Review - Chapters 1 - 6

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1.

Since M-2 excludes time deposits, M-2 is a less comprehensive measure of the money supply than M-1.

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2.

When individuals withdraw cash from checking accounts, the money supply is unaffected.

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3.

What serves for money in France may not be money in another country.

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4.

Since investors prefer short-term securities to longer-term securities, the yield curve is always positively
sloped.

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5.

The underwriting of an issue of securities guarantees the firm issuing the securities a specified amount of
money.

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6.

If an issue of securities is overpriced, the underwriters may let the price fall to sell the securities.

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7.

The larger the margin requirement, the greater the proportion of a stock purchase the investor may borrow.

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8.

When funds are deposited in a savings account, the excess reserves of banks are unaffected.

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9.

A financial intermediary creates claims on itself, when it accepts depositors' funds.

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10.

If a firm issues securities that are sold to a commercial bank, individuals' savings are directly transferred to
the firm.

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11.

Only large commercial banks are subject to the regulation of the Federal Reserve.

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12.

If the Treasury borrows from the Federal Reserve, the lending capacity of banks is reduced.

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13.

If the Treasury sells debt that is purchased by corporations and uses the funds to purchase military
equipment, the excess reserves of the banking system are not affected.

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14.

The President of the United States appoints the Federal Open Market Committee.

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15.

Under a system of fluctuating exchange rates, a currency will depreciate if supply exceeds the demand for
the currency.

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Multiple Choice
Identify the choice that best completes the statement or answers the question.

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16.

The term structure of interest rates relates

a.

risk and yields

b.

yields and bond ratings

c.

term and yields

d.

stock and bond yields

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17.

The term structure of interest rates indicates the

a.

relationship between risk and yields

b.

relationship between the time and yields

c.

the difference between borrowing and lending

d.

the difference between the yield (interest rate) on government and corporate debt

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18.

M-2 includes
1.

demand deposits

2.

savings accounts

3.

small certificates of deposit

a.

1 and 2

b.

2 and 3

c.

1 and 3

d.

all three

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19.

Which of the following is not part of the underwriting process?

a.

the prospectus

b.

the Federal Reserve

c.

the Securities and Exchange Commission

d.

the syndicate

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20.

An investment banker is not a financial intermediary because

a.

it does not transfer money from investors to firms

b.

it does not create claims on itself

c.

it does facilitate the transfer of funds

d.

it creates claims on itself

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21.

The regulation of security markets

a.

protects investors from poor investments

b.

is enforced by the Federal Reserve

c.

is enforced by the SEC

d.

applies only to government securities

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22.

The individual (or firm) who makes a market

1.

guarantees to buy at specified (bid) prices

2.

guarantees to buy at specified (ask) prices

3.

guarantees to sell at specified (bid) prices

4.

guarantees to sell at specified (ask) prices

a.

1 and 3

b.

1 and 4

c.

2 and 3

d.

2 and 4

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23.

The New York Stock Exchange

a.

is a financial intermediary

b.

is a secondary market

c.

transfers funds to businesses

d.

forbids buying stock on margin

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24.

Over-the-counter stock quotes are obtained through

a.

Nasdaq

b.

SEC

c.

SIPC

d.

FDIC

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25.

The efficient market hypothesis

a.

suggests that the market for securities is becoming less efficient

b.

implies that investor can consistently outperform the market

c.

is built upon competition and the rapid dissemination of information

d.

suggests that security prices change slowly over time

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26.

The primary assets of life insurance companies include

a.

life insurance

b.

corporate securities

c.

municipal securities

d.

insurance policies

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27.

Withdrawing cash from a checking account does not decrease

a.

the money supply

b.

demand deposits

c.

total reserves

d.

excess reserves

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28.

The structure of the Federal Reserve includes

1.

all commercial banks

2.

the twelve district banks

3.

the Board of Governors

a.

1 and 2

b.

1 and 3

c.

2 and 3

d.

1, 2, and 3

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29.

The members of the Board of Governors are

a.

elected by the member banks

b.

appointed by the Senate

c.

appointed by the President of the United States

d.

elected by the Federal Open Market Committee

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30.

The Federal Reserve may contract the money supply by

1.

selling securities

2.

buying securities

3.

raising reserve requirements

4.

lowering reserve requirements

a.

1 and 3

b.

1 and 4

c.

2 and 3

d.

2 and 4

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31.

If the federal government runs a deficit and finances the deficit by borrowing from the Federal Reserve,
1.

the reserves of commercial banks are reduced

2.

the reserves of commercial banks are increased

3.

the required reserves of commercial banks are increased

4.

the required reserves of commercial banks are reduced

a.

1 and 3

b.

1 and 4

c.

2 and 3

d.

2 and 4

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32.

If commercial banks grant loans,

a.

the money supply is increased

b.

total reserves are increased

c.

excess reserves are increased

d.

the money supply is reduced

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33.

Commercial banks may borrow reserves from each other in the

a.

reserves market

b.

stock market

c.

bank market

d.

federal funds market

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34.

The tools of monetary policy include

a.

open market operations

b.

the purchase of corporate stock

c.

the federal government deficit

d.

taxation

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35.

During a period of recession the Federal Reserve

1.

increases the federal funds rate

2.

buys government securities

3.

sells government securities

4.

lowers the federal funds are

a.

1 and 2

b.

1 and 3

c.

2 and 4

d.

3 and 4

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Problem

36.

If the price of the European euro is $1.26, how many euros are necessary to purchase $1.00?

RESPONSE:
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A dollar is worth 0.79365 euros ($1/1.26).

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37.

What is a nation's cash inflow (outflow) on its current account and its capital account given the following
information? Was there a net currency inflow or outflow?
imports

$145

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exports

211

direct investments abroad

72

foreign investments in the country

143

foreign purchases of domestic securities

86

purchases of foreign securities

29

net income from foreign investments

37

government spending abroad

22

RESPONSE:
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Debit

Credit

Current account
exports

$211

imports

$145

government spending abroad

22

net income from investment abroad

37

Balance on current account

$81

Capital account
direct investment abroad

72

foreign investment in U.S.

purchases of foreign securities
foreign purchases of U.S. securities
Balance on capital account

143
29
86
$128

In this problem there is a net credit balance on both the current and capital accounts,
which means there is a currency inflow. This inflow may be used to increase foreign
reserves or repay any loans from the IMF.

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