Practice Quiz for Chapters 1

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1.

During most historical periods, the yield curve has been positively sloped.

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2.

A negatively sloped yield curve is associated with the anticipation that interest rates will decline.

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3.

A major function of the New York Stock Exchange is to raise money for firms.

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4.

In a short sale investors sell stock they own with the intention to buy it back within a short period of time.

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5.

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

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6.

The use of margin increases the potential percentage return on an investment in stock.

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7.

Securities markets are often inefficient, so investors can anticipate beating the market over a period of
years.

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8.

When cash is deposited in a checking account, the reserves of commercial banks are increased.

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9.

Investments in money market mutual funds are insured up to $100,000 by the federal government.

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10.

Commercial banks may buy and sell reserves in the federal funds market.

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

11.

M-1 includes coins, currency, and ____.

a.

demand deposits

b.

savings accounts

c.

certificates of deposit

d.

time deposits

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12.

The power to create money is given by the Constitution to

a.

state governments

b.

Congress

c.

the Federal Reserve

d.

commercial banks

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13.

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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14.

A firm that guarantees the proceeds from the sale of a new issue of securities is the
a.

brokerage firm

b.

syndicate

c.

underwriter

d.

insurance company

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15.

If the initial offer price for new securities is too high, the underwriters may
1.

purchase the securities with their own funds

2.

sell the securities at the offer price

3.

let the price fall

a.

1 and 2

b.

1 and 3

c.

2 and 3

d.

1, 2, and 3

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16.

An investment banker
1.

often underwrites new issues of securities

2.

may be a division within a brokerage firm

3.

facilitates the sale of new securities

a.

1 and 2

b.

1 and 3

c.

2 and 3

d.

all three

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17.

If the initial offer price is too low,

1.

supply will exceed demand

2.

demand will exceed supply

3.

the price of the security will rise

4.

the price of the security will decline

a.

1 and 3

b.

1 and 4

c.

2 and 3

d.

2 and 4

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18.

The minimum margin requirement is established by

a.

brokerage firms

b.

Congress

c.

the SEC

d.

the Federal Reserve

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19.

Efficient securities markets imply that

a.

investors cannot outperform the market

b.

investors cannot expect to outperform the market

c.

security prices are randomly determined

d.

there is little risk of loss over an extended investment horizon

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20.

A specialist
a.

stresses one type of investment

b.

only buys stock

c.

analyzes corporate securities

d.

makes a market in securities

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21.

Entering a sell order at $18.50 when the bid is 18-19

a.

is a market order

b.

illustrates a short sale

c.

requires a margin payment

d.

is a limit order

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22.

Which of the following is inconsistent with efficient securities markets?

a.

stock prices change rapidly in response to new information

b.

investors cannot expect to outperform the market consistently

c.

bond prices change rapidly in response to new information

d.

analysis of financial data will lead to superior investment performance

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23.

Which of the following is not a financial intermediary?

a.

New York Stock Exchange

b.

Washington Savings and Loan

c.

First National City Bank

d.

Merchants Savings Bank

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24.

M-1 includes coins, currency, and ____.

a.

demand deposits

b.

savings accounts

c.

certificates of deposit

d.

time deposits

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25.

The assets of a typical commercial bank include

a.

commercial loans

b.

demand deposits

c.

common stock

d.

equity

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26.

M-2 includes
1.

demand deposits

2.

savings accounts

3.

negotiable certificates of deposit

a.

1 and 2

b.

2 and 3

c.

1 and 3

d.

all three

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27.

An investment bank 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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28.

When commercial banks grant loans,

a.

the money supply is reduced

b.

the money supply is increased

c.

total reserves increase

d.

total reserves decrease

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29.

During a period of recession, a federal government surplus should retire debt owed
a.

the Federal Reserve

b.

commercial banks

c.

the general public

d.

the Federal Deposit Insurance Corporation

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30.

If the federal government runs a deficit and borrows from commercial banks,
1.

total deposits are not affected

2.

total deposits are increased

3.

excess reserves are reduced

4.

excess reserves are decreased

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.

Anticipation of inflation discourages

1.

saving

2.

borrowing

3.

lending

4.

purchasing goods

a.

1 and 2

b.

1 and 3

c.

2 and 3

d.

3 and 4

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33.

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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34.

Anticipation of inflation encourages

a.

lending

b.

borrowing

c.

retiring debt

d.

saving

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35.

Which of the following causes a currency inflow?

1.

foreign travel and foreign investments

2.

domestic travel by foreigners

3.

dividend payments from foreign corporations

4.

dividend payments to foreign investors

a.

1 and 3

b.

1 and 4

c.

2 and 3

d.

2 and 4

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Problem

36.

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

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

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government spending abroad

22

RESPONSE:
ANSWER:
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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Supplementary

37.

If the reserve requirement for demand deposits is 10 percent, what is the maximum change in the money
supply that the banking system can create if
a.

the Federal Reserve puts $1,000,000 of new reserves in the banking system

b.

$1,000,000 in cash is deposited in checking accounts

c.

General Motors borrows $1,000,000 from an insurance company?

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ANSWER:
a.

new excess reserves: $1,000,000

maximum possible expansion in the money supply:
$1,000,000/.1 = $10,000,000

b.

new excess reserves: $1,000,000 - 100,000 = $900,000

maximum possible expansion in the money supply:
$900,000/.1 = $9,000,000

c.

new excess reserves: $0

maximum possible expansion in the money supply:
$0/.1 = $0
(Borrowing from the non-bank public does not affect the banking system's
ability to create new money.)

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