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Q:
The daily turnover in the foreign exchange market is:
A) millions of dollars.
B) billions of dollars.
C) trillions of dollars.
D) declining in the last decade.
Q:
If it is the real rate of interest that savers and borrowers respond to, how does the Fed impact a real rate by targeting a nominal rate of interest?
Q:
Which of the following is NOT true of the foreign-exchange market?
A) It is an over-the-counter market.
B) Most foreign-exchange trading takes place in London.
C) The busiest trading time is morning east coast time, when markets in New York and London are both open.
D) Trading volume worldwide exceeds $1 trillion per day.
Q:
In what ways do the regional Federal Reserve Banks influence monetary policy?
Q:
Suppose a Nintendo Wii has a price of 24,000 yen in Japan and the yen-dollar exchange rate changes from 80 yen to the dollar to 100 yen to the dollar? What happens to the price of the Wii measured in dollars?
Q:
Who makes up the voting members of the Federal Reserve's Open Market Committee?
Q:
When it takes more euros to purchase a dollar, the dollars is said to have:
A) depreciated
B) appreciated
C) it depends on whether one is using direct or indirect quotations
D) it depends on whether one is considering cross rates or exchange rates
Q:
Why can't two Governors of the Fed come from the same district and does this limitation make sense today?
Q:
Indirect quotations in terms of foreign currency refers to:
A) expressing exchange rates as units of foreign currency in terms of domestic currency
B) expressing exchange rates as units of domestic currency in terms of foreign currency
C) expressing exchange rates of less traded currency by using a "major" currency
D) expressing exchange rates in terms of commodities such as gold
Q:
Why is it technically incorrect to say that the board of directors of the regional Fed banks set the discount rate that each bank charges?
Q:
If Sony keeps the price of PlayStation 3 constant in terms of dollars, what is the impact on Sony of a stronger yen?
A) a decline in exports to the United States
B) an increase in imports from the United States
C) lower profit
D) higher profit
Q:
The Federal Reserve is the U.S. government's bank. Identify the functions the Fed performs in this role.
Q:
What action did many Japanese car manufacturers take in response to the stronger yen following the 2007-2009 financial crisis?
A) They only accepted payments in the form of yen.
B) They chose to target China as the primary market for exports.
C) They abandoned the market in the United States.
D) They moved their production to the United States.
Q:
How are the locations of the twelve regional Federal Reserve Banks and the corresponding districts explained?
Q:
In what way is a stronger yen/weaker dollar a burden for Japanese exporters?
A) They received dollars when they sell goods but most of their costs of production are in yen.
B) They receive yen when they sell goods but most of their costs of production are in dollars.
C) The price of their exports will decline, resulting in lower profits.
D) The stronger yen is likely to increase Japanese inflation, resulting in lower profits.
Q:
Why are so few state chartered banks members of the Federal Reserve System?
Q:
Which of the following would cause the nominal exchange rate to appreciate?
A) The real exchange rate depreciates.
B) The domestic inflation rate decreases.
C) The domestic inflation rate increases.
D) The government budget deficit decreases.
Q:
Predict how monetary policymaking would change, if at all, if members of the Board of Governors of the Federal Reserve were popularly elected to two-year terms and could run for re-election.
Q:
Which of the following would cause the nominal exchange rate to depreciate?
A) The real exchange rate appreciates.
B) The domestic inflation rate increases.
C) The foreign inflation rate increases.
D) The government budget deficit increases.
Q:
Explain why inflation is a way for governments to default on a portion of the debts they owe.
Q:
A depreciating nominal exchange rate results from
A) a depreciating real exchange rate.
B) a low domestic inflation rate relative to the foreign inflation rate.
C) an appreciating real exchange rate.
D) a large government budget deficit.
Q:
Why might Congress actually prefer the higher rate of inflation that might result from deficit spending to higher taxes and/or a cut in government spending?
Q:
When a country's real exchange rate depreciates,
A) its nominal exchange rate must have appreciated.
B) its nominal exchange rate must also have depreciated.
C) it can trade its goods for fewer units of foreign goods.
D) it can trade its goods for more units of foreign goods.
Q:
Using the U.S. as an example, explain why rising budget deficits on the part of a federal government creates a potential point of conflict between fiscal and monetary policymakers.
Q:
What are the information costs associated with forward contracts?
Q:
Imagine a central banker who takes office believing that, ultimately, the best way to stimulate an economy is to keep people guessing. This means the policymaker will often, but not always, announce one change but then actually do something else. What do you think of the central bank's chances for achieving its objectives and why?
Q:
Why are forward contracts typically illiquid?
Q:
Provide an example where monetary policymakers in the United States would be put in a position of conflicting goals and as a result forced to make a tradeoff.
Q:
The person on the other side of a transaction is referred to as the:
A) derivator
B) counterparty
C) hedger
D) speculator
Q:
The Federal Reserve didn't always communicate its actions to the public like it does today. As recently as the mid 1990s, secrecy ruled. Why do you think the Fed and most central banks now are more public about their actions and the reasons for them?
Q:
When talking about forward contracts, the date on which the contracted delivery must take place is called:
A) the settlement date
B) the counterparty date
C) forward date
D) spot date
Q:
The text points out that the apparent result of central bank independence has been better performing economies. Why do you think it took so long for many countries to create independent central banks?
Q:
Forward contracts
A) are highly liquid.
B) entail small information costs.
C) provide little risk sharing.
D) are subject to default risk.
Q:
What are the operational components of central bank independence?
Q:
Forward transactions
A) provide substantial liquidity.
B) entail small information costs.
C) provide risk sharing.
D) provide reduced tax payments.
Q:
What do you think is meant by the statement that "successful monetary policy requires competent people and the right institutional environment"?
Q:
The existence of counterparty risk
A) has no effect on the contracting parties.
B) is disallowed under current government regulations.
C) results in information costs for buyers and sellers when analyzing the potential creditworthiness of potential trading partners.
D) reduces the risk introduced by forward contracts.
Q:
The chairman of the Fed gives a speech and hints that, at the next meeting of the Open Market Committee, the issues of a rapidly growing economy and preliminary indications of rising prices will have to be addressed. You are in the market for a new house and your mortgage broker calls to tell you that the interest rate on the $100,000, 30-year mortgage you applied for has just increased by a quarter of a percent. Why did the rate increase even though the Fed has not announced any rate change?
Q:
Forward contracts are often illiquid because
A) any capital gains on them are heavily taxed, making investors reluctant to sell them.
B) government regulation has not provided for a secondary market in them.
C) they generally contain terms specific to the particular buyer and seller.
D) the brokerage fees involved in buying and selling them are very high.
Q:
Today there is a clear consensus about the best way to design a central bank. What are the criteria for a successful central bank?
Q:
Forward transactions
A) provide little risk sharing.
B) are very liquid.
C) have information problems.
D) are widely used by sellers of commodities, but rarely used by buyers of commodities.
Q:
Why might the central bankers in emerging market economies focus more attention on a stable exchange rate than say the Federal Reserve or the European Central Bank?
Q:
Forward transactions originated in the market for
A) common stock.
B) corporate bonds.
C) government bonds.
D) agricultural and other commodities.
Q:
What are the potential problems that can result if central bankers set a target of a zero rate of inflation?
Q:
Forward transactions would be useful to
A) a government wanting to know the size of its future debt.
B) a household wanting to reduce its future tax liability.
C) a business wanting to know the cost of its funds on future loans.
D) a business wanting to expand its operations in overseas markets.
Q:
How do the specific goals of interest rate and exchange rate stability differ in importance from the other specific goals mentioned for central bankers?
Q:
Forward transactions
A) allow savers and borrowers to conduct a transaction now and settle in the future.
B) allow savers and borrowers to postpone a transaction from now to the future.
C) always involve increased risk compared with spot transactions.
D) may not be conducted on organized exchanges.
Q:
One of the specific goals for central bankers is financial system stability. Considering the U.S., for example, would this imply that the Federal Reserve would always take action to prevent any single bank from failing? Explain.
Q:
Spot transactions
A) involve immediate settlement.
B) may only take place in face-to-face trading.
C) take place on-the-spot, rather than on an organized exchange.
D) are relatively unimportant in financial markets.
Q:
We have a country, Fantasyland, where the current per capita real income is 20,000 units of output, and the current average growth rate is 2.0 percent. What will be the difference in the standard of living twenty years from now if Fantasyland grows at a rate of 3.5 percent and we assume population is constant?
Q:
Using forward transactions allows
A) holders of common stock to lock in future dividend payments.
B) the federal government to stabilize fluctuations in tax receipts.
C) corporations to reduce problems arising from future fluctuations in their dividend payments.
D) both buyers and sellers to reduce risks associated with price fluctuations.
Q:
If one of the specific goals that central bankers focus on is economic growth, should they aim for the highest short-term growth rate the economy can achieve? Explain.
Q:
Describe two useful purposes served by speculators in derivatives markets.
Q:
Explain why inflation degrades the information content of prices.
Q:
Which of the following is NOT a result of the ability of investors to hedge?
A) increased access to funds by firms and households
B) investors are more willing to invest
C) increased risk aversion
D) slower economic growth
Q:
What may be the reasons that explain the observation that during periods of hyperinflation economic growth actually slows or even contracts?
Q:
If insurance is available on an activity:
A) more of that activity will occur
B) less of that activity will occur
C) investors will be less likely to hedge
D) it increases the risk of engaging in that activity
Q:
Imagine you own a retail mail order business. You produce your catalog, where items and prices are listed, in January and you use the same catalog all year. The central bank in your country increases the money supply by an amount to cause inflation to average one percent each month. Ignoring any seasonality in sales (like the holiday season), what should happen to your sales as the year progresses and why?
Q:
How does hedging affect the flow of funds in the financial system?
A) It reduces it since it is a sign that investors do not like risk.
B) It reduces it because it increases risk by encouraging speculation.
C) It increases it because it reduces risk thus encouraging more people to make financial investments.
D) It increases it by encouraging more speculation.
Q:
Discuss how the goals of central bankers can be linked to risk and the ability or inability of individuals to eliminate this risk.
Q:
Speculators in derivatives markets
A) reduce the efficiency of these markets.
B) are acting contrary to U.S. securities laws.
C) accept risk transferred to them by hedgers.
D) reduce the liquidity of these markets.
Q:
What are the specific objectives of most central bankers?
Q:
Profits from speculation arise because of
A) the spread between the bid and ask prices on bonds.
B) the illiquidity of markets for derivative instruments.
C) the high information costs in markets for derivative instruments.
D) disagreements among traders about future prices of a commodity or financial instrument.
Q:
What do modern central bankers not do?
Q:
Speculators are primarily interested in
A) betting on anticipated changes in prices.
B) reducing their exposure to the risk of price fluctuations.
C) increasing market liquidity.
D) reducing the spread between bid and ask prices on bonds.
Q:
Explain why it is correct to say the Federal Reserve functions as the government's bank but it is incorrect to say it controls the government's budget.
Q:
Hedgers are primarily interested in
A) betting on anticipated changes in prices.
B) reducing their exposure to the risk of price fluctuations.
C) increasing market liquidity.
D) reducing the spread between bid and ask prices on bonds.
Q:
What are the three main functions a central bank performs in its role as a banker's bank?
Q:
Which best describes a credit default swap?
A) It is designed to reduce interest-rate risk.
B) The issuer receives payments from the buyer in return for agreeing to make payments to the buyer if the security goes into default.
C) Issuers are taking out insurance in case of default.
D) It represents a way for the issuer to establish its creditworthiness.
Q:
If we think back to Chapter 11 when we discussed moral hazard, discuss how a government ceding the right to control the amount of currency to a central bank is a way to treat a potential moral hazard problem.
Q:
All of the following are steps involved in basic currency swaps EXCEPT
A) counterparties exchange the net interest at the end of the swap.
B) the parties exchange principals in two currencies.
C) the parties exchange periodic interest payments over the life of the agreement.
D) the parties exchange the principal amount at the end of the agreement.
Q:
If governments operated like businesses, meaning their goal was to maximize profits, why would they likely never give up the power to print money to any other institution?
Q:
A key reason that firms and financial institutions might participate in an interest rate swap is
A) to transfer interest rate risk to parties that are more willing to bear it.
B) the low information costs of swaps compared with other derivative contracts.
C) the greater liquidity of swaps compared with other derivative contracts.
D) the favorable tax implications of swaps compared with other derivative contracts.
Q:
If we look back in history, why has the role of creating money fallen to central banks?
Q:
An advantage of a swap over futures and options is that
A) they can be written for long periods.
B) they are more liquid.
C) they carry less default risk.
D) there is no need to assess the creditworthiness of participants.
Q:
All of the following are true about central bank independence except that it: A. is usually given at the pleasure of governments.B. can be eliminated by governments in a time of crisis.C. is usually guaranteed by a country's constitution.D. can be subverted by the actions of fiscal policymakers.
Q:
An interest rate swap involving the exchange of floating-rate obligations for fixed-rate obligations is known as
A) swaption.
B) swap option.
C) forward swaps.
D) plain vanilla.
Q:
The autonomy of modern central banks means that governments cannot increase their spending by: A. raising taxes.B. issuing bonds.C. printing money.D. either issuing bonds or printing money; both represent debt.
Q:
A shortcoming of swaps that has led to the domination of the swaps market by large firms and financial institutions is
A) the lack of privacy.
B) need to assess creditworthiness.
C) desire for more flexibility.
D) limited size of the market.
Q:
If a government were to find that it cannot raise taxes any further, and that it cannot borrow any further from financial markets, the government: A. cannot increase its spending any further.B. can increase spending by having the central banks purchase its bonds.C. is in default.D. can decrease the amount of money in circulation.