FI 412 Mills Exam 1 Questions with
100% Correct Answers
FOMC Correct Answer: A component of the Fed Reserve that is responsible for
making monetary policy decisions
How many member are on the FOMC Correct Answer: 12 members, 7 members
from the Fed's board of governors, 5 from the Fed Reverse district bank
presidents
What are the FOMC goals? Correct Answer: Maximum employment and stable
prices (also called dual mandate)
Fed's Influence on Interest Rates Correct Answer: The FOMC sets a range for the
federal funds rate. Current rate is 4.25-4.5%
What economic circumstances influences the FOMC to lower the rate? Correct
Answer: If unemployment is high, the FOMC will lower the fed funds rate. This is
also called stimulative, expansionary, loose-money policy stance.
What economic conditions cause the FOMC to raise rates? Correct Answer: If
inflation is above the 2% target rate, they will set the fed funds rate to a higher
level. This is also called a restrictive, contractionary, tight-money policy.
Stagflation Correct Answer: Happens when inflation and unemployment are too
high.
Dot-com Bubble Correct Answer: Fed responded by cutting the FFR
Global Financial Crisis Correct Answer: FOMC increases to the FFR as US
economy strengthens, had concerns about inflation. 08 happened and then
kept the FFR at 0-.25 to increase economic activity
, COVID-19 Correct Answer: FOMC first cuts FFR twice and implemented
quantitative easing and then after increased the FFR 11 times
quantative easing Correct Answer: Meant to increase demand for debt
securities, driving their prices up and yields down, reducing long term interest
rates to further stimulate the economy.
Current state of monetary policy Correct Answer: FFR is at 4.24-4.5%. Moderately
restrictive policy. Reasons are low unemployment rate, elevated inflation,
elevated uncertainty about economic outlook.
Future FOMC expectations Correct Answer: Long run FFR is 3%. Short term is to
cut FFR by .25%
Tangible vs. Intangible Assets Correct Answer: Tangible assets are physical;
Intangible assets do not exist in physical form
Debt vs. Equity Correct Answer: Debt instruments are assets that pay a fixed
dollar amount. Equity owners have residual claim on cash flows
Hybrid Assets Correct Answer: Preferred stock and convertible bonds
BA Spread Correct Answer: The difference between the asking price and bid
price.
Factors of the BA Spread Correct Answer: Greater variability in the prices lead
more risk for MM to hold asset in inventory which leads to a HIGHER BA spread. A
Thicker market leads to shorter expected holding periods for MM which lowers
the BA Spread.
Nominal expected returns Correct Answer: are calculated without first adjusting
for inflation.
100% Correct Answers
FOMC Correct Answer: A component of the Fed Reserve that is responsible for
making monetary policy decisions
How many member are on the FOMC Correct Answer: 12 members, 7 members
from the Fed's board of governors, 5 from the Fed Reverse district bank
presidents
What are the FOMC goals? Correct Answer: Maximum employment and stable
prices (also called dual mandate)
Fed's Influence on Interest Rates Correct Answer: The FOMC sets a range for the
federal funds rate. Current rate is 4.25-4.5%
What economic circumstances influences the FOMC to lower the rate? Correct
Answer: If unemployment is high, the FOMC will lower the fed funds rate. This is
also called stimulative, expansionary, loose-money policy stance.
What economic conditions cause the FOMC to raise rates? Correct Answer: If
inflation is above the 2% target rate, they will set the fed funds rate to a higher
level. This is also called a restrictive, contractionary, tight-money policy.
Stagflation Correct Answer: Happens when inflation and unemployment are too
high.
Dot-com Bubble Correct Answer: Fed responded by cutting the FFR
Global Financial Crisis Correct Answer: FOMC increases to the FFR as US
economy strengthens, had concerns about inflation. 08 happened and then
kept the FFR at 0-.25 to increase economic activity
, COVID-19 Correct Answer: FOMC first cuts FFR twice and implemented
quantitative easing and then after increased the FFR 11 times
quantative easing Correct Answer: Meant to increase demand for debt
securities, driving their prices up and yields down, reducing long term interest
rates to further stimulate the economy.
Current state of monetary policy Correct Answer: FFR is at 4.24-4.5%. Moderately
restrictive policy. Reasons are low unemployment rate, elevated inflation,
elevated uncertainty about economic outlook.
Future FOMC expectations Correct Answer: Long run FFR is 3%. Short term is to
cut FFR by .25%
Tangible vs. Intangible Assets Correct Answer: Tangible assets are physical;
Intangible assets do not exist in physical form
Debt vs. Equity Correct Answer: Debt instruments are assets that pay a fixed
dollar amount. Equity owners have residual claim on cash flows
Hybrid Assets Correct Answer: Preferred stock and convertible bonds
BA Spread Correct Answer: The difference between the asking price and bid
price.
Factors of the BA Spread Correct Answer: Greater variability in the prices lead
more risk for MM to hold asset in inventory which leads to a HIGHER BA spread. A
Thicker market leads to shorter expected holding periods for MM which lowers
the BA Spread.
Nominal expected returns Correct Answer: are calculated without first adjusting
for inflation.
