Introduction to Financial Economics
Exam Materials
Course Introduction
Introduction to Financial Economics provides students with a foundational understanding of how financial markets operate and the economic principles that underpin financial decision-making. The course explores the roles of financial institutions, instruments, and markets, delving into topics such as risk, return, portfolio theory, asset valuation, and market efficiency. Students learn to analyze the impact of economic developments on financial markets and to apply basic economic models to understand investment decisions, the behavior of investors, and the function of capital markets in allocating resources within an economy.
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) Increased liquidity in recent decades has reduced interest rates on which of the following assets (holding constant all other things that affect interest rates)?
A) U.S. government bonds
B) bonds issued by large corporations
C) business loans
D) bonds issued by state governments
Answer: C
Q2) Monetary policy refers to the government's
A) decisions on how much money to spend.
B) decisions on how much money to collect in taxes.
C) plans for retiring the national debt.
D) management of the money supply and interest rates to achieve macroeconomic objectives.
Answer: D
Q3) Briefly explain the process of securitizing mortgages.
Answer: The mortgage lender sells the loan to a government-sponsored enterprise or financial firm that bundles the mortgage with mortgages from other lenders,providing the basis for a mortgage-backed security.
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) A monetary aggregate is a measure of
A) the inflation rate.
B) the total economic activity of the country.
C) money broader than currency.
D) definitive money.
Answer: C
Q2) If money is declared to be legal tender,it must be
A) minted from a precious metal.
B) acceptable to citizens of foreign countries.
C) possible to exchange it for an equivalent amount of precious metal.
D) accepted to settle private transactions and it must be accepted for the payment of taxes.
Answer: D
Q3) Which of the following statements is TRUE about M2?
A) Its total value is smaller than that of M1.
B) Apart from those assets also included in M1, it includes no assets that offer check-writing features.
C) Its total value is about four times as large as M1.
D) It includes large-denomination time deposits.
Answer: C
To view all questions and flashcards with answers, click on the resource link above. Page 4
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) What is the yield to maturity of a perpetuity with a coupon of $40 and a price of $800?
Answer: The yield to maturity equals $40 / $800 = 5%.
Q2) A simple loan involves
A) interest payments from the borrower to the lender periodically during the life of the loan.
B) no payment of interest by the borrower to the lender.
C) payment of interest by the borrower to the lender only at the time the loan matures.
D) payment only of principal by the borrower to the lender at maturity.
Answer: C
Q3) A discount bond resembles a simple loan in that
A) the interest on neither is taxable.
B) the borrower repays in a single payment.
C) both represent assets to the borrowers who issue them.
D) both have par values greater than their face values.
Answer: B
To view all questions and flashcards with answers, click on the resource link above.
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) Suppose that there is concern about the stability of the global financial system causing a flight to the safety of U.S.government bonds.Which of the following is NOT a likely consequence?
A) higher price of U.S. government bonds
B) lower interest rate on U.S. government bonds
C) increased demand for U.S. government bonds
D) reduced supply of U.S. government bonds
Q2) As wealth decreases,which of the following is likely to account for a smaller fraction of a saver's portfolio?
A) stocks
B) corporate bonds
C) cash
D) U.S. government securities
Q3) Suppose that Congress passes an investment tax credit.The likely result will be
A) the supply curve for bonds will shift to the right.
B) the demand curve for bonds will shift to the left.
C) the demand curve for bonds will shift to the right.
D) the equilibrium interest rate will fall.
Q4) Assess the impact on the bond market of the rise in Internet trading of stocks.
Q5) Explain why the nominal interest rate is the opportunity cost of holding money.
To view all questions and flashcards with answers, click on the resource link above. Page 6
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) The difference between the yield on 3-month Treasury bills and 10-year Treasury notes is largest typically during A) recessions.
B) expansions.
C) periods of high inflation.
D) when the yield curve is inverted.
Q2) Bond ratings
A) are published annually by the federal government and are based largely on information contained in corporate tax returns.
B) are published annually by the federal government and are based on publicly available information.
C) are published monthly by the federal government and are based on publicly available information.
D) are published by private bond-rating agencies.
Q3) A flight to quality refers to a shift by savers from A) bonds and into stocks.
B) stocks and into gold or other precious metals.
C) bonds and into real assets, such as real estate.
D) low-quality bonds and into high-quality bonds.
Page 7
To view all questions and flashcards with answers, click on the resource link above.
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) If market participants have rational expectations,then the best forecast of the price of a stock in the next period is
A) equal to an average of the prices of the stock in previous periods.
B) equal to the price of the stock in the current period.
C) dependent upon all information available in the current period, including, but not limited to, the price of the stock in the current period.
D) dependent on information available in the previous period.
Q2) What are the differences between common stock and preferred stock?
Q3) In comparing actively managed mutual funds with those funds that simply buy and hold a large market portfolio (index funds),we would expect that
A) the actively managed funds provide a higher return than the index funds.
B) the index funds provide a higher return after expenses than the actively managed funds.
C) actively managed funds and index funds provide the same returns.
D) index funds provide a lower return than actively managed funds only if taxes are taken into consideration.
Q4) Explain what is meant by the "double taxation of dividends"?
Q5) What is the difference between adaptive expectations and rational expectations?
To view all questions and flashcards with answers, click on the resource link above. Page 8
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) When reading an options listing for a company like Microsoft
A) both call and put options are listed.
B) call options, but not put options, are listed.
C) put options, but not call options, are listed.
D) neither call nor put options are listed.
Q2) How do exchanges seek to reduce default risk in the futures market?
Q3) Suppose you are a manager for a company that produces grape jelly.Which of the following is the best way for you to reduce your risk?
A) acquire a derivative that increases in value if grape prices increase
B) acquire a derivative that increases in value if grape jelly prices increase
C) sell a derivative that increases in value if grape prices increase
D) sell a derivative that increases in value if grape jelly prices increase
Q4) Which of the following is NOT an advantage of a futures contract over a forward contract?
A) reduced counterparty risk
B) increased flexibility
C) lower information cost
D) increased liquidity
Q5) Why may some investors prefer forward contracts to futures?
Q6) What are the steps involved in using options for a short sale of a stock?
Page 9
To view all questions and flashcards with answers, click on the resource link above.
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) What are three reasons that the interest-rate parity condition may not always hold?
Q2) Which of the following has the largest impact on short-run movements in exchange rates?
A) growth rate of exports
B) growth rate of imports
C) investment opportunities
D) changes in the trade deficit
Q3) The law of one price does NOT hold for
A) agricultural goods.
B) tradeable goods.
C) differentiated goods.
D) goods whose production causes pollution.
Q4) The theory of purchasing power parity assumes that
A) nominal exchange rates are not affected by movements in relative price levels.
B) real exchange rates are fixed.
C) movements in nominal exchange rates are the result of movements in real exchange rates.
D) inflation rates are roughly the same in most 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) Moral hazard is NOT eliminated in debt financing because
A) borrowers have an incentive to assume greater risk than is in the interest of the lender.
B) firms with a great deal of debt often go bankrupt.
C) principal-agent problems are greater with debt financing than with equity financing.
D) the use of restrictive covenants tends to increase moral hazard.
Q2) The reduction in average cost resulting from an increase in the volume of a good or service produced is called
A) information cost.
B) transactions cost.
C) diminishing returns.
D) economies of scale.
Q3) Which of the following concerns were raised as a result of record low interest rates in 2016?
A) high perceived risk of default
B) high interest rate risk
C) corporations facing a lack of demand for bonds
D) high risk premiums on investment-grade corporate bonds
Q4) How do car dealers help reduce adverse selection?
Page 11
To view all questions and flashcards with answers, click on the resource link above.
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) What is the current limit on balances that are covered by federal deposit insurance?
A) $100,000
B) $250,000
C) $500,000
D) $1,000,000
Q2) Which of the following can be described as when a bank buys securities owned by a business while agreeing to sell them back at a later date?
A) repurchase agreement
B) reverse repurchase agreement
C) federal funds
D) discount loans
Q3) What is the largest category of bank assets?
A) loans
B) reserves
C) securities
D) cash items in the process of collection
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?
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) A firm that holds an inventory of a security and serves as an intermediary between buyers and sellers of the security is known as a(n)
A) underwriter.
B) finance company.
C) syndicate.
D) market maker.
Q2) What is the name of the pension plan under which employees can make tax-deductible contributions through regular payroll deductions?
A) 401(k) plan
B) Social Security plan
C) early retirement plan
D) 486(b) plan
Q3) Hedge funds have been criticized for
A) their heavy use of short selling.
B) their inability to mobilize a large amount of funds.
C) forcing quick price changes that reduce market inefficiencies.
D) excessive use of hedging strategies.
Q4) What were the two main rationale for exempting nonbanks from restrictions on assets and degrees of leverage?
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) Which investment caused the Reserve Primary Fund to incur heavy losses?
A) mortgage-backed securities
B) real estate investment trusts
C) commercial paper issued by Bear Stearns
D) commercial paper issued by Lehman Brothers
Q2) Why do governments want to maintain the health of the banking system?
Q3) If banks were required to hold 100% reserves,this would
A) put banks out of business.
B) put depositors at greater risk of losing their money.
C) prevent banks from making risky loans.
D) eliminate bank runs.
Q4) What are the likely effects of a sovereign debt crisis in terms of the government's ability to finance its debt?
Q5) Why was the Fed reluctant to rescue insolvent banks?
A) It thought it may lead to moral hazard.
B) It thought it may lead to adverse selection.
C) It thought they were still liquid.
D) It did not think they were insolvent.
Q6) How does deflation affect those with debt?
Q7) What are two ways that governments can prevent bank panics?
To view all questions and flashcards with answers, click on the resource link above. Page 14
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) The regional Federal Reserve Banks are owned by
A) the federal government.
B) the Federal Reserve System.
C) the state governments covered by each bank's region.
D) private banks which are part of the Federal Reserve System in each region.
Q2) The Dodd-Frank Act removed which group from decisions regarding the presidents of Federal Reserve Banks?
A) Class A directors
B) Class B directors
C) Class C directors
D) Board of Governors
Q3) Who are the members of the Financial Stability Oversight Council?
Q4) Which central bank gained the power to set interest rates independent of the government in the late 1990s?
A) Bank of England
B) Bank of Canada
C) Bank of China
D) Federal Reserve Bank
Q5) What are the three books to which the FOMC has access and what information is included in each?
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) Included in both M1 and M2 are
A) savings accounts and money market mutual funds.
B) savings accounts and checkable deposits.
C) money market mutual funds and currency.
D) currency and checkable deposits.
Q2) Why didn't the surge in the monetary base between 2008-2012 lead to a similar surge in the money supply?
A) The currency-deposit ratio rose significantly, resulting in a much smaller money multiplier.
B) The excess reserve-deposit ratio rose significantly, resulting in a much smaller money multiplier.
C) The Fed increased the required reserve ratio, resulting in a much smaller money multiplier.
D) Nonborrowed reserves declined, offsetting the increase in the monetary base.
Q3) In what year did the United States go off the gold standard?
A) 1933
B) 1945
C) 1981
D) 2001
Q4) Briefly explain the process of multiple deposit creation.
To view all questions and flashcards with answers, click on the resource link above. Page 16
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) Which of the following countries experienced hyperinflation during the 1920s?
A) The United States
B) Canada
C) Germany
D) England
Q2) Which of the following is NOT an accurate description of open market operations prior to 2008?
A) It was used to affect the market for bank reserves.
B) It was used to control the federal funds rate.
C) It involved buying and selling short-term Treasury securities.
D) It involved buying and selling long-term securities.
Q3) Which of the following is an operating target?
A) M1
B) M2
C) nonborrowed reserves
D) the inflation rate
Q4) What has been the approach of the European Central Bank to monetary targeting?
Q5) What is meant by inflation targeting? Does the Fed engage in inflation targeting?
Q6) On which type of unemployment can monetary policy have the most effect? Why?
Page 17
To view all questions and flashcards with answers, click on the resource link above.
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) 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.
Q2) How does a sterilized intervention by the Fed in foreign exchange markets differ from an unsterilized intervention?
Q3) If the U.S.current account balance is negative,
A) its financial account is likely to be positive.
B) its financial account is likely to be negative.
C) it must use official settlements to balance its payments.
D) its balance of payments cannot be zero.
Q4) Why do some economists think a global savings glut contributed to the U.S.running a current account deficit in the 2000s?
To view all questions and flashcards with answers, click on the resource link above. Page 18
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) An increase in all of the following will increase aggregate demand EXCEPT A) investment.
B) savings.
C) exports.
D) government spending.
Q2) Most economists believe that changes in the price level have
A) no effect on the quantity of output supplied in either the short run or the long run.
B) an effect on the quantity of output supplied in the short run, but not in the long run.
C) an effect on the quantity of output supplied in the long run, but not in the short run.
D) an effect on the quantity of output supplied in both the short run and the long run.
Q3) Everything else being constant,a lower real interest rate
A) increases desired saving and net exports.
B) decreases desired saving but increases net exports.
C) increases desired saving and investment.
D) increases desired investment but decreases net exports.
Q4) How does an increase in interest rates affect net exports?
To view all questions and flashcards with answers, click on the resource link above.
Page 19
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) What is the multiplier? If MPC = 0.75,what is the value of the multiplier in the simple model of the economy?
Q2) What three parts of the economy are represented in the IS-MP model?
Q3) Lowering the target for the federal funds rate is unlikely to be effective in fighting a recession when a(n)________ in the risk premium demanded by investors causes a ________ in interest rates.
A) increase; rise
B) increase; fall
C) decrease; rise
D) decrease; fall
Q4) In the IS-MP model,when the Fed increases the real interest rate
A) the MP curve shifts up resulting in a decline in the output gap.
B) the MP curve shifts up resulting in an increase in the output gap.
C) the MP curve shifts down resulting in a decline in the output gap.
D) the MP curve shifts down resulting in an increase in the output gap.
Q5) Use the following data to calculate equilibrium real GDP: C = 0.75Y,I = $2 trillion,G = $1 trillion and NX = -$0.5 trillion.
Q6) What limited the effectiveness of monetary policy during the financial crisis of 2007-2009?
Page 20
To view all questions and flashcards with answers, click on the resource link above.