ECO 4223 Final Exam Questions and Correct
Answers
Question 1
If reserves in the banking system increase by $100, then checkable deposits will
increase by $400 in the simple model of deposit creation when the required reserve
ratio is:
A. 0.20
B. 0.25
Correct Answer
B
Question 2
A discount bond selling for $18,000 with a face value of $20,000 in one year has a
yield maturity of:
A. 10%
B. 11%
Correct Answer
B
Question 3
When the Fed increases the interest rate, it pays banks on their reserves and:
A. the reserve-deposit ratio increases
B. the money supply increases
Correct Answer
A
Page 1 of 78
,Question 4
Which of the following are true of fixed payment loans?:
A. installment loans and mortgages are frequently of the fixed payment types
B. the borrower repays both the principal and interest at the maturity date
Correct Answer
A
Question 5
To prevent banks from using excess reserves to make loans that would increase the
money supply, the Fed could conduct open-market _______ and ______ the interest rate
paid on bank reserves:
A. Sales; raise
B. purchases; lower
Correct Answer
A
Question 6
The theory of portfolio choice suggests that the most important factor affecting the
demand for domestic and foreign assets is the ______ on these relative to one another:
A. risk
B. expected return
Correct Answer
B
Question 7
When the _____ interest rate is higher, there are fewer incentives to ______ and greater
incentive to ______
A. real; lend, borrow
B. nominal; borrow, lend
Correct Answer
A
Page 2 of 78
,Question 8
In the bond market, the bond suppliers are the _____ and the bond demanders are the
_____
A. lenders, borrowers
B. borrowers, lenders
Correct Answer
B
Question 9
If the nominal rate of interest is 5%, and the expected inflation rate is 3%, the real rate
of interest is:
A. 2%
B. 1%
Correct Answer
A
Question 10
Using the Gordon Growth formula, if the most recent dividend payment is $2.00, Ke is
12%, and g is 10%, then the current stock price is:
A. $100
B. $110
Correct Answer
B
Question 11
A _____ pays the owner a fixed coupon payment every year until the maturity date,
when the _______ value is repaid
A. coupon bond, face
B. coupon bond, discount
Correct Answer
A
Page 3 of 78
, Question 12
If the Fed increases the rate paid on reserves, banks will tend to hold ___ excess
reserves, which will _____ the money multiplier
A. more; increase
B. more; decrease
Correct Answer
B
Question 13
Economist consider the ______ to be the most accurate measure of interest rate.
A. yield to maturity
B. real interest rate
Correct Answer
A
Question 14
The value of any investment is found by computing the:
A. present value of all future sales
B. present value of all future cash flows
Correct Answer
B
Question 15
The present vale of an expected future payment _______ as the interest rate decreases
A. rise
B. falls
Correct Answer
A
Page 4 of 78
Answers
Question 1
If reserves in the banking system increase by $100, then checkable deposits will
increase by $400 in the simple model of deposit creation when the required reserve
ratio is:
A. 0.20
B. 0.25
Correct Answer
B
Question 2
A discount bond selling for $18,000 with a face value of $20,000 in one year has a
yield maturity of:
A. 10%
B. 11%
Correct Answer
B
Question 3
When the Fed increases the interest rate, it pays banks on their reserves and:
A. the reserve-deposit ratio increases
B. the money supply increases
Correct Answer
A
Page 1 of 78
,Question 4
Which of the following are true of fixed payment loans?:
A. installment loans and mortgages are frequently of the fixed payment types
B. the borrower repays both the principal and interest at the maturity date
Correct Answer
A
Question 5
To prevent banks from using excess reserves to make loans that would increase the
money supply, the Fed could conduct open-market _______ and ______ the interest rate
paid on bank reserves:
A. Sales; raise
B. purchases; lower
Correct Answer
A
Question 6
The theory of portfolio choice suggests that the most important factor affecting the
demand for domestic and foreign assets is the ______ on these relative to one another:
A. risk
B. expected return
Correct Answer
B
Question 7
When the _____ interest rate is higher, there are fewer incentives to ______ and greater
incentive to ______
A. real; lend, borrow
B. nominal; borrow, lend
Correct Answer
A
Page 2 of 78
,Question 8
In the bond market, the bond suppliers are the _____ and the bond demanders are the
_____
A. lenders, borrowers
B. borrowers, lenders
Correct Answer
B
Question 9
If the nominal rate of interest is 5%, and the expected inflation rate is 3%, the real rate
of interest is:
A. 2%
B. 1%
Correct Answer
A
Question 10
Using the Gordon Growth formula, if the most recent dividend payment is $2.00, Ke is
12%, and g is 10%, then the current stock price is:
A. $100
B. $110
Correct Answer
B
Question 11
A _____ pays the owner a fixed coupon payment every year until the maturity date,
when the _______ value is repaid
A. coupon bond, face
B. coupon bond, discount
Correct Answer
A
Page 3 of 78
, Question 12
If the Fed increases the rate paid on reserves, banks will tend to hold ___ excess
reserves, which will _____ the money multiplier
A. more; increase
B. more; decrease
Correct Answer
B
Question 13
Economist consider the ______ to be the most accurate measure of interest rate.
A. yield to maturity
B. real interest rate
Correct Answer
A
Question 14
The value of any investment is found by computing the:
A. present value of all future sales
B. present value of all future cash flows
Correct Answer
B
Question 15
The present vale of an expected future payment _______ as the interest rate decreases
A. rise
B. falls
Correct Answer
A
Page 4 of 78
