Questions:
1. The Classical Theory of Asset Prices assumes which of the following ideas?
A. The interest rate to use is the nominal rate, assets are the discounted sum of their future values, and expected income is the best information available.
B. Actual past income is the best information available, assets are the discounted sum of their future values, and the interest rate is the safe interest rate plus a risk premium.
C. The value of an asset is the discounted present value of expected cash flows, expected income is the best information available, and the interest rate is the safe interest rate plus a risk premium.
D. The interest rate to use is the real rate, expected income is the best information available, and the assets are the discounted sum of their future values
2. Economists use two principle interest rates: nominal and real. The purpose of this distinction is to
A. use nominal interest rates during periods when the economy is growing and real interest rates during economic down turns
B. adjust for the influences that inflation may have on business profits
C. account for and factor the influences that inflation may have on the behavior that consumers and firms use to determine how much to save out of their incomes
3. During periods of increasing inflationary pressure, the Federal Reserve should
A. buy member bank's bonds to encourage increased lending to the public
B. sell bonds to member banks to discourage lending to the public
C. reduce the discount rate to make it easier for small businesses to borrow money
4. What is the increased moral hazard associated with the too big to fail (TBTF) bailouts of the largest of financial institutions?
A. Financial institutions might misuse the bailout funds and continue the same practices that lead to the original failure.
B. Depositors will lose their deposits.
C. Employees of the financial institutions will lose their jobs.
5. The Federal Reserve's primary tool for managing the money flow is
A. discount rate
B. reserve ratio
C. open-market operations
D. term auction facility