Efficient Markets Theory and Monetary Economics - Prof. Ralph Byrns, Quizzes of Financial Market

Download Efficient Markets Theory and Monetary Economics - Prof. Ralph Byrns and more Quizzes Financial Market in PDF only on Docsity! Econ 423: Questions from Previous Versions of Quiz 5 [Fall 2000-present] 1. The weak version of the efficient market hypothesis asserts that, the current market price of any asset is: (a) based primarily on investors’ expectations about how other investors assess the market for the asset. (b) the price willingly paid by the highest successful bidder. (c) the discounted value of expected cash flow, based on all readily available relevant information. (d) determined by the certainty of future interest payments. 2. The efficient market hypothesis is inconsistent with the evidence for the existence of a/an: (a) small-firm effect. (b) random walk effect. (c) July effect. (d) insider trading effect. (e) economies of scale effect. 3. According to the strong version of efficient markets theory, when “good news” about a company’s income is made public, the price of its stock will: (a) rise in the short run but revert back to its “natural” value in the long run. (b) either rise or fall, because stock prices follow a random walk unaffected by specific short-run events. (c) rise only if the good news was unexpected. (d) rise immediately, but then fall shortly after the announcement because savvy investors will sell the stock short because they expect the market to overvalue the good news. 4. NOT cited as evidence against efficient markets theory would be the: (a) January effect. (b) small firm effect. (c) Fisher effect. (d) volatility of financial markets. (e) experiences of Warren Buffet, Michael Milken, and other individuals who have made huge amounts of income across significant periods of time. 5. An assertion that, “Investing in a market in which people believe in efficiency is like playing poker against those who believe it does not pay to look at cards,” is attributed to: (a) junk bond king Michael Milken. (b) billionaire investor Warren Buffett. (c) inside trader Ivan Boesky. (d) pioneering retailer Sam Walton. (e) Enron CEO Ken Lay. 6. According to efficient markets theory the best way for small and risk averse investors with limited capital to take advantage of the relatively higher rates of return found in the stock markets, while still diversifying, is to invest in: (a) Dow Jones Industrial stocks. (b) blue chip stocks. (c) indexed mutual funds. (d) hedge funds. 7. Ivan Boesky, the most successful of the so-called “arbs” [arbitrageurs] in the 1980s, seemed able to outperform the market on a consistent basis. Ultimately, however, he spent time in jail for violating securities laws. This is evidence that: (a) securities markets are not efficient. (b) unexploited profit opportunities were abundant. (c) investors with inside information may be able to predictably outperform the market, but only if they acquire insider information by accident. (d) brilliant analysis is necessary to identify rare but predictable profit opportunities. 8. The efficient market hypothesis suggests that minimizing transaction costs and thereby maximizing the expected rate of return after adjustments for risk is accomplished through a: (a) “buy and hold” strategy. (b) Keynesian beauty contest. (c) careful study of alternative investments that helps investors “outguess” the market. (d) a buy and sell strategy. (e) dynamic hedging strategy. 9. The efficient market hypothesis suggests that allocating your funds in the financial markets on the advice of a financial analyst (a) will certainly mean higher returns than if you had made selections by throwing darts at the financial page. (b) will always mean lower returns than if you had made selections by throwing darts at the financial page. (c) is good for the economy. (d) is not likely to prove superior to a strategy of making selections by throwing darts at the financial page. 10. The interest rate on municipal bonds falls relative to the interest rate on Treasury securities when: (a) there is a major default in the municipal bond market. (b) income tax rates are raised. (c) municipal bonds become less widely traded. (d) corporate bonds become riskier. 1 11. An explanation of the Great Depression as having originated in part from increased expectations that the Smoot-Hawley Tariff would be enacted, provoking a world-wide trade war, is most consistent with the theory of: (a) John Maynard Keynes, as outlined in his book, The General Theory of Employment, Interest and Money. (b) the Ricardian theory of comparative advantage. (c) rational expectations. (d) asset bubbles. (e) irrational speculative exuberance. 12. In predicting the macroeconomic effects of changes in rates of monetary growth, the theory of efficient markets is least compatible with: (a) neoclassical macroeconomics. (b) the theory of rational expectations. (c) the Fisher effect. (d) the liquidity effect. (e) the price level effect. (f) “natural rate” theories of unemployment and interest rates. (g) the nominal income effect. 13. Technical analysis based on past patterns to try to predict future prices for financial securities is, according to the theory of efficient markets: (a) roughly as accurate as trying to foresee the future based on tea leaves or palm reading. (b) a demanding discipline requiring very sophisticated statistical techniques. (c) an efficient way to generate useful strategies for investments. (d) consistent with the random walk hypothesis. 14. According to the strong version of the efficient market hypothesis, the current price of a financial security: (a) is the discounted net present value of any riskless future interest payments. (b) fully reflects an optimal forecast based on all available relevant information. (c) is determined by the analysis of the highest successful bidder. (d) equals face value divided by the legally specified rate of return. 15. Tax rate reductions can yield more tax revenues if people respond by: (a) moving along the upward sloping part of the Laffer Curve. (b) working much harder, saving and investing much more, and avoiding or evading taxes less vigorously. (c) consuming less and saving more from disposable income. (d) using loopholes to equate their marginal and average tax rates. 16. One major difference between neoclassical macroeconomics and Keynesian theory centers on: (a) the flexibility of outputs in a capitalist system. (b) whether scarcity is alleviated by price gouging when shortages are rampant. (c) the flexibility of wages, prices, and interest rates. (d) how an increase in the money supply will affect the price level in the long run. (e) whether equilibrium exists when C+I+G+(X- M) = C+S+T. 17. Declines in the stock market during late 2000 and then again, following 9/11, had major impacts on bond markets. As investors began to doubt the financial health of corporations, the interest rate on (a) both corporate and U.S. Treasury securities rose, but the rate on Treasury securities rose by less than the rate on corporate securities, increasing the interest rate spread between the two. (b) both corporate and U.S. Treasury securities rose, but the rate on corporate securities rose by less than the rate on Treasury securities, decreasing the interest rate spread between the two. (c) corporate securities rose and the rate on Treasury securities declined, increasing the interest rate spread between the two. (d) both corporate and U.S. Treasury securities declined, but the rate on corporate securities declined by less than the rate on Treasury securities, decreasing the interest rate spread between the two. 18. Although it can have a number of characteristics and serves more than one role, money must (a) be backed in gold. (b) have a nonmonetary value. (c) be widely acceptable for payment. (d) be inexpensive to produce. 19. Recent research by behavioral economists tends to be least consistent with the: (a) Keynesian “beauty contest” theory of investor behavior. (b) the endowment effect. (c) the “snake-bit” effect. (d) standard economic assumptions that people are unfailingly rational and forward thinking. (e) Adam Smith’s assumption that we tend to be more concerned with things that are near us than events that are distant. 2 42. In the long run, changes in the Fed’s discounting operations alter the money supply primarily through changes in the: (a) size only of the monetary base alone. (b) value of the actual money multiplier alone. (c) monetary base and actual money multiplier. (d) buying and selling of U.S. bonds. 43. 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. 44. The Federal Reserve System controls the U.S. money supply primarily through: (a) reserve- requirement ratio. (b) open-market operations. (c) discounting operations. (d) margin requirements. (e) money multiplier. 45. All else equal, an increase in the discount rate will cause on increase in the ratio: (a) MS/MB. (b) 1/ rr. (c) ΔY/ΔA. (d) consumptionY/ΔY/ΔA. (d) consumptionA. (d) consumption/GDP. (e) XR/demand deposits. 46. The potential (mp) and actual (ma) money multipliers would be equal only if: (a) the public closed all bank deposits and held only cash. (b) banks held no excess reserves and all currency were deposited in banks. (c) the FED bought all U.S. government debt. (d) all borrowers paid off all their bank loans. (e) banks closed all FED deposits, holding all reserves as vault cash. 47. The asset [speculative] demand for money decreases if people begin to expect: (a) other assets to become increasingly risky. (b) liquidity to become more advantageous. (c) interest rates on bonds to fall. (d) the prices of bonds to fall. 48. Classical macroeconomists contended that the only reason we hold money is to make transactions, but John Maynard Keynes argued that money is held for diverse reasons, including its use as: (a) a medium of exchange. (b) a hedge against the possibility of a falling stock market. (c) “insurance” to guard against unforeseen events, or to exploit unpredicted opportunities. (d) an asset when people expect that interest rates may rise. (e) All of the above. 49. Keynesian monetary theory can be interpreted as rejecting the conclusion of classical monetary theory that: (a) the income velocity of money is extremely stable. (b) wages and prices are flexible in the long run. (c) MV = PQ. (d) the level of output is proportional to the money supply. (e) government deficits do not affect the money supply. 50. Such modern monetarists as Milton Friedman believe that discretionary monetary policies should be replaced with: (a) the equation of exchange. (b) discretionary fiscal policies. (c) a monetary growth rule. (d) a zero growth rule. (e) presidential discretion and a line-item veto for government budgets. 51. Currency in circulation + legal reserves in banks equals: (a) the monetary base. (b) "low-powered money." (c) demand deposits. (d) checkable accounts + time deposits. (e) quasi-money. 52. 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. 53. Many Japanese workers receive about half of their annual income as an annual bonus paid at the end of the year. Compared with the U.S. practice of paying workers weekly or bi-weekly, the Japanese bonus system: (a) makes money more efficient in exchange. (b) reduces the velocity of money by raising average money balances held relative to annual income. (c) increases velocity by lowering average money balances held as percentages of annual income. (d) decreases the use of credit. 54. Compared to stockholders in most corporations, banks that are "stockholders" of the Federal Reserve Banks have: (a) fewer rights. (b) higher dividends. (c) more control. (d) booming markets for their stock. (e) significant monopoly power and profits. 5 55. Money can comprehensively (but fuzzily) be characterized as: (a) any assets or set of assets widely accepted in payment for goods and services or in the repayment of debt. (b) a unique and accurate cardinal measure of income and wealth. (c) riskless repositories of spending power. (d) bills of exchange and trade. (e) an unrecognized liability of the federal government. (f) all of the above. 56. Fractional reserve banking systems are more stable if: (a) fiat money is backed by agricultural commodities. (b) people keep stable proportions of their money in banks. (c) banks' excess reserves rise when depressions begin. (d) psychological theories of business cycles are valid. 57. A loan automatically deposited in your checking account at the financial institution that issued the loan is: (a) backed by new corporate stock. (b) possible only in a 100% reserve banking system. (c) new money. (d) part of M2 but not M1. (e) credit liquidity. 58. 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 rate (d). [e] the federal funds rate. 59. Neither the Fed’s Board of Governors nor the Federal Open Market Committee (FOMC) have the absolute legal authority to: (a) set a uniform discount rate that member banks face in all 12 District Banks. (b) establish, within limits, reserve requirements. (c) set margin requirements. (d) conduct open market operations. (e) announce target rates for the federal funds market. 60. 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. 61. 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. 62. 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. 63. Federal funds are (a) funds raised by the federal government in the bond market. (b) loans made by the Federal Reserve System to banks. (c) loans made by banks to the Federal Reserve System. (d) loans made to each other by banks that are members of the Federal Reserve System. (e) none of the above. 64. The primary purpose of the FED envisioned by Congress in 1912-13 was to: (a) prosecute lenders that charged higher interest rates than were legally permissible. (b) print money to cover deficit spending. (c) act as a "lender of last resort." (d) ensure the profitability of commercial banks. (e) set uniform reserve requirement ratios for all institutions that issue demand deposits. 65. Milton Friedman asserts that the demand for money is strongly and positively related to: (a) wealth. (b) interest rates on bonds. (c) returns on physical capital. (d) expected rates of inflation. 66. 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 especially burdensome domestic regulations, relative to foreign bank regulation. 67. 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. 6 68. Suppose a banking crisis erupted. The money supply would shrink by the greatest amount if the public _____ their holdings of cash relative to demand deposits and the banks _____ their reserve-deposit ratio [the required reserve ration + the ratio of excess reserves to deposits]. (a) decreased; decreased (b) decreased; increased (c) increased; decreased (d) increased; increased 69. Media headlines that that “the Fed lowered the interest rate” mean that the FRS’s Board of Governors has announced a reduction in the: (a) discount rate (d). (b) target rate for interest charged in the federal funds market. (c) legal maximum rate that can be charged on credit cards. (d) interest rates paid on US Treasury bonds. (e) target rate of price inflation. 70. Which of the following functions is NOT performed by any of the twelve regional Federal Reserve Banks? (a) Check clearing. (b) Conducting economic research. (c) Setting interest rates payable on time deposits. (d) Issuing new currency. 71. The most common way for a central bank to reduce the money supply is for it to: (a) collect higher taxes. (b) sell bonds to the public. (c) buy bonds from the U.S. Treasury. (d) buy bonds from the public. 72. Persistent deficits in the current account in the U.S. balance of payments, and the accompanying inflows of international financial capital during the 1980s, 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 federal budget deficits. (d) undervaluation of the dollar in international financial markets. (e) powerful expectations of worldwide stagflation. 73. Adverse selection and moral hazard problems that interfere with the efficient functioning of financial markets arise from the fundamental problem of: (a) non-collateralized risk. B) free-riding. (c) asymmetric information. D) costly state verification. 74. 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. 75. The evolution of the payments system from barter to precious metals, then to fiat money, then to checks, and increasingly to electronic transfers can best be understood as a consequence of (a) government regulations designed to improve the efficiency of the payments system. (b) competition among firms to make it easier for customers to purchase their products. (c) innovations that reduced the costs of exchanging goods and services. (d) computerization. (e) appropriate central planning. 76. 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. 77. The monetary base is defined as (a) bank reserves [legal reserves = LR] plus currency in circulation [Cnbp]. (b) bank reserves minus vault cash. (c) all deposits at the Fed. (d) deposits at the Fed plus vault cash. (e) the gold in Fort Knox. 78. The asset 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. 79. If there is a financial panic and increased uncertainty about the returns in the stock market and bond market, what is the likely effect on money demand? (a) Money demand declines first, then rises when inflation increases. (b) Money demand rises. (c) The overall effect is ambiguous. (d) Money demand declines. 7