Financial Economics
Final Exam Questions
Course Introduction
Financial Economics explores the principles and methodologies used to analyze financial markets and instruments within the broader context of economic theory. The course examines how individuals, firms, and institutions make investment and financing decisions, focusing on topics such as asset pricing, risk management, portfolio theory, market efficiency, and the functioning of financial intermediaries. Students will gain an understanding of how financial markets operate, how information is processed and reflected in prices, and the role of financial regulation and policy. The course integrates theoretical models with real-world applications, preparing students to critically evaluate financial decisions and market behavior.
Recommended Textbook
Money Banking and the Financial System 3rd Edition by R. Glenn Hubbard
Available Study Resources on Quizplus
18 Chapters
1993 Verified Questions
1993 Flashcards
Source URL: https://quizplus.com/study-set/1222 Page 2
Chapter 1: Introducing Money and the Financial System
Available Study Resources on Quizplus for this Chatper
70 Verified Questions
70 Flashcards
Source URL: https://quizplus.com/quiz/24159
Sample Questions
Q1) Because securitized loans are loans that have been bundled with other loans and sold to investors,they are
A) financial assets but not financial securities.
B) financial securities but not financial assets.
C) both financial assets and financial securities.
D) neither financial assets nor financial securities.
Answer: C
Q2) Why did some economists and policymakers criticize the Fed and Treasury for arranging the sale of Bear Stearns to JP Morgan Chase in 2008?
Answer: The main concern was with the moral hazard problem,which is the possibility that managers of financial firms such as Bear Stearns might make riskier investments if they believe that the federal government will save them from bankruptcy.
Q3) All of the following represent returns to savers EXCEPT
A) dividends on stocks.
B) fees on loans.
C) interest on deposits.
D) coupon payments on bonds.
Answer: B
To view all questions and flashcards with answers, click on the resource link above.
3
Chapter 2: Money and the Payments System
Available Study Resources on Quizplus for this Chatper
121 Verified Questions
121 Flashcards
Source URL: https://quizplus.com/quiz/24160
Sample Questions
Q1) Hyperinflations are usually caused by large budget deficits financed by
A) selling bonds to private investors.
B) selling bonds to the central bank.
C) raising taxes.
D) borrowing from commercial banks.
Answer: B
Q2) What is normally the ultimate cause of hyperinflation?
Answer: The ultimate cause of hyperinflation is usually governments spending more than they collect in taxes,which results in government budget deficits.Governments that can't sell bonds to private investors will often sell them to their central banks.In paying for the bonds,the central bank increases the country's money supply.Excessive increases in the money supply result in hyperinflation.
Q3) In a barter system individuals
A) find it impossible to specialize.
B) must be entirely self-sufficient.
C) find it difficult to specialize, but may be able to do so.
D) will almost invariably specialize.
Answer: C
Q4) In what way are other assets less liquid than money?
Answer: You incur transactions costs when you exchange other assets for money.
Page 4
To view all questions and flashcards with answers, click on the resource link above.
Chapter 3: Interest Rates and Rates of Return
Available Study Resources on Quizplus for this Chatper
111 Verified Questions
111 Flashcards
Source URL: https://quizplus.com/quiz/24161
Sample Questions
Q1) Which of the following is NOT fixed on a coupon bond?
A) coupon
B) coupon rate
C) market price
D) par value
Answer: C
Q2) Which of the following is NOT a fixed-payment loan?
A) mortgage
B) car loan
C) student loan
D) corporate bond
Answer: D
Q3) The amount of funds the borrower receives from the lender with a simple loan is called the
A) principal.
B) equity.
C) claim.
D) collateral.
Answer: A
To view all questions and flashcards with answers, click on the resource link above.
Page 5
Chapter 4: Determining Interest Rates
Available Study Resources on Quizplus for this Chatper
143 Verified Questions
143 Flashcards
Source URL: https://quizplus.com/quiz/24162
Sample Questions
Q1) The demand curve for loanable funds slopes down because A) at lower bond prices more loanable funds will be supplied.
B) lower interest rates reduce the inflation rate.
C) an increase in the interest rate makes borrowers more willing and able to demand more funds.
D) a decrease in the interest rate makes borrowers more willing and able to demand more funds.
Q2) When expected inflation increases,investors ________ their demand for bonds because,for each nominal interest rate,the higher the inflation rate,the ________ the real interest rate investors will receive.
A) increase; higher
B) increase; lower
C) reduce; higher
D) reduce; lower
Q3) How can diversification reduce idiosyncratic risk but not systematic risk?
Q4) According to the Fisher effect,an increase in expected inflation results in
A) lower nominal interest rates.
B) higher nominal interest rates.
C) lower real interest rates.
D) higher real interest rates.
Page 6
To view all questions and flashcards with answers, click on the resource link above.
Chapter 5: The Risk Structure and Term Structure of Interest
Rates
Available Study Resources on Quizplus for this Chatper
112 Verified Questions
112 Flashcards
Source URL: https://quizplus.com/quiz/24163
Sample Questions
Q1) Which of the following is NOT true of the yield curve for U.S.Treasury securities?
A) Typically, it slopes upward.
B) It depicts the relationship among yields on securities of different maturities.
C) Typically, it shifts up or down rather than twists.
D) Typically, it slopes downward.
Q2) Which of the following accurately describes the tax treatment of municipal bonds?
A) All income from municipal bonds is tax free.
B) Interest is tax free, but unrealized capital gains are taxable.
C) Interest is tax free, but realized capital gains are taxable.
D) Interest is taxable, but capital gains are tax free.
Q3) According to the liquidity premium theory,a steep yield curve may be an indicator of A) expectations of a significant increase in inflation.
B) an upcoming recession.
C) an economic slowdown.
D) lower future short-term interest rates.
Q4) How do ratings agencies earn income?
To view all questions and flashcards with answers, click on the resource link above. Page 7
Chapter 6: The Stock Market, information, and Financial
Market Efficiency
Available Study Resources on Quizplus for this Chatper
118 Verified Questions
118 Flashcards
Source URL: https://quizplus.com/quiz/24164
Sample Questions
Q1) Which type of stock should result in the best return according to the efficient markets hypothesis?
A) a firm that is expected to be highly profitable in the future
B) a firm that is considered to be undervalued
C) a firm expected to earn little profit in the future
D) none of the above
Q2) Suppose you buy a stock that sells for $20.It's expected annual dividend is $2 and you expect its price to be $25 in one year.What is your expected rate of return on the stock?
Q3) According to the Gordon growth model,what is the value of a stock with a dividend of $1,required return on equity of 10% and expected growth rate of dividends of 5%?
A) $2
B) $10
C) $20
D) $21
Q4) Explain what is meant by the "double taxation of dividends"?
Q5) In what way do owners of stocks have limited liability?
Page 8
Q6) What are the effects of the double taxation of dividends?
Q7) How can stock prices affect spending by businesses and households?
To view all questions and flashcards with answers, click on the resource link above.
Chapter 7: Derivatives and Derivative Markets
Available Study Resources on Quizplus for this Chatper
123 Verified Questions
123 Flashcards
Source URL: https://quizplus.com/quiz/24165
Sample Questions
Q1) The period over which a call or put option exists is
A) determined by its delivery date.
B) determined by its expiration date.
C) determined by whether the contract is written for a commodity or for a financial instrument.
D) indeterminate; options contracts continue in existence until either the buyer or the seller desires to discontinue it.
Q2) When talking about forward contracts,the date on which the contracted delivery must take place is called the
A) settlement date.
B) counterparty date.
C) forward date.
D) spot date.
Q3) An advantage of a swap over futures and options is that
A) they can be written for long periods.
B) they are more liquid.
C) they carry less default risk.
D) there is no need to assess the creditworthiness of participants.
Q4) What are the steps involved in using options for a short sale of a stock?
To view all questions and flashcards with answers, click on the resource link above. Page 9
Chapter 8: The Market for Foreign Exchange
Available Study Resources on Quizplus for this Chatper
115 Verified Questions
115 Flashcards
Source URL: https://quizplus.com/quiz/24166
Sample Questions
Q1) If the interest rate on a U.S.one-year bond is 2%,the interest rate on a Brazilian one-year bond is 8%,and the currency premium on reals (Brazilian currency)is 3%,what is the expected rate of appreciation of the U.S.dollar according to interest-rate parity?
A) -3%
B) 3%
C) 5%
D) 6%
Q2) Briefly explain how a U.S.company that exports to Europe can hedge against exchange rate risk.
Q3) Suppose you invest $5,000 in a one-year Japanese bond that pays 1% interest.At the time of your purchase,85 yen equals $1 while one year later,80 yen equals $1.What will be the value of your investment in one year when measured in dollars?
Q4) Suppose that short-term real interest rates fall in Japan.Is this likely to be good news or bad news for the tourism industry in Hawaii?
Q5) What would happen to the value of the dollar if prices in the United States increased more rapidly relative to prices in other countries?
To view all questions and flashcards with answers, click on the resource link above. Page 10
Chapter 9: Transactions Costs, asymmetric Information, and the Structure of the Financial System
Available Study Resources on Quizplus for this Chatper
118 Verified Questions
118 Flashcards
Source URL: https://quizplus.com/quiz/24167
Sample Questions
Q1) Which of the following does NOT represent a way in which financial intermediaries take advantage of economies of scale?
A) paying lower brokerage fees per dollar invested
B) paying lower legal fees per dollar invested
C) purchasing sophisticated computer systems
D) paying lower taxes per dollar invested
Q2) In the 1790s,stock and bond markets were established in all of the following cities EXCEPT
A) New York.
B) Boston.
C) Washington, D.C.
D) Philadelphia.
Q3) Financial intermediaries reduce transactions costs by
A) charging fees to small savers.
B) charging fees to small investors.
C) taking advantage of economies of scale.
D) avoiding risky investments.
Q4) How do high interest rates increase the risk of adverse selection in the bond market?
Q5) How can restrictive covenants help to reduce moral hazard in bond markets?
To view all questions and flashcards with answers, click on the resource link above. Page 11
Chapter 10: The Economics of Banking
Available Study Resources on Quizplus for this Chatper
146 Verified Questions
146 Flashcards
Source URL: https://quizplus.com/quiz/24168
Sample Questions
Q1) Required reserves are
A) the portion of demand deposits and NOW accounts banks must hold.
B) zero on demand deposits.
C) zero on NOW accounts.
D) imposed on all deposits at commercial banks.
Q2) If you have $2 million in a CD at a commercial bank that is a member of the FDIC,how much of your funds are uninsured?
A) $0
B) $1 million
C) $1.75 million
D) $2 million
Q3) What are federally chartered banks called?
A) federal banks
B) Federal Reserve banks
C) national banks
D) central banks
Q4) Suppose a bank has assets of $500 million and capital of $100 million.Its return on assets is -3%.What is its leverage ratio? What is its return on equity?
Q5) What is a repurchase agreement?
To view all questions and flashcards with answers, click on the resource link above. Page 12
Chapter 11: Beyond Commercial Banks: Shadow Banks and
Nonbank Financial Institutions
Available Study Resources on Quizplus for this Chatper
101 Verified Questions
101 Flashcards
Source URL: https://quizplus.com/quiz/24169
Sample Questions
Q1) Factoring
A) involves selling stocks and using the proceeds to buy bonds.
B) is purchasing accounts receivable at a discount.
C) is calculating the optimal par values of stocks and bonds.
D) has been declared illegal under the Factoring Reform Act of 1994.
Q2) What were the two main rationale for exempting nonbanks from restrictions on assets and degrees of leverage?
Q3) Shadow banks ________ borrow short-term funds that are not federally insured and use them for long-term investment,and therefore ________ to runs similar to those that occurred during the financial crisis.
A) continue to; are vulnerable
B) continue to; are no longer vulnerable
C) no longer; are vulnerable
D) no longer; are no longer vulnerable
Q4) Entry-level hires in investment banking firms are usually called
A) associates.
B) analysts.
C) managers.
D) newbies.
Q5) How is the use of leverage a "double-edged sword"?
To view all questions and flashcards with answers, click on the resource link above. Page 13
Chapter 12: Financial Crises and Financial Regulation
Available Study Resources on Quizplus for this Chatper
79 Verified Questions
79 Flashcards
Source URL: https://quizplus.com/quiz/24170
Sample Questions
Q1) Banks face liquidity risk because
A) they can have difficulty meeting their depositor's demands to withdraw money.
B) they are unable to borrow from the Federal Reserve.
C) households and businesses may seek to borrow a large amount of funds in a short period of time.
D) governments tend to run high budget deficits.
Q2) The recession that became the Great Depression began
A) two months prior to the stock market crash of 1929.
B) with the stock market crash of 1929.
C) one year after the stock market crash of 1929.
D) with the banking panics of the early 1930s.
Q3) Regulation Q
A) prohibited interstate banking.
B) placed ceilings on allowable interest rates on time and savings deposits.
C) required all banks to hold reserves against demand deposits.
D) broadened the basis on which the Fed could make discount loans.
Q4) What are the primary reasons for and against a policy of "too big to fail."
Q5) What are the two most common reasons for a sovereign debt crisis?
Q6) What other markets were affected by the decline in the housing market beginning in 2006? Briefly explain why.
Page 14
To view all questions and flashcards with answers, click on the resource link above.
Chapter 13: The Federal Reserve and Central Banking
Available Study Resources on Quizplus for this Chatper
109 Verified Questions
109 Flashcards
Source URL: https://quizplus.com/quiz/24171
Sample Questions
Q1) Which of the following men has NOT served as Chairman of the Board of Governors?
A) Milton Friedman
B) Arthur Burns
C) Paul Volcker
D) Alan Greenspan
Q2) The Beige Book is prepared by
A) district banks.
B) the Board of Governors.
C) FOMC staff members.
D) the Commerce Department.
Q3) In what ways is the Fed independent of the political process?
Q4) Apart from the United States,in countries where central bank board members serve fixed terms of office
A) none have terms as long as fourteen years.
B) many serve for life or good behavior.
C) all have terms longer than fourteen years.
D) the head of the central bank rarely has a term longer than one year.
Q5) What are the limitations to the Fed's independence?
Q6) How do individuals become members of the Board of Governors?
Q7) What constitutes meaningful independence of a central bank?
To view all questions and flashcards with answers, click on the resource link above. Page 15
Chapter 14: The Federal Reserves Balance Sheet and the
Money Supply Process
Available Study Resources on Quizplus for this Chatper
89 Verified Questions
89 Flashcards
Source URL: https://quizplus.com/quiz/24172
Sample Questions
Q1) When the Fed lends to depository institutions,the loans are called
A) federal funds.
B) discount loans.
C) repurchase agreements.
D) reverse repurchase agreements.
Q2) What unusual policy actions did the Fed take during the Financial Crisis of 2007-2009 that affected its balance sheet?
Q3) The primary assets of the Fed are
A) discount loans and reserves.
B) discount loans and government securities.
C) government securities and reserves.
D) discount loans and open market operations.
Q4) As of August 2016,the value of currency in circulation was about
A) $1.1 billion.
B) $24 billion.
C) $1.4 trillion.
D) $44 trillion.
Q5) Why did banks increase their holdings of excess reserves during the Financial Crisis of 2007-2009?
Q6) Briefly explain the process of multiple deposit creation. Page 16
To view all questions and flashcards with answers, click on the resource link above.
Page 17
Chapter 15: Monetary Policy
Available Study Resources on Quizplus for this Chatper
139 Verified Questions
139 Flashcards
Source URL: https://quizplus.com/quiz/24173
Sample Questions
Q1) A falling dollar makes U.S.goods
A) more expensive abroad and increases the volume of U.S. exports.
B) less expensive abroad and increases the volume of U.S. exports.
C) less expensive abroad and decreases the volume of U.S. exports.
D) more expensive abroad and decreases the volume of U.S. exports.
Q2) Sally Jones lost her job at a steel company because of a permanent decline in the demand for steel.Sally Jones is considered by economists to be
A) naturally unemployed.
B) cyclically unemployed.
C) structurally unemployed.
D) frictionally unemployed.
Q3) What is the difference between defensive and dynamic open market operations?
Q4) The Employment Act of 1946 codified the federal government's commitment to
A) promote high employment consistent with price stability.
B) promote high employment irrespective of the effects on price stability.
C) guarantee a job to every unemployed person.
D) fine companies that engage in excessive layoffs during recessions.
Q5) Describe the temporary lending facilities that the Fed set up during the Financial Crisis of 2007-2009.
To view all questions and flashcards with answers, click on the resource link above. Page 18
Chapter 16: The International Financial System and Monetary Policy
Available Study Resources on Quizplus for this Chatper
108 Verified Questions
108 Flashcards
Source URL: https://quizplus.com/quiz/24174
Sample Questions
Q1) The trade balance is
A) by definition, identical to the current account balance.
B) a major portion, but not the only component, of the current account balance.
C) almost invariably larger than the financial account balance.
D) the largest component of the financial account.
Q2) Currently,the dominant reserve currency is the
A) U.S. dollar.
B) Japanese yen.
C) euro.
D) British pound.
Q3) If the Fed buys $2 billion of short-term securities issued by the government of Japan and pays for them by writing a check for $2 billion
A) its assets will rise by $2 billion and the monetary base will rise by $2 billion.
B) its assets will fall by $2 billion and the monetary base will fall by $2 billion.
C) its assets will rise by $2 billion and the monetary base will fall by $2 billion.
D) its assets will fall by $2 billion and the monetary base will rise by $2 billion.
To view all questions and flashcards with answers, click on the resource link above.
Page 19
Chapter 17: Monetary Theory I- the Aggregate Demand and Aggregate Supply Model
Available Study Resources on Quizplus for this Chatper
103 Verified Questions
103 Flashcards
Source URL: https://quizplus.com/quiz/24175
Sample Questions
Q1) How does an increase in the price level lead to a higher interest rate?
Q2) If in the short run prices did not respond at all to changes in aggregate demand,the short-run aggregate supply curve would A) be vertical. B) be horizontal. C) slope up. D) slope down.
Q3) Suppose that many households look to the stock market to gauge how the economy is likely to perform in the future.When stock prices are rising,households will be optimistic about the future state of the economy and will increase their spending on houses and consumer durables,such as cars and furniture.When stock prices are falling,households will be pessimistic about the future and will cut back on their spending.If this view of the link between stock prices and household spending is correct,what will be the effect of a decline in stock prices on output in the new Keynesian view? Be sure to distinguish the short run from the long run.
Q4) What is the principal source of change in productivity growth?
Q5) According to new Keynesians,why can firms increase output in the short run in response to higher prices?
To view all questions and flashcards with answers, click on the resource link above. Page 20
Q6) What are the seven key factors that cause the aggregate demand curve to shift?
Chapter 18: Monetary Theory Ii: the Is-Mp Model
Available Study Resources on Quizplus for this Chatper
88 Verified Questions
88 Flashcards
Source URL: https://quizplus.com/quiz/24176
Sample Questions
Q1) In the bank lending channel,an important reason for output increases in the short run after an expansionary monetary policy is that
A) the funds directly available for households and firms to spend will increase.
B) prices will increase, making increased production more profitable for firms.
C) the increase in government spending from an expansionary monetary policy increases output through the multiplier effect.
D) the ability of banks to make loans will increase.
Q2) The MP curve represents
A) the Fed's monetary policy actions in setting a target for the federal funds rate.
B) the relationship between the money supply and the price level.
C) a relationship between the real interest rate and manufacturing production.
D) the relationship between real interest rates and potential GDP.
Q3) An increase in the output gap causes the demand for real balances
A) to rise and the interest rate to fall.
B) to fall and the interest rate to rise.
C) and the interest rate to fall.
D) and the interest rate to rise.
Q4) What is the inflation gap? What is the output gap?
To view all questions and flashcards with answers, click on the resource link above.
Page 21