Econ 423: Financial Markets

Questions from Previous Versions of Final Exam

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 + ΔB + ΔMB. (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.
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.

22. Consider the “gamble” [1] $1000 with certainty, versus [2] zero with probability 0.50, and $2,200 with probability 0.50. Now consider the gamble [3] zero change with probability 0.95, and negative $25,000 with probability 0.05, versus [4] negative $1000 with certainty. An individual who prefers option [1] to option [2], and option [3] to option [4] exhibits: (a) risk averse behavior when considering both potential gains and potential losses. (b) risk loving behavior when considering both potential gains and potential losses. (c) risk averse behavior when considering potential gains and loss averse [risk-loving] behavior when considering potential losses. (d) risk loving behavior when considering potential gains but risk averse behavior when considering potential losses.

23. Long Term Capital Management relied on the revolutionary concept of dynamic hedging and generated exceptional rates of return during 1994-1997, but lost billions of dollars in 1998 because: (a) rivals began imitating its previously-successful investment strategy, which eliminated the inefficiencies in financial markets LTCM had been exploiting. (b) LTCM analysts incorrectly predicted that an unusually high risk premium between U.S. Treasury bonds and corporate bonds would shrink back to historical norms, and LTCM had consequently leveraged enormous purchases of corporate bonds. (c) SEC auditors uncovered enormous amounts of bezzle that LTCM had disguised in its annual reports. (d) LTCM overinvested in bonds issued by the governments of Russia and China.

24. Only a moronic financial consultant would advise a non-profit organization to invest in: (a) U.S. Treasury bonds. (b) junk bonds. (c) municipal bonds. (d) common stock. (e) real estate.

25. It is untrue that when Michael Milken securitized the junk bond market: (a) the riskiness of financial investments in junk bonds, even if indirectly, was reduced. (b) fewer funds were diverted from conservative economic investments into riskier types of economic investments. (c) interest rates paid by the issuers of junk bonds declined. (d) financial intermediation into risky investments became a more efficient process. (e) Michael Milken’s annual income soared.

26. Firms that acquire equity interests in the short term for supplying financing to other firms that are not yet ready to sell securities to the general public are known as: (a) speculative brokerages. (b) investment banking firms. (c) venture capital firms. (d) financial hatcheries. (e) cradle robbers.
27. When fearing regret and seeking pride cause an investor to sell winners too early and hold losers too long, the investor is exhibiting the: (a) disposition effect. (b) illusion of control. (c) underconfidence effect. (d) illusion of knowledge. (e) overconfidence effect.
28. Important benefits of the bank consolidation and national branch banking most economists advocated have not included: (a) improved efficiency from driving inefficient banks out of business. (b) increased diversification of asset portfolios that may lower the probability of a banking crisis. (c) reductions in lending to small businesses that have reduced default risk. (d) increased efficiency derived from economies of scale.
29. Financial intermediaries realize greater returns when investors churn. The term “churning” refers to: (a) a buy-and-hold strategy. (b) selling all the stocks in an investor’s portfolio. (c) creating a new portfolio. (d) rapidly buying and selling assets in a portfolio. (e) selling a stock when the price is at its highest point.
30. When the Fed purchases a security with an agreement that the seller will buy the security back in a short period, usually 1 to 15 days, the transaction is known as a: (a) matched sale-purchase. (b) repo. (c) long sell. (d) short buy.
31. The dominant predictable economic problem posed by the expected wave of retirements by baby-boomers is that: (a) Social Security assets are projected to decrease below its income by 2034. (b) the government will be unable to generate funds to pay for Social Security. (c) the ratio of population to labor force is projected to increase dramatically as baby boomers start to retire. (d) the surplus funds in Social Security from past years have evaporated. (e) Social Security assets generate very low rates of return.
32. Which of the following theories and investment strategies are least compatibly paired? (a) Efficient markets | optimal diversification and buy-and-hold {indexed mutual funds?}. (b) Keynesian beauty contest | go-with-the-“animal spirits” of the crowd. (c) Black-Scholes-Merton | dynamic hedging. (d) capital asset pricing model [CAPM] | narrowly specialized present value analysis of very few selected stocks.
33. Unrecognized by classical macroeconomic theorists but a foundation for Keynesian liquidity preference theory is the existence of: (a) exchange rate risk. (b) interest rate risk. (c) inflation risk. (d) default risk. (e) uncompensated risk.
34. Interest rates on municipal bonds are most likely to increase, all else equal, as a consequence of: (a) the 2001 tax cuts that reduce maximum marginal income tax rates from 39% to 35%. (b) foreign financial investments in U.S. assets funded by dollars secured because of our balance of trade deficits. (c) waves of relatively unskilled workers immigrating into the United States illegally. (d) deregulation which has resulted in a wave of mergers between commercial banks.

35. The least liquid money market instruments are: (a) repos. (b) commercial paper. (c) Treasury bonds. (d) bankers acceptances. (e) securitized mortgages.

36. From the perspective of the investor, the fundamental differences between hedge funds and mutual funds are that hedge funds: (a) tend to have less risky portfolios. (b) guarantee much higher rates of return. (c) are less regulated and require you to be able to bear a loss of at least $1,000,000 before you are eligible as an “accredited investor” to invest a minimum of $1,000,000. (d) are not limited to investing in companies headquartered in the United States.
37. The least homogeneous and standardized, and consequently, the least liquid of the following financial assets would be: (a) futures contracts. (b) investment grade corporate bonds. (c) bankers acceptances. (d) repos. (e) thirty-year U.S. Treasury bonds. (f) commercial paper. (g) T-bills. (h) Eurodollar accounts. (i) pancakes.
38. A synonym for the risk loving behavior most people seem to exhibit when confronted with certain forms of risky potential losses is: (a) skittishness. (b) uncertainty phobia. (c) loss aversion. (d) dysfunctional heroism. (e) peak-end dominance.
39. Abba Lerner’s Wage-Price Reaction Functions were developed as an extension of the ideas of: (a) President Franklin Delano Roosevelt who advocated curing the Great Depression through “pump-priming.” (b) Karl Marx, who viewed rising wage-price disparities between the rich and the poor as wedges to accelerate the advent of a socialist revolution. (c) John Maynard Keynes, who was castigated by neoclassically-oriented macroeconomists as intellectually bankrupt. (d) early “gold bugs” who opposed the printing of fiat money. (e) President Herbert Hoover, who believed that record budget deficits that had triggered the slide of the United States into the Great Depression required cuts in government spending and increases in tax rates and revenues.

40. A typical insurance agent is likely to be happiest when an individual client buys a competitively-priced $250,000: (a) health insurance policy. (b) whole life policy. (c) auto collision and liability insurance policy to cover possible accidents while driving his gold-plated Hummer. (d) term life insurance policy.

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.

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.
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.

69. The Nobel Prize-winning economist who, in the PBS video The Trillion Dollar Bet, stated that “we virtually eliminated uncertainty” was: (a) Myron Scholes. (b) Robert Merton. (c) Fischer Black. (d) Kiyosi Ito. (e) Paul Samuelson. (f) Merton Miller.

70. Regulations mandate a “Chinese Wall” that separates research analysts from other investment banking activities. This barrier is intended primarily to prevent: (a) the CEOs of investment banks from claiming ignorance in the event that the firm’s accounting records violate securities laws. (b) outsiders from accessing non-public information. (d) clients from within the same industry from learning valuable information about their business rivals. (e) research analysts from being pressured to skew their reports in ways that would be favorable for other activities of the investment bank.

71. The monetary base of the United States would be increased if: (a) the Federal Reserve System’s Board of Governors raised the reserve requirement ratio. (b) banks reduced their holdings of excess reserves by increasing loans to business investors. (c) Congress reduced federal budget deficits by cutting government spending and increasing tax rates. (d) the Federal Reserve Branch Bank in Charlotte wrote a check to pay for new Dell computers. (e) Americans began buying fewer Fords and Chevrolets and more Saabs, Fiats, and BMWs.

72. The value of a call option tends to be higher the: (a) lower the current price of the underlying asset is relative to the strike price. (b) less volatile has been the price of the underlying asset. (c) longer the time till the expiration date of the option. (d) higher the strike price is relative to the current price of the underlying asset.

73. “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” was the bon mot of: (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.

74. Examples of creative responses to changes in laws and regulations that govern the financial system would not include: (a) the securitization of junk bonds initiated by Michael Milken in the 1980s. (b) Eurodollar accounts. (c) money market accounts offered by commercial banks. (d) the federal funds market. (e) the growth of credit unions, S&Ls, and independent investment banks following the Great Depression. (f) the existence of loan sharks and “payday” lenders.

75. Another massive terrorist attack on the United States would be least likely to cause: (a) financial investors to shift their portfolios in the direction of greater liquidity. (b) downward pressure on interest rates in bond markets. (c) President Bush and the Congress to press for even more huge permanent tax cuts. (d) the Federal Reserve System to lower its target federal funds rate, buy lots more U.S. Treasury bonds, lower the discount rate and perhaps even lower the reserve ratio a tad. (e) the stock market to plummet.

76. Interdependencies between monetary and fiscal policies are summarized in the equation: (a) G + T = ΔB + ΔMB. (b) m_a = (MS)/(MB). (c) G = T + ΔB + ΔMB. (d) MV = PQ.

77. A “tombstone” about a new security issue published in the legal notices section of a financial newspaper is: (a) an announcement that the new issue of the security has been sold to financial investors. (b) an invitation to potential buyers to read a prospectus describing the security. (c) information about where interested investors can learn about the new issue at an on-line web address. (d) required before the call provisions of the debenture for the security can be exercised.

78. That variations in the rates of entrepreneurial innovation of major technological advances account for major long-wave business cycles is the core of: (a) Marxist theories of business cycles. (b) Keynesian theory that investors’ “animal spirits” cause them to move as if being herded by the invisible hand of the marketplace. (c) behavioral explanations of market bubbles and boom-bust cycles. (d) the “magnificent dynamics” of classical macroeconomic theory developed by Adam Smith and refined by Reverend Thomas Robert Malthus. (e) Joseph Schumpeter’s theory of the “creative destruction” inherent in capitalistic market systems.

79. The reason most large organizations offer group life and health insurance to employees and their families and that few such employees instead buy similar insurance privately and personally is that: (a) premiums on group insurance plans are tax deductible. (b) insurance companies charge lower premiums for group policies because economies of scale reduce their transaction costs in marketing. (c) firms offering group programs are subsidized by the selected insurers. (d) most major insurers strongly prefer not to deal with people who do not work for large organizations.

80. Consider the argument that scarcity is the basic economic problem, and that wise macroeconomic policy should therefore emphasize Aggregate Supply, not Aggregate Demand. This idea would be most strongly advocated by modern followers of the teachings of: (a) conservative economic theory. (b) classical or neoclassical macroeconomic theory. (c) Karl Marx. (d) liberal economic theory. (e) John Maynard Keynes.

81. Moderate long run increases in the actual money multiplier are most likely to result from a slight but permanent Federal Reserve System: (a) reduction of the discount rate. (b) increase in its annual purchases of U.S. Treasury bonds from commercial banks. (c) reduction of the margin requirement. (d) increase in the federal funds rate it targets. (e) adoption of a moderate [2%?] inflation target.

82. The nominal rate of return investors require before they will to buy a specific asset is least affected by the: (a) asset’s duration or maturity. (b) Laffer curve. (c) investors’ expectations about inflation. (d) specific riskiness of the asset. (e) tax rates applicable to interest income from the asset.

83. A central bank that allows the purchase or sale of domestic currency by foreigners to affect the domestic monetary base and thus, the money supply, is pursuing a policy known as: (a) sterilized foreign exchange intervention. (b) arbitrage. (c) exchange rate fixing. (d) unsterilized foreign exchange intervention. (e) dirty float.

84. Political business cycles are a likely result if policymakers implement: (a) massive pork barrel projects and then steer lucrative government contracts to campaign contributors. (b) pro-business tax cuts that favor wealthy people while cutting welfare programs that benefit the poor. (c) expansionary policies before elections, and contractionary policies following elections. (d) a Constitutional Amendment to promote astrological harmony by requiring that the federal budget be balanced each time our Earth circles the sun. (e) higher tariffs and stricter immigration laws to prevent the outsourcing of American jobs.
85. The sources of government revenue that decline relatively most rapidly during an economic downturn are: (a) personal income taxes. (b) Social Security taxes. (c) property taxes. (d) sales taxes. (e) corporate income taxes.
86. Under the US bookkeeping system, the US Balance of Payments account would be debited if: (a) a British tourist at Disney World bought a Mickey Mouse hat. (b) a Southern Season in Chapel Hill purchased a selection of foreign wines and cheeses for sale in the store. (c) a German paid Euros far an LA Lakers jersey in a shop in Manila. (d) an international student attends UNC.
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.

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.

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.

123. The members of the Federal Reserve System’s Open Market Committee do not include: (a) the seven members of the Board of Governors. (b) the president of the Federal Reserve Bank of New York. (c) the rotating presidents of four other Federal Reserve banks. (d) the Treasurer of the United States. (e) the chairman of the Board of Governors.

124. Labor productivity tends to rise when: (a) the K/L ratio increases. (b) the K/L ratio decreases. (c) workers forego education. (d) capital becomes more expensive. (e) wage levels fall. 125. A shift from AS0 to AS1 would be most likely to result from: (a) forest fires that destroyed half of our harvestable timber. (b) rising labor force participation rates among women. (c) fears among investors that inflation is about to erupt. (d) increasing tax rates sufficiently to cure the federal budget surplus. (e) stiffer penalties on employers who hire illegal immigrants. 126. Stagflation is illustrated by a movement from: (a) AS0 to AS1. (b) AD0 to AD1. (c) AS1 to AS0. (d) AD1 to AD0.

127. For the M1 money supply, the potential (m_p=1/rr) and actual (m_a=MS/MB) 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.

128. One effect of a successful bank robbery is to increase the: (a) expectations effect. (b) money supply. (c) liquidity effect. (d) potential money multiplier. (e) homeland insecurity index.

129. The implosion of Long Term Capital Management was caused by the: (a) high management fees charged by the fund’s two Nobel Prize winners. (b) fund’s high leverage ratio of 20 to 1. (c) sharp decrease in the spread between corporate bonds and Treasury bonds in 1998. (d) Russian default of its international debt, collapse of markets in the Far East, and the sharp increase in the spread between corporate bonds and Treasury bonds. (e) fund’s shift away from a market-neutral investment strategy.

130. Important types of U.S. financial intermediaries include: (a) oil companies. (b) the U.S. Treasury. (c) the local telephone company. (d) insurance companies. (e) steel companies .

131. The term used to describe the Fed's ability to discourage banks from making too many trips to the discount window is (a) "arm twisting." (b) the "yellow dog" rule. (c) "black-listing." (d) "moral suasion." (e) “red-lining”.

132. Capitalization is a process that converts: (a) natural resources into economic capital. (b) predictable income flows into wealth. (c) the opportunity cost of capital into the market interest rate. (d) financial capital into economic investment. (e) fixed costs into variable costs.

133. John Maynard Keynes mocked the conservative monetary policymakers at the Bank of England as: (a) the little old ladies of Threadneedle Street. (b) boring drones of the rentier class. (c) dispirited farm animals on a train bound for the slaughter house. (d) myopic judges of financial “beauty contests”. (e) addle-pated practitioners of the conventional wisdom.

134. An example of a second price auction is: (a) a silent auction. (b) the stock market. (c) E-bay. (d) an English auction. (e) a foreclosure auction. (f) a Dutch auction.

135. Dynamic hedging in accord with the Black-Scholes equation can eliminate uncertainty is an erroneous notion that was expressed in The Trillion Dollar Bet by the Nobel Prize winner: (a) Fisher Black. (b) Myron Scholes. (c) Robert Merton. (d) Leo Melamud. (e) Merton Miller.

136. Modern firms may use “tournament theory” concepts to over-compensate executives with the intent of: (a) providing many lower level workers incentives to work hard. (b) finding loop-holes to hide large amounts of taxable profit. (c) create an aggressive feeling towards top industry competitors to increase efficiency and productivity. (d) create a false image to entice potential stockholders to purchase.

137. Goldsmiths were the ancestors of modern banks because they: (a) required minimum average balances in all accounts. (b) gave away gold prizes to new depositors. (c) held all their reserves in gold. (d) held only part of their deposits as gold reserves, and created money by lending excess reserves. (e) were subject to tight regulation.

138. The demand curve in the American market for bonds would shift to the right in response to an increase in the: (a) expected inflation rate. (b) liquidity of common stocks. (c) volatility of stock prices. (d) federal budget deficit. (e) value of the Euro relative to the dollar.

139. If the liquidity effect exceeds the Fisher effect, then when the Fed raises reserve requirements the federal funds rate: (a) falls. (b) rises. (c) is unaffected. (d) none of the above.

140. When a fledgling corporation sells common stock for the first time, the issue is: (a) a big chunk of money. (b) an initial public offering. (c) sold through a secondary market. (d) an over-the-counter exchange.

141. According to Frank Knight, risk, unlike uncertainty: (a) is totally unpredictable. (b) is a major source of pure economic profits. (c) may reasonably be estimated. (d) cannot be taken into account when firms make decisions about production and pricing.

142. Tools that can be used broadly to minimize risk but which cannot reduce Knightian uncertainty are: (a) options. (b) warrants. (c) puts. (d) calls. (e) longs. (f) shorts. (g) stocks. (h) bonds.

143. If a severe depression causes a budget deficit that policymakers attempt to “cure” by raising tax rates and cutting government spending, Keynesians argue that: (a) automatic stabilizers may stimulate inflation. (b) the cyclical budget deficit could grow as the depression worsens even if the federal budget would generate a structural surplus. (c) import restrictions may be the only way to save American jobs. (d) price controls may become necessary to ensure stable levels of efficiency wages.

144. An alternative method for investment banks to sell securities to a limited number of investors rather than the public as a whole is through: (a) an initial public offering. (b) a market order. (c) a limit order. (d) private placement. (e) direct placement.

145. Reasons why many if not most Americans now handle much less cash relative to their incomes than was typical in earlier times do not include reduced transaction costs associated with: (a) the availability of automatic teller machines (ATMs). (b) the ability to make electronic deposits of paychecks. (c) using credit cards. (d) involuntary private sector transfer payments. (e) on-line banking.

146. When major American corporations have been unable to expand by funding projects with retained earnings, the bulk of their expansions in the past four decades have been externally funded by: (a) borrowing from commercial banks. (b) selling record amounts of new shares of corporate stock. (c) borrowing by issuing corporate bonds. (d) borrowing from governmental agencies.

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.

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.

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.

177. A retail company offering multiple lines of clothes in the same store is attempting to exploit economies of: (a) scope. (b) scale. (c) structure. (d) information. (e) transaction costs.

178. That the self-interests of professional corporate managers may conflict with maximizing shareholder value is an example of: (a) the negative economic profit syndrome. (b) why profit-sharing plans are necessary. (c) maximizing revenue instead of profit. (d) principal-agent problems. (e) the bezzle.

179. If you paid a friend’s entrance fee for a poker tournament and agreed to split any winnings and then your friend played sloppily because your money is at risk, not his, then you have suffered because of: (a) moral hazard. (b) asymmetric information. (c) creative response. (d) adverse selection.

180. Unlike spot transactions, forward financial transactions or transactions in financial futures: (a) theoretically permit perfect option pricing to eliminate all risk, but not all uncertainty. (b) exacerbate interest rate risk. (c) facilitate hedging to reduce exchange risk. (d) worsen default risk. (e) are not consummated immediately.

181. Currency in the hands of the non-banking public (“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.

182. If land that rents for $100,000 annually can be bought for $800,000 today, it will be a break-even investment if the market interest rate is: (a) 6%. (b) 10%. (c) 12.5%. (d) 15%. (e) 8%.

183. Innovating new technologies and products while bearing risks and uncertainty is among the roles played by: (a) bureaucrats. (b) entrepreneurs. (c) monopolists. (d) politicians. (e) inventors.

184. In The Great Crash, John Kenneth Galbraith hypothesized that pressure for deregulation of business and corporate fraud (bezzle) both tend to grow most rapidly during a period of: (a) creative response. (b) overall economic downturn. (c) other highly publicized scandals. (d) lack of severity. (e) economic prosperity.

185. The idea that people or firms that successfully buy goods or sell services [“getting a contract”] through a bidding process are disadvantaged because they probably lack information possessed by unsuccessful bidders is known as: (a) negative returns. (b) the winner’s curse. (c) the loser dilemma. (d) cut-throat losses. (e) animal spirits.

186. Early classical economists such as Adam Smith, Thomas Malthus, and David Ricardo theorized that business cycles are caused by changes in: (a) population in response to resource availability. (b) capitalists’ ability to exploit labor. (c) socio‑psychological mass movements. (d) unexpected business inventories.

187. John Stuart Mill developed a theory that long run price level stability does not require governmental action beyond the coining of money, and would automatically be achievable through market forces. His laissez faire theory of the supply of money is based on an assumption that: (a) government deficits and surpluses cancel each other out over the long run. (b) the long run supply curve for gold is roughly a horizontal line. (c) international trade is based on reciprocal demands and supplies. (d) “good money drives out bad.” (e) deflation is a result of “too much money chasing too many goods.”

188. At maturity, a currently available set of securities that pays the greater of face-value or inflation-adjusted principal comprises inflation-indexed: (a) U.S. Treasury bonds. (b) shares of stock in the Federal Reserve System owned by member banks. (c) municipal bonds. (d) corporate bonds. (e) savings accounts.

189. A graph showing a positive relationship between the interest rate and the expected inflation rate would illustrate the: (a) Cambridge equation. (b) Friedman’s liquidity effect. (c) Fisher effect. (d) Laffer curve.

190. Transactions to reduce downside risk are known as: (a) puts. (b) calls. (c) hedges. (d) options. (e) futures contracts. (f) forward contracts.

191. Keynesian theory is in agreement with classical and neoclassical theory that flexible wages, interest rates, and prices, combined with Say’s law, ensure full employment and a maximum value for output: (a) in the short run. (b) as long as government follows laissez faire policies. (c) but only if the government runs deficits to fight inflation and deflation. (d) in the long run, but in the long run we are all dead. (e) on average, but not at every instant in time.

192. Creative response is illustrated by: (a) gambling for social benefit and leisure. (b) President Franklin Roosevelt’s New Deal policies to combat the Great Depression. (c) loan sharking as a way for borrowers to avoid the credit rationing caused by usury laws. (d) expansionary monetary policies during economic downturns.

193. Some recent proposals for privatization of Social Security would allow workers to personally manage parts of their “Social Security” savings. Advocates of these proposals assert that retirees would gain because of the higher average rates of return from private sector investments relative to the current Social Security fund’s portfolio of Treasury securities. NOT among the possible drawbacks of such a proposal is that such privatization would tend to: (a) increase the interest rate on national debt. (b) reduce the rate of return on non-Treasury financial assets in which private savers would be allowed to invest. (c) decrease the actual rate of saving in the United States relative to GDP. (d) increase the riskiness of the average retiree’s income.

194. If the net present value of a small investment project is precisely zero: (a) the investment is not worthwhile. (b) the cost of the project equals its present value, and the rate of return on the project equals the annualized cost of capital. (c) the firm is probably in a perfectly competitive market that is in long run equilibrium. (d) society as a whole would definitely gain if the investment was made anyway.

195. Modern portfolio theory suggests that an individual household’s demand for money is negatively related to: (a) expected income. (b) interest rates. (c) the price level. (d) transaction costs incurred in dealing in alternative assets. (e) expected rates of inflation.

196. The macroeconomic effect on Aggregate Demand and on the rate of domestic investment of each extra dollar in federal taxes collected is most similar to the effect of each additional dollar: (a) that U.S. firms receive for exports. (b) of saving by households or earnings retained by corporations. (c) of new monetary base created by the Fed. (d) earned by illegal immigrant workers and sent to their families in another country. (e) spent by foreigners to purchase U.S. produced goods.

197. Irrational exuberance, the term now widely used to explain why prices for many tech stocks rose far above their reasonable market values in the 1990s, was characterized by John Maynard Keynes as: (a) “peak/end explosiveness.” (b) “NASDAQ mania.” (c) “unwarranted exhilaration.” (d) “animal spirits.” (e) “cognitive dissonance.” (f) “ego slippage.”

198. The concept that "demand creates its own supply" is most consistent with: (a) marginalist theory. (b) Keynesian theory. (c) natural rate theory. (d) new classical macroeconomics. (e) Marxist analysis. (f) modern monetarism.

199. The LEAST liquid of the following assets is: (a) a corporation's economic capital. (b) savings accounts. (c) cash. (d) U.S. savings bonds. (e) checking accounts.

200. John Maynard Keynes’s precautionary demand for money states that we have cash on hand because: (a) investing is uncertain; your investment can be lost or lose value. (b) cash is needed to purchase goods or services not planned for. (c) in periods of low interest rates, it’s not worth the time to invest. (d) banks are unscrupulous institutions.

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.

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.

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.

231. Policies of central banks around the world are increasingly directed at: (a) achieving constant rates of growth in the money supply. (b) maximizing economic growth. (c) stabilizing exchange rates. (d) maximizing purchasing power. (e) ensuring full employment. (f) eliminating inflation. (g) targeting a low and stable rate of inflation.

232. Many financial institutions “warehouse” surplus funds in money market instruments because: (a) money markets usually generate the highest average rates of return. (b) capital markets are less risky and tend to yield lower rates of return. (c) most financial institution are quite risk averse and thus, are reluctant to invest in capital securities. (d) the timing may not quite right for longer-term investments in higher-yield stocks, bonds, or loans.

233. A contract that requires a financial investor to buy (take delivery of) certain securities on a future date is called a (a) short contract. (b) wide contract. (c) hedge contract. (d) cross contract. (e) narrow contract. (f) long contract. (g) tall contract. (h) deviation.

234. Towns and other governmental units have begun selling municipal assets, such as sewer systems, to large corporations which then lease the systems back to the municipality at a discount, letting the firm obtain a depreciable asset that reduces its tax liabilities. This is an example of: (a) moral hazard. (b) asymmetrical information. (c) embezzling. (d) creative response.

235. Between 1970 and 2005, major American corporations: (a) repurchased such large amounts of shares of their own stock that stock issues were a negative net source of corporate finance. (b) took advantage of an especially strong stock market to issue record numbers of new shares. (c) generally abandoned corporate bond and commercial paper markets to concentrate on new stock issues. (d) were unable to compete with most foreign firms for new financing.

236. Theories that fail to predict turning points in business cycles, but which do help explain the severity and duration of swings in economic activity, are the: (a) classical macroeconomic theories of business cycles. (b) Marxist theories of business cycles. (c) psychological theories of business cycles. (d) Keynesian theories of business cycles. (e) external shock theories of business cycles.

237. Bearer instruments, meaning that anyone who physically presents the security to the issuer at maturity receives the principal and interest, include: (a) common stocks. (b) negotiable certificates of deposits. (c) commercial paper. (d) corporate debentures. (e) securitized derivatives.

238. The Federal Deposit Insurance Corporation [FDIC] guarantees the security of the funds deposited by the customers of commercial banks. The Federal Reserve Board sets a legal minimum on the percentage of deposits that banks must keep in reserve [rr]. This reserve requirement ratio is intended to: (a) limit growth of money supply by limiting the amounts that banks can lend. (b) prevent the bank “panics” that were common before the FED was established in 1914. (c) ensure that banks hold sufficient liquid assets to permit depositors to withdraw cash when they demand it. (d) stabilize the exchange rate of the dollar for foreign currencies. (e) prevent “runs” on banks that might necessitate the FED acting as a “lender of last resort.”

239. Gross private domestic investment in the GDP accounts would NOT include: (a) growth of manufacturers' inventories. (b) purchases of new shares of Google stock. (c) new machinery bought by firms. (d) new residential housing and production facilities. (e) a new Toyota factory in Iowa.

240. Distributive efficiency in financial intermediation requires: (a) nondiscrimination and fairness in the allocation of savings, investments, and loans. (b) minimization of the difference between the rates of return savers receive and the interest rates charged borrowers. (c) portfolios to reflect savers’ relative time horizons and willingness to bear risk, and debt structures to reflect the sources and terms of funding relatively best suited to the needs of investors, government agencies, or deficit households. (d) savings to flow into the most desirable combination of feasible investments.

241. Classical macroeconomic theories rely most heavily on (a) Say’s law and flexible wages, interest rates, and prices. (b) Occam’s razor and the Keep It Simple Stupid [KISS] rule. (c) Keynesian cross models and sticky wages and prices. (d) fiscal policy and the visible hand of government spending. (d) private investment and the paradox of thrift. (e) creative responses within the financial system.

242. The bankers acceptances by which banks agree to pay the holder specified amounts of money on specific dates are: (a) effectively loans in forward markets. (b) subject to significant default risk. (c) money market instruments commonly bought and sold until maturity. (d) characterized by relatively high interest rates, much like junk bonds. (e) legally required to be strictly domestic to avoid foreign exchange risk.

243. The U.S. commercial banking system is not directly and significantly regulated by the: (a) Federal Deposit Insurance Corporation. (b) Federal Reserve System. (c) Office of the Comptroller of the Currency. (d) US Department of the Treasury.

244. Contemporary Anachronism, Inc. issues one million shares of stock at its initial public offering. This is an example of: (a) underwriting. (b) a primary market. (c) a secondary market. (d) an over-the-counter [OTC] market. (e) a securities exchange.

245. A “financial superstore” that offers financial derivatives, mortgage lending, money market accounts, time deposits, stocks and bonds, pension management, consumer loans, currency exchange, and commodity investing from a single location is trying to exploit: (a) depositor gullibility. (b) economies of scale. (c) location efficiencies. (d) increasing external returns. (e) economies of scope.

246. If people become optimistic about living longer and consequently save more for their retirement years, the decline in interest rates will tend to: (a) raise capital costs for business firms. (b) decrease investment expenditures. (c) discourage buying on installment plans. (d) stimulate economic growth.

247. Neither the Federal Reserve System nor any other federal, state, or local government agency directly controls the: (a) discount rate. (b) reserve requirement ratio. (c) federal funds rate. (d) margin requirement. (e) usury ceiling that limits the amounts that lenders can charge to borrowers.

248. Financial derivatives do not include: (a) stocks and bonds. (b) swaps. (c) futures. (d) options. (e) forward contracts. (f) straddles. (g) put contracts. (h) call contracts.

249. In the long run, if the inflation rate in the United States is higher than the average inflation rate in continental Europe and if productivity increases less rapidly in the United States than in continental Europe, then:(a) the euro should appreciate relative to the dollar. (a) the euro should depreciate relative to the dollar. (a) there should be no change in the euro price of dollars. (a) it is not clear what will happen to the euro price of dollars.

250. The information about a stock most likely to enable a financial investor to gain a pure economic profit would be: (a) a hot tip from a friend who is a stock broker. (b) careful technical analysis of historical data about the volatility and long term trend of the stock. (c) insider information that addresses unpublicized devlopments that will soon affect corporate profits. (d) the reputation of the corporate managers for integrity and industry-specific knowledge.

251. The tax deductibility of mortgage interest tends to cause: (a) heavier reliance on debt to finance purchases of family homes. (b) overinvestment in family homes, from the perspective of the overall economy, relative to other forms of economic investment. (c) significant reliance on second mortgages to finance non-home expenditures. (d) tax structures to be slightly relatively less progressive than they otherwise would be. (e) all of the above.

252. If the economy is less than prosperous, a structural surplus in the full-employment budget may indicate that: (a) fiscal drag is a problem. (b) tax rates are too low. (c) G exceeds T at full employment. (d) inflation is cured by the invisible hand. (e) margin requirements are excessive.

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.

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.

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.

287. When decision makers choose not to pursue further information because the expected reward for searching for it does not exceed its expected cost, the result is: (a) intentional ignorance. (b) total ignorance. (c) deceptive ignorance. (d) rational ignorance. (e) asymmetric information.

288. A structural budget deficit is based on projections about how revenues and spending would be related, given current tax and government spending policies, and assuming that: (a) the economy would be at full employment levels of output. (b) the Phillips curve is stable. (c) automatic stabilizers are not operational. (d) financial markets operate efficiently. (e) None of the above.

289. Clauses in bonds that protect bondholders’ interests against moral hazard by limiting the discretion of corporate managers are called: (a) restrictive covenants. (b) debentures. (a) sinking funds. (b) bond indentures.

290. Hyperinflation becomes a major problem when: (a) governments shift from commodity money to fiat monetary systems. (b) the average level of prices increases at a rate exceeding 50 percent annually. (c) relative price changes begin accelerating. (d) people shift to barter because they have lost faith in the purchasing power of money.

291. Many modern monetarists (most notably, Milton Friedman) believe that discretionary monetary policies should be replaced with: (a) the equation of exchange. (b) Keynesian discretionary policies. (c) a monetary growth rule. (d) a zero growth rule. (e) presidential discretion.

292. Call provisions in corporate or municipal bonds become more likely to be exercised if: (a) financial managers of the issuer begin to expect inflation. (b) interest rates rise and bond values fall. (c) correspondent banks become more willing to finance the organization by accepting commercial paper. (d) interest rates fall and bond values rise.

293. Events encountered early in the Great Depression [1929-1933] would not have included: (a) stock prices declining on average to roughly 10 percent of their 1929 levels. (b) widespread bank failures. (c) the aggregate price level declining by roughly 1/3. (d) nominal wages falling by roughly 25%. (e) employed workers having increasing difficulties in “making ends meet.”

294. 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.

295. In 1946, the dollar became the world’s key currency under the terms of the: (a) General Agreement on Trade and Tariffs. (b) World Bank Agreement. (c) Bretton-Woods Agreement. (d) League of Nations. (e) United Nations Charter. (f) International Monotony Fund.

296. The type of mutual fund with the simplest portfolio to manage is a/an: (a) growth fund. (b) balanced fund. (c) global equity fund. (d) index fund. (e) outreach fund. (f) iniquity fund.

297. A common logical error is for people who buy lottery tickets to view their probability of winning as: (a) higher if they pick numbers themselves than if the numbers are assigned randomly by a machine. (b) lower if the lottery prize has grown significantly because it has not been won in several weeks. (c) the same whether they buy a ticket or not. (d) higher for larger multi-state lotteries than for smaller single in-state lotteries.

298. If the theory that money is neutral in the long run is correct, then: (a) exchange rates are unaffected by the relative growths of the money supplies of different countries. (b) interest rates are the only real economic variable affected by fiscal policy. (c) money illusion may be more significant in the long run than in the short run. (d) changes in the money supply result in proportional increases in the price level, but ultimately do not affect “real” economic variables.

299. Insurance companies reduce moral hazard by their policyholders by: (a) having “co-pays” and deductibles. (b) rejecting clients who are not creditworthy. (c) making clients take a polygraph (d) charging high premiums. (e) not covering diseases their policyholders had before becoming policyholders.

300. Adverse selection is a problem associated with equity and debt contracts arising from: (a) the lender’s relative lack of information about the borrower’s potential returns and risks of his investment activities. (b) the lender’s inability to legally require sufficient collateral to cover a 100 percent loss if the borrower defaults. (c) the borrower’s lack of incentive to seek a loan for highly risky investments. (d) the difference between quantifiable risk and Knightian uncertainty.

301. Achieving a macroeconomic goal of economic growth can be most directly facilitated by government policies that encourage: (a) perpetually balancing the federal budget. (b) price level stability. (c) consumers to save and firms to invest. (d) maximum employment. (e) maximization of corporate profits.

302. The majority of household debt in the United States consists of (a) credit card debt. (b) consumer installment debt. (c) collateralized loans. (d) unsecured loans, such as student loans.

303. The “house-money” effect is in play if financial investors: (a) sell a stock to cash in on a short-term profit after a stock rises in price. (b) take greater risks after generating higher rates of return than expected. (c) acquire insider information that is likely to increase the value of a stock. (d) receive inherited funds only after a longer wait than expected.

304. Higher inflationary expectations make borrowers willing to pay the higher nominal interest rates that lenders insist on according to the: (a) Keynes effect. (b) natural real rate of interest theory, as refined by Irving Fisher and, more recently, Milton Friedman from earlier work by Knut Wicksell. (c) conflict theory of interest. (d) liquidity avoidance theory. (e) Phillips curve hypothesis.

305. Point r* in the figure below represents the return approximated by: (a) a perpetuity. (b) the average for all economic capital. (c) long term U.S. Treasury bonds. (d) the average for all financial assets. (e) a very liquid riskless short-term asset such as a T-bill that will mature tomorrow.

306. The variable on the x-axis that would be least consistent with standard investment theories would be: (a) transaction costs. (b) time to maturity. (c) risk. (d) diversification. (e) tax rates on returns. 307. If time to maturity is on the horizontal axis of this function, this curve is know as a/an: (a) yield curve. (b) inverted function. (c) annuity function. (d) risk / reward curve. (e) payoff curve.

308. The process by which one insurance company hedges by allocating a portion of the risk to another insurer and paying the second insurer a portion of the premium is known as: (a) risk minimization. (b) reinsurance. (c) option insurance. (d) coinsurance. (e) distributed insurance.

309. When Federal Reserve District Banks lower the discount rate, it is untrue that: (a) member banks borrow more from the Fed. (b) the monetary base grows. (c) the actual money multiplier grows. (d) banks reduce their holdings of excess reserves. (e) the money supply grows. (f) leverage on the owners’ equity in commercial banks increases. (g) the potential money multiplier increases.

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.

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.

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.

341. The nation’s M1 money supply does not include the values of: (a) coins. (b) paper. (c) travelers checks. (d) stocks and bonds. (e) funds in checkable accounts [demand deposits] at commercial banks, savings-and-loans, mutual savings banks, and credit unions.

342. The motive for holding money first described by John Maynard Keynes that now underpins much of the emphasis on liquidity in parts of modern portfolio theory is the: (a) transactions motive. (b) precautionary motive. (c) speculative motive. (c) liability motive. (e) uncertainty motive.

343. The Aggregate Supply curve is roughly horizontal or is gently positively sloped up to the point of full employment and then becomes vertical according to: (a) Austrian theory. (b) Eugen von Böhm-Bawerk. (c) the Cambridge equation and classical liberals. (d) A. Jules E. Dupuit. (e) efficient markets theory. (f) Fabian socialists. (g) John Kenneth Galbraith. (h) Friedrich Hayek. (i) institutionalism. (j) William Stanley Jevons. (k) John Maynard Keynes’ The General Theory of Employment, Money, and Interest. (l) libertarians. (m) modern monetarism. (n) neoclassical macroeconomics. (o) Okun’s Law. (p) Arthur Cecil Pigou. (q) quantity theories of money. (r) real business cycle theory. (s) supply-side economics. (t) Johann Heinrich von Thünen. (u) utilitarianism. (v) voodoo economics. (w) Friedrich von Wieser. (x) Xenophon. (y) yield to maturity analysis. (z) Zeno.

344. The Gramm-Leach-Bliley Financial Services Modernization Act repealed parts of the Glass-Steagall and McFadden Acts so that now all: (a) commercial banks are, within limits, allowed to invest in real estate, underwrite new issues of stocks and bonds, and sell certain types of insurance. (b) commercial banks are required to join the Federal Deposit Insurance Corporation. (c) deposits in all financial intermediaries, regardless of form, are subject to the same reserve requirement. (d) loans made by financial institutions must entail liens against equally valuable assets.

345. The relative liquidities of financial instruments are least influenced by the relative: (a) volumes of transactions in the securities. (b) reputations of the issuers. (c) globalization in the world economy. (d) perceptions among financial investors of the probability of default or other financial risks.

346. The Federal Reserve System was: (a) the third central bank established by an act of Congress. (b) established at the urging of Alexander Hamilton shortly after the adoption of the U.S. Constitution. (c) chaired from 1914 until 1933 by the Secretary of the U.S. Treasury. (d) originally intended to curb excessive growth of the money supply.

347. The efficient markets hypothesis is most consistent with: (a) the theory of rational expectations. (b) Keynesian beauty contests. (c) research findings in behavioral finance and behavioral economics. (d) psychological explanations of business cycles.

348. Sticky wages and prices are least consistent with: (a) markets characterized by kinked demand curves. (b) efficiency wages. (c) wage and price floors and ceilings. (d) neoclassical macroeconomic theory. (e) Keynesian theory. (f) widespread collective bargaining agreements. (g) Abba Lerner’s asymmetric wage-price reaction functions.

349. Suppose the monetary base is $1 trillion, the M1 money supply is $2.5 trillion, and the reserve requirement ratio is 1/6. It follows that: (a) the actual money multiplier is six. (b) excess reserves in the banking system and cash in the hands of the non-banking public have prevented banks from making a total of $3.5 trillion in extra loans. (c) the potential money multiplier is 2.5. (d) reserves on deposit at the Federal Reserve System = $1.5 trillion. (e) demand deposits = $1.5 trillion and time deposits in commercial banks = $1 trillion.

350. Accomplishing the macroeconomic goal of economic growth can be most directly facilitated by government policies that encourage: (a) maximum employment. (b) price level stability. (c) consumers to save and firms to invest. (d) perpetually balancing the federal budget.

351. Most U.S. Treasury bills are sold directly to: (a) pension funds. (b) competitive bidders. (c) the Federal Reserve System. (d) noncompetitive bidders. (e) money market mutual funds.

352. Of the following U.S. presidents, the only one(s) who did not average all-time higher budget deficits during any of his [their combined] four-year term(s) of office than all previous record average deficits during some predecessor’s four year term(s) of office was: (a) Herbert Hoover [Great Depression, 1929-33]. (b) Franklin Roosevelt [Great Depression and WWII, 1933-45]. (c) John F. Kennedy and Lyndon Johnson [Great Society and Vietnam War, 1963-69]. (d) Richard Nixon and Gerald Ford [Vietnam and Watergate and OPEC, 1969-77]. (e) Jimmy Carter [OPEC and Iran, 1977-81]. (f) Ronald Reagan [Supply-side Economics, 1981-89]. (g) George H.W. Bush [War in the Gulf, 1989-93]. (h) Bill Clinton [Rubinomics, 1993-2001] (i) George W. Bush [War on Terrorism, 2001-05].

353. Professor Perpetually Perplexed has been offered a perpetuity that pays $2500 every year forever beginning one year from today, and the market interest rate for bonds with similar risk is 12%. The current price of the bond is: (a) $2500. (b) $20,833.33. (c) $22,231.43. (d) $25,000. (e) $28,000.

354. Nations absolutely committed to a fixed exchange rate system will usually be forced to have their central banks: (a) buy domestic currency if their currency is overvalued. (b) sell foreign currency if their currency is overvalued. (c) buy foreign currency if their domestic currency is undervalued. (d) float their currency if the foreign currency is overvalued.

355. Monthly payments on a conventional mortgage are: (a) decreased steadily as the amount of the principal owed is reduced. (b) initially heavily weighted as interest payments, and then interest payments decline and retirement of the principal accelerates as more and more fixed monthly payments are made. (c) unamortized. (d) higher the longer the term of the mortgage.

356. 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.

357. The function in this figure is commonly known as a: (a) Laffer curve. (b) revenue neutral tax curve (c) Gresham curve. (d) classical tax curve. (e) Ricardian equivalence curve. 358. If taxes always create disincentive effects that adversely affect GDP, the tax rate at which GDP will be the highest in this figure is: (a) 10% (b) 20% (c) 30% (d) 40% (e) zero.

359. Several studies suggest that married middle-aged women tend to reap higher average rates of return on financial investments that do young single men primarily because these women are more likely to: (a) spend extra time doing basic analysis before they buy a security. (b) follow strategies of “buy and hold.” (c) intuitively understand the long run impact of new financial information. (d) have better access to insider information about their employers’ business plans before these plans are announced. (e) diversify and don’t “put all their eggs” into one basket.

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..

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.

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.

392. A decrease in the rate of monetary growth will drive interest rates up if the: (a) economy is in a perfect liquidity trap. (b) liquidity effect exceeds the sum of the income effect, price level effect, and the expected inflation [or deflation] effect. (c) price level declines because monetary growth triggers cost-push inflation.

393. A bank’s partial repayment of discount loans from the Fed immediately reduces the: (a) potential money multiplier. (b) monetary base. (c) Keynesian spending multiplier. (d) M1 money supply. (e) applicable sliding discount rate.

394. All else equal, an increase in marginal income tax rates would most surely reduce the interest rates on: (a) junk bonds. (b) premier bonds. (c) U.S. Treasury bonds. (d) municipal bonds. (e) investment grade bonds.

395. An auctioneer begins by stating an unrealistically high price and then reducing the price incrementally until a bidder indicates a willingness to buy in: (a) an E-Bay auction. (b) a Dutch auction. (c) a winner-take-all auction. (d) an English auction.

396. Spot transactions differ from forward transactions because in a spot transaction: (a) the future time to trade remains unspecified. (b) all risk is eliminated. (c) trade occurs immediately. (d) higher credit risk requires screening for the creditworthiness of the other party. (e) no bargaining is possible.

397. The fact that a bank’s percentage rate of return on assets is invariably less than its percentage rate on return on capital (or equity) is an example of the power of: (a) government regulation to favor a regulated industry. (b) financial leverage. (c) how banks reap pure economic profit through financial intermediation. (d) how technological improvements in information processing impose downward pressure on the “spread.” (e) the relatively greater market power of banks when compared to other financial intermediaries.

398. The notion that, ex ante, the nominal interest rate equals the real interest rate plus the expected rate of inflation [i_n = r^* + E(Þ)] is called the: (a) classical paradigm (b) Fisher equation. (c) Hume conjecture. (d) Keynesian equation. (e) monetarist equation. (f) Marshallian equation.

399. The classical demand for money was summarized in the late 19th century at England’s Cambridge University in an equation written: (a) [G-T] = [S-I] + [M-X]. (b) V = MQ/P. (c) C=I=G=(X-M) = Y. (d) Md = kPQ, or Md =kY. (e) MV=PQ.

400. The neutrality of money in the long run: (a) prevents short run speculative “bubbles.” (b) is a crucial conclusion of classical economists and monetarists. (c) implies that Phillips curves are smoothly parabolic. (d) helps explain the desirability of backing the money supply with precious metals. (e) is logically necessary for the operation of the equation of exchange MV=PQ.

401. An agent (financial institution of investor) that has agreed to deliver a specific asset (as yet unpossessed) to another party at a future date has: (a) taken a long position. (b) hedged against risk. (c) entered a forward transaction. (d) taken a short position. (e) bought an option.

402. The proceeds from insurance policies are tax-free, which provides incentives for firms to: (a) provide health insurance for executives, but not employees. (b) self-insure because premium surcharges compensate for the moral hazards to firms. (c) buy life insurance on employees if premiums are tax-deductible as business expenses. (d) pool their assets to take advantage of lower premiums for group rates as the group gets larger. (e) protect this unreliable revenue source by adopting stringent occupational safety and health standards.

403. The notion that an excessively high tax structure that would yield a budget surplus at a full employment level of national income, but which depresses aggregate expenditures and aggregate demand, thereby preventing the economy from reaching full employment, is known as: (a) fiscal deficiency. (b) fiscal drag. (c) the Laffer curve. (d) the Magee curve. (e) the Keynesian paradox.

404. The idea that using money as a medium of exchange promotes efficiency is based on the fact that money: (a) increases transactions costs. (b) is inexpensive to produce. (c) generates seignorage profits to the Treasury at lower costs than is true of taxation. (d) is a reasonably accurate measure of value. (e) facilitates divisions of labor and specialization and trade according to comparative advantage.

405. The clearest signal that “the market” views a proposed merger as inefficient would be: (a) a decline in the stock of the acquiring company. (b) a decline in the stock of the company being acquired. (c) a decline in the sum of the market capitalization of the companies involved. (d) the initiation of anti-trust action by the Federal Trade Commission or the US Department of Justice.

406. The most important of the following factors for determining the economic growth of a country would be the: (a). country's level of resources. (b) independence of the country's central bank. (c) country's rates of saving and investment. (d) level of sophistication of a country's financial markets.

407. 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, including banks. (c) buy bonds from the U.S. Treasury. (d) buy bonds from the public, including banks.

408. The designers of the Federal Reserve Act of 1913 originally intended the Fed to rely primarily on: (a) open market operations. (b) discounting, so the Fed would be a “lender of last resort.” (c) setting reserve requirements. (d) setting margin requirements. (e) regulating and auditing most financial intermediaries.

409. A social benefit of the public debt is: (a) increased private investment. (b) reduced interest rates. (c) its use as a stabilization instrument. (d) the provision of liquidity ‑ assets for savers that are relatively free of default risk. (e) higher bond prices.

410. Potentially harmful effects to exporters or importers from exchange risk can be mitigated by the establishment of: (a) exchange controls. (b) forward markets. (c) prudent macroeconomic policy. (d) a balanced capital account. (e) reserve currency provisions.

411. One major advantage to the issuer of a security of a private placement for the security is that private placement reduces the: (a) default risk. (b) net rate of return received by buyers of the security. (c) transaction costs borne by the issuer. (d) interest rate risk.

412. The liquidity (Keynesian) effect associated with a newly adopted contractionary monetary policy will harm a borrower most if a recent mortgage loan is: (a) conventional. (b) 30 years instead of 15. (c) adjustable rate [ARM]. (d) “ballooned” at the end of 8 years.

413. Interest rate risk is born most heavily by the homebuyer if the loan is: (a) a longer (30-year) conventional mortgage. (b) an adjustable rate mortgage. (c) a shorter (15-year) conventional mortgage. (d) “ballooned” so that full repayment is required at the end of eight years.

414. The notion that giant corporations are plagued by what we now term “principal-agent problems” was originally described by. (a) A.A. Berle and Gardiner Means in 1930s discussions of “separation of ownership from control.” (b) Karl Marx in Das Kapital. (c) Plato in The Republic as an example of why economic decisions are best made by a philosopher-king. (d) Thorstein Veblen in the 1890s as “conflicting class interests.” (e) John Kenneth Galbraith in his 1950s discussion of “technostructure.”

415. Medieval goldsmiths were the ancestors of modern banks because they: (a) required minimum average balances in all accounts. (b) gave away gold prizes to new depositors. (c) held all their reserves in gold. (d) held only part of their deposits as gold reserves, and created money by lending excess reserves. (e) were subject to tight regulation.

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.

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.

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.

454. According to tournament theory, stockholders may benefit if high level corporate executives are paid more than the values of their personal marginal products [VMPs] because: (a) price earnings ratios for blue-chip stocks are quite positively correlated with executive compensation. (b) lower level employees may strive harder to be promoted so that they can capture these economic rents for themselves. (c) the distribution of corporate income will tend to be equalized. (d) salaries paid to corporate executives are tax deductible.

455. The rate of return on financial assets tends to be negatively related to: (a) probability of default. (b) liquidity. (c) risk. (d) time to maturity. (e) the expected rate of inflation.

456. At the end of The Trillion Dollar Bet, Paul Samuelson argues that in large part, Long Term Capital Management failed because: (a) although options can be used to dynamically and perfectly hedge against calculable risk, Knightian uncertainty is impossible to predict. (b) good judgment can be far more important than beautiful equations in guiding decisions for sound financial portfolios. (c) financial markets are plagued with asymmetric information. (d) the collapse of financial markets is a predictable consequence of the exposure of significant “bezzle” in financial records.

457. Financial contracts that obligate each party to exchange a set of payments it owns for another set of payment owned by another party are called: (a) futures contracts. (b) futures options. (c) call options. (d) swaps. (e) future exchanges.

458. Behavioral economics is least consistent with: (a) Keynesian beauty contests. (b) financial investors being less likely to sell if the price of a stock goes down than if it goes up. (c) the weak version of efficient markets theory. (d) failures to ignore fixed costs when making rational decisions. (e) prospect theory. (f) people being risk avoiding when faced with risky gains but risk seeking when they try to avoid risky losses.

459. When investors can not distinguish good and bad firms, and therefore offer an average price which undervalues good stocks while overvaluing poor stocks; even though the firms’ managers and owners know the difference and only sell poor stocks at an overvalued price, there is an application to financial markets of the problem summarized as. (a) moral hazard. (b) the public information problem (c) the free-rider problem. (d) the “lemons” model. (e) stock market risk.

460. Highly-publicized recent changes of “the interest rate” by the FED primarily and most importantly entail changes to the (a) legal reserve requirement ratio. (b) FED’s target rate for the federal funds rate. (c) discount rate. (d) interest ceilings imposed on lenders that issue credit cards. (e) margin requirement for stock market purchases. (f) open market interest rate.

461. The idea that natural rates of unemployment and interest would be unaffected in the long run by the time paths of the economy if different macro policies were pursued is most consistent with: (a) hysterisis. (b) stochastic macroequilibration. (c) neoclassical macroeconomics and Milton Friedman’s monetarist theory. (d) a horizontal long run Phillips curve. (e) asymmetric wage and price reaction functions.

462. Factoids: [1] the Dow-Jones index has tended to rise in January, [2] stocks for firms with small market capitalizations have tended to outperformed stocks from firms with high capitalization, [c] Michael Milken made hundreds of millions of dollars in salary and bonuses by securitizing junk bonds, and [4] stocks with published price earnings ratios that were below the average for the market have tended to outperform otherwise comparable stocks in subsequent periods. These facts are least consistent with: (a) Keynesian beauty contests. (b) behavioral finance. (c) efficient markets theory. (d) the importance of transaction costs in explaining asset prices.

463. The asset that would come closest to yielding a “risk-free” rate of return would be: (a) owner-occupied housing. (b) an inflation-adjusted 10-year US Treasury bond purchased within three months of maturity. (c) an Aaa rated municipal bond. (d) stock in a well-managed hedge fund. (e) stock in a mutual fund that was perfectly diversified to eliminate specific risk.

464. The supply of loanable funds varies positively with the: (a) willingness of people to defer consumption into the future. (b) profitability and productivity of new capital investments. (c) price of the output that new capital will produce. (d) future income from newly purchased capital.

465. Suppose an informed investor seeks profits by purchasing an undervalued security, but some uninformed investors follow along by purchasing the same security the informed investor buys, even though they did not pay for the information, and thus they bid up the price to reflect the securities’ true value. There is still the issue that inadequate amounts of information will be processed because of: (a) the principal-agent problem. (b) market timing. (c) efficient markets. (d) the free-rider problem. (e) competitive bidding.

466. Incomplete information or costly mobility absorbs resources that are not always reflected by a monetary price, yielding the concept of: (a) transactions costs. (b) confusion in exchange. (c) market failure. (d) “lumpiness”. (e) economic entropy.

467. Suppose P = CPI/100. According to the Cambridge version of classical monetary theory, the cost of holding a dollar is: (a) [$1/P], so that it is negatively related to [the reciprocal of] the price level. (b) the interest forgone by holding $1 instead of investing in capital. (c) the security sacrificed by holding $1 during an inflationary period. (d) the purchasing power lost because of inflation.

468. The percentage of excess reserves that banks view as optimal 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.

469. The offering of many products through a central location (e.g., offering checking savings accounts in addition to insurance and access to financial investments in mutual funds) is a way for a financial conglomerate to attempt to exploit: (a) the rational ignorance of consumers and small savers (b) economies of scale. (c) economies of scope. (d) urbanization economies. (e) localization economies.

470. A Japanese speculator who bought California real estate for $6 million when the yen was trading at 100¥ per dollar and who sold the property a year later for $5.8 million after the yen to dollar rate rose to 120¥ per dollar would have: (a) gained from bearing exchange rate risk. (b) broken even in purchasing power expressed in yen. (c) lost roughly 2% on the investment. (d) been better off had the real estate been purchased originally with dollars. (e) lost even more by buying land in Japan.

471. The tool of the Fed that was serendipitously discovered in the 1920s when the Fed attempted to increase its operating budget is: (a) discounting operations. (b) reserve requirement ratios. (c) margin requirements. (d) open market operations. (e) interest rate ceilings. (f) sales of Fed stock to member banks.

472. Aggregate Demand would be more directly and immediately affected than Aggregate Supply by: (a) unions demanding raises to offset losses caused earlier by unexpected inflation. (b) OPEC raising oil prices from $18 to $33 per barrel. (c) massive buildups of government defense spending. (d) increases in the rate of technological advances. (e) new and costly safety regulations.

473. Small savers are likely to realize the greatest returns for the risk they bear from financial investments in: (a) indexed mutual funds. (b) hedge funds. (c) penny stocks. (d) venture capital funds. (e) initial public offerings.

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 à [G-t] = [S—I] + [M—X].

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.

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 M_d = kPQ, or M_d = 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.

502. A comprehensive federal government budget equation blurs distinctions between monetary and fiscal policy because (a) G = T+ Δ bonds + Δ MB. (b) Keynesians assume that fiscal policy deficits were covered by increases in taxes. (c) Milton Friedman and other monetarists assume that all federal deficits are bond-financed. (d) a gold standard would make domestic and foreign currencies interchangeable. (f) high tax rates discourage effort.

503. The money supply is increased instantly if: (a) a bank lends some of its excess reserves. (b) the FED sells bonds to the public. (c) federal deficits increase. (d) people hold more currency because distrust of banks increases. (e) the reserve requirement ratio increases.

504. Two Nobel -prize-winning economists featured in The Trillion Dollar Bet [title of the PBS Nova program] but who did not become closely involved with Long Term Capital Management [LTCM] were: (a) Fisher Black and Myron Scholes. (b) Maurice Allais and John Nash. (c) Merton Miller and Paul Samuelson. (d) Robert Merton and Kenneth Arrow.

505. All of the following are evidence against efficient market theories except the: (a) January effect. (b) small firm effect. (c) Fisher effect. (d) high income of Michael Milken when he invented the junk bond market. (e) liquidity (Keynes) effect.

506. Depreciation of a currency under a system of flexible exchange risk is most like: (a) default risk in a corporate bond. (b) devaluation under a fixed exchange rate system. (c) inflation risk. (d) an import quota. (e) a subsidy on exports.

507. Eurodollars are: (a) money used in Europe. (b) money used in the United States. (c) European dollars deposited in foreign banks outside of the United States or in foreign branches of U.S. banks. (d) U.S. dollars deposited in foreign banks outside of the United States or in foreign branches of U.S. banks.

508. When a financial institution hedges for a specific asset it is holding it: (a) sells short. (b) makes a micro hedge. (c) engages in a partial hedge. (d) makes a macro hedge. (e) partakes in the asset’s disintermediation.

509. A financial institution that either refuses to make a loan of any amount to a borrower, even if the borrower is willing to pay the higher rate, or makes a loan that is much less than the borrower would like, practices: (a) loan screening. (b) credit rationing. (c) coinsurance. (d) restrictive covenants. (e) none of the above.

510. “Buy and hold” is the best strategy for most financial investors according to the conventional wisdom drawn from the assumptions that underpin: (a) the Black-Scholes equation. (b) dynamic hedging. (c) optimal diversification models. (d) theories of efficient markets. (e) minimax straddle and hedge options.

511. Financial intermediaries cannot be successful in the long run unless they consistently: (a) generate positive economic profits. (b) reduce transactions costs when channeling funds from savers to borrowers. (c) integrate the speediest communication technologies. (d) comply fully with federal regulations.

512. Efficient portfolios are portfolios associated with the: (a) lowest expected rate of return for a given level of risk. (b) highest expected rate of return for a given level of acceptable risk. (c) lowest level of risk for a given expected rate of return. (d) lowest possible market risk. (e) highest possible expected rate of return.

513. Members of the Federal Open Market Committee do not include: (a) all seven members of the Board of Governors (b) the president of the Federal Reserve Bank of New York (c) the rotating presidents of four other Federal Reserve banks (d) the Secretary of the Treasury of the United States. (e) the chairman of the Board of Governors.

514. Wages and prices are assumed to adjust to excess supply less rapidly than they adjust to comparable amounts of excess demand according to: (a) Keynesian theories of business cycles and Lerner wage-price reaction functions. (b) the theory of efficient markets. (c) the theory of rational expectations. (d) the quantity theory of money. (e) real business cycle theory.

515. Total reserves in the banking system equal: (a) required reserves + excess reserves. (b) required reserves – excess reserves. (c) required reserves. (d) excess reserves.

516. The Keynesian speculative (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.

517. The principal/agent problem is not central in a situation where: (a) An A student who agreed to write your term paper did a terrible job after you paid her in advance. (b) CEO Kenneth Lay sells his Enron stock options while touting Enron as incredibly undervalued. (c) A salesperson with an expense account takes her husband out to dinner and charges the meal to her employer. (d) A used car salesman turns back his own SUV’s odometer to defraud a naive buyer. (e) A rookie NBA guard with a lucrative guaranteed contract parties all night before a crucial game. (f) WorldCom’s CEO muscles a bank into granting an uncollateralized personal loan because he steers a lot of business to the bank. (g) Salespeople for a luggage company book first class seats when traveling out of town and write off the expense as “customer entertainments” when they bill their bosses.

518. If a firm based in the United States is due to be paid in euros in two months, to hedge against exchange rate risk the firm could: (a) sell euro futures short. (b) buy euro futures long. (c) stay out of the exchange futures market. (d) sell dollar futures short. (e) do a “swap” of its forward contract in exchange for long term eurodollars.

519. If one U.S. dollar exchanges for 1/2 British pound, 120 yen, and 12 French francs, then one French franc will be exchanged for: (a) 1/10 yen. (b) 1/20 pound. (c) 12 dollars. (d) 10 yen.

520. Any instance in which the price of an asset differs significantly from its fundamental market value is known as a: (a) bubble. (b) balloon. (c) buy and hold strategy. (d) hot dog. (e) deviation.

521. The sum of currency in circulation and total bank reserves is called (a) the nonborrowed base. (b) the borrowed base. (c) the monetary base. (d) the money supply.

522. Legal requirements that a bank must have at least a certain minimum percentage of capital relative to its assets are rationalized by an argument that a bank that holds too little capital: (a) will be less profitable than other banks. (b) is more likely to fail, thereby imposing costs on other banks. (c) is less likely to be able to make intra-bank loans through the federal funds market. (d) is likely to pay lower interest rates to its depositors. (e) has an unfair competitive advantage over savings-and-loans.

523. The riskiness of a financial portfolio can be reduced through (a) defenestration. (b) disintermediation. (c) underwriting. (d) diversification. (e) syndication.

524. Assets become less attractive to prospective financial investors when: (a) they become more liquid. (b) their prices go up. (c) interest rates increase. (d) default risks decrease.

525. When the FED buys U.S. bonds, the: (a) excess reserves in banks increase immediately. (b) money destruction process gradually follows. (c) level of total bank reserves is decreased. (d) actual money multiplier declines to a new level. (e) money supply declines because banks call in loans.

526. The process in which investment bankers “packages” new securities, markets them to the public, and then delivers the proceeds (funds) to the issuing entity is known as: (a) warranteeing. (b) subordinating. (c) underwriting. (d) kiting (f) securitization. (e) registration.

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 M_d = 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.

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 [m_a] 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.

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.

566. Relative to a depository intermediary’s percentage return on assets, its percentage return on equity (or percentage return on capital) will: (a) tend to be countercyclical, relative to economic growth throughout a nation. (b) undoubtedly be larger. (c) probably be far more stable. (d) necessarily be smaller. (e) be either greater or less, depending on the efficiency of its management.

567. In the foreign exchange market, if the interest rate on deposits in foreign intermediaries increases, holding everything else constant, the: (a) expected return on domestic deposits increases. (b) expected return schedule for foreign deposits shifts to the left. (c) dollar depreciates. (d) the dollar appreciates.

568. The absorption equation suggests that in their effect on equilibrium, federal taxes [T] are “dollar-for-dollar,” economically equivalent to: (a) saving [S]. (b) federal transfer payments [T_R]. (c) government spending [G]. (d) net exports [X-M]. (e) consumption spending [C].

569. Venture capital firms are usually organized as: (a) open-ended mutual funds or nonprofit businesses. (b) limited partnerships or close-ended mutual funds. (c) sole proprietorships or corporations. (d) municipal REITs or as state agencies for local economic development.

570. A debt contract is said to be “incentive compatible” if: (a) the contract is a positive sum game. (b) restrictive covenants limit the type of activities that can be undertaken by the borrower. (c) cosigners for the debt are judgment free. (d) a borrower’s substantial net worth pledged to the proposed enterprise reduces the probability of morally hazardous behavior.

571. The theory of purchasing power parity (PPP) suggests that if one country's price level falls relative to another's, its currency should: (a) depreciate in the long run. (b) appreciate in the long run. (c) rise in the short run, and then return to its original rate. (d) depreciate in the short run, but then rebound.

572. 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) consumption/GDP. (e) XR/DD.

573. 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.

574. The method of financing government outlays that, dollar-for-dollar, most expands Aggregate Demand is: (a) borrowing within the country. (b) borrowing abroad. (c) taxation. (d) confiscation. (e) creating additional monetary base.

575. Markets will tend to operate more efficiently if: (a) highly profitable opportunities are so widespread that all investors can gain higher incomes. (b) large numbers of profit‑seekers compete vigorously for ideas or information that might prove profitable. (c) competition causes any predictable abnormal gain from an investment to be exploited only after a lengthy lag. (d) real interest rates are biased upwards. (e) all prices and wages are rigid.

576. An increase in Treasury deposits at the Fed causes: (a) the monetary base to increase. (b) the monetary base to decrease. (c) Fed assets to increase but has no effect on the monetary base. (d) Fed assets to decrease but has no effect on the monetary base.

577. Excess reserves are equal to: (a) total reserves minus discount loans. (b) vault cash plus deposits with Federal Reserve banks minus required reserves. (c) vault cash minus required reserves. (d) deposits with the Fed minus vault cash plus required reserves.

578. Financial institutions subject to the Fed’s reserve requirements ratio include: (a) only state chartered banks. (b) only nationally chartered banks. (c) only intermediaries with assets less than $100 million. (d) only banks with assets exceeding $500 million. (e) all institutions that issue demand deposits, whether or not they are members of the Federal Reserve System.

579. There are two types of open market operations: _____ open market operations are intended to change the level of reserves and the monetary base, and _____ open market operations are intended to offset movements in other factors that affect the monetary base. (a) defensive; dynamic (b) defensive; static (c) dynamic; defensive (d) dynamic; static (e) regulatory; administrative (f) convergent; smoothing

580. At an annual interest rate of 8%, the present value of a $100 income stream, which begins with a first payment 365 days from today, and then $100 each subsequent year forever, is: (a) infinite. (b) $500. (c) $1096. (d) $2000. (e) $800. (f) $1250. (g) $920 (h) $1080.

581. That depositors earn interest on checking and savings accounts, and yet may withdraw their funds whenever necessary, is possible because: (a) government regulations mandate this policy. (b) financial intermediaries earn such large profits. (c) financial intermediaries lower transaction costs. (d) financial intermediaries hold highly diversified asset portfolios.

582. The idea that a specific amount of deflationary pressure takes significantly longer to yield convergence to equilibrium prices and wages than would comparable inflationary pressure can most directly be illustrated by: (a) relative-cross elasticity equations. (b) a Keynesian-cross diagram. (c) the quantity theory of money. (d) Lerner wage-price reaction functions. (e) present value equations.

583. The present value of a fixed annual income stream that goes on forever is: (a) infinite. (b) zero. (c) the annual income multiplied by the interest rate. (d) the annual income divided by the interest rate.

584. When estimating the nature of a probability function for an event entails considerable guesswork because experience with the event is so sporadic or rare that any estimates are extremely speculative, then we confront a concept Frank Knight termed: (a) risk. (b) uncertainty. (c) the veil of ignorance. (d) meta-probability. (e) stochasticity.

585. Vesting refers to the length of time: (a) an insurance company has been in business. (b) that a person must be enrolled in a pension plan before being entitled to receive benefits. (c) until a CD matures. (d) a premium must be paid under term insurance.

586. The intensity of Keynesian-style fiscal policies would most reasonably be reflected in the state of the federal government’s: (a) rate of monetary growth. (b) laws limiting or encouraging free international trade. (c) cyclical budget deficit or surplus, measured at the current level of GDP. (d) interest rate policies. (e) structural budget deficit or surplus, which would be estimated as if the economy were at full-employment GDP.

587. The conversion of a barter economy to one that uses money increases efficiency by reducing: (a) the need to exchange goods. (b) the need to specialize. (c) the need to employ team production methods. (d) transactions costs.

588. The traditional American distrust of moneyed interests and the fear of centralized power help to explain: (a) the failures of the first two experiments in central banking in the United States. (b) the decentralized structure of the Federal Reserve System. (c) why the Board of Governors of the Federal Reserve System is not located in New York. (d) why the U.S. did not have a central bank during most of the 19^th Century (e) all of the above

589. Loans made to consumers by independent finance companies are typically: (a) only for the purchase of cars or boats. (b) at interest rates below those charged by banks for the same type of loan. (c) at interest rates above those charged by banks for the same type of loan. (d) not made for less than $10,000.

590. If you buy stock from a corporation newly-formed by your sibling when the firm makes its initial public offering (IPO), you would be engaged in: (a) direct primary financing. (b) mutual funding. (c) financing through a secondary market. (d) short term equity financing. (e) long-term debt financing.

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.

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.

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.

633. In one sense, _____ appears surprising since it means that a financial institution is not _____ its portfolio of loans and thus is exposing itself to more risk. (a) specialization in lending /diversifying (b) specialization in lending / rationing (c) credit rationing / diversifying (d) screening / rationing

634. Clauses in life insurance policies that eliminate death benefits if the insured person commits suicide are examples of: (a) exemption warrantees. (b) restrictive covenants. (c) anti-fraud exclusions. (d) risk-based deductibles. (e) restrictive provisions.

635. The portion of the registration statement that potential buyers legally must be given a before they can invest in a new security is called a: (a) prospectus. (b) proxy statement. (c) fiduciary warrant. (d) verification certificate. (e) good faith document. (f) collateral selection instrument.

636. The Aggregate Demand curve declines (shifts leftward) in response to higher: (a) levels of consumer optimism. (b) investment spending. (c) government spending. (d) net exports. (e) tax rates.

637. Private placement issues are most commonly purchased by: (a) insurance companies and pension funds. (b) mutual funds. (c) investment banks. (d) trustees of large inheritances. (e) non-profit corporations.

638. Compensating balances are a form of collateral sometimes required when banks make commercial loans. The firm receiving the loan must: (a) provide a percentage of the loan to the bank in cash. (b) keep required minimums in accounts at the bank. (c) issue stock to cover the amount of the loan for insurance purposes. (d) limit the amount of the loan as a percentage of total net worth.

639. The risk structure of interest rates is the relationship among: (a) rates on mortgages that are adjustable at different points in the future. (b) interest rates of different bonds with the same maturity. (c) the terms to maturity of different bonds. (d) interest rates on bonds with different maturities.

640. The bubble theory of speculative markets is least compatible with the notion that: (a) investors bid up quickly to levels well above their true value to simply get in on the action. (b) investor behavior is often driven by irrational factors. (c) great losses will occur when prices revert back to prior levels. (d) present value calculations based on expected dividends dominate stock pricing. (e) investors focus primarily on their views of the expectations of other investors.

641. Calculating relative prices is most difficult in a: (a) capitalist economy. (b) monetary economy. (c) socialist economy. (d) barter economy. (e) market economy.

642. The primary difference between the “payoff” and the “purchase and assumption” methods of handling failed banks is that the FDIC: (a) guarantees all deposits, not just those under the $100,000 limit, when it uses the “payoff” method. (b) guarantees all deposits, not just those under the $100,000 limit, when it uses the “purchase and assumption” method. (c) is more likely to use the “payoff” method when the bank is large and it fears that depositor losses may spur business bankruptcies and other bank failures. (d) permits the bank to continue to operate under the “purchase and assumption” method, which is a variant of a Chapter 11 bankruptcy protection, but it closes the bank immediately under the payoff approach.

643. NOT among standard assets directly in any typical financial intermediary’s portfolio of assets would be: (a) common stocks. (b) economic investment in production facilities held by multinational corporations. (c) commercial paper. (d) US Treasury bonds. (e) corporate bonds. (f) junk bonds. (g) financial derivatives.

644. One explanation for why stocks may soar far above reasonable market value (true present value) after favorable news is: (a) irrational exuberance. (b) stock influx. (c) stock outflux. (d) corporate malfeasance. (e) unwarranted exhilaration. (f) peak/end explosiveness.

645. Long term corporate bonds that were once investment grade but which have dropped to ratings to Baa or worse are called: (a) tombstones. (b) fallen angels. (c) junk bonds. (d) dead puppies. (e) insecurities. (f) speculatories. (g) suppositories.

646. Interest rates on bonds of the same maturity are least likely to differ because of differences in (a) liquidity. (b) risk. (c) income tax treatment. (d) price/earnings ratios. (e) None of the above.

647. Which of the following best explains the difference between brokers and dealers? (a) Brokers are pure intermediaries; dealers make markets by standing ready to buy and sell at given prices. (b) Dealers are pure intermediaries; brokers make markets by standing ready to buy and sell at given prices. (c) Dealers link up buyers and sellers, but do not stand ready to buy and sell from their inventories of securities; brokers stand ready to buy and sell from their inventories of securities. (d) There is no difference between brokers and dealers – the terms are synonyms.

648. The prohibition against banks underwriting corporate securities and engaging in brokerage, real estate, and insurance activities was repealed by the (a) Gramm-Leach-Bliley Financial Services Modernization Act. (b) Competitive Equality in Banking Act (c) Depositary Institution Deregulation and Monetary Control Act. (d) Glass Steagall Act.

649. Because of the adverse selection problem, (a) good credit risks are more likely to seek loans causing lenders to make a disproportionate amount of loans to good credit risks. (b) lenders may refuse loans to individuals with high net worth, because of their greater proclivity to "skip town." (c) lenders are reluctant to make loans not secured by collateral. (d) a “lemons market” for junk bonds has emerged to ensure that poor credit risks can secure funding if their business plans are fundamentally sound

650. Dollar-denominated deposits held in banks outside the United States are called: (a) Euros. (b) Eurodollars. (c) Eurobonds. (d) OPEC-dollars. (e) seignorage.

651. If the velocity of money increases and real GDP and the money supply are constant, the price level will: (a) rise. (b) fall. (c) not be affected. (d) None of the above.

652. Mutual fund manager Mickey Loner has had the best track record on Wall Street for 20 years. You like his image for extreme caution, so you invest heavily in his fund. Six months later, his shrink has put him through assertiveness training and a newly aggressive strategy bankrupts the fund. You have suffered “zee tremendous capital loss” because of: (a) disintermediation. (b) moral hazard. (c) bad luck. (d) adverse selection. (e) securitization. (f) insecuritization.

653. The accelerating pace of financial innovation has meant that many financial regulations imposed in earlier times have increasingly become: (a) obsolete. (b) major stimuli for a healthier financial system. (c) more powerful as mechanisms for government stabilization policies. (d) important for consumer protection. (e) powerful in their effects on international monetary markets.

654. One likely explanation for the relatively high rates of inflation experienced in many Latin American countries is the: (a) relatively slow growth in money supplies in these countries. (b) relatively rapid growth in these countries’ money supplies. (c) decline in the prices of basic commodities in these countries. (d) primitive states of commodity markets in these countries.

655. People hold money even during inflationary episodes when other assets prove to be better stores of value. This can be explained by the fact that money is: (a) extremely liquid. (b) a unique good for which there are no substitutes. (c) the only thing accepted in economic exchange. (d) all of the above.

656. An option that gives the owner the right to buy a financial instrument at the exercise price within a specified period is a/an: (a) call option. (b) put option. (c) American option. (d) diverse option. (e) European option.

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 + ΔB + ΔMB. (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.

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.

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.

698. Diversification of a financial investment portfolio reduces risk when percentage changes in the values of various assets have large and significantly: (a) positive co-variance. (b) autocorrelated residuals. (c) skewed probability functions. (d) biased kurtosis. (e) negative co-variance. (f) positive correlation coefficients.

699. The volatility of commodity prices tends to be dampened by the actions of: (a) labor unions. (b) corporate CEOs who overstate revenues and understate costs in annual reports. (c) myopic financial investors. (d) speculators. (e) stock brokerage firms.

700. An investment bank that doesn't want to incur the entire risk of underwriting a large security issue may cooperate with other investment banks by forming a: (a) shelf registration. (b) joint subsidiary. (c) whole issue (d) rating agency (e) syndicate. (f) turn-key solution. (g) restrictive covenant.

701. A corporation’s right to repurchase previously issued bonds is specified in a debenture’s:(a) conversion clause. (b) call provision. (c) collateralized agreement. (d) lien. (e) recall guarantee. (f) redemption clause.

702. After a recession during 1920-1921, the Fed was pressed for operating income. It solved this problem by purchasing income-earning securities, which gave rise to the discovery of: (a) the real bills doctrine. (b) discount window policies. (c) open market operations. (d) lender of last resort status.(e) interest rates pegging. (f) margin requirements.

703. The most important source of external funds used to finance businesses are (a) investment firms. (a) stocks and IPO’s. (a) debt and equity securities. (d) bank loans. (e) venture capitalists. (f) retained earnings.

704. The notion that “expectations in financial markets reflect optimal forecasts using all available information” is central to: (a) adverse selection. (b) asymmetric information. (c) insider information. (d) the strong version of efficient markets theory. (e) modern game theory. (f) saddle point equilibration.

705. The single most significant borrower in money markets and capital markets over the past seven decades has been the (a) Federal Reserve System. (b) US Treasury. (c) White House. (d) Money Center Banks. (e) United Nations. (f) World Bank. (g) International Monetary Fund.

706. The primary difference between the equilibrium interest rate for US Treasury bonds and for Aaa Corporate bonds is the: (a) higher bond rating for blue chip bonds. (b) risk premium. (c) greater interest rate risk for Aaa bonds. (d) applicability of calculation using the inverted yield curve formula. (e) inflation risk inherent in holding government bonds.

707. Compound interest refers to: (a) earning interest on the principal. (b) earning interest on previously earned interest. (c) investing for multiple years. (d) recursive investment planning.

708. The rate of return for an asset which costs $1,500 today and pays $1,800 a year from now is: (a) 5 percent. (b) 10 percent. (c) 15 percent. (d) 17.5 percent. (e) 20 percent.

709. Speculative bubbles and financial panics are most consistent with: (a) Keynesian theory. (b) rational expectations. (c) classical economics. (d) the weak version of efficient markets theory. (e) the semi-strong version of efficient markets theory. (f) the strong version of efficient markets theory.

710. When the price of the underlying financial instrument is below the exercise (strike) price, a call option is said to be: (a) a flying angel. (b) out of the money. (c) a fallen angel. (d) in the money. (e) at the money. (f) below the curtain.

711. When the likelihood of a certain event cannot be predicted with any reasonable degree of confidence, business decisionmakers are confronted by: (a) random selection. (b) Knightian uncertainty. (c) stochastic probability. (d) moral hazards. (e) risk.

712. Funds that a firm has already spent, or is committed to spend, regardless of whether a project is pursued, are termed: (a) fixed, or sunk, costs. (b) opportunity costs. (c) exorbitant costs. (d) variation costs. (e) deadweight losses.

713. Investment is NOT necessarily in equilibrium if: (a) after adjusting for risk, liquidity, and time to maturity, all income-producing assets yield the same returns. (b) all prices exactly equal their corresponding present values. (c) the average expected rates of return on all investments equal the market rate of interest. (d) the risks for all investments are equal, regardless of their rates of return. (e) the market interest rate on loanable funds and the rates of return on existing capital are all equal.

714. Economic rents that can be capitalized are least likely to arise from: (a) production cost advantages. (b) proprietary knowledge. (c) being first to market a differentiable new product or to innovate a new production technology. (d) a vigorously competitive market environment.

715. If the rate of return on an asset exceeds the interest rate: (a) its present value exceeds its price. (b) the market is moving away from equilibrium. (c) you should sell the asset as quickly as possible. (d) economic rent is being realized by the resource supplier. (e) current purchase of the asset would be unprofitable.

716. Securities annually paying specific amounts forever are: (a) stocks. (b) perennials. (c) royalties. (d) perpetuities. (e) renewals.

717. Financial intermediation is, broadly, the process of: (a) lending money out at interest. (b) spending funds faster than revenues are acquired. (c) channeling funds from savers to dissavers, and to investors in economic capital. (d) buying and selling currencies in international money markets. (e) issuing bonds to cover government deficits.

718. Principal-agent problems associated with the separation of ownership from the control of a corporation are most likely to cause problems for attaining: (a) maximum present value of shareholders’ equity. (b) distributive efficiency between managers and stockholders. (c) allocative efficiency within the production department of major corporations. (d) global efficiency for the economy if the firm is in a highly competitive industry.

719. Which of the following are least likely to be claimants to a firm's income stream? (a) shareholders (b) managers (c) government (d) suppliers (e) customers.

720. Mr. Hoper has an income of $40,000 this year and $60,000 next year. He can invest in a project that costs $10,000 this year, which generates an income of $12,000 next year. The market interest rate is 10%. What is the maximum possible consumption this year, if Mr. Hoper invests in the project and plans to consume $50,000 next year? (a) $40,000 (b) $50,000 (c) $60,000 (d) A cool $1 million.

721. The stock market is important primarily because it is (a) the primary source of new investment funds for major corporations. (b) the most widely followed financial market in the United States. (c) the market in which interest rates are determined. (d) the market in which exchange rates are determined.

722. Efficiency in financial intermediation involves minimization of (a) default risks to savers. (b) the spread between interest paid by borrowers and inters payments to savers. (c) financial profits to intermediaries.

723. NOT among the reasons that financial intermediaries can more efficiently channel the funds from households that save to firms that invest or households that borrow are (a) lower transaction costs. (b) economies of scale that facilitate screening to reduce borrowing by parties that pose relatively high default risk (c) more powerful incentives to maximize wealth. (d) superior information at lower cost per dollar transaction.

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.

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

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

762. Which of the following is not included in the measure of M1? (a) traveler's checks. (B) demand deposits. (c) currency. (d) gold coins issued by the U.S. Treasury.

763. If a security pays $110 next year and $121 the year after that what is its yield to maturity if it sells for $200? (a) 9 percent (b) 10 percent (C) 11 percent (D) 12 percent

764. A lender who charges 15% nominal interest will realize 10% real interest if there is a 5%: (a) rate of deflation. (b) increase in the price level. (c) rate of growth in national income. (d) tax surcharge on interest incomes. (e) decline in nominal GDP.

765. Money is a completely safe asset only in that there is almost no risk that: (a) you never lose anything by holding money. (b) its purchasing power will change. (c) its face value will change while you own it. (d) you will lose it or be robbed.

766. A loan automatically deposited in your checking account by the financial institution that issued it 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.

767. Compared to interest rates on long-term U.S. government bonds, interest rates on _____ fluctuate more and are lower on average. (a) medium-quality corporate bonds (b) low-quality corporate bonds (c) high-quality corporate bonds (d) three-month Treasury bills (e) none of the above.

768. When compared to financial markets of twenty years ago, today's financial markets: (a) provide small savers with greater options. (b) limit the saving options offered to small savers. (c) limit the lending options of small investors. (d) directly involve a far smaller proportion of the population because income is increasingly unequally distributed.

769. Since its introduction, the Euro has declined in value relative to the dollar, thereby, benefiting _____ and harming _____. (a) American businesses; American consumers (b) American businesses; foreign businesses (c) American consumers; American businesses (d) foreign businesses; American consumers.

770. Which of the following can be described as involving direct finance? (a) A corporation issues new shares of stock. (b) People buy shares in a mutual fund. (c) A pension fund manager buys commercial paper in the secondary market. (d) An insurance company buys shares of common stock in the over-the-counter markets.

771. Which of the following are investment intermediaries? (a) Life insurance companies (b) Mutual funds (c) Pension funds (d) State and local government retirement funds.

772. Depository institutions that issue checkable accounts and time deposits include: (a) insurance companies. (b) credit unions. (c) pension funds (d) mutual funds. (e) the US Treasury.

773. 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 by banks to each other. (e) none of the above.

774. The presence of transaction costs in financial markets explains, in part, why: (a) financial intermediaries and indirect finance play such an important role in financial markets. (b) equity and bond financing play such an important role in financial markets. (c) corporations get more funds through equity financing than they get from financial intermediaries. (d) direct financing is more important than indirect financing as a source of funds.

775. Which of the following do not provide charters? (a) The Office of the Comptroller of the Currency (b) The Federal Reserve System (c) The National Credit Union Administration (d) State banking and insurance commissions.

776. A situation in which a party issuing a debt instrument fails to make scheduled payments is called a: (a) failure. (b) insolvency. (c) devaluation. (d) default.

777. A corporation acquires new funds only when its securities are sold in the: (a) primary market by an investment bank. (b) primary market by a stock exchange broker. (c) secondary market by a securities dealer. (d) secondary market by a commercial bank.

778. Adverse selection and moral hazard problems that interfere with the efficient functioning of financial markets arise from the fundamental problem of: (a) noncollateralized risk. (b) free-riding. (c) asymmetric information. (d) costly state verification.

779. When economists say that money promotes efficiency, they mean that money: (a) increases transactions costs. (b) encourages specialization and the division of labor. (c) is inexpensive to produce. (d) generates seignorage profits to the Treasury at lower costs than is true of taxation.

780. Advocates of the European monetary union point to the advantages that a single currency has in: (a) eliminating the transaction costs involved in having to exchange the currency of one country for the currency of another. (b) speeding the economic disintegration of European countries. (c) allowing member countries to repudiate their government debts. (d) reducing reliance on gold as the major international payments mechanism.

781. Inflation most immediately and directly reduces the usefulness of money as a: (a) store of value. (b) unit of account. (c) medium of exchange. (d) measure of value. (e) mechanism for interpersonal comparisons of utility.

782. 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.

783. The primary assets of a pension fund are: (a) money market instruments. (b) corporate bonds and stock. (c) consumer and business loans. (d) mortgages.

784. Money most helps us avoid the problems associated with the requirement for exchange that: (a) government regulations are often barriers to certain transactions. (b) a double coincidence of wants must exist. (c) specialization according to subdivisions of labor create alienation. (d) comparative disadvantages raise production costs to unprofitable levels.

785. With an interest rate of 10 percent, the present value of a security that pays $1,100 next year and $1,460 four years from now is: (a) $1,000. (b) $2,560. (c) $3,000. (d) $2,000.

786. Which of the following $1,000 face-value securities has the highest yield to maturity? (a) A 5 percent coupon bond selling for $1,000 (b) A 10 percent coupon bond selling for $1,000 (c) A 12 percent coupon bond selling for $1,000 (d) A 12 percent coupon bond selling for $1,100.

787. The notion that, ex ante, the nominal interest rate equals the real interest rate plus the expected rate of inflation is called the: (a) Fisher equation. (b) Keynesian equation. (c) Monetarist equation. (d) Marshall equation.

788. The major goals in regulating financial institutions include all of the following EXCEPT: (a) protection of savers. (b) macroeconomic stability. (c) the promotion of efficiency. (d) keeping interest rates above usury ceilings.

789. When the price of a bond is above the equilibrium price, there is an excess _____ for (of) bonds and price will _____. (a) demand; rise (b) demand; fall (c) supply; fall (d) supply; rise.

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.

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%.

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.

831. The FED's Open Market Committee: (a) sets the levels of purchases or sales of government securities. (b) stabilizes prices in securities markets. (c) acts in an advisory capacity to the Board of Governors. (d) is elected by the directors of FED member banks.

832. A bank that sells $2 million in bonds to the FED will find that its total reserves are initially: (a) increased by $2 million. (b) decreased by $2 million. (c) reduced by (rr) X ($2 million). (d) expanded by (1‑rr) X ($2 million).

833. The FED might try (probably ineffectively) to directly limit stock market speculation by changing: (a) reserve requirements ratios. (b) margin requirements. (c) discount rates. (d) federal funds rates.

834. Monetary policies that reduce the money supply include: (a) FED sales of Treasury bonds to banks. (b) reducing government spending. (c) lowering the discount rate. (d) increasing margin requirements.

835. The transaction demand for money arises from the: (a) need to consummate predictable transactions. (b) desire to increase investment. (c) use of money as a store of value. (d) fear of a rising price level.

836. Speculative (or asset) cash balances are negatively related to: (a) individual income. (b) uncertainty about the future. (c) rates of interest. (d) recessionary trends.

837. A simple version of Irving Fisher’s “equation of exchange” is written: (a) MQ = PV. (b) M = QVP. (c) MV = PQ. (d) VP = MQ

838. If all currency is held in bank vaults and each bank loans exactly 80 percent of its total reserves, then there will be: (a) "runs" on banks. (b) five times as much money as reserves. (c) excess liquidity. (d) inflation. (e) financial collapse.

839. The actual money multiplier is: (a) 1/rr. (b) equal to MS/MB. (c) larger than the potential money multiplier. (d) reduced if the public deposits its cash in banks.

840. One way for financial investors to "spread" risk and reduce the uncertainty of their income streams is through: (a) investing only in government bonds. (b) barter. (c) diversification. (d) monetization.

841. The share of bank reserves held to accommodate depositors' withdrawals is: (a) excess reserves. (b) free reserves. (c) speculation reserves. (d) Federal Reserves. (e) defense reserves.

842. Banks can increase the money supply by: (a) printing money. (b) debasing the supply of currency. (c) lending excess reserves as demand‑deposit money. (d) selling Treasury bills directly to the public.

843. If Treasury deposits at the Fed are predicted to _____, the manager of the trading desk at the New York Fed bank will likely conduct _____ open market operations to _____ reserves. (a) increase; defensive; inject (b) decrease; defensive; drain (c) increase; dynamic; inject (d) decrease; dynamic; drain.

844. Fed District banks, and NOT the Federal Open Market Committee (FOMC) have formal legal authority to set _____ and the _____, but the FOMC has these powers in practice. (a) margin requirements; discount rate (b) margin requirements; federal funds rate (c) reserve requirements; discount rate (d) reserve requirements; federal funds rate

845. Financial intermediation occurs when financial institutions: (a) incur substantial outflows of funds. (b) facilitate financial flows from ultimate lenders to ultimate borrowers. (c) face rigid reserve requirement ratios. (d) experience "runs" if depositors fear insolvency.

846. The major economic purpose of any financial system is to: (a) channel savings to their most productive uses. (b) collect taxes to support government spending. (c) generate monopoly profits for Wall Street. (d) provide checking and savings accounts. (e) balance surpluses between business and government.

847. The FED's reserve requirement ratio: (a) is its most powerful monetary tool. (b) helps stabilize the actual money multiplier. (c) reduces the actual money multiplier. (d) reduces the money supply relative to the monetary base. (e) All of the above.

848. The most important advantage of discount policy is that the Fed can use it to: (a) disguise its intentions about future monetary policy. (b) perform its role as lender of last resort. (c) control the money supply. (d) punish banks that have deficient reserves.

849. The Fed's ability to discourage banks from making too many trips to the discount window is frequently referred to as: (a) "arm twisting." (b) the "red dog" rule. (c) "discount blitzing!" (d) "moral suasion.".

850. Tying the discount rate to a market interest rate would tend to: (a) increase instability in reserves and the monetary base. (b) increase instability in the nonborrowed base. (c) reduce instability in the nonborrowed base. (d) reduce instability in reserves and the monetary base.

851. The Gram-Leach-Bliley Act of 1999 significantly repealed prohibitions forbidding commercial banks from acting as investment bankers that had been imbedded in the (a). Glass-Steagall Act (b) Riegle-Neal Act. (c) Community Reinvestment Act. (d) Competitive Equality in Banking Act. (e) McFadden Act.

852. Open market purchases raise the _____ thereby raising the _____. (a) money multiplier; money supply (b) money multiplier; monetary base (c) monetary base; money supply (d) money base; money multiplier.

853. Market interest rates are LEAST influenced by: (a) people's willingness to defer consumption if they are rewarded for doing so. (b) people's desires for liquidity. (c) the marginal productivity of new capital relative to its price. (d) the face values of existing stock certificates relative to their current prices.

854. Although the FDIC was created to prevent bank failures, its existence encourages banks to: (a) take too much risk. (b) hold too much capital. (c) open too many branches. (d) buy too much stock.

855. When one party to an on-going transaction has incentives to engage in activities detrimental to the other party after an agreement has been reached, there is a problem of: (a) moral hazard. (b) split incentives. (c) ex ante shirking. (d) pre-contractual opportunism. (e) adverse selection.

856. The main motive behind the forces that have shaped the development of the current regulatory system has been the desire to: (a) prevent monopolistic practices. (b) ensure a stable and sound banking system. (c) create an interstate banking system. (d) foster a highly competitive banking system.

857. Since depositors, like any lender, only receive fixed payments while the bank keeps any surplus profits, they face the _____ problem that banks may take on too _____ risk. (a) adverse selection; little (b) adverse selection; much (c) moral hazard; little (d) moral hazard; much

858. If the FDIC decides that a bank is too big to fail, it will use the _____ method, effectively ensuring that _____ depositors will suffer losses. (a) payoff; large (b) payoff; no (c) purchase and assumption; large (d) purchase and assumption; no

859. NOT among the ways that regulators attempt to reduce the riskiness of banks' asset portfolios is by: (a) limiting the amount of loans in particular categories or to individual borrowers. (b) sometimes prohibiting banks from holding risky assets such as common stocks. (c) establishing a minimum interest rate floor that banks can earn on certain assets. (d) setting high bank capital requirements to increase the cost of bank failure to the owners.

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.

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.

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.

905. When the Fed wants to decrease the level of reserves in the banking system, it will: (a) purchase government bonds. (b) sell government bonds. (c) extend discount loans to banks. (d) raise margin requirements.

906. Individuals and institutions that hold deposits in banks are called: (a) debt holders. (b) residual claimants. (c) bondholders. (d) depositors. (e) policyholders.

907. If the required reserve ratio is equal to 10 percent, a single bank can increase its loans up to a maximum amount equal to: (a) its excess reserves. (b) 10 times its excess reserves. (c) 10 percent of its excess reserves. (d) its total reserves.

908. In the simple deposit expansion model, an expansion in checkable deposits of $1,000 when the required reserve ratio is equal to 20 percent implies that the Fed: (a) sold $200 in government bonds. (b) sold $500 in government bonds. (c) purchased $200 in government bonds. (d) purchased $500 in government bonds.

909. The sum of vault cash, deposits at Federal Reserve banks, and currency in circulation is called: (a) the money supply. (b) the monetary base. (c) Federal Reserve liabilities. (d) near-cash.

910. There are two ways in which the Fed can provide additional reserves to the banking system: it can _____ government bonds or it can _____ discount loans to commercial banks. (a) sell; extend (b) sell; call in (c) purchase; extend (d) purchase; call in

911. When the Fed purchases artwork to decorate the conference room at the Federal Reserve Bank of Kansas City: (a) reserves rise, but the monetary base falls. (b) reserves fall. (c) currency in circulation falls. (d) the monetary base rises.

912. The Fed's securities holdings consist primarily of: (a) Treasury securities, but in the distant past also included bankers' acceptances. (b) municipal bonds, but in the distant past also included bankers' acceptances. (c) bankers' acceptances, but in the distant past also included Treasury bonds. (d) Treasury bonds, but also in the past have included municipal bonds.

913. An increase in _____ leads to an equal, though temporary, increase in the monetary base.: (a) deferred availability cash items (b) Treasury currency outstanding (c) float (d) Treasury deposits with the Fed

914. The monetary base declines when: (a) the Fed purchases securities. (b) the Fed purchases foreign currency. (c) float increases. (d) the Fed sells securities.

915. Float is defined as: (a) bank deposits minus U.S. Treasury deposits. (b) reserves minus currency in circulation. (c) cash items in the process of collection minus deferred availability cash items. (d) deferred availability cash items minus cash items in the process of collection. (e) U.S. Treasury deposits minus bank deposits.

916. The volume of loans that the Fed makes to banks is affected by the Fed's setting of the interest rate on these loans, called the: (a) federal funds rate. (b) prime rate. (c) discount rate. (d) interbank rate.

917. Special Drawing Rights (SDRs) are issued to governments by the _____ to settle international debts and have replaced _____ in international transactions. (a) Federal Reserve System, gold (b) Federal Reserve System, dollars (c) International Monetary Fund, gold (d) International Monetary Fund, dollars

918. A Fed purchase of gold, SDRs, a deposit (asset) denominated in a foreign currency or any other asset (such as a computer) is just an open market: (a) purchase of these assets, raising the monetary base. (b) sale of these assets, raising the monetary base. (c) purchase of these assets, lowering the monetary base. (d) sale of these assets, lowering the monetary base.

919. Which is the most important category of Fed assets?: (a) U.S. Treasury securities (b) discount loans (c) gold and SDR certificates (d) cash items in the process of collection

920. When a member of the nonbank public withdraws currency from a bank,: (a) both the monetary base and bank reserves fall. (b) the monetary base falls, but bank reserves remain unchanged. (c) bank reserves fall, but the monetary base remains unchanged. (d) both currency in circulation and the monetary base rise.

921. When the Treasury acquires gold or SDRs, it issues certificates to the _____, which are a claim on the gold or SDRs, and in turn is credited with deposit balances at the _____. Fed. (a) Federal Reserve System, Fed (b) Federal Reserve System, IMF (c) International Monetary Fund, Fed (d) International Monetary Fund, IMF

922. If a member of the nonbank public sells a government bond to the Federal Reserve in exchange for currency, the monetary base will: (a) remain unchanged, but reserves will fall. (b) remain unchanged, but reserves will rise. (c) rise, but currency in circulation will remain unchanged. (d) rise, but reserves are unchanged until the individual makes a bank deposit.

923. Many money supply models tend to focus on the monetary base rather than on reserves since Fed actions usually have: (a) no effect on reserves, but a predictable effect on the monetary base. (b) little effect on reserves but a predictable effect on the monetary base. (c) a more predictable effect on the monetary base. (d) none of the above.

924. The ratio that relates the change in the money supply to a given change in the monetary base is called the: (a) money multiplier. (b) required reserve ratio. (c) deposit ratio. (d) discount rate.

925. The Fed lacks complete control over the money supply because it cannot perfectly predict: (a) the amount of discount borrowing by banks. (b) shifts from deposits to currency. (c) the level of excess reserves held by banks. (d) any of the above.

926. If the Fed uses open market operations to inject reserves into the banking system and they are held as excess reserves, then the money supply: (a) increases by only the initial increase in reserves. (b) increases by only one-half the initial increase in reserves. (c) increases by a multiple of the initial increase in reserves. (d) does not change.

927. The money multiplier is: (a) negatively related to high-powered money. (b) positively related to the excess reserves ratio. (c) negatively related to the required reserve ratio. (d) positively related to holdings of excess reserves.

928. For a given level of the monetary base, an increase in the currency / checkable deposit ratio will mean: (a) an increase in currency in circulation and an increase in the money supply. (b) an increase in money supply but no change in reserves. (c) a decrease in the money supply. (d) an increase in currency in circulation but no change in the money supply.

929. For a given level of the monetary base, a decrease in the required reserve ratio on checkable deposits will eventually yield: (a) a decrease in the money supply. (b) an increase in the money supply. (c) a decrease in checkable deposits. (d) an increase in discount borrowing.

930. The variable that reflects the effect on the money supply of changes in factors other than the monetary base is the: (a) currency/checkable deposits ratio. (b) required reserve ratio. (c) money multiplier. (d) nonborrowed base.

931. Open market operations intended to offset movements in noncontrollable factors (such as float) that affect reserves and the monetary base are called: (a) defensive (or passive) open market operations. (b) dynamic open market operations. (c) offensive open market operations. (d) reactionary open market operations.

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.

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.

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.

972. Long-term financial instruments would include a: (a) negotiable certificate of deposit (b) bankers acceptance (c) six-month loan (d) U.S. Treasury bill (e) U.S. Treasury bond.

973. Economists find no completely satisfactory way to measure money because: (a) money supply statistics are a state secret. (b) the Federal Reserve does not employ or report different measures of the money supply. (c) the "moneyness" or liquidity of an asset is a matter of degree. (d) economists find disagreement interesting and refuse to agree for ideological reasons.

974. When a recession occurs, normally the demand for corporate bonds _____ and the supply of bonds _____. (a) increases; increases (b) increases; decreases (c) decreases; decreases (d) decreases; increases

975. When the Fed decreases the money stock, the money supply curve shifts to the _____ and the interest rate _____. (a) right; rises (b) right; falls (c) left; falls (d) left; rises

976. When the growth rate of the money supply increases, nominal interest rates end up being permanently higher if: (a) the liquidity effect is larger than the other effects. (b) there is fast adjustment of bank lending operations. (c) adjustments for expected inflation are relatively slow. (d) the expected inflation effect is larger than the liquidity effect.

977. For a holding period of one year the expected return on a consol is _____ the higher is the price of the consol today, and _____ the higher is the price of the consol next year. (a) higher; higher (b) higher; lower (c) lower; higher (d) lower; lower

978. Problems created by asymmetric information would not include: (a) irrational exuberance among overly optimistic financial investors. (b) moral hazard. (c) adverse selection. (d) the principal-agent problem. (e) attempts by stockholders to “free-ride”, thereby failing to adequately monitor a corporation’s top managers.

979. Mishkin and Eakin’s analysis of adverse selection indicates that financial intermediaries, especially banks,: (a) have advantages in overcoming the free-rider problem, helping to explain why indirect finance is a more important source of business finance than is direct finance. (b) despite their success in overcoming free-rider problems, nevertheless, play a minor role in moving funds from savers to corporations. (c) provide better-known and larger corporations a higher percentage of their external funds than they do to newer and smaller corporations, which rely to a greater extent on the new issues market for funds. (d) have no special expertise that allows them to assess the business plans of growing firms.

980. One financial intermediary in our financial structure that helps to reduce the extent of moral hazard that arises from the principal-agent problem when entities that wish to borrow lack sufficient current collateral to justify the funding they seek is the: (a) venture capital firm. (b) money market mutual fund. (c) pawn broker. (d) savings and loan association. (e) Securities and Exchange Commission.

981. Which of the following is NOT an advantage of forming a bank holding company?: (a) It allows ownership of several banks where branching is prohibited. (b) It allows owners to engage in activities that banks are prohibited from engaging in. (c) Holding companies can issue commercial paper as a source of funds. (d) A bank holding company has limited liability because it is a corporation; other banks must be formed as proprietorships or partnerships.

982. The only country without a true national banking system in which banks have branches that are not legally pure subsidiaries throughout the nation is: (a) Canada. (b) France. (c) Italy. (d) the United States.

983. When a $10 check written on the First National Bank of Chicago is deposited in an account at Citibank, then: (a) the liabilities of the FNB decrease by $10. (b) the reserves of FNB increase by $10. (c) the liabilities of Citibank decrease by $10. (d) the assets of Citibank decrease by $10.

984. When $1 million previously kept under the depositor’s mattress is deposited at a bank, if the required reserve ratio is 20 percent and the bank chooses not to hold any excess reserves but makes loans instead, then, in the bank's final balance sheet: (a) the assets at the bank increase by $800,000. (b) the liabilities of the bank increase by $1,000,000. (c) the liabilities of the bank increase by $800,000. (d) reserves increase by $160,000.

985. Social Security is most reasonably describable as a: (a) fully funded pension plan. (b) federally insured private pension plan. (c) government sponsored private pension plan. (d) "pay-as-you-go" system.

986. When a large corporation wishes to sell stocks and bonds, it usually employs: (a) a takeover specialist. (b) a finance company. (c) an investment bank. (d) a commercial bank. (e) none of the above.

987. _____ assist in the initial sale of securities in the primary market; _____ assist in the trading of securities in the secondary markets. (a) commercial banks; hedge funds (b) commercial banks; mutual funds (c) investment banks; securities brokers and dealers (d) commercial banks; securities brokers and dealers (e) investment banks; mutual funds

988. Long-Term Capital got into trouble when it thought that the spread between prices on long-term Treasury bonds and long-term corporate bonds was too _____, and bet that this "anomaly" would disappear and the spread would _____.: (a) high; narrow (b) low; widen (c) low; narrow (d) high; widen

989. The futures markets have grown rapidly in recent years because: (a) interest rates are less volatile. (b) technology has lowered transaction costs. (c) financial managers are more risk averse. (d) shareholders are more risk averse.

990. By selling short a futures contract of $100,000 at a price of 96 you are agreeing to deliver: (a) $100,000 face value securities for $104,167. (b) $96,000 face value securities for $100,000. (c) $100,000 face value securities for $96,000. (d) $96,000 face value securities for $100,000.

991. Americans' fear of centralized power and their distrust of moneyed interests explains why the U.S. did not have a central bank during most of the: (a) 17th century. (b) 18th century. (c) 19th century. (d) 20th century.

992. Which of the following are not duties of the Board of Governors of the Federal Reserve System?: (a) Setting margin requirements, the fraction of the purchase price of the securities that has to be paid for with cash. (b) Setting the maximum interest rates payable on certain types of time deposits under Regulation Q. (c) Approving the discount rate "established" by the Federal Reserve banks. (d) Representing the United States in negotiations with foreign governments on economic matters.

993. The Fed may feel implicit pressure to support the president's policies since the President: (a) can abolish the Fed by presidential announcement. (b) can veto legislation that might limit the Fed's discretionary authority (c) appoints a commission that determines the incomes of all Fed employees. (d) unilaterally appoints all Governors of the Fed, and can fire them at will.

994. The Federal Reserve entity that determines monetary policy strategy is the: (a) Board of Governors. (b) chairman of the Board of Governors. (c) Federal Open Market Committee. (d) Shadow Open Market Committee.

995. Advocates of a constant rate of growth of the money supply believe that discretionary monetary policy is: (a) irrelevant and doesn't matter. (b) less effective than fiscal policy. (c) a Bolshevik plot. (d) likely to be destabilizing.

996. In general, banks make profits by selling _____ liabilities and buying _____ assets. (a) long-term; shorter-term (b) short-term; longer-term (c) illiquid; liquid (d) risky; risk-free

True / False: 2 points each. True = (a) False = (b)

997. Myron Scholes was correct in asserting in The Trillion Dollar Bet that dynamic hedging based on the Black-Scholes equations can eliminate uncertainty.

998. Higher expected rates of return on economic investments cause investors to be more willing to borrow financial capital.

999. According to Frank Knight, risk is more important than uncertainty in generating pure economic profits

1000. An interest rate of 10 percent causes a current investment of $1,000 to be worth $1,331 in three years.

1001. All economic profits arise from either (a) providing society with capital, (b) managing a corporation, (c) exploiting labor, or (d) evading taxes.

1002. An investment that costs $100,000 today and that generates annual payments of $8,000 is worthwhile if the market interest rate is 6 percent.

1003. The present value of a perpetuity equals the annual payment divided by the market interest rate.

1004. Most profit can be traced to monopoly power, innovation, or the bearing of risk and uncertainty.

1005. Real interest rates are the percentage premiums of purchasing power that are paid to the ultimate providers of capital.

1006. Expectations of inflation tend to make borrowers more willing to take out loans, but lenders less willing to make loans.

1007. If the rate of return on an investment exceeds the market rate of interest, then the present value of the investment exceeds its price.

1008. An investment that, after expenses, generates $125,000 annually has a present value of $1,000,000 if the annual interest rate is 8 percent.

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