ECON7100-M50 Spring 2015

Self-Study15

1. Quantitative easing aims to
   1. directly stimulate government spending.
   2. increase private spending by flooding the market with money.
   3. increase the yield of long-term bonds.
   4. increase the money supply by limiting the purchase of financial assets to Treasury bonds.
2. Hot money inflow is bad for the destination economy because it would
   1. lead to rapid appreciation of its currency.
   2. damage its import industries.
   3. boost its export industries.
   4. lead to rapid depreciation of its currency.
3. The Fed normally buys mostly _________ from the ______ when it needs to _______ money supply because they are safe assets backed by government power to _______.
   1. Treasury bonds; market; increase; spend
   2. Treasury bonds; market; increase; tax
   3. private financial assets; market; increase; tax
   4. Treasury bonds; Treasury; decrease; tax
4. A high debt/GDP ratio will lead to _______ government borrowing costs because investors will demand _______ yields to offset higher default risk.
   1. lower; higher
   2. lower; lower
   3. higher; lower
   4. higher; higher
5. Investors prefer bonds to stocks when
   1. the stock market is depressed and there is a flight to safety.
   2. the stock market is booming and the bond yield is low.
   3. capital preservation is not an issue.
   4. the risk of capital loss is low.
6. A low margin requirement for a loan can lead to a sizable _______ in a _____ market.
   1. capital gain; bear
   2. capital loss; bull
   3. capital loss; bear
   4. capital gain; bull
7. Corporate debt financing is preferred when
   1. bond yield is high.
   2. bond coupon rate is high.
   3. investment grade spread is large.
   4. stock prices and interest rate are low.
8. Monetary policy (maintained by the _________) becomes _______ policy (maintained by the legislature) when _______ money ends up facilitating government borrowing to fund budget _________.
   1. central bank; fiscal; tight; deficits
   2. legislature; fiscal; tight; deficits
   3. central bank; fiscal; cheap; deficits
   4. legislature; fiscal; cheap; surpluses
9. Because their values are not federally insured, investments in the non-bank financial markets are
   1. more risky than bank deposits.
   2. lower-yielding than bank deposits.
   3. higher-yielding than bank deposits.
   4. Both A and C.
10. The conflict of interest faced by the rating agencies arises from
    1. their investment in credit default swaps.
    2. the freedom of bond issuers to shop for favorable ratings.
    3. their ownership of investment banks.
    4. their source of revenues.
    5. Both B and D.
11. Leveraging and deleveraging ____________ the business cycles by _________ optimism and pessimism.
    1. amplify; restraining
    2. dampen; restraining
    3. amplify; reinforcing
    4. dampen; reinforcing
12. Inflow of hot money fuels inflation in high-interest developing economies because
    1. it raises the local interest rate and encourages more speculative borrowing.
    2. it decreases the supply of local money.
    3. it forces the local interest rate down and encourages more speculative borrowing.
    4. it forces the local interest rate down and discourages speculative borrowing.
13. Credit default swaps
    1. generate revenues for the issuers with adequate loss reserves.
    2. are unregulated insurance contracts.
    3. were limited to covering mortgage loans.
    4. discourage moral hazard on the part of the debt issuers.
    5. Both A and B.
14. The money multiplier model assumes that
    1. some banks may be reluctant to lend due to uncertain risk environment.
    2. some customers may not keep all their money in the bank.
    3. some customers may be reluctant to borrow due to economic recession.
    4. there will always be customers wanting to borrow as much as the banks want to lend.
15. Hong Kong's dollar peg means that
    1. Hong Kong can issue US dollars.
    2. the US prices of Hong Kong products are not subject to exchange rate risk.
    3. the US can issue Hong Kong dollars.
    4. the exchange-rate risk has practically been eliminated for transactions denominated in either Hong Kong dollar or US dollar.
    5. Both B and D.
16. Taxpayer guarantees against failure, whether implied or explicit, had led to risky leverage by giant financial institutions because
    1. investors are willing to accept lower yields from their debt issues.
    2. stockholders will be made whole in case of insolvency.
    3. bond holders will be made whole in case of insolvency.
    4. tax-payers will be forced to bail them out.
    5. Both A and D.
17. Hong Kong interest rates are tied to the US interest rates because
    1. Hong Kong dollar is pegged to the US dollar.
    2. higher Hong Kong interest rate would attract speculative capital flow into Hong Kong absent exchange rate risk.
    3. the US chooses to peg its currency to the Hong Kong dollar.
    4. Hong Kong uses US dollar as the medium of exchange.
    5. Both A and B.
18. A home mortgage is under water when
    1. the current home price is below the outstanding mortgage loan balance.
    2. the home equity is negative.
    3. part of the down payment has been wiped out.
    4. the mortgage has been securitized.
    5. Both A and B.
19. US government finances its budget deficit by
    1. selling new bonds to domestic and foreign investors.
    2. buying existing bonds from the market.
    3. selling new bonds only to foreign investors.
    4. selling new bonds only to the Treasury.
20. In the period leading up to the 2007 housing bust, US banks were more willing to make subprime loans because they
    1. could sell off their more risky loans to the capital market.
    2. could earn high loan originating fees.
    3. tight regulations ensured that nothing will go wrong.
    4. All of the above.
    5. Both A and B.