MCQs

Question 1

The decision by inflation targeters to choose inflation targets ________ zero reflects
the concern of monetary policymakers that particularly ________ inflation can have
substantial negative effects on real economic activity.

A) below; high
B) below; low
C) above; high
D) above; low

Answer 1

D) above; low

Question 2

High interest rates might ________ purchasing a house or car but at the same time
high interest
rates might ________ saving
A) discourage; encourage
B) discourage; discourage
C) encourage; encourage
D) encourage; discourage

Answer 2

A) discourage; encourage

Question 3

Q3. Channelling funds from individuals with surplus funds to those desiring funds when
the saver does not purchase the borrower’s security is known as
A) barter.
B) redistribution.
C) financial intermediation.
D) taxation.

Answer 3

C) financial intermediation.

Question 4

Which of the following can be described as direct finance?
A) You take out a mortgage from your local bank.
B) You borrow €2500 from a friend.
C) You buy Google shares in the secondary market.
D) You buy shares in a mutual fund

Answer 4

B) You borrow €2500 from a friend.

Question 5

Securities are ________ for the person who buys them, but are ________ for the
individual or
firm that issues them.
A) assets; liabilities
B) liabilities; assets
C) negotiable; nonnegotiable
D) nonnegotiable; negotiable

Answer 5

A) assets; liabilities

Question 6

Which of the following is NOT an element of inflation targeting?

A) A public announcement of medium-term numerical targets for inflation

B) An institutional commitment to price stability as the primary long-run goal

C) An information-inclusive approach in which only monetary aggregates are used in
making decisions about monetary policy

D) Increased accountability of the central bank for attaining its inflation objectives

Answer 6

C) An information-inclusive approach in which only monetary aggregates are used in
making decisions about monetary policy

Question 7

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 7

D) Ensuring that investors never suffer losses

Question 8

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 8

B) money is a stock and income is a flow

Question 9

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 9

C) M1 stays the same and M2 stays the same.

Question 10

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 10

C) Money increases economic efficiency because it decreases transactions costs.

Question 11

____is relative ease & speed with which an asset can be converted into a medium of exchange.
A) Efficiency
B) Liquidity
C) Deflation
D) Specialization

Answer 11

B) Liquidity

Question 12

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 12

B) currency; savings bonds; house.

Question 13

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 13

B) fiat

Question 14

Open market sales shrink ________ thereby lowering ________.
A) the money multiplier; the money supply
B) the money multiplier; reserves and the monetary base
C) reserves and the monetary base; the money supply
D) the money base; the money multiplier

Answer 14

C) reserves and the monetary base; the money supply

Question 15

The primary indicator of the US Fed’s stance on monetary policy is
A) the discount rate.
B) the federal funds rate.
C) the growth rate of the monetary base.
D) the growth rate of M2

Answer 15

B) the federal funds rate.

Question 16

If the Bank of England decides to reduce UK bank reserves, it can
A) purchase government bonds.
B) extend discount loans to banks.
C) sell government bonds.
D) print more currency

Answer 16

C) sell government bonds.

Question 17

The effect of an open market purchase on reserves differs depending on how the seller of the bonds keeps the proceeds. If the proceeds are kept in ________, the open market purchase has no effect on reserves; if the proceeds are kept as ________, reserves increase by the amount of the open market purchase.
A) deposits; deposits
B) deposits; currency
C) currency; deposits
D) currency; currency

Answer 17

C) currency; deposits

Question 18

When a US bank sells a government bond to the Federal Reserve, reserves in the US banking system
________ and the US monetary base ________, everything else held constant.
A) increase; increases
B) increase; decreases
C) decrease; increases
D) decrease; decreases

Answer 18

A) increase; increases

Question 19

Purchases and sales of euro-area government securities by the ECB are called
A) discount loans.
B) central bank fund transfers.
C) open market operations.
D) swap transactions.

Answer 19

C) open market operations.

Question 20

The Targeted Longer-Term Refinancing Operations (TLTROs) initiated by the ECB aim to:

A) Provide immediate short-term liquidity exclusively for central banks.

B) Encourage banks to lend to non-financial companies and households in the Eurozone.

C) Stabilise the exchange rate of the Euro against the US dollar.

D) Buy distressed assets from banks to clean their balance sheets

Answer 20

B) Encourage banks to lend to non-financial companies and households in the Eurozone.

Question 21

The three players in the US money supply process include
A) banks, depositors, and the U.S. Treasury.
B) banks, depositors, and borrowers.
C) banks, depositors, and the central bank.
D) banks, borrowers, and the central bank.

Answer 21

C) banks, depositors, and the central bank.

Question 22

The ability of a central bank to set monetary policy goals is
A) political independence.
B) goal independence.
C) policy independence.
D) instrument independence.

Answer 22

B) goal independence.

Question 23

The mandate for the monetary policy goals that has been given to the European Central Bank is an example of a ________ mandate.
A) primary
B) dual
C) secondary
D) hierarchical

Answer 23

D) hierarchical

Question 24

A central feature of monetary policy strategies in all countries is the use of a nominal variable that monetary policymakers use as an intermediate target to achieve an ultimate goal such as price stability. Such a variable is called a nominal
A) anchor.
B) benchmark.
C) tether.
D) guideline

Answer 24

A) anchor

Question 25

Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap times the change in the interest rate is called
A) basic duration analysis.
B) basic gap analysis.
C) interest-exposure analysis.
D) gap-exposure analysis.

Answer 25

B) basic gap analysis.

Question 26

Differences in ______explain why interest rates on U.K. Treasury securities are not all the same.
A) risk
B) liquidity
C) time to maturity
D) tax characteristics

Answer 26

C) time to maturity

Question 27

How do Fintechs primarily differentiate themselves from traditional financial intermediaries?

A) By offering fewer product choices and limited service options.

B) By relying on legacy systems and avoiding technology-driven solutions.

C) By prioritising customer experience through technological innovation and tailored services.

D) By setting higher fees and interest rates than conventional banks

Answer 27

C) By prioritising customer experience through technological innovation and tailored services.

Question 28

Bank capital has both benefits and costs for the bank owners. Higher bank capital ________ the likelihood of bankruptcy, but higher bank capital ________ the return on equity for a given return on assets.
A) reduces; reduces
B) increases; increases
C) reduces; increases
D) increases; reduces

Answer 28

A) reduces; reduces

Question 29

In the absence of regulation, banks would probably hold
A) too much capital, reducing the efficiency of the payments system.
B) too much capital, reducing the profitability of banks.
C) too little capital.
D) too much capital, making it more difficult to obtain loans.

Answer 29

C) too little capital.

Question 30

US bank loans from the Federal Reserve are called ________ and represent a ________ of funds.
A) discount loans; use
B) discount loans; source
C) fed funds; use
D) fed funds; source

Answer 30

B) discount loans; source

Question 31

In general, banks make profits by selling ________ liabilities and buying ________ assets.
A) long-term; shorter-term
B) short-term; longer-term
C) illiquid; liquid
D) risky; risk-free

Answer 31

B) short-term; longer-term

Question 32

A bank is insolvent when
A) its liabilities exceed its assets.
B) its assets exceed its liabilities.
C) its capital exceeds its liabilities.
D) its assets increase in value.

Answer 32

A) its liabilities exceed its assets.

Question 33

For a given return on assets, the lower is bank capital,

A) the lower is the return for the owners of the bank.

B) the higher is the return for the owners of the bank.

C) the lower is the credit risk for the owners of the bank.

D) the lower the possibility of bank failure.

Answer 33

B) the higher is the return for the owners of the bank.