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

Download Past Final Exam - Financial Markets and Economic Fluctuations | ECON 423 and more Exams Financial Market in PDF only on Docsity! 1 Econ 423: Questions from Previous Final Examinations 1. Risk that can be reduced significantly through diversification is: (a) inflation risk. (b) specific risk, or unique risk. (c) default risk. (d) interest rate risk. (e) exchange rate risk. (f) market risk. 2. Suppose a firm applies the same internal cost of capital when evaluating investments, regardless of the other characteristics of various possible investments. The firm is most likely to: (a) maximize the expected profitability of its investment portfolio. (b) accept poor low risk projects but reject good high risk projects. (c) allocate its financial capital efficiently. (d) accept poor high risk projects but reject good low risk projects. (e) maintain excessive liquidity relative to the optimal investment portfolio. 3. The accelerating rate of innovation in financial intermediation over the past 50 years or so is probably least attributable to: (a) the increasing proportion of bezzle entailed in mergers and acquisitions. (b) globalization of the world economy. (c) creative responses and loophole mining. (d) technological advances in telecommunications and computers. 4. The fact that the US has far more banks relative to GDP than do most other relatively advanced countries is primarily a result of: (a) more vigorous competition in the financial sector of the United States than elsewhere. (b) the faster rates at which US financial institutions tend to innovate new technologies. (c) the relatively wider geographic distribution of economic activity in the United States. (d) laws and regulations that have protected competitors instead of competitive processes. 5. All else equal, a bank’s rate of return on equity is likely to be higher the lower is: (a) bank capital. (b) the bank’s rate of return on assets. (c) the rate of creative response. (d) the spread between interest paid to depositors and the interest rate paid by borrowers. 6. The collateralized loans owed by US households do not include: (a) variable interest rate mortgages on homes. (b) education loans. (c) second mortgages on homes. (d) auto loans. (e) conventional mortgages. 7. That federal “fiscal policy” [government taxing and spending] and “monetary policy” [especially open market operations] are inextricably linked is clearly shown in the: (a) absorption equation G-T = S-I+M-X. (b) Aggregate Expenditure equation C+I+G+X-M = AE. (c) comprehensive government budget equation G = T + ∆B + ∆MB. (d) national income accounts GDP – CCA – IBT = GNI. (e) equation of exchange MV = PQ. 8. The bulk of US federal laws and regulations that significantly limited competition in financial intermediation by 1980s had originated during: (a) 1776-1800. (b) 1801-1825. (c) 1826-1850. (d) 1851-1875. (e) 1876-1900. (f) 1901-1925. (g) 1926-1950. (h) 1951-1975. 9. Interest rates on bonds with identical maturities are least likely to differ because of differences in their relative: (a) transaction costs (b) riskiness. (c) fungibility. (d) liquidity. (e) tax liabilities. 10. The bulk of the interest on the U.S. Treasury bonds the Fed buys in its open market operations is not distributed to banks that own stock in Federal Reserve District Banks because: (a) laws limit the return on this stock to less than the market rate of interest with a maximum of six percent [6%] annually, with all surpluses being repaid to the Treasury at regular intervals. (b) this interest only partially covers the operating expenses of the Federal Reserve System. (c) the Federal Reserve Act of 1913 requires this interest to be reinvested in Treasury bonds. (d) Congress eliminated the requirement that interest be paid on U.S. Treasury bonds held by federal agencies. 11. Policies intended to reduce moral hazard for insurance companies do not include: (a) offering insurance to groups. (b) deductibles. (c) restrictive provisions. (d) coinsurance. (e) limiting the amount of insurance coverage. 2 12. The speculative [asset] demand for money described by John Maynard Keynes is most closely related to the use of money as a/an: (a) medium of exchange. (b) standard unit of account. (c) measure of value. (d) store of value. (e) standard of deferred payment. 13. An investment bank retains the greatest flexibility in placing a new issue of a security if it: (a) engages in a private placement. (b) forms a syndicate with other investment banks. (c) underwrites the issue. (d) negotiates a “best efforts” contract with the issuer. (e) markets the new security to the general public. 14. The commercial banking industry’s creative responses to restrictions on branch banking included the development and rapidly expanding use of: (a) loan sharking. (b) ATMs. (c) financial derivatives. (d) investment banking spin-offs. 15. Sales of common stock have been negative sources of funding for major U.S. corporations during the past four decades because: (a) these corporations have purchased enormous quantities of treasury stock. (b) the average real interest rates banks charge on commercial paper have been both very low and quite stable relative to previous historical averages. (c) the founders of corporations have been increasingly selling the stock they secured when these corporations were first established. (d) foreign investors with excess U.S. dollars universally prefer buying U.S, corporate bonds instead of U.S. economic capital. 16. The efficient market hypothesis is most clearly inconsistent with the: (a) performance of investment analysts and mutual funds. (b) random walk behavior of stock prices. (c) January effect. (d) technical analysis of historical asset prices. (e) stock prices after the announcements of positive earning and stock splits. 17. What is the yield to maturity on a bond that has a price of $10,000 and pays $500 annually forever? (A) 10% (B) 15% (C) 5% (D) 20% (E) 25% 18. An investor invariably increases the overall riskiness of an investment portfolio by increasing the: (a) liquidity of the portfolio. (b) percentage of options held in the portfolio. (c) proportion of municipal bonds in the portfolio. (d) leverage of the portfolio. (e) extent of diversification in the portfolio. 19. Political goals for monetary policy makers would least plausibly include maximum: (a) vertical and horizontal equity. (b) purchasing power. (c) economic growth. (d) exchange rate stability. (e) employment. 20. The first notable economist to advocate zero inflation as the only appropriate target for central bankers is/was: (a) Ben Bernanke. (b) Milton Friedman (c) Alan Greenspan. (d) Knut Wicksell. (e) President Woodrow Wilson, who was an economics professor and then President of Princeton University before his election in 1912. [The Federal Reserve Act was passed in his first year in office.] 21. An increase in the expected rate of inflation tends to cause the: (a) demand for corporate bonds to decrease. (b) federal government’s structural budget to move towards deficit. (c) quantity of corporate bonds supplied to decrease. (d) federal government’s cyclical budget to move towards a surplus (e) demand for corporate bonds to increase. 5 41. A mutual fund that cannot accept more than a legally specified total amount of investor money is a/an: (a) closely-held fund. (b) limited liability fund. (c) hedge fund. (d) back-loaded fund. (e) closed-end fund. (f) front-loaded fund. (g) open-end fund. 42. Investors who interpret the past business operations of a firm and the past performance of the stock when making decisions on investments are being affected by the psychological bias known as: (a) familiarity. (b) cognitive dissonance. (c) representativeness. (d) overconfidence. (e) financial myopia. 43. The supply of loanable funds is most closely related to the: (a) demand for bonds. (b) size of the government budget deficit. (c) rate of return on economic investment. (d) probability of changes in the structure of relative prices for goods. 44. The difference between annual interest rates financial institutions pay depositors and the interest rate charged on loans is called the: (a) mark-up. (b) differential. (c) spread. (d) margin. (e) return on equity. (f) premium. (g) return on assets. 45. A municipality can pay off its indebtedness with funds generated by the project built with bond money, or it can pay bondholders with funds from tax revenues if the municipality has issued: (a) general obligation bonds. (b) revenue bonds. (c) promissory bonds. (d) school bonds. (e) capital bonds. 46. Banker’s acceptances are important primarily because they facilitate: (a) increased velocity in secondary markets for money market instruments. (b) the generation of discretionary revenue for commercial banks. (c) the process of creative response. (d) international transactions between individuals or firms concerned about the credit risk associated with dealing with foreign buyers. 47. The efficient markets hypothesis relies most heavily on concepts encapsulated in the quote: (a) I am the master of my fate; I am the captain of my soul. [Invictus, William Ernest Henley]. (b) “For if the sun breed maggots in a dead dog, being a good kissing carrion … Have you a daughter?” [Hamlet, William Shakespeare]. (c) “No, they did not bury me, though there is a period of time I remember with a shuddering wonder, as of a passage through some inconceivable world that had no hope in it, and no desire.” [Heart of Darkness, Joseph Conrad] (d) “Did she have a precursor? She did, indeed she did.” [Lolita, Vladimir Nabokov]. (e) “O endless information in this universe, you are so great as to overwhelm the lone human mind.” [The Island of Dr. Moreau, H.G. Wells]. (f) “A horse, a horse, my kingdom for a horse!” [Richard III, William Shakespeare]. 48. The owner of a financial asset with an erratic price history can most completely eliminate downside risk during a period while retaining potential upside gains by: (a) selling a call option. (b) giving the broker a stop-loss order. (c) selling the asset short. (d) buying a put option. (e) selling the asset immediately. 49. Almost all U.S. stock market indices would plummet if: (a) foreign central banks with massive dollar reserves accumulated because of U.S. current account deficits became more willing to buy assets other than Treasury bonds. (b) baby-boomers began consuming less and saving more preparatory to their anticipated retirement. (c) simultaneous terrorist attacks obliterated the Holland Tunnel, the Golden Gate Bridge, Disney World, and Fort Bragg. (d) the dollar appreciated dramatically relative to the Euro, the yuan, the yen, and the rupee. 6 50. Eurodollar accounts came into existence in the late 1950s in part because: (a) during the Cold War, the Soviet Union recognized that most of the world treated U.S. dollars as a global medium of exchange, but feared the U.S. government might freeze USSR assets held in American banks. (b) Euro denominated accounts reduced the transactions cost born by U.S. investors who were buying European capital assets. (c) many Western investors used Eurodollars to hedge against the growing power of the Chinese economy. (d) American banks paid higher real rates of interest than were paid by European banks. 51. The Federal Reserve can expand reserves in the banking system by: (a) buying Treasury bonds. (b) raising the discount rate. (c) lowering the reserve requirement ratio. (d) selling government securities. (e) raising the reserve requirement ratio. (f) increasing margin requirements. 52. The dates when the scheduled payments from a financial asset will be realized are central to the concept of: (a) yield ratios. (b) duration. (c) maturation. (d) financial structure. (e) debt-equity ratios. 53. The average investor diversifies most completely and minimizes risk by investing in: (a) stocks. (b) indexed mutual funds. (c) junk bonds. (d) Latin American government bonds. (e) corporate debentures. 54. 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. 55. Ownership of a call option characterizes a financial investor who has: (a) a long position. (b) exceptional willingness to take risks. (c) a straddle position. (d) a macro-hedge. (e) a short position. 56. Many people expect that without major reforms, Social Security will go broke and the federal government might default on Social Security payments. Are their fears warranted? (a) No, if absolutely necessary the government can, and will run bigger federal deficits or print money to cover legally-mandated Social Security payments. (b) No, the current surpluses in Social Security are always multiplying, and this should be enough to cover the baby boomer generation. (c) Yes, with the baby-boomer generation retiring, the Social Security surplus that currently exists will be exhausted, and will lack adequate revenue. (d) Yes, President Bush’s privatization of Social Security has proved extremely detrimental to the surplus. 57. The difference between interest rates on corporate bonds and U.S Treasury bonds of similar maturity is a measure of the: (a) credit premium. (b) risk premium. (c) prime rate of interest. (d) actuarial risk. (e) duration premium. 58. The primary reason the Federal Reserve system requires banks to hold a certain percentage of their liabilities as reserves is to: (a) facilitate the financing of federal budget deficits. (b) minimize the probability of runs on the banking system. (c) more efficiently monitor bank demand deposits. (d) dampen the effects of excessive leverage on the riskiness of portfolios of bank assets. (e) increase Fed control of the money supply. 59. A group of college students with way too much free time realize that they can usually beat the casinos by playing blackjack if they successfully “count cards” and bet most heavily when the percentages of high cards expected in the next few hands is highest. These students are attempting to gain by taking advantage of a probabilistic form of: (a) arbitrage. (b) moral hazard. (c) asymmetric information. (d) cheating. (e) tournament theory. 60. Depository institutions do not include: (a) commercial banks. (b) mutual savings banks. (c) pension funds. (d) savings and loans associations. (e) credit unions. 7 61. John Kenneth Galbraith’s theory of the cyclicality of the bezzle is most clearly illustrated by: (a) the cliché that “the devil finds work for idle hands.” (b) a recent case in which European governments paid a mercenary company to patrol waters off the coast of Somalia to protect commercial ships from pirates. (c) a case in which a Mafia-run casino hires relatively few thugs to identify card- counters when casino profits are high, but hires a lot more thugs to identify and brutally thrash card- counters when casino profits have dropped. (d) rampant drug smuggling across the US-Mexico border [particularly into New Mexico] as a result of federal agents cooperating with smugglers in exchange for bribes. (e) situations in which, when students do well on their state level exams, teachers more actively seek to catch cheaters [the scores being so high, and the teachers wanting to be conscientious], whereas, when students do poorly, teachers do not seek to catch cheaters [when scores are low, the teachers fear losing their jobs]. 62. A college graduate who recently entered the workforce and expects to move up the ranks rapidly would be least likely to finance a newly-bought home with a/an: (a) shared-appreciation mortgage [SAM]. (b) reverse annuity mortgage [RAM]. (c) graduated-payment mortgage. (d) adjustable rate mortgage [ARM]. (e) equity participation mortgage. (f) conventional 30-year mortgage. (g) balloon mortgage. 63. From the end of World War II until 1971, for purposes of international payments the United States backed the U.S. dollar with gold in accord with sections of the: (a) Treaty of Bretton Woods. (b) revised Federal Reserve Act, Regulation Q. (c) McFadden Act. (d) Charter of the United Nations. (e) Glass-Stiegel Act. 64. A structural budget surplus that generates a cyclical budget deficit by significantly inhibiting Aggregate Demand poses a problem known as: (a) fiscal drag. (b) the supply-side dilemma of the Laffer curve. (c) the Keynesian recessionary ratchet. (d) intergenerational warfare. (e) functional finance imbalance. 65. The efficient market hypothesis is most consistent with the: (a) small-firm effect. (b) observation that asset prices follow a random walk. (c) higher than average increase in stock prices from December through January. (d) negative correlation between initial price/earnings ratios and subsequent rates of return. (e) erratic occurrence of significant price bubbles. (f) persistent market overreactions to both good news and bad news about the earnings and prospects of common stocks. 66. Reasons why member banks borrow and lend huge sums through the federal funds market instead of borrowing from the Fed’s discount window do not include the fact that member banks: (a) sometimes need immediate infusions of reserves when they are in danger of being short. (b) are reluctant to alert the Fed to potential liquidity problems. (c) do not earn interest on their excess reserves. (d) federal funds rate is usually significantly lower than the Fed’s discount rate. 67. The adoption of more expansionary fiscal policies would be most clearly evidenced by: (a) increases in the structural [full employment] budget deficit. (b) leftward shifts in the Laffer curve. (c) the magnitudes of cyclical budget deficits as percentages of GDP. (d) tax cuts aimed primarily at individuals in high tax brackets instead of low income individuals. (e) elimination of inheritance taxes. (f) the Fed purchasing more US Treasury bonds and fewer Treasury bills. 68. The idea that growth of the money supply at a low fixed percentage rate annually is likely to yield greater macroeconomic stability than when monetary policy is at the discretion of government officials is the foundation for: (a) neoclassical macroeconomic theory. (b) John Maynard Keynes’s liquidity preference theory. (c) Irving Fisher’s natural rate of interest. (d) Abba Lerner’s wage-price reaction functions. (e) Milton Friedman’s monetary growth rule. 10 87. Only a deranged megalomaniac would try to fine-tune financial regulations and policies to achieve: (a) distributive efficiency in financial markets. (b) maximum purchasing power. (c) minimum Knightian uncertainty. (d) productive [technical] efficiency in financial markets. (e) maximum employment. (f) allocative efficiency in financial markets. (g) security for depositors. (h) maximum economic growth. 88. A borrower who knew that a certain business venture was quite risky but who persuaded a lender that the project was extraordinarily safe would be exploiting: (a) conflicts of interest. (b) asymmetric information. (c) Knightian uncertainty. (d) Keynesian risk. (e) the Fisher equation. 89. Financial investors who buy or sell stock through the New York Stock Exchange are engaged in a/an: (a) primary market. (b) initial public offering. (c) secondary market. (d) over-the-counter [OTC] market. 90. Long-Term Capital Management was: (a) a spectacularly successful mutual fund company during the 1960s. (b) a spectacularly successful hedge fund company in the late 1990s that failed as spectacularly as it had succeeded. (c) the original name that Wilbur and Orville Salomon gave their investment bank before adopting the well-known name Salomon Brothers. (d) a New York Times bestseller by Nobel Prize-winning economists Myron Scholes and Robert C. Merton explaining their work in language aimed at a popular audience. (e) name of the semi-governmental entity chartered by the Legislature in the 1980s to oversee urban renewal in Washington D.C. at a time when the city was struggling with excessive wealth disparity, a climbing murder rate, and an epidemic of crack cocaine use among the poor. 91. The price of a call option is least affected by the: (a) expiration date. (b) strike price. (c) current price of the underlying asset. (d) duration of the underlying asset. (e) historical price volatility of the underlying asset. 92. The notion that widespread expectations of recessions or inflation tend to amplify swings in business activity underpins the: (a) psychological theory of the business cycle. (b) theory of rational expectations. (c) Keynesian theory of business cycles. (d) neoclassical theory of business cycles. (e) Austrian theory of business cycles. 93. The risk structure of interest rates illustrates how the market weighs: (a) actuarial risk. (b) relative economic risk. (c) Knightian uncertainty. (d) specific risk. (e) market risk. (f) predictable probabilities. (g) macroeconomic risk. (h) absolute financial risk. 94. Federal Reserve District Banks are technically “owned” by: (a) member banks in their districts. (b) the federal government. (c) private stockholders. (d) the Federal Reserve System. 95. The creation of new and more liquid marketable debt instruments that are backed by less liquid and less marketable financial assets is called: (a) securitization. (b) enhanced selection. (b) homogenization. (d) standardization. (e) diversification. 96. The key difference between classical [or neoclassical] and Keynesian macroeconomists is their differing beliefs about the: (a) slope of the aggregate demand curve. (b) speeds at which monetary wages and prices adjust. (c) natural rate of unemployment. (d) full-employment level of output. 97. The extent and timing of financial innovation is least likely to respond to changes in: (a) computer technologies. (b) interest rates. (c) financial regulations. (d) macroeconomic conditions. (e) the Dow- Jones index. (f) interest rate risk. (g) the rate of inflation. (h) the globalization of trade and finance. 98. The most liquid of the following assets would be: (a) put options. (b) investment grade corporate bonds. (c) U.S. Treasury bonds. (d) call options. (e) junk bonds. 11 99. 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. 100. For purposes of its accounting records, a bank cannot reduce the total amounts of outstanding loans by: (a) not renewing some loans when they come due. (b) selling some loans to other financial institutions. (c) selling commercial loans to the Federal Reserve. (d) determining that some of its outstanding loans are uncollectible bad debts. 101. Secondary markets do not exist for: (a) federal funds. (b) mortgages. (c) U.S. Treasury bills (d) negotiable certificates of deposit (e) repurchase agreements. 102. Recent theories attempting to explain enormous and growing income differentials between top corporate executives and most of the rest of corporate workers include: (a) the snake-bite effect. (b) the Keynesian beauty contest. (c) tournament theory. (d) game theory. (e) pyramid theory. 103. The bulk of household debt in the United States consists of (a) commercial loans. (b) credit card debt. (c) consumer installment debt. (d) collateralized loans. (e) unsecured loans, such as student loans. 104. If the Federal Reserve buys dollars by selling foreign currencies in the foreign exchange market, the effect is the same as (a) an open market sale of bonds to decrease the monetary base and the money supply. (b) raising the reserve requirement ratio to increase the monetary base and the money supply. (c) an open market purchase of bonds to increase the monetary base and the money supply. (d) a reduction in the discount rate to encourage discount loans, thereby increasing the monetary base, the money multiplier, and the money supply. 105. When depositors move their funds from traditional financial institutions because higher interest rates are paid by other institutions or on other financial assets, the process is called: (a) disintermediation. (b) capital mobilization. (b) loophole mining. (d) deposit jumping. (e) asset shifting. 106. Interest rate risk is shifted from lenders to borrowers when: (a) the yield curve for bonds becomes steeper. (b) new home buyers take out adjustable rate mortgages. (c) financial markets adjust to lower rates of inflation per the Fisher effect. (d) the yield curve for bonds becomes flatter. (d) relatively illiquid and heterogeneous financial instruments are securitized. 107. Investors’ demands for specific financial assets are likely to be most positively related to the: (a) current price of the assets relative to the income streams they generate. (b) expected returns on alternative assets. (c) riskiness of the assets relative to alternative assets. (d) assets’ liquidity relative to the liquidity of alternative assets. (e) price-earnings ratios of the assets. 108. Sources of funds for commercial banks include: (a) commercial loans. (b) real estate loans. (c) automobile loans. (d) discount loans. (e) lines of credit. 109. The idea that financial portfolios can be shielded against risk through fine-tuned trading in options “at all times, in markets all over the world,” is most consistent with the theories underpinning: (a) rational expectations models. (b) the Black-Scholes-Merton recipe for dynamic hedging. (c) adaptive expectations models. (d) Keynesian beauty contests. (e) technical analysis. 110. The total value of a investor’s assets relative to the net worth or equity of the financial investor is a positive measure of the investor’s’: (a) rate of return on assets. (a) risk averseness. (c) financial leverage. (d) accounting exposure. (e) profitability. (f) internal rate of discount. 12 111. Banks’ attempts to deal with the problems of adverse selection and moral hazard are least relevant in explaining: (a) screening and monitoring of loan applicants. (b) collateral and compensating balances. (c) credit rationing. (d) creative response. 112. A bank’s owners do not usually want the bank to hold a lot of capital [equity] relative to the bank’s assets because: (a) the owners are more likely to face personal bankruptcy if the bank’s loan portfolio is excessively risky. (b) higher returns on equity are realized when bank capital is a smaller percentage of bank assets. (c) relatively high levels of capitalization attract closer scrutiny by regulators. (d) the bank’s competitors are more likely to try to establish branches in the bank’s primary territory. 113. The driving force behind the securitization of mortgages, automobile loans, and some credit card debt has been: (a) the rising regulatory constraints on substitute financial instruments. (b) the desire of mortgage and auto lenders to exit this field of lending. (c) advances in computer and telecommunications technologies. (d) federal deregulation of allowable interest rates. 114. Examples of financial derivatives would include: (a) puts and calls. (b) repos. (c) convertible bonds. (d) common stock. (e) corporate debentures. 115. The regular members of Board of Governors of the Federal Reserve serve 14 year terms: (a) to protect against conflict of interests during election time or favorable biases toward certain groups particularly during election times. (b) because the Board elects new members to teach them the clockworks of the Federal Reserve (c) because this is the minimum amount of years required to be considered for chairman of the board (d) to give monetary policy (primarily open market operations) ample time to take effect. 116. 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. 117. Merger and acquisition (M&A) activity is probably most positively related to: (a) John Kenneth Galbraith’s concept of “the bezzle.” (b) declines in the Dow-Jones index. (c) federal government deficits as a percentage of GDP. (d) the rate of technological change. 118. A new security issue that does not generate sufficient interest from an investment bankers clients to sell all of the securities by the issue date is: (a) privately placed. (b) undersubscribed. (c) limit- ordered. (d) underfunded. (e) oversubscribed. 119. The classical macroeconomic theory developed prior to 1930 was most consistent with: (a) asset demands for money. (b) transaction demands for money. (c) money as a store of value. (d) precautionary demands for money. (e) speculative demands for money. 120. If NBA rookie all-star Luke Skywalker bets against his team in games he plays after receiving the money designated in his contract, the way he plays would illustrate the problems caused by: (a) stupidity. (b) overachievement. (c) moral hazard. (d) default aversion. (e) underachievement. 121. 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. 122. 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. 15 147. When the price of the underlying financial instrument is below the exercise [strike] price of a call option, the option is said to be: (a) out of the money. (b) on the interior. (c) in the money. (d) unripe. (e) dead on the money. (f) ripe for a put. 148. A contract requiring a specified future monetary payment at a specified future point in time in exchange for the delivery of a specific asset is called a: (a) hedge. (b) long contract. (c) nonconvertible option. (d) swap. (e) gamble. 149. Finance companies usually raise capital in the money markets by: (a) selling commercial paper. (b) acquiring loans from private individuals. (c) selling securities. (d) lending funds to large organizations or institutions and applying high interest rates to acquire hefty returns. 150. The money supply would contract in response to: (a) open market purchases of Treasury bonds. (b) open market sales of Treasury bonds. (c) lowering the discount rate. (d) increasing the amount of discount loans made to commercial banks. (e) lowering margin requirements. 151. Classically-oriented macroeconomists would view excessive unemployment as a symptom that wage rates relative to output prices: (a) cause excessive Aggregate Demand. (b) are too high to clear labor markets. (c) are too low to clear labor markets. (d) require militant unionism to be curbed. 152. Instruments traded in money markets would not include: (a) bankers acceptances. (b) U.S. Treasury bills. (c) commercial paper. (d) securitized residential mortgages. (e) Eurodollars. 153. 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. 154. The pair of Nobel Prize winning economists who had personal financial interests in the fortunes of Long Term Capital Management are: (a) Robert Merton and Myron Scholes. (b) Fischer Black and Paul Samuelson. (c) Merton Miller and John Nash. (d) Edward Prescott and Finn Kydland. (e) Daniel Kahneman and Vernon Smith. 155. You foolishly bought a lottery ticket while inebriated. Against all odds, you won a $25 million “Jackpot” spread across 20 years. You’ve taken the “instant cash” option, which yielded $4,500,000 after taxes. You’re willing to take some risks until you figure out what you “really want to do.” A savvy friend suggests buying forward contracts, but advises that you might more conservatively also consider futures contracts. Not among the advantages associated with buying futures contracts instead of forward contracts would be relatively greater: (a) average rates of discount. (b) liquidity. (c) standardization. (d) regulatory oversight to ensure against fraud. 156. Interest rates on given financial instruments tend to be lower the: (a) shorter the period to maturity. (b) greater the risk of default. (c) less liquid the asset is. (d) greater the expected rate of inflation. (e) greater the face value is relative to the market price. 157. Restrictive covenants on bonds are intended to: (a) provide a systemized set of regulations stating when bondholders can cash in their securities. (b) protect the interests of bondholders by limiting the actions of the borrower . (c) protect bondholders from interest rate risk. (d) protect the interests of owners of firms threatened by unlimited liability should the firm fail. (e) minimize the interest rates paid by corporations on outstanding debts. 158. Payments by the Federal Reserve System to its employees: (a) are not limited or controlled in any way by federal laws and regulations. (b) increase the monetary base. (c) cause increases in US national debt. (d) are offset through contractionary open market operations. (e) are limited by provisions of Regulation Q and the McFadden Act. 16 159. The United States’ dual banking system refers to: (a) a way in which depositors can have a checking account and a money market account in order to receive the most interest possible. (b) the fact that the federal government and the FDIC both oversee the activities of the banks. (c) a system in which banks supervised by the federal government and the banks supervised by the states operate side by side. (d) the ability of the banks to offer demand deposits and mortgage loans. 160. One way venture capitalist commonly deal with problems of moral hazard that is illegal for banks to do is to: (a) make a member of the venture capitalist’s firm marry the CEO of the startup firm that secures VC funding. (b) place a member of the venture capitalist firm on the board of directors of the company that secures VC funding. (c) nothing, banks and venture capitalist must follow the same lending restrictions. (d) require a member of the company that secures VC funding to be a member on the venture capitalist board of directors. 161. Persistent deficits in the current account of the U.S. balance of payments and the accompanying inflows of international financial capital during the 1980s and again in the 2000s were at least partially reflective of: (a) the increasingly successful collusion of OPEC countries in raising oil prices. (b) losses of virtually all U.S. comparative advantages. (c) persistent record-breaking federal budget deficits. (d) undervaluation of the dollar in international financial markets. 162. Adverse selection in which biases in pension plans favoring only top managers of firms were frequently misrepresented persuaded the US Congress to establish the: (a) Federal Depository Insurance Corporation. (b) Social Security Administration. (c) Pension Insurance Administration. (d) Employee Retirement Income Security Administration (ERISA). 163. An example of rational ignorance is illustrated if you: (a) are elected to a political office. (b) settle for a spouse who is not your “ideal” mate. (c) eat a steak that raises your cholesterol level. (d) were suspended from high school for misbehavior. 164. An equation capable of specifying the location/value of a moving variable at every continuously calculable nanosecond in time would be most likely to entail the use of: (a) Newtonian thermodynamics. (b) Ito calculus. (c) Fermat’s theorem. (d) the Black-Scholes equation. (e) Leibniz differentials. 165. An arbitrageur is an individual or organization that will: (a) simultaneously buy low and sell high in different markets. (b) create disparities between prices in different markets. (c) resolve disputes between consumers and sellers. (d) buy low and sell high at different time periods. (e) probably suffer losses in the long run. 166. The fact that roughly 15% of Coca Cola stock is owned by financial investors who live in Georgia, where Coca Cola’s headquarters is located, is evidence of a: (a) familiarity effect. (b) winner’s curse effect. (c) local flavor effect. (d) domesticated effect. (e) home bias effect. 167. Relative to most other countries, the true rate of saving in the United States may be substantially understated in part because: (a) the U.S. underground economy is proportionally larger than in most other countries. (b) Americans tend to spend proportionally more on education than most foreigners do, and GDP accountants treat education as consumption. (c) federal budget deficits are misleadingly considered to be dissaving. (d) the United States is the world’s largest creditor nation; other countries owe American entities substantial sums. 168. A contract that gives the owner the right to buy a financial instrument at the exercise [strike] price within a specific period of time is a/an: (a) continental option. (b) put option. (c) call option. (d) European option. (e) indexed option. 169. If domestic saving and investment are constant, rising federal budget deficits yield: (a) lower interest rates. (b) higher tax rates. (c) growing trade deficits. (d) reduced public debt. 17 170. Abba Lerner’s wage-price reaction functions illustrate the Keynesian belief that, in the short run for a market economy: (a) surpluses are resolved faster than shortages. (b) full employment is automatically achieved. (c) shortages are resolved more quickly than surpluses. (d) wages and prices adjust more quickly downward than upward. (e) the distribution of income becomes less equal during recessions. 171. This pair of Lerner wage–price reaction functions is consistent with the idea(s) that: (a) wages and prices do not instantaneously adjust to clear markets when demands or supplies change. (b) wages are “stickier” than prices. (c) reduced demands in labor markets yield unemployment in the short run. (d) if disruptions to the economy are halted, all markets will clear and the classical results will hold in the long run. (e) all of the above. 172. According to these Lerner wage-price reaction functions: (a) labor markets adjust to shocks less rapidly than would commodity markets subjected to similar shocks. (b) the Keynesian model of adjustment to declining Aggregate Demand is incorrect. (c) markets are strongly efficient if new information is rapidly converted into equilibrium prices. (d) excess supply yields more rapid price adjustment than does comparable excess demand. (e) commodity markets yield faster quantity adjustments in response to disruptions than do labor markets. 173. The business cycle theorist who described capitalism as a process of creative destruction was: (a) John Maynard Keynes. (b) Milton Friedman. (c) Thomas Malthus. (d) Joseph A. Schumpeter. (e) William Stanley Jevons. 174. If households shift from an emphasis on cash in their portfolios and more stocks and bonds because they have become more willing to hold less liquid assets, the: (a) interest rate rises. (b) present value of future income falls. (c) interest rate falls. (d) stock market will crash. 175. Stock options provided as parts of the compensation of corporate CEOs: (a) dilute stockholder equity. (b) reduce incentives for honest executives to maximize shareholder wealth. (c) are a form of insider trading. (d) discourage misleading manipulation of corporate income statements and balance sheets. 176. Federal agricultural subsidies tend to be quickly: (a) spent because most farmers lack adequate budgeting skills. (b) capitalized into higher prices for farm land. (c) slashed whenever pressure mounts to cut the federal deficit. (d) absorbed by rising costs for agricultural labor. 20 201. 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. 202. A financial asset that pays its owner a fixed interest payment every year until the maturity date, and then a set final amount, is a: (a) coupon bond. (b) discount bond. (c) zero interest bond. (d) fixed interest loan. 203. A short-term “bailout” of funding that helped Long Term Capital Management avoid defaulting in 1998 was engineered by the: (a) New York Stock Exchange. (b) Federal Reserve System. (c) International Monetary Fund. (d) Chicago Board of Trade. (e) World Bank. (f) Securities and Exchange Commission. 204. 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. 205. The volatility of interest rates increased dramatically in the 1970s and 1980s, creating a perception of increased interest-rate risk and. (a) causing banks to shift their portfolios from an emphasis on loans to a greater emphasis on stocks. (b) increasing the cost of financial innovation. (c) reducing the range of the different types of business and consumer deposits and funding offered by financial intermediaries. (d) increasing the demand for financial innovation. 206. The enormous federal budget deficits of the 1980s, the early 1990s, and from 2001 onward have been largely accommodated through: (a) high inflation rates. (b) large trade deficits. (c) Keynesian policies. (d) low unemployment rates. 207. The events of September 11, 2001, caused the Federal Reserve System 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. 208. Stronger preferences for current consumption over future consumption would be indicated by a: (a) higher interest rate. (b) more rapid rate of investment. (c) larger government budget surplus. (d) surplus in the balance of trade. 209. From the vantage point of society, the major advantage of historical-cost accounting over market- value accounting would be that historical-cost accounting: (a) reduces the odds that shaky banks will "bet- the-bank" by taking excessive risks in hopes of staying in operation. (b) makes it easier for bank officials to hide insolvencies. (c) requires fewer resources to acquire data and perform calculations. (d) makes it easier for regulators and politicians to disguise insolvencies. (e) improves the ability of regulators to close a bank before its net worth falls to zero. 210. Banks that are members of the Federal Reserve System tend to prefer to borrow from each other when making short-term portfolio adjustments rather than from the FED because (a) the FED’s discount rate is set at punitively high levels. (b) borrowing through the federal funds market is usually less of a hassle. (c) moral hazard is less of a problem for private banks. (d) interstate banking operates on a “buddy” system. (e) competitive deregulation makes state-chartered banks relatively riskier. 21 211. Principal-agent problems become a more significant threat to the interests of potential financial investors when: (a) the market price of a stock surges above the strike price of an option to buy the stock. (b) pension funds and insurance companies engage in private placements of new securities issues. (c) mergers and acquisitions are a major source of revenue for an investment banking firm. (d) the Federal Open Market Committee (FOMC) meets in secret to determine future directions for monetary policy. (e) analyst/researchers in an investment banking firm are influenced by deal- making in the investment banking division. 212. Joe purchases a 91-day $10,000 Treasury bill for $9,732.14. The $10,000 T-bill’s annualized yield is: (a) 8%. (b) 9%. (c) 10%. (d) 11%. (e) 12%. 213. 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. 214. An increase in the equilibrium interest rate from il to i2 would be a result of: (a) a higher price for bonds. (b) a business cycle boom. (c) an increase in the expected inflation rate. (d) a decrease in the expected inflation rate. 215. “Payday” loan companies have sometimes been able to avoid usury laws because: (a) usury laws have been found “unconstitutional” by the United States Supreme Court. (b) they operate in interstate commerce by being headquartered in states other than those in which they operate, and consequently they argue that they are not subject to state usury laws because of the “commerce clause” of the U.S. Constitution. (c) they make large “off-the-books” campaign contributions to incumbent state legislators. (d) All of the above. 216. Although households or individual employees are ultimately the largest purchasers of capital market securities, they usually buy these securities through financial institutions such as: (a) mutual funds or pension funds. (b) over-the-counter markets. (c) venture capital firms. (d) commercial banks and thrifts. (e) money market. 217. According to the quantity theory of money central to neoclassical macroeconomic models: (a) output grows when the price level rises. (b) real output is unaffected by the money supply. (c) employment depends on the velocity of money. (d) growth of per capita income is impossible in the long run. 218. The primary function of investment banks is to: (a) bundle deposits into loans. (b) extend long-term credit to other financial institutions. (c) help corporations raise funds. (d) provide credit to firms engaged in international trade. (e) securitize illiquid financial assets. 219. Major normative macroeconomic goals specified in the Employment Act of 1946 do not include “… maximum: (a) employment.” (b) purchasing power.” (c) national security.” (d) economic growth.” 220. If the interest rate on a mortgage is tied to some market interest rate and changes periodically, the home buyer has a mortgage that is: (a) an adjustable rate mortgage [ARM]. (b) interest flexible. (c) conventional. (d) ballooned. 22 221. Unlike forward financial transactions or futures, spot transactions in financial instruments: (a) are immediately consummated. (b) exacerbate interest rate risk. (c) worsen default risk. (d) facilitate hedging to reduce exchange risk. (e) theoretically permit perfect option pricing to eliminate all risk, but not all uncertainty. 222. Financial institutions would not exist if: (a) the economy reached a steady state equilibrium. (b) transaction costs were also nonexistent. (c) competitive pressures did not make people so greedily self-interested. (d) capitalism was replaced by socialism. (e) people could safely store their money in their own homes. 223. Credit rationing that tends to stimulate loan shark activity is a predictable consequence of: (a) usury laws. (b) a monetary growth rule. (c) a downturn in the level of economic activity. (d) reductions in the reserve requirement ratio. (e) disintermediation. 224. Suppose half of the world population, randomly selected, was magically vaporized by space aliens, but no other aspect of life on Earth was unaffected. Ignoring any psychological trauma this calamity might entail, on average, the economic well being of survivors would be: (a) decreased because of decreased specialization and exchange according to comparative advantage. (b) increased because of increases in the per capita availability of land and economic capital. (c) decreased because of declines in the total value of human capital on Earth. (d) increased because of improved efficiencies associated with divisions of labor in productive processes. (e) unaffected because the total value of world production would not be affected in a predictable direction. 225. 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. 226. 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. 227. The demand for money as an asset would be negatively affected by increases in: (a) uncertainty about future income (b) expected hikes in interest rates. (c) wealth. (d) . income. (e) expected inflation. 228. 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. 229. Frank Knight’s definition of uncertainty is relatively most applicable to: (a) interest rate risk. (b) default risk. (c) market risk. (d) foreign exchange risk. (e) specific risk. (f) inflation risk. 230. Net economic investment for the economy as a whole occurs when: (a) romance novelist Portia Palpitates buys a $4 ream of paper from Staples to print out the first draft of her latest masterpiece. (b) Punque Roque, a startup sand-and-gravel pit that launched its IPO today, sells Jester common stock for $10,000. (c) Cognitive-Slippage pays Carolina Cab $11,000 for a fully depreciated taxi with 477,164 miles on its odometer. (d) Ima Grate Stoodent, a sophomore economics major, signs a one-year lease on a used double-wide trailer. (e) Microsoft buys all outstanding IBM stock for $20 billion in a hostile takeover of the former computer monolith. 25 253. Separation of ownership (stockholders) from control (management) in modern giant corporations tends to split the economic functions of _________ and yields __________________. (a) capitalists | monopoly profits. (b) union leaders | exploitation of workers by professional managers. (c) entrepreneurship | such principal - agent problems as moral hazard and adverse selection. (d) bureaucrats | abuses of oligarchic power. 254. In a world with few barriers to capital mobility, the domestic interest rate equals the sum of the foreign interest rate and the expected depreciation of the domestic currency, a situation known as the: (a) interest parity condition. (b) purchasing power parity condition. (c) exchange rate parity condition. (d) foreign asset parity condition. (e) purchasing power parity theorem. (e) law of one price. 255. 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. 256. The all-time record for total federal deficits during a four-year term of office was set during the administration of President: (a) Herbert Hoover [Great Depression, 1929-33]. (b) Franklin Roosevelt [World War II, 1941-45]. (c) Ronald Reagan [Supply-side Economics, 1981-89]. (d) Bill Clinton [Rubinomics, 1997-2001] (e) George W. Bush [War on Terrorism, 2001-05]. 257. Disadvantages to a manufacturing firm of financing a major new production facility by issuing money market instruments instead of capital market instruments do not include: (a) transaction costs incurred when the debt must be rolled over. (b) the reduced net rate of return because money-market lenders insist on ownership positions. (c) potentially higher refinancing costs if interest rates rise before the debt is rolled over. 258. 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. 259. In the long run, a 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. 260. 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. 261. John Kenneth Galbraith’s model predicts an increase in “bezzle” following the financial deregulation that tends to emerge during a period of relative prosperity. This increase in financial fraud can be viewed as an example of: (a) credit rationing. (b) immoral hazard. (c) adaptive expectations. (d) creative response. (e) moral suasion. 262. Piggy-back mortgages became increasingly common after roughly 2001 because: (a) computerized records increasingly enable mortgage lenders to “qualify” potential borrowers at lower transaction costs. (b) baby boomers are starting to retire and many of them need increased retirement income. (c) historically low interest rates have encouraged lenders to take greater risks. (d) adjustable rate mortgages shift interest rate risk from the lender to the borrower. 26 263. 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. (b) universal preference for liquidity. (c) yield premium. (d) differential impact of the U.S. tax code. 264. 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. 265. The U.S. Treasury quit issuing certain financial instruments in 2001. In May 2005, to the delight of much of the financial community, the Treasury announced that it would once again be issuing: (a) 15-year Treasury bonds. (b) gold certificates. (c) 30-year Treasury bonds. (d) silver certificates. (e) 20-year Treasury bonds. (f) 5-year revenue bonds. 266. The best-known capital market securities are. (a) CDs and stocks. (b) mutual funds and bonds. (c) commodities and futures. (d) stocks and bonds. (e) puts and calls. 267. If a mild recession is accompanied by a huge surplus in the full-employment budget, this may indicate that: (a) fiscal drag is a problem. (b) tax rates are too low. (c) G exceeds T at full employment. (d) inflation has been cured by the invisible hand. (e) the Laffer curve hypothesis is totally invalid. 268. If John Maynard Keynes were still alive in 2005, he would be likely to assert that the most successful investors are likely to be those who: (a) diversify portfolios. (b) research historical trends. (c) are most willing to bear Knightian uncertainty. (d) correctly anticipate a surge of irrational exuberance. (e) use buy-and-hold strategies to minimize transaction costs. 269. When starting up a new bank, a type of regulation intended to reduce both adverse selection and moral hazard is a requirement of: (a) significant capitalization. (b) demonstrated community need. (c) chartering. (d) residual claimants. (e) character tests. 270. If given amounts of excess demand typically yield increases in wages and prices that exceed declines in wages and prices in response to comparable amounts of excess supply, then the: (a) money supply is neutral. (b) wage-price reaction functions developed by Abba Lerner are asymmetric. (c) demand for money depends primarily on expected transactions. (d) economy will experience hyperinflation if Aggregate Supply shrinks. (e) rate of economic growth is stimulated by disinflationary policies in the short run.. 271. Financial investors whose portfolios have become more risky are least likely to be able to optimally reduce such risk by: (a) selling their risky assets. (b) buying options. (c) hedging dynamically. (d) converting to more liquid assets. (e) buying calls and selling puts. 272. According to the interest parity condition, if the domestic interest rate is 10 percent and the foreign interest rate is 12 percent, then (a) the expected appreciation of the foreign currency must be 4 percent. (b) the expected appreciation of the foreign currency must be 2 percent. (c) the expected depreciation of the foreign currency must be 2 percent. (d) the expected depreciation of the foreign currency must be 4 percent. 273. Bonds with relatively low default risk are called: (a) premier bonds. (b) coupon bonds. (c) annuities. (d) blue chip bonds. (e) investment grade bonds. 274. In contrast to the optimal investment strategy generated from the Black-Scholes-Merton model, standard investment advice that appears to emerge from the theory of efficient markets is that investors who lack insider information would probably do best, on average, with a strategy of: (a) dynamic hedging. (b) fine-tuned trading in options “at all times, in all markets, all over the world.” (c) “buying and holding” shares in an indexed mutual fund. (d) selling assets when “good news” becomes public, and buying assets when “bad news” is made known, because markets tend to overcompensate for news that is likely to be irrelevant to long term trends. 27 275. A lender’s right to sell property that is collateral for a loan if the underlying loan defaults is based on: (a) a lien. (b) the down payment. (c) private mortgage insurance. (d) borrower qualification. (e) amortization. 276. Events or theories that are totally implausible in explaining the economic crash of 1929-1933 and the duration of the Great Depression would include the idea that: (a) a collapse of investment spending was caused by the pessimistic “animal spirits” of investors. (b) the Federal Reserve System unwittingly following contractionary policies. (c) low margin requirements in the 1920s precipitated an unsustainable bubble of financial speculation. (d) expectations that the Smoot-Hawley Tariff Act of 1930 would be enacted. (e) increases in tax rates initiated by President Hoover to balance the budget were unwisely enacted by Congress in 1931. (f) excessively high exchange rates for the dollar that choked off exports of US goods and increased imports of goods from low-wage countries. 277. John Maynard Keynes’ innovations in monetary theory did not include the concepts of: (a) money as a measure of value. (b) asset demands for money. (c) money as a store of value. (d) precautionary demands for money. (e) speculative demands for money. 278. A domestic currency is most likely to appreciate as a response to major: (a) decreases in domestic nominal interest rates due to lowered expectations of inflation. (b) decreases in the domestic real interest rate. (c) increases in the growth rate of the domestic money supply. (d) increases in the country’s current account deficit because domestic prosperity has stimulated imports. 279. 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. 280. 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. 281. Classical macroeconomists viewed the cost of holding money as: (a) current interest rates. (b) profits from economic investment. (c) goods that could be purchased with the money. (d) hard to determine because of sticky pricing. (e) the percentage rate of inflation. 282. 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. 283. 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. 284. A financial investor who sells a short contract is required to: (a) close out the buying investor’s position in the near future. (b) deliver securities in the near future that the individual does not currently own. (c) hedge securities in the near the future. (d) buy securities in the future. 285. During the early years of an amortizing conventional mortgage loan, the lender applies: (a) most of the monthly payment to the outstanding principal balance. (b) all of the monthly payment to the outstanding principal balance. (c) most of the monthly payment to interest on the loan. (d) all of the monthly payment to interest on the loan. (e) the monthly payment equally to interest on the loan and the outstanding principal balance. 286. Business cycles tend to be relatively minor and are quickly and automatically cured so that the economy will return to its original full employment equilibrium according to: (a) the population dynamics theory. (b) psychological theories of the business cycle. (c) Joseph Schumpeter’s theory of creative destruction. (d) classical macroeconomic theory. (e) external shock theory. 30 310. Riskless profit opportunities in the futures market are reduced or eliminated by extremely competitive processes called: (a) speculation. (b) hedging. (c) arbitrage. (d) open interest. (e) mark- to-market puts and calls. 311. Most of the world switched from being on a fixed exchange rate system to a floating exchange rate system [the dirty float]: (a) at the beginning of World War II, when financial and political instability in Europe proved highly contagious. (b) in 1971, when President Nixon announced that the United States dollar was no longer backed with gold in any fashion. (c) at the end of World War I, under the terms of the Treaty of Versailles. (d) when the Soviet Union collapsed and became 15 separate and sovereign nations between 1989 and 1990. 312. A situation in which the residents of a relatively small and unstable country abandon the country’s own currency and begin using currency issued in a significantly larger and more stable economy is called: (a) paritization. (b) dollarization. (c) commodification. (d) empoundment. (e) a currency swap. 313. The traditional Keynesian remedies for a recession or depression are: (a) laissez faire government policies. (b) increases in government spending or reductions in tax rates. (c) balancing the federal budget and paying off the national debt. (d) higher tariffs on imports or reduced import quotas to slow the outsourcing of domestic jobs. (e) to initiate aggressive foreign policies that will ensure jobs in the military for young healthy people. 314. 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. 315. The theorist who most notably disagreed with the idea that money is neutral – that “the absolute quantity of money in a nation has no affect on the real output of that nation” would have been: (a) John Maynard Keynes. (b) Adam Smith. (c) David Hume. (d) David Ricardo. (e) John Stuart Mill. (f) Milton Friedman. 316. The investment decisions of pension fund administrators would be least comprehensible and most clearly inconsistent with the objectives of those whose funds they manage if they invested heavily in: (a) investment grade tax free municipal bonds. (b) a highly diversified portfolio of junk bonds. (c) blue chip corporate stocks. (d) U.S. Treasury bonds. (e) a seasoned issue of bonds being marketed by a reputable investment banker. 317. Alexa and Chandra were destitute before they loaded five ATM machines from three shopping malls into their rented U-Haul truck, escaped, and broke the machines open. The immediate result of their crime spree is an increase in the: (a) Keynesian spending multiplier. (b) money supply. (c) reserves in the banking system. (d) monetary base. (e) government budget deficit. 318. Yasmin owns an appliance store, and Jill is a painter with nine gallons of leftover paint. They both belong to the Swap Club, which was organized to evade income taxes. Yasmin would like a fresh coat of paint on the interior of her house and Jill wants a television. Jill agrees to paint three of Yasmin’s rooms in exchange for a wide-screen digital TV. Jill and Yasmin have experienced: (a) zero transaction costs. (b) fiscal deficiency. (c) costly disequilibrium. (d) a double coincidence of wants. (e) an underground division of labor. 319. Wages and prices are assumed to adjust to given equal rates of excess demand or excess supply almost instantaneously and with equal rapidity, according to: (a) Lerner wage-price reaction functions. (b) such modern variants of neoclassical economic theory as the theory of efficient markets. (c) traditional Keynesian theory of business cycles. (d) modern behavioral economics. (e) the “new” Keynesian theories of business cycles. 31 320. Uncle Sam offers to pay you [or your heirs or assigns] $50 each year forever starting one year from today if you loan him some money today. The current interest rate is 5%. What is the maximum amount are you willing to loan him? (a) $0. (b) $250. (c) $1000. (d) $2,500. (e) $10,000. 321. The Nobel Prize winning economists with personal financial interests in the fortunes of Long Term Capital Management are: (a) Robert Merton and Myron Scholes. (b) Fisher Black and Paul Samuelson. (c) Merton Miller and John Nash. (d) Edward Prescott and Finn Kydland. (e) Daniel Kahneman and Vernon Smith. 322. 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. (e) budget deficits are likely to reduce people’s incentives to save while increasing the incentives for business firms to invest in economic capital. 323. The theory that the magnitude of “bezzle” [corporate fraud] and pressure for deregulation are both positively related to the level of prosperity in a country, and that the discovery and prosecution of bezzle and pressure for more regulation emerge during downturns in economic activity was authored by: (a) John Kenneth Galbraith. (b) John Maynard Keynes. (c) Paul Samuelson. (d) Milton Friedman. (e) Myron Scholes. 324. Transaction costs incurred by a lender who desired to sell would be highest for the money market securities: (a) repos. (b) U.S. Treasury bills. (c) interbank loans through the federal funds market. (d) commercial paper. (e) bankers acceptances. (f) negotiable CDs. (g) Eurodollars. 325. Inflationary growth is shown by a shift from: (a) AS0 to AS1. (b) AD0 to AD1. (c) AS1 to AS0. (d) AD1 to AD0. 326. In the U.S. economy, the era from 1865 or so to roughly 1890 would be shown as movement like: (a) AS0 to AS1. (b) AD0 to AD1. (c) AS1 to AS0. (d) AD1 to AD0. 327. The odds of reelection for incumbent national politicians are likely to be harmed most by a shift from: (a) AS0 to AS1. (b) AD0 to AD1. (c) AS1 to AS0. (d) AD1 to AD0. 328. From 1929 to 1933, most economies throughout the world experienced a shift similar to: (a) AS0 to AS1. (b) AD0 to AD1. (c) AS1 to AS0. (d) AD1 to AD0. 329. 330. The potential money multiplier is to the reserve requirement ratio as the Keynesian “full strength” multiplier is to the: (a) rate of return on investment. (b) marginal propensity to save. (c) natural rate of interest. (d) recessionary gap. (e) structural budget deficit. 331. The theory that best explains term structure of interest rates is the: (a) liquidity premium theory. (b) optimal investment theory. (c) segmented market theory. (d) natural rate theory. (e) pure expectations theory. (f) efficient markets theory. (g) adaptive expectations theory. (h) preferred habitat theory. 32 332. 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. 333. The “Rube Goldberg” structure of financial regulation, the Federal Reserve System, and perhaps the entire financial system is probably least reflective of the traditional American: (a) fears of centralized power. (b) political concerns about “states rights.” (c) distrust of moneyed interest. (d) reluctance to trust the U.S. Treasury to properly control our currency and the money supply. (e) ad hoc [one-chunk-at-a-time] method of construction. 334. Recent examples of the securitization of assets include the rapid growth of: (a) mortgage backed securities. (b) internet banking. (c) debit cards. (d) household credit card debt. 335. The National Bank Act of 1863 imposed a prohibitive tax on the banknotes (currency) issued by state-chartered banks and was intended to eliminate state-chartering, but the number of these banks actually increased during the next century because they vigorously: (a) issued credit cards and lines of credit to wealthy individuals. (b) ignored the regulations of the Comptroller of the Currency. (c) issued deposit accounts to individuals and business firms. (d) branched into neighboring states. 336. 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 regulations in financial markets. 337. One lone minor 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. 338. The most important economic function of financial institutions is: (a) financial intermediation. (b) setting the interest rates for personal loans and commercial paper. (c) redistributing income and wealth. (d) “creating” money through loans from excess reserves. (e) facilitating the financing of federal budget deficits. 339. 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. 340. 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. 35 360. More efficient financial intermediaries tend to have higher than average rates of return because they are better able to discern bad risks, consequently reducing losses that arise from: (a) financial panics. (b) Knightian uncertainty. (c) moral hazard. (d) irrational exuberance. (e) adverse selection. 361. Overnight loans between banks that belong to the Federal Reserve System are transacted through the: (a) required reserves market. (b) excess reserves markets. (c) federal funds market. (d) interbank money market. (e) surplus funds market. 362. Milton Friedman believes it likely that an increase in the rate of monetary growth will cause nominal interest rates to: (a) rise because nominal income, the price level, and expected inflation will all rise, swamping the liquidity effect. (b) fall because inflation will reduce the willingness of financial investors to borrow. (c) rise because foreign investors will view U.S. financial securities more favorably. (d) fall because it will be easier for the U.S. Treasury to fund any federal deficit. 363. Money market repos are seldom if ever: (a) low risk loans. (b) collateralized with Treasury securities. (c) low interest rate loans. (d) substitutes for funds that could be secured from the FED’s discount window or through the federal funds market. (e) defaulted. 364. That dynamic hedging in accord with the Black-Scholes equation can eliminate uncertainty is an erroneous notion expressed in The Trillion Dollar Bet by the Nobel Prize winner: (a) Fisher Black. (b) Myron Scholes. (c) Robert Merton. (d) Leo Malamed. (e) Merton Miller. 365. In the United States during the past 25 years, the numbers of commercial banks, savings-and-loans, mutual savings banks, and credit unions have all decreased dramatically primarily because of: (a) deregulation in federal legal barriers that previously limited: (i) mergers and acquisitions among financial intermediaries, and (ii) competition between financial intermediaries. (b) globalization of financial markets. (c) declines in the average propensity to save – Americans now save significantly less than 4% of their disposable income. (d) increases in the federal debt and in private debt as Americans increasingly use credit cards and corporations increasingly rely on borrowed funds instead of equity (common stock) financing. (e) All of the above. 366. If the Federal Reserve System raises its target interest rates and through a domino effect, mortgage interest rates rise, there is likely to be a decrease in the: (a) rent charged for apartments near college campuses. (b) demand for housing. (c) rates of retirement of current middle-aged homeowners. (d) supply of housing. (e) mobility of migrant farm labor between different agricultural regions. 367. In the over-the-counter market, dealers “make a market” by: (a) using technical analysis to set the prices of securities. (b) building inventories of stocks when investors place an order to sell, and selling stocks from their inventories when investors want to buy. (c) forming syndicates with investment bankers associated with large brokerage houses. (d) securitizing financial derivatives. 368. If equilibrium real interest rates in the U.S. rise to an all time high, people in China are more likely to: (a) buy bonds in the U.S. market. (b) invest their economic capital in China. (c) import goods from Korea instead of the United States. (d) raise prices on all Chinese exports. (e) import goods from the United States. 369. Historically, the single most profitable category of export per unit for citizens of the United States as a whole has been: (a) iron and steel. (b) U.S. currency. (c) financial technology. (d) laissez faire economic policies. 370. Financial services that have become increasingly practical realities for many or most Americans primarily because of computer technologies developed in the last four decades or so do not include: (a) credit cards. (b) electronic banking facilities. (c) checking and savings accounts. (d) debit cards and ATM machines.(e) on-line banking.. 36 371. You have been following the price of a stock for many months but did not buy in because you did not have any money. Now you speculate the stock is over valued and you believe it is likely to fall in value in the near future. Now that you have money, you might capitalize on your belief by: (a) selling short. (b) buying the stock now as it might continue to go up even though you do not believe it will. (c) selling long. (d) You cannot capitalize on it, because you have simply missed the boat. 372. If our economy is a car, then money as a medium exchange functions as: (a) the steering wheel. (b) antifreeze. (c) gasoline. (d) the headlights. (e) the gear shift. 373. Between September 11, 2001 and today, the M1 money supply grew 3% to 7% faster than measured GDP, which suggests that since 9/11: (a) pessimism among consumers and investors reduced the velocity of money. (b) the underground economy grew substantially. (c) the real wage rate increased faster than prices. (d) the exchange rate of the dollar declined about 30% relative to the Euro. 374. In the long run, adoption of the proposal to at least partially privatize Social Security is least likely to: (a) increase the level of national debt. (b) boost the income shares of people at the top of the pyramid, while reducing the shares of low-income people. (c) significantly increase post-retirement real incomes for most senior citizens. (d) raise interest rates paid very short-term U.S. Treasury bonds and other federal debt. (e) intensify moral hazard problems because if prospective retirees are confident that a senior citizen voting bloc will bail out people whose investments fail, they are likely to engage in excessively risky investment strategies. (f) the size of a federal bureaucracy because some agency will screen investments to identify those suitable for potential retirees. (g) increase the level of the stock market and drive down the rate of return for financial investors. (h) boost the relative incomes of mutual firm managers and stock brokerage firms. 375. Automated buy or sell market orders from major institutional investors based on target values for particular financial securities are referred to as: (a) making a market. (b) program trading. (c) puts and calls. (d) swap orders. (e) arbitraged portfolio management. 376. All else equal, rapid growth in the U.S. economy would be most certain to be accompanied by: (a) increased federal budget deficits. (b) increases in both the supplies of and demands for corporate bonds. (c) declines in the real rate of interest. (d) increases in the capital account surplus in the U.S. balance of payments. 377. According to 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) is determined by the analysis of the highest successful bidder. (c) fully reflects all available relevant information. (d) equals face value divided by the legally specified rate of return. 378. If monitoring the performance of agents is costly, then among the practical techniques that a principal (e.g., a corporate board) can use to induce its agents (e.g., managers) to be diligent is to: (a) pay them more than they would make in their next best alternative employment, per the theory of “efficiency wages.” (b) reduce all salaries proportionally if annual reports indicate lower returns on assets than is typical of the industry. (c) set up profit sharing programs for all employees, with fixed and identical shares going to each employee. (d) hire consultants who specialize in the engineering efficiency of production techniques. 379. From the perspectives of American financial investors, inflation-indexed U.S. Treasury bonds may still pose a problem of: (a) default risk. (b) exchange rate risk. (c) interest rate risk. (d) liquidity risk. (e) inflation risk. 380. Finance companies raise funds and thereby provide consumers indirect access to money markets by selling: (a) commercial paper. (b) shares of their common stock. (c) securitized short-term personal loans. (d) collateralized foreign exchange. (e) financial acceptances. (f) debentures. 37 381. A bond that pays a fixed interest payment every period and repays the face value at the maturity date is: (a) a coupon bond. (b) an amortized bond. (c) an annuity. (d) a debenture. (e) a discount bond. 382. If you pay $9,925 for a 91-day Treasury bill with a face value of $10,000, the bill’s annualized yield to maturity is roughly: (a) 0.75 percent. (b) 1.5 percent. (c) 3.0 percent. (d) 4.5 percent. (e) 7.5 percent. 383. If the current tax structure is T1 and potential GDP is $12 trillion, but current GDP is only $6 trillion, then: (a) government should increase taxes to balance the budget. (b) the structural deficit is de and the cyclical deficit equals ac – de. (c) structural surplus equals fg. (d) cyclical deficit equals ac. (e) fiscal drag is inhibiting economic growth. 384. With tax structure T0 and full employment GDP of $18 trillion: (a) the budget has a structural deficit of fg. (b) fiscal drag may be at fault if current GDP is only $12 trillion. (b) Keynesian theory supports a cut in government spending to eliminate an inflationary gap. (c) supply side theory supports a tax hike to balance the budget. 385. If interest rates fall and this lowers mortgage payments so that homebuyers can afford to buy more expensive houses, the predictable increase in housing prices is most directly a symptom of: (a) capitalization. (b) a speculative bubble in the housing market. (c) national economic prosperity. (d) securitization. (e) rational expectations and efficient markets. 386. Consumers’ increased reliance on credit cards and the ready availability of currency through ATMs has tended to increase the: (a) marginal propensity to consume. (b) velocity of money. (c) average costs of transactions. (d) pure economic profits of commercial banks. (e) M1 money supply. 387. 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. 388. If transaction motives dominate the demand for money, then after the price level has increased people are most likely to: (a) consume even more than usual so there is no chance the money will devalue even further. (b) hold a greater real quantity of money[M/P]. (c) hold a greater nominal quantity of money [M]. (d) consume more in the short run but then slow to their original level of consumption. 389. 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. 390. A bidder is certain to secure the amounts of T-Bills it wants to buy if it: (a) bids more than the average of all bids received by the Treasury. (b) makes a noncompetitive bid for T-bills. (c) structures a “repo” for T-bills that is lower than any other repo offered on the market. (d) bids less than the average of all bids received by the Treasury. 391. A nation is likely to experience economic growth and development if there are increases in: (a) imports of consumer goods. (b) the marginal propensity to consume. (c) investor confidence and rates of private saving. (d) federal budget deficits. (e) the Keynesian spending multiplier. 40 416. Say's Law is a cornerstone for: (a) Marxist macroeconomics. (b) Keynesian economics. (c) classical macroeconomics. (d) Schumpeterian business cycles. 417. The income velocity of money in Irving Fisher’s equation of exchange is calculated as: (a) nominal money stock/nominal GDP. (b) nominal GDP/nominal money stock. (c) real money stock/real GDP. (d) mc2. 418. In the long run, the activities of successful speculators tend to: (a) reduce the volatility of prices. (b) attract legal attention resulting in imprisonment. (c) increase the level and volatility of prices. (d) yield tremendous profits and raise costs to consumers. 419. Changes in reserve requirements most directly and immediately affect the: (a) monetary base. (b) banks' holdings of securities. (c) Fed's holdings of foreign exchange. (d) potential money multiplier. (e) actual money multiplier. 420. An individual or organization that simultaneously buys low and sells high in different markets is a/an: (a) angel duster. (b) escalator. (c) arbitrager. (d) finagler. (e) optimizer. (f) elevator. (g) speculator. (h) analyst. (i) operator. (j) optionizer. (k) corporate raider. 421. Keynesian monetary theory assumes that the cost of holding money is best measured by the: (a) reciprocal of the CPI (i.e., 1/CPI). (b) CPI. (c) interest rates on bonds. (d) realized rate of inflation. 422. From a macroeconomic perspective, allocative efficiency in financial intermediation requires: (a) the flows from savers to borrowers to facilitate the investments expected to be most socially valuable. (b) maximization of profit by central bankers. (c) minimization of the spread realized by typical intermediaries. (d) maximization the rates of return of investors. (e) maximization of the present values of an individual investor’s portfolio. 423. Forming a syndicate is a method: (a) for attempting to exploit insider information to corner the market for a security. (b) by which investment bankers team up with other investment bankers to hedge the risk associated with placing huge new financial issues. (c) for developing a tombstone. (d) of pooling funds to lobby legislators to support laws favored by special interest groups. (e) that diversifies the asset structure of a financial portfolio. 424. Capital accumulation by firms in the form of new plants and equipment is most directly facilitated by: (a) predictable and stable expansion of the money supply. (b) low national saving rates. (c) bigger federal deficits at full employment. (d) financial investments in primary markets. (e) high interest rates. 425. A macroeconomic reason for the federal government to collect taxes from you is to: (a) keep you from spending it. (b) base taxes on a benefit principle. (c) provide monetary base for the FED’s conduct of expansionary open market operations. (d) avoid deflationary policies. (e) base taxation on an ability-to-pay principle. 426. 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. 427. Government profit that arises from differences between the value of currency printed and its printing cost is: (a) arbitrage. (b) fecundity. (c) seignorage. (d) profligacy. 428. Final profit-maximizing decisions by firms on alternative investments in economic capital would be most rationally based on: (a) rate-of-return analysis. (b) break-even analysis. (c) decision trees. (d) net present value [NPV] calculations. (e) fudge factors. 41 429. Relative to most variants of neoclassical macroeconomic theory, Keynesian theories of depression or recession are least consistent with: (a) Aggregate Supply curves that are positively sloped but not vertical. (b) the equation of exchange. (c) wage and price adjustments that are assumed symmetric and rapid. (d) the possible existence of long-run Phillips curves. 430. Diversification will be least economically efficient in reducing a stockholder’s portfolio risk if (a) unrelated firms merge into huge conglomerates (b) different firms respond to business cycles in very different ways. (c) Betas differ substantially among firms. (d) the covariances of firms tend to be highly negative. 431. Classical economists, modern monetarists, and Keynesians would all agree that: (a) declining investment leads to lower rates of return. (b) economic activity is volatile in a market economy. (c) equilibrium investment occurs when rates of return equal interest rates. (d) business cycles occur because of volatility in investors' moods. 432. Although perfect hedging against specific risk is theoretically possible, hedging would be least likely to be even close to perfect if an individual investor tried to avoid: (a) market risk. (b) interest rate risk. (c) inflation risk. (d) default risk. (e) unique risk. (f) exchange rate risk. 433. People with surpluses of money adjust by increasing their: (a) efforts to secure higher incomes. (b) consumption or outlays for financial or capital investments. (c) demands for money. (d) saving rates out of current income. (e) bank balances in checking accounts. 434. One Nobel-prize-winning economist featured in The Trillion Dollar Bet [title of the PBS Nova program] but who did not become associated with Long Term Capital Management [LTCM] was: (a) Duncan Black. (b) Myron Scholes. (c) Paul Samuelson. (d) Robert Merton. (e) Fisher Black. 435. The price of a stock option is least affected by the: (a) strike price. (b) price volatility of the stock and similar stocks within its industry. (c) strict regulations set by the SEC’s Options Pricing Regulatory Division. (d) length of time until the option’s expiration date. (e) stock’s historical market performance. 436. 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. 437. Classical macroeconomic theory is least consistent with the view that money is a: (a) medium of exchange. (b) measure of value. (c) standard unit of account. (d) store of value. (e) standard of deferred payment. 438. If federal outlays were $3500 billion and taxes revenues were $3600 billion, then there would necessarily be a $100 billion decline 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. 439. John Maynard Keynes' major innovation in monetary theory focused on the: (a) growth of the money supply. (b) loan policies of banks. (c) transactions demand for money. (d) speculative (asset) demand for money. 440. In 2003, New York Attorney General Eliot Spitzer alleged that Dick Strong’s mutual funds management firm, Strong Capital, engaged in illegal “after-hours” trades with Canary Capital, by allowing Canary to quickly jump in and out of its mutual funds to take advantage of market trends and make a quick buck - a practice known as: (a) insider trading. (b) market timing. (c) SOEB trading. (d) arbitrage. (e) stock swaps. 441. The economist who originally teamed with Myron Scholes to develop the Black-Scholes equations was: (a) Duncan Black. (b) Robert Merton. (c) Fischer Black. (d) Stanley Black. (e) Paul Samuelson. 42 442. 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. 443. 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. 444. An example of how principal/agent problems can reduce long run stockholder wealth occurs when, in the short run, executives: (a) insist on fringe benefits [perqs] not taxed as normal income. (b) engage in special-interest lobbying that yields tax breaks for some industries but not others. (c) earn higher incomes than stockholders. (d) mistakenly hire inept middle-managers. (e) inflate corporate accounting statements to drive up a stock’s price so that managers’ stock options can be exercised. 445. Capitalization is the process whereby: (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. 446. Financial investments in market-indexed no-load mutual funds with low management fees are optimal for most savers according to the theory of: (a) efficient markets. (b) Keynesian beauty contests. (c) irrational exuberance. (d) economic anomalies. (e) trend investing. 447. 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. 448. If the price/earnings ratio of Dehydrated Water, Inc. is 20, the historically-based accounting rate of return for Dehydrated Water is: (a) 20 percent. (b) 10 percent. (c) 200 percent. (d) 5 percent. 449. A new issue that does not generate sufficient interest among buyers to permit the complete sale of the securities by the issue date is described as. (a) privately placed. (b) undersubscribed. (c) limit- ordered. (d) underfunded. (e) oversubscribed. (f) overfunded. (g) weakly demanded. 450. BOTH Aggregate Demand and Aggregate Supply would tend to be reduced by increases in: (a) investment. (b) population growth rates. (c) marginal tax rates. (d) consumer confidence. (e) federal deficits. 451. Conventional descriptions of efficient markets theories are least compatible with: (a) “buy-and- hold” investment strategies. (b) dynamic hedging. (c) optimal diversification. (d) indexed mutual funds for average financial investors. (e) the theory of rational expectations. 452. 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. 453. Conversions of transactions balances to speculative (asset) balances of money are most easily explained if financial investors expect: (a) deficits to cause hyperinflation. (b) extraordinarily low interest rates to rise. (c) bond prices to increase. (d) loans to be exceptionally profitable. (e) the FED to sell more U.S. bonds. 45 474. Preferred stockholders hold a claim on assets that has priority over the claims of: (a) both common stockholders and bondholders. (b) neither common stockholders nor bondholders. (c) common stockholders, but after that of bondholders. (d) bondholders but after that of common stockholders. 475. Financial derivatives that can be used to broadly minimize risk but which cannot moderate uncertainty are called: (a) options. (b) warrants. (c) calls. (d) longs. (e) shorts. (f) stocks. (g) bonds. (h) miracles. (i) cup cakes. (j) flows. 476. Any financial investor able to use fully-owned assets with relatively low total value to control assets with significantly higher total value is said to be highly: (a) suspect. (b) leveraged. (c) mortgaged. (d) speculative. (e) arbitraged. 477. The economist who could use this graph to illustrate his hypothesis that we try to smooth consumption over our lifetimes, even though our income fluctuates, would be: (a) Milton Friedman. (b) John Maynard Keynes. (c) John Kenneth Galbraith. (d) Frank Knight. (e) Adam Smith. 478. The secondary market for mortgages was created by the: (a) Federal Home Loan Bank Board. (b) FreddieMac. (c) FannieMay. (d) U.S. Veterans Administration. (e) Federal Housing Administration. (f) none of the above. 479. When households hoard any extra money into idle balances because of pessimism, risk-aversion, or a belief that transaction costs are prohibitive, there is a problem known as a: (a) Keynes effect. (b) precautionary balance. (c) liquidity trap. (d) speculative balance. (e) miser effect. 480. If persistent, huge federal budget deficits were consistently accommodated by FED purchases of U.S. bonds, Milton Friedman and most other monetarists would predict that, in the long run, there would be: (a) disinflation in relative prices, but higher unemployment. (b) lower interest rates and faster economic growth. (c) better job opportunities and less stagflation. (d) increases in the price level, but not in aggregate output. 481. Corporate bonds secured by tangible non-real estate property are called: (a) secured bonds. (b) collateralized bonds. (c) mortgage bonds. (d) equipment trust certificates. 482. A long period of prosperity in the United States would be least likely to be accompanied by: (a) increases in the bezzle relative to GDP. (b) stock market bubbles caused by “irrational exuberance.” (c) increases in mergers and acquisitions. (d) pressure for Congress to deregulate business and eliminate a lot of “red tape.” (e) increases in cyclical federal budget deficits and decreases in structural budget deficits. 483. Expanding the money supply by a fixed small percentage rate each year as Milton Friedman has advocated is ultimately logically inconsistent with: (a) neoclassical economic theory. (b) small structural budget deficits. (c) a Constitutional amendment requiring balancing the federal budget annually. (d) the absorption equation [G-t] = [S—I] + [M—X]. 46 484. Risk affects liquidity in the sense that: (a) during uncertain times [e.g., when the prospect of a depression looms], 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. 485. 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. 486. If unanticipated growth of Aggregate Demand causes unemployment rates to fall and investors to expand investment, the resulting increases in human and physical capital: (a) increases the marginal productivity of workers. (b) increases the cost of leisure for average workers. (c) reduces the “natural” rate of unemployment. (d) is an example of a hysterisis effect. (e) All of the above. 487. Bonds secured by the cash flow of a particular revenue-generating project are known as: (a) coupon bonds. (b) general obligation bonds. (c) municipal bonds. (d) revenue bonds. 488. The neutrality of money is most consistent with the idea that: (a) how things are measured matters only trivially in the long run. (b) investors quickly learn to anticipate FED policies. (c) Aggregate Supply tends to grow faster than Aggregate Demand. (d) fiscal policy is more effective in the short run than monetary policy. (e) growth of the money supply affects real output more in the long run than in the short run. 489. 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. 490. A general equation capable of specifying the location/value of a moving variable at every continuously calculable nanosecond in time would be most likely to entail the use of: (a) Newtonian thermodynamics. (b) Ito calculus. (c) Fermat’s theorem. (d) the Black-Scholes equation. (e) Leibniz differentials. (f) hysterisis modeling. 491. If market prices for all financial investments perfectly reflect the best possible forecasts of future events, the efficiency of markets is termed: (a) perfectly rational. (b) weak. (c) omniscient. (d) strong. (e) semi-strong. (f) unfathomable. (g) really lucky. 492. The susceptibility of the value of an investment to fluctuations in the interest rate is known as: (a) volatility. (b) interest rate risk. (c) market fluctuation effect. (d) liquidity risk. 493. Federal legislation enacted in 2002 to deal with conflicts of interest by requiring corporate accountability, increased financial disclosure, and auditor independence is known as the. (a) Glass- Steagall Act. (b) Investment Advisers Act. (c) Sarbanes-Oxley Act. (d) McFadden Act. (e) Financial Insulation Act of 2002. (e) Graham-Leach-Bliley Act. 494. One macroeconomic theory assumes given amounts of excess demand in some sectors of the economy typically yield increases in wages and prices that exceed declines in wages and prices in response to comparable amounts of excess supply in other sectors of the economy. It further assumes that the structure of the economy is constantly in flux. This theory helps explain: (a) a persistent bias towards low rates of creeping inflation in the economy. (b) why policymakers cannot influence the natural rate of unemployment. (c) why interest rates and unemployment rates are roughly identical across time. (d) why Aggregate Demand has no long-run impact on real sectors of the economy. (e) why the structure of relative wages and the price level move in tandem. 47 495. If increasing uncertainty about stability in the stock market and bond market precipitate a financial panic, the likely effect on the demand for money would be that demand for money: (a) falls at first, and then rises when inflationary expectations increase. (b) rises. (c) overall, may either rise or fall because of offsetting Fisher and liquidity effects. (d) declines. 496. When federal budget deficits soar, if no new privately-held public debt is issued, then offsetting the deficits requires an equal increase in the: (a) international balance of trade. (b) rate of private investment. (c) monetary base. (d) rate of private saving. (e) sales of Treasury bonds by the FED. 497. An appropriate label on the Y1-axis in the top graph for this figure that is intended to illustrate John Kenneth Galbraith’s theories about the consequences of principal-agent problems and the dynamics of government would be: (a) risk. (b) interest rates. (c) consumer confidence. (d) national income. (e) bezzle. (f) discount rate. 498. An appropriate label on the Y2-axis in the middle graph of this figure intended to illustrate John Kenneth Galbraith’s theories about the consequences of principal-agent problems and the dynamics of government would be: (a) financial regulation. (b) electoral votes for incumbent politicians. (c) bezzle. (d) political uncertainty. (e) stock market indices. 499. According to the classical macroeconomic model, the: (a) government can reduce unemployment by running deficits. (b) demand for nominal money can be written as Md = kPQ, or Md = kPy. (c) income velocity of money determines real output. (d) money supply determines real output. (e) price level depends primarily on velocity. 500. Lenders frequently try to protect themselves from defaults on home loans by requiring borrowers to purchase: (a) default insurance. (b) private mortgage insurance. (c) home loan insurance. (d) term mortgage insurance. (e) title insurance. 501. When the Fed buys a security with an agreement that it can sell the security back to the seller in 1 to 15 days, the transaction is known as a: (a) matched sale-purchase. (b) repo. (c) long sell. (d) short buy. (e) factor reversal. 50 527. An auctioneer solicits the audience for ever higher bids until that moment when no other bidder seems willing to exceed the current top bid in a/an: (a) winner-take-all auction. (b) English auction. (c) Dutch auction. (d) E-Bay auction. (d) surplus auction. 528. The term “creative response” of the financial system refers to adjustments in financial institutions when faced with (a) emerging profit opportunities. (b) globalization of the world economy. (c) laws and regulations that limit opportunities for profits. (d) changes in the credit-worthiness of borrowers. 529. The commitment of funds by a financial investor based on the investor’s assessment of the consensus view about an investment is basic to the process of: (a) modern monetarism. (b) a Keynesian beauty contest. (c) value investing. (d) market timing. (e) rational expectations. 530. A short contract requires that the financial investor: (a) buy securities in the future. (b) deliver securities in the near future that the individual does not currently own. (c) hedge securities in the near the future. (d) close out the investor’s position in the near future. 531. The lowest priority for payments from funds secured through liquidation of a bankrupt firm goes to: (a) collateralized bank lenders. (b) general revenue bank lenders. (c) preferred stock holders. (d) common stock holders. (e) bond holders. 532. The average lifetime of a debt security’s stream of payments is called the security’s: (a) duration. (b) maturation. (c) seignorage. (d) longevity. (e) chronology. 533. A bond issuer retains the right to force a holder to sell a debenture back to the issuer if the bond contains a: (a) reclaim provision. (b) call provision. (c) reissue provision. (d) recall provision. (e) rebound provision. 534. The idea that “money is a veil” (neutral) because of rapid adjustments to increases or decreases in the money supply is LEAST consistent with ideas of: (a) classical macroeconomics. (b) the quantity theory of money based on Fisher’s MV=PQ. (c) real business cycle theories. (d) the Cambridge equation that Md = kPQ. (e).Keynesian theory. (f) efficient markets theory. 535. Savings and Loans (S&Ls) are to mortgages and long term loans as commercial banks are to: (a) commercial paper and short term loans. (b) overnight lending and the federal funds market. (c) floor plans [at, e.g., car dealers] and inventory financing. (d) venture capital and initial public offerings. 536. The law of large numbers suggests that when many people are insured, the probability distribution of the pay-outs will ultimately facilitate accurate predictions by taking the form of a: (a) normal distribution [a standard bell curve]. (b) stable standard deviation. (c) Poisson function. (d) student-T- distribution. (e) uniform distribution. 537. The dividend appreciation model of asset pricing is least compatible with: (a) efficient markets theory. (b) classical or neoclassical economics. (c) the “Keynesian beauty contest.” (d) rational expectations. 538. Output prices adjust more quickly than production costs do in response to changes in circumstances. This helps explain why: (a) inflation and unemployment are key microeconomic problems. (b) short- run Aggregate Demand curves are negatively sloped. (c) declines in Aggregate Demand cause stagflation. (d) short-run Aggregate Supply curves are positively sloped. 539. A bank robber who gets away with a lot of cash has most immediately and directly increased the: (a) riskiness of financial investments. (b) public’s expectations of inflation. (c) money supply. (d) liquidity effect. (e) velocity of money. 540. Aggregate Demand is most likely to shrink as a consequence of: (a) reductions in household saving. (b) rising government budget deficits. (c) leftward shifts in the supply of loanable funds (d). increased expectations of inflation. 51 541. When probability functions for certain broad classes of rare or exceedingly speculative events are primarily a matter of relatively uninformed guesswork, business decision makers are confronted by: (a) risk. (b) uncertainty. (c) moral hazards. (d) stochastic probability. (e) random selection. 542. The actual money multiplier [ma] is least affected by (a) the marginal propensity to save (mps). (b) excess reserves as a percentage of bank liabilities (xr). (c) the reserve requirement ratio (rr). (d) the Fed’s discount [d] rate. (e) the federal funds rate. 543. 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. 544. If you rely on the Food and Drug Administration and assume that the meat you buy from a grocery store is not diseased without microscopically inspecting its quality yourself, you are exhibiting the behavior known as: (a) moral hazard. (b) adverse selection. (c) rational ignorance. (d) a principal- agent problem. (e) bezzle. 545. Financial innovations are least likely to emerge because of: (a) rising interest rates (b) changes in the financial environment. (c) falling interest rates. (d) new financial regulations. (e) increasingly globalized capital markets. (f) price level stability. (g) deregulation in financial markets. 546. Market-value accounting has numerous advantages over historical-cost accounting, but the advantages do not include: (a) giving regulators the ability to close a bank before its net worth falls to zero. (b) absorbing fewer resources to acquire data and perform calculations. (c) reducing the incidence in the number of banks that “bet-the-bank” by taking excessive risks in hopes of staying in operation. (d) making it more difficult for bank officials to hide insolvencies. (e) making it more difficult for regulators and politicians to hide insolvencies. 547. Poorer people tend to have relative difficulty borrowing funds primarily because they: (a) seldom have much collateral. (b) tend, inherently, to be less honest. (c) suffer from pervasive wage and price discrimination. (d) fail to understand how financial markets operate. (e) all of the above. 548. When maximizing stockholder wealth conflicts with the self-interests of professional corporate managers, the difficulties encountered are broadly categorized as: (a) revenue satisficing. (b) the bezzle. (c) maximization of sales instead of profit. (d) principal/agent problems. (e) disincentives. 549. “Janitor’s insurance” is insider slang in the insurance industry for policies that: (a) pay out private unemployment benefits in the event you are fired. (b) provide limited benefits and protection. (c) have lower premiums to cater to the poor who want insurance. (d) cover liabilities from industrial accidents. (e) firms take out on the lives of their employees. 550. 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. 551. The reciprocal of a price-earnings ratio is mathematically equivalent to: (a) the accounting rate of return realized for the period. (b) the asset price divided by the income expected by its owner across the future. (c) book value divided by market capitalization. (d) market capitalization divided by shares outstanding. 552. Attempts to predict movements in stock prices based on past patterns are, according to the efficient markets theory: (a) a waste of time. (b) profitably employed by all financial analysts. (c) the most efficient rules to employ. (d) consistent with the random walk hypothesis. 52 553. All else constant, federal budget surpluses allow decreases in the: (a) national debt. (b) pressure for recession. (c) money multiplier. (d) misery index. (e) export/import ratio. 554. A person who is relatively risk averse will be likely to hold: (a) no money as a financial asset. (b) relatively large amounts of real estate. (c) assets expected to earn relatively low rates of return, but the variance and standard deviations on these returns also tend to be relatively low. (d) a single financial asset such as stock in XYZ corporation. (e) a relatively more diversified asset portfolio, overall. 555. 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. 556. Bearer instruments that pay holders the principal and earned interest only at or after maturity are: (a) negotiable certificates of deposit: (b) preferred bonds. (c) usually sold at discount rates exceeding the interest rates for other comparably risky instruments. (d) convertible debentures. (e) typically adjusted for the inflation experienced over the life of the instrument. 557. The bank chartering process is especially designed to deal with the _____ problem, and regular bank examinations help to reduce the _____ problem. (a) adverse selection; adverse selection (b) adverse selection; moral hazard (c) moral hazard; adverse selection (d) moral hazard; moral hazard 558. 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. (f) fiscal federalism. 559. For a given total return on assets, the owners of a bank will realize a higher rate of return on equity the lower is the level of: (a) the reserve requirement ratio. (b) the discount rate. (c) bank capital. (d) Treasury securities. (e) lending spread. (f) margin requirements. 560. If the market interest rate is 10 percent per year and government analysts discount the future benefits from a public project by only 5 percent per year, there will be an overstatement of the: (a) present value of the future benefits flowing from the project. (b) present value of immediate benefits. (c) current costs of the project. (d) true costs of the project. 561. If your noncompetitive bid for a Treasury bill is successful, then you will: (a) certainly pay less than if you had submitted a competitive bid. (b) probably pay more than if you had submitted a competitive bid. (c) pay the average of prices offered in successful competitive bids. (d) pay the same as the lowest successful competitive bidders. 562. Intermediaries with current portfolios of loans that are relatively narrow and specialized can most obviously reduce their exposure to risk for a given rate of return by: (a) reducing their excess reserve ratios. (b) screening to avoid adverse selection. (c) stringently rationing credit. (d) borrowing federal funds to increase their financial leverage. (e) diversifying their portfolios. 563. Internal financing for corporations is obtained by: (a) borrowing from banks. (b) selling common stock or bonds. (c) borrowing from stockholders. (d) reinvesting corporate income instead of paying it out as dividends. (e) none of the above. 564. Media headlines that that “the Fed lowered the interest rate” mean that the Board of Governors has announced a reduction in the: (a) interest rates paid on US Treasury money market instruments. (b) target rate for interest charged in the federal funds market. (c) interest rates paid on US Treasury bonds. (d) legal maximum rate that can be charged on credit cards. (e) target rate of price inflation. 565. Relatively faster inflation in one country than in others would affect its balance of payments by increasing: (a) exports but decreasing imports. (b) imports but decreasing exports. (c) both exports and imports. (d) capital exports and decreasing imports of consumer goods. 55 591. When the Federal Reserve Bank of Richmond writes a check to pay for refreshments at its annual year-end party, the: (a) reserves in the banking system grow, but the monetary base falls. (b) reserves fall. (c) magnitude of the federal deficit that the Treasury inevitably must somehow finance is increased. (d) monetary base rises. (e) currency in circulation falls. 592. Bank liabilities considered partially, but not fully, rate-sensitive include: (a) checkable deposits. (b) federal funds. (c) non-negotiable CDs. (d) fixed-rate mortgages. (e) money market deposit accounts. 593. The least likely way for a financial investor to use to reduce the risk associated with a given expected rate of return would be: (a) buying options. (b) selling short, based on expectations that the price of an asset will fall. (c) buying foreign exchange futures when contractually obligated to pay a foreigner in the near future. (d) diversifying a portfolio. (e) hedging. 594. If you bought a long contract on financial futures, you would be hoping that interest rates: (a) rise. (b) fall. (c) are stable. (d) fluctuate. 595. The factor most likely responsible for this decline in the interest rate from il to i2 in the figure at right would be: (a) a decline in the price level. (b) a decline in income. (c) an increase in the money supply. (d) a decline in the expected inflation rate. 596. Yield curves are usually: (a) gently upward-sloping. (b) gently downward-sloping. (c) flat. (d) bowl shaped. (e) mound shaped. (f) rectangular hyperbolas. 597. By hedging a portfolio, a bank manager: (a) reduces interest rate risk. (b) increases reinvestment risk. (c) increases exchange rate risk. (d) increases the probability of gains. 598. Bond prices are negatively related to the: (a) volatility of stock prices. (b) willingness of households to save. (c) interest rate. (d) optimism of employees about their job security and personal longevity. (e) size of the federal government surplus. 599. A bank that wants to reduce moral hazard by closely monitoring borrowers’ check payment practices often requires commercial borrowers to: (a) place a bank officer on their board of directors. (b) place a corporate officer on the bank’s board of directors. (c) keep compensating balances in a checking account at the bank. (d) charge interest rates that provide a “commercial cushion premium” against default risk. 600. Not among the tasks that investment bankers commonly perform when acting as an underwriter to sell securities to the public would be: (a) arranging interim financing from a venture capital firm. (b) pricing the security. (c) preparing the filings required by the Securities and Exchange Commission. (d) arranging for the security to be rated. (e) helping write the prospectus for the sale of the stock. 601. The seller of an option has the: (a) right to buy or sell the underlying asset. (b) obligation to buy or sell the underlying asset, at the buyer’s discretion. (c) ability to reduce transaction risk. (d) right to exchange one payment stream for another. 602. A bank manager concerned about interest income who expects interest rates to rise and who knows the bank currently has a positive gap should: (a) increase rate-sensitive assets and increase rate- sensitive liabilities. (b) decrease rate-sensitive assets and increase rate-sensitive liabilities. (c) decrease rate-sensitive assets and decrease rate-sensitive liabilities. (d) increase rate-sensitive assets and decrease rate-sensitive liabilities. 56 603. The risk that occurs because stock prices fluctuate is called: (a) stock market risk. (b) reinvestment risk. (c) interest rate risk. (d) default risk. 604. Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap times the change in the interest rate is called: (a) basic duration analysis. (b) basic gap analysis. (c) interest- exposure analysis. (d) gap-exposure analysis. (e) profit sensitivity analysis. 605. Provisions in loan contracts that forbid borrowers to engage in specified risky activities are called: (a) proscription bonds. (b) restrictive covenants. (c) due-on-sale clauses. (d) liens. 606. Investment banks find it less difficult to price and place securities if the firm has prior issues currently selling in the market. Such securities are called: (a) secondary issues. (b) seasoned issues. (c) sustained issues. (d) scarf issues. (e) secured issue. 607. Investment banks advertise security offerings with block ads in the Wall Street Journal, frequently after the security issue has been fully subscribed and the sale fully executed. Such an ad is called a: (a) tombstone. (b) marker. (c) prospectus. (d) registration statement. 608. From the perspectives of both the issuing corporation and the investment banker, the best outcome occurs when a new issue is: (a) undersubscribed. (b) fully subscribed. (c) oversubscribed. (d) syndicated. (e) broadcast. 609. The buyers of private placement securities are least likely to be: (a) insurance companies. (b) pension funds. (c) mutual funds. (d) commercial banks. (e) investment banks. 610. An instruction to a securities agent to buy or sell the security at the current market price is called: (a) a limit order. (b) a market order. (c) a pit order. (d) an option order. (e) a put. 611. Spreading false rumors about a company in an attempt to manipulate the market price of a security is an activity engaged in by an investment: (a) club. (b) syndicate. (c) pool. (d) cartel. (e) shark school. 612. The primary asset of a typical finance company is its: (a) commercial paper. (b) reserves for loan losses. (c) loan portfolio. (d) bank loans. (e) checkable deposits. 613. Insurance companies’ attempts to minimize adverse selection and moral hazard helps explain: (a) collateral deposits. (b) risk-based premiums. (c) compensating balances. (d) reinsurance. 614. Employees are not guaranteed a specific retirement benefit if a pension system is a/an: (a) defined- benefit plan. (b) defined-contribution plan. (c) overfunded plan. (d) underfunded plan. 615. One problem if regulators are likely to adopt a “too-big-to-fail policy” is that that such policies: (a) reduce the incentives for moral hazard by big banks. (b) increase the incentives for moral hazard by big banks. (c) reduce the incentives for adverse selection by big banks. (d) increase the incentives for adverse selection by big banks. 616. Thrift institutions do not include: (a) savings and loans. (b) credit unions. (c) mutual savings banks. (d) commercial banks. 617. The financial institutions that have most notably gained market share over the past 25 years have been: (a) commercial banks. (b) savings and loan associations. (c) credit unions. (d) mutual funds. 618. Liabilities on a bank’s balance sheet include: (a) vault cash. (b) reserves at the Fed. (c) checkable deposits. (d) loans. (e) deposits with other banks. 619. The Glass-Steagall Act prohibited commercial banks from: (a) issuing equity to finance bank expansion. (b) engaging in underwriting of and dealing in corporate securities. (c) selling new issues of government securities. (d) purchasing any debt securities. (e) interstate branch banking. 57 620. A typical commercial bank’s largest source of funds is its: (a) nontransaction deposits. (b) checking deposits. (c) borrowing from the Fed. (d) federal funds. 621. A foreign exchange intervention with an offsetting open market operation that leaves the monetary base unchanged is called: (a) an unsterilized foreign exchange intervention. (b) a sterilized foreign exchange intervention. (c) an exchange rate feedback rule. (d) a money neutral foreign exchange intervention. 622. The bundling of GNMA-guaranteed mortgages into a saleable security (usually for large institutional investors) is an example of: (a) disintermediation. (b) quasi-intermediation. (c) futures bundling. (d) hedge optioning. (e) securitization. 623. Credits in the U.S. balance of payments accounts would include: (a) capital outflows. (b) foreign aid. (c) merchandise exports. (d) merchandise imports. 624. The size of the statistical discrepancy needed to balance the balance of payments account indicates that: (a) hidden capital flows into the U.S. are inconsequential. (b) items in the balance of payments are measured quite accurately. (c) many international transactions go unrecorded. (d) US citizens gain significantly from the use of the dollar as an international medium of exchange. 625. A balance of payments _____ is associated with a _____ of international reserves. (a) deficit; loss (b) deficit; gain (c) surplus; loss (d) balance; gain 626. If the European demand for American exports rises at the same time that U.S. productivity rises relative to European productivity, then, in the long run: (a) the euro should appreciate relative to the dollar. (b) the dollar should depreciate relative to the euro. (c) the dollar should appreciate relative to the euro. (d) it is not clear whether the euro should appreciate or depreciate relative to the dollar. 627. John Kenneth Galbraith’s bezzle concept would be least applicable to: (a) Sadaam Hussein’s refusal to honor a treaty allowing access by UN arms inspectors during 1994-2002. (b) exaggerated official statistics on the USSR’s economic growth during 1929-1985. (c) the Annual Reports of K-Mart, WorldCom and Enron etc. during 1990-2002. (d) “boiler room” sales of phony corporate stocks. (e) widespread corporate shenanigans prior to establishment of the SEC in 1933. 628. The agency responsible for regulation of the futures exchanges and trading in financial futures is the: (a) Commodity Futures Trading Commission [CFTC]. (b) Securities and Exchange Commission [SEC] (c) US Treasury. (d) Comptroller of the Currency. (e) Federal Board of Trade. (f) None of the above. 629. The Fed was pressed for income during the 1920-1 recession, and began purchasing income-earning securities, thereby serendipitously discovering: (a) open market operations. (b) the real bills doctrine. (c) a stable monetary growth rule. (d) bi-metalism. (e) how to “peg” interest rates. 630. The notion that the prices of financial instruments instantaneously capitalize “rational expectations that reflect optimal forecasts based on all available information” is central to: (a) adverse selection. (b) insider information. (c) asymmetric information. (d) a strong version of efficient markets theory. (e) modern game theory. (f) saddle point equilibration. 631. Property pledged to the lender in the event that a borrower cannot repay a debt is called: (a) collateral. (b) points. (c) interest. (d) good faith money. (e) baksheesh. 632. Deposit insurance can increase the likelihood that depositors will need protection, as banks with deposit insurance are: (a) likely to take on greater risks than they otherwise would. (b) likely to be too conservative, reducing the probability of turning a profit. (c) likely to regard deposits as an unattractive source of funds due to depositors’ demands for safety. (d) placed at a competitive disadvantage in acquiring funds. 60 657. Over the past 25 years or so, the US financial institutions that have grown proportionally the most relative to these other financial institutions would be: (a) mutual funds. (b) commercial banks. (c) savings and loan associations. (d) credit unions. (e) mutual savings banks. 658. Banks increase the money supply when they: (a) build assets by charging interest. (b) print currency. (c) put more coins into circulation. (d) lend parts of excess reserves. 659. The percentage of deposits held in excess reserves depends most strongly 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. 660. The initial declines in nominal interest rates when expansionary monetary policy has not been expected are examples of the: (a) Friedman effect. (b) liquidity (Keynes) effect. (c) financial income effect. (d) capitalization effect. (e) Fisher effect. 661. In symbols, the absorption equation is written: (a) C + I + G + X – M = C + S + T. (b) G = T + ∆B + ∆MB. (c) G – T = [S – I] + [X – M]. (d) GDP – CCA – IBT = GNI. (e) PV = A/i. (f) MV = PQ. 662. When a lender refuses to make a loan even though potential borrowers assert willingness to pay the stated interest rate or even a higher rate, the bank is said to engage in: (a) coercive bargaining. (b) strategic holding out. (c) credit rationing. (d) collusive behavior. (e) tacit collusion. 663. Comprehensive and meaningful reform of the financial system would include: (a) greater diversity in regulation. (b) minimizing artificial incentives for new forms of intermediaries to emerge. (c) legally mandating that interest rates be adjusted for inflation. (d) encouraging greater competition among financial regulators. 664. Insurance management tools that give policyholders incentives to avoid the accidents insured against do not include: (a) reinsurance. (b) deductibles. (c) risk-based premiums. (d) coinsurance. 665. Attempts to manipulate the market prices of securities are among the illegal strategies commonly practiced by: (a) investment pools. (b) pit bosses. (c) loan sharks. (d) pit bulls. (e) pit bears. (f) arbitragers. 666. In the United States, the government agency requiring that firms selling securities in public markets adhere to standard accounting principles and disclose information about their sales, assets, and earnings is the (a) Federal Communications Commission. (b) Federal Trade Commission. (c) Securities and Exchange Commission. (d) U.S. Treasury Department. (e) Federal Reserve System. 667. Appreciation of the dollar would be most likely to result from: (a) low U.S. inflation relative to the rest of the world. (b) rapid U.S. economic growth. (c) an increase in U.S. imports. (d) U.S. balance of payments deficits. 668. The US banking system, in which some banks are chartered by the Comptroller of the Currency and supervised by the Fed, while other similar banks are chartered and significantly supervised by the various states is known as the: (a) “side-by-side” system. (b) dual banking system. (c) partial reserve system. (d) branch banking system. (e) fiscal federalism system. 669. The process of transforming previously less liquid financial assets into more liquid capital market securities is known as: (a) commercialization. (b) sleigh riding. (c) securitization. (d) liquefying. (e) hedging. (f) portfolio exfoliation. 670. 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) is a less accurate indicator of the tightness of credit market conditions than is the nominal interest rate. (d) defines the discount rate. 61 671. A financial contract that obligates one party to exchange a set of payments it owns for another set of payments owned by another party is called a: (a) cross hedge. (b) cross call option. (c) cross put option. (d) swap. 672. A financial asset that pays a fixed amount of money on an annual basis forever is called a: (a) trust fund. (b) future value. (c) perpetuity. (d) present value. 673. North Carolina and several neighboring states are in the Federal Reserve Bank district centered in: (a) Baltimore. (b) Washington DC. (c) Atlanta. (d) Richmond. (e) Charlotte. (f) Charleston. 674. A bank’s commitment (for a specified future period) to provide a firm with loans up to a given amount at an interest rate tied to a market interest rate is called: (a) seignorage. (b) credit rationing. (c) a line of credit. (d) continuous dealings. 675. Which of the following items cannot reasonably serve as a store of value? (a) Money (b) Stocks and bonds (c) Houses (d) Credit cards 676. 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 proper rates of return for specific investments. 677. The Purchasing Power Parity (PPP) theorem suggests that a country’s: (a) price level is positively related to the international exchange rate of its currency. (b) exchange rate is positively related to the amount of domestic inflation expected. (c) exchange rate is negatively related to its price level. (d) unemployment rate is negatively related to its rate of monetary growth. (e) terms of trade are determined by the industries in which it has absolute advantages. 678. Bugs Bunny believes liquidity premium theory but, all else equal, he prefers to minimize interest rate risk by holding short term bonds. Bugs would be most likely to be induced to switch to longer term bonds if: (a) the expected rate of inflation increased. (b) his latest electrocardiogram boosted his optimism about his potential longevity. (c) the yield curve became significantly steeper. (d) the US Treasury began to issue more 271-day bills and fewer long term bonds. 679. The money market instruments most conducive to the flow of international trade are: (a) Eurodollar deposits. (b) repurchase agreements [repos]. (c) banker’s acceptances. (d) foreign exchange insurance. (e) negotiable certificates of deposit. 680. Placing a large new financial issue by simultaneously using the services of several brokerage houses requires forming a/an: (a) cartel. (b) underwriters group. (c) lien-management association. (d) syndicate. (e) equity multiplier subsidiary. 681. You win the Idaho state lottery and are entitled to two tax-free payments of $500,000 each. You receive the first payment today and the next payment in exactly one year. Assume the interest rate is an unusually high 25%. The present value of your winnings is: (a) $1,000,000. (b) $900,000. (c) $750,000. (d) $666,666.67. (e) $1,250,000. 682. An individual’s purchase of shares of a stock from a newly-formed corporation when the corporation makes its initial public offering (IPO) would be an example of (a) long-term debt financing. (b) direct primary financing. (c) financing through a secondary market. (d) short term equity financing. (e) mutual funding. 683. National income accountants have noted a ______ saving trend in America, which [if true] implies that in the aggregate, Americans’ net worth is __________. (a) positive / rising. (b) negative / falling. (c) falling / rising. (d) positive / falling. 62 684. Even casual readers will know that not among standard sections of the Wall Street Journal would be: (a) Money & Investing. (b) Marketplace. (c) Personal Journal. (d) International Developments. 685. A privately operated national network that allows banks that lack enough reserves to borrow directly from banks with surpluses of reserves is the: (a) federal funds market. (b) federal reserve district bank. (c) Chicago Commodity Exchange. (d) margin discounter net. (e) stock and bond market known as "Wall Street". 686. Old MacDonald’s wife just bought the farm but three years earlier the couple had dumped her ___________ insurance to use the cash value to buy stock while good times were rolling. However, their broker failed to advise them to ____________ so MacDonald is left with nothing following the tech market crash. (a) term life / hedge (b) universal life / pay taxes (c) named peril / hedge (d) universal life / diversify 687. When a financial institution hedges interest-rate risk across its entire portfolio, the hedge is a (a) cross hedge. (b) macro hedge. (c) micro hedge. (d) future hedge. (e) global hedge. (f) forward hedge. 688. The price specified in an option contract at which the holder can buy or sell the underlying asset is called the exercise price or the: (a) premium. (b) call price. (c) strike price. (d) put price. (e) derivative price. 689. Pension plan assets have historically been invested primarily in (a) government securities. (b) corporate bonds. (c) certificates of deposit. (d) corporate stock. (e) hedges and options. 690. Although roughly half of the S&Ls in the United States had negative net worth and were thus insolvent by the end of 1982, regulators adopted a policy of regulatory _____, which amounted to _____ capital requirements. (a) sufferance / raising (b) forbearance / lowering (c) indulgence / raising (d) agnosticism; lowering 691. When offers to buy a new security issue exceed the amounts available, the issue is: (a) overfunded. (b) fully subscribed. (c) fully funded. (d) oversubscribed. (e) underfunded. (f) undersubscribed. 692. An asset's liquidity is, by definition, MOST negatively related to the: (a) asset's suitability as a commodity money. (b) transaction costs incurred in its purchase or sale. (c) speed with which it can be sold. (d) certainty about its market price. (e) profitability of investing in stocks or bonds. 693. Efficient markets theory implies that the prices of stocks and bonds will be unaffected by changes in the FED’s: (a) discount rate. (b) target rate for the federal funds rate. (c) margin requirements. (d) open market operations. (e) reserve requirement ratios. 694. The value of one currency relative to another is called the (a) terms of trade. (b) exchange rate. (c) swap parameter. (d) arbitrage ratio. (e) currency coefficient. 695. Applying the theory of bureaucratic behavior to the Fed helps explain why the Fed (a) usually supports congressional attempts to limit the central bank's autonomy. (b) is so secretive about the conduct of future monetary policy. (c) sought to loosen its control over banks in the 1980s. (d) is unwilling to take on powerful groups that may threaten its autonomy. 696. Under an international gold standard, if a country ended up with a deficit from the balances on its capital and current accounts, it: (a) exported gold to settle the balance. (b) imported gold to settle the balance. (c) showed a deficit for all international transactions. (d) showed a surplus for all international transactions. 697. Under “best-efforts” underwriting, the underwriter: (a) pays for the entire security issue. (b) sells the security on a commission basis. (c) syndicates the issue to spread the risk among different brokerage houses. (d) makes a special appeal to the Securities and Exchange Commission to permit delaying the issue. (e) issues the prospectus with no guarantee about its accuracy. 65 724. Which of the following functions are not performed by any of the twelve regional Federal Reserve Banks? (a) Check clearing (b) Conducting economic research (c) Setting interest rates payable on time deposits (d) Issuing new currency 725. 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 726. The chairman of the Board of Governors who served throughout the first term of George W. Bush’s tenure as president received his initial appointment from President (a) Bill Clinton. (b) Gerald Ford. (c) Richard Nixon. (d) Ronald Reagan. (e) George H.W. Bush. 727. Financial intermediaries can substantially reduce transaction costs per dollar of transactions because their relatively large size enables them to exploit: (a) poorly informed consumers. (b) their market power. (c) divisions of labor. (d) their comparative disadvantages. (e) economies of scale. 728. The theory of bureaucratic behavior suggests that the objective of a bureaucracy is to maximize (a) the public's welfare. (b) profits. (c) its own welfare. (d) conflict with the executive and legislative branches of government. 729. NOT among the major reasons for the rapid expansion of international banking would be the (a) rapid growth in international trade. (b) desire for U.S. banks to expand. (c) growth of multinational corporations. (d) desire for U.S. banks to escape burdensome domestic regulations. 730. IPOs became especially important in the U.S. economy during the 1990s as major sources of financing for (a) so-called "blue-chip" companies. (b) hedge funds. (c) “dot.coms” and internet companies. (d) mutual funds. (e) puts and calls. 731. Mutual funds differ from hedge funds primarily in that mutual funds: (a) have a minimum investment requirement of $100,000 or more. (b) typically charge investors higher fees than do hedge funds. (c) do not require investors to commit their money for than a few weeks at a time, explaining why they pay higher fees. (d) are limited to fewer than 100 investors (limited partners). (e) are far more regulated than hedge funds. 732. Futures contracts are regularly traded on the (a) Chicago Board of Trade. (b) New York Stock Exchange. (c) American Stock Exchange. (d) Chicago Board of Options Exchange. 733. If you shorted a futures contract for bonds you hope that interest rates (a) rise. (b) fall. C) are stable. (d) fluctuate. (e) are driven down by disinflation. 734. Futures differ from forwards because they are (a) used to hedge portfolios. (b) used to hedge individual securities. (c) used in both financial and foreign exchange markets. (d) a standardized contract. (e) not marked to market daily. 735. Fraudulent practices and other abuses of private pension funds led Congress to enact the (a) FDIC Act. (b) Federal Reserve Act. (c) FHLBS. (d) Employee Retirement Income Security Act. 736. The government institution that has responsibility for the amount of money and credit supplied in the economy as a whole is the: (a) central bank. (b) commercial bank. (c) bank of settlement. (d) monetary fund. 737. Moral hazard is an important feature of insurance arrangements because the existence of insurance (a) provides increased incentives for risk taking. (b) is a hindrance to efficient risk taking. (c) causes the private cost of the insured activity to increase. (d) unnecessarily drives up the cost of doing business. 66 738. The regulatory system that has evolved in the United States whereby banks are regulated at the state level, the national level, or both, is known as a (a) bilateral regulatory system. (b) tiered regulatory system. (c) two-tiered regulatory system. (d) dual banking system. 739. Which of the following are not reported as assets on a bank's balance sheet? (a) Cash items in the process of collection (b) Deposits with other banks (c) U.S. Treasury securities (d) Checkable deposits 740. A clause in a mortgage loan contract requiring the borrower to purchase homeowner's insurance is an example of a (a) proscriptive covenant. (b) prescriptive covenant. (c) restrictive covenant. (d) constraint-imposed covenant. 741. The most important category of assets on a typical bank's balance sheet is (a) discount loans. (b) corporate securities. (c) loans. (d) cash items in the process of collection. 742. If bad credit risks 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. 743. That most used cars are sold by intermediaries (i.e., used car dealers) provides evidence that these intermediaries (a) have been afforded special government treatment, since used car dealers do not provide information that is valued by consumers of used cars. (b) are able to prevent potential competitors from free-riding off the information that they provide. (c) have failed to solve adverse selection problems in this market because "lemons" continue to be traded. (d) care little about their reputations for ethical transactions, because what potential customers think bears little on the profitability of a used car lot. 744. You would become more willing to purchase U.S. Treasury bonds, other things equal, if (a) you inherited $1 million from your Uncle Harry. (b) you expect interest rates to rise. (c) gold bullion became more liquid and its price became less volatile. (d) expected rates of inflation suddenly increased. 745. Not among the major advantages of market-value accounting over historical-cost accounting would be that market-value accounting: (a) improves the ability of regulators to close a bank before its net worth falls to zero. (b) reduces the incidence in the number of banks that "bet- the-bank" by taking excessive risks in hopes of staying in operation. (c) makes it harder for bank officials to hide insolvencies. (d) makes it harder for regulators and politicians to hide insolvencies. (e) requires fewer resources to acquire data and perform calculations. 746. Of money's three functions, the one that most distinguishes money from other assets is its function as a: (a) store of value. (B) unit of account. (c) standard of deferred payment. (d) medium of exchange. 747. A starting point for understanding exchange rate determination is _____, which states: if two countries produce an identical good, the price of the good should be the same throughout the world no matter which country produces it. (a) Gresham's law (b) the law of one price (c) purchasing power parity (d) arbitrage 748. The term structure of interest rates is (a) the relationship among interest rates of different bonds with the same maturity. (b) the structure of how interest rates move over time. (c) the relationship among the term to maturity of different bonds. (d) the relationship among interest rates on bonds with different maturities. 749. 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 67 750. Which of the following is not one of the eight basic puzzles about financial structure? (a) Large, well-established corporations have superior access to securities markets to finance their activities. (b) Indirect finance, which involves the activities of financial intermediaries, is many times more important than direct finance, in which businesses raise funds directly from lenders in financial markets. (c) Collateral is a prevalent feature of debt contracts for households, but not business since they have many alternative sources for funds. (d) Banks are the most important source of external funds to finance businesses. 751. 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. 752. Poorer people usually have more difficulty getting loans because they: (a) face consistent policies of price discrimination. (b) typically have little collateral. (c) are inherently less honest. (d) are less likely to benefit from access to financial markets. (e) are characterized by all of the above. 753. The theory of purchasing power parity states that exchange rates between any two currencies will adjust to reflect changes in (a) the interest rates of the two countries. (b) the current account balances of the two countries. (c) the price levels of the two countries. (d) monetary policies of the two countries. 754. Which of the following would cause appreciation of the domestic currency? (a) A higher domestic nominal interest rate due to a higher expected inflation rate. (b) A decline in the domestic real interest rate. (c) Slower growth in the domestic money supply. (d) Relatively slow growth of productivity. 755. If the exchange rate between the dollar and the euro changes from 1.0 to 1.1 euros per dollar, the (a) euro appreciates and the dollar depreciates. (b) dollar depreciates and the euro appreciates. (c) euro depreciates and the dollar appreciates. (d) dollar depreciates and the euro depreciates. 756. A bank failure is less likely to occur when a bank (a) holds less U.S. government securities. (b) suffers large deposit outflows. (c) minimizes excess reserves. (d) has more bank capital. 757. 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 quantity of money demanded 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. 758. If wealth decreases, the demand for common stocks _____ and that of long-term bonds _____. (a) increases; increases (b) increases; decreases (c) decreases; decreases (d) decreases; increases 759. When the FED buys U.S. Treasury bonds during its open market operations, the: (a) burden on Americans is higher than if the bonds were privately held. (b) Treasury must repay these bonds even if the government goes bankrupt. (c) bonds owned by the FED should probably NOT be considered government debt. (d) FED makes huge profits that it fully distributes to stockholders. (e) monetary base shrinks, dampening inflationary pressures. 760. Major problems associated with federal budget deficits include potentially: (a) more rapid inflation. (b) higher rates of money growth. (c) higher interest rates. (d) lower international exchange rates for the dollar. (e) All of the above. 761. 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 70 790. When stock prices become more volatile, the ______ curve for bonds shifts to the _____. (a) demand; right (b) demand; left (c) supply; left (d) supply; right. 791. The term structure of interest rates is the: (a) relationship among interest rates of different bonds with the same maturity. (b) structure of how interest rates move over time. (c) relationship among the term to maturity of different bonds. (d) relationship among interest rates on bonds with different maturities. 792. Which of the following long-term bonds has the highest interest rate? (a) Corporate Baa bonds (b) U.S. Treasury bonds (c) Corporate Aaa bonds (d) High grade municipal bonds. 793. The risk premium on corporate bonds rises when: (a) brokerage commissions fall in the corporate bond market. (b) a flurry of major corporate bankruptcies occurs. (c) the Treasury bond market becomes less liquid. (d) corporate bonds become more liquid. 794. Typically, yield curves are: (a) gently upward sloping. (b) gently downward sloping. (c) flat. (d) bowl shaped. (e) mound shaped. 795. Risk premiums are reflected in the interest rate on a given asset minus the: (a) probability of default. (b) interest rate on a relatively riskless asset. (c) expected rate of inflation. (d) loan guarantee rate offered by a competitive asset. 796. According to the liquidity premium theory of the term structure, a steeply upward sloping yield curve indicates that: (a) short-term interest rates are expected to rise in the future. (b) short-term interest rates are expected to remain unchanged in the future. (c) short-term interest rates are expected to decline moderately in the future. (d) short-term interest rates are expected to decline sharply in the future. 797. When the exchange rate for the Mexican pesos changes from 9 pesos to the dollar to 10 pesos to the dollar, then the peso has: (a) appreciated and the dollar has appreciated. (b) depreciated and the dollar has appreciated. (c) appreciated and the dollar has depreciated. (d) depreciated and the dollar has depreciated. 798. A one-time increase in the domestic money supply causes the domestic currency to: (a) depreciate more in the short run than in the long run. (b) depreciate more in the long run than in the short run. (c) appreciate more in the short run than in the long run. (d) appreciate more in the long run than in the short run. 799. In the past 20 years or so, American corporations: (a) repurchased such large numbers of shares that stock issues have been a negative source of corporate finance in recent years. (b) took advantage of an especially strong stock market to issue record numbers of new shares in recent years. (c) generally abandoned corporate bond and commercial paper markets to concentrate on new stock issues. (d) have been unable to compete with most foreign firms for new financing. 800. Which of the following bank assets is the most liquid? (a) Consumer loans (b) Reserves (c) Cash items in process of collection (d) U.S. government securities. 801. If a bank has $100,000 of deposits, a required reserve ratio of 20 percent, and it holds $40,000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet is: (a) $30,000. (b) $25,000. (c) $20,000. (d) $10,000. 802. The process of transforming otherwise illiquid financial assets into marketable capital market instruments is know as: (a) securitization. (b) internationalization. (c) arbitrage. (d) program trading. (e) none of the above. 803. High-yield bonds that have always been rated below investment grade by the bond-rating agencies are often referred to as: (a) municipal bonds. (b) Yankee bonds. (c) "fallen angels." (d) junk bonds. 71 804. Of the following sources of external finance for large well-established American nonfinancial businesses, the least important is: (a) loans from financial intermediaries. (b) stocks. (c) bonds and commercial paper. (d) loans from governments, foreigners, and other businesses. 805. Probably the most significant factor explaining the drastic drop in the number of bank failures since the Great Depression has been: (a) the creation of the FDIC. (b) rapid economic growth since 1941. (c) the employment of new procedures by the Federal Reserve. (d) better bank management. (e) relative deregulation of the financial sector since 1981. 806. A bank’s “loan loss reserves” are estimates of the amounts of: (a) loans from other banks that will need to be repaid during a given period. (b) outflows of funds expected because of disintermediation. (c) contracts that will require renegotiation because of declines in market rates of interest. (d) assets that will prove uncollectible. (e) records that will be lost in the event of catastrophic computer failure. 807. Volatile investment plans due to changing business expectations, consequently driving business cycles in an economy, are an integral part of the modern macroeconomic theory originated by: (a) Irving Fisher. (b) Milton Friedman. (c) John Maynard Keynes. (d) Arthur Laffer. 808. 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. 809. The asset (speculative) demand for money depends strongly on: (a) private reluctance to invest speculatively. (b) forgone interest as a major cost of holding money. (c) anticipated stock market inflation. (d) eagerness to hold assets with fluctuating values. (e) desires to maximize tax-free income. 810. A chainsaw is to brain surgery as changes in: (a) government spending are to monetary policy. (b) open market operations are to interest rates. (c) tax rates are to foreign exchange rates. (d) discount rates are to bank lending. (e) reserve requirement ratios are to monetary stability. 811. The percentage of excess reserves banks desire depends most on the difference between the: (a) required reserve ratio and the margin requirement. (b) percentage of government deficit and the rate of inflation. (c) interest rates banks charge, and the interest rate they must pay to borrow reserves. (d) monetary base and the level of open market operations. (e) potential, and actual, money multipliers. 812. When the FED sells U.S. bonds, the banking system: (a) raises the monetary base proportionately. (b) reduces the potential money multiplier. (c) gradually shrinks loan-based demand deposits. (d) quickly boosts the level of bank reserves. 813. NOT among the assumptions underpinning the theory of efficient markets would be the idea that: (a) economic behavior is based on nearly perfect information among many market participants. (b) all prices are fixed in the short run. (c) transportation costs are zero, so that all goods and inputs can be moved freely and instantaneously between markets. (d) buyers try to maximize their utility, sellers their profits, and workers their well-being. 814. According to the natural real rate of interest hypothesis: (a) contractionary monetary policies permanently reduce real interest rates. (b) the real rate of interest is the percentage purchasing power paid by a borrower to a lender. (c) monetary growth lowers nominal interest rates in the long run. (d) the natural unemployment rate equals the nominal interest rate. 815. A lender who charges 12% interest anticipating a 6% real return expects the price level to: (a) decrease by 6%. (b) increase by 6%. (c) increase by 18%. (d) decrease 18%. 72 816. Increases in Aggregate Demand tend to directly yield increases in: (a) real interest and unemployment rates. (b) price inflation when resources are fully employed. (c) the reserve requirement ratio. (d) real tax rates, but reduce nominal tax revenue. 817. If the price level falls with a given money supply, real money balances will: (a) fall. (b) rise. (c) not be affected. (d) reduce the national debt. 818. Federal deficits are most inflationary when they are financed by the sales of U.S. Treasury bonds to _____ during a period of _____. (a) foreign firms and governments / international payments deficits. (b) worried people who hoard money / depression. (c) general public / wartime. (d) the FED (which prints the money) / full employment. 819. If aggregate output is constant while the money supply and its velocity both double, the equation of exchange predicts that the price level will: (a) double. (b) remain constant. (c) fall by 1/2. (d) quadruple (rise by a factor of 4.) 820. Keynesians view the opportunity cost of holding money as the: (a) wage rate foregone. (b) interest rate. (c) reciprocal of the price level. (d) growth rate of velocity. 821. Monetary policy makers would combat inflation by: (a) lowering the legal reserve ratio. (b) lowering the discount rate. (c) selling government securities to banks. (d) lowering the margin requirement. 822. Short-term instability in the demand for money would LEAST easily be traced to: (a) unstable expectations. (b) institutional changes. (c) unstable aggregate output. (d) swings in interest rates. 823. Milton Friedman's views are LEAST consistent with the idea that: (a) unstable Aggregate Demand can cause depression and inflation. (b) velocity is more predictably stable than the money supply. (c) the money supply should grow at a fixed annual rate of about 2 to 5 percent. (d) reductions in government spending will curb inflation. 824. If the prices of bonds were expected to fall in the near future then: (a) the asset demand for money would increase. (b) the transactions demand for money would increase. (c) the asset demand for money would fall. (d) the transactions demand for money would fall. 825. Velocity of money is: (a) greater, the more efficient money is in exchange. (b) greater, the smaller the ratio of nominal GDP to the price level. (c) lower, the greater the ratio of the transaction demand for money to nominal GDP. (d) unaffected by inflationary expectations. 826. Keynesian monetary theory suggests that the velocity of money falls when people: (a) decrease their saving. (b) convert money from transaction balances to asset balances. (c) elect politicians who enact deficits. (d) begin anticipating faster inflation. 827. Savers who move their funds out of financial institutions and seek higher interest rates elsewhere are practicing: (a) capital mobility. (b) loophole mining. (c) disintermediation. (d) deposit jumping. 828. Changes in the reserve requirement are an infrequently used monetary policy tool since: (a) this tool is too blunt. (It is to monetary stability what a chainsaw would be to brain surgery.) (b) this tool is too weak. (c) banks find it too easy to adjust so such changes are ineffective. (d) a Congressional resolution prevents it from being changed more than once every 48 months. 829. When those most likely to produce the outcome insured against are the ones who purchase insurance, insurance companies are said to face the problem of: (a) fraudulent claims. (b) moral hazard. (c) adverse selection. (d) pecuniary purchases. 830. When drivers are more likely to drive more recklessly because they have insurance against collisions, insurers are faced with negative effects from the: (a) moral hazard problem. (b) adverse selection problem. (c) assigned risk problem. (d) queuing problem. (e) personal culpability problem. 75 860. Holding large amounts of bank capital helps prevent bank failures because it: (a) means that the bank has a higher income. (b) makes loans easier to sell. (c) can be used to absorb the losses resulting from deposit outflows. (d) makes it easier to call in loans. 861. The legislation that separated investment banking from commercial banking is known as the: (a) National Bank Act of 1863. (b) Federal Reserve Act of 1913. (c) Glass-Steagall Act. (d) McFadden Act. 862. The Depository Institutions Deregulation and Monetary Control Act of 1980: (a) approved NOW accounts nationwide. (b) restricted the use of ATS accounts. (c) imposed restrictive usury ceilings on large agricultural loans. (d) allowed banks to invest in common stocks. (e) imposed uniform reserve requirements on time deposits and CDs. 863. Although as many as half of the S&Ls in the U.S. had a negative net worth and were thus insolvent by the end of 1982, regulators adopted a policy of _____, which amounted to _____ capital requirements. (a) regulatory forbearance; raising (b) regulatory forbearance; lowering (c) regulatory agnosticism; raising (d) regulatory agnosticism; lowering 864. The Federal Home Loan Bank Board and the FSLIC, both of which failed in their regulatory tasks, were abolished by the: (a) Competitive Equality Banking Act of 1987. (b) Financial Institutions Reform, Recovery and Enforcement Act of 1989. (c) Office of Thrift Supervision. (d) Office of the Comptroller of the Currency. 865. To replenish the reserves of the Savings Association Insurance Fund, the government: (a) levied a one-time tax on all deposits of savings and loans. (b) levied a one-time tax on all deposits of commercial banks. (c) raised deposit insurance premiums. (d) raised the excise tax on ATM transactions. 866. FIRREA imposes new restrictions on thrift activities. Under these restrictions, S&Ls: (a) can no longer purchase junk bonds. (b) cannot hold commercial real estate loans. (c) must hold at least 90% of their assets in investments that are housing related. (d) must comply with all of the above. 867. As in the United States, an important factor in the banking crises in Latin America was the: (a) financial liberalization that occurred in the 1980s. (b) decline in real interest rates that occurred in the 1980s. (c) high inflation that occurred in the 1980s. (d) sluggish economic growth that occurred in the 1980s. 868. "Bureaucratic gambling" refers to the: (a) strategy of thrift managers that they would not be audited by thrift regulators in the 1980s due to the relatively weak bureaucratic power of thrift regulators. (b) risk that thrift regulators took in publicizing the plight of the S&L industry in the early 1980s. (c) strategy adopted by thrift regulators of lowering capital requirements and pursuing regulatory forbearance in the 1980s in the hope that conditions in the S&L industry would improve. (d) frequency with which the Secretary of the Treasury has printed up extra money before heading for Las Vegas. 869. The federal regulatory agency responsible for regulating the activities of life insurance companies is: (a) the FDIC. (b) the Fed. (c) the FHLBS. (d) none of the above; there is no such federal regulatory agency. 870. Property and casualty insurance companies hold the largest share of their assets in: (a) long-term government bonds. (b) short-term government securities and commercial paper. (c) tax-exempt municipal bonds. (d) medium-term corporate bonds. 871. Keough plans and IRAs are: (a) individual pension plans. (b) government pension plans. (c) corporate pension plans. (d) public pension plans. 76 872. The Social Security system is an example of a public pension plan that is: (a) underfunded. (b) fully funded. (c) overfunded. (d) none of the above. 873. Which of the following is not provided by business finance companies?: (a) Factoring (b) Leasing equipment (c) Checking accounts (d) All are provided by business finance companies. 874. The fastest-growing types of financial intermediaries since the 1970s have been: (a) commercial banks. (b) credit unions. (c) finance companies. (d) money market mutual funds. 875. Mutual funds that allow shares to be redeemed at any time at a price that is tied to the asset value of the fund are known as: (a) close-end funds. (b) open-end funds. (c) asset-value funds. (d) redeemable funds. 876. Most mutual funds are: (a) no-load funds. (b) load funds. (c) large-load funds. (d) small-load funds. 877. Of the following financial intermediaries, which holds the least liquid assets?: (a) Property and casualty insurance companies (b) Life insurance companies (c) Money market mutual funds (d) Commercial banks 878. Of the three agencies that have been created to promote residential housing, the only one that is an entity of the U.S. government is: (a) Fannie Mae. (b) Ginnie Mae. (c) Freddie Mac. (d) Sallie Mae. 879. In financial markets an IPO is an: (a) investment portfolio option. (b) initial public offering. (c) initial portfolio offering. (d) investment portfolio option. 880. A Supreme Court ruling in March 1996 held that: (a) state laws to prevent banks from selling insurance can be superseded by federal rulings from banking regulators that allow banks to sell insurance. (b) state laws to prevent banks from selling insurance can not be superseded by federal rulings from banking regulators that allow banks to sell insurance. (c) state laws to prevent banks from selling insurance can be superseded only if Congress enacts legislation that allow banks to sell insurance. (d) state laws to prevent banks from selling insurance can not be superseded by federal legislation. 881. Insurance management tools that give policyholders incentives to avoid accidents insured against include: (a) deductibles. (b) risk-based premiums (c) coinsurance. (d) all of the above. 882. Competition among sellers of insurance policies has ______, and as a result, independent insurance agents have ______ market share. (a) decreased; lost (b) decreased; gained (c) increased; gained (d) increased; lost 883. Although neither _____ nor the _____ are officially set by the Federal Open Market Committee, decisions concerning these policy tools are effectively made by the committee. (a) margin requirements; discount rate (b) margin requirements; federal funds rate (c) reserve requirements; discount rate (d) reserve requirements; federal funds rate 884. Mutual funds are primarily held by: (a) financial institutions. (b) households. (c) nonfinacial businesses. (d) foreigners. (e) the Social Security trust fund. 885. A contract that requires the investor to sell securities on a future date is called a: (a) short contract. (b) long contract. (c) hedge. (d) micro hedge. (e) swap. 886. The advantage of forward contracts over future contracts is that they: (a) are standardized. (b) have lower default risk. (c) are more liquid. (d) are more flexible. 887. Options are contracts that give the purchasers the: (a) option to buy or sell an underlying asset. (b) obligation to buy or sell an underlying asset. (c) right to hold an underlying asset. (d) right to switch payment streams. 77 888. Which of the following features of futures contracts were not designed to increase liquidity?: (a) standardized contracts (b) traded up until maturity (c) not tied to one specific type of bond (d) marked to market daily 889. When a financial institution hedges the interest-rate risk for a specific asset, the hedge is called a: (a) macro hedge. (b) micro hedge. (c) cross hedge. (d) futures hedge. 890. When the financial institution is hedging interest-rate risk on its overall portfolio, then the hedge is a: (a) macro hedge. (b) micro hedge. (c) cross hedge. (d) futures hedge. 891. When the underlying asset in the futures contract is not the same as the asset being hedged then a _______ has taken place. (a) micro hedge (b) macro hedge (c) cross hedge (d) hedge ratio 892. Member commercial banks must purchase stock in their district Fed banks; the dividend paid by that stock is limited to: (a) four percent annually. (b) five percent annually. (c) six percent annually. (d) eight percent annually. 893. An option that can be exercised at any time up to maturity is called a(n): (a) swap. (b) stock option. (c) European option. (d) American option. 894. The _____ Fed bank, with over 30 percent of the system's assets, is the most important of the Federal Reserve Banks.: (a) Chicago (b) Los Angeles (c) Miami (d) New York (e) Washington, DC 895. The president from which Federal Reserve Bank always has a vote in the Federal Open Market Committee?: (a) Philadelphia (b) Boston (c) San Francisco (d) New York 896. All _____ are required to be members of the Fed. (a) state chartered banks (b) nationally chartered banks (c) banks with assets less than $100 million (d) banks with assets less than $500 million 897. Banks subject to reserve requirements set by the Federal Reserve System include: (a) only state chartered banks. (b) only nationally chartered banks. (c) only banks with assets less than $100 million. (d) only banks with assets less than $500 million . (e) all banks whether or not they are members of the Federal Reserve System. 898. The four players in the money supply process include: (a) banks, depositors, borrowers, and the U.S. Treasury. (b) banks, depositors, the central bank, and the U.S. Treasury. (c) banks, depositors, the central bank, and borrowers. (d) banks, borrowers, the central bank, and the U.S. Treasury. 899. If you sold a short contract on financial futures you hope interest rates: (a) rise. (b) fall. (c) are stable. (d) fluctuate. 900. Of the four players in the money supply process, most observers agree that the most important player is: (a) the United States Treasury. (b) the Federal Reserve System. (c) the FDIC. (d) the Office of Thrift Supervision. 901. Which of the following are NOT depository institutions?: (a) Commercial banks (b) Savings and loan associations (c) Mutual savings banks (d) Insurance companies 902. The monetary liabilities of the Federal Reserve include: (a) government securities and discount loans. (b) currency in circulation and reserves. (c) government securities and reserves. (d) currency in circulation and discount loans. 903. If the required reserve ratio is 20 percent, the simple deposit multiplier is: (a) 5.0. (b) 2.5. (c) 4.0 (d) 10.0. 904. When the Federal Reserve purchases a government bond in the open market: (a) reserves in the banking system increase. (b) reserves in the banking system decline. (c) Federal Reserve liabilities remain unchanged. (d) Federal Reserve liabilities decline. 80 932. The Fed can exert more precise control over _____ than it can over _____. (a) high-powered money; reserves (b) high-powered money; the monetary base (c) the monetary base; high-powered money (d) reserves; high-powered money 933. If the required reserve ratio is ten percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the money supply is: (a) $8000 billions. (b) $1200 billion. (c) $1,200,800 billion. (d) $8400 billion. 934. An increase in the nonborrowed monetary base, ceteris paribus, will eventually cause: (a) the money supply to fall. (b) the money supply to rise. (c) no change in the money supply. (d) demand deposits to fall. 935. All else constant, an increase in the required reserve ratio on checkable deposits will cause: (a) the money supply to rise. (b) the money supply to remain constant. (c) the money supply to fall. (d) checkable deposits to rise. 936. The actual execution of open market operations is done at: (a) the Board of Governors in Washington, D.C. (b) the Federal Reserve Bank of New York. (c) the Federal Reserve Bank of Philadelphia. (d) the Federal Reserve Bank of Boston. 937. The Fed's most commonly used means of changing the money supply is: (a) changing reserve requirements. (b) changing the discount rate. (c) open market operations. (d) changes in the Regulation Q ceiling rate. 938. The Fed's least commonly used means of changing the money supply is: (a) changing reserve requirements. (b) changing the discount rate. (c) open market sales. (d) open market purchases. 939. The Fed uses three policy tools to manipulate the money supply: _____ , which affect reserves and the monetary base; changes in _____, which affect reserves and the monetary base by influencing the quantity of discount loans; and changes in _____, which affect the money multiplier. (a) open market operations; the discount rate; margin requirements. (b) open market operations; the discount rate; reserve requirements. (c) the discount rate; open market operations; margin requirements. (d) the discount rate; open market operations; reserve requirements. 940. The discount rate is the: (a) interest rate the Fed charges on loans to banks. (b) price the Fed pays for government securities. (c) interest rate that banks charge their most preferred customers. (d) price banks pay the Fed for government securities. 941. If the Fed wants to temporarily inject reserves in the banking system, it will engage in: (a) a repurchase agreement. (b) a matched sale-purchase transaction. (c) reverse repurchase agreement. (d) none of the above. 942. If the Fed wants to temporarily drain reserves from the banking system, it will engage in: (a) a repurchase agreement. (b) a matched sale-purchase transaction. (c) a "pump" agreement. (d) none of the above. 943. If bad storms slow the check-clearing process, float tends to _____ causing the Fed to initiate defensive open market _____. (a) decrease; sales (b) decrease; purchases (c) increase; sales (d) increase; purchases 944. Which of the following is not an advantage of a penalty discount rate?: (a) A penalty discount rate would eliminate announcement effect uncertainty. (b) Banks would no longer borrow from the Fed to make a profit. (c) Fluctuations in reserves and the monetary base would be reduced relative to the current administered rate policy. (d) None of the above--all are believed to be advantages of a penalty discount rate policy. 81 945. The most common type of discount loan that the Fed extends to banks is called: (a) seasonal credit. (b) extended credit. (c) adjustment credit. (d) installment credit. 946. An increase in _____ reduces the money supply since it causes the _____ to fall. (a) reserve requirements; monetary base (b) reserve requirements; money multiplier (c) margin requirements; monetary base (d) margin requirements; money multiplier 947. Seasonal credit from Federal Reserve District Banks: (a) can be obtained with a telephone call. (b) is expected to be repaid fairly quickly. (c) is given to a limited number of banks in vacation and agricultural areas. (d) is all of the above. 948. In the market for reserves, an open market purchase shifts the supply curve to the: (a) left, lowering the federal funds interest rate. (b) right, lowering the federal funds interest rate. (c) right, raising the federal funds interest rate. (d) left, raising the federal funds interest rate. 949. In the market for reserves, a _____ discount rate shifts the supply curve to the left, _____ the federal funds interest rate. (a) lower; lowering (b) higher; raising (c) higher; lowering (d) lower; raising 950. Consider a proposal to adopt policies to (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) incompatible with the recommendations of Milton Friedman, among other modern monetarists. (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. 951. The type of macroeconomic policy that, after implementation, probably has the longest and most variable lag before its effects are felt is: (a) changes in tax rates. (b) industrial policy. (c) monetary policy. (d) incomes policy. (e) a change in the definition of M1. 952. According to natural rate theory, macropolicy cannot affect long-run rates of: (a) unemployment and inflation. (b) real interest and unemployment. (c) governmental growth. (d) monetary expansion. 953. According to the theory of rational expectations, discretionary monetary and fiscal policies will be effective only: (a) in the long run. (b) by shifting Aggregate Supply more than Aggregate Demand. (c) if they don't take households and firms by surprise. (d) if they cannot be forecasted accurately. 954. Time lags that hinder stabilization policy occur in which order over time?: (a) Impact, recognition, administrative. (b) Administrative, recognition, impact. (c) Impact, administrative, recognition. (d) Recognition, administrative, impact. 955. According to natural rate theory, expansionary monetary and fiscal policies: (a) may reduce unemployment temporarily. (b) eventually generate inflationary expectations. (c) cause nominal interest to rise in the long run. (d) lack any long-term effect on unemployment. (e) All of the above. 956. If the percentage growth rate of the US money supply were permanently increased, nominal interest rates would ultimately be permanently higher if the: (a) Keynes (liquidity) effect were larger than the Fisher effect. (b) Friedman effect exceeded the Keynes effect. (c) adjustments in markets for financial capital to expectations about inflation were incomplete. (d) Fisher effect were larger than the Keynes (liquidity) effect. (e) international capital market completely absorbed all of the extra dollars. 957. 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. 82 958. The primary source of external funds major US firms use to finance their activities is: (a) sales of new stock. (b) sales of bonds and commercial paper. (c) bank loans. (d) loans from foreign investors. (e) retained earnings. 959. One major difference between money and income is that: (a) money is a flow and income is a stock. (b) money is a stock and income is a flow. (c) there is no difference--money and income are both stocks. (d) there is no difference--money and income are both flows. 960. Banks, savings and loan associations, mutual savings banks, credit unions, and the stock market: (a) link those who want to save with these who want to invest. (b) are depositories for all money in the economy. (c) have been unresponsive to federal attempts to change the regulatory environment. (d) are the primary mechanisms used for direct economic investment. 961. Bank reserves held to accommodate depositors' withdrawals are: (a) excess reserves (written XR). (b) free reserves (or FR). (c) speculation reserves. (d) Federal Reserves. (e) defensive reserves. 962. Hyperinflation or persistent galloping inflation: (a) pose fewer problems than nominal inflation. (b) enhance economic efficiency by increasing the velocity of money. (c) undermine people's confidence in an economy's monetary system. (d) are usually caused by small but chronic structural budget deficits. (e) are seldom caused by excessive growth of the money supply. 963. NOT among crucial characteristics of money is its use as a: (a) medium of exchange. (b) standard unit of account. (c) store of value. (d) standard of deferred payment. (e) means of interpersonal utility comparisons. 964. A declining stock market index due to lower share prices will be most likely to: (a) drive unemployment rates down. (b) generate ever-larger federal government budget surpluses. (c) create inflationary pressure, thereby increasing interest rates. (d) make it easier for newly-established firms to secure funding. (e) reduce people's wealth and as a result reduce their consumption. 965. When the federal government budget runs a surplus, allowing the US Treasury to pay off some of our national debt, the _____ curve for bonds in the market for loanable funds shifts to the _____. (a) demand; right (b) demand; left (c) supply; left (d) supply; right 966. Prior to every recession in the United States since 1900, there has been a drop in the: (a) stock market’s Dow-Jones index. (b) supply of money. (c) growth rate of the money supply. (d) federal budget surplus or an increase in the deficit. (e) supply of economic capital. 967. The price paid for the rental of borrowed funds (usually expressed as a percentage of the rental of $100 per year) is commonly referred to as the: (a) inflation rate. (b) exchange rate. (c) interest rate. (d) aggregate price level. 968. The organization primarily responsible for the conduct of monetary policy in the United States is the: (a) Comptroller of the Currency. (b) U.S. Treasury. (c) Federal Reserve System. (d) Bureau of Monetary Affairs. (e) U.S. Mint. 969. Everything else constant, a stronger dollar will mean that: (a) tourists vacationing in the United States can buy things at less cost to them. (b) Americans can vacation in England at less cost. (c) French cheese becomes more expensive. (d) Japanese cars become more expensive. 970. 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 971. The most comprehensive measure of aggregate output is: (a) gross domestic product. (b) net national product. (b) the stock value of the industrial 500. (d) national income.