding the money supply. 142. The term structure of interest rates is shown in a: (a) yield curve. (b) velocity curve. (c) risk-reward curve. (d) realization curve. (e) liquidity curve. 143. Organized exchanges and over-the-counter [OTC] exchanges are important institutions in the: (a) secondary market for commercial paper. (b) primary market for bonds (c) secondary market for capital securities. (d) primary market for capital securities. 144. The type of mutual fund with the simplest portfolio to manage is a/an: (a) growth fund. (b) balanced fund. (c) global equity fund. (d) index fund. (e) outreach fund. (f) iniquity fund. 17 145. When decision makers choose not to pursue further information because the expected reward for searching for it does not exceed its expected cost, the result is: (a) intentional ignorance. (b) total ignorance. (c) deceptive ignorance. (d) rational ignorance. (e) asymmetric information. 146. A common logical error is for people who buy lottery tickets to view their probability of winning as: (a) higher if they pick numbers themselves than if the numbers are assigned randomly by a machine. (b) lower if the lottery prize has grown significantly because it has not been won in several weeks. (c) the same whether they buy a ticket or not. (d) higher for larger multi-state lotteries than for smaller single in-state lotteries. 147. If the theory that money is neutral in the long run is correct, then: (a) exchange rates are unaffected by the relative growths of the money supplies of different countries. (b) interest rates are the only real economic variable affected by fiscal policy. (c) money illusion may be more significant in the long run than in the short run. (d) changes in the money supply result in proportional increases in the price level, but ultimately do not affect “real” economic variables. 148. When analyzing financial markets, broad categories of risk do not include: (a) interest rate risk. (b) inflationary risk. (c) exchange rate risk. (d) speculative risk. (e) default risk. 149. Portfolio structures based on individual investors’ assessments of consensus views about alternative investments conform to the model known as the: (a) efficient markets model. (b) Keynesian beauty contest. (c) value investing approach. (d) theory of market timing. (e) rational expectations theory. 150. Fractional reserve banking is the system that (a) allows banks not to insure their deposits. (b) allows banks not to join the Federal Reserve System. (c) limits banks' activities from crossing state lines. (d) allows banks to keep smaller reserves than their deposits. 151. The proportion that you would lose if you bought an asset and immediately sold it is a measure (although negatively related) of the asset’s (a) net present value. (b) liquidity. (c) par value. (d) abandonment cost. (e) transactions ratio. 152. The present value of $100 per year forever at an interest rate of 5% per year is: (a) infinite. (b) $500. (c) $909.10. (d) $2000. 153. Point r* in the figure below represents the return approximated by: (a) a perpetuity. (b) the average for all economic capital. (c) long term U.S. Treasury bonds. (d) the average for all financial assets. (e) a very liquid riskless short-term asset such as a T-bill that will mature tomorrow. 154. The variable on the x-axis that would be least consistent with standard investment theories would be: (a) transaction costs. (b) time to maturity. (c) risk. (d) diversification. (e) tax rates on returns. 155. If time to maturity is on the horizontal axis of this function, this curve is know as a/an: (a) yield curve. (b) inverted function. (c) annuity function. (d) risk / reward curve. (e) payoff curve. 20 175. The major reason for the federal government to finance its outlays by collecting taxes instead of merely printing money is to: (a) facilitate increases in the size and scope of government. (b) control inflation by limiting spending by private individuals and firms. (c) provide liquidity to the Federal Reserve System and financial institutions. (d) hold down the rate of unemployment. (e) protect American firms that compete with low-cost imports and to firms that export goods to foreigners. 176. A decrease in marginal federal tax rates would likely have the effect of _____ the demand for municipal bonds, and _____ the demand for U.S. Treasury bonds. (a) increasing; increasing (b) increasing; decreasing (c) decreasing; increasing (d) decreasing; decreasing 177. Financial investors who have recently lost significant amounts of wealth due to a drop in the values of their stock portfolios frequently err by tending to: (a) erratically shift from bonds to stocks, and then back again, thereby incurring excessive transaction costs. (b) become overly risk averse because of the “snake-bite” effect, or excessively willing to take risk because of the “break- even” effect. (c) focus excessively on low variable costs, while ignoring high sunk costs. (d) over- value the advice given by friends or acquaintances who have invested more successfully. 178. The process whereby reasonably predictable flows of income are converted into wealth is called: (a) capitalization. (b) profiteering. (c) securitization. (c) hedging. (d) rent-seeking. (e) convertibility. 179. According to the strong version of the efficient market hypothesis, the current price of a financial security: (a) is the discounted net present value of any riskless future interest payments. (b) fully reflects an optimal forecast based on all available relevant information. (c) is determined by the analysis of the highest successful bidder. (d) equals face value divided by the legally specified rate of return. 180. Targeting for a hostile takeover is common when a corporation has assets that are worth: (a) more than the total value of the corporation’s stock. (b) more than the total value of the corporation’s debt. (c) less than the total value of the corporation’s stock. (d) less than the total value of the corporation’s debt. 181. When financial investors in Enron suffered enormous losses during 2001-2002 because of deceptive accounting practices and insider trading, they were the victims of a problem known as: (a) moral hazard. (b) adverse selection. (c) stock market risk. (d) bureaucratic gambling. 182. American workers tend to be more productive than their counterparts in Asia in part because they have: (a) less capital to work with. (b) more capital to work with. (c) lower marginal products. (d) been instilled with a stronger work ethic. (e) access to better sports programming, which promotes teamwork. 183. If the market interest rate is 10 percent per year and government analysts discount the future benefits from a public project that generates no positive external social benefits by only 5 percent per year, for this project there will be an overstatement for the project of the: (a) present value of the future benefits. (b) current value of immediate benefits. (c) average costs. (d) marginal costs. (e) true costs of the project. 184. If people who do not pay for information take advantage of the information that other people have paid to acquire, there is a problem called the: (a) easy rider problem. (b) principal-agent problem. (c) sneaky-agent problem. (d) free-rider problem. (e) asymmetric reaction problem. 21 185. John Kenneth Galbraith’s bezzle concept is least consistent with a theory that: (a) prosperity fosters a political climate that favors deregulation. (b) companies have greater incentives to commit fraud during periods of economic downturn. (c) people monitor economic performance less closely in good times than in bad times. (d) economic downturns cause citizens to try to determine who is at fault. 186. If you paid a friend’s entrance fee for a poker tournament and agreed to split any winnings and then your friend played sloppily because your money is at risk, not his, then you have suffered because of: (a) moral hazard. (b) asymmetric information. (c) creative response. (d) adverse selection. 187. Important types of U.S. financial intermediaries include: (a) oil companies. (b) the U.S. Treasury. (c) the local telephone company. (d) insurance companies. (e) steel companies. 188. Corporate boards that issue stock options in attempts to induce executives to be diligent may not ultimately cause the executives to maximize shareholder value because such options can: (a) be sold only to current stockholders, but not outsiders. (b) create incentives for short-run misstatements of costs, revenues, assets, and liabilities. (c) eventually exceed strike prices, stimulating volatility in the price of the underlying stock. (d) always be exercised at the executives’ sole discretion, thereby diluting stockholder equity. (e) create overfunding of the executives’ pension plans. 189. A French speculator who bought real estate in Hawaii for $1 million when the euro was trading at 1.1€ per dollar and who sold the real estate for $1.1 million after the euro to dollar rate changed to 1.0€ per dollar would have: (a) gained from bearing exchange rate risk. (b) broken even in purchasing power expressed in euros. (c) lost approximately 2% on the investment. (d) been better off had the real estate been purchased originally with dollars. (e) lost even more by buying land in France. 190. Diversification is effective in reducing the riskiness of portfolios of financial assets issued by specific firms, but it is relatively ineffective as a mechanism for reducing market risk– e.g. the bursting of a stock market bubble. This suggests that market risk is closely related to the concept of: (a) illiquidity. (b) negative covariance. (c) entrepreneurial risk. (d) asymmetric information. (e) Knightian uncertainty. 191. The economy-wide productive (technical) efficiency of financial intermediation increases when there are decreases in: (a) national debt. (b) the spread. (c) interest rates. (d) rates of return on investment. 192. Relative to private savers or non-financial business borrowers, financial intermediaries are able to substantially lower transaction costs by exploiting: (a) economies of scale. (b) political connections. (c) good reputation. (d) prominent locations. 193. A perpetuity is a security that pays: (a) equal cash flows at equal intervals of time forever. (b) equal cash flows at equal intervals of time for a specific period. (c) unequal cash flows at equal intervals of time forever. (d) specific amount at a specific point in time. 194. It is untrue of corporate debt and equity that: (a) both can be long-term financial instruments. (b) both involve a claim on the issuer’s income. (c) both enable a corporation to raise funds. (d) a lower debt/equity ratio increases both riskiness and the average rates of return [or interest rates] for both stockholders and lenders. (e) “greater leverage” entails a higher debt/equity ratio. 22 195. The liquidity premium theory does not explain why: (a) interest rates on bonds with different maturities move together. (b) yield curves are usually positively sloped. (c) yield curves have steep slopes when short-term interest rates are unusually low. (d) securities with greater risk generate higher rates of return over the long run. 196. Moral hazard on the part of a firm’s executives will be most problematic to buyers of the firm’s (a) products. (b) preferred stock. (c) debentures. (d) collateralized loans. (e) common stock. 197. An advantage of the recovery (payback) rule for investment decisions is that: (a) flows of funds expected only after the payback period are ignored. (b) any additional outlays that might be required after the payback period are ignored. (c) dollar for dollar, expected receivables and outlays within the payback period are equally weighted, regardless of their precise timing. (d) the time value of money is ignored. (e) the concept is far easier for dimwitted managers to understand than is net present value calculation. 198. Transaction costs in managing a portfolio of assets are minimized by a strategy of: (a) technical analysis. (b) inertia trading. (c) day trading. (d) buy-and-hold. (e) variance minimization. (f) covariant offsets. 199. In symbols, the absorption equation is written: (a) MV = PQ. (b) G – T = [S – I] + [X – M]. (c) G = T + ∆B + ∆MB. (d) GDP – CCA – IBT = GNI. (e) C + I + G + X – M = C + S + T. 200. To minimize the interest and default risks associated with given expected rates of return, relatively unsophisticated individual investors can most reasonably and easily invest in: (a) common stock. (b) diversified mutual funds. (c) corporate bonds. (d) long term municipal bonds. (e) real estate. 201. If an investment project (normal project) has an internal rate of return [IRR] equal to the cost of capital, the net present value [NPV] for that project is: (a) positive. (b) negative. (c) zero. (d) unable to be determined from this information. 202. If the rate of return you calculate on an asset exceeds the interest rate: (a) competition for profit should make its price fall quickly. (b) its price is less than its present value . (b) the market is in long term equilibrium. (c) you should avoid buying the asset. (d) the price should fall quickly. 203. If the annual interest rate is 12% and a rental house can be expected to rent perpetually for $1,000 monthly, rough calculation suggests that the house has a present value of: (a) $240,000. (b) $144,000. (c) $100,000. (d) $72,000. (e) $12,000.\ 204. Interest rates will probably fall if “baby-boomer” households decide to: (a) consume more now, shrinking the loanable funds available for business investments. (b) buy new homes instead of restoring their old ones. (c) increase the liquidity of their assets because they expect a stock market crash. (d) save more towards their retirements now because of fear that the Social Security trust fund will soon go broke. 205. The idea that innovation is a major source of economic profit is central to the ideas of: (a) Joseph A. Schumpeter. (b) Karl Marx. (c) Frank Knight. (d) Horatio Alger. (e) John Bates Clark. 206. An increase in the demand for loanable funds is reflected in an increase in the: (a) term structure of interest rates. (b) demand for money. (c) supply of bonds. (d) supply of money. (e) demand for bonds. 25 227. Money can comprehensively (but fuzzily) be characterized as: (a) any [sets of] assets that are widely accepted in payment for goods and services or in the repayment of debt. (b) a unique and accurate cardinal measure of income and wealth. (c) riskless repositories of spending power. (d) bills of exchange and trade. (e) an unrecognized liability of the federal government. (f) all of the above. 228. Equilibrium interest rates vary among different financial instruments because of differences in all of the following EXCEPT: (a) default risk. (b) term to maturity. (c) liquidity. (d) the solvency of the lender. (e) tax treatments on the net returns on bonds. (f) exchange rate risk. 229. In recent decades, the most important sources of external funds used to finance businesses have been: (a) investment firms. (a) IPOs and issues of common stocks. (a) debt and equity securities. (d) bank loans. (e) venture capitalists. (f) retained earnings. 230. NOT among the reasons that financial intermediaries can, more efficiently than households, channel the funds from households that save to firms that invest or households that borrow are (a) more powerful incentives to maximize wealth. (b) economies of scale that facilitate screening to reduce borrowing by parties that pose relatively high default risk (c) lower transaction costs. (d) superior information at lower cost per dollar transaction. 231. John Kenneth Galbraith’s bezzle concept would apply least well to: (a) exaggerated official statistics on the USSR’s economic growth during 1929-1985. (b) organized criminals’ ascendance in the Russian economy following the breakup of the USSR into 15 independent republics in the early 1990s. [Criminals had operated in a “market system” of sorts before 1991.] (c) the Annual Reports of Enron and WorldCom during 1990-2002. (d) widespread corporate shenanigans prior to establishment of the Securities and Exchange Commission [SEC] in 1933. (e) high pressure sales of corporate stocks by operators and employees of “boiler rooms.” 232. Speculative bubbles and financial panics are most consistent with: (a) Keynesian theory. (b) rational expectations. (c) classical economics. (d) the weak version of efficient markets theory. (e) the semi-strong version of efficient markets theory. (f) the strong version of efficient markets theory. 233. The efficient markets hypothesis suggests that the Federal Reserve System is least likely to affect financial markets if it: (a) changes the reserve requirement ratio facing banks. (b) buys US Treasury bonds. (c) changes the margin requirement. (d) announces that, in the Fed’s view, the stock market is suffering a renewed case of irrational exuberance. (e) changes the discount rate. 234. Of the four effects on interest rates from an increase in the money supply, the one that works in the opposite direction of the other three is the: (a) liquidity effect. (b) income effect. (c) price level effect. (d) expected inflation effect. 235. Politicians in a democratic society may be shortsighted because of their desires to win reelection. Thus, the political process may: (a) be strongly biased towards continually creating new laws and regulations that impede efficiency in the financial sector. (b) impart a deflationary bias to monetary policy. (c) impart a inflationary bias to monetary policy by generating political business cycles, in which just before elections, lower unemployment and interest rates are pursued through expansionary policies. (d) be strongly consistently biased to enact deregulation that creates instability in the financial sector. 26 236. Successful financial intermediaries have higher earnings on their investments than would loan individual households because they are better equipped than individuals to screen out good from bad risks, thereby reducing losses due to (a) moral hazard. (b) adverse selection. (c) bad luck. (d) financial panics. 237. The Chair and the Members of the Fed’s Board of Governors are: (a) chosen by a vote of the 12 Federal Reserve District Bank presidents. (b) appointed by the newly-elected President of the United States in years divisible by 4, as are cabinet positions. (c) appointed by the President and confirmed by the US Senate as incumbent Governors resign or their terms of office lapse. (d) not legally allowed to serve more than five 14-year terms. 238. The designers of the Federal Reserve Act meant to create a central bank characterized by its: (a) system of checks and balances, insulation from political pressure, and decentralization of power. (b) strong concentration of power in the hands of a few men. (c) reliance solely on its power to [1] conduct open market operations, [2] clear federal debt, and [3] act as a lender-of-last-resort. (d) responsiveness to the electorate. 239. A discount loan by the Fed to a bank causes reserves in the banking system to: (a) increase, while the monetary base decreases. (b) decrease, and the monetary base also decreases. (c) decrease, resulting in an increase in the monetary base. (d) increase, and the monetary base will also increase. 240. A lender who charges 12% interest anticipating a real return of roughly 6% expects the price level to: (a) decline by 6%. (b) increase by 6%. (c) increase by 18%. (d) fall by 18%. 241. The primary difference between the equilibrium interest rate for US Treasury bonds and for Aaa Corporate bonds is the: (a) higher bond rating for blue chip bonds. (b) risk premium. (c) greater interest rate risk for Aaa bonds. (d) applicability of calculation using the inverted yield curve formula. (e) inflation risk inherent in holding government bonds. 242. The spread between interest rates on low-quality corporate bonds and U.S. Treasury bonds (a) widened significantly during the Great Depression. (b) widened significantly during the 1980s and 1990s. (c) narrowed significantly during the Great Depression. (d) was reversed during the Great Depression. (e) was reversed between 1980 and 1990. 243. Abuses of asymmetric information can lead to a widespread collapse of financial intermediaries that financial analysts refer to as a: (a) financial collapse. (b) financial panic. (c) financial disintermediation. (d) bank holiday. (e) domino collapse. 244. The idea that using money as a medium of exchange promotes efficiency is based on the fact that money: (a) increases transactions costs. (b) is inexpensive to produce. (c) generates seignorage profits to the Treasury at lower costs than is true of taxation. (d) is a reasonably accurate measure of value. (e) facilitates divisions of labor and specialization and trade according to comparative advantage. 245. That the self-interests of professional corporate managers may conflict with maximizing shareholder value is an example of: (a) the negative economic profit syndrome. (b) why profit- sharing plans are necessary. (c) maximizing revenue instead of profit. (d) principal/agent problems. (e) the bezzle. 27 246. Which of the following is NOT an example of the principal/agent problem? (a) CEO Kenneth Lay sells his Enron stock options while touting Enron as incredibly undervalued. (b) A used car salesman turns back his own SUV’s odometer to defraud a naive buyer. (c) A rookie NBA guard with a lucrative guaranteed contract parties all night before a crucial game. (d) Worldcoms’s CEO muscles a bank into granting an enormous uncollateralized personal loan because he steers a lot of business to the bank. (e) An A+ student who agreed to write your term paper did a terrible job after you paid her in advance. 247. Starting at D1 and S1, an improvement in investors' optimism could explain a movement from an initial: (a) point of d to point a. (b) point of a to point b. (c) point of d to point b. (d) point of a to point c. 248. Starting at D1 and S1, increased consumption (out of current income) would explain a movement from : (a) point a to point b. (b) point c to point d. (c) point c to point b. (d) point d to point a. (e) point a to point d. 249. A decrease in investors' optimism would result in a movement from an initial point of c to point: (a) a. (b) b. (c) c. (d) d. 250. Banks can increase the money supply by: (a) raising the excess reserve ratio. (b) debasing the supply of currency. (c) lending excess reserves as demand-deposit money. (d) selling Treasury bills directly to the public. (e) printing money. (f) behaving in accord with Gresham’s law. 251. Risk affects liquidity in the sense that: (a) during uncertain times [e.g., when prospects of a depression loom], many people adjust their portfolios to hold greater proportions of relatively liquid assets, including money. (b) quick sales of an asset may result in substantial losses. (c) people avoid selling financial assets if the future is risky. (d) risky securities are less liquid than real estate. 252. Corporations may obtain internal financing by: (a) borrowing from stockholders. (b) reinvesting corporate income instead of giving it out as dividends to stockholders. (c) selling more preferred stock. (d) borrowing from banks instead of selling stock. (e) All of the above. 253. The notion that giant corporations are plagued by what we now term “principal-agent problems” was originally described by. (a) A.A. Berle and Gardiner Means in 1930s discussions of “separation of ownership from control.” (b) Karl Marx in Das Kapital. (c) Plato in The Republic as an example of why economic decisions are best made by a philosopher-king. (d) Thorstein Veblen in the 1890s as “class conflicts.” (e) John Kenneth Galbraith in his 1950s discussion of “technostructure.” 254. The early Quantity Theory of Money concluded that, in equilibrium, the price level is: (a) negatively related to the money supply. (b) independent of movements in the money supply. (c) exactly proportional to the money supply. (d) higher when the economy experiences excess capacity. (e) positively related to the level of national output. 255. When the owner of a resource is paid in excess of the minimum required to supply given amounts of the resource, the owner is the beneficiary of: (a) economic rents. (b) wage premiums. (c) excess profits. (d) surplus values. (e) capitalization. 30 281. Efficient market theories yield the result that (a) present values equal prices, and rates of return, adjusted for risk, are consistent with market interest rates. (b) most investors accurately attempt to out-guess other investors in predicting the consequences of economic events. (c) efficient investors are especially astute in judging how most other investors will react to changing conditions. (d) risk and maturity structures are irrelevant in estimating the proper rates of return for specific investments. 282. Compound interest refers to: (a) earning interest on the principal. (b) earning interest on previously earned interest. (c) investing for multiple years. (d) recursive investment planning. 283. Principal-agent problems associated with the separation of ownership from the control of a corporation are most likely to cause problems for attaining: (a) maximum present value of shareholders’ equity. (b) distributive efficiency between managers and stockholders. (c) allocative efficiency within production divisions of major corporations. (d) global efficiency for firms in highly competitive industries. 284. Although the Federal Open Market Committee does not have formal authority to set _____ and the _____, because the FRS District Banks legally set these, the FOMC does possess the authority in practice. (a) margin requirements; discount rate (b) margin requirements; federal funds rate (c) reserve requirements; discount rate (d) reserve requirements; federal funds rate 285. Which of the following functions is NOT performed by any of the twelve regional Federal Reserve Banks? (a) Check clearing. (b) Conducting economic research. (c) Setting interest rates payable on time deposits. (d) Issuing new currency. 286. The designers of the Federal Reserve Act of 1912 intended the Fed to rely primarily on : (a) open market operations. (b) backing currency with gold reserves. (c) setting reserve requirements. (d) setting margin requirements. (e) discounting operations. 287. The government institution responsible for regulating the amount of money and credit supplied in the domestic economy as a whole is the (a) monetary fund. (b) commercial bank. (c) bank of settlement. (d) central bank. (e) US Treasury. (f) FDIC. (g) FSLIC. (h) Institutional Review Board. 288. When the federal government's budget deficit increases, the _____ curve for bonds shifts to the _____. (a) demand; right (b) demand; left (c) supply; left (d) supply; right 289. When money prices are used to facilitate comparisons of value, money is said to function as a (a) unit of account. (b) medium of exchange. (c) store of value. (d) payments-system ruler. 290. Pure economic profit is most closely related to the concept of: (a) exploitation of labor. (b) opportunity cost. (c) pure rent. (d) pure oligopoly. (e) capitalization. 291. The principal/agent problem is largest for: (a) owners of common stock. (b) owners of corporate bonds. (c) commercial banks that make loans to corporations. (d) None of the above. 292. If you buy a ten-year $100,000 bond with a face rate of 7.5% when the interest rate is 10% and sell it when the interest rate is 15%, you will receive: (a) less than you paid for the bond. (b) more than you paid for the bond. (c) the same amount that you paid for the bond. (d) income taxable at higher rates than wages. 293. Monetary policy tools do NOT include changes in the: (a) discount rate. (b) reserve requirements ratio. (c) marginal income tax rate. (d) total value of bonds the FED buys or sells. (e) open market operations. 31 294. The federal funds market is one example of: (a) creative response. (b) government intervention. (c) government secured loans. (d) monetary policy in action. (e) incomes policy. 295. Markets will tend to operate efficiently if: (a) highly profitable opportunities are so widespread that all investors can gain higher incomes. (b) large numbers of profit-seekers compete vigorously for ideas or information that might prove profitable. (c) competition causes any predictable abnormal gain from an investment to be exploited only after a lengthy time lag. (d) all prices and wages are rigid. (e) real interest rates are biased upwards. 296. The real rate of interest equals the: (a) difference between payments by borrowers and the receipts of depositors. (b) nominal interest rate plus the rate of inflation. (c) annual percentage of purchasing power paid for the use of money. (d) rate paid on riskless government securities. 297. The rise in nominal interest rates as higher inflation comes to be expected is an example of the: (a) Keynes effect. (b) real wealth effect. (c) Fisher effect. (d) Friedman effect. 298. Payments for a resource in excess of the minimum required to supply given amounts of the resource are called: (a) economic rents. (b) wage premiums. (c) excess profits. (d) surplus values. (e) capitalization. 299. An example of economic capital would be: (a) loanable funds in banks. (b) factory buildings. (c) gold held by price speculators. (d) labor's productive skills. (e) corporate stocks. 300. If you can buy a bond today for $1,000 and it will mature at $1,210 two years from now, the rate of return on this financial investment is: (a) 10%. (b) 10.5%. (c) 11%. (d) 12%. (e) 21%. 301. Nominal interest rates are: (a) always identical to real interest rates. (b) the percentage of monetary premiums paid per time period for the use of money. (c) determined by the size of economic rents. (d) the percentage of purchasing power transferred from borrowers to lenders. 302. Natural rate theory suggests that if policy makers continually aim for a target interest rate below the natural rate, maintaining the target rate would require: (a) high real interest rates and low nominal interest rates. (b) constant or declining rates of inflation. (c) actual inflation to exceed expected inflation continuously. (d) tariff barriers to prevent competition from cheap labor. 303. The Federal Reserve System's Open Market Committee: (a) includes all seven members of the Board of Governors and the President. (b) conducts the most important parts of monetary policy. (c) has complete control over the financial system. (d) is responsible for fiscal policy. 304. A bank's total required reserves are equal to: (a) those set by the Senate Banking Committee. (b) actual reserves plus excess reserves. (c) one divided by the reserve requirements ratio. (d) demand deposits times the reserve requirements ratio. 305. The money supply is negatively related to the: (a) potential money multiplier. (b) margin requirement ratio. (c) actual money multiplier. (d) percentages of excess reserves held by banks. 306. FED purchases of government securities on the open market most directly and immediately increase the: (a) discount rate. (b) monetary base. (c) supply of money. (d) market interest rate. (e) unemployment rate. 307. The FED's ability to set "margin requirements" refers to: (a) down payments on stock. (b) bank capitalization requirements. (c) interest rate ceilings. (d) consumer credit controls. 32 308. Goals in regulating financial institutions do NOT include: (a) economic efficiency in financial intermediation. (b) equalization of income levels. (c) minimizing differences between interest rates borrowers pay and those received by the ultimate lenders. (d) protection of savers. (e) macroeconomic stability. 309. Fiat money has value primarily because it is: (a) accepted as a medium of exchange. (b) verified by the United Nations. (c) backed by gold or silver. (d) a good hedge against inflation. (e) heterogeneous and indivisible. 310. Calculating relative prices is most difficult in a: (a) capitalist economy. (b) monetary economy. (c) socialist economy. (d) barter economy. (e) market economy. 311. By definition, the M1 money supply includes demand deposits plus: (a) certificates of deposit. (b) time deposits. (c) savings deposits. (d) long term deposits at nonbank thrifts. (e) currency held by the non-banking public. 312. Fractional reserve banking systems are more stable if: (a) fiat money is backed by agricultural commodities. (b) people keep stable proportions of their money in banks. (c) banks' excess reserves rise when depressions begin. (d) psychological theories of business cycles are valid. 313. The major goals in regulating financial institutions include all of the following EXCEPT: (a) protection of savers. (b) macroeconomic stability. (c) the promotion of efficiency. (d) keeping interest rates above usury ceilings. 314. When banks that are members of the Federal Reserve System temporarily borrow reserves from other banks, the network used most often is the: (a) open market. (b) barter market. (c) securities market. (d) federal funds market. (e) interbank lending consortium. 315. If the FED lowers the reserve requirement ratio, this will: (a) increase the maximum quantity of demand-deposit money. (b) reduce the maximum quantity of investment funds. (c) expand the demand for money. (d) reduce average bank profitability. 316. A financial system's major economic purpose is to: (a) channel savings to more productive uses. (b) print money to support the government. (c) increase the money multiplier. (d) protect individuals against recessions. 317. When the FED lowers the discount rate, the: (a) money supply decreases. (b) actual money multiplier increases. (c) banks hold more excess reserves. (d) monetary base shrinks. 318. The FED buys and sells government securities to: (a) maximize its rate of return on assets. (b) balance the risk, liquidity, and return on its assets. (c) finance government purchases of goods and services. (d) regulate the money supply and the rate of interest. 319. The percentage of deposits held in excess reserves depends on differences between the FED's discount rate and the: (a) required reserve ratio. (b) open market operations. (c) interest rates banks can charge on loans. (d) potential money multiplier. 320. An increase in investor optimism will cause: (a) interest rates to rise. (b) slower technology advances. (c) slumps in business construction. (d) interest rates to fall. 321. Of the following events, the one most likely to reduce Aggregate Demand is: (a) increased spending by the government. (b) expectations of price increases. (c) reduced saving by consumers. (d) reductions in the supply of loanable funds. 35 348. The greatest percentage rate of return would be generated by a financial investment that yielded: (a) annual income = $1,000; current price = $10,000. (b) monthly income = $90; current price = $24,000. (c) annual income = $1,200; current price = $10,800. (d) annual income = $800; current price = $9,000. 349. Banks, savings and loan associations, mutual savings banks, and credit unions: (a) are no longer important players in financial intermediation. (b) since deregulation now provide services only to small depositors. (c) have been adept at innovating in response to changes in the regulatory environment. (d) include as assets all amounts deposited by savers. 350. Compared to interest rates on long-term U.S. government bonds, interest rates on _____ fluctuate more and are lower on average. (a) medium-quality corporate bonds. (b) low-quality corporate bonds. (c) high-quality corporate bonds. (d) three-month Treasury bills. (e) none of the above. 351. Milton Friedman is famous for his statement that, "Inflation is always and everywhere a: (a) repressionary consequence.” (b) discretionary failure.” (c) recessionary artifact.” (d) monetary phenomenon." 352. A change in the exchange rate has a direct effect on Americans because it affects (a) the price of foreign goods to American consumers. (b) the price of American goods to foreign consumers. (c) the price Americans will pay to travel abroad. (d) the price foreigners will pay to travel to the U.S. (e) All of the above. 353. GDP measured with constant prices is referred to as: (a) real GDP. (b) nominal GDP. (c) the GDP deflator. (d) industrial production. 354. Which of the following can be described as involving direct finance? (a) A corporation charges its employees less than the par value for new shares of stock. (b) People buy shares in a mutual fund. (c) A pension fund manager buys banker’s acceptances in the secondary market. (d) An insurance company buys shares of common stock in the over-the-counter markets. 355. Which of the following can be described as involving indirect finance? (a) You make a loan to your neighbor. (b) You buy a U.S. Treasury bill from the bank. (c) You buy a U.S. Treasury bill from the U.S. Treasury. (d) A bank acquires lots of commercial paper by merging with another bank. 356. Primary markets include the: (a) New York Stock Exchange (b) U.S. government bond market. (c) over-the-counter stock market. (d) options markets. (e) None of the above. 357. A corporation acquires new funds only when its securities are sold in the: (a) primary market by an investment bank. (b) primary market by a stock exchange broker. (c) secondary market by a securities dealer. (d) secondary market by a commercial bank. 358. Studies of the major developed countries show that: (a) external financing for corporations is dominated by financial intermediaries. (b) external financing for corporations is dominated by securities issues. (c) financial intermediaries avoid lending to corporations. (d) none of the above are consistent across countries. 359. That depositors earn interest on checking and savings accounts, and yet withdraw their funds whenever necessary is possible because: (a) government regulations mandate this policy. (b) financial intermediaries earn such large profits. (c) financial intermediaries lower transaction costs. (d) financial intermediaries hold highly diversified asset portfolios. 36 360. A potential borrower usually has better information about the potential returns and risk of the investment projects he plans to undertake than does the lender. This inequality of information is called (a) moral hazard. (b) asymmetric information. (c) reverse causation. (d) adverse selection. 361. The conversion of a barter economy to one that uses money (a) increases efficiency by reducing the need to exchange goods and services. (b) increases efficiency by reducing the need to specialize. (c) increases efficiency by reducing transactions costs. (d) does not increase economic efficiency. 362. If bad credit risks are the ones who most actively seek loans and, therefore, receive them from financial intermediaries, then financial intermediaries face the problem of (a) moral hazard. (b) adverse selection. (c) free-riding. (d) costly state verification. 363. If the price level doubles, the value of money (a) doubles. (b) more than doubles, due to scale economies. (c) rises but does not double, due to diminishing returns. (d) falls by 50 percent. 364. Although it can have a number of characteristics and serves more than one role, money must (a) be backed in gold. (b) have a nonmonetary value. (c) be widely acceptable for payment. (d) be inexpensive to produce. 365. Which of the following is not included in the M1 measure of money but is included in the M2 measure of money? (a) currency. (b) traveler's checks. (c) demand deposits. (d) small denomination time deposits. 366. If there are five goods in a barter economy, you need to know ten pairs of relative prices to knowledgably exchange one good for another. If, however, there are ten goods in a barter economy, then the number of relative prices one needs to know to knowledgably exchange one good for another is. (a) 20. (b) 25. (c) 30. (d) 45. (e) 90. 367. If an individual moves money from a small-denomination time deposit to a demand 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. 368. 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. 369. The current yield on a $5,000, 8 percent coupon bond now selling for $4,000 is: (a) 5 percent. (b) 8 percent. (c) 10 percent. (d) 20 percent. 370. In which of the following situations would you prefer to be making a loan? (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. 371. The nominal interest rate minus the expected rate of inflation: (a) defines the ex ante real interest rate. (b) is a less accurate measure of the incentives to borrow and lend than is the nominal interest rate. (c) defines the purchasing power of money. (d) is a less accurate indicator of the tightness of credit market conditions than is the nominal interest rate. (e) defines the discount rate. 372. A $6,000 coupon bond with a $240 coupon payment every year has a coupon rate of (a) 2 percent. (b) 4 percent. (c) 6 percent. (d) 8 percent. 37 373. The common-sense notion that a dollar paid to you in the future is usually less valuable to you, subjectively, than a dollar today is a major underpinning for the concept of: (a) economic profit. (b) inflation. (c) interest. (d) deflation. (e) the rate of return on capital. 374. The _____ states that the nominal interest rate equals the real interest rate plus the expected rate of inflation. (a) Fisher equation. (b) Keynesian equation. (c) Monetarist equation. (d) Marshall equation. 375. If fluctuations in interest rates become larger, then, other things equal, the demand for stocks _____ and the demand for long-term bonds _____. (a) increases; increases (b) increases; decreases (c) decreases; decreases (d) decreases; increases. 376. If wealth decreases, the demand for common stocks _____ and that for long-term bonds _____. (a) increases; increases (b) increases; decreases (c) decreases; decreases (d) decreases; increases 377. When the interest rate on a bond is ______ the equilibrium interest rate, in the bond market there is excess _____ and the interest rate will _____. (a) above; demand; rise (b) above; demand; fall (c) below; supply; fall (d) above; supply; rise (e) below, demand, rise. 378. When the expected inflation rate increases, the demand for bonds _____, the supply of bonds _____, and the interest rate ______. (a) increases; increases; rises (b) decreases; decreases; falls (c) increases; decreases; falls (d) decreases; increases; rises 379. When real income _____, the demand curve for money shifts to the _____ and the interest rate _____. (a) falls; right; rises (b) falls; right; falls (c) falls; left; rises (d) rises; left; rises (e) rises; right; rises 380. When stock prices become _____ volatile, the demand curve for bonds shifts to the _____ and the interest rate _____. (a) more; right; rises (b) more; left; falls (c) less; left; falls (d) less; left; rises (e) less; right; falls 381. Factors that cause the demand curve for bonds to shift to the left include (a) an increase in the volatility of stock prices. (b) a decrease in the expected returns on stocks. (c) a decrease in the inflation rate. (d) an increase in real national income. (e) none of the above. 382. In his Liquidity Preference Framework, Keynes assumed that money has a zero rate of return. Thus, when interest rates (a) rise, the expected return on money falls relative to the expected return on bonds, causing the demand for money to fall. (b) rise, the expected return on money falls relative to the expected return on bonds, causing the demand for money to rise. (c) fall, the expected return on money falls relative to the expected return on bonds, causing the demand for money to fall. (d) fall, the expected return on money falls relative to the expected return on bonds, causing the demand for money to rise. 383. When the growth rate of the money supply increases, interest rates end up being permanently lower if (a) the liquidity effect is larger than the other effects. (b) there is fast adjustment of expected inflation. (c) there is slow adjustment of expected deflation. (d) the expected inflation effect is larger than the liquidity effect. 384. Interest rates on bonds of the same maturity will differ because of differences in: (a) liquidity. (b) risk. (c) income tax treatment. (d) all of the above.