1. An increase in the prevailing interest rate

a. increases the present value of future returns from investment, and increases investment.

b. decreases the present value of future returns from investment, and decreases investment.

c. decreases the present value of future returns from investment, and increases investment.

d. increases the present value of future returns from investment, and decreases investment.

2. Using the rule of 70, if your parents place 10,000 in a deposit for you on the day you are

born, approximately how much will be in the account when you retire at 70 years old if the

deposit earns 3 per cent per year?

a. 300

b. 3,000

c. 20,000

d. 70,000

e. 80,000

3. Which of the following does not help reduce the risk that people face?

a. increasing the rate of return within their portfolio

b. diversifying their portfolio

c. All of these answers help reduce risk.

d. buying insurance

4. Which of the following is an example of moral hazard?

a. After Guiseppe buys fire insurance, he begins to smoke cigarettes in bed.

b. None of these answers demonstrate moral hazard.

c. Martin has been feeling poorly lately so he seeks health insurance.

d. Both of Suzanne's parents lost their teeth due to gum disease, so Suzanne buys dental

insurance.

e. All of these answers demonstrate moral hazard.

5. Share prices will follow a random walk if

a. shares are overvalued.

b. people behave irrationally when choosing shares.

c. markets reflect all available information in a rational way.

d. shares are undervalued.

6. A miner who has been unable to find work for so long that he has stopped looking for work is

considered to be

a. not in the labour force. c. unemployed.

b. not in the adult population. d. employed.

7. A minimum wage law tends to

a. help all teenagers because they receive a higher wage than they would otherwise.

b. have no impact on unemployment as long as it is set above the competitive equilibrium

wage.

c. create more unemployment in high-skill job markets than in low-skill job markets.

d. create more unemployment in low-skill job markets than in high-skill job markets.

8. Unions might increase efficiency in the case where they

a. raise the wage for insiders above the competitive equilibrium.

b. lower the wage of local outsiders.

c. offset the market power of a large firm that is the dominant employer in a region.

d. threaten a strike but don't actually follow through so there are no lost hours of work.

9. Which of the following types of unemployment will exist even if the wage is at the

competitive equilibrium?

a. unemployment due to unions

b. unemployment due to efficiency wages

c. frictional unemployment

d. unemployment due to minimum-wage laws

10. Other things the same, if reserve requirements are increased, the reserve ratio

a. increases, the money multiplier increases, and the money supply increases.

b. increases, the money multiplier decreases, and the money supply decreases.

c. decreases, the money multiplier increases, and the money supply increases.

d. decreases, the money multiplier decreases, and the money supply increases.

11. The banking system currently has $100 billion of reserves, none of which are excess. People

hold only deposits and no currency, and the reserve requirement is 10 percent. If the Fed lowers

the reserve requirement to 5 percent and at the same time buys $10 billion worth of bonds, then by

how much does the money supply change?

a. It rises by $200 billion.

b. It rises by $800 billion.

c. It rises by $1,200 billion.

d. None of the above is correct.

12. If people decide to hold more currency relative to deposits, the money supply

a. falls. The larger the reserve ratio is, the more the money supply falls.

b. falls. The larger the reserve ratio is, the less the money supply falls.

c. rises. The larger the reserve ratio is, the more the money supply rises.

d. rises. The larger the reserve ratio is, the less the money supply rises.

13. If the federal funds rate were below the level the Federal Reserve had targeted, the Fed

could move the rate back towards its target by

a. buying bonds. This buying would reduce reserves.

b. buying bonds. This buying would increase reserves.

c. selling bonds. This selling would reduce reserves.

d. selling bonds. This selling would increase reserves.

14. If an economy uses silver as money, then that economy's money

a. serves as a store of value but not as a medium of exchange.

b. serves as a medium of exchange but not as a unit of account.

c. is commodity money.

d. has no intrinsic value.

15. A bank loans Greg's Ice Cream $250,000 to remodel a building near campus to use as a new

store. On their respective balance sheets, this loan is

a. a liability for the bank and an asset for Greg's Ice Cream. The loan increases the money supply.

b. a liability for the bank and an asset for Greg's Ice Cream. The loan does not increase the money

supply.

c. an asset for the bank and a liability for Greg's Ice Cream. The loan increases the money supply.

d. an asset for the bank and a liability for Greg's Ice Cream. The loan does not increase the money

supply

16. According to the quantity equation, the price level would change less than proportionately

with a rise in the money supply if there were also

a. either a rise in output or a rise in velocity.

b. either a rise in output or a fall in velocity.

c. either a fall in output or a rise in velocity.

d. either a fall in output or a fall in velocity.

17. During the 2008 financial crisis velocity decreased. This means that the rate at which

money changed hands

a. decreased. Other things the same, a decrease in velocity decreases the price level.

b. decreased. Other things the same, a decrease in velocity increases the price level.

c. increased. Other things the same, an increase in velocity decreases the price level.

d. increased. Other things the same, an increase in velocity increases the price level.

18. You put money into an account and earn a real interest rate of 4 percent. Inflation is 2

percent, and your marginal tax rate is 25 percent. What is your after-tax real rate of interest?

a. 1.5 percent.

b. 2.5 percent.

c. 5.0 percent.

d. 4.5 percent.

19. Which of the following is correct?

a. Inflation impedes financial markets in their role of allocating savings to alternative

investments.

b. Inflation encourages savings through the tax treatment on capital gains.

c. Inflation encourages larger holdings of currency by the public.

d. Inflation reduces people's real purchasing power.

20. High and unexpected inflation has a greater cost

a. for those who save than for those who borrow.

b. for those who hold a little money than for those who hold a lot of money.

c. for those whose wages increase by as much as inflation than those who are paid a fixed nominal

wage.

d. for savers in low income tax brackets than for savers in high income tax brackets.