Money appears to have a major influence on
a. inflation.
b. the business cycle.
c. interest rates.
*d. each of the above.
Budget deficits are important to study in a money and banking class because
A. budget deficits cause banks to fail.
B. without budget deficits banks would not exist.
C. Budget deficits may influence the conduct of monetary policy.
D. of each of the above.
An increase in the growth rate of the money supply is most likely to be followed by
a. a recession.
b. a decline in economic activity.
*c. inflation.
d. all of the above.
A sharp decrease in the growth rate of the money supply is most likely to be followed by
*a. a decline in economic activity.
b an upswing in the business cycle.
c. inflation.
d. all of the above.
Suppose that due to a fear that the United States is about to enter a long period of stagnant growth, stock prices fall by 50% on average. Predict what would happen to spending by consumers.
a. spending would probably increase.
*b. spending would probably fall.
c. spending would probably be unaffected.
d. the change in spending would be ambiguous.
Budget deficits can be a concern because they might
a. ultimately lead to lower inflation.
b. lead to lower interest rates.
*c. lead to a higher rate of money growth which causes inflation.
d. cause all of the above to occur.
Which of the following is most likely to result from a stronger euro?
*a. U.S. goods exported aboard will cost less in Germany, and so Germans will buy more of them.
b. U.S. goods exported aboard will cost more in Germany, and so Germans will buy more of them.
c. U. S. goods exported abroad will cost more in Germany, and so Germans will buy fewer of them.
d. Americans will purchase more foreign goods.
Which of the following are true statements?
a. Inflation is defined as a continual increase in the money supply.
b. Inflation is a condition of a continually rising price level.
c. The inflation rate is measured as the rate of change in the aggregate price level.
*e. Only (b) and (c) of the above are true statements.
When the dollar depreciates in value, it benefits_______ and harms________.
*a. American exporters; American consumers
b. American exporters; foreign consumers
c. foreign exporters; American exporters
d. foreign exporters; American tourists
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The Federal Reserve System is:
a. a large commercial bank
b. another name for the U.S. Treasury
*c. the central bank in the United States
d. the organization that insures bank deposits in the U.S.
When a nation's money supply persistently increases at a faster rate than the nation can increase its output of goods and services, which of the following happens?
a. budget deficits increase
*b. inflation occurs
c. real output accelerates
d. living standards rise
Assuming that the inflation rate is positive, which of the following statements characterizes the relationship between the actual or observed interest rate and the real interest rate?
a. they are the same thing
b. real interest rates are higher than actual interest rates
*c. real interest rates are lower than actual interest rates
d. none of the above is necessarily true
A chief concern about large budget deficits is that they may lead to:
*a. lower living standards in the future
b. lower interest rates in the present
c. deflation in the future
d. all of the above
When you purchase shares of corporate stock, then:
a. you have loaned money to the corporation
*b. you own part of the corporation
c. you have made new funds available to the corporation
d. all of the above
Suppose XYZ corporation earns profits of $2 per share, is priced at $30 per share, and pays an annual dividend of $1.50 per share. Which of the following is correct?
a. the PE ratio of XYZ stock is 15
b. the dividend yield of XYZ Corporation is 5 percent
c. the company pays out 75 percent of its profits in dividends
*d. all of the above are correct
Suppose Hi‑Tech Corporation currently sells at $100 per share, earns profits of $2 per share, and pays an annual dividend of 50 cents per share. Which of the following is correct?
a. the market expects relatively slow growth for High‑Tech
b. the dividend yield is 5 percent
*c. the PE ratio is 50
d. none of the above is correct
Suppose you buy $1,000 worth of newly issued IBM bonds. Which of the following is correct?
a. You now own a small portion of IBM corporation.
*b. You have loaned $1,000 to IBM corporation.
c. Both of the above are correct.
d. None of the above are correct.
A graph depicting money growth rates and inflation rates for a cross‑section of nations would likely indicate that:
*a. countries with high money growth tend to have high inflation
b. countries with high money growth tend to have low inflation
c. there is no clear correlation between money growth rates and inflation rates across countries
d. the United States had the lowest inflation rate of any country
Monetary policy consists of:
a. controlling taxes to influence consumer and business spending
*b. influencing the availability of bank credit by changing interest rates
c. adjusting the level of government expenditures to stimulate economic activity
d. all of the above
Inflation is most often caused by:
a. supply side forces such as oil prices which increase costs to producers
b. demand side forces which depress the level of consumer spending
*c. rapid expansion of the money supply
d. unreasonable wage demands on the part of labor unions
The interest rate is:
a. the cost of using borrowed funds
b. a key variable that influences investment in capital goods
c. strongly influenced by monetary policy actions
*d. all of the above
Common stocks (or corporate stocks):
a. represent an IOU on the part of the issuing firm
b. entitle the holder to contractual payments
c. were a poor investment over the period 1982‑1996
*d. allow the holder to share in the earnings of the firm
Financial intermediaries:
a. channel funds from savers to borrowers
b. greatly enhance economic efficiency
c. have been an source of many financial innovations
*d. have done all of the above
The real interest rate is defined as:
a. the actual interest rate plus the rate of inflation
*b. the actual interest rate minus the rate of inflation
c. the actual rate people pay rather than the advertised rate
d. none of the above
Which of the following cannot be described as indirect finance?
a. You take out a mortgage from your bank.
b. An insurance company lends money to General Motors Corporation.
*c. You borrow $1000 from your best friend.
d. You buy shares in a mutual fund.
e. None of the above.
Which of the following is a short-term financial instrument?
*a U.S. Treasury bill.
b. Share of IBM stock.
c. New York City bond with a maturity of 2 years.
d. Residential mortgage.
Which of the following statements about the characteristics of debt and equity is true?
a. They can both be short-term financial instruments.
b. Bond holders are a residual claimant.
c. The income from bonds is typically more variable than that from equities.
d. Bonds pay dividends.
*e. None of the above.
Which of the following markets in the United States in never set up as an organized exchange?
a. Stock market
b. Corporate bond market
*c. U. S. government bond market
d. Futures market
Which of the following is traded in a money market?
a. U.S. Treasury bonds
b. Mortgages
c. Common stocks
*d. Federal funds
e. None of the above
Which of the following is a depository institution?
a. Life insurance company
*b. Credit union
c. Pension fund
d. Finance company
The primary assets of a mutual savings bank are
a. money market instruments.
b. corporate bonds and stock.
c. consumer and business loans.
*d. mortgages.
The primary liabilities of a savings and loan association are
a. bonds.
b. mortgages.
*c. deposits.
d. commercial paper.
Savings and loan associations are regulated by the
a. Office of the Comptroller of the Currency.
b. Federal Home Loan Bank System and FSLIC.
c. Securities and Exchange Commission.
*d. The Office of Thrift Supervision.
A bond denominated in a currency other than that of the country in which it is sold is called a(n) a. foreign bond.
*b. eurobond.
c. equity bond.
d. currency bond.
Financial intermediaries promote efficiency and thereby increase people's wealth
a. by reducing the transaction cost of linking together lender and borrowers.
b. to the extent that they help solve problems created by adverse selection and moral hazard.
c. by providing additional jobs.
*d. because of only (a) and (b) of the above.
Contractual savings institutions include:
a. commercial banks and thrifts.
*b. life insurance companies and pension funds.
c. finance companies and mutual funds.
d. all of the above.
Typically, lenders have inferior information relative to borrowers about the potential returns and risks associated with any investment project. This difference in information is called_________, and it gives rise to the ________problem.
a. asymmetric information; moral hazard
*b. asymmetric information; adverse selection
c. adverse selection; moral hazard
d. adverse selection; asymmetric information
U. S. Treasury bills are
a. issued in three-, six-, nine-, and twelve-month maturities.
b. the most liquid of the money market instruments.
c. the safest of all the money market instruments.
*d. are only (b) and (c) of the above.
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Federal funds are loans made by the
a. Federal Reserve System to commercial banks.
*b. one commercial bank to another.
c. the U.S. Treasury to the Federal Reserve.
d. the Federal Reserve to the U. S. Treasury.
All of the following are financial intermediaries except
a. commercial banks
b. insurance companies
c. pension funds
d. mutual funds
*e. none of the above
Life insurance policies typically contain a clause stating that the company will not be required to pay death benefits in the event that the insured commits suicide. Life insurance companies include such clauses in insurance contracts to protect against the ________ problem
a. time value of money
*b. adverse selection
c. restrictive covenant
d. defined contribution
General Motors Acceptance Corporation (GMAC) is an example of a
*a. sales finance company
b. consumer finance company
c. business finance company
d. public finance company
Lisa wants to add a new room to her house. What type of finance company will she deal with in getting the loan to finance the room addition?
a. sales finance company
*b. consumer finance company
c. business finance company
d. public finance company
Mutual funds that charge a sales commission when shares are purchases are called
a. no-load funds
*b. loaded funds
c. sinking funds
d. sinking-charge funds
When an investment bank purchases a new issue of securities in the hopes of making a profits, it is said to ________ the issue.
a. pawn
b. backstock
c. syndicate
*d. underwrite
Brokers are distinguished from the dealers in that brokers do not
*a. hold inventories of securities
b. make profits
c. incur losses
d. deal directly with the public
To encourage higher enrollments at colleges and universities, the government created the following agency to purchase student loans granted by financial institutions under the Guaranteed Student Loan Program.
a. Fannie Mae
b. Ginnie Mae
*c. Sallie Mae
d. Freddie Mac
Charging insurance premiums on the basis of how much risk a policyholder poses for the insurance company is a time-honored principle of insurance management to reduce
a. moral hazard
*b. adverse selection
c. free riding
d. principal-agent problems
Which of the following describes the relationship between legal tender and money?
a. being legal tender is a necessary but not sufficient condition for a substance to be money.
*b. being legal tender is a sufficient but not necessary condition for a substance to be money
c. being legal tender is a necessary and sufficient condition for a substance to be money
d. being legal tender is neither necessary nor sufficient for a substance to be money
Which of the following is not legal tender?
a. a dime
b. a $20 dollar bill
*c. a checking account in a commercial bank
d. none of the above‑‑that is, all of the above are legal tender
A six pack of Mountain Dew is priced at $2.79. This example illustrates money serving as:
a. a medium of exchange
*b. a standard of value
c. a means of payment
d. a store of value
In the 1970s, the U.S. price level doubled. In the 1970s, money served which function very poorly?
a. standard of value
b. unit of account
c. means of payment
*d. store of value
Our current monetary system may be characterized as a:
a. gold standard system
b. commodity money system
*c. credit or fiat money system
d. representative full‑bodied monetary system
Today, our money is "backed"
a. 25 percent by gold certificates held by the Federal Reserve
b. 40 percent by gold certificates held by the Federal Reserve
c. by a combination of gold certificates and silver certificates
*d. by faith that our government will keep the growth of money in moderation
Which of the following is not included in M2?
a. currency and coins
b. demand deposits
c. money market mutual fund shares
*d. corporate bonds held by firms and individuals
Which of the following payments instruments are least efficient from society's point of view?
a. currency
b. a system of electronic funds transfers
*c. credit cards
d. all are equally efficient
Which of the following have not served as money at some time?
a. gold
b. tobacco
*c. credit cards
d. silver
The designation "legal tender":
a. applies to all forms of M1 money today
b. is a necessary condition for an item to be considered money
*c. means that a seller cannot refuse payment made in that form
d. all of the above
Which of the following can serve as a store of value?
a. art
b. money
c. gold
*d. all of the above
Which of the following assets is most liquid?
a. 2‑year Treasury bonds
b. shares of common stock
*c. passbook savings accounts
d. gold bars
The $20 gold piece so common in old Western films is an example of:
*a. full‑bodied commodity money
b. representative full‑bodied commodity money
c. fiat money
d. barter money
The development of representative full‑bodied commodity money stemmed mainly from the underlying commodity's lack of:
a. scarcity
*b. portability
c. durability
d. none of the above
When an economist talks about the impossibility of barter, she really is not saying that barter is impossible. Rather, she means to imply that
*a. barter transactions are relatively costly.
b. barter has no useful place in today's world. It is impossible for barter transactions to leave the parties to an exchange better off.
c. it is impossible for barter transactions to leave the parties to an exchange better off.
d. each of the above is true.
The resources expended trying to find potential buyers or sellers and negotiating over price and terms are called
a. barter costs.
*b. transaction costs.
c. information costs.
d. enforcement costs.
If cigarettes serve as a medium of exchange, a unit of account, and a store of wealth, cigarettes are said to function as
a. bank deposits.
b. reserves.
*c. money.
d. loanable funds.
Because money reduces both the time it takes to make exchanges and the necessity of a double coincidence of wants, people will find that they can more easily pursue their individual comparative advantages. Thus money
a. encourages nonproductive pursuits.
*b. encourages specialization.
c. forces people to become too specialized.
d. causes a waste of resources due to the duplication of many activities.
As the transaction costs of selling an asset rise, the asset is said to become
a. more valuable.
b. more liquid.
*c. less liquid.
d. more moneylike.
Which of the following are problems with a payments system based largely on checks?
a. Checks are costly to process.
b. Checks are costly to transport.
c. Checks take time to move through the check-clearing system.
*d. All of the above.
e. Only (a) and (b) of the above.
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Starting January 1, 1999 the ______ became the official currency of countries joining the European Monetary System:
*a. euro
b. franc
c. dollar
d. yen
Which of the following is not included in the money aggregate M2?
a. Currency
b. Money market deposit accounts
c. Small denomination CDs (time deposits)
*d. Savings bonds
Which of the following best describes the behavior of the money aggregates M1 and M2?
*a. While both M1 and M2 tend to rise and fall together, they can grow at very different rates.
b. M1 always grows at a much faster rate than M2.
c. While both M1 and M2 tend to move closely together over periods as short as a year, in the long run they tend to move in opposite directions.
d. While both M1 and M2 tend to move closely together over periods as short as a year, in the long run their growth rates are vastly different.
The conversion of a barter economy to one that uses money
a. increases efficiency by reducing the need to exchange goods.
*b. increases efficiency by reducing transaction costs.
c. has no effect on economic efficiency since efficiency is a production concept, not an exchange concept.
d. decreases efficiency by reducing the need to specialize.
Generally, the problem of defining money becomes__________trouble some as the pace of financial innovation________.
a. less; quickens
*b. more; quickens
c. more; slows
d. more; stops
If an individual "cashes in" a U.S. savings bond for currency,
a. M1 increases and M2 stays the same.
b. M1 stays the and M2 increases.
c. M1 stays the same and M2 stays the same.
*d. M1 increases and M2 increases.
Generally speaking, the initial data on the monetary aggregates reported by the Fed are
a. not a reliable guide to the short-run behavior of the money supply.
b. a reliable guide to the long-run behavior of the money supply.
c. a reliable guide to the short-run behavior of the money supply.
*d. both (a) and (b) of the above.
Student loans and mortgage loans are examples of
a. "simple" loans
*b. fixed-payment loans
c. coupon loan
d. discount loans
A sharp decline in market interest rates will:
*a. increase the price of existing bonds
b. increase the yield on existing bonds
c. decrease the price of existing bonds
d. do none of the above
The prime loan rate (prime interest rate):
a. is set by the Federal Reserve
b. is the loan rate charged to small businesses and consumers
*c. is a benchmark interest rate set by large banks
d. exerts only a weak influence over bank loan rates
The real interest rate is defined as:
a. the actual interest rate plus the rate of inflation
*b. the actual interest rate minus the rate of inflation
c. the actual rate people pay rather than the advertised rate
d. none of the above
According to the Fischer Effect, interest rates rise when
a. national income increases
b. the economy moves into a recession
c. price deflation occurs
*d. expected inflation rises
The U.S. experience over the past 60 years suggests that interest rates
*a. rise during business cycle expansions and fall during contractions
b. rise during business cycle contractions and fall during expansions
c. fall during business cycle contractions and remain constant during expansions
d. fall during business cycle expansions and remain constant during contractions
In 1997, the U.S. Treasury began to issue indexed securities whose interest and principal payments are adjusted for changes in the consumer price index. These securities are known as
a. Treasury bills
b. Treasury notes
c. Treasury bonds
*d. TIPS
Assume the nominal interest rate is 12 percent, the expected inflation rate is 5 percent, and the marginal income tax rate is 25 percent. Then the after‑tax real interest rate is:
a. 7 percent
b. negative 2 percent
*c. 4 percent
d. none of the above
The passage of a balanced budget amendment to the U.S. Constitution requiring the federal budget to be balanced annually would tend to result in
a. the bond demand curve shifting rightward
b. the bond demand curve shifting leftward
c. the bond supply curve shifting rightward
*d. the bond supply curve shifting leftward
If nominal interest rates are 8 percent, expected inflation is 4 percent, and the
relevant marginal tax rate is 25 percent:
a. the real rate of interest is 6 percent
b. the aftertax real rate of interest is 2.25 percent
c. the real rate of interest is 2 percent
*d. the aftertax real rate of interest is 2 percent
The early years of the Reagan administration witnessed deregulation in several industries, including banking, communications, airlines, and others. This widespread deregulation tended to______ the marginal productivity of capital and ______ real interest rates.
*a. increases, increases
b. increases, decreases
c. decreases, increases
d. decreases, decreases
In which of the following situations would you rather be borrowing?
a. the interest rate is 20% and expected inflation rate is 15%
b. the interest rate is 4% and expected inflation rate is 1%.
c. the interest rate is 13% and expected inflation rate is 15%
*d. the interest rate is 10% and expected inflation rate is 15%
It is normally true that, the longer the time to maturity of a U.S. Treasury bill:
a. the lower the discount rate
*b. the less liquid the asset
c. the lower the level of taxation on the Treasury bill
d. the lower the market risk in the Treasury bill
Transactions costs are lowest in:
*a. Treasury bills
b. common stocks
c. U.S. government bonds
d. municipal bonds
The least liquid asset below is:
*a. Treasury bond
b. money market mutual fund share
c. passbook savings account
d. checking account deposit
To be considered highly liquid, an asset must:
a. be easily convertible to the medium of exchange
b. not fluctuate sharply in value
c. be sellable without substantial transactions costs
*d. exhibit all of the above qualities
Which of the following bears the most market risk?
*a. corporate bond
b. savings account deposit
c. certificate of deposit (CD)
d. checking account deposit
Which of the following is NOT true?
*a. liquidity and risk are positively related
b. risk and yield are positively related
c. liquidity and yield are inversely related
d. all of the above are true
Which asset carries the greatest default risk?
a. corporate bond
*b. corporate stock
c. long‑term Treasury bond
d. money market mutual fund shares
In the loanable funds model, which of the following would shift the demand curve for loanable funds rightward?
a. an increase in the money supply
b. a reduction in the federal budget deficit
*c. an increase in business confidence
d. an increase in the private saving rate
In the loanable funds model, which of the following would shift the supply curve of loanable funds leftward?
a. a reduction in expected inflation
b. an increase in the federal budget deficit
*c. households becoming less thrifty
d. none of the above
