The Fed can _______ the level of spending as a means of stimulating the economy by _______ the money supply.
A) increase; decreasing
B) decrease; increasing
C) decrease; decreasing
D) increase; increasing
increase; increasing
A credit crunch can occur in periods:
A) when a stimulative monetary policy is implemented.
B) when a restrictive monetary policy is implemented.
C) when both of these occur.
D) when neither of these occur.
when both of these occur
In general, there is a(n):
A) positive relationship between unemployment and inflation.
B) inverse relationship between unemployment and inflation.
C) inverse relationship between GNP and inflation.
D) positive relationship between GNP and unemployment.
an inverse relationship between unemployment and inflation
A _______ money policy can reduce unemployment, and a _______ money policy can reduce inflation.
A) tight; loose
B) loose; tight
C) tight; tight
D) loose; loose
loose; tight
A loose money policy tends to _______ economic growth and place _______ pressure on the inflation rate.
A) stimulate; downward
B) stimulate; upward
C) dampen; upward
D) dampen; downward
stimulate; upward
_______ serves as the most direct indicator of economic growth in the United States.
A) GDP
B) National income
C) The unemployment rate
D) The industrial production index
GDP
Which of the following is not an indicator of inflation?
A) housing price indexes
B) wage rates
C) oil prices
D) consumer confidence surveys
consumer confidence surveys
The M2 money supply is a _______ economic indicator.
A) leading
B) lagging
C) coincident
D) none of these
leading
Manufacturing and trade sales are a _______ economic indicator.
A) leading
B) lagging
C) coincident
D) none of these
coincident
The average prime rate is a _______ economic indicator.
A) leading
B) lagging
C) coincident
D) none of these
lagging
The time lag between when an economic problem arises and when it is reported in economic statistics is the _______ lag.
A) recognition
B) implementation
C) impact
D) open-market
recognition lag
The time between when an economic problem is realized and when the Fed tries to correct it with its policies is the _______ lag.
A) recognition
B) implementation
C) impact
D) open-market
implementation
The time between when the Fed adjusts the money supply and when interest rates change reflects the _______ lag.
A) recognition
B) implementation
C) impact
D) open-market
impact
Which of the following best describes the relationship between the Fed and the Administration?
A) The Fed must receive approval by the Administration before conducting monetary policy.
B) The Fed must implement a monetary policy specifically to the suppor
none of these statements describe the relationship between the Fed and the Administration
When the Fed attempts to counter rising rates (caused by an increase in the budget deficit) by loosening the money supply, this is known as:
A) monetizing the debt.
B) the crowding-out effect.
C) both monetizing the debt and the crowding-out effect.
D) ne
monetizing the debt
International flows of funds can affect the Fed's monetary policy. For example, if there is downward pressure on U.S. interest rates that can be offset by foreign _______ of funds, the Fed may not feel compelled to use a _______ monetary policy.
A) inflow
outflows; tight
Costner National, a commercial bank, operates primarily in the money market. Which of the following is not a way in which Costner is affected by the Fed's monetary policy?
A) a change in interest rates that affects the risk-free interest rate
B) a change
all of these are correct
The _______ lag represents the time from when an economic problem exists until it is recognized.
A) recognition
B) adjustment
C) implementation
D) none of these
recognition
A _______ dollar tends to exert inflationary pressure in the U.S.
A) stable
B) strong
C) weak
D) strong and stable
weak
According to the theory of rational expectations, _______ inflationary expectations encourage businesses and households to _______ their demand for loanable funds in order to borrow and make planned expenditures increase.
A) higher; reduce
B) higher; incr
higher; increase
Historical evidence has shown that, when the Fed significantly increases the money supply, U.S. inflation tends to _______ shortly thereafter which in turn places _______ pressure on U.S. interest rates.
A) increase; upward
B) increase; downward
C) decrea
increase; upward
Under a passive monetary policy,:
A) the economy cannot be expected to correct itself without participation by the Fed.
B) interest rates should ultimately increase in a weak economy because the demand for loanable funds should decline as economic growth
the level of business investment should ultimately increase; which should lead to a stronger economy and more jobs. However, the adjustment could take as long as years
Which of the following is true?
A) Federal deficits require that the Fed purchase government securities.
B) Federal deficits will always result in an increase in the money supply.
C) The Federal Reserve monetizes debt by selling securities which ultimatel
none of these statements are true
Inflation is commonly the result of a:
A) large budget deficit.
B) high level of interest rates.
C) high level of unemployment.
D) high level of aggregate demand.
high level of aggregate demand
According to the theory of rational expectations, if the Fed uses open market operations in order to increase the supply of loanable funds, what is the ultimate effect on interest rates?
A) There will be a reduction in interest rates.
B) There will be an
the impact on interest rates cannot be determined
The Federal Reserve would be most inclined to use a stimulative monetary policy to cure a recession if oil prices are:
A) low and steady.
B) low, but rising.
C) very high, but declining slightly.
D) very high and rising.
low and steady
Global crowding out is described in the text to mean the impact of:
A) excessive U.S. population growth on interest rates.
B) excessive global population growth on interest rates.
C) an excessive budget deficit in one country on interest rates of another
an excessive budget deficit in one country on interest rates of another country
If the federal government is willing to pay whatever is necessary to borrow loanable funds, but the private sector is not, this reflects:
A) the crowding-out effect.
B) dynamic open market operations.
C) defensive open market operations.
D) monetizing the
the crowding-out effect
When the Fed uses open market operations by purchasing Treasury securities from various financial institutions in the U.S., there will be:
A) an outward shift in the supply schedule of loanable funds.
B) an inward shift in the supply schedule of loanable
an outward shift in the supply schedule of loanable funds
When the Fed uses open market operations by selling some of its Treasury securities to investors in the U.S., there will be:
A) an outward shift in the supply schedule of loanable funds.
B) an inward shift in the supply schedule of loanable funds.
C) no s
an inward shift in the supply schedule of loanable funds
Which of the following is NOT a disadvantage of inflation targeting?
A) If the U.S. inflation rate deviates substantially from the Fed's target inflation rate, the Fed could lose credibility.
B) The Fed's complete focus on inflation could result in a much
the Fed's complete focus on inflation could result in much higher interest rates, which would discourage economic growth
Financial institutions such as commercial banks, bond mutual funds, insurance companies, and pension funds maintain large portfolios of bonds, so their portfolio is _______ affected when the Fed _______ interest rates.
A) unfavorably; decreases
B) unfavor
unfavorably; increases
The Fed can affect the interaction between the demand for money and the supply of money to influence interest rates, the aggregate level of spending, and therefore economic growth.
A) true
B) false
true
According to the theory of rational expectations, higher inflationary expectations encourage businesses and households to reduce their demand for loanable funds.
A) true
B) false
false
A passive monetary policy adjusts money supply automatically in response to economic conditions.
A) true
B) false
false
If the Fed implemented a policy of inflation targeting, and if the U.S. inflation rate deviated substantially from the Fed's target inflation rate, the Fed could lose credibility.
A) true
B) false
true
When both inflation and unemployment are relatively high, there is more disagreement among FOMC members about the proper monetary policy to implement.
A) true
B) false
true
If the Fed attempts to reduce inflation, it would likely increase money supply growth.
A) true
B) false
false
The Fed usually prefers to monetize the debt when inflation is relatively high.
A) true
B) false
false
Which of the following is NOT a major component of the Federal Reserve System?
A) member banks
B) Federal Open Market Committee
C) Securities and Exchange Commission
D) Board of Governors
securities exchange commission
Of the nine directors of each Fed district bank, _______ is/are elected by member banks in that district.
A) one
B) nine
C) six
D) three
six
Which of the following is not an activity of Fed district banks?
A) clearing checks
B) replacing old currency
C) providing loans to depository institutions
D) acting as an intermediary to match up lenders and borrowers in the commercial paper market
acting as an intermediary to match up lenders and borrowers in the commercial paper market
All _______ are required to be members of the Federal Reserve System.
A) state banks
B) national banks
C) savings and loan associations
D) finance companies
E) state banks and national banks
national banks
The _______ is made up of seven individual members, and each member is appointed by the President of the United States.
A) Board of Governors
B) Federal Reserve district bank
C) Federal Open Market Committee (FOMC)
D) Securities and Exchange Commission
Board of Governors
Which of the following is currently a main role of the Federal Reserve's Board of Governors?
A) regulating commercial banks
B) regulating foreign trade
C) controlling monetary policy
D) regulating commercial banks and controlling monetary policy
regulating commercial baks and controlling monetary policy
With regard to monetary policy, which of the following is under direct control of the Federal Reserve's Board of Governors?
A) revise reserve requirements for depository institu�tions
B) authorize changes in the amount of borrowing by the Treasury
C) moni
revise reserve requirements for depository institutions
The _______ rate is the interest rate charged on Fed district bank loans to depository institutions.
A) federal funds
B) prime
C) primary credit lending
D) real
primary credit lending
Which of the following is an action that the Fed uses to increase or decrease the money supply?
A) buying or selling Treasury securities in the secondary market
B) adjusting the tax rate imposed on income earned on Treasury securities
C) adjusting the cou
buying or selling treasury securities in the secondary market
FOMC money supply level objectives are specified in the form of a:
A) high end.
B) low end.
C) specific money supply level.
D) target range.
target range
Total funds of commercial banks will initially _______ by the dollar amount of securities _______ by the Fed.
A) increase; purchased
B) increase; sold
C) decrease; purchased
D) increased; purchased or sold
increased; purchased
The purchase of government securities by someone other than the Fed results in:
A) an overall increase in reserves among commercial banks.
B) an overall decrease in reserves among commercial banks.
C) offsetting changes in reserve positions at commercial
offsetting changes in reserve positions at commercial banks
As the supply of funds in the banking system _______, the federal funds rate _______ along with other interest rates.
A) increases; declines
B) increases; increases
C) declines, declines
D) none of these
increased; declines
Repurchase agreements are purchased by the Fed to _______ the aggregate level of bank funds.
A) temporarily decrease
B) permanently increase
C) permanently decrease
D) temporarily increase
temporarily increase
When open market operations are used to _______ bank funds, the yield on debt instruments _______.
A) reduce; decreases
B) reduce; increases
C) increase; increases
D) none of these
reduce; increases
_______ open market operations offset the impact of other conditions that affect the level of funds.
A) Active
B) Passive
C) Dynamic
D) Defensive
defensive
_______ credit may be used for any purpose and is available only to depository institutions that meet specific requirements for financial soundness.
A) Primary
B) Secondary
C) Tertiary
D) None of these
primary
To decrease money supply, the Fed could _______ the reserve requirement ratio.
A) increase
B) stabilize
C) reduce
D) eliminate
increase
The _______ is directly responsible for controlling money supply growth.
A) Federal Advisory Council
B) FOMC
C) Board of Governors
D) President of the United States
FOMC
Assume that the reserve requirements ratio is 15%. An initial injection of $150 million could result in a maximum change in the money supply of:
A) $150 million.
B) $1 billion.
C) $1 million.
D) $22.5 million.
$1 billion
The form of money consisting of currency held by the public and checkable deposits at depository institutions is called:
A) M1.
B) M2.
C) M3.
D) MMDA.
M1
The Monetary Control Act of 1980 subjected:
A) only member banks to the reserve require�ments set by the Fed.
B) only S&Ls to the reserve requirements set by the Fed.
C) all depository institutions to the reserve requirements set by the Fed.
D) only natio
all depository institutions to the reserve requirement set by the Fed
The voting members of the Federal Open Market Committee consist of the Board of Governors plus the:
A) President of the United States.
B) presidents of the 12 Fed district banks.
C) presidents of 5 Fed district banks.
D) Federal Advisory Council.
presidents of 5 Fed district banks
The Board of Governors is composed of:
A) seven members appointed by the President of the United States.
B) the 12 presidents of the Fed district banks.
C) the Federal Open Market Committee, plus the Federal Advisory Council.
D) the Federal Open Market Co
seven members appointed by the President of the US
The _______ is directly responsible for setting reserve requirements.
A) Federal Advisory Council
B) FOMC
C) Board of Governors
D) President of the United States
board of governors
The _______ is directly responsible for conducting monetary policy.
A) Federal Advisory Council
B) FOMC
C) Senate
D) President of the United States
FOMC
Based on a 2003 policy, the primary credit lending rate is set:
A) lower than the federal funds rate.
B) lower than the prevailing Treasury bill rate.
C) lower than the expected inflation rate.
D) above the federal funds rate.
above the federal funds rate
A(n) _______ in Federal Reserve float causes a(n) _______ in bank reserves.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) increase or decrease; decrease
increase or decrease; decrease
The _______ consists of seven members, each of whom is appointed by the President of the United States.
A) FOMC
B) Federal Advisory Council
C) Board of Governors
D) none of these
Board of Governors
Assume that the reserve requirement ratio is 12 percent and that the Fed uses open market operations by buying $200 million worth of Treasury securities. Assuming that banks use all funds except required reserves to make loans and that the public does not
increase; $1.67n billion
When the Fed purchases securities, the total funds of commercial banks _______ by the market value of securities purchased by the Fed. This activity initiated by the FOMC's policy directive is referred to as a _______ of money supply growth.
A) increase;
increase;loosening
Which of the following statements is incorrect with respect to a single European monetary policy?
A) It allows for more consistent economic conditions across the countries.
B) It prevents any participating European country from solving local economic prob
all of these are correct with respect to a single european monetary policy
33. Since 2003, the Fed's rate on short-term loans to depository institutions is referred to as the:
A) discount rate.
B) primary credit lending rate.
C) federal funds rate.
D) prime rate.
primary credit lending rate
34. _______ credit extended by the Fed to financial institutions may be used for any purpose and is available only to depository institutions that satisfy specific criteria reflecting financial soundness.
A) Primary
B) Secondary
C) Tertiary
D) None of the
primary
Members of the Board of Governors serve 14-year nonrenewable terms.
A) true
B) false
true
The main monetary policy goal of most central banks is to stabilize the value of the local currency against foreign currencies.
A) true
B) false
false
The primary credit lending rate changes in accordance with changes in the federal funds rate.
A) true
B) false
true
The purpose of the Trading Desk of the Federal Reserve Bank of New York is to buy stocks for member commercial banks.
A) true
B) false
false
The federal funds rate is the rate at which the Fed lends money directly to member banks.
A) true
B) false
true
In general, securities with _______ characteristics will offer _______ yields.
A) favorable; higher
B) favorable; lower
C) unfavorable; lower
D) none of these
favorable; lower
Default risk is likely to be highest for:
A) short term Treasury securities.
B) AAA corporate securities.
C) long term Treasury securities.
D) BBB corporate securities.
BBB corporate securities
Some financial institutions, such as commercial banks, are required by law to invest only in:
A) junk bonds.
B) corporate stock.
C) Treasury securities.
D) investment-grade bonds.
investment-grade bonds
If a security can easily be converted to cash without a loss in value, it:
A) is liquid.
B) has a high after tax yield.
C) has high default risk.
D) is illiquid.
is liquid
Securities that offer _______ liquidity will offer a _______ yield to be preferred.
A) lower; higher
B) lower; lower
C) higher; higher
D) higher; lower
lower; higher
If all other characteristics are similar, _______ would have to offer _______.
A) taxable securities; a higher after tax yield than tax exempt securities
B) taxable securities; a higher before tax yield than tax exempt securities
C) tax exempt securities;
taxable securities; a higher before tax yield than tax-exempt securities
Assume an investor's tax rate is 25 percent. The before tax yield on a security is 12 percent. What is the after tax yield?
A) 16.00 percent
B) 9.25 percent
C) 9.00 percent
D) 3.00 percent
E) none of these
9.00 percent
An investor's tax rate is 30 percent. What must the before tax yield on a security be to have an after tax yield of 11 percent?
A) 7.7 percent
B) 15.71 percent
C) 130 percent
D) 11.00 percent
E) none of these
15.71 percent
A firm in the 35 percent tax bracket is aware of a tax-exempt security that is paying a yield of 7 percent. To match this yield, taxable securities must offer a before-tax yield of _______ percent.
A) 7.0
B) 10.8
C) 20.0
D) none of these
10.8
Holding other factors, such as risk constant, the relation�ship between the maturity and annualized yield of secur�ities is called the _______ structure of interest rates.
A) term
B) default
C) liquidity
D) tax
E) none of these
term
The term structure of interest rates defines the relationship between _______ and _______.
A) risk; return
B) risk; maturity
C) maturity; yield
D) default risk ratings; maturity
maturity; yield
If shorter term securities have higher annualized yields than longer term securities, the yield curve:
A) is horizontal.
B) is upward sloping.
C) is downward sloping.
D) cannot be determined without additional infor�ma�tion (such as the level of market in
is downward sloping
Assume that annualized yields of short term and long term securities are equal. If investors suddenly believe inter�est rates will increase, their actions may cause the yield curve to:
A) become inverted.
B) become flat.
C) become upward sloping.
D) be un
become upward sloping
If issuers of securities (borrowers) and investors suddenly expect interest rates to decrease, their actions to benefit from their expectations should cause:
A) long term yields to rise.
B) short term yields to decrease.
C) prices of long term securities
none of these
Within the category of capital market securities, municipal bonds have the _______ before-tax yield, and their after-tax yield is typically _______ of Treasury bonds from the perspective of investors in high tax brackets.
A) highest; below that
B) lowest;
lowest; above that
The yield offered on a debt security is _______ related to the prevailing risk-free rate and _______ related to the security's risk premium.
A) negatively; negatively
B) positively; positively
C) negatively; positively
D) positively; negatively
positively; positively
The theory for the term structure of interest rates that says the shape of the yield curve is determined solely by expectations of future interest rates is called the:
A) segmented markets theory.
B) liquidity premium theory.
C) pure expectations theory.
pure expectations theory
Assume investors are indifferent among security maturities. Today, the annualized two year interest rate is 12 percent, and the one year interest rate is 9 percent. What is the forward rate according to the pure expectations theory?
A) 15.08 percent
B) 3.
15.08
Assume the yield curve is flat. If investors flood the short-term market and avoid the long-term market, they may cause the yield curve to:
A) remain flat.
B) become upward sloping.
C) become downward sloping.
D) do none of these.
become upward sloping
According to pure expectations theory, if interest rates are expected to decrease, there will be _______ pressure on the demand for short-term funds by borrowers and _______ pressure on the demand for long-term funds issued by borrowers.
A) upward; upward
upward; downward
The degree to which the Treasury's debt management policy could affect the term structure of interest rates is greatest if:
A) most debt is financed by foreign investors.
B) the Treasury's debt level is small.
C) maturity markets are segmented.
D) most de
maturity markets are segmented
According to the pure expectations theory of the term structure of interest rates, the _______ the difference between the implied one year forward rate and today's one year interest rate, the _______ is the expected change in the one year interest rate.
A
greater; greater
Assume that today, the annualized two year interest rate is 12 percent, and the one year interest rate is 9 percent. A three-year security has an annualized interest rate of 14 percent. What is the one year forward rate two years from now?
A) 12.67 percen
none of these
Assume that a yield curve is influenced by interest rate expectations and a liquidity premium. Assume the yield curve is initially flat. If liquidity suddenly was no longer important, the yield curve would now have a _______ slope (assuming no other chang
slight downward
According to the liquidity premium theory, the expected yield on a two year security will _______ the expected yield from consecutive investments in one year securities.
A) equal
B) be less than
C) be greater than
D) be less than or greater than, dependin
be greater than
Assume that the current yield on one-year securities is 6 percent, and that the yield on a two-year security is 7 percent. If the liquidity premium on a two-year security is 0.4 percent, then the one-year forward rate is _______ percent.
A) 8.0
B) 7.6
C)
7.6
If liquidity influences the yield curve, but is not considered when deriving the forward interest rate, the forward interest rate _______ the market's expectation of the future interest rate.
A) overestimates
B) accurately estimates
C) underestimates
D) i
overestimates
If the liquidity premium exists, a flat yield curve would be interpreted as the market expecting _______ in interest rates.
A) no changes
B) a slight decrease
C) a slight increase
D) a large increase
a slight decrease
The theory of the term structure of interest rates, which states that investors and borrowers choose securities with maturities that satisfy their forecasted cash needs, is the _______ theory.
A) pure expectations
B) liquidity premium
C) segmented markets
segmented markets
According to the segmented markets theory, if most investors suddenly preferred to invest in short term securities and most borrowers suddenly preferred to issue long term securities, there would be:
A) upward pressure on the price of long� term securitie
upward pressure on the prices of short-term seurities
A theory states that while investors and borrowers may normally concentrate on a particular natural maturity market, conditions may cause them to change maturity markets. This theory is called the _______ theory.
A) liquidity premium
B) efficient markets
preferred habitat
According to segmented markets theory, if investors have mostly short-term funds available and borrowers want long-term funds, there would be _______ pressure on the supply of short-term funds provided by investors and _______ pressure on the yield of lon
upward; upward
If a yield curve is upward sloping, the investment strategy of buying long term securities, then selling them after a short period (say, one year) is called:
A) riding the yield curve.
B) liquidating the yield curve.
C) segmenting the yield curve.
D) a fo
riding the yield curve
Other things equal, the yield required on A-rated bonds should be _______ the yield required on B-rated bonds whose other characteristics are exactly the same.
A) greater than
B) equal to
C) less than
D) All of these are possible, depending on the size of
less than
The price at which non convertible bonds can be issued should be _______ the price at which convertible bonds can be issued (assuming that all other characteristics of the two types of bonds are exactly the same).
A) greater than
B) equal to
C) less than
less than
In some time periods, there is evidence that corporations initially financed long term projects with short term funds. They planned to borrow long term funds once inter�est rates were lower. This specifically supports the _______ theory for explaining the
expectations
According to the expectations theory, the sudden expectation of lower interest rates in the future will cause a _______ supply of short term funds provided by investors, and a _______ supply of long term funds.
A) large; large
B) large; small
C) small; sm
small; large
The yield curve of Canada is:
A) always downward sloping.
B) always upward sloping.
C) exactly the same as the United States at any point in time.
D) none of these.
none of these
If research showed that anticipation about future interest rates was the only important factor for all investors in choosing short term or long term securities, this would support the argument made by the _______ theory.
A) liquidity premium
B) expectatio
expectations
If research showed that all investors attempt to purchase securities that perfectly match their time in which they will have available funds, this would specifically support the argument made by the _______ theory.
A) liquidity premium
B) real interest ra
segmented markets
You are considering the purchase of a tax-exempt security that is paying a yield of 10.08 percent. You are in the 28 percent tax bracket. To match this after-tax yield, you would consider taxable securities that pay _______ percent.
A) 31.1
B) 19
C) 12.5
14
The annualized yield on a three-year security is 13 percent; the annualized two-year interest rate is 12 percent, while the one-year interest rate is 9 percent. The forward rate one-year ahead is _______ percent.
A) 2.8
B) 115
C) 103
D) 15.1
15.1
The annualized yield on a three-year security is 13 percent; the annualized two-year interest rate is 12 percent, while the one-year interest rate is 9 percent. The forward rate two years ahead is _______ percent.
A) 1.8
B) 9.0
C) 15.0
D) none of these
15
According to segmented markets theory, if investors have mostly long-term funds available and borrowers want short-term funds, this will place _______ pressure on the demand for long-term funds issued by borrowers and the yield curve will be _______ slopi
downward; downward
Assume that the Treasury experiences a large decrease in the budget deficit and purchases a large number of T-bills. This action will _______ the supply of T-bills in the market and places _______ pressure on the yield of T-bills.
A) decrease; downward
B)
decrease; upward
Vaughn Corporation is considering the issue of commercial paper and would like to know the yield it should offer on its commercial paper. The corporation believes that a 0.2 percent default risk premium, a 0.1 percent liquidity premium, and a 0.3 percent
7.6
The yield curve for corporate bonds:
A) would typically lie below the Treasury yield curve.
B) is identical to the Treasury yield curve.
C) typically has the same slope as the Treasury yield curve.
D) is irrelevant to investors.
typically has the same slope as the treasury yield curve
In general, credit ratings have served as reasonable indicators of the likelihood of default.
A) true
B) false
true
Interest income from municipal bonds is exempt from state taxes but is subject to federal taxes.
A) true
B) false
false
If liquidity influences the yield curve, the forward rate underestimates the market's expectation of the future interest rate.
A) true
B) false
false
The level of installment debt as a percentage of disposable income has been _______ in recent years; it is generally _______ in recessionary periods.
A) increasing; higher
B) increasing; lower
C) decreasing; higher
D) decreasing; lower
increasing; lower
At any given point in time, households would demand a _______ quantity of loanable funds at _______ rates of interest.
A) greater; higher
B) greater; lower
C) smaller; lower
D) none of these
greater; lower
Businesses demand loanable funds to:
A) finance installment debt.
B) subsidize other companies.
C) invest in fixed and short-term assets.
D) do none of these.
invest in fixed short-term assets
The required return to implement a given business project will be _______ if interest rates are lower. This implies that businesses will demand a _______ quantity of loanable funds when interest rates are lower.
A) greater; lower
B) lower; greater
C) lowe
lower; greater
If interest rates are _______, _______ projects will have positive NPVs.
A) higher; more
B) lower; more
C) lower; no
D) none of these
lower; more
The demand for funds resulting from business investment in short term assets is _______ related to the number of pro�jects implemented, and is therefore _______ related to the interest rate.
A) inversely; positively
B) positively; inversely
C) inversely;
positively; inversely
If economic conditions become less favorable,:
A) expected cash flows on various projects will increase.
B) more proposed projects will have expected returns greater than the hurdle rate.
C) there would be additional acceptable business projects.
D) there
there would be a decreased demand by business for loanable funds
As a result of more favorable economic conditions, there is a(n) _______ demand for loanable funds, causing an _______ shift in the demand curve.
A) decreased; inward
B) decreased; outward
C) increased; outward
D) increased; inward
increased; outward
The federal government demand for loanable funds is interest _______. If the budget deficit was expected to increase, the federal government demand for loanable funds would _______.
A) elastic; decrease
B) elastic; increase
C) inelastic; increase
D) inela
inelastic; increase
Other things being equal, foreign governments and corpora�tions would demand _______ U.S. funds if their local interest rates were lower than U.S. rates. Therefore, for a given set of foreign interest rates, foreign demand for U.S. funds is _______ relate
less; inversely
For a given set of foreign interest rates, the quantity of U.S. loanable funds demanded by foreign governments or firms will be _______ U.S. interest rates.
A) positively related to
B) inversely related to
C) unrelated to
D) none of these
inversely related to
The quantity of loanable funds supplied is normally:
A) highly interest elastic.
B) more interest elastic than the demand for loanable funds.
C) less interest elastic than the demand for loanable funds.
D) equally interest elastic as the demand for loanab
less interset elastic that the demand for loanable funds
The _______ sector is the largest supplier of loanable funds.
A) household
B) government
C) business
D) none of these
household
If a strong economy allows for a large _______ in households income, the supply curve will shift _______.
A) decrease; outward
B) increase; inward
C) increase; outward
D) none of these
increase; outward
The equilibrium interest rate:
A) equates the aggregate demand for funds with the aggre�gate supply of loanable funds.
B) equates the elasticity of the aggregate demand and supply for loanable funds.
C) decreases as the aggregate supply of loanable funds
equates the aggregate demand for funds with the aggregate supply of loanable funds
The equilibrium interest rate should:
A) fall when the aggregate supply funds exceeds aggregate demand for funds.
B) rise when the aggregate supply of funds exceeds aggre�gate demand for funds.
C) fall when the aggregate demand for funds exceeds aggre�gat
fall when the aggregate supply funds exceeds aggregate demand for funds
Which of the following are likely to cause a decrease in the equilibrium U.S. interest rate, other things being equal?
A) a decrease in savings by foreign savers
B) an increase in inflation
C) pessimistic economic projections that cause businesses to redu
pessimistic economic projections that cause businesses to reduce expansion plans
The Fisher effect states that the:
A) nominal interest rate equals the expected infla�tion rate plus the real rate of interest.
B) nominal interest rate equals the real rate of interest minus the expected inflation rate.
C) real rate of interest equals th
nominal interest rate equals the expected inflation rate plus the real rate of interest
If the real interest rate was negative for a period of time, then:
A) inflation is expected to exceed the nominal interest rate in the future.
B) inflation is expected to be less than the nominal interest rate in the future.
C) actual inflation was less t
actual inflation was greater than the nominal interest rate
If inflation is expected to decrease, then:
A) savers will provide less funds at the existing equil�ibrium interest rate.
B) the equilibrium interest rate will increase.
C) the equilibrium interest rate will decrease.
D) borrowers will demand more funds a
the equilibrium interest rate will decrease
If inflation turns out to be lower than expected,:
A) savers benefit.
B) borrowers benefit while savers are not affected.
C) savers and borrowers are equally affected.
D) savers are adversely affected but borrowers benefit.
saver's benefit
If the economy weakens, there is _______ pressure on interest rates. If the Federal Reserve increases the money supply, there is _______ pressure on interest rates (assume that inflationary expectations are not affected).
A) upward; upward
B) upward; down
downward; downward
What is the basis of the relationship between the Fisher effect and the loanable funds theory?
A) the saver's desire to maintain the existing real rate of interest
B) the borrower's desire to achieve a positive real rate of interest
C) the saver's desire
the saver's desire to maintain the existing real rate of interest
Assume that foreign investors who have invested in U.S. securities decide to decrease their holdings of U.S. secur�ities and instead increase their holdings of securities in their own countries. This should cause the supply of loan�able funds in the Unite
decrease; upward
Assume that foreign investors who have invested in U.S. securities decide to increase their holdings of U.S. secur�ities. This should cause the supply of loanable funds in the United States to _______ and should place _______ pressure on U.S. interest rat
increase; downward
If the federal government needs to borrow additional funds, this borrowing reflects _______ in the supply of loanable funds, and _______ in the demand for loanable funds.
A) an increase; no change
B) a decrease; no change
C) no change; an increase
D) no c
no change; an increase
If the federal government reduces its budget deficit, this causes _______ in the supply of loanable funds, and _______ in the demand for loanable funds.
A) an increase; no change
B) a decrease; no change
C) no change; an increase
D) no change; a decrease
no chance; a decrease
Due to expectations of higher inflation in the future, we would typically expect the supply of loanable funds to _______ and the demand for loanable funds to _______.
A) increase; decrease
B) increase; increase
C) decrease; increase
D) decrease; decrease
decrease; increase
Due to expectations of lower inflation in the future, we would typically expect the supply of loanable funds to _______ and the demand for loanable funds to _______.
A) increase; decrease
B) increase; increase
C) decrease; increase
D) decrease; decrease
increase; decrease
If the real interest rate is expected by a particular person to become negative, then the purchasing power of his or her savings would be _______, as the inflation rate is expected to be _______ the existing nominal interest rate.
A) decreasing; less than
decreasing; less than
If economic expansion is expected to increase, then demand for loanable funds should _______ and interest rates should _______.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
increase; increase
If economic expansion is expected to decrease, the demand for loanable funds should _______ and interest rates should _______.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
decrease; decrease
If the real interest rate was stable over time, this would suggest that there is _______ relationship between inflation and nominal interest rate movements.
A) a positive
B) an inverse
C) no
D) an uncertain (cannot be determined from information given)
a positive
If inflation and nominal interest rates move more closely together over time than they did in earlier periods, this would _______ the volatility of the real interest rate move�ments over time.
A) increase
B) decrease
C) have an effect, which cannot be det
decrease
Canada and the U.S. are major trading partners. If Canada experiences a major increase in economic growth, it could place _______ pressure on Canadian interest rates and _______ pressure on U.S. interest rates.
A) upward; upward
B) upward; downward
C) dow
upward; upward
If investors shift funds from stocks into bank deposits, this _______ the supply of loanable funds, and places _______ pressure on interest rates.
A) increases; upward
B) increases; downward
C) decreases; downward
D) decreases; upward
increases; downward
When Japanese interest rates rise, and if exchange rate expectations remain unchanged, the most likely effect is that the supply of loanable funds provided by Japanese investors to the United States will _______, and the U.S. interest rates will _______.
decrease; increase
Which of the following will probably NOT result in an increase in the business demand for loanable funds?
A) an increase in positive net present value (NPV) projects
B) a reduction in interest rates on business loans
C) a recession
D) none of these
a recession
If the aggregate demand for loanable funds increases without a corresponding _______ in aggregate supply, there will be a _______ of loanable funds.
A) increase; surplus
B) increase; shortage
C) decrease; surplus
D) decrease; shortage
increase; shortage
A _______ federal government deficit increases the quantity of loanable funds demanded at any prevailing interest rate, causing an _______ shift in the demand schedule.
A) higher; inward
B) higher; outward
C) lower; outward
D) none of these
higher; outward
Which of the following is not true regarding foreign interest rates?
A) The large flow of funds between countries causes interest rates in any given country to become more susceptible to interest rate movements in other countries.
B) The expectations of a
an increase in a foreign country's interest rates will encourage investors in that country to invest their funds in other countries
Which of the following is least likely to affect household demand for loanable funds?
A) a decrease in tax rates
B) an increase in interest rates
C) a reduction in positive net present value (NPV) projects available
D) All of these are equally likely to a
a reduction in positive net present value (NPV) projects available
Which of the following statements is incorrect?
A) The Fed's monetary policy is intended to control the economic conditions in the U.S.
B) The Fed's monetary policy affects the supply of loanable funds, which affects interest rates.
C) By influencing inte
all of these statements are correct
According to the loanable funds theory, market interest rates are determined by the factors that control the supply of and demand for loanable funds.
A) true
B) false
true
The supply of loanable funds in the U.S. is partly determined by the monetary policy implemented by the Federal Reserve System.
A) true
B) false
true
financial market participants who provide funds are called
surplus units
the main provider(s) of funds to the US Treasury is (are):
households and businesses
the largest deficit unit is (are):
the US treasury
those financial markets that facilitate the flow of short-term funds are known as:
money markets
funds are provided to the initial issuer of securities in the:
primary market
which of the following is a capital market instrument?
a)six month CD
b) three month Treasury bill
c) ten year bond
d) agreement for a bank to loan funds directly to a company for 9 months
c) ten year bond
which of the following is a money market security?
a) treasury note
b) municipal bond
c)mortgage
d) commercial paper
d) commercial paper
the most common investors in federal funds are:
depository institutions
equity securities have a _________ expected return than most long-term debt securities, and they exhibit a ________ degree of risk
higher; higher
money market securities generally have __________ liquidity. Capital market securities are typically expected to have a _______ annualized return.
more; higher
if security prices fully reflected all available information, the markets for these securities are:
efficient
if markets were _________, investors could use available information ignored by the market to earn abnormally high returns
inefficient
the securities act of 1933:
a) required complete disclosure of relevant information for publicly offered securities in the primary market
b) declared trading strategies to manipulate the prices of public secondary securities illegal
c) declared misleading
a) required complete disclosure of relevant information for publicly offered securities in the primary market
the securities exchange commission (SEC) was established by the:
Security Exchange Act of 1934
common stock is an example of a(n)
equity security
if financial markets were ________ all information about any securities for sale in primary and secondary markets would be continuously and freely available to investors
a) perfect
b) inefficient
c) perfect
d) imperfect
perfect
the typical role of securities firm in a public offering of securities is to
a) purchase the entire issue for its own investment
b) place the entire issue with a single large investor
c) spread the issue across several investors until the entire issue is
c) spread the issue across several investors until the entire issue is sold
Without the participation of financial intermediaries in financial market transactions,:
A) information and transaction costs would be lower.
B) transaction costs would be higher but information costs would be unchanged.
C) information costs would be high
D) information and transaction costs would be higher.
Which of the following is most likely to be described as a depository institution?
A) finance companies
B) securities firms
C) credit unions
D) pension funds
E) insurance companies
pension funds
n aggregate, _______ are the most dominant depository institution.
A) commercial banks
B) savings banks
C) credit unions
D) S&Ls
commercial banks
Which of the following is a nondepository financial insti�tu�tion?
A) savings banks
B) commercial banks
C) savings and loan associations
D) mutual funds
mutual funds
Which of the following distinguishes credit unions from commercial banks and savings institutions?
A) Credit unions are non profit.
B) Credit unions accept deposits but do not make loans.
C) Credit unions make loans but do not accept deposits.
D) Savings
credit unions are non profit
When a securities firm acts as a broker, it:
A) guarantees the issuer a specific price for newly issued securities.
B) makes a market in specific securities by adjusting its own inventory.
C) executes transactions between two parties.
D) purchases securit
executes transactions between two parties
When a securities firm acts as a(n) _______, it maintains a position in securities.
A) adviser
B) dealer
C) broker
D) none of these
dealer
_______ obtain funds by issuing securities, then lend the funds to individuals and small businesses.
A) Finance companies
B) Securities firms
C) Mutual funds
D) Insurance companies
mutual funds
Households with _______ are served by _______.
A) deficient funds; depository institutions and finance companies
B) deficient funds; finance companies only
C) savings; finance companies only
D) savings; pension funds and finance companies
deficient funds; depository institutions and finance companies
_______ concentrate on mortgage loans.
A) Finance companies
B) Commercial banks
C) Savings institutions
D) Credit unions
savings institutions
_______ securities have a maturity of one year or less; _______ securities are generally more liquid.
A) Money market; capital market
B) Money market; money market
C) Capital market; money market
D) Capital market; capital market
money market; money market
Which of the following is not a major investor in stocks?
A) commercial banks
B) insurance companies
C) mutual funds
D) pension funds
commercial banks
Which of the following financial intermediaries commonly invests in stocks and bonds?
A) pension funds
B) insurance companies
C) mutual funds
D) all of these
all of the above
A five-year security was purchased two years ago by an investor who plans to resell it. The security will be sold by the investor in the so-called _______ market.
A) secondary
B) primary
C) deficit
D) surplus
secondary
Financial markets facilitating the flow of short-term funds with maturities of less than one year are known as _______ markets.
A) money
B) capital
C) primary
D) secondary
E) none of these
money
Which of the following transactions would not be considered a secondary market transaction?
A) an individual investor purchases some existing shares of stock in IBM through his broker
B) an institutional investor sells some Disney stock through its broker
microsoft issues new shares of common stock using its investment bank
If investors speculate in the underlying asset rather than derivative contracts on the underlying asset, they will probably achieve _______ returns, and they are exposed to relatively _______ risk.
A) lower; lower
B) lower; higher
C) higher; lower
D) high
lower; lower
_______ maintain a larger amount of assets than the other types of depository institutions.
A) Credit unions
B) Commercial banks
C) Life insurance companies
D) Savings institutions
commercial banks
The main source of funds for _______ is proceeds from selling securities to households and businesses, while their main use of funds is providing loans to households and businesses.
A) savings institutions
B) commercial banks
C) mutual funds
D) finance co
finance companies
Which of the following is not a reason why depository financial institutions are popular?
A) They offer deposit accounts that can accommodate the amount and liquidity characteristics desired by most surplus units.
B) They repackage funds received from dep
they use their information resources to act as a broker, executing securities transactions between two parties
Long-term debt securities tend to have a _______ expected return and _______ risk than money market securities.
A) lower; lower
B) lower; higher
C) higher; lower
D) higher; higher
higher; higher
Those participants who receive more money than they spend are referred to as _______ units.
A) deficit
B) surplus
C) borrowing
D) government
surplus
Equity securities:
A) have a maturity.
B) pay interest on a periodic basis.
C) represent ownership in the issuer.
D) repay the principal amount at maturity.
repay the principal amount at maturity
The finance segment known as _______ involves decisions such as how much funding to obtain, and how to invest the proceeds to expand operations.
A) corporate finance
B) investment management
C) financial markets and institutions
D) none of these
corporate finance
Which of the following statements is incorrect?
A) Financial markets attract funds from investors and channel the funds to corporations.
B) Money markets enable corporations to borrow funds on a short-term basis so that they can support their existing ope
financial institutions serve solely as intermediaries with the financial markets and never serve as investors.
There is a _______ relationship between the risk of a security and the expected return from investing in the security.
A) positive
B) negative
C) indeterminable
D) none of these
positive
Which of the following is not a typical money market security?
A) Treasury bills
B) Treasury bonds
C) commercial paper
D) negotiable certificates of deposit
treasury bond
If a security is undervalued, some investors would capitalize from this by purchasing that security. As a result, the security's price will _______, resulting in a _______ return for those investors.
A) rise; lower
B) fall; higher
C) fall; lower
D) rise;
rise; higher
Which of the following statements is incorrect?
A) It is probably safe to say that various forms of unethical behavior will continue in the future.
B) New financial scandals will likely result in new regulations.
C) New regulations will likely be followed
the most naive investors are often the ones that benefit the most from financial scandals.
_______ is not a securities firm.
A) American Express
B) Merrill Lynch
C) Morgan Stanley
D) Goldman Sachs
american express
Currently, _______ hold the largest amount of assets of all financial institutions.
A) commercial banks
B) credit unions
C) finance companies
D) securities firms
commercial banks
If financial markets are efficient, this implies that investors can ignore the various investment instruments available.
A) true
B) false
false
Securities are certificates that represent a claim on the provider of funds.
A) true
B) false
true
Debt securities are certificates that represent debt (borrowed funds) by the issuer.
A) true
B) false
true
When security prices fully reflect all available information, the markets for these securities are said to be efficient.
A) true
B) false
true
If markets are perfect, securities buyers and sellers do not have full access to information and cannot always break down securities to the precise size they desire.
A) true
B) false
false
A broker executes securities transactions between two parties and charges a fee reflected in the bid-ask spread.
A) true
B) false
true
The euro increased business between European countries and created a more competitive environment in Europe.
A) true
B) false
true
In recent years, financial institutions have consolidated to capitalize on economies of scale and on economies of scope.
A) true
B) false
true
Securities are certificates that represent a claim on the provider of funds.
A) true
B) false
true
Debt securities are certificates that represent debt (borrowed funds) by the issuer.
A) true
B) false
true
Common types of capital market securities include Treasury bills and commercial paper.
A) true
B) false
false
Common types of money market securities include negotiable certificates of deposit and Treasury bills.
A) true
B) false
true
Capital market securities are commonly issued in order to finance the purchase of assets such as buildings, equipment, or machinery.
A) true
B) false
true
Commercial banks in aggregate have more assets than of savings institutions.
A) true
B) false
true