Q&A Hero

Q: Comparing the European and the U.S. central bank systems, the Executive Board of the European system resembles: A. the FOMC.B. the Board of Governors.C. the Presidents of the regional Federal Reserve Banks.D. the Chairman of the Board of Governors of the Fed.

Q: Due in part to record low interest rates on U.S. Treasury Bonds, A) investors searching for higher yields bought corporate bonds B) interest rates on corporate bonds rose C) corporations faced higher borrowing costs D) many corporations were at greater risk of defaulting

Q: Comparing the European and the U.S. central bank systems, the National Central Banks that make up part of the European System of Central Banks resembles: A. the U.S. Treasury.B. the Board of Governors.C. the FOMC.D. the regional Federal Reserve Banks.

Q: By reducing transactions and information costs, financial intermediaries can A) offer savers higher interest rates. B) offer borrowers lower interest rates. C) earn a profit. D) all of the above.

Q: By 2014, the euro had become the currency of: A. every country in Europe.B. eighteen countries in Europe.C. twenty-five countries in Europe.D. all European countries except Great Britain.

Q: The purpose of collateral and restrictive covenants is to reduce ________ in debt contracts. A) adverse selection B) transactions costs C) moral hazard D) loan amounts

Q: The Agreement to form a European monetary union was formalized in the Treaty of: A. Maastricht.B. Paris.C. Amsterdam.D. Milan.

Q: Which of the following is the most important source of external financing for corporations? A) stock market B) bond market C) retained earnings D) mortgages

Q: Which statement best completes the following sentence; "The U.S. dollar is to the fifty states as the euro is to…"? A. The European Central BankB. The states of the European Monetary UnionC. The National Central BanksD. The European System of Central Banks

Q: Why are corporations more likely to raise funds externally by debt instead of equity? A) moral hazard is less of a problem with debt contracts B) transactions costs tend to be higher in the stock market than bond market C) to avoid paying dividends D) interest rates tend to be lower than dividend rates

Q: One valuable lesson investors should learn from the stock market behavior during the late 1990s and early 2000s is that the Fed: A. can control the stock market.B. can reduce the idiosyncratic risk of investing but not the systematic risk.C. can eliminate the risk from investing.D. cannot prevent a stock market decline.

Q: Smaller firms tend to rely on financial intermediaries instead of financial markets for external financing due to A) transactions costs. B) adverse selection. C) moral hazard. D) all of the above.

Q: The objectives set for the Fed by Congress are: A. very specific; this adds to the Fed's accountability.B. by design, quite vague, allowing the Fed to really set its own goals.C. specific regarding inflation, but vague on all other goals.D. specific on the growth rate for the economy, but vague on all other objectives.

Q: In the late 2000s, which source of funds for corporations grew the most? A) net new stock issues B) net new bond issues C) net new loans D) net new commercial paper

Q: The likelihood that the Fed will implement a change that will seriously harm the economy is minimized by the fact that: A. only bright, well-intentioned people are appointed to key roles at the Fed.B. Congress can remove the Chairman of the Fed at any time.C. the Board of Governors ultimately must answer to the U.S. President since he can replace them.D. there is decision making by committee.

Q: In the late 2000s, the primary source of external funds for corporations was A) commercial paper. B) loans. C) bonds. D) stocks.

Q: Which of the following statements best completes the following: "The Fed's independence can only be revoked by…"? A. The U.S. PresidentB. The Secretary of the TreasuryC. CongressD. Changing the U.S. Constitution

Q: In the late 2000s, which of the following was the primary source of external financing for small to medium-size firms? A) mortgages B) bank loans other than mortgages C) trade credit D) other loans

Q: During World War II, the Fed accommodated the war effort by: A. significantly curtailing credit in the economy.B. keeping bond prices high and interest rates low.C. selling any Treasury securities the public did not purchase.D. curtailing credit and keeping bond prices high.

Q: How can restrictive covenants help to reduce moral hazard in bond markets?

Q: A large step toward independence occurred for the Fed in 1935 when the: A. Fed went from two to twelve districts.B. Secretary of the Treasury and the Comptroller of the Currency were removed from the Board of Governors.C. Chairman of the Board of Governors was no longer a cabinet position.D. Fed was given the ability to control its own budget.

Q: How does the principal-agent problem increase the possibility of moral hazard?

Q: The interest rate changes that result from the FOMC meetings: A. can be altered only by Congress.B. can be altered by the Secretary of the Treasury during an economic crisis.C. cannot be changed by anyone other than the FOMC.D. can only be altered during a time of crisis by the U.S. President.

Q: How does the use of collateral and net worth help reduce the problem of adverse selection?

Q: Most of the Fed's income is: A. paid to member banks in the form of a dividend.B. sent to the FDIC to shore up the depositor insurance fund.C. returned to the U.S. Treasury.D. used to build the Fed's portfolio of securities.

Q: What are the reasons why disclosure by the SEC do not eliminate the information costs of adverse selection?

Q: The Fed's revenue comes: A. from Congressional appropriation.B. from the Department of Commerce.C. from internally generated funds from interest on securities it holds and fees charged to banks for payments system services.D. solely from taxes placed on member banks.

Q: How does adverse selection in financial markets affect the method by which firms raise funds?

Q: Criteria used to judge a central bank's independence include each of the following, except: A. budgetary independence.B. long terms for members.C. cabinet or ministry level of authority.D. irreversible decisions.

Q: Compared to CDs and money market funds, crowd funding A) provides higher expected returns with increased safety B) provides lower expected returns in exchange for increased safety C) is likely to result in lower returns due to higher volatility D) provides opportunities for higher returns but also significant losses

Q: Once the FOMC announces the result of its meeting the attendees: A. it must brief the financial news immediately after and answer questions posed to them.B. observe a twenty-four hour blackout period following the meeting during which they do not speak publicly about the economic outlook or current monetary policy.C. observe a blackout period that lasts for a week following the meeting during which they do not speak publicly about the economic outlook or current monetary policy.D. never discuss the policy issues addressed in the meetings.

Q: Many economists and policymakers have raised concerns about crowd funding due to the existence of: A) information costs facing small investors B) information costs facing business start ups C) transaction costs facing business start ups D) increased competition for banks in funding business start ups

Q: Once the FOMC meetings adjourn, the public is made aware of the FOMC's decision: A. immediately after the meeting.B. forty-eight hours after the meeting adjourns.C. within five business days.D. twenty-four hours after the meeting adjourns.

Q: A part of the Jumpstart Our Business Startups (JOBS) Act: A) banks were required to provide special financing for start ups B) differences between qualified and unaccredited investors were removed C) the SEC is no longer is allowed to regulate funding of business start ups D) Congress removed some of the restrictions on using crowd-funding to allow small investors to buy equity in start-ups

Q: The primary purpose of meetings of the FOMC is to: A. set the required reserve rate.B. set the discount rate.C. decide on how to influence financial conditions.D. set the prime rate.

Q: Crowd funding can best be described as: A) raising funds in a very large market B) raising small amounts of money from large numbers of people C) many firms competing for the same source of funds D) making funds available for a large number of business start ups

Q: Changes in the federal funds rate influence the economy's growth rate through all of the following except by: A. making it more or less attractive to people save.B. making it more or less expensive to borrow.C. making investment spending more or less attractive.D. altering the real interest rate when inflation is changing quickly.

Q: The existence of adverse selection results in: A) reduced market efficiency B) an increase in the likelihood of moral hazard C) increase market transactions D) higher transaction costs

Q: The FOMC controls the real interest rate: A. if inflation changes quickly.B. if inflation doesn't change quickly.C. only if it adjusts the federal funds rate to match the changes in the rate of inflation.D. only on an annual basis.

Q: Suppose that investors perceive a higher risk of investing in Europe as a result of a sovereign debt crisis. Make use of a graph of the foreign exchange market to show how this will affect the value of the euro.

Q: The federal funds rate is stated as: A. a real interest rate.B. a nominal interest rate.C. a rate that is automatically indexed to inflation.D. the current rate less the expected rate of inflation.

Q: Suppose the Federal Reserve reduces interest rates while interest rates in Europe do not change. Make use of a graph of the foreign exchange market to show how this will affect the value of the dollar.

Q: The federal funds rate is the interest rate: A. the Fed charges banks who borrow from it.B. banks charge each other for overnight loans on excess reserves held at the Fed.C. the U.S. Treasury charges banks that need emergency funds.D. the FDIC charges banks that need to borrow from it to meet depositor demands.

Q: Suppose interest rates in the U.S. are 3% while interest rates on comparable bonds in Japan are 1%. By how much is the exchange rate between the yen and dollar expected to change according to the interest-rate parity condition?

Q: The interest rate that the FOMC currently chooses to control is: A. the federal funds rate.B. the 30-year Treasury bond rate.C. the discount rate.D. the prime rate.

Q: What are three reasons that the interest-rate parity condition may not always hold?

Q: The Chairman of the FOMC is: A. the Secretary of the Treasury.B. the Vice-Chairman of the Board of Governors.C. the Chairman of the Board of Governors.D. the President of the New York Fed.

Q: Suppose you invest $5,000 in a one-year Japanese bond that pays 1% interest. At the time of your purchase, 85 yen equals $1 while one year later, 80 yen equals $1. What will be the value of your investment in one year when measured in dollars?

Q: Which of the following is (are) not a permanent voting member(s) on the FOMC? A. The seven Governors of the FedB. The Secretary of the TreasuryC. The President of the Federal Reserve Bank of New YorkD. The chair of the Board of Governors

Q: In 2010, fears were growing that the dollar would experience a significant decline in value. What are the likely implications for the euro-dollar exchange rate?

Q: The number of voting members on the Federal Open Market Committee is: A. 7.B. 12.C. 19.D. 8.

Q: Suppose that the one-year Treasury bill rate in the United States is 6%, the one-year government bond rate in Canada is 4%, and investors expect the U.S. dollar to depreciate against the Canadian dollar by 4% over the coming year. Is the nominal interest rate parity condition violated?

Q: The Federal Open Market Committee began operating in: A. 1913.B. 1929.C. 1914.D. 1936.

Q: Suppose that short-term real interest rates fall in Japan. Is this likely to be good news or bad news for the tourism industry in Hawaii?

Q: The Federal Reserve's Open Market Committee currently meets: A. monthly.B. bi-weekly.C. eight times a year.D. once every quarter, unless a crisis warrants more frequent meetings.

Q: If the interest rate on a U.S. one-year bond is 1%, the interest rate on a Mexican one-year bond is 5%, and investors expect the dollar to appreciate by 1% versus the peso, what is the currency premium for U.S. investors to hold Mexican pesos? A) -3% B) 3% C) 4% D) 7%

Q: Members of the Board of Governors of the Fed: A. can be reappointed after their term expires.B. must leave office when there is a new administration elected.C. serve one non-renewable fourteen-year term.D. are appointed for life, though they can resign at any time.

Q: If the interest rate on a U.S. one-year bond is 2%, the interest rate on a Brazilian one-year bond is 8%, and the currency premium on reals (Brazilian currency) is 3%, what is the expected rate of appreciation of the U.S. dollar according to interest-rate parity? A) -3% B) 3% C) 5% D) 6%

Q: The Federal Reserve Act explicitly requires that the Board of Governors represents each of the following, except: A. commercial interests.B. foreign interests.C. financial interests.D. agricultural interests.

Q: Which of the following has the largest impact on short-run movements in exchange rates? A) growth rate of exports B) growth rate of imports C) investment opportunities D) changes in the trade deficit

Q: The Board of Governors of the Fed performs each of the following functions, except: A. analyzing financial and economic conditions.B. setting the reserve requirement.C. approving bank merger applications.D. making discount loans.

Q: Which of the following is most likely to lead to an increase in the value of the dollar? A) decline in U.S. interest rates B) increase in imports to the United States C) decrease in exports from the United States D) increase in U.S. interest rates compared to foreign interest rates

Q: The members of the Board of Governors in recent years have been all of the following, except: A. former academic economists.B. former economic forecasters.C. a current Secretary of the Treasury.D. former bankers.

Q: Which of the following will take place in the foreign exchange market if there is an increase in the demand for products made in the United States? A) The supply of dollars will decrease. B) The demand for dollars will decrease. C) The demand for dollars will increase. D) The dollar will decrease in value.

Q: The Chairman of the Board of Governors: A. serves a four-year term that cannot be renewed.B. is selected from the Board of Governors, appointed by the U.S. President.C. serves the same four-year term as the U.S. President.D. serves an eight-year term.

Q: The situation in which investors choose to put their funds in a safe asset during uncertain times is known as A) hedging. B) speculation. C) flight to quality. D) arbitrage.

Q: To make sure the U.S. President cannot unduly influence the Board of Governors: A. the terms of the governors are staggered.B. the law prevents a resident from appointing more than one governor.C. the terms of the governors are ten years long.D. only three governors can be replaced in any one year.

Q: The currency premium in foreign-exchange markets A) helps to offset anticipated declines in exchange rates. B) helps to offset anticipated increases in exchange rates. C) indicates investors' collective preference for financial instruments denominated in one currency relative to those denominated in another. D) rises as domestic interest rates fall.

Q: The Governors of the Federal Reserve System serve terms of: A. four years that can be renewed.B. fourteen years.C. four years, the same as the U.S. President, and the terms are not renewable.D. seven years.

Q: All of the following are reasons for caution when considering investing in emerging markets EXCEPT: A) in rapidly growing economies, expectations of future growth are already reflected in stock prices. B) economies experiencing rapid growth typically experience a dilution effect. C) fees for investing in funds that specialize in emerging markets tend to be higher than other funds. D) most economists expect the economies of emerging markets to grow more slowly than that of more advanced economies.

Q: The Governors of the Federal Reserve System are appointed by the: A. member banks from their home district.B. Board of Directors of the Reserve Bank from their home district.C. President of the United States.D. Chairman of the Federal Reserve System.

Q: Which of the following statements about the supply of dollars in the foreign exchange market is true? A) It is equal to the money supply. B) It represents the demand for U.S. goods and financial assets by firms and households outside the United States. C) It represents the supply of U.S. goods and financial assets by firms and households within the United States. D) It is determined by the willingness of households and firms that own dollars to exchange them for foreign currency.

Q: Current law regarding the Fed's Board of Governors stipulates that: A. no more than three governors can come from the same district.B. no more than two governors can come from the same district.C. every district must have at least one governor on the board.D. no more than one governor can come from the same district.

Q: Suppose that you expect during the next year the dollar will appreciate against the pound from 0.5 pound to the dollar to 0.75 pound to the dollar. How much will you expect to make on an investment of $10,000 in British government securities that will mature in one year and pay interest of 8%? A) -59.5% B) -28% C) 8% D) 28%

Q: How many members are on the Board of Governors of the Federal Reserve System? A. Twelve, one for each districtB. SevenC. NineD. Fourteen

Q: The demand for U.S. dollars represents: A) the demand for U.S. goods and financial assets by households and firms outside the United States. B) the demand for foreign goods and financial assets by households and firms within the United States. C) the demand for U.S. goods and financial assets by households and firms within the United States. D) the willingness of households and firms that own dollars to exchange them for foreign currency.

Q: The Federal Reserve banks play a role in formulating monetary policy by each of the following, except: A. conducting open market operations from their banks.B. participating in FOMC meetings.C. participation in setting the discount rate.D. making discount loans.

Q: What real-world complications keep purchasing power parity from being a complete explanation of exchange rates ?

Q: Buying and selling U.S. Treasury Securities for the Fed's own portfolio is called: A. managing the float.B. discount buying.C. open market operations.D. reserve adjustment.

Q: What would happen to the value of the dollar if prices in the U.S. increased more rapidly relative to prices in other countries?