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A movement along the bond demand or supply curve occurs when ________ changes.

Changes in Equilibrium Interest Rates
1) A movement along the bond demand or supply curve occurs when ________ changes.
A) bond price
B) income
C) wealth
D) expected return
Answer: A
Ques Status: Previous Edition
2) When the price of a bond decreases, all else equal, the bond demand curve ________.
A) shifts right
B) shifts left
C) does not shift
D) inverts
Answer: C
Ques Status: Previous Edition

3) During business cycle expansions when income and wealth are rising, the demand for bonds
________ and the demand curve shifts to the ________, everything else held constant.
A) falls; right
B) falls; left
C) rises; right
D) rises; left
Answer: C
Ques Status: Previous Edition
4) Everything else held constant, when households save less, wealth and the demand for bonds
________ and the bond demand curve shifts ________.
A) increase; right
B) increase; left
C) decrease; right
D) decrease; left
Answer: D
Ques Status: Previous Edition
5) Everything else held constant, if interest rates are expected to fall in the future, the demand for
long-term bonds today ________ and the demand curve shifts to the ________.
A) rises; right
B) rises; left
C) falls; right
D) falls; left
Answer: A
Ques Status: Previous Edition
6) Holding the expected return on bonds constant, an increase in the expected return on common
stocks would ________ the demand for bonds, shifting the demand curve to the ________.
A) decrease; left
B) decrease; right
C) increase; left
D) increase; right
Answer: A
Ques Status: Previous Edition
7) Everything else held constant, an increase in expected inflation, lowers the expected return on
________ compared to ________ assets.
A) bonds; financial
B) bonds; real
C) physical; financial
D) physical; real
Answer: B
Ques Status: Previous Edition

8) Everything else held constant, an increase in the riskiness of bonds relative to alternative assets
causes the demand for bonds to ________ and the demand curve to shift to the ________.
A) rise; right
B) rise; left
C) fall; right
D) fall; left
Answer: D
Ques Status: Previous Edition
9) Everything else held constant, when stock prices become less volatile, the demand curve for
bonds shifts to the ________ and the interest rate ________.
A) right; rises
B) right; falls
C) left; falls
D) left; rises
Answer: D
Ques Status: Previous Edition
10) Everything else held constant, when stock prices become ________ volatile, the demand curve
for bonds shifts to the ________ and the interest rate ________.
A) more; right; rises
B) more; right; falls
C) less; left; falls
D) less; left; does not change
Answer: B
Ques Status: Previous Edition
11) Everything else held constant, an increase in the liquidity of bonds results in a ________ in
demand for bonds and the demand curve shifts to the ________.
A) rise; right
B) rise; left
C) fall; right
D) fall; left
Answer: A
Ques Status: Previous Edition
12) Everything else held constant, when bonds become less widely traded, and as a consequence the
market becomes less liquid, the demand curve for bonds shifts to the ________ and the interest
rate ________.
A) right; rises
B) right; falls
C) left; falls
D) left; rises
Answer: D
Ques Status: Previous Edition

13) The reduction of brokerage commissions for trading common stocks that occurred in 1975
caused the demand for bonds to ________ and the demand curve to shift to the ________.
A) fall; right
B) fall, left
C) rise; right
D) rise; left
Answer: B
Ques Status: Previous Edition
14) Factors that decrease the demand for bonds include
A) an increase in the volatility of stock prices.
B) a decrease in the expected returns on stocks.
C) a decrease in the inflation rate.
D) a decrease in the riskiness of stocks.
Answer: D
Ques Status: Previous Edition
15) During a recession, the supply of bonds ________ and the supply curve shifts to the ________,
everything else held constant.
A) increases; left
B) increases; right
C) decreases; left
D) decreases; right
Answer: C
Ques Status: Previous Edition
16) In a business cycle expansion, the ________ of bonds increases and the ________ curve shifts to
the ________ as business investments are expected to be more profitable.
A) supply; supply; right
B) supply; supply; left
C) demand; demand; right
D) demand; demand; left
Answer: A
Ques Status: New
17) When the expected inflation rate increases, the real cost of borrowing ________ and bond supply
________, everything else held constant.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
Answer: C
Ques Status: Previous Edition

18) An increase in the expected inflation rate causes the supply of bonds to ________ and the supply
curve to shift to the ________, everything else held constant.
A) increase; left
B) increase; right
C) decrease; left
D) decrease; right
Answer: B
Ques Status: Previous Edition
19) Higher government deficits ________ the supply of bonds and shift the supply curve to the
________, everything else held constant.
A) increase; left
B) increase; right
C) decrease; left
D) decrease; right
Answer: B
Ques Status: Previous Edition
20) Factors that can cause the supply curve for bonds to shift to the right include
A) an expansion in overall economic activity.
B) a decrease in expected inflation.
C) a decrease in government deficits.
D) a business cycle recession.
Answer: A
Ques Status: Previous Edition
21) When the inflation rate is expected to increase, the ________ for bonds falls, while the ________
curve shifts to the right, everything else held constant.
A) demand; demand
B) demand; supply
C) supply; demand
D) supply; supply
Answer: B
Ques Status: Previous Edition
22) When the expected inflation rate increases, the demand for bonds ________, the supply of bonds
________, and the interest rate ________, everything else held constant.
A) increases; increases; rises
B) decreases; decreases; falls
C) increases; decreases; falls
D) decreases; increases; rises
Answer: D
Ques Status: Previous Edition

23) Everything else held constant, when the inflation rate is expected to rise, interest rates will
________; this result has been termed the ________.
A) fall; Keynes effect
B) fall; Fisher effect
C) rise; Keynes effect
D) rise; Fisher effect
Answer: D
Ques Status: Previous Edition
24) The economist Irving Fisher, after whom the Fisher effect is named, explained why interest rates
________ as the expected rate of inflation ________, everything else held constant.
A) rise; increases
B) rise; stabilizes
C) fall; stabilizes
D) fall; increases
Answer: A
Ques Status: Previous Edition
25) Everything else held constant, during a business cycle expansion, the supply of bonds shifts to
the ________ as businesses perceive more profitable investment opportunities, while the
demand for bonds shifts to the ________ as a result of the increase in wealth generated by the
economic expansion.
A) right; left
B) right; right
C) left; left
D) left; right
Answer: B
Ques Status: Previous Edition
26) When the economy slips into a recession, normally the demand for bonds ________, the supply
of bonds ________, and the interest rate ________, everything else held constant.
A) increases; increases; rises
B) decreases; decreases; falls
C) increases; decreases; falls
D) decreases; increases; rises
Answer: B
Ques Status: Previous Edition
27) When an economy grows out of a recession, normally the demand for bonds ________ and the
supply of bonds ________, everything else held constant.
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases
Answer: A
Ques Status: Previous Edition

28) Deflation causes the demand for bonds to ________, the supply of bonds to ________, and bond
prices to ________, everything else held constant.
A) increase; increase; increase
B) increase; decrease; increase
C) decrease; increase; increase
D) decrease; decrease; increase
Answer: B
Ques Status: Previous Edition
29) In the 1990s Japan had the lowest interest rates in the world due to a combination of
A) inflation and recession.
B) deflation and expansion.
C) inflation and expansion.
D) deflation and recession.
Answer: D
Ques Status: Previous Edition
30) When the interest rate changes,
A) the demand curve for bonds shifts to the right.
B) the demand curve for bonds shifts to the left.
C) the supply curve for bonds shifts to the right.
D) it is because either the demand or the supply curve has shifted.
Answer: D
Ques Status: Previous Edition
31) The interest rate falls when either the demand for bonds ________ or the supply of bonds
________.
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases
Answer: B
Ques Status: Revised
32) When the government has a surplus, as occurred in the late 1990s, the ________ curve of bonds
shifts to the ________, everything else held constant.
A) supply; right
B) supply; left
C) demand; right
D) demand; left
Answer: B
Ques Status: Previous Edition

33) A decrease in the brokerage commissions in the housing market from 6% to 5% of the sales price
will shift the ________ curve for bonds to the ________, everything else held constant.
A) demand; right
B) demand; left
C) supply; right
D) supply; left
Answer: B
Ques Status: Previous Edition
34) When rare coin prices become volatile, the ________ curve for bonds shifts to the ________,
everything else held constant.
A) demand; right
B) demand; left
C) supply; right
D) supply; left
Answer: A
Ques Status: Previous Edition
35) If people expect real estate prices to increase significantly, the ________ curve for bonds will
shift to the ________, everything else held constant.
A) demand; right
B) demand; left
C) supply; left
D) supply; right
Answer: B
Ques Status: Previous Edition
36) Everything else held constant, when prices in the art market become more uncertain,
A) the demand curve for bonds shifts to the left and the interest rate rises.
B) the demand curve for bonds shifts to the left and the interest rate falls.
C) the demand curve for bonds shifts to the right and the interest rate falls.
D) the supply curve for bonds shifts to the right and the interest rate falls.
Answer: C
Ques Status: Previous Edition
37) Everything else held constant, when real estate prices are expected to decrease
A) the demand curve for bonds shifts to the left and the interest rate rises.
B) the demand curve for bonds shifts to the left and the interest rate falls.
C) the demand curve for bonds shifts to the right and the interest rate falls.
D) the supply curve for bonds shifts to the right and the interest rate falls.
Answer: C
Ques Status: New
38) Everything else held constant, when the government has higher budget deficits
A) the demand curve for bonds shifts to the left and the interest rate rises.
B) the demand curve for bonds shifts to the left and the interest rate falls.
C) the supply curve for bonds shifts to the right and the interest rate falls.
D) the supply curve for bonds shifts to the right and the interest rate rises.
Answer: D
Ques Status: New

39) If stock prices are expected to climb next year, everything else held constant, the ________ curve
for bonds shifts ________ and the interest rate ________.
A) demand; left; rises
B) demand; right; rises
C) demand; left; falls
D) supply; left; rises
Answer: A
Ques Status: New
40) If prices in the bond market become more volatile, everything else held constant, the demand
curve for bonds shifts ________ and interest rates ________.
A) left; rise
B) left; fall
C) right; rise
D) right; fall
Answer: A
Ques Status: New
41) If brokerage commissions on stocks fall, everything else held constant, the demand for bonds
________, the price of bonds ________, and the interest rate ________.
A) decreases; decreases; increases
B) decreases; decreases; decreases
C) increases; decreases; increases
D) increases; increases; increases
Answer: A
Ques Status: New
42) If the expected return on bonds increases, all else equal, the demand for bonds increases, the
price of bonds ________, and the interest rate ________.
A) increases; decreases
B) increases; increases
C) decreases; decreases
D) decreases; increases
Answer: A
Ques Status: New


43) In the figure above, a factor that could cause the supply of bonds to shift to the right is:
A) a decrease in government budget deficits.
B) a decrease in expected inflation.
C) a recession.
D) a business cycle expansion.
Answer: D
Ques Status: Previous Edition
44) In the figure above, a factor that could cause the demand for bonds to decrease (shift to the left)
is:
A) an increase in the expected return on bonds relative to other assets.
B) a decrease in the expected return on bonds relative to other assets.
C) an increase in wealth.
D) a reduction in the riskiness of bonds relative to other assets.
Answer: B
Ques Status: Previous Edition
45) In the figure above, the price of bonds would fall from P1 to P2
A) inflation is expected to increase in the future.
B) interest rates are expected to fall in the future.
C) the expected return on bonds relative to other assets is expected to increase in the future.
D) the riskiness of bonds falls relative to other assets.
Answer: A
Ques Status: Previous Edition

If the price of bonds is set ________ the equilibrium price, the quantity of bonds demanded exceeds the quantity of bonds supplied, a condition called excess ________. A) above; demand

Supply and Demand in the Bond Market
1) In the bond market, the bond demanders are the ________ and the bond suppliers are the
________.
A) lenders; borrowers
B) lenders; advancers
C) borrowers; lenders
D) borrowers; advancers
Answer: A
Ques Status: New
2) The demand curve for bonds has the usual downward slope, indicating that at ________ prices
of the bond, everything else equal, the ________ is higher.
A) higher; demand
B) higher; quantity demanded
C) lower; demand
D) lower; quantity demanded
Answer: D
Ques Status: Previous Edition

3) The supply curve for bonds has the usual upward slope, indicating that as the price ________,
ceteris paribus, the ________ increases.
A) falls; supply
B) falls; quantity supplied
C) rises; supply
D) rises; quantity supplied
Answer: D
Ques Status: Previous Edition
4) In the bond market, the market equilibrium shows the market-clearing ________ and
market-clearing ________.
A) price; deposit
B) interest rate; deposit
C) price; interest rate
D) interest rate; premium
Answer: C
Ques Status: Previous Edition
5) When the price of a bond is above the equilibrium price, there is an excess ________ bonds and
price will ________.
A) demand for; rise
B) demand for; fall
C) supply of; fall
D) supply of; rise
Answer: C
Ques Status: Previous Edition
6) When the price of a bond is ________ the equilibrium price, there is an excess demand for bonds
and price will ________.
A) above; rise
B) above; fall
C) below; fall
D) below; rise
Answer: D
Ques Status: Previous Edition
7) When the interest rate on a bond is above the equilibrium interest rate, in the bond market there
is excess ________ and the interest rate will ________.
A) demand; rise
B) demand; fall
C) supply; fall
D) supply; rise
Answer: B
Ques Status: Previous Edition

8) When the interest rate on a bond is ________ the equilibrium interest rate, in the bond market there is excess ________ and the interest rate will ________.
A) above; demand; rise
B) above; demand; fall
C) below; supply; fall
D) above; supply; rise
Answer: B
Ques Status: Previous Edition
9) A situation in which the quantity of bonds supplied exceeds the quantity of bonds demanded is
called a condition of excess supply; because people want to sell ________ bonds than others
want to buy, the price of bonds will ________.
A) fewer; fall
B) fewer; rise
C) more; fall
D) more; rise
Answer: C
Ques Status: Previous Edition
10) If the price of bonds is set ________ the equilibrium price, the quantity of bonds demanded
exceeds the quantity of bonds supplied, a condition called excess ________.
A) above; demand
B) above; supply
C) below; demand
D) below; supply
Answer: C
Ques Status: Previous Edition

If stock prices are expected to drop dramatically, then, other things equal, the demand for stocks will ________ and that of Treasury bills will ________.

Determinants of Asset Demand
1) Pieces of property that serve as a store of value are called
A) assets.
B) units of account.
C) liabilities.
D) borrowings.
Answer: A
Ques Status: New
2) Of the four factors that influence asset demand, which factor will cause the demand for all assets
to increase when it increases, everything else held constant?
A) wealth
B) expected returns
C) risk
D) liquidity
Answer: A
Ques Status: Previous Edition
3) If wealth increases, the demand for stocks ________ and that of long -term bonds ________,
everything else held constant.
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases
Answer: A
Ques Status: Previous Edition
4) Everything else held constant, a decrease in wealth
A) increases the demand for stocks.
B) increases the demand for bonds.
C) reduces the demand for silver.
D) increases the demand for gold.
Answer: C
Ques Status: Revised
5) An increase in an assetʹs expected return relative to that of an alternative asset, holding
everything else constant, ________ the quantity demanded of the asset.
A) increases
B) decreases
C) has no effect on
D) erases
Answer: A
Ques Status: New
6) Everything else held constant, if the expected return on ABC stock rises from 5 to 10 percent and
the expected return on CBS stock is unchanged, then the expected return of holding CBS stock
________ relative to ABC stock and the demand for CBS stock ________.
A) rises; rises
B) rises; falls
C) falls; rises
D) falls; falls
Answer: D
Ques Status: Previous Edition
7) Everything else held constant, if the expected return on U.S. Treasury bonds falls from 10 to 5
percent and the expected return on GE stock rises from 7 to 8 percent, then the expected return
of holding GE stock ________ relative to U.S. Treasury bonds and the demand for GE stock
________.
A) rises; rises
B) rises; falls
C) falls; rises
D) falls; falls
Answer: A
Ques Status: Previous Edition
8) If housing prices are expected to increase, then, other things equal, the demand for houses will
________ and that of Treasury bills will ________.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
Answer: B
Ques Status: Revised
9) If stock prices are expected to drop dramatically, then, other things equal, the demand for stocks
will ________ and that of Treasury bills will ________.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
Answer: D
Ques Status: Previous Edition
10) Everything else held constant, if the expected return on RST stock declines from 12 to 9 percent
and the expected return on XYZ stock declines from 8 to 7 percent, then the expected return of
holding RST stock ________ relative to XYZ stock and demand for XYZ stock ________.
A) rises; rises
B) rises; falls
C) falls; rises
D) falls; falls
Answer: C
Ques Status: Previous Edition

11) Everything else held constant, if the expected return on U.S. Treasury bonds falls from 8 to 7
percent and the expected return on corporate bonds falls from 10 to 8 percent, then the expected
return of corporate bonds ________ relative to U.S. Treasury bonds and the demand for
corporate bonds ________.
A) rises; rises
B) rises; falls
C) falls; rises
D) falls; falls
Answer: D
Ques Status: Previous Edition
12) An increase in the expected rate of inflation will ________ the expected return on bonds relative
to the that on ________ assets, everything else held constant.
A) reduce; financial
B) reduce; real
C) raise; financial
D) raise; real
Answer: B
Ques Status: Previous Edition
13) If fluctuations in interest rates become smaller, then, other things equal, the demand for stocks
________ and the demand for long-term bonds ________.
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases
Answer: D
Ques Status: Previous Edition
14) If the price of gold becomes less volatile, then, other things equal, the demand for stocks will
________ and the demand for antiques will ________.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
Answer: C
Ques Status: Previous Edition
15) If brokerage commissions on bond sales decrease, then, other things equal, the demand for
bonds will ________ and the demand for real estate will ________.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
Answer: B
Ques Status: Previous Edition

16) If gold becomes acceptable as a medium of exchange, the demand for gold will ________ and
the demand for bonds will ________, everything else held constant.
A) decrease; decrease
B) decrease; increase
C) increase; increase
D) increase; decrease
Answer: D
Ques Status: Previous Edition
17) The demand for Picasso paintings rises (holding everything else equal) when
A) stocks become easier to sell.
B) people expect a boom in real estate prices.
C) Treasury securities become riskier.
D) people expect gold prices to rise.
Answer: C
Ques Status: Revised
18) The demand for silver decreases, other things equal, when
A) the gold market is expected to boom.
B) the market for silver becomes more liquid.
C) wealth grows rapidly.
D) interest rates are expected to rise.
Answer: A
Ques Status: Revised
19) You would be less willing to purchase U.S. Treasury bonds, other things equal, if
A) you inherit $1 million from your Uncle Harry.
B) you expect interest rates to fall.
C) gold becomes more liquid.
D) stock prices are expected to fall.
Answer: C
Ques Status: Revised
20) You would be more willing to buy AT&T bonds (holding everything else constant) if
A) the brokerage commissions on bond sales become cheaper.
B) interest rates are expected to rise.
C) your wealth has decreased.
D) you expect diamonds to appreciate in value.
Answer: A
Ques Status: Revised
21) The demand for gold increases, other things equal, when
A) the market for silver becomes more liquid.
B) interest rates are expected to rise.
C) interest rates are expected to fall.
D) real estate prices are expected to increase.
Answer: B
Ques Status: Revised

22) Holding everything else constant,
A) if asset Aʹs risk rises relative to that of alternative assets, the demand will increase for asset
A.
B) the more liquid is asset A, relative to alternative assets, the greater will be the demand for
asset A.
C) the lower the expected return to asset A relative to alternative assets, the greater will be
the demand for asset A.
D) if wealth increases, demand for asset A increases and demand for alternative assets
decreases.
Answer: B
Ques Status: Previous Edition
23) Holding all other factors constant, the quantity demanded of an asset is
A) positively related to wealth.
B) negatively related to its expected return relative to alternative assets.
C) positively related to the risk of its returns relative to alternative assets.
D) negatively related to its liquidity relative to alternative assets.
Answer: A
Ques Status: New
24) Everything else held constant, would an increase in volatility of stock prices have any impact on the demand for rare coins? Why or why not?
Answer: Yes, it would cause the demand for rare coins to increase. The increased volatility of
stock prices means that there is relatively more risk in owning stock than there was
previously and so the demand for an alternative asset, rare coins, would increase.
Ques Status: Previous Edition

If a financial institution has 50% of its portfolio in a bond with a five-year duration and 50% of its portfolio in a bond with a seven-year duration, what is the duration of the portfolio?

Measuring Interest-Rate Risk: Duration
1) Duration is
A) an assetʹs term to maturity.
B) the time until the next interest payment for a coupon bond.
C) the average lifetime of a debt securityʹs stream of payments.
D) the time between interest payments for a coupon bond.
Answer: C
Ques Status: Previous Edition
2) Comparing a discount bond and a coupon bond with the same maturity,
A) the coupon bond has the greater effective maturity.
B) the discount bond has the greater effective maturity.
C) the effective maturity cannot be calculated for a coupon bond.
D) the effective maturity cannot be calculated for a discount bond.
Answer: B
Ques Status: Previous Edition
3) The duration of a coupon bond increases
A) the longer is the bondʹs term to maturity.
B) when interest rates increase.
C) the higher the coupon rate on the bond.
D) the higher the bond price.
Answer: A
Ques Status: Previous Edition
4) All else equal, when interest rates ________, the duration of a coupon bond ________.
A) rise; falls
B) rise; increases
C) falls; falls
D) falls; does not change
Answer: A
Ques Status: New
5) All else equal, the ________ the coupon rate on a bond, the ________ the bondʹs duration.
A) higher; longer
B) higher; shorter
C) lower; shorter
D) greater; longer
Answer: B
Ques Status: Previous Edition
6) If a financial institution has 50% of its portfolio in a bond with a five-year duration and 50% of its portfolio in a bond with a seven-year duration, what is the duration of the portfolio?
A) 12 years
B) 7 years
C) 6 years
D) 5 years
Answer: C
Ques Status: Previous Edition
7) An assetʹs interest rate risk ________ as the duration of the asset ________.
A) increases; decreases
B) decreases; decreases
C) decreases; increases
D) remains constant; increases
Answer: B
Ques Status: Previous Edition

The ________ interest rate more accurately reflects the true cost of borrowing.

The Distinction Between Real and Nominal Interest Rates
1) The ________ interest rate is adjusted for expected changes in the price level.
A) ex ante real
B) ex post real
C) ex post nominal
D) ex ante nominal
Answer: A
Ques Status: New

2) The ________ interest rate more accurately reflects the true cost of borrowing.
A) nominal
B) real
C) discount
D) market
Answer: B
Ques Status: Previous Edition
3) The nominal interest rate minus the expected rate of inflation
A) defines the real interest rate.
B) is a less accurate measure of the incentives to borrow and lend than is the nominal interest
rate.
C) is a less accurate indicator of the tightness of credit market conditions than is the nominal
interest rate.
D) defines the discount rate.
Answer: A
Ques Status: Previous Edition
4) When the ________ interest rate is low, there are greater incentives to ________ and fewer
incentives to ________.
A) nominal; lend; borrow
B) real; lend; borrow
C) real; borrow; lend
D) market; lend; borrow
Answer: C
Ques Status: Previous Edition
5) The interest rate that describes how well a lender has done in real terms after the fact is called
the
A) ex post real interest rate.
B) ex ante real interest rate.
C) ex post nominal interest rate.
D) ex ante nominal interest rate.
Answer: A
Ques Status: New
6) The ________ states that the nominal interest rate equals the real interest rate plus the expected
rate of inflation.
A) Fisher equation
B) Keynesian equation
C) Monetarist equation
D) Marshall equation
Answer: A
Ques Status: Previous Edition

7) If the nominal rate of interest is 2 percent, and the expected inflation rate is -10 percent, the real
rate of interest is
A) 2 percent.
B) 8 percent.
C) 10 percent.
D) 12 percent.
Answer: D
Ques Status: Previous Edition
8) In which of the following situations would you prefer to be the lender?
A) The interest rate is 9 percent and the expected inflation rate is 7 percent.
B) The interest rate is 4 percent and the expected inflation rate is 1 percent.
C) The interest rate is 13 percent and the expected inflation rate is 15 percent.
D) The interest rate is 25 percent and the expected inflation rate is 50 percent.
Answer: B
Ques Status: Previous Edition
9) In which of the following situations would you prefer to be the borrower?
A) The interest rate is 9 percent and the expected inflation rate is 7 percent.
B) The interest rate is 4 percent and the expected inflation rate is 1 percent.
C) The interest rate is 13 percent and the expected inflation rate is 15 percent.
D) The interest rate is 25 percent and the expected inflation rate is 50 percent.
Answer: D
Ques Status: Revised
10) If you expect the inflation rate to be 15 percent next year and a one -year bond has a yield to
maturity of 7 percent, then the real interest rate on this bond is
A) 7 percent.
B) 22 percent.
C) -15 percent.
D) -8 percent.
Answer: D
Ques Status: Previous Edition
11) If you expect the inflation rate to be 12 percent next year and a one -year bond has a yield to
maturity of 7 percent, then the real interest rate on this bond is
A) -5 percent.
B) -2 percent.
C) 2 percent.
D) 12 percent.
Answer: A
Ques Status: Previous Edition

12) If you expect the inflation rate to be 4 percent next year and a one year bond has a yield to
maturity of 7 percent, then the real interest rate on this bond is
A) -3 percent.
B) -2 percent.
C) 3 percent.
D) 7 percent.
Answer: C
Ques Status: Previous Edition
13) The interest rate on Treasury Inflation Protected Securities is a direct measure of
A) the real interest rate.
B) the nominal interest rate.
C) the rate of inflation.
D) the rate of deflation.
Answer: A
Ques Status: Previous Edition
14) Assuming the same coupon rate and maturity length, the difference between the yield on a
Treasury Inflation Protected Security and the yield on a nonindexed Treasury security provides
insight into
A) the nominal interest rate.
B) the real interest rate.
C) the nominal exchange rate.
D) the expected inflation rate.
Answer: D
Ques Status: Previous Edition
15) Assuming the same coupon rate and maturity length, when the interest rate on a Treasury
Inflation Protected Security is 3 percent, and the yield on a nonindexed Treasury bond is 8
percent, the expected rate of inflation is
A) 3 percent.
B) 5 percent.
C) 8 percent.
D) 11 percent.
Answer: B
Ques Status: Previous Edition
16) Would it make sense to buy a house when mortgage rates are 14% and expected inflation is
15%? Explain your answer.
Answer: Even though the nominal rate for the mortgage appears high, the real cost of borrowing
the funds is -1%. Yes, under this circumstance it would be reasonable to make this
purchase.
Ques Status: Previous Edition

The ________ is defined as the payments to the owner plus the change in a securityʹs value expressed as a fraction of the securityʹs purchase price.

The Distinction Between Interest Rates and Returns
1) The ________ is defined as the payments to the owner plus the change in a securityʹs value
expressed as a fraction of the securityʹs purchase price.
A) yield to maturity
B) current yield
C) rate of return
D) yield rate
Answer: C
Ques Status: Previous Edition
2) Which of the following are true concerning the distinction between interest rates and returns?
A) The rate of return on a bond will not necessarily equal the interest rate on that bond.
B) The return can be expressed as the difference between the current yield and the rate of
capital gains.
C) The rate of return will be greater than the interest rate when the price of the bond falls
between time t and time t + 1.
D) The return can be expressed as the sum of the discount yield and the rate of capital gains.
Answer: A
Ques Status: Previous Edition
3) The sum of the current yield and the rate of capital gain is called the
A) rate of return.
B) discount yield.
C) pertuity yield.
D) par value.
Answer: A
Ques Status: New
4) What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,200 next year?
A) 5 percent
B) 10 percent
C) -5 percent
D) 25 percent
Answer: D
Ques Status: Previous Edition
5) What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $900
next year?
A) 5 percent
B) 10 percent
C) -5 percent
D) -10 percent
Answer: C
Ques Status: Previous Edition
6) The return on a 5 percent coupon bond that initially sells for $1,000 and sells for $950 next year
is
A) -10 percent.
B) -5 percent.
C) 0 percent.
D) 5 percent.
Answer: C
Ques Status: Previous Edition
7) Suppose you are holding a 5 percent coupon bond maturing in one year with a yield to maturity
of 15 percent. If the interest rate on one-year bonds rises from 15 percent to 20 percent over the
course of the year, what is the yearly return on the bond you are holding?
A) 5 percent
B) 10 percent
C) 15 percent
D) 20 percent
Answer: C
Ques Status: Previous Edition
8) If the interest rates on all bonds rise from 5 to 6 percent over the course of the year, which bond
would you prefer to have been holding?
A) A bond with one year to maturity
B) A bond with five years to maturity
C) A bond with ten years to maturity
D) A bond with twenty years to maturity
Answer: A
Ques Status: Previous Edition
9) An equal decrease in all bond interest rates
A) increases the price of a five-year bond more than the price of a ten-year bond.
B) increases the price of a ten-year bond more than the price of a five-year bond.
C) decreases the price of a five-year bond more than the price of a ten-year bond.
D) decreases the price of a ten-year bond more than the price of a five-year bond.
Answer: B
Ques Status: Previous Edition
10) An equal increase in all bond interest rates
A) increases the return to all bond maturities by an equal amount.
B) decreases the return to all bond maturities by an equal amount.
C) has no effect on the returns to bonds.
D) decreases long-term bond returns more than short-term bond returns.
Answer: D
Ques Status: Previous Edition
11) Which of the following are generally true of bonds?
A) The only bond whose return equals the initial yield to maturity is one whose time to
maturity is the same as the holding period.
B) A rise in interest rates is associated with a fall in bond prices, resulting in capital gains on
bonds whose terms to maturity are longer than the holding periods.
C) The longer a bondʹs maturity, the smaller is the size of the price change associated with an
interest rate change.
D) Prices and returns for short-term bonds are more volatile than those for longer-term
bonds.
Answer: A
Ques Status: Previous Edition
12) Which of the following are generally true of all bonds?
A) The longer a bondʹs maturity, the greater is the rate of return that occurs as a result of the
increase in the interest rate.
B) Even though a bond has a substantial initial interest rate, its return can turn out to be
negative if interest rates rise.
C) Prices and returns for short-term bonds are more volatile than those for longer term
bonds.
D) A fall in interest rates results in capital losses for bonds whose terms to maturity are longer
than the holding period.
Answer: B
Ques Status: Previous Edition
13) The riskiness of an assetʹs returns due to changes in interest rates is
A) exchange-rate risk.
B) price risk.
C) asset risk.
D) interest-rate risk.
Answer: D
Ques Status: Previous Edition
14) Interest-rate risk is the riskiness of an assetʹs returns due to
A) interest-rate changes.
B) changes in the coupon rate.
C) default of the borrower.
D) changes in the assetʹs maturity.
Answer: A
Ques Status: Previous Edition
15) Prices and returns for ________ bonds are more volatile than those for ________ bonds,
everything else held constant.
A) long-term; long-term
B) long-term; short-term
C) short-term; long-term
D) short-term; short-term
Answer: B
Ques Status: Previous Edition
16) There is ________ for any bond whose time to maturity matches the holding period.
A) no interest-rate risk
B) a large interest-rate risk
C) rate-of-return risk
D) yield-to-maturity risk
Answer: A
Ques Status: New
17) Your favorite uncle advises you to purchase long-term bonds because their interest rate is 10%.
Should you follow his advice?
Answer: It depends on where you think interest rates are headed in the future. If you think
interest rates will be going up, you should not follow your uncleʹs advice because you
would then have to discount your bond if you needed to sell it before the maturity date.
Long-term bonds have a greater interest-rate risk.
Ques Status: Previous Edition

The concept of ________ is based on the common-sense notion that a dollar paid to you in the future is less valuable to you than a dollar today.

4.1 Measuring Interest Rates
1) The concept of ________ is based on the common-sense notion that a dollar paid to you in the
future is less valuable to you than a dollar today.
A) present value
B) future value
C) interest
D) deflation
Answer: A
Ques Status: Previous Edition
2) The present value of an expected future payment ________ as the interest rate increases.
A) falls
B) rises
C) is constant
D) is unaffected
Answer: A
Ques Status: Previous Edition
3) An increase in the time to the promised future payment ________ the present value of the
payment.
A) decreases
B) increases
C) has no effect on
D) is irrelevant to
Answer: A
Ques Status: Previous Edition
4) With an interest rate of 6 percent, the present value of $100 next year is approximately
A) $106.
B) $100.
C) $94.
D) $92.
Answer: C
Ques Status: Previous Edition
5) If a security pays $55 in one year and $133 in three years, its present value is $150 if the interest
rate is
A) 5 percent.
B) 10 percent.
C) 12.5 percent.
D) 15 percent.
Answer: B
Ques Status: Previous Edition
6) To claim that a lottery winner who is to receive $1 million per year for twenty years has won $20
million ignores the process of
A) face value.
B) par value.
C) deflation.
D) discounting the future.
Answer: D
Ques Status: Revised
7) A credit market instrument that provides the borrower with an amount of funds that must be
repaid at the maturity date along with an interest payment is known as a
A) simple loan.
B) fixed-payment loan.
C) coupon bond.
D) discount bond.
Answer: A
Ques Status: Previous Edition
8) A credit market instrument that requires the borrower to make the same payment every period
until the maturity date is known as a
A) simple loan.
B) fixed-payment loan.
C) coupon bond.
D) discount bond.
Answer: B
Ques Status: Previous Edition
9) Which of the following are true of fixed payment loans?
A) The borrower repays both the principal and interest at the maturity date.
B) Installment loans and mortgages are frequently of the fixed payment type.
C) The borrower pays interest periodically and the principal at the maturity date.
D) Commercial loans to businesses are often of this type.
Answer: B
Ques Status: Previous Edition
10) A fully amortized loan is another name for
A) a simple loan.
B) a fixed-payment loan.
C) a commercial loan.
D) an unsecured loan.
Answer: B
Ques Status: Previous Edition
11) A credit market instrument that pays the owner a fixed coupon payment every year until the
maturity date and then repays the face value is called a
A) simple loan.
B) fixed-payment loan.
C) coupon bond.
D) discount bond.
Answer: C
Ques Status: Previous Edition
12) A ________ pays the owner a fixed coupon payment every year until the maturity date, when
the ________ value is repaid.
A) coupon bond; discount
B) discount bond; discount
C) coupon bond; face
D) discount bond; face
Answer: C
Ques Status: Previous Edition
13) The ________ is the final amount that will be paid to the holder of a coupon bond.
A) discount value
B) coupon value
C) face value
D) present value
Answer: C
Ques Status: Previous Edition
14) When talking about a coupon bond, face value and ________ mean the same thing.
A) par value
B) coupon value
C) amortized value
D) discount value
Answer: A
Ques Status: New
15) The dollar amount of the yearly coupon payment expressed as a percentage of the face value of
the bond is called the bondʹs
A) coupon rate.
B) maturity rate.
C) face value rate.
D) payment rate.
Answer: A
Ques Status: New
16) If a $5,000 coupon bond has a coupon rate of 13 percent, then the coupon payment every year is
A) $650.
B) $1,300.
C) $130.
D) $13.
Answer: A
Ques Status: Previous Edition
17) An $8,000 coupon bond with a $400 coupon payment every year has a coupon rate of
A) 5 percent.
B) 8 percent.
C) 10 percent.
D) 40 percent.
Answer: A
Ques Status: Previous Edition
18) All of the following are examples of coupon bonds except
A) Corporate bonds
B) U.S. Treasury bills
C) U.S. Treasury notes
D) U.S. Treasury bonds
Answer: B
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19) A bond that is bought at a price below its face value and the face value is repaid at a maturity
date is called a
A) simple loan.
B) fixed-payment loan.
C) coupon bond.
D) discount bond.
Answer: D
Ques Status: Previous Edition
20) A ________ is bought at a price below its face value, and the ________ value is repaid at the
maturity date.
A) coupon bond; discount
B) discount bond; discount
C) coupon bond; face
D) discount bond; face
Answer: D
Ques Status: Previous Edition
21) A discount bond
A) pays the bondholder a fixed amount every period and the face value at maturity.
B) pays the bondholder the face value at maturity.
C) pays all interest and the face value at maturity.
D) pays the face value at maturity plus any capital gain.
Answer: B
Ques Status: Previous Edition
22) Examples of discount bonds include
A) U.S. Treasury bills.
B) corporate bonds.
C) U.S. Treasury notes.
D) municipal bonds.
Answer: A
Ques Status: Previous Edition
23) Which of the following are true for discount bonds?
A) A discount bond is bought at par.
B) The purchaser receives the face value of the bond at the maturity date.
C) U.S. Treasury bonds and notes are examples of discount bonds.
D) The purchaser receives the par value at maturity plus any capital gains.
Answer: B
Ques Status: Previous Edition
24) The interest rate that equates the present value of payments received from a debt instrument
with its value today is the
A) simple interest rate.
B) current yield.
C) yield to maturity.
D) real interest rate.
Answer: C
Ques Status: Previous Edition
25) Economists consider the ________ to be the most accurate measure of interest rates.
A) simple interest rate.
B) current yield.
C) yield to maturity.
D) real interest rate.
Answer: C
Ques Status: Previous Edition
26) For simple loans, the simple interest rate is ________ the yield to maturity.
A) greater than
B) less than
C) equal to
D) not comparable to
Answer: C
Ques Status: Previous Edition
27) If the amount payable in two years is $2420 for a simple loan at 10 percent interest, the loan
amount is
A) $1000.
B) $1210.
C) $2000.
D) $2200.
Answer: C
Ques Status: Previous Edition
28) For a 3-year simple loan of $10,000 at 10 percent, the amount to be repaid is
A) $10,030.
B) $10,300.
C) $13,000.
D) $13,310.
Answer: D
Ques Status: Previous Edition
29) If $22,050 is the amount payable in two years for a $20,000 simple loan made today, the interest
rate is
A) 5 percent.
B) 10 percent.
C) 22 percent.
D) 25 percent.
Answer: A
Ques Status: Previous Edition
30) If a security pays $110 next year and $121 the year after that, what is its yield to maturity if it
sells for $200?
A) 9 percent
B) 10 percent
C) 11 percent
D) 12 percent
Answer: B
Ques Status: Previous Edition
31) The present value of a fixed-payment loan is calculated as the ________ of the present value of
all cash flow payments.
A) sum
B) difference
C) multiple
D) log
Answer: A
Ques Status: New
32) Which of the following are true for a coupon bond?
A) When the coupon bond is priced at its face value, the yield to maturity equals the coupon
rate.
B) The price of a coupon bond and the yield to maturity are positively related.
C) The yield to maturity is greater than the coupon rate when the bond price is above the par
value.
D) The yield is less than the coupon rate when the bond price is below the par value.
Answer: A
Ques Status: Previous Edition
33) The price of a coupon bond and the yield to maturity are ________ related; that is, as the yield to
maturity ________, the price of the bond ________.
A) positively; rises; rises
B) negatively; falls; falls
C) positively; rises; falls
D) negatively; rises; falls
Answer: D
Ques Status: Previous Edition
34) The yield to maturity is ________ than the ________ rate when the bond price is ________ its face
value.
A) greater; coupon; above
B) greater; coupon; below
C) greater; perpetuity; above
D) less; perpetuity; below
Answer: B
Ques Status: Previous Edition
35) A $10,000 8 percent coupon bond that sells for $10,000 has a yield to maturity of
A) 8 percent.
B) 10 percent.
C) 12 percent.
D) 14 percent.
Answer: A
Ques Status: Previous Edition
36) Which of the following $1,000 face-value securities has the highest yield to maturity?
A) A 5 percent coupon bond selling for $1,000
B) A 10 percent coupon bond selling for $1,000
C) A 12 percent coupon bond selling for $1,000
D) A 12 percent coupon bond selling for $1,100
Answer: C
Ques Status: Previous Edition
37) Which of the following $5,000 face-value securities has the highest to maturity?
A) A 6 percent coupon bond selling for $5,000
B) A 6 percent coupon bond selling for $5,500
C) A 10 percent coupon bond selling for $5,000
D) A 12 percent coupon bond selling for $4,500
Answer: D
Ques Status: Previous Edition
38) Which of the following $1,000 face-value securities has the highest yield to maturity?
A) A 5 percent coupon bond with a price of $600
B) A 5 percent coupon bond with a price of $800
C) A 5 percent coupon bond with a price of $1,000
D) A 5 percent coupon bond with a price of $1,200
Answer: A
Ques Status: Previous Edition
39) Which of the following $1,000 face-value securities has the lowest yield to maturity?
A) A 5 percent coupon bond selling for $1,000
B) A 10 percent coupon bond selling for $1,000
C) A 15 percent coupon bond selling for $1,000
D) A 15 percent coupon bond selling for $900
Answer: A
Ques Status: Previous Edition

40) Which of the following bonds would you prefer to be buying?
A) A $10,000 face-value security with a 10 percent coupon selling for $9,000
B) A $10,000 face-value security with a 7 percent coupon selling for $10,000
C) A $10,000 face-value security with a 9 percent coupon selling for $10,000
D) A $10,000 face-value security with a 10 percent coupon selling for $10,000
Answer: A
Ques Status: Previous Edition
41) A coupon bond that has no maturity date and no repayment of principal is called a
A) consol.
B) cabinet.
C) Treasury bill.
D) Treasury note.
Answer: A
Ques Status: New
42) The price of a consol equals the coupon payment
A) times the interest rate.
B) plus the interest rate.
C) minus the interest rate.
D) divided by the interest rate.
Answer: D
Ques Status: Previous Edition
43) The interest rate on a consol equals the
A) price times the coupon payment.
B) price divided by the coupon payment.
C) coupon payment plus the price.
D) coupon payment divided by the price.
Answer: D
Ques Status: Previous Edition
44) A consol paying $20 annually when the interest rate is 5 percent has a price of
A) $100.
B) $200.
C) $400.
D) $800.
Answer: C
Ques Status: Previous Edition
45) If a perpetuity has a price of $500 and an annual interest payment of $25, the interest rate is
A) 2.5 percent.
B) 5 percent.
C) 7.5 percent.
D) 10 percent.
Answer: B
Ques Status: Revised
46) The yield to maturity for a perpetuity is a useful approximation for the yield to maturity on
long-term coupon bonds. It is called the ________ when approximating the yield for a coupon
bond.
A) current yield
B) discount yield
C) future yield
D) star yield
Answer: A
Ques Status: New
47) The yield to maturity for a one-year discount bond equals the increase in price over the year,
divided by the
A) initial price.
B) face value.
C) interest rate.
D) coupon rate.
Answer: A
Ques Status: Previous Edition
48) If a $10,000 face-value discount bond maturing in one year is selling for $5,000, then its yield to
maturity is
A) 5 percent.
B) 10 percent.
C) 50 percent.
D) 100 percent.
Answer: D
Ques Status: Previous Edition
49) If a $5,000 face-value discount bond maturing in one year is selling for $5,000, then its yield to
maturity is
A) 0 percent.
B) 5 percent.
C) 10 percent.
D) 20 percent.
Answer: A
Ques Status: Previous Edition
50) A discount bond selling for $15,000 with a face value of $20,000 in one year has a yield to
maturity of
A) 3 percent.
B) 20 percent.
C) 25 percent.
D) 33.3 percent.
Answer: D
Ques Status: Previous Edition
51) The yield to maturity for a discount bond is ________ related to the current bond price.
A) negatively
B) positively
C) not
D) directly
Answer: A
Ques Status: New
52) In Japan in 1998 and in the U.S. in 2008, interest rates were negative for a short period of time because investors found it convenient to hold six-month bills as a store of value because
A) of the high inflation rate.
B) these bills sold at a discount from face value.
C) the bills were denominated in small amounts and could be stored electronically.
D) the bills were denominated in large amounts and could be stored electronically.
Answer: D
Ques Status: Revised
53) If the interest rate is 5%, what is the present value of a security that pays you $1, 050 next year
and $1,102.50 two years from now? If this security sold for $2200, is the yield to maturity greater
or less than 5%? Why?
Answer: PV = $1,050/(1. +.05) + $1,102.50/(1 + 0.5)2
PV = $2,000
If this security sold for $2200, the yield to maturity is less than 5%. The lower the interest
rate the higher the present value.
Ques Status: Previous Edition

The Fed revises its estimates of the monetary aggregates, sometimes by large amounts, because

3.5 How Reliable are the Money Data?
1) The Fed revises its estimates of the monetary aggregates, sometimes by large amounts, because
A) large depository institutions need only report their deposits infrequently.
B) weekly monetary data need to be adjusted for the ʺweekend effect.ʺ
C) monthly monetary data need to be adjusted for the ʺpayday effect.ʺ
D) seasonal adjustments become more precise only as more data becomes available.
Answer: D
Ques Status: Previous Edition
2) The Fed estimates initial monetary aggregate reports because ________ depository institutions
report the amount of their deposits infrequently.
A) all
B) small
C) large
D) state
Answer: B
Ques Status: Previous Edition

3) The increase in holiday spending is not the same every year causing the Fedʹs adjustment for
________ to be revised as more data becomes available.
A) seasonal variation
B) reporting discrepancy
C) market churning
D) transactions discrepancy
Answer: A
Ques Status: Previous Edition
4) An examination of revised money supply statistics, when compared to the initial statistics,
suggests that the initial statistics
A) are pretty good.
B) do not provide a good guide to short-run movements in the money supply.
C) provide a poor guide of monetary policy because they are usually underestimates of the
revised statistics.
D) provide a good guide of monetary policy, though they are usually underestimates of the
revised statistics.
Answer: B
Ques Status: Previous Edition
5) Generally, the initial money supply data reported by the Fed
A) is not a reliable guide to the short-run behavior of the money supply.
B) is not a reliable guide to the long-run behavior of the money supply.
C) is a reliable guide to the short-run behavior of the money supply.
D) usually underestimate the revised statistics.
Answer: A
Ques Status: Revised
6) The initial money supply data reported by the Fed are not a reliable guide to short -run
movements in the money supply such as a ________, but are reasonably reliable for longer
periods such as a ________.
A) month; year
B) day; month
C) year; decade
D) decade; century
Answer: A
Ques Status: New

Recent financial innovation makes the Federal Reserveʹs job of conducting monetary policy

3.4 Measuring Money
1) Recent financial innovation makes the Federal Reserveʹs job of conducting monetary policy
A) easier, since the Fed now knows what to consider money.
B) more difficult, since the Fed now knows what to consider money.
C) easier, since the Fed no longer knows what to consider money.
D) more difficult, since the Fed no longer knows what to consider money.
Answer: D
Ques Status: Previous Edition

2) Defining money becomes ________ difficult as the pace of financial innovation ________.
A) less; quickens
B) more; quickens
C) more; slows
D) more; stops
Answer: B
Ques Status: Previous Edition
3) Monetary aggregates are
A) measures of the money supply reported by the Federal Reserve.
B) measures of the wealth of individuals.
C) never redefined since ʺmoneyʺ never changes.
D) reported by the Treasury Department annually.
Answer: A
Ques Status: New
4) ________ is the narrowest monetary aggregate that the Fed reports.
A) M0
B) M1
C) M2
D) M3
Answer: B
Ques Status: Previous Edition
5) The currency component includes paper money and coins held in ________.
A) bank vaults
B) ATMs
C) the hands of the nonbank public
D) the central bank
Answer: C
Ques Status: Previous Edition
6) The components of the U.S. M1 money supply are demand and checkable deposits plus
A) currency.
B) currency plus savings deposits.
C) currency plus travelers checks.
D) currency plus travelers checks plus money market deposits.
Answer: C
Ques Status: Previous Edition
7) The M1 measure of money includes
A) small denomination time deposits.
B) travelerʹs checks.
C) money market deposit accounts.
D) money market mutual fund shares.
Answer: B
Ques Status: Previous Edition

8) Which of the following is not included in the measure of M1?
A) NOW accounts.
B) Demand deposits.
C) Currency.
D) Savings deposits.
Answer: D
Ques Status: Previous Edition
9) Which of the following is not included in the M1 measure of money but is included in the M2
measure of money?
A) Currency
B) Travelerʹs checks
C) Demand deposits
D) Small-denomination time deposits
Answer: D
Ques Status: Previous Edition
10) Which of the following is included in both M1 and M2?
A) Currency
B) Savings deposits
C) Small-denomination time deposits
D) Money market deposit accounts
Answer: A
Ques Status: Previous Edition
11) Which of the following is not included in the monetary aggregate M2?
A) Currency
B) Savings bonds
C) Travelerʹs checks
D) Checking deposits
Answer: B
Ques Status: Previous Edition
12) Which of the following is included in M2 but not in M1?
A) NOW accounts
B) Demand deposits
C) Currency
D) Money market mutual fund shares (retail)
Answer: D
Ques Status: Previous Edition
13) Of the following, the largest is
A) money market deposit accounts.
B) demand deposits.
C) M1.
D) M2.
Answer: D
Ques Status: Previous Edition
14) If an individual redeems a U.S. savings bond for currency
A) M1 stays the same and M2 decreases.
B) M1 increases and M2 increases.
C) M1 increases and M2 stays the same.
D) M1 stays the same and M2 stays the same.
Answer: B
Ques Status: Previous Edition
15) If an individual moves money from a small-denomination time deposit to a demand deposit
account,
A) M1 increases and M2 stays the same.
B) M1 stays the same and M2 increases.
C) M1 stays the same and M2 stays the same.
D) M1 increases and M2 decreases.
Answer: A
Ques Status: Previous Edition
16) If an individual moves money from a demand deposit account to a money market deposit
account,
A) M1 decreases and M2 stays the same.
B) M1 stays the same and M2 increases.
C) M1 stays the same and M2 stays the same.
D) M1 increases and M2 decreases.
Answer: A
Ques Status: Previous Edition
17) If an individual moves money from a savings deposit account to a money market deposit
account,
A) M1 decreases and M2 stays the same.
B) M1 stays the same and M2 increases.
C) M1 stays the same and M2 stays the same.
D) M1 increases and M2 decreases.
Answer: C
Ques Status: Previous Edition
18) If an individual moves money from currency to a demand deposit account,
A) M1 decreases and M2 stays the same.
B) M1 stays the same and M2 increases.
C) M1 stays the same and M2 stays the same.
D) M1 increases and M2 stays the same.
Answer: C
Ques Status: Previous Edition
19) If an individual moves money from a money market deposit account to currency,
A) M1 increases and M2 stays the same.
B) M1 stays the same and M2 increases.
C) M1 stays the same and M2 stays the same.
D) M1 increases and M2 decreases.
Answer: A
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20) Small-denomination time deposits refer to certificates of deposit with a denomination of less
than ________.
A) $1,000
B) $10,000
C) $100,000
D) $1,000,000
Answer: C
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21) Which of the following statements accurately describes the two measures of the money supply?
A) The two measures do not move together, so they cannot be used interchangeably by
policymakers.
B) The two measuresʹ movements closely parallel each other, even on a month-to-month
basis.
C) Short-run movements in the money supply are extremely reliable.
D) M2 is the narrowest measure the Fed reports.
Answer: A
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22) The decade during which the growth rates of monetary aggregates diverged the most is
A) the 1960s.
B) the 1970s.
C) the 1980s.
D) the 1990s.
Answer: D
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23) Why are most of the U.S. dollars held outside of the United States?
Answer: Concern about high inflation eroding the value of their own currency causes many people
in foreign countries to hold U.S. dollars as a hedge against inflation risk.
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As the payments system evolves from barter to a monetary system,

3.3 Evolution of the Payments System
1) The payments system is
A) the method of conducting transactions in the economy.
B) used by union officials to set salary caps.
C) an illegal method of rewarding contracts.
D) used by your employer to determine salary increases.
Answer: A
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2) As the payments system evolves from barter to a monetary system,
A) commodity money is likely to precede the use of paper currency.
B) transaction costs increase.
C) the number of prices that need to be calculated increase rather dramatically.
D) specialization decreases.
Answer: A
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3) A disadvantage of ________ is that it is very heavy and hard to transport from one place to
another.
A) commodity money
B) fiat money
C) electronic money
D) paper money
Answer: A
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4) Paper currency that has been declared legal tender but is not convertible into coins or precious
metals is called ________ money.
A) commodity
B) fiat
C) electronic
D) funny
Answer: B
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5) When paper currency is decreed by governments as legal tender, legally it must be ________.
A) paper currency backed by gold
B) a precious metal such as gold or silver
C) accepted as payment for debts
D) convertible into an electronic payment
Answer: C
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6) The evolution of the payments system from barter to precious metals, then to fiat money, then to
checks can best be understood as a consequence of the fact that
A) paper is more costly to produce than precious metals.
B) precious metals were not generally acceptable.
C) precious metals were difficult to carry and transport.
D) paper money is less accepted than checks.
Answer: C
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7) Compared to checks, paper currency and coins have the major drawbacks that they
A) are easily stolen.
B) are hard to counterfeit.
C) are not the most liquid assets.
D) must be backed by gold.
Answer: A
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8) Introduction of checks into the payments system reduced the costs of exchanging goods and
services. Another advantage of checks is that
A) they provide convenient receipts for purchases.
B) they can never be stolen.
C) they are more widely accepted than currency.
D) the funds from a deposited check are available for use immediately.
Answer: A
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9) The evolution of the payments system from barter to precious metals, then to fiat money, then to
checks can best be understood as a consequence of
A) government regulations designed to improve the efficiency of the payments system.
B) government regulations designed to promote the safety of the payments system.
C) innovations that reduced the costs of exchanging goods and services.
D) competition among firms to make it easier for customers to purchase their products.
Answer: C
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10) Compared to an electronic payments system, a payments system based on checks has the major
drawback that
A) checks are less costly to process.
B) checks take longer to process, meaning that it may take several days before the depositor
can get her cash.
C) fraud may be more difficult to commit when paper receipts are eliminated.
D) legal liability is more clearly defined.
Answer: B
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11) Which of the following sequences accurately describes the evolution of the payments system?
A) Barter, coins made of precious metals, paper currency, checks, electronic funds transfers
B) Barter, coins made of precious metals, checks, paper currency, electronic funds transfers
C) Barter, checks, paper currency, coins made of precious metals, electronic funds transfers
D) Barter, checks, paper currency, electronic funds transfers
Answer: A
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12) During the past two decades an important characteristic of the modern payments system has
been the rapidly increasing use of
A) checks and decreasing use of currency.
B) electronic fund transfers.
C) commodity monies.
D) fiat money.
Answer: B
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13) Which of the following is not a form of e-money?
A) a debit card
B) a credit card
C) a stored-value card
D) a smart card
Answer: B
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14) A smart card is the equivalent of
A) cash.
B) savings bonds.
C) savings deposits.
D) certificates of deposit.
Answer: A
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15) An electronic payments system has not completely replaced the paper payments system because of all of the following reasons except
A) expensive equipment is necessary to set up the system.
B) security concerns.
C) privacy concerns.
D) transportation costs.
Answer: D
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16) In explaining the evolution of money
A) government regulation is the most important factor.
B) commodity money, because it is valued more highly, tends to drive out paper money.
C) new forms of money evolve to lower transaction costs.
D) paper money is always backed by gold and therefore more desirable than checks.
Answer: C
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17) What factors have slowed down the movement to a system where all payments are made
electronically?
Answer: The equipment necessary to set up the system is expensive, security of the information,
and privacy concerns are issues that need to be addressed before an electronic payments
system will be widely accepted.
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Of moneyʹs three functions, the one that distinguishes money from other assets is its function as a

3.2 Functions of Money
1) Of moneyʹs three functions, the one that distinguishes money from other assets is its function as a
A) store of value.
B) unit of account.
C) standard of deferred payment.
D) medium of exchange.
Answer: D
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2) If peanuts serve as a medium of exchange, a unit of account, and a store of value, then peanuts
are
A) bank deposits.
B) reserves.
C) money.
D) loanable funds.
Answer: C
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3) ________ are the time and resources spent trying to exchange goods and services.
A) Bargaining costs.
B) Transaction costs.
C) Contracting costs.
D) Barter costs.
Answer: B
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4) Compared to an economy that uses a medium of exchange, in a barter economy
A) transaction costs are higher.
B) transaction costs are lower.
C) liquidity costs are higher.
D) liquidity costs are lower.
Answer: A
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5) When compared to exchange systems that rely on money, disadvantages of the barter system
include:
A) the requirement of a double coincidence of wants.
B) lowering the cost of exchanging goods over time.
C) lowering the cost of exchange to those who would specialize.
D) encouraging specialization and the division of labor.
Answer: A
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6) The conversion of a barter economy to one that uses money
A) increases efficiency by reducing the need to exchange goods and services.
B) increases efficiency by reducing the need to specialize.
C) increases efficiency by reducing transactions costs.
D) does not increase economic efficiency.
Answer: C
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7) Which of the following statements best explains how the use of money in an economy increases
economic efficiency?
A) Money increases economic efficiency because it is costless to produce.
B) Money increases economic efficiency because it discourages specialization.
C) Money increases economic efficiency because it decreases transactions costs.
D) Money cannot have an effect on economic efficiency.
Answer: C
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8) When economists say that money promotes ________, they mean that money encourages
specialization and the division of labor.
A) bargaining
B) contracting
C) efficiency
D) greed
Answer: C
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9) Money ________ transaction costs, allowing people to specialize in what they do best.
A) reduces
B) increases
C) enhances
D) eliminates
Answer: A
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10) For a commodity to function effectively as money it must be
A) easily standardized, making it easy to ascertain its value.
B) difficult to make change.
C) deteriorate quickly so that its supply does not become too large.
D) hard to carry around.
Answer: A
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11) All of the following are necessary criteria for a commodity to function as money except
A) it must deteriorate quickly.
B) it must be divisible.
C) it must be easy to carry.
D) it must be widely accepted.
Answer: A
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12) Whatever a society uses as money, the distinguishing characteristic is that it must
A) be completely inflation proof.
B) be generally acceptable as payment for goods and services or in the repayment of debt.
C) contain gold.
D) be produced by the government.
Answer: B
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13) All but the most primitive societies use money as a medium of exchange, implying that
A) the use of money is economically efficient.
B) barter exchange is economically efficient.
C) barter exchange cannot work outside the family.
D) inflation is not a concern.
Answer: A
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14) Kevin purchasing concert tickets with his debit card is an example of the ________ function of
money.
A) medium of exchange
B) unit of account
C) store of value
D) specialization
Answer: A
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15) When money prices are used to facilitate comparisons of value, money is said to function as a
A) unit of account.
B) medium of exchange.
C) store of value.
D) payments-system ruler.
Answer: A
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16) A problem with barter exchange when there are many goods is that in a barter system
A) transactions costs are minimized.
B) there exists a multiple number of prices for each good.
C) there is only one store of value.
D) exchange of services is impossible.
Answer: B
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17) In a barter economy the number of prices in an economy with N goods is
A) [N(N - 1)]/2.
B) N(N/2).
C) 2N.
D) N(N/2) - 1.
Answer: A
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18) If there are five goods in a barter economy, one needs to know ten prices in order to exchange
one good for another. If, however, there are ten goods in a barter economy, then one needs to
know ________ prices in order to exchange one good for another.
A) 20
B) 25
C) 30
D) 45
Answer: D
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19) If there are four goods in a barter economy, then one needs to know ________ prices in order to
exchange one good for another.
A) 8
B) 6
C) 5
D) 4
Answer: B
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20) Because it is a unit of account, money
A) increases transaction costs.
B) reduces the number of prices that need to be calculated.
C) does not earn interest.
D) discourages specialization.
Answer: B
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21) Dennis notices that jackets are on sale for $99. In this case money is functioning as a ________.
A) medium of exchange
B) unit of account
C) store of value
D) payments-system ruler
Answer: B
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22) As a store of value, money
A) does not earn interest.
B) cannot be a durable asset.
C) must be currency.
D) is a way of saving for future purchases.
Answer: D
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23) Patrick places his pocket change into his savings bank on his desk each evening. By his actions,
Patrick indicates that he believes that money is a
A) medium of exchange.
B) unit of account.
C) store of value.
D) unit of specialization.
Answer: C
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24) ________ is the relative ease and speed with which an asset can be converted into a medium of
exchange.
A) Efficiency
B) Liquidity
C) Deflation
D) Specialization
Answer: B
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25) Increasing transactions costs of selling an asset make the asset
A) more valuable.
B) more liquid.
C) less liquid.
D) more moneylike.
Answer: C
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26) Since it does not have to be converted into anything else to make purchases, ________ is the
most liquid asset.
A) money
B) stock
C) artwork
D) gold
Answer: A
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27) Of the following assets, the least liquid is
A) stocks.
B) travelerʹs checks.
C) checking deposits.
D) a house.
Answer: D
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28) Ranking assets from most liquid to least liquid, the correct order is
A) savings bonds; house; currency.
B) currency; savings bonds; house.
C) currency; house; savings bonds.
D) house; savings bonds; currency.
Answer: B
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29) People hold money even during inflationary episodes when other assets prove to be better
stores of value. This can be explained by the fact that money is
A) extremely liquid.
B) a unique good for which there are no substitutes.
C) the only thing accepted in economic exchange.
D) backed by gold.
Answer: A
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30) If the price level doubles, the value of money
A) doubles.
B) more than doubles, due to scale economies.
C) rises but does not double, due to diminishing returns.
D) falls by 50 percent.
Answer: D
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31) A fall in the level of prices
A) does not affect the value of money.
B) has an uncertain effect on the value of money.
C) increases the value of money.
D) reduces the value of money.
Answer: C
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32) A hyperinflation is
A) a period of extreme inflation generally greater than 50% per month.
B) a period of anxiety caused by rising prices.
C) an increase in output caused by higher prices.
D) impossible today because of tighter regulations.
Answer: A
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33) During hyperinflations,
A) the value of money rises rapidly.
B) money no longer functions as a good store of value and people may resort to barter
transactions on a much larger scale.
C) middle-class savers benefit as prices rise.
D) moneyʹs value remains fixed to the price level; that is, if prices double so does the value of
money.
Answer: B
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34) Because inflation in Germany after World War I sometimes exceeded 1,000 % per month, one
can conclude that the German economy suffered from
A) deflation.
B) disinflation.
C) hyperinflation.
D) superdeflation.
Answer: C
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35) If merchants in the country Zed choose to close their doors, preferring to be stuck with rotting
merchandise rather than worthless currency, then one can conclude that Zed is experiencing a
A) superdeflation.
B) hyperdeflation.
C) disinflation.
D) hyperinflation.
Answer: D
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36) Explain how cigarettes could be called ʺmoneyʺ in prisoner-of-war camps of World War II.
Answer: The cigarettes performed the three functions of money. They served as the medium of
exchange because individuals did exchange items for cigarettes. They served as a unit of
account because prices were quoted in terms of the number of cigarettes required for the
exchange. They served as a store of value because an individual would be willing to save
their cigarettes even if they did not smoke because they believed that they could
exchange the cigarettes for something that they did want at some time in the future.
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Which of the following statements uses the economistsʹ definition of money?

3.1 Meaning of Money
1) To an economist, ________ is anything that is generally accepted in payment for goods and
services or in the repayment of debt.
A) wealth
B) income
C) money
D) credit
Answer: C
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2) Money is
A) anything that is generally accepted in payment for goods and services or in the repayment
of debt.
B) a flow of earnings per unit of time.
C) the total collection of pieces of property that are a store of value.
D) always based on a precious metal like gold or silver.
Answer: A
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3) Currency includes
A) paper money and coins.
B) paper money, coins, and checks.
C) paper money and checks.
D) paper money, coins, checks, and savings deposits.
Answer: A
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4) Even economists have no single, precise definition of money because
A) money supply statistics are a state secret.
B) the Federal Reserve does not employ or report different measures of the money supply.
C) the ʺmoneynessʺ or liquidity of an asset is a matter of degree.
D) economists find disagreement interesting and refuse to agree for ideological reasons.
Answer: C
Ques Status: Revised
5) The total collection of pieces of property that serve to store value is a personʹs
A) wealth.
B) income.
C) money.
D) credit.
Answer: A
Ques Status: New
6) A personʹs house is part of her
A) money.
B) income.
C) liabilities.
D) wealth.
Answer: D
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7) ________ is used to make purchases while ________ is the total collection of pieces of property that serve to store value.
A) Money; income
B) Wealth; income
C) Income; money
D) Money; wealth
Answer: D
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8) ________ is a flow of earnings per unit of time.
A) Income
B) Money
C) Wealth
D) Currency
Answer: A
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9) An individualʹs annual salary is her
A) money.
B) income.
C) wealth.
D) liabilities.
Answer: B
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10) When we say that money is a stock variable, we mean that
A) the quantity of money is measured at a given point in time.
B) we must attach a time period to the measure.
C) it is sold in the equity market.
D) money never loses purchasing power.
Answer: A
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11) The difference between money and income is that
A) money is a flow and income is a stock.
B) money is a stock and income is a flow.
C) there is no differencemoney and income are both stocks.
D) there is no differencemoney and income are both flows.
Answer: B
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12) Which of the following is a true statement?
A) Money and income are flow variables.
B) Money is a flow variable.
C) Income is a flow variable.
D) Money and income are stock variables.
Answer: C
Ques Status: Revised
13) Which of the following statements uses the economistsʹ definition of money?
A) I plan to earn a lot of money over the summer.
B) Betsy is richshe has a lot of money.
C) I hope that I have enough money to buy my lunch today.
D) The job with New Company gave me the opportunity to earn more money.
Answer: C
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Which of the following is not a goal of financial regulation?

2.7 Regulation of the Financial System
1) Which of the following is not a goal of financial regulation?
A) Ensuring the soundness of the financial system
B) Reducing moral hazard
C) Reducing adverse selection
D) Ensuring that investors never suffer losses
Answer: D
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2) Increasing the amount of information available to investors helps to reduce the problems of
________ and ________ in the financial markets.
A) adverse selection; moral hazard
B) adverse selection; risk sharing
C) moral hazard; transactions costs
D) adverse selection; economies of scale
Answer: A
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3) A goal of the Securities and Exchange Commission is to reduce problems arising from
A) competition.
B) banking panics.
C) risk.
D) asymmetric information.
Answer: D
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4) The purpose of the disclosure requirements of the Securities and Exchange Commission is to
A) increase the information available to investors.
B) prevent bank panics.
C) improve monetary control.
D) protect investors against financial losses.
Answer: A
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5) Government regulations to reduce the possibility of financial panic include all of the following
except
A) transactions costs.
B) restrictions on assets and activities.
C) disclosure.
D) deposit insurance.
Answer: A
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6) Which of the following do not provide charters?
A) The Office of the Comptroller of the Currency
B) The Federal Reserve System
C) The National Credit Union Administration
D) State banking and insurance commissions
Answer: B
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7) A restriction on bank activities that was repealed in 1999 was
A) the prohibition of the payment of interest on checking deposits.
B) restrictions on credit terms.
C) minimum down payments on loans to purchase securities.
D) separation of commercial banking from the securities industries.
Answer: D
Ques Status: Revised
8) In order to reduce risk and increase the safety of financial institutions, commercial banks and
other depository institutions are prohibited from
A) owning municipal bonds.
B) making real estate loans.
C) making personal loans.
D) owning common stock.
Answer: D
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9) The primary purpose of deposit insurance is to
A) improve the flow of information to investors.
B) prevent banking panics.
C) protect bank shareholders against losses.
D) protect bank employees from unemployment.
Answer: B
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10) The agency that was created to protect depositors after the banking failures of 1930 -1933 is the
A) Federal Reserve System.
B) Federal Deposit Insurance Corporation.
C) Treasury Department.
D) Office of the Comptroller of the Currency.
Answer: B
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11) Savings and loan associations are regulated by the
A) Federal Reserve System.
B) Securities and Exchange Commission.
C) Office of the Comptroller of the Currency.
D) Office of Thrift Supervision.
Answer: D
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12) The regulatory agency that sets reserve requirements for all banks is
A) the Federal Reserve System.
B) the Federal Deposit Insurance Corporation.
C) the Office of Thrift Supervision.
D) the Securities and Exchange Commission.
Answer: A
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13) Asymmetric information is a universal problem. This would suggest that financial regulations
A) in industrial countries are an unqualified failure.
B) differ significantly around the world.
C) in industrialized nations are similar.
D) are unnecessary.
Answer: C
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14) How do regulators help to ensure the soundness of financial intermediaries?
Answer: Regulators restrict who can set up a financial intermediary, conduct regular
examinations, restrict assets, and provide insurance to help ensure the soundness of
financial intermediaries.
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