Q&A Hero

Q: Explain the law of one price and the theory of purchasing power parity. Why doesn't purchasing power parity explain all exchange rate movements in the short run? What factors determine long-run exchange rates?

Q: If the Brazilian demand for American exports rises at the same time that U.S. productivity rises relative to Brazilian productivity, then, in the long run, ________, everything else held constant. A. the Brazilian real will appreciate relative to the U.S. dollar B. the Brazilian real will depreciate relative to the U.S. dollar C. the Brazilian real will either appreciate, depreciate, or remain constant relative to the U.S. dollar D. there is no effect on the Brazilian real relative to the U.S. dollar

Q: If the inflation rate in the United States is higher than that in Mexico and productivity is growing at a slower rate in the United States than in Mexico, then, in the long run, ________, everything else held constant. A. the Mexican peso will appreciate relative to the U.S. dollar B. the Mexican peso will depreciate relative to the U.S. dollar C. the Mexican peso will either appreciate, depreciate, or remain constant relative to the U.S. dollar D. there will be no effect on the Mexican peso relative to the U.S. dollar

Q: If the U.S. Congress imposes a quota on imports of Japanese cars due to claims of "unfair" trade practices, and Japanese demand for American exports increases at the same time, then, in the long run ________, everything else held constant. A. the Japanese yen will appreciate relative to the U.S. dollar B. the Japanese yen will depreciate relative to the U.S. dollar C. the Japanese yen will either appreciate, depreciate or remain constant against the U.S. dollar D. there will be no effect on the Japanese yen relative to the U.S. dollar

Q: If the 2005 inflation rate in Canada is 4 percent, and the inflation rate in Mexico is 2 percent, then the theory of purchasing power parity predicts that, during 2005, the value of the Canadian dollar in terms of Mexican pesos will A. rise by 6 percent. B. rise by 2 percent. C. fall by 6 percent. D. fall by 2 percent.

Q: In the long run, a rise in a country's price level (relative to the foreign price level) causes its currency to ________, while a fall in the country's relative price level causes its currency to ________. A. appreciate; appreciate B. appreciate; depreciate C. depreciate; appreciate D. depreciate; depreciate

Q: The theory of PPP suggests that if one country's price level rises relative to another's, its currency should A. depreciate in the long run. B. appreciate in the long run. C. depreciate in the short run. D. appreciate in the short run.

Q: According to PPP, the real exchange rate between two countries will always equal A. 0.0. B. 0.5. C. 1.0. D. 1.5.

Q: If the real exchange rate between the United States and Japan is ________, then it is cheaper to buy goods in Japan than in the United States. A. greater than 1.0 B. greater than 0.5 C. less than 0.5 D. less than 1.0

Q: The theory of purchasing power parity states that exchange rates between any two currencies will adjust to reflect changes in A. the trade balances of the two countries. B. the current account balances of the two countries. C. fiscal policies of the two countries. D. the price levels of the two countries.

Q: The theory of purchasing power parity cannot fully explain exchange rate movements in the short run because A. all goods are identical even if produced in different countries. B. monetary policy differs across countries. C. some goods are not traded between countries. D. fiscal policy differs across countries.

Q: The theory of PPP suggests that if one country's price level falls relative to another's, its currency should A. depreciate in the long run. B. appreciate in the long run. C. appreciate in the short run. D. depreciate in the short run.

Q: The theory of PPP suggests that if one country's price level falls relative to another's, its currency should A. depreciate. B. appreciate. C. float. D. do none of the above.

Q: The theory of PPP suggests that if one country's price level rises relative to another's, its currency should A. depreciate. B. appreciate. C. float. D. do none of the above.

Q: The ________ states that exchange rates between any two currencies will adjust to reflect changes in the price levels of the two countries. A. theory of purchasing power parity B. law of one price C. theory of money neutrality D. quantity theory of money

Q: If float is predicted to increase because of bad weather, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves.A) defensive; injectB) defensive; drainC) dynamic; injectD) dynamic; drain

Q: The Federal Reserve ________ pay interest on reserves held on deposit. The European System of Central Banks ________ pay interest on reserves held on deposit. A. does; does B. does; does not C. does not; does D. does not; does not

Q: The equivalent to the Federal Reserve's discount rate in the European System of Central Banks is the A. federal funds rate. B. marginal lending rate. C. deposit facility rate. D. lombard rate.

Q: When the European System of Central Banks uses long-term refinancing operations, it is similar to the Federal Reserve using A. dynamic open market operations. B. defensive open market operations. C. discount policy. D. reserve requirements.

Q: When the European System of Central Banks uses main refinancing operations, it is similar to the Federal Reserve using A. dynamic open market operations. B. defensive open market operations. C. discount policy. D. reserve requirements.

Q: The European System of Central Banks signals the stance of its monetary policy by setting a target for the A. federal funds rate. B. overnight cash rate. C. lombard rate. D. reserve rate.

Q: Which of the following statements is an example of the Fed's conditional commitment policy? A. "In these circumstances, the Committee believes that policy accommodation can be maintained for a considerable period." B. "The Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time." C. "Policy accommodation can be removed at a pace that is likely to be measured." D. "The exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, and inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal."

Q: To lower long-term interest rates, in 2010 the Fed started its new open market operation program to purchase A. mortgage-backed securities. B. commercial papers. C. long-term Treasuries. D. Treasury bills and Treasury notes.

Q: To lower interest rates on residential mortgages to stimulate the housing market, the Fed extended its open market operations to purchase A. mortgage-backed securities. B. commercial papers. C. long-term Treasuries. D. Treasury bills and Treasury notes.

Q: The Fed's open market operations normally involve only the purchase of government securities, particularly those that are short-term. However, during the crisis, the Fed started new programs to purchase A. mortgage-backed securities and long-term Treasuries. B. mortgage-backed securities and Treasury bills. C. commercial papers and short-term Treasuries. D. Treasury bills and Treasury notes.

Q: The facility that was created in December of 2007 that banks can use to borrow from the Fed that has less of a stigma for banks compared to borrowing from the discount window is the A. Term Securities Lending Facility. B. Term Auction Facility. C. Primary Dealer Credit Facility. D. Commercial Paper Funding Facility.

Q: The interest rate for primary credit is usually set ________ basis points ________ the federal funds rate. In March 2008, this gap was changed to ________ basis points. A. 50; below; 100 B. 100; above; 25 C. 100; below; 50 D. 50; above; 25

Q: The purpose of the commitment by the Fed to keep the federal funds rate at zero for a long period of time is to A. lower the long term interest rates. B. lower the short term interest rates. C. increase the long term interest rates. D. increase the short term interest rates.

Q: Which of the following monetary policy tools is more effective when the economy faces the interest rate zero-lower-bound problem? A. open market operation B. discount policy C. required reserve ratio D. the Fed's liquidity provision

Q: From before the financial crisis began in September of 2007 to when the crisis was over at the end of 2009, the huge expansion in the Fed's balance sheet and the monetary base did not result in a large increase in monetary supply because A. most of it just flowed into holdings of excess reserve. B. the Fed also increased the required reserve ratio. C. the Fed also conducted open market sales. D. the discount loan decreased.

Q: From before the financial crisis began in September of 2007 to when the crisis was over at the end of 2009, amount of Federal Reserve assets rose, leading to A. a huge increase in the monetary base. B. a huge expansion of the money supply. C. an economic expansion. D. a high inflation.

Q: Explain dynamic and defensive open market operations. What is the purpose of each type? Describe two situations when defensive open market operations are used. How are defensive open market operations typically conducted?

Q: When the Fed wants to raise interest rates after banks have accumulated large amounts of excess reserves, it would A. increase the interest rate paid on excess reserves. B. increase discount rate. C. increase the required reserve ratio. D. conduct massive open market purchase.

Q: The policy tool of changing reserve requirements is A. the most widely used. B. the preferred tool from the bank's perspective. C. no longer used. D. still used, even with its disadvantages.

Q: Funds held in ________ are subject to reserve requirements. A. all checkable deposits B. all checkable and time deposits C. all checkable, time, and money market fund deposits D. all time deposits

Q: Since 1980, ________ are subject to reserve requirements. A. only commercial banks B. only the member institutions of the Federal Reserve C. only nationally chartered depository institutions D. all depository institutions

Q: The Federal Reserve has had the authority to vary reserve requirements since the A. 1920s. B. 1930s. C. 1940s. D. 1950s.

Q: A decrease in ________ increases the money supply since it causes the ________ to rise. A. reserve requirements; monetary base B. reserve requirements; money multiplier C. margin requirements; monetary base D. margin requirements; money multiplier

Q: An increase in ________ reduces the money supply since it causes the ________ to fall. A. reserve requirements; monetary base B. reserve requirements; money multiplier C. margin requirements; monetary base D. margin requirements; money multiplier

Q: The most important advantage of discount policy is that the Fed can use it to A. precisely control the monetary base. B. perform its role as lender of last resort. C. control the money supply. D. punish banks that have deficient reserves.

Q: The Fed's lender-of-last-resort function A. has proven to be ineffective. B. cannot prevent runs by large depositors. C. is no longer necessary due to FDIC insurance. D. creates a moral hazard problem.

Q: A financial panic was averted in October 1987 following "Black Monday" when the Fed announced that A. it was lowering the discount rate. B. it would provide discount loans to any bank that would make loans to the security industry. C. it stood ready to purchase common stocks to prevent a further slide in stock prices. D. it was raising the discount rate.

Q: Much of the credit for prevention of a financial market meltdown after "Black Monday" (October 19, 1987) must be given to the Federal Reserve System and then-chairman A. Paul Volcker. B. Alan Blinder. C. Arthur Burns. D. Alan Greenspan.

Q: At its inception, the Federal Reserve was intended to be A. the Treasury's banker. B. the issuer of government debt. C. a lender-of-last-resort. D. a regulator of bank holding companies.

Q: The Fed is considering eliminating A. primary credit lending. B. secondary credit lending. C. seasonal credit lending. D. its lender of last resort function.

Q: The interest rate on seasonal credit equals A. the federal funds rate. B. the primary credit rate. C. the secondary credit rate. D. an average of the federal funds rate and rates on certificates of deposits.

Q: The interest rate on secondary credit is set ________ basis points ________ the primary credit rate. A. 100; above B. 100; below C. 50; above D. 50; below

Q: The discount rate refers to the interest rate on A. primary credit. B. secondary credit. C. seasonal credit. D. federal funds.

Q: Assume that no banks hold excess reserves, and the public holds no currency. If a bank sells a $100 security to the Fed, explain what happens to this bank and two additional steps in the deposit expansion process, assuming a 10% reserve requirement. How much do deposits and loans increase for the banking system when the process is completed?

Q: Foreign banks generally pay higher deposit rates than U.S. banks.

Q: Decisions by ________ about their holdings of currency and by ________ about their holdings of excess reserves affect the money supply. A. borrowers; depositors B. banks; depositors C. depositors; borrowers D. depositors; banks

Q: Foreign banks generally operate with higher capital ratios than U.S. banks.

Q: Decisions by depositors to increase their holdings of ________, or of banks to hold excess reserves will result in a ________ expansion of deposits than the simple model predicts. A. deposits; smaller B. deposits; larger C. currency; smaller D. currency; larger

Q: A forward market exchange in foreign currencies is an agreement to exchange: a. currencies in the future at an unspecified time at an exchange rate determined at the time the contract is agreed to. b. currencies in the future at a specified time at an unknown exchange rate. c. currencies in the future at an unspecified time at an unknown exchange rate. d. a product for a foreign currency in the future at a specified time. e. currencies in the future at a specified time at an exchange rate determined at the time the contract is signed.

Q: Decisions by depositors to increase their holdings of ________, or of banks to hold ________ will result in a smaller expansion of deposits than the simple model predicts. A. deposits; required reserves B. deposits; excess reserves C. currency; required reserves A) currency; excess reserves

Q: Covered interest rate arbitrage is possible when: a. both currencies are appreciating. b. the actual inflation rates are identical in both countries. c. the difference in the interest rates in two countries exactly equals the spot-to-forward exchange rate differential. d. the difference in interest rates in two countries is out of line with the spot-to-forward exchange rate differential. e. none of the above

Q: A bank has excess reserves of $1,000 and demand deposit liabilities of $80,000 when the reserve requirement is 25 percent. If the reserve requirement is lowered to 20 percent, the bank's excess reserves will be A. $1,000. B. $5,000. C. $8,000. D. $9,000.

Q: If the spot rate is 1.67CAN$/US$ and the 1-month forward rate is 1.70CAN$/US$: a. the Canadian dollar is selling at a premium. b. the Canadian dollar is selling at a discount. c. the U.S. dollar is selling at a discount. d. the U.S. dollar is selling at par. e. none of the above

Q: A bank has excess reserves of $1,000 and demand deposit liabilities of $80,000 when the reserve requirement is 20 percent. If the reserve requirement is lowered to 10 percent, the bank's excess reserves will be A. $1,000. B. $8,000. C. $9,000. D. $17,000.

Q: A London based firm has a subsidiary located in New York. The subsidiary has $1,000 in assets, $750 in liabilities and $250 in equity. The current spot rate is $1.60/£.If the spot rate changes to $1.50/£, what will be the firm's gain or loss?a. $10.42 gainb. £10.42 gainc. $10.42 lossd. £10.42 losse. cannot be determined

Q: A bank has no excess reserves and demand deposit liabilities of $100,000 when the required reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, the bank's excess reserves will now be A. -$5,000. B. -$1,000. C. $1,000. D. $5,000.

Q: A London based firm has a subsidiary located in New York. The subsidiary has $1,000 in assets, $750 in liabilities and $250 in equity. The current spot rate is $1.60/£.What is the U.S. firm's net exposure?a. $250b. £250c. £1,000d. $1,200e. $1,600

Q: A bank has excess reserves of $10,000 and demand deposit liabilities of $100,000 when the required reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, the bank's excess reserves will be A. -$5,000. B. -$1,000. C. $1,000. D. $5,000.

Q: A bank's net balance sheet exposure to changes in the value of Euros is measured as:a. the amount of assets denominated in U.S. dollars minus the amount of liabilities denominated in Euros.b. the amount of assets denominated in Euros minus the amount of liabilities denominated in U.S. dollars.c. the amount of liabilities denominated in Euros minus the amount of liabilities denominated in U.S. dollars.d. the amount of assets denominated in Euros minus the amount of assets denominated in U.S. dollars.e. the amount of assets denominated in Euros minus the amount of liabilities denominated in Euros.

Q: A bank has excess reserves of $4,000 and demand deposit liabilities of $100,000 when the required reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, the bank's excess reserves will be A. -$5,000. B. -$1,000. C. $1,000. D. $5,000.

Q: Non-performing international loans do not completely reflect potential losses because: a. foreign governments have never defaulted on their debts. b. banks often loan borrowers funds to make payments on existing loans. c. U.S. banks can easily recover the funds in foreign courts. d. the U.S. government has strongly discouraged U.S. banks from making international loans. e. all of the above

Q: A bank has excess reserves of $6,000 and demand deposit liabilities of $100,000 when the required reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, the bank's excess reserves will be A. -$5,000. B. -$1,000. C. $1,000. D. $5,000.

Q: The risk that a foreign government will suspend debt service payments is known as: a. LC risk. b. foreign exchange risk. c. euro risk. d. sovereign risk. e. country risk.

Q: If a bank has excess reserves of $7,000 and demand deposit liabilities of $100,000, and if the reserve requirement is 10 percent, then the bank has actual reserves of A. $14,000. B. $17,000. C. $22,000. D. $27,000.

Q: Put the following steps of the creation of a banker's acceptance in order. I. Shipping documents delivered II. Letter of credit is issued III. Bankers' acceptance presented at maturity IV. Goods are shipped a. I, IV, II, III b. II, IV, III, I c. II, IV, I, III d. I, IV, III, II e. I, II, III, IV

Q: Suppose a person cashes his payroll check and holds all the funds in the form of currency. Everything else held constant, total reserves in the banking system ________ and the monetary base ________. A. remain unchanged; increases B. decrease; increases C. decrease; remains unchanged D. decrease; decreases

Q: All of the following are basic sources of cash flows except: a. liquidating assets. b. cash flows from operations. c. issuing new equity. d. liquidating liabilities. e. issuing new debt.

Q: An increase in ________ leads to an equal ________ in the monetary base in the short run. A. float; decrease B. float; increase C. discount loans; decrease D. Treasury deposits at the Fed; increase

Q: Term loans are generally repaid with funds from: a. investing cash flows. b. issuing new debt. c. reductions in inventory and receivables. d. cash flows from operations. e. redeeming marketable securities.

Q: The monetary base declines when A. the Fed extends discount loans. B. Treasury deposits at the Fed decrease. C. float increases. D. the Fed sells securities.

Q: Short-term working capital loans are generally repaid with funds from: a. investing cash flows. b. issuing new debt. c. reductions in inventory and receivables. d. issuing new equity e. redeeming marketable securities.

Q: A decrease in ________ leads to an equal ________ in the monetary base in the short run. A. float; increase B. float; decrease C. Treasury deposits at the Fed; decrease D. discount loans; increase

Q: Which of the following is not one of the essential issues in evaluating commercial loan requests? a. The structure of the borrower's board of directors. b. The character of the borrower. c. The use of the loan proceeds. d. The source of repayment for the loan. e. The amount the customer needs to borrow.

Q: There are two ways in which the Fed can provide additional reserves to the banking system: it can ________ government bonds or it can ________ discount loans to commercial banks. A. sell; extend B. sell; call in C. purchase; extend D. purchase; call in

Q: All of the following would be generally be considered acceptable commercial loan purposes except: a. seasonal cash needs. b. paying off other bank debts. c. purchasing new equipment. d. acquiring another firm. e. expanding plant capacity.