Liberty University BUSI 321 test 1 exam solutions answers right

Liberty University BUSI 321 test 1 exam solutions answers right

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Question 1 Which of the following is a money market security?

Question 2 Funds are provided to the initial issuer of securities in the

Question 3 When particular securities are perceived to be ____ by the market, their prices decrease when they are sold by investors.

Question 4 Money market securities generally have ____. Capital market securities are typically expected to have a ____.

Question 5 ____ are long­term debt obligations issued by corporations and government agencies to support their operations.

Question 6 Which of the following transactions would not be considered a secondary market transaction?

Question 7 Which of the following is not a reason why depository financial institutions are popular?

Question 8  ____ are classified as a depository institution.

Question 9 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.

Question 10 The substantial decline in interest rates during the credit crisis is attributed to which of the following changes in the market for loanable funds?

Question 11 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 movements over time.

Question 12 If a strong economy allows for a large ____ in households income, the supply curve will shift ____.

Question 13 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.

Question 14 If economic expansion is expected to increase, then demand for loanable funds should ____ and interest rates should ____.

Question 15 The federal government demand for loanable funds is ____. If the budget deficit was expected to increase, the federal government demand for loanable funds would ____.

Question 16 If the real interest rate was negative for a period of time, then

Question 17 At any given point in time, households would demand a ____ quantity of loanable funds at ____ rates of interest.

Question 18 In some time periods there is evidence that corporations initially financed long­term projects with short­term funds. They planned to borrow long­term funds once interest rates were lower. This specifically supports the ____ for explaining the term structure of interest rates.

Question 19 The ____ theory suggests that although investors and borrowers may normally concentrate on a particular natural maturity market, certain events may cause them to wander from it.

Question 20 You are considering the purchase of a tax­exempt security that is paying a yield of 10.08 percent. You are in the 28 percent tax bracket. To match this after­tax yield, you would consider taxable securities that pay

Question 21 Holding other factors such as risk constant, the relationship between the maturity and annualized yield of securities is called the

Question 22 According to segmented markets theory, if investors have mostly short­term funds available and borrowers want long­term funds, there would be ____ pressure on the supply of short­term funds provided by investors and ____ pressure on the yield of longterm securities.

Question 23 The yield offered on a debt security is ____ related to the prevailing risk­free rate and ____ related to the security's risk premium.

Question 24 If the liquidity premium exists, a flat yield curve would be interpreted as the market expecting ____ in interest rates.

Question 25 The annualized yield on a three­year security is 13 percent; the annualized two­year interest rate is 12 percent, while the one­year interest rate is 9 percent. The forward rate two years ahead is ____ percent.

Question 26 If the liquidity premium theory completely describes the term structure of interest rates, then, on the average, the yield curve should be

Question 27 The advisory committee making recommendations to the Fed about economic and banking related issues is the

Question 28 The voting members of the Federal Open Market Committee consist of the Board of Governors plus the

Question 29 When open market operations are used to ____ bank funds, the yield on debt instruments ____.

Question 30 The ____ is directly responsible for setting reserve requirements.

Question 31 The Monetary Control Act of 1980 subjected

Question 32 Which of the following did the Fed not do during the credit crisis?

Question 33 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(n) ____ of money supply growth.

Question 34 The ____ is made up of seven individual members, and each member is appointed by the president of the U.S.

Question 35 A ____­money policy can reduce unemployment, and a ____­money policy can reduce inflation.

Question 36 When the Fed purchases Treasury securities, the account balances of the investors who sell their securities to the Fed _________, and there are _________ in the account balances of other financial institutions.

Question 37 If the Fed uses a passive monetary policy during weak economic conditions,

Question 38 Global crowding out is described in the text to mean the impact of

Question 39 In the “operation twist” strategy used in 2011 and 2012, the Fed sold _______ Treasury securities and used the proceeds to purchase ________ Treasury securities.

Question 40 A purchase of Treasury securities by the Fed leads to a(n) ____ in interest rates and a(n) ____ in the level of business investment.

Question 41 Which of the following is not a reason that a stimulative monetary policy may be ineffective?

Question 42 Historical evidence has shown that, when the Fed significantly increases money supply, U.S. inflation tends to ____ shortly thereafter which in turn places ____ pressure on U.S. interest rates.

Question 43 The money market interest rate paid by corporations that borrow short­term funds in a particular country is typically:

Question 44 If an investor buys a T­bill with a 90­day maturity and $50,000 par value for $48,500 and holds it to maturity, what is the annualized yield?

Question 45 When a bank guarantees a future payment to a firm, the financial instrument used is called

Question 46 Robbins Corp. frequently invests excess funds in the Mexican money market. One year ago, Robbins invested in a one­year Mexican money market security that provided a yield of 25 percent. At the end of the year, when Robbins converted the Mexican pesos to dollars, the peso had depreciated from $.12 to $.11. What is the effective yield earned by Robbins?

Question 47 The rate at which depository institutions effectively lend or borrow funds from each other is the ____.

Question 48 Commercial paper is

Question 49 ____ is a short­term debt instrument issued only be well­known, creditworthy firms and is normally issued to provide liquidity or finance a firm's investment in inventory and accounts receivable.

Question 50 T­bills and commercial paper are sold

       1.    Financial market participants who provide funds are called

a.	deficit units.
b.	surplus units.
c.	primary units.
d.	secondary units.

       2.    The main provider(s) of funds to the U.S. Treasury is (are)

a.	households and businesses.
b.	foreign financial institutions.
c.	the Federal Reserve System.
d.	foreign nonfinancial sectors.

       3.    The largest deficit unit is (are)

a.	households and businesses.
b.	foreign financial institutions.
c.	the U.S. Treasury.
d.	foreign nonfinancial sectors.

       4.    Those financial markets that facilitate the flow of short-term funds are known as

a.	money markets.
b.	capital markets.
c.	primary markets.
d.	secondary markets.

       5.    Funds are provided to the initial issuer of securities in the

a.	secondary market.
b.	primary market.
c.	deficit market.
d.	surplus market.

       6.    Which of the following is a capital market instrument?

a.	a six-month CD
b.	a three-month Treasury bill
c.	a ten-year bond
d.	an agreement for a bank to loan funds directly to a company for nine months

       7.    Which of the following is a money market security?

a.	Treasury note
b.	municipal bond
c.	mortgage
d.	commercial paper

       8.    The creditors in the federal funds market are

a.	households.
b.	depository institutions.
c.	firms.
d.	government agencies.

       9.    Equity securities have a ____ expected return than most long-term debt securities, and they exhibit a ____ degree of risk.

a.	higher; higher
b.	lower; lower
c.	lower; higher
d.	higher; lower

    10.    Money market securities generally have ____. Capital market securities are typically expected to have a ____.

a.	less liquidity; higher annualized return
b.	more liquidity; lower annualized return
c.	less liquidity; lower annualized return
d.	more liquidity; higher annualized return

    11.    If security prices fully reflect all available information, the markets for these securities are

a.	efficient.
b.	primary.
c.	overvalued.
d.	undervalued.

    12.    If markets are ____, investors could use available information ignored by the market to earn abnormally high returns.

a.	perfect
b.	active
c.	inefficient
d.	in equilibrium

    13.    If financial markets are efficient, this implies that all securities should earn the same return.

a. True

b. False

    14.    The Securities Act of 1933

a.	required complete disclosure of relevant financial 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 financial statements for public primary securities illegal.
d.	required complete disclosure of relevant financial information for securities traded in the secondary market.
e.	all of the above

    15.    The Securities Exchange Commission (SEC) was established by the

a.	Federal Reserve Act.
b.	McFadden Act.
c.	Securities Exchange Act of 1934.
d.	Glass-Steagall Act.
e.	none of the above

    16.    Common stock is an example of a(n)

a.	debt security.
b.	money market security.
c.	equity security.
d.	A and B

    17.    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.	efficient
b.	inefficient
c.	perfect
d.	imperfect

    18.    The typical role of a 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 sold.
d.	provide all large investors with loans so that they can invest in the offering.

    19.    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 higher but transaction costs would be unchanged.
d.	information and transaction costs would be higher.

    20.    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

    21.    In aggregate, ____ are the most dominant depository institution, with more total assets than other depository institutions.

a.	commercial banks
b.	savings banks
c.	credit unions
d.	S&Ls

    22.    Which of the following is a nondepository financial institution?

a.	savings banks
b.	commercial banks
c.	savings and loan associations
d.	mutual funds

    23.    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 institutions restrict their business to members who share a common bond

    24.    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 securities for its own account.

    25.    When a securities firm acts as a(n) ____, it maintains a position in securities.

a.	adviser
b.	dealer
c.	broker
d.	none of the above

    26.    ____ 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

    27.    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

    28.    ____ concentrate on mortgage loans.

a.	Finance companies
b.	Commercial banks
c.	Savings institutions
d.	Credit unions

    29.    ____ 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

    30.    Which of the following is not a major investor in stocks?

a.	commercial banks
b.	insurance companies
c.	mutual funds
d.	pension funds

    31.    Which of the following financial intermediaries commonly invests in stocks and bonds?

a.	pension funds
b.	insurance companies
c.	mutual funds
d.	all of the above

    32.    Securities are certificates that represent a claim on the issuer.

a. True

b. False

    33.    Debt securities are certificates that represent debt (borrowed funds) by the issuer.

a. True

b. False

    34.    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

a.	secondary market.
b.	primary market.
c.	deficit market.
d.	surplus market.

    35.    When security prices fully reflect all available information, the markets for these securities are said to be efficient.

a. True

b. False

    36.    If markets are perfect, securities buyers and sellers to not have full access to information and cannot always break down securities to the precise size they desire.

a. True

b. False

    37.    A broker executes securities transactions between two parties and charges a fee reflected in the bid-ask spread.

a. True

b. False

    38.    The euro increased business between European countries and created a more competitive environment in Europe.

a. True

b. False

    39.    In recent years, financial institutions have consolidated to capitalize on economies of scale and on economies of scope.

a. True

b. False

    40.    Securities are certificates that represent a claim on the provider of funds.

a. True

b. False

    41.    Debt securities include commercial paper, Treasury bonds, and corporate bonds.

a. True

b. False

    42.    Common types of capital market securities include Treasury bills and commercial paper.

a. True

b. False

    43.    Common types of money market securities include negotiable certificates of deposit and Treasury bills.

a. True

b. False

    44.    Money market securities are commonly issued in order to finance the purchase of assets such as buildings, equipment, or machinery.

a. True

b. False

    45.    The total asset value of savings institutions is larger than that of commercial banks.

a. True

b. False

    46.    Financial markets facilitating the flow of short-term funds with maturities of less than one year are known as

a.	secondary markets.
b.	capital markets.
c.	primary markets.
d.	money markets.
e.	none of the above

    47.    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.
c.	A firm that was privately held engages in an offering of stock to the public.
d.	All of the above are secondary market transactions.

    48.    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.	higher; higher

    49.    ____ maintain a larger amount of assets in aggregate than the other types of nondepository institutions.

a.	Finance companies
b.	Mutual funds
c.	Life insurance companies
d.	Securities firms

    50.    A common use of funds for ____ is investment in stocks 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 companies

    51.    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

    52.    Common types of capital market securities include Treasury bills and commercial paper.

a. True

b. False

    53.    Common types of money market securities include negotiable certificates of deposit and Treasury bills.

a. True

b. False

    54.    Capital market securities are commonly issued in order to finance the purchase of assets such as buildings, equipment, or machinery.

a. True

b. False

    55.    Commercial banks in aggregate have more assets than credit unions.

a. True

b. False

    56.    Those participants who receive more money than they spend are referred to as

a.	deficit units.
b.	surplus units.
c.	borrowing units.
d.	government units.

    57.    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.

    58.    The term ____ 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 the above

    59.    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 the above

    60.    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; higher

    61.    The credit crisis in the 2008-2009 period was caused by weak economies in Asia.

a. True

b. False

    62.    ____ are classified as a depository institution.

a.	Credit unions
b.	Pension funds
c.	Finance companies
d.	Securities firms

    63.    The main reason that depository institutions experienced financial problems during the credit crisis was their investment in:

a.	mortgages.
b.	money market securities.
c.	stock.
d.	Treasury bonds.

    64.    Those financial markets that facilitate the flow of short-term funds (with maturities of less than one year) are known as capital markets, while those that facilitate the flow of long-term funds are known as money markets.

a. True

b. False

    65.    Treasury bonds have a maturity of one to three years.

a. True

b. False

    66.    Since markets are efficient, institutional and individual investors should ignore the various investment instruments available.

a. True

b. False

    67.    Speculating with derivative contracts on an underlying asset typically results in both higher risk and higher returns than speculating in the underlying asset itself.

a. True

b. False

    68.    When security prices fully reflect all available information, the markets for these securities are said to be perfect.

a. True

b. False

    69.    Securities that are not as safe and liquid as other securities are never considered for investment by anyone.

a. True

b. False

    70.    By requiring full disclosure of information, securities laws prevent investors from making poor investment decisions.

a. True

b. False

    71.    When a depository institution offers a loan, it is acting as a creditor.

a. True

b. False

    72.    Savings institutions represent a nondepository institution.

a. True

b. False

    73.    Most mutual funds obtain funds by issuing securities, then lend the funds to individuals and small businesses.

a. True

b. False

    74.    Institutional investors not only provide financial support to companies but exercise some degree of corporate control over them.

a. True

b. False

    75.    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 deposits to provide loans of the size and maturity desired by deficit units.
c.	They accept the risk on loans provided.
d.	They use their information resources to act as a broker, executing securities transactions between two parties.
e.	They have more expertise than individual surplus units in evaluating the creditworthiness of deficit units.

    76.    According to your text, which of the following is not considered a money market security?

a.	Treasury bills
b.	Treasury notes
c.	retail CD
d.	banker's acceptance
e.	commercial paper

    77.    ____ are not considered capital market securities.

a.	Repurchase agreements
b.	Municipal bonds
c.	Corporate bonds
d.	Equity securities
e.	Mortgages

    78.    ____ are long-term debt obligations issued by corporations and government agencies to support their operations.

a.	Common stock
b.	Derivative securities
c.	Bonds
d.	None of the above

    79.    Equity securities should normally have a ____ expected return and ____ risk than money market securities.

a.	lower; lower
b.	lower; higher
c.	higher; lower
d.	higher; higher

    80.    If investors speculate in derivative contracts rather than 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.	higher; higher

    81.    When particular securities are perceived to be ____ by the market, their prices decrease when they are sold by investors.

a.	undervalued
b.	overvalued
c.	fairly priced
d.	efficient
e.	none of the above

    82.    Which of the following are not considered depository financial institutions?

a.	finance companies
b.	commercial banks
c.	savings institutions
d.	credit unions
e.	All of the above are depository financial institutions.

    83.    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 companies
e.	pension funds

    84.    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 operations.
c.	Financial institutions serve solely as intermediaries with the financial markets and never serve as investors.
d.	Investors seek to invest their funds in the stock of firms that are presently undervalued and have much potential to improve.

    85.    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

       1.    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

       2.    The level of installment debt as a percentage of disposable income is generally ____ during recessionary periods.

a.	higher
b.	lower
c.	zero
d.	negative

       3.    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 the above

       4.    Businesses demand loanable funds to

a.	finance installment debt.
b.	subsidize other companies.
c.	invest in fixed and short-term assets.
d.	none of the above

       5.    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.	lower; lower
d.	greater; greater

       6.    If interest rates are ____, ____ projects will have positive NPVs.

a.	higher; more
b.	lower; more
c.	lower; no
d.	none of the above

       7.    The demand for funds resulting from business investment in short-term assets is ____ related to the number of projects implemented, and is therefore ____ related to the interest rate.

a.	inversely; positively
b.	positively; inversely
c.	inversely; inversely
d.	positively; positively

       8.    If economic conditions become less favorable, then:

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 would be a decreased demand by business for loanable funds.

       9.    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

    10.    The federal government demand for loanable funds is ____. If the budget deficit was expected to increase, the federal government demand for loanable funds would ____.

a.	interest elastic; decrease
b.	interest elastic; increase
c.	interest inelastic; increase
d.	interest inelastic; decrease

    11.    Other things being equal, foreign governments and corporations 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 ____ related to U.S. interest rates.

a.	less; inversely
b.	more; positively
c.	less; positively
d.	more; inversely

    12.    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 the above

    13.    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 loanable funds.
e.	A and B

    14.    The ____ sector is the largest supplier of loanable funds.

a.	household
b.	government
c.	business
d.	none of the above

    15.    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

    16.    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 the above

    17.    The equilibrium interest rate

a.	equates the aggregate demand for funds with the aggregate 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 decreases.
d.	increases as the aggregate demand for loanable funds decreases.

    18.    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 aggregate demand for funds.
c.	fall when the aggregate demand for funds exceeds aggregate supply of funds.
d.	rise when aggregate demand for funds equals aggregate supply of funds.
e.	B and C

    19.    Which of the following is 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 reduce expansion plans
d.	a decrease in savings by U.S. households

    20.    The Fisher effect states that the

a.	nominal interest rate equals the expected inflation 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 the nominal interest rate plus the expected inflation rate.
d.	expected inflation rate equals the nominal interest rate plus the real rate of interest.

    21.    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 than the nominal interest rate.
d.	actual inflation was greater than the nominal interest rate.

    22.    If inflation is expected to decrease, then

a.	savers will provide less funds at the existing equilibrium interest rate.
b.	the equilibrium interest rate will increase.
c.	the equilibrium interest rate will decrease.
d.	borrowers will demand more funds at the existing equilibrium interest rate.

    23.    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.

    24.    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; downward
c.	downward; upward
d.	downward; downward

    25.    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 to achieve a negative real rate of interest
d.	B and C

    26.    Assume that foreign investors who have invested in U.S. securities decide to decrease their holdings of U.S. securities and to instead increase their holdings of securities in their own countries. This should cause the supply of loanable funds in the United States to ____ and should place ____ pressure on U.S. interest rates.

a.	decrease; upward
b.	decrease; downward
c.	increase; downward
d.	increase; upward

    27.    Assume that foreign investors who have invested in U.S. securities decide to increase their holdings of U.S. securities. This should cause the supply of loanable funds in the United States to ____ and should place ____ pressure on U.S. interest rates.

a.	decrease; upward
b.	decrease; downward
c.	increase; downward
d.	increase; upward

    28.    If the federal government needs to borrow additional funds, this borrowing reflects a(n) ____ in the supply of loanable funds, and a(n) ____ in the demand for loanable funds.

a.	increase; no change
b.	decrease; no change
c.	no change; increase
d.	no change; decrease

    29.    If the federal government reduces its budget deficit, this causes a(n) ____ in the supply of loanable funds, and a(n) ____ in the demand for loanable funds.

a.	increase; no change
b.	decrease; no change
c.	no change; increase
d.	no change; decrease

    30.    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

    31.    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

    32.    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
b.	decreasing; greater than
c.	increasing; greater than
d.	increasing; less than

    33.    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

    34.    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

    35.    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 above)

    36.    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 movements over time.

a.	increase
b.	decrease
c.	have an effect, which cannot be determined with above information, on
d.	have no effect on

    37.    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.	downward; downward
d.	downward; upward

    38.    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

    39.    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 ____.

a.	increase; increase
b.	increase; decrease
c.	decrease; decrease
d.	decrease; increase

    40.    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 the above

    41.    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

    42.    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 the above

    43.    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 strong dollar should cause a flow of funds to the U.S.
c.	An increase in a foreign country's interest rates will encourage investors in that country to invest their funds in other countries.
d.	All of the above are true regarding foreign interest rates.

    44.    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 the above are equally likely to affect household demand for loanable funds.

    45.    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 interest rates, the Fed is able to influence the amount of money that corporations and households are willing to borrow and spend.
d.	All of the statements above are true.

    46.    At any point in time, households and businesses demand a greater quantity of loanable funds at lower rates of interest.

a. True

b. False

    47.    The business demand for funds resulting from short-term investments is inversely related to the number of projects implemented and inversely related to the interest rate.

a. True

b. False

    48.    Other things being equal, a smaller quantity of U.S. funds would be demanded by foreign governments and corporations if their domestic interest rates were high relative to U.S. rates.

a. True

b. False

    49.    If foreign interest rates fall, foreign firms and governments would likely reduce their demand for U.S. funds.

a. True

b. False

    50.    Since the aggregate demand for loanable funds is the sum of the quantities demanded by the separate sectors, and since most of these sectors are likely to demand a larger quantity of funds at lower interest rates (other things being equal), the aggregate demand for loanable funds is positively related to interest rates at any point in time.

a. True

b. False

    51.    In general, suppliers of loanable funds are willing to supply more funds if the interest rate is higher.

a. True

b. False

    52.    If the aggregate demand for loanable funds increases without a corresponding increase in aggregate supply, there will be a surplus of loanable funds.

a. True

b. False

    53.    The relationship between interest rates and expected inflation is often referred to as the loanable funds theory.

a. True

b. False

    54.    According to the Fisher effect, if the real interest rate is zero, the nominal interest rate must be equal to the expected inflation rate.

a. True

b. False

    55.    To forecast interest rates using the Fisher effect, the real interest rate for an upcoming period can be forecasted by subtracting the expected inflation rate over that period from the nominal interest rate quoted for that period.

a. True

b. False

    56.    According to the Fisher effect, when the inflation rate is lower than anticipated, the real interest rate is relatively low.

a. True

b. False

    57.    Forecasters should consider future plans for corporate expansion and the future state of the economy when forecasting business demand for loanable funds.

a. True

b. False

    58.    The ____ suggests that the market interest rate is determined by factors that control the supply of and demand for loanable funds.

a.	Fisher effect
b.	loanable funds theory
c.	real interest rate
d.	none of the above

    59.    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.	All of the above will result in an increase in the business demand for loanable funds.

    60.    Other things being equal, a ____ quantity of U.S. funds would be demanded by foreign governments and corporations if their domestic interest rates were ____ relative to U.S. rates.

a.	smaller; high
b.	larger; high
c.	larger; low
d.	none of the above

    61.    The federal government demand for funds is said to be interest inelastic, or ____ to interest rates.

a.	sensitive
b.	insensitive
c.	relatively sensitive as compared to other sectors
d.	none of the above

    62.    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

    63.    The expected impact of an increased expansion by businesses is an ____ shift in the demand schedule and ____ in the supply schedule.

a.	inward; an inward shift
b.	inward; an outward shift
c.	outward; an inward shift
d.	outward; no obvious change

    64.    Which of the following is a valid representation of the Fisher effect?

a.	i = E(INF) + iR
b.	iR = E(INF) + i
c.	E(INF) = i + iR
d.	none of the above

    65.    The real interest rate can be forecasted by subtracting the ____ from the ____ for that period.

a.	nominal interest rate; expected inflation rate
b.	prime rate; nominal interest rate
c.	expected inflation rate; nominal interest rate
d.	prime rate; expected inflation rate

    66.    According to the Fisher effect, expectations of higher inflation cause savers to require a ____ on savings.

a.	higher nominal interest rate
b.	higher real interest rate
c.	lower nominal interest rate
d.	lower real interest rate

    67.    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 the above

       1.    In general, securities with ____ characteristics will offer ____ yields.

a.	favorable; higher
b.	favorable; lower
c.	unfavorable; lower
d.	none of the above

       2.    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.

       3.    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.

       4.    Credit ratings are most commonly used to indicate which financial institutions have available funds that they can lend to borrowers.

a. True

b. False

       5.    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.

       6.    Securities that offer ____ liquidity will need to offer a ____ yield.

a.	lower; higher
b.	lower; lower
c.	higher; higher
d.	B and C

       7.    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; a higher after-tax yield than taxable securities
d.	tax-exempt securities; a higher before-tax yield than taxable securities

       8.    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 the above

       9.    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 the above

    10.    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

a.	7.0 percent.
b.	10.8 percent.
c.	20.0 percent.
d.	none of the above

    11.    Holding other factors such as risk constant, the relationship between the maturity and annualized yield of securities is called the

a.	term structure of interest rates.
b.	default structure of interest rates.
c.	liquidity structure of interest rates.
d.	tax structure of interest rates.
e.	none of the above

    12.    The term structure of interest rates defines the relationship

a.	between risk and return.
b.	between risk and maturity.
c.	between maturity and yield.
d.	between default risk ratings and maturity.

    13.    Interest income from municipal bonds is exempt from state taxes but is subject to federal taxes.

a. True

b. False

    14.    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 unless we know additional information (such as the level of market interest rates).

    15.    Assume that annualized yields of short-term and long-term securities are equal. If investors suddenly believe interest rates will increase, their actions may cause the yield curve to

a.	become inverted.
b.	become flat.
c.	become upward sloping.
d.	be unaffected.

    16.    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 to decrease.
d.	A and B
e.	none of the above

    17.    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; above that
c.	highest; above that
d.	lowest; below that

    18.    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

    19.    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.
d.	theory of rational expectations.

    20.    Assume investors are indifferent among security maturities. Today, the annualized 2-year interest rate is 12 percent, and the 1-year interest rate is 9 percent. What is the forward rate according to the pure expectations theory?

a.	15.08 percent
b.	3.00 percent
c.	12.00 percent
d.	12.62 percent
e.	11.41 percent

    21.    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.	none of the above

    22.    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
b.	downward; downward
c.	upward; downward
d.	downward; upward

    23.    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.	A and B

    24.    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; less
b.	less; greater
c.	greater; greater
d.	less; less
e.	C and D

    25.    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 percent
b.	113 percent
c.	195 percent
d.	15.67 percent
e.	none of the above

    26.    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 ____ (assuming no other changes).

a.	slight downward slope
b.	slight upward slope
c.	steep upward slope
d.	steep downward slope

    27.    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.	B and C are possible, depending on the size of the liquidity premium

    28.    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

a.	8.0 percent.
b.	7.6 percent.
c.	3.0 percent.
d.	7.0 percent.

    29.    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.	is an unbiased forecast of (it has an equal chance of overestimating or underestimating)

    30.    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

    31.    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

a.	pure expectations theory.
b.	liquidity premium theory.
c.	segmented markets theory.
d.	liquidity habitat theory.

    32.    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 securities.
b.	upward pressure on the price of short-term securities.
c.	downward pressure on the yield of long-term securities.
d.	A and C

    33.    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

a.	liquidity premium theory.
b.	efficient markets theory.
c.	pure expectations theory.
d.	preferred habitat theory.

    34.    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 long-term securities.

a.	upward; upward
b.	downward; downward
c.	upward; downward
d.	downward; upward

    35.    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 forward roll.
e.	none of the above

    36.    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 the above are possible, depending on the size of the bond offering.

    37.    Assume that the Treasury bond yield today is 2% higher than it was one year ago. Also assume that the credit (default) risk premium of an A-rated bond declined by 0.4% since one year ago. A newly issued A-rated bond will likely offer a yield today that is ____ the yield that was offered on an A-rated bond issued one year ago.

a.	greater than
b.	equal to
c.	less than
d.	A or B are both common

    38.    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 interest rates were lower. This specifically supports the ____ for explaining the term structure of interest rates.

a.	liquidity premium theory
b.	expectations theory
c.	segmented markets theory
d.	A and C

    39.    According to 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; small
d.	small; large

    40.    The yield curve in a foreign country is

a.	always downward sloping.
b.	non-existent.
c.	the same as the United States at any point in time.
d.	none of the above

    41.    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

a.	liquidity premium theory.
b.	expectations theory.
c.	segmented markets theory.
d.	A and B

    42.    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

a.	liquidity premium theory.
b.	real interest rate theory.
c.	expectations theory.
d.	segmented markets theory.

    43.    If the Treasury uses a relatively large proportion of ____ debt to finance the deficit, this may place upward pressure on ____ interest rates, and corporations may reduce their investment in fixed assets.

a.	long-term; long-term
b.	long-term; short-term
c.	short-term; long-term
d.	B and C

    44.    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

a.	31.1 percent.
b.	19 percent.
c.	12.5 percent.
d.	14 percent.

    45.    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

    46.    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 the above

    47.    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 ____ sloping.

a.	upward; downward
b.	downward; upward
c.	upward; upward
d.	downward; downward

    48.    An upward-sloping yield curve indicates that Treasury securities with ____ maturities offer ____ annualized yields.

a.	longer; lower
b.	longer; higher
c.	shorter; lower
d.	shorter; higher
e.	B and C

    49.    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
c.	increase; upward
d.	increase; downward

    50.    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 tax adjustment are necessary to sell its commercial paper to investors. Furthermore, annualized T-bill rates are 7 percent. Based on this information, Vaughn should offer ____ percent on its commercial paper.

a.	8.0
b.	7.6
c.	7.5
d.	7.9
e.	none of the above

    51.    If liquidity influences the yield curve, the forward rate underestimates the market's expectation of the future interest rate.

a. True

b. False

    52.    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.

    53.    Some types of debt securities always offer a higher yield than others.

a. True

b. False

    54.    Investors will always prefer the purchase of risk-free Treasury securities, since other securities have a higher level of risk.

a. True

b. False

    55.    The higher a bond rating, the lower the perceived default risk.

a. True

b. False

    56.    Treasury securities are exempt from federal and state income taxes.

a. True

b. False

    57.    The term structure of interest rates defines the relationship between maturity and annualized yield, holding other factors such as risk constant.

a. True

b. False

    58.    The graphic comparison of maturities and annualized yields is known as the interest rate curve.

a. True

b. False

    59.    According to the segmented markets theory, the term structure of interest rates is determined solely by expectations of future interest rates.

a. True

b. False

    60.    The forward rate is commonly used to represent the market's forecast of the future interest rate.

a. True

b. False

    61.    Other things being equal, an expected decrease in interest rates will increase the demand for long-term funds by borrowers.

a. True

b. False

    62.    The preference for more liquid short-term securities places downward pressure on the slope of the yield curve.

a. True

b. False

    63.    When expectations theory is combined with the liquidity theory, the yield on a security will always be equal to the yield from consecutive investments in shorter-term securities over the same investment horizon.

a. True

b. False

    64.    The segmented markets theory suggests that although investors and borrowers may normally concentrate on a particular natural maturity market, certain events may cause them to wander from it.

a. True

b. False

    65.    If the yield curve is upward sloping, some investors may attempt to benefit from the higher yields on longer-term securities, even when they have funds for only a short period of time. This strategy is known as riding the yield curve.

a. True

b. False

    66.    Yield curves are always upward sloping.

a. True

b. False

    67.    Which of the following statements is not true with respect to debt securities?

a.	Some types of debt securities always offer a higher yield than others.
b.	Debt securities offer different yields because they exhibit different characteristics that influence the offered yield.
c.	In general, securities with favorable characteristics will offer higher yields to entice investors.
d.	All of the above are true with respect to debt securities.

    68.    Which of the following is not a characteristic affecting the yields on debt securities?

a.	default risk
b.	liquidity
c.	tax status
d.	term to maturity
e.	All of the above affect yields on debt securities.

    69.    All other characteristics being equal, securities with ____ liquidity would have to offer a ____ yield to be preferred.

a.	lower; higher
b.	higher; higher
c.	lower; lower
d.	none of the above

    70.    A downward-sloping yield curve indicates that Treasury securities with ____ maturities offer ____ annualized yields.

a.	longer; lower
b.	longer; higher
c.	shorter; lower
d.	shorter; higher
e.	Answers A and D are correct.

    71.    Assume that the Treasury experiences a large increase in the budget deficit and issues a large number of T-bills. This action will ____ the supply of T-bills in the market and place ____ pressure on the yield of T-bills.

a.	decrease; downward
b.	decrease; upward
c.	increase; upward
d.	increase; downward

    72.    If the liquidity premium theory completely describes the term structure of interest rates, then, on the average, the yield curve should be

a.	flat.
b.	downward sloping.
c.	upward sloping.
d.	none of the above.

    73.    If interest rates are expected to decrease, the yield on new short-term securities may be expected to ____, and the yield curve should be ____ sloping.

a.	increase; upward
b.	increase; downward
c.	decrease; upward
d.	decrease; downward

    74.    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 short-term funds by borrowers and the yield curve will be ____ sloping.

a.	upward; downward
b.	downward; upward
c.	upward; upward
d.	downward; downward

    75.    The ____ theory suggests that although investors and borrowers may normally concentrate on a particular natural maturity market, certain events may cause them to wander from it.

a.	pure expectations
b.	liquidity premium
c.	segmented markets
d.	preferred habitat

    76.    If the Treasury uses a relatively large proportion of ____ debt to finance a budget deficit, this would place ____ pressure on long-term yields.

a.	short-term; downward
b.	long-term; downward
c.	short-term; upward
d.	long-term; upward

       1.    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

       2.    As a result of the Financial Reform Act of 2010, the ____ was assigned the role of regulating financial products and services.

a.	Federal Advisory Committee
b.	Federal Open Market Committee
c.	Consumer Financial Protection Bureau
d.	Board of Governors

       3.    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 stock market

       4.    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.	A and B

       5.    The ____ is made up of seven individual members, and each member is appointed by the president of the U.S.

a.	Board of Governors
b.	Federal Reserve district bank
c.	Federal Open Market Committee (FOMC)
d.	Securities and Exchange Commission

       6.    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.	A and C

       7.    Members of the Board of Governors serve 14-year nonrenewable terms.

a. True

b. False

       8.    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 institutions
b.	authorize changes in the amount of borrowing by the Treasury
c.	monitor the stock market for insider trading
d.	monitor the derivatives market for illegal trading strategies

       9.    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

    10.    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 coupon rate on Treasury bonds
d.	selling Treasury securities in the primary market

    11.    The Policy Directive is provided by Board of Governors to the FOMC.

a. True

b. False

    12.    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.	A and B

    13.    The purchase of government securities by someone other than the Fed results in

a.	an overall increase in funds among commercial banks.
b.	an overall decrease in funds among commercial banks.
c.	offsetting changes in funds at commercial banks.
d.	an increase in securities maintained by the Fed.

    14.    As the supply of funds in the banking system ____, the federal funds rate ____.

a.	increases; declines
b.	increases; increases
c.	declines, declines
d.	none of the above

    15.    Repurchase agreements are purchased by the Fed to

a.	temporarily decrease the aggregate level of bank funds.
b.	permanently increase the aggregate level of bank funds.
c.	permanently decrease the aggregate level of bank funds.
d.	temporarily increase the aggregate level of bank funds.

    16.    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 the above

    17.    ____ open market operations offset the impact of other conditions that affect the level of funds.

a.	Active
b.	Passive
c.	Dynamic
d.	Defensive

    18.    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

    19.    The primary credit lending rate changes in accordance with changes in the federal funds rate.

a. True

b. False

    20.    ____ 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 the above

    21.    To decrease money supply, the Fed could ____ the reserve requirement ratio.

a.	increase
b.	stabilize
c.	reduce
d.	eliminate

    22.    The ____ the reserve requirement ratio, the ____ the ultimate effect of any initial increase in money supply.

a.	lower; less
b.	lower; greater
c.	greater; less
d.	B and C

    23.    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

    24.    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.

    25.    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.

    26.    The Monetary Control Act of 1980 subjected

a.	only member banks to the reserve requirements 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 national banks to reserve requirements set by the Fed.

    27.    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

    28.    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.

    29.    The Board of Governors is composed of

a.	seven members appointed by the President of the United States.
b.	the 12 presidents of Fed district banks.
c.	the Federal Open Market Committee, plus the Federal Advisory Council.
d.	the Federal Open Market Committee, plus the President of the United States.

    30.    The ____ is directly responsible for setting reserve requirements.

a.	Federal Advisory Council
b.	FOMC
c.	Board of Governors
d.	President of the United States

    31.    The ____ is directly responsible for conducting monetary policy.

a.	Federal Advisory Council
b.	FOMC
c.	Senate
d.	President of the United States

    32.    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.

    33.    A(n) ____ in Federal Reserve float causes a(n) ____ in bank funds.

a.	increase; increase
b.	increase; decrease
c.	decrease; decrease
d.	B and C

    34.    The ____ consists of seven members, each of whom is appointed by the President of the United States.

a.	Federal Open Market Committee (FOMC)
b.	Federal Advisory Council
c.	Board of Governors
d.	none of the above

    35.    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 store any cash, the money supply should ____ by about ____.

a.	increase; $200 million
b.	increase; $1.67 billion
c.	decrease; $200 million
d.	decrease; $1.67 billion

    36.    The federal funds rate is the rate at which the Fed lends money directly to member banks.

a. True

b. False

    37.    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(n) ____ of money supply growth.

a.	increase; loosening
b.	decrease; tightening
c.	decrease; loosening
d.	increase; tightening
e.	none of the above

    38.    The Trading Desk is sometimes directed to ____ a sufficient amount of Treasury securities that will ____ the federal funds rate to a new targeted level set by the FOMC.

a.	buy; decrease
b.	sell; increase
c.	buy; increase
d.	sell; decrease
e.	A and B

    39.    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 problems with its own unique monetary policy.
c.	A policy used in a particular period may not affect the participating countries equally, since they all have the same currency.
d.	Each participating country will still be able to apply its own fiscal policy (tax and government expenditure decisions).
e.	All of the above are true with respect to a single European monetary policy.

    40.    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

    41.    ____ 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 above

    42.    Most of the Fed's income is transferred to the U.S. Department of Justice.

a. True

b. False

    43.    All commercial banks are required to be members of the Fed.

a. True

b. False

    44.    Each member of the Board of Governors is appointed by the president of the United States and serves a nonrenewable 14-year term.

a. True

b. False

    45.    Each Federal Reserve district bank is responsible for reporting its regional conditions, and all of these reports are consolidated to compose the Beige Book.

a. True

b. False

    46.    When the Trading Desk sells a sufficient amount of Treasury securities, it creates a surplus of funds in the banking system. Consequently, the federal funds rate decreases along with other interest rates.

a. True

b. False

    47.    Adjustment of the primary credit lending rate is the most common means by which the Fed controls the money supply.

a. True

b. False

    48.    To increase the money supply, the Trading Desk would be instructed to sell government securities.

a. True

b. False

    49.    To increase the money supply, the Fed may increase the reserve requirement ratio.

a. True

b. False

    50.    Which of the following is not true with respect to the Federal Reserve Act of 1913?

a.	It established reserve requirements for member commercial banks.
b.	It specified fourteen districts across the United States as well as a city in each district where a Federal Reserve district bank was to be established.
c.	Each district focused on its particular district, without much concern for other districts.
d.	All of the above are true.

    51.    ____ is (are) not a component of the Fed as it exists today.

a.	The Federal Advisory Council
b.	The Board of Governors
c.	National banks
d.	The U.S. Department of Commerce
e.	All of the above are components of the Fed.

    52.    The advisory committee making recommendations to the Fed about economic and banking related issues is the

a.	Consumer Advisory Council.
b.	Thrift Institutions Advisory Council.
c.	Federal Advisory Council.
d.	none of the above

    53.    The advisory committee offering views on issues related to credit unions is the

a.	Consumer Advisory Council.
b.	Thrift Institutions Advisory Council.
c.	Federal Advisory Council.
d.	none of the above

    54.    If the Fed desires to ____ the money supply using open market operations, it would instruct the trading desk to ____ government securities.

a.	increase; purchase
b.	increase; sell
c.	decrease; purchase
d.	Answers B and C are correct.

    55.    When the Fed buys Treasury bills as a means of increasing the money supply, it places ____ pressure on their prices and ____ pressure on their yields.

a.	upward; upward
b.	downward; downward
c.	upward; downward
d.	downward; upward

    56.    To increase the money supply growth, the Fed could

a.	sell government securities in the secondary market.
b.	increase the primary credit lending rate.
c.	increase the reserve requirement ratio.
d.	all of the above
e.	none of the above