MONEY AND BANKING TEST 1

1. Ranking assets from most liquid to least liquid, the correct order is A)
savings bonds; house; currency.
B) currency; savings bonds; house.
C) currency; house; savings bonds.
D) house; savings bonds; currency.
2. ________ markets transfer funds from people who have an excess of available funds to
people who have a shortage.
A) Commodity
B) Fund-available
C) Financial
D) Derivative exchange
3. Which of the following are true concerning the distinction between interest rates and
returns?
A) The rate of return on a bond will not necessarily equal the interest rate on that bond. B)
The return can be expressed as the difference between the current yield and the rate of
capital gains.
C) The rate of return will be greater than the interest rate when the price of the bond falls
between time t and time t + 1.
D) The return can be expressed as the sum of the discount yield and the rate of capital gains.
4. The total collection of pieces of property that serve to store value is a personʹs
A) wealth. B) income. C) money. D) credit.
5. As the payments system evolves from barter to a monetary system,
A) commodity money is likely to precede the use of paper currency.
B) transaction costs increase.
C) the number of prices that need to be calculated increase rather dramatically.
D) specialization decreases.
6. When the interest rate changes,
A) the demand curve for bonds shifts to the right.
B) the demand curve for bonds shifts to the left.
C) the supply curve for bonds shifts to the right.
D) it is because either the demand or the supply curve has shifted.
7. The M1 measure of money includes
A) small denomination time deposits.
B) travelerʹs checks.
C) money market deposit accounts.
D) money market mutual fund shares
8. In which of the following situations would you prefer to be the lender?
A) The interest rate is 9 percent and the expected inflation rate is 7 percent. B)
The interest rate is 4 percent and the expected inflation rate is 1 percent. C) The
interest rate is 13 percent and the expected inflation rate is 15 percent. D) The
interest rate is 25 percent and the expected inflation rate is 50 percent.
9. Which of the following statements accurately describes the two measures of the money
supply?
A) The two measures do not move together, so they cannot be used interchangeably by
policymakers.
B) The two measuresʹ movements closely parallel each other, even on a month-to-month
basis.
C) Short-run movements in the money supply are extremely reliable.
D) M2 is the narrowest measure the Fed reports
10. Which of the following $1,000 face-value securities has the highest yield to maturity?
A) A 5 percent coupon bond with a price of $600
B) A 5 percent coupon bond with a price of $800
C) A 5 percent coupon bond with a price of $1,000
D) A 5 percent coupon bond with a price of $1,200
11. When the ________ interest rate is low, there are greater incentives to ________ and
fewer incentives to ________.
A) nominal; lend; borrow
B) real; lend; borrow
C) real; borrow; lend
D) market; lend; borrow
12. The spread between the interest rates on bonds with default risk and default-free bonds is
called the
A) risk premium.
B) junk margin.
C) bond margin.
D) default premium.
13. Compared to interest rates on long-term U.S. government bonds, interest rates on three
month Treasury bills fluctuate ________ and are ________ on average.
A) more; lower
B) less; lower
C) more; higher
D) less; higher
14. Which of the following are true for discount bonds?
A) A discount bond is bought at par.
B) The purchaser receives the face value of the bond at the maturity date.
C) U.S. Treasury bonds and notes are examples of discount bonds.
D) The purchaser receives the par value at maturity plus any capital gains.
15. Everything else held constant, an increase in the riskiness of bonds relative to alternative
assets causes the demand for bonds to ________ and the demand curve to shift to the
________.
A) rise; right
B) rise; left
C) fall; right
D) fall; left
16. The yield to maturity is ________ than the ________ rate when the bond price is
________ its face value.
A) greater; coupon; above
B) greater; coupon; below
C) greater; perpetuity; above
D) less; perpetuity; below
17. What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for
$1,200 next year?
A) 5 percent
B) 10 percent
C) -5 percent
D) 25 percent
18. Everything else held constant, if the expected return on RST stock declines from 12 to 9
percent and the expected return on XYZ stock declines from 8 to 7 percent, then the expected
return of holding RST stock ________ relative to XYZ stock and demand for XYZ stock
________.
A) rises; rises
B) rises; falls
C) falls; rises
D) falls; falls
19. If prices in the bond market become more volatile, everything else held constant, the
demand curve for bonds shifts ________ and interest rates ________.
A) left; rise
B) left; fall
C) right; rise
D) right; fall
20. In explaining the evolution of money
A) government regulation is the most important factor.
B) commodity money, because it is valued more highly, tends to drive out paper money. C)
new forms of money evolve to lower transaction costs.
D) paper money is always backed by gold and therefore more desirable than checks.
21. The payments system is
A) the method of conducting transactions in the economy.
B) used by union officials to set salary caps.
C) an illegal method of rewarding contracts.
D) used by your employer to determine salary increases.
22. Evidence from the United States and other foreign countries indicates that
A) there is a strong positive association between inflation and growth rate of money over
long periods of time.
B) there is little support for the assertion that ʺinflation is always and everywhere a monetary
phenomenon.ʺ
C) countries with low monetary growth rates tend to experience higher rates of inflation, all
else being constant.
D) money growth is clearly unrelated to inflation.
23. Currency includes
A) paper money and coins.
B) paper money, coins, and checks.
C) paper money and checks.
D) paper money, coins, checks, and savings deposits.
24. When money prices are used to facilitate comparisons of value, money is said to function
as a
A) unit of account.
B) medium of exchange.
C) store of value.
D) payments-system ruler.
25. During hyperinflations,
A) the value of money rises rapidly.
B) money no longer functions as a good store of value and people may resort to barter
transactions on a much larger scale.
C) middle-class savers benefit as prices rise.
D) moneyʹs value remains fixed to the price level; that is, if prices double so does the value
of money.
26. Which of the following statements are true?
A) A liquid asset is one that can be quickly and cheaply converted into cash.
B) The demand for a bond declines when it becomes less liquid, decreasing the interest rate
spread between it and relatively more liquid bonds.
C) The differences in bond interest rates reflect differences in default risk only.
D) The corporate bond market is the most liquid bond market.
27. Municipal bonds have default risk, yet their interest rates are lower than the rates on
default-free Treasury bonds. This suggests that
A) the benefit from the tax-exempt status of municipal bonds is less than their default risk.
B) the benefit from the tax-exempt status of municipal bonds equals their default risk.
C) the benefit from the tax-exempt status of municipal bonds exceeds their default risk. D)
Treasury bonds are not default-free.
28. The upward and downward movement of aggregate output produced in the economy is
referred to as the ________.
A) roller coaster
B) see saw
C) business cycle
D) shock wave
29. When yield curves are downward sloping,
A) long-term interest rates are above short-term interest rates. (upward)
B) short-term interest rates are above long-term interest rates.
C) short-term interest rates are about the same as long-term interest rates. (flat) D)
medium-term interest rates are above both short-term and long-term interest rates. 30.
According to the liquidity premium theory of the term structure
A) because buyers of bonds may prefer bonds of one maturity over another, interest rates on
bonds of different maturities do not move together over time.
B) the interest rate on long-term bonds will equal an average of short-term interest rates that
people expect to occur over the life of the long-term bonds plus a term premium.
C) because of the positive term premium, the yield curve will not be observed to be
downward sloping.
D) the interest rate for each maturity bond is determined by supply and demand for that
maturity bond.
MONEY AND BANKING TEST 2
1. ________ markets transfer funds from people who have an excess of available funds to
people who have a shortage.
A) Commodity
B) Fund-available
C) Financial
D) Derivative exchange
2. High interest rates might ________ purchasing a house or car but at the same time high
interest rates might ________ saving.
A) discourage; encourage
B) discourage; discourage
C) encourage; encourage
D) encourage; discourage
3. If prices in the bond market become more volatile, everything else held constant, the
demand curve for bonds shifts ________ and interest rates ________. A) left; rise
B) left; fall
C) right; rise
D) right; fall
4. The yield to maturity is ________ than the ________ rate when the bond price is
________ its face value.
A) greater; coupon; above
B) greater; coupon; below
C) greater; perpetuity; above
D) less; perpetuity; below
5. What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for
$900 next year?
A) 5 percent
B) 10 percent
C) -5 percent
D) -10 percent
6. Which of the following are true for discount bonds?
A) A discount bond is bought at par.
B) The purchaser receives the face value of the bond at the maturity date.
C) U.S. Treasury bonds and notes are examples of discount bonds.
D) The purchaser receives the par value at maturity plus any capital gains. 7. Everything else
held constant, an increase in the riskiness of bonds relative to alternative assets causes the
demand for bonds to ________ and the demand curve to shift to the ________.
A) rise; right
B) rise; left
C) fall; right
D) fall; left
8. Which of the following $1,000 face-value securities has the highest yield to maturity? A)
A 5 percent coupon bond with a price of $600
B) A 5 percent coupon bond with a price of $800
C) A 5 percent coupon bond with a price of $1,000
D) A 5 percent coupon bond with a price of $1,200
9. A credit market instrument that requires the borrower to make the same payment every
period until the maturity date is known as a
A) simple loan.
B) fixed-payment loan.
C) coupon bond.
D) discount bond.
10. When the ________ interest rate is low, there are greater incentives to ________ and
fewer incentives to ________.
A) nominal; lend; borrow
B) real; lend; borrow
C) real; borrow; lend
D) market; lend; borrow
11. When the interest rate changes,
A) the demand curve for bonds shifts to the right.
B) the demand curve for bonds shifts to the left.
C) the supply curve for bonds shifts to the right.
D) it is because either the demand or the supply curve has shifted.
12. The M1 measure of money includes
A) small denomination time deposits.
B) travelerʹs checks.
C) money market deposit accounts.
D) money market mutual fund shares.
13. In which of the following situations would you prefer to be the lender? A)
The interest rate is 9 percent and the expected inflation rate is 7 percent. B)
The interest rate is 4 percent and the expected inflation rate is 1 percent.
C) The interest rate is 13 percent and the expected inflation rate is 15 percent. D) The interest
rate is 25 percent and the expected inflation rate is 50 percent. 14. Which of the following
statements accurately describes the two measures of the money supply?
A) The two measures do not move together, so they cannot be used interchangeably by
policymakers.
B) The two measuresʹ movements closely parallel each other, even on a month-to-month
basis.
C) Short-run movements in the money supply are extremely reliable.
D) M2 is the narrowest measure the Fed reports.
15. The total collection of pieces of property that serve to store value is a personʹs
A) wealth. B) income. C) money. D) credit.
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. As the payments system evolves from barter to a monetary system,
A) commodity money is likely to precede the use of paper currency. B)
transaction costs increase.
C) the number of prices that need to be calculated increase rather dramatically.
D) specialization decreases.
18. Which of the following are true concerning the distinction between interest rates and
returns?
A) The rate of return on a bond will not necessarily equal the interest rate on that bond. B)
The return can be expressed as the difference between the current yield and the rate of
capital gains.
C) The rate of return will be greater than the interest rate when the price of the bond falls
between time t and time t + 1.
D) The return can be expressed as the sum of the discount yield and the rate of capital gains.
19. Which of the following statements about the characteristics of debt and equity is false?
A) They can both be long-term financial instruments.
B) They can both be short-term financial instruments.
C) They both involve a claim on the issuerʹs income.
D) They both enable a corporation to raise funds.
20. ) Municipal bonds have default risk, yet their interest rates are lower than the rates on
default-free Treasury bonds. This suggests that
A) the benefit from the tax-exempt status of municipal bonds is less than their default risk.
B) the benefit from the tax-exempt status of municipal bonds equals their default risk.
C) the benefit from the tax-exempt status of municipal bonds exceeds their default risk. D)
Treasury bonds are not default-free.
21. When yield curves are downward sloping,
A) long-term interest rates are above short-term interest rates.
B) short-term interest rates are above long-term interest rates.
C) short-term interest rates are about the same as long-term interest rates.
D) medium-term interest rates are above both short-term and long-term interest rates.
22. According to the liquidity premium theory of the term structure
A) because buyers of bonds may prefer bonds of one maturity over another, interest rates on
bonds of different maturities do not move together over time.
B) the interest rate on long-term bonds will equal an average of short-term interest rates that
people expect to occur over the life of the long-term bonds plus a term premium.
C) because of the positive term premium, the yield curve will not be observed to be
downward sloping.
D) the interest rate for each maturity bond is determined by supply and demand for that
maturity bond.
23. ) The segmented markets theory can explain
A) why yield curves usually tend to slope upward.
B) why interest rates on bonds of different maturities tend to move together. C) why yield
curves tend to slope upward when short-term interest rates are low and to be inverted when
short-term interest rates are high.
D) why yield curves have been used to forecast business cycles.
24. If an individual moves money from a small-denomination time deposit to a demand
deposit account,
A) M1 increases and M2 stays the same.
B) M1 stays the same and M2 increases.
C) M1 stays the same and M2 stays the same.
D) M1 increases and M2 decreases.
25. Of moneyʹs three functions, the one that distinguishes money from other assets is its
function as a
A) store of value.
B) unit of account.
C) standard of deferred payment.
D) medium of exchange.
26. Which of the following events will increase the interest rate?
a. tax cut causes increased budget deficits
b. Businesses decide to buy more capital equipment and go to…
c. the holiday approaches, people withdraw money from their
savings…
d. All of the above
27. If a security pays $55 in one year and $133 in three years, its present value is $150 if the
interest rate is
A) 5 percent.
B) 10 percent.
C) 12.5 percent.
D) 15 percent.