1. Which of the following is likely to lead to expansionary/inflationary monetary policy?
a. Rising unemployment
b. Rising government budget deficits
c. Declining oil prices
d. All of the above will likely lead to expansionary/inflationary monetary policy
e. Only (a) and (b) will likely lead to expansionary/inflationary monetary policy
2. A difference between the M3 and L measures of the aggregate money supply is that only L includes
a. Bank long-term repurchase agreements
b. Small denomination time deposits
c. Demand deposits at banks
d. Short-term Treasury securities
e. Term Eurodollars
3. The demand for an asset will tend to ________ with a decrease in liquidity relative to other assets and _______ when the riskiness of an asset increases relative to other assets.
a. increase: remain the same
b. decrease; increase
c. decrease; decrease
d. increase; increase
e. increase; decrease
4. According to the article “Where is all the U.S. currency hiding?”, which of the following is true?
a. The 1993 estimated figure says that about 80% of all U.S. currency is held within the U.S.
b. Deceleration in the narrow money measures always portends a weakening economy.
c. (a) and (b) are both true.
d. Large swings in overseas holdings of U.S. currency typically have a large impact on the current level of domestic economic activity.
e. None of the above statements is true.
5. Which of the following is included in the M2 monetary aggregate?
a. Treasury Bills
b. Bankers acceptances
c. Commercial paper
d. Negotiable CDs
e. Small-denomination time deposits
6. According to the article “Why is Europe forming a Monetary Union?”, which of the following is true?
a. Each country of the European Monetary Union can use its own monetary policy to boost its economy.
b. It is beneficial to use a single currency because it reduces transactions costs.
c. Each country of the European Monetary Union can use its own fiscal policy with no limitations as long as the government budget deficit will be offset by the government surplus in the long run.
d. (a) and (b) are true statements.
e. (a) and (c) are true statements.
7. Which of the following is an example of indirect finance?
a. Joe, a mountain bike shop owner, obtains a business loan from a local credit union
b. A bank sells an existing mortgage agreement to an individual investor
c. Karen buys 50 shares of Dairy Queen on E-trade
d. A large chemical firm sells a number of long-term bonds to individual investors in order to finance a new ethylene glycol plant
e. (a) and (b)
8. According to the loanable funds approach, which of the following would happen if the expected inflation rate falls (holding everything else constant)?
a. The bond demand curve will shift to the right and the bond supply curve will shift to the left. The equilibrium bond price will increase and the equilibrium interest rate will decrease from their initial levels. The equilibrium quantity of bonds will be indeterminate.
b. The bond demand curve will shift to the left and the bond supply curve will shift to the left. The equilibrium bond price and the equilibrium interest rate will be indeterminate while the equilibrium quantity of bonds will decrease.
c. The bond demand curve will shift to the right and the bond supply curve will also shift to the right. The equilibrium bond price and the equilibrium interest rate will be indeterminate while the equilibrium quantity of bonds will increase.
d. The bond demand curve will shift to the left while the bond supply curve does not shift. The equilibrium quantity of bonds will increase, the equilibrium bond price will increase and the equilibrium interest rate will decrease.
e. None of the above are true.
9. On Tuesday, March 22, 2003, Alan Greenspan, Chairman of the Federal Reserve Board, received news that unusually inclement weather had devastated the Caribou herds of Northern Canada, causing the price of imported Caribou steaks, fur, and antlers to skyrocket. Fearing a sharp increase in inflation across the United States, Greenspan announces that he will probably move to increase interest rates over the next quarter year. This unexpected interest rate hike will have varying effects on the prices of different securities. Consider the following three securities:
Treasury bonds (with maturity 10 years from now)
Shares of common stock
Overnight repurchase agreements
Rank these securities from the largest percent change in price to the lowest percent change in price.
a. Treasury bonds, shares of common stock, overnight repurchase agreements
b. Overnight repurchase agreements, shares of common stock, Treasury bonds
c. Overnight repurchase agreements, Treasury bonds, shares of common stock
d. Shares of common stock, Treasury bonds, overnight repurchase agreements
e. Treasury bonds, overnight repurchase agreements, shares of common stock
10. According to the textbook, which of the following is true?
a. Prices and returns for long-term bonds are more volatile than those for shorter-term bonds.
b. Prices and returns for long-term bonds are less volatile than those for shorter-term bonds.
c. Prices and returns for long-term bonds are almost the same as those for shorter-term bonds.
d. Prices and returns for long-term or shorter-term bonds do not move together in a systematic way.
e. Prices and returns for long-term bonds are equal to prices and returns for shorter-term bonds in equilibrium.
11. Along the demand curve for loanable funds,
a. The behavior of borrowers is insensitive to changes in the level of interest rates.
b. The level of wealth in the economy is held constant.
c. The level of wealth in the economy is allowed to vary.
d. (a) and (b)
e. (a) and (c)
12. For a zero-coupon bond, the yield to maturity is determined by the bond’s face value and its
a. purchase price.
b. current yield.
c. coupon rate.
d. expected inflation rate.
e. None of the above are true.
13. If a bond’s yield is equal to its coupon rate, then all of the following are correct except
a. the bond is undervalued.
b. the bond sells at its face value.
b. the bond’s yield to maturity equals its current yield.
d. the bond’s coupon rate equals its yield to maturity.
e. None of the above are false statements.
14. Which of the following is true?
a. Yield on a discount basis overstates the more accurate measure of the interest rate, the yield to maturity.
b. Yield on a discount basis understates the more accurate measure of the interest rate, the yield to maturity.
c. The longer the maturity of the discount bond, the smaller the error of yield on a discount basis becomes.
d. (a) and (b) are true.
e. (a) and (c) are true.
15. An increase in the growth rate of the money supply (holding everything else constant) is most likely to be followed by
a. a decline in economic activity.
b. an increase in the price level.
c. an expansion of economic activity.
d. all of the above
e. (b) and (c)
16. The most prominent role for money is to serve as a
a. form of credit.
b. source of income.
c. means of payment.
d. standard of value.
e. store of value.
17. Every 20th century recession in the United States has been preceded by a decline in
a. the exchange rate.
b. the average price level.
c. the rate of money growth.
d. the money stock.
e. the price of gold.
18. According to the loanable funds approach, which of these will result in the equilibrium interest rate falling?
a. A decrease in the supply of loanable funds.
b. A decrease in the demand for loanable funds.
c. An increase in the supply of loanable funds.
d. An increase in the demand for loanable funds.
e. (b) or (c).
19. When income tax rates are _______, interest rates on Treasury bonds ______ relative to the interest rates on state and local bonds.
a. lowered; fall
b. lowered; rise
c. raised; fall
d. raised; do not change
e. raised; do not change
20. A consol bond that pays $10 per year is worth ________ at a nominal interest rate of 20%.
a. $100
b. $100
c. $500
d. $200
e. $50
Economics 330: Money and Banking - Midterm 2002
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