Assignment:
Practice Questions
Choose the one alternative that best completes the statement or answers the question.
1) American companies can borrow funds
A) only in U.S. financial markets.
B) in both U.S. and foreign financial markets.
C) only from the U.S. government.
D) only in foreign financial markets.
2) Financial institutions search for ________ has resulted in many financial innovations.
A) regulations
B) higher risk
C) higher profits
D) respect
3) A continuing increase in the growth of the money supply is likely followed by
A) no change in the economy
B) an increase in the price level.
C) a depression.
D) a recession.
4) ________ policy involves decisions about government spending and taxation.
A) Systemic
B) Financial
C) Monetary
D) Fiscal
5) An important source of short-term funds for commercial banks are ________ which can be resold on the secondary market.
A) mortgage-backed securities
B) negotiable CDs
C) municipal bonds
D) commercial paper
6) When secondary market buyers and sellers of securities meet in one central location to conduct trades the market is called an
A) over-the-counter market.
B) exchange.
C) common market.
D) barter market.
7) A liquid asset is
A) an asset that can easily and quickly be sold to raise cash.
B) difficult to resell.
C) a share of an ocean resort.
D) always sold in an over- the-counter market.
8) Forty or so dealers establish a "market" in these securities by standing ready to buy and sell them.
A) common stocks
B) U.S. government bonds
C) surplus stocks
D) secondary stocks
9) An investment intermediary that lends funds to consumers is
A) a consumer company.
B) an investment bank.
C) a finance company.
D) a finance fund.
10) The agency that was created to protect depositors after the banking failures of 1930-1933 is the
A) Federal Reserve System.
B) Treasury Department.
C) Office of the Comptroller of the Currency.
D) Federal Deposit Insurance Corporation.
11) 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) a unique good for which there are no substitutes.
B) the only thing accepted in economic exchange.
C) backed by gold.
D) extremely liquid.
12) The evolution of the payments system from barter to precious metals, then to fiat money, then to checks can best be understood as a consequence of the fact that
A) paper money is less accepted than checks.
B) paper is more costly to produce than precious metals.
C) precious metals were difficult to carry and transport.
D) precious metals were not generally acceptable.
13) A smart card is the equivalent of
A) cash.
B) certificates of deposit.
C) savings bonds.
D) savings deposits.
14) In a barter economy the number of prices in an economy with N goods is
A) N(N/2).
B) 2N.
C) [N(N - 1)]/2.
D) N(N/2) - 1.
15) Which of the following is NOT included in the measure of M1?
A) savings deposits
B) demand deposits
C) currency
D) NOW accounts
16) If there are five goods in a barter economy, one needs to know ten prices in order to exchange one good for another. If, however, there are ten goods in a barter economy, then one needs to know ________ prices in order to exchange one good for another.
A) 20
B) 25
C) 30
D) 45
17) Which of the following are TRUE for a coupon bond?
A) The price of a coupon bond and the yield to maturity are positively related.
B) When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate.
C) The yield is less than the coupon rate when the bond price is below the par value.
D) The yield to maturity is greater than the coupon rate when the bond price is above the par value.
18) Interest-rate risk is the riskiness of an asset's returns due to
A) default of the borrower.
B) changes in the asset's maturity.
C) changes in the coupon rate.
D) interest-rate changes.
19) The price of a coupon bond and the yield to maturity are ________ related; that is, as the yield to maturity ________, the price of the bond ________.
A) negatively; falls; falls
B) positively; rises; falls
C) negatively; rises; falls
D) positively; rises; rises
20) Another name for a consol is a ________ because it is a bond with no maturity date. The owner receives fixed coupon payments forever.
A) municipality
B) perpetuity
C) discount bond
D) high-yield bond
21) The concept of ________ is based on the common-sense notion that a dollar paid to you in the future is less valuable to you than a dollar today.
A) present value
B) interest
C) deflation
D) future value
22) In the 1990s Japan had the lowest interest rates in the world due to a combination of
A) inflation and expansion.
B) inflation and recession.
C) deflation and recession.
D) deflation and expansion.
23) If stock prices are expected to climb next year, everything else held constant, the ________ curve for bonds shifts ________ and the interest rate ________.
A) demand; right; rises
B) supply; left; rises
C) demand; left; falls
D) demand; left; rises
24) It is possible that when the money supply rises, interest rates may ________ if the ________ effect is more than offset by changes in income, the price level, and expected inflation.
A) rise; liquidity
B) fall; liquidity
C) rise; risk
D) fall; risk
25) A decline in the expected inflation rate causes the demand for money to ________ and the demand curve to shift to the ________, everything else held constant.
A) decrease; right
B) increase; right
C) decrease; left
D) increase; left