Question

Section A: Choose the BEST answer

1. Earning interest on past interest is referred to as

A. present value.

B. future value.

C. compounding.

D. discounting.

2. Interest rates on long-term loans are generally _______ than interest rates on short-term loans, partly because ________ loans are riskier.

A. lower; short-term

B. lower; long-term

C. higher; long-term

D. higher; short-term

3. Maturity is

A. the time until borrowed funds are repaid.

B. the total interest accumulated on a financial security.

C. a situation in which equity becomes worthless.

D. the principal amount invested in a financial security.

4. Everything else remaining unchanged, an increase in the supply of security A and an increase in the demand for security B causes the price of security A to ______ and the price of security B to _______.

A. fall; fall B. fall; rise C. rise; fall D. rise; rise

5. Which of the following assets is likely to be least liquid?

A. Funds held as certificate of deposits B. Funds held in checking accounts C. Coins and currency D. Travelers checks

6. Consider a bond that has a present value of $1,000. If the annual rate of interest is 7 percent, the future value of the bond after a year is

A. $930. B. $935. C. $1,000. D. $1,070.

7. Consider a perpetuity making one payment each year that has a present value of $1,500. If the annual rate of discount is 3 percent, the annual payment is

A. $15. B. $45. C. $500. D. $1,500.

8. The analysis of the term structure of interest rates assumes that

A. there is uncertainty about future interest rates.

B. there is no risk involved in the purchase and sale of long-term securities.

C. short-term and long-term securities offer the same rate of interest.

D. there are no transaction costs.

9. What does an upward-sloping yield curve imply, according to the expectations theory of the term structure of interest rates?

A. Investors expect long-term interest rates to fall in the future.

B. Investors expect future short-term interest rates to be lower than the current short-term interest rate.

C. Investors expect future short-term interest rates to be the same as the current short-term interest rate.

D. Investors expect future short-term interest rates to be higher than the current short-term interest rate.

10. If the expected inflation rate is 4 percent, the nominal interest rate is 6 percent, and the actualinflation rate turns out to be 2 percent, then the realized real interest rate is __________ than the expected real interest rate and borrowers _________ relative to lenders.

A. less; gain B. less; lose C. greater; gain D. greater; lose

11. In the CAMELS rating system, which is used to assess the health of the banks, the letter C stands for

A. controls. B. currency reserves. C. capital adequacy. D. compliance with regulations.

12. The discount rate is the interest rate on

A. loans of reserves between banks. B. discount loans from the Federal Reserve. C. discount bonds. D. federal agency securities.

13. Which of the following statements is true?

A. If the Fed wants to decrease money supply, it sells government securities. B. If the Fed wants to increase money supply, it sells government securities.

C. If the Fed wants to decrease money demand, it sells government securities. D. If the Fed wants to increase money demand, it sells government securities.

14. If the Fed decides to tighten monetary policy, it uses ________ to ________ the money supply.

A. defensive open-market operations; decrease B. dynamic open-market operations; increase

C. defensive open-market operations; increase D. dynamic open-market operations; decrease

15. The lag that arises because it takes time for policymakers to choose a course of action is referred to as the _______ lag.

A. implementation B. recognition C. data D. decision

16. A decrease in the money supply is an example of a(n) ________ policy.

A. countercyclical B. procyclical C. contractionary D. expansionary

17. When the Fed uses its policy tools to smooth out the business cycle, the policy is referred to as a(n)

A. stabilization policy. B. Pareto-efficient policy. C. contractionary policy. D. expansionary policy.

18. Which of the following is a possible drawback of a bank run?

A. It leaves the banks with excess reserves. B. It leads to a fall in investment activities because of lack of loans available to business firms.

C. It leads to a fall in the demand for loans by the business firms. D. It leads to an excessive increase in the supply of money by the banks.

19. When people or firms that are worse than average risks are most likely to enter a contract that is offered to everyone, the problem is called

A. irrational expectations. B. adverse selection. C. opportunity cost. D. moral hazard.

20. The federal funds rate is the interest rate in the market for

A. mortgage loans. B. loans of government securities. C. federal agency securities. D. loans of reserves between banks.

Answer 1